Contrary to the those who suggest the Mayan calendar predicts the end of the world or to those expecting the asteroid Toutatis to strike earth on December 12th 2012 I believe we will still be alive and kicking in 2013. However, we may be doing a lot less driving.
The fall of 2012 is the earliest anticipated arrival of peak oil with the more commonly projected date in the fall of 2014. The difference in the dates is due to misgivings about the actual excess capacity OPEC possesses.
OPEC claims it has 5.3 to 6.4 million barrels per day of excess (unused) production capacity. However, those numbers do not take into account the more than 2 mbpd of quota cheating currently in progress. Of the 4.5 mbpd in production cuts in December 2008 OPEC is only at a 53% compliance rate. That means they are producing 2.115 mbpd more than their production quota claims. Depending on whom you listen to there will be some allowance in the excess capacity numbers for this over production.
I don't want to go into great detail about this in this commentary so let's make some basic assumptions.
Let's assume OPEC has 5.3 mbpd of claimed excess capacity today (based on December 2008 numbers) and let's subtract the 2.1 million barrels of production cheating today. That gives us 3.2 mbpd of excess capacity. Obviously that could vary by a million barrels either way but for my purposes today lets round it to 3.0 mbpd.
The IEA claims OPEC depletion rates are around 7%. They are producing in round numbers today right at 30 mbpd. That means they are losing 2.1 mbpd to depletion every year. Obviously they are adding to production every year but are they adding two million barrels are year? Absolutely not. They are not even claiming any additional production capacity gains. The new wells they are drilling are in existing fields where infrastructure already exists. This is the cheapest and most cost effective way to supplement declining production levels.
That 7% depletion rate also applies to all oil fields older than two years. We are currently producing 87 mbpd of oil and natural gas liquids. That means we lose roughly 6 mbpd per year to depletion on a global basis.
Opening up a brand new field with new exploration, new wells, new pipelines and processing facilities is expensive. Back in 2007-2009 Saudi Arabia spent $125 billion opening a new field to add 1.25 mbpd to capacity. Even in Saudi Arabia it takes 5-7 years to bring a new field online from scratch.
The IEA is also predicting global demand will increase by 1.5 - 1.8 mbpd in 2011 and again in 2012. Demand increased significantly more than that in 2010 at +2.7 mbpd and at the fastest pace since 2004.
If oil nearly doubled their estimates in 2010 could we expect it to at least hit their estimates in 2011 and 2012? You would think that would be a save bet.
By the way, where did the oil come from to satisfy that 2.7 mbpd of demand if OPEC is still producing at their cutback levels of 2008? Obviously somebody is not telling the truth because that oil did not magically appear in tankers.
Based on the numbers above this is what the fall of 2012 looks like.
Current global demand 87 mbpd with OPEC supplying 30 mbpd.
2011 demand increase 1.5 mbpd (IEA claims)
2011 global depletion -6.0 mbpd (IEA claims)
2011 OPEC Increase +1.0 mbpd (I am being generous)
2011 Non-OPEC gain +1.0 mbpd (I am being generous)
2011 Net loss of oil -2.5 mbpd
The IEA and others claim that net production loss will be made up by OPEC's current excess capacity. Remember in the paragraphs above I calculated that excess capacity at 3.2 mbpd. So, in theory we will escape 2011 with a margin of safety of roughly 700,000 bpd.
In 2012 we will find out exactly how much capacity OPEC has because the demand and depletion numbers reach the point where calming words and bogus claims will have no effect.
2012 demand increase 1.5 mbpd (IEA claims)
2012 global depletion -6.0 mbpd (IEA claims)
2012 OPEC Increase +1.0 mbpd (I am being generous)
2012 Non-OPEC gain +0.5 mbpd (IEA claims)
2012 Net loss of oil -3.0 mbpd
We went into 2012 with a claimed 700,000 bpd of excess capacity by OPEC. Even if we gave them credit for an extra million barrels of magically appearing capacity that would only be 1.7 mbpd. With our net loss of oil in 2012 of 3.0 mbpd and after scrapping the bottom of the OPEC barrel we would still end up with a net loss of -1.3 mbpd for 2012.
The IEA claims demand will be over 90 mbpd in 2012 but there is no verifiable production to fill that demand. In fact the odds are very good there will be less production in 2012 than in 2011 and the price of gasoline will be much higher.
Let's assume everyone is wrong and OPEC really does have 5.3 mbpd in excess capacity today. Let's also assume the IEA is wrong on depletion and it is only 5% instead of 7%. Let's also assume several countries also rushed some production schedules and we gained another 2.0 mbpd in new production over 2011. All of that only means we could end 2012 with production and demand dead even and everyone running at 100% to maintain that production. Maybe, just maybe we could stretch the day of reckoning until the spring of 2014. It would take positive surprises in every single area listed above and I still don't think we could make it, but it is possible. We still hit the wall in 2014 or before. There is no scenario that gets us past 2014 short of global governments legislating driving on odd numbered days of the week until everyone owns an electric car.
So what will actually happen when we hit the production wall? Will our lives change dramatically in 2012? They will not change dramatically on day one because nobody will really know when day one was for months or even years after it happens.
However, our lives will change and the change will start well before that fateful day arrives. If you are not planning for it today it is going to be VERY painful.
I am going to continue this article on Wednesday and it is the one article this year everyone needs to read. Stay tuned.
This newsletter is only one of the newsletters produced by OilSlick each day. The investment newsletter is also produced daily and contains the current play recommendations in the energy sector. Stocks, options and futures are featured. If you are not receiving the "Play Newsletter" please visit the subscribe link below to register.
Subscribe to Energy Picks Newsletter
See a list of our closed plays from 2010 here: Closed Positions
The OilSlick Newsletter is based on the expectations for global oil production to peak and begin to decline in the 2012-2014 timeframe. This is called "Peak Oil." This is the point where global production of conventional oil supplies can no longer be supplemented by enough oil sands production, deepwater oil production, biofuels and natural gas liquids to offset the decline in existing fields. The roughly 6% annual decline of existing production due to depletion is larger than the rate of new discoveries and new production being added each year. The Peak Oil countdown clock is ticking and time is growing short. Peak Oil is coming, are you prepared?