I have commented in the past on the startling disconnect that exists between the long term global oil supply and demand projections that are released each year by the U.S. Energy Information Agency (EIA) and those that are offered by oil depletion experts such as Matthew Simmons, Kenneth Deffeyes and Colin Campbell. Deffeyes, for example, has predicted that Peak Oil wil occur in November 2005 at or near the present rate of about 84 Mb/d and then begin a slow terminal decline. My own analysis, which is based on current production, known rates of global oilfield depletion and an ODAC report of projects that will be coming online in the next few years, predicted a double peak in 2006 and 2008 at about 86.5 Mb/d, with production declining thereafter.
In contrast, the EIA's Annual Energy Outlook 2005 with Projections to 2025 predicts that global oil production will rise to over 120 Mb/d in year 2025, and that global production capacity in 2025 will be over 126 Mb/d. Saudi Arabia, which owns at least 25% of the worlds proven oil reserves, presently has a production capacity of about 10 Mb/d. The EIA projects Saudi production in the year 2025 to more than double to about 22.5 Mb/d, a number that most experts and the Saudis themselves consider wildly unrealistic, given the fact that the Ghawar megafield that currently supplies more than half of oil Saudi production is approaching its depletion midpoint. The EIA projections would require the world to bring more than four new Saudi Arabias online by the year 2025 to reach the 120 Mb/d figure, plus an estimated five additional Saudi Arabias to compensate for declining production elsewhere due to depletion.
In order to understand how the EIA can some up with such remarkable projections, we must first appreciate that it is a government entity administered by politicians and staffed with economists. Politicians tend to have no great devotion to objective truth, and are generally loathe to take any action that might upset influential special interests, which in the case of oil include oil companies, automobile manufacturers and, because the health of the entire economy is underpinned by inexpensive oil, the financiers of Wall Street. With the debt of General Motors and Ford already having fallen to junk bond status, predictions of future trouble for the automobile industry would be further damaging to their financial picture and therefore are politically unwelcome. The greater U.S. economy, which is highly debt-leveraged, requires long term economic growth to service the debt, or it will implode. Any predictions of a hiatus in such growth by a U.S. governmental agency could cause panic in the financial sector. As I have previously noted, nationalization, world politics and growing competition have conspired to freeze the top five U.S. oil companies out of 97% of the future potential oil market, and they are producing their current fields at rates that will be sustainable for only a very short period of time. In essence, they are fighting over table scraps. Their stock prices have done well lately because the price of oil has skyrocketed, but their long term prognosis is poor unless through "regime change" or another mechanism they can find a way to participate in the other 97% of the ever-shrinking pie of global oil reserves. The EIA would only exacerbate their problems by pointing this out, so it remains silent.
As the savvy observer might have predicted, the EIA's Annual Energy Outlook 2005 manages to keep all of those special interests reasonably satisfied. The automobile industry will be pleased that it predicts the amount of gasoline that will be available for light duty vehicle use to increase at an annual rate of 1.7% between 2003 and 2025, and that alternative fuels will only make up 2% of the market in 2025. It even predicts that the automobiles and SUVs of the year 2025 will have considerably more horsepower than they do at present, as a result of "new technologies" such as reduced engine friction, variable valve timing and reduced drag coefficients (all of these technologies have in fact been in place for some time). The number of new cars and light trucks on the road is predicted to steadily increase during that time as well.
The oil companies and their shareholders should also be satisfied with the EIA's predictions. Despite current Reserve to Production ratios in the United States and Europe that range from 5 to 9, loosely specified "new technologies" are anticipated to limit production decline in the United States to 0.1% per year and those in Western Europe to 1.3% per year through 2025, decreases that will be more than offset by production increases in other areas, such as Africa and Australia, and in unconventional oil production (tar sands, heavy oil, oil shale) that are controlled by Western oil companies. Judging from the EIA report, the future remains bright for the Exxon Mobils of the world. Perhaps most remarkably, these production increases are predicted to occur in a reference case where crude oil prices are maintained within a band of under $30 per barrel.
The EIA openly admits that its projections are predicated on a set of base assumptions of the what world's economic growth will be over the next two decades. The reference case assumption is described as:
Baseline economic growth (3.1 percent per annum), world oil price falling to about $25 per barrel by 2010 and rising to $30.31 per barrel, and technology assumptions....
The reference case assumes that OPEC producers will continue to demonstrate a disciplined production approach to maintain prices within an announced target range of $25 to $31 per barrel in 2003 dollars.
In other words, continued economic growth is so essential to the viability of the current debt-leveraged system of finance (growth in a debt-leveraged economy has been likened to riding a bicycle; you must keep pedaling or fall off) that it has been built into the EIA's analysis as a basic assumption. This exercise in tautology ensures that the final projections will be consistent with the financial community's need for future economic growth.
The EIA methodology then proceeds to calculate the amount of additional crude oil that would be required by the assumed economic growth, relying upon sophisticated models that predict energy usage based upon economic activity and the degree of affluence within a country. Total global oil supply is then projected based upon what would be adequate to meet the anticipated demand, with a cushion of spare capacity thrown in to ensure favorable conditions of low market volatility. The projected increase in global supply is then divvied up among the oil-producing countries of the world. Production in Saudi Arabia and Russia, for example, is projected to increase by a degree of magnitude that is considered to be impossible, or at least undesirable by the political leadership of those countries.
The "technology assumptions" included in the EIA reference case allow the EIA to deemphasize or ignore altogether the very real physical and geologic constraints that threaten to curtail future oil production. In my opinion, the EIA methodology would scarcely have more credibility if it would have started with the number of Escalades and Excursions that the Detroit auto companies desire to sell in the year 2025 and worked backward to determine how much oil production would be required to keep them on the road. Their projections can perhaps best be described as politically inspired fiction. They exist to calm stock market investors and the voting public, and are a useful tool that the United States can wield to exert leverage on countries such as Saudi Arabia and Russia in order to coerce them to substantially increase their future oil production capacities.
By overestimating the possible rate of future production from Western-controlled oil fields such as the North Sea and Alaska, the EIA projections also create a useful illusion that OPEC may be at a risk of losing market share in the event that it decides to maintain oil prices above the desired ceiling of about $30 per barrel in the EIA reference case. The Issues in Focus section of the EIA report describe an OPEC strategy for higher market price prices as being of "relatively high risk:"
if OPEC members jointly limited production to maintain high prices and low market share, new oil conservation or exploration and production technologies might be developed. Such a strategy would also increase the incentive for individual OPEC members to exceed their output quotas, cause importing countries to enact oil consumption reduction policies, and increase the likelihood that world economic growth would be slowed. While this strategy could result in relatively high revenues and profits in the short term, it would also be a relatively high-risk strategy.
As Deffeyes noted in his book Hubbert's Peak, the oil industry has in fact invested quite a bit of its profits in "new technology" over the past several decades. The potential for significant further improvement in that technology may be more limited than the economists at the EIA expect. If I were an OPEC strategist, I wouldn't be all that concerned at losing market share as a result of "new technologies." As far as conservation is concerned, this would benefit OPEC in the long term as well by prolonging its saleable resources.
Despite the EIA's comments, the only real incentive that OPEC and its leader Saudi Arabia will have to maintain the price of oil within the price band desired by the Western industrialized countries will be a desire to avoid the various tools of persuasion and intimidation that the latter, and particularly the United States can bring to bear.