What the Kuwait Oil Study Says About Peak Oil

This year Kuwait University and the Kuwait Oil Company released results of a study using a modified version of Hubbert’s curve to predict that oil will peak in 2014.  This study seems to mostly agree with a another study that was popularized by Sir Richard Bronson of Virgin Group Ltd., which predicted that oil will peak in 2015.

There are many different arguments about the time frame of peak oil, some argue that it has already occurred (Dot 2 and/or Dot 3) and others argue that peak oil won’t occur for many years (Dot 1).  I personally do not get too hung up on when peak oil will occur or whether it  has occurred.  Either way you look at it peak oil is not something that can be ignored and as you get near the top of the curve you begin feeling the effects of peak oil.  This is because more costly sources are being used and it is more difficult to increase production.  Many of the economic troubles that we are experiencing today stem from these facts.

Peak Oil Curve

One of the major reasons the Kuwaiti study is so interesting is because a major oil producer is stating that it will no longer be able to keep up with the demand of its product and that the it will be more costly to acquire.  That is like Apple telling its consumers that even though demand for its iPhone is increasing, in a few years it will no longer be able to keep up with demand and the iPhone® price will also start increasing.  No oil corporation would want to admit peak oil’s effects on their business which is why this announcement is so unbelievable.

The really unfortunate part of this whole ordeal is that while oil companies, oil producing nations and numerous other respected organizations are releasing reports that peak oil is REAL and IMMINENT, we continue down the same path.  Cities, states and governments should be having serious discussions about how to deal with peak oil and should also be considering plans to deal with these conditions.  Instead, the United States government is busy talking about things like health care, broadband expansion, cap and trade and numerous other topics that are irrelevant in a world where cheap energy is no longer abundant.  Cities continue to spend money on beautification projects and citizens are living their lives like everything is just going to go back to the way things have always been.  I realize that NO ONE wants to talk about these things because it can paint a grim future for our society, but if we continue to put our heads in the sand we will have a major problem on our hands that no one is prepared for.  If we start planning now we could have a brighter future, but planning can only begin when everyone is mentally prepared to begin serious, tough discussions.

If you are interested in some more information about peak oil, visit one of Dan’s previous articles here.

Sources

http://www.msnbc.msn.com/id/35838273/ns/business-oil_and_energy/

http://green.autoblog.com/2010/03/18/kuwaiti-study-conventional-oil-to-peak-in-2014/2#comments

http://www.guardian.co.uk/business/2010/feb/07/branson-warns-peak-oil-close

http://www.theoildrum.com/node/5395

6 thoughts on “What the Kuwait Oil Study Says About Peak Oil

  1. Dandyone

    “no oil corporation would want to admit peak oil’s effect on their business which is why this announcement is so unbelievable” … Kuwait Oil Company is state owned, so while it is technically a corporation, it is not beholden to shareholders who need to be coddled.

    I don’t really get the iPhone analogy. For one, Apple is the only manufacturer of iPhones. Kuwait is just one of many oil companies. Two, since KOC is not beholden to shareholders (at least in the western sense) they don’t have to worry about share prices falling. How would an announcement that a resource is limited and therefore the price is going to go up badly impact them? Three, they said that global production is going to peak in 2014, not that KOC were personally going to run out of oil at that time. Kuwait is certainly not in a pretty position since they are militarily weak, and when it comes down to it, what the U.S. and China can’t buy we very well might take… but outside of becoming attacked in a resource war (and I hardly see how announcing peak oil will inspire an attack) it hardly makes sense that they are saying something terrible to their people (the closest thing to shareholders). After all, they are really saying, “the market is going to get tight, and we will see our national income rise very soon”.

    From “The really unfortunate part…” on I am with you all the way! We definitely need to pull our heads out of …

    Thanks for the post. Keep spreading the word. We won’t get far until people grasp the significance of the issue.

    -DA

    p.s. Technically speaking, the Hubbert method is not really statistically defensible, though mathematically it is slick and offers a parsimonious solution. If it predicts the peak correctly it is due to either a lucky accident or the fact that multiple errors cancel each other out. If you look at the U.S. case, Hubbert got the date right (at least in one of his predictions…). But he was totally off in his prediction of the amount of oil that would ultimately be produced. This is important because his model produces a bell-shaped curve which means that the peak will occur at the midpoint – when as much of the URR has been produced as is still left in the ground. These two errors cancelled themselves out in the U.S. case. The peak actually happened somewhere between 1/3 and 1/4 of likely production (only time will tell). By producing a model that says that the peak occurs when half the oil has been produced, then underpredicting the amount of URR, the peak luckily fell on target. This is to take nothing away from the man. He was a bold, insightful, extremely intelligent and courageous man.

    Reply
    1. Zach Hudson Post author

      Kuwait Oil Company may not be privately or publicly owned, but that does not mean that they like mentioning a diminishing production of their product. This, is where the iPhone analogy comes in. Either way you look at it Kuwait will see less product to sell, just like how Apple had less iPhones to sell in my analogy. Whether or not oil producers are going to become richer is debatable, there profit margins are usually very small and regulations/operating costs continue to increase. Typically, less product increases demand which increases price, but there becomes a point where both the producer and the purchaser find it no longer economical. If it is no longer economical either alternatives will appear or the demand will decrease from decreased usage (demand).

      Hubbert’s Peak is not perfect and it is not exact, but it is a model that gives you estimation. This estimation has, for the most part, been pretty accurate so far. Another thing that Hubbert’s Peak does not take into account is technological advancements, wars, etc…. If there were no outside influences then the model may be perfect, but we have many other factors in the world so the actual curve of production is not a perfect bell shape.

      Reply
  2. Dandyone

    RE: “whether or not oil producers are going to become richer is debatable, there [sic] profit margins are usually very small and regulations/operating costs continue to increase” Care to take a guess at how many petrodollars were generated in 2008? The U.S. alone spent $337.9 billion dollars on oil imports in that single year alone (http://www.eia.doe.gov/aer/txt/ptb0520.html). These petrodollars funded an explosion of expensive megaprojects in Gulf States and still left billions floating around in bloated sovereign wealth funds. Trust me, oil exporters were making profits – HUGE profits. They weren’t simply reinvesting in E&P and barely scraping by on the margin by any sense of the term.

    And the costs of production are not going up all that much in many of these countries. They will… but they have not yet. Best estimates still say mature on-shore fields around the Persian Gulf produce oil at $10-15 (or less) per barrel… and this is where the vast majority of the world supply still comes from (I suggest reading Fredrik Robellius’ dissertation). Somewhere upward of 5 mbpd are still being produced from Ghawar. Given that the average price per barrel ended up being around $100 in 2008, that left a profit margin of *nearly* 900%. Why *nearly* 900%? Because internal consumption is highly subsidized (probably at or even below cost), and this eats into the profits.

    Scarcity will drive the value of oil up, and net oil exporters will most certainly become richer for that. Some small oil companies (and even some larger ones) will eventually fail as they run out of sources to tap… especially if the price that consumers are able to pay is less than the costs of doing business.

    Out of curiosity, have you read the entire report? I see the report states that global production will peak in 2014. This is different than saying that Kuwait will peak in 2014. In fact, the graph of forecasted Kuwait production shows a peak sometime between 2030 and 2035 (see Figure 7), and Table 1 indicates that their model has Kuwait reaching a peak in 2033.

    That’s hardly admitting the equivalent of running out of iPhones in a few years. It’s more like Steve Jobs saying we’ll reach a peak in iPhone production in 20 to 25 years, but other cell phone manufacturers will be forced to cut production in just 4. So for 16 to 21 years, Apple will see increasing iPhone production while the world is starved and willing to pay a high price. This doesn’t seem like such an outrageous thing for ‘Apple’ to say, but if you still disagree, then so be it.

    RE: Hubbert methodology. You are correct, the Hubbert methodology can’t take into account technology, wars, natural disasters, etc. You go on to say, “If there were no outside influences the model may be perfect”

    While the quoted statement may be technically correct, the statement itself is meaningless. Who cares if a model which makes unrealistic assumptions is perfect only if bad assumptions hold? The fact is we do make advances in technology, but we also have wars and natural disasters on a pretty frequent basis. Hubbert got lucky because he made two errors. He underpredicted the U.S. URR and built a model which puts a peak at the halfway point.

    Frankly, I think peak oilers should be more freaked out about these errors and what they mean. They mean that world production will likely peak when we are closer to 1/3 of total URR. It is simply too easy to see that technology will continue to advance and the price will continue to climb – ergo we will see the world produce more than the 2.3 trillion barrels (or whatever) that the Hubbert methodologies predict. Peak oilers who are wedded to the Hubbert methodology (read: nearly all of them) poo-poo this likelihood. They say that we’ll never get to 3 trillion barrels. I believe that there is a good possibility that URR is in fact closer to 3 to 3.5 trillion barrels, but that the peak in production rates will likely occur when the world has consumed roughly 1/3 of URR. This means we are likely to be at or near peak today.

    Reply
    1. Zach Hudson Post author

      Knowing when for sure the world will peak or when Kuwait may peak is not a easy task (more like impossible). I do believe that we are at or near peak today as well. This appears to be true from the production data, price/availability, and exploration data. I see you really dislike the Hubbert’s theory, which is fine. I don’t consider it perfect and I don’t live by it, but to expect it to be perfect in real life seems odd. I think it is an useful tool that can be used to help explain peak oil and it can give estimates of points on the plot. To expect it to be right on would be ignorant, but that does not mean it is useless either.

      There is more to consider than just the oil peaking for Kuwait. If Kuwait is nearing peak or at peak, then how likely is it that they will be able to increase production (let alone keep it constant). In order for the world to continue to exist as it is peak oil is not the only issue. The other issue is continuing to meet the increased demand for oil from expanding economies. Just the simple fact that increasing production is harder or impossible the closer to peak you are (theoretically), will put a giant stress on the world. The other thing to consider is the scenario where the oil producers can continue to increase production (to meet demand) for many more years. This will then, more than likely, create a scenario where the drop-off after peak is much faster.

      Ultimately higher energy costs and less easily obtainable oil can create economic roller coasters that occur more frequently, kind of like the economic downturn we are experiencing now.

      Reply
  3. Dandyone

    BTW, nobody in their right mind – not even a technocrat or economist – would argue that we are at Dot 3.

    Anyone can pull down the BP energy stats and make a pretty simple project of plotting historic production which culminates with a dot representing where we sit today. There is no arguing where we are today; the argument is about what is going to happen tomorrow.

    In other words, the peak oil debate is not about where we are on a curve, but rather the peak oil argument is about the shape of the curve and the area under the curve.

    Reply

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