By Simon Taylor, Founding Director
Geoffrey Smith's piece, Energy Guru brings good news to Davos centring on Pulitzer prize winner Daniel Yergin's exuberance about future global oil supply, is typical of the over-optimism to be expected in these post-collapse, pre-recovery times. Yergin (founder of the consultancy now known as IHS-CERA) often cites past false predictions for the timing of a peak in global oil supplies as evidence that no such problem is likely to occur soon. Unfortunately he does not exactly have a good record in the predictions game himself, as a brief perusal of the Oil Drum website demonstrates.
Just like other serial optimists, including until recently the International Energy Agency (IEA), Yergin suggests that the problems facing the oil industry lie above ground. He cites geopolitical tensions, the pace of investment and other factors such as lack of sufficient equipment. All these issues will play a role, but they are not the whole story. There are four key underlying factors which will perhaps play the ultimate role in influencing the capacity of the world's oil industry to provide sufficient new production:
- Annual discoveries of conventional oil have declined for the past four decades - this decline continues: The last time the world discovered more oil than it consumed was in 1984. Today annual discoveries (including large recent discoveries in the Gulf of Mexico) represent a small fraction of what the world consumes each year.
- Projections for future demand to 2030 (as of November 2009) are up almost 24% from today: The IEA suggests demand will reach around 104m bpd by 2030, up from a 2008 high of approximately 85m bpd. With a significant upturn in the world economy anticipated, global demand currently stands at roughly 83-84m bpd.
- The global annual decline in conventional oil production through depletion is increasing: The annual loss in output from existing oil fields stood at approximately 4m bpd by 2009 - up from a previous estimate of approximately 3.7m bpd in 2007-2008. This means that each year, the global oil industry has to add the equivalent of the entire output of Angola and Nigeria combined - Africa's first and second largest producers - just to stand still.
- There are insufficient new projects in the pipeline: Analysis shows that new projects coming into production within the next seven years are insufficient to offset the combined impact of projected future demand and the decline from existing projects. This means we will imminently (in terms of being able to do anything about it) face an oil supply crunch, where increased overall demand cannot be catered for.
Global Witness has strenuously avoided the trap of making predictions about the precise timing such a crunch. Much more important is for governments, industry and society at large to appreciate that it is very likely to occur in the near-term, rather than at some over-optimistic point in the distant future, as Yergin and others would have us believe. In November 2008, the IEA stated that by 2015 (five years from now), there could be a gap of approximately 7m bpd between total expected output and its projection for global demand. Of course, the parameters affecting this projection have since changed - the global economy has further tanked, reducing demand, which would delay the crunch point. At the same time, many development projects have been cancelled or delayed, bringing the collision point closer. This example demonstrates the folly of fixed predictions: the parameters can change and projections are suddenly wrong, providing ammunition for the eternal optimist. But if onetime optimists like the IEA can come to such a conclusion, then we should all be concerned.
Global Witness has spent much of the past decade documenting corruption, asset stripping and conflict around access to oil; all in a world with sufficient resources to go round. Imagine instead a situation where demand stands (using the IEA's example) at 7m bpd above the capacity to supply - that world is unlikely to be a peaceful place. To put 7m bpd in context, it represents 39% of the IEA's projection of US demand by 2015, or 63% of China's projected demand. Most frighteningly, 7m bpd is 230% of the IEA's projection for sub-Saharan Africa's demand. In such a world, those who can pay will do so - even if we complain about high prices. Those who can't will have to do without. This begs the question: how will desperately poor people in the mega-cities of the global South cope with food production and distribution?
The theme of this year's Davos meeting - "Rethink, Redesign, Rebuild" - implies the need for some radical rethinking about how unsustainable our global economy has become. Following on from the appalling fiasco in Copenhagen, Yergin's suggestion that our future global oil demands can be met seems reckless and is unwelcome. It is now time for governments to acknowledge the scale and imminence of this crisis. This would then pave the way for an adult conversation about future energy production, in particular a risk-based assessment of global reserves. This, together with annual assessments of the status of all oil projects would allow for a more accurate evaluation of global supplies. Furthermore, government urgently need to acknowledge the scale and imminence of this problem. Instead, today the world relies on fantasy claims, and data locked away in proprietary databases of companies like Yergin's. Those companies' business relationships with the global oil industry surely undermine his ability to comment dispassionately or informatively when it comes to discussions about the future of a resource we are perfectly prepared to go to war over.
For a more detailed discussion about the consequences of an imminent oil supply crunch, and in particular how a failure to address this will make the climate crisis worse, see Global Witness' October 2009 report: Heads in the Sand.