Oily Questions IV - The Case For Peak Oil

Now for the long-awaited 4th part of my ongoing thoughts about oil. If you want to catch-up on the last three, here are parts One, Two and Three.

Despite the recent drop in oil prices due to slackening worldwide demand, the argument that worldwide oil supplies have peaked remains strong. Last night, 60 Minutes did a 24-minute infomercial on Saudi Aramco, the world's largest oil company. Aramco officials led Leslie Stahl around on a tour of their mind-numbingly advanced facility, but the most salient question was never asked: why do they need all of this? The short answer is that the Age of Cheap Oil is long gone.

Four years ago, Saudi Aramco was injecting a staggering 7 million barrels of sea water per day back into Ghawar, the world's largest oilfield, in order to prop up pressure. Ghawar accounts for 30% of Saudi oil reserves and up to 70% of daily output. All Saudi production comes from very old fields, with no major exploration success since the 1960s, and almost every field has high and rising water cut. (Energy Bulletin)

On 60 Minutes, Ali Al-Naimi, the Saudi oil minister and de facto head of the OPEC oil cartel stared into the camera and told American audiences that there's plenty of Saudi oil left to keep us fat and happy for another 20-30 years. While that may well be true, how much would oil have to cost consumers for this scenario to be cost-effective and feasible for the Saudis?

Here's why OPEC has been so coy about releasing its proven reserves over the last 25 years and how its reserve levels have magically increased:

In 1985, OPEC countries decided to link their production quotas to their reserves. This, in turn, provoked huge increases in estimated reserves in order to increase their production rights (see charts below). This also allowed OPEC nations to obtain bigger loans at lower interest rates. In a 2006 Bloomberg interview, Dr. Ali Samsam Bakhtiari, a senior oil expert employed by the National Iranian Oil Co., said that OPEC's reserves are grossly overstated, that world oil production is now at its peak and he predicted that it will fall 32% by 2020. 

Just take a look at the charts below and consider the rapid decline of the U.S. oil industry in the early 70's. It doesn't take much to conclude that we're being hoodwinked by OPEC. But as long as someone keeps our Hummers humming along, we'd rather just turn a blind eye and moronically chant "Drill, baby, drill!"

If you would like to read a detailed analysis of Saudi oil, I recommend reading Twilight In The Desert by Matthew Simmons.

Declared reserves with suspicious increases (in billion of barrels):

Opec_reserve_growth