PEAK OIL:  101 Mbd in 2030

April 28 2013 delayed FreeVenue public release of Jan 28th MemberVenue guidance ~

Today's monthly update of my global All Liquids depletion model (Peak Scenario-2500) reveals there is sufficient capital, a demonstrated build capacity and sufficient Proved Reserves for a natural GEOLOGIC PEAK of 101 Mbd in 2030.  Post-peak production would decline at a manageable o.8%/yr 'til mid-Century.  Should production be understated, the model predicts triple-digit induced PEAK DEMAND will stymie further consumption growth as soon as 2035 upon USA Refiner Acquisition Crude price permanently exceeding $260/barrel.  So either way, Peak Oil is on the way within a generation...

Today's PS-2500 revision reflects two factors:  (a) the projected annual New Capacity build rate to Year 2100 reduced to 4.9-Mbd (from 5.2) & (b) All Liquids URR/EUR decreased by 4-Gb to 6,911-Gb.

 current Status

Global production has increased dramatically from the Recession low of 83.1 Mbd (Jan/2009), setting yet another monthly record (89.3-Mbd) in Oct/2012 and a new quarterly record of 89.1-Mbd (2012Q4).  The 2012 year-to-date extraction is on pace to shatter last year's annual record (87.1) with a new mark of 89.0-Mbd and monthly production is poised to break 90 come September, while cracking the 95-Mbd threshold in 2020.

At $92/barrel in December, USA RACrude is far below the PEAK DEMAND Barrier ($109) as defined and calculated by the TRENDLines Barrel Meter price model.  This enabled the sector to set a new monthly Consumption record in November (90.4-Mbd) after many months of status quo while the PDB was in breach.  International Inventories are presently just under their 5-yr avg and 5% of global capacity is presently idle, eagerly awaiting new Demand from non-OECD nations.

The Barrel Meter suggests USA RAC price found equilibrium this past July and will resume its secular uptrend after more improved fundamentals set the stage for a decline to $80 in 2015Q1.  Ever-increasing marginal barrel costs will see crude rise to $340/barrel in 2040.  WTI currently sells $5 below USA RAC.

See the World Production Records venue for higher resolution charts of current extraction both at the global level and by the Top 7 nations.  Saudi Arabia is back on top and Canada has overtaken Iran.  Historical analysis of Crude & Gasoline Price components & future target prices (thru 2040) can be viewed via my Gas Pump & Barrel Meter charts.

It is little known the pause in global production seen in 2009 was the 11th annual decline since 1975.  Applying my study of North American business cycle patterns, similar setbacks can be expected during potential business cycle troughs in 2019, 2029, 2034 & 2043.  These potential downturns are reflected in the PS-2500 modelling.  That said, as BRIC nations become more prominent on the global scene, it is believed future USA Recessions will have increasingly less influence on both annual oil production and UDRO.

2012 saw 3.9 Mbd of flow from new facilities.  A sure sign of the health and robustness of the sector is evident by the fact that after addressing Underlying Decline loss and another year of record production, global Surplus Capacity remained an amazing 4.3-Mbd.  Total Capacity has climbed to 93.3-Mbd.

2012 year-to-date stats reveal Underlying Decline Rate Observed (UDRO) for All Liquids remained steady at 3.5% (3.09-Mbd) worldwide; down to 2.4% (0.27 Mbd) in Saudi Arabia; & steady @ 2.5% (0.22 Mbd) in the USA.  Modelling of the secular trend suggests global UDRO will rise to 5.5% by 2050.

Due to the limited horizon of accurate long-term consumption projections and uncertainty with respect to technologic advances, the PS-2500 All Liquids production profile post-2035 reflects potential flow from prudent Reserves development ... not Demand.  The model assumes the sector will maintain supply-chain best practices by developing Proved Reserves from available resource at a pace consistent with the historic 40-yr Reserves/Production ratio whilst maintaining 5.0-Mbd of Surplus Capacity to keep prices in balance.

 Target All Liquids  Extraction Rates

 URR/EUR

Underlying Decline

In a typical profile, annual production builds over time, attains a peak, maintains a plateau, then declines.  Because fields and petroleum provinces are developed over years or decades, some of the wells of a field, or fields within a province, or ultimately provinces within global production ... can be in decline or retired while others are still in growth stage or plateau.  This annual loss factor is the field/province/world's Natural Underlying Decline.

IEA calculates the annual Natural Underlying Decline Rate is 5% in post-peak Regular Conventional Crude fields, and as much as 15% in non-conventional post-peak Deep Sea fields, with a weighted avg of 9%.  A Producer's EOR activity can improve extraction results and diminish this loss factor.  After general EOR activity, IEA calculates the annual loss is 6.7% for Conventional & Deep Sea crude categories that represent 83% of global production.

I call this net absolute figure, more applicable to our depletion studies, Underlying Decline Observed (UDO).  It is expressed in millions of barrels per day (mbd) per annum.  More commonly, analysis of RCC or All Liquids is conducted in percentage terms per time interval - and the Underlying Decline Rate Observed (UDRO) is appropriate.  To maintain a production plateau, Production Capacity must be incrementally increased each year to match UDO loss.

Within a typical petroleum province, roughly a third of fields & wells are relatively recent and are annually ramping up their production rate.  Another third are in plateau.  And the balance are the mature and near-retired wells & fields where significant depletion is reflected by production decline within.

Since Nov/2007, Peak Scenario-2500 has uniquely provided stakeholders with regular monthly reporting of global UDO/UDRO status, along with progress on the two key mature provinces of Saudi Arabia & USA.

In March 2009, PS-2500 analysis was first to discover Global UDO initially became a significant factor during the 1970 American Recession.  Chart#4 illustrates long term global annual UDO (red line), but it is the Underlying Decline Rate Observed (UDRO) inset showing annual rates that is most instructive.  I have found UDRO exhibits a tendency to ebb and flow.  These cyclical (8.5-yr) crests correlate with all six USA Recessions since 1970.  The cycle tops appear to reflect reduced maintenance & EOR activity during economic contractions, no doubt due to capital & cash flow challenges amid a reduced Demand environment.

UDRO's highest annual surge (bold red line) was 6.3% of global All Liquids production in 1984.  The 4.3% & 2.9% crests during the 1991 & 2001 Recessions were followed by a 1.9% UDRO trough in 2006 - then 3.2% in 2008.  The 2011/2012 setback (3.5%) seems to mimic the belated cycle top in the wake of the back-to-back 1980's Recessions.  The loss factor is expected continue its secular uptrend, rising to 5.5% by 2050.  My study of USA business cycle recessions (TRI-USA) suggests UDRO crests may occur in 2019, 2029, 2034 & 2043, but with a diminishing effect as the USA becomes less dominant on the global scene.  China GDP will surpass the USA in 2022.

Analysis by Trendlines Research reveals over the last 43 years, UDRO has averaged 2.9% annually.  From 1970, this necessitated the construction of 120-Mbd of new facilities:  77 to address UDO & 43-Mbd to raise Extraction Capacity from 48 in 1969 to 91-Mbd by December 2009.  In short, the oil sector has been adding 3 Mbd/yr ... or a new Saudi Arabia every three years for four decades!  Terminal global production decline will normally commence upon Annual New Capacity no longer exceeding the UDO trend line.

In a more recent context, the industry commissioned 36 Mbd of new capacity from 2001 to 2010.  During that ten year span, a full 24 Mbd was applied against this Underlying Decline challenge; and the remaining 12 Mbd serviced new Demand & added to Surplus Capacity.  This impressive task (3.7 Mbd/yr) was equivalent to a new Russia coming on stream every three years.  Visually, the bold red line in charts #3 & #4 tracks annual Underlying Decline Observed.

Cycles aside, the magnitude of loss will generally rise as Peak  approaches.  Viewing the future, by my measure 90-Mbd (4.3/yr) of New Capacity will be required to attain the 2030 target.  This will facilitate an 15-Mbd increase in Capacity (91/2009 to 106/2030) and the other 75-Mbd addresses UDO loss over those 22 years.  Added to the 77-Mbd to cover 1970-2009 decline loss, I calculate a total 152-Mbd of Capacity will have been dedicated to this loss phenomenon over the full six decades.

The oil sector presently maintains a seven-year trend for New Capacity of 4.3-Mbd/yr, thus demonstrating an ability to attain the PEAK target.  And, perhaps even a less difficult task considering the record breaking 5.2-Mbd new capacity installed in 2010!  Based on present URR Estimates and subject to Capital availability, the Industry can maintain the necessary activity level until inevitable resource constraints begin to restrain the pace of desired new development after Year 2059.

Below, PS-2500 is compared to the short time frame practitioner estimates for All Liquids UDRO:

   1.7% - Leonardo Maugeri (2012-2020 avg)

   1.9% - Adam Brandt (2007 - sole peer-reviewed contribution)

   2.1% - CERA (2009-2030 avg)

   3.0% - IEA (2010-2035 avg)

  3.3% - Peak Scenario 2500 (2012, cyclical & rising to 5.5% by 2050)

   4.1% - Matt Simmons (2009-2030 avg)

   4.2% - Jeff Rubin (2009)

   4.5% - EIA (2009-2030 avg)

   4.5% - OPEC (2008)

   4.7% - Chris Skrebowski (2010)

   5.0% - Total (2009)

   5.0% - Deutsche Bank (5%  2009, rising to 8% by 2030 ... 6.7% avg)

   5.2% - Schlumberger (2009-2030 avg)

   5.25% - Sadad al Husseini (2009)

   6.0% - PFC (by 2030)

   7.0% - UK Energy Research Centre (2009)

   9.0% - consensus at theOilDrum & PeakOildotcom (2009)

The PS-2500 findings surrounding the nature of Underlying Decline vary considerably from the consensus McPeakster hypothesis.  Chatter at PeakOildotcom & theOilDrum proposes All Liquids UDRO rose fast & furious from 0% in 2002 to 9% in 2009.  Their simplistic musings are void of any explanation for the above mentioned 77 Mbd of new facilities built from 1970 to 2009 that failed to increase production!  The 7% figure adopted by the UK Energy Research Centre is similarly a figure fabricated from thin air.  Acknowledgment by McPeaksters that their scary scenarios are groundless will not occur anytime soon.  These groups are agenda-driven and facts just get it in the way...

Finally, let's give this loss factor some overall context.  The USA sports a 2.5% All Liquids UDRO as an 86% depleted petroleum province in 2010.  Less mature Saudi Arabia at 48% Depletion, sports a 2.4% All Liquids UDRO in 2012.  Both are reasonably good proxies as to what will be faced on the global scale in the domain of Underlying Decline.  With global Depletion at a mere 16%, it is almost certain the general trend of global UDRO will not exceed 5% 'til mid-century on its journey to ultimate exhaustion by Year 2496.

All Liquids 2012 (year-to-date) Underlying Decline Rates Observed:  3.5% (3.09-Mbd) and falling worldwide;  2.4% (0.27-Mbd) & falling in Saudi Arabia;  2.5% (0.22-Mbd) and rising in the USA.

Toward Peak Demand

In 2004, a new breed of practitioners began using a unique genre of "bottom-up" flow studies.  They were inspired by a growing realization actual production could not attain the lofty numbers being forecast in many of the demand-oriented scenarios.  Peak Rates as high as 146-Mbd were entering the realm.  Over the next five years, the new methodology saw the upper limit for forecast Peak Rates plunge to a more realistic 113-Mbd.  But lately, an ironic reversal appears to be in play.  It is increasingly apparent these (bottom-up) potential maximum flow targets are now themselves significantly over-estimating probable demand rates over the long term.

This arises from newer models whose Consumption projections have been adapted to reflect demand destruction associated with Crude Prices which may range from $190 - $248/barrel by 2035.  These studies are finding the four-decade 1-Mbd/yr Demand growth trend is giving way to a waning growth rate which will see annual consumption eventually cease to rise.  Since Oct/2011 my multi-disciplinary approach has led me to propose this rather un-extraordinary event will occur upon Crude Price permanently surpassing a definitive petroleum/GDP ratio threshold I've discovered:  the PEAK DEMAND Barrier.

There have already been four transgressions of this line-in-the-sand (1980, 2008, 2011 & in early 2012.  On each occasion, global Consumption failed to set new records 'til Crude Price retreated back below the PDB.  At this time there are no further temporary incursions foreseen in the medium future, but the 5% per annum rise in extraction costs will eventually take Price above the Barrier in 2036.  Being six years after GEOLOGIC Peak Oil, this event will have only a minor effect on production.  But should prices rise more quickly than projected, PEAK DEMAND could indeed become a reality and trigger PEAK OIL before the natural 2030 Geologic Peak.  This invisible line blocking Demand from increasing was $92 in early 2008, $101 in early 2011, $106 in early 2012, is $109 today and rises to $260 by 2035.

Analysis of demand destruction within the Barrel Meter & Gas Pump models since 2009 has been increasingly helpful in understanding the phenomenon of PEAK DEMAND.  It was discovered the plotting of four definitive petroleum-cost/GDP ratios were instrumental in explaining historic events and the prediction of future episodes.  The charting of future price targets commenced Sept/2008 and adding critical thresholds affords the ability to provide thoughtful future guidance to policymakers, legislators & stakeholders as well as relevant stock/futures market participants.

The first annotated petroleum/GDP ratio to be featured on TRENDLines charts was the Price Spike Ceiling (Nov/2009), illustrating the upper limits for both USA gasoline & USA contract crude.  Shortly thereafter, the Barrel Meter chart offered guidance as to when and at what price rising Crude Price would induce or augment economic downturns - via the G-20 Recessions Induced threshold.  Crude Price crossed this level in 2008 ($106)and several vulnerable nations joined the Great Recession.  It almost happened again in 2011 during the MENA (Libya) spike.  RAC shot up to $113, just shy of the $117 threshold which would have induced multiple contractions worldwide.

Drilling down to the national level, the Gas Pump successfully predicted in Feb/2010 the eventual 2011Q2/Q3 downturn in the North American auto sector via the USA Light Vehicle Sales Barrier.  By the production chart, it would seem many decades of plentiful supply are assured.  And for some sectors this is quite correct.  High oil prices have never induced a US Recession.  The American economy is much too diverse and per capita income too high to be significantly affected by climbing petroleum prices.  The TRENDLines Recession Indicator calculates recent successive quarters of high oil costs trimmed only 0.2% off December's GDP growth rate.  The TRENDLines Gas Pump model predicts USA gasoline will be priced well under its LVS Barrier thru 2013 & 2014, thus paving the way for robust US auto sector growth all else being equal.

Its analysis suggests a permanent encroachment of the USA LVSC Barrier would jeopardize car and light truck manufacturing and would require a rapid changeover to hybrids, electric, natural gas & fuel cells.  Light Vehicle Sales have plunged each time (1980, 1990, 2008, 2011 & early 2012) pump price has transgressed this definitive gasoline/GDP ratio line.  Failure to respond could see over the course of two years, something in the order of two to five million units/yr could be knocked off the then current pace.

Consumption has increased by an avg 1-Mbd/yr since 1970.  PS-2500's PEAK DEMAND module indicates global consumption started to break away from this long-time trend in 2004.  Many were shocked upon learning OECD consumption had indeed peaked in 2005.  Model analysis determines Demand will level off in 2035 upon Crude Price surpassing $260/barrel.

 the Peak ... & Terminal Decline

The transition from ever growing Production to terminal decline in any sized province is normally dependent on the delicate balance between Annual Underlying Decline Observed (UDO) and Annual New Capacity.  To complicate matters, I have found global UDO does not rise incrementally each year as universally assumed.  UDRO rocketed to a 6.3% high after America's back-to-back 1980's Recessions, but then drifted to a low of 1.7% by 1999.

Add unpredictable OPEC interference & global GDP volatility to the fray and producers have their work cut out in monitoring quota, UDO loss, then stalwartly making up the difference ... and more.  It is my finding that over the past four decades, new capacity installations averaged 3.0 Mbd/yr.  The long term avg for UDO is 1.9 Mbd.  The balance of 1.1 Mbd/yr increased capacity from 48 in 1969 to 91-Mbd in 2009.

A second factor surrounds Producers present ability to extract at will from any of seven categories of conventional & non-conventional resource.  It is inevitable they will face resource constraint in the future.  The first stream to peak was Regular Conventional Oil (69-Mbd in May 2005).  Dwindling Proved Reserves will one day reach the depletion point where the call on annual New Capacity is more than deliverable.

These are the two conventional forcings (UDO & resource constraint) which would normally determine the onset of terminal decline.  Both could be truncated by PEAK DEMAND if price gets out-of-control ... say by failure to maintain sufficient surplus capacity (4-Mbd).  For purposes of modelling GEOLOGIC PEAK, a minimum 5-Mbd of Spare Capacity is maintained thru to 2100 to maintain supply-chain best practices & price stability.  UDRO rises to 5.5% by 2050.  Lacking accurate Demand projections for the post-2035 era, the production profile reflects the probable 7-category bottom-up flows thereafter.

Chart#1 illustrates the down slope is shaped by the harmonics of the underlying unique production profiles of each All Liquids stream within the GEOLOGIC PEAK Scenario.  Present data indicates Regular Conventional Oil (light sweet crude) will exhaust in 2098, Deep Sea reserves in 2014, Arctic in 2114, Kerogen in 2119, Shale Oil in 2164, X-Heavy in 2243, Bitumen in 2131, GTL in 2391 & CTL in 2496.

    GEOLOGIC PEAK Scenario:  This production profile reflects a New Capacity build rate avg of 3.9-Mbd/yr to 2035 and rising to 7.0-Mbd/yr by 2100 as UDO deteriorates.  UDO surpasses annual new installations in 2031.  Analysis concludes the sector will see the first shortfalls in desired New Capacity levels of light sweet crude in 2060.

Being the earlier of the two junctures, UDO would thus be the obvious determinant of this scenario's Peak Date in 2030.  Annual production will have reached 101-Mbd by then.  Adding in 5-Mbd of spare capacity reveals a capacity peak of 106-Mbd.  PS-2500 calculates this feat requires development of 613-Gb of today's 1,360-Gb tally of Proved Reserves.  The post-peak environment `til mid-Century will feature a manageable o.8%/yr decline rate.

    PEAK DEMAND Scenario:  At some point in time ever-rising Crude Price finally inhibits annual increases in global Consumption.  The Barrel Meter boldly suggests the existence of a PEAK DEMAND Barrier ... an invisible line representing a definitive crude-cost/GDP ratio demarking the level where demand destruction attains critical mass.  It is proposed this threshold halted consumption growth @ $92/barrel in 2008 & $101 in early 2011 and $105 at the start of 2012.  New monthly Consumption records commenced again this past November now that Crude Price ($92) has retreated.  The PDB rises to $260 by 2035.

Global Consumption's rate of growth began to deteriorate with the first price shocks of 2004.  Many were surprised to find conservation, substitution and energy intensity advancements combined to bring about an OECD Consumption peak in 2005.  With a future besieged with triple-digit Crude Prices from 2018 onward, a module within the PS-2500 model monitors Barrel Meter price projections for a permanent breach of the Peak Demand Barrier and related demand destruction.

At this time, it appears Crude Price will surpass the PDB in 2035 ($260/barrel), but at that juncture production will have already been in terminal decline for five years.  So should oil prices escalate faster than projected, PEAK DEMAND could indeed truncate the natural GEOLOGIC PEAK.

 2035 Outlook

The higher resolution of PS-2500's  Year 2035 Outlook  provides an opportunity to present the general view of the two competing All Liquids forecast camps and the resultant "scary wedge".  Both assume  5.0-Mbd Surplus Capacity & Underlying Decline Rate Observed (UDRO) rising to 3.9% (from 3.5% today).

(a)  First, an ultra conservative trajectory with an apparent 93-Mbd Peak in 2015, declining to 22-Mbd by 2035 (hashed lime line).  As a Worst Case Scenario, this projection assumes the oil sector will develop no further production capacity in the future other than the announced-to-date MegaProjects.

(b)  Second, the more plausible production profile where new Megaprojects will avg 3.9 Mbd/yr thru 2035 (4.3-Mbd/yr current trend).  Its optimistic trajectory is down from past estimates as high as 121-Mbd 'cuz the Consumption growth rate has been waning since 2004 due to demand destruction associated with triple-digit oil prices.  It culminates with 101-Mbd Peak Oil in 2030.

In practical terms, recent history (since 1970) has shown the pessimistic projection line (hashed lime line) incrementally rises thru time to meet the past production trend line (solid lime line).  In short, the Scary Wedge as shown has been as ominous for over four decades but the start point constantly gets pushed back to "next year".

To prevent Terminal Decline in the coming two decades, Producers need only monitor the UDO trend and commit to a New Capacity construction regimen that consistently matches or exceeds that loss.  As seen in Chart#4, the Industry has generally and stalwartly installed sufficient New Capacity to meet this challenge ever since 1970.  From a recent low of 2.6-Mbd installed New Capacity in Y2k, this metric has been on a steady rise, culminating in an incredible 5.2-Mbd of facilities in 2010.

Resource availability for capacity additions poses no constraint until Year 2060.  With 1,360-Gb of Proved Reserves, the Industry doesn't need a newly discovered barrel of oil 'til Year 2054.  For over two decades the sector has relied on a supply chain that pre-supposes a 40-yr reserve/production ratio.  This means the exploration sector need only convert from Resource to Proved Reserves an amount slightly in excess of the amount it consumes ... 33-Gb per year.  The performance over the past ten years has actually been 58-Gb/year!

Actual annual production will be affected by Price & Demand forcings, sometimes influenced by natural disaster, weather and geopolitical events.  I have attempted to account for these nuances by adjusting for future economic Recessions and spike events.  The recent record 6.1 Mbd of global Surplus Capacity in early 2010 was instructive and the model strives to maintain an avg 5-Mbd throughout the Century.  It is the foremost factor in securing reasonable Crude Prices over the duration.

 North American Preparedness

The soft post-peak decline masks the critical necessity for North American jurisdiction governments, policymakers and stakeholders to have substitutions, infrastructure & conservation measures in place for the time when gasoline & diesel fleets eventually face peril.  The Barrel Meter & Gas Pump models currently do not forecast Crude Price and gasoline will permanently breach the Light Vehicle Sales Barrier.

But should such a scenario unfold within two decades, dire consequences will prevail.  The Light Vehicle Sales pace would plummet by 2-5 million units per annum.  PS-2500 has been warning for some time that prudent mitigation should guide the transportation sector to significantly wean itself off gasoline/diesel based fuels.

 Saudi Arabia

Russia & Saudi Arabia have enjoyed a friendly rivalry for the title of World's leading All Liquids Supplier nation for three decades.  OPEC mandated restrictions on member quotas since Autumn 2008 had enabled Russia to slip ahead, but the Libya episode has afforded the Kingdom the opportunity to regain the title once again and in the process set new annual/quarterly/monthly records!  Albeit the Kingdom announced in 2007 it was relinquishing its role as swing producer, its realization that triple-digit crude oil prices jeopardizes a stable world economy has resulted in Saudi Arabia again becoming more pro-active.

Saudi Aramco started 2012 with an unrivalled 2.0-Mbd Surplus Capacity and 12.0 MSC (maximum sustainable capacity).  This huge surplus capacity is masking the reality that the Kingdom has passed a major milestone:  the Peak of its MSC.  Trendlines Research declared in 2009 that KSA's 12.5-Mbd MSC record that year would never again be exceeded.  MegaProject analysis indicates there are insufficient new facilities planned within the visible horizon to outpace the nation's Underlying Decline Observed factor.

After many years of loyal support, my estimate of the Kingdom's Regular Conventional Oil URR has been drastically reduced over the past four years ... to 270-Gb.  The discrepancy between this linearization-indicated figure versus the 900-Gb RCO resource base touted by the Kingdom is rather disturbing.

Trendlines Research calculates Saudi UDO to be 0.27 Mbd/yr (2.5% of 2012 All Liquids).  Even assuming this to be a stable metric, the completion of announced MegaProjects would mean MSC of only 11.6 Mbd by the end of 2015.  Saudi Arabia must install an additional 1.0 Mbd in unannounced new facilities before 2016 to avoid 2009 being deemed its MSC Peak ... an almost impossible task at this juncture considering lead times.

This historic event is somewhat consistent with my calculation that KSA crossed the midpoint of its light sweet crude URR in 2012Q1.  Regardless, its reserves are quite large and the nation will continue to be the globe's number one (or two) All Liquids supplier for a generation.  Production Capacity of its All Liquids will not sink below 10-Mbd (8-Mbd RCO) prior to 2028.  Aramco has many strategic options and is vulnerable to OPEC mandates.  The unrivalled Surplus Capacity makes it impossible to forecast if Saudi production will ever surpass the 2011 peak.  See my separately released 5th Annual Saudi Outlook - an update for further discussion.

 Crude Price Components & Volatility

In the six months from July/2008 to Jan/2009, the avg monthly price for USA contract crude suffered a decline from $129 back to the same $37/barrel price level it had been at in Dec/2004.  Below, the components of this $92 collapse are examined. 

The major reason for the shocking correction is directly related to traders' confidence in seeing robust Surplus Capacity being reinstated ... via a combination of the 5-Mbd collapse in Consumption & the historic magnitude of Megaprojects coming on stream.  The TRENDLines Barrel Meter has been quantifying the price components of Crude Price and Gasoline since 2003 and estimates the restoration of Surplus Capacity @ $34/barrel.  With time, it is hoped the sector will come to realize the critical importance of this fundamental element in maintaining reasonable Crude Prices.

To that end, PS-2500 methodology has been tweaked to strive for a minimum 5-Mbd spare capacity thru to 2100.  When Saudi Arabia declared in 2007 it would no longer play swing producer, there were two reasons:  (a) with global production of 85-Mbd, the Kingdom felt its ramp-up potential was of too little consequence to move markets;  & (b) the $12-billion cost of developing 1-Mbd of capacity was considered too high a price for its rare implementation.

Due to imposed OPEC quota restrictions, Aramco by circumstance has today the ability to call up an additional 1.75-Mbd of crude (included in 4.3-Mbd global spare capacity).  The market has priced this in, but down the road KSA has a stated preference of trimming its idle capacity to only 1.5 Mbd.  The Barrel Meter reveals at least 5-Mbd of Surplus Capacity is necessary for equilibrium pricing.  Hopefully in the near future, Iraq, Russia, Brazil, USA & Canada can share more of the responsible, critical role of maintaining a portion of the globe's callable Surplus Capacity.

From Oct/2006 to July 2008, the McPeakster fraternity was successful in originating/disseminating web-based rumours that Saudi Arabia's Ghawar giant field was in terminal decline.  PeakOildotcom, theOilDrum, Matt Simmons & Jeff Rubin (ex-CIBC WM) were the main players that wrongly translated a reversal of Saudi extraction to be a harbinger of overall global decline.  But, as the Kingdom increased production from 8.7 Mbd to 9.5, the hoax by these perpetrators was exposed.  Prices plummeted as traders raced to eradicate their wrongheaded Depletion Premium as a pricing component.  It can be safely said that the proponents of the myth of imminent Peak Oil (McPeaksters) have since 1989 been the best thing ever to have happened to the sector since invention of the automobile.

The second largest collapse price component is USDollar Debasement.  Failure of the American Congress to address its future structural deficits started a forcing in April 2004 that just kept growing.  Fortunately perhaps, the safe haven status of American investment instruments during the coincident 2008 Liquidity Crisis shaved $28/barrel off peak prices.

Stress Premium is the most volatile of Crude Price sub-component.  This "phantom" issue is also the most difficult to quantify and least understood.  It includes geopolitical issues, media noise-du-jour, weather events & natural disaster.  The Autumn 2008 correction saw $2/barrel attributed to this and another $26/barrel for related Excess Margin.

Of lesser importance during the 2008 price move were international Inventory Draws ($-1/barrel), Extraction costs ($10) & Speculation/Hedging activity ($-1).  Together these seven pricing components comprised the $92 (net) spike from $37 in Dec/2004 to $129 and back again.

After successfully predicting the 2011 spike (and its ramifications) and sudden downside plunge a year in advance, today the Barrel Meter suggests Crude Price attained equilibrium in June and subject to caveats will trade in  a fairly narrow range 'til 2014Q3 when ever-rising Extraction costs will be the main driver of Crude Price as it resumes it secular (albeit bumpy) uptrend.

As explained above, July 2008 was a perfect storm of contributing factors.  Even in the general commodity headiness of that Summer, I have found Crude Price was in no fashion exceeding its Fundamentals Fair Value.  The Barrel Meter inset chart tracks Crude Price variance from FFV since 1999.  It validates my stalwart position the historic spike was not a bubble.  This metric reveals Crude Price was precisely at FFV in July 2008.  OTOH, the late 2009 spiking activity appears to have no basis in fundamentals.  This real bubble (as evidenced by obscene IOC reported earnings) saw Crude Price rocket a lofty 40% above FFV - a premium not seen since late 2002.

Since Nov/2009, the Barrel Meter model has discovered four definitive Oil/GDP ratios which signal significant economic events.  The first was the line-in-the-sand where USA Light Vehicle Sales are stymied.  The demarcation today is $109/barrel for RAC (WTI $5 less).  In Feb/2010 the Price Spike Ceiling was found.  It marks the point where demand destruction sets a limit on surging crude prices (July 2008).    In April 2010 the critical ratio (presently $127/barrel) was found which if crossed for any sustained time would induce a new round of G-20 Recessions similar to the events in early 2008.  In Oct/2011 the threshold was found (PEAK DEMAND Barrier) where above which global Consumption ceases to grow.  Interpretation of how these and other factors play a part in pricing structure can be viewed via my Barrel Meter & Gas Pump charts & discussions.  The former includes 1-Yr, 5-Yr & 10-Yr & Year 2035 price targets, Fundamentals Fair Value variance inset.  The latter identifies the USA's Light Vehicle Sales Barrier and Price Spike Ceiling for USA gasoline.

 Trivia

Proved reserves (1,360-Gb) have doubled since 1978 and grew by an 58-Gb/yr over the last ten years ... 26-Gb net after 32-Gb of annual consumption deducted.

Generally, for every $1/barrel increase in Crude, another 22-Gb of resource is added to URR.

Excluding BTL, 1,319-Gb of the 6,911 Gb of global URR has been consumed, thus worldwide Depletion is currently 19%.  The Global Depletion Rate is 0.5%/yr today (32-Gb annually extracted liquids as a percentage of global URR).  If measured as a percentage of remaining resource (5,627 Gb), it is a higher 0.6%/yr.

$43/barrel:  global production-weighted avg for oil exploration, development, lift & overhead costs in Dec/2012.  Price range includes:

• $6 - $30/barrel for regular conventional oil

• $54 (Brazilian sugar cane) to $504 (algae biofuel)

• $55 avg for bitumen production

• $60 avg for (light tight) shale oil

• $65 avg for deep-sea projects

$12 Billion - avg cost of commissioning 1-Mbd of new extraction capacity

$26 Billion - Avg cost of commissioning 1-Mbd of refining capacity

$5 Billion - floating LNG plants

$405 Million - avg cost of new rigs

$10 trillion - cost of maintaining & commissioning extraction/refining capacity to 2035

Deep Sea drilling record:  Japanese probe, Chikyu, reached 7,740 metres (25,400') below ocean surface off Japan's north coast

USA:  Assisted by Shale Oil, Kerogen & Biofuels production, the USA will reclaim its status as #1 global All Liquids producer in 2021; and will exceed its 1985 ALL Liquids extraction record of 11.2-mbd in 2024.  USA passed its 50% URR midpoint in 1966, four years prior to its RCC Peak.  It will attain oil self-sufficiency in 2044.

Regular Conventional Oil (light sweet crude) passed the midpoint of its URR (1,998-Gb) in Aug/2006, following its 69-Mbd May 2005 global production PEAK

1-Mbd = sufficient fuel for 5% of all vehicles on-the-road for a single day

(PS-2500 January Update cont'd above...)

 McPeaksters ... & their myths

In 1972, the Club of Rome attempted to shock stakeholders, politicians and policy makers with its Limits to Growth study forecast of All Liquids Peak Oil:  117-Mbd in 1995.  They attempted to promote awareness natural resources are finite, but in jeopardy with growing global population.  This was underscored in 1974 with M K Hubbert's similar prediction:  111-Mbd in 1995 (excluding NGL, deep sea, polar, Orinoco & tar sands).

Because OPEC manipulation truncated both these predictions, Colin Campbell attempted to update the long-term prospects for All Liquids.  The Irish geologist stunned many when in 1989 he declared present All Liquids flow (65.5 Mbd) would never again re-attain its 1979 pre-crisis Peak of 67 Mbd (see all 3 charted).  Well, he was very wrong (88 Mbd today).  This episode made it quite clear the uncertainty & price volatility caused by such pessimistic reports (even by well-intentioned professionals) required formal addressing by the energy sector.

In that regard, we saw OECD's IEA, USA's EIA, OPEC and major IOCs step forward with their own annual & bi-annual long-range projections in an attempt to set the record straight and stabilize the marketplace.  The effort did not last long.  After Y2k, the ranks of McPeaksters (promoters of "imminent" Peak Oil) swelled with a growing element from the lunatic fringe.  Campbell's well-meaning alert was hijacked and discourse deteriorated to the realm of economic and social collapse whilst the world runs out of oil.  As the rhetoric escalated, I thought it would be constructive to provide a platform for objective opposing views of the future.

And the TRENDLines multi-model oil depletion study was born...

A new Annual Production Record of 87.0-Mbd was set in 2011.  With this, 2012 marks the 23rd consecutive year that McPeaksters are mistakenly proclaiming "Peak Oil was last year and dire consequences are imminent."  And with 2012 setting another annual record (89 Mbd), 2013 is destined for the same attribution!  Please note that All Liquids extraction was a mere 66-Mbd when in 1989 McPeaksters first declared that oil had indeed peaked!

The worst case scenario presented in the 2035 Outlook (chart#3) typifies the pessimistic position of McPeaksters.  Starting in 1989, well-intentioned souls within that fraternity have put forward projections, but each and virtually every attempt has either failed the test of time or has been found to exhibit deficient methodology.

The list includes Colin Campbell, Richard Duncan & Walter Youngquist, Samsam Bakhtiari, Chris Skrebowski, Stuart Staniford, Anthony Eriksen, Matt Simmons, Rembrandt Koppelaar, Fredric Robelius, Jeff Rubin, Kjell Aleklett, Sadad al Husseini, Robert Hirsch & Jean Laherrère.  Their upward revisions have become commonplace.

This list will grow when the final Outlook at the verge of invalidation also passes into posterity.  The only remaining effort is by Chris Skrebowski (2015) who had eluded disqualification by repeated ad nauseum upward revisions due to inherent flaws in his "worst case" Megaprojects model.

The common denominator among these stalwart practitioners was a failure to recognize within their models one or more of four guiding principles:  that rising crude price expands URR; that the very long lead time for MegaProjects leaves upcoming new capacity outside their visible horizon;  an overestimation of Underlying Decline Rate Observed; & chronic underestimation of global surplus capacity.

Rising URR has the most impact.  TRENDLines 22-model URR Estimates Avg reveals the All Liquids resource pool has doubled since '95 to 4.2-Tb currently.  The première failed Outlooks by Club of Rome (120-mbd in 1995), M King Hubbert (34-mbd in Y2k) & Colin Campbell (66-mbd Peak in 1989) are directly attributable to their very low URR estimates (2.15-Tb, 1.25-Tb & 1.57-Tb respectively).

It is a little known fact that if no further discoveries were made after today's date, present proven reserves of 1,360-Gb wouldn't be fully consumed 'til 2053.  For two decades the oil sector supply chain has operated within a regime that assumes a 40-yr Reserve/Production ratio.  To maintain this metric, the industry has added an avg 54-Gb to the proven reserve tally over the last ten years.  This more than covers present Consumption of 32-Gb/yr.  The McPeakster hypothesis that Peak Oil occurs 40 years after Peak Discovery is utter nonsense considering economic realities and industry practices.

Generally, for every $1/barrel increase in Crude, another 22-Gb of resource is added to URR.  It irks McPeaksters to no end that Michael Lynch (& Morry Adelman) had it right back in 1997:   As goes Price ... so goes URR & Peak!  EIA has openly supported Lynch's 1989 position that as Crude Price generally rises from $10 toward $40/barrel, the economic non-conventional resource would expand to 5-Tb over a 25 year time frame (2014).  In that regard, the Lynch prediction is on pace when one considers the average URR in our monthly 19-model Depletion Scenarios update is already 4.3-Tb.

A related common flaw wrt URR is the failure of some Outlooks to account for exhaustion of the designated resource.  The error of too low a Peak and/or an overly aggressive post-peak Decline Rate creates a visible "dogleg" to exhaust their stranded URR, examples of which can be seen in our depiction of full peak-to-exhaustion production profiles in the Trendlines Peak Oil Depletion Tier-2 Scenarios, and especially visible in our annual tracking of the Colin Campbell Depletion Model.

To avoid the visible horizon dilemma, one must sacrifice some degree of purism, and implement a best efforts factor for ongoing MegaProject activity.  Avoiding this practice plagues practitioners to constant upward revisions as Producers announce new facilities.

The 2035 Outlook of my Peak Scenario-2500 (chart #3) includes a hypothetical worst case scenario that assumes no further MegaProject construction will occur other than those announced to date.  It assumes UDRO will rise to 4.2% per annum; and thus Global Supply deteriorates to 20-Mbd by 2035.  The resultant "Scary Wedge" naturally seems ominous.  In reality however, that Scary Wedge started way back in 1970 and has been stalwartly in-filled by Producers almost every year.  The sector recreates a new Russia every three years!

History reveals that the conservative bottom-up trajectory shown in the 2035 Outlook within PS-2500 slowly rises over time to merge with the historic trend line ... a trajectory that assumes a 3.4-Mbd Annual New Capacity trend until resource constraints make their presence after 2069.  Or there could be a real shocker - Demand growth evaporates!

A more recent strategy by McPeaksters like PeakOilDotcom, theOilDrum, EWG, Jeff Rubin (formerly with CIBC World Markets) & Robert Hirsh, has been their misleading adaption of "the Wedge" by a false tweaking of it to make it look more SCARY.  Whereas our Wedge includes a notation that Underlying Decline began in 1970 and has been addressed thru the decades, their new & improved SCARY WEDGEs imply it is a new 2009 phenomenon.  To enhance the SCARY WEDGEs, some have incorporated erroneous global Underlying Decline Rates as high as 9%.  "Next year" is always the first year of terminal decline.  And 'cuz new records are set, the chart is always "redrawn" every year!

Whether via the SCARY WEDGE or general web-forum discussion, McPeaksters have taken to misleading the public, the Media & policymakers by substituting the IEA's All Liquids annual 3.3% UDRO with higher rate subsets from within the IEA WEO-2008 Outlook.  The detailed study within the Outlook mentions pre-EOR underlying decline rates of 15% (deep sea), 10% (2030 worldwide), 9% (2007 worldwide), and post-EOR observed rates of 8.6% (2030: conventional, deep sea, arctic & NGL) & 6.7% (2007: same).  These subset ratios have no place in their All Liquids Wedge charts.

Scrutiny by Trendlines Research has embarrassed some McPeaksters into replacing the misleading figures above with more conservative figures.  In turn, they have employed a 4.5% UDRO stat borrowed from their long time Nemesis:  CERA.  But even in this action of desperation their activity hides behind a screen of dishonesty:  4.5% is from an aged CERA study.  It is commonly known within the sector that in April 2008 CERA adopted a new and lower 2.1% UDRO rate for All Liquids.  CERA reconfirmed its 2009-2030 2.1% avg loss calculation in August 2009.

The setting of yet another new annual production record in 2008 had McPeaksters in utter disarray.  The new 2010 record left them void of credibility.  The foundation for their flawed methodology and talking points is evident in a comparison of our UDRO analysis positions.  Our chart#4 illustrates the PS-2500 analysis with its 2.8% Avg Rate over the 1970-2011 span.  McPeaksters in turn present no data at all and came up with a consensus determination of an incremental rise from 0% in 2002 to 9% in 2009.  It was an utter fabrication.

Another factoid absent from McPeakster sites and presentations is that NGLs and the five component non-conventional streams are all in "growth mode".  Today, Regular Conventional Crude is only 72% of All Liquids production.  Having peaked @ 69 Mbd in 2005 and down to 64 in 2012, nobody disputes the Decline occurring in its post-plateau fields and provinces.

None of the category flows comprising the "other 28%" of All Liquids Production are expected to Peak prior to 2029.  By 2039, they will make up 50% of All Liquids production.  Yet the McPeakster fraternity is consumed with narrow discussions surrounding Regular Conventional Oil and ignores the rising significance of NGL & non-conventionals.

In summary, there are four major variances from PS-2500 and almost all the McPeaksters:  (a) my 3.3% current Underlying Decline Rate Observed loss factor vs their 5-9% guesstimates;  (b) my extrapolation of the 3.6 Mbd trend for annual New Capacity vs their position no further installations will be announced; & (c) my projection of a 62-Mbd plateau to 2023 for Regular Conventional Oil vs their adoption of Colin Campbell's forecast of continuation of the 2.2% decline that commenced in 2006 and stretching to 2030; & (d) chronic underestimation of global Surplus Capacity (5-Mbd today).  As RCO is the largest component of All Liquids, its demise will determine whether Peak Oil is imminent or a generation away!

Misinformation surrounding the use of The Scary Wedge by McPeaksters is not a new phenomenon.  It is a mere ploy akin to tactics used by the Lunatic Fringe elements within the Global Warming fraternity.  Remember Al Gore's stepladder stunt?  Or his compelling conception of Atlantic waters lapping the lower stories of Manhattan skyscrapers?

Rational Climate Change debate has been harmed irreparably by the alarmist "imminent global warming" exaggerations by agenda driven zealots.  Sound familiar?  In general they hate cars, big industry, metropolitans, red meat, forestry and mining. furs and population growth.  They revel in the prospect that their dire forecasts of TEOTWAWKI will transform society to sustainable agrarian communes.  The current hysteria is a remnant of the old Zero Population Growth proponents.

The Lunatic Fringe would have folks believe that PEAK OIL will collapse global economies and have us all living on Mennonite/Amish style farmsteads.  Fiat currencies will fail; armed hordes will roam the Americas; subdivisions will be bulldozed as non-farmers rebuild the inner cities;  and finally, their Die-Off theory promotes a sustainable society where 5 Billion souls will be wiped off the face of the Earth.  This mix of anarchists & survivalists has been preparing since 1989 to be part of that last 1 Billion! 

Fortunately, with history as our guide, there was no such calamity when in 1980, 1981 & 1982 global oil production declined by a staggering 5%/yr.  Global GDP advanced at 1.7% regardless.  Averaged over these three years, the USA did not have negative GDP growth.

No respected Agency foresees a peak in total global energy production in the foreseeable future.  Renewable & Nuclear alternatives are poised to more than surpass the decline in fossil fuels.  The demise of mankind is thus grossly over estimated.

As a final word on McPeaksters, their rhetoric seems to have overwhelmed the few well-intentioned geologists that were early to the discussion.  Far too many within this fraternity are extremists from the Lunatic Fringe.  It is a psychosis.  They are clinically depressed souls that seek the collapse of society so that they alone may rise in the aftermath.  Many of them have long ago been marginalized and/or disowned by family, friends, co-workers and neighbours.

They dwell in Internet forums seeking affirmation from likeminded survivalists.  Mostly of the Boomer demographic, many are dismayed that the idealism of their youth has not come to fruition.  Some are burdened with the additional baggage of a failed marriage(s) and dotcom or real estate investments.  The clock is ticking, and their future is bleak.

The prospect of collapsing economies, fiat currencies, institutions and the rule of law allows them a glimmer of hope for a second chance at life.  Surely their decades of preparation:  the mountainside cabin, the rifles, ammo, pickup, chainsaw, lotsa cans and a ton of dry goods will be recognized and rewarded by the bestowal of leadership in a new "amerika".  These folks need pity, and lotsa help ... not patronization.   The mainstream Media rightfully dismisses them.

Finally, a word to all the idiots in lala land that believe solar & wind power is about to save our asses & the planet:  every year, the EIA updates its forecast for the mix of primary electrical production that it expects in 2035.  The 2011 version of its Int'l Energy Outlook reveals that only 7% of the global mix will be solar, tide, geothermal & wind based.  Let's repeat that:  7%.  Adding hydro, Renewables are a mere 23% of the total tally.  The balance is comprised of All Liquids (2%), Coal (37%), Natural Gas (22%) & Nuclear (16%).  Looking at global energy consumption in 2035, the breakdown is All Liquids (incl BTL) 29%, Coal 27%, Natural Gas 23%, Nuclear 7% & Renewables 14%.

Vegan-pussies & latté sippers with a man-crush on the Prius Hybrid were uncontrollably elated with the news that after 12 years of worldwide sales, Toyota sold its millionth vehicle in May 2009.  Well sorry suckers, the Ford Mustang did that in 18 months!  And Camaro/Firebird did it 42 months.

Why aren't the environmentalists at the showrooms buying the Chevy Volt? Only 18,000 EV's sold in 2011 in all Canada & USA.  Only 2,000 sold in March.  The plant shut for five weeks due to lack of demand.  In those same five weeks, our Oshawa Ontario facility pumped out 12,500 Camaros!  The enviro-nazis disseminated conspiracy theories for two decades accusing "big oil" of sabotaging the electric car despite GM saying nobody wanted 'em.  Yes, they are same suspects that created Global Warming.  By promoting coal & gas fired power plants instead of nuclear, misguided environmentalists ironically created the very fossil fuel dominated world that they are now threatened by...

Lacking an understanding of the Underlying Decline Observed process has caused much of the angst within the McPeakster fraternity this past decade.  Their paranoia that Proved Reserves figures have been falsified and Underlying Decline Rate Observed is as much as 9% per annum has been fed by gloom merchants such as Jeff Rubin & the late Matt Simmons.

Our model is based on the premise that the cycle crests of underlying decline observed are caused by the American Recessions.  With the USA economy presently in Recovery, it is my position that short term moderation of UDRO is underway and imminent Peak Oil (2008-2015) is a misguided fantasy within the fraternity that never lets facts get in the way of another scary story.

Underlying Decline Observed (UDO), Underlying Decline Rate Observed (UDRO) & Underlying Decline Rate (UDR) are terms coined by Freddy Hutter of TrendLines in our 2008/11/12 & 2007/12/19 Depletion Scenarios updates

"McPeakster" was coined by Freddy Hutter of TrendLines in our 2008/2/11 Scenarios update

"McDoomer" coined by Freddy Hutter of TrendLines in our 2009/1/23 PS-2500 update, but he originated the term at the PeakOildotcom forums in June 2008

"McBears" coined by Freddy Hutter of TrendLines at Seeking Alpha and then the September USA Recession Index in September 2010

"Demand Destruction Barrier" was coined by Freddy Hutter in the November 2009 Barrel Meter Discussions

"Oil Price Induced G-20 Recessions" was coined by Freddy Hutter of TRENDLines Research in February 2010 Barrel Meter Discussions

"New Car Sales Collapse Threshold" & "Light Vehicle Sales Collapse Threshold" (February 2011) were coined by Freddy Hutter in the Gas Pump Discussions

"Peak Demand Barrier" was coined by Freddy Hutter of TRENDLines in the October 2011 update of PS-2500 (2011/10/17)

"Price Spike Ceiling" was coined by Freddy Hutter of TRENDLines in the February 2012 update of  & Gas Pump Discussions

"Geopolitical Fear Premium" was coined in March 2008 & "Media Noise-du-jour" & Stress Premium were coined by Freddy Hutter of TRENDLines in the March 2012 & July 2012 updates of Barrel Meter Discussions.

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Peak Scenario 2500 Archive with text for 2013  2012  2011  2010  2009  2008  2007  (available @ MemberVenue)

Peak Scenario 2500  Chart archive w/o text for 2013  2012  2011  2010  2009  2008  2007  (available @ MemberVenue)

2007/2008/2009/2010/2011/2012/2013 Revisions Archive of Freddy Hutter's Peak Scenario 2500:    (with text)  or  (charts only) ... available @ MemberVenue only

Feel free to email me with questions, comments or permissions

Below, the January 2013 version of Peak Scenario-2500  is compared with 13 other current Outlooks in our Peak Oil Depletion Tier-1 Scenarios analysis:

click this chart for the presentation & footnotes regarding our 15-model Peak Oil Depletion Scenarios Presentation

Please visit our similar 22-model URR Estimates venue for more on this topic