PEAKING OF WORLD OIL PRODUCTION:
IMPACTS, MITIGATION, & RISK MANAGEMENT
Robert L. Hirsch, SAIC, Project Leader
Roger Bezdek, MISI
Robert Wendling, MISI
The peaking of world oil production presents the U.S. and the world with an
unprecedented risk management problem. As peaking is approached, liquid fuel
prices and price volatility will increase dramatically, and, without timely mitigation,
the economic, social, and political costs will be unprecedented. Viable mitigation
options exist on both the supply and demand sides, but to have substantial
impact, they must be initiated more than a decade in advance of peaking.
In 2003, the world consumed just under 80 million barrels per day (MM bpd) of
oil. U.S. consumption was almost 20 MM bpd, two-thirds of which was in the
transportation sector. The U.S. has a fleet of about 210 million automobiles and
light trucks (vans, pick-ups, and SUVs). The average age of U.S. automobiles is
nine years. Under normal conditions, replacement of only half the automobile
fleet will require 10-15 years. The average age of light trucks is seven years.
Under normal conditions, replacement of one-half of the stock of light trucks will
require 9-14 years. While significant improvements in fuel efficiency are possible
in automobiles and light trucks, any affordable approach to upgrading will be
inherently time-consuming, requiring more than a decade to achieve significant
overall fuel efficiency improvement.
Besides further oil exploration, there are commercial options for increasing world
oil supply and for the production of substitute liquid fuels: 1) Improved Oil
Recovery (IOR) can marginally increase production from existing reservoirs; one
of the largest of the IOR opportunities is Enhanced Oil Recovery (EOR), which
can help moderate oil production declines from reservoirs that are past their peak
production: 2) Heavy oil / oil sands represents a large resource of lower grade
oils, now primarily produced in Canada and Venezuela; those resources are
capable of significant production increases;. 3) Coal liquefaction is a wellestablished
technique for producing clean substitute fuels from the world’s
abundant coal reserves; and finally, 4) Clean substitute fuels can be produced
from remotely located natural gas, but exploitation must compete with the world’s
growing demand for liquefied natural gas. However, world-scale contributions
from these options will require 10-20 years of accelerated effort.
Dealing with world oil production peaking will be extremely complex, involve
literally trillions of dollars and require many years of intense effort. To explore
these complexities, three alternative mitigation scenarios were analyzed:
! Scenario I assumed that action is not initiated until peaking occurs.
! Scenario II assumed that action is initiated 10 years before peaking.
! Scenario III assumed action is initiated 20 years before peaking.
For this analysis estimates of the possible contributions of each mitigation option
were developed, based on an assumed crash program rate of implementation.
Our approach was simplified in order to provide transparency and promote
understanding. Our estimates are approximate, but the mitigation envelope that
results is believed to be directionally indicative of the realities of such an
enormous undertaking. The inescapable conclusion is that more than a decade
will be required for the collective contributions to produce results that significantly
impact world supply and demand for liquid fuels.
Important observations and conclusions from this study are as follows:
1. When world oil peaking will occur is not known with certainty. A fundamental
problem in predicting oil peaking is the poor quality of and possible political
biases in world oil reserves data. Some experts believe peaking may occur soon.
This study indicates that “soon” is within 20 years.
2. The problems associated with world oil production peaking will not be
temporary, and past “energy crisis” experience will provide relatively little
guidance. The challenge of oil peaking deserves immediate, serious attention, if
risks are to be fully understood and mitigation begun on a timely basis.
3. Oil peaking will create a severe liquid fuels problem for the transportation
sector, not an “energy crisis” in the usual sense that term has been used.
4. Peaking will result in dramatically higher oil prices, which will cause protracted
economic hardship in the United States and the world. However, the problems
are not insoluble. Timely, aggressive mitigation initiatives addressing both the
supply and the demand sides of the issue will be required.
5. In the developed nations, the problems will be especially serious. In the
developing nations peaking problems have the potential to be much worse.
6. Mitigation will require a minimum of a decade of intense, expensive effort,
because the scale of liquid fuels mitigation is inherently extremely large.
7. While greater end-use efficiency is essential, increased efficiency alone will
be neither sufficient nor timely enough to solve the problem. Production of large
amounts of substitute liquid fuels will be required. A number of commercial or
near-commercial substitute fuel production technologies are currently available
for deployment, so the production of vast amounts of substitute liquid fuels is
feasible with existing technology.
8. Intervention by governments will be required, because the economic and
social implications of oil peaking would otherwise be chaotic. The experiences of
the 1970s and 1980s offer important guides as to government actions that are
desirable and those that are undesirable, but the process will not be easy.
Mitigating the peaking of world conventional oil production presents a classic risk
! Mitigation initiated earlier than required may turn out to be
premature, if peaking is long delayed.
! If peaking is imminent, failure to initiate timely mitigation
could be extremely damaging.
Prudent risk management requires the planning and implementation of mitigation
well before peaking. Early mitigation will almost certainly be less expensive than
delayed mitigation. A unique aspect of the world oil peaking problem is that its
timing is uncertain, because of inadequate and potentially biased reserves data
from elsewhere around the world. In addition, the onset of peaking may be
obscured by the volatile nature of oil prices. Since the potential economic impact
of peaking is immense and the uncertainties relating to all facets of the problem
are large, detailed quantitative studies to address the uncertainties and to
explore mitigation strategies are a critical need.
The purpose of this analysis was to identify the critical issues surrounding the
occurrence and mitigation of world oil production peaking. We simplified many of
the complexities in an effort to provide a transparent analysis. Nevertheless, our
study is neither simple nor brief. We recognize that when oil prices escalate
dramatically, there will be demand and economic impacts that will alter our
simplified assumptions. Consideration of those feedbacks will be a daunting task
but one that should be undertaken.
Our study required that we make a number of assumptions and estimates. We
well recognize that in-depth analyses may yield different numbers.
Nevertheless, this analysis clearly demonstrates that the key to mitigation of
world oil production peaking will be the construction a large number of substitute
fuel production facilities, coupled to significant increases in transportation fuel
efficiency. The time required to mitigate world oil production peaking is measured
on a decade time-scale. Related production facility size is large and capital
intensive. How and when governments decide to address these challenges is
yet to be determined.
Our focus on existing commercial and near-commercial mitigation technologies
illustrates that a number of technologies are currently ready for immediate and
extensive implementation. Our analysis was not meant to be limiting. We believe
that future research will provide additional mitigation options, some possibly
superior to those we considered. Indeed, it would be appropriate to greatly
accelerate public and private oil peaking mitigation research. However, the
reader must recognize that doing the research required to bring new
technologies to commercial readiness takes time under the best of
circumstances. Thereafter, more than a decade of intense implementation will
be required for world scale impact, because of the inherently large scale of world
In summary, the problem of the peaking of world conventional oil production is
unlike any yet faced by modern industrial society. The challenges and
uncertainties need to be much better understood. Technologies exist to mitigate
the problem. Timely, aggressive risk management will be essential.