118 comments on Fatih Birol Presents the IEA World Energy Outlook 2007
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Ask me about the weather, and I talk about net oil exports.
A reminder: Our (Khebab/Brown) middle case is that the top five net oil exporters (about half of current net exports worldwide) hit zero net exports in 2031. Our model and recent case histories, e.g., the UK and Indonesia, show that net export decline rates tend to accelerate with time (worse than an exponential decline rate).
Even if we assume flat total liquids production for Saudi Arabia (11 mbpd in 2005), at their current rate of increase in consumption, their overall long term net export decline rate (2005 to 2030) would be -10%/year, resulting in zero net exports in 2036 (and again, the net export decline rate would start out at a low rate and accelerate).
I think that the big surprise is going to be a rapid decline in net oil exports from Russia.
Remind me how this works. I would say the UK was able to hit zero exports as oil is/was a tiny part of the total economy (1.7mbpd x $90 = ~$56bn per year from a ~$2 trillion economy). The same can not be said for major exporters like Russia and especially Saudi. When a country’s economy depends in large part on the revenue generated from oil export, a sizeable proportion of exports have to remain. It is folly to suggest that the Saudi economy could maintain/grow internal consumption as exports fell to zero. Without oil exports there is no Saudi economy, no money, without money there are no imported BMWs. (CIA World Factbook has this sentence “The petroleum sector accounts for roughly 75% of budget revenues, 45% of GDP, and 90% of export earnings.”) Unless you are suggesting Saudi develops a complete economy that doesn’t require imports – I’d say impossible with 28 million (+2% pa) living in a desert – we can be certain Saudi will be a significant exporter for just as long as they remain a significant producer and consumer of oil.
Zero net exports from Saudi in 2036 despite constant 11mbpd production? Not a chance.
First and foremost, the severe problems for importers arise not from the proximity to zero net exports, but from the first 50% or so decline in net exports. Also, note that as oil prices skyrocket, an exporter can and will generate more cash flow from declining net exports.
I thought that the UK and Indonesian case histories were interesting.
The UK is rich, taxes energy consumption and had basically flat liquids consumption over the decline period.
Indonesia is relatively poor, provides energy subsidies and had increasing liquids consumption over the decline period
Result?
The UK crashed to zero in seven years. It took Indonesia a little longer; they crashed in 8 years.
I would think that virtually every net oil exporter in the world would fall somewhere along a demographic continuum from Indonesia to the UK.
I certainly agree that declining net exports driven in large part by increased exporter consumption is a major, perhaps the most significant, problem faced by importers. However this talk of zero net exporters from countries like Saudi who are so reliant on exports seems highly unlikely and in my mind distracted from what is otherwise a very valid point.
Indonesia is more like the UK than Saudi in terms of how important oil is to its economy. Indonesia has a GDP of $264.7bn, virtually the same as Saudi at $282bn. Their relative oil production (and historic export proportions) shows how less important oil exports are compared to Saudi and how Indonesia (like the UK) could afford to run net exports down to zero.
I don’t accept that the UK and Indonesia provide the endpoints of a continuum of important variables for the ELM.
Consumption is only part of the story.
The key indicator of the net export decline rate is consumption as a percentage of production at the final peak. And the overall UK net export decline rate was -55%/year, with flat consumption, because of their high consumption as a percentage of production. In any case, it's just a question of how rapid the net export decline rate is.
But a key point to keep in mind is what I call Phase One and Phase Two Net Export Declines. In Phase One, cash flows from export sales increases, even as volumes decline, because of rising oil prices. In Phase Two, cash flows from export sales decline, as volumes decline, because rising oil prices can't offset the volume decline.
Westexas:
I love your work, man, but this is silly. The UK and Indonesia could only go to zero because there was someone else exporting. You can't use the same decline rates for Iran, Russia and SA because the effect on the world price will be totally different when the exports from the last few big exporters start to decline and that will affect domestic consumption.
Now, the asymptotic approach to zero isn't going to be a picnic, but it seems certain that exports will continue at gradually diminishing levels until the end of the oil age. The threat of military action by the US on behalf of energy importers (whether they wish to acknowledge it or not) will keep markets "well supplied" as OPEC ministers love to say.
At what prices we will have to see. But the oil will be flowing.
As I said elsewhere, it's not the last half of the net export decline that causes the immediate problems for importers. It's the first half. Whether some key net exporters maintain some low level of exports for a long time is not really relevant once the world net oil export market has largely collapsed.
In "our" (Khebab did all of the hard work) presentation at ASPO-USA, we used low case, middle case and high case projections of production (based on HL) and consumption (based on a Monte Carlo analysis of prior consumption).
The shape of things to come? Consumption crashing ahead of production - in order to maintain export status. Which part of the ELM was it that forecast this?
Hey, I can hardly see that yellow bit in 2007 ;)
That's what the ELM is all about: things get ugly when consumption growth and production growth have oposite signs (and the first is positive).
Euan,
Are you sure you are not trying to support the ELM here? In any case, note that we don't have the final 2007 data yet. The EIA shows Indonesia (I believe a founding member of OPEC) at about 65,000 bpd net imports for 2005 and 2006.
As I have said elsewhere, whether some exporters maintain some low level of net exports or whether they actually precisely hit zero net exports and stay there is not really relevant to the big picture. What is going to torpedo the SS World Industrial Economy is the first 50% decline in world net exports.
In any case, in what I have described as the Phase One net export decline, I anticipate that their cash flow from export sales will increase, even as export volumes decline, because of rising oil prices.
Regardless of scale, in a world with increasingly tight supplies this seems like a huge problem. The graph above is pretty chilling if you ask me.
I wonder, do you have a similar graph for Saudi Arabia currently? It might give us an idea if it is following a similar trend to Indonesia.
I don't have Saudi to hand, but UAE is a good proxy. The danger with UAE is not rising consumption but falling production in the next 2 decades. Exports only begin exponential decline when the ratio of exports : production becomes small.
Thanks for this! I would expect UAE to be a lot closer to Saudi in any case.
See my post down the thread. Saudi Arabia will almost certainly show an accelerating net export decline rate from 2006 to 2007 versus 2005 to 2006; the only question is what the number is. We will have to see what happens in 2008.
Here's a recent article that also addresses this issue: http://www.iht.com/articles/2007/12/09/business/oil.php.
Most notably:
"The economies of many big oil-exporting countries are growing so fast that their need for energy within their borders is crimping how much they can sell abroad, adding new strains to the global oil market."
"Indonesia has already made this flip. By some projections, the same could happen within five years to Mexico, the No. 2 source of foreign oil for the United States, and soon after that to Iran, the world's fourth-largest exporter."
"The report said "soaring internal rates of oil consumption" in Russia, in Mexico and in member states of the Organization of the Petroleum Exporting Countries would reduce crude exports as much as 2.5 million barrels a day by the end of the decade."
Chris,
The ME countries may not run the net exports down quite to zero, but they need to make their oil last for a very long time while it is all they have, other than sand, to leave to the following generations .
So, if the net exporters are sensible they will take more than a twenty year view, and will take care of their citizens ahead of other nations. Don't assume other countries will act like the UK - i.e. exporting oil two years ago at 40$ a barrel, now buying it back at 90$!
They will conserve their wealth and won't run unnecesary balance of trade surplus', this means exporting the absolute minimum they can get away with.
I would expect them to drop export volumes more quickly than depletion rate - then hold them at a level that will pay for imports that they can easily maintain for years and years.
On current form it looks like holding foreign currency or bonds is way too risky in the medium to long term.
It looks like the minimum decline rate of net exports for each exporter as their production peaks is going to be at least high single digits. For nations such as Mexico and the UK with deep water production decline rates can be expected to be even/much higher.
Of the 15 largest consumers only 4 import less than 90% of their needs – USA, China, India and Thailand – all the rest are very dependent on net exports.
There are other important uses for oil besides fuel. So, all these large users will very soon have rapidly diminishing supplies of oil available for transport - it isn't change that causes the problem, but rate of change.
The Saudi ruling class has enough money to keep the Mercedes coming till long after the oil is gone. The Saudi economy is another story. Per capita income in the KSA is dropping from population increase (down from 24k to 8k according to Crude Awakening). As oil production declines, the Saudis will have to choose between money from oil exports that drives the economy and energy from oil consumption that powers the economy. I would argue that either of those options will increase social unrest. I would not expect the KSA to still exist in 2031.
Chris, just a small comment in between here.
Many ME nations are acutely aware of this.
Hence the scramble for nuclear power.
Hence the very vocal plans to build the countries (like UAE) into tourism meccas that will generate revenue (i.e. diversify the economy).
Hence the quote from Sheikh Rashid: "My grandfather rode a camel, my father rode a camel, I drive a Mercedes, my son drives a Land Rover, his son will drive a Land Rover, but his son will ride a camel."
And I do agree that they may not be able to give up on exporting oil as easily as UK. That should be painfully obvious.
I'd like to see the Middle East nations with large trade surpluses today invest large amounts - literally a few billion dollars - into solar research. Primarily concentrating solar power (CSP). What could be done over a decade with that kind of investment? No idea, but I think it would be a worthy avenue for a cash rich, solar rich, current oil exporter to explore. Also likely more profitable than nuclear, given the geopolitical implications and uranium scarcity in the Middle East.
Chris Vernon said,
"'d like to see the Middle East nations with large trade surpluses today invest large amounts - literally a few billion dollars - into solar research. Primarily concentrating solar power (CSP)."
EXACTLY. It is interesting to note that some of the 'TRANS-MED" installations discussedfor getting electricity from the desert by way of CSP extend over into the middle east and Saudi Arabia.
Interestingly, North Africa and some of the oil poor areas of the middle east may turn out to have something very marketable in the future....open space for solar access! Won't it be ironic if some of the currently poorest areas of the world were to see some of the biggest economic expansion in the future, based on CSP and other solar energy developments? Times they are a changin'....:-)
RC
You don't need research on concentrating solar power. You need production engineering, that is, reducing the cost of building solar concentrators. The key is reducing the cost of maintenance, construction, and fabrication, in that order.
There is a difference between a product and a process. Concentrating solar power units are a product. Making them is a process, and that is where the room for improvement comes in.
My bet is that China will set up factories to make CSP cheap and export them to people who are competing with them for LNG. Like us?
The photovoltaics need research, though. We can always use another ten percent of electricity out of the silicon.
Hi Westexas,
I've been off ill so might have missed it but have you published the ASPO presentation or anything here regarding the ELM yet?
Nick.
No, we have both been busy on other projects. BTW, Drudge Report headline today (no linked story yet):
OIL-RICH NATIONS USE MORE ENERGY, CUTTING EXPORTS...
I have some suspicions as to where this story may be coming from (I have had several discussions with a reporter regarding this topic). We shall see.
I've worked your ELM model concept into a little (35 pages!) piece I wrote that tries to sum it all up called: "Peak Oil Joining The Dots..." available here FYI:
http://www.megatrends2020.com/Peak_Oil__Joining_The_Dots.doc
Regards, Nick.