PEAK DEMAND (100-Mbd) Triggered by $213/barrel Crude Oil in 2029

April 25th delayed FreeVenue public release of Jan 25th MemberVenue guidance ~ Today's monthly update of my global oil depletion model (Peak Scenario-2500) reveals there are sufficient Proved Reserves (610-Gb) and a demonstrated build capacity for a natural GEOLOGIC PEAK of 103 Mbd in 2031.  Post-peak production would decline at a reasonable 1.1%/yr to mid-Century.  This scenario assumes extrapolation of the long-term Consumption trend (1-Mbd/yr) and an avg annual New Capacity pace less than the current trend.  That said, this growth-as-usual oriented scenario will likely never come to fruition...

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 Peak Rates fall 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 themselves significantly over-estimating probable production rates.

Redesigned Demand modules have re-stated consumption projections to account for demand destruction associated with Crude Price approaching $363/barrel by 2035.  The four-decade 1-Mbd/yr Demand growth trend (upon which my "GEOLOGIC PEAK" scenario is based) is giving way to a waning growth rate that will see annual consumption eventually cease to rise after Crude Price surpasses permanently a definitive petroleum/GDP ratio threshold called the PEAK DEMAND Barrier (which I discovered in Oct/ 2011).

Because it is more probable for production to take this dampened path rather than one creating excessive surplus capacity, the emphasis of my monthly Outlook updates have since July 2010 favoured the more conservative "PEAK DEMAND" inspired scenario.  The March 2011 model run was the first to indicate production will PEAK due to an absolute decline in Demand rather than natural geologic constraints.  The PEAK DEMAND event (100-Mbd) will occur upon oil surpassing $213/barrel in 2029.

In that respect, today's PS-2500 monthly revision of the PEAK DEMAND Scenario reflects three factors:  (a) target for annual Underlying Decline Rate Observed (UDRO) by 2050 decreases to 4.4% (from 4.5%);  (b) the projected annual New Capacity trend to Year 2100 decreased to 3.5-Mbd (from 3.7) &  (c) URR decreased by 96-GB (mostly regular conventional). 

The Barrel Meter currently forecasts improving oil fundamentals will see Crude Price decline to $63/barrel (inviting OPEC intervention) by Jan/2014, then resume its secular uptrend ... a two decade journey to as high as $363.  And so begins a race against time for governments, stakeholders and policymakers to have infrastructure in place for the transition away from gasoline/diesel transportation fleets.  We are not "running out of oil" and it is not true "the well is running dry".  In fact, All Liquids production will not fall back below this year's pace of 88-Mbd 'til Year 2046.  But the stuff is going to be really expensive!

On the surface it would seem many decades of plentiful supply are assured.  And for some sectors this is quite correct.  But my Gas Pump model reveals the North American transportation sector is not one of 'em!  Its survival depends on a somewhat rapid changeover to hybrids, electric, natural gas & fuel cells prior to the next major sticker shock (2022-2024) upon gasoline surpassing $5.40/gallon ($148/barrel Crude Price) and particularly by the permanent major encroachment of the USA LVSC Barrier in 2027.

Long term, All Liquids will cross the midpoint of its 7.9-Tb URR in 2103.  With petroleum-based liquids exhausting around Year 2496, there appears to be only 500 years of oil left!  After that date, flow will be solely dependent on renewable Biofuels.

Status Today - Global production has increased dramatically from the Recession low of 83.1 Mbd (Jan/2009), setting yet another monthly record (90.2-Mbd) in Dec/2011 and a new quarterly record of 89.5 Mbd (2011Q4).  The oil sector pace has shattered last year's annual record with a new mark of 87.4-Mbd and monthly production is poised to break the 95-Mbd threshold in 2015 & the 100-Mbd marker in 2029.  Int'l Inventories are presently near their 5-yr avg and 5% of global capacity is presently idle, eagerly awaiting new Demand from non-OECD nations.  OECD consumption peaked in 2005.

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!  Historical analysis of Crude & Gasoline Price components & future target prices (out to 2035) can be viewed via our Gas Pump & Barrel Meter charts.

EIA Records   (see charts)

Annual World Production Record:  87.5 Mbd  2011

Quarterly World Supply Record:  89.5 Mbd  2011Q4

Monthly World Extraction Record:  90.2 Mbd  Dec/2011

It is little known the pause in global production seen in 2009 was actually the 11th annual decline since 1975.  Applying my study of North American economic cycle patterns, it is almost certain similar softness can be expected via 2017 & 2026 business cycle troughs - and these potential downturns are indeed reflected in the PS-2500 modelling.  As BRIC nations become more prominent on the global scene, it is expected USA Recessions will have much reduced influence.

There was a near-record 4.9 Mbd of flow from new facilities in 2011.  A sign of the health and robustness of the sector is evident by the fact that after addressing Underlying Decline loss and record production, global Surplus Capacity is only a tad lower this year @ 4-Mbd.  Total Capacity is a record 92-Mbd.

Year-end stats reveal Underlying Decline Rate Observed (UDRO) for All Liquids is up modestly @ 3.2% (2.79-Mbd) worldwide, up as well to 3.1% (0.35 Mbd) in Saudi Arabia & steady @ 2.5% (0.22 Mbd) in the USA.  In keeping with its cyclical nature, the loss factor should see its next high during a probable economic Recession or soft landing in 2017.  Modelling of the secular trend (including its 8.5 year cycles) suggests UDRO will rise to 4.4% by 2050.

Due to the limited horizon of accurate long-term consumption projections and uncertainty of technologic advances, the PS-2500 All Liquids production profile post-2035 still reflects available flows 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 while maintaining a static 5.0-Mbd of Surplus Capacity.

The 11 streams tracked as All Liquids include RCO (light sweet crude), NGL, refinery gain and the non-conventionals: GTL (gas-to-liquid), Deep Sea, Arctic, Bitumen (oil sands), X-Heavy, CTL (coal-to-liquid), Kerogen (shale) & BTL (biofuels-to-liquid) ... each with its own unique production profile.  PS-2500 is a composite analysis of the 7 major components of All Liquids.  Regular Conventional Oil (RCO) is the only category that is post-Peak, down 5-Mbd from 69-Mbd in (May) 2005.

PS-2500 is a flow based bottom-up study with best-efforts projections for new capacity as constrained by Demand realities by Trendlines Research energy analyst, Freddy Hutter.  It is our contribution to the 16 models that comprise the TRENDLines Tier-1 Scenarios presentation chart I track each month, illustrating industry consensus on the timing of Peak Oil & its Depletion.

Target All Liquids  Extraction Rates :

Toward Peak Demand

Analysis of demand destruction within the Barrel Meter & Gas Pump models since 2009 has been increasingly helpful in understanding the phenomenon of PEAK DEMAND.  The effort revealed four Petroleum/GDP ratios can be plotted to explain historic events.  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.

The first annotated Petroleum/GDP threshold on these model charts was the Demand Destruction Barrier - illustrating (Nov/2009) future maximums for both Gasoline Price & USA contract Crude Price.  Shortly thereafter, the Barrel Meter offered guidance as to when and at what price rising Crude Price would induce or augment economic downturns - via the G-20 Recessions Threshold.  Drilling down to the national level, the Gas Pump successfully predicted two years ago (Feb/2010) the 2011Q2/Q3 downturn in the North American auto sector via the Light Vehicle Sales Barrier.  And as announced in Oct/2011, the Barrel Meter commenced annotation of the PEAK DEMAND Barrier: a line-in-the-sand price level at which global Consumption stops growing ... both temporarily and permanently.  This invisible line blocking Demand from increasing was @ $90 in early 2008, is $103 today and rises to $262 by 2035.

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 the long-time trend in 2004 and was reflected by the peak of OECD consumption in 2005.  It will level off late next decade.  Since its first monthly run in July 2010, the module has been suggesting it is increasingly unlikely a resource-constrained GEOLOGIC PEAK will occur.

PS-2500's PEAK DEMAND scenario projects All Liquids consumption will attain its ultimate peak upon a permanent breach of the PEAK DEMAND Barrier ... a definitive Petroleum/GDP ratio that temporarily halted Consumption from rising during most of both 2008 & 2011 and thus far in 2012.  The Barrel Meter model currently projects that the next time this line-in-the-sand is significantly surpassed, it will be the final encroachment.  This rather unnoticeable event will occur when Crude Price rises above $213/barrel in 2029.

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

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

   2.1% - CERA (2009-2030 avg)

   3.0% - IEA (2010-2035 avg)

   3.2% - Peak Scenario-2500  (2011, cyclical & rising to 4.4% 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% in 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 57% Depletion, sported a 3.1% All Liquids UDRO in 2011.  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 at least mid-century on its journey to ultimate exhaustion by Year 2103.

All Liquids 2011 (year-to-date) Underlying Decline Rates Observed:  3.2% (2.79-Mbd) and rising worldwide;  3.1% (0.35-Mbd) & rising in Saudi Arabia;  2.5% (0.22-Mbd) and rising in the USA.

2035 Outlook

This higher resolution of PS-2500's Year 2035 Outlook provides an opportunity to present the general view of the two competing camps:

(a) First, an ultra conservative All Liquids trajectory with an apparent 95-Mbd Peak in 2016, declining to 39 Mbd by 2035 (hashed lime line).  It assumes Underlying Decline Rate Observed (UDRO) of 3.1% avg and 4.9-Mbd avg for Surplus Capacity.  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 (same UDRO & Surplus Capacity) but where Megaprojects will avg 3.2 Mbd/yr thru to 2035 (3.7 Mbd/yr current trend).  Albeit a more optimistic trajectory, the Consumption growth rate is waning due to the secular uptrend in oil costs.  PEAK DEMAND of 100-Mbd should prevail upon USA contract crude price surpassing $213/barrel in 2029.

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 Wedge as shown has been as ominous for four decades but continually gets pushed back to "next year".  (see chart#3)

It takes up to 7 years to bring to fruition very large (MegaProject) capacity facilities.  The Autumn 2008 Credit Crisis jeopardized some planned ventures and may have deferred what were imminent announcements as stakeholders used the opportunity of a Recessionary environment to rewrite contracts and MOUs in a deflated pricing regime.

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 5.2-Mbd of facilities in 2010.

Resource availability for capacity additions poses no constraint until Year 2073.  With 1,256-Gb of Proved Reserves, the Industry doesn't need a newly discovered barrel of oil 'til Year 2049.  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 ... 32-Gb per year.  The performance over the past ten years has actually been 50-Gb/year!

Actual annual production will be affected by Price & Demand forcings, sometimes influenced by natural and geopolitical events.  I have attempted to account for these nuances by adjusting for future economic Recessions and high price periods.  The recent record 6.1 Mbd of global Surplus Capacity in early 2010 will decline somewhat but the model strives to maintain an avg 4.9-Mbd over the next 24 years  - and is the foremost factor in securing reasonable Crude Prices over the duration.

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 double-dip 80's Recessions, but then drifted way down to 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.  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 (RCO) in June 2005.  A second stream, Arctic & Deep Sea extraction, starts terminal decline in 2031.  The NGL/GTL category commences decline in 2042.  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) for the onset of terminal decline.  Below we see the resolution of these factors within our two scenarios.  Both assume a minimum of 5-Mbd of Surplus Capacity is maintained thru to 2100 to maintain supply chain best practices & integrity and that UDRO rises to 4.4% by 2050.  Lacking accurate Demand projections for the post-2035 era, both production profiles reflect the 7 stream bottom-up flows thereafter.

GEOLOGIC PEAK Scenario:  Assumptions for this projection include extrapolation of Demand's historic 1-Mbd growth rate and a New Capacity build rate averaging 3.0-Mbd/yr 'til 2050.  This normal course of events results in the secular trend of rising UDO surpassing annual new installations in 2032.

This scenario requires a greater draw on RCO resource and analysis concludes the sector would see the first shortfalls in desired flow levels of light sweet crude in 2046.

Being the earlier of the two junctures, UDO would be the obvious determinant of this scenario's Peak Date in 2031.  Annual production will have reached 103-Mbd by then.  Adding in that year's 5-Mbd of spare capacity reveals a potential capacity peak of 108 Mbd.  PS-2500 calculates this feat requires development of 696-Gb of today's 1,256-Gb tally of Proved Reserves.  Attainment of Peak Rate would be followed by a manageable 1.1%/yr post-peak decline rate 'til mid-Century.

PEAK DEMAND Scenario:  This projection downgrades production targets to reflect demand destruction in a future besieged with triple-digit Crude Prices.  Demand's rate of growth began to deteriorate with the first price shocks in 2004.  Conservation, substitution and energy intensity advancements combined to bring about an OECD Consumption peak in 2005.  This scenario considers forecasts (imported from the Barrel Meter) of Crude Price rising as high as $363 (2035).

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 petroleum/GDP ratio which demarks critical levels of demand destruction.  This threshold halted consumption growth @ $90/barrel in 2008 & $99 in early 2011.  The PDB stands @ $103 today and will rise to $262 by 2035.  My current analysis indicates Crude Price will permanently encroach the PDB in 2029 upon surpassing $213/barrel, thus arresting Demand @ 100 Mbd.  There will be a coincident topping of the Production rate before spare capacity becomes detrimental in scope.

The trajectory is enabled by a New Capacity build rate averaging a similar 3.0 Mbd/yr to 2050.  PS-2500 calculates this feat requires development of only 610-Gb of today's 1,256-Gb tally of Proved Reserves.  Albeit terminal decline is demand-inspired in the early stage, eventually geologic realities determine the course of this scenario's  post-peak production profile.  Already by 2030, the UDO factor is exceeding the reduced annual New Capacity rate as the sector pares back new infrastructure.  Together this results in a manageable 0.8% post-peak decline rate, but accelerates when in 2063 the oil sector commences to experience shortfalls in developing light sweet crude (RCO) Reserves.

Chart#1 illustrates the down slope is shaped by the harmonics of the underlying unique production profiles of each All Liquids stream within the PEAK DEMAND Scenario.  Present data indicates Regular Conventional Oil (light sweet crude) will exhaust in 2103, the Arctic resource in 2115, Kerogen in 2200, X-Heavy/Bitumen in 2249, GTL in 2413 & CTL in 2496.

North American Pre-Peak Preparedness

The soft post-peak decline masks the necessity for North American jurisdiction governments, policymakers and stakeholders to have substitutions, infrastructure & conservation measures in place by an earlier date.  The Barrel Meter & Gas Pump models forecast Crude Price and gasoline will breach ($148/barrel & $5.40/gal pump) the Light Vehicle Sales Barrier from 2022 to 2024.  As such, the models warn prudent mitigation should guide the transportation sector to significantly wean itself off gasoline/diesel based fuels prior to this event.  Even more troubling actually is the Barrel Meter's ominous alert of high Crude Prices ($278/barrel) inducing multi-year G-20 Recessions in 2032.

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 setting new annual/quarterly/monthly records in the process.  Albeit the Kingdom announced in 2007 it is 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 2011 with an unrivalled 4.05-mbd Surplus Capacity and 12.25 MSC (maximum sustainable capacity).  Despite OPEC quota restrictions, Aramco used the Libya shortfall episode to draw upon their spare capacity to ramp up production and set new records.  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 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 support loyalty, my estimate of the Kingdom's Regular Conventional Oil URR has been drastically reduced over the past four years ... to 211-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 0.35 Mbd/yr (3.1% of 2011 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 consistent with my calculation that KSA crossed the midpoint of its light sweet crude URR in 2007.  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 RCO) prior to 2030.  Aramco has many strategic options and is vulnerable to OPEC mandates.  The unrivalled Surplus Capacity makes it impossible to forecast Saudi peak production.  See my separately released 5th Annual Saudi Outlook - an update for further discussion.

Volatility of Crude Price

The USA monthly contract Crude Price suffered a $92/barrel collapse from July/2008 to Jan/2009.  One major reason was traders' confidence in seeing robust Surplus Capacity being reinstated ... via a combination of the 5-Mbd collapse in Consumption & the historic Megaprojects coming on stream.  The TRENDLines Barrel Meter has been quantifying the price components of Crude Price since 2003 and estimates the restoration Surplus Capacity @ $21/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 at this time the ability to bring on up an additional 2.0-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 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.

Geopolitical events are the biggest mover of Crude Price.  The 2008 correction saw $33/barrel of "fear factor" evaporate in mere weeks.  This "phantom" issue is both the most volatile and least understood and makes its presence via direct Windfall Profits to Producers.  For the most part it is media & website driven.

Of lesser importance during the 2008 price collapse were international Inventory Draws ($6/barrel), Extraction costs ($6) & Speculation/Hedging activity (-$1).  Together these six pricing components comprised the $92 spike from $37 in Dec/2004 to $129 and back again.

After successfully predicting the 2011 spike (and its ramifications) a year in advance, today the Barrel Meter is again controversial via its forecast of Crude Price returning to $63/barrel by early 2014 based on vastly improving fundamentals and a probable trimming of fear-factor induced Windfall Profits.  Thereafter, ever-rising Extraction costs will be the main driver of Crude Price as it resumes it secular (albeit bumpy) uptrend.  I believe fundamentals have become cyclical and the 2008/2011 spikes are due for repeat in 2016, 2020 & 2023.

As explained above, July 2008 was a perfect storm of contributing factors.  Even in the headiness of that Summer, Crude Price was not really 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 a mere 3% above FFV in July 2008.  OTOH, the late 2009 spiking activity appears not to have been supported by fundamentals.  This real bubble (as evidenced by obscene IOC reported earnings) saw Crude Price reach a lofty 36% above FFV - a level not seen since late 2002.

USA contact crude has exceeded $90/barrel since early February - a line in the sand which I have warned (since Nov/2009) that if breached would decimate the rebound of USA Light Vehicle Sales and manufacturing.  Another critical Crude-Cost/GDP ratio, signalled by $121/barrel, is a threshold which if crossed for any sustained time would induce a new round of G-20 Recessions.  A new feature of the Barrel Meter this month is annotation of the PEAK DEMAND Barrier - the price level above which 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 and three petroleum/GDP ratios:  PEAK DEMAND Barrier, G-20 Recessions Threshold & Demand Destruction Barrier.  The latter demarks the USA's Light Vehicle Sales Barrier.

Trivia

Proved reserves (1,256-Gb) have doubled since 1978 and grew by an 50-Gb/yr over the last ten years ... 18-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, 1,288-Gb of the 7,941 Gb of global URR has been consumed, thus worldwide Depletion is currently 16%.  The Global Depletion Rate is 0.4%/yr today (32-Gb annually extracted liquids as a percentage of global URR).  If measured as a percentage of remaining resource (6,653 Gb), it is a higher 0.5%/yr.

$26/barrel:  Global avg for oil exploration, development, lift & overhead costs in Dec/2011 ... from $6/barrel in Middle East to $47/barrel for bitumen to $65/barrel for deep-sea projects

$54/barrel:  avg biofuel cost of production via Brazilian sugar cane

$504/barrel:  avg biofuel cost of production via algae

$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 Record:  Royal Dutch Shell's 9,356' Silvertip well in the Gulf of Mexico & & Anadarko's 16,300' Itaipu exploratory well in the subsalt region of Brazil's Campos Basin.

USA:  Assisted by Kerogen & Biofuels processing, the USA will reclaim its status as #1 World Liquids Producer in 2047; and will exceed its 1985 ALL Liquids extraction record of 11.2-mbd in 2075.  USA passed its 50% URR midpoint in 1966, four years prior to its RCC Peak.

Regular Conventional Oil (light sweet crude) passed the midpoint of its URR (1,947 Gb) in June 2007, 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 depletion study was born...

A new Annual Production Record of 87.5 Mbd was set in Dec/2011.  With this, 2012 marks the 23rd consecutive year that McPeaksters are mistakenly proclaiming "Peak Oil was last year and dire consequences are imminent."  With 2012 setting another annual record (89.1), 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 maintains his elusiveness 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 three guiding principles:  that rising crude price expands URR; that the very long lead time for MegaProjects leaves upcoming new capacity outside their visible horizon;  and an overestimation of Underlying Decline Rate Observed.

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 1,256-Gb wouldn't be fully consumed 'til 2049.  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 50-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 40yrs 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 avg 3.1% per annum; and thus Global Supply deteriorates to 39-Mbd by 2035.  The resultant "Wedge" naturally seems ominous.  In reality however, that 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 virtual continuation of the 3.4-Mbd Annual New Capacity trend until resource constraints make their presence after 2052.  Or there could be a real shocker - Demand growth evaporates! - a scenario Trendlines Research subscribed to in March 2011.

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 2011, 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 three major variances from PS-2500 and almost all the McPeaksters:  (a) my 3.2% current Underlying Decline Rate Observed loss factor vs their 5-9% guesstimates;  (b) my extrapolation of the 3.1 Mbd trend for annual New Capacity vs their position no further installations will be announced; & (c) my projection of a o.8% decline rate for Regular Conventional Oil over the next two decades vs their adoption of Colin Campbell's forecast of continuation of the 2.3% decline that commenced in 2006.  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.  And now we have news only 125 Chevy Volts were sold in July 2011.

Why aren't the environmentalists at the showrooms buying the Chevy Volt? Only 7,000 sold by Dec/2011.  They disseminated conspiracy theories for two decades accusing the oil sector 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

"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)

Feel free to email me with questions, comments or permissions.

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

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

2007/2008/2009/2010/2011/2012 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 2012 version of Peak Scenario-2500  is compared with 14 other current Outlooks in our Peak Oil Depletion Tier-1 Scenarios analysis:

click this chart for the presentation & footnotes regarding our 16-model Peak Oil Depletion Scenarios Presentation

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