Oil Exports

You don’t have to have an awful lot of gray hair to remember the excitement around England’s massive North Sea oil fields. While discovered in 1969, it wasn’t until well into the 1980s, on the back of surging oil prices, that the fields came into full production.  Turning up the taps, the United Kingdom (as well as Norway and Germany, who also have North Sea production) became a significant exporter of oil.

But then, in 1999, something happened: the UK’s North Sea production hit peak… that tipping point after which reservoirs go into decline, setting in motion both reduced production and progressively higher costs related to extracting the remaining oil.

While the experience of North Sea oil production provides yet another useful example of the validity of the Peak Oil theory, what concerns us today is a critical but usually overlooked aspect of the discussion; exports.

At the time that the North Sea peaked in 1999, the U.K. was exporting 1 million barrels of oil per day. By August 2004, it had become a net importer.  What happened to cause the situation to turn around so quickly?

To understand the importance of exports when discussing peak oil, ask yourself the question: “What’s more important: the fact that global oil production is falling… or that the oil exporting nations are cutting off their exports?”

While the two questions are clearly linked, it is the nuance of the export question that clearly matters the most.  Especially if you live in a country such as the U.S., which currently imports about 70 percent of its oil.

Which brings us to the Export Land Model (or, ELM as I will refer to it from here).  The basic thesis expressed by students of the ELM is that, to fully appreciate the impact of peak oil, you cannot look only at the production declines so presciently anticipated by ML Hubbard in 1956.   You also have to look at the rate of local consumption and the importance of that consumption on the ability of a country to export their oil.

The ELM graph here looks at both sides of the equation, and the result as it applies to exports.

As you can see, for illustrative purposes the ELM assumes that, after a country’s oil production hits peak it will decline at a rate 5 percent annually at the same time that local consumption increases by 2.5 percent. The red line then shows the impact those two metrics will have on the ability of the country to export its excess production. Using these assumptions, the ELM shows that exports reach zero in nine years.

Real world data shows that the metrics used in the ELM are quite conservative. The chart below plots the hypothetical ELM against the actual data from the United Kingdom and Indonesia. While the ELM forecast hypothesizes nine years between peak to the end of exports, Indonesia’s exports ceased seven years after peak, and the UK’s exports stopped just six years after peak.

The important take away here is not that the UK and Indonesia are no longer receiving the oil export income of the good old days — that is entirely a localized concern.

Rather it is that the global market is now deprived of those exports; between UK and Indonesia alone, the change over the last decade alone amounts to a swing in the wrong direction of a total of 2 million barrels per day.  And those are just two of a number of important countries that have swung from exporters to importers in recent years.

China, for example, became a net exporter in 1993, the result of flattening production against skyrocketing consumption. Over the last decade alone, China’s oil consumption has almost doubled, to about 8 million barrels a day, about half of which is now imported.

So, again, while people tend to focus on production, they are overlooking the impact on exports forecasted by the ELM.  In the case of China, they went from a net exporter in 1993 to importing 4 million barrels a day today… with those imports projected to rise another 50 percent over the next 10 years.

This is what’s creating so much international competition for the remaining supplies of oil. And why the trend for higher energy prices is so well entrenched. And if the ELM is right, things are about to get far worse… far sooner than many people expect.

Regards,
David Galland
June 10, 2008