We comment only intermittently on the oil scene (there are only so many hours in the day), but the health and remaining productive capacity of the world’s major oil fields is a vital economic and strategic issue. Yet the big producers provide little information, so experts try to extrapolate from the data points they possess.
The reason this issue is of particular concern is the Peak Oil hypothesis, which states that once half the world’s oil reserves have been lifted, production levels will fall and the price of extraction will rise. Some experts believe we have reached or are about to pass the peak oil threshold. Since the biggest field account for the majority of the world’s oil production, and Ghawar is the largest field of them all, it merits special attention.
We discussed an earlier Econbrowser post, which highlighted the fact that Saudi oil production is declining, and pointed to information that suggested it might well be due to the condition of the fields themselves, rather than a choice of the Saudis to lower output. This post, “Northern Ghawar is in decline,” goes further with this discussion (note that most of the oil in Ghawar is in the northern part of the field).
It goes without saying that if the peak oil scenario is valid, we will face escalating oil prices much sooner than pretty much anybody in the financial community expects.
Here are the highlights; the post itself is very detailed and has lots of colorful charts:
If you end up being surprised by the big story of the next decade, you can’t say, “nobody told us.” Instead you’ll have to say, “we didn’t listen.”
Stuart Staniford (Ph.D. in physics) has been conducting a very careful and detailed investigation of all that is publicly known about Ghawar in Saudi Arabia, which is by far the world’s largest and most important oil field. This field has been managed by injecting water below the oil, which causes the remaining oil to rise toward the top of the reservoir where it can be more readily pumped out. The following diagram is an example of the kind of evidence Stuart has looked at to determine how high the water level was at different locations and different points of time….
By far the most important evidence Stuart brings to bear is based on an effort to reconcile various maps of the detailed geologic structure of Ghawar. With this and estimates of the permeability and porosity of the rock, one can then infer how a particular production rate (in thousands of barrels per day) would translate into a rise in the oil water contact over time. Stuart’s analysis appears to be quite detailed and sophisticated, including for example a modest planar slope to the oil water contact at a fixed point in time arising from differentials in water salinity. Stuart’s inferred path is shown in the red line above. Although one might quarrel about any single piece of evidence, the agreement of the inference from the various sources seems pretty compelling….
If Stuart’s analysis is correct, it seems very likely that production from the northern part of Ghawar must have already entered a period of sharp and irreversible decline, which would account for the otherwise unexplained drops in Saudi Arabian oil production over the last two years….
Here I have only skimmed the surface of Stuart’s painstakingly detailed analysis. But let me briefly comment on what it means and why he did it. Neither Stuart nor I have a particular agenda here. The Saudis have been deliberately concealing the data that could settle this speculation quite conclusively. And yet, accurate information about what is ahead is absolutely vital in order to help us all make the adjustments and adaptations necessary for what is to come. Stuart observed that nobody had a compelling fix on the facts, even though the story may prove to be one of the most important events of our lifetime. For that reason, he decided that it was worthwhile for someone with his abilities to wade through all the detailed information available to try to form the most accurate picture of where things currently stand.
After Stuart’s monumental research, I really think the burden of proof is on those who claim that Saudi Arabian production can continue to increase. At this point, we need not the conclusions of experts nor the reassurances from Aramco, but hard data to support the claims.
If Saudi production is permanently on the way down, we have just entered a new phase of history.