Peak Oil in the Rest of the World

What caused the recent crash in the oil price from $110 (Brent) in July to $70 today and what is going to happen next? With the world producing 94 Mbpd (IEA total liquids) $1.4 trillion has just been wiped off annualised global GDP and the incomes of producing and exporting nations. Energy will get cheaper again, for a while at least. The immediate impact is a reduction in global GDP and deflationary pressure. There is a lot of information to review and summarise and so this week and next we will present the story in stages culminating we hope with an oil market forecast scenario.

Figure 1 Global oil production has been split into three geo-political categories: 1) USA and Canada, 2) OPEC and 3) the Rest of the World (RoW). RoW production bears the hallmarks of having peaked in the period 2005 to 2010 and this has consequences for oil prices, demand and prosperity in parts of the world, especially the OECD (Figure 3). Most of the growth in oil supply has been in the USA and Canada where the market has been flooded with expensive oil. Data are crude oil + condensate + natural gas liquids (C+C+NGL) and exclude biofuels and refinery gains that are included by the IEA in their total liquids number.

The concept of peak oil remains controversial. One school observes that the Olympic Peak of July 2008 (87.9 Mbpd, total liquids IEA) has been swept away by successive production records, the latest data from the IEA showing 94.2 Mbpd. In a recent post I showed that all of the growth in total liquids since May 2005 has come from either low quality (NGL) or expensive supply (light tight oil [LTO] and tar sands) (Figure 2). And most of this growth is located in the USA and Canada.

Figure 2 Global production of conventional crude oil and condensate has not changed since May 2005 despite a prolonged spell of record high oil price. All of the growth has come from expensive LTO and tar sands. The toxic mix of high debt and losses in the LTO industry that are in the making may short circuit the global banking system again.

But while the USA and Canada have been bathed in the warm glow of growing supplies of expensive oil, the RoW has seen their supplies stagnate and fall (Figure 1). The importing countries like most of Europe, China, India, Japan and S Korea are all competing for finite supplies from OPEC. Since oil is often seen as the lifeblood for the global economy, not managing to access enough of it at the affordable price you want inevitably strangles growth out of the economy. It is this competition for supplies that has underpinned $100+ oil and undermined economic growth for so long.

Figure 2 OECD oil consumption crashed under the weight of high oil price, debt and the near collapse of the banking system and never recovered. Low oil price, if it lasts long enough which is doubtful, will help stimulate demand for oil in the OECD which most western governments appear to be ambivalent about. Based on a chart by Art Berman.

OECD oil consumption fell dramatically in the wake of the crash and has never recovered. The anti-fossil fuel lobby that seems to have the ear of most OECD governments and institutions will be pleased with this outcome. If you are Portuguese, Spanish, Italian or Greek and had to sell your car, less so.

Global debt levels are clearly a part of the big picture which includes the expansion of debt in North America to expand LTO and shale gas production and expansion of debt in China to expand Chinese consumption. LTO and shale gas are both expensive to produce, and the conundrum that the producers and banks still face is how to rationalise over production of an expensive resource that dumps the price and creates a loss for both producer and bank.

Low oil price will have two predictable outcomes. It is going to result in reduced production, not only of LTO but across the whole oil market including OPEC. Even although OPEC voted to not reduce supply, the market forces that OPEC increasingly operates under will do the job involuntarily for them. A rout in the LTO producers is widely anticipated. And returning to Figure 1, low oil price is going to sharpen that oil production decline in the RoW. Possible to anticipate but impossible to forecast, global oil production will be heading down in the next 12 to 24 months. But lower prices are going to come as an enormous relief to consumers who will go out and consume more. The OECD and the RoW will emerge with reduced oil production capacity and increased thirst for oil.

Related posts

Drowning in oil again
Global Oil and Other Liquid Fuels Production Update
The 2014 Oil Price Crash Explained

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10 Responses to Peak Oil in the Rest of the World

  1. Dave Rutledge says:

    Hi Euan,

    Good charts. Any sense that the productivity of the light tight oil producers is improving enough to allow them to deal with the lower prices?


    • Euan Mearns says:

      Dave, I think improved drilling efficiency will ultimately yield to drilling steadily poorer resource at some point. What will make an impact though are significantly reduced costs owing to the rout that will be under way. E

  2. Jacob says:

    I think that gas should be considered too, as it influences oil use and demand. As oil became expensive, some uses have shifted to gas – in industry and heating. In some countries gas is also used as a vehicle fuel. To understand the oil market you need to look also into the gas market,

  3. Sam Taylor says:


    One model I’ve seen proposed as to how peak oil might play out is termed ‘oscillating decline’, in which constrained production sends prices higher for a time, which buts the brakes on the economy ultimately decreasing prices through reduced demand. This then drives up demand until prices spike again. However with each bounce, debt financing becomes harder to come by, and the production starts declining. The bounces in price help drive deflationary pressures in oil importing countries, further increasing the difficulties in servicing debt. It certainly sounds about right to me.

    • Euan Mearns says:

      On The Oil Drum this was Christened “the oil accordion”. TOD still has a very active email list. Most see the price going below $50 and “never again” going N of $148.

      Quite a bit of discussion about the relative roles of supply and demand in current rout. Supply growth has been robust, especially from Libya, but it is in line with the last 5 years where demand growth and supply growth were in balance. Hence I believe the weakness is demand driven and this may be leading indicator of some nasty surprises brewing in global economy.

      • Javier says:

        Great article Euan,

        Well, this is peak oil, no doubt. Between 2002-2005 oil demand from US+EU+Japan faltered and then came down and has never recovered. From 2011 China and India oil demand is faltering. More easily seen in China if you look at diesel consumption, since they are buying so much oil for their strategic reserve.

        2005 was the year of conventional C+C peak, and was also the year of the all important net oil exports peak.

        2014 to 2015 will probably see a peak in oil production as reduced demand drives a reduction in production bringing back high oil prices and so on, as you explain.

        They are going to call it peak demand so to indicate that there’s plenty of oil, is just that we don’t want it anymore. As if it is not a big deal.

        It does look like a big crisis is in the brewing. Too many issues, not only the oil and lack of growth, but also the trillions in bad debt and the monetary madness of central banks, the unwind of the carry trade pushing up the dollar, the assault on the reserve-currency status, and let’s not forget the usual culprits, the over-indebted countries. Something is gotta give.

        I’m worried it could be the one that pushes us over the edge.

  4. Ed says:

    Falling oil prices shows that the increase of world GDP has failed to keep up with the increase in oil production.

    I feel the next round of QE coming on; this time in the form of direct US and Canadian government financial support of tight and tar sands oil production to stop them going bust, keep prices low, and stimulate world GDP growth. The by product of this policy will be to keep up the economic pressure on Russia.

    Just remember you heard it from me first, folks.

    ps It will work until US tight oil starts to decline, then ….

  5. Fred says:

    I have to wonder if the ‘supply glut’ from Saudi and OPEC, being timed for peak oil, isn’t planned to achieve some ends – it seems indicative somehow.

    Now, first off, dropping the price of oil by pumping ‘all out’ provides a route for KSA to drive US frackers to the wall and scoop up the bankrupt companies – turning US oil into KSA oil. Similarly for any expensive oil, such as tar sands, etc. I think they are taking advantage of the global slowdown (and thus reduced demand) to do this the one last time it works.

    But what is then the game plan?

    Cutting production pushes up prices, but will also send the world into GFC II, given the above. However, if you are a country with a nice big sovereign wealth fund to manage, knowing when the crash is coming is tantamount to a licence to print money as well as sheltering assets from it’s effects.

    So, we come out of GFC II into a different world. Oil production has dropped, and is still declining. Oil prices have spiked, but stayed relatively high. KSA and other sovereign wealth funds own more (carpetbagging). Banks have either folded, or been bailed out again – the global financial system has taken a big hit, minimum. China is in a bad way.

    Anyone know how to find out where those sovereign wealth fund investments are at?

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