Meeting the growth in world oil demand over the next 15-20 years will require a massive expansion in oil production capacity, especially for the OPEC countries. With non-OPEC conventional oil supplies expected to peak in the next five to ten years, OPEC production capacity will need to double by 2020 according to most forecasts. However, providing such a large increase in capacity will be a considerable financial, managerial and political challenge for the OPEC nations — and it is by no means certain that the extra 25-35 mbpd of capacity can be provided either within the requisite time frame or at the prices assumed by recent forecasts.
Current estimates of the world’s ultimately recoverable reserves (URR) range from a very pessimistic 1,800 bn bbls to a more optimistic 3,000 bn bbls, of which non-OPEC URR represent between 900 and 1,270 bn bbls. Although world oil reserves are theoretically adequate to meet even the most bullish forecasts of world oil demand up to 2020, it is clear that much of the incremental supply will have to come from the OPEC countries, especially in the Middle East, since this is where most of the remaining and undiscovered oil reserves are to be found.
The total size of the world’s URR is one of the most important factors in determining both the date and the level at which conventional oil production will peak. Pioneering work by Martin King Hubbert in the 1950s correctly predicted a peak in US Lower 48 production in the early 1970s and the ‘Hubbert curve’ has been extended since then for the world as a whole. According to the resource pessimists, the peak in world conventional oil production could be very close, possibly within the next decade and perhaps as early as 2004, whereas the resource optimists argue that the peak could be up to 30 years later.
Using a modified Hubbert curve (to take into account up to 400 billion bbls of mainly Middle East oil ‘shut in’ by OPEC production policies since 1973), the CGES shows that there is considerable flexibility about when and where the peak might occur, but that producing more oil up front results in a faster decline once the peak has passed, since the area under the curve is fixed by the URR. As a result, oil demand rather than supply is likely to be the main constraint until the peak is passed, although the decline would be very rapid indeed if the world’s URR is only 2,000 billion bbls or less as the resource pessimists would have it.
The consensus view — embodied in recent forecasts by the IEA, EIA and CIA — that oil demand will grow by 2% per annum for the next twenty years must be open to serious question, since it implies that there is no physical, economic or political constraint on making these oil supplies available. If any of these constraints start to bite, the result will be higher oil prices and therefore slower demand growth. Given the scale of investment required in the OPEC Gulf countries over the next twenty years, higher oil prices and slower demand growth looks like a more credible scenario than low prices and high demand growth.