An Export Land Model Analysis for the USA-Part2

...it becomes difficult to imagine that global oil production could gently waft down from lofty heights in a graceful smooth and continuous curve spanning decades. Rather, the picture that presents itself is one of stepwise declines happening in more and more places, and eventually encompassing the entire planet.

Dmitry Orlov, Peak Oil is History

In Part 1, I presented my best estimate Export Land Model analysis for the USA, based on my analysis of trends in petroleum production and consumption for the USA and its top ten import sources.  In the article I laid out my explicit assumptions.

Here, in Part 2, I examine some different possible future scenarios, based on alternative pessimistic and optimistic assumptions about the trends in petroleum production and consumption for the USA and its top ten import sources.

Warning 

If you are the type of person whose hates the feeling of cognitive dissonance, you may not enjoy this article.  I explore several different possible future scenarios here (and still more in part 3), and, when you get through them all, you might feel more confused than ever about what might happen to the USA's consumption in the future.  If you are looking for: “And that's the way it is,” you may find this article troubling—but I encourage you to work through it nevertheless.

I presented in part 1 my best estimate of what I believe to be most likely trend of future USA consumption—but I readily admit that I might be wrong (in either direction!), and, I am willing change my view if I find compelling evidence to do so.    Part of having the flexibility of mind to do so comes from thinking through alternative scenarios, such as presented here.   Try it and you will understand the issues better, I think.

I don't think that any of the following assumptions are, by themselves, ridiculous, because there is some support either in the production data itself, or, for geopolitical reasons.  In my opinion, however, it is unlikely that these would all happen together.  Nevertheless, I believe that exploring the plausible extremes of pessimism and optimism help to set outer boundaries on what we can expect going forward.

Pessimistic Export Land Model Estimate—why you should prepare for hard times

Figure 4 below shows the Export Land Model analysis, analogous to that shown in Figure 3 in Part 1, but with a few key assumptions shifted towards the pessimistic side:

1) USA—no change in assumptions.

2) Canada only sends its net exports to the USA. Canada's production is still assumed to increase, as represented by the modified Hubbert equation fit to the 1980-2009 production data. This could happen if, for example, because of global oil shortages, Eastern Canada was no longer able to import petroleum from Europe, Africa and the Middle East.  

3) Mexico—no change in assumptions (i.e., still no net exports by 2015). 

 

4) Venezuela—no change in assumptions (i.e., still no net exports by 2023). 

5) Saudi Arabia—no change in assumptions (i.e., still no net exports by 2024). 

6) Nigeria's production follows the trend represented by the Hubbert equation fit to its more recent 2002-2009 production data, and, Nigeria continues to send 53% of its net exports to the USA (i.e., now no net exports by 2018).  This could happen if, for example, civil unrest and militant attacks increase, and/or, foreign investments don't occur to increase or maintain production.

7) Russia's production continues to follow the trend represented by the Hubbert equation fit to the 1999-2009 production data, but Russia stops its linear increase in the percentage of exports to the USA.  That is, exports remain fixed at 2009 levels of 8%.  I still assume that Russian domestic consumption stays flat (i.e., still no net exports by 2022, but not increasing amounts of exports to the USA up to that point). 

8) Algeria—no change in assumptions (i.e., still no net exports by 2030). 

9) Angola's production increases at “only” 24 %/yr and its ultimately recoverable petroleum equals only 11.5 bbs, as represented by the unconstrained Hubbert equation best fit to the 2001-2009 production data. I still assume that Angola continues to send at least 24% of its net exports to the USA (i.e., this still results in no net exports by 2025, but in lesser quantities). 

10) Iraq's production continues to follow the trend represented by the Hubbert equation fit to the 2003-2009 production data (this was scenario 1 in my original trend analysis for Iraq; i.e., now, no net exports by 2030).  This would be consistent with Iraqi's recent history of periodic recoveries and war, and/or with a lack of foreign investments.  I still assumed that Iraq's domestic consumption follows the upward trend represented by the Hubbert equation fit to 2003-2009 consumption data, and, that Iraq continues to send at least 26% of its net exports to the USA.

11) Brazil—no change in assumptions.

A large part of the steep decline in Figure 4 at 2010 is due to my pessimistic assumption made that Canada starts to send only it net exportable petroleum to the USA.  That amounts to a minus 0.4-0.5 bbs/yr difference, as compared to my best estimate model shown in Figure 3.  As I have already explained in Canada—Petroleum Superpower or Super-slave? this would be difficult for Canada to do.  But, if over the next decade or so Venezuala, Saudi Arabia, Russia, Angola, Algeria etc..., all have no net exports, then where would Canada import its oil from in order to make up for the extra quantity, over its net exports, that it presently exports to the USA?  At some point in time in this scenario something like this would happen—but probably it would play out on a more gradual timeframe than depicted in the figure.

According to this "pessimistic scenario," the annual decline in production from 2011-2021 is in the 4-5 %/yr range, instead of 3-4 %/yr, as compared to the best estimate model.  Consequently, there is a 29% decline from 2005 to 2013, and another 23% decline from 2013 to 2021.  That's a 52% drop over 16 years

This is still not as severe a decline as what Russia experienced in the early 1990s, but substantially more severe than my best estimate shown in Figure 3.  As before, there are no prospects for an upswing through the 2020s and beyond—just a shallower rate of decline.  According to this scenario, by 2025, the only two significant import sources to the USA would be from Canada and Brazil.  

Optimistic Export Land Model Estimate—you should still prepare for hard times

Figure 5 below shows the Export Land Model analysis, analogous to that shown in Figure 3 in Part 1, but with a few key assumptions shifted towards the optimistic side:

1) USA—the rate of decline in domestic production in the USA stabilizes and remains roughly constant, as represented by the sum of the Hubbert equation and modified Hubbert equation fits to the different components of production (the stabilization is mainly due to increases in NGL production, see Figures 7 and 9 in Trends in USA Petroleum Production and Consumption.

2) Canada—no change in assumptions (i.e., the same continued trend of increased exports).

3) Mexico—production follows the longer term trend represented by the modified Hubbert equation fit to the 1987-2009 data (this was depicted as the dashed green line in Figure 4, here).  This may happen, for example, if alternative production sources (e.g., KMZ and others) are developed in time to mitigate the decline in the Cantarell field (i.e., now net exports continue past 2030). 

 

4) Venezuela—no change in assumptions (i.e., still no net exports by 2023). 

5) Saudi Arabia—production is assumed to stay constant at 3.847 bbs/yr (the average value of production from 2003 to 2009)—at least until 2030 (this was depicted as the dashed green line in Figure 3, here).  Domestic consumption still assumed to continue its exponential increase, and Saudi Arabia is still assumed to send 18% of its net exports to the USA.

6) Nigeria—no change in assumptions (i.e., still no net exports by 2039). 

7) Russia—no change in assumptions (i.e, still no net exports by 2023). 

8) Algeria—no change in assumptions (i.e., still no net exports by 2030). 

9) Angola—no change in assumptions (i.e., still no net exports by 2025). 

10) Iraq's production is assumed to explode upwards as represented by the Hubbert equation fit to 2003-2009 production data and assuming the production rate increases 17.5 %/yr and the ultimately recoverable petroleum (Qº) of 115 bbs (this was scenario 2 in my original trend analysis for Iraq).  This could happen if Iraq remains politically stable, the foreign investments come through, and, the projected quantity of oil really is in the ground (i.e., Qº = 115 bbs). I still assume that Iraq's domestic consumption follows the upward trend represented by the Hubbert equation fit to 2003-2009 consumption data, and, that Iraq continues to send at least 26% of its net exports to the USA.

11) Brazil—no change in assumptions (i.e., the same continued trend of increased exports).

The predicted consumption curve actually tracks pretty closely to the Hubbert equation best fit to the USA’s 1984-2009 consumption data (originally presented in Figure 10 here), a portion of which  I depict in the figure (dash red line). 

The predicted consumption curve might be characterized as a type of "rosy peak oil scenario," such as described in Orlov’s article, with a gentle wafting down in production, and, US consumption following suit.  For this scenario, however, the “wafting” would not last for decades, but rather, about one decade. 

According to the "optimistic scenario," the annual decline in production from 2010-2021 is predicted to be quite modest at less than 1%/yr.  That is less than the rate of decline in the past few years (i.e., about 9% since 2007). Production actually picks up slightly from its 2009 levels, and consequently, the total decline in the consumption rate is only 8% from 2005 to 2013, followed by and additional 5% decline from 2013 to 2021.  That's only a 13% drop over 11 years. 

The annual rate of decline in consumption does not steepen by more than -1%/yr until 2028.  Thereafter, throughout the 2030s, the consumption rate declines at a steeper rate of about 2-3 %/yr.  That steepening decline occurs for a few different reasons.  One reason is that assumed exponential increase in domestic consumption eventually takes out all of Saudi Arabia's production.  That is, despite an assumed continued production rate of 3.847 bbs/yr, Saudi Arabia's net exports still goes to zero by 2043.  Additional reasons are that Mexico's and Iraq's production start to go into steep decline through the 2030s, and hence, their net exports decrease even more rapidly.  

By 2040, USA consumption is predicted to be 64% of its peak consumption in 2005—a 36% drop over 25 years.

In summary, the USA consumption decline is delayed a decade and then the consumption decline from 2030 to 2040 is slightly milder than the predicted decline from 2010 to 2030 as depicted for my best estimate scenario in Figure 3.   The difference in the consumption decline curves in Figure 3 compared to Figure 5 is mainly due to the optimistic production assumption for Iraq.  Iraq's assumed enormous increase in production helps mitigate the declining exports from several other countries that are headed towards zero net exports by 2030 (e.g., Venezuela, Russia, Angola, Algeria).

What is most striking about the "optimistic scenario” presented in Figure 6 is that the USA’s consumption is still predicted to decline.  This is despite the optimistic assumptions that: the long-term decline in US production stabilizes, Mexico pulls out of its death-spiral of production decline, Saudi Arabian production does not decline at all, and, Iraq undergoes one of the most dramatic increases in production the world has ever seen.  We are talking here about Iraq's production rate from 2020 to 2030 eclipsing that of Saudi Arabia's assumed continued high rate of production.  Add to that my original assumptions of continued increases in production and exports from Canada and Brazil.  Despite all that “rosy” thinking, there are still not enough net exports from the top ten to put the USA’s consumption above its peak in 2005.  Just stop and think about that for minute.

Now, consider this: what would it take for there to actually be a growth in consumption—that is, a return to the consumption rate of 2005 and higher?

A "Sunshine and Lollipops" Export Land Model Estimate—a return to "normal" growth

To get the USA's consumption back to and above its all time 2005 high, I assume that USA, Mexican and Saudi Arabian production has stabilized, and, that there is continued growth in production (and exports to the USA) from Canada, Iraq and Brazil, as described above for the Optimistic Export Land Model Estimate.

Additionally, I assume that the trends of declining production from Venezuela, Russia, Angola, Algeria and Nigeria all stop and stabilize. Specifically, I have assumed that production, and exports to the USA, from Venezuela, Russia, Angola, Algeria and Nigeria all stay at their respective 2009 levels throughout 2010-2040. 

Figure 6 shows what this fantastic scenario would look like:

According to this "super optimistic" scenario, the peak in the USA’s consumption rate occurs in 2024 at 7.94 bbs/yr, which is about 4.5% larger than the peak in 2005.  Not surprisingly, the predicted peak in consumption in 2024 coincidences with the peak in Iraq's exports.  After that, Iraqi exports go down, mainly because Iraq's production goes into decline.  By 2036, the USA's consumption rate is back down to 2009 levels (about 6.9 bbs/yr). 

Based on this, I characterize this "super optimistic" scenario as predicting enough oil for a slight uptick in consumption over the first half and then a slight downtrend for the second half of a 25 year period.

There is one big problem with this scenario—it is a fiction at the moment.   I see no evidence in the production data to support the assumptions that the predicted production declines for Saudi Arabia, Venezuela, Russia, Angola, Algeria and Nigeria would all stop and stabilize. 

There is some hope, however, that the decline curves for these countries will not be a steep as represented by Hubbert equation fits to these data. 

As shown in my analysis of the US production data, the decline side of the production curve did not follow a simple logistic curve very well (see e.g., Figure 1 here).  Rather, the decline-side of the production curve, as modeled using the modified Hubbert equation, was more consistent with a steady increase in the fraction of recoverable oil (i.e., Q¥ ).  That increase corresponds to an about 0.53 percent increase per year (in the vernacular of the modified Hubbert equation, fcq = 1.0053).   This is probably reflecting improvements in the technologies of recovery or refining over the long period of the USA’s decline curve. 

It is possible that the decline side of the production curves for one or more of Saudi Arabia, Venezuela, Russia, Angola, Algeria, Nigeria, Brazil or Iraq will be similar to the USA’s.   For example, if hydraulic fracturing technology is brought to these countries, it might mitigate the steepness of the decline-side of the production curve. 

My trouble is that all of these countries are either in the early stages of decline or still on the growth-side of the production curve, and therefore I can’t apply the modified Hubbert equation to fit the decline side of the production curve. 

But, even if these countries all follow more of a USA-style decline side production curve, that still would not mean constant production for 30 year, as I assumed for the exports portrayed in Figure 6.  Rather, the production rate would decline, but at a more gradual rate than modeled using the traditional Hubbert equation.  This, in turn, should slow the rate of decline in exports as compared to Figure 3. 

For example, according to this USA-style production decline scenario, net exports for Saudi Arabia would probably hit zero somewhere between 2023 (as predicted assuming a declining production curve that follows the Hubbert equation—the solid green line in Figure 3 here) and 2044 (as predicted assuming a constant production rate—the dashed green line in Figure 3 here).  As this pertains to USA consumption, I picture in my mind something half-way between Figure 6 and Figure 3. 

Nevertheless, I think that Figure 6 is still useful for illustrating just what it would take to have a modest increase in consumption, similar to what we saw over the 25 year period from 1982 to 2007.  It seems unlikely to me that the days of “normal” growth are coming back, however.

Optimist-lite

And what if Iraq is not able to boost its production as hoped for and predicted by some analysts and the Iraqi's?  What if instead, Iraq is only able to maintain its present production at about 1 bbs/yr, but, all the other optimistic assumptions represented in Figure 5 still apply?  

Welcome to optimist-lite—really Iraq-lite, to be more specific.

The prediction for an “optimistic-lite scenario,” shown in Figure 7 below, is that the USA's predicted consumption curve is apparoxiamtely inverted, as compared to that shown in Figure 5.  That is, as shown in Figure 7, from about 2016 to 2025, the consumption rate declines at about 2-3 %/yr, and then, from 2025 on, the consumption rate decline is shallower at less than 1 % /yr.  

By 2040, the USA's consumption rate is predicted to end up at 62% of its peak in 2005—a 38% decrease over 25 years.  That’s about the same total decline as predicted under the "optimistic scenario" shown in Figure 5—it’s just that the decline pathway takes on a more near-term pessimistic shape.

These various optimistic outlooks all rely heavily upon the hoped-for bounty of massively increased oil production from Iraq and/or continued stable production from a number of the USA's top 10 import sources.  If the Iraq bounty is realized, then it probably will allow the USA to stumble along with a modest annual declining rate of consumption for another decade or so before succumbing to the about same decline as predicted in my best estimate presented in Figure 3 of Part 1.  

In Part 3, I will explore some implicit assumptions that are buried in this Export Land Model Analysis: fungibility, what happens to the exporting countries, and ERoEI.