Sunday, October 21, 2012

Predicting Global and Regional Petroleum Consumption Trends Part 6: North America

Last time in the series, I mentioned that there is data (in the BP review) which supports the idea that North America (NA) could become a net petroleum exporter in less than 20 years from now.

I also said that this would not occur in the way you might think, so, I want to note at the outset that this suggestion is not based on the need for NA to dramatically increase its production rates to equal and then surpass present levels of consumption, and, thereby become a net exporter.  There are people who suggest such a scenario.  For instance, just last July 2012, Mark Mills was suggesting that NA could become becoming the largest supplier of fossil fuels to the world by 2030 mainly though accelerated production of its vast resources of fossil fuels (see Unleashing the North American Energy Colossus: Hydrocarbons Can Fuel Growth and Prosperity).  Mills’s article relies heavily on two recent reports from Citi group (Energy 2020 North America, the new Middle East) and Wood Mackenzie (U.S. Supply Forecast and Potential Jobs and Economic Impacts (2012-2030)). 

I am quite skeptical of scenarios, such as Mills’, which suggest greatly enhance petroleum production, e.g., due to NA’s exploitation of vast resources of tar sand, Alaska/Arctic Oil, deep water oil in the Gulf of Mexico, oil off the West or East coast, or shale oil and oil shale extraction.  The main reason why I am skeptical is that the proponents of these scenarios seem to confuse or conflate the differences between resources, which may be very large, and economically recoverable resources and actual identified reserves, which are always much smaller than the base resource.  They also ignore the problem of considering what amounts of net energy (or net barrels of oil if you will) that can actually be obtained from places like tar sands or oil shale, e.g., because the oil or pre-oil kerogen has to be unlocked from tons of rock and thermally treated using highly energy consuming process.   Usually they vaguely refer to technological advances as being able to solve these present real-world problems again by conflating technological advances in other areas (e.g., information technology) with hoped-for advances in the geological sciences. Perhaps it is not surprising that the ones suggesting that it would so easy to increase production rates by 50 or 100 percent, are typically non-geologists. 

If you need to educate yourself on these issues, I recommend Dave Cohen’s 2006 article on the oil drum, Cornucopians-A Guide for the Perplexed, or, to some retired geologists like David (Heading Out) Summers Bit Tooth Enrgy blog posts on Tar Sands Mining or his review of the Citi Group report suggesting that NA’s production will rise to that of ME, or David Hughes’ 2011 PCI article, Hydrocarbons in North America, or Art Berman’s ASPO webinar, Shale Oil in Perspective. 

Contrary to suggesting that NA’s production rate will rise, the analysis to follow suggests a flat production rate trend.  This flat rate, coupled with trends of declining import rates (e.g., in favor of imports to Asia) and increasing export rates, means that NA’s consumption rate will decline.  The declining consumption rate crosses the flat production rate in about 2028-2029, making it possible for NA to become a net exporter, if the decline in consumption rate were to continue.

As usual, I refer readers to Part 1 for an introduction to the data bases, methods, abbreviation and definitions used in this series.

North America’s production, consumption and net export trends: an ELM analysis
Figure 24 presents the reported production, consumption and calculated net exports rates (dark blue, bright red and dark green open circles respectively) and the corresponding nonlinear least squares analysis (NLLS) best logistic equation best-fit curves (solid lines with the same respective colors). 

Production rates in NA follow three distinct trend periods, which I modeled using three separate logistic equation fits to the BP review data for 1965-76, 1977-90, and 1991-2011, respectively.   Consumption rates in the NA were modeled in Figure 24 using two logistic equations fits to the data from 1965-82 and 1983-2011, respectively.

The best fit parameters of Qo, Qand the rate constant "a" are summarized in Table 6 below:

Table 6 summary of best fit parameter for production and consumption for NA

Qo (bbs)
Q∞ (bbs)
a (yr-1)
Production 1965-1976
Production 1977-1990
Production 1991-2011
Consumption 1965-82
Consumption 1983-2011

As illustrated in Figure 24, NA’s annual production rates have increased in each of the last three years.  Especially the up-ticks in 2010 and 2011 have caused the logistic equation best fit to the production rate data for the 1991-2011 time range to predict a much flatter trend than the declining production rate trend I predicted in Estimating the End of Global Petroleum Exports, Part 3, using the BP review data up to 2009.  The NLLS best fit parameter, Q∞, suggests a very large ultimately recoverable reserve, albeit being produced at a very slow rate of 1.3%/yr (a=0.013).   The NLLS best fit to the consumption data for 1983-2011 suggests consumption declining more steeply than the comparable analysis in Estimating the End Part 3.  For instance, now consumption is predicted to dip below 7 bby in 2031 instead of 2039.   This, of course is due to the down-ticks in 2010 and 2011 consumption rate compared to the peak rate of 9.1-9.2 bby in 2005-2007.  NA consumption rate of 8.4 bby in 2011 is about -9% down from that mark.

Thus according to this ELM analysis, even with the decline in consumption rate, depicted by the red curve, and the very gradual decline in production rate represented by the blue curve were to be followed, these two lines still cross in 2045 at 4.9 bby, implying that NA would be a net positive exporter thereafter.    

However, as I have repeatedly pointed out in the earlier parts of this series, the ELM analysis doesn’t consider the trends for changing exports and imports into and out of NA and how these would impact consumption rates.  Rather ELM just assumes static import/export behavior.

As illustrated in the PIE analysis to follow, exports and imports into and out of NA having been changing quite dramatically over the past decade and if these trends consider consumption rates in NA will drop much more steeply than depicted in Figure 24. 

Predicting Petroleum Export Rates from NA to other Regions
Figure 25 shows the relationship between petroleum production rates and export rates for NA, as already worked out in my previous study from a few months ago.   This is actual the same as Figure 1 in Part 1 of “Relationship between Petroleum Exports and Production.”

The proportion of NA’s production being exported still small, but growing from 6.9 percent in 2000 to 14.7 percent in 2011 (rhs scale, black line regression trend line, r2=0.92).  I should point out that the bulk of the exports from the USA are petroleum products, but, there are inter-regional crude oil exports from Mexico and Canada.  The total export trend is driven by the strong upward export trend to SA (line green line r2=0.92) .  However there are also substantial upward export trends to EU (blue line r2=0.56), AF (brown line r2=0.86), CH (pink line r2=0.56) and rAP (blood red line r2=0.46).  The proportion of exports to EU, CH and rAP are all up.  For instance, in 2011, 42% of NA's exports went to SA, 32% went to EU and 11% went to rAP.

Figure 26 shows predicted absolute regional exports from NA to the other regions, based upon the combination of the flat production rate trends shown in Figure 24 and the increasing proportion of production being exported according to the trend lines shown in Figure 26.

Because NA’s production rate is predicted to be flat to slowly declining, but, the export trend is strongly upwards (black line in Figure 25), NA’s total absolute exports are predicted to steadily rise over the entire study period to 2065.  As illustrated in Figure 26, SA and EU are the major beneficiaries of NA’s exports.  For instance, by 2020, SA and EU are receiving 0.44 and 0.29 bby respectively, and this grows to 0.6 and 0.36, respectively, bby by 2030.

Predicting Petroleum Import Rates to NA from other Regions
Figure 27 shows the sum (black line), and individual import contributions, predicted for each of the other eight regions, to NA.
Over the past decade, NA imported about 7 times more than it exported, although I think that situation will dramatically change over the next decade.  Over the last decade, total imports to NA initially increased, but then started to drop. 

This is due to two counteracting trends. 

On one hand, imports from ME, SA and EU have been falling.  For instance, in 2000, the sum of petroleum imports from these three regions equaled about 2.6 bby.  But, by 2011, the sum of petroleum imports from these three regions equaled about 1.8 bby, a -0.8 bby difference. 

On the other hand, imports from AF and FS have been increasing.  For instance, in 2000, the sum of imports from AF and FS equaled 0.7 bby, but this was up to 1.2 bby by 2011, a +0.5 bby difference. 

Consequently, because of the substantial “replacement” petroleum imports from AF and FS, what would have been a -0.8 bby decrease in imports (from decreases from ME, SA and EU) is only a decline of about -0.3 bby. 

Still, after imports to NA peaked in about 2007, they started to go down again.  This was mainly because imports from AF started to go down again.  In Part 4, I predicted that this downward trend will continue because AF’s production rates is peaking and subsequent production will decrease quite rapidly thereafter.  Similarly, as shown in Part 2 for FS, although the export trend to NA, EU and other regions is up, because FS appears to be reaching peak production, the absolute amounts of exports from FS to other regions will be going down in the future.  However, NA’s imports from FS still have a ways to go up, as they are not predicted to decrease until about 2017, assuming FS follows its predicted production and export trend.

As you can see from Figures 26 and 27, at some point in the mid 2020s, the increasing export rate will come up to meet and exceed the declining import rate.  

Predicting Consumption Rates for NA based on the PIE analysis
I applied my normalization to NA in the same manner as done for SA and AF.  For NA, the average calculated consumption rate, based on the summation of production plus imports minus exports for the 2001-2011 time range, was 0.618 ± 0.129 bby lower than the reported consumption rate for NA as reported in the BP review. Therefore my normalization for NA consisted of adding 0.618 bby from the predicted future consumption rate and adjusting total net exports downwards by this same amount.  And, like SA and AF, I did not attempt to distribute this correction proportionally among the individual absolute exports and absolute import to and from each of the other regions.

Figure 28 shows the production, consumption and net export data, and corresponding best fit curves, the later two now shown as dashed lines.  Added is the predicted net export (light green solid line representing total absolute exports minus total absolute imports plus the -0.618 bby correction) and consumption (blood red solid line) prediction curves, based on my PIE analysis (exports minus imports plus the +0.618 bby correction). 

The results presented in Figure 28 suggest that if NA’s production rate follows the flat trend predicted by the logistic equation best fit (solid blue line), and NA’s export and import rates continue along the trend lines shown in Figures 26 and 27, respectively, then the predicted total export rate curve (solid green line) transitions from negative to positive around 2028-2029.  The year to reach zero net exports is shifted by about 4 years as compared to from the mid-2020s cross-over, suggested by comparing Figures 26 and 27, due to the -0.618 bby normalization applied to the net export rates. 

The consequence of this PIE analysis is the prediction of a steeply declining domestic consumption rate for NA.  The consumption rate decline predicted by the PIE analysis (solid blood red line)—is much steeper than that suggested by the logistic equation fit to the consumption rate data (dashed red line).  For instance, a decline in NA’s domestic consumption rates from about 9 bby in 2008 to about 5 bby in 2029 represents a 45 percent decrease, or about -22.5 percent per decade or -2.25 percent per year. 

That sounds like a lot, but, as I pointed out earlier on NA’s consumption rate in 2011 was already down by about -9% down from its high point in 2005-2007.  So, NA may be right on track with this trend.

Some implications from this analysis
I (here and here) and others have suggested there is a strong correlation between petroleum consumption rates and GDP.  Therefore, the prediction of a declining petroleum consumption rate also implies that the economy will decline, roughly in proportion to the consumption rate decline.  Maybe the relationship is not 1:1, but, I think at least the direction of change would be the same.   That is, it is hard to imagine a growing economy while at the same time petroleum consumption rates are declining on average -2.2 percent per year for 20 years in a row.

Most people living in NA would be depressed to think of another two decades of economic decline about the same as what has been experienced over the last 4 years.  This would mean an entire generation of diminishing educational and work opportunities, high unemployment rate, declining purchasing power and the political unrest associated with these trends.

How could people in NA survive such a 20 year down trend?  

And what about after 20 years, when NA has the potential to becomes a net petroleum exporter?

As far as surviving a decline rate in petroleum consumption, we already have some regional examples to look to for guidance. 

As you have already seen in Part 3 of this series, the FS’s petroleum consumption rate declined by about by 53% over 7 years from about 3 bby in 1990 to 1.4 bby in 1997—that’s a -7.5 %/yr decline.  Of course, the concurrent economic crash was terrible, but people still survived.  But Soviet Union did not.  Following this rapid decline, petroleum consumption rates have subsequently come back slightly, but present petroleum consumption rates as nowhere near the pre-crash consumption rates.  What did go up dramatically for the former Soviet Union countries are net petroleum exports.

Additionally, as you will see later on in this series, JP’s petroleum consumption rate has declined by about by 24% over the last 15 years, from a peak of about 2.1 bby in 1996, to 1.6 bby in 2011—that’s a -1.6 %/yr decline.  The 1990s has been called Japan’s “lost decade,” but this has really stretched into a lost two decades.   The purchasing power of the Japanese has dropped from USA levels in 1991, to below Western European levels today (see e.g., The Japanese tragedy).   However, despite the declining GDP, decreasing hours worked per capita, high unemployment, especially among the young, JP has coped (Japan's Lost Decade: All Too Real).  That’s good, because I see no abatement of this trend for Japan for the next 20 years. 

I think that North America will experience something similar to Japan’s lost two decades, although there are aspects of the former Soviet Union’s experience that are also likely. 

Like Japan, North America will likely see the same declining GDP and purchasing power as experienced by Japan.  Also similar to Japan, are the demographic trends of aging and retiring baby boomers and their likelihood to consume less, and, trend of high youth unemployment rates. 

It is important to keep in mind, however, that like Japan in the early 1990s, North Americans are wealthy, by global standards, and therefore even a -22.5 percent per decade in petroleum consumption rates and GDP, would still only put North Americans at about the level of Europeans today.  For instance, at a population of about 0.46 billion in 2011, NA’s average per capita petroleum consumption equals 18.3 barrels per person per year (bpy).  If the consumption rate trend line shown in Figure 28 is followed, and the present population growth trend for NA continues, then by 2029, per capita petroleum consumption would be 8.7 bpy.  That is about the same as EU’s per capita petroleum consumption rate of 9 bby in 2011.

Like the former Soviet Union, North America has substantial petroleum resources.  What this means is that by 2029, when consumption crosses below production, North America has the potential to become a net exporter.  That would mean that at least some of the positive economic benefits that Mark Mills, Citi group and Wood Mackenzie are suggesting may still occur. 

Improved trade deficit?  Yes definitely, especially when you consider that the net export outlook for FS, AF and SA are all down substantially by 2029.  In fact, according to the ELM analysis increased domestic consumption rates will drive all three of these regions to zero net exports before 2029.  The PIE analysis is a little more optimistic that these regions will still have net exports by 2029 but the net exports are all down substantially from 2011 levels. 

In either case, it probably means that in 2029 the other regions, like rAP, CH, EU and JP that needing to import oil will be willing to pay a high premium for it.

Increased government tax and lease revenues? 
Maybe, if the price of oil was substantially higher than today, and, I think it will be because the down turn in net exports from the traditional exporting regions. 

Increased employment rates?
No, I doubt that employment would decline overall, because the economic downturn associated with lower petroleum consumption rates would overwhelm any job increases in the energy sector. 

Will North America then become the next Middle East?
No, probably not, at least in terms of net exports.  As suggested by the analysis in Part 2 of this series, production rates in ME could be down from 2011 levels of 9.5 to 5.9 bby by 2029.  And, depending on whether you tend towards the ELM or the PIE analysis, net exports could be down to 1.4 to 2.9 bby, down from about 7 bby in 2011.  According to Figure 28, it would take until 2042 before NA’s net exports got up to +1 bby, and this would mean a continuing drop in the domestic consumption rate down the equivalent of a per capita consumption rate of 6.5 bpy. 

Speaking of regions that will be desperate for imported oil by 2030, next time, I will turn my attention to the European region.  


  1. Hey, always excellent!

    When I read those mentioned articles I get a strange feeling. It's not from the rational part of me, but from my gut. I feel like they are either knowingly lying to me, or they are lying to themselves about our predicament. Makes me wonder what other truths out there are similarly fabricated?

  2. DaShui, my hunch is that the authors of those studies (mostly journalists or PhDs in economics btw) are trying to do whatwever they can to put a positive spin on the USA's or NA's production trend data.
    For instance, looking back at Figure 24, if you take ONLY the last three or four years of production data (blue circles) and do a linear regression on ONLY those points, then the extrapolated line would intersect with the red line in about 2020. I think that this is basically what Mills did in his article. Journalists and economists think that such an extrapolation is okay, because they have never heard of the Hubbert Equation or the physical realities represented by it.


Your comments, questions and suggestions are welcome! However, comments with cursing or ad hominem attacks will be removed.