Without the economic slowdown that started at the end of 2008 world oil consumption would have reached a record level. There was a great danger that a gap would have been created between world oil produced and the amount of oil consumed per day. It could have widened to the point that the world would be drawing down on storage.
The projected difference was between daily consumption of 88 million barrels versus daily production of 85 million barrels per day. The production numbers include gas liquids etc.
This sounds like a small amount that could be narrowed with a price spike as the market is wont to do. Generally higher prices remove demand from the market as people make choices regarding marginal consumption. However, given the increasing demand worldwide and the appearance of Peak Oil there is evidence that countries would either have to cut back on consumption or draw down on existing inventory.
The only real problem in the US and most of the world is what is defined as inventory and what percentage of that number is useful.
The US gross inventory numbers are the highest they have ever been–including the strategic petroleum reserve. Given that demand is also at the highest this is probably a good thing.
Here’s the catch.
The US inventory numbers include the oil in tankers off US shores, the oil in pipelines, the oil around the storage containers—in other words a large percentage of these numbers are work in process inventory. It is not useable oil for the most part without great difficulty of pushing it out—very difficult to do if oil is not entering the opposite end of where the oil has to come out.
Consider the US gasoline pipelines if you will. The pipelines begin in the US Gulf region as multiple pipelines of gasoline leave the refineries and slowly snake their way north at about 5 miles per hour. The pipelines start branching off at various cities and regions on it’s journey to the US northeast where the gasoline exits from one remaining pipeline many weeks later. If there is a huge demand placed on this supply and the pipeline volume is depleted in a panic (remember the 1973 oil embargo) then no amount of new gasoline leaving the refineries in the Gulf of Mexico is going to speed up the refill of the pipeline. That could take weeks–if not longer. Imagine the panic.
To give you a recent example of this inventory in process situation—TransCanada pipelines is building a new heavy oil pipeline in Canada (Keystone Pipeline) that is 3,456 kilometers long and has a volume (when full) of 9 million barrels of heavy oil. When it is completed it will take 3 months to fill before any useable oil will exit. Just imagine you have all this oil in “inventory” and you have a shortage problem develop in the middle of summer– prices are rising but there is no supply because there is no way to effectively push the oil out of the end for processing. The politicians would have a field day.
Examples of Peak Oil are starting to emerge besides the obvious US example of the US production drop since 1970 that was referred to in part 1 of this series.
Mexico’s largest field Cantarell had a widely publicized Peak Oil Experience in May 2005. They had been using all sorts of modern drilling and recovery techniques with great success. Unfortunately all the modern techniques cannot recover oil that is not there—consequently they have had a very serious decline curve from that gigantic field. Somewhere in the neighborhood of 20% per year.
With some luck this production decline may level off to approximately 25% of their peak production with continued drilling and maintenance.
The problem here is that if the field declines further Mexico may not be able to export oil—and with some estimates that oil revenues account for 50% of Mexico’s social spending—you have a real problem. The political and crime situation in the country has been getting more prickly of late and declining social spending could aggravate an already delicate problem.
What could happen here?
If oil is the glue that holds society together then the situation could turn to chaos. Will it overflow into the US?
You can see the problem.
See Part 3–More on the Chaos of Peak Oil