Another Take On Peak Oil: Exports, Not Production, Indicate Crisis

Posted by Zoe Macintosh on February 25, 2010 at 7:47 am

Freefalling oil barrels illustrate a net export collapse. And yet there are still barrels. (image: gettyimages.com)

President Obama pledges to attain national energy independence, only to be publicly rebuked days later by the Saudi oil minister for his lack of practicality. Two prestigious energy tracking agencies (CERA and the UK Energy Research Center) study the issue and release hefty reports in the same month with opposite conclusions. These are some of the examples given by host Jim Puplava in a January 30 segment of Financial Sense Newshour to introduce the increasingly fierce peak oil debate.

But to independent petroleum geologist and guest expert Jeffrey Brown, a crisis of world peak oil production is less critical than a crisis of peak oil exports.

Most of the peak oil debate centers on supply, analyzing the productivity of oil fields both known and yet-to-be discovered. There is no consensus on the amount of oil left in the world. Experts diverge considerably in their estimates due to the lack of truly reliable data and the powerful political motivations involved. Brown takes a different angle by using a different model, one developed with colleague Dr. Samuel Foucher and originally inspired by Matthew Simmons. Dubbed the Export Land Model, it analyzes a nation’s net oil exports—the difference between a nation’s production and consumption of its total liquid oil products.

According to Brown, it’s the future net exports, not production, we should be paying closest attention to when searching for signs of peak oil, because that’s the factor that crashes first, and hardest. Brown’s analytical model is unique in that it emphasizes the tendency of oil exporting nations to experience economic growth even as their oil supplies diminish.

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The model’s reasoning goes like this: A nation only exports the surplus of its vital resources. Following a peak in oil production, a nation is flush with capital after exporting more oil than ever in its history—oil that is often sold at previously unreached high prices as well–and its economy responds with growth. But with an expanding economy comes growing demand for oil, causing the nation’s domestic oil needs to cut into a supply that recently began a steady decline. These two sources of pressure on the nation’s oil surplus cause it to deplete at an ever-faster rate. Unless the nation does the unprecedented and keeps its rate of domestic consumption always at or below its exponentially declining rate of production, the surplus vanishes and exports stop.

The “iron triangle” of the Export Land Model. Increasing consumption causes a nation’s net export decline rate to exceed its production decline rate. (image: wikipedia.org)

It’s because the decline in oil exports accelerates that the bottleneck in oil made available to importing nations occurs as a “crash,” not the steady decline, or “long gradual tail” so often pictured by authorities like the IEA. As Brown said on the OilDrum discussion board: “I’ve compared a typical production decline profile to a commercial airliner doing a normal gradual descent for landing. An export crash, like the UK and perhaps Mexico, looks more like a terrifying near vertical dive into the ground.”

UK oil production and exports. The production curve is the classic “peak oil” curve. As can be seen, the drop-off in net exports is dramatically steeper than the drop-off in production. (image: energybulletin.net)

But even an airplane crashing into the ground still stops at the ground. Not so with an export crash, which is only one step on a still-lower descent. Brown discussed with Puplava how a net exporter can become a net importer within a matter of years, and gave the UK as an example, which peaked in net oil exports (as well as production) in 1999, and hit zero export status in 2005.

As these exporters slip into importer status, not only are they not delivering oil into the market, they’re creating additional demand for the remaining volume of exported oil. And these exporters are simply falling into the path that the US and China followed. We went from being a major oil exporter in the Second World War to net importer status only three years later in 1948. (from the interview with Puplava)

According to Brown, the UK is a “classic example” of his model, because it saw a rapid export crash with “virtually no increase in consumption.” The example of the US is also highly illustrative, as its fast consumption rate made it a net importer long before its production peaked—a margin of 22 years.

That’s why Brown’s comparison above is particularly daunting. If other countries are following the US’ pattern, the world could experience a supply shortage far in advance of a global production peak, or what most people talk about when discussing “peak oil.”

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To an oil-exporting nation, a decline in its oil surplus means it needs to start selling some other product. But to a global community dependent on oil, a depletion of net exports may as well be a supply crash. That’s the insight that makes net export analysis so powerful, but it is still surprisingly ignored in most peak oil discussions.

According to Brown’s ELM analysis from 2008, net oil exports from the world’s top five producers have already peaked. A graph supporting this fact showed the price of oil against the average annual net oil exports from Saudi Arabia, Russia, Norway, Iran, and the United Arab Emirates. As prices rose, these countries’ cumulative net oil exports also rose—presumably out of the desire to cash in on increasing demand indicated by higher prices. But in 2005, crude oil exports from these countries dropped sharply. The decline continued even as prices skyrocketed on their way to the all-time peak of $147 per barrel in July of 2008. Brown explained the significance of this pattern in an email to HeatingOil.com:

I brought up the post-2005 production and net export volumes versus price because it does provide evidence that the post-2005 decline in crude production and the decline in net oil exports were, [in my opinion], largely involuntary, much like the Texas & North Sea declines. My point was that if producers and exporters were happy to meet rising demand from 2002 to 2005, why were they suddenly unwilling to meet higher demand from 2005 to 2008?

If we are to believe the Export Land Model, the answer is that they did not have the oil to export. The model, using EIA data for these nations’ oil consumption, production and exports showed that these nations had already reached peak oil production and export capacity, and would approach zero net liquid fuel exports by 2030. Because these countries are responsible for about half of all the world’s oil exports, the 2008 paper that presented these results predicted a literal “draining-away” of the world economy’s lifeblood. It is worth noting that according to the IEA, which does not engage in ELM analysis, 2020 is the projected date of the global peak in oil production.

In an article published on GetRealList on February 8, energy analyst Chris Nolen, after studying two of the top three exporters to the US, declared “The Oil Export Crisis Has Arrived.” Finding that Mexico and Venezuela together exhibited an 8% decline in exports since 2005, he suggested that a crisis has been present for some time, but has not fully manifested because of the recession’s dampening effect on the US economy and demand for oil.

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The Export Land Model is just a theory, like any other. But what makes it compelling is that even if it’s a little right, it says that whatever happens will happen quickly.

Brown happens to think both a production peak and export peak has been reached. He has said that the spike in oil prices from 2005 to 2008 was the result of a furious bidding war for dwindling exports—a theory at odds with the belief that the price run-up of the past few years was a result of excessive speculation, not market fundamentals. That is how oil can be selling for $80 a barrel even though supplies are at record highs and demand at record lows (as had been the case in recent months). But if Brown is correct (and it’s possible that both were contributing factors), then current prices are not a confounding anomaly, but a reflection of true demand for a critical resource in advance of pending export scarcity.