Just shy of a year ago, I wrote an article for Energy and Capital entitled "Canary in a Data Mine," in which I examined the global scenario for oil production and demand, and concluded:
So the upshot is this: There is clearly a yawning gap, possibly as much as 2%, opening between production and demand in 2007 for those of us who depend on imports.
It looks to me like the loss of export capacity will prove to be the canary in the data mine. It doesn't really matter if the peak is technically a few years off if we can't satisfy our ever-growing thirst.
That canary has now keeled over.
The problem is simple: Net oil exporters are awash in the cash from their oil exports. As they grow up and continue to industrialize, they consume more of their own production, which cuts into their exports.
There is also the factor of subsidies. With such extraordinary income from their oil sales, net oil exporters don't need the income from domestic consumption. They'd rather invest it in building infrastructure and stimulating their economies, so they subsidize the cost of fuel. Fast-growing economies like China would screech to a halt if consumers had to pay the market rate for fuel, so instead the Chinese pay about $2.80/gal for gasoline, and in the countries of the Middle East, gasoline generally goes for under $1.50/gal.
It should be obvious that as time goes on, the export problem becomes a vicious circle. As export supply falls, the price of exported oil goes up, which sends even more money to the producers, who will use it to build more and consume even more energy, which will further cut into their exports. A growing sentiment among net oil exporters to save some oil for future generations will further limit their output.
For a country like the U.S., which imports about two-thirds of its oil, the most immediate problem isn't peak oil, but peak exports. The gradual loss of imported oil has hit us first, and will cost us more than the mere global supply peak would.
So this week, I take a closer look at the vicious circle of declining exports.
The Export Land Model
Dallas-based independent petroleum geologist Jeffrey Brown and Dr. Samuel Foucher (aka "Khebab"), a Ph.D. expert on signal processing, have been working for about two years now on a model to demonstrate the net export problem, which they call the Export Land Model (ELM). Progress on the model and its implications have been regularly discussed on TheOilDrum.com, including the recent update "Is a Net Oil Export Hurricane Hitting the US Gulf Coast?"
The model proposes a hypothetical oil exporting country called "Export Land," and makes the following simple and reasonable assumptions about it:
- Peak production rate: 2 mbpd
- Rate of decline post-peak: 5%/year
- Internal consumption: 1 mbpd
- Rate of consumption increase: 2.5%/year
Here's their model in graphical terms:
Source: The Oil Drum
The results of this analysis are startling:
- Exports cease in only nine years, far faster than overall oil production.
- Exports decline at an accelerating rate, starting at about -13% and ending at about -48%, averaging about -29% per year over the 8 years of decline.
- Only about 10% of the oil produced after the peak is ever exported!
Applying the concepts in the model to the world's actual oil production, they focused on the world's top five net oil exporting countries—Saudi Arabia, Russia, Norway, Iran and the UAE—which together account for about half of the world's net oil exports.
The results were ominous:
In their middle case scenario, these top five exporters will approach zero net oil exports around 2031, starting from an average net export decline of about one mbpd per year in 2006. In a recent post, Brown notes, "net exports by the top five net oil exporters dropped by 800,000 bpd in 2006, from a 2005 peak of 23.5 mbpd, and I estimate that they dropped by about one mbpd in 2007."
According to a recent article in the Wall Street Journal, data from the EIA did indeed show about a one million barrel per day decline in exports in 2007.
Exporters to the U.S.
Since "peak exports" is what we really should be worried about in the U.S., let's take a closer look at our imports.
Here are the top 10 sources of U.S. crude oil and petroleum product imports, as of March 2008:
Top 10 Suppliers of U.S. Oil Imports and Their Fuel Costs
| Rank | Country | Thousand | Domestic cost of gasoline (US $/gal, 2006 prices) |
| 1 | Canada | 78,814 | $5.49 |
| 2 | Saudi Arabia | 47,806 | $0.45 |
| 3 | Mexico | 42,111 | $2.35 |
| 4 | Nigeria | 36,381 | *$1.94 |
| 5 | Venezuela | 32,009 | $0.19 |
| 6 | Iraq | 23,967 | (no data, probably about $0.25) |
| 7 | Algeria | 13,674 | $1.21 |
| 8 | Russia | 12,466 | $3.97 |
| 9 | Angola | 12,043 | $1.90 |
| 10 | Virgin Is. | 9,002 | (no data) |
Sources: Oil Import data: EIA. Gasoline prices: German Technical Corporation
(* corrected from previous version)
According to EIA, the total crude oil and petroleum product supplied to the U.S. market in March was about 612 million barrels. Total imports were 389 million barrels, or 64% of our total consumption. (Considered on an annual basis, and looking only at crude oil, our imports are probably closer to three-quarters of the total than two-thirds.)
By way of example, if it were all priced at $130 a barrel, the oil we imported last year would have cost $638 billion, which is probably in the neighborhood of what we'll spend this year for imports. That's over four times as much as we are spending annually on the war in Iraq.
The economic fallout from oil prices has arrived in the form of a widening trade deficit. According to a report from the Commerce Department yesterday, both the price and the volume of imported oil hit new highs in April, which contributed to overall U.S. imports reaching a record $216.4 billion. The trade deficit now stands at $61 billion.
No economy can survive such a drain on its finances. If we don't do something to stop that flow of money to oil exporters, it will kill us. Consider this: The price of oil has approximately doubled over the last year. If it doubles again in the next year, that fiscal wound will be bleeding at the rate of about $1.3 trillion per year, or about 10% of our total GDP!
Charts for Our Top 9 Suppliers
To see how the export decline problem might affect us here in the U.S., we now look at the net exports of our top 9 suppliers in turn. Normally, I wouldn't have attempted this sort of data analysis for a weekly column, but I just discovered that Jonathan Callahan of Mazama Science has released a very handy little online tool called the Energy Export Databrowser that makes it easy. (The tool uses data from the BP 2007 Statistical Review, which has no data for the Virgin Islands, so their production not shown here.)
Here are his charts of oil consumption, production, exports and imports for each country, with the net percentage change from 2005-2006. (Note: for countries with no consumption data, only production is shown.)
Canada: Exports +16.4%
Fortunately for the U.S., oil exports from Canada are actually rising, due to a boom in production from unconventional oil and gas, and tar sands. Canada's production is truly the only significant bright spot in the outlook for oil imports to the U.S., and we have focused on it intently in picking stocks.
Saudi Arabia: Exports -4%
The situation for the world's top oil exporter is quite different, where exports decreased 4% from 2005-2006, and 7% from 2006-2007 (EIA). At Saudi Arabia's level of production, this is an enormously worrisome development.
Mexico: Exports -4.2%
Mexico's export decline is of particular concern, since they are one of only two suppliers who can reach us by pipeline. Their supergiant field Cantarell has gone into collapse, declining at the rate of about 14% a year. By the end of 2009, it is projected to be producing only half of what it was producing at the end of 2004.
Nigeria: Production -4.6%
Nigeria continues to be beset with civil unrest and strikes, which have shut in between 800,000 and 1 million barrels per day of capacity for the last two years, and dampened hopes for a significant increase in its production. In fact, its production actually fell from 2005-2006:
Venezuela: Exports -5.5%
Venezuela's exports have been in decline for a decade, and the rate appears to be accelerating. According to the latest EIA data, Venezuela's net export decline rate now stands at -7.6% a year.
Brown notes that the combined net oil exports from Venezuela & Mexico to the US dropped at the whopping rate of -32% per year over the six months between last October and this March.
Iraq: Production +9%
Production data from Iraq is notoriously unreliable, due to a robust black market and deliberate reporting of incorrect data. We also have no consumption data for Iraq in this database. In my considered opinion, the extremely slow progress that the Iraqi congress has made in establishing revenue sharing and production agreements between the various parties, and the continuing violence and sabotage in that country, makes it an unreliable hope for increasing exports substantially, at least in the foreseeable future.
Algeria: Exports -1.1%
Algeria is one of the few African oil producers where the environment is relatively stable, and where oil production might hope to be increased. It is also utterly dependent on its oil revenues, which make up nearly all of its export income, and that should serve to make it a compliant participant in the global oil markets. However, it is still a small producer, accounting for only about 5% of our oil imports.
Russia: Exports +1.5%*
I put an * after that number because Russia's export situation has changed since 2006, where the dataset used to generate these charts ends. I included this chart for the sake of completeness, and to keep with the same dataset as the other charts.
According to Brown and Foucher, Russia's exports declined 6.7% from December 2006 to December 2007. Their projected 10-year net export decline rate for Russia is -8.2%/year, ±4%, with a middle case scenario approaching zero net exports in 2024.
(For a good detailed look at Russia's oil production, see Foucher's recent analysis, "Russia's Oil Production is About to Peak.")
Angola: Production +14.2%
Angola has just surpassed Nigeria for the first time in 50 years as the top African oil producing nation. The country produced 1.87 million barrels per day in April, according to OPEC, vs. Nigeria's production of 1.81 million barrels per day. As previously mentioned, this is mostly due to the shut-in capacity in Nigeria. Angola's production—accounting for about 5% of the U.S.'s imports—might be increased a little in the coming years, but in the absence of consumption data the exportable portion is unknown, and in any case is fairly insignificant in the big picture for the U.S.
Looking at those charts, one thing should be very clear: Many of the big exporters on whose output we most desperately rely aren't going to be reliable for much longer. Most of the production gains are from small producers in Africa, which are fraught with conflict and relatively inhospitable to foreign investment, so we shouldn't count on them too much, either.
A Sobering—and Profitable—Thought
The impending export crisis is a very sobering realization. When oil imports simply aren't available, we will be forced to live within a smaller energy budget, and the adjustment could be painful.
So never mind the fact that the world will still be consuming a wee little bit of oil by the end of the century.
Never mind that we're only about halfway through the total amount of oil that the world will ever produce.
In fact, never mind peak oil.
The real questions are much more urgent:
Will the world be ready to deal with zero next exports from the top five exporters in a mere 25 years or so? World net exports appear to be declining at about 2.5% per year already, and according to the ELM model, we should expect that rate to accelerate.
Closer to home, will the U.S. be prepared to replace the two-thirds of its lifeblood that is imported, before it goes off the market? High oil prices and a struggling economy have already reduced our imports by 6% over the last year, but how close to the bone can we cut?
This is why we here at Angel Publishing have sought out the best fossil fuel plays we can find in North America. As the old Billie Holiday song goes,
Money, you've got lots of friends
Crowding round the door
When you're gone, spending ends
They don't come no more
Rich relations give
Crust of bread and such
You can help yourself
But don't take too much
Mama may have, Papa may have
But God bless the child that's got his own
The unconventional oil and gas plays we have uncovered in the U.S. and Canada may not be able to make us fossil fuel independent, but they will be the resources we count on as the export curtain falls.
Amid the panic, there will also be profit...and a piece of it can be yours when you subscribe to the $20 Trillion report.
Until next time,
Chris
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