By: Robert Hirsch
Restrictions on world oil production can be divided into four categories:
2. Legitimate National Interests
4. Political Upheaval
Consider each in reverse order:
Political upheaval is currently rampant across the Middle East, resulting in a major spike in world oil prices. No one knows how far the impacts will go or how long it will take to reach some kind of stability and what that stability will mean to oil production in the Middle Eastern countries that produce oil. We are thus relegated to best guesses, which span weeks, months, or years before there are clear resolutions. One pre-Middle East chaos country limited by political upheaval is Iraq, which is believed to have the oil reserves to produce at a much higher level, but Iraqi government chaos has severely limited oil production expansion. In another long-standing case, Nigeria has been plagued by internal political strife, which has negatively impacted its oil production.
Mismanagement of oil production within a country can be due to a variety of factors, all of which mean lower oil production than would otherwise be the case. Venezuela is the poster child of national mismanagement. The country has huge resources of heavy oil that could be produced at much higher rates. Underproduction is due to the government syphoning off so much cash flow that oil production operations are starved for needed funds. In addition, Venezuela has made it extremely difficult, if not impossible for foreign oil companies to operate in the country. Another example of mismanagement is Mexico, where government confiscation of oil revenues, substandard technology, and restrictions on foreign investment has led to significant Mexican oil production decline.
Legitimate national interests include decisions by governments to husband their oil reserves for the long-term benefit of their people. This occurs in various ways, some of them subtle. Not so subtle is the Saudi King's decree that any new oil fields discovered in the near future will not be developed in order that new discoveries can benefit Saudis in future years.
Then there is geology, which is the ultimate restriction. Oil is a finite resource. We will never produce more oil than nature provided over millions of years. All that's there is called the oil resource, but we can only produce what is called the "reserves," which is a fraction of the resource. Why? Because the geology associated with each oil deposit sets a practical limit on ultimate production. In a few cases, reserves can total up to half of a local resource. In others, reserves can amount to no more than a few percent of the resource. Typically, reserves are around 30% of the resource. If you think we should be able to do better than 30% on average, take some time to look at some oil reservoirs rock cores.
The complexity is often mind boggling.
What's this all boil down to? Based on geology, many analysts have forecast the onset of the decline of world oil production in the next 2-5 years. Legitimate national interests, mismanagement, and political upheaval can only hasten that onset. To explain these and other energy issues we wrote the book entitled "The Impending World Energy Mess." Oil production is a very complicated activity. What happens in oil will impact all of us, so it's worth some study.