Jeffrey Brown: To Understand The Oil Story, You Need To Understand Exports

Despite the attention-grabbing economic volatility that is grabbing headlines, it’s important to keep our eye on the energy story firmly in focus. This is especially true as the headlines we regularly read about Peak Oil being dead are “manifestly false” according to this week’s podcast guest, petroleum geologist Jeffrey Brown. 

As concerning as the fact that global oil production has plateaued over the past decade, despite trillions invested in trying to goose it higher, are Brown’s forcasting model for oil exports. His Export Land Model shows how rising internal consumption can swing (and has swung) countries from major exporters to permanent importers within a dizzingly short period of time:

The crucial issue to understand about what has happened after 2005 is that we’ve had a very large increase in global gas production and natural gas liquids, but a much slower increase in crude plus condensate. So, what I think has happened is the actual crude oil production has basically flatlined while the liquids associated with natural gas production, condensate and natural gas liquids, have continued to increase. So, we ask for the price of oil, we get the price of Brent or WTI; but when you ask for the volume of oil, you get some combination of crude, condensate, natural gas liquids, biofuels. So, the fact is that substitution has worked and is working in that they’re bringing on alternative substitutes, but they’re only partial substitutes. The actual, physical volume of crude oil production has probably been flat to down since 2005. Over the past ten years, it has taken us trillions of dollars, basically, to keep us on an undulating plateau in actual crude oil production. What happens going forward?

So, basically, the conventional wisdom is the fact that we’ve seen an increase in liquids production, seems there’s no evidence of the peak in sight. And, I think in regard to crude oil production, that argument is manifestly false. I think that we’ve probably seen a peak in actual crude oil production, 45 and lower API gravities, despite trillions of dollars of upstream capex expenditures.

I started wondering in late 2005 what happens to oil exports from an exporting country, given a production decline and rising consumption. And, so I just started, I just constructed a simple little model. I assumed a production of about two million barrels a day or so at peak, consumption of one, and assumed production falls about 5% per year, basically what the North Sea did, and assumed consumption increases to 2.5% per year. What the model showed was that exports, net exports would go to zero in only nine years, even though a roughly modest production decline. So, the easy way to state it is giving an ongoing, inevitable decline in production, unless an exporting country cuts their domestic oil consumption at the same rate as the rate of decline in production, or at a faster rate, it’s a mathematical certainty that the net export decline rate, what they actually ship out to consumers will exceed the rate of decline in production. And, furthermore, it accelerates.