Kunstler: The Cheap Oil Mirage

…As a baseline, it helps to understand that the four largest super-giant oil fields of the world are now in decline. They have been responsible for producing 14 percent of the world’s oil supply. They are now old and tired (thirty years is old in the oil world) and they are in depletion. These are The Cantarell field of Mexico, the Burgan field of Kuwait, the Daqing field of China, and the granddaddy of them all, the Ghawar field of Saudi Arabia.

The Cantarell field is a horror story. Pemex, the Mexican national oil company, tried to conceal the dire developments, because Cantarell alone is practically the whole Mexican oil industry. But it is now self-evident that Cantarell is crashing, with a 40 percent annual decline rate projected ahead, meaning a couple of years and it’s out. Mexico is America’s second largest source of oil imports (after No. 1 Canada and before No. 3 Saudi Arabia). When Cantarell crashes, the Mexican oil industry will crash and the US will be out a major source of imported oil. The US will also be out of imports that were so conveniently close they could be shipped by pipeline rather than tanker ships. For its part, Mexico will be out of a major source of export hard currency revenue and as its economy crashes will probably become even more politically unstable — meaning more Mexican citizens desperately seeking to get out. Guess where.

Burgan is is in decline. The Kuwaitis announced it themselves last year. Daqing has been the major source of China’s domestic oil, which is otherwise paltry, meaning Daqing’s decline will only make China more desperate for imports. Ghawar remains shrouded in mystery, since Saudi Aramco does not welcome outside audits. But at 50 years old it is well past the mean age of peak production for oil fields and that alone probably tells the story. Beyond that, we know that Ghawar is producing with a (best case) 35 percent “water cut” (and perhaps much higher). They have to pump seawater into the field (a standard practice) to keep the oil coming out under pressure. The trouble is that they are getting this substantial water cut after redeploying their equipment for horizontal drilling — an ominous sign. Saudi Arabia declared last year that it would increase production to 12 million barrels a day by 2009. By close of 2006, it appeared to have trouble producing 9 million, with prospects for a 4 percent annual decline rate in the years just ahead.

Elsewhere, Iran is not only past peak, but its domestic demand is so high that it cannot maintain its export levels. The North Sea, which saved the West’s ass through the 1990s, is now crapping out at a steep decline rate. Iraq is on track to Palookaville, despite substantial reserves, and even if, by some miracle, its tired old oil infrastructure survives the war, the US may lose access to future production for geopolitical reasons that should be obvious.

Atlantic Free Press