Flattening COVID-19 cases and postponing oil peak?

May 22, 2020

In the mid-1950s Marion King Hubbert developed a model known as the King Hubbert Curve, which was meant to predict the year of the oil peak production in the USA. Considering a fixed stock in the ground, Hubbert predicted that the peak would happen in 1970, which made sense given the oil exploration and extraction technologies at the time.

This simple model was based on a normal distribution (Fig. 1), in which σ, the standard deviation, is used to compute tm, the time required to reach the production peak (Pm), given the current stock (Q) and the current production (P0).

Figure 1: M. King Hubbert Curve and equation to determine the timing for maximum production (Tm)
Figure 1: M. King Hubbert Curve and equation to determine the timing for maximum production (Tm)

Equation underpinning Figure 1

Because the area under the curve -which corresponds to the oil stock- is fixed, the model indicates that increasing the production peak Pm, shortens the period to reach the peak. Conversely, if Pm is reduced the time required to reach the peak is extended and the curve is flattened. Simple… but wrong.

Hubbert´s model overlooks the tremendous investments in R&D that have unveiled new reserves and brought about non-conventional oil wells into production. Technological achievements have doubled global oil proven reserves in the last 30 years (BP, 2019). Accordingly, the area under the curve has grown and global oil production has been increasing since the 1970s. Just in the USA, oil production has doubled over the last seven years. The country was pumping out 16% of the global production in 2018 (BP, 2019).

While the global oil peak is nowhere to be seen, we now face the COVID-19 pandemic, which has tremendously affected oil demand and its prices. Despite this overlooking of added reserves, Hubbert´s model is still helpful to understand how the coronavirus spread will affect oil production.

Dr. Carl Bergstrom, a Professor of Biology at the University of Washington, tweeted on March 07 his analysis on lowering and postponing the “epidemic peak” through control measures such as social distancing (Fig. 2). The advantage of flattening the curve is that the number of infected people per day decreases, reducing the pressure put on the health care system. In addition, postponing the peak facilitates the preparedness of the health system as well, and therefore, more people may recover from the illness with hospital support.

The cases curve can be understood with an analogy to Hubbert´s model. If we consider that there will be a fixed number of cases (stock), by decreasing the rate of new cases (production) the time for the peak is pushed forward and the peak is lowered to a number that the system might be able to handle.

Figure 2: Dr. Bergstrom analysis of COVID19 cases evolution with and without controls (Lancina, 2020)
Figure 2: Dr. Bergstrom analysis of COVID19 cases evolution with and without controls (Lancina, 2020)

The control measures to fight the pandemic are strongly based on limits in the operation of several economic activities. These limits have made fuel demand drop and will also lead us into a deep global recession, that will likely extend the low demand on fuels. So, as we flatten the pandemic curve, we flatten the oil production curve and the peak is now pushed forward by a decreased production.

The problem is that there is a minimum production limit. It is not feasible to simply close the oil tap: stopping and restarting production is usually prohibitively expensive. Solutions such as aboveground storage are limited and reaching their maximum capacity. Therefore, the planning and investments made over the last years to ramp up oil production are now challenged by this unexpected situation. Alike to the pandemic, there is no short-term fix to the oil market without losses.

What follows illustrates how particular the current situation is. On April 20, 2020, the barrel price of West Texas Intermediate (WTI) dropped 40% and reached $10.77 and was negotiated at negative values by the end of that day -37 $/bbl (Lockett H., 2020). Oil that had already been produced had no place to be stored and was being payed to be taken elsewhere. This unintended outcome has been caused by a factor not covered by traditional energy economics analysis. In a different scenario, low fuel prices would have been an incentive for an increasing demand, but controlling the coronavirus spread means staying at home, not driving, not travelling, not producing. Demand is not there.

Figure 3: Historical global oil’s proven reserves and annual average prices
Figure 3: Historical global oil’s proven reserves and annual average prices

A global response for the low demand was woven in an accord between OPEC+ countries that agreed to cut the global output by 10%. Going back to Hubbert´s model, the 2019 BP Statistical Review of World Energy states that global production in 2018 was 94.17 million barrels per day and sets total proven reserves in 1730 billion barrels. We can do the exercise of imagining a production peak of 100,000,000 bbl/day. In reality, according to the International Energy Agency (IEA), the production in 2018 was already 98.3 million barrels per day (IEA 2019). If we consider a scenario with a maximum production of 100,000,000 bbl/day and the oil proven reserves in 2018, according to Hubbert’s model a 10% reduction in the production would postpone it by only 4 years, and we would reach it again in 2029.

However, recovering production at the same level or even higher is not granted. The cost of producing a barrel of oil varies widely from one well to another, based on its prospection, development, financial, operation and maintenance costs. About 5 million barrels per day are not profitable at a $25/bbl price (IEA, 2020). If oil offer is constrained and the market is not flooded with cheap barrels, it will still require some time for demand to catch up and start driving prices up. Until that happens, part of the current oil stock cannot be produced.

In conclusion, time for peak production (tm) is being pushed in opposite directions by two factors. A diminished demand will reduce production level (Pm) and push tm forward; and reduced prices will impact how much of the current stock (Q) can be produced, thus bringing tm closer.

Environmentally thinking, it makes sense to move out from oil and invest in solar and wind for more resilient energy systems. So, we can now wonder… has this pandemic brought about the oil peak?

Given that the resilience of an oil-based system has been challenged, this might be an opportunity to switch from investments in fossil fuels to renewable energy sources such as wind and solar. Is a system based on electricity more resilient than oil? Independently of the energy source, storage capacity is a bottleneck. However, one difference is operation and maintenance costs because wind and solar radiation are free primary energy sources, and the maintenance costs of such systems is low compared to its fixed costs (EIA, 2020).

Environmentally thinking, it makes sense to move out from oil and invest in solar and wind for more resilient energy systems. So, we can now wonder… has this pandemic brought about the oil peak?

About

Sérgio Pacca is an associate professor at the School of Arts, Sciences and Humanities (EACH) of the University of São Paulo (USP) in Brazil. He is a faculty member of the graduate programs in Energy, Civil Engineering, and Sustainability. He was a Fulbright Nexus scholar in 2015 and a visiting scholar at the City University of New York in 2018.

Francisco Zubeldía is a Chemical Engineer from the UNMdP in Argentina. He has postgraduate degrees in physics and energy and is now a Fulbright scholar getting an MSc in Engineering Management at Trine University in Angola, Indiana. He is the Content Manager for the 'Energy Inputs' series of research articles on Fulbrighter.

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