The challenge of depletion is straightforward: Oil production first must make up for the depletion of mature fields before any net additional oil can be counted. It’s like pouring water into a bucket with a hole in it.

Depletion rates after the peak can vary widely, from about 2% per year for a well-managed onshore field, to 20% or more per year for deepwater fields like Mexico’s Cantarell field, and other deepwater fields in the Gulf of Mexico. Of the 42 largest oil producing countries in the world, representing roughly 98% of all oil production, 30 have either plateaued or passed their peaks.

Anyone familiar with a balance sheet should understand this concept, but many observers routinely miss it. World oil production must first struggle against a background decline rate of about 4.5% from mature fields before it can manage any increases. In recent years, the net increase in global oil production is about 1% per year, but we expect that to fall to zero and then go negative by 2015.

The IEA’s World Energy Outlook 2008 included, for the first time, a study of the depletion rates of the world’s top 800 oil fields. It found rates of 6.7% for past-peak fields, increasing to 8.6% by 2030 (the end date of the report’s “reference scenario”). Averaged across all fields, the rate is 5.1%. Against such high decline rates-up from a generally accepted 4.5% estimate only a few years ago–the agency calculates that the world would need to add a whopping 64 million barrels per day (mbpd) of new capacitybetween 2007 and 2030 in order to meet an anticipated demand growing at 1.6% per year. That’s like adding six new Saudi Arabias.

The IEA concluded that the world will have a hard time reaching 100 mbpd within the next two decades. Their projected supply curves are now sharply reduced, while their global demand projections continue to show about a 1.5% annual rate of growth.

The report concluded with this stark warning:

For all the uncertainties highlighted in this report, we can be certain that the energy world will look a lot different in 2030 than it does today. The world energy system will be transformed, but not necessarily in the way we would like to see…[W]hile market imbalances could temporarily cause prices to fall back, it is becoming increasingly apparent that the era of cheap oil is over…It is within the power of all governments, of producing and consuming countries alike, acting alone or together, to steer the world towards a cleaner, cleverer and more competitive energy system. Time is running out and the time to act is now.

An average 5.1% per year depletion rate removes 3.7 mbpd from world supply every year. By 2015, we expect relentless depletion to overcome new supply.

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IEA Oil Report: “Time Is Running Out”