Editorial note
Welcome to the second installment of our new series, The Oil Crunch. We opened the series by exploring the forces behind global oil benchmarks, for the second time this year, surged past the $100 mark, such as the declining oil production as due to the conflict in the Middle East. You can read the piece below.
Oil product is the perfect sedge way for this piece we are delighted to welcome our first contributor for this series, the political risk and geopolitical analyst, Yagiz Sullu. He was among the first scholars to systematically examine how declining oil production influences authoritarian resilience
By Yagiz Sullu
The global energy debate has largely focused on oil price fluctuations and how those changes affect the economies of oil-dependent states.
Oil supply: In some countries, terminal decline has already begun
But for many oil-producing countries, a different transition has already begun, putting their economies on a difficult-to-manage track.
Their oil production has peaked and is unlikely to return to previous peak levels. Terminal decline in oil production is the stage when a country’s oil production enters a sustained, long-term decline after reaching its peak. Unlike temporary production declines caused by conflicts, sanctions, or strategic interests, terminal decline results from deeper structural challenges.
This includes ageing oil fields, a lack of exploration projects, or an inability to offset declining output with new production.
Crude oil – a finite resource
The natural oil supply is finite due to the slow natural processes involved in its formation, compared to the rapid rate at which it is extracted.
The difference between resource formation and extraction rates leads to a gradual decrease in available resources. Oil reservoirs can go through extensive natural depletion, such as a reduction in reservoir pressure over time, which reduces oil flow to the surface, lowers production rates, and increases extraction challenges.
But advanced technologies can revive fields. For example, enhanced oil recovery techniques can extend the life of oil fields by injecting CO2 into depleted oil reservoirs or applying thermal recovery, which involves introducing heat, such as injecting steam, to improve the oil’s ability to flow through the reservoir.
Terminal decline in oil production explained
However, this isn’t a permanent solution because the fundamental limit is geological; oil is a finite resource, and no technology can create more of it once reservoirs are depleted. Methods such as enhanced oil recovery techniques are also complex and expensive. Companies implement such methods only when primary and secondary recovery techniques are ineffective.
Depending on factors such as oil prices, employing these methods may not be economically viable, and oil may be left in the reservoir because extracting the remaining oil is not profitable.
Countries facing declining oil production
Countries on this track range from oil producers in Africa to the Middle East and the post-Soviet region.
Azerbaijan is one example. Following the “Contract of the Century” and the rapid development of its offshore oil fields, the country’s oil production reached its peak in 2010. Since then, production has fallen substantially as its major Azeri-Chirag-Gunashli oil fields have matured.
Despite efforts to slow the decline, Azerbaijan has not returned to its previous production peak. Similar trends are also visible in Africa. Gabon reached peak oil production in the 1990s and has never returned to those levels. Equatorial Guinea experienced an even sharper decline. After rapidly becoming a major oil producer following offshore discoveries in the 1990s, its production peaked in the 2000s before entering a prolonged decline.
Terminal vs temporary decline
Compared to temporary declines in oil production, the terminal decline is a permanent
issue that could have dire consequences for governments dependent on oil revenues. In economic terms, as production declines irreversibly, oil-dependent countries would face declining revenues, undermining their fiscal capacity for various programs.
Terminal decline could create societal challenges and risks
Perceptions of terminal decline could deter investment by oil companies, leaving oil producers with aged infrastructure and limited funds for innovation.
Politically, it could fuel elite and public dissent as the share of oil revenues shrinks, reducing economic benefits among elites and public spending. Elites may defect to the opposition, and the public may protest and mobilise against the government.
The number of countries facing terminal decline is likely to increase over time. Although discoveries and technological improvements can offset some declining production, maintaining output requires producers to continuously develop enough new capacity to compensate for barrels lost from ageing fields. As more countries reach this stage, replacing declining production could become increasingly difficult and expensive.
This does not mean that the world is facing a supply crisis. Large reserves remain, and countries with discoveries and undeveloped fields can continue adding production. However, if global oil demand remains high while production declines across a growing number of producers, the industry will face greater pressure to bring new supplies online.
Clean energy sources to the rescue in an age of declining oil production
This is where expanding clean energy technologies becomes particularly important. Renewable energy, electric vehicles, battery storage, and greater energy efficiency are generally discussed as tools for reducing emissions.
Clean energy can slow the terminal decline
But they can also reduce pressure on an oil industry that must continuously replace declining production. Although oil is central to most producing countries’ economies, some also have clean energy potential that has not been unleashed yet. Attracting investments to their clean energy industries would mean less pressure on oil production and more opportunities for the governments to move away from dependence on oil.
Developments on both sides of the market will therefore shape oil’s future. The question is not only how quickly global demand changes, but also how quickly existing producers lose the ability to maintain their current output.
As more countries enter terminal decline, clean energy technologies could become increasingly important for reducing the pressure created by a global oil industry that may find it harder to replace every barrel it loses over time.
Yagiz Sullu, PhD, is a political risk and geopolitical analyst specialising in governance, international political economy, energy security, and strategic risk in developing and resource-dependent economies. He is the Founder and Lead Analyst at Sullu Strategic Advisory LLC among the first scholars to systematically examine how declining oil production influences authoritarian resilience. He has advanced new research on the political and economic consequences of resource depletion.
In the next instalment of the Oil Crunch, we will look at whether Saudi Arabia secretly believes that the future belongs to clean energy and what they’re doing behind the scenes.
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