By Daniel Yergin
02-05-04 No price in America is more visible, indeed inescapable, than that
of gasoline. And Americans don't like the numbers they're seeing today, and
their anger has turned high prices at the pump into highly flammable political
fodder. OPEC's decision to cut production has further fuelled the fire.
But what are those prices telling us? That driving this summer will be
expensive? Or that $ 3 a gallon, which spouted at a California station, is our
future? Or more worrying, that after many years of false alarms, the world is
truly beginning to run out of oil?
That last question is at the centre of a fierce debate. Adherents of the
"peak oil" theory warn of a permanent oil shortage. In the next five
or 10 years, they maintain, the world's capacity to produce oil will reach its
geological limit and fall behind growing demand. They trace their arguments back
to the geophysicist M. King Hubbert, who in 1956 accurately predicted that
American oil production would reach its apex around 1970.
In a recent book, "Hubbert's Peak," Kenneth S. Defeyes, an emeritus
professor of geology at Princeton, wrote that "Global oil production will
probably reach a peak sometime during this decade." Current prices, he
adds, "may be the preamble to a major crisis."
In "Out of Gas," David Goodstein, a professor at the California
Institute of Technology, also argues that world oil output will peak "most
probably within this decade" and thereafter "will decline
forever."
For Americans rattled by current prices, this theory holds out the unsettling
prospect of gasoline prices at $ 5, $ 6, $ 7 a gallon and higher still. In the
face of such a grim prospect, $ 1.76 -- national average -- fades in importance.
Of course, today's average price doesn't approach the one reached in 1981,
around $ 2.80, adjusted for inflation, and prices in Europe are typically far
higher than that.
Still, are the peakists right?
Yes, oil is a finite resource, and fear of running out has always haunted the
petroleum industry. In the 1880's, John Archbold, who would succeed John D.
Rockefeller as head of the Standard Oil Trust, began to sell his shares in the
company because engineers told him that America's days as an oil producer were
numbered.
After World War I, the American government's top oil expert predicted a coming
"gasoline famine." One solution was to cobble together the three
easternmost provinces of the defunct Ottoman Empire into a new country, called
Iraq, believed to be rich in oil resources and safely under British control.
After World War II, fears of shortages spiked again, and the industry
invented offshore drilling. (Today, 30 % of America's crude oil comes from the
Gulf of Mexico.) Reserves in Saudi Arabia and Kuwait, discovered just before
World War II, were rapidly developed.
The oil crises of the 1970's -- the 1973 Arab oil embargo and the 1979-80
Iranian revolution -- were also seen as the harbingers of the "end of
oil." In 1972, an international research group called the Club of Rome
predicted the world would soon run short of natural resources. Spiralling oil
prices in the following years -- from $ 3 a barrel to $ 34 a barrel -- seemed
like a confirmation.
Of course, that's not what happened. Supply steeply increased from new
non-OPEC sources like Alaska and the North Sea; coal and nuclear power plants
pushed oil out of electricity generation, and conservation reduced demand. By
the mid-1980's, oil, supposedly headed for $ 100 a barrel, instead fell to as
low as $ 6.
Historically, then, dire oil predictions have been undone by two factors. One is
the opening (or reopening) of territories to exploration by companies faced with
a constant demand to replace declining reserves. The second is the tremendous
impact of new technology. After World War I, seismic technology, used for
locating enemy artillery, was adapted to oil field exploration. And in the
1990's, it became feasible to drill into deep offshore fields, which was
inconceivable during those crisis years of the 1970's.
Better technology and management have increased Russian output by 45 % since
1998, making Russia the world's second-largest oil producer. And if United
States sanctions are lifted on Libya, new investment there could push up
production. In the meantime, advanced information technologies and sophisticated
remote sensing techniques are making exploration and production much more
efficient, which could make an additional 125 bn barrels available over the next
decade, an amount greater than the current proved reserves of Iraq.
Those who don't believe a shortage is imminent do not deny that a peak will
eventually be reached. They just believe that it is much farther off into the
future.
"You can certainly make a good case that sometime before the year 2050
conventional oil production will have peaked," said the head of exploration
for a major oil company. He and others believe, however, that oil production
will simply plateau, and then farther into the future begin to decline.
They also arguethat the proponents of peak oil consistently underestimate the
reserves of regions in Russia, the Caspian Sea, the Middle East and the
deepwater Gulf of Mexico. Also, they say, the industry will continue to increase
the percentage of oil that can be recovered from a given field.
A major question concerns the real size of the Persian Gulf reserves. The
world's proven reserves, in total, currently stand at 1.2 tn barrels (almost
double the level of the early 1970's). Of that, nearly 60 % is in the Persian
Gulf. But many worried about near-term oil shortages believe that the gulf
reserves been overstated for political purposes by Persian Gulf countries.
Others believe that with so much still to be explored, the reserves will prove
to be much larger. Both views may be right.
Meanwhile, technology is expanding the definition of oil. In the decades
ahead, more and more of our gasoline, heating oil and jet fuel will be made of
so-called unconventional oils. These include petroleum mined from Canada's oil
sands, once prohibitively expensive to extract, and liquids derived from natural
gas. Conversion of large, remote deposits of natural gas into usable liquids
appears to be on the edge of commercial viability.
The world will need all these sources of supply, since even with increased
energy conservation, economic growth, led by China and India, could well mean
that the world will use 20 % more oil a decade hence. Yet it looks as if
supplies will meet that demand.
If there is an obstacle, it won't be the predicted peak in production, at
least in the next few decades. Rather, it will be the politics and policies of
oil-producing countries and swings in global economic growth.
And the extent of these difficulties, whatever they turn out to be, will
register in the ups and downs at the gasoline pump.
Daniel Yergin, chairman of Cambridge Energy Research Associates or CERA, is
the author of "The Prize: The Epic Quest for Oil, Money and Power."
Source: Petroleumworld