Peak Oil? Maybe in 30 Years

Dallas Morning News
June 12, 2006

The Princeton geologist Ken Deffeyes warns that the imminent peak of global oil production will result in "war, famine, pestilence and death." Mr. Deffeyes, author of 2001's Hubbert's Peak: The Impending World Oil Shortage and 2005's Beyond Oil: The View From Hubbert's Peak, predicted that the peak of global oil production would occur this past Thanksgiving. Mr. Deffeyes isn't alone. Houston investment banker Matthew Simmons claims in his 2005 book Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy that the Saudis are lying about the size of their reserves and that they are really running on empty; last September, he announced that "we could be looking at $10-a-gallon gas this winter."

Colin Campbell, a former petroleum geologist who is now a trustee of the U.K.-based Oil Depletion Analysis Centre, warned way back in 2002 that we were headed for peak oil production and that this would lead to "war, starvation, economic recession, possibly even the extinction of homo sapiens."

And James Schlesinger, the country's first secretary of energy, declared in the winter issue of the neoconservative foreign policy journal The National Interest that "a growing consensus accepts that the peak is not that far off." He added, "The inability readily to expand the supply of oil, given rising demand, will in the future impose a severe economic shock."

Even some traditionally calm voices are starting to sound panicky. In March 2005, the New York investment bank Goldman Sachs issued a report suggesting that oil prices would experience a "super spike" in 2006, reaching up to $105 per barrel. ChevronTexaco's willyoujoinus.com campaign, featuring a series of full-page newspaper ads that urge Americans to conserve energy, flatly declares, "The era of easy oil is over."

Such forecasts have been bolstered by a steep rise in oil prices over the last three years, going from $18 a barrel in 2002 to $70 last fall. If the price of something goes up, after all, that means it's becoming scarcer.

The good news is that peak oil doomsters are probably wrong that world oil production is about to decline forever. Most analysts believe that world petroleum supplies will meet projected demand at reasonable prices for at least another generation.

The bad news is that much of the world's oil reserves are in the custody of unstable and sometimes hostile regimes. But oil-producing nations would be the ultimate losers if they provoked an "oil crisis," since that would spur industrialized countries to cut back on imports and develop alternative energy technologies.

Predictions of imminent catastrophic depletion are almost as old as the oil industry. But most of today's petro-doomsters base their forecasts on the work of geologist M. King Hubbert, who correctly predicted in 1956 that U.S. domestic oil production in the lower 48 states would peak around 1970 and begin to decline. In 1969, he predicted that world oil production would peak around 2000.

Dr. Hubbert argued that oil production grows until half the recoverable resources in a field have been extracted, after which production falls off at the same rate at which it expanded. This theory suggests a bell-shaped curve rising from first discovery to peak and descending to depletion. Dr. Hubbert calculated that peak oil production follows peak oil discovery with a time lag.

Globally, discoveries of new oil fields peaked in 1962. The time lag between peak global discoveries and peak production was estimated to be around 32 years, but peak oilers claim that the two oil crises of the 1970s reduced consumption and delayed the peak until now. Dr. Hubbert's modern disciples argue that humanity has now used up half of the world's ultimately recoverable reserves of oil, which means we are at or over the peak.

The prophets of oily doom are opposed by preachers of energy abundance. Chief among the latter is energy economist Michael Lynch, president of the Global Petroleum Service consultancy in Massachusetts.

"Colin Campbell has the worst forecasting record on oil supply," says Mr. Lynch, "and that's saying a lot." He points out that in a 1989 article for the journal Noroil, Mr. Campbell claimed the peak of world oil production had already passed and incorrectly predicted that oil soon would cost $30 to $50 a barrel. As for Mr. Simmons, Mr. Lynch dismisses him with a sneer: "Petroleum engineers know a lot more about petroleum engineering than a Harvard MBA."

One petroleum engineer – Michael Economides of the University of Houston – calls peak oil predictions "the figments of the imaginations of born-again pessimist geologists." Like Mr. Lynch, Mr. Economides, who worked in Russia to boost that country's oil production in the last decade, rejects Mr. Simmons' analysis. Saudi Arabia, which produces about 10 million barrels of oil a day, "is underproducing every one of their wells," he claims. "I can produce 20 million barrels of oil in Saudi Arabia."

So, who's right? Fortunately, it looks like humanity is at least a generation away from peak oil production. Unfortunately, there could be another oil crisis any day now.

The world consumes about 87 million barrels of oil per day, or nearly 30 billion barrels of oil per year. How much oil is left? It's hard to be sure. Proven oil reserves – oil that is recoverable under current economic and operating conditions – are estimated to be 1.1 trillion barrels by the industry journal World Oil, 1.2 trillion by the oil company BP and 1.3 trillion by Oil and Gas Journal. In March 2005, the private U.K.-based energy consultancy IHS Energy estimated that the world's remaining recoverable reserves, excluding unconventional sources such as heavy oil or tar sands, are between 1.3 trillion and 2.4 trillion barrels.

But are proven reserves all that's left? Several analyses put ultimate reserves at much higher levels. For example, the U.S. Geological Survey undertook a comprehensive analysis of world oil reserves in 2000. It calculated that the total world endowment of recoverable oil is 3 trillion barrels and that the endowment of conventional oil resources is equivalent to about 5.9 trillion barrels. Proven reserves of oil, gas and natural gas liquids are equivalent to 2 trillion barrels of oil.

The Geological Survey calculates that humanity already has consumed about 1 trillion barrels of oil equivalent, which means 82 percent of the world's endowment of oil and gas resources remains to be used.

In November 2005, the International Energy Agency, an organization created in 1974 by 26 industrialized countries to assess global energy issues, released its annual World Energy Outlook report, which accepted the Geological Survey numbers and concluded that "the world's energy resources are adequate to meet projected growth in energy demand" until at least 2030.

The report predicted that oil production would grow from the 2004 level of 82 million barrels a day to 115 million barrels a day and that any peak would occur after 2030. At the Montreal Climate Change Conference in December, Claude Mandil, head of the International Energy Agency, declared: "We don't share the tenets of the peak oil theory. We feel that they underestimate technological developments. For many decades to come, there is no geological problem."

Probably the most respected private oil consultancy in the world is Cambridge Energy Research Associates in Boston. Its senior consultant Robert W. Esser testified at a House Energy and Air Quality Subcommittee hearing on the peak oil theory in December. "CERA's belief is that the world is not running out of oil imminently or in the near to medium term," Mr. Esser said.

Peak oilers discount these rosy scenarios, insisting the relevant fact is that new oil discoveries have been falling during the last couple of decades. But petroleum optimists, such as the analysts at the Geological Survey, say there is more to it than that. They point out that reserve growth and new discoveries have been outpacing oil consumption. (Reserve growth is the increase in production in already discovered and developed fields.) The increase in production is a result of improved recovery technologies, further discoveries in the field and improved field management.

By 2004, technological advances enabled engineers to recover 35 percent of a conventional reservoir's oil, up from an average 22 percent in 1980. If this recovery factor can be increased five percentage points, that would boost global recoverable reserves by more than all of Saudi Arabia's proven reserves.

Mr. Economides points out that in 1976, the U.S. was estimated to have 23 billion barrels of reserves remaining. In 2005, it still had 23 billion barrels of oil reserves, even though American oil fields produced almost 40 billion barrels of oil between 1976 and 2005.

So if the world has adequate oil supplies for the next generation, can we all go back to driving Hummers? Not so fast.

The International Energy Agency calculates that $3 trillion must be invested in oil production and refining facilities during the next 25 years to meet world demand in 2030. In principle, that target could easily be met, since producing 1 trillion barrels at $30 per barrel yields $30 trillion in income over 25 years.

The problem is that the vast majority of the world's remaining oil reserves are not possessed by private enterprises. Seventy-seven percent of known reserves belong to government-owned companies. That means oil will be produced with all the efficiency associated with central planning. Mr. Economides estimates, for example, that it will take $4 billion in investment to keep Venezuela's oil production at current levels. Yet that country's Castro-wannabe president, Hugo Chávez, is investing just half that.

If ChevronTexaco, ExxonMobil or other private companies owned the reserves, the world would be in a much more secure position with regard to oil production. Instead, we are subject to the whims of figures like Mr. Chávez, Russia's Vladimir Putin and Iran's Mahmoud Ahmadinejad, and must worry about the doubtful stability of their personalities and regimes.

In the mid-1990s, the world had more than 10 million barrels per day of spare production capacity. That figure has fallen to between 1 and 2 million barrels, which means that any significant disruption in supplies can cause prices to soar.

Mr. Economides worries that the conventional wisdom that oil-producing countries do not want to cause a global economic recession is wrong. "The danger posed by the axis of energy militants – Venezuela, Iran and, increasingly, Russia under President Vladimir Putin – is that they could not care less," he says. "These militants hardly have functioning real economies whose workings would be adversely affected by a recession."

Mr. Economides' views looked prophetic when oil prices jumped to a three-and-a-half-month high after Iran's threat in January to retaliate against any U.N. sanctions imposed to curb its nuclear ambitions by cutting its oil exports.

Despite the recent jump in oil prices, the world's economy has not slowed down. Why not? Goldman Sachs notes that oil is less important than it was a generation ago. At the height of the Iranian oil crisis in 1980­81, paying for gasoline took up 4.5 percent of U.S. gross domestic product and 7.2 percent of U.S. consumer expenditures.

In 2005, even though U.S. gas prices peaked at $3.07 per gallon after Hurricane Katrina, only 2.6 percent of GDP went to pay for gas, and consumers spent only 3.7 percent of their incomes to fuel their cars and SUVs. Goldman Sachs believes gasoline prices would need to exceed $4 per gallon before consumers really started to cut back.

As the oil crisis of the 1970s demonstrated, while the demand for oil is inelastic in the short run, consumers do eventually adjust to higher prices. U.S. oil consumption declined by 13 percent between 1973 and 1983. According to Frederick Cedoz, vice president of the Washington, D.C., consulting group Global Water and Energy Strategy Team, "We get three times more GDP out of a barrel of oil than we did in the 1970s."

The higher prices of the 1970s led to an oil glut and prices below $10 a barrel by 1986. Should one or more "energy militants" choose to deploy the "oil weapon" again, they will cause considerable economic pain to developed countries. But detonating the oil weapon would end up disarming the energy militants for a generation, after consumer cutbacks produce a new glut. One day, the oil age will end. As with all resources, there is ultimately a finite supply of oil. So it is not yet clear how the world will power itself for the bulk of the coming century. But we have at least three more decades to find alternatives to petroleum.

"Trusting markets is the only way we can assure energy abundance in the future," notes the University of Houston's Mr. Economides. "It's also the only way that we will ever transition to something other than oil and gas."

Ronald Bailey, the science correspondent for Reason magazine, is author of "Liberation Biology: The Scientific and Moral Case for the Biotech Revolution" (Prometheus). This essay was adapted from a longer version available online at www.reason.com.