catapult magazine

catapult magazine

Vol 4, Num 11 :: 2005.06.03 — 2005.06.16


Do high oil prices foreshadow a deeper crisis?

Part 1 of 3

Beneath the current chatter about rising oil prices a little known debate among geologists, economists and energy analysts is highlighting a startling question: Could world oil production be close to peaking, not just temporarily, but for all time?

If so, further dramatic price rises lie ahead—possibly within a year or two, but almost surely within the next decade according to some experts.

Not even these pessimists believe the world will run out of oil any time soon. The key issue is whether due to geological constraints the world is near or at its maximum production level. If this assumption proves correct, rising oil demand will collide with falling oil production and initiate an era of permanent shortages.

The consensus view among economists, geologists and energy analysts, however, is just the opposite. The consensus thinkers believe that large oil discoveries lay ahead and that new technology for finding and extracting oil will keep the world awash in petroleum for decades to come.

While predictions about peak world oil production have been around since the mid-1970s, the recent run-up in prices has sparked new interest in dissenting views about oil's future. A small, but growing group of oil geologists and academics has been expanding on the work of M. King Hubbert, a Shell Oil Company geophysicist. In 1956 Hubbert predicted that oil production in the continental United States would peak around 1970 and thereafter decline. He was widely ridiculed at the time, but he proved correct. Oil production from the lower 48 states continues to decline to this day.

Hubbert's basic idea was that because oil is a finite resource, its production rises in a bell-shaped curve, reaches a maximum, and thereafter begins a gradual decline. The pessimists have applied Hubbert's model to world oil production and come up with peaks that range from 2005 to 2020. With energy needs continuing to expand worldwide, especially in rapidly growing countries such as China and India, demand for petroleum is now rising swiftly. If world supplies were to shrink, something would have to give and that something would be price.

At current prices oil is still relatively cheap, according to Douglas Reynolds, associate professor of oil and energy economics at the University of Alaska-Fairbanks. It would have to reach $70 to $80 a barrel just to match its inflation-adjusted price during the last oil shock in 1979. When the peak does occur—something Reynolds expects between now and 2015—prices will likely reach between $150 to $300 a barrel.

The exact date for a peak is impossible to pin down because it depends on economic growth rates, recessions (which lower demand temporarily), imprecise oil resource estimates and possible additional large discoveries which might push back the peak.

"It'll be years before we can look back and say whether it happened," says David Goodstein, vice provost and professor of physics at the California Institute of Technology. But, "unlike the first shock in 1973, it won't be temporary," explains Goodstein who recently published Out of Gas: The End of the Age of Oil.

For this reason, he counsels, "we ought to give ourselves the best head start we can." With bold political leadership and public resolve he believes the world could kick its fossil fuel habit within a decade or two. "If we're very fortunate, the worst (we'll experience) will be continuously rising prices, not panic," he says.

Matthew Simmons, chairman of Simmons & Company International, a Houston investment bank specializing in energy, says warning signs are already flashing. Some 70 percent of all current oil production comes from fields discovered over 30 years ago. Oil is now depleting at rates faster than new discoveries can replace it. Costs for finding new oil are rising as well. "The days of the easy stuff disappeared long ago," Simmons says.

Simmons is technically correct according to a report compiled by IHG Energy, a division of the global energy consulting firm IHG Group. But, he leaves out growth from additions to reserves, which expand as additional work is done on existing fields and technology makes more of the oil extractable. When both new discoveries and reserve additions are counted, the oil industry continues to replace all its depleted reserves, the IHG report says.

Peak oil theorists counter that peak oil production always follows peak discovery and that world oil discoveries peaked in the 1960s. Simmons disputes the notion that new technologies will expand the pool of recoverable oil by very much in the future. He says these technologies are already widely used and any effect they've had on reserves is in the past. Now, all those technologies act like extra straws in the same glass, drawing down oil resources more quickly without increasing their recoverable size.

Because oil deposits are never 100 percent recoverable for both economic and geological reasons, the effect of technology on recovery rates is critical to the debate. "Recovery factors could double using 'smart well' technology," according to Thomas Ahlbrandt, World Energy Project Chief at the U. S. Geological Survey (USGS). ("Smart well" is a generic term applied to a wide array of technologies used to enhance oil recovery.) Ahlbrandt led a team which evaluated world oil and gas resources in the late 1990s, an assessment that is continuing and expanding.

How much oil the world has left depends on how much it had to start with. Ahlbrandt's team believes the earth had an endowment of 3 trillion barrels of oil. (The team also came up with a low estimate of 2.2 trillion and a high estimate of 3.9 trillion.) The pessimists often put the earth's total oil resource near 2 trillion barrels.

The total amount of crude oil consumed through 2003 is about 900 billion barrels. The world consumed almost 29 billion barrels of oil last year and is set to consume more this year. The U. S. Energy Information Administration (EIA) expects demand to grow to more than 43 billion barrels a year by 2025.

While the USGS makes no formal projections about peak oil production, Ahlbrandt points to the work of EIA analysts who used the USGS numbers to construct 12 different scenarios for peak oil production ranging from 2021 to 2112. (The 2112 scenario assumes the highest estimate of oil resources and absolutely no world economic growth between now and then.) The most likely scenario calls for a peak in 2037.

<— continue to part two —> 

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