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Cheap Oil to Last, "Doomsday" Fears Overblown, Author Says

Brian Handwerk
for National Geographic News
February 14, 2007
 
Is the era of cheap oil really at an end? Or could a glut send prices
into a freefall? Should Western countries fear energy blackmail from oil-
rich powers?

There's no crystal ball to predict oil's future, but Leonardo Maugeri believes that much can be learned by looking at the industry's past.

Maugeri is the author of The Age of Oil: The Mythology, History, and Future of the World's Most Controversial Resource. As a senior vice president at the Italian oil corporation Eni SpA, he's also an oil-industry insider.

In his book Maugeri explains how prices affect the cycle of oil production and why he believes oil "doomsday theorists" are tapping an empty well.

Maugeri's theories often challenge conventional wisdom but are likely to become an essential part of the debate on oil's future.

He discussed his controversial ideas in an interview with National Geographic News.

Some experts believe we're at or near a point where world oil supply will be unable to meet demand—with potentially devastating consequences. Are we close to this point of "peak oil"?

It's so seductive, in a way, to speak of a coming catastrophe—but we're not on the brink of a catastrophe.

People usually assume that the planet is thoroughly explored [for oil], but this is not true. The United States and Canada are the most thoroughly explored, and the latest discovery by Chevron in the Gulf of Mexico demonstrates that they are not really so [thoroughly] explored.

Other parts of the world are really not explored at all. Even today more than 70 percent of the world's oil exploration wells are concentrated in the U.S. and Canada—countries that hold only 3 percent of the world's oil reserves. Conversely, only 3 percent of the world's exploration wells are drilled in the Middle East.

Many countries, Saudi Arabia in particular, have discovered oil fields in the past but have never developed them because of their fear of creating excess capacity.

No one knows how much oil there is. But all the hints we have—for example surveys made the U.S. Geological Survey—indicate that the world still has really huge oil resources in its soil.

The problem is that in order to bring this oil onstream, you need to be sure what the price of oil will be in the future—so you need to know how long [current] consumption levels will remain.

Some enormous proven fields exhibit slowing oil production, but you stress that new technologies can boost these rates?

Yes. I'll give you an example.

Yukos, the Russian company destroyed by Vladimir Putin, doubled its production in four years by one simple [act].

They hired Schlumberger, [the U.S. oil-technology company] with great experience in the drilling and management of oil fields. The recovery rate for Yukos went from 9 percent to 26 percent without any new discovery.

What's behind today's relatively high oil prices?

These prices are not due to the world's oil drying up—they are simply derived from the low investments of two decades. In the 1990s OPEC repeatedly asked countries to find an agreement in order to sustain prices, because prices were very low due to overproduction.

OPEC continually [said], if you don't ensure markets for new capacity, we won't spend money [on development]. And sooner or later, if we don't spend money, the current capacity will be overloaded, and a crash will come.

Now the production crash has come. We're paying today for the low prices of yesterday.

Refining is another pillar of the current crisis. Right now there's not enough refining capacity in the world, but the world is not running out of refining capacity, because humans build refineries.

You believe that these developments are part of a historical pattern?

Westerners think about the problem of oil security in terms of security of supply. But if you speak with the large producers, their tragedy has been that throughout history, prices have [suddenly] collapsed.

Many times it was because of a combination of excess development of production capacity and a sudden decline in global demand.

This happened during the time of the Wall Street crash in 1929, just when new discoveries in Texas put a lot of new oil in the market. It happened again in the 1950s and 1960s and again in the 1980s.

In the minds of the great producers, the problem is that the growth of demand is not sure, and there is a long delay before consumption reacts to the price of oil.

Sooner or later demand will cool or decline, so they are very concerned about the possibility of sustaining future demand in order to make these [increased production] investments. We don't usually take that point of view into account.

On November 1 of last year OPEC ministers cut production by 1.2 million barrels a day in response to falling prices. How might this impact future markets?

In the last few years there has been a boom in investment, not only for the development of new production capacity but also refineries.

This was created by the increase in the price of oil, so now all the producers are [concerned] about how long demand will last to sustain the huge growth of production capacity which is on the way all over the world.

The more prices are sustained, the more the investment boom will continue, and there is a point—when you've spent 50 or 60 percent of the money—that you can't stop those investments even if prices come down. We still need one or two more years [of current price levels] in order to reach this point of no return.

But if for some reason demand cools or stops dramatically, the large producers in particular will soon stop their investments.

How do you address political fears concerning oil security?

The Middle East has always been an unstable area, and unfortunately oil is not found in Switzerland.

The first interest of Saudi Arabia and other large producers is not to blackmail the West. They want to have a secure demand and stable oil prices in order to make money.

Of course they try to raise the price of oil, because they want money. But this is an economic attitude and not an ideological attitude. So I think the problem of oil security is overrated.

Even at the apex of the Iranian revolution, [Ayatollah Ruhollah] Khomeini never used oil as a weapon. Oil is the main source of income for most of the producing countries, and they know very well that you can use oil as a weapon for only a very short period of time until, as in the past, the world is able to react.

Rationing would be a nightmare for them. When the West decided to devise energy policies aimed at curbing consumption, demand for oil [from the West] declined between 1979 and 1983 by more than five million barrels per day—or more than 10 percent of demand at that time.

This was a dramatic response to the two oil shocks [of the 1970s], and the final response was the collapse of prices in 1986.

The producers are very aware of this situation, and they don't want to use oil as a weapon.

Can we ease our "oil addiction" before supplies run short?

The Stone Age didn't finish because of a lack of stone. The Oil Age won't finish because of a lack of oil. Sooner or later, probably in this century, oil will be surpassed by another source of energy.

The most effective way to decrease our dependence on oil is to change our habits. We waste a lot of energy because we are so addicted to cheap oil.

American people consume 26 barrels of oil per person each year. That's down from the peak of per capita consumption of oil—in 1978 each American consumed 32 or 33 barrels per year.

Yet an American still consumes more than twice what a European consumes (less than 13 barrels per year), and we in Europe also waste a lot of oil.

The Chinese consume about 1.7 barrels per person each year, and only about 8 percent of the global demand. My preoccupation is not how much China will consume but how we can reduce the foolish consumption of the Westerners.

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