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Cheap-Oil Era Is Far From Over, Analyst Says

Brian Handwerk
for National Geographic News
May 20, 2004
 
Everyone agrees that Earth's oil supply is limited—but just how
close are we to running out? Some experts predict an irreversible
shortage within a few years.

But at least one analyst argues against the premise of the new National Geographic magazine cover story, "The End of Cheap Oil." Leonardo Maugeri, an economist and oil industry analyst with the Italian oil and gas company Eni S.p.A., says that new technologies and underestimated reserves mean that the sun is far from setting on the oil age.


Concern about oil droughts is nearly as old as the petroleum industry itself.

"As a matter of fact, those fears began long before oil became a critical fuel," said Maugeri, whose new report on the subject will be published in the May 21 issue of Science.

"In the 1860s, soon after the beginning of oil's modern age, boom-and-bust phenomena marked the advent of the new era. Every boom [caused] an increasing fear of running out of oil, leading to overspending in oil production and refining. It was this situation that led John D. Rockefeller [of the Standard Oil Company] to decide to avoid deadly competition in the market by eliminating his competitors," Maugeri said from his Rome office.

In 1919 United States Geological Survey (USGS) head George Otis Smith even predicted that the nation would be out of oil in nine years.

Smith's prediction was false, as were other dire warnings that were followed by supply bonanzas. But not all cautionary oil predictions have been wrong.

On Hubbert's Peak

One popular model used for predicting oil supply and shortage is based on the work of geophysicist M. King Hubbert. In 1956 Hubbert calculated that U.S. oil production would hit its all-time peak in the early 1970s. Though many ridiculed the proposition, Hubbert turned out to be right.

Now analysts are using Hubbert's formulas to predict when worldwide production will hit its irreversible peak. They conclude that the global peak in oil production is just a few years away. If it happens, supply will be unable to keep up with rising demand.

"I'm predicting that the smooth curve of oil production will peak on Thanksgiving 2005," said Princeton University professor emeritus Ken Deffeyes.

Deffeyes, a geologist by training, is the author of Hubbert's Peak: The Impending World Oil Shortage. He once worked with Hubbert at the Shell oil company's Houston, Texas, research lab.

"The uncertainty is only a few weeks in either direction," he added. Oil production "has been marching towards this point for several years as steadily as can be," he told National Geographic News.

Deffeyes argues that crude-oil production in the past few years has been flat, as expected at the top of Hubbert's bell-shaped curve. Growth, he says, has essentially stopped.

Oil market impacts—drastic shortages, price hikes—will begin to be seen when the production peak is passed, long before the wells actually run dry.

As a result, Deffeyes fears that a major oil-supply crisis will occur before alternative energy sources or conservation measures can be implemented. He wryly suggests that such a crisis could help achieve the goals of the ill-fated Kyoto climate treaty—we'll burn less oil simply because less of it will come out of the ground.

"The present chaos in energy prices may, in fact, be the leading edge of an even more serious crisis," Deffeyes asserted on his Web site. "We all have to place our bets. Doing nothing is equivalent to betting against Hubbert."

Oil Estimates an Inexact Science

Maugeri, however, says such predictions by "oil doomsters" are rooted in assumptions that are false or unknowable.

"No one knows the amount of oil really contained in reservoirs," he said. "This knowledge evolves over time only by making new wells and through [development of] much more sophisticated technology."

Maugeri argues that the cost to find and develop oil has dropped over the last two decades from U.S. $21 per barrel of oil to under $6 in 1997-99 (prices adjusted for inflation).

"Hubbert succeeded in forecasting the U.S. oil situation only because of the extreme maturity of the area, the most intensively explored and exploited in the world," Maugeri said. "But he completely failed, for example, in his predictions about U.S. gas reserves, because gas exploration and production was by far younger."

Oil is found in porous rock below the Earth's surface, making quantity estimates difficult. The knowledge of existing oil fields is ever changing. Estimates of a field's reserves sometimes increase tremendously once the field is drilled and put into use.

Maugeri attributes such "reserve growth" to technology, price swings, politics, and better knowledge of existing fields. He references the Kern River field, found in California in 1899.

In 1942 the field was estimated to hold 54 million remaining barrels. Over the next 44 years, however, the field produced some 736 million barrels. It was estimated in 1986 to still have 970 million in reserve.

Numerous fields have followed a similar pattern. The amount of oil in them, of course, didnt change. The technology of finding and extracting it did.

The possibility of undiscovered oil fields is also a matter of debate. Deffeyes and others believe that significant new discoveries are unlikely, while others place their faith in the South China Sea and increasing development in places like Kazakhstan. In recent years, new oil finds have equaled only about one-fourth of the world's annual oil usage. But Maugeri says that's because new finds are not a high priority for major oil nations or international companies, which may be afraid of creating a price-sinking surplus.

"In fact," he wrote, "countries such as Saudi Arabia or Iraq (which together hold about 35 percent of the world's proven reserves of oil) produce petroleum only from a few old fields, although they have discovered but not developed more than 50 new fields each."

Yet data on those new Middle Eastern fields is sketchy at best. Some analysts fear that OPEC nations have unrealistically increased their reserve estimates.

If OPEC estimates are inflated, they could have dire consequences for global supply—and the critical date of peak worldwide production could come sooner than predicted. Entities like Saudi Aramco, Saudi Arabia's national oil company, jealously guard their data, clouding the picture.

Chief Economist Fatih Birol, of the Paris-based International Energy Agency (IEA), would like to see more specific oil-reserve information.

"The data is very opaque," Birol told National Geographic News. "We don't know exactly how much these reserves [hold]. The main reason is not technology but regulatory and policy issues. Oil is so very strategic for the well-being of humanity. I think it's important that we put pressure on oil producers and on major companies—that they have more transparency in terms of reserves."

Oil as Economic Engine

Oil has always been about economics, and the IEA's Birol suggests that the biggest looming problem is rooted in investments rather than in supply.

"We have enough oil reserves, but two major problems exist," he said. "One is the transparency of oil-reserve data, and the other is the perhaps more important issue of mobilizing investments in a timely manner to increase oil production capacity worldwide. We don't profit from oil under the ground unless it comes to a power plant or a pump station. The key word is investments." If oil companies receive more money from investors, they'll be more likely to risk trying new extraction technologies, searching for new oil fields, and so on.

"The oil sector competes with many other sectors for [investors'] money, and the oil sector's performance in the last year was not very good in some respects," he continued. "Money goes where it will get return. Will investments come in a timely manner in order to bring oil to consumers?"

Birol also sees a financial thicket in the Persian Gulf region, where many countries ban the free flow of international capital.

"I am not sure that Saudi Arabia, for example, will be able to increase production capacity with domestic financial resources, even if the government wants to do so, in the absence of international capital."

That, of course, involves another issue as old as the oil industry—politics. Maugeri asserts that the most detrimental effects of oil-shortage fears have been bad political decisions and attempts to influence or control the world's oil-rich regions, especially the perpetually volatile Middle East.

"Alarms on oil shortages assumed a new political dimension when oil began to play a critical role in modern life, after World War I," he said.

However long the oil lasts, such political maneuverings, at least, might be expected to remain constant.

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