Future oil supplies.
The national security problem, as several bipartisan expert groups have recently pointed out, is rooted in the growth of terrorist activity. Terrorist attack at any point in the oil production and delivery system can cause major economic and political disruption. Such disruptions have been a concern for years, of course, because oil reserves are concentrated in the Middle East. What's new and dangerous is that terrorists will make good on the threat. Unlike the members of OPEC, terrorist groups have little or no economic incentive to keep oil revenues flowing.
A related problem is that some of the cash we pay for oil gets redistributed to terrorist organizations, thus creating another risk for our national security. Even if paying this ransom persuades terrorists not to disable oil-production facilities in the Middle East, for example, it enhances their ability to cause trouble elsewhere.
Climate change is the other reason to act now. Although some uncertainties remain about the specifics, almost all scientists (and not a few business executives) agree that the likely prospect of climate change justifies taking steps soon to mitigate greenhouse gas emissions. However, it's hard to capture the carbon dioxide produced by a moving vehicle. Therefore, the only way to reduce greenhouse gas emissions from oil burned in the transportation sector is to use less oil.
In short, even if its production doesn't soon peak, we should start reducing our dependence on oil now. Fortunately, there is no shortage of good ideas about how to do so. As the recent National Research Council report on auto efficiency standards shows, technology is available to reduce the use of gasoline in existing internal combustion engines. Coupling ethanol produced from cellulose with hybrid engines is a very promising avenue for creating a domestic carbon-neutral fuel. Harder but still worth pursuing as a research program is the hydrogen economy.
This isn't the doom-and-gloom scenario that Hirsch et al. conjure up, but it runs headlong into the same question: Will our leaders act now or continue to dither? If they are to be convinced, it seems to me that a reprise of the tenuous arguments about limits to the growth of oil production isn't going to do the job. We can only hope that our national security and the plain risks of climate change are reasons enough to take direct action on oil.
Resources for the Future
Robert L. Hirsch, Roger H. Bezdek, and Robert M. Wendling have produced an excellent analysis of the peak oil issue, which is attracting increasing interest in many quarters around the world, and rightfully so.
The world is coming to the end of the first half of the Age of Oil. It lasted 150 years and saw the rapid expansion of industry, transport, trade, agriculture, and financial capital, which allowed the population to expand sixfold, almost exactly in parallel with oil production. The financial capital was created by banks that lent more than they had on deposit, charging interest on it. The system worked because there was confidence that tomorrow's expansion, fueled by cheap oil-based energy, was adequate collateral for today's debt.
The second half of the Age of Oil now dawns and will see the decline of oil and all that depends on it. The actual decline of oil after peak is only about 2 to 3 percent per year, which could perhaps be managed if governments introduced sensible policies. One such proposal is a depletion protocol, whereby countries would cut imports to match the world depletion rate. It would have the effect of moderating world prices to prevent profiteering from shortages by oil companies and producer governments, especially in the Middle East. It would mean that the poor countries of the world could afford their minimal needs and would prevent the massive and destabilizing financial flows associated with high world prices. More important, it would force consumers to face reality as imposed by Nature. Successful efforts to cut waste, which is now running at monumental levels, and improve inefficiency could follow, as well as the move to renewable energy sources to the extent possible.
Public data on oil reserves are grossly unreliable and misunderstood, allowing a vigorous debate on the actual date of peak. Whether it comes this year, next year, or in 5 years pales in significance compared with what will follow. Perhaps the most serious risk relates to the impact on the financial system, because in effect the decline removes the prospect of economic growth that provides the collateral for today's debt. Whereas the physical decline of oil is gradual, the perception of the post-peak decline could come in a flash and lead to panic. The major banks and investment houses are already becoming aware of the situation, but face the challenge of placing the mammoth flow of money that enters their coffers every day. In practice, they have few options but to continue the momentum of traditional practices, built on the outdated mind-sets of the past, with their principal objective being to remain competitive with each other whether the markets rise or fall. Virtually all companies quoted on the stock exchanges are overvalued to the extent that their accounts tacitly assume a business-as-usual supply of energy, essential to their businesses. In contrast, independent fund managers with more flexibility are already reacting by taking positions in commodities and renewable energies and by trying to benefit from short-term price fluctuations.
Governments are in practice unlikely to introduce appropriate policies, finding it politically easier to react than prepare. It is admittedly difficult for them to deal with an unprecedented discontinuity defying the principles of classical economics, which proclaim that supply must always match demand in an open market and that one resource seamlessly replaces another as the need arises. But failure to react to the depletion of oil as imposed by Nature could plunge the world into a second Great Depression, which might reduce world population to levels closer to those that preceded the Age of Oil. There is much at stake.
COLIN J. CAMPBELL
Oil Depletion Analysis Centre
As Robert L. Hirsch, Roger H. Bezdek, and Robert M. Wendling eloquently describe, a peak in global oil production is not a matter of if but when. Yet in order to assess how far we are from peak and to prepare ourselves for the moment in which supply begins to decline, we need to gather the most accurate available data. Unfortunately, reserve data are sorely lacking, and the global energy market suffers from the absence of an auditing mechanism to verify the accuracy of data provided by producers. The reason is that over three-quarters of the world's oil reserves are concentrated in the hands of governments rather than public companies.
Unlike publicly traded oil companies, which are accountable to their stockholders, OPEC governments are accountable to no one. In recent years, we have seen that even public companies sometimes fail to provide accurate data on their reserves. In 2004, Shell had to downsize its reserve figures by 20 percent. Government reporting standards are far poorer. In many cases, OPEC countries have inflated their reserve figures in order to win higher production quotas or attract foreign investment. In the 1980s, for example, most OPEC members doubled their reserve figures overnight, despite the fact that exploration activities in the Persian Gulf declined because of the Iran-Iraq War. These governments, many of them corrupt and dictatorial, allow no access to their field-by-field data. The data situation worsened in 2004 when Russia, the world's second largest oil producer and not a member of OPEC, declared its reserve data a state secret.
Our ability to create a full picture of the world's reserve base is further hindered by the fact that in recent years, exploration has been shifting from regions where oil is ubiquitous to regions with less potential. According to the 2004 World Energy Outlook of the International Energy Agency (IEA), only 12 percent of the world's undiscovered oil and gas reserves are located in North America, yet 64 percent of the new wells drilled in 1995-2003 were drilled there. On the other hand, 51 percent of undiscovered reserves are located in the Middle East and the former Soviet Union, but only 7 percent of the new wells were drilled in those regions. The reason for that is, again, the reluctance of many producers to open their countries for exploration by foreign companies.
These issues require behavioral changes by the major producers; changes that they are unlikely to enact of their own volition. The major consuming countries should form an auditing mechanism under the auspices of the IEA and demand that OPEC countries provide full access to their reserve data. Without such information, we cannot assess our proximity to peak and therefore cannot make informed policy decisions that could mitigate the scenarios described by the authors.
Director of Policy and Strategic Planning
Institute for the Analysis of Global Security
I was greatly impressed by "Peaking Oil Production: Sooner Rather Than Later?" because I felt it gave a very fair and balanced analysis of the issue. However, because I am quoted as projecting peak oil as occurring "after 2007," I think your readers are entitled to know how I came to this somewhat alarming conclusion.
My analysis is based on production statistics, which although not perfect are subject to a much smaller margin of error than reserves statistics. The world is looking for a flow of oil supply, and in an important sense is less interested in the stock of oil (reserves), except insofar as these can be taken as a proxy for future flows.
By listing all the larger oil projects where peak flows are 100,000 barrels per day or more, we can gain a good idea of the upcoming production flows. The magazine I edit, Petroleum Review, publishes these listings of megaprojects at intervals, the most recent being in the April 2005 issue. We have now done it for long enough to be confident that few if any large projects have been missed. Stock exchange rules and investor relations mean that no company fails to announce new projects of any size.
Because these large projects average 5 to 6 years from discovery to first oil, and even large onshore projects take 3 to 4 years, there can be few surprises before 2010 and not much before 2012. Simply adding up future flows, however, misleads, because depletion has now reached the point where 18 major producers and 40 minor producers are in outright decline, meaning that each year they produce less than the year before.
The buyers of oil from the counties in decline are (obviously) unable to buy the production that is no longer there. Replacing this supply and meeting demand growth both constitute new demand for the countries where production is still expanding. By the end of 2004, just less than 29 percent of global production was coming from countries in decline. This meant that the 71 percent still expanding had to meet all the global demand growth as well as replacing the "lost" production. In the next 2 or 3 years, the countries in decline will be joined by Denmark, Mexico, China, Brunei, Malaysia, and India. By that point, the world will be hovering on the brink, with nearly 50 percent of production coming from countries in decline balanced or offset by the 50 percent where production is still expanding.
Once the expanders cannot offset the decliners, global oil production peaks.
If global demand (the least predictable part of the equation) averages 2 to 2.5 percent (somewhat slower than the past 2 years), then we find that supply and demand can more or less balance until 2007, but after 2008 only minimal oil demand growth can be met and by 2010 none at all. Because major oil developments take so long to come to production, new discovery now will be too late to affect peak.
The best we can hope for is that the development of known discoveries plus some new discovery can draw the peak out into an extended plateau while human ingenuity races to cope with the new realities.
Editor, Petroleum Review
Worries about the future supply of oil began many years ago, but recently a serious concern has arisen that an imminent peak in world oil production will be followed by decline and global economic chaos. Yet the world and the United States have weathered many past peaks, which have been mostly ignored or forgotten.
World oil production dropped 15 percent after 1980. Cause: high prices from the Iran-Iraq war. Earlier, the Arab oil embargo cut global oil production by 7 percent in 1974. Much earlier, the Great Depression cut U.S. oil demand and production by 22 percent after 1929. And even earlier, U.S. oil production dropped 44 percent after 1880, 20 percent after 1870, and 30 percent after 1862, as prices fluctuated wildly.
In every case, the law of supply and demand worked, and the "oil supply problem" solved itself. The solution wasn't necessarily comfortable. In the United States, the net effect of the 1973-1980 oil price hikes was a doubling of unemployment, a fourfold increase in inflation, and the worst recession since 1929.
Yet future oil supplies, now as in the past, continue to be underestimated for at least three reasons: the U.S. Securities and Exchange Commission (SEC), technology, and oil price increases. The SEC effectively defines "proved oil reserves" worldwide; it is a decidedly and deliberately conservative definition. The effect, now and historically, is a serious understating of oil reserves. This is shown by a continuing growth in U.S. proved oil reserves. They were 36 billon barrels in 1983. Twenty years later, they were 31 billon barrels, an apparent drop of 5 billon barrels. In the interim, the United States produced 64 billon barrels. Simply adding these back to the corrected 2003 reserves shows that the 1983 numbers were understated by a factor of 2.64, or 164 percent.
Technology is a continuous process, enabling discovery and production from places and by means unimaginable in the past. The most famous of oil-supply pessimists, M. King Hubbert, predicted correctly in 1956 that U.S. oil production would peak in 1970 and then rapidly decline. But the oil potential in the deep Gulf of Mexico and in Alaska and the impact of a host of technology developments assured continued U.S. oil development. Hubbert necessarily ignored all these factors, because he based his projections only on history.
Increasing oil prices also enable the exploitation of resources once thought uneconomical, and they accelerate the development and application of new technologies to find and produce oil, induce conservation by consumers, and drive the development and use of alternative fuel supplies. All help force supply and demand into balance.
ARLIE M. SKOV
Retired petroleum engineer
Santa Barbara, California
Arlie M. Skov is past president (1991) of the International Society of Petroleum Engineers and a past member (1996-2002) of the U.S. National Petroleum Council.
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|Author:||Fri, Robert; Campbell, Colin J.; Korin, Anne; Skrebowski, Chris; Skov, Arlie M.|
|Publication:||Issues in Science and Technology|
|Date:||Jun 22, 2005|
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