Last stop gas:
Cheap oil, the only oil that matters, is just about gone

As gas prices rise, oil policy, to no one's great surprise, has become a major fixation of the presidential candidates and their surrogates. At any given moment, they can be found debating how the United States should persuade OPEC to bring down the price of crude or which candidate favors increasing gasoline taxes least. In June the argument was over how much oil there ought to be in the Strategic Petroleum Reserve (SPR). George Bush said we should fill it to the brim. John Kerry thought that just below the brim would be fine. In all of this back-and-forthing, however, neither of the candidates has mentioned the real problem facing American consumers of petroleum and petroleum by-products. Like the Strategic Petroleum Reserve, the Earth itself has a limited storage capacity, and at some point in the not-too-distant future, the cheap oil that fueled 100 years of economic growth will cease to exist.

The key here is a concept known as peak oil production. In 1956 the agro-physicist M. King Hubbert observed that the production of oil from any given field does not proceed smoothly until the last drop of oil has been sucked from the ground but instead follows a long peaking curve. Once roughly half the oil has been extracted, it becomes harder—and more expensive—to get at the remainder. Daily production begins to fall off, and eventually the field is abandoned. Hubbert believed that this peak phenomenon (known today as Hubbert's Curve) could be seen at any scale—from a single field in Texas to all the fields in a country. Less than two decades later, Hubbert's theory was vindicated. In 1971 oil production in the United States hit a peak and began a long, slow decline that oil companies, despite much effort, have not been able to reverse.

Ultimately, such a peak must also occur globally. It doesn't mean that the oil will stop flowing overnight. But it does mean that oil producers will find it harder and harder, and, eventually, impossible, to raise their yearly production. And since demand will continue to rise (oil may be finite, but our energy appetites are not), the price of oil will head for the sky. The last time production fell seriously behind demand—the Iranian revolution of 1979—oil prices hit the modern-day equivalent of $80 a barrel and pushed the world into a deep recession. And keep in mind that this was a temporary disruption: a permanent decline in oil production (assuming we haven't found something new to burn) would be an economic catastrophe.

It gets worse. The term “peak” is misleading: it suggests a symmetrical curve, as if since it took a century or so to reach the peak it ought to take another century for production to fall to zero. Sadly, this isn't so. Because oil demand still will be rising even as production peaks, prices will jump, to $100 a barrel and more. Those high prices will inspire the oil industry: producers will redouble efforts to find more oil and, for a while, may manage to keep world production from falling. The peak, in other words, will look more like a plateau, and panic may subside. Unfortunately, this rush of new production means only that remaining reserves will go even faster, so when production finally does fall, the downward slope will be almost vertical.

Precisely when oil production will peak is a complex question. Pessimistic scientists say it already has. The optimists say perhaps we won't see a decline in production until 2035. Yet even the most optimistic forecasters agree on one thing: Within our lifetime, or the lifetime of our children, oil will cease to be the cheap, plentiful fuel that today provides 40 percent of the world's energy.

If a peak in oil production truly is imminent, why don't we hear more about it? One reason is history. Pessimists have been predicting an oil peak and associated mayhem since the late 1880s, and thus far the industry has proven them spectacularly wrong. During the gloomy 1970s, for example, many experts and even oil companies believed production would peak by the late 1990s. Instead, the high prices from the 1970s and early 1980s proved a powerful incentive for oil companies not only to look for more oil but to become much smarter about how they did it.

Indeed, in Hubbert's time, it was hard to know how much oil there was. Now, with seismic imaging, engineers can pinpoint the precise location of likely oil-bearing rocks. And with high-tech drills, they can reach ten miles underground, move in any direction—even horizontally—and electronically “smell” the presence of oil and gas. So good did oil companies get at finding and producing oil that, in the decade after the Arab oil embargo, discovery rates soared, markets glutted, and the price fell from a high of $40 a barrel to less than $10—so low that OPEC was nearly put out of business. It's a classic example of a self-correcting market: high prices bring their own cure.

Not surprisingly, such steady successes have imbued the oil industry—and many governments as well—with a kind of permanent optimism. Not only do high oil prices make it profitable to extract previously “uneconomic” oil but, by funding the development of new technology and new methods, the high prices actually bring down the costs of getting that expensive oil. Case in point: Canada's vast deposits of oil-bearing tar sands, long regarded as too expensive to exploit, now can be refined economically into usable oil, and will only become more attractive as the price of oil rises. So, yes, oil may indeed be finite, oilmen will confess, but due to the magic of the marketplace we can keep pushing that end point into the indefinite future.

This optimism, however, seems to have reached a peak of its own. The industry has become startlingly proficient, but efficiency alone can't circumvent the most basic rule of the oil business—oil can't be produced unless it has been discovered. And here the optimists run into a real snag: despite all the new exploration gadgetry—and, in part, because of it—the industry is actually discovering less oil today than it was even ten years ago. In fact, although oil production has yet to hit its peak, oil discovery peaked in 1964. Since then the volume of newly discovered oil—that is, the number of barrels oil companies can find each year and put down on the books as “known” or “discovered” reserves—has on average steadily fallen each year. There have been exceptions—most recently the large finds in the Gulf of Mexico, offshore West Africa, and the Caspian Sea. But discoveries have again slumped and are now well below consumption: last year the world burned 25 billion barrels of oil, yet oil companies were able to discover just 8 billion barrels—less than one new barrel for every three consumed.

Oil optimists argue that the technology for oil discovery will also continue to improve. This is undoubtedly correct, but it just means that production will peak all the sooner. In the past, oil discovery was a gamble in which wildcatters would follow hunches, dig expensive holes to nowhere, and only occasionally hit a payoff. Now, because oil companies are so good at “seeing” where the oil is, nearly every pull is a jackpot. For example, when oil companies began to look for oil along the coast of Angola in the 1990s, seismic technology was so accurate that nearly every well drilled hit oil. But the converse was that companies could essentially see all the oil that was there right away. And, in fact, discovery rates in Angola have dropped off precipitously—a pattern that is repeated in nearly every new oil frontier. The discovery dilemma helps explain why oil companies like Shell have been struggling to meet production goals. But it also helps explain a new trend in geopolitical anxiety. Despite billions of dollars of industry investment, oil fields in Alaska, the Western Sedimentary Basin of Canada, and Britain's North Sea—formerly prolific provinces that once shielded the global economy from the machinations of OPEC—are today in steep decline. North Sea production peaked in 2002, Mexico may peak by 2005, and Nigeria could peak by 2007.

Even the Russian oil boom—which had persuaded the Bush Administration that America had a new and reliable non-Arab oil partner—now seems overstated. Russia may possess as many as 150 billion barrels, according to U.S. estimates, but that's still less than a fifth of the 850 billion barrels estimated to remain in the Middle East. Furthermore, most OPEC states are holding back their production in an effort to keep world supplies tight and prices high. But Russia, in an effort to maximize oil revenues today, has its taps wide open—a move that will have questionable effects on the nation's long-term economic health (some analysts believe Russia would be better off conserving production and selling its oil later, when prices are higher).

Oil production outside OPEC will likely peak by no later than 2015, meaning that the United States, China, and other big importers will be forced to rely even more heavily on the one supplier they trust the least. That may seem like a worst-case scenario. But, in fact, OPEC faces a peak of its own—probably sometime in 2025, at which point prices will truly begin to rise. Again, the economy will adjust. Higher prices will reduce demand for oil. Prices will also make so-called unconventional oil much more appealing, though this, too, has limits. Canada's huge reserves of tar sand, for example, cannot be refined into oil without generating vast quantities of carbon dioxide—forcing the choice between maintaining an oil-based economy and doing something to slow climate change. In all probability, we will by then have found a way to remove CO2, but not without adding to the cost of using oil. In other words, while we may not ever run out of oil, we can already see the day when we will run out of cheap oil. And for an economy built on inexpensive crude, that is the only peak that matters.

Policymakers seem unwilling even to hint that oil is a limited resource. Indeed, two of the proposals for “fixing” the current mess—releasing oil from the SPR or “jawboning” Arabs into pumping more oil—rest on the premise that today's oil problem is a temporary glitch in supply, when everyone knows not only that cheap oil is finite but that the longer we wait to find some new form of energy, the harder and more costly and disruptive the change will be. Yet such reluctance isn't surprising. To suggest that something is amiss would spook the markets and give massive political leverage to OPEC, and it would also run counter to the West's central organizing principle of nonstop economic growth. Those are all real problems. But simply pretending the oil will last forever is not a real solution.

Previous · Next

USERNAME
PASSWORD
Subscriber? · Lost password? Lost username? · More help

Last stop gas: Cheap oil, the only oil that matters, is just about gone

Last stop gas:
Cheap oil, the only oil that matters, is just about gone