The End of Doom (8 page)

Hubbert's Peak

Hubbert argued that oil production grows until half the recoverable resources in a field have been extracted, after which production falls off at essentially the same rate at which it expanded. This theory suggests a bell-shaped curve rising from first discovery to peak and descending to depletion. Hubbert calculated that peak oil production follows peak oil discovery with a time lag. Globally, discoveries of new oil fields peaked in 1962. The time lag between peak global discoveries and peak production was estimated to be around thirty-two years, but peak oilers claim that the two oil crises of the 1970s reduced consumption and thereby delayed the peak until now. Hubbert's modern disciples argue that humanity has now used up half of the world's ultimately recoverable reserves of oil, which means we are at or over the peak.

Have we reached or passed the halfway mark of world petroleum reserves? Not yet. The
2014 Statistical Review of World Energy,
issued by the oil company BP, notes that global proved oil reserves rose from 1.04 billion barrels in 1992 to 1.69 trillion barrels in 2011. The US Energy Information Administration's
2013 International Energy Outlook
concurs with the BP review and reports that known world oil reserves total 1.6 trillion barrels.

Recall that peak oil was supposed to have happened in 2005 (on Thanksgiving Day!), when production was 82 million barrels per day. In 2014, global oil production reached 92 million barrels per day. At that rate of production, current reserves would last fifty years. In general, most experts project that to meet demand in 2035, world oil production will rise to around 110 million barrels per day. At that rate, known reserves would last forty years. In addition, proved reserves of natural gas in 2012 stood at 187 trillion cubic meters and annual production was 3.4 trillion cubic meters, at which rate known supplies would last fifty-five years.

The International Energy Agency annually issues its
Resources to Reserves
report. The IEA is an international think tank established in the 1970s by the governments of the rich countries that are members of the Organisation for Economic Co-operation and Development. The IEA advises those governments on energy supplies and policies. Like most organizations that evaluate future resource supplies, the IEA makes a distinction between reserves and resources. Reserves are known stocks that can be produced economically using today's technology. Resources are stock estimates that are judged likely to be ultimately producible depending on market and technological developments.

The IEA's
Resources to Reserves 2013
report estimated that worldwide proven conventional oil reserves stand at 1.3 trillion barrels. Adding estimated recoverable conventional oil resources brings the total to 2.7 trillion barrels. The IEA then estimates that reserves of unconventional oil are around 400 billion barrels and recoverable resources of 3.2 trillion barrels. This assessment brings the total world petroleum reserves to 1.7 trillion barrels and the global resource base to just under 6 trillion barrels. In his 2012 report
Oil: The Next Revolution,
Harvard University Belfer Center scholar Leonardo Maugeri agrees: “Oil is not in short supply. From a purely physical point of view, there are huge volumes of conventional and unconventional oils still to be developed, with no ‘peak-oil' in sight.” As evidence, he cites data from the US Geological Survey suggesting that the remaining conventional oil resources are 7 to 8 trillion barrels.

With regard to natural gas supplies, thanks in large measure to the combination of hydro-fracturing and horizontal drilling, vast new stores have been released from previously unexploitable shale formations. The IEA in 2011 issued a report asserting: “Conventional recoverable resources are equivalent to more than 120 years of current global consumption, while total recoverable resources could sustain today's production for over 250 years.” As the IEA 2013 report succinctly notes, “Fossil fuels are abundant in many regions of the world and they are in sufficient quantities to meet expected increasing demands.”

The fundamental error made by the peak oil disciples of Hubbert is now clear; they substantially underestimated the actual amount of petroleum reserves and resources and the oil industry's ever-increasing technological prowess to exploit them. The notion that once half of the oil in a field has been produced, the only direction is down seems intuitively obvious. And oil is, after all, an exhaustible resource of which there is only so much. Peak oil theorists ominously point out that since the 1980s the volume of new discoveries has been smaller than the amount of oil extracted. Yet, oil reserves have continued to grow. How could this be?

Swedish economist Marian Radetzki explained this paradox by noting that “the quantity of reserves in new discoveries regularly appreciates in the process of field development exploration and subsequent exploitation.” In other words, oil companies often find more crude in their wells than initially predicted. In addition, peak oilists tend to assume that oil production technology is static when in fact constant improvement enables the extraction of ever-greater quantities of oil from a field. “Historical data from the United States reveal that the ultimately recovered oil when a field ceases to produce is on average six times as large as the volume announced after the initial discovery,” observes Radetzki. Oil companies basically look for more crude in fields that that they have already discovered and regularly find it in the form of appreciating reserves.

For example, since 1950 some 2.6 million oil and gas wells have been drilled in the United States and more than 800,000 are currently producing oil or gas. In contrast, Saudi Arabia has only about 2,900 operating wells, and all of the Organization of Petroleum Exporting Countries (OPEC) wells total just 37,500. This suggests, even taking into account differences in geology, that there is plenty of scope for boosting the production of known fields by means of reserve appreciation in OPEC and other oil-producing countries.

Consider the Kern River Field in California, which was discovered in 1899. In 1942 it was estimated that only 54 million barrels remained to be produced there. During the next forty-four years the field produced 736 million barrels and had another 970 million barrels remaining. In 1980 the US was estimated to have between 27 and 30 billion barrels of reserves. In 2013 the US Energy Information Administration estimated US proven oil reserves at 29 billion barrels, even though American oil fields had produced about 80 billion barrels of oil between 1980 and 2013.

Back in 1973, US Foreign Service officer James Akins dryly observed: “Oil experts, economists, and government officials who have attempted in recent years to predict the future demand and prices of oil have had only marginally better success than those who foretell the advent of earthquakes or the second coming of the Messiah.” Keeping Akins's admonition firmly in mind, what does future energy demand look like?

In their April 2013 study “The Global Energy Outlook,” Duke University researchers Richard Newell and Stuart Iler comprehensively review petroleum consumption and production estimates from the US Energy Information Administration, the International Energy Agency, and the oil companies ExxonMobil and BP. Those estimates more or less converge on an increase in consumption from the current 88 million barrels per day to around 110 million barrels per day in 2035. Similarly, they project that natural gas demand will rise from 320 billion cubic feet per day now to somewhere between 462 to 514 billion cubic feet per day in 2035. They do further note: “While energy consumption continues to grow, it is growing at a slower rate as energy continues to decouple from economic growth, due to structural transformation in the economy and technological improvements in energy efficiency. Fossil fuels will continue to dominate the energy mix, but their share is falling, and for the first time the absolute level of some fossil fuels looks ready to plateau and then potentially decline.”

All of the energy consumption estimates reported by Newell and Iler incorporate assessments concerning likely improvements in energy efficiency and production technologies, as well as the adoption of subsidies for renewables and prices on carbon dioxide emissions. For example, ExxonMobil's
2014 Outlook for Energy
report assumes that rich developed countries will impose carbon dioxide emissions control measures that amount to “an implied cost of CO
2
emissions that will reach about $80 per tonne in 2040.” Similarly, the consultancy Synapse Energy Economics projected in its 2012 report that carbon dioxide prices would range between $35 and $90 per ton by 2040.

What will the price of oil be in the future? One can find just about any estimate one wants. For example, in late 2013, Reuters polled twenty leading oil industry experts and obtained estimates for 2020 prices ranging from $70 to $160 per barrel. The International Energy Agency projects that the price of oil will be around $128 per barrel (2012 dollars) in 2035.

In their analysis of commodity super-cycles, Erten and Ocampo report: “In contrast to these trends in non-oil commodity prices, real oil prices have experienced a long-term upward trend, which was only interrupted temporarily during some four decades of the twentieth century.” This suggests that the price of oil will not likely fall back to its 1998 average of $17 per barrel (2014 dollars). High oil prices have, however, drawn forth substantial investments in new production. Later in this decade, extra supplies of crude will meet weakening demand as the super-cycle decelerates, resulting in falling prices.

Harvard University analyst Maugeri also argues that recent big investments in production and innovation will enable oil producers to bring an additional 18 million barrels of oil per day to the market by 2020, raising global production to around 110 million barrels per day. “The age of ‘cheap oil' is probably behind us,” writes Maugeri, “but it is still uncertain what the future level of oil prices might be. Technology may turn today's expensive oil into tomorrow's cheap oil.” By cheap oil, Maugeri means the $20 to $30 per barrel price that prevailed during most of the last half of the twentieth century. He believes that the trend toward more production will tend to stabilize the price of oil after 2015. Maugeri's suggestion that oil prices could dip below $50 per barrel in the near term was realized in January 2015 when the price for benchmark West Texas Intermediate crude hovered around $45 per barrel, but he generally assumes that the price will remain above $70 in the run-up to 2020.

Despite reassuring petroleum reserve estimates and the downward pressure on prices that increased production and the waning of the current commodity super-cycle generates, a peak oil crisis might still happen. How? Through political mismanagement.

Political Peak Oil

“The real problems concerning future oil production are above the surface, not beneath it, and relate to political decisions and geopolitical instability,” notes Maugeri. It is a disquieting fact that government-owned oil companies control nearly 90 percent of the world's oil reserves and produce about 75 percent of current supplies. Not guided by the profit motive to take future income into account, governments use their state-owned oil companies to plunder petroleum reserves as quickly and as messily as possible, often using oil revenues to buy off restive populations. In the wake of the Arab Spring uprisings in 2011, Saudi Arabia's monarchy bought social peace by quickly boosting wages by $130 billion; Algeria announced a $156 billion infrastructure and jobs program; and Kuwait gave every citizen $3,600 and fourteen months of free groceries. In addition, tens of billions of dollars generated by government-owned oil companies are diverted into the private offshore accounts of corrupt politicians. Some scholars have dubbed this depressing dynamic the “oil curse.”

Consequently, government oil companies typically underinvest, with the result that oil production is far less than is technically and economically possible. According to Maugeri, private oil companies currently recover about 35 percent of the petroleum in a typical oil field. If that recovery factor could be increased by another five percentage points, it would boost worldwide recoverable reserves by more than all of Saudi Arabia's current proven reserves. The oil recovery rates for government-owned oil companies are, however, much lower than those of private companies. “The oil recovery rate is well below 25 percent, because of old technologies, reservoir mismanagement, limited investment,” explains Maugeri. He estimates that the recovery rate for several major oil-producing countries—including Russia, Iran, Venezuela, Kuwait, and Iraq—is actually below 20 percent.

As noted earlier, lots of the world's oil is unfortunately produced by government-owned companies run by corrupt regimes. Besides those just listed, there are the basket cases of Nigeria, Chad, Sudan, Angola, and Libya—and that's just in Africa. If an “oil crisis” fails to materialize, it will be chiefly because nimble private oil companies will have succeeded in boosting production capacity in enough places around the world that temporarily losing one or two major producers to incompetence or malice won't matter much. But the sad fact is that the world's energy security would be a lot greater if more of the world's oil and gas resources were in the hands of private companies. Peak oil, if it occurs, will be the result of human folly and government greed, not because the world has suddenly run out of crude.

Finally, it should be noted that many environmentalists aren't scared that we will soon run out of oil; instead, they fear that we won't. Why? Because they worry about the effect the carbon dioxide emitted into atmosphere by burning all that oil will have on the climate. Let's set that concern aside until the chapter asking “Can We Cope with the Heat?”

“Nature makes a drought, but man makes a shortage”

That's the trenchant slogan that Leiden University College water resource economist David Zetland uses to sum up how bureaucratic mismanagement of supply and demand in most countries pervasively misallocates water. He also makes the intellectually elegant point that people must not confuse scarcity and shortages. Scarcity arises from the fact that human wants are boundless while the resources to satisfy them are limited. Since we can't have it all, we manage the scarcities engendered by our desires by allocating our time and money between competing goods and services.