Welcome to the age of scarcity
The Globe and Mail
By BARRIE MCKENNA
Washington — After two months of fruitless drilling, Austrian-born mining engineer Anthony Lucas was ready to give up on ever finding oil beneath a sandy hill in southeastern Texas.
Then suddenly, the ground rumbled and a jet of greenish-black crude shot out of the Spindletop well, spewing oil 60 metres into the air.
The massive gusher on January 10, 1901, marked the dawn of the age of oil. Until then, a typical well might produce 50 barrels a day. Spindletop churned out 100,000 — more than all the existing wells in the United States combined. By the time it ran dry in the 1980s, the field beneath the well had served up 153 million barrels of Texas tea.
This story begins with abundant oil. Vast supplies of the light fuel spawned new and previously unimagined demand — cars, planes and a transportation revolution.
Oil also made much of the world rich.
But if it can be tapped, it can also run out. Experts theorize that global oil production, which has increased exponentially since 1901, is poised to slump — slowly at first, and then sharply thereafter.
This supply curve predicament is known as "Hubbert's Peak," named after the venerable U.S. geologist M. King Hubbert, who accurately predicted in the 1950s that U.S. oil output would peak around 1970 and then inevitably decline.
Kenneth Deffeyes, a geologist who worked with Mr. Hubbert at Shell Oil, now warns ominously that the Hubbert's Peak for the world as a whole is bearing down on us. He even fixes a precise date for the beginning of the end for oil at Nov. 25, 2005 — U.S. Thanksgiving Day.
"It's real and it's here," argues the author of Beyond Oil: the View from Hubbert's Peak.
Forget for a moment the demand side of the equation — including China's and India's growing thirst — failure to adequately gird ourselves for the demise of oil has put the world on a rocky course of scarcity and high prices, according to a growing horde of Hubbert disciples. Mr. Deffeyes estimates that by 2019, oil production will fall to 90 per cent of its current peak.
"After you drive a car off a cliff, it's too late to hit the brakes," he says. "In effect, we have gone over the edge of the cliff."
For a world hooked on oil, the new supply-demand paradigm promises to be as transforming a period as the oil gushers were to the last century. Whether it happens this year, or in two decades, few would argue that depletion is a preventable event.
Price may well be the first hint of this new global energy reality.
A barrel of crude, which cost as little as $10 (U.S.) a barrel in 1998, is now worth five times that after breeching the $50 barrier earlier this year. A few analysts warn the price of crude could double again in the next couple of years. Even more optimistic forecasters agree that the days of cheap oil are likely gone forever, and that scarcity, coupled with rising demand and a falling U.S. dollar, will mean years of sustained high prices.
"Prices are very sensitive to peoples' perceptions of whether we're going to run out of oil," explains Ted Breton, director of energy market forecasting at Pace Global Energy Services in Fairfax, Va.
That prevailing market psyche has set the scene for a new, higher floor price for oil — apparently endorsed by Saudi Arabia and the Organization of Petroleum Exporting Countries, which controls 40 per cent of global output. Mr. Breton figures the price of crude may slip a bit in the months ahead, but hold at $40 a barrel for a while, with even higher spikes when people occasionally get spooked that the world may be running out.
Two key changes have conspired to make world oil markets much more volatile. There is surging new demand for oil in fast-growing China and India, where the middle class is taking to the road in a big way. And in the Middle East, mega-producer Saudi Arabia appears to have run out of spare production to turn on and off the tap at will.
There will be losers — countries, industries and even workers. Just as powerful locomotives made obsolete almost overnight the vast network of canals built with the blood and sweat of immigrants in the early 1800s, so too will the gas-guzzlers of this century vanish.
There also will be winners, including Canada, which is sitting on 175 billion barrels of sand-laden Alberta bitumen.
"The question is not whether there are buried hydrocarbons. It's at what price you can extract them, and does the technology advance fast enough as the horizon of fuels recede?" points out Peter Huber, a senior fellow at the conservative Manhattan Institute and co-author with Mark Mills of a new book on the future of oil, The Bottomless Well.
"The horizon is not receding in Alberta. It is receding in the United States because we've been pumping for a hundred years."
Few know that better than John Steinhauser, a retired Denver-based independent oil and gas producer. Now 81, he has spent the better part of three decades trying to squeeze oil out of finds from California to Pennsylvania that larger producers had abandoned or overlooked.
"There are still places where more oil can be found, but not anything like in the past," he acknowledges.
In Texas and Louisiana, for example, the oil frontier has moved so far offshore that a visitor to Galveston, Tex., or New Orleans might never realize there still is an industry. After draining onshore wells such as Spindletop, producers realized they could tap into the same vast subterranean reservoirs, which extend out into the Gulf of Mexico.
Oil producers began to move offshore in the 1930s and 1940s. Offshore activity exploded in the 1950s as the exploration of a decade earlier began to bear fruit — first at depths of 30 metres and by the mid-1960s in waters twice that deep. By the late 1970s, producers were putting fixed platforms in about 300 metres of water in the Gulf, just beyond the edge of the continental shelf.
That too was quickly explored and exploited, forcing producers into even deeper water. More than 210 km off the Louisiana coast, Royal Dutch/Shell Group's $1.5-billion Ursa platform floats like a giant octopus a kilometre above the sea floor, boring into pockets of oil and gas as far as eight km away. This is the final frontier in the relentless hunt for oil and gas. Beyond Ursa, the continental shelf drops off sharply into waters so deep that current technology can't get at the hydrocarbons trapped beneath.
Even as the age of oil recedes, the transition need not be an economic Armageddon, argues Mr. Huber of the Manhattan Institute. Billions of gallons of annual oil consumption can be painlessly shifted to where it's needed from industries that are wasteful users of hydrocarbons, including natural gas-fired power plants and factories that use oil to generate heat and steam.
He similarly envisions a day when nearly everyone in the developed world will be driving cheap and efficient hybrid electric vehicles, helping to shift 15 per cent of the energy economy from oil to the electric grid within two decades.
Like Shell, the industry will develop new ways to grab the hydrocarbons believed to be locked in the earth forever — in shale, in sand and beneath the world's oceans.
In the meantime, Mr. Huber says, wasting energy should be a virtue, not a vice, because the faster we use it up, the better we get at finding new supplies, and the less our economy depends on energy.
"Energy begets more energy; tomorrow's supply is determined by today's demand," Mr. Huber and Mr. Mills conclude in The Bottomless Well. "The more energy we seize and use, the more adept we become at finding and seizing more."
The ability to extract more than a million barrels a day from Alberta's oil sands is a testament to the use of technology to continuously expand the planet's energy supplies. Mr. Huber says the demise of abundant oil will put countries like Canada, with its huge oil sands, coal-based methane and uranium deposits, near the top of the energy heap.
And so even as the age of oil recedes in the United States, for Canada, the story may be just beginning. Canada's oil reserves, including the oil sands, now stand second only to Saudi Arabia's at 179 billion barrels. (The United States ranks 11th with 22 billion barrels). Over the next decade, investors will sink as much as $87-billion to tap Alberta's oil sands, nearly doubling output to 2.7 million barrels a day. Billions more will be spent to get that oil to consumers in the United States.
The United States has long been the driver of global demand. With just 5 per cent of the world's population, it consumes one-quarter of the world's oil — two-thirds of which winds up in the tanks of ever-larger American vehicles.
But the U.S. consumer is poised to lose its perch atop the global demand pyramid, argues James Gannon, an energy analyst and author of a recent study on the Asian transportation boom for the New York-based energy think tank Inform. He says China and India have joined the United States in sending a signal to oil markets that they will buy up every last drop of crude available, reinforcing paranoia about scarcity.
"We've had our way in the international oil market for basically a century. We are the No. 1 customer for just about every oil-producing country in the world," Mr. Gannon says of the United States.
But that's about to change. Chinese oil consumption has nearly quadrupled since 1980 to 5.7 billion barrels a day. It is expected to double again by 2025. And the Chinese are only just discovering their own Route 66. By 2030, China will have more cars on the road than the United States, putting a call on the world's scarce supplies.
"There will be a moment of awakening for the North American consumer — a realization that it is not entitled to stand first in line to quench its thirst for oil before everyone else gets a shot."
There is another, more sobering way to look at the dilemma facing the world's big oil consumers. What's already happening in the United States — the growing gap between dwindling output and rising demand — is the harbinger of what the world faces in the coming decades.
The Spindletop gusher in Texas created the supply, which awakened the world's thirst.
But there are no more Spindletops — discoveries so vast that they create their own demand. Today, each new find, however significant, doesn't begin to satisfy the world's thirst. Indeed, the chasm between new discoveries and demand has been on an ever-widening course since the early 1980s.
At least for oil, the age of bounty has given way to the age of scarcity.