The Outlook on Oil
Some Experts Worry That Production Will Soon Peak. Others Warn That It Already Has.
by Jim Motavalli
In 1938, oil was discovered at Dhahran, near the Persian Gulf, and a small oasis became a modern city, complete with the sleek headquarters of the Saudi Aramco national oil company. If you’re an American or British oil worker, life is good in the Dhahran Hills, where homes in the suburban enclaves are made of brick or fieldstone, and despite the desert heat the gardens blossom with large shade trees, flowering bougainvillea and oleander. There are bike paths, a 27-hole golf course, a rugby field and horse stables.
Once life was like this for oil workers in Texas, where roadside oil wells were symbols of a new American prosperity. Oil drillers struck a geyser of black gold at Spindletop, near Beaumont, in 1901, and landowners were soon selling $100 tracts for $20,000 and more. Instant millionaires were created, leading to the clich� of the hick in cowboy boots who paid cash for his Cadillac. But today, after yielding 153 million barrels of oil, old Spindletop is mostly a museum site. Texas still has 129 billion barrels of oil, by some estimates, but it is located deep beneath the earth, making economic recovery difficult. The average well in Texas today produces nine barrels of oil a day, compared to 6,000 barrels in oil-rich Saudi Arabia.
But this situation, too, may be fluid. Despite the reliance on it evident in nearly all strategic energy planning, Saudi oil is also a finite resource, and some fear that the desert kingdom may be the next mega-producer to lose momentum.
Is the world running out of oil? Ask that question and the geologists and strategic planners will say you’re missing the point: We’ll no more “run out of oil” than we will run out of water in the ocean. About half of the world’s known reserves are still in the ground. The real issue, they say, is when will the planet reach the peak of oil production, after which a slow decline will inevitably clash with demand that grows at two percent per year. Finally, they add, we’ll stop producing oil altogether because it will become uneconomic or because technology will have moved on, not because we’ve pumped out the last drop.
The Great Debate
We’ve reached a dramatic crossroads, with highly credentialed experts coming to diametrically opposite conclusions about the future of the world’s oil supply. With consumers paying $2.50 or more for a gallon of gasoline at the same time ExxonMobil and other oil producers are raking in the largest corporate profits in history, we’re at least finally paying attention. So are we being manipulated by greedy oil companies, or is the shortage very real, demanding an abrupt about-face after more than 100 years of heavy reliance on a constant supply of relatively inexpensive oil?
Unfortunately, the more you talk to experts and immerse yourself in technical data about R/P ratios and constant decline rates, the more confused you become. Unlike the debate over climate change, which the skeptics lost long ago, the war of words over peak oil is still very much raging, with solid science on both sides.
But one conclusion is irrefutable: The age of cheap oil is definitely over, and even as our appetite for it seems insatiable (with world demand likely to grow 50 percent by 2025), petroleum itself will end up downsizing. And it’s unlikely that the high oil prices of 2005 will be a bubble, as was the 1970s fallout from the Arab oil embargo. Today, not only is oil getting harder to find in economically exploitable form, but the use of what remains is contra-indicated by the hard reality of global warming. Even if we had ample oil, in the long run we’d need to switch to renewables, anyway.
When will oil peak? A growing body of oil company geologists, oil executives, and investment bankers, including the influential American geologist L.F. Ivanhoe, see it happening by 2010. The Department of Energy (DOE) has given various estimates, ranging from 2016 to 2037. But many oil companies are skeptical it will ever happen, putting faith in higher prices and new technology (including horizontal drilling and 4-D exploration) spurring ever more productive exploration. Exploration will have to be very productive indeed to keep up with world demand, which the Defense Department’s Energy Information Administration (EIA) believes will grow from 78 million barrels per day in 2002 to 118 million barrels in 2025.
Are we on track to meet that growing demand? No, says a report by L.B. Magoon for the U.S. Geological Survey (USGS). “Technology is great,” he wrote, “but it can’t find what’s not there. In the last five years, we consumed 27 billion barrels of oil a year, but the oil industry discovered only three billion barrels a year. So only one barrel was replaced for every nine we used!” Annual oil discoveries have been declining since 1965.
Might oil peak have already been reached? So said Iranian petroleum geologist Ali Samsam Bakhtiari last October: “In my humble opinion,” he said, “we should now have reached peak oil. So it is high time to close this critical chapter in the history of international oil industry and bid the mighty peak farewell.” And concurring is highly respected Irish geologist Colin Campbell, who said, also in October, “The maximum peak of production as far as the normal so-called oil has come [in 2005], after which there will be a long decline.”
The Trickle or the Geyser?
There’s no lack of firm conviction when it comes to oil. Robert Hirsch’s resum� includes stints at both Exxon and ARCO, and he’s now senior energy program advisor at the Science Applications International Corporation. “The ‘depletion’ folks by and large are not exaggerating the problem, particularly when you add in the risk dimension,” he said in an interview. “The oil reserves are very uncertain. Middle East politics and egos are in play, and the rest of the world is at great risk because there will be no quick fixes when depletion starts.”
In a report for the Atlantic Council of the U.S., Hirsch wrote that “the age of plentiful, low-cost petroleum is approaching an end,” and that “unless mitigation is orchestrated on a timely basis, the economic damage to the world economy will be dire and long lasting.” What’s more, Hirsch says, we won’t have much warning when oil peak is finally reached. Studying the examples of the U.S. (which reached peak oil production in 1970) and Great Britain (peak in 1999), Hirsch concludes that “it was not obvious that production was about to peak a year ahead of the event. In most cases, the peaks were sharp.”
So it’s business as usual, with the politicians in denial, until we finally see the oil peak in the rear-view mirror. The huge challenge is that, as a 2005 Department of Energy (DOE) analysis indicated, we risk a 20-year “severe liquid fuels problem” if we delay our planning for a post-petroleum energy economy until peak is actually reached. Even if we began a crash program 10 years before peak, the DOE report says we’ll still have a decade of hardship.
Peak oil may be closer than we think. The chief Cassandra today is probably oil analyst Matthew Simmons, whose views are not easily discredited because of his stellar credentials. Simmons, a sometime confidant of President Bush on oil matters, is chairperson and chief executive of the energy-oriented Simmons & Company International investment bank in Houston, and is a member of the National Petroleum Council and the Council on Foreign Relations. He writes in his book Twilight in the Desert, based on considerable research, that “Saudi Arabian oil production is at or very near its peak sustainable volume (if it did not, in fact peak almost 25 years ago), and is likely to go into decline in the very foreseeable future [emphasis in the original]. There is only a small probability that Saudi Arabia will ever deliver the quantities of petroleum that are assigned to it in all the major forecasts of world oil production and consumption.”
Simmons says that a few “super giant” oil fields in Saudi Arabia (including the massive Ghawar field, the world’s largest, discovered in 1953) account for 92 percent of the country’s crude oil output, and that these fields are aging and suffering from rising “water cut.” (Water is injected into mature oil fields to keep the oil flowing; it’s a sign they’re declining.)
Simmons told E, “In fact, the real risk is not the question of proven reserves, which is a very fuzzy area. The real story is that there are basically just five old, mature fields that account for 90 percent of all Saudi production, and a remarkably small number of wellheads that produce the oil from these fields. It leaves the Saudis with no diversification if any one of the fields suffer a production collapse.”
The implications of this are huge, since Saudi Arabia has the planet’s largest proven reserves and is the world’s largest oil exporter, from which the U.S. buys 1.5 million barrels a day (15 percent of our total consumption in 2004). Some 60 percent of the 20 million barrels of oil the U.S. consumes every day (enough to cover a football field with a column of oil 2,500 feet tall) is imported, and replacing the supply from Saudi Arabia would be no simple task.
DOE’s “International Energy Outlook 2005” projects that Saudi Arabia could be producing 20.4 million barrels of oil per day by 2025, twice its current production. The Saudis, some of them at least, are in synch with this scenario. Saudi oil minister Ali al-Naimi said at an oil conference in South Africa last September that it would “soon” add 200 billion barrels to its current reserve estimate of 264 billion barrels. He added that his country could easily produce more than the current 9.5 million barrels daily, but that limited refining capacity restrained the system’s ability to absorb more oil. “Give us the customers and we will pump more oil,” he said.
In a report for the Ross Smith Energy Group, petroleum engineer Jim Jarrell takes on Twilight in the Desert and other skeptical Saudi onlookers. He cites a 2000 USGS report that ranked Saudi Arabia number one worldwide in terms of undiscovered oil resource potential. Jarrell praises the Saudis for using conservative methods for assigning oil reserves, and for managing the resources carefully to allow only an “extremely flat” decline.
In an interview, Jarrell says, “Our report says we could find no evidence to support a concern that current Saudi production levels are near imminent and irreconcilable decline. In fact the evidence tells us that the Saudis are well informed and are operating their wells prudently.” But can the Saudis ramp up to 20 million barrels of oil a day, as confidently proclaimed by many? “I have no idea,” says Jarrell.
But neither Simmons nor Jarrell is on the ground in Saudi Arabia. Jarrell admits that determining actual reserve levels “would require a detailed reservoir-by-reservoir evaluation.” As Muhammed-Ali Zainy of London’s Centre for Global Energy Studies points out, we’ll just have to take Saudi Arabia’s word for its reserves and pumping capacity, since the nature of its closed society makes any oversight impossible.
Some of the most trenchant criticism of Saudi Arabian oil capacity comes from inside the Kingdom itself. Dr. Sadad al Husseini, the newly retired head of oil exploration and production for Saudi Arabia, told Britain’s Channel 4 in October that “it’s unrealistic for the world to be expecting such high numbers from all of the producers, including Saudi Arabia.” The hope that his country would be producing more than 20 million barrels of oil per day in the next two decades was “unrealistic,” he said, and “a dangerous basis for policy.” Al Husseini also said that he believed that world oil would peak at 95 million barrels per day in 2015.
“We don’t see us as the ones making sure the oil is there for the rest of the world,” an unnamed senior Saudi Aramco official told the New York Times in 2004. He further cautioned that even the attempt to get up to 12 million barrels a day would “wreak havoc within a decade,” by damaging the oil fields.
Simmons, who believes that major producers Iran, Iraq (yes, Iraq), Kuwait, Venezuela and Indonesia are “highly likely” to have passed peak, claims that it’s more likely that he’ll be living on the moon in 2025 than for Saudi Arabia to be producing 22 million barrels of oil per day. His views are echoed by another unimpeachable source, Edward O. Price, Jr., the former head of exploration for the national oil company Saudi Aramco. Price questions the existence of vast untapped oil reserves in Saudi Arabia, and points to a 20-year-old study by four American oil companies, then working with Aramco, that found, according to the New York Times, “little in the way of undiscovered oil reserves.”
A Gusher of Profit
As consumers suffer at the pumps, the oil companies themselves are floating on an ocean of record profits. The third quarter of 2005 showed $9.92 billion in earnings for ExxonMobil, $9.03 billion for Royal Dutch Shell and $6.53 billion for British Petroleum. In an attempt to deflect the blame, the oil giants are spending heavily on ad campaigns, such as an American Petroleum Institute (API) spot that urges consumers to turn down their thermostats, clean their furnace filters and weatherstrip their windows.
Further, the message is: “You’d better trust us, because we’re in trouble if you don’t.” Chevron says, “It took us 125 years to use the first trillion barrels of oil. We’ll use the next trillion in 30.” ExxonMobil’s ads note that “as the world grows, it will require about 50 percent more energy in 2030 than today.” But the latter company’s message that it has “consistently led the industry in research and technology” was somewhat undercut by its bland assertion, in USA Today, that it had no plans to invest its unprecedented earnings in renewable or alternative energy. “We’d rather re-invest in what we know,” said ExxonMobil spokesperson Dave Gardner.
In full-page newspaper ads, API claims that there is 131 billion barrels of oil just waiting to be discovered in the U.S. through offshore and Mountain West drilling, if only the “federal restrictions and permitting delays” were removed. The implication seems to be that the radically pro-Big Oil Bush administration and the appeasement-minded Congress aren’t doing enough.
API comes out swinging when angry politicians such as Senator Hillary Rodham Clinton (D-NY) call for a $20 billion per year clean energy fund paid for with a windfall tax on oil profits. “They seem to think our companies are owned by space aliens,” fumes John Felmy, API’s chief economist. “This is an attack on their own constituents who are invested in pension funds and 401k plans.” Asked where the public should direct its anger, Felmy points at “decades of government policy that has hindered the oil industry in its search for more oil.”
The only reason we’re not discovering any new oil, say Peter Huber and Mark Mills in a Wall Street Journal piece, is that “the cost of oil remains so low.” In other words, we keep buying oil from the Middle East because it’s cheaper than developing new sources, such as the 3.5 trillion barrels sunk in Venezuelan clay in the Orinoco basin and the Athabasca tar sands of Canada. Respected oil analyst Daniel Yergin, chairperson of Cambridge Energy Research Associates and author of The Prize, says that unconventional oil sources (tar sands, ultra-deep-water developments, natural gas liquids) will account for 30 percent of total capacity by 2010, up from 10 percent today.
There are huge technological (and environmental) hurtles to overcome before even a fraction of unconventional resources can be tapped. Some analysts doubt that much of this potential oil will ever be recovered. But others are bullish. Paul Kuklinski, an energy analyst with Boston Energy Research, says unconventional sources will increasingly come on line after 2020, when emerging technologies such as horizontal wells “will allow us to recover oil from wells that were considered unrecoverable, with much less impact on the environment.”
The oil industry makes forecasts of its own, and not surprisingly they show us dependent on petroleum for the foreseeable future. ExxonMobil President Rex Tillerson said in September that as much as three billion barrels of conventional oil are waiting to be recovered, and another seven trillion barrels may be lurking in the aforementioned unconventional sources, including tar sands and oil shale (see sidebar). The company’s “Outlook for Energy: A 2030 View,” published in 2004, forecasts 2.8 percent annual world economic growth in that period, accompanied by 1.5 percent growth in annual oil demand. Oil and gas, the report said, will account for 60 percent of new energy demand in the period under study. Wind and solar will grow 10 percent, it said, but still account for less than one percent of total energy use.
But even in the oil industry’s own “Outlook” report it’s possible to find some caveats. Although the report notes the aforementioned seven trillion barrels of unconventional oil, it doesn’t seem all that optimistic about exploiting them. A Bulletin of Atomic Scientists’ analysis of the report points out that ExxonMobil sees no significant contribution from oil shale even by 2030, and only a modest 3.3 percent contribution from Canadian oil sands (development of which may be hampered by a natural gas shortfall as described by Julian Darley of the Post Carbon Institute in his new book High Noon for Natural Gas: The New Energy Crisis).
Nevertheless, ExxonMobil’s assessment (echoed by a Bush administration heavily stacked with former oil executives) is consistently steady-as-she-goes, based on the assumption that all that oil is out there, and that neither renewable energy nor global warming will be a factor. ExxonMobil, in particular, is contemptuous of the former, and outright dismissive about the latter. “At ExxonMobil Corporation’s laboratories [in Annandale, New Jersey], there isn’t a solar panel or windmill in sight,” wrote the Wall Street Journal. “About the closest Exxon’s scientists get to ‘renewable’ energy is perfecting an oil that Exxon could sell to companies operating wind turbines.”
API’s Felmy dismisses renewables, and sees a future only for natural gas hidden in frozen methane hydrates (there are reportedly vast deposits in the U.S.) and cellulose ethanol, a fuel made from agricultural waste championed by former CIA chief James Woolsey, among others. But, as Earth Island Journal reports, methane hydrates are a potentially devastating global warming enhancer, and initial attempts to find and exploit deposits commercially have been disappointing. “To think about vast deposits that will be commercially exploitable, it’s my opinion it just won’t happen,” says Dr. Keith Kvenvolden, emeritus organic geochemist at USGS.
The peak oil chicken littles have resources of their own. There’s a growing mountain of books with titles like Power Down, The End of Oil, The Party’s Over, Crude Awakenings and The End of Fossil Energy. Websites include Oilcrisis.com, Peakoil.net, Peakoil.org, Lifeaftertheoilcrash.net, Hubbertpeak.com, Survivingpeakoil.com, and many more. They’re supported by groups like the Association for the Study of Peak Oil (ASPO). Their messages are similar: We’re heading for a major energy crash, with peak likely to be reached between 2006 (this year!) and 2016. According to Richard Heinberg’s Power Down, 24 of the 44 significant oil-producing nations are “clearly past their peak of production.” ASPO believes that all petroleum liquids will peak around 2007.
Most peak oil analysts point to a mysterious force known as the Hubbert Peak, which some believe to be infallible. In 1956, when American oil production was riding high, a leading oil geologist named Dr. Marion King Hubbert was widely ridiculed for publishing a paper claiming that the lower 48 states (excluding Alaska, which had yet to feel a drill bit) would reach a production peak between 1965 and 1970. It arrived right on schedule, in 1970, when U.S. oil topped out at 9.4 million barrels of oil per day. An extension of Hubbert’s Peak to world oil production would put us right at the very top of an upturned finger, in sharp contrast to the continuing upward climb predicted by the federal EIA. By 2080, the curve sees world oil slowed to a relative trickle.
Hubbert died in 1989, but not before he had predicted that global oil peak would occur between 1990 and 2000. Was he wrong? We may not know for some time, since oil peaks only become clear in rear-view mirrors.
Hubbert and his followers have their critics. One of the most combative and pugilistic of the debunkers is Michael C. Lynch, a research affiliate at MIT’s Center for International Studies and president of Strategic Energy and Economic Research Inc. “I scoff at poor analysis and unwarranted alarmism,” he told E. “I think the current market is driven by speculation, and that we will see relief in the next few months.”
Lynch derides Simmons’ Twilight in the Desert as “embarrassingly bad. He includes minimal data, but the data actually refutes his arguments.” He considers it “illogical” that Saudi Arabia would be pumping its oil reserves dry. “You never have a basin with a few giant fields and nothing else,” he says.
And, in a 2003 article for Oil & Gas Journal, Lynch also took on the Hubbert Peak itself. Using arguments Richard Heinberg in Power Down describes as “well worn,” Lynch outlines a “major theoretical flaw” in the “very simplistic” curve. He says that the oil pessimists rely too heavily on geology, when in fact “demand determines production, not geology.”
Lynch says the Hubbert Peak only appears to have validity, since mature oil production grows very slowly, with new fields representing no more than a small proportion of existing fields. Peak oil gurus like Campbell and petroleum consultant Jean H. Laherrere “have apparently rediscovered the Hubbert curve, but without understanding it,” Lynch writes. He denies that oil production necessarily follows a Hubbert-like bell curve, pointing to Campbell’s work that shows production for 51 non-OPEC nations “and only eight of them could be said to resemble a Hubbert curve even approximately.” The Hubbert curve, Lynch argues, “originally held as scientific and inviolable, is of no particular value.”
At the end of the day, Lynch is one of the last bears on oil prices. Oil crises are short-term affairs, he says, and the general price trend is downward. “The possibility of a price drop so rapid that OPEC can’t stabilize the market at the level they want is real,” he said last May. In this, Lynch directly challenges such respected oil observers as Goldman Sachs, which last March floated the idea of oil prices reaching $105 a barrel by 2007. “We believe oil markets may have entered the early stages of what we have referred to as a ‘super spike’ period—a multi-year trading band of oil prices high enough to meaningfully reduce energy consumption and recreate a spare capacity cushion only after which will lower energy prices return,” said company analysts.
Another prominent voice, Jeffrey Rubin, chief economist for Canada’s Imperial Bank of Commerce, believes prices will reach $100 a barrel by late 2007 (translating into $4 a gallon at the pumps). Again, the problem is too little oil chasing too much demand. “The gap between supply and demand grows as much as three million barrels a day by 2008,” Rubin said. “Global oil needs are almost 84 million barrels a day now.”
It’s impossible to escape the conclusion that we’re steaming full speed into a train wreck of monumental proportions. Obviously, the world made do without oil for millennia (indeed, a graph of oil in the context of human history makes petroleum appear to be a very brief episode). But we’re incredibly dependent on it now, and not just for transportation and home heating.
Consider the fact that the average piece of food travels 1,500 miles before it reaches your plate. Geologist Dale Allen Pfeiffer has pointed out that it takes 10 calories of fossil fuel to produce one calorie of food eaten in the U.S. Pesticides are made from oil, and commercial fertilizers from natural gas. Farming machinery, increasingly complex in recent years, runs on oil and was built using it.
Building a desktop computer consumes 10 times it weight in fossil fuels. A single 32-megabyte DRAM chip requires 3.5 pounds of fossil fuels to make. The average car consumes 27 to 54 barrels of oil…not on the road, but in the factory.
Because our way of life is so intimately connected to cheap oil, critics like James Howard Kunstler, author of The Long Emergency, see a profound realignment of society ahead. “We are going to have to live a lot more locally and a lot more intensively on that local level,” Kunstler said in a 2005 speech in Hudson, New York. “Industrial agriculture, as represented by the Archer Daniels Midland/soda pop and Cheez Doodle model of doing things, will not survive the end of the cheap oil economy. The implication of this is enormous. Successful human ecologies in the near future will have to be supported by intensively farmed agricultural hinterlands. Places that can’t do this will fail….What goes for the scale of places will be equally true for the scale of social organization. All large-scale enterprises, including many types of corporations and governments will function very poorly in the post-cheap oil world.”
Kunstler may be understating the human ingenuity factor, and he quickly dismisses the potential for alternative energy, from wind power to solar and biofuels (see sidebar). It’s hard to imagine, as he does, big cities and suburbs emptying out because we simply won’t have access to cheap oil (and can’t keep the air conditioning running). But it’s far more likely a scenario than the cheerful Energy Information Administration charts showing ever-rising oil reserves in the Middle East, with production meeting demand simply because, well, it has to.
Jared Diamond discusses one of the critical stops on the road map to societal failure in his book Collapse: “It turns out that societies often fail even to attempt to solve a problem once it has been perceived.” What happens, he writes, it that “some people may reason correctly that they can advance their own interests by behavior harmful to other people…The perpetrators know they will often get away with their bad behavior, especially if there is no law against it or the law isn’t effectively enforced. They feel safe because the perpetrators are typically concentrated (few in number) and highly motivated by the prospect of reaping big, certain and immediate profits, while the losses are spread over large numbers of individuals.”
Diamond isn’t specifically talking about oil companies and their mega-profits, but his scenario offers a precise explanation for the West’s failure to act in the face of clear and present energy danger. With the oil companies and their supporters in Congress and the White House not only controlling the debate but assuring the public that a steady hand is at the tiller, we may very well drift toward the kind of abrupt collapse Diamond documents as having taken down the Vikings, the Mayans and the mysterious tribe that inhabited Easter Island. Instead of cryptic stone statues, we may leave behind rusting oil derricks and highways that lead nowhere. Research assistance by Mike LaTronica, Jayasudha Joseph and Daniel Scollan.
JIM MOTAVALLI is editor of E.