[Paleopsych] WP: It's Not the End Of the Oil Age
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Mon Aug 1 16:59:11 UTC 2005
It's Not the End Of the Oil Age
Technology and Higher Prices Drive a Supply Buildup
By Daniel Yergin
Sunday, July 31, 2005; B07
We're not running out of oil. Not yet.
"Shortage" is certainly in the air -- and in the price. Right now the
oil market is tight, even tighter than it was on the eve of the 1973
oil crisis. In this high-risk market, "surprises" ranging from
political instability to hurricanes could send oil prices spiking
higher. Moreover, the specter of an energy shortage is not limited to
oil. Natural gas supplies are not keeping pace with growing demand.
Even supplies of coal, which generates about half of the country's
electricity, are constrained at a time when our electric power system
has been tested by an extraordinary heat wave.
But it is oil that gets most of the attention. Prices around $60 a
barrel, driven by high demand growth, are fueling the fear of imminent
shortage -- that the world is going to begin running out of oil in
five or 10 years. This shortage, it is argued, will be amplified by
the substantial and growing demand from two giants: China and India.
Yet this fear is not borne out by the fundamentals of supply. Our new,
field-by-field analysis of production capacity, led by my colleagues
Peter Jackson and Robert Esser, is quite at odds with the current view
and leads to a strikingly different conclusion: There will be a large,
unprecedented buildup of oil supply in the next few years. Between
2004 and 2010, capacity to produce oil (not actual production) could
grow by 16 million barrels a day -- from 85 million barrels per day to
101 million barrels a day -- a 20 percent increase. Such growth over
the next few years would relieve the current pressure on supply and
Where will this growth come from? It is pretty evenly divided between
non-OPEC and OPEC. The largest non-OPEC growth is projected for
Canada, Kazakhstan, Brazil, Azerbaijan, Angola and Russia. In the OPEC
countries, significant growth is expected to occur in Saudi Arabia,
Nigeria, Algeria and Libya, among others. Our estimate for growth in
Iraq is quite modest -- only 1 million barrels a day -- reflecting the
high degree of uncertainty there. In the forecast, the United States
remains almost level, with development in the deep-water areas of the
Gulf of Mexico compensating for declines elsewhere.
While questions can be raised about specific countries, this forecast
is not speculative. It is based on what is already unfolding. The oil
industry is governed by a "law of long lead times." Much of the new
capacity that will become available between now and 2010 is under
development. Many of the projects that embody this new capacity were
approved in the 2001-03 period, based on price expectations much lower
than current prices.
There are risks to any forecast. In this case, the risks are not the
"below ground" ones of geology or lack of resources. Rather, they are
"above ground" -- political instability, outright conflict, terrorism
or slowdowns in decision making on the part of governments in
oil-producing countries. Yet, even with the scaling back of the
forecast, it would still constitute a big increase in output.
This is not the first time that the world has "run out of oil." It's
more like the fifth. Cycles of shortage and surplus characterize the
entire history of the oil industry. A similar fear of shortage after
World War I was one of the main drivers for cobbling together the
three easternmost provinces of the defunct Ottoman Turkish Empire to
create Iraq. In more recent times, the "permanent oil shortage" of the
1970s gave way to the glut and price collapse of the 1980s.
But this time, it is said, is "different." A common pattern in the
shortage periods is to underestimate the impact of technology. And,
once again, technology is key. "Proven reserves" are not necessarily a
good guide to the future. The current Securities and Exchange
Commission disclosure rules, which define "reserves" for investors,
are based on 30-year-old technology and offer an incomplete picture of
future potential. As skills improve, output from many producing
regions will be much greater than anticipated. The share of
"unconventional oil" -- Canadian oil sands, ultra-deep-water
developments, "natural gas liquids" -- will rise from 10 percent of
total capacity in 1990 to 30 percent by 2010. The "unconventional"
will cease being frontier and will instead become "conventional." Over
the next few years, new facilities will be transforming what are
inaccessible natural gas reserves in different parts of the world into
a quality, diesel-like fuel.
The growing supply of energy should not lead us to underestimate the
longer-term challenge of providing energy for a growing world economy.
At this point, even with greater efficiency, it looks as though the
world could be using 50 percent more oil 25 years from now. That is a
very big challenge. But at least for the next several years, the
growing production capacity will take the air out of the fear of
imminent shortage. And that in turn will provide us the breathing
space to address the investment needs and the full panoply of
technologies and approaches -- from development to conservation --
that will be required to fuel a growing world economy, ensure energy
security and meet the needs of what is becoming the global middle
The writer is chairman of Cambridge Energy Research Associates. His
book "The Prize: the Epic Quest for Oil, Money and Power" received the
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