[Paleopsych] WP: It's Not the End Of the Oil Age

Premise Checker checker at panix.com
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
    Pulitzer Prize.

More information about the paleopsych mailing list