Is the age of oil coming to an end?
With crude at US$50 a barrel and producers operating near maximum output, fears are widespread that the world is on the cusp of a major oil shock. In a four-part series beginning today, the National Post looks at what lies ahead for a world increasingly dependent on an increasingly scarce resource.
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In the billions of years since its creation, our planet has produced about two trillion barrels of commercially extractable oil. In the space of little more than a century, humans have burned almost half of that. And we will likely make far quicker work of the rest. Oil consumption was once monopolized by a small set of wealthy Western nations. No longer: In Asia, in particular, hundreds of millions of upwardly mobile citizens crave the same gas-guzzling conveyances the West has taken for granted since the First World War.
Thanks to corporate upheaval in Russia, tribal warfare in Nigeria, Iraq's insurgency and the threat of a terror attack against Saudi oil terminals, it is not hard to imagine a new crisis pushing the price of oil into three figures. But though such a spike could set the world's economy reeling, the effect would likely be short-lived. Wars, uprising and political squabbles eventually end. And the first order of business for whichever government they leave standing is usually to get the pumps up and running. The far more intractable problem will arise when those pumps start going dry and there aren't enough new ones to replace them.
If one simply divides total known reserves by annual global consumption, there would theoretically be enough oil to supply projected demand for at least 40 years, perhaps much longer. But because of the mechanics of oil extraction, the world does not have to consume its last drop before a supply crisis hits. Even undepleted oil fields degrade over time. As a result, production tends to follow a bell-shaped pattern, rising quickly after initial discoveries, plateauing, then declining.
When this model is applied using the most conservative estimates of global oil reserves, it predicts the world will hit its peak production rate -- often described as the "Hubbert peak," after the Shell Oil geophysicist who first conceived it in the 1950s -- within this decade.
Of course, experts have predicted the end of the oil age before -- most notably after the oil shocks of the 1970s. And cynics are quick to note the volume of proved oil reserves has increased in the last three decades, thanks to new exploration and advanced recovery methods. But in the absence of a major new oil find, such advances can only go so far.
Published estimates of "ultimate recovery" -- the total quantity of oil available, including what we have already used up -- have actually been fairly consistent since the 1950s, hovering around two trillion barrels. (A notable exception is the 2000 U.S. Geological Survey (USGS), which puts the number at closer to three trillion.)
Moreover, the global rate of virgin oil discovery has been in decline for decades, suggesting the world has run out of Kuwaits and Saudi Arabias.
"People are scrambling to find new oil, but they are finding less and less of it, and in smaller and smaller quantities," says David Goodstein, a professor at the California Institute of Technology and author of Out of Gas: The End of the Age of Oil. "It is true that people have been predicting the end of oil since the 19th century. It's the story of the little boy who cried wolf. But what they forget is that, at the end of that story, the wolf shows up."
The actual timing of the approaching Hubbert peak is a matter of dispute. Prof. Goodstein believes it may come in the next five years based on the assumption of a two-trillion barrel world. At the other extreme, the Washington-based Energy Information Administration (EIA), a research arm of the U.S. Department of Energy, has concluded, on the basis of the USGS' three-billion barrel estimate, that the peak won't arrive until 2037.
But even if oil supply does rise for several more decades, it is uncertain whether its ascent can match the steep demand from Asia's boom nations, which are in the midst of a wholesale shift to oil-based economies.
In China, refineries are now processing 17% more oil than at this time last year. The Chinese passenger car market grew by a factor of 10 during the 1990s, and within a quarter-century, it is expected China will have more cars than the United States.
In India, diesel fuel use is increasing at an annual rate of 10%. Since British colonial times, the country has relied primarily on its rail network, the world's biggest. But as Indians move into the middle class in coming decades, they will do what middle-class people inevitably do: upgrade to the comfort and convenience of a privately owned automobile.
As a result of this, as well as the continued expansion of Western economies, total global consumption is expected to skyrocket in coming years -- from 82-million barrels a day now, to about 121-million b/d in 2025, says the EIA.
To put this 39-million barrel increase in context, it would exceed the entire current output of all members of the Organization of Petroleum Exporting Countries. Given that just about every supplier in the world is already pumping as much as it can, it is unclear where all that oil will come from.
"If you look at proved reserves, the new production has got to come from the Middle East and OPEC," says Linda Doman, co-ordinator of the IEA's authoritative International Energy Outlook 2004 report. Like many who are bullish on oil, she emphasizes the fact that some Arab nations have been closed to Western researchers for decades, and so might still yield hidden reserves.
"There is definitely a school of thought that says Saudi Arabia hasn't had a major discovery in a couple of years -- and so it won't be able to increase its production. And I've heard that about Iraq, too. But we would say if you let foreign direct investment in, we think the USGS would discover as much oil as needed to meet demand.
"We also have a lot coming in from deep-water sources off West Africa, the Caspian Sea, Venezuela and Russia. And there is a little coming in from other sources, like shale oil and tar sands."
Recent disclosures cast doubt on this sunny analysis. IEA projections assume the Saudis will be able to more than double their current capacity of 10-million b/d by 2020. But a recent investigation by The New York Times suggests many of the country's major oil fields have become more seriously degraded than previously believed. According to internal documents from Saudi Aramco, the state-run oil company, Saudi Arabia may not be able to generate any increase at all in coming years, let alone 10 million b/d.
It is also questionable whether the Saudis possess the reserves they claim. Reserve figures published by Western oil companies are typically subject to audit. But figures for Saudi Aramco, like other state-run oil companies, are closely guarded. Some experts have stated publicly they believe the numbers are cooked.
As for Iraq, much has been made of the opportunities that await Western oil companies in the aftermath of sanctions and Saddam Hussein. But even with tens of billions of dollars in new infrastructure, its production will likely never be raised much beyond six million b/d, a mere three-million b/d increase compared to current levels.
"I don't know how they are going to get to 120-million barrels," says Prof. Goodstein. "Look at the current situation. The Saudis claim they're going to increase production by a million barrels per day. That's supposed to be our relief. We're talking about 40 times that. Yes, there is the Caspian Basin. But it contains only about 3% of the world's existing oil. That's trivial. Extra production is going to have to come from the Middle East. Nowhere else really matters."
As oil reserves dry up, price increases will make the development of non-conventional oil sources such as Canada's tar sands and Venezuela's heavy oils more economically attractive. But it is questionable how much of these resources can be transformed into useful petroleum products. Our tar sands, for instance, are not composed of liquid oil, but of solid deposits that must be mined. Two tons are required to extract a single barrel of fuel. And like coal, it cannot be distilled directly into gasoline, thanks to its high carbon content. It must first be hydrogenated with natural gas, a product that itself is expected to become increasingly expensive and rare in coming decades.
Even in the worst case, no one expects an acute oil shortage to develop overnight. A more likely scenario is that a sustained economic boom in Asia and North America will continue to produce a steady rise in global demand -- on the order of two million to four million b/d. Initially, the excess demand will be met as Gulf states max out their existing capacity and new discoveries are rushed into production. But eventually, that will not be enough. And then the global price will increase steeply as nations bid up the available product.
What will this mean for Canada?
As a net exporter, we will profit overall in the medium term: The United States, the world's leading oil addict at 20-million b/d, will likely want to buy every drop we produce, no matter what the price. And since Canada has access to a wide variety of energy sources, it will be able to phase out residential and industrial oil applications with coal, natural gas, nuclear and renewable energy sources. But unfortunately, despite decades of false hopes, there is still no reliable replacement for the internal combustion engine. And so, as Hubbert's peak approaches, it is the long-distance commuter, the SUV owner and the independent truck driver who will pay the heaviest price.
Given all this, why aren't we more worried? When Arab countries responded to the 1973 Arab-Israeli war with an oil embargo and prices quadrupled, the West was thrown into panic and economic spasm. But although the West has seen an almost comparable (albeit more gradual) price rise since the late 1990s, the effect has been far more muted. Most Western economies are still experiencing healthy growth. And high pump prices have done little to discourage the purchase of big cars and suburban sprawl.
One reason for the difference may be we are simply a lot richer than we were 30 years ago. In the 1970s, the value of oil consumed by North Americans rose to more than 8% of gross domestic product. In recent years, the figure has been closer to 3.5%. The price of oil affects our lives much less than it did then.
In the 1970s, on the other hand, most of the world was still relying on wood and coal, and billions of people in the developing world had never driven -- let alone aspired to own -- a car. One can only hope they enjoy the motoring life while they can, for they may well be joining the oil age at its twilight.