Too many cyclists can't resist this Chicken Little stuff.
Here's the quick version of the reply: if we're on the verge of knowable scarcity, why isn't the price of oil higher?
Some more detailed sources of information:
U.S. Department of Energy's Energy Outlook to 2025:
Will the oil run out?
Feb 8th 2001
From The Economist print edition
Eventually, yes; but by then it might no longer matter
A SHIMMERING pleasure palace rises up out of the sands outside Riyadh, the capital of Saudi Arabia. It is surrounded by manicured gardens and extensive grounds in which hundreds of exquisitely groomed camels disport themselves. In this overprivileged spot, the owner, a favourite prince of the ruling family, recently threw a sumptuous banquet for foreign dignitaries. The guest of honour was the custodian of the gooey gold that makes such opulence possible: Ali Naimi, Saudi Arabia’s minister of petroleum. Even Bill Richardson, then America’s energy minister, took the trouble to attend.
But how long will that black gold continue to ensure such prosperity? Mr Naimi has his answer ready. “I am not in the business of forecasting or dreaming,” he says with a wry smile, “but I am certain of one thing: hydrocarbons will remain the fuel of choice for the 21st century.”
That puts him at odds with the growing chorus of those (including the best-known of his predecessors, Sheikh Zaki Yamani) who say that oil’s grip on energy markets may soon start to weaken. The prospective scarcity of oil, the argument goes, combined with the instability of undemocratic Arab regimes, will cause a steep rise in hydrocarbons prices over the next two decades. The voracious demand for oil in the developing world will make things even worse. All this will speed the transition to cleaner alternatives.
Doomsters have been predicting dry wells since the 1970s, but so far the oil is still gushing. Vast sums have been spent and professional reputations staked on trying to guess what proportion of the total amount of conventional oil in the ground mankind has already consumed. The extreme pessimists among leading geologists, such as Colin Campbell and Jean Laherrère, argue that depletion is now close to the psychologically important half-way mark. The extreme optimists, such as the experts at America’s Geological Survey, argue that this turning point is still decades away. Most take up a position somewhere in-between. Shell’s Ged Davis expects the half-way mark to be reached some time between 2015 and 2030. The International Energy Agency (IEA), which represents the big energy-consuming nations, agrees that many oil fields outside the Middle East will soon mature, but does not expect a global supply crunch in the next 20 years.
In the past, pundits have rarely got their oil forecasts right. Nearly all the predictions made in the wake of the 1970s oil shocks for oil prices in 2000 were way off the mark. America’s Department of Energy, for example, thought that oil at the turn of the century would reach $250 a barrel (at 2000 prices). Planners at Exxon predicted a price of $100, which was still way out, but at least their forecast for oil demand in 2000 was spot on.
One of the best forecasting records is that of Morris Adelman, a professor at MIT. He has long insisted that oil is not only plentiful, but also that it is a “fungible, global commodity” that will find its way to markets regardless of politics, making nonsense of all the talk about energy security and independence. “Back in 1973, I predicted in The Economist that if the Arabs don’t sell us oil, somebody else will,” he recalls. One reason for his optimism has been the poor quality of information about reserves in most parts of the world. It turns out that there is much more oil hidden away under the earth’s surface than most people imagined back in the 1970s.
Even Exxon says it has learned one crucial lesson from earlier forecasting mistakes: it greatly underestimated the power of technology. Thanks to advances in exploration and production technology, the amount of oil available has increased enormously. Even hitherto uneconomic hydrocarbons such as tar sands are becoming more attractive. Shell’s Mr Moody-Stuart says that such “non-traditional oil will eventually behave like non-OPEC oil or marginal fields do today: if OPEC raises prices too much, these sources will help regulate the price.”
But can this pace of innovation continue? “You must be kidding: we’re just getting started,” says Euan Baird, the boss of Schlumberger, a giant oil-services firm. Mr Adelman, too, accepts that tomorrow’s oil-exploration technology is bound to be better than today’s. That is why he dismisses the idea of an oil crisis in the short to medium term. “Scarcity is still assumed even by reasonable men and middle-of-the-road forecasters, but that is wrong. For the next 25 to 50 years, the oil available to the market is for all intents and purposes infinite.”
Looking for a quiet life
But scarcity is not the only reason why the world might move away from oil. The unnerving volatility of oil prices, together with growing concern about the environmental impact of hydrocarbons, is already spurring the search for alternatives. In time, such investments might well produce innovations that will break oil’s near-monopoly on the global transport market. A quote now making the rounds in the energy business sums up the argument: “The stone age did not end because the world ran out of stones, and the oil age will end long before the world runs out of oil.”
The past few years have provided a useful reminder that price gyrations impose real pain on economies, at both extremes. When oil prices collapsed to around $10 a barrel in early 1999, many producer countries got into dire straits. When prices soared above $30 a barrel last year, consumer economies got squeezed in turn. The worst-hit were newly industrialised countries such as Thailand and South Korea which, unlike the OECD countries, have become far more reliant on oil over the past 20 years.
There have been political repercussions, too. Several West European economies nearly ground to a halt last September as lorry drivers, farmers and other heavy petrol users revolted against high prices at the pump. America’s politicians faced similar fury over heating oil last autumn, just before the elections, prompting the president to release some oil from the government’s Strategic Petroleum Reserve.
Yet volatile energy prices, however irksome, are clearly here to stay. The world had been lulled into a false sense of security by the decade-long period of low and stable prices following the collapse of oil prices in the mid-1980s (except for a brief spike surrounding the Gulf war). Taking a longer view, however, volatility and unpredictability in oil prices appear to be the norm, as they are for every other commodity. Indeed, they seem worse under the fractious and ill-disciplined OPEC oil cartel than they would be either in a free market or in a strong monopoly. What is more, changes in the oil business in the past few years have had the effect of increasing volatility. According to Michael Lynch of WEFA, an economic consultancy, the decade of stable oil prices that consumers enjoyed until recently was due chiefly to a prolonged glut in production capacity. But that came to an end as demand soared and investment by OPEC producers failed to keep pace. Today only Saudi Arabia has significant spare capacity. And there has been a lot of cost-cutting in the industry recently that has left the oil market with smaller stocks and therefore much more exposed to price spikes. If the world’s thirst for oil is to be met, CERA reckons that oil supply must increase by a quarter over the next ten years, to at least 100m barrels per day. But it calculates that world production capacity today is 6m barrels per day lower than it would have been had there been no price collapse two years ago.
Mr West, the consultant, worries about bottlenecks in the refining and pipelines system. He points out that in America no one has built a new refinery in 20 years, despite strong growth in demand. This is because a combination of low margins, red tape, ever tougher environmental regulations and the NIMBY (not in my back yard) syndrome have conspired to make this part of the oil business thoroughly unattractive.
The green imperative
Asked about their biggest worry for the future, however, most industry bosses will say greenery. At the global level, their main headache is climate change. The clearest sign of change is the progress, albeit in fits and starts, of the Kyoto Protocol, a pact among industrial countries to cut emissions of greenhouse gases. For years the industry tried to ridicule the sandals-and-beards brigade and dismiss any scientific evidence suggesting that burning fossil fuels might contribute to global warming. Now it has softened its stance.
A summit last November to discuss the Kyoto treaty ended in failure, but many energy firms now accept that national restraints on carbon emissions are likely to be introduced in the medium term. Indeed, a growing band of companies, led by BP and Shell, are already preparing for the day when the price of carbon emissions is no longer zero. Mr Moody-Stuart thinks the Kyoto pact is crucial because it forces businesses to “put their best and sharpest minds on the task” of reducing carbon emissions. Other firms, notably Exxon, publicly scoff about global warming, but are quietly investing huge sums in carbon-related technology.
If oilmen are getting headaches over global warming, they are suffering migraines over local air pollution. Concerns about the environmental harm, and especially the effect on human health, of burning fossil fuels have risen to the top of the agenda in many countries. The rich world is imposing ever stricter emissions standards on refineries and power-generation plants, as well as tightening the requirements to reduce pollutants in petrol. And poorer countries too, as they gradually become better off, are putting pressure on energy companies to clean up. “Concern over the environment will not be linear, but it will be an extremely significant and irreversible force over the longer term, especially in developing countries,” says BP’s John Browne. Like its rival Shell, BP has made a big shift towards natural gas, and placed hedging bets on renewable energy and hydrogen fuel cells as well.
Drowning in oil—and loving it
So are the doomsayers right in predicting oil’s demise, even if they are wrong about the causes? Perhaps, but it might be a long wait. As the old lags of the energy business like to say, “The best substitute for gasoline is gasoline,” and it seems pretty plain that oil will be dislodged only by something that is equally cheap, easy to use and efficient—and less polluting. Even if such a thing can be found, oil could be around for decades yet, so great are the sunk investments in infrastructure, so strong the power of incumbency, so impressive the advances in fossil-fuel technology—and, quite possibly, so vast the remaining deposits.
If still in doubt, visit Al-Shaybah. Flying over the inhospitable expanses of Saudi Arabia’s Empty Quarter, you will see nothing but a desolate stretch of desert, larger than France; yet tucked away under the striking red sand dunes is one of the world’s largest oil fields. Aramco, the government oil company controlled by Mr Naimi, had to invest a total of $2.5 billion to bring the Shaybah field on stream, but since it opened in 1999, its vast output of over 600,000 barrels a day has already repaid that investment. For the next 100 years, everything it produces will be undiluted profit. And as you stare down on Shaybah, consider that Saudi Arabia could develop another dozen fields of the same size without beginning to make a dent in its proven reserves. Oil may not be tomorrow’s fuel, but today could go on for an awfully long time.