Oil: The illusion of plenty
One hundred and twelve
billion of anything sounds like a limitless quantity. But
in terms of barrels of oil, it's just a drop in the gas
tank. The world uses about 27 billion barrels of oil per
year, meaning that 112 billion barrels--the proven oil
reserves of Iraq, the second largest proven oil reserves
in the world--would last a little more than four years at
today's usage rates.
In the future, 112 billion barrels will likely prove even
shorter-lived. In the United States, gas-guzzling sport
utility vehicles and larger homes are deemed essential.
As the underdeveloped world industrializes, demand for
oil by billions of people increases; China and India are
building superhighways and automobile factories. Energy
demand is expected to rise by about 50 percent over the
next 20 years, with about 40 percent of that demand to be
supplied by petroleum.
Ever-increasing supplies of low-cost petroleum are
thought to be vital to the U.S. and world economies,
which is why the invasion of Iraq and the belief that
controlling its 112-billion-barrel reserve would give the
United States a limitless pipeline to cheap oil were so
dangerous. The war in Iraq will definitely have an effect
on the U.S. and world economies, but not a positive one.
The invasion, occupation, and rebuilding of Iraq will
cost the people of the United States both blood and
treasure. But more to the point, Iraq could be a fatal
distraction from many fundamental and extremely
unpleasant facts that actually threaten the United States--one
of which is the finite nature of petroleum resources.
Petroleum reserves are limited. Petroleum is not a
renewable resource and production cannot continue to
increase indefinitely. A day of reckoning will come
sometime in the future. The point at which production can
no longer keep up with increasing demand will mean a
radical and painful readjustment globally to everyday
In spite of that indisputable fact, people behave as if
the global petroleum supply is unending. Predictions of
the exhaustion of oil reserves seem to have lost all
credibility. The public assumes that inexpensive oil will
be available essentially forever. The idea that petroleum
resources are finite and that petroleum production might
peak in the near future seems to have vanished from all
discussions of energy policy in Congress, in the press,
and even among public interest groups.
This surreal situation is due to several factors. One,
certainly, is that pessimists have cried wolf too often.
Forecasts of imminent shortages of oil, food, and other
natural resources are confounded by the enormous display
of material goods that envelops consumers in the West.
For most people, the market price of any commodity is
what signals shortage or plenty. Time and again,
collapsing oil prices have succeeded rising oil prices,
leading to the belief that oil will always become cheap
again. That oil supplies are currently abundant and
inexpensive and have been for nearly 20 years, and that
the models used to predict peak oil production are not
easy to understand, appear to ignore economic factors,
and are based on proprietary data, explain to some degree
the present feeling of permanent abundance.
In reality, the differential between petroleum production
cost and market price is so large that market price
cannot be used as a measure of resource depletion. For
example, the variation in the average price of oil
between 1998 ($10 per barrel) and 2000 ($24 per barrel)
had nothing to do with depletion of reserves and
everything to do with an attempt to exercise "market
discipline" by the Organization of Petroleum
Exporting Countries (OPEC).
But the most important reason there seems to be an
unending supply of oil is the activity of non-OPEC
producers. Oil production is immensely lucrative. Large
amounts of petroleum have been and will continue to be
produced outside the Middle East at costs that are very
low, $5-$10 per barrel, compared to the desired OPEC
price range of $22-$28 per barrel. The opportunity to
realize extraordinary profits provides irresistible
pressure to produce as much oil as possible, as soon as
Yet oil is a finite resource, and there are only so many
places to look for it. Sooner or later petroleum
production will decline, so sooner or later the prophets
of depletion will be correct. The question then becomes:
Can a peak oil forecast be made that is useful to the
petroleum industry and to consumers, one that will alert
them to the problems and allow for a redeployment of
Answering that question requires an understanding of why
the world's rising petroleum needs are being met without
skyrocketing prices or supply shortages.
Everyone knows that the science and technology
underpinning computers, telecommunications, and medicine
have advanced dramatically over the last 20 years. The
proof is everywhere, from ever more powerful personal
computers, to increasingly sophisticated cell phones, to
new medical imaging technologies and pharmaceuticals.
Unknown to most people, however, advances in geological
sciences and petroleum technologies have been equally
profound and dramatic. Since the 1970s, plate tectonics
has been providing a uniform framework for understanding
the geology of the Earth's surface (including petroleum
formation). Much as X-ray and nuclear magnetic resonance
tomography examine structures within the human body non-invasively,
three-dimensional seismography now allows potential oil-bearing
formations to be evaluated in great detail. Nuclear
magnetic resonance probes are used to determine porosity
and hydrocarbon content as well as to estimate the
permeability of these formations. Petroleum deposits are
being brought into production on the continental shelves
off Texas, Brazil, and West Africa in water up to 8,000
feet deep--areas that were, until recently, inaccessible.
Technological advances like sub-sea terminals,
directional drilling, and floating production, storage,
and offloading ships have been developed to exploit
smaller, previously uneconomic or unreachable deposits.
Sophisticated science and technology coupled with
unparalleled profitability has provided the foundation
for the wide availability of oil.
Yet the same advances in geology and engineering that
have provided consumers with seemingly limitless
petroleum also allow much better estimates to be made of
how much oil may ultimately be recovered. After a five-year
collaboration with representatives from the petroleum
industry and other U.S. government agencies, the U.S.
Geological Survey (USGS) completed a comprehensive study
of oil resources. The "USGS World Petroleum
Assessment 2000" is the first study to use modern
science to estimate ultimate oil resources. 
The importance of this assessment is difficult to
overstate. Previous world oil resource evaluations have
ranged from crude "back-of-the-envelope"
calculations to estimates based on proprietary databases,
and have often lacked enough detail to allow a comparison
between production and estimated reserves. We now have
credible, easily accessible long-term production records
and science-based resource estimates for all of the
important oil producing regions in the world--crucial for
understanding how oil production might evolve over time.
The USGS assessment allocates reserves to three separate
and distinct categories. The first is "proven
reserves," or petroleum that can be produced using
current technology. The second category is "undiscovered
reserves"--oil deposits that are highly likely to
exist based on similar areas already producing oil. The
third category is "reserve growth" and
represents possible production from extensions of
existing fields, application of new technology, and
decreased well spacing in existing fields. Oil in this
last category can be extracted much less rapidly than oil
in the proven and undiscovered categories. (For purposes
of determining the approximate year of peak or constant
output, the best that can be hoped for is that all proven
reserves are produced and all undiscovered reserves are
found and produced as rapidly as needed. Petroleum from
reserve growth, produced at much lower rates, can be
ignored. According to the USGS, it is available only to
lengthen the period of peak production or to reduce the
decline in a field's output.)
As of January 1, 1996, OPEC's proven and undiscovered
reserves amounted to about 853 billion barrels, while
similar non-OPEC reserves were 769 billion barrels,
according to the USGS assessment. Based on actual
production patterns in many non-OPEC oil producers,
output can increase until there remains between 10 and 20
years of proven plus undiscovered reserves (as determined
by the USGS), at which point a production plateau or
decline sets in, depending on the reserve growth that is
Given that non-OPEC production rates are nearly twice as
great as OPEC rates, and assuming stable prices and 2
percent per year market growth, non-OPEC production will
reach a maximum sometime between 2010 and 2018 based on
resource limitations alone (assuming complete cooperation
of producers and that all undiscovered oil is actually
found and produced as rapidly as needed).  Once this
happens, OPEC will control the market completely, and it
is unlikely that production will increase much longer.
Yet this simplistic analysis is too optimistic. There is
no such thing as "non-OPEC oil," but rather U.S.
oil, Norwegian oil, and oil produced by various other
countries. In particular, about 39 percent of non-OPEC
proven plus undiscovered reserves are located in the
former Soviet Union. It is only a matter of time before
these countries reach an agreement with OPEC on how to
divide the oil market, at which point the current
illusion of unlimited oil resources will end, not due to
resource constraints but to political factors.
Yet the U.S. public, industrial and political leaders,
environmentalists, and policy-makers in general do not
believe that they need to be concerned with the finite
supply of oil and its unfavorable (from the U.S.
perspective) geographic distribution. As noted earlier,
the overwhelming majority behaves as if inexpensive oil
will be readily available far into the distant future.
This attitude is reflected in U.S. policy toward Iraq.
One might expect that a major consequence of the U.S.
conquest of Iraq would have been full control of Iraqi
oil reserves, reducing or eliminating the ability of OPEC
to set prices, and giving the United States a permanent--because
oil is forever--overwhelming strategic advantage. It
would allow the United States to dictate production rates
and lower prices, which would serve two important aims.
Reduced prices would reward consumers in the West, buying
their support for U.S. policies. It would also deprive
oil producers of the revenues with which they could
challenge the U.S. domination of the Middle East. Oil
prices could be expected to drop to between $15 and $20
per barrel once existing Iraqi fields were refurbished
and large new deposits were developed.
However, lower prices would stimulate consumption and
decrease the incentive to develop more inaccessible
reserves, essentially those of the non-OPEC producers. If
non-OPEC producers fail to develop those harder-to-get-at
reserves, peak oil production will more likely occur
earlier, at the front end of the 2010-2018 forecast. So
the very success of the current effort to seize control
of the Middle East would doom U.S. imperial ambition to
failure within the next 10 years, from an oil supply
This scenario is now implausible given the bitter Iraqi
resistance to U.S. occupation, and it is not clear when
Iraqi production might reach, much less significantly
exceed, its pre-invasion level.
To understand what may unfold, given current levels of
sabotage and chaos in Iraq, one must examine how the
petroleum marketing system has changed over the past
year, and in particular the role that OPEC producers have
In 2002, Iraqi oil production averaged two million
barrels per day. The United States must have understood
that an attack might interrupt production, which would in
turn cause a large increase in the price of oil. Since
this would have a severe negative impact on the world
economy, it would further inflame anti-American sentiment
throughout the world and even turn U.S. voters against
the enterprise. The conclusion: Lost Iraqi production had
to be replaced. Thus, an agreement was reached with OPEC
to stabilize the markets by increasing production levels
In March 2003, the Saudi oil minister reassured the
International Energy Agency of Saudi Arabia's
longstanding policy and practice of supplying the oil
markets reliably and promptly, and highlighted the
collective responsibility that producing countries have
shown in addressing the concerns of world oil markets.
This was most likely viewed as a temporary measure, as it
was assumed that Iraqi production would be restored and
expanded rapidly after the United States took charge.
In addition to the impending interruption of Iraqi
production, in early 2003 Venezuelan oil production was
far below its OPEC quota due to a conflict between
populist president Hugo Chavez and the business
community; Nigerian production was also depressed by
OPEC rose to the occasion (or, more likely, felt
compelled to rise to the occasion, given the huge U.S.
military presence in the Persian Gulf in preparation for
war) and increased production by about 3.2 million
barrels per day--equivalent to the production of the
Norwegian North Sea sector--virtually overnight, more
than compensating for lost Iraqi, Venezuelan, and
About 65 percent of the increase came from just two
countries, Saudi Arabia and Kuwait; Saudi Arabia alone
contributed more than half and probably controls what
remains of any spare production capacity.
The critical role that OPEC, in particular Saudi Arabia,
plays as the swing producer for the world oil market is
clearly evident from this episode, which allows one to
quantify the ability of the Saudis to affect the world
oil market and the world economy.
The U.S. assault on Iraq has not undermined the power of
OPEC and Saudi Arabia. On the contrary, it has if
anything enhanced that power. This will not change until
Iraqi oil production significantly exceeds its pre-invasion
level. Thus, even in the short term, and on the most
cynical level, U.S. Iraq policy vis-a-vis oil has been a
Oil supplies are finite and will soon be controlled by a
handful of nations; the invasion of Iraq and control of
its supplies will do little to change that. One can only
hope that an informed electorate and its principled
representatives will realize that the facts do matter,
and that nature--not military might--will soon dictate
the ultimate availability of petroleum.
1. T. Ahlbrandt (project leader), "The USGS World
Petroleum Assessment 2000." The assessment is
available at www.usgs.gov and on compact disc. A detailed
analysis using the assessment appears in Alfred Cavallo,
"Predicting the Peak in World Oil Production,"
Natural Resources Research, 2002, vol. 11, pp. 187-195.
Production statistics, based on data from the
International Energy Agency, are available in a variety
of trade publications, including Oil and Gas Journal,
World Oil, and Petroleum Economist.
2. The most popular method used to predict a peak in oil
production is in M. King Hubbert's monograph, Energy
Resources: A Report to the Committee on Natural
Resources, National Academy of Sciences-National Research
Council, Publication 1000-D, December 1962. Hubbert noted
that resource production often (but not always) could be
described by a logistic growth curve, and used oil
production records and estimates of proven oil reserves
made by the American Petroleum Institute's Committee on
Petroleum Reserves to estimate the year of U.S. peak
production. Hubbert does not discuss the assumptions
implicit in his model, among which are stable markets,
excellent profitability, and affordable prices for oil.
See also Colin Campbell and J. H. Laherrere, "The
End of Cheap Oil," Scientific American, March 1998,
pp. 78-83. The Oil and Gas Journal has also recently
published a series of articles discussing the future of
petroleum and its alternatives. See Bob Williams, "Special
Report: Debate Over Peak Oil Issue Boiling Over, With
Major Implications For Industry, Society," Oil and
Gas Journal, July 14, 2003.
Zdroj: Alfred Cavallo, Bulletin of the Atomic
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