How long will oil hold out?
By Matt Crenson
Associated Press
Could the petroleum joy ride — cheap, abundant oil that has sent the global economy whizzing along with the pedal to the metal and the AC blasting for decades — be coming to an end?
Some observers of the oil industry think so. They predict that this year, maybe next — almost certainly by the end of the decade — the world's oil production, having grown exuberantly for more than a century, will peak and begin to decline.
And then it really will be all downhill. The price of oil will increase drastically. Major oil-consuming countries will experience crippling inflation, unemployment and economic instability. Princeton University geologist Kenneth S. Deffeyes predicts "a permanent state of oil shortage."
According to these experts, it will take a decade or more before conservation measures and new technologies can bridge the gap between supply and demand, and even then the situation will be touch and go.
None of this will affect vacation plans this summer — Americans can expect another season of beach weekends and road trips to Graceland relatively unimpeded by the cost of getting there. Though gas prices are up, they are expected to remain below $2.50 a gallon. Accounting for inflation, that's pretty comparable to what motorists paid for most of the 20th century; it only feels expensive because gasoline was unusually cheap between 1986 and 2003.
And there are many who doubt the doomsday scenario will ever come true. Most oil industry analysts think production will continue growing for at least another 30 years. By then, substitute energy sources probably will be available to ease the transition into a post-oil age.
"This is just silly," said Michael Lynch, president of Strategic Energy and Economic Research in Winchester, Mass. "It's not like industrial civilization is going to come crashing down."
Where you stand on "peak oil," as parties to the debate call it, depends on which forces you consider dominant in controlling the oil markets. People who consider economic forces most important believe that prices are high right now mostly because of demand from China and other fast growing economies. But eventually, high prices should encourage consumers to use less and producers to pump more.
Watching for signs
But Deffeyes and many other geologists counter that when it comes to oil, Mother Nature trumps Adam Smith. The way they see it, Saudi Arabia, Russia, Norway and other major producers are already pumping as fast as they can. The only way to increase production capacity is to discover more oil. Yet with a few exceptions, there just isn't much left out there to be discovered.
"The economists all think that if you show up at the cashier's cage with enough currency, God will put more oil in (the) ground," Deffeyes said.
There will be warning signs before global oil production peaks, the bearers of bad news contend. Prices will rise dramatically and become increasingly volatile. With little or no excess production capacity, minor supply disruptions — political instability in Venezuela, hurricanes in the Gulf of Mexico or labor unrest in Nigeria, for example — will send the oil markets into a tizzy. So will periodic admissions by oil companies and petroleum-rich nations that they have been overestimating their reserves.
Oil producers will grow flush with cash. And because the price of oil ultimately affects the cost of just about everything else in the economy, inflation will climb.
Anybody who has been paying close attention to the news lately may feel a bit queasy at this stage. Could $5-a-gallon gas be right around the corner?
"The world has never seen anything like this before and so we just really don't know," said Robert L. Hirsch, an energy analyst at Science Applications International Corp., a Santa Monica, Calif., consulting firm.
Still, he added, "there's a number of really competent professionals that are very pessimistic."
The pessimism stems from a legendary episode in the history of petroleum geology. Back in 1956, a geologist named M. King Hubbert predicted that U.S. oil production would peak in 1970.
His superiors at Shell Oil were aghast. They tried to persuade Hubbert not to speak publicly about his work. His peers, used to decades of making impressive oil discoveries, were skeptical.
But Hubbert was right. U.S. oil production did peak in 1970, and it has declined steadily ever since. Even impressive discoveries such as Alaska's Prudhoe Bay, with 13 billion barrels in recoverable reserves, haven't been able to reverse that trend.
Hubbert started his analysis by gathering statistics on how much oil had been discovered and produced in the Lower 48 states between 1901 and 1956 (Alaska was still terra incognita to petroleum geologists 50 years ago). His data showed the country's oil reserves had increased rapidly from 1901 until the 1930s, then more slowly after that.
When Hubbert graphed that pattern it looked very much like America's oil supply was about to peak. Soon, it appeared, America's petroleum reserves would reach an all-time maximum. And then they would begin to shrink as the oil companies extracted crude from the ground faster than geologists could find it.
Is Peak almost here?
Critics claim that Hubbert simply got lucky.
"When it pretty much worked," Lynch said, "he decided, aha, it has to be a bell curve."
But many experts see no reason global oil production has to peak at all. It could plateau and then gradually fall as other forms of energy emerge.
"Even in 30 to 40 years there's still going to be huge amounts of oil in the Middle East," said Daniel Sperling, director of the Institute of Transportation Studies at the University of California-Davis.
The Energy Information Administration, a branch of the U.S. Department of Energy, puts 2026 as the date global oil production will most probably peak.
Some scientists say it could happen sooner. A few years ago, geologists began applying Hubbert's methods to the world's oil production. Their analyses indicated that global oil production would peak sometime during the first decade of the 21st century.
Deffeyes thinks the peak will be in late 2005 or early 2006. Houston investment banker Matthew Simmons puts it at 2007 to 2009. California Institute of Technology physicist David Goodstein, whose book "The End of Oil" was published last year, predicts it will arrive before 2010.
If oil supplies really do decline in the next few decades, America's energy survival will hinge on the past century's technology, not the next one's. Hirsch's report concludes that compensating for a long-term oil shortfall would require building a massive infrastructure to convert coal, natural gas and other fossil fuels into combustible liquids.
Proponents of coal liquefaction, which creates synthetic oil by heating coal in the presence of hydrogen gas, refer to the process as "clean coal" technology.
Energy analysts say coal liquefaction can produce synthetic oil at a cost of $32 a barrel, well below the $50 range where oil has been trading for the past year or so. But before they invest billions of dollars in coal liquefaction, investors want to be sure that oil prices will remain high.
Investors are similarly wary about tar sands and heavy oil deposits in Canada and Venezuela. Though they are too gooey to be pumped from the ground like conventional oil, engineers have developed ways of liquefying the deposits with injections of hot water and other means. Already, about 8 percent of Canada's oil production comes from tar sands.
Unfortunately, it costs energy to recover energy from tar sands. Most Canadian operations use natural gas to heat water for oil recovery; and like oil, natural gas has gotten dramatically more expensive in the past few years.
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