April 10, 2004
NOT WHEN BUT WHOM:
Imagining a $7-a-Gallon Future (DANIEL YERGIN, 4/04/04, NY Times)
Adherents of the "peak oil" theory warn of a permanent oil shortage. In the next five or 10 years, they maintain, the world's capacity to produce oil will reach its geological limit and fall behind growing demand. They trace their arguments back to the geophysicist M. King Hubbert, who in 1956 accurately predicted that American oil production would reach its apex around 1970. In a recent book, "Hubbert's Peak," Kenneth S. Defeyes, an emeritus professor of geology at Princeton, wrote that "Global oil production will probably reach a peak sometime during this decade." Current prices, he adds, "may be the preamble to a major crisis."In "Out of Gas," David Goodstein, a professor at the California Institute of Technology, also argues that world oil output will peak "most probably within this decade" and thereafter "will decline forever."
For Americans rattled by current prices, this theory holds out the unsettling prospect of gasoline prices at $5, $6, $7 a gallon and higher still. In the face of such a grim prospect, $1.76 - last week's national average - fades in importance.
Of course, today's average price doesn't approach the one reached in 1981, around $2.80, adjusted for inflation, and prices in Europe are typically far higher than that.
Still, are the peakists right?
Yes, oil is a finite resource, and fear of running out has always haunted the petroleum industry. In the 1880's, John Archbold, who would succeed John D. Rockefeller as head of the Standard Oil Trust, began to sell his shares in the company because engineers told him that America's days as an oil producer were numbered.
After World War I, the American government's top oil expert predicted a coming "gasoline famine." One solution was to cobble together the three easternmost provinces of the defunct Ottoman Empire into a new country, called Iraq, believed to be rich in oil resources and safely under British control.
After World War II, fears of shortages spiked again, and the industry invented offshore drilling. (Today, 30 percent of America's crude oil comes from the Gulf of Mexico.) Reserves in Saudi Arabia and Kuwait, discovered just before World War II, were rapidly developed.
The oil crises of the 1970's - the 1973 Arab oil embargo and the 1979-80 Iranian revolution - were also seen as the harbingers of the "end of oil." In 1972, an international research group called the Club of Rome predicted the world would soon run short of natural resources. Spiraling oil prices in the following years - from $3 a barrel to $34 a barrel - seemed like a confirmation.
Of course, that's not what happened. Supply steeply increased from new non-OPEC sources like Alaska and the North Sea; coal and nuclear power plants pushed oil out of electricity generation, and conservation reduced demand. By the mid-1980's, oil, supposedly headed for $100 a barrel, instead fell to as low as $6.
Historically, then, dire oil predictions have been undone by two factors. One is the opening (or reopening) of territories to exploration by companies faced with a constant demand to replace declining reserves. The second is the tremendous impact of new technology.
The important issue isn't running out--which won't happen--but who we end up depending on to supply our oil. It's interesting that many of those who insist that we are now engaged in a twilight struggle with all of Islam show no concern that the Muslim world supplies so much of our energy. Posted by Orrin Judd at April 10, 2004 9:40 AM
Those Hubbert Peak folks really form an odd little cult. Quite a few of us in the industry think of them as the Larouchies of oil and gas. Yergin, on the other hand, is a heavyweight. Nice to see him throw that weight around from time to time.
Posted by: kevin whited at April 10, 2004 10:42 AMIt doesn't matter upon whose oil we depend. Whoever it is will be depending on us for a market.
Posted by: jsmith at April 10, 2004 11:14 AMUnless the Chinese, Indians, Indonesians & Africans learn to drive...
Posted by: oj at April 10, 2004 11:21 AMYeah, but we've got the cash and the SUVs and the V-8s. And little desire to change.
Posted by: jsmith at April 10, 2004 12:35 PMMost of the people complaining about low US domestic production are economic illiterates, or counting on the their listeners to be recent public school graduates.
There's also the phenomena where the some reserves are not accessable until the price is high enough. This has the effect of creating new oil at $40 a barrel that would never be touched at $10.
I know this personally. Once worked for a small software company which by accident was making the only automated notification system that could meet federal EPA regulations for new production fields. (The alternative was hiring some guy to sit at a console watching nothing happen all night.) We were about to sign a contract with Mobil Oil for their Kern County fields with an eye to using that money to expanding our four man company and making deals with other producers when they just shut down all US production. The prices got high enough because of Saddam's attempt at adding a nineteeth province, and after he'd been dealt with, they dropped back down to an uneconomic level. Made better business decision to leave that oil in the ground for later and go back to shipping it in from elsewhere. Got me laid off.
Posted by: Raoul Ortega at April 10, 2004 12:44 PMj:
Which is where government is required to engage in social engineering. Raise gas taxes and you change behaviors
Posted by: oj at April 10, 2004 12:47 PMDeep breaths everyone.
As the price rises, less economical fields can be profitably pumped. This increases supply and puts downward pressure on prices.
Also say repeat "Canadian Oil Sands" over and over when you feel nervous:
http://www.geotimes.org/mar03/NN_canada.html
From that website:
"Estimates of Canada’s oil reserves jumped from 4.9 billion barrels to 180 billion this year, making the country the second-largest oil reserve in the world, according to an annual survey conducted by the Oil and Gas Journal. The change catapults Canada ahead of Iraq in terms of reserve size, and decreases OPEC’s share of the world’s oil reserves by more than 10 percent."
Posted by: AML at April 10, 2004 1:08 PMMy point is it doesn't matter where the oil comes from--anyone who has it will want to sell it, and they will always find a ready market here. Partly because we've not demonstrated any particular preference for conservation, despite a variety of government mandates and government incentives, and partly because we've got the most dynamic, robust, growing economy in the world--an economy that is thirsty for oil.
Sure government policies can alter the market. And obviously as easily recovered supplies dry up and prices rise the market will change. But it's awfully hard to see the Sauds, in particular, and anyone else in the Middle East (or anywhere else) these days denying oil to the highest bidder.
Which we most surely will remain, regardless of the Chinese, Indians or anyone else.
Besides, if there is a successful global suppliers boycott of the US, we'll just go nuclear. Power, that is...
Posted by: jsmith at April 10, 2004 1:16 PMPeople forget that the original Valdez oil pipeline in Alaska seemed as bottled up in Congress as the current ANW oil proposal is -- until the OPEC oil embargo suddenly doubled the price of gasoline in the United States. Then all the objections being floated by the environmenalists supporters in the House and Senate were swamped in a tidal wave of public demand for any options to keep prices down.
Once prices rise high enough in the future to spark the same public outcries, the same thing will happen and areas currently off-limits to exploration due to political pressure will become open, since outside of the hard-liners in safe congressional seats, all the others in Congress will deem keeping their jobs more important than keeping a few sections of the tundra free from Halliburton's evil influence.
Posted by: John at April 10, 2004 2:45 PMAnd oil has been struck in Tennessee:
http://tennessean.com/business/archives/04/04/49542537.shtml?Element_ID=49542537
There is apparently so much crude trying to bubble out of that well that the drillers haven't even been able to remove their bit for the past three weeks. Production currently runs at about 500 barrels/day, and there are plans to drill 20 or so more wells in the vicinty. According to the story, the oil in Pickett County is relatively close to the ground so it won't be too expensive to get out.
Posted by: Joe at April 10, 2004 8:59 PMJoe,
I can't resist...
The land wouldn't be owned by a family named "Clampett" would it? : )
Posted by: Bartman at April 10, 2004 9:41 PMI think it is Kentucky, but perhaps some of Harry's relatives live there.
Posted by: jim hamlen at April 10, 2004 11:12 PM"Which is where government is required to engage in social engineering. Raise gas taxes and you change behaviors"
OJ, how is it that you are simultaneously against secularism because it leads to dependence on the state (in your view) and for reliance on state social engineering to control economic behavior? Do your personalities switch at random or do you exercise some control over it?
As the article states, the "experts" were worrying about the demise of oil as far back as 1880. And as others are pointing out on this thread, there are multiple sources of energy, both petroleum based and non-petroleum based, that are ready to kick in at the right price. The market is smarter than any central planner can ever be, let it work.
Robert:
Every state action is social engineering. The state is a tool, but a dangerous one. I oppose making the State an end in itself, not using the state to achieve certain ends.
Of course we'll never run out of oil, that's why we need to intervene artificially if we're going to reduce dependence on it quickly.
Posted by: oj at April 11, 2004 8:34 AMNew oil at $40 a barrel does not have the same effect when it's at 10 a barrel. Higher prices will inevitably lead to a transition where new energy sources are used, but such transitions are not economically painless. It will be very wrenching and probably catatrosphic for some families. People who are blithe about those costs probably aren't the ones who will be so affected.
If prices get high enough to make Canadian oil sand cost effective, it will only increase supply from that low level, not the supply as it is today.
Sensible and prudent actions should be taken now to ameliorate the negative effects of such high prices. Not the least of which is OJ's concern on national security. As East Asia (and others like India) continue to develop, they'll eat up more oil than is being brought into production. Whether or not we hit a worldwide Hubbert Peak's will be seen in the next 5 years. Even if that happens, we'll still have plenty of oil so this isn't doomsaying, but it does mean we better look at the options.
Posted by: Chris Durnell at April 12, 2004 1:30 PMI do have a relative in Kentucky, a daughter.
We are relatively less dependent on oil under Muslims than we were in the 1970s and will become less and less dependent as time goes by, because there's lots and lots of oil in places like Peru.
Right now, I'm paying $2.39/gal for self-serve regular. Approximately half the cars on the road here are SUVs, the bigger the better.
People gripe about gas prices, but they don't really care. I doubt $7 would make 'em care either.
Posted by: Harry Eagar at April 13, 2004 8:28 PMGreat! We could balance the budget on consumption taxes.
Posted by: oj at April 13, 2004 8:49 PM