Are We Running
out of Oil?
The last year has seen a major
and sustained spike in the price of oil. A barrel
of crude, which sold for 30 dollars at the end of
the Iraq war two years ago, has been changing hands
for over 50 dollars, although just recently it has
eased off to about 45 dollars. This has caused significant
pain to the developed and developing countries alike,
and has led to renewed fears that we are “running
out” of oil.
As to whether this is true is a matter of debate,
but what is certainly true is that we are running
out oil production capacity. Almost all the unused
capacity has been taken up in the last two years,
primarily due to surging demand, especially in the
US and China. The markets have been very tight as
just about every well is currently producing. Only
the Saudis have some spare capacity left, but they
are reluctant to use up the only slack left in the
system.
For the oil producers this has been a windfall.
The Saudis, who are selling 10 million barrels every
day, will earn over 150 billion dollars in oil exports
if prices stay around 50 dollars per barrel. Western
oil companies are also recording stupendous profits.
But this boom is artificial, and fears of 80 dollars
per barrel oil are overblown. In fact, we are probably
near the peak in oil prices during this cycle. Expect
oil to finish the year around 40 dollars per barrel.
There are several forces at play that will push
prices down. First and foremost, the high current
prices are dampening demand growth. China will not
need anywhere the growth in imports its economy
created last year. Even in the US we are seeing
a switch away from the heaviest of gas guzzling
SUV’s.
Part of the price surge has also been a terrorism
premium of about 5 dollars per barrel the market
has assessed due to fear of disruption of Saudi
supply. As the short-term perception of terrorism
in Saudi diminishes, this premium will shrink.
Finally, the high current price is going to attract
increased production. Many oil companies are hesitant
to invest heavily in new production precisely because
of fears that prices will soon collapse, as they
did in 1986 and 1998. For many oil-producing states,
this fear of a price collapse remains very real.
The current price surge is not the advanced warning
of worsening oil shortages and eventual depletion
of the world’s oil supply. In fact there remains
plenty of oil in the ground (250 billion barrels
in Saudi alone) and vast areas of unexplored planet
that will likely hold several hundred billion barrels
more.
Oil is primarily the fuel of choice for transportation.
Heating and electric power can be handled by plentiful
natural gas and coal. But only oil works well as
a jet fuel and car fuel. How much oil will we need
this century for these purposes?
The answer is obviously based on guesswork, but
we can do a reasonable estimate of maximum use.
Let us assume the world population peaks around
9 billion people (as the UN estimates), and this
leads to 3 billion cars (in a few decades this should
be a reasonable ratio). Let us also assume that
these cars are gas-electric hybrids that get 50
mpg and are driven an average of 10,000 miles per
year. This means each car consumes 400 gallons,
or about 10 barrels of oil per year. Three billion
cars would therefore demand 30 billion barrels.
That would be a reasonable upper limit on world
oil consumption. Given that there is 1.2 trillion
barrels of proven reserves at present, and probably
that much more out there that can be found or extracted
from existing fields, we certainly have enough oil
for the next several decades. Further down the future,
other energy possibilities await. Ideas such as
hydrogen fuel cells, coal gasification, liquefied
natural gas fuel, shale oil, and tar sands as sources
of crude oil. These hold potential sources of power
that extend well beyond any predictable time horizon.
We are not running out of oil, and that is not why
prices are jumping.
