By Dr. Nayyer Ali

June 03, 2005

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.


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Editor: Akhtar M. Faruqui
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