When oil peaks...

Asia Times

By Tony Wesolowsky
Jan 26, 2005

PRAGUE - Fertilizer, DVDs, rubber, cheap flights, plastics and metals. None of these things have anything in common, right? Think again. An ingredient in all of them, in one form or another, is oil.

Oil is the precious primer of the world economic engine, making it hum. Oil provides 40% of the world's energy needs, and nearly 90% of all transportation. It's also a building block for many products and goods. Cut supplies of this natural resource and life as we know it could change.

But while some experts say the world runs no risk of running out of oil, others disagree. Sounding the alarm is the Association for the Study of Peak Oil and Gas. Its president is Kjell Aleklett, a physics professor at Sweden's Upsalla University.

"[During] the next 30 years we will find more than 150, maybe 200, but probably not, but 150 billion barrels of oil is roughly what you're going to find," Aleklett said. "And during the same period, we will consume 1,000 [billion barrels of oil]. So that means we are now digging deep into the reserves we have at the moment."

Aleklett is among a group of international experts - ex-oil executives and geologists - who believe there is less oil percolating under the ground than the oil industry acknowledges. They say the world has burned up nearly half of all its oil - an estimated 900 billion barrels of crude.

In industry jargon, that halfway point is the "peak", after which reserves no longer rise but drop. No one denies this will happen eventually. After all, oil is a finite resource. But these oil skeptics - so-called "peak" oil analysts - say the "peak" is coming sooner rather than later, maybe even in 2008. They paint a gloomy picture: falling oil supplies plus rising demand will equal shortages - and perhaps a rising risk of war.

Mainstream experts, however, dismiss such talk as scaremongering. They say predictions about the end of petroleum have been made since shortly after the first commercial oil rig went up in western Pennsylvania back in 1859. The reality, they say, is that supplies are growing, with more oil coming out of Iraq, Russia, the Caspian Sea and elsewhere.

And if supplies dip and prices rise, these experts say that will spur the industry to explore for more. Plus, breakthroughs in technology will make it easier to extract oil hard to get at now, such as the petroleum locked in sands in Canada.

Michael Lynch, a critic of the peak oil movement, said the movement's guru, geologist Colin Campbell, has a long record of making inaccurate predictions. "The people who predict peak oil have been predicting it any day now for 15 years," Lynch said. "Like Colin Campbell said in '89 that this is the peak right now, in '91 he said the peak is next year, and in '95 he said it's in '97 and so forth. I've generally been predicting continued rise [in oil supplies] since I started working on this; really making forecasts in the late '80s. I think over the next 30 years you won't see a peak unless it's from the demand side."

But with oil breaking the US$50-a-barrel barrier in October, and amid other concerns, the peak oil crowd is grabbing more attention. One of their most startling claims is the following: six barrels of oil are now used for every new barrel discovered. Major oil finds - that is, more than 500 million barrels - peaked in 1964. In 2000, there were 13 such discoveries; in 2001, six; in 2002, two; and in 2003, zero - the first time that had ever happened.

The "peak" oil analysts also say oil-industry investment patterns seem to indicate that there isn't much oil left to discover.

In 2004, the Financial Times quoted a study by Scottish energy consultant Wood Mackenzie showing that major oil companies had invested $35 billion to develop existing oilfields in 1998. Five years later in 2003, the amount was $50 billion, a record, according to the Mackenzie study. During the same time period, spending on oil exploration dropped from $11 billion to $8 billion. Peak oil analysts contend that the oil companies were putting their money where the oil is - and that's not oil exploration.

Analyst Lynch refuted that claim. Exploration is down, he said, because companies are drilling even more oil from existing fields. He said there are other factors at play as well. "When you look at oil discoveries and production, these are partly influenced by geology, but they are heavily influenced by politics, economics and infrastructure, and things like that," Lynch said. "So they [the peak oil people] are mistakenly assuming that what they're seeing is a lack of oil. In other words, geology is determining it, when in reality what's happened is that people in the Middle East cut back drilling because they had a huge surplus of oil and they nationalized their operations in the '70s and so forth."

Depletion of reservesSaudi Arabia holds one-quarter of the world's proven oil reserves - some 260 billion barrels. But even here there are signs of field depletion. No major fields have been discovered since 1970.

Aquifers are being drained to pump oil out from deeper and deeper in the ground, a sign that the easier and cheaper-to-drill oil near the surface is gone or going. The Saudis, and the world's biggest oilfield, Ghawar - a 500-kilometer-long sliver of land near the Persian Gulf - are not as robust as they once were.

Mathew Simmons, an energy investment banker and onetime adviser to US President George W Bush, said no one really knows how much oil the Saudis have. The state-owned oil company Saudi Aramco has not provided production data for more than two decades. But Simmons noted that the Saudis have been talking about the risk of depleting their own reserves since the 1970s.

"What I find interesting is that there clearly has been a running debate going on within the ranks of Aramco going all the way back to the 1970s when Saudi Arabia had the market opportunity, or, you could argue, was forced into opening its valves faster and faster to keep global markets supplied," Simmons said. "And by 1974, when their oil production had grown from under 3 [million] to over 8 million barrels a day in a four-year period of time, there were already debates going on within Aramco as to whether they were already overproducing these fields."

On the record, Saudi Aramco officials confidently speak of increasing production in the future. But "peak oil" analysts are not so sure. After the "peak", these analysts say, oil supplies will start to drop, prices will rise and then risk of conflicts over resources will grow.

Bullish oilmen, however, still enthusiastically point to possible new discoveries in places as far-flung as Colombia and Sudan. Or the Caspian region, which has long been cited as a potential paradise of oil riches.

In 1997, the US State Department put the possible value of Caspian Sea oil at an amazing $4 trillion. One field, Kashagan in Kazakhstan, was thought to be particularly bountiful. But as Simmons explained, Kashagan - and Caspian oil - might have been more hype than reality.

"Now, there's an enormous project that got sanctioned to begin development spending in the middle of 2004 called Kashagan that is being billed by some people as the biggest oilfield found in the last 30 years," Simmons said. "Interestingly enough, three of its original partners who held collectively 30% have already bailed out."

Even oilmen admit that Caspian Sea prospects were probably overblown, although reserves there are still significant. But new discoveries often do not have a major impact on world oil supply.

"Fifty percent of all the oil we are using today is just from something like 150 oilfields, and there are something like 40,000 [oilfields] in the world," said Aleklett of Upsalla University.

But if discoveries are down and supplies dipping, demand is up. Driving it is population growth led by China, with 1.3 billion people. Buoyed by an economic boom, China has overtaken Japan as the world's second oil-consuming country after the United States.

The US Department of Energy predicts that through 2020, energy consumption in China will rise about 4.3% a year, and by at least 3% in three other large developing countries: India, Brazil and Mexico.

Aleklett and other peak oil analysts warn that meeting future demand without seriously drawing down reserves is impossible. Aleklett said China is aware that oil will be scarcer in the future and is scrambling to buy up or contract for as much oil as it can - even negotiating with Canada, America's top energy supplier.

Possible Sino-American jousting for Canadian oil could be just a glimpse of what will be a more fierce global competition for black gold. Michael T Klare, author of Resources Wars, noted that the biggest oil supplies are found in some of the most volatile regions: the Middle East, the Caucasus and Central Asia. He said major world powers won't be drawn into direct conflict there but they won't sit on the sidelines, either.

"But rather, proxy conflicts where all these countries get involved in local disputes within Kazakhstan, within Georgia, Azerbaijan, these other countries; one side favoring one party to a dispute, the other side favoring the other side to a dispute," Klare said. "So you get these big powers getting involved in local conflicts and escalating into something larger."

Klare highlighted the Caspian region. The five states that share its shores - Kazakhstan, Russia, Iran, Azerbaijan and Turkmenistan - have been haggling for years on how to divide the sea and divvy up its riches. As oil and gas become more precious, Klare said, that competition could become more intense and less compromising.

Aleklett and other peak oil analysts have argued that the West must curb its hunger for oil now to avoid problems later. He pointed out that the US has 5% of the world's population, but uses 25% of its resources.

The father of the peak oil movement, US geologist M King Hubbert, said an economic model based of infinite growth but fueled by finite natural resources is doomed. Ironically, there's also a saying from oil-rich Saudi Arabia that goes: "My father rode a camel. I drive a car. My son flies a jet airplane. His son will ride a camel."

http://www.atimes.com/atimes/Global_Economy/GA26Dj04.html