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The Coming Oil Crisis--Really

<i> Gregg Easterbrook's new book, "Beside Still Waters," will be published in November. In 1980, he won the Investigative Reporters and Editors Award for a series of articles showing that oil supplies were far more plentiful than was then assumed</i>

The petroleum market is glutted, the member states of the Organization of Petroleum Exporting Countries are bickering among themselves even more than usual and gasoline pump prices are lower in real terms than in the 1950s heyday of the finned Caddy. That makes it the perfect time to start worrying about running out of oil!

Enjoy those ponderous four-wheel drives and “utes” while you can. For the next decade or so, ample world supplies of petroleum seem likely. But the same kind of statistical barometers that, during the trumped-up 1970s energy “crisis,” suggested there was actually plenty of oil, now suggest that the world is approaching its oil-production upper bound.

Sometime in the next 20 years or less, global petroleum output may begin a permanent decline, even as world oil demand continues to rise. Though market forces and improved oil-production technology should keep petroleum flowing well into the 21st century, the peak of the Oil Age may come far earlier than conventional thinking now assumes. As Craig Hatfield, a professor of geology at the University of Toledo, notes, “The world has burned more oil since the year 1970 than throughout its entire history to that point. Huge volumes of oil have been found since the 1970s, but we’re using that oil so much more rapidly that the top of the curve is no longer hard to see.”

Here’s the math. Since the dawn of the Oil Age, the world has burned about 800 billion barrels of petroleum. Somewhere between 1,000 billion and 1,600 billion barrels of oil are estimated to remain in formations where production would be economically feasible. (These calculations assume future price increases to draw out oil that cannot now be produced economically.) This suggests there may be twice as much (affordable) oil still in the ground as the world has used so far.

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That may sound like a vast amount, but at the current rate of world oil consumption, 1,600 billion barrels would be depleted in about 60 years. And world consumption is not standing still but increasing. Current global petroleum use, already a mind-bending 71 million barrels a day, is rising at almost 2% a year. Sound small? A 2% annual increase doubles a figure in 34 years. At just a 2% annual increase in oil demand, by 2010 the world will have consumed half the total amount of petroleum that appears economically and technologically feasible to extract.

The rate of consumption growth may accelerate, depending on whether developing-nation economies prosper. China today imports 800,000 barrels of oil daily. At its current rate of growth, by the year 2015, China will be importing 8 million barrels a day, the same as current U.S. imports. By 2025, China may import twice as much oil as the U.S. now does. If demand continues to expand while reserves decline, the oil-price equilibrium will rise; eventually, supply will become scarce relative to demand, and a permanent oil-price spiral could begin.

Think there must be lots of oil out there waiting to be discovered? That’s possible, but most studies show discoveries trending down. Continental domestic U.S. oil production peaked in 1970, and has been declining since. Production in Alaska and the former Soviet Union peaked in 1988 and has been declining since, though economic recovery in the new Commonwealth of Independent States might alter that equation. OPEC claims a reserve of about 660 billion barrels of oil, but this number is widely considered exaggerated. Extensive quantities of petroleum are locked up in oil shale and tar sands, but, so far, no one has devised an economical means to extract such fuels. Unless there exists some large petroleum formation so far unknown, or some fundamentally new form of extraction technology, global oil production seems likely to peak while many cars you see parked outside your office window are still on the road.

This isn’t a doomsday concern, just a reason why a national commitment to alternative energy forms makes sense now, when there is time to work on the problem rationally. But the legacy of the ersatz ‘70s “crisis” makes it hard for the political, economic and media realms to give this the attention it deserves.

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The short version of the 1970s energy “crisis” is that it was caused not by any underlying lack of supply but by Middle East politics and regulatory rules that impeded market forces. Once President Jimmy Carter decontrolled oil and natural-gas prices, the “crisis” ended. By the mid-1980s, reduced demand, led mainly by energy-efficiency and auto miles-per-gallon improvements in the U.S., caused the bottom to fall out of oil prices, and OPEC to disintegrate as a monopoly.

But in a classic case of learning the lesson of the last war, most observers now seem determined to believe that since the last energy SOS was phony, all future alarms must be phony, too. News organizations that looked silly in the 1970s by squealing about the end of energy now overcompensate by treating energy supply as old news, when the genuine news on this subject is yet to come. Economists, clear winners of the 1970s energy disputes, now place too much faith in their own rhetoric, asserting that higher prices endlessly will refill petroleum reserves by granting increased incentives to produce. This was true in the 1970s, when price controls discouraged production; it may not be true after 2010, when feasible reserves begin to decline. As Hatfield points out, “Market forces are wonderful, but they cannot increase the amount of oil that exists to be discovered.”

Consumers and producers, both of whom benefit from ample cheap oil, may be engaged in a game of mutual wishing-away of larger trends. Right now, 4WDs, “light” trucks and enormous “utes” are so popular even Sierra Club members are barreling down the freeway in eco-nightmare conveyances that look like armored attack vehicles designed for Desert Storm. You can’t blame business for supplying what the market wants, but that does not make what the market wants good national policy.

Through the 1980s and early 1990s, the “energy intensity” of the U.S. economy--the BTU’s needed for a dollar of output--was declining, even as the economy grew and people drove more miles in nicer cars. Steady improvements in U.S. energy efficiency kept world oil demand soft, holding down prices and moderating the balance of payments deficit. But beginning in 1995--roughly when the big-vehicle craze began, though that is not the only factor--U.S. energy use per dollar of gross domestic product started back up for the first time since the 1973 oil crunch. So far, no price has been paid. But it’s Pollyanna logic to suppose no price will ever be paid, should the trend for increasing oil consumption continue.

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In an unlikely move, British Petroleum and Royal Dutch Shell, two of the largest oil companies, recently have begun to say it is time society started preparing for the decline of oil. In April, Shell became the first large oil company to announce support for the Kyoto greenhouse-gas reduction treaty, encouraging more efficient fossil-fuel use. The company’s reasoning was that if increased petroleum efficiency is needed anyway, why not get climate protection as a bonus? Take note that for all the ideological razzle over the rather modest reforms the Kyoto treaty asks--a nasty fight is expected between the Clinton administration and congressional GOP--even a small negative change in the petroleum supply-demand equilibrium rapidly would swamp in significance all proposed regulatory initiatives regarding global warming.

Companies like BP and Shell are not speaking of the decline of petroleum because they have been infected with green virus. They want to remain large profitable fuel companies, and are simply aware that the energy future now lies in replacing oil. Many attractive alternatives exist, some with the virtues of being zero-pollution or wholly renewable. Bus and taxi fleets in several cities already run on compressed natural gas, which is cheaper than oil and has lower greenhouse gas emissions. Ethanol, made from corn, has unimpressive economics, but new forms of ethanol, made from genetically engineered grasses or dwarf trees, might be cheap and environmentally transparent, since plants used to “grow” this fuel subtract from the air the same amount of carbon dioxide that cars burning the fuel release. Forward-thinking oil companies are beginning to pursue such ideas, in part because the first to offer practical alternative fuels will have a fantastic marketing advantage over companies whose fates remain tied to politically vulnerable petroleum supplies.

Other oil alternatives are not far off. Hydrogen made from natural gas or even by using solar energy might power “fuel cell” vehicles with no emissions of any kind, other than warm water vapor. An energy economy based on solar-power conversion--increasingly close to practical--would be endlessly renewable, since its driving force would be the sun.

Right now, the perception of alternate fuels is that they represent some kind of unpleasant, retrenched standard of living for an age of limits. Quite the contrary. The attraction of alternate fuels is they will make possible the sustenance of the consumer lifestyle, by allowing the U.S. to kiss expensive, polluting Middle East oil good-bye. If the automobile continues to gobble declining fossil fuels and spew carbon dioxide, it might die as a product category, but if car culture can convert to benign, renewable fuels, for good or ill, the private car will be with us indefinitely. Chrysler, Ford, Toyota, Mercedes and other auto makers already are saying that the first practical fuel-cell cars will be on the market by around 2005.

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The conversion to renewable energy will not happen, however, without a serious national commitment to new forms of fuel. The world went from petroleum being an oddity, to a petroleum-based transportation economy in less than 50 years. The transition to an alternative-fuels economy might be accomplished faster--fast enough to head off the economic disruptions of a global oil production peak.

But the second, genuine energy crisis will be avoided only if preparations are made well in advance. Now, with prosperity high and petroleum politics quiet, is the ideal time to begin. Better to fix the roof while the sun is shining.


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