Imagining a $7-a-Gallon Future
By Daniel Yergin

No price in America is more visible, indeed inescapable, than that of gasoline. And Americans don't like the numbers they're seeing today, and their anger has turned high prices at the pump into highly flammable political fodder. OPEC's decision last week to cut production has further fueled the fire.

But what are those prices telling us? That driving this summer will be expensive? Or that $3 a gallon, which spouted last week at a California station, is our future? Or more worrying, that after many years of false alarms, the world is truly beginning to run out of oil?

That last question is at the center of a fierce debate. 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. After World War I, seismic technology, used for locating enemy artillery, was adapted to oil field exploration. And in the 1990's, it became feasible to drill into deep offshore fields, which was inconceivable during those crisis years of the 1970's.

Better technology and management have increased Russian output by 45 percent since 1998, making Russia the world's second-largest oil producer. And if United States sanctions are lifted on Libya, new investment there could push up production. In the meantime, advanced information technologies and sophisticated remote sensing techniques are making exploration and production much more efficient, which could make an additional 125 billion barrels available over the next decade, an amount greater than the current proved reserves of Iraq.

Those who don't believe a shortage is imminent do not deny that a peak will eventually be reached. They just believe that it is much farther off into the future.

"You can certainly make a good case that sometime before the year 2050 conventional oil production will have peaked," said the head of exploration for a major oil company. He and others believe, however, that oil production will simply plateau, and then farther into the future begin to decline.

They also argue that the proponents of peak oil consistently underestimate the reserves of regions in Russia, the Caspian Sea, the Middle East and the deepwater Gulf of Mexico. Also, they say, the industry will continue to increase the percentage of oil that can be recovered from a given field.

A major question concerns the real size of the Persian Gulf reserves. The world's proven reserves, in total, currently stand at 1.2 trillion barrels (almost double the level of the early 1970's). Of that, nearly 60 percent is in the Persian Gulf. But many worried about near-term oil shortages believe that the gulf reserves been overstated for political purposes by Persian Gulf countries. Others believe that with so much still to be explored, the reserves will prove to be much larger. Both views may be right.

Meanwhile, technology is expanding the definition of oil. In the decades ahead, more and more of our gasoline, heating oil and jet fuel will be made of so-called unconventional oils. These include petroleum mined from Canada's oil sands, once prohibitively expensive to extract, and liquids derived from natural gas. Conversion of large, remote deposits of natural gas into usable liquids appears to be on the edge of commercial viability.

The world will need all these sources of supply, since even with increased energy conservation, economic growth, led by China and India, could well mean that the world will use 20 percent more oil a decade hence.

Yet it looks as if supplies will meet that demand. If there is an obstacle, it won't be the predicted peak in production, at least in the next few decades. Rather, it will be the politics and policies of oil-producing countries and swings in global economic growth. And the extent of these difficulties, whatever they turn out to be, will register in the ups and downs at the gasoline pump.

Daniel Yergin, chairman of Cambridge Energy Research Associates or CERA, is the author of "The Prize: The Epic Quest for Oil, Money and Power." It views are not necessarily those of Petroleumworld.

This article originally appeared in the 4/4/2004 edition of the New York Times.Petroleumworld reprint the article in the interest of our readers.


Petroleumworld. News 05 02 04

Copyright © Cera 2004, All rights reserved