If you're a regular reader of this blog, you know that I've been following the trends with oil, and have predicted that November 2005 we will begin to see the price of oil rise as demand begins to outstrip supply as a continous trend. I am still of this opinion. The oil market is extremely tight now, and there are other pressures facing us as well.
Below, is a second opinion.
But before we get to it, let's be clear on a few things. It's pointless reading the article below and saying, "There, you see, you're wrong." Try not to see it in terms of right and wrong. We can argue for years about who is right and wrong. The point is to see that urgent change is upon us whether we like it or not. We should not be looking for excuses to remain stuck in our cafe latte-cargo pants-Christina Aguilera obsessed dreamworlds. We need to collectively wake up, make some changes (like overcome our collective addictions to oil and learn to grow our own food), do something useful. We need especially to realise that oil is not going to bring the same artificial convenience, the same kind of consumption lifestyle we've been used to. Our lives, unless we are already very very wealthy, will not be the suburban bliss that we thought was our birthright because that's how our parents lived.
I do agree that we will continue to become more efficient at using oil, and extracting oil. And we have done so. In fact, there are reports that people have invented engines that could get you 200 miles to the gallon (and that the scientists inventing (and re-inventing) and selling these engines have either been bought off by the giant oil companies or, in one case, bludgeoned to death).
But no one knows for sure what is going down underground. What we do know is despite all our efforts, we have less and less supply to show for it. We also know that after the last oil crisis in 1973 North Sea oil and oil in Alaska saved us. That's just about gone now. It's looking pretty clear now that those big reserves in the North Sea were the scraps in the refrigerator. Now, whatever we find will be crumbs on the floor. There it is in layman's terms.
So I personally disagree with some of the content below. Some very well educated oil people, like Colin Campbell and others, do too. It's also true that even if your extraction gets a lot better, once you're in decline, that also occurs a lot faster.
I hope though, that Mr Yergin is as clever as the Pulitzer people think he is. That will be good for all of us, for a limited time only.
Technology and Higher Prices Drive a Supply Buildup
By Daniel Yergin
Sunday, July 31, 2005; Page B07
We're not running out of oil. Not yet.
"Shortage" is certainly in the air -- and in the price. Right now the oil market is tight, even tighter than it was on the eve of the 1973 oil crisis. In this high-risk market, "surprises" ranging from political instability to hurricanes could send oil prices spiking higher. Moreover, the specter of an energy shortage is not limited to oil. Natural gas supplies are not keeping pace with growing demand. Even supplies of coal, which generates about half of the country's electricity, are constrained at a time when our electric power system has been tested by an extraordinary heat wave.
But it is oil that gets most of the attention. Prices around $60 a barrel, driven by high demand growth, are fueling the fear of imminent shortage -- that the world is going to begin running out of oil in five or 10 years. This shortage, it is argued, will be amplified by the substantial and growing demand from two giants: China and India.
Yet this fear is not borne out by the fundamentals of supply. Our new, field-by-field analysis of production capacity, led by my colleagues Peter Jackson and Robert Esser, is quite at odds with the current view and leads to a strikingly different conclusion: There will be a large, unprecedented buildup of oil supply in the next few years. Between 2004 and 2010, capacity to produce oil (not actual production) could grow by 16 million barrels a day -- from 85 million barrels per day to 101 million barrels a day -- a 20 percent increase. Such growth over the next few years would relieve the current pressure on supply and demand.
Where will this growth come from? It is pretty evenly divided between non-OPEC and OPEC. The largest non-OPEC growth is projected for Canada, Kazakhstan, Brazil, Azerbaijan, Angola and Russia. In the OPEC countries, significant growth is expected to occur in Saudi Arabia, Nigeria, Algeria and Libya, among others. Our estimate for growth in Iraq is quite modest -- only 1 million barrels a day -- reflecting the high degree of uncertainty there. In the forecast, the United States remains almost level, with development in the deep-water areas of the Gulf of Mexico compensating for declines elsewhere.
While questions can be raised about specific countries, this forecast is not speculative. It is based on what is already unfolding. The oil industry is governed by a "law of long lead times." Much of the new capacity that will become available between now and 2010 is under development. Many of the projects that embody this new capacity were approved in the 2001-03 period, based on price expectations much lower than current prices.
There are risks to any forecast. In this case, the risks are not the "below ground" ones of geology or lack of resources. Rather, they are "above ground" -- political instability, outright conflict, terrorism or slowdowns in decision making on the part of governments in oil-producing countries. Yet, even with the scaling back of the forecast, it would still constitute a big increase in output.
This is not the first time that the world has "run out of oil." It's more like the fifth. Cycles of shortage and surplus characterize the entire history of the oil industry. A similar fear of shortage after World War I was one of the main drivers for cobbling together the three easternmost provinces of the defunct Ottoman Turkish Empire to create Iraq. In more recent times, the "permanent oil shortage" of the 1970s gave way to the glut and price collapse of the 1980s.
But this time, it is said, is "different." A common pattern in the shortage periods is to underestimate the impact of technology. And, once again, technology is key. "Proven reserves" are not necessarily a good guide to the future. The current Securities and Exchange Commission disclosure rules, which define "reserves" for investors, are based on 30-year-old technology and offer an incomplete picture of future potential. As skills improve, output from many producing regions will be much greater than anticipated. The share of "unconventional oil" -- Canadian oil sands, ultra-deep-water developments, "natural gas liquids" -- will rise from 10 percent of total capacity in 1990 to 30 percent by 2010. The "unconventional" will cease being frontier and will instead become "conventional." Over the next few years, new facilities will be transforming what are inaccessible natural gas reserves in different parts of the world into a quality, diesel-like fuel.
The growing supply of energy should not lead us to underestimate the longer-term challenge of providing energy for a growing world economy. At this point, even with greater efficiency, it looks as though the world could be using 50 percent more oil 25 years from now. That is a very big challenge. But at least for the next several years, the growing production capacity will take the air out of the fear of imminent shortage. And that in turn will provide us the breathing space to address the investment needs and the full panoply of technologies and approaches -- from development to conservation -- that will be required to fuel a growing world economy, ensure energy security and meet the needs of what is becoming the global middle class.
The writer is chairman of Cambridge Energy Research Associates. His book "The Prize: the Epic Quest for Oil, Money and Power" received the Pulitzer Prize.
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