One More Time: Are We Running Out of Oil?

On p. 20 of the text, the ups and downs in the supply of ginseng are noted. A much more prominent product that is much in the news these days is oil. Are we running out of oil? If so, when will it happen? Is oil production going to peak and then rapidly decline? Questions like these seem to be on everyone's mind, and there is much debate about whether an oil crisis is looming. Much of the debate is focused on an idea called "peak oil theory," which says that oil production will soon peak and will then decline rapidly, causing a major oil crisis in the world. Opponents of the peak oil theory reject it and point to several predictions of peak oil theorists that have clearly been wrong. The claims of each group are examined below.

The arguments of peak oil supporters. Individuals and groups who support the idea of peak oil make the following arguments:

  • The world's supply of oil is clearly finite, and we are using it up at a rapid rate. The fact that a shortage is looming is evident in the cost of a barrel of oil. In 1998, oil cost US$10 a barrel, but by July 2008 the cost was US$145.
  • Output from oil fields around the world is declining (in some fields the decline is about 18 percent a year). Declines are particularly evident in the Middle East, Europe, and the U.S. That means that 3-4 million barrels a day of new oil will have to be found for global oil production just to remain steady.
  • Many big oil-producing countries are very secretive about their year-to-year production rates, so it is difficult to know just how fast their output is really declining. Their oil fields may be in worse shape than they will admit.
  • Some top-level executives in the oil industry are now saying that there is a limit to how much oil can be produced each year, and that a ceiling on oil production of about 100 million barrels per day may be reached as early as 2012. The International Energy Agency (IEA) also predicts that oil production of more than 100 million barrels of oil per day will be difficult to achieve.
  • Oil production will peak because of factors such as restricted access to oil fields, shortages of oil field workers, rapidly increasing costs, political crises, and complex oil field geology.
  • Christophe de Margerie, CEO of the French oil company Total SA, says that it will be difficult to achieve a production level of even 100 million barrels a day by 2030 (in 2006, production was 85 million barrels a day). That view is shared by James Mulva, CEO of ConocoPhillips, and by the chairman of the Libya National Oil Corporation.
  • The future of oil production in important oil-producing countries like Nigeria, Iran, and Iraq is very uncertain due to political instability.
  • The International Energy Agency has questioned the 174 billion barrel reserves figure commonly cited for the Alberta oil sands, saying that uncertain project economics make it unlikely that that much oil could be extracted. It said that a number closer to 15 billion barrels was more accurate.
  • New oil discoveries have declined sharply. For example, new discoveries in the Middle East during 1963-1972 totalled 187 billion barrels, but new discoveries during 1993-2002 totalled only 16 billion barrels.
  • In 1956, M.K. Hubbert predicted that U.S. oil production would peak in the early 1970’s, and he was right. The same thing will happen with world oil production.

The arguments of peak oil opponents. Those who reject the peak oil theory make the following arguments:

  • World oil production has been steadily increasing, and in 2006 was the highest in history, averaging over 85 million barrels per day (over 31 billion barrels per year). Oil output will eventually plateau, but it will not peak and then fall rapidly.
  • A widely used measure of oil reserves is "ultimate recoverable reserves" (URR). TrendLines, a Canadian research company, notes that the world's URR is increasing at an increasing rate. For example, during the period 1957-2006, URR grew at an annual rate of 2.4 percent, but during 2000-2007, it grew at an annual rate of 6 percent. Oil reserves are continuing to increase, and this means that peak oil supporters have had to continually keep moving the crisis date off into the future.
  • The U.S. Geological Services (USGS) predicts that URR will grow by about 2.4 per cent annually for the next few years. The URR was 1.6 trillion barrels in 1995 and is predicted to rise to 3.3 trillion barrels in 2025. (Note: URR actually reached 3.2 trillion barrels in 2006, nearly the level that the USGS predicted would not be reached until 2025.)
  • In 1979, the "life index" of oil was estimated at about 35 years (at 1979 consumption rates). That meant that we should have experienced an oil crisis early in the 21st century. But by 2003, the life index had actually risen to 40 years, and by 2007 it had risen to 45 years. These increases have occurred even though oil consumption rates now far exceed those of 1979.
  • There have been several major new discoveries in the last couple of years (for example, off the coast of Brazil and in the Gulf of Mexico). The new Gulf of Mexico oil field may contain up to 15 billion barrels of oil. If it does, that single new field would increase U.S. oil reserves by 50 percent. The new oil field off the coast of Brazil may contain 33 billion barrels of oil.
  • A 2008 study by the Cambridge Energy Research Associates (CERA) concludes that there is no impending peak in oil production, and that new oil finds in the Gulf of Mexico, Brazil, and Russia will more than make up for declining production in older fields in the Middle East, Europe, and the U.S.
  • M.K. Hubbert's prediction for U.S. oil production was correct, but his prediction for world production was far off the mark. He predicted that global oil production would peak at 12 billion barrels per year by early in the 21 century, but actual production in 2006 was actually 31 billion barrels.
  • Canadian and Japanese researchers have succeeded in extracting natural gas from structures called gas hydrates. The energy locked in gas hydrates may exceed the total world supply of energy available from coal, oil, and natural gas combined. If this new technology becomes commercially viable, it will have a dramatic effect on the total supply of fossil fuels.
  • Geologist Kenneth Deffeyes predicted that world oil production would peak on November 25, 2005, but he was wrong. Doomsday predictions like this are almost always wrong because they fail to take into account changing conditions.

Critics of peak oil also use several well-known arguments from economics to argue that the peak oil idea is not correct. First, they note that the higher the price of oil, the greater the amount of oil that can be extracted in an economically viable way. Second, higher oil prices will also discourage consumption, and that will make the existing supply of oil last longer. Third, higher oil prices will motivate the development of alternate sources of fuel, and that will also make the existing oil supply last longer. Fourth, new technologies for extracting oil are constantly being developed and old technologies are being refined. This means that more oil can be extracted than was originally thought. For example, the Chevron discovery in the Gulf of Mexico was achieved by using more powerful computers and algorithms to draw a picture of oil reservoirs thousands of metres below the surface of the Gulf of Mexico.

Questions for Discussion

  1. Which group (peak oil supporters or their opponents) do you think makes more persuasive arguments about the future of oil production? Explain your reasoning.
  2. After considering the arguments in support of peak oil theory and the arguments against it, draw a graph (with oil production on the vertical axis and time on the horizontal axis) which shows your predictions of world oil production from now until the year 2100. Defend your predictions.
  3. Consider the following statement: "There are so many uncertainties that must be taken into account when trying to predict world oil production that it is impossible to have any confidence in anyone's predictions." Do you agree or disagree with the statement? Explain your reasoning.

Sources: John Lyons and David Luhnow, "Brazil May Be The Globe's Next Big Spigot," The Globe and Mail, May 23, 2008, p. B8; Neil King and Peter Fritsch, "IEA Set To Lower Global Oil Supply Forecast," The Wall Street Journal, May 22, 2008, p. B11; "New Method To Extract Gas Hydrates," Winnipeg Free Press, April 17, 2008, p. A6; Neil King, "A Rosy View Of Oil Supply," The Globe and Mail, January 17, 2008, p. B7; Russell Gold and Ann Davis, "Oil Officials See Limit Looming on Production," The Wall Street Journal, November 19, 2007, pp. A1, A17; Judy Monchuk, "Slew Of Deals Shows Oil Sands Fever Not Breaking," The Globe and Mail, August 6, 2007, p. B3; Shawn McCarthy, "Canada's Oil Boom Has Legs, IEA Says," The Globe and Mail, July 10, 2007, pp. B1, B16; Neil Reynolds, "Peak Oil Doomsayers Fall Silent As Reserves Grow Ever Larger," The Globe and Mail, April 11, 2007, p. B2; Robert Hirsch, "Peaking of World Oil Production: Recent Forecasts," WorldOil, April, 2007, Vol. 228; Patrick Brethour, "Peak Oil Theorists Don't Know Jack," The Globe and Mail, September 6, 2006, pp. B1, B6; Michael Lynch, "Oil Discovery Forecasts Doomed," The Globe and Mail, May 28, 2005, p. B6; Peter Tertzakian, "Canada: Energy Superpower?," The Globe and Mail, May 28, 2005, p. B6; Barrie McKenna, "Welcome To The Age Of Scarcity," The Globe and Mail, May 21, 2005, p. B15; Haris Anwar, "Supply: Are Saudi Reserves Drying Up?," The Globe and Mail, May 21, 2005, p. B19.