March 22, 2005
The Energy Crunch To Come
By Michael T. Klare
Data released annually at this time by the major oil companies on
their prior-year performances rarely generates much interest outside
the business world. With oil prices at an all-time high and Big Oil
reporting record profits, however, this year has been exceptional.
Many media outlets covered the announcement of mammoth profits
garnered by ExxonMobil, the nation's wealthiest public corporation,
and other large firms. Exxon's fourth-quarter earnings, at $8.42
billion, represented the highest quarterly income ever reported by an
American firm.
"This is the most profitable company in the world," declared Nick
Raich, research director of Zacks Investment Research in Chicago. But
cheering as the recent announcements may have been for many on Wall
Street, they also contained a less auspicious sign. Despite having
spent billions of dollars on exploration, the major energy firms are
reporting few new discoveries and so have been digging ever deeper
into existing reserves. If this trend continues -- and there is every
reason to assume it will -- the world is headed for a severe and
prolonged energy crunch in the not-too-distant future.
To put this in perspective, bear in mind that the global oil industry
has, until now, largely been able to increase its combined output
every year in step with rising world demand. True, there have been a
number of occasions when demand has outpaced supply, producing
temporary shortages and high gasoline prices at the pump. But the
industry has always been able been able to catch up again and so
quench the world's insatiable thirst for oil. This has been possible
because the big energy companies kept up a constant and successful
search for new sources of oil to supplement the supplies drawn from
their existing reserves. The world's known reserves still contain a
lot of oil -- approximately 1.1 trillion barrels, by the estimates of
experts at the oil major BP -- but they cannot satisfy rising world
demand indefinitely; and so, in the absence of major new discoveries,
we face a gradual contraction in the global supply of petroleum.
Signs of an Energy Crunch
It is in this context that the following disclosures, all reported in
recent months, take on such significance.
* ConocoPhillips, the Houston-based amalgam of Continental Oil and
Phillips Petroleum, announced in January that new additions to its
oil reserves in 2004 amounted to only about 60-65% of all the oil it
produced that year, entailing a significant depletion of those
existing reserves.
* ChevronTexaco, the second largest U.S. energy firm after
ExxonMobil, also reported a significant imbalance between oil
production and replacement. Although not willing to disclose the
precise nature of the company's shortfall, chief executive Dave
O'Reilly told analysts that he expects "our 2004 reserves-replacement
rate to be low."
* Royal Dutch/Shell, already reeling from admissions last year that
it had over-stated its oil and natural gas reserves by 20%, recently
lowered its estimated holdings by another 10%, bringing its net loss
to the equivalent of 5.3 billion barrels of oil. Even more worrisome,
Shell announced in February that it had replaced only about 45-55% of
the oil and gas it produced in 2004, an unexpectedly disappointing
figure.
These and similar disclosures suggest that the major private oil
companies are failing to discover promising new sources of petroleum
just as demand for their products soars. According to a recent study
released by PFC Energy of Washington, D.C., over the past 20 years,
the major oil firms have been producing and consuming twice as much
oil as they have been finding. "In effect," says Mike Rodgers, author
of the report, "the world's crude oil supply is still largely
dependent on legacy assets discovered during the exploration
heydays." True, vast reservoirs of untapped petroleum were discovered
in those "heydays," mostly the 1950s and 1960s, but these reserves,
being finite, will eventually run dry and, if not replaced soon, will
leave the world facing a devastating energy crunch.
The notion that world oil supplies are likely to contract in the
years ahead is hotly contested by numerous analysts in government and
industry, who contend that many large fields await discovery. "Is the
resource base large enough [to satisfy rising world demand]? We
believe it is," affirmed ExxonMobil president Rex W. Tillerson in
December. But other experts cast doubt on such claims by pointing to
those disappointing reserve-replacement rates. "We've run out of good
projects," said Matt Simmons, head of the oil-investment bank Simmons
& Co. International. "This is not a money issue.... If these
companies had fantastic projects, they'd be out there [developing new
fields]."
That the major oil firms see few promising new fields to invest in
right now is further suggested by reports that these companies are
sinking their colossal profits in mega-mergers and stock buy-back
programs rather than in exploration and field development.
ExxonMobil, for example, spent $9.95 billion to buy back its own
stock in 2004, while ChevronTexaco put out $2.5 billion to do the
same. Meanwhile several big companies, including ChevronTexaco, are
said to be eyeing California-based Unocal Corp. as a possible
acquisition, and ConocoPhillips recently announced a $2 billion
investment in Lukoil, the Russian energy giant. These moves are
consuming funds that might have gone into new-field exploration --
yet another indicator of diminished expectations for major new
discoveries. "If they had attractive things to invest in, they'd be
investing their little heads off," explained PFC Energy managing
director Gerald Kepes. But the great exploration opportunities of
yesteryear "have largely dried up."
It is true, of course, that the private energy firms are largely
barred from investment in Mexico, Venezuela, and the Persian Gulf
countries, where oilfield development is the exclusive prerogative of
state-owned companies. Hence, a major goal of the Bush
administration's energy policy is to persuade or compel these
countries to open up their territories to exploration by U.S. firms
-- which, it is claimed, possess the advanced technological know-how
that would make possible the discovery of previously unknown fields.
But the energy professionals who run the state-owned companies insist
that they do not need outside help to search for oil and that they
have already mapped their countries' major prospects. Here, too,
there has been a marked slowdown in new discoveries over the past
decade or so.
The worldwide decline in new discoveries has profound implications
for the global supply of energy and, by extension, the world economy.
Given a recent surge in energy demand from China and other
rapidly-developing countries, the U.S. Department of Energy (DoE)
predicts that, for all future energy needs to be satisfied, total
world oil output will have to climb by 50% between now and 2025;
from, that is, approximately 80 million to 120 million barrels per
day. A staggering increase in global production, that extra 40
million barrels per day would be the equivalent of total world daily
consumption in 1969. Absent major new discoveries, however, the
global oil industry will likely prove incapable of providing all of
this additional energy. Without massive new oil discoveries, prices
will rise, supplies will dwindle, and the world economy will plunge
into recession -- or worse.
Where Is Oil's Peak?
Just how soon such an energy crunch will arrive and just how severe
it is likely to be are matters of considerable debate. To a great
extent, this debate hinges on the concept of "peak oil," or maximum
sustainable daily output. In the 1950s, a petroleum geologist named
M. King Hubbert published a series of equations showing that the
output of any given oil well or reservoir will follow a parabolic
curve over time. Production rises quickly after initial drilling and
then loses momentum as output reaches its maximum or "peak" --
usually when half of the total amount of oil has been extracted --
after which production falls at an increasingly sharp rate. In 1956,
using these equations, Hubbert predicted that conventional (that is,
liquid) U.S. oil output would peak in the early 1970s. His prediction
provoked much derision at the time, but earned him considerable
renown when U.S. output did indeed achieve its peak level in 1972.
Because of insufficient data at the time, Hubbert was unable to apply
his equations to non-U.S. production. He did, however, predict that
global output -- just like U.S. output -- would eventually reach a
peak level and then begin an irreversible decline.
Today, the concept of global peak oil is widely accepted in the
energy field, though debate rages over when this moment will actually
occur. Those who believe that oil supplies are abundant tend to put
this date far in the future, well beyond our immediate concern. The
DoE, for example, noted in its International Energy Outlook for 2004
that it expects "conventional oil to peak closer to the middle than
to the beginning of the 21st century." But other analysts are not so
sanguine. "It is my opinion that the peak will occur in late 2005 or
in the first few months of 2006," says Princeton geologist Kenneth S.
Deffeyes in a new book, Beyond Oil. A more conservative estimate by
Mike Rodgers of PFC Energy locates the peak somewhere in the vicinity
of 2010-2015. If either of these predictions proves accurate, global
oil supply can never climb high enough to satisfy the elevated
consumption levels projected by the DoE for 2025 and beyond.
Where one stands on this critical issue depends on one's estimate of
how much petroleum the Earth originally possessed. Those like
Deffeyes, who contend that peak oil will arrive soon, believe that
our petroleum inheritance amounted to roughly 2,000 billion barrels
when commercial oil drilling first commenced in 1859. Since we have
already consumed approximately 950 billion barrels and are now
burning some 30 billion barrels each year, in this scenario the
halfway point of total world extraction -- and so the moment of peak
production -- should be just a year or two away. By contrast, those
who hold that peak oil is safely in the distance claim that the
world's total inheritance is closer to 3,000 billion barrels. This
more optimistic figure would include the 950 billion barrels already
consumed, "proven" reserves of approximately 1,150 billion barrels,
and as-yet-undiscovered fields believed to hold another 900 billion
barrels. This latter amount, it should be noted, represents the
equivalent of all the known oil in the Middle East, Asia, and Africa
combined.
Where might these mammoth still-undiscovered reservoirs lie? This is
no idle question, given that the major oil companies have scoured the
world for over a century in the search of new sources of supply --
and, in recent years, have come up virtually empty-handed. True, a
handful of impressive finds -- in the 1 billion barrel range -- have
been uncovered off the west coast of Africa, and one very large field
(the 10-billion barrel Kashagan field) was discovered in Kazakhstan's
portion of the Caspian Sea.
Most other recent discoveries have been relatively small, and often
located in deep offshore waters or other remote locations where the
costs of production are high. "The reason [investment] is not
increasing," Mike Rodgers has observed, "is that, in so many regions
of the world, the fields have gotten so small that even though you
might be able to drill a well and get a positive rate of return, the
incremental value doesn't mean a lot." It is conceivable, of course,
that Iraq and Saudi Arabia could harbor large fields that have simply
escaped discovery in earlier sweeps. Perhaps these could indeed be
located through the use of advanced seismic technology, as advocated
by the Bush administration.
Put all of this together, however, and none of it comes remotely
close to the scale of discovery needed to generate that additional
900 billion barrels of oil, which is why the recent oil-company
reports are so significant. If the more optimistic estimates of
global oil are on the mark, it stands to reason that the major firms
should be finding more new oil every year than they are producing;
yet the very opposite has been the case for the last 20 years. If
this continues to be the case, it is hard to imagine that the
approach of global peak oil can be that far in the future.
Whether peak oil arrives in 2005, 2010, or 2015, and whether the
maximum level of daily oil output turns out to be 90 or 100 million
barrels will not matter much in the long run. In any of these
scenarios, global oil production will level off and begin to decline
at a level far below the anticipated world demand of 120 million
barrels per day in 2025. True, some of this shortfall may be absorbed
by the accelerated development of "unconventional" petroleum fuels --
liquid condensate from the production of natural gas, fuels derived
from tar sands and oil shale, liquids extracted from coal, and the
like -- but these materials are exceedingly costly to produce and
their manufacture entails too many environmental risks to make them
practical substitutes for conventional oil.
Even with increased production of such substitutes, the inevitable
contraction in global petroleum supplies would only be postponed for
a few years. Eventually, scientists and engineers may develop
entirely new sources of energy -- for example, geothermal, biomass,
or hydrogen-based systems -- but at current rates of development,
none of these alternatives will be available on a large enough scale
when petroleum products become scarce.
So while the major stockholders of Exxon, Chevron, and the other oil
giants may be exulting at the moment, the rest of us should be deeply
disturbed by their recent reports. Despite all the optimistic talk
from Washington, we are facing a substantial and inescapable threat
of global energy scarcity, which can only have dire consequences for
our economy and the world's. Indeed, we are beginning to see hints of
that today, with rising prices at the neighborhood gas pump and a
perceptible decline in consumer spending.
This coming scarcity cannot be wished away, nor can it be erased
through drilling in the Arctic National Wildlife Refuge, which
contains far too little petroleum to make a significant difference
even in U.S. oil supplies. Only an ambitious program of energy
conservation -- entailing the imposition of much higher
fuel-efficiency standards for American automobiles and SUVs -- and
the massive funding of R&D in, and then the full-scale development of
alternative, environmentally-friendly fuels can offer hope of
averting the disaster otherwise awaiting us.
Michael T. Klare is a professor of peace and world security studies
at Hampshire College and the author, most recently, of Blood and Oil:
The Dangers and Consequences of America's Growing Petroleum
Dependency (Metropolitan Books).
Copyright 2005 Michael Klare
This piece first appeared, with an introduction by Tom Engelhardt, at
Tomdispatch.com.
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