An oped piece by George Will -- George F. Will : yesterday exhibits many of the typical "everything's OK--nothing bad will happen" arguments about oil--plus adding in his own poor analysis for additional flavor. It is worth looking at because much of the population either doesn't think about these issues or buys the head in the sand approach taken by Will.
Oil produced the modern world— its ways of work, warfare and recreation — and soon, we are told, the end of cheap oil will produce abrupt, wrenching changes in the way we live. Changes, certainly, but not convulsions, because the modern world responds to price signals.
That is why U.S. energy efficiency — energy consumed to produce a dollar of GDP — has roughly doubled since the oil shocks of the 1970s. America's less than 5 percent of the world population consumes more than 20 percent of all oil. Surging demand by India and especially China will cause prices to rise. And terrorists, or chaos in Venezuela — America's fourth-largest supplier, behind Canada, Saudi Arabia and Mexico — or Nigeria, the fifth-largest, could cause prices to soar.
However, in 1920 the inflation-adjusted price of gasoline was twice today's. To match 1981 prices, a gallon of gasoline today would have to be $3.50. Inexpensive gasoline is one reason why since 1988 the average gas mileage of U.S. passenger vehicles has declined, and why in the 2003 model year, for the first time since the mid-1970s, the average weight of a new car or light truck was more than two tons (4,021 pounds).
In 1977 President Carter said we "could use up all the proven reserves of oil in the entire world by the end of the next decade." But today known reserves are larger than ever. Reserves and production outside the Middle East are larger than they were 31 years ago, when a State Department report was titled "The Oil Crisis: This Time the Wolf is Here."
In 1971, a year before Texas output passed its peak, U.S. production was more than two-thirds of the nation's needs. Today the nation imports 54 percent of the oil it uses. M.A. Adelman of MIT notes that in 1971 non-OPEC countries had about 200 billion barrels of proven reserves. In the next 33 years they produced 460 billion "and now have 209 billion 'remaining.'" Note Adelman's quotation marks. To predict actual reserves would require predicting future exploration and development technologies.
However, the rate of discovery has been declining for several decades. Of course, oil supplies are, as some people say with a sense of profound discovery, "finite." But that distinguishes oil not at all from land, water or pistachio nuts.
Russell Roberts, an economist, says: Imagine that you love pistachio nuts and are given a room filled 5 feet deep with them. But you must eat them in the room and must leave the shells. When will you have eaten them all? Never. Because as it becomes increasingly difficult to find nuts amidst the shells, the cost of the nuts, in time and effort, will become too high. You will seek a substitute — pistachios from a store, or another snack.
Oil over $40 a barrel accelerates exploration for new fields, and development of known but technologically inaccessible fields, including some fields four miles below the surface of the Gulf of Mexico, where there may be at least 25 billion barrels. High prices may also prompt development of hitherto economically unfeasible sources, such as U.S. oil shale and Canadian tar sands. Tim Appenzeller, writing in National Geographic, says tar-sand deposits in Alberta "hold the equivalent of more than 1.6 trillion barrels of oil — an amount that may exceed the world's remaining reserves of ordinary crude." Alberta, a future Saudi Arabia? Perhaps. Full-throttle production of oil from tar sand is not economical. So far.
MIT's Adelman notes that even before 1800 — before the coal-fired industrial revolution — Europeans worried about exhausting coal supplies. "European production actually did peak in 1913 and is nearly negligible today." Billions of tons remain beneath European soil but are uneconomical to remove. So far.
"Reserves and production outside the Middle East are larger than they were 31 years ago..."
Yes, reserves and production are higher than they were three decades ago, but what is key with oil is not how much is left, but how fast can you pump it, since--as Will notes--demand is surging. There are two points that Will overlooks with this argument. First, two thirds of all proven oil reserve claims are in the Middle East; in other words--OPEC--and OPEC lies about its reserves. In the 1980s OPEC set its policy of allocating production quotas on the basis of the proven oil reserves claimed by each country. Within a year or two of this decision, every OPEC country had doubled the amount of proven oil reserves it claimed--even when no significant new discoveries had been made. These claims are almost universally considered to be overstated.
The second problem with Will's statement is that reserves can increase at the same time that production falls. For example, ChevronTexaco has reported six straight years of increasing oil and natural gas reserves, a cumulative increase of 14 percent, more than one billion barrels. But at the same time production has fallen for each of those six years. The company's annual output has fallen by almost 15 percent, and the declines have continued recently despite a company promise to increase production in 2002. Other companies have experience the same problem.
The majority of the world's oil production comes from only a few hundred giant and super-giant oil fields. Thousands of smaller fields won't add up to the production that these majors put out; and the majors just aren't being found anymore.
"In 1971, a year before Texas output passed its peak, U.S. production was more than two-thirds of the nation's needs."
Will very nearly hits on the core of the matter here. Not only did Texas production hit it's peak, but production for all of the U.S. peaked and rolled over into decline. Even when Alaska and offshore production were brought online, they were not enought to stem the decline. In 1970, the U.S. produced 10 million barrels of crude oil a day. Today we produce less than 6 million barrels a day. This "Hubert Peak" will happen worldwide at some point.
"Oil over $40 a barrel accelerates exploration for new fields, and development of known but technologically inaccessible fields..."
But it doesn't necessarily produce higher rates of production. The oil shocks of the 1970s lead to the biggest oil drilling boom in U.S. history in the 1980s, but we still ended the decade pumping less crude than we began with.
"tar-sand deposits in Alberta "hold the equivalent of more than 1.6 trillion barrels of oil — an amount that may exceed the world's remaining reserves of ordinary crude." Alberta, a future Saudi Arabia?"
Not in terms of daily production. It's much more difficult to get oil out of tar sands than by poking a hole in the groundmore takes mroe energy and tremendous amounts of water. Canada is alreadysignificant significan portion of its oil production from tar sands, but it will never replace conventional oil.
"Of course, oil supplies are, as some people say with a sense of profound discovery, "finite." But that distinguishes oil not at all from land, water or pistachio nuts."
Will's most amazing mistatement. Yes, land, water and pistachio nuts are finite, but they are either renewable (water and pistachio nuts) or need to be conserved to prevent a catastrophe (soil.)
"When will you have eaten them all? Never. Because as it becomes increasingly difficult to find nuts amidst the shells, the cost of the nuts, in time and effort, will become too high. You will seek a substitute — pistachios from a store, or another snack."
Will almost gets it, but not quite. Implied in this statement is the fact that consumption will decline, although the implications are totally ignored. Unlike pistachio nuts, there is not readily available substitute waiting at the store; nothing produces as much energy or is as versatile as oil. Finding the alternatives when oil production goes into decline is at the heart of producing a sustainable economy, and it is not an easy problem.
"Billions of tons [of coal] remain beneath European soil but are uneconomical to remove. So far."
The final fallacy--that money drives everything. Most of the oil ever made, as well as most of the coal remain beneath the ground and always will. The problem comes not from how much it costs to get it out, the problem comes when it takes more energy to get it out of the ground than you get from it. Then it is no longer an net energy source, and it won't matter how much the price goes up. Net energy gained, not the market will drive the future of energy production.