< Back to Iraqi Dinar in the News February 26th, 2006

Oil Futures

Oil Futures

Some experts believe the age of oil is near its end. Others insist that there are trillions of untapped barrels left -- and that the future of oil depends more on what happens above ground than below.

ACCORDING TO ''The Prize," Daniel Yergin's Pulitzer Prize-winning 1991 history of the oil industry, the dawning of the automotive age was a time of deep pessimism about America's oil supply. World War I had just ended and few new fields had been discovered. Crude was in such short supply that some refineries were running at half capacity. ''Leading geologists," wrote Yergin, ''prophesied gloomily that the limits on US production were near."

Instead, the fear of shortage and the resulting rise of oil prices spurred the use of experimental prospecting techniques. The use of seismographs, aerial photography, improved drilling technology, and specialized inventions like the torsion balance and the magnetometer ushered in a new era of oil exploration, and the 1920s saw a rush of major American oil finds.

Yergin, the founder and chairman of Cambridge Energy Research Associates, a leading oil consultancy based in Cambridge, likes to tell this story to people who are worried that we have entered the final, terminal phase of exhausting the world's oil supply that we have passed the point of what experts call ''peak oil."

A lot of people are worrying these days. In public appearances the famed former Texas oilman T. Boone Pickens has declared that supplies are dwindling. Arjun Murti, a Goldman Sachs oil analyst who spooked markets last spring by predicting that oil could in 2007 rise to $105 a barrel, recently said that forecast might be conservative if the peak oil model is correct. Even President Bush, another former oilman, has been hinting that the age of oil is drawing to a close, following up last month's State of the Union speech in which he proclaimed that ''America is addicted to oil" with a barnstorming tour to talk up the benefits of wind and solar energy, ethanol, and a host of other alternative fuels.

And two weeks ago, Kenneth Deffeyes, a retired Princeton geology professor and leading ''peakist," announced on his website that, according to his calculations, global daily oil production passed into eclipse in December and began an inexorable, accelerating decline. The fact that the chairman of Kuwait's state oil company had conceded in November that the Burgan oil field, second-largest on the planet, was ''exhausted" only seemed to underline his point. As Deffeyes wrote, ''I can now refer to the world oil peak in the past tense. My career as a prophet is over. I'm now an historian."

But for many oil industry analysts, Yergin among them, talk about an imminent ''end of oil" is both premature and deeply wrongheaded. The history of oil exploration, they point out, has been defined by an ever-improving ability to wring more oil out of the earth and, when necessary, to use it more efficiently. In that sense, the size of the world's oil supply is shaped primarily by the interplay of geopolitics, economics, and technological innovation. As Yergin argues in an article in the forthcoming issue of Foreign Affairs, it's these factors, rather than the limits of geology, that should concern us.

Yergin and other oil optimists concede that there may be very good reasons to curtail our use of oil climate change, for one, or instability in the Persian Gulf. But visions of dry wells should not be among them. As Michael Lynch, a fervent anti-peakist and the head of the Winchester-based energy consulting firm Strategic Energy & Economic Research, puts it, ''we've got enough oil out there to turn the planet into an Easy-Bake oven."

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Worries about the oil supply running out are as old as the oil age. And they have sometimes been well founded. In 1956, M. King Hubbert, a former Shell research geologist then working at the US Geological Survey, predicted that US oil production capacity would peak in the early 1970s. Mostly ridiculed at the time, he turned out to be right: US production leveled off in 1970 and has been dropping ever since. Most of today's peakists make their forecasts at least in part by applying ''Hubbert's curve" (a bell curve in which production rises then falls as a direct function of remaining reserves) to the world supply.

The worry is not that we'll soon run out of oil in an absolute sense. The consensus view among peakists and anti-peakists alike is that the earth still contains 7 to 9 trillion barrels of oil, as against the 1 trillion we've already pumped out.

The debate, instead, is over how many of those remaining barrels are recoverable. Colin Campbell, a Scottish former oil industry geologist who is, along with Deffeyes, one of the best-known contemporary peakists, believes it's 850 billion. Exxon Mobil president Rex Tillerson has said it could be as high as 7 trillion.

The peak, these analysts point out, is not a matter of total numbers, but the rate at which we can get the oil out of the ground. The world has very little surplus oil capacity today. Fed by unexpectedly high demand from India and China, global consumption has grown briskly for the past several years, and if production levels off, a gap will open up between supply and demand. The result would be crippling shortages and oil prices far higher than any we've seen. According to Charles Maxwell, a widely respected oil industry analyst at the brokerage house Weeden & Company, a 2 percent shortfall can easily mean a 20 percent increase in price: ''Everyone around the world pays that huge penalty, in order to determine who's going to go without that 2 percent."

Maxwell himself thinks things will get pretty dire at that point a 20 percent spike, he says, ''means that people can't buy clothes and housing. It slows economic growth immeasurably. And God save us from the time when instead of going flat, production starts dropping off." Matthew Simmons, head of a Houston-based energy investing firm and a vocal oil pessimist, has sketched a future in which oil wars proliferate as supply tails off.

Deffeyes believes we may adjust without major catastrophes, but some of the changes he portends will be hard to ignore. Even our diet will change. When fuel costs make flying vegetables up from South America prohibitively expensive, he says, ''we're going to need to rely far more on locally grown crops, things that can be stored over the winter. We're going to have to learn to love rutabagas and parsnips and turnips, all of which I hate."

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There are two problems with this story, according to the optimists. One is the geology. Last year, Robert Esser and Peter Jackson, two petroleum geologists at CERA, completed a field-by-field study of the world oil supply and concluded that the oil production capacity had plenty of growth left in it. Instead of an impending or recently passed peak, they describe a leveling off of production in 30 or 40 years, followed by an ''undulating plateau" lasting several decades more.

Still, this may provide little comfort. After all, 30 or 40 years is within many of our lifetimes, and the end of the plateau is within the lifetimes of our children or grandchildren.

Which raises the second critique, namely, that oil production is not a matter of geology alone. The smooth rise and fall of Hubbert's curve, the peak critics argue, implies an ineluctability not borne out by human history. In the past, Michael Lynch points out, when perceived shortages have driven prices up, two things have happened: we've found ways to find more oil, and we've found ways to use less of it.

It's not a process, of course, limited to oil. ''For a long time," says Henry Lee, director of the Environment and Natural Resources Program at Harvard's Kennedy School of Government and an agnostic on peak oil, ''we worried that we were running out of iron, then it was steel, then aluminum....I'd be hard-pressed to give you a metal that we worry about in this respect today."

Today, innovations like horizontal drilling and 3-D seismic technology are allowing oil companies to reopen previously abandoned fields. For peakists, this only means reserves are going to be exhausted sooner: ''The primary impact of technological innovation," Campbell says, ''has been to allow us to extract oil faster." But Lynch responds that the ability to extract more means we can revise outdated estimates of available reserves upward.

Furthermore, the very definition of oil is expanding. The CERA report predicts that so-called ''unconventional" oil sources condensates and natural gas liquids, oils from Canadian and Venezuelan tar sands, and ultra-deepwater oil will make up more than a third of global production by 2020. Extracting some of these remains difficult and expensive, but the costs have dropped in recent years, and most analysts predict that they will drop still further. Any future rise in the price of oil only makes these alternatives more economically feasible.

We're also getting better at stretching our supply. According to Yergin, the 1970s oil shocks set off three decades of previously unheard-of energy efficiency in the US, allowing the economy to grow 150 percent while energy consumption grew only 25 percent. By the time oil production plateaus, he says, ''I think we'll be driving cars that get 110 miles to the gallon, 120 miles to the gallon." To assume we won't be able to adjust in time, Yergin says, ''means you think the technological revolution that began in the 18th century is going to end."

The anti-peakist narrative can have a smug ring to it, with its firm faith in the power of markets and progress and rational behavior. Yergin, however, is eager to dispel any charge of complacency. He is concerned about the future of oil, he insists, it's just that what concerns him is taking place aboveground, not below. Today's tightened supply, after all, is due not to geology but geopolitics the lack of foreign investment in Iran, the chaos in Iraq, the tumultuous politics of Venezuela, rebel attacks in Nigeria.

''It's politics within countries, the timing of decision-making, the clash of nations, those are the things I worry about," Yergin says. Finding the oil, he suggests, is the easy part.

Some experts believe the age of oil is near its end. Others insist that there are trillions of untapped barrels left and that the future of oil depends more on what happens above ground than below.

Drake Bennett is the staff writer for Ideas. E-mail