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Tuesday, September 27th, 2005

It's better to cry wolf now than to

No one knows how much is left, but humankind can't wait any longer to come up with alternatives

George Monbiot/The Guardian (London)

Are global oil supplies about to peak? Are they,
in other words, about to reach their maximum and
then go into decline? There is a simple answer to
this question: no one has the faintest idea.

Consider these two statements: 1. "Last year
Saudi Aramco made credible claims that as much as
500bn-700bn barrels remain to be discovered in
the kingdom." 2. "Saudi Arabia clearly seems to
be nearing or at its peak output and cannot
materially grow its oil production."

The first comes from a report by Energy
Intelligence, a consultancy used by the major oil
companies. The second comes from a book by
Matthew Simmons, an energy investor who advises
the Bush administration. Whom should we believe?
I have now read 4,000 pages of reports on global
oil supply, and I know less about it than I did
before I started. The only firm conclusion I have
reached is that the people sitting on the world's
reserves are liars.

In 1985 Kuwait announced that it possessed 50%
more oil than it had previously declared. Had it
just discovered a new field? Had it developed a
new technology that could extract more oil from
the old fields? No. Opec, the price-fixing cartel
to which it belongs, had decided to allocate
production quotas to its members based on the
size of their reserves. The bigger your stated
reserve, the more you were allowed to produce.
The other states soon followed Kuwait, adding a
total of 300bn barrels to their reserves: enough,
if it existed, to supply the world for 10 years.
And their magic oil never runs out. Though
extraction has long outstripped discovery, Kuwait
posts the same reserves today as it claimed in
1985.

So we turn to the US Geological Survey for an
answer, and find that its estimates of global oil
supply are as reliable as the Pentagon's
assessments of Iraqi weapons of mass destruction.
In 1981 it said we possessed 1,719bn barrels of
oil. In 2000, 2,659. Yet the discovery of major
oilfields peaked in 1964. Where has it come from?

It is true to say that oil reserves are not
fixed. As technology improves or the price
increases, oil that was formerly too expensive to
extract becomes available. But the oil geologist
Jean Laherrère points out that the survey's
estimate "implies a five-fold increase in
discovery rate and reserve addition, for which no
evidence is presented. Such an improvement in
performance is in fact utterly implausible, given
the great technological achievements of the
industry over the past 20 years, the worldwide
search, and the deliberate effort to find the
largest remaining prospects."

The current high oil prices are the result of a
shortage of refineries - exacerbated by the
hurricanes in the Gulf of Mexico - rather than a
global shortage of crude. But behind that problem
lurks another. Last week Chris Vernon of the
organisation PowerSwitch published figures
showing that while total global oil production
has risen since 2000, the production of light
sweet crude - the kind that is easiest to refine
into motor fuels - has fallen, by 2m barrels a
day. This grade, he claims, has already peaked.
The refinery crisis results partly from this
constraint: there aren't enough plants capable of
processing the heavier grades.

And next in the queue? Who knows? All I can say
is that George Bush himself does not appear to
share the US Geological Survey's optimism. "In
terms of world supply," he said in March, "I
think if you look at all the statistics, demand
is outracing supply, and supplies are getting
tight." What has he seen that we haven't?

If the figures have been fudged, we're stuffed.
That might sound extreme, but it is not my
conclusion. It is that of the consultants hired
by the US department of energy. In February this
year the department released a report called
Peaking of World Oil Production: Impacts,
Mitigation and Risk Management. I say "released",
for it was never properly published. For several
months the only publicly available copy was
lodged on the website of the Hilltop high school
in Chula Vista, California.

The department's consultants, led by the energy
analyst Robert L Hirsch, concluded that "without
timely mitigation, the economic, social and
political costs will be unprecedented". It is
possible to reduce demand and to start developing
alternatives, but this would take "10-20 years"
and "trillions of dollars". "Waiting until world
oil production peaks before taking crash
programme action leaves the world with a
significant liquid fuel deficit for more than two
decades", which would cause problems "unlike any
yet faced by modern industrial society".

Of course, we have been here before. Oil analysts
and environmentalists have warned of disappearing
reserves ever since drilling began, and they have
always been proved wrong. According to people
such as the Danish statistician Bjorn Lomborg,
this is because the industry is self-regulating.
"High real prices deter consumption and encourage
the development of other sources of oil and
non-oil energy supplies," he says. "Since
searching costs money, new searches will not be
initiated too far in advance of production.
Consequently, new oilfields will be continuously
added as demand rises ... we will stop using oil
when other energy technologies provide superior
benefits."

It is beginning to look as if he is wrong on all
counts. As the Economist magazine pointed out on
September 10, "demand for petrol is pretty
inelastic in the short term", because people
still have to go to work, however much it costs.
According to the analyst it cites, "it would take
a doubling of petrol prices to reduce American
petrol consumption by just 5%".

Lomborg's idea that companies can just go out and
find new oil when demand rises suggests that he
believes geology is as malleable as statistics.
One day - or so we should hope - a superior
technology will certainly emerge, but cheap
alternatives to liquid fuels are currently
decades away. Yes, the pessimists have been
crying wolf for almost a century. But better
that, perhaps, than crying "sheep" when the
wolves appear.

The Hirsch report has no truck with those who
believe in the magic of the markets. "High prices
do not a priori lead to greater production.
Geology is ultimately the limiting factor." There
are plenty of oil shales, tar sands and coal
seams available for turning into liquid fuels,
but it would take years and a massive investment
before enough came online. Hirsch compares the
projections of the oil optimists to those of the
gas optimists in the late 1990s, who promised
"growing supply at reasonable prices for the
foreseeable future" in the US and Canada. Today
the same people are bemoaning the deficit. "The
North American natural gas market is set for the
longest period of sustained high prices in its
history, even adjusting for inflation ... Gas
production in the United States (excluding
Alaska) now appears to be in permanent decline."

"The bottom line," Hirsch says, "is that no one
knows with certainty when world oil production
will reach a peak, but geologists have no doubt
that it will happen." Our hopes of a soft landing
rest on just two propositions: that the oil
producers' figures are correct, and that
governments act before they have to. I hope that
reassures you.

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