It's Not the End Of the Oil Age
Technology and Higher Prices Drive a Supply Buildup
By Daniel Yergin
July 31, 2005
We're not running out of oil. Not yet.
"Shortage" is certainly in the air -- and in the
price. Right now the oil market is tight, even tighter than it was on the
eve of the 1973 oil crisis. In this high-risk market, "surprises"
ranging from political instability to hurricanes could send oil prices spiking
higher. Moreover, the specter of an energy shortage is not limited to oil.
Natural gas supplies are not keeping pace with growing demand. Even supplies
of coal, which generates about half of the country's electricity, are constrained
at a time when our electric power system has been tested by an extraordinary
But it is oil that gets most of the attention. Prices around
$60 a barrel, driven by high demand growth, are fueling the fear of imminent
shortage -- that the world is going to begin running out of oil in five
or 10 years. This shortage, it is argued, will be amplified by the substantial
and growing demand from two giants: China and India.
Yet this fear is not borne out by the fundamentals of supply.
Our new, field-by-field analysis of production capacity, led by my colleagues
Peter Jackson and Robert Esser, is quite at odds with the current view and
leads to a strikingly different conclusion: There will be a large, unprecedented
buildup of oil supply in the next few years. Between 2004 and 2010, capacity
to produce oil (not actual production) could grow by 16 million barrels
a day -- from 85 million barrels per day to 101 million barrels a day --
a 20 percent increase. Such growth over the next few years would relieve
the current pressure on supply and demand.
Where will this growth come from? It is pretty evenly divided
between non-OPEC and OPEC. The largest non-OPEC growth is projected for
Canada, Kazakhstan, Brazil, Azerbaijan, Angola and Russia. In the OPEC countries,
significant growth is expected to occur in Saudi Arabia, Nigeria, Algeria
and Libya, among others. Our estimate for growth in Iraq is quite modest
-- only 1 million barrels a day -- reflecting the high degree of uncertainty
there. In the forecast, the United States remains almost level, with development
in the deep-water areas of the Gulf of Mexico compensating for declines
While questions can be raised about specific countries, this
forecast is not speculative. It is based on what is already unfolding. The
oil industry is governed by a "law of long lead times." Much of
the new capacity that will become available between now and 2010 is under
development. Many of the projects that embody this new capacity were approved
in the 2001-03 period, based on price expectations much lower than current
There are risks to any forecast. In this case, the risks are
not the "below ground" ones of geology or lack of resources. Rather,
they are "above ground" -- political instability, outright conflict,
terrorism or slowdowns in decision making on the part of governments in
oil-producing countries. Yet, even with the scaling back of the forecast,
it would still constitute a big increase in output.
This is not the first time that the world has "run out
of oil." It's more like the fifth. Cycles of shortage and surplus characterize
the entire history of the oil industry. A similar fear of shortage after
World War I was one of the main drivers for cobbling together the three
easternmost provinces of the defunct Ottoman Turkish Empire to create Iraq.
In more recent times, the "permanent oil shortage" of the 1970s
gave way to the glut and price collapse of the 1980s.
But this time, it is said, is "different." A common
pattern in the shortage periods is to underestimate the impact of technology.
And, once again, technology is key. "Proven reserves" are not
necessarily a good guide to the future. The current Securities and Exchange
Commission disclosure rules, which define "reserves" for investors,
are based on 30-year-old technology and offer an incomplete picture of future
potential. As skills improve, output from many producing regions will be
much greater than anticipated.
The share of "unconventional oil" -- Canadian oil
sands, ultra-deep-water developments, "natural gas liquids" --
will rise from 10 percent of total capacity in 1990 to 30 percent by 2010.
The "unconventional" will cease being frontier and will instead
become "conventional." Over the next few years, new facilities
will be transforming what are inaccessible natural gas reserves in different
parts of the world into a quality, diesel-like fuel.
The growing supply of energy should not lead us to underestimate
the longer-term challenge of providing energy for a growing world economy.
At this point, even with greater efficiency, it looks as though the world
could be using 50 percent more oil 25 years from now. That is a very big
challenge. But at least for the next several years, the growing production
capacity will take the air out of the fear of imminent shortage.
And that in turn will provide us the breathing space to address
the investment needs and the full panoply of technologies and approaches
-- from development to conservation -- that will be required to fuel a growing
world economy, ensure energy security and meet the needs of what is becoming
the global middle class.
The writer is chairman of Cambridge Energy Research Associates.
His book "The Prize: the Epic Quest for Oil, Money and Power"
received the Pulitzer Prize
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