The End of Cheap Oil?

The new cycle of resource nationalism is bad news


Crude oil prices rose above $74 per barrel this week and Goldman Sachs warned that the world could be facing $95 per barrel oil by this fall. Later this week the National Petroleum Council (NPC), which advises the Secretary of the Department of Energy, will release a new report which will find that conventional oil and gas supplies are not likely to keep up with growing global demand over the next 25 years. Of course, supply and demand must balance, so what the Journal is telling us is that the NPC thinks high oil prices are here to stay.

The sobering news about oil prices was preceded by the International Energy Agency's (IEA) Medium Term Oil Market Report (MTOMR). That report looked at energy supply and demand projections through 2012. The IEA was founded by the 26 members of the Organization of Economic Cooperation and Development (OECD) during the 1970s energy crisis to analyze and advise on global energy trends. The IEA projects the global demand for oil will rise by 1.9 million barrels per day or 2.2% per year on average, reaching 95.8 million barrels per day by 2012, up from 86 million today. Non-OPEC production is forecast to increase between 2007 and 2012 by a modest 2.5 million barrels per day. OPEC currently has spare production capacity of 3 million barrels per day and the IEA expects OPEC production capacity to rise by 4 million barrels per day by 2012.

Has the peak of world oil production arrived? The IEA report says probably not. The IEA notes that "the concept of peak oil production and its timing are emotive subjects which raise intense debate." Nevertheless, the IEA acknowledges that its new five-year forecast suggests that non-OPEC production "appears, for now, to have reached an effective plateau, rather than a peak." Let's put aside the question of how a plateau differs from a flat peak. The IEA reminds us that much depends on the definition of "conventional" oil production. Offshore oil was once unconventional and depending on technology and economics ultra-deep sea oil and tar sands may become conventional sources of crude. In addition, the IEA, while noting hydrocarbon supplies are finite, argues that the chief barrier to increasing medium-term production is access to reserves and the underinvestment in production infrastructure.

The resurgence of resource nationalism bears a good bit of the responsibility for the glum oil supply projections-what I've previously called "political peak oil." Seventy-seven percent of world oil reserves are owned by national oil companies. Unfortunately, national oil companies are located in technologically backward countries without access to world-class production expertise and adequate supplies of capital. As the IEA diplomatically puts it, "Often political and social spending needs grow to the point where oil exploration and development investment is compromised, in turn reducing oil and gas exports." And this is happening. Major oil producers such as Venezuela, Mexico, Russia, and Iran are using oil revenues to bribe their people and not investing enough to maintain future oil production.

To make matters worse, Venezuela is seizing a number of oil production projects operated by private international companies. Russia has done the same. Few investors are eager to invest in oil production in Iran and Iraq given current geopolitical realities. The IEA projects that there will no net expansion in oil production in Venezuela, Iran, Iraq, and Nigeria between now and 2012. In addition, spare global production capacity is currently at 3 million barrels per day and is expected to fall to 1.5 million barrels per day by 2012. Thus any disruption in production anywhere in the world will boost prices.

How much oil is left? The U.S. Energy Information Administration's International Energy Outlook 2007 calculates that world proven reserves of oil are 1.3 trillion barrels and projects that world consumption will rise to 118 million barrels per day by 2030. In 2002, U.S. Geological Survey researchers estimated that 3 trillion barrels of conventional oil remain to be recovered. "It's not peak oil: it's in the ground, we know where a lot of it is, but it's getting it out," said Leo Drollas, an oil expert at the Centre for Global Energy Studies in the Guardian.

The IEA report notes that the world has once before experienced a political boom/bust cycle in oil production. The previous bout of resource nationalism in the 1970s spawned high oil prices which, in turn, reduced demand and encouraged exploration for new supplies. Eventually, reduced demand and increased supplies combined to dramatically lower prices and which then cut the revenues flowing to oil state regimes. And the cycle continued as cash-strapped oil state regimes in the 1980s anxiously sought to boost their flagging revenues by inviting international oil companies to come back. The good news is that market forces eventually bring oil nationalists to heel. The bad news is that the process is far from pleasant for the world's economy.

Disclosure: Those 50 shares of ExxonMobil that I own are looking pretty good, but they don't make up for the amount I have to pay at the gas pump.

Ronald Bailey is Reason's science correspondent. His book Liberation Biology: The Scientific and Moral Case for the Biotech Revolution is now available from Prometheus Books.

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