The Energy Crunch to Come
By Michael T. Klare
TomDispatch

Tuesday 22 March 2005

Soaring oil profits, declining discoveries and danger signs.
Data released annually at this time by the major oil companies on their
prior-year performances rarely generates much interest outside the business
world. With oil prices at an all-time high and Big Oil reporting record profits,
however, this year has been exceptional. Many media outlets covered the
announcement of mammoth profits garnered by ExxonMobil, the nation's wealthiest
public corporation, and other large firms. Exxon's fourth-quarter earnings, at
$8.42 billion, represented the highest quarterly income ever reported by an
American firm.

"This is the most profitable company in the world," declared Nick Raich,
research director of Zacks Investment Research in Chicago. But cheering as the
recent announcements may have been for many on Wall Street, they also contained
a less auspicious sign. Despite having spent billions of dollars on exploration,
the major energy firms are reporting few new discoveries and so have been
digging ever deeper into existing reserves. If this trend continues -- and there
is every reason to assume it will -- the world is headed for a severe and
prolonged energy crunch in the not-too-distant future.

To put this in perspective, bear in mind that the global oil industry has,
until now, largely been able to increase its combined output every year in step
with rising world demand. True, there have been a number of occasions when
demand has outpaced supply, producing temporary shortages and high gasoline
prices at the pump. But the industry has always been able been able to catch up
again and so quench the world's insatiable thirst for oil. This has been
possible because the big energy companies kept up a constant and successful
search for new sources of oil to supplement the supplies drawn from their
existing reserves. The world's known reserves still contain a lot of oil --
approximately 1.1 trillion barrels, by the estimates of experts at the oil major
BP -- but they cannot satisfy rising world demand indefinitely; and so, in the
absence of major new discoveries, we face a gradual contraction in the global
supply of petroleum.

Signs of an Energy Crunch

It is in this context that the following disclosures, all reported in recent
months, take on such significance.
ConocoPhillips, the Houston-based amalgam of Continental Oil and Phillips
Petroleum, announced in January that new additions to its oil reserves in 2004
amounted to only about 60-65% of all the oil it produced that year, entailing a
significant depletion of those existing reserves.


ChevronTexaco, the second largest U.S. energy firm after ExxonMobil, also
reported a significant imbalance between oil production and replacement.
Although not willing to disclose the precise nature of the company's shortfall,
chief executive Dave O'Reilly told analysts that he expects "our 2004
reserves-replacement rate to be low."


Royal Dutch/Shell, already reeling from admissions last year that it had
over-stated its oil and natural gas reserves by 20%, recently lowered its
estimated holdings by another 10%, bringing its net loss to the equivalent of
5.3 billion barrels of oil. Even more worrisome, Shell announced in February
that it had replaced only about 45-55% of the oil and gas it produced in 2004,
an unexpectedly disappointing figure.

These and similar disclosures suggest that the major private oil companies
are failing to discover promising new sources of petroleum just as demand for
their products soars. According to a recent study released by PFC Energy of
Washington, D.C., over the past 20 years, the major oil firms have been
producing and consuming twice as much oil as they have been finding. "In
effect," says Mike Rodgers, author of the report, "the world's crude oil supply
is still largely dependent on legacy assets discovered during the exploration
heydays." True, vast reservoirs of untapped petroleum were discovered in those
"heydays," mostly the 1950s and 1960s, but these reserves, being finite, will
eventually run dry and, if not replaced soon, will leave the world facing a
devastating energy crunch.

The notion that world oil supplies are likely to contract in the years ahead
is hotly contested by numerous analysts in government and industry, who contend
that many large fields await discovery. "Is the resource base large enough [to
satisfy rising world demand]? We believe it is," affirmed ExxonMobil president
Rex W. Tillerson in December. But other experts cast doubt on such claims by
pointing to those disappointing reserve-replacement rates. "We've run out of
good projects," said Matt Simmons, head of the oil-investment bank Simmons & Co.
International. "This is not a money issue.... If these companies had fantastic
projects, they'd be out there [developing new fields]."

That the major oil firms see few promising new fields to invest in right now
is further suggested by reports that these companies are sinking their colossal
profits in mega-mergers and stock buy-back programs rather than in exploration
and field development. ExxonMobil, for example, spent $9.95 billion to buy back
its own stock in 2004, while ChevronTexaco put out $2.5 billion to do the same.
Meanwhile several big companies, including ChevronTexaco, are said to be eyeing
California-based Unocal Corp. as a possible acquisition, and ConocoPhillips
recently announced a $2 billion investment in Lukoil, the Russian energy giant.
These moves are consuming funds that might have gone into new-field exploration
-- yet another indicator of diminished expectations for major new discoveries.
"If they had attractive things to invest in, they'd be investing their little
heads off," explained PFC Energy managing director Gerald Kepes. But the great
exploration opportunities of yesteryear "have
largely dried up."

It is true, of course, that the private energy firms are largely barred from
investment in Mexico, Venezuela, and the Persian Gulf countries, where oilfield
development is the exclusive prerogative of state-owned companies. Hence, a
major goal of the Bush administration's energy policy is to persuade or compel
these countries to open up their territories to exploration by U.S. firms --
which, it is claimed, possess the advanced technological know-how that would
make possible the discovery of previously unknown fields. But the energy
professionals who run the state-owned companies insist that they do not need
outside help to search for oil and that they have already mapped their
countries' major prospects. Here, too, there has been a marked slowdown in new
discoveries over the past decade or so.

The worldwide decline in new discoveries has profound implications for the
global supply of energy and, by extension, the world economy. Given a recent
surge in energy demand from China and other rapidly-developing countries, the
U.S. Department of Energy (DoE) predicts that, for all future energy needs to be
satisfied, total world oil output will have to climb by 50% between now and
2025; from, that is, approximately 80 million to 120 million barrels per day. A
staggering increase in global production, that extra 40 million barrels per day
would be the equivalent of total world daily consumption in 1969. Absent major
new discoveries, however, the global oil industry will likely prove incapable of
providing all of this additional energy. Without massive new oil discoveries,
prices will rise, supplies will dwindle, and the world economy will plunge into
recession -- or worse.

Where Is Oil's Peak?

Just how soon such an energy crunch will arrive and just how severe it is
likely to be are matters of considerable debate. To a great extent, this debate
hinges on the concept of "peak oil," or maximum sustainable daily output. In the
1950s, a petroleum geologist named M. King Hubbert published a series of
equations showing that the output of any given oil well or reservoir will follow
a parabolic curve over time. Production rises quickly after initial drilling and
then loses momentum as output reaches its maximum or "peak" -- usually when half
of the total amount of oil has been extracted -- after which production falls at
an increasingly sharp rate. In 1956, using these equations, Hubbert predicted
that conventional (that is, liquid) U.S. oil output would peak in the early
1970s. His prediction provoked much derision at the time, but earned him
considerable renown when U.S. output did indeed achieve its peak level in 1972.
Because of insufficient data at the time, Hubbert was
unable to apply his equations to non-U.S. production. He did, however, predict
that global output -- just like U.S. output -- would eventually reach a peak
level and then begin an irreversible decline.

Today, the concept of global peak oil is widely accepted in the energy
field, though debate rages over when this moment will actually occur. Those who
believe that oil supplies are abundant tend to put this date far in the future,
well beyond our immediate concern. The DoE, for example, noted in its
International Energy Outlook for 2004 that it expects "conventional oil to peak
closer to the middle than to the beginning of the 21st century." But other
analysts are not so sanguine. "It is my opinion that the peak will occur in late
2005 or in the first few months of 2006," says Princeton geologist Kenneth S.
Deffeyes in a new book, Beyond Oil. A more conservative estimate by Mike Rodgers
of PFC Energy locates the peak somewhere in the vicinity of 2010-2015. If either
of these predictions proves accurate, global oil supply can never climb high
enough to satisfy the elevated consumption levels projected by the DoE for 2025
and beyond.

Where one stands on this critical issue depends on one's estimate of how
much petroleum the Earth originally possessed. Those like Deffeyes, who contend
that peak oil will arrive soon, believe that our petroleum inheritance amounted
to roughly 2,000 billion barrels when commercial oil drilling first commenced in
1859. Since we have already consumed approximately 950 billion barrels and are
now burning some 30 billion barrels each year, in this scenario the halfway
point of total world extraction -- and so the moment of peak production --
should be just a year or two away. By contrast, those who hold that peak oil is
safely in the distance claim that the world's total inheritance is closer to
3,000 billion barrels. This more optimistic figure would include the 950 billion
barrels already consumed, "proven" reserves of approximately 1,150 billion
barrels, and as-yet-undiscovered fields believed to hold another 900 billion
barrels. This latter amount, it should be noted, represents
the equivalent of all the known oil in the Middle East, Asia, and Africa
combined.

Where might these mammoth still-undiscovered reservoirs lie? This is no idle
question, given that the major oil companies have scoured the world for over a
century in the search of new sources of supply -- and, in recent years, have
come up virtually empty-handed. True, a handful of impressive finds -- in the 1
billion barrel range -- have been uncovered off the west coast of Africa, and
one very large field (the 10-billion barrel Kashagan field) was discovered in
Kazakhstan's portion of the Caspian Sea.

Most other recent discoveries have been relatively small, and often located
in deep offshore waters or other remote locations where the costs of production
are high. "The reason [investment] is not increasing," Mike Rodgers has
observed, "is that, in so many regions of the world, the fields have gotten so
small that even though you might be able to drill a well and get a positive rate
of return, the incremental value doesn't mean a lot." It is conceivable, of
course, that Iraq and Saudi Arabia could harbor large fields that have simply
escaped discovery in earlier sweeps. Perhaps these could indeed be located
through the use of advanced seismic technology, as advocated by the Bush
administration.

Put all of this together, however, and none of it comes remotely close to
the scale of discovery needed to generate that additional 900 billion barrels of
oil, which is why the recent oil-company reports are so significant. If the more
optimistic estimates of global oil are on the mark, it stands to reason that the
major firms should be finding more new oil every year than they are producing;
yet the very opposite has been the case for the last 20 years. If this continues
to be the case, it is hard to imagine that the approach of global peak oil can
be that far in the future.

Whether peak oil arrives in 2005, 2010, or 2015, and whether the maximum
level of daily oil output turns out to be 90 or 100 million barrels will not
matter much in the long run. In any of these scenarios, global oil production
will level off and begin to decline at a level far below the anticipated world
demand of 120 million barrels per day in 2025. True, some of this shortfall may
be absorbed by the accelerated development of "unconventional" petroleum fuels
-- liquid condensate from the production of natural gas, fuels derived from tar
sands and oil shale, liquids extracted from coal, and the like -- but these
materials are exceedingly costly to produce and their manufacture entails too
many environmental risks to make them practical substitutes for conventional
oil.

Even with increased production of such substitutes, the inevitable
contraction in global petroleum supplies would only be postponed for a few
years. Eventually, scientists and engineers may develop entirely new sources of
energy -- for example, geothermal, biomass, or hydrogen-based systems -- but at
current rates of development, none of these alternatives will be available on a
large enough scale when petroleum products become scarce.

So while the major stockholders of Exxon, Chevron, and the other oil giants
may be exulting at the moment, the rest of us should be deeply disturbed by
their recent reports. Despite all the optimistic talk from Washington, we are
facing a substantial and inescapable threat of global energy scarcity, which can
only have dire consequences for our economy and the world's. Indeed, we are
beginning to see hints of that today, with rising prices at the neighborhood gas
pump and a perceptible decline in consumer spending.

This coming scarcity cannot be wished away, nor can it be erased through
drilling in the Arctic National Wildlife Refuge, which contains far too little
petroleum to make a significant difference even in U.S. oil supplies. Only an
ambitious program of energy conservation -- entailing the imposition of much
higher fuel-efficiency standards for American automobiles and SUVs -- and the
massive funding of R&D in, and then the full-scale development of alternative,
environmentally-friendly fuels can offer hope of averting the disaster otherwise
awaiting us.
--------
Michael T. Klare is a professor of peace and world security studies at
Hampshire College and the author, most recently, of Blood and Oil: The Dangers
and Consequences of America's Growing Petroleum Dependency (Metropolitan Books).



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