Getting Facts and Fiction Straight on Oil Crisis

If world demand continues to grow at 2 percent a year, then almost 160 million barrels a day will need to be extracted in 2035, twice as much as today; and meeting this demand is almost inconceivable.

Published: 09-Jan-2006

hould have survived one of the more irritating journalistic traditions by now, or are there so many you just missed one? Late December provokes a universal reporting catharsis whereby entire organs devote themselves to looking back on the year either in pictures or in news stories.

Presumably the purpose is to learn from mistakes made or is it simply a purge in time for a fresh supply of bad news in the year ahead?

Thankfully this is a trap Arabian Business managed to avoid and rightly so. It always struck me as industry ennui. Filling newsprint easily rather than taxing the allegedly fine minds of its reporters. So let’s depart from the chronic ‘look back on 2005’ and look ahead.

There is no shortage of topics locally and so many myths to debunk that one is spoilt for choice. However, ignoring the ridiculous obsession with traffic and house prices for a moment, it’s probably appropriate to try and deal with the one that still drives the region’s future and possesses the potential to destroy everyone else’s — oil.

History suggests that the first half of the oil age has just closed. It lasted 150 years and saw the rapid global expansion of industry, transport, trade, agriculture and financial capital and allowed huge increases in populations.

Alas, the second half now dawns, and will be marked by the decline of oil and all that depends on it, including financial capital.

This is good news and bad news as they say. Good for the region, in that as a net recipient of a forecast US$240 billion from oil within the GCC and US$40 billion for the UAE alone, we can probably expect new airports, business parks, roads and new themed projects, from the overpriced to the under-whelming. Bad in that an economic boom often involves over expansion and diversification due less to business prowess and ability and more to do with egos.

The hinge question is whether we have reached what geologists term peak oil — output at the top of the production bell curve after which supply is always falling, together with higher costs of extraction.

Local minds were forced to consider the realities of this during 2005 when the Burgan field, Kuwait’s largest and the world’s second largest, passed its maximum production point.

That’s not to say oil is running out. On the contrary, it seems likely that there is global capacity for many years yet. However, about 944 billion barrels of oil has so far been extracted, some 764 billion remains extractable in known fields, or reserves, and a further 142 billion of reserves are classed as ‘yet-to-find’, meaning oil that is expected to be discovered. If this is so, then the overall oil peak arrives next year.

What is agreed is that world oil demand is surging. The International Energy Agency, which collates national figures and predicts demand, says developing countries could push demand up to 121 million barrels a day by 2030, and that oil companies and oil-producing nations must spend about US$100 billion a year to develop new supplies to keep pace.

If world demand continues to grow at 2% a year, then almost 160 million barrels a day will need to be extracted in 2035, twice as much as today.

Assurances given recently at the local MEED conference for example, foresee increased oil supply as a result of extra expenditure in lifting capacity.

Meeting the kind of demand above is almost inconceivable. According to industry consultants IHS Energy, around 90% of all known oil reserves are now in production — suggesting that few major discoveries remain to be made.

Shell says its reserves fell last year because it only found enough oil to replace 15% to 25 % of what the company produced. BP told the US stock exchange that it replaced only 89% of its production in 2004.

So if we are at or about to enter peak oil, then global production can be expected to decline steadily at about 2% to 3% a year. Combined with the sort of heady demand outlined above, this can only lead to one thing, strong upward pressure on the spot price.

Despite the assurances from western governments that inventories are sound or a mild winter is expected, this kind of pressure exceeds anything we have experienced so far. The cost of everything from travel, heating, agriculture, trade and plastics rises. And the scramble to control oil resources intensifies.

For the west that will mean, at best, kissing your lifestyle goodbye and, at worst, the foundations for world war three.

Stephen Corley is a business consultant with experience in fund and asset management.


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