|The Gathering Storm
By CHARLES T. MAXWELL
MONDAY, NOVEMBER 15, 2004
The dean of energy analysts sees a difficult future
THE ENERGY CRISIS WE ARE IN today is entirely different from the temporary
problems we experienced in 1973-74, 1979-86, 1990-91 and 2000. Then, there
were political issues: Some nations were willing and able to produce oil for
our use and some were not. There was always sufficient worldwide geological
capacity to produce additional barrels of crude oil to meet the world's
No longer. In the next major energy crisis, that capacity will likely be
eroded. So the crisis should have a severe impact, be global in scope, and
be difficult to solve. Plainly, it will be unprecedented. What may emerge
could well be a restructured world, as well as a restructured oil industry.
Over the next 25 years, a new world energy economy will arrive in three
waves. We are near the top of the first and smallest one, a warning wave. A
second more powerful wave likely will hit in the 2009-2010 period when the
non-OPEC world may reach its all-time highest output of crude oil,
subsequently declining to become ever more dependent on OPEC for incremental
barrels of production. The final wave should break around 2020, or earlier,
as even OPEC's vast reserves are tapped at a maximum rate of production.
After that, oil volume should head down and keep falling, never to revive.
Then the world's energy companies and governments finally may begin to
address new sources of energy to replace oil, and this issue should become
the principal economic and political preoccupation for the rest of the
An international economic disturbance of this magnitude will create
potential conflicts between nations and civil competition within societies.
These could be a trial for us and for our children, made worse in the early
years by our lack of preparation and our failure to understand what is
already happening to us. There could be a good deal of time wasted in
recrimination while we seek to pin responsibility on culprits and
conspirators and demons: The oil companies, government regulators, Wall
Street, the automobile companies, OPEC, the Arabs, gas-guzzling U.S.
consumers and so on.
Eventually, we will have to get down to addressing the real issues. They are
geological -- the limits on supply -- and they are human -- the tendencies
toward greater consumption.
There will be many who claim that the root of the problem is that we are
"running out of oil." This is not an accurate way to describe the situation.
We are running out of the ability to produce 2% more barrels each year to
meet world demand that increases about 2% annually. The potential loss of
the incremental barrels of output in the non-OPEC world as early as
2009-2010 would put the availability of additional barrels -- and power over
the price at which the world's consumers might purchase them -- in the hands
of five OPEC nations: Saudi Arabia, Iraq, Kuwait, the United Arab Emirates
and Iran. (Under some circumstances, Venezuela might be an additional member
of the club.)
Depending on their perception of their own political and economic strength,
these countries might decide to lift crude prices much faster than the rate
of dollar inflation, thus initiating economic and social changes in energy
use on a global basis.
For the period 1987 to 2003, the historical range of oil prices was
approximately $10 to $40 per barrel, with an average of $20. For 2004 to
2010, the price range could be $30 to $60, with an average of $40. For 2011
to 2020, the range could be $50 to $100, with an average price of $70 per
Such prices would unleash both destruction and creativity throughout
industry and finance. As occurred in the 1970s, the design of cars, trucks,
ships, planes and trains would change, commercial buildings and homes would
be modified; chemical and industrial processing and most machinery would be
redesigned to emphasize fuel economy or substitute fuels; tax systems would
be thoroughly overhauled, with changed incentives and penalties. Urban
planning and residential patterns would change. Living standards might slip
a bit and they would recover in different shape: Cooler rooms in winter and
warmer rooms in summer, changing clothes instead of thermostats, taking
quicker showers and buying fewer hot tubs, using less lighting, indoors and
out, accepting smaller and lighter cars, walking and bicycling more, and
using public transportation; these are the obvious changes to come.
Europeans, who long ago forced themselves to accept this lifestyle by
imposing high energy taxes, might at last receive an economic return on
their investment, while the U.S. struggles to change.
Could all this really result from the lack of a few extra barrels of oil in
the non-OPEC world, and only five or six years out? Actually, a crisis could
develop even earlier if one or two of the main OPEC producers were closed
down for an extended period by a political or military emergency.
Close to 40% of global energy consumption is based on petroleum. Currently,
we are utilizing about 98% of our world crude oil-producing capacity. The
system should be considered stressed at a 95% utilization rate. We are no
longer investing enough to lift capacity additions above the level of future
demand growth on a consistent basis.
Greater use of natural gas would help, if adequate supplies were available
at reasonable cost. However, in North America, the problems of obtaining gas
are similar to those of obtaining oil. The U.S.'s natural-gas output appears
already to have peaked. Canada can produce a bit more, but not enough to
meet its own needs, along with ours, for the next decade. Europe might have
an easier situation switching some oil demand over to gas, but new gas
supplies would have to be transported long distances by pipeline from
Russia, Turkmenistan, Iran, Algeria, and four or five countries of the Arab
Middle East or by liquid-natural-gas tanker from Nigeria, Trinidad, or the
Gulf. These incremental gas volumes would not come cheaply, quickly or
without political risk. Some major gas-production developments are starting
up in China and Southeast Asia, but the infrastructure to transport this gas
and distribute it to local markets is not yet ready for use, and may require
many years before it is. Most critically, gas cannot easily or cheaply take
over the role of oil as the major transportation fuel. So, in the next
decade, natural gas can only stand in for some oil consumption.
Our ability to substitute more coal for oil is also circumscribed since the
technology to burn coal cleanly is still under development, and our vast
coal supplies cannot yet be utilized without changing public opinion on the
environmental consequences or changing the technology to avoid pollutants.
That goes double for nuclear power. Using a lot more of these two fuels in
the near term cannot be done in any case, since it would take many years to
bring new plants and equipment on line.
If substitution is not immediately available, what about increasing
production beyond conventional estimates? Surely, if prices rose a bit, a
substantial new supply could be made available to the market? In many
commodities, this would be correct. But, not in crude oil. The great Shell
Oil geophysicist, M. King Hubbert (1903-1989), outlined the reasons for this
in the mid-1950s when he predicted that the peak of U.S. oil production
would occur in the early 1970s (and, despite considerable skepticism about
his prediction, he was right on target). His case was that oil explorers,
entering a new geological basin searching for petroleum, would always choose
the largest and most accessible fields to drill first, because that would
maximize their early returns. This selection would delay until later the
harder work, at higher unit costs, of finding midsize and smaller fields in
the mature years of basin production.
In addition, he observed, as oil reservoirs approached the halfway point of
the production levels they were eventually going to yield, daily output
would peak and subsequently start down.
Hubbert's two principles do work in practical terms in oil fields. The
depletion of recoverable reserves in oil fields whose production levels have
gone beyond their halfway point is causing a decline today in the output in
certain mature oil-producing areas of the U.S., Canada, the North Sea,
Russia, China, Saudi Arabia, Iran, Venezuela and Indonesia, among the major
producers. Each year now, some 4% to 5% of world crude production is
depleted, and an equivalent amount must be found, developed and brought
onstream to maintain the original production volume. A further 2% must be
found, developed and made available to the market to cover global growth
Few people outside the oil industry understand that 6% to 7% more oil must
be found and made available to the market each year in order to meet 2%
growth in world consumption. It's a huge job; and it is getting harder to
do, as the potential reserve size of prospects we are drilling today is
smaller, and the large, prolific fields found in the past are advancing
along their decline curves. Currently, some 70% of the oil that is consumed
comes from fields discovered 25 or more years ago.
Most of the likely oil-bearing basins of the world have now been prospected,
and the odds of vast new reserves suddenly making an appearance are low. Of
course, relatively large individual discoveries will occasionally turn up in
the years ahead, but not in size and number to suggest these finds can equal
the substantially greater amount of supplies that are being burned up.
Today, the world is consuming some 30 billion barrels a year, and we are
finding less than one-third that amount. This is a far cry from the
mid-1960s, when the world discovery rate peaked at an annual figure of over
45 billion barrels, and we were using something less than 15 billion barrels
Perhaps new technology can produce more? New equipment and methods do allow
us to produce more from present fields, and to exploit some smaller fields
at lower cost. However, the last decade brought the greatest application of
oil-field technology ever seen, and the angle of the downtrend in the number
of barrels discovered each year has hardly changed. Furthermore, no devices
are known to be under development now in the oil industry's labs that would
dramatically change the basic trend. Technology doesn't seem to be moving
fast enough to save us.
Our country's leaders have three main choices: Taking over someone else's
oil fields; carrying on until the lights go out and Americans are freezing
in the dark; or changing our life style by deep conservation while heavily
investing in alternative energy sources at higher costs.
The first two choices can be only temporary palliatives. Taking over foreign
energy fields would be against this country's principles, and, like most
violations of principle, it wouldn't work. This strategy wouldn't protect us
from war, terrorism and the exhaustion of our military and moral resources.
Carrying on as we are until we crash looks more like "surrender" than
By elimination, if not by wisdom, we will eventually turn to a massive
national and international conservation effort. It should be launched with
further development of coal and nuclear energy, along with imported liquid
natural gas, tight-sands gas, coal-bed methane, gas-to-liquids conversion,
tar sands and wind power. (Solar and biomass are not yet sufficiently
developed to play a leading role.)
Whenever we decide to confront this reality, the resulting program surely
will require many years of investing vast amounts of capital. It could,
therefore, pre-empt some other lines of investment in economies already
strapped for adequate returns to support the promises they have made to
their aging societies. Without discipline, mental and physical preparedness
and an intelligent selection of priorities conceived early enough to keep us
from wavering, we will not pass the oncoming test.
CHARLES T. MAXWELL is a senior energy analyst at Weeden & Co., in Greenwich,
Conn. He has been working in the energy field for 36 years.