catapult magazine

Do high oil prices foreshadow a deeper crisis?

Part 3 of 3

by

The USGS survey did not include non-conventional sources such as tar sands which in Canada alone may hold more oil than Saudi Arabia. But, the difficulty of extracting the oil makes it much more costly to produce than conventional oil. Since so much energy is involved in the extraction process, the costs of extraction rise when energy prices go up.

Ahlbrandt says that extensive deposits of new oil are likely to be found in the Arctic, especially northeast Greenland, and offshore in the South Atlantic. He admits that in the case of Greenland significant technical hurdles would have to be overcome.

He also points out that 80 percent of all the oil wells ever drilled have been drilled in the United States. When Hubbert did his work on U. S. production, Ahlbrandt explains, he was dealing with a very mature set of oil fields about which much was known. He says compared to the United States the rest of the world has barely been explored, and this is part of why he believes many large deposits are yet to be discovered.

Still, the pessimists remain unconvinced and even alarmed by current indicators. "I don't buy that we haven't found the biggest fields yet," Reynolds says. After all, he adds, "if (a field) is that big, it's pretty darn easy to find. It's not like it's hiding behind the moon."

Beyond this Russia has said it is now pumping at full capacity. In addition, The New York Times reported earlier this year that advanced oil recovery techniques may not be delivering as promised, citing a precipitous drop in production from a major field in Oman even after the techniques were applied. Also in question, the Times reported in a separate story, is the ability of Saudi Arabia, the world's largest oil exporter, to produce more than it already does.

"If this is true, then we're at the peak," says Simmons.

Simmons has been seeking additional data from Saudi Aramco, the Saudi national oil company. But recent releases of information from the company haven't satisfied him that it can significantly increase production to supply the growing needs of the world.

Ahlbrandt, who previously worked as an oil company geologist in Saudi Arabia and who knows Saudi oil officials well, says he's comfortable with Saudi Aramco's reassurances and believes that Saudi Arabia has vast oil deposits yet to be developed.

Reynolds says that may not matter much for reasons that have nothing to do with geology or oil reserves. His work has shown that large state oil companies such as Saudi Aramco and Mexico's PEMEX tend to be risk averse. The governments that own them are more interested in having a consistent stream of profits to pay for various government expenditures than making heavy investments in exploration that might fail to produce results.

Reynolds now puts Russian oil companies in this category since the Russian government has made it clear that transferring ownership of Russian oil assets to foreigners won't be tolerated. He expects the Russian government to take tighter control of its domestic oil industry through taxation and backdoor moves at nationalization that might include taking control of a company for failure to pay taxes.

That means governments of the world's top two oil exporters and a third very important one may delay investment in oil exploration in order to fund more government spending, Reynolds says. Perversely, higher prices may make it even more likely that the state-controlled companies will do this. Saudi Arabia, Russia and Mexico may figure that bringing a lot more oil onto the market will only drive prices down, penalizing them for their investments.

Reynolds contends that this behavior among three big exporters will likely push the date of peak oil production forward. But, it will also make production declines on the other side of the peak less dramatic as the oil that has been held back is finally brought into production.

He added that even if the USGS numbers are too low and the world's total oil resource is twice the mean estimate—that is, 6 trillion barrels—this would only push the peak back by perhaps another 10 years, still not a lot of extra time to make a transition to alternate fuels.

Both sides of the debate agree that oil is not a limitless resource and that someday the world will have to wean itself from its oil habit. But, there's a lot riding on whether that day is close at hand or whether it lies comfortably in the future.