The Oil Shortage Myth

Alarmism about running out of black gold is fueled by speculators and doesn't reflect the reality of available, albeit pricey, oil in coming years.

By Jim Ostroff, Associate Editor, The Kiplinger Letter

August 7, 2008

Warnings about running out of oil are overdone. It's a useful sound bite for proponents of so-called peak oil, who don't have the foggiest knowledge of petroleum geology. But they do have something to sell. Some oil trading fund managers, for instance, hope to spook other investors into bidding up prices, and neo-green activists advocate ending oil usage because it's "dirty" and say we'll run out soon anyway.

Doomsday forecasts are off base in two key respects:

• Demand. High fuel prices spur consumers and businesses to cut back on consumption. They also boost purchases of more fuel efficient automobiles, which presently include as many hybrids as drivers can get their hands on.

Rather than growing at a projected 3% this year, oil use worldwide will be up around 1%. Longer term, the planet's ballyhooed appetite for oil isn't likely to expand 3% to 5% a year, requiring oil production to balloon 50% to 130 million barrels a day by 2030. Instead, global oil consumption will be closer to 115 million barrels by that year, even with the increased use in fast growing economies such as China and India.

• Supply. Oil prices above $75 a barrel jump-started burgeoning markets for biofuels made without any petroleum and new supplies of oil made from unconventional sources like shale oil in the U.S. and tar sands in Canada. Worldwide oil production will likely rise 10% by 2018 to nearly 97 million barrels daily, though oil will be pricey. Even as older wells in the U.S., Europe and elsewhere fade, new technologies will open production from huge reserves off Brazil's coast, which may hold 50 billion barrels of oil. And there are other finds.

"The peak oil alarmists fail to say anything about the vast amounts of oil being found in the Gulf of Mexico now, or the major deal that Chevron just did in oil rich Angola," says John Kilduff, a senior vice president with MFGlobal, a commodities trading firm.

New high-tech exploration also shows that Iraq's oil reserves potentially are double the Saddam Hussein-era estimates, placing the reserves second in the world behind Saudi Arabia's, Kilduff says. With other likely bonanzas to be produced from North Dakota's Bakken oil field, in the Arctic and off the U.S. and West African coasts, increases in oil supply will outpace demand in the coming years.

This doesn't mean that oil and fuels will be dirt cheap. Crude oil produced from fields miles below the ocean or in frigid, inhospitable climates costs more than sinking a well in Texas, Oklahoma or California reserves. But over time, the ramp-up of production will ease extreme price volatility and help curtail sharp price run-ups experienced the past two years.

Until the middle of this decade, there had been about a 3 million barrel a day surplus in world production that could buffer unexpected supply disruptions. The cushion evaporated in 2007, courtesy of an unanticipated surge in oil usage in China and India. A small reserve materialized this year, but it was so small that investors became even bolder about bidding up crude oil prices. And alarmist talk about peak oil grew louder.

The decline in reserves also negatively affected oil production. "Producers such as Venezuela could let production fall and nationalize the oil industry because there was no punishment for doing this when prices kept rising," says Lucian Pugliaresi, president of the Energy Policy Research Foundation.

However, that psychology has been reversed the past couple of months. With slowing demand growth restoring the cushion to 2 million barrels a day or so next year, and reduced chances that oil prices will climb endlessly, oil producing nations have a new incentive to increase production, Pugliaresi says.

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