April 2, 2004

Record Gas Prices May Foreshadow Coming Shortage

By Alejandro Eggers Moreno

U.S. gasoline prices reached their highest mark ever on March 23. Meanwhile, oil giant Royal Dutch/Shell just slashed its petroleum reserve estimates by 20 percent, after a massive accounting scandal. While the soaring prices at the pump have the public worried about another 1970s style oil crisis, waiting in line might ultimately be the least of our concerns. An increasing number of prominent petroleum geologists — including many former oil company employees — have warned that official estimates of available global oil reserves are dangerously over-exaggerated. They may well be right.

For energy companies like Shell, proven oil and gas reserves are the primary indicator of economic health. They have every incentive to boost reserve estimates; the more oil they can claim, the more competitive and attractive to shareholders they appear. Even more worrisome, private companies are not the only ones with an incentive to inflate estimates. In the mid 1980s, OPEC decided to factor in member states’ reserves when determining their market share. Global oil reserves jumped overnight. Today, the more oil a country can claim — the methods each uses to determine this are a closely guarded secret — the more influence it has on the global energy scene.

As a result, say the geologists, there may be considerably less oil in the world than the oil producing countries and energy companies claim, and global oil production could peak far sooner than expected — some predict as early as 2010. Once production has peaked, getting at the remaining oil becomes increasingly difficult and expensive. For an economy still wholly reliant on fossil fuels, the effects would be catastrophic. As the oil supply shrinks, essential petroleum-dependent products (that is, nearly everything in modern society, from transportation to electricity to basic foodstuffs) are rendered either unavailable or unaffordable. Eventually, as companies like Shell employ even more complex and invasive drilling techniques, the energy required to extract a barrel of oil exceeds the amount it can generate, and oil ceases altogether to be an energy source.

Of course, all major players in the oil business — private and public — insist that there will be enough oil to last well through the 21st century. But given their incentive to inflate reserve totals, it would be irresponsible not to question their estimates.

The official figures — that is, those cited by oil companies to prove their product is secure — are notoriously unreliable. For example, in 2002 the U.S. Geological Service claimed that total U.S. oil production will eventually reach 362 billion barrels. This calculation far surpasses most independent estimates, which place the figure closer to 200 billion, and it would require new American discoveries to equal the total reserves of Kuwait.

The USGS itself admits its figures are “based on non-technical considerations that support domestic supply growth to the levels necessary to meet domestic demand levels.” In other words, it determines supply estimates not by how much oil is left, but by guessing how much people will ultimately want.

Compounding the problem, most governments and all major energy companies insist that an oil shortage — and thus the point at which the world needs to find an alternate energy source — only will occur when the final drop is pumped from the ground. It does not take a petroleum geologist to realize that demand will outpace supply — and a global energy crisis will ensue — long before the last bit of oil is gone.

These rosy estimates also fail to consider the rising global energy demand, particularly among developing nations. China itself could render the figures obsolete; last year alone Chinese oil imports rose by nearly a third, and China’s energy demand is expected to double by 2025. Despite the extra oil — as well as a 100 million ton increase in coal production — the country already has begun to suffer from an energy shortage. To put the size of China’s energy problem in scale, in the last two years its electricity use has increased by an amount equal to the total power consumption of Brazil.

The consequences of overestimating the global oil supply would be devastating. In the best-case scenario, industry would recover by turning to less efficient and more polluting fuels, accelerating the already noticeable effects of global warming. Worst case would be a total economic collapse, with today’s rising gas prices in the United States and sporadic blackouts across China merely the mildest previews of what is to come.

Granted, it is quite possible that there will never be an oil shortage, that global reserves are healthy enough to last until well after a replacement energy source is discovered. But given that those responsible for measuring the supply have a vested interest in it appearing high, the accuracy of their estimates cannot be taken for granted. The future of oil may not be as bright as it seems, both to the energy industry at large and to anyone who relies on their computer, their car, or their planet.

Moreno is vice president of the Strategic Assessments Institute, a Los Angeles-based policy consulting firm.

Return to the Frontpage