Posted: 11/03/2005 | Author: H. Sterling Burnett
Oil Crisis Hysteria
DISPATCHES DIPLOMAT AND INTERNATIONAL CANADA 23
Every time oil and gas prices rise for an extended period, the media report dire warnings that a crisis is upon us—we are running out of oil. I would argue we’re not.
Many factors contribute to the current high gas prices. Economic conditions within the industry combined with increased environmental restrictions have limited refining capacity in the United States. No new refinery has been built in more than 25 years, while several older ones have closed. Political considerations have limited the development of new economically recoverable domestic sources of oil and natural gas on public lands and off much of the coastline. For instance, politicians have been debating whether to undertake exploration and production in Alaska’s Arctic National Wildlife Refuge (ANWR) since it was expanded in 1980. Despite the duel facts that only 2,000 of the refuge’s more than 19 million acres would be affected by production and it is estimated to contain between six and 16 billion barrels of recoverable oil (at $25 to $30 per barrel prices), the U.S. government has repeatedly rejected opening ANWR up to exploration. Political conflicts in several oil exporting countries like Nigeria, Iraq and Venezuela have reduced supply to the world market and made its delivery undependable. While the Organization of Oil Exporting Countries (OPEC) has attempted to moderate world oil prices by increasing the amount it delivers, its member countries have done little in recent years to increase the actual amount of crude oil pumped and refined gasoline produced. Finally, burgeoning economic power houses like China are using more oil, leaving less to go around.
Dwindling supplies of oil are not a factor in the current price at the pump. Fortunately, for the mid- to long-term, new technologies continually increase the amount of recoverable oil. At the same time high prices—which signal scarcity— regularly encourage new exploration and development.
The history of the petroleum industry is one of predictions of near-term depletion, followed by the discovery of new oil fields and the development of technologies for recovering additional supplies. Before the first U.S. oil well was drilled in Pennsylvania in 1859, petroleum supplies were limited to crude oil that oozed to the surface. In 1855, an advertisement for Kier’s Rock Oil advised buyers to “hurry, before this wonderful product is depleted from Nature’s laboratory.� Indeed, seven oil-shortage scares occurred before 1950. Predictions of an oil famine during the Arab oil embargo in the 1970s were followed by a glut of cheap oil. World oil production continued to increase throughout the 1990s. While prices have periodically spiked, oil prices fell to a inflation-adjusted 30-year low in 2001.
Estimates of the world’s total oil endowment have continually grown faster than humanity can pump petroleum out of the ground. In 1920, the U.S. Geological Survey announced that the world’s total endowment of oil amounted to 60 billion barrels. By 1950, the estimate had increased to around 600 billion barrels. The most recent estimate was of a 3,000- billion-barrel endowment. By 2000, about 900 billion barrels of oil had been produced. If world oil consumption continues to increase at an average rate of 1.4 percent a year, and no further resources are discovered and no improvements are made in the technology used to recover oil, the world’s supply will last until 2056.
These estimates do not include unconventional oil resources that require additional processing to extract liquid petroleum. Oil production from tar sands in Canada and South America would add about 600 billion barrels to the world’s supply, and rock — oil shale — in Colorado, Utah and Wyoming alone contains 1,500 billion barrels of oil. Worldwide, reserves could be as large as 14,000 billion barrels—more than 500 years of oil at year 2000 production rates. The process of producing oil from oil shale is expensive — more than delivering oil from tar sands — but if world oil prices remain high it could become economically viable.
Canada is especially well suited to profit from the current supply and demand. It produces more oil than it consumes and will likely continue to do so for the near future. It is already the largest oil exporter to the U.S. and China is in negotiations to contract for secure supplies regardless of the vagaries of the world market. At current, and reasonably estimated future prices, oil from Canada’s abundant tar sands will remain profitable. Finally, at current prices, oil refining has become increasingly profitable.
It is true that in the long run, an economy that uses petroleum as a primary energy source is not sustainable. However, sustainability is a chimera. Every technology since the birth of civilization has been replaced as people devised more efficient technologies. The history of energy use is largely one of substitution—from wood and whale oil in the 19th century, to coal by the 1890s.
No one can predict the future, but the world contains enough oil to last beyond 2100. Only fools would try to anticipate what energy sources our descendants will utilize that far in the future. Over the next several decades the world likely will continue to see short-term spikes in the price of oil, but these will be caused by political instability and market interference, not an irreversible decline in supply.
Sterling Burnett is a senior fellow with the National Center for Policy Analysis, a nonprofit research institute in Dallas, Texas.