Oil Shock

Vijay V. Vaitheeswaran’s article on oil is highly problematic ("Think Again: Oil," November/December 2007). To begin with, the statement, "The world has more proven reserves of oil today than it did three decades ago, according to official estimates," clearly indicates Vaitheeswaran’s limited knowledge about the debate surrounding oil reserves. Apparently, he simply accepts statistical data (such as that published in BP’s Statistical Review of World Energy) without question.

The fact is, most crude oil was found in the 1960s, and the discovery rate has since declined. There is no way to replace today’s consumption of 30 billion barrels a year with new discoveries. Yes, technology might extract more oil at an early stage of production, but in the end, we may face the same pattern of decline witnessed in the giant Mexican oil field Cantarell, where production is falling fast.

The problem for the United States in the future is that there will be a 7 million barrel a day increase in the consumption and importation of oil during the next 25 years (the same amount that China consumes today), according to the Energy Information Administration. But by 2030, the oil-exporting countries will have less production than they do today. Where will the oil required to fulfill this shortfall come from?

Vaitheeswaran may be an excellent journalist when it comes to subjects other than future oil production, but on this issue, he is severely mistaken. He should heed the words of former U.S. Energy Secretary James R. Schlesinger’s statement from September 2007: "[T]o the peakists I say, ‘You can declare victory. You are no longer the beleaguered small minority of voices crying in the wilderness. You are now mainstream.’" It’s unfortunate that Vaitheeswaran chooses to live on the fringe.

— Kjell Aleklett
Professor of Physics
Uppsala University
President
Association for the Study of Peak Oil & Gas
Uppsala, Sweden

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Vaitheeswaran’s article is a perfect example of the instant energy expertise that surfaces any time oil prices go on a vertical run. The giveaway comes early on when we are served the tired old platitude that Canada has tar sands with greater energy content than all the oil in Saudi Arabia. This is not yet true in reserve terms: Alberta Energy and Utilities Board estimated in 2006 that the total oil sands reserves stand at 174.5 billion barrels, compared to Saudi Arabia’s 264.3 billion barrels. And though Alberta’s total may eventually amount to as many as 315 billion barrels, the comparison is still dealing with proverbial apples and oranges. The Wyoming and Colorado oil shales in the United States contain even more oil than Alberta’s oil sands — but in both cases producers face the nontrivial (not to mention costly and environmentally ruinous) task of separating a small share (5 to 10 percent) of tightly bound liquid from solid mass.

Canadian oil sands extraction began in 1967, and by 2005, production reached 1 million barrels per day, equal to roughly 1.25 percent of global crude oil extraction. Most forecasts see oil production from Athabasca oil sands at 2 million barrels per day by 2015, and the government of Alberta believes it could be 3 million by 2020 and possibly 5 million in 2030. By that time, however, OPEC anticipates global extraction will be 118 million barrels per day, so even the highest conceivable oil sands contribution would supply no more than 4 percent of the total. Clearly, in no way could these "mucky deposits" displace today’s Saudi production or even make a crucial difference.

Similarly naive is Vaitheeswaran’s faith in China’s "burgeoning green revolution," promoting "alternatives to hydrocarbon fuels" and enacting "tough fuel economy standards." It is more appropriate to consider China’s "green" record since 2000. By 2006, oil consumption in the country had risen by 56 percent, total energy use had increased by 75 percent, and emissions of sulfur dioxide were up by 30 percent. China has now surpassed the United States as the world’s largest emitter of greenhouse gases. This hardly portends a green future. If Vaitheeswaran is willing to bet on the future of China’s "hydrogen-powered automotive technologies," I am ready to play. I am not a gambling man, but this is close to a sure thing. So, I bet Vaitheeswaran a loonie (one high-flying Canadian dollar) that China will not become the world’s leading producer of hydrogen cars, not by 2015, not even by 2025. It’s a small amount, but given the parlous state of the U.S. currency, he may want to start worrying how he will discharge that eventual debt.

— Vaclav Smil
Distinguished Professor
Faculty of Environment
University of Manitoba
Winnipeg, Canada

Vaitheeswaran’s assertion that Russian pipeline politics are nothing for Europe to worry about is cold comfort. It’s also clearly at odds with Central Europe’s experience for the past 17 years. Moscow tried to force the Baltic states to back away from independence by cutting off energy in 1990. Energy flows were stopped in late 1992 in an attempt to pressure Latvia and Estonia to allow Russia’s officer corps to remain. Ukraine was offered restored gas flows between 1993 and 1994 in exchange for a larger slice of the Black Sea navy fleet. Oil from the Druzhba pipeline was cut off from Latvia in 2002 when Russia was denied permission to buy the Ventspils port. Oil stopped flowing to Lithuania in July 2006 when the government sold its refinery and port facilities to a Polish, rather than a Russian, company. The pipelines are still empty.

Vaitheeswaran doesn’t need to take my word for it; the Russians couldn’t be clearer about their intentions. In September of last year, Viktor Chernomyrdin, the Russian ambassador to Ukraine and former head of Gazprom, stated that the price of natural gas to Ukraine in 2008 would depend on who the new prime minister would be. The Swedish Defense Research Agency has documented more than 40 energy disruptions by Russia for political reasons. If Russia is not using energy as a political tool in Europe, why are most of the major Russian-European energy deals decided personally by President Vladimir Putin? As Europe becomes increasingly dependent on Russian natural gas shipments, more countries face the risk of "energy pressure." Europe’s concern over Russia’s pipeline politics is valid — and the threat is growing.

— Keith Smith
Senior Associate
Energy and National Security Program
Center for Strategic and International Studies
Washington, D.C.

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Vijay Vaitheeswaran replies:

The three letters critiquing my piece fall into the same trap that ensnared the failed Club of Rome thinkers, the discredited Population Bomb forecasters, and other eco-pessimist prognosticators back in the 1970s: They adopt an end-of-technology mind-set, assume that today’s demand curves will rise in a straight line forever, and largely ignore the dynamic interplay of market price incentives and future technological innovation.

Kjell Aleklett pins his argument about impending peak oil on the notion that the discovery of new oil fields has slowed since the 1960s. But there are even bigger resources available right under our noses, thanks to technological breakthroughs such as multilateral drilling and 3-D seismic drilling that were unforeseen by petro-pessimists three decades ago — and that explain why the world’s ultimately recoverable resource base is still expanding. Globally, the oil industry recovers only about one third of the oil known to exist in any given reservoir, leaving plenty of room for improvement. Large parts of Iraq, Saudi Arabia, and Siberia (never mind the Arctic) have not even been explored with the latest equipment. New technologies such as 4-D seismic analysis and electromagnetic "direct detection" of hydrocarbons are lifting that recovery rate. Even an increase of a few percentage points would provide more oil to the market than another discovery on the scale of those in the Caspian or North seas — as the massive field recently discovered off the coast of Brazil demonstrates.

Vaclav Smil makes an argument that is internally inconsistent. My piece pointed out that the vast remaining reserves of unconventional hydrocarbons, such as Canada’s tar sands, help disprove the depletion thesis. After criticizing my estimate of the potential of tar sands, Smil goes on to make my argument for me, speculating that Alberta may have more oil-bearing sands than I suggested — and adding that the American West may have oil shale that overshadows even that staggering tally. More serious is his observation that tar sands have not yet grown into an important source of gasoline. That is true, but it is because oil prices did not justify sustained investment in alternatives to conventional oil during the past 30 years. The more correct the gloomsters are about conventional oil peaking and prices shooting up, the more likely it is that sustained price signals will lead to an outpouring of investment in alternatives to oil — whether it is in clean alternatives such as biofuels, or dirty ones such as shale and tar sands. Turning to Smil’s wager, I’ll happily bet what I forecast — that China will, in the future, be a world leader in one of the various advanced automotive technologies that I describe in my new book, ZOOM. Given the extraordinary burst of innovation now taking place in the energy and auto industries of developing giants like China and Brazil, to think otherwise would be loony.

Keith Smith does not even attempt to challenge my principal argument: It is not in Russia’s interest to sustain an embargo against its biggest customers in Western Europe. All of his counter-examples are beside the point. Everybody agrees that Russia uses its local control over piped gas to bully its smaller neighbors and former Soviet satellites. But he offers no rebuttal to my central proposition, which is that this sort of saber-rattling will not lead to a sustained embargo of the European Union, and that Brussels would do better by calling Russia’s bluff. As the failed OPEC oil embargo of the 1970s showed, hydrocarbon producers who impose embargoes on their best customers end up suffering far more than those customers, especially as they risk killing the goose that lays their golden egg.