Oil Panic and the Global Crisis: Predictions and Myths

Steven M. Gorelick holds the Cyrus Fisher Tolman Professorship in the School of Earth Sciences at Stanford University, where he has been on the faculty for over 20 years. In 2005, he was named a Guggenheim Fellow for his study of global oil depletion. Professor Gorelick is a Fellow of both the American Geophysical Union and Geological Society of America, and he has been selected twice as a Fulbright Senior Scholar (1997 and 2008) for studies of water resources issues in Australia

Author Interview:

Are we on the verge of running out of oil? 

No. Although oil consumption has increased over time, so too has the estimated global oil endowment. Historically, the estimated global oil endowment has been sufficient to maintain supplies for 40-50 years into the future. So there has been and continues to be about 45 years of oil yet to be produced. During each decade that the oil endowment is estimated, more and more oil is identified. The increase in the estimated oil endowment continues to keep pace with the rate of consumption. Similarly, we can look at oil reserves. If the world were running out of oil, why have global oil reserves nearly doubled since 1986? Oil reserves are increasing over time, which is not what one would expect if the world were running out of oil.

Why are there such extraordinarily different views on the future of oil?

Those who maintain that the world is rapidly running out of oil base their view, at least in part, on US historical oil production, which went through a peak in 1971. When applied to the world, the peak-oil model does not account for the continuously increasing trend in the estimated global oil endowment, improvements in oil discovery and production technology, increased use-efficiency, the increasing role of unconventional oil, and the emergence of fuel alternatives that decrease oil demand.

What lessons can be drawn from the production history of other non-renewable resources? 

The world has never run out of any significant, globally traded, non-renewable mineral resource. In the 1970s, it was predicted that the world would run out of lead, zinc, tin, gold, silver, and platinum by 1990. That did not happen. Production of some mineral resources has declined, but the declines have reflected decreases in demand due to resource substitution or environmental and health safety, rather than scarcity. An important notion is “end use need” – whether the function of a particular commodity can be met in the absence of that commodity. For example, the historical use of copper in telephone wires has been satisfied by fibre optic cables and wireless technology.

Has panic taken over the reporting of objective facts, or should we be more concerned than we are?  

No, it is not a matter of objective reporting of facts but rather the interpretation of those facts. For example, modern oil production has greatly exceeded the volume of discoveries, which logically could be interpreted to mean that the world can no longer depend on oil. But there has also been an increase in the amount of oil that can be profitably produced, and the known quantity is so enormous that there have not been short-term economic incentives to increase the discovery rate. The major justified concern about oil panic is that most of the cheap oil resides in parts of the world that are politically unstable or under the control of governments that are oppressive or corrupt.

What warnings do the oil shortage scares of the 20^th century offer us today?  

Sudden increases in the price of oil have resulted in panic and the erroneous conclusion that the oil era is rapidly coming to an end. Between 1915 and 1916, the price of oil increased nearly five-fold, leading to a prediction that US oil would be depleted within 27 years. That did not happen. Between 1977 and 1982, the price of oil increased almost three-fold, with the CIA concluding that global oil production was near its peak. However, by 1986 the price of oil had fallen back to its 1977 value, as there was an oil glut. It is true that supply disruptions due to natural disasters and world events have resulted in oil price increases. But the long-term trend in the inflation-adjusted price of oil has not increased, which suggests that oil scarcity does not exist.

To what degree will the growing needs of developing nations, such as China and India, control global consumption?

The greatest pressure on oil use is certainly the increasing demand in developing nations. In the US, there are about 840 motor vehicles for every 1,000 people. In China and India, vehicle ownership is under 100 per 1,000 people. If vehicle ownership in developing nations grows to rival that of the US, there certainly will be severe stress on oil production required to meet demand. However, there are two factors offsetting this demand for oil. First is the tremendous increase in the efficiency in oil use that has occurred over the past 30 years. For example, in 1980, China used about 3 barrels of oil to produce $1,000 in gross domestic product (GDP). Today China uses less than 1.3 barrels to generate the same GDP. The US and the rest of the developed world have experienced similar increases in efficiency, and the trend continues toward greater efficiency. The second factor offsetting demand in developing nations is that the level of economic development and local environmental concerns will suppress private vehicle ownership. Average incomes in China and India are less than 7 percent and 3 percent those in the US, respectively. Only the wealthy can afford to own, maintain, and pay for fuel for cars. Given the high-population urban centers in these countries, air quality degradation is rapidly becoming a key concern, and vehicle use will have to be regulated, thereby capping the demand for oil.

Will oil sands, coal, and natural gas provide temporary or long-term solutions to transportation energy needs, or are there viable alternative transportation fuels on the horizon?

Oil sands have already changed the oil resource landscape. In just one year, from 2002 to 2003, Canada’s oil reserves grew from the equivalent of 2 percent of Saudi Arabia’s reserves to 69 percent. This growth was due to new technology for mining oil sands at a price competitive with conventional oil production.  Globally, the endowment of natural gas, in terms of energy equivalent, is on par with the oil endowment. The enormous reserves of natural gas and coal can be either converted into liquid transportation fuel or used to promote electric hybrid or fully electric vehicles. Such vehicles are far more efficient than those running on gasoline and diesel fuel. Currently, about 70 percent of oil is used for transportation fuel. The transition to electric vehicles would extend the lifetime of existing transportation fuels derived from oil for many, many decades. Finally, there are serious drawbacks of adopting biofuels as alternatives, such as their low energy density compared to gasoline and the environmental consequences of land-use conversion. 

 What is the role of environmental and economic issues in determining our future use of oil? 

There are major environmental and economic concerns that will force the world to use less oil in the future. First, global carbon dioxide pollution is a serious problem, and burning transportation fuels is responsible for about 40 percent of emissions, since cars produce about 1 pound of carbon dioxide for every mile driven. The US, which is responsible for about one-quarter of global oil consumption, emits twice as much carbon dioxide from oil use as any other country. Second, economic pressures will discourage oil consumption. About 3 percent of US GDP is spent on oil imports, and from 2005 to 2008, the US spent over $1 trillion on imported oil. Other oil importing nations are in a similar, if not worse, situation. All oil-importing nations are subject to the whims of OPEC, which intentionally controls production to maintain high oil prices. Furthermore, the US spends over $60 per barrel of oil to maintain a standing force needed to defend the Middle East. The costs of remaining dependent on oil are strong incentives to move away from oil as the sole source of transportation fuel. One difficulty encountered in the development of alternative transportation fuels and the development of more efficient but initially more expensive vehicles, is the tremendous fluctuation in the global oil price. An alternative fuel or vehicle may seem economically viable when the global oil price is high, but shortly thereafter the alternative becomes economically stranded as the global oil price declines. One possibility to maintain price stability is for importing nations to develop “economic petroleum reserves” to counterbalance the OPEC cartel.