QUOTE OF THE WEEK
 Every calamity is a spur and valuable hint.  
                                                       -- Emerson

-- Sanjai M. Padya

World oil reserves cannot be given in precise figures: they can only be estimated. The oil industry believes that the total recoverable oil in the known oilfields of the world was about 2,300 billion barrels, of which we have already used up more than half. The total volume of crude oil present in the known reserves is believed to be 1,050 billion barrels (1050 Gb). The barrel is a measure used in the industry to denote a volume of 42 American gallons, equivalent to 159.7 litres. The American gallon measures 3.785 litres.

The industry classifies as reserve only that oil which can be economically recovered with the usual conventional equipment. The tar sands of Canada will officially become a reserve when the strip mines and the thermal equipment necessary for the extraction of their bitumen and its upgrading into crude are put in place. At that stage, Canada will be reckoned to have a reserve of nearly 180 billion barrels instead of the presently recognized 5 billion barrels. The country is already producing one million barrels of crude oil per day from those sands. The recent hike in oil prices has driven companies to invest 100 billion dollars and start building the infrastructure to extend extraction facilities.

The United States has a large area in its Great Western Desert with an oil-shale layer more than ten feet thick at a depth of about a thousand feet. The shale reserves of the United States contain some 1500 billion barrels of crude, about twice the total of the Middle East and almost six times as much as Saudi Arabia. But whilst the technology for extracting oil from tar sands is well established and already in operation, that for the extraction of shale oil is still in the experimental stage. The process of heating the oil-containing rock in situ and keeping it at a temperature of 650-700 degrees for periods of 3 to 4 years to make it release its oil has been successfully tried on a small scale. Work is still in progress to evolve an economical extraction process and to take steps not to allow metal salts in the shale to dissolve, seep out and pollute the surrounding ground.

There are also other difficult deposits that may become workable at high petroleum prices. Regions around the poles (both North and South) are thought to hold large quantities of oil and may some day supply our energy. During the period of apartheid, South Africa was under an embargo. It had to convert coal to oil to satisfy its needs. Apparently even today South Africa finds it worth its while to run 40% of its vehicles on liquid fuel made from coal. With all these possibilities, we need not look upon a possible end of easy oil as doomsday. Rising concerns about global warming have led Europe and America to consider nuclear fuels as an attractive alternative to oil and coal for the generation of electricity. It is in this context that India finds it useful and possible to look for a source of nuclear fuel through an accord with the United States. With the adoption of hydrogen fuel-cell engines in road transport vehicles, they can be kept running when easy oil becomes scarce.

Hubbert’s Peak Theory

In 1956, at a meeting of the American Petroleum Institute, the American Geophysicist Marion King Hubbert presented a mathematical model of the way petroleum was pumped and depleted at individual oilfields and in larger areas. His model predicted that oil production in the continental United States would reach a peak between 1965 and 1970, and that world production would peak in 2000.

Hubbert observed that petroleum is a non-renewable resource and that production at oil fields followed a pattern. It was characterized by a slow start, gathered pace as the infrastructure in the field was built up and improved, until a time when a maximum was reached and production could not be increased any further even if more wells were dug or better machinery introduced. The peak for that field had been reached. Production could stay at the peak rate for a period and then a gradual but increasing decline would set in.

His prediction for continental U.S. missed the mark by only one year: the peak came in 1971, with a daily extraction of 11million barrels, and production has been on the decrease since. It has now fallen to 5.5 million barrels per day. His estimate of the world peak has been missed because oil consumption was reduced by the Middle East oil embargo of 1973, the Iranian revolution of 1979-80, and economic recessions of which the last one ended in the early two thousands.  It was being forecast to occur in 2010, then in 2007, but now the general feeling seems to be that some kind of peak has occurred in late 2004 or spring 2005.

Some oil analysts do not agree that a sharp peak is possible in the world’s oil production, given the wide variations in oil discovery peaks between countries. In fact the U.S. government oil watchers are of the opinion that production can still go above 2004 values and stay there for a large number of years. The International Energy Agency, which groups many mainly non-OPEC countries, and the U.S. Government’s Energy Information Agency have both expressed the belief that the peak would most likely have the shape of an extended plateau, starting about 2020 and oil supply remaining more or less satisfactory until the year 2040.

The high price of oil

For the past 30 years, the Organization of Oil Exporting countries (OPEC) has acted as a regulator of oil price, increasing production when prices got too high and reducing it to prevent the price from going too low.  But demand has been rising too fast in the last two years. In 2005, the year the daily consumption reached 84.9 million barrels a day, the Saudi petroleum authorities promised to get OPEC to intervene and bring prices down. But in the end OPEC had to admit that they had too little spare capacity left to do much. The oil is there, but the infrastructure to bring it to the surface was unable to meet the increasing demands. The Saudis have undertaken to increase their own production to 12 million barrels a day from the current 10 million by 2009.

Saudi Arabia’s oil does not seem to be running out: its largest oilfield, the Ghawar, is reported to be in good health and expected to reach a peak only by 2020. Presumably, it would only require a few more wells and pumps to start giving out more. But Kuwait has announced that its Burgan Oilfield, second largest in the world, peaked in 2005. Mexico has announced that its major Cantarell oil field also peaked in 2005, but that an even larger field had been discovered recently. Matthew Simmons, an investment banker who has been dealing with the oil industry for the past 30 years, serves on the board of the Atlantic Council of the U.S., and is a member of the National Petroleum Council and the Council of Foreign Relations, published his book “Twilight in the Desert: the coming Saudi Shock and the World Economy” in spring last year. He claims that extensive research has convinced him that Saudi Arabia’s oil reserves are much smaller than is currently believed, and that we may soon be faced with a shock from that quarter.

The outlook for those who hope for a reduction in oil prices soon to come appears rather bleak. The high prices of today ($69+ a barrel on April 11) are a reflection of the fact that the demand has increased to the extent that the supply is strained. An oil expert’s model has indicated that a 2% shortage can result in an increase of 20% in the price of oil. And it is certain that China and India are both in need of more and more oil.

President Bush has told the Americans that they should reconsider their addiction to oil. Why shouldn’t he, when he knows that 40% of all gasoline produced in the world is consumed in the U.S.