Over the Peak

As oil prices soared from $24 per barrel in early 2003 to a peak of $70 per barrel in September 2005, the question being asked by experts and policy makers alike was whether we've "entered a new era," as Chevron Corporation CEO David O'Reilly has said, or just encountered a temporary glitch that will be corrected by market forces, as ExxonMobil President Rex Tillerson argued in a speech to the World Petroleum Congress last September. The most intriguing thing about this raging debate over whether oil production will soon peak -- and put an end to the go-go days of the petroleum age -- is that it's occurring at all. The fact that a century into the age of oil, and with the global economy dependent on $3 trillion worth of this black liquid each year, we don't know how much is left, is extraordinary.

It turns out that most of the forecasters who are responsible for the long-term energy projections on which private and public decision makers rely -- from Wal-Mart to the International Energy Agency -- have been on automatic pilot, assuming that whatever the future level of demand, the oil companies will be able to extract sufficient oil to meet it. You don't have to be a card-carrying member of the "peak oil" school that has gathered behind former Shell geologist Colin Campbell to see that this is a dangerous assumption.

One fact is undeniable: over the past decade, oil production has been falling in 33 of the world's 48 largest oil producing countries, including 6 of the 11 members of OPEC. In the continental United States, the world's oil pioneer, production peaked 35 years ago at 8 million barrels per day, falling to less than 3 million barrels per day now. Among the other major oil-producing countries where production is declining are the United Kingdom and Indonesia. Those who take a more sanguine view of the global oil prospect point to the 1.1 trillion barrels of "proven" reserves that are currently on the books of the world's oil companies -- equivalent to all the oil extracted over the past century, or more than 40 years of consumption at the current rate. Although those same figures appear in most official oil reports, it turns out that roughly three-quarters of the world's oil is controlled by state-owned companies, whose reserve figures are never audited and are based as much on politics as on geology. Many countries have added paper barrels to their reserves at times they weren't even looking for oil.

Since oil can't be extracted unless it is found, one of the most persuasive arguments that oil production is nearing its peak is that oil extraction has exceeded discoveries by a factor of three during the past two decades. This is clearly a trend that cannot continue. PFC Energy, an oil industry consulting firm, has recently analyzed these figures and concluded that non-OPEC oil production will peak within five years, and that OPEC production could peak within another five years. Chevron Corporation is among those that have argued that nearly half the world's exploitable oil has already been extracted.

The largest wild card facing the future of oil is the Middle East, where highly secretive state-owned companies have kept silent on the condition of their vast oil fields for the last 30 years. Contrary to the popular myth that their oil resources are so vast as to flow freely from the Earth wherever a hole is punched, papers published by Saudi engineers indicate that massive water injection and other forms of secondary recovery are now needed to keep the oil flowing. A handful of 30 to 50-year-old oil fields supplies most of the nearly 10 million barrels of oil that Saudi Arabia produces each day, and hardly any new fields have been discovered in the last two decades. Late last year, U.S. intelligence analysts questioned whether Saudi Arabia can even meet its near-term pledge to raise production modestly, let alone achieve the massive increases that many oil-consuming countries appear to be counting on.