An Uncomfortable Fact About Oil

Rising prices are just beginning: Demand is up; supplies are level. Things could get ugly.
From the May 2010 Trumpet Print Edition

America is mired in recession. Europe is in turmoil. Banks are reducing lending. Families are selling their extra vehicles. All of these factors would tend to push the price of oil down. Yet, the opposite has happened. The price of crude-oil futures jumped more than 70 percent over the past year, and as of mid-April sat near $86 per barrel.

This strange contradiction is an overlooked warning sign that nations—especially America—would do well to heed.

In the time ahead, it is going to become dramatically more difficult to obtain and secure energy—and sooner than most people realize. This is a truth that American policy makers and politicians are afraid to publicly admit because the implications of an oil-constrained world affect everything from stock markets and food production to the dollar’s status as the world’s reserve currency.

In short, over the next several years, global oil dynamics may change the planet forever. And America will not be immune.

Fast Running Out

The United States imports a whopping 56 percent of its daily oil needs—over 10.9 million barrels per day. That is more than the total daily production of Saudi Arabia—the world’s top oil producer. But even this number underestimates America’s vulnerability to oil shock. That is because America imports close to one fifth of the world’s available oil.

And this dependence on foreign oil supplies is set to get worse. America’s oil fields are rapidly going dry.

No country has spent more money on oil exploration and production than the U.S. Nor has any country drilled as many holes looking for oil. Yet, despite record dollars spent and unlimited access to the best, most advanced technology available, America’s oil production is in relentless decline. It is a decline that has continued for 40 years—despite discoveries in the Gulf of Mexico, the Bakken Formation, the Rocky Mountains, and Alaska.

These are uncontroversial facts grounded in geology.

Here are some more. On March 25 the U.S. Department of Energy revealed that “a chance exists” that the world could experience a decline of liquid fuels production between 2011 and 2015 “if the investment is not there.”

Although the Department of Energy (DoE) officially dismisses “peak oil” theory, which predicts that new crude oil production will soon be unable to keep up with depletion from the many hundreds of thousands of old wells that have falling production, its own data actually backs up the peak oil theory.

In April 2009, the DoE published figures summarizing global liquid fossil fuel production and revealed some startling facts. A report titled “Meeting the World’s Demand for Liquid Fuels” shows that the DoE expects total world fossil fuel production to steadily increase through 2030. But here is where the report borders on ridiculous. The DoE admits it has no idea where the extra oil production will come from.

After tabulating all the known and announced oil discoveries, the DoE found that the cumulative production from existing and known oil fields and discoveries will enter a slow decline beginning in 2012.

According to the DoE data, “unidentified” additional liquid fuel projects will have to fill a 10 million-barrel-per-day gap between supply and demand within five years. Ten million barrels per day is almost the equivalent of the daily oil production of Saudi Arabia.

That much new oil production may be wishful thinking.

Production from the world’s 500 giant fields (fields containing more than 500 million barrels of oil) is declining. These fields produce approximately 60 percent of conventional oil. Many of these fields are over 50 years old and few new giant oil fields have been discovered in recent years. These are facts.

So where is the oil going to come from?

Phantom Oil Supplies

Experience shows that once an oil field reaches max production, it goes into decline. New technology has in some cases helped slow the decline rates, but not reverse them. Fields in Texas and the North Sea—from which has come 1 out of every 11 barrels of oil the world has produced—have received massive amounts of money, virtually unlimited access, and the best technology, yet they are still fractions of their former selves.

Recent research from Oxford University suggests the world’s oil reserves may have been “exaggerated by one third” because opec countries over-reported their reserves in the 1980s when competing for global market share. According to the report’s author, Sir David King, the world could be in for a shock beginning around 2014. He said he was “very concerned” that Western governments were not taking the data showing demand outstripping supply more seriously, especially when China is putting so much effort and money into grabbing as many energy resources as possible.

These are statistics that America and the world are not ready for.

Even if Exxon Mobil, Chevron, Conoco Philips and every other U.S. oil company that wanted it was given immediate, unlimited access to America’s eastern seaboard and Alaska, it would take a decade for any meaningful quantities of oil to begin flowing—and that is assuming there are meaningful quantities of oil located there in the first place.

It would take similar herculean effort to tap the new preliminary discoveries off the coast of Brazil. Canada’s tar sands? They might help a bit, but they too are difficult and costly to mine—not to mention extremely disruptive to the environment.

So where is the oil going to come from?

Eighty-six dollars per barrel is a far cry from oil’s highs of around $147—though it took a global recession to knock it down that far. But the alarming thing is that despite the severe economic downturn and reduced demand, oil is still soaring above the $10 per barrel it was trading at just over a decade ago.

Sky-high oil prices may soon be an uncomfortable and permanent fact that America and the world will be forced to deal with—and the results will not be pretty.