Get Ready For Another Oil Shock!
By L.F. Ivanhoe

(table of contents)

from THE FUTURIST, January/February, 1997

A petroleum consultant warns that we've already found almost all the oil there is, and we're using it up fast. We must therefore anticipate that there will be less petroleum entering world markets within the foreseeable future.

After the oil crises of the 1970s, petroleum shortages disappeared and prices stabilized. The world stopped worrying about oil, but the grim fact remains that the world's petroleum reserves are limited, and they are rapidly being used up.

What happened in the 1970s was simply that prices rose suddenly, so the search for additional petroleum supplies became compelling and the incentives to conserve oil increased sharply. Shifts in supply and demand of all fuels solved the global petroleum problem.

But a much more serious problem looms in the future. Most of the world's large, economically viable oil fields have already been found, so a permanent oil shock is inevitable early in the next century. More Europeans than Americans are aware of this.

The question is not whether, but when, world crude oil productivity will start to decline, ushering in the permanent oil shock era. Some believe we have enough to last another 50 years at present rates. I disagree: Most of the large exploration targets for oil supply have been found, at the same time that the world's population (and, along with it, demand for energy) is exploding.

Modern Petroleum Technology

Petroleum exploration is an efficient technical procedure. Shooting a modern seismic net of lines across any geologic/sedimentary basin will reveal virtually all significant prospects, thus showing oil companies where to lease for further test drilling. However, it is a fact that the largest oil and gas fields in any sedimentary basin or oil province are also the biggest targets and the easiest to find with any given technology; thus, they are normally found early in any exploration phase.

Today, there are virtually no areas where petroleum exploration cannot be successfully carried out if regional geological studies indicate a good chance of finding major petroleum fields (i.e., those with an ultimate recovery of more than 100 million barrels of oil).

The latest phase of petroleum exploration began with the introduction of 3-D digital seismic methods in the late 1970s. This technical refinement coincided with the Iran-Iraq War and the accompanying 1980 oil price surge to $40/barrel, which produced a global public energy panic. A worldwide exploration boom followed immediately to find oil anywhere outside the Persian Gulf.

Unfortunately, despite intense efforts by all of the world's oil companies, only a few of the new major fields promised by their geologists were actually found. The world's accessible oil provinces had all been previously recognized and most of their major fields found earlier. Numerous major finds had been made in the late 1960s, which brought on production offshore by new marine technologies during the mid-1970s in time to bring the OPEC producers to heel. No new major oil provinces (those producing 7 to 25 billion barrels) have been found since 1980.

The world is finite. The 1,311 known major and giant oil fields contain 94% of the world's known oil and are accordingly the most critical for future global oil supplies. Figure A summarizes when and where the known global fields were discovered. The peak global oil finding year was 1962. Since then, the global discovery rate has dropped sharply in all regions.

Modern three-dimensional seismic and horizontal-drilling techniques improved current oil recovery in known fields, but made no substantial change in global reserves or discoveries of major fields. When the world oil price collapsed in 1986, exploration funds and efforts were cut back drastically everywhere; and by 1989, all major companies were downsizing and eliminating most of their geological and geophysical staffs. The minimum six-year period needed to discover the five largest fields in any basin had passed without making enough discoveries to whet top management's enthusiasm, so the money dried up for all but prime prospects.

This is unfortunate, because the huge remaining resources postulated by scientists and reported in the Oil and Gas Journal and U.S. Geological Survey publications will never be converted to reserves unless explored for. It is unlikely that increasing the global oil price to the 1980 maximum ($40/barrel) would make any substantial improvement in the discovery rate of new major fields, as the golden age of oil exploration passed its peak in 1962. For example, much of the current attraction for Russian oil deals is aimed at increasing production rather than exploring for new sources. Western petroleum engineers and service/supply companies are being used to get additional production out of known pools.

Reserves vs. Resources

There is a great deal of disagreement on the issue of future oil supply; one reason is that there is confusion among the terms used, such as active and inactive reserves, known and unknown resources, etc. Like the mining term ore, oil reserves are by definition economic or profitable. Oil resources, conversely, are less tangible. Two useful oil business terms are:

· Reserves--engineers' (conservative) opinions of how much oil is known to be producible, within a known time, with known techniques, at known costs, and in known fields. Conservative bankers will loan money on reserves.

· Resources--geologists' (optimistic) opinions of all undiscovered oil theoretically present in an area. Conservative bankers will NOT loan money on resources.

Petroleum explorers must find--and then petroleum engineers convert--theoretical resources into producible reserves. An example of a resource that will probably never become a reserve is gold dissolved in seawater.

Use of either term depends greatly on whose money is involved. "Resources" means using your money; "reserves" means using my money. Differences can be enormous. Government agencies and academic scientists tend to estimate resources, whereas industrial/oil companies appraise only reserves. The public, using its own money to buy gasoline, is interested in producible reserves, not in theoretical resources.

"Assessing world oil is only the beginning of the search for oil," says C.D. Masters, retired chief of U.S. Geological Survey Petroleum Resource Analysis. "Assessment means nothing more than a judgment on its occurrence. Whether it will be discovered depends on discovery activity." Well-intentioned but irresponsible scientists who continue to discuss resources rather than reserves may be a significant reason for the lack of realistic energy policies.

Active vs. Inactive Reserves

Two more terms that cloud the oil supply discussion are:

· Active reserves--those producible within the foreseeable future (i.e, 20 years or less); and

· Inactive reserves--those known to exist but not considered producible within 20 years; i.e., inaccessible or producible only with not-as-yet commercial methods, such as enhanced oil recovery. Conservative bankers will NOT loan money on inactive reserves.

Oil companies are in business to make money--not to find oil per se. What is the present economic value of oil to be produced more than 20 years in the future? Virtually zero, regardless of its price.

Scientific geological committees have recently blurred the discussion of known reserves by including inactive with active, thus artificially increasing the U.S. national reserves by redefining critical terms and using creative bookkeeping. Meanwhile, mature oil fields continue to decline, as predicted by engineers.

Political Reserves

All government petroleum ministries have an inherent interest in announcing the "good news" of large national hydrocarbon reserves, inasmuch as large reserves are useful for national political prestige and in negotiations for OPEC production quotas, World Bank loans and grants, etc. Sudden unsubstantiated reserve increases announced by any government ministry should be viewed with considerable skepticism. They may be mostly the puffery of "political reserves" that will increase a nation's paper reserves but have no effect on ultimate oil production.

For instance, units of natural gas are commonly converted to barrels of oil equivalent (BOE) to increase a company's or nation's BOE reserves. However, natural gas is neither the economic nor the social equivalent of crude oil: It's not as convenient, safe, or flexible as oil.

Political reserves tend to lull the public, politicians, and stockbrokers into complacency. But the critical numbers are U.S. and world oil production and new oil field discoveries in recent years, and these numbers are not encouraging. (See Table 1.)

A major problem is that planners base their forecasts on what amounts to political reserves--numbers that are fudged (accidentally or intentionally) by the oil ministries responsible for providing statistics to international bodies. For example, the much-quoted annual BP Statistical Review of World Energy's tables and graphs on "Distribution of Oil Reserves in 1994" contains a fine-print footnote: "Estimates contained in this table are those published by the Oil and Gas Journal in its issue of December 26, 1994, plus an estimate of natural gas liquids for North America."

One must go back to the Oil and Gas Journal (O&GJ) year-end reports to check each of the oil-producing nations' oil and gas reserves and production. On close examination, one soon runs into problems with the numbers. O&GJ merely compiles the reserve information provided annually by each country's government source. There is no way to check on the accuracy of foreign reports. To many foreign ministries, the O&GJ's requests for reserve data is either a sensitive state secret or a nuisance chore no one is critically concerned about. Due to ignorance or lack of guidance, a common answer is "same as last year." More than half of the 94 nations listed in O&GJ's 1994 report have the identical oil reserve numbers as a year earlier.

Some nations' numbers are obviously gross approximations. Iraq doubled its reported reserves from 47 Bbo to 100 Bbo in 1987--the number that Iraq still lists for its reserves eight years later. Who could prove Iraq wrong? And what difference would it make to Iraq if the world's economists and planners were misled by Saddam Hussien's petroleum ministry?

Even more egregious than the exaggerations of political reserves is the economists' treatment of the U.S. Geological Survey's resource numbers. These are commonly added to the O&GJ reserves to produce a grand total of each nation's "oil endowment." The sum of the two (unknown) values gives huge "fruit salad" numbers that are routinely and incorrectly called reserves. No time limits are set for discovering the USGS resources.

Shocks and Aftershocks

By the year 2000, global population will be 50% greater than in 1975, with a corresponding increase in demand for crude oil. The industrializing countries (China, India, etc.) will soon become hard competitors with Western nations for world crude exports.

It is reluctantly concluded from the USGS's global discovery statistics (Figure A) that the world's total oil production might peak about the year 2010, after which the normal decline of the world's oil fields will take over. By 2050, oil production will be a small fraction of today's bounty.

The critical date is when global public demand will substantially exceed the available supply from the few Persian Gulf Moslem oil exporters. The permanent global oil shortage will begin when the world's oil demand exceeds global production--i.e., about 2010 if normal oil-fields decline occurs, or as early as 2000 if the world's key oil producer, Saudi Arabia, has serious political problems that curtail its exports. World oil production will thereafter continue to decline at a dwindling rate. (See Figure B.)

This foreseeable energy/oil crisis will affect everyone. Governments will have the highest priorities for transportation fuels during an emergency. A sudden global crude oil shortage of 5% could bring back the gasoline lines of the 1970s--to the American public's surprise and dismay. But this time the oil shortage will be permanent.

Thus the question is not whether but when the foreseeable permanent oil crunch will occur. This next paralyzing and permanent oil shock will not be solved by any redistribution patterns or by economic cleverness, because it will be a consequence of pending and inexorable depletion of the world's conventional crude oil supply. Few economists can bring themselves to accept that the global oil supply is geologically finite.

The global price of oil after the supply crunch should follow the simplest economic law of supply and demand: There will be a major increase in crude oil and all other fuels' prices, accompanied by global hyperinflation, rationing, etc. After the associated economic implosion, many of the world's developed societies may look like today's Russia. The United States may be competing with China for every tanker of oil, with the Persian Gulf oil exporters preferring Chinese rockets to American paper dollars for their oil.

The economic and social ramifications of the coming oil shock will require serious planning worldwide.

The global oil shortage we now can foresee will differ from the 1973 and 1979 oil-price surges, which were the result of political moves by the exporting countries. Then, global buyers began searching immediately for oil supplies during the Iran-Iraq War, which produced the world's greatest-ever oil exploration effort, from 1979 to 1985. Unfortunately, their discovery rate was much lower than earlier, and few giant fields were found. The oil field "whales" had all been fished out.

Living with Less Oil

The first thing needed will be a U.S. tax on gasoline consumption. As Europe has done, the U.S. government should compel maximum oil conservation by imposing at least a $1 per gallon tax on gasoline. But don't expect such until a national emergency occurs. It is vehemently resisted by two groups of voters--namely, those who buy gasoline and those who sell it!

The entire world went on an "energy diet" during the 1970s by using all types of energy more efficiently (insulation, etc.), which lowered the global consumption of fuels. After 1973, the world's oil demand flattened out. Unfortunately, the global discovery rate has continued to decline precipitously, and few new non-OPEC giant fields have been found in recent years. There will be no known giant oil fields waiting to be brought on line when the next oil shortage hits about the year 2010, after which date the world's oil fields and production will steadily decline.

Figure B shows the type of global crude oil decline that the world can expect after the 2010 production peak. It is apparent that the use of oil products thereafter will be continually restricted. A major change in lifestyles should be expected by the lower and middle classes in all societies. Besides the government (police, armed services, etc.), only the wealthy upper classes will have the money for auto and airplane fuel.

Serious research and planning for alternative fuels will not be undertaken until governments acknowledge that a problem exists. Natural gas/methanol is an obvious existing alternative fuel that can be produced with known technologies, and almost in the huge volumes of the crude oil to be replaced (i.e., more than 1 billion gallons a day). But natural gas is already used for many other purposes, such as household and industrial heating, fertilizer, electricity, etc. So it should not be counted on to quickly replace all or most of crude oil. Building gas pipelines takes decades. The other alternative fuels (solar, wind, geothermal, wood, waste) combined produce less than 1% of U.S. electricity!

Those democratic governments in power when the global oil production peaks will all be cast out by their voters unless they have made major efforts to stave off the inevitable fuel crisis.

They have been warned!

About the Author
L. F. (Buzz) Ivanhoe, president, Novum Corp., Ojai, California, is a registered geologist, geophysicist, engineer and oceanographer with 50 years domestic and international experience in petroleum exploration with various private and government oil companies. He was associated with Occidental Petroleum from 1968 to 1980 where he was senior advisor of worldwide evaluations of petroleum basins from 1974-80. On leaving Oxy, he moved to Santa Barbara and formed Novum, an international energy exploration consulting firm, now located in Ojai, California. Mr. Ivanhoe is the author of numerous papers on various technical subjects, including some 50 on the evaluation of foreign prospective basins and projections of future global oil supplies. He is the sponsor and coordinator of the new M. King Hubbert Center for Petroleum Supply Studies at the Petroleum Engineering Department of the Colorado School of Mines in Golden, Colorado.

His address is 1217 Gregory Street, Ojai, California 93023. Telephone 805/646-8620; fax 805/646-5506.

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