Dr. Manuel FuentesIntroduction

During the 1970’s many analysts warned that the world would soon run out of oil. Yet they were wrong.

The expert’s dire predictions were emotional and political reactions. Even at the time, oil experts knew that they had no scientific basis. Just a few years earlier oil exploration had revealed enormous new oil provinces on the North Slope of Alaska and below the North Sea off the cost of Europe. By 1973 the world had consumed, according with experts’ best estimates, only about one eighth of its endowment of readily accessible crude oil (so called conventional oil).

However, the next oil crunch will not be so temporary. Several analyses of the discovery and production of oil fields around the world suggest that within the next decade, the supply of conventional oil will be unable to keep up with demand. This conclusion contradicts the picture one gets from oil industry reports, which boasted of 1,020 billion barrels of oil (Gbo) in "proved" reserves at the start of 1998. Dividing that figure by the current production rate of about 23.6Gbo a year, might suggest that crude oil could remain plentiful and cheap for 43 more years, probably more because official charts show reserves growing.

Unfortunately, this appraisal makes three critical errors [1]:

1. It relies on distorted estimated of reserves. There are three vital numbers needed to project future oil production. The first is the tally of how much oil has been extracted to date, a figure known as cumulative production. The second is an estimate of reserves, the amount that companies can pump out of known oil fields before having to abandon them. Finally, one must have an educated guess at the quantity of conventional oil that remains to be discovered and exploited. To obtain the cumulative production is easy because companies meter the oil as it flows out of the wells. Most experts agree that the industry had removed just over 800Gbo from the earth at the end of 1997. Getting good estimates of reserves is much harder. Almost all available statistics come from surveys conducted by the Oil and Gas Journal or World Oil. They consult government and oil companies around the world. The data, which are accepted uncritically, contains systematic errors. Estimating reserves is an inexact science, so petroleum engineers assign a probability to their assessment. In practice, companies and countries are often deliberately vague about the likelihood of the reserves they report. Exaggerated estimates can, for instance, raise the price of an oil company’s stock. Members of OPEC faced a greater temptation to inflate their reserves because the higher their reserves, the more oil they are allowed to export. Another systematic error is the fact that the definition of reserves varies from region to region. So a proven reserve estimate in the USA is roughly equal to a P90 (90% probability) estimate. According with [2], the world had at the end of 1996 approximately 850Gbo of conventional oil in P50 reserves.

2. It pretends that production will remain constant. World oil reserves have marched steadily upward over the past 20 years. But about 80% of the oil produced today flows from fields that were found before 1973, and the great majority of them are in decline. In the 1990’s oil companies have discovered an average of 7Gbo a year; last year they drained more than 3 times as much.

3. It assumes that the last bucket of oil can be pumped from the ground just as quickly as the barrels of oil gushing from wells today. In fact, the rate at which any well can produce oil always rises to a maximum and then, when about half of the oil is gone, begins falling gradually back to zero.

From an economic perspective, when the world runs completely out of oil is not directly relevant: what matters is when production begins to taper off. Beyond this point, prices will rise unless demand declines commensurately. Using several techniques to estimates the current reserves of conventional oil and the amount still left to be discovered, we conclude that the decline will begin before 2010 [3].

While the potential magnitude of the global fossil resource base is truly gigantic, it would be a tall order to transfer more than a small part of these quantities into actual energy reserves. In the past, it was possible to transfer more than sufficient quantities from resources to reserves. The reserves to production ratio varied between 40 to 70 years for gas and between 10 to 45 years for oil. Additions to reserves (from the resources base) generally outpaced increases in annual production leading to a gradual rise in the reserve to production ratio, especially for natural gas, during the last 15 years. In the future, it may also be possible to transfer sufficient quantities of fossil resources to reserves to keep up with the increases in consumption, no matter how difficult such undertaking may appear from the current perspective. High rates of technological progress and changes in extraction economics would be required in the reported fossil, renewable and nuclear energy requirements.

There are other possible obstacles in utilizing large portions of the global fossil resource base [4]. They include financing and environmental constrains. For example, a large part of the estimated resource base of 5,000Gtoe (toe = tonnes of oil equivalent) consists of coal. This is certainly sufficient to provide enough fossil energy even for a high demand scenario well beyond the next 100 years, but this may not be a viable strategy. Consumption of such quantities of fossil energy translates into cumulative CO2 of the same magnitude, almost 5,000GtC, or more than 6 times the current atmospheric CO2 concentration. A shift to other sources of energy, and global energy decarbonization, are likely to occur due to other reasons than resource depletion.