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The Future of Oil

June 1, 2004 at 12:00 AM EST


JEFFREY BROWN: No one needs to be told what’s going on at the local gas pump these days. But today’s high prices have rekindled some provocative questions about the long-term future of oil and our use of it.

We explore some of these questions now with Paul Roberts, author of a new book titled “The End of Oil.” Mr. Roberts writes regularly on economic and energy issues. And Daniel Yergin, chairman of Cambridge Energy Research Associates, an international consulting firm. Among his books is “The Prize: The Epic Quest for Oil, Money, and Power,” which won the Pulitzer prize. Welcome to you both. Mr. Roberts, starting with you and playing directly off the title of your book, are we running out of oil?

PAUL ROBERTS: Well, you know, it would be interesting to look at the current prices and say one way or the other that this is the sign that everything is changing, that we are hitting a limit. But I think time will tell whether the market is fundamentally tight… whether prices are being driven by speculation.

The more interesting question is, what happens next? I think there are a couple of things we can look at that can speak to us about this notion of depletion, when oil runs out. We know oil is finite. The question is, when do we hit a peak in production? And you know, the optimist will tell you we don’t need to worry until 2040, 2045, which means we have plenty of time to develop alternatives and to kind of prepare ourselves for that eventuality.

My sense, though, is that we’re going to be running into trouble earlier, and here’s why. In the first case, we can see that it’s getting harder and harder to find oil. Discovery rates — that is, the rate at which oil companies can find oil and put it on their books for later production — that’s been declining since 1961.

Right now, we burn about 29 billion barrels of oil a year — cars, factories, furnaces. We’re only discovering around nine billion barrels of oil. So with that ratio, it can’t go on forever. And you can look at companies like Shell Oil, struggling to discover oil as fast as they need to, to keep shareholders happy… and Shell is not alone. A lot of companies are struggling. The second thing you need to look at, and we can do this briefly, is that when you’re talking about when oil production peaks, you need to divide the world into two parts.

First there’s OPEC, which has a lot of oil and will peak later, and then there’s non-OPEC — North Sea, Caspian, Africa, and elsewhere — and there you’re going to see a peak in production sometime I think in the next ten to twelve years, and that is getting pretty close.

JEFFREY BROWN: All right, Mr. Yergin, what’s your view on the…

DANIEL YERGIN: Well, actually, we’re running out of oil. We’ve been running out of oil since 1859, when we discovered it. In the 1970s, we heard the same kind of things, that we’re going to run out of oil tomorrow.

Actually, last year, the oil companies replaced 117 percent of what they produced. Based on looking at prices today, if you look six years ago, oil was $10 a barrel, and you would have said we we’re going to have a glut forever. I think it’s not optimist and pessimist. I think most well-informed opinions say the peak probably comes around 2040.

There’s a small group who says it came last year or two years ago. But when we do our numbers, we show that oil production at the end of this decade worldwide will be 20 percent higher, more than 20 percent higher than it was at the beginning of this decade. And that’s on a field-by-field analysis.

JEFFREY BROWN: So, do you see this as a cyclical period that we’re going through?

DANIEL YERGIN: I think there are these patterns of running out. In the 1880s, one of the founders of Standard Oil started selling off his shares because they told him there was no oil outside Pennsylvania. It is a big challenge to replace reserves. But I think people who think we’re at the peak underestimate the continuing impact of technology. And I think that the bigger constraint before geology is geopolitics.

JEFFREY BROWN: The question is whether we’re at the end of cheap oil.

DANIEL YERGIN: I think it’s going to go in cycles. I think the prices we’re going to see now — I think we see a surge of production coming in the second half of this decade. And that we might again be looking at lower-priced oil, again. But I think, for the next two years or so, we’re in a tight period. And right now, even with these increases now that OPEC says they’re going to do, we’re in a very tight situation where the market is vulnerable to significant shocks. And so we have to be prepared for that.

JEFFREY BROWN: Mr. Roberts, as you build your case in your book, you see the end of oil pushing us into a whole new energy regime. What do you think should happen?

PAUL ROBERTS: Well, right now, I think, I disagree with Dan. I think that we are in a period where, you know, cheap oil is the thing of the past. Where price settles, that remains to be seen, but even Arab analysts are saying now that the market can tolerate a much higher price band — in the $30s, the high $30s. So that’s where I think we’re going to be.

The good news there is that tends to push the economy into a more efficient behavior. So we’re going to see a reduction in demand increases, more efficiency. We’re also going to see more interest in alternative fuels.

Now, granted, we are nowhere near where we need to be in alternative technologies, and alternative fuels. They don’t compete cost-wise with oil or natural gas or coal. But give them time, and I think we could see that, particularly if oil prices remain high. So, I think that’s a positive — actually a positive development and certainly going to hurt people at the wallets when they go to fill up their cars. But they should keep in mind that this isn’t making the economy do what it’s going to need to do. And the geopolitical question is relevant that Dan brings up.

You know, we are at a point now where sudden volatility, sudden instability in an oil producing nation is probably far more dangerous to oil supply than any chance of running out. But there’s another factor we need to look at, and that is the environment. You know, we’ll be able to find oil for decades and decades. The problem is that we may not have the time. We’re going to have to do something about the way we produce our energy because it’s impacting climate.

JEFFREY BROWN: Where do you come down on this when you consider the price swings, the geopolitical issues you brought up, the environmental issues that he just brought up?

DANIEL YERGIN: Well, I continue — I believe that conservation — I, for a long time, have believed that conservation is very important and is, in a sense, our cheapest energy source. Still, my brother sends me an e-mail saying “the next car I buy is a hybrid.” I mean, it does start to change people, and I think if it goes on for a couple years, it starts to change the conviction, what type of airline — airplane engines and everything like that. But we’ve had a long period here where prices have been quite low. And I think now people say, “well, these are going to last a while.” It will affect the decisions they make on new investments.

JEFFREY BROWN: How realistic is a move towards more alternative energies?

DANIEL YERGIN: We’ve been waiting a long time. Billions and billions of dollars have been spent on it. Currently, renewables and solar, excluding hydropower, is like 0.2 percent of our supply. So even if it quadruples, it’s less than 1 percent. It takes time. Costs are coming down for things like wind power. But they’re far from being competitive on a large scale. It may be ten, fifteen years. Obviously, we have to continue to invest in a whole panoply of research and development to be ready.

JEFFREY BROWN: Mr. Roberts, how high do prices have to go at the gas pump to change people’s behavior and attitudes to move to a kind of future you’re talking about?

PAUL ROBERTS: Well, there’s two ways to look at it. One would be to look at Europe, where they pay as much as $5 a gallon for gasoline. And it has, you know, clearly affected the way they use energy. But the other way to say that, you know, since we don’t have a political climate here where we could have anything like a $5-a-gallon tax or a price of $5… so, maybe the question is at what point do consumers start to take this seriously?

You know, when do consumers and companies say, “okay, this isn’t just a seasonal thing; it isn’t simply cyclical. It may be here for the long term. I need to start making new decisions.” And, you know, at that point, and it’s hard to say when that could be. I mean, historically, oil prices come down after the summer driving season. And they if don’t come down this year, that might be a signal to consumers that, might be a signal –

DANIEL YERGIN: — they’ll come down again and we’re in a period of lower prices again. I think, you know, when you look — in “The Prize,” I had hundreds and hundreds of characters, but at the end of the day, I decided there are just two characters who really counted: Supply and demand. And this is a… we’re dealing here with cycles.


PAUL ROBERTS: Well, I mean, you know, that’s been the historical pattern, and that’s given the industry and a lot of government officials a great sense of optimism that this is self-correcting, you know, and we’ll have a few years of pain. The high prices will encourage oil companies to go out and look for new oil. And all the money they’re making now will be reinvested in additional oil exploration and production. And that’s great if it works out. And I guess we’ll have to wait it out.

DANIEL YERGIN:I think we can already see… we can see out to the year 2010, 2012, and we see some big increases coming. But, as Paul says, one major issue here is what governments want to do, not consuming governments, but governments…

JEFFREY BROWN: The geopolitical question you were talking about.

DANIEL YERGIN: Yeah, the geopolitical question. You know, what does Russia really do? Does it build a pipeline to Murmansk? Does it build a pipeline to Asia? Does it compete with the Middle East? Politics is very involved in all of this.

JEFFREY BROWN: Let me ask you briefly both, is there any question about oil’s place in the future of our economy?

DANIEL YERGIN: Well, I think that it’s possible by the year 2025 natural gas will have overtaken oil. But it looks, you know, you only have so far out to look. You look at China, where so much of the demand is coming. The next ten or 15 years, oil remains the primary energy source, perhaps even 20 years.

JEFFREY BROWN: Mr. Roberts, what’s your answer?

PAUL ROBERTS: Well, I think that it’s going to remain, in parts of the world it’s going to remain critical. In china, obviously, they want a car culture. They’re not going to be able to leapfrog into the 22nd century any faster than we can. But America clearly needs to take leadership here and say, and recognize, and publicly recognize that an oil-based economy can’t go on forever and that if we’re going to change, even if it takes, you know, twenty or thirty years for us to hit a peak, as Dan suggests — and I don’t happen to agree — but even if it does, we need to start making investments now in all kinds of things. The technologies that today are taking up a tiny share of the market, they have to be grown. We have to be looking for the other technologies that are going to appear. We have to create an atmosphere…

DANIEL YERGIN: Is it the consumer? Is it government mandating it? Is it prices from the market? How does this happen?

PAUL ROBERTS: Well, I think if you want to include climate change in your equation, which you have to, you have to eventually get to a climate or a carbon-based economy. You have to charge people and companies for the carbon they produce. That sets a whole bunch of things in motion. It is not an attractive policy option in this country. This country can’t even acknowledge that climate’s a problem. You can’t use the “c-word” in political discourse here.

JEFFREY BROWN: Okay. Big, long-term questions. Paul Roberts and Daniel Yergin, thank you very much.


PAUL ROBERTS: Thank you.