Certain about supply

Sept. 4, 2006
To judge by recent communication to Oil & Gas Journal, an expression of optimism about oil supply constitutes suspicious behavior.

To judge by recent communication to Oil & Gas Journal, an expression of optimism about oil supply constitutes suspicious behavior. In response to a recent report about an upbeat projection of oil-production capacity, OGJ received messages offering contrary opinions that were, well, intense. One of them questioned the qualifications of the very qualified reporter who wrote the article. Another suggested that if OGJ would look at the numbers it would not report on optimistic projections about future oil supply.

The messages came from serious sources. Sent as personal communications, they won’t be published. They’re noteworthy, however, as evidence that opinions on this issue have hardened as people studying it entrench themselves in certitude, which if directed toward policy can be a problem.

Future supply

For the record, OGJ recognizes the importance of future oil supply and has published many articles on the subject, written from many perspectives. It will continue to do so as fresh approaches and new insights emerge. OGJ also looks regularly at “the numbers,” having published annual estimates of country oil and gas reserves and oil production for many decades. It is familiar enough with the numbers, in fact, to know that with reserves there is no way to be right. On the issue of future oil supply, that might be the most valuable insight of all.

The study in question came from Cambridge Energy Research Associates (OGJ, Aug. 21, 2006, p. 20). It said global oil-production capacity might climb to 110 million b/d in 2015 from 88.74 million b/d now. Much of the increase, it said, will come from NGLs and extra-heavy oil. CERA often expresses confidence in oil volumes remaining to be produced and in technological progress.

Most observers on the pessimistic side of the issue disagree on both scores. They stress physical limits on oil volumes and see little reason to expect technology to advance fast enough to prevent a peaking of oil production within a few years if not a calamitous supply collapse.

On both sides of the issue, mistakes can be costly.

Pessimists express strong regret that governments aren’t doing more to prepare for the supply precipice over which they fear the world soon will fall. Some of them also see ruinous implications for humanity. Because alarmism attracts more attention in the general media than do other positions on the issue, imminent depletion-as opposed to a slowdown or reversal of production growth-becomes the prevailing and almost certainly mistaken view of the public.

This properly troubles supply optimists, who point to historic errors of foreign and economic policy made by governments reacting to forecasts of imminent depletion. Those forecasts have appeared since the birth of the oil industry and have been defied, so far, by production growth.

Still, the world obviously has entered a transition from cheap to more costly sources of conventional oil and increasingly depends on unconventional sources. And it’s clear that relentlessly expanding demand is straining physical capacities to produce, transport, and refine oil and that labor and material shortages limit capacity expansion.

Policy relevance

How much oil remains to be produced in the world, while vitally important, is in fact less relevant to immediate policy-making than how much money can and will be spent on production and other capacities. Part of the reason for this is that numbers about remaining oil numbers are inherently imprecise; they’re reserves estimates based on interpretation of imperfect, relatively sparse, and ever-changing technical and economic data. Another part of the reason is that investment decisions are based on local metrics that ignore global or even country-level reserves.

So while debate over reserves and future production will yield insights into an important question, it can’t supply definitive answers and should inform but never determine policy. Certitude should not blind the debate-or policies guided by it-to geologic and technical surprises such as those that have confounded past assumptions about imminent depletion. And the debate must not short-circuit public and official attention to more immediately relevant issues, such as resource access and supplies of labor, materials, and capital.