New York Times  [Printer-friendly version]
September 10, 2005


By Joseph Nocera

"We're halfway through the hydrocarbon era," my old friend T. Boone
Pickens has been saying for the last couple of years. You may remember
Mr. Pickens as the most famous corporate raider of the 1980's, but he
has spent his life in the oil patch. A geologist by training, Mr.
Pickens founded Mesa Petroleum at the age of 26 and ran it for the
next 40 years. Now, at 77, he works the oil patch in a different way,
running a pair of energy-oriented hedge funds in Dallas.

A folksy line like Mr. Pickens's -- it sticks with you. But I hadn't
realized until recently that it also meant Mr. Pickens had taken sides
in a surprisingly heated debate. He subscribes to what is being called
the peak oil hypothesis, which holds that there simply isn't very much
new oil left to be found in the world. As a result, we are currently
in the gradual process of draining the more than a trillion barrels of
proven reserves that are still in the ground. And when it's gone, it's

The best-known "peakist" these days is Matthew R. Simmons, who runs
Simmons & Company, an investment bank and consulting firm in Houston
specializing in energy companies. Mr. Simmons's essential belief, he
told me recently, is that energy demand is about to exceed supply
significantly. And that was pre-Hurricane Katrina -- before the storm
damaged refineries, pipelines and offshore rigs all along the Gulf
Coast. "I would argue that we are in a serious energy crisis," Mr.
Simmons added. He forecasts increasing oil prices.

There is a second group of forecasters, though, who argue with equal
vehemence that the world is not in an energy crisis and it probably
won't face one for a very long time. The best-known proponent of this
view is Daniel Yergin, author of "The Prize: The Epic Quest for Oil,
Money and Power," a history of oil that won the 1992 Pulitzer Prize,
and the founder of a rather sizable consulting firm, Cambridge Energy
Research Associates.

"This is the fifth time that we're supposedly running out of oil," Mr.
Yergin said. But, he added, each time new technologies made it
possible for oil companies to find new sources of oil and extract new
oil from old sources. His firm released a survey a few months ago that
says from 2004 to 2010, world oil supplies will have increased by as
much as 16 million barrels a day, "outstripping the likely demand
increase." Most of those who hold this view say that oil prices will
eventually drift down.

DOES it surprise you to learn that when it comes to one of most vital
resources known to man, there could be such an incredible divergence
of opinion? It sure surprised me. Even some of the oil majors are on
opposites sides, with Chevron taking the peakist view, and Exxon Mobil
more aligned with the Yergin camp.

There are three reasons for this lack of consensus. First, because oil
is buried underground, it is hard to measure. So basic "facts" -- like
how much oil remains, and how much can be ultimately extracted -- are
as much the product of guesswork as science. Second, the world of oil
can be shrouded in secrecy. As an article in The New York Times
Magazine recently pointed out, Saudi Arabia, the biggest producer of
them all, won't even allow its reserve and production data to be

Finally, though, the fact that this enormous divergence has developed
speaks volumes about the very different way each camp views the world.
"It's the geologists on one side and the economists on the other
side," was the way the energy analyst Seth Kleinman of PFC Energy in
Washington put it recently. That's an overgeneralization, of course,
but one that contains plenty of truth.

The two sides do agree on one thing: the recent run-up in oil prices,
which began well before Hurricane Katrina, has come about because
demand for oil has caught up with supply. The enormous burst of
economic activity in China, the generally good economic conditions in
the United States and the rest of the West -- these and other factors
have led to a surge in oil demand.

"The world produces about 85 million barrels a day," Mr. Pickens said.
"That's where demand is now, too. And I've seen forecasts that demand
is going to be higher than that by the end of the year."

What's more, Mr. Pickens added, pre-Hurricane Katrina refining
capacity was already at the breaking point, which is another point
that is pretty unarguable. "Refineries were operating at 96 percent,"
he said. "You can't operate anything at 96 percent. It'll start
breaking down."

That last paragraph, though, encapsulates the world view of the
peakists: all the easy deals have been done. One reason refineries are
operating at such high capacity is that no new refineries have been
built in the United States for some 30 years, which Mr. Simmons
believes can be attributed to the shortsightedness of the industry.
"My theory was that if the industry didn't expand like crazy the U.S.
would find itself running short of energy." It didn't, and we are.

Even more troubling, the pessimists believe that it is going to be
increasingly difficult to replace the oil that we're now using up.
"Let me give you a number that is pretty shocking when you hear it,"
Mr. Pickens said. "The world uses 30 billion barrels of oil a year.
There is no way we're replacing 30 billion barrels of oil. Just a
million barrels a day is 1,000 wells producing 1,000 barrels. That's

How do the economists counter the geologists' arguments? They don't
deny that it is hard to find new oil. But they believe that whenever
tight supplies push up the price of oil, the rising price itself
becomes our salvation. For one thing, higher prices temper demand as
people begin to change their energy habits. (Mr. Pickens believes this
as well.) Surprisingly, this has not yet happened even as gasoline at
the pump has more than doubled in the last year or so. But inevitably,
there will come a point when it will change behaviors.

Secondly, they believe higher prices spur innovation. Oil that
couldn't be extracted profitably at, say, $15 a barrel, can be
enormously profitable at $60 a barrel. In the view of Mr. Yergin and
his allies, in fact, this is exactly what has been happening. They
point to new oil that is coming out of the Caspian Sea, deepwater
drilling in Brazil and the oil sands in northern Alberta as examples.
The 16 million barrels a day of new oil Mr. Yergin expects to see by
2010, he told me, "is predicated on $25-to-$30 oil." If oil stays
higher than that, then there will be even more investment, and not
just in ways to extract oil, but in new refineries and pipelines and
other infrastructure.

If you mention this theory to a hard-core peakist like Mr. Simmons,
you'd better be ready for an earful. "These economists are so smug,"
he said derisively. "All they talk about is the magic of the free
market. They don't seem to understand that this is incredibly capital

He pointed to those Canadian oil sands -- where, he said, Shell Canada
recently announced it was going to raise its investment to $7.3
billion from $4 billion to produce an additional 100,000 barrels a
day. "Just think about that; $3.3 billion for just 100,000 barrels,"
he said. "Doesn't that tell you something?"

Of course the economists can be just as dismissive of the peakists.
"I've gone from disagreeing with them to debunking them," scoffed the
energy consultant Michael C. Lynch. "I believe the world will expand
the reserve base. If you put a road in the middle of the jungle, that
can wind up expanding the resource base."

"By most estimates," he added, "total global resources is eight
trillion barrels of oil. They are saying only a small percentage of
that is recoverable, and you can't do anything about it. We are saying
the amount that is recoverable expands over time."

I wish I had the confidence to make my own forecast, but in this case,
I don't. What I do know -- what we all know -- is that oil is a finite
resource. Surely, the peakists are right about that. What I also know
is historically, the economists have generally been right about how
the price of oil has wound up fixing the problem.

As Gary N. Ross, the chief executive of the PIRA Energy Group, puts
it: "Price is the only thing that matters. The new threshold of price
will do its magic on the supply-and-demand side."

After all, it always has before. And it will again. Until it doesn't.

Copyright 2005 The New York Times Company