The New York Times (pg. WK1)  [Printer-friendly version]
April 20, 2008


By Jad Mouawad

Oil prices rose above $116 a barrel last week, setting another record
for the world's most indispensable energy commodity. What was striking
about this latest milestone was what didn't happen: there was no
shortage of oil, no sudden embargo, no exporter turning off its

The weak dollar, worries about terrorism and speculation on commodity
markets certainly played a role. But, of course, so did demand.
Producers are struggling to pump as much as they can to quench the
thirst not only of the developed world, but fast-growing developing
nations like China and India, the two most populous countries. To many
experts, the steadily rising price underscored longer-term fears about
the future of a system that has supplied cheap oil for more than a

"This is the market signaling there is a problem," said Jan Stuart,
global oil economist at UBS, "that there is a growing difficulty to
meet demand with new supplies."

Today's tensions are only likely to get worse in coming years.
Consider a few numbers: The planet's population is expected to grow by
50 percent to nine billion by sometime in the middle of the century.
The number of cars and trucks is projected to double in 30 years-- to
more than two billion -- as developing nations rapidly modernize. And
twice as many passenger jetliners, more than 36,000, will in all
likelihood be crisscrossing the skies in 20 years.

All of that will require a lot more oil -- enough that global oil
consumption will jump by some 35 percent by the year 2030, according
to the International Energy Agency, a leading global energy forecaster
for the United States and other developed nations. For producers it
will mean somehow finding and pumping an additional 11 billion barrels
of oil every year.

And that's only 22 years away, a heartbeat for the petroleum industry,
where the pace of finding and tapping new supplies is measured in

The pursuit of oil will be just part of the energy challenge. The
world's total energy demand -- including oil, coal, natural gas,
nuclear power, as well as renewable energy sources like wind, solar
and hydro power -- is set to rise by 65 percent over the next two
decades, according to the I.E.A.

But petroleum, the dominant fuel of the 20th century, will remain the
top energy source. It accounts for more than a third of the world's
total energy needs, ahead of coal and natural gas. Refined into
gasoline, kerosene or diesel fuel, oil has no viable substitute as a
transportation fuel, and that is not likely to change much in the next
30 years.

The problem is that no one can say for sure where all this oil is
going to come from.

That might not sound like such a bad thing for those concerned about
carbon emissions and climate change. High prices might end up forcing
people to conserve and encourage the development of alternatives. But
the energy crunch might also result in a global scramble for
resources, energy wars, and much higher energy prices.

Some oil executives are sounding the alarm bell. At a recent energy
conference, John Hess, the chief executive of Hess Corporation, the
international oil company, warned that an oil crisis was looming if
the world didn't deal with runaway demand and strained supplies. The
chief executive of Royal Dutch Shell, Jeroen van der Veer, said
recently, with some understatement, that, "the energy outlook does
not look rosy."

For one thing, the world's oil supplies are already stretched.
Countries outside of the OPEC cartel -- which have been the main
source of new oil discoveries and production since the 1970s -- have
said they expect little to no growth this year in oil production.

The North Sea and Alaska are slowly running out of oil and producers
there are struggling to keep production from falling. Russia's
phenomenal oil surge is coming to an end; a top executive of Lukoil,
the country's second-largest oil group, said last week that the
country's production was unlikely to grow much. Nigeria is battling a
violent militancy. And Mexico, the third-most-important supplier of
crude to the United States, has been stuck in a crippling political
debate over keeping out foreign investors while witnessing a dramatic
drop in production that some analysts say may be irreversible.

What about OPEC? The 13 members of the Organization of the Petroleum
Exporting Countries account for three-quarters of the world's proven
oil reserves. But for various reasons, most of those countries are
making it harder, if not impossible, for foreign oil companies to
invest within their borders. With energy prices rising, OPEC producers
are seeing record revenues, which have reduced the incentive to dip
into their supplies by boosting production.

At the same time, major oil companies like Exxon Mobil, BP and Chevron
are finding it harder to compete worldwide, as national oil companies
erode their once-dominant positions. Fourteen of the world's Top 20
oil companies are state-owned giants, like Saudi Aramco and Russia's
Gazprom. That leaves Western oil companies in control of less than 10
percent of the world's oil and gas reserves.

Facing higher costs, those companies are also having greater
difficulty locating new oil deposits. Despite spending over $100
billion on exploration last year, the five largest international oil
companies found less oil last year than they pumped out of the ground.

A small band of skeptics view today's record prices as evidence that
oil supplies have peaked -- that half the globe's oil supply has
already been used up. But most experts believe that there are still
enough oil reserves, both discovered and undiscovered, to last at
least through the middle of the century.

The problem is that in many corners of the world, geopolitics, more
than geology, has removed much of those reserves from the reach of
independent oil companies.

"There are plenty of resources in the globe," Rex Tillerson, the
chairman of Exxon, recently told an investor conference. The
difficulty, he said, was "just continuing to have access to all of the

Over the past century, the world burned through a trillion barrels of
oil. Another 1.2 trillion barrels of known conventional oil reserves
wait to tapped, according to BP, one of the world's biggest oil
companies. It sounds like a lot. But given the current rate of growth
in demand, a trillion of those barrels will be used up in less than 30

What then? Many analysts estimate another trillion barrels of yet-to-
be-found oil remains, but in remote places like the Arctic Ocean where
it will be expensive to extract, or in countries that might restrict

The big oil companies have been in a global dash to find and pump more
oil. But it takes time, sometimes a decade, before the first barrels
from a newly discovered oil field are pumped and sold.

What of the alternatives?

Corn ethanol, which was sold as a quick fix to the nation's dependency
on oil imports, is an imperfect substitute. It is now blamed for
driving up food prices while emitting more carbon dioxide and
providing a third less energy per gallon than gasoline.

It is no panacea either. Even if oil companies can meet the federal
requirement to use 36 billion gallons of ethanol by 2022, which many
say will be impossible, it would only amount to 10 percent of the
country's current oil demand.

Likewise, the rush to develop heavy oil, tar sands and shale oil
reserves, and investments to turn coal into liquid fuels, like diesel,
will yield only small amounts of fuel. But their cost to the
environment will be much higher than the exploitation of conventional

Some experts are not quite so worried. They argue that the oil
industry is a cyclical one in which higher prices eventually push down
demand. "We're in a bubble right now," said Robert Mabro, a well-
known oil expert at the Oxford Institute for Energy Studies. "Prices
are rising because everyone expects them to do so. We've seen the same
thing in the real estate market."

Still, the growth in oil consumption almost certainly will need to
slow in coming years. But it seems unlikely that developing nations
will cut their consumption first. China, India and the Middle East are
in the midst of exceptional economic booms and need cheap energy,
which is largely subsidized by their governments, to keep growing and

Oil now accounts for just 19 percent of China's energy needs. But
China's oil demand is expected to more than double by 2030 to over 16
million barrels a day, according to the International Energy Agency,
as more people rise from poverty, move out of villages and buy more

Just as in the United States, much of the increase in China's oil
demand has come from that country's love affair with cars. The number
of vehicles in China rose sevenfold between 1990 and 2006, to 37
million. China has now surpassed both Germany and Japan to become the
second-largest car market in the world, and is set to overtake the
United States by around 2015. China could have as many as 300 million
vehicles by 2030.

William Chandler, an energy expert at the Carnegie Endowment for
International Peace, estimates that if the Chinese were using energy
like Americans, global energy use would double overnight and five more
Saudi Arabias would be needed just to meet oil demand. India isn't far
behind. By 2030, the two counties will import as much oil as the
United States and Japan do today.

What about the United States? The country has shown little willingness
to address its energy needs in a rational way. James Schlesinger, the
nation's first energy secretary in the 1970s, once said the United
States was capable of only two approaches to its energy policy:
"complacency or crisis."

The United States is the only major industrialized nation to see its
oil consumption surge since the oil shocks of the 1970s and 1980s.
This can partly be explained by the fact that the United States has
some of the lowest gasoline prices in the world, the least fuel-
efficient cars on the roads, the lowest energy taxes, and the longest
daily commutes of any industrialized nation. The result: about a
quarter of the world's oil goes to the United States every day, and of
that, more than half goes to its cars and trucks.

Rising prices and fears about the security of future supplies finally
persuaded Congress last year to approve the first increase in fuel
efficiency standards in 30 years, raising the average fleet-wide
standards by 40 percent to 35 miles a gallon by 2020. The push, which
was resisted by American carmakers for years, is underwhelming. The
same goal could be reached overnight if everyone drove a Honda: the
Japanese carmaker's fleet already averages 35 miles a gallon.

"The country has been living beyond its means," said Vaclav Smil, a
prominent energy expert at the University of Manitoba. "The situation
is dire. We need to do relative sacrifices. But people don't realize
how dire the situation is."