Beyond the Age of Petroleum
That this industry debilitation is not a temporary problem but symptomatic of a long-term trend was confirmed in two important studies published this past summer by conservative industry organizations.
The first of these was released July 9 by the International Energy Agency (IEA), an affiliate of the Organization for Economic Cooperation and Development, the club of major industrial powers. Titled Medium-Term Oil Market Report, it is a blunt assessment of the global supply-and-demand equation over the 2007-12 period. The news is not good.
Predicting that world economic activity will grow by an average of 4.5 percent per year during this period--much of it driven by unbridled growth in China, India and the Middle East--the report concludes that global oil demand will rise by 2.2 percent per year, pushing world oil consumption from approximately 86 million barrels per day in 2007 to 96 million in 2012. With luck and massive new investment, the oil industry will be able to increase output sufficiently to satisfy the higher level of demand anticipated for 2012--barely. Beyond that, however, there appears little likelihood that the industry will be able to sustain any increase in demand. "Oil look[s] extremely tight in five years' time," the agency declared.
Underlying the report's general conclusion are a number of specific concerns. Most notably, it points to a worrisome decline in the yield of older fields in non-OPEC countries and a corresponding need for increased output from the OPEC countries, most of which are located in conflict-prone areas of the Middle East and Africa. The numbers involved are staggering. At first blush, it would seem that the need for an extra 10 million barrels per day between now and 2012 would translate into an added 2 million barrels per day in each of the next five years--a conceivably attainable goal. But that doesn't take into account the decline of older fields. According to the report, the world actually needs an extra 5 million: 3 million to make up for the decline in older fields plus the 2 million in added requirements. This is a daunting and possibly insurmountable challenge, especially when one considers that almost all of the additional petroleum will have to come from Iran, Iraq, Kuwait, Saudi Arabia, Algeria, Angola, Libya, Nigeria, Sudan, Kazakhstan and Venezuela--countries that do not inspire the sort of investor confidence that will be needed to pour hundreds of billions of dollars into new drilling rigs, pipelines and other essential infrastructure.
Similar causes for anxiety can be found in the second major study released last summer, Facing the Hard Truths About Energy, prepared by the National Petroleum Council, a major industry organization. Because it supposedly provided a "balanced" view of the nation's energy dilemma, the NPC report was widely praised on Capitol Hill and in the media; adding to its luster was the identity of its chief author, former ExxonMobil CEO Lee Raymond.
Like the IEA report, the NPC study starts with the claim that, with the right mix of policies and higher investment, the industry is capable of satisfying US and international oil and natural gas demand. "Fortunately, the world is not running out of energy resources," the report bravely asserts. But obstacles to the development and delivery of these resources abound, so prudent policies and practices are urgently required. Although "there is no single, easy solution to the multiple challenges we face," the authors conclude, they are "confident that the prompt adoption of these strategies" will allow the United States to satisfy its long-term energy needs.
Read further into the report, however, and serious doubts emerge. Here again, worries arise from the growing difficulties of extracting oil and gas from less-favorable locations and the geopolitical risks associated with increased reliance on unfriendly and unstable suppliers. According to the NPC (using data acquired from the IEA), an estimated $20 trillion in new infrastructure will be needed over the next twenty-five years to ensure that sufficient energy is available to satisfy anticipated worldwide demand.
The report then states the obvious: "A stable and attractive investment climate will be necessary to attract adequate capital for evolution and expansion of the energy infrastructure." This is where any astute observer should begin to get truly alarmed, for, as the study notes, no such climate can be expected. As the center of gravity of world oil production shifts decisively to OPEC suppliers and state-centric energy producers like Russia, geopolitical rather than market factors will come to dominate the marketplace.
"These shifts pose profound implications for U.S. interests, strategies, and policy-making," the NPC report states. "Many of the expected changes could heighten risks to U.S. energy security in a world where U.S. influence is likely to decline as economic power shifts to other nations. In years to come, security threats to the world's main sources of oil and natural gas may worsen."
The implications are obvious: major investors are not likely to cough up the trillions of dollars needed to substantially boost production in the years ahead, suggesting that the global output of conventional petroleum will not reach the elevated levels predicted by the Energy Department but will soon begin an irreversible decline.
This conclusion leads to two obvious strategic impulses: first, the government will seek to ease the qualms of major energy investors by promising to protect their overseas investments through the deployment of American military forces; and second, the industry will seek to hedge its bets by shifting an ever-increasing share of its investment funds into the development of nonpetroleum liquids.