On January 9, 2004, Royal Dutch/Shell, one of the world’s largest publicly traded oil companies, shocked the international financial community by announcing that it had overstated its oil and gas reserves by 20 percent, representing the equivalent of 3.9 billion barrels of petroleum–worth an estimated $136 billion
at then current prices of about $35 per barrel. The announcement led to an immediate plunge in the value of Shell’s stocks (shares of its two holding companies, Royal Dutch Petroleum Company of the Netherlands and Shell Transport and Trading Company of Britain, are traded separately) and the ouster of top corporate officials; it has also prompted an investigation by the Securities and Exchange Commission and equivalent bodies in Holland and England. But far more significant than the financial and corporate repercussions of the reserve overstatement were its implications for the global energy equation: In contrast to oil company claims that petroleum is abundant and will remain so for a considerable time to come, it suddenly appeared that untapped supplies may prove more limited than was once assumed.
Scarcely had the global oil community absorbed the troubling news from Shell than it received yet another powerful shock: On February 24, the New York Times reported that top US energy analysts now believe that Saudi Arabia–the world’s number-one producer–is facing the wholesale depletion of its major oilfields and may not be able to sustain its current output of 10 million barrels per day (mbd) much beyond the current decade. Were Saudi production to fall below 10 mbd for any length of time, the global energy system would simply collapse, as no other country can make up the difference on a sustained basis. But even if the Saudis do maintain this level, but fail to rise above it, the global economy will still suffer, since there is no way to satisfy rapidly growing world demand without a substantial increase in Saudi output. The US Department of Energy (DOE), for example, predicts that Saudi oil production will rise by 12.5 mbd between now and 2025, an increase of 125 percent, in order to meet anticipated world demand at the end of that period. Without this additional 12.5 mbd, there is no way the global oil industry will be able to satisfy anticipated requirements in the years ahead, and the entire world will face an acute energy crisis.
These two developments, coupled with news of declining or stagnant production in such established oil “provinces” as the United States, the North Sea, Indonesia, Nigeria and Venezuela, have directed fresh attention to claims that the world is approaching the moment of maximum or “peak” oil output, beyond which no amount of drilling or investment will result in higher levels of production.
The concept of “peak” oil derives from the pioneering research of M. King Hubbert, a prominent geophysicist who worked for many years at Shell Oil in Houston. In the early 1950s Hubbert determined that the oil output of any given field or reservoir typically follows a parabolic (bell) curve: at first, production rises very rapidly as the largest and most accessible stores of oil are developed; eventually, the rate of increase begins to decline as these stores are depleted and drilling commences on smaller, less accessible pockets; eventually, daily field output achieves its maximum attainable, or peak, level, and then begins an irreversible decline, moving ever closer to zero as all remaining supplies are exhausted. Hubbert further determined that peak production normally occurs when half of the reservoir’s original petroleum inheritance has been extracted.