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You are here: Home / Foreign Affairs / Oil Shock

Oil Shock

by John Cole|  June 28, 200511:56 am| 8 Comments

This post is in: Foreign Affairs

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If Kevin Drum’s 547 part piece on peak oil scared the hell out of you, I would reach for the smelling salts before reading “A Cartel and Its Snakeoil”:

Across the oil industry, the uneasy feeling is growing that world production may be approaching its own “Hubbert’s Peak.” The last major field yielding more than a million barrels a day was found in Mexico in 1976. New discoveries peaked in 1960, and production outside the Middle East reached its high point in 1997. Meanwhile world demand continues to accelerate by 3% a year. Indonesia, once a major exporter, now imports its oil.

Before an uneasy feeling grows into full-blown pessimism, however, one must consider the supposedly vast oil resources lying beneath Saudi Arabia. The Saudis possess 25% of the world’s proven reserves. They routinely proclaim that, for at least the next 50 years, they could easily double their current output of 10 million barrels a day.

But is this true? Matthew R. Simmons, a Texas investment banker with a Harvard Business School degree and 20 years’ experience in oil, has his doubts. In “Twilight in the Desert,” Mr. Simmons argues that the Saudis may be deceiving the world and themselves. If only half of his claims prove to be true, we could be in for some nasty surprises.

Aye, carumba.

*** Update ***

TNR has a piece on petrodollars and extremism.

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Reader Interactions

8Comments

  1. 1.

    SomeCallMeTim

    June 28, 2005 at 12:14 pm

    I wouldn’t worry too much. HBS degree + oil experience hasn’t had much positive correlation with competence or foreknowledge in the past.

  2. 2.

    JonBuck

    June 28, 2005 at 12:42 pm

    I’ve been reeling on this issue for welll over a week now. I’m very, very scared about the next few years.

    There’s a process out there called Thermal Depolymerization that can make crude oil and natural gas from organic waste. I feel it is a viable partial solution. But it may be too late for investment.

  3. 3.

    Sojourner

    June 28, 2005 at 1:38 pm

    Saudi Arabia has invested heavily in solar power over the last decade.

    What does that tell you?

  4. 4.

    Jon H

    June 28, 2005 at 1:43 pm

    “What does that tell you?”

    Well, it tells me that the Saudis figure that it is more profitable to sell their oil on the market, instead of using it themselves for purposes which can be served by other sources.

  5. 5.

    sidereal

    June 28, 2005 at 2:02 pm

    It tells me they have a lot of sun and a lot of open terrain.

  6. 6.

    Jimmy Jazz

    June 28, 2005 at 2:30 pm

    Coincidentally enough, we invaded the country with the second largest oil reserves in the world, I’m not sure if you heard about that. Shockingly, it turns out that they didn’t have any “weapons of mass destruction” or “links to fundamentalist terrorist groups targeting America”, but they do have a lot of oil, so I guess “oil’s well that ends well”.

  7. 7.

    James Emerson

    June 28, 2005 at 4:31 pm

    There’s nothing mystical about peak oil. The natural processes that create oil move along with the geological ages. The drilling and use of oil has tapped about one half of all oil that was created through the eons. It took us about a hundred years to use about half. With half remaining in the ground, one would think that we have plenty of time to rectify the growing gap between demand and production, but sadly this isn’t the case.

    The most easily discoverable and recoverable oil has been discovered and recovered. As the article has stated, there have been precious few large deposits discovered sine the 1970s. The biggest deposits have, for the most part, been pumped more than half dry. In the case of Saudi’s giant ghowar field, which produces half of SAs output, the recovered oil is now about 40% water caused by water injection technology that the Saudis have employed to keep production high. They aren’t the only ones using high output technology either. The result of water injection is that the field remains in high production for a longer period, but the negative is that when production finally peaks, its production declines much faster than a non-water injected field. In essence, 40% water in the recovered oil means that Ghowar is in its “last throes” of production.

    Now the people are in denial about peak oil do have a valid point. There are enormous quantities of crude left in the ground. The downside is that these deposits are more expensive to recover and refine than the “sweet light” crude which is the favorite fuel source for the motoring public. Heavy sour crude is refineable into the products we like, but it contains a lower percentage of the hydorcarbons that motor fuels are make from.

    So the coming catastrophe won’t be so much as the sudden disappearance of motor fuels, but will be the upward price pressure driven (so to speak) from increasing world demand curve against a stagnant and/or decreasing supply curve. The only elasticity between this bifurcating curve set is in the price, unless we find a “reasonable facsimile.” But that would require a national effort, and the reality is that this is the administration that wants to privatize everything, including the pretigious Los Alamos Labs.

    The price is where the rubber meets the road. How many of us can afford a work-a-day SUV commute when gasoline reaches $5 per gallon? How many of us can afford to go out and buy a Prius…even if you can find one? How many of us can afford to buy fruit grown in Peru, and salad grown in Mexico? The answer is not very many.

  8. 8.

    Jess

    June 28, 2005 at 10:08 pm

    For a really scary summary of peak oil issues, check out lifeaftertheoilcrash.net (or .org or .com…I can’t remember offhand. Okay, just google it).

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