By John W. Schoen Senior producer
updated 9/19/2005 6:11:58 PM ET 2005-09-19T22:11:58

With global oil production already stretched to the limit, hurricane Katrina put a serious crimp in the world’s energy pipeline. The task of restoring Gulf oil and natural gas production to pre-Katrina levels will take months.

Now, with global demand still rising — especially in rapidly developing countries like China and India — oil industry and government leaders around the world are struggling to find ways to produce enough oil and gas to keep the world’s economy from sliding into recession. The effort is playing out amid a widening debate about the reasons global oil production hasn't expanded fast enough to keep up with growing demand.

At a two-day conference here, oil industry executives, analysts and leaders from oil producing countries are looking at a variety of pieces of the puzzle. But the central question remains: Can more oil be found and produced fast enough to head off a global energy crunch?

The only honest answer is: No one knows for sure.

No one doubts that there is plenty of oil underground waiting to be tapped. As of  the end of 2003, the world’s estimated remaining reserves stood at over 1.1 trillion barrels, according to the American Petroleum Institute. The industry trade group figures that’s enough to continue producing at 2003 rates for another 43 years even if no new oil is found.

But reserves aren’t worth much unless than can be pumped out of the ground fast enough.

“I can’t drive into the filling station and say, “Fill 'er up with reserves,” said Ken Deffeyes, a Princeton University geoscientist who has predicted that oil production will peak later this year. “It’s got to be production capacity. And that’s what’s hurting now and is going to be hurting more.”

Booms and busts
Over the past 100 years, the oil industry had its share of booms and busts, gluts and shortages. The conventional wisdom held that when supplies got tight, oil producers would increase output from readily available reserves — or go find more. For much of the second half of the last century, those reserves were so plentiful that the world’s biggest producers — most of them in the Middle East — created the Organization of Petroleum Exporting Countries in 1968 to limit production in order to maintain prices by preventing a market glut.  

“We’ve had an illusion for the last 40 years that there was so much oil in the Middle East that it would never run out,” said Matthew Simmons, a Houston investment banker whose recent book “Twilight in the Desert” casts doubt Saudi Arabia’s ability to boost production.

The current production squeeze has its roots in OPEC’s failure to manage prices in the late 1990s, when a deep recession in Asia brought a sharp drop in demand. Oil prices crashed to $10 a barrel, bringing a wave of industry consolidation that brought mergers, layoffs, and a major pullback in investment in finding new oil fields and expanding production.

Because of the long lead times needed to develop those oil fields, that late-90s investment drought began to be felt at the start of this decade. Then, as Asia’s growth rebounded sharply, energy demand increased and created a major shock to the global oil market.  

Along with that sharp growth in demand came several major hiccups in supply. In December, 2002, political turmoil in Venezuela — an OPEC producer and major source of U.S. imports — culminated in a nationwide strike that put a major damper on oil output, from which the country has yet to fully recover. The U.S.-led war in Iraq — which was supposed to open that country’s vast reserves for development — has set back potential production gains there.

Relying on reserves
After Katrina knocked out as much as 10 percent of U.S. oil and gas production, it took an emergency withdrawal of 60 million barrels from global strategic reserves to head off serious shortages.

OPEC countries, meanwhile, have been pumping as fast as they can. With the possible exception of Saudi Arabia, there is little or no spare capacity left among oil exporters. Despite pledges by the Saudis to keep the oil market adequately supplied, the relentless growth in demand has been consuming every new barrel of oil put on the market.

Predictions of a peak in world oil production aren’t new. One of the earliest came more than five decades ago, when a Shell oil geophysicist, Dr. M. King Hubbert, predicted that U.S. oil production would top out in 1970. Though widely dismissed by the oil industry, his forecast proved to be dead on. Despite billions of investment in exploration and production in the Gulf of Mexico and Alaska since that year, U.S. output continues its steady decline.

More recently, Deffeyes, who worked with Hubbert early in his career, has used the same mathematical analysis to project the timing of the peak in world oil production. His prediction: Oil output will max out later this year.

But some analysts and industry executives note that dire predictions of coming oil shortages have been wrong before, and the latest round is no different. One of them is  Daniel Yergin, chairman of Cambridge Energy Research Associates and author of a Pulitzer-prize winning book on the history of the oil industry.

Running out of oil ... again
“This is now the fifth time when we’ve run out of oil,” he said. “The thinking began in the 1880s that we were running out of oil. So we’ve gone though these episodes before and it’s very similar languages. The US Geological Survey in the 1920s said the U.S. was going to run out of oil in nine years and three months.”

Yergin believes that recent investment — spurred by higher oil prices — will soon bring enough production online to more than meet the growth in global demand. A recent report by his firm, adding up the expected new production from projects already underway, forecasts a rise in global oil production of nearly 20 percent from current levels by 2010. If that forecast proves accurate, the flood of new oil could push global supplies as much as 6 to 7.5 million barrels per day higher than demand, sending prices sharply lower, according to the report.

Aside from new investment, technological advances are also helping to boost production from existing fields. So-called “3D seismic” analysis of underground rock formations has reduced the guesswork involved in finding oil, along with the number of costly dry holes, allowing oil companies to invest their capital more efficiently.

Advances in drilling techniques — including sensors placed on drill bits that send information back to the surface in real time — are allowing oil producers to extract pockets of oil that would otherwise be out of reach. Most oil companies are only able to recovery 60 to 70 percent of the oil in a given reservoir, according to Gary Adams, Global Upstream Leader at IBM Business Consulting Services.

Room for improvement
“There is inefficiency that’s still in play right now and great room for improvement,” said Adams. “And it will ultimately lead to more barrels of oil produced each year. It’s not that you’re depleting the reservoir faster — meaning that your limiting supply. It means that you’re getting more out of the ground from the same reservoirs when you got less before.”

But despite billions in investment around the world, and advances in exploration technology, the pace of new oil discovery has slowed in the past few decades. After over a hundred years of exploration, the number of a major new finds of easily recoverable oil have steadily diminished. That’s forced oil companies to look deeper and deeper offshore or in hostile climates like Siberia. And oil produced from those projects isn’t cheap.

“It’s like catching bass in a pond,” said Deffeyes. “After you’ve caught most of the fish, it gets harder to catch more fish. And after you’ve found most of the oil, it gets hard to find more oil.”

And as exploration moves to more difficult locations, development of existing reserves has become more difficult in many oil-rich countries due to ongoing political turmoil.

Even Yergin concedes that the prospects for finding more oil underground could be severely constrained by political turmoil above the ground. From Nigeria, where violent conflict and protests have repeatedly interrupted oil exports, to Russia, where the government seizure of oil producer Yukos has scared away investors, oil supplies from more than a dozen “hot spots” around the globe are at risk of being cut off, according to the U.S. Energy Information Administration.

While no one can say for sure how much more oil will be found — or how fast production will increase — the stakes are huge. Though higher oil prices have spurred development of alternative sources like wind and solar (and provided momentum for expanded use of coal and nuclear power), these alternatives aren’t close to being ready to replace petroleum. Given the lead time in developing alternative energy sources, the risk is that a shortfall in oil supplies could leave the world’s economic engine sputtering.

Losing bet
One need only to look to New Orleans for an example of the risk of postponing investment as a solution to the global economy’s dependence on scarce oil, said Robert Kauffman, a professor at Boston University's Center for Energy & Environmental Studies.

“Everybody knew eventually that hurricane was coming,” he said. “And we said, ‘We don’t need to fix it now, we can postpone it.’ We made a bet, and we lost. And now we have to pay up big time.

“And it’s the same thing with oil. You want to make a bet? Fine. You want to say the peak isn’t for 30 years or 40 years? Fine. Do nothing. But if you lose the bet, you’ve got to pay up big time.”

What would it take to replace oil? Simmons believes it will require nothing less than the equivalent cost and commitment on the order of fighting another war — this one to transform the world’s energy infrastructure in less than a decade.

“I really do believe that if we understand these problems and go to a war footing,” he said, “that in a shorter period of time than the 12 years it took to destroy and rebuild Europe and Japan we can fix this thing.

“And in fixing it, we can get along while we also go on a scientific expedition that exceeds what we did when we invented radar and the atomic bomb. Because we can probably invent some new forms of energy we don’t even know about.”

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