Seeker Blog

There is so much nonsense being written about high oil prices and the “coming oil crisis” that it is time to look at some informed commentary. Daniel Yergin, chairman of Cambridge Energy Research Associates is the single best source on energy economics accessible to the lay reader. I especially recommend this July 27, 2005 article It’s not the end of the oil age

Yergin’s forecast is that real reserves will grow by 20% by 2010, and that the real risks are not “below ground”, but are the “above ground” risks of political instability, outright conflict, terrorism or slowdowns in decision making on the part of oil-producing governments.

“Shortage” is certainly in the air — and in the price. Right now the oil market is tight, even tighter than it was on the eve of the 1973 oil crisis. In this high-risk market, “surprises” ranging from political instability to hurricanes could send oil prices spiking higher.
Moreover, the spectre of an energy shortage is not limited to oil. Natural gas supplies are not keeping pace with growing demand. Even supplies of coal, which generates about half of the country’s electricity, are constrained at a time when our electric power system has been tested by an extraordinary heat wave.

But it is oil that gets most of the attention. Prices around $ 60 a barrel, driven by high demand growth, are fuelling the fear of imminent shortage — that the world is going to begin running out of oil in five or 10 years. This shortage, it is argued, will be amplified by the substantial and growing demand from two giants: China and India.

Yet this fear is not borne out by the fundamentals of supply. Our new, field-by-field analysis of production capacity, led by my colleagues Peter Jackson and Robert Esser, is quite at odds with the current view and leads to a strikingly different conclusion: There will be a large, unprecedented build-up of oil supply in the next few years. Between 2004 and 2010, capacity to produce oil (not actual production) could grow by 16 mm bpd — from 85 mm bpd to 101 mm bpd — a 20 % increase. Such growth over the next few years would relieve the current pressure on supply and demand.

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While questions can be raised about specific countries, this forecast is not speculative. It is based on what is already unfolding. The oil industry is governed by a “law of long lead times.” Much of the new capacity that will become available between now and 2010 is under development. Many of the projects that embody this new capacity were approved in the 2001-03 period, based on price expectations much lower than current prices.

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But at least for the next several years, the growing production capacity will take the air out of the fear of imminent shortage. And that in turn will provide us the breathing space to address the investment needs and the full panoply of technologies and approaches — from development to conservation — that will be required to fuel a growing world economy, ensure energy security and meet the needs of what is becoming the global middle class.

Yergin is the author of the definitive, Pulitzer prize winning “The Prize: the Epic Quest for Oil, Money and Power“.