"The very same high oil prices that doomsters claim are a sign of imminent depletion also provide a powerful incentive for the development of these mucky deposits—and for the technology that will allow us to extract them in a cleaner fashion."

Foreign Policy
Think Again: Oil
By Vijay V. Vaitheeswaran

“The World Is Running Out of Oil”

Hardly. The world has more proven reserves of oil today than it did three decades ago, according to official estimates. Despite years of oil guzzling and countless doomsday predictions, the world is simply not running out of oil. It is running into it. Oil is of course a nonrenewable resource and so, by definition, it will run dry some day. But that day is not upon us, despite the fact that a growing chorus of “depletionists” argue that we’ve already reached the global peak of oil production. Their view, however, imagines the global resource base in oil as fixed, and technology as static. In fact, neither assumption is true. Innovative firms are investing in ever better technologies for oil exploration and production, pushing back the oil peak further and further.

The key is understanding the role of scarcity, price signals, and future technological innovation in bringing the world’s vast remaining hydrocarbon reserves to market. Thanks to advances in technology, the average global oil recovery rate from reservoirs has grown from about 20 percent for much of the 20th century to around 35 percent today. That is an admirable improvement. But it also means that two thirds of the oil known to exist in any given reservoir is still left untapped.

The best rebuttal to the depletionists’ case lies in the world’s immense stores of “unconventional” hydrocarbons. These deposits of shale, tar sands, and heavy oil can be converted to fuel that could power today’s ordinary automobiles. Canada, for example, has deposits of tar sands with greater energy content than all the oil in Saudi Arabia. China, the United States, Venezuela, and others also have large deposits of these energy sources. The problem is that the conversion comes at a much greater environmental and economic cost than conventional crude oil. But the very same high oil prices that doomsters claim are a sign of imminent depletion also provide a powerful incentive for the development of these mucky deposits—and for the technology that will allow us to extract them in a cleaner fashion.

“Oil Companies Are to Blame For High Prices”

Actually, no. Whenever the cost of a gallon at American gasoline pumps shoots up, politicians and energy activists claim oil companies like ExxonMobil and BP are fixing prices. Big Oil may appear all-powerful to the consumer, but in reality the major private-sector energy companies with the famous brand names are powerless compared with the OPEC goliaths.

The issue again is supply and demand. Unlike during the 1970s oil shocks, when most oil was sold through bilateral contracts, much of the world’s petroleum today is sold through sophisticated and highly liquid futures markets, such as the New York Mercantile Exchange. It is therefore difficult for firms to manipulate prices. And when there are suspicions of back-room dealings, market watchdogs step in.

It is true that the oil market is far from unfettered, distorted as it is by a host of subsidies and handouts. It is also true that a conspiratorial cabal does meet regularly behind closed doors to rig prices and supply. However, that cabal is not Big Oil. It is OPEC. Saudi Aramco, a charter member, holds 20 times the oil reserves of ExxonMobil, the biggest of the private-sector majors. In other words, the Western firms are price takers, not price setters.

In fact, despite the current spate of record profits, Big Oil is in big trouble. Oil-rich countries, such as Venezuela and Russia, are nationalizing their resources, just as Saudi Arabia and Iran once did. That means most of the world’s reserves, and all of the cheap or easily accessed oil sources, are no longer available to the major private companies. The Western oil firms are running out of their primary product, even though the world at large is not. And that is a development that could ultimately hurt consumers, because Big Oil is the only counterweight to OPEC we have.

“China’s Thirst for Oil Is Insatiable”

So what? China’s oil consumption should not be considered a global environmental nightmare. That gloomy view ignores an important development: China’s determination to find alternatives to hydrocarbon fuels. China’s burgeoning green revolution is not driven by concern for the environment, but by growing paranoia among the country’s leadership over dependence on Persian Gulf oil. It is one reason China now has tough fuel economy standards, and why it’s a world leader in developing electric and hydrogen-powered automotive technologies. What’s more, it’s not hard to imagine that some technological leapfrogging, along the lines of what has occurred in telecommunications in the developing world during the past decade, could transform the next generation of Chinese cars into green machines.

Vijay V. Vaitheeswaran is correspondent for The Economist and coauthor, with Iain Carson, of Zoom: The Global Race to Fuel the Car of the Future (New York: Twelve Books, 2007).