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Here We Go Again: The oil surplus won't last as long as we might wish.
by James Srodes, Barrons, Oct 19, 1998

Most news analysts got it wrong when they credited low oil prices for the recent proposed $48 billion takeover of Amoco by British Petroleum. What's really driving this mega-merger is an impending global oil shortage that will have profound economic and social implications. Seen in this light, the BP-Amoco merger makes short and long-term sense, and the light also shines on other oil companies.

For European companies like BP, marriages of convenience with American merger partners will offer shelters for profits from the uncertainties of the European monetary union. Also, there will be cost savings from cutting staff and consolidating offices. And U.S. oil companies like Amoco bring retail service-station networks and refineries into the world's largest market for petroleum products. But most of all, the new hybrid giants will have the muscle to survive critical challenges that loom in the not-too-distant future.

Behind the BP pursuit of an American base is a recent series of alerts from many respected petroleum engineers, acknowledged by oil-industry executives and government energy planners: We rapidly approach the point where the global output of new discoveries of oil will begin to contract sharply even as the world demand for energy products becomes still more acute.

Put most simply, a consensus has formed in recent months that within a few years new supplies of conventional oil energy will be outstripped by spiking world demand. Very soon after that the real volume of oil output will begin to shrink abruptly -- even as demand growth coasts a bit higher.

We've seen this before, but the 21st century's supply disruptions and soaring prices will dwarf the OPEC crunches of 1973 and 1979.

The best industry estimates reckon that the world began this year with 1,020 billion barrels of oil in "proved" reserves. At the current production rate of 23.6 billion barrels a year, these supplies would last only another 43 years -- if there were no growth in demand.

As for growth in supply, the industry has spent the past 20 years exploiting a new age of discovery technology. Now many oil geologists say that 90% of the globe's oil fields have already been tapped and many are already exhausted.

Bigger Problem

There are several things wrong with the current consensus. Many of the OPEC nations have been inflating their estimates of proved oil reserves. More obviously, consumption of oil products has already jumped by 50% in Asia and by a third in Latin America, since 1990. By the estimated peak production year of 2010, world demand will have risen by more than 60% to as much as 40 billion barrels a year. Finally, there is the geological bad news that once a mature oil field reaches the midpoint in its productive life it becomes harder to pump out each remaining barrel. Examples of mature fields include much of the Middle East, the North Slope and the North Sea.

Two remarkable things about this latest crisis outcry are how recent it is and how authoritative are the alarmists. It was only last November that two top oil geologists presented papers on the impending oil depletion to a conference of the International Energy Agency of the United Nations in Paris. Colin J. Campbell, an Oxford-trained geologist, and his French counterpart, Jean H. Laherrere, have been senior geologists for firms such as Total, Texaco and Amoco for more than 40 years. Currently they work at the industry think tank Petroconsultants in Geneva.

The two geologists were so convincing that the IEA dropped a generation-old view that held oil discoveries to be merely a function of price -- that is, the higher the price the more oil will be found. Last March, at the Moscow summit of the Group of Eight major industrial nations, the IEA presented its own paper to the national leaders accepting the Campbell-Laherrere view that sometime between 2010 and 2020 the crisis will be upon us full blast. The Campbell-Laherrere analysis also cut the reserve of oil currently known to be in the ground to about 850 billion barrels.

Since then, others have joined in the public debate. Recently, Franco Bernabe, chief executive of the Italian oil company ENI SpA, has given a series of interviews in which he moved the doomsday clock forward to between 2000 and 2005. He forecast that today's world price for a barrel of oil would soon begin to rise from its $15 base and quickly pass the $30 mark. He forecast that both the British and Norwegian sides of the North Sea will begin to see production declines within three years. The United States passed its peak (even with Alaska) long ago. Left open for argument is the amount of new oil left to be discovered in the Third World.

So much global economic progress depends on the exploitation of oil. Energy from all hydrocarbon sources accounts for 80% of what makes our world go and oil accounts for 38% of all energy used. And it's oil that truly powers economic activity because it produces so much raw lift for activities, since it is so movable and can be used in so many ways.

Most "alternative" energy sources require more energy to get them running than they ever produce. For instance, it takes 71% more energy to produce a gallon of ethanol from grain than the energy contained in a gallon of ethanol will generate in use. A barrel of oil routinely offers 10 or more times the raw power for our activities than it takes to get it, conferring an enormous profit not only on the companies that supply oil but on the entire economy.

Some alternative sources are just the figurative drop in the bucket. Wind generators require technological investments that outweigh the power they can generate, even if every windy hillside is sown with them. Solar cells pay off only in remote locations. Other substitutes are possible and may provide almost as much economic profit. But construction of nuclear reactors or projects to wrench oil from shale deposits have mostly been cancelled during the last 20 years of oil surplus and low prices. And coal, which is abundant and profitable, has environmental costs. The recent uproar when strip miners blasted the top of a scenic West Virginia mountain showed just how much of our environmental consciousness will have to be reassessed during the next energy crisis.

Advancing the Market

This is where market forces come in and why the BP-Amoco merger fits the rough logic of the days ahead. Soon enough the giant oil combines of the next decade will find themselves doing battle with the likes of Vice President Gore and British Prime Minister Tony Blair. The bigger the major oil producers become, the longer they can hold out against the temptations of politicians to redistribute what oil remains. The 'Seventies offer a convincing example of the impulse to tax "windfall profits" and spend the proceeds on vegetarian-style alternative energy sources.

Then very quickly the fight will be over the dwindling petro-reserves themselves. Those nations rich with oil and strong in resolve will get their energy fix. By that standard America can thrive quite nicely; so, too, can countries as diverse as Britain, Mexico and South Africa. Other European Union members will fare according to their ability to command and pay for energy (in dollars and not in euros, thank you).

Much of the social safety net that defines the industrial West will be up for debate again at considerable political pain. Nuclear power, with all the fears it raises, will be back on the policy agenda again.

There will be obvious nations at risk too. Some are already visible on the horizon. Russia, which has lost control of the petro-energy subsidies that made collectivism possible, is imploding before us. Japan, which must import each barrel it uses of economic growth, is adrift. Even some nations that have oil -- Indonesia and Nigeria, for example -- must show they can control it, lest it be poured down the drain of civil strife.

Other productive and oil-rich regions face challenges. The Middle East with its easy pickings grows increasingly unstable with each passing day. Some new fields, such as the Caspian Sea area, are hostage to rival bands of terrorists whichever way their pipelines head.

Finally there are the have-nots, those poor nations strangled by a poverty that can be alleviated only by massive use of more and cheaper energy. Think of China, India or Pakistan unable to obtain the means of prosperity and the picture grows dark indeed. The struggle for national prosperity fueled by energy will not automatically go to the rich and already powerful. The nuclear wild card makes players of all nations.

Left to market forces, the energy producers of the world will find and exploit a range of energy resources at the prices that reflect the needs of the world. But the vision of the last half century -- that anyone can have everything -- is no longer likely.

JAMES SRODES is a Washington writer specializing in international business.

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