bottom of the
barrel?

By Jeffrey Winters, Supplement Editor

Predicting the end of the oil age has been an ongoing obsession in some quarters. Back in the 1970s, the Club of Rome, a European think tank, released a famous report forecasting the imminent decline not just in oil production, but in the extraction of all major raw materials, in agricultural output, and ultimately in human population. Thankfully, we seem to be nowhere near the Malthusian limits of growth they foresaw.

Even so, something does seem to be afoot. Oil prices peaked this summer near $50 a barrel, driven in part by supply problems. Petroleum production volume is so close to demand that seemingly small disruptions—a strike in Venezuela, a pipeline bombing in Iraq, financial woes of a Russian producer—triggered real or imagined shortages. And with worldwide oil demand increasing by about 1.5 percent per year, producers are scrambling to keep up.

A look at consumption trends reveals that the demand side of the equation may be hard to control, at least in the short term. Contrary to the stereotype, profligate consumption by SUV-driving Americans is not the main driver of the recent run-up in demand. In fact, while the United States consumed some 20 million barrels a day in 2003, this is little changed from the nearly 19 million a day used in 1978, on the eve of the Iranian revolution. Considering the economic and population growth in that time, it is a relative model of restraint.

The pattern for the rest of the world tells a markedly different story. From 1978 to 2003, worldwide oil consumption (excluding the United States) soared from 45 million to almost 60 million barrels a day. Much of that increase came as a result of rapid industrialization in China, India, and other developing nations. In a real sense, not only has the United States relocated its manufacturing base overseas, but it has transferred some of its thirst for oil there as well.

Adding production may be more difficult in the coming years. The map on this page shows the 20 nations with the largest natural endowments of conventional petroleum reserves. Although substantial known reserves remain, the next decade will see the rapid draining of stocks in nations such as Mexico, Norway, and Russia. Conventional production—that is, not in deep water, polar regions, tar sands, or other difficult, high-cost operations—will be increasingly concentrated in the Middle East and Central Asia.

Indeed, while we are not close to running out of oil on a global basis, the reduction in the number of conventional suppliers suggests that inexpensive oil may well be a thing of the past. With production costs as little as $2 a barrel, Middle East oil can be very profitable at $25, even $15 a barrel. But with competition from other conventional suppliers reduced or eliminated, there's little reason to expect that Middle Eastern oil will sell below the cost of unconventional supplies, such as that extracted from Canadian tar sands, which needs prices above $30 to be profitable.

A limit to growth? Probably not. But it might be as good a signal as any to begin planning in earnest for the end of the Oil Age.

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