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The end of cheap gas

By Steven Martinovich
web posted July 18, 2005

According to a rapidly growing minority, the very act of gassing up your vehicle is a misguided act of optimism. Projections that the world's supply of oil will simultaneously meet rapidly growing demand and last for decades are based on inaccurate information or outright falsehood. We are nearing the end of cheap and plentiful oil and we have no plan for what comes next.

The key player in this drama, not surprisingly, is Saudi Arabia. According to Matthew Simmons' Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy, though we're repeatedly told otherwise, the Saudi oil miracle is coming to an end. The days of easily recoverable oil are giving way to increasingly complicated technical solutions for smaller amounts of oil. Exacerbating today's problem was decades of overproduction that harmed the Kingdom's oilfields, resulting in less than expected recovery of proven reserves.

Rather than acknowledge this, writes Simmons, Saudi Arabia continues to assure the world that its existing giant oilfields -- many of them decades old now -- will keep producing at current levels. Even when those fields' productive lives are over, they claim, other fields will come online to meet demand. Finally, the Kingdom claims it is sitting oil reserves of 250 billion barrels, so shortages are a distant concern. We believe this, says Simmons, because the Kingdom is highly secretive about its oil industry. The world is denied even basic field-by-field production information, forcing the global economy to rely only on Saudi honesty.

To prove otherwise Simmons, chairman and CEO of an investment bank that specializes in the energy industry, has combed through decades of scientific papers. The picture he paints is a stark one. Saudi Aramco, the nationalized company that runs the Kingdom's oil industry, essentially relies on six giant oilfields for its production. Despite extensive efforts, the company has been unable to locate any other sizable reserves. To simply keep current production levels, the company is forced to employ the latest technology -- a move that is further harming the aging fields.

Not surprisingly this has tremendous ramifications for the world. The vast majority of energy use is devoted to transportation -- both people and products -- and a growing scarcity of oil will raise the price of virtually everything. Unless the world comes up with a plan for a post-oil future, argues Simmons, the world economy will face a tremendous shock. While there is still oil in the ground, he writes, alternative technologies must be developed. We are now past the point where we can debate the question. Our oil-fueled world isn't sustainable for much longer.

"This sustainability question has suddenly emerged as the world's most important energy issue. Sadly, we may have begun asking this question too late to alter the course of energy in any meaningful way, simply because the question was ignored for so long while the mortality of the Saudi oilfields was concealed by three veils -- secrecy, sovereignty, and self-delusion. Saudi Arabia drew the veils of secrecy and sovereignty. We expert energy observers drew our own veil of self-delusion with our lack of skeptical curiosity, our willingness to trust, and perhaps our reluctance to confront the unpleasant truth."

Simmons does indeed build a compelling case though skeptics are right to point out that he bases most of his conclusions on the 200 or so technical papers published through the Society of Petroleum Engineers by Saudi technicians. These papers tend to highlight problems and can paint a one-sided view of any industry. Simmons responds that the papers accurately portray the growing problems that Saudi engineers are grappling with, problems that will -- short of a divine miracle -- eventually overcome their ability to continue tapping the Kingdom's diminishing reserves.

Twilight in the Desert does indeed paint a very sobering picture of a world that will soon learn an unpleasant truth about the amount of oil left to be drawn from the earth. Many of Simmons' conclusions can be debated -- the difficulty in predicting how long Saudi Arabia's oil industry will last in its present form means both sides can build credible cases -- but the amount of evidence he brings to bear is very persuasive. Simmons has authored a compelling warning for the world - one that should provoke discussion about a future we'll probably greet in just a few years time.

Steven Martinovich is a freelance writer in Sudbury, Ontario, Canada.

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