Busting the peak oil myth

SMARTSHARE

Last fortnight, a leading oil MNC came out with its Annual Statistical Review of World Energy and leading business papers splashed it across their front pages. This is an annual ritual in which the company reminds the world that oil is a scarce commodity and will soon be extinct like the dodo.

As per the review, India's oil reserves will last another 19.3 years while global reserves will last 40.5 years.

Peak oil theory states that any finite resource like oil will have a beginning, middle, and an end of production, and at some point it will reach a level of maximum output, which will be its peak.

Most of today's peak oil theorists base their forecasts on the work of the geologist M King Hubbert, who correctly predicted in 1956 that US domestic oil production would peak around 1970 and begin to decline. In 1969, Hubbert predicted that world oil production would peak around 2000.

While US production did peak in 1970, world production did not peak in 2000. It continues to rise but not every year, though we consume around four times the oil that we discover.

In fact, predictions of imminent catastrophic depletion are almost as old as the oil industry. An 1855 advertisement for Kier's Rock Oil, a patent medicine whose key ingredient was petroleum bubbling up from salt wells near Pittsburgh, urged customers to buy soon before "this wonderful product is depleted from Nature's laboratory".

The ad appeared four years before Pennsylvania's first oil well was drilled. In 1919, David White of the US Geological Survey predicted oil production would peak in nine years. It hasn't till date. Last year, the world produced 84.4 million barrels of oil a day and consumed 84.1 million barrels.

Consumption of oil, however, will rise going forward as developing nations like us will need higher energy. As of date, the US, which accounts for just 5 per cent of the world population, consumes close to 25 per cent of world oil. China and India, which together account for around 37 per cent of the population, use only 11 per cent of oil.

Where would this production come from? From the existing wells and new discoveries, of course.

As technology improves, a higher percentage of crude can be recovered from a discovered field. That should explain why our reserves, which were meant to last only 17.8 years at a lower consumption rate in 2001, are now known to last for another 19.3 years in 2006 at higher consumption levels. And these are the figures of the same MNC which is painting a red picture.

Similarly, Brazilian reserves will now last for 18.5 years from 2006 rather than 17.5 years from 2001. Russia, Australian reserves will last 21 years from the earlier 14 and so on. The world reserves, meant to last 40.3 years in 2001, are now expected to last 40.5 from now.

Demand for more oil is taking the world to the deep sea and changing their earlier perceptions. Earlier thinking that oil was only present at around 1,200-1,800 metre depth has been long discarded.

The rigs in the KG basin have successfully dug to 5,800 metres. The challenge here is handling higher pressure and temperatures. As science grapples with these issues, it will be made safer and success rate would increase.

My view is that in the short run, the oil is in limited supply and the production is inelastic. But in the longer run it is not. The only risk is in the short term, as around 80 per cent of the current capacity is in regions that are considered hot spots or unstable.

But even if we assume for a moment that oil supply is constrained, it is only at a particular price. At $100 dollars, the supply of oil would be much more as it becomes remunerative to harness deep sea wells. Coal gasification and "Shale" sand conversion would become highly remunerative and inundate the markets with supply.

The world will have enough oil during our life time and those of our children. It is another scenario that our nature-loving children may not opt to burn it. Yes, they will have an option!