Letter to the Editor

8th January, 2000

The Editor
Foreign Affairs
58, East 68th Street,
New York, NY 10021

Dear Sir:

I would like to comment on the article "The Shocks of a World of Cheap Oil" by Jaffe and Manning in the January-February issue. One can of course agree with its main theme that a prolonged period of low oil prices would wreak havoc with the social, political and economic structure of those countries that depend heavily upon oil revenue. Nor can one do other than applaud the recommendation that the United States or NATO should avoid further ill-considered military engagements overseas.

What needs to be challenged, however, is the assumption that oil prices will be low, for which hardly any cogent argument or firm data are offered. I will examine this aspect of the paper.

1. The paper tries to justify an abundant oil supply on the alleged flaws in past oil resource estimates, casting derision on the Club of Rome's Limits to Growth report, which is misrepresented. In fact, it correctly stated that the known reserves of petroleum in 1972 were 455 Gb (billion barrels), a number which is incidentally wrongly quoted as 550 Gb by the authors. They fail to grasp that the term Reserves refers to prudent estimates of what remained to be produced from known fields at that time and did not include the amounts left to discover in new fields. The Limits to Growth report did, however, consider a case of the ultimate recovery being five times larger than the then reserves, namely 2275 Gb. This is close to the mean of consistent world estimates of conventional oil over the past thirty years, being confirmed recently by the US Geological Survey and International Energy Agency. The paper is not therefore justified in deriding the Limits to Growth report on this score.

It goes on to state that the world consumed 600 Gb between 1970 and 1990, again demonstrating a casual approach to oil statistics: the actual amount was 374 Gb.

2. The paper states bluntly that the world faces a glut of oil, not a pending shortage, without offering a shred of evidence or supporting data. It states that OPEC is currently holding 5 Mb/d off the market as if it were an established fact. How many wells are actually shut in? and where are they?

3. It refers to the impressive advances in technology, but misunderstands the import. Advances in geochemistry now make it possible to identify and map the oil generating trends once the essential data have been gathered, explaining the occurrences of oil and why the intervening tracts are barren. Advances in seismic technology, together with colossal computing power, now make it possible to see the smallest trap, even in some cases the oil itself. Accordingly, oilmen now have a much better knowledge of where oil occurs and where it does not, and are hence able to make more accurate estimates of the endowment in Nature.

The reality is that discovery peaked in the 1960s, despite all the technology, a worldwide search and a deliberate effort to find the largest remaining fields. The world now finds one barrel of conventional oil for every four it consumes, and there is no evidence that the downward trend can be reversed. Few would dispute that oil has to be found before it can be produced, or that peak discovery has to be followed by peak production. The authors ignore the critical evidence of discovery trends, which in turn point to a global peak of production in the next few years. About half the yet-to-produce (reserves plus yet-to-find) lies in just five Middle East countries whose share of world supply is inexorably rising, as the International Energy Agency confirms.

4. The paper claims that market forces have released new oil supplies after the hegemony of the major companies, causing a fall in price. The market, with its derivatives component, does indeed set price on the marginal barrel based on sentiment and very short-term pressures, making no charge for depletion. A free oil market has always over-reacted and has a minimal impact on overall supply because most oil comes from the large old low-cost fields. It is not a good way to deal with a depleting resource as important as oil. Some measure of external control has always been required, whether exercised by Rockefeller, the Texas Railroad Commission, the major companies or OPEC.

5. The authors think that oil supply is controlled by politics not geology. Oil and politics are indeed never far apart, and politics can affect the rate of extraction to a degree. In Britain, Mrs Thatcher created an environment of hyper-activity during which most of the country’s oil was found. But if they brought her back, there is nothing even she could do to arrest the pending consequential steep decline in production imposed by Nature and the immutable physics of the reservoir.

6. The paper claims that America has ample supplies in the Western Hemisphere and Atlantic Basin to meet its future needs. It is not specific as to where this oil is, and fails to point out some important limitations. Mexico this year reduced its reserves from the previously exaggerated number of 44 Gb to 28 Gb following an external audit. Of Venezuela's 73 Gb reported reserves only about 29 are conventional oil: the rest being Heavy and Extra-Heavy oil, which is expensive and, above all, slow to produce. Some promising deepwater finds have indeed been made off Brasil and in the Gulf of Mexico, together offering promise of some 30-40 Gb, but the economics of deepwater operations demand high flow rates and rapid depletion. Nor can America rely on North Sea supply because production is at peak. Norway is currently the world's second largest exporter but its oil production is set to decline at about 6% a year as its old giant fields come off their designed production plateaux, despite heroic technological efforts.

Besides, the other inhabitants of the Western Hemisphere have their demands on oil too. Most countries in Latin America are already net importers.

The only way by which America, whose own production peaked in the early 1970s, can meet its future needs from local sources would be to reduce those needs.

7. The authors rightly draw attention to the disappointments of the Caspian, and speak of the growing dependence of Europe, India, China and Japan on Middle East oil. Do they admit that these regions are subject to resource constraints in their otherwise Cornucopian world ?

One is left wondering what their motive was in writing such a misleading piece and how it came to be published. Was it perhaps intended to undermine the confidence of the Middle East in its control of world oil supply and price, or to remind us obliquely of the prospect of American military intervention? If the Middle East were forced to make the colossal investments needed to ramp up its production, global peak would be higher and the subsequent decline steeper, making a bad situation worse.

yours sincerely,

C. J. Campbell