The world will soon have too much oil

A pipeline worker operates valves at the Nahran Omar oil
refinery near the city of Basra in Iraq in this undated AP photo

A DISCUSSION paper released last year by one of the world’s foremost experts on oil, gas, and energy is causing growing excitement in a world where consumers are daily informed that the supply of oil has peaked and is running out.

In the paper “Oil: The Next Revolution, Leonardo Maugeri stated that oil and gas reserves are not running out — but is in fact getting more.

He goes as far as predicting an oversupply of oil and gas in seven years.

Published by the Belfer Centre for Science and International Affairs at the Harvard Kennedy School, Maugeri’s paper showed how worldwide discoveries of new oil and gas supplies are at such an unprecedented level that the conservative projections have supply outpacing consumption by 2020. “This could lead to a steep dip in oil prices,” he stated.

He said in his paper that the price of oil was currently kept artificially high and mooted $70 dollar per vat as a market related figure.

Touting several worst-case scenarios, Maugeri said a new world-wide economic recession; or a drastic change in Chinese consumption patterns; or a sudden solution to major political tensions affecting a major oil producer such as Iran, could trigger a major decrease and even a collapse of the price of oil.

“By collapse, I mean a fall below $50 per barrel for one year,” he said.

He stated the most important point to note, however, is that oil was not in short supply.

“From a purely physical point of view, there are huge volumesof conventional and unconventional oils still to be developed, with no “peak oil” in sight.

He said the full deployment of the world’s oil potential depends only on price, technology, and political factors. As for price, he pointed out that more than 80% of the additional production under development globally seems to be profitable with a price of oil higher than $70 per barrel.

Stressing that future oil prices remain uncertain, he pointed out the oil market will remain “highly volatile until 2015 and prone to extreme movements in opposite directions, thus representing a major challenge for investors, in spite of its short and long term opportunities.

“After 2015, however, most of the projects considered in this paper will advance significantly and contribute to a strong build-up of the world’s production capacity.

“This could provoke a major phenomenon of overproduction and lead to a significant, stable dip of oil prices, unless oil demand were to grow at a sustained yearly rate of at least 1,6% for the entire decade.

Maugeri said in the next decades, a lot of “unconventional oils”, such as shale/tight oils in the U.S., Canadian tar sands, Venezuela’s extra heavy oils, and Brazil’s pre-salt oils will be produced.

While cautioning that more than 50% of the global oil supply will continue to come from a geographic arc stretching from Russia to the Persian Gulf, he points out that Iraq, the U.S., Canada, and Brazil have the highest potential in terms of effective production in the next decade.

He said the most surprising factor of the global picture, however, was the explosion of the U.S. oil output.

“Thanks to the technological revolution brought about by the combined use of horizontal drilling and hydraulic fracturing, the U.S. is now exploiting its huge and virtually untouched shale and tight oil fields, whose production — although still in its infancy — is already skyrocketing in North Dakota and Texas,” he wrote.

Maugeri stressed in his paper that the shale or “tight oil” boom in the U.S. was not “a temporary bubble, but the most important revolution” in oil in decades. He added more countries would start hydraulic fracturing over the next decades, which might bear “surprising results”, given the fact that most shale or “tight oil” resources in the world are still unknown and untapped.

“China appears to be the first country to follow the U.S. example. Moreover, the extension of horizontal drilling and hydraulic fracturing combined to con ventional oil fields might dramatically increase world’s oil production and revive mature, declining oilfields,” he said.

Horizontal drilling and hydraulic fracturing can make even South Africa an oil rich country — if environmental concerns about fracking the Karoo’s rich deposits can be addressed. Chances of this ever happening are slim, however.

For as Maugeri concludes, a revolution in environmental and technologies to curb emissions are required “to sustain the development of most unconventional oils”, along with “a strong enforcement of already existing standards”, rather than massive over-regulation. “Without such a revolution, a continuous dispute between the industry and environmental groups will force government to delay the development of new projects,” he said.

• Source: “Oil: The Next Revolution”, by Leonardo Maugeri, discussion paper 2010-7 Belfer Centre for Science and International Affairs at the Harvard Kennedy School