Energy leaders search for crude solutions

John W. Schoen Senior producer • Profile • E-mail

LONDON - With global oil production already stretched to the limit, hurricane Katrina put a serious crimp in the world’s energy pipeline. The task of restoring Gulf oil and natural gas production to pre-Katrina levels will take months.

Now, with global demand still rising — especially in rapidly developing countries like China and India — oil industry and government leaders around the world are struggling to find ways to produce enough oil and gas to keep the world’s economy from sliding into recession. The effort is playing out amid a widening debate about the reasons global oil production hasn't expanded fast enough to keep up with growing demand.

At a two-day conference here, oil industry executives, analysts and leaders from oil producing countries are looking at a variety of pieces of the puzzle. But the central question remains: Can more oil be found and produced fast enough to head off a global energy crunch?

The only honest answer is: No one knows for sure.

No one doubts that there is plenty of oil underground waiting to be tapped. As of  the end of 2003, the world’s estimated remaining reserves stood at over 1.1 trillion barrels, according to the American Petroleum Institute. The industry trade group figures that’s enough to continue producing at 2003 rates for another 43 years even if no new oil is found.

But reserves aren’t worth much unless than can be pumped out of the ground fast enough.

‘I can’t drive into the filling station and say, “Fill 'er up with reserves.’ — Kenneth Deffeyes Princeton Univ. geoscientist

“I can’t drive into the filling station and say, “Fill 'er up with reserves,” said Ken Deffeyes, a Princeton University geoscientist who has predicted that oil production will peak later this year. “It’s got to be production capacity. And that’s what’s hurting now and is going to be hurting more.”

Booms and busts
Over the past 100 years, the oil industry had its share of booms and busts, gluts and shortages. The conventional wisdom held that when supplies got tight, oil producers would increase output from readily available reserves — or go find more. For much of the second half of the last century, those reserves were so plentiful that the world’s biggest producers — most of them in the Middle East — created the Organization of Petroleum Exporting Countries in 1968 to limit production in order to maintain prices by preventing a market glut.  

“We’ve had an illusion for the last 40 years that there was so much oil in the Middle East that it would never run out,” said Matthew Simmons, a Houston investment banker whose recent book “Twilight in the Desert” casts doubt Saudi Arabia’s ability to boost production.

The current production squeeze has its roots in OPEC’s failure to manage prices in the late 1990s, when a deep recession in Asia brought a sharp drop in demand. Oil prices crashed to $10 a barrel, bringing a wave of industry consolidation that brought mergers, layoffs, and a major pullback in investment in finding new oil fields and expanding production.

Because of the long lead times needed to develop those oil fields, that late-90s investment drought began to be felt at the start of this decade. Then, as Asia’s growth rebounded sharply, energy demand increased and created a major shock to the global oil market.  

Along with sharp growth in demand came several major hiccups in supply.

Along with that sharp growth in demand came several major hiccups in supply. In December, 2002, political turmoil in Venezuela — an OPEC producer and major source of U.S. imports — culminated in a nationwide strike that put a major damper on oil output, from which the country has yet to fully recover. The U.S.-led war in Iraq — which was supposed to open that country’s vast reserves for development — has set back potential production gains there.

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