Gas over $3 a gallon? Before September, that seemed pretty unlikely. But the high prices weren’t just an anomaly blown in by hurricanes. They were mainly the result of long-term supply and demand changes, and experts in the field say we’d better get used to the upward price trends. Not only that, we’d better start planning for the future, when world oil production peaks and today’s sticker shock will seem mild by comparison.
“Nobody knows how much oil OPEC [Organization of the Petroleum Exporting Countries] really has because its projections are part geology and part politics,” says Robert Kaufmann, a College of Arts and Sciences professor of geography and environment, so it’s difficult to gauge world oil reserves. But using various geologic estimates, he and undergraduate Laura Shiers (CAS’06) have created a model that projects world oil production will peak in fifteen to twenty-five years. Kaufmann, who recently developed an oil model for the European Central Bank to help predict inflation in Europe and who models world oil production and markets for the United Nations, emphasizes that we won’t wake up one morning to a news headline that the world has run out of oil, “but it will run out of inexpensive oil in our lifetime, affordable oil to run our economy as we do.” When that happens, he says, the United States “will have a tremendous need for energy from alternative sources.”
Although oil prices will undergo cyclical ups and downs resulting from short-term factors such as seasonal demand fluctuations, overall, oil will become increasingly expensive. Driven particularly by the rapid economic growth in China and India and ever-increasing U.S. consumption, world demand for oil is rising. Much of the world ’s oil is produced by OPEC nations, which include Saudi Arabia and other Middle East countries, Venezuela, and Nigeria. Despite the increase in world demand, there has been no expansion in OPEC production capacity for thirty years. Late last fall, OPEC countries were operating at close to capacity, about 95 percent, narrowing the gap between demand and supply. Added to that, oil-producing areas outside of OPEC — in the North Sea, Canada, the United States, and Mexico — don’t have the capacity to significantly increase production in the short term, says Cutler Cleveland, a CAS professor of geography and environment and director of the Center for Energy and Environmental Studies.
U.S. oil companies also now stock fewer days’ oil supply than in past decades, increasing our reliance on current production. This, along with fear of supply shortages resulting from disruptions caused by political unrest in Iraq, Nigeria, and elsewhere, says Kaufmann, contributes to rising prices. “We are living closer to the edge,” he says.
Investing In Alternatives
“Oil is the lifeblood of industrial civilization,” says Cleveland. And we’re prime users. With only 5 percent of the world’s population, the United States consumes more than 25 percent of the world’s oil and also contributes fully 20 percent of the gross world product. Crude oil in the United States is used mostly for gasoline, but also for fertilizers, pesticides, and a wide range of plastics and other synthetics.
Be it ten, twenty, or fifty years from now, when world oil production peaks, oil prices will spike, Kaufmann says, and we will encounter “one of the biggest social and political challenges for this century, with serious implications for the United States.” The higher prices “will definitely have a negative impact on the United States,” says Cleveland, who with Kaufmann has created an array of econometric oil models that integrate economics, geology, engineering, and political variables. They estimate that this country would need backup alternative energy sources equivalent to at least ten million barrels of oil a day to supplement oil supplies. They say that hitting the peak without such a plan could trigger a major world recession. “Overall economic health is directly tied to energy. Almost every U.S. recession has been tied to the cost of oil,” Kaufmann says.
Cleveland and Kaufmann propose that the United States invest in alternative energy sources, sooner rather than later. Waiting until after the peak occurs will be too late, they say. Time will be needed to, for example, retool the auto industry by replacing gasoline motors, refitting gas stations, and retraining mechanics.
“Can we sustain our economy as it is by some means other than cheap oil?” asks Cleveland. “We have an imperative to look at fuels that don’t release carbon into the atmosphere as do oil, gas, and coal, contributing to a global-warming, greenhouse effect, which has become a very serious issue whose import will only grow.” He advises putting all renewable energy sources on the table for consideration as alternatives to oil, even though some will not prove viable. “It’s prime time for wind,” he says, which is now cost-effective in some areas, and nuclear power is more reliable today than in the past and has the advantage of releasing few greenhouse gases. However, nuclear power raises cost, waste disposal, and public perception problems that need to be resolved before new plants will be built. Cleveland advocates public policy that encourages the development of a range of renewable sources, including photovoltaic energy, biofuels, and biomass, to see which work best.
Kaufmann recommends that the United States phase in a large consumer oil tax, to 50 percent over about twenty years, and offset that tax by reducing other taxes, such as payroll and corporate, so that the total tax amount isn’t raised. This tax, he says, would send a needed signal to producers and entrepreneurs that there will be a market for alternative energies. “If there’s a tax on oil, wind producers can sell wind energy for the same price or cheaper, which will generate an incentive: they can make a profit.” But he opposes subsidizing particular fuel alternatives. “The tax doesn’t choose the preferred technologies,” he says. “The market will do that.”
Drilling Our Way Out?
To decrease U.S. dependence on foreign sources — we import some 65 percent of our oil, mainly from Canada, Saudi Arabia, Mexico, Venezuela, and Nigeria — the federal government hopes to develop oil fields domestically, in Alaska and elsewhere. For instance, the U.S. Senate recently approved a plan to allow drilling for oil in Alaska’s Arctic National Wildlife Refuge. But, according to both Cleveland and Kaufmann, that project cannot significantly improve the oil supply for the United States or have an impact on world oil prices — never mind the compelling environmental impact questions it raises.
The two experts agree that although the Arctic National Wildlife Refuge “lies above the most promising oil prospect in the nation,” the amount that is economically recoverable (that is, profitable using current technology) is only three billion barrels, or just 152 days’ supply. Current government projections say it would take about a decade after development begins to supply 1.4 million barrels of oil per day — a “drop in the bucket,” according to Cleveland, compared to projections of U.S. consumption in 2020, and “an even smaller drop in the much bigger bucket” of world oil production.
Extricating itself from the world oil market is an unrealistic goal for the United States, says Kaufmann. “World oil is one big pool, with no separate markets,” he says. “What happens in one sector ripples to every other.” For example, if Venezuela were to stop selling oil to the United States, the United States would find a new supplier, and Venezuela would need a new buyer. “It’s a delusion to think the United States can insulate itself,” he says.
Outside of Alaska, the United States has a “very much depleted resource base,” says Kaufmann, so “it takes more energy to get the oil out; there’s less return on the energy invested to recover oil.” He maintains that it is more cost-effective for the United States to import oil. “We can’t drill our way out of this,” Cleveland says.
Conservatively Speaking
From individual measures such as turning down the thermostat, driving more selectively, and replacing SUVs with hybrid cars to public policy steps like increasing controls on gas emissions, oil conservation is just dawning in the United States. “Since Jimmy Carter, U.S. presidents, both Republicans and Democrats, have emphasized increasing the energy supply for the United States,” says Cleveland, “but are afraid to engage the American public in a discussion about decreasing demand. A sound energy policy will address supply and demand.”
Americans could do a lot more to use energy efficiently and should examine their lifestyle as it affects energy consumption, he says. “Is it responsible to drive around in SUVs, build 5,000-square-foot homes, or live fifty miles from our jobs?” Our answers as a nation ultimately will shape the demand side of the oil equation. To balance the supply side, say Cleveland and Kaufmann, the federal government needs to find ways to encourage, but not control, the development of renewable alternative energy sources — and soon.
