And these are:

1. Decline of proven reserves

After the first oil crisis in the early seventies, energy investment was forced outside of the most prolific oil basins that had been nationalized. Though new oil reserves were found in the seventies, eighties, and also nineties, these were on a logarithmic scale smaller compared to the giants of cheap and easily accessible oil discovered in the thirties, forties and fifties. Some of the older proven reserves fell in a state of neglect and disrepair (Iran, Russia,) mostly for reasons of politics, or poor management. Nevertheless, an illusion of oil diversity was held up for nearly three decades, whilst demand continued to rise steadily. A good example is the United States of America. Ahead of WW II, domestic supply was larger than domestic demand – the country exported oil. In the late forties, domestic supply and demand were balanced, both rising. Since then, the USA is a net importer of oil – some 70 % are imported these days, with demand still on the rise. Even the discovery of huge fields in Alaska (1970’ies) and the Gulf of Mexico (1990’ties) couldn’t influence the long-term picture of domestic demand outpacing domestic supply.

2. New oil is difficult to get

New oil is often located in areas of prohibitive remoteness and harsh climate, such as the arctic. Other oil reservoirs contain toxic gases (Kazakhstan, Australia, to name just two examples) that require expensive treatment and expensive alloys – and delivery of special corrosion-resistant pipes can take up to two years: steel has become an extremely thought-after commodity. Offshore drilling rates have increased from USD 40000 /d in the nineties to USD 500000/d in 2008. The oil services industry, shrinking in the nineties, suddenly has to cope with an enormous demand, a situation it struggles to cope with. Assuming oil is finally found, a minimum of some five years is required to bring the fields on stream. Other areas are burdened by constant turmoil (Nigeria), and even genocide (Sudan). With global production nearing a plateau rate (experts are somewhat divided when it exactly happens or happened), new production capacity will only be able to delay the inevitable and irreversible decline, in a desperate catch-up game.

3. Confinement of production and refining capacity

The last century’s nineties and the first years of the 21st century can be characterized as a time dominated by a preoccupation with virtual technology and business – themes like food, power, and metals were eclipsed by dotcoms and the Y2K bug (that never came). Being an engineer or a farmer wasn’t perceived as chique, and the energy business wasn’t able to attract young top talent. A temporary oversupply of oil triggered private and state-hold companies to pull-out capital, and to limit financial exposure– resulting in a closure of “idle” refineries and stagnant oil field developments. A lot of today’s global supply hinges on aging pipelines and outdated refineries. Despite there being today a lot of discovered new scope, bringing these resources on stream takes time – and will have no effect on the at current supply-constraint market.

4. Government and Lawmaker’s inertia

The current situation didn’t come out of the blue- even primitive computer models of the seventies (Club of Rome study etc) had anticipated a mismatch of (declining) supply and (rising) demand. What did governments and lawmakers do? Nothing! Only governments could have forced the energy industry to shift focus from fossil toward sustainable energy sources, by well-thought and creative tax incentives. Whilst powerful new energy systems such as wind and solar energy entered the realm of economic feasibility, the big push just never happened.

5. Private companies aren’t assuming enough leadership

So everybody continued doing what they always did: Producing gas-guzzling cars, pumping and refining oil, and taxing refined liquids. Oil and car companies invested mainly in the business they understand best (oil, SUV’s), rather than venturing into hazardous sustainable scenarios. Even those who did, such as Honda’s hybrid developments, were treated as outsiders for a long time.

6. New millions of people are demanding gasoline and diesel

During the last fifty years, the world’s population has almost tripled. Booming countries in Asia demand an acceptable way of live, which means, among others, energy. Many former oil exporting countries have become net importers (= domestic demand outpacing domestic supply), which means that an ever increasing number of countries is draining established resources. The USA were self-sufficient until 1948, China and India until 1995, and Indonesia is becoming a net-importer in 2008. Malaysia will follow in 2016.

7. A natural gas revolution that didn’t materialize

Since the early seventies, a news commodity entered the market: Liquified Natural Gas. Compared to oil, kerosene and gasoline, Natural Gas is rich in Methane (CH4), a fuel that contains a lot of hydrogen and very little carbon to burn. Burning methane creates predominantly vapor, and only a little bit of C02.
Though LNG powers turbines in plants, can power cars and even airplanes, it is more difficult to ship (cooling), store (pressurized containers) and use (bulky tanks). From a niche commodity it has developed into a widely used power source for electricity generation, yet it hasn’t replaced gasoline and diesel the way some have predicted.

8. Speculation

In addition to the above mentioned market aspects oil production capacity is threatened by conflict and terrorism. In other words: There are plenty of reasons why things could go wrong and only a few lights of hope are seen, far away on the horizon. No wonder that the futures market appears bleak- dragging the current prices up. According to some recent market studies, speculation in commodity markets started around 2002, and these are partly responsible for the actual commodity price explosion - a short-time correction might be imminent with dramatic consequences for farmers, and other commodity suppliers.


How could a solution be found?

In the immediate future, the answer has to come from the demand side. Current oil consumption is both economically and ecologically unsustainable. We, the world’s citizen, have to find better ways to deal with energy. Governments could play the most eminent role: Stimulating a shift from fossil sources of energy to sustainable sources of energy. The technology is there – the will to do so isn’t, yet. In addition, a bit of regulatory oversight might be welcome to keep institutional investor's greed in check.


© 2008 by Franz L Kessler

The author of this article has worked 23 years in the oil and gas business, and has a PHD in geology