The Real Oil Shock

By Matthew Simmons

Between 1950 and 2005, the world's use of oil grew more than eightfold, bringing global demand to 85 million bbl. of oil per day. Despite that incredible growth, the world's oil appetite is just getting a head of steam, as countries like China and India finally move toward lifestyles comparable to those of Europe and the U.S. Most oil-forecasting models show demand rising to between 120 million and 130 million bbl. per day by 2025 or 2030. The only way this demand can be met is for most of the additional supply to come from the Middle East, with Saudi Arabia providing the bulk.

Don't bet on it.

For decades, almost all public-policy planners, aided by most oil experts, assumed that the Middle East had vast quantities of proven oil reserves that could be extracted at extremely low cost, thereby enabling oil demand to grow to almost any level. Anchoring that belief is a hope that Saudi Arabia's oil production can increase from around 9 million bbl. a day in 2005 to 25 million or even 30 million bbl. a day by sometime between 2025 and 2030.

After spending more than two years researching my book Twilight in the Desert, I am convinced that it is highly improbable that Middle Eastern oil--and particularly Saudi Arabian oil--can grow to those far higher levels. Instead there is a risk that Saudi Arabia's oil output and the rest of the Middle East's oil supply may start to decline.

Saudi Arabia's specific production risk stems from the fact that almost 90% of its supply comes from only five key but aging giant oil fields. Each of those aging fields is exposed to a potential production decline. The implications of this risk are enormous, since 35 years of intense exploration in the kingdom has unearthed only one significant new oil field, Shaybah. Its peak production is less than 3% of Saudi Arabia's oil output.

The likelihood that Saudi Arabia can increase its output to even 15 million bbl. a day is remote. Even maintaining its current production rate for an indefinite period of time is hardly a certainty. The Ghawar, Abqaiq and Berri fields (which still make up about 90% of Saudi Arabia's light crude) now pump oil from water-injection wells--essentially the low-hanging fruit. Once that ends, oil production in those key fields will decline, and the declines could be steep. The two other giant fields producing lesser-quality oil are subject to this same risk. Quantifying the timing and the magnitude of the pending drop is impossible based on the skimpy data Saudi Arabia now discloses. But the risk is real, and the drop could happen soon.

The bottom line: the global oil supply has probably peaked. While the world expects to consume 120 million bbl. a day two decades from now, actual supply may be half that rate. This conclusion aptly portrays the potential magnitude of the energy ditch we are now in. It is impossible to calculate the odds of this supply-demand imbalance happening, but prudent planning argues that the world should assume the bleaker scenario. Then it follows that a global plan to use oil more rationally must be urgently developed and implemented.

In the near term, the global economy needs to significantly reduce its oil intensity. Because 70% of the world's oil is used as transportation fuel, that would be the place to start. We need to create new forms of transportation fuels as well as reduce the quantity of goods and people moved by cars and large trucks. If a high percentage of products now transported by large trucks were shifted to the global rail system, an efficiency savings of three- to tenfold could be realized. If those goods could be shipped over water rather than rail, even greater efficiencies would be realized. While such changes will take time, they have to succeed.

We also need to pull out all the stops to find new oil supplies. Actions like drilling in the controversial Arctic National Wildlife Reserve and exploring for more oil and natural gas on the outer continental shelf of North America suddenly take on a sense of urgency. They would not cure the problem but could buy time to offset shrinking supply.

A second change would come through embracing "distributed work." Most commercial businesses still operate on a concept that all employees need to work in the same office building to communicate. That was a necessity 20 to 40 years ago, but now faxes, e-mail, telephones and video conferencing allow people to work where they live, eliminating several hours of daily commuting time. And we need to manufacture more products and grow more food close to markets where they will be consumed.

None of these changes are technically difficult. Collectively they could dramatically reduce the oil intensity of developed countries' economies while serving as role models for the rapidly emerging new economies that cannot afford to use oil as wastefully as we have used it.

If a master plan is quickly adopted on a global scale, the world can safely cope with a peak in oil production and create a more sustainable and enjoyable economy at the same time. If we ignore these changes and peak oil does occur, the unforeseen consequences could create a far darker world.

Matthew Simmons is the author of Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy (John Wiley & Sons)