Full version Oil Shortage

Oil Shortage

This print version free essay Oil Shortage.

Category: Social Issues

Autor: reviewessays 20 March 2011

Words: 1959 | Pages: 8

The age of cheap and easy oil may be coming to an end. The incredible price fluctuations (mostly upwards) have created a heated debate amongst businesses, politicians, and the general public. This debate of energy supply may be one of the most important social issues today. This paper will cover the possible consequences of an energy shortage, as well as present opposing viewpoints of the likelihood of a future oil shortage.

The modern industry economy is heavily dependent on access to cheap oil. It is important to understand that this debate does not concern itself with whether or not oil will completely run out, but rather the acknowledgement that a significant decline in the availability of oil will increase real prices and cause a drop in the standard of living, possibly catastrophically so.

For instance, one must consider the effect that increasing oil prices have on transportation costs. For instance, about 2/3 of the oil supply in the United States is used for transportation, which makes sense when one considers that every consumable good must travel from the point of production to the point of consumption, usually with many steps in between. A 1% increase in fuel prices results in a 0.4% increase in freight costs (exponentially), thus a 10% rise in fuel prices would correspond to a 40% rise in freight costs. An increase in freight costs would cause an increase in price for goods. By far, transportation (automobiles, air travel, etc.) is the most directly impacted industry by increasing oil prices brought about by dwindling supplies.

Very closely related to the transportation industry is the agricultural industry in terms of petroleum shocks. Modern agriculture is fed by oil-based pesticides, natural gas produced fertilizers, and tractors and transport vehicles fed by gasoline or diesel engines. According to the Energy Bulletin, a leading UK energy science magazine, food travels an average of 1,500 miles from the point of growth to where it is eaten in the United States. Also, for every one calorie of food consumed in the United States, 10 calories of oil were required to produce that food.

Transportation sectors and agriculture are not the only industries dependent heavily on petroleum. Modern medicine requires extensive quantities of cheap oil for the synthesis of pharmaceuticals and plastics. Water distribution requires synthetic chemicals for purification. A majority of consumer goods are made at least partially from plastics.

In short, most industrialized economies today depend on an abundance of cheap oil, and almost none more so than the United States. Now that such a dependency has been established, we can now consider the theories posed about whether or not oil may be in short supply.

There exists a multitude of theories about the future of oil, concerning the future supply as well as the potential for some functions in society provided for predominantly or completely by oil to be assisted or replaced by an alternative. Most of these theories can be placed into two categories: the Optimistic Theory of Oil and the Pessimistic Theory of Oil. My personal opinion is that the Pessimistic theories are more accurate, at least in near-term scope, than those of the optimistic side.

According to the Optimistic Theories, the scenario in which the world finds itself is not at all bleak in regards to the apparently dwindling oil supplies or the rising energy prices that have been seen over the past few years. Economic growth will not be significantly affected by energy constraints. The lack of concern can be attributed to one or more proposed theories.

One such theory is the abiogenic petroleum origin theory, also known as the abiotic theory, according to which oil and other petroleum compounds are formed from enormous carbon deposits buried deep underground. These carbon deposits, in theory, still leak petroleum upwards through the mantle, and thus are “replenishing” the deposits of oil that have been extracted as well creating new deposits. In short, abiotic theorists propose that the supply of oil is far more immense than believed by geologists who hold that oil was caused by decaying organic matter over millions of years.

Other optimists believe that hydrocarbon exploration efforts in the future will reveal at least one more mega-sized field (field containing more than 100 billion barrels), which would significantly boost the reserves of the globe (Lynch). This exploration will come about as a result of increased capital investment resulting from strong market forces (Wood). In brief, some optimists opine that oil exploration has been insignificant in recent decades, either because oil interests want a low statement of known global reserves (see below) or because the economic incentives to find massive additional sources of hydrocarbons have not been sufficient for such an undertaking. But with the recent record profits that the oil industry has shown, ample sums of investment capital have been generated to pursue such measures.

Alternatively, some optimists theorize that the stated reserves of the oil producing nations of the world are purposefully understated. Such an understatement, they say, allows oil producing nations to artificially inflate the price of oil per barrel by reducing the available supply, since the oil-producing nation could use a small reserve number to justify decreased output (Lynch). This would be especially true for a nation-member of OPEC, an organization that sets quotas for oil sales based off a member’s stated reserves. If this cartel-like behavior is occurring, according to the optimists, than the supply side problem of the oil dilemma is unfounded, as there would still be plenty of oil left in the world to meet a future demand, even one that is growing at a sustained rate (Lynch).

Next, technological advances are seen as the solution by some to the upcoming oil problem, mainly in two points. Firstly, say some optimists, advances in well and extraction technologies will result in higher yields from existing oil fields. Secondly, rising oil prices (and resulting gas prices) will drive development in non-conventional oil and alternative energy sources. By the time oil supplies become scarce (if ever,) wind, solar, fuel cell, hydrogen, fusion, or other technologies will be adequate on efficiency and scale to supplant oil sufficiently to stave off a crisis (Lynch). Also, scaled up production of hybrid vehicles and other improvements in automotive efficiency has vast potential to reduce the quantity of oil necessary for transportation, which (as stated before) is the largest oil consuming sector in the world (Wood).

Lastly, some see biofuels, such as ethanol or biodiesel, as potential future replacements for oil, noting that automobile factories across the world have already produced thousands of vehicles that run on various blends of these fuels (Wood).

Other analysts don’t hold such a rosy view on oil. This body of analysts is made up of some of the most respected physicists, geologists, and energy bankers in the world. A pessimistic theorist believes that the supply of cheap, economically viable oil will not keep up with rising demand and that grave economic and political consequences may result if appropriate action is not taken for reasons that have already been stated.

Firstly, the abiotic theory of oil is considered to be a fringe theory that was discredited numerous times (Wood). Even if there is some truth to the abiotic theory, the fact remains that oil supplies in known fields are decreasing, so even if there is replenishment occurring, it is not doing so at a rate significant enough to stave off oil depletion (Leeb).

Secondly, there is ample evidence to suggest that further exploration will not uncover oil supplies sufficient for the increased demand. For starters, for every 1 barrel of oil that has been discovered in the past three decades, 5 barrels have been consumed. In fact, oil discovery peaked in 1964 and shows no sign of coming back. (Leeb) The oil industry has long had powerful incentives to find more oil, and they have tried, with the development of expensive topographical technologies to assist in prospecting. Unfortunately, the yielded discoveries for these new techniques have been disappointing, with only three big oil finds in the last three years (a historically paltry number) (Savinar).

Thirdly, there is little evidence to support the idea that reserves are understated by nations and oil companies in order to inflate the price. In fact, it appears that quite the opposite is true. Why would oil companies have an incentive to overstate reserves?

“The answer is simple if you understand how publicly traded oil companies work. An oil company's share value is dictated first and foremost not by the price of oil but by how much oil that company reports having in reserve. A company can't admit its reserves are peaking or it risks seeing its share price drop relative to other companies who report more abundant reserves. Big Oil companies are thus motivated to over - not under - report how much oil they have in reserve” (Savinar).

In recent times, Shell has been fined $500 million for overstating their reserve numbers. Similarly, leaked internal Kuwait records suggest that Kuwait has overstated its reserves by 50 billion barrels, leading many to conclude that Saudi Arabia may have overestimated by 200 billion barrels (Simmons).

Finally, the role that technology can play in preventing an energy crisis may be dismally small. While new discoveries in extraction technology have boosted yields by a significant margin (about 10% increased efficiency in the last two decades), these increases are not sufficient to offset the increase in the demand for oil, which has and will continue to rise by 2% every year (Leeb).

More importantly, alternative energy sources are terribly inadequate to relieve the burden of oil dependence for the world economy. It is not that there are not technically viable alternatives to oil. It’s that none of the proposed alternatives can be scaled up to anywhere near the level that oil exists today. According to Matthew Savinar “In order to offset a 10% reduction in U.S. petroleum consumption, the amount of installed solar and wind energy systems would have to be increased by 2,200%” (Savinar). Such an increase is highly unlikely to occur. Most experts agree that fusion power is a distant achievement, one that may come too late to combat an energy shortage (Greene).

And finally, biofuels suffer from a number of problems. There is considerable debate surrounding ethanol’s technical viability, especially ethanol created from corn (the most common method in the U.S.). Ethanol may actually be an energy loser, in that it takes more energy to create the ethanol than it delivers (Greene). Biodiesel fuel has some potential to take the burden off diesel fuels, but only when blended with normal diesel fuel. In any case, biofuel production on a massive scale would require using arable land that would otherwise be used for food production.

In conclusion, the debate surrounding whether or not the age of cheap oil will end is a very important one. However, the various interpretations of the presenting evidence makes deciphering such a future difficult, at least in a definitive sense.


Crying Wolf: warnings about oil supply, Michael C. Lynch, M.I.T., March 1998

The Coming Economic Collapse: How You Can Thrive When Oil Cost $200 a Barrel, Stephen Leeb Ph.D., Warner Business Books. Feb. 2006

Long Term World Oil Supply Scenarios: The Future Is Neither as Bleak or Rosy as Some Assert, John H. Wood, Gary R. Long, David F. Morehouse. Aug, 2004.

Twilight in the Desert, Matthew Simmons, Wiley Publications. June, 2005.

The End of Suburbia: Oil Depletion and the Collapse of the American Dream (DVD), Directed by Barry Greene, Produced by Barry Silverthorn, The Electric Wallpaper, 2004.