In 1998, fossil fuels were used to meet about 90 percent of global commercial-energy demand.[1] (See World commercial energy supply

.)

In energy terms, oil makes the single largest contribution to world energy supply, at 40 percent, followed by coal at 26 percent and natural gas at about 24 percent.

Non-renewable, fossil fuels take millions of years to form, so for all intents and purposes they are finite and, ultimately, exhaustible energy resources.

While few would deny that the consumption of fossil fuels will eventually lead to their exhaustion, how and when the various fuels will decline remain uncertain. The debate over conventional crude oil is of especially great interest because of its dominant role in global energy supply.(a)

World crude oil prices

shows the trend, in constant dollars, in global crude oil prices between 1970 and 1999. The 20-year gradual price decline beginning in 1980 was at least partly the cause of OPEC's cut in oil production -- with a subsequent rise in the price of crude oil -- that began in 1999 and led to major jumps in the prices of US petroleum products including gasoline, diesel fuel, and jet fuel.

At least until recently, there has been little international interest in when worldwide oil production might peak and begin its inevitable decline. There are, nonetheless, geology-based arguments suggesting that global oil production may be only a decade or so away from this turning point. When, not if, peaking occurs, major new sources of energy will have to be introduced quite rapidly. The squeeze will be felt first in global transportation -- which is virtually totally dependent on petroleum.

While most analysts acknowledge the inevitability of a peaking in global oil production, some doubt that such a downturn will occur anytime soon.

• "We've heard it all before," is a typical reaction to the possibility.



• "For years Cassandras have been saying the world is running out of oil. But prices are low, proven reserves are large, and, at today's production rates, oil will last over 40 years," is another.

While an element of skepticism is warranted, evidence for concern is far stronger today than ever before, partly because nearly all promising sedimentary basins worldwide have been explored to one extent or another.

All who depend on oil need to bring an open mind to this accumulating evidence.

One indication that trouble may lie ahead can be found in the International Energy Agency's (IEA) World Energy Outlook, 1995. In this report, IEA projects that world petroleum demand will grow in the range of 35 to 39 percent, relative to 1994, by the year 2010 -- about 2-percent growth per year.

To meet this demand, IEA assumes that non-OPEC production will continue to rise -- by 3 to 18 percent by 2010 -- and that OPEC will make up the difference. Under this scenario, OPEC production -- principally in Saudi Arabia, Iran, Iraq, Kuwait, and the United Arab Emirates -- would have to increase by about 21 million barrels per day by 2010, from 27 to about 48 million barrels per day, 50 percent greater than the historical peak set in 1977.

Yet, according to petroleum geologist Joseph Riva (retired from the Congressional Research Service), planned expansion of production in these five major producing countries will fall some 10 million barrels per day short of the required goal.[2] Riva concludes that the

"planned oil production expansions...are less than half that needed to meet the 2010 world oil demand projected by IEA, but will cost in excess of $100 billion, plus an additional $20 billion to upgrade and expand Persian Gulf refineries to meet growing world product demand. Oil production expansion beyond that planned would be even more expensive, on a per-barrel basis, as the remaining oil becomes more difficult to recover and enhanced oil recovery projects are required."

To complicate such supply issues, worldwide production will have to shift to Middle Eastern countries as global peaking approaches.

• In 1998, OPEC accounted for about 42 percent of world oil supply.



• By 2010, this percentage could reach 53 percent -- essentially the same share OPEC had in 1973 at the time of the Arab oil embargo. [3]



• The principal OPEC suppliers will be Venezuela and the Middle Eastern giants: Saudi Arabia, Iran, Iraq, Kuwait, and Abu Dhabi.[4] According to the Oil & Gas Journal,

  "...only OPEC countries have room for production capacity growth sufficient to deal with all anticipated increases in petroleum demand. OPEC, especially Middle East OPEC, is where the monster reserves are..."[5]

With the strengthened position of Persian Gulf producers will come the increased economic and security risks associated with this volatile region. While difficult to quantify in economic terms, the risks are real to those heavily dependent on oil from the region. And in the longer term, this will mean virtually everyone.

Consumers everywhere will feel the peaking of global oil production. In particular, peaking will register with the developers, manufacturers, and owners of motor vehicles, since nearly all vehicles today are powered by petroleum products. Indeed, cars, trucks, buses, and other motor vehicles account for about a third of global oil use, 40 percent of oil use in the OECD countries, and about half of oil use in the United States.[6]

Notes

1. BP Statistical Review of World Energy, June 1995.

2. Joseph P. Riva, Jr. "World Oil Production After Year 2000: Business As Usual Or Crises?," Congressional Research Service, Library of Congress, 95-925 SPR, August 1995.

3. "Steady Rise in Oil, Gas Demand Ahead," Oil & Gas Journal, June 6, 1994: 34-36; U.S. DOE, "Annual Energy Review," DOE/EIA-0384(93): 291.

4. "Energy," The Economist, June 18, 1994: 13.

5. Bob Tippee, "Questions Cloud Outlook for Oil Production Capacity Growth in the Middle East," Oil & Gas Journal, July 11, 1994: 33-36.

6. Jim J. MacKenzie and M.P. Walsh, Driving Forces: Motor Vehicle Trends and Their Implications for Global Warming, Energy Strategies, and Transportation Planning (Washington, DC: World Resources Institute, 1990).