Book Review – The Age of Oil

(12/1/2008) - (Note: In addition to being a review, this article is a follow-up to  “Peak Oil – When Will it Run Out?.”  If you have read this article, I highly recommend reading this review.)

Theories regarding peak oil tend to be placed on a scale ranging from pessimistic to cornucopian.  Pessimistic doomsayers believe that oil production has peaked and is beginning a ride down a slippery slope of annual 4-5% (or more) reductions in production.  On the other side of the scale, the optimistic cornucopians believe oil production will rise until 2030 and beyond, followed by a long period of constant production.  

Leonardo Maugeri’s The Age of Oil: The Mythology, History, and Future of the World’s Most Controversial Resource falls on the cornucopian side of the scale, though he makes no attempt to predict how much oil we have left.  “Oil resources are finite; this is irrefutable,” says Maugeri.  “But it is equally true that no one knows just how finite they are.  And trying to assess their order of magnitude is a very complicated puzzle.”  The Age of Oil tells the story of the 20th century’s defining resource and discusses different factors that Maugeri believes need to be taken into account, especially by peak oil pessimists, when analyzing the future of this precious resource.

The History of Oil

According to Maugeri, the history of the oil market is defined by its unpredictable price fluctuations.  This is the story he tells in the first section of the book, a tour of 150 years of oil exploration, price booms and busts, politics, and oil magnates.  He begins with the legendary John D. Rockefeller, who, according to Maugeri, used his monopoly as a means to steady the normally volatile price of oil, thus making business better for everyone (except this competitors).  I know little about Rockefeller and cannot evaluate Maugeri’s objectivity on this issue.  Deserved or not, it is clear that Maugeri has a great deal of respect founder of Standard Oil, a company which spawned many of the world’s largest oil companies after it was broken apart by an anti-trust lawsuit in 1911.   

The introduction of aircraft and tanks as powerful military tools in the First World War whipped the Western powers into an oil exploration fervor.  Without oil, none could hope to survive future armed conflicts.  This led to exploration abroad, especially in the Middle East.  Maugeri says that this fevor also led to fearful proclamations that the world’s supply of oil would soon expire.  In 1919, a study by the U.S. Senate declared that the world had about 25 years of oil left.  Soon after, the science of oil exploration came into its own, leading to the discovery of billions of barrels of new oil reserves.  This wave of exploration and production, combined with reduced demand resulting from the Great Depression, led to an over-supply of oil in the 1930’s.  

Mauger writes that the 1950’s and 1960’s are known as “golden age” of oil.  During this period, oil world-wide oil consumption rose from 9.3 million barrels per day (mbd) in 1948 to 53 mbd in 1973, a compound growth of about 7% a year.  By comparison, growth in consumption from 1973 till 2007 was a mere 1.3% a year. 

Maugeri then covers the two oil shocks of the 1970’s, and discusses how these events erroneously led to predictions of future oil shortages, few of which materialized.  He says that these shortages led to enormous waves of oil exploration and extraction in the North Sea and the United States.  Combined with reduced consumption, this helped contribute to the oil glut of the mid-1980’s.

The last part of the historical narrative addresses the rising price of oil in 2004-5, which peaked at $71 a barrel.  Maugeri argues that, like previous oil shocks, the driving factors were merely psychological and not rational, and that there was no real (in 2006) reason that prices should break $30-32 a barrel.  This oil shock is just like the others, and we should expect prices to drop as production increases.  While it is true that oil has dropped significantly since its high of $145.29 in July 2008, it is currently selling for about $54 a barrel, even though the economies of big oil consumers like the United States, the E.U., and Japan have been in a recession for most of 2008.  Have the fundamentals of the game changed?  Only time will tell.

Confronting Peak Oil Pessimists

After his history of oil, Maugeri transitions into a critique of peak oil pessimists.  Hubbertian analysis, as I have discussed before, stresses the geological limitations that define the oil supply.  A Hubbertian analysis, the type favored by many peak oil pessimists, relies upon certain assumptions about the future.  For instance, most people who believe oil production will peak soon believe that it is highly improbable that any large, undiscovered oil fields lie undiscovered, and that current reserves are at the very least unlikely to grow, if not inflated.  They also posit that there will be few advances in future technology leading to increased production.  Maugeri, on the other hand, focuses on different historical trends – trends that lead him to believe that peak oil is not an imminent threat.

Maugeri doesn’t dispute that there is truth in Hubbert’s model itself, but believes that it has very limited applicability.  He says Hubbert was successful in estimating peak oil in the United States because “the United States was (and is) by far the oldest and most intensively known, explored, and aggressively exploited area in the world.”  Hubbert’s modern disciples, argues Maugeri, assume that the world is similarly explored.

He finds this claim to be false.  The United States has 560,000 active wells (about 1 for every 6.8mi²), and almost a million wells have been drilled in Texas alone.  By comparison, Maugeri says that Iraq (about 2/3 the size of Texas) has only had 2,300 wells drilled, and Saudi Arabia only has 1,500 actively producing wells (1 for every 556mi²).  But these cases are not entirely comparable.  Earlier in the book he notes that several oil fields in Texas were ruined when wildcatters drilled too many wells too close together, destroying the well’s internal pressure.  Because Saudi and Iraqi oil production did not begin until later, they presumably did not make similar mistakes.  Maugeri doesn’t include data on how many of the Texas wells were drilled during this early period of exploration. 

How Oil Reserves are Estimated

Maugeri argues that since the world’s oil potential has not been fully exploited, future oil production is not a simple matter of geology, but related to political decisions, changes in consumption habits, price trends, and technological evolutions.

The methods used to calculate oil reserves vary from location to location, and estimates are in constant flux as they take into account new information, not all of which is geological.  Maugeri states that, “the prevailing classification system for assessing reserves has been devised by the Society of Petroleum Engineers (SPE) and the World Petroleum Congress (WPC), who outline three categories:

---Proven Reserves – defined as the amount of oil and gas in place in known reservoirs that can be estimated with ‘reasonable certainty’ to be commercially recoverable under current economic conditions, operating methods, and government regulations.  The concept of ‘reasonable certainty’ is associated with a probability of profitable recovery of at least 90 percent.

---Probable Reserves – the probability of profitable recovery falls to 50 percent.

---Possible Reserves – profitable probability of recovery no less than 10 percent.”

There is not a linear relationship between the amount of oil in the ground and what we call “reserves,” even if they are “proven.”  From my point of view, the key phrase here is “commercially recoverable.”  Maugeri cites a 1996 study by the U.S. Geological Survey which pegged worldwide conventional oil reserves at 2.3 trillion barrels, with a long-term price scenario of $18 a barrel.  If the long-term price increases, the amount of oil that is “commercially recoverable” will increase despite the fact that the amount of oil in the ground has not changed.  

Neither is there a necessary correlation between reserves and oil production.  Oil extraction is not a simple as drilling a hole and watching the oil drain out.  The classic “gusher” wells, as portrayed in movies such as There Will Be Blood, occur due to internal pressure within the well.  However, this natural pressure only provides enough force to recover about 15% of the oil in the ground. 

Advanced techniques, known as secondary recovery methods, can be implemented to increase recovery rates.  An oil field that has been “tapped” using natural pressure can produce far more oil when secondary recovery methods are employed.  Maugeri says that current worldwide recovery rates average about 35%, meaning a well runs dry once 35% of the original petroleum has been extracted.  Recovery rates vary greatly from region to region.  The North Sea and the United States boast recovery rates of over 50% with current technology, while the recovery rate for Saudi Arabia and Russia is around 15-20%.  In theory, the same technology employed in the United States and the North Sea could be used to significantly increase recovery rates in Saudi Arabia and Russia. 

Thus, increasing the average recovery rate is another way to increase the amount of oil that is potentially producible.  World recovery rates have increased from 22% in 1980 to 35% today, which helps explain why the life-index of world oil reserves has risen even though discoveries of new oil fields have been declining.  “In 1948,” says Maugeri, “the ratio between proven oil reserves and current production (R/P ratio) indicated a remaining life of 20.5 years for existing reserves.  By 1973, the life-index had risen to 32.7 years, and 32 years later – in 2005 – the same index pointed to reserves lasting around 38 years.”

Maugeri’s argument that peak oil is not upon us is fairly convincing, though some questions remain.  One important question Maugeri doesn’t deal with is what current reserve estimates are when different prices of oil are taken into account.  But how much is available at $20/barrel?  $50?  $300?  A world with plentiful $200/barrel oil is not the same as a world with oil selling for $10 a barrel.  Estimating different “peaks” of oil production based on price would be a much more nuanced and useful (and difficult) than simply estimating when production of oil has peaked, period.  Perhaps this type of analysis would show us that oil with production costs of $20/barrel has already peaked, but that we are decades away from a peak of $200 oil.  Of course, this sort of analysis would have to be updated as technology improves and production costs decline. But I believe that it would provide a much more realistic picture of how peak oil would effect people's every day lives. 

Toward the end of the book, Maugeri helps illuminate a question many people have posed – Why did oil reserves in nearly every OPEC country suddenly jump in the mid-1980’s?:

(Source – Wikipedia) Mrd Baril = Billions of barrels

Between 1984 and 1988, five Persian Gulf countries raised their estimated oil reserves by a combined 237 billion barrels.  Maugeri says that these increases in reserve estimates came soon after the countries of the Persian Gulf nationalized their oil fields, which had previously been under the control of Western oil companies known as the Seven Sisters.  During the golden era of oil, the Seven Sisters routinely underestimated their reserves in order to limit over-production.  Maugeri asserts that the sudden spikes in reserves can be attributed to the desire of Persian Gulf companies to correct these mistakes.

For me, however, the main problem isn’t so much the sudden jump, but the eerie flatness in reserves since.  Maugeri says that Gulf producers have “limited themselves to maintaining a steady level of production capacity through reserve replacement.”  Yet this seems to contradict another of his points, that Gulf countries have severely limited exploration.  Oil reserves tend to be discovered in large and unpredictable chunks.  Even if Saudi Arabia is limited its exploration, one major find could boost reserves by 40 or 50 billion barrels of oil.  Likewise, several years might go by without a major find.  Thus, it seems very odd to me that so many of the Gulf countries would find just the right amount of oil to replace their production year after year. 

When Will Peak Oil Occur?

Answering this question relies upon at least two assumptions.  The first factor is the amount of oil in the ground.  It is unlikely that we will ever know the exact answer to this question, so the best we can do is continue to learn and gather information, accepting that previous estimates will need to be revised.

Second, we need to decide which current trends will hold, and which will change.  Maugeri points out that the recent price increase has led to a slight up-tick in the number and size of new oil fields discovered.  Though the increases small, this goes against a forty year trend.  On the other hand, Maugeri assumes that oil extraction technology will continue to improve as it has in the past.  Yet there is no guarantee of this either.  The best thing we can do, in my opinion, is be candid about the situation and pay attention to all the relevant evidence and historical trends. 

The Age of Oil offers an interesting and informative view of the history of oil, and a measured and optimistic vision of its future.  This book is in many ways the antithesis of Beyond Oil, a classic Hubbertian analysis.  Both works are informative and well researched, and each is colored by its author’s convictions about what the future holds.  If you want to know about the history of oil, you could do a lot worse than the first portion of this book.  The second half offers the best argument for the “cornucopian” peak oil viewpoint that I have read.  The book's value is justified by this portion alone.

Buy this book at: