Daniel Yergin: It's Still the One

Oil’s very future is now being seriously questioned, debated, and challenged. The author of an acclaimed history explains why, just as we need more oil than ever, it is changing faster than we can keep up with.

…Just because we have entered this new age of high-velocity change does not mean this story is about the imminent end of oil. Consider the “peak oil” thesis — shorthand for the presumption that the world has reached the high point of production and is headed for a downward slope. Historically, peak-oil thinking gains attention during times when markets are tight and prices are rising, stoking fears of a permanent shortage. In 2007 and 2008, the belief system built around peak oil helped drive prices to $147.27. (It was actually the fifth time that the world had supposedly “run out” of oil. The first such episode was in the 1880s; the last instance before this most recent time was in the 1970s.)

However, careful examination of the world’s resource base — including my own firm’s analysis of more than 800 of the largest oil fields — indicates that the resource endowment of the planet is sufficient to keep up with demand for decades to come. That, of course, does not mean that the oil will actually make it to consumers. Any number of “aboveground” risks and obstacles can stand in the way, from government policies that restrict access to tax systems to civil conflict to geopolitics to rising costs of exploration and production to uncertainties about demand. As has been the case for decades and decades, the shifting relations between producing and consuming countries, between traditional oil companies and state-owned oil companies, will do much to determine what resources are developed, and when, and thus to define the future of the industry.

There are two further caveats. Many of the new projects will be bigger, more complex, and more expensive. In the 1990s, a “megaproject” might have cost $500 million to $1 billion. Today, the price tag is more like $5 billion to $10 billion. And an increasing part of the new petroleum will come in the form of so-called “unconventional oil” — from ultradeep waters, Canadian oil sands, and the liquids that are produced with natural gas.

But through all these changes, one constant of the oil market is that it is not constant. The changing balance of supply and demand — shaped by economics, politics, technologies, consumer tastes, and accidents of all sorts — will continue to move prices. Economic recovery, expectations thereof, the pent-up demand for “demand,” a shift into oil as a “financial asset” — some combination of these could certainly send oil prices up again, even with the current surplus in the market. Yet, the quest for stability is also a constant for oil, whether in reaction to the boom-and-bust world of northwest Pennsylvania in the late 19th century, the 10-cents-a-barrel world of Texas oil in the 1930s, or the $147.27 barrel of West Texas Intermediate in July 2008.

Foreign Policy

This article is part of a special report on oil called Oil: The Long Goodbye. A lot of articles, and a lot of big names. In addition to Yergin, there are pieces by Peter Maas, Prince
Turki al-Faisal, Amy Myers Jaffe, Fatih Birol, and others.