The "unconventional unidentified" oil that the global economy is counting on has not yet been discovered, and just might not exist.
by David Fleming
I have missed my vocation. I should have been a pick-pocket. I like dipping sneakily into heavy tomes full of small print, and seeing what I come up with. Very occasionally, I find something quite extraordinary.
There is only one explanation: "unidentified unconventional oil" is there for decoration only.
The latest issue of the International Energy Agency's annual publication, World Energy Outlook, is a case in point. It has a story to tell which will profoundly affect the future of every man and woman on earth.
The International Energy Agency (IEA) is the most authoritative body in the field of energy. It was set up by the OECD in 1974 with an office in Paris; its job is to try to bring order to the world oil market, to tell governments what is happening in the market, and to publish statistics. The 1998 edition of the Outlook contains a table and graph which forecasts the supply of oil during the first two decades of the next century.
Evidently, there are some big expansions in oil production on the way. An investment of "many multi-billion" dollars in something called "unidentified unconventional oil," which stands at zero at the moment, will be producing as much oil as the Middle East does today; Middle East oil production itself will more-than double, as will production of oil from natural gas–known as natural gas liquids.
In total, allowing for sources that are in decline, production in 2020 will be about 65% more than it is now, and a reasonable summary of all this might be: "All's well."
And then I noticed something odd.
The first thing that looked suspicious is this "unidentified unconventional oil." What is that? And if it really is "unidentified", what is it doing in the table?
Well, "unconventional" oil is derived from a variety of rather inconvenient sources. It is extracted from oil shales (oil-sodden rocks) and from oil and tar sands; it is synthesized from coal and gas, and it is produced from vegetation (biomass).
The production of oil from unconventional sources calls for exceptional reserves of patience.
For instance, in the case of tar sands and shales, you typically have to make a crater some three hundred feet deep; you then dig out millions of tons of sand and transport it to a plant to extract the oil by a heavy industrial process which involves the application of heat and high pressure; you then have to find somewhere to dump the waste.
It can be done, but even to do it on a small scale produces a landscape which is a black vision of hell, and in the process, you use up much of the energy you get from the oil. The cost is huge, and the mess is beyond description. On a large scale, it is not a proposition at all.
Other "unconventional" sources–as the name suggests–have similar problems.
Now for this word "unidentified." What it means is that no one has yet been able to say what those unconventional sources might actually be. As the Outlook puts it, they are "currently unknown or uncertain." In short, they do not exist, not even in the form of a sketch on the back of an envelope.
In fact, the Outlook disarmingly describes them as the "balancing item"–the shortfall which they expect in the supply of oil in 2020, and which has to be written into the table somehow to make the figures add up. There is only one explanation: "unidentified unconventional oil" is there for decoration only.
The second odd thing about this survey of future oil prospects is the starring role the IEA has in mind for the oil producers in the Middle East.
The oil market is a pas-de-deux between two dancers; they are, first, the Middle East oil producers who are also members of OPEC–that is, Iran, Iraq, Kuwait, Saudi Arabia, and the United Arab Emirates; and, secondly, the "rest-of-the-world" (which includes the United Kingdom).
Until now, the rest-of-the-world has been much the more important of the two groups, but this is about to change.
In 2001, according to the Outlook, the rest-of-the- world's oil production will reach its all-time peak of around 47 million barrels per day (Mbd). From then onwards it is downhill all the way, passing the 27 Mbd mark in 2020, and thence towards depletion.
The Middle East, on the other hand, has a few more shots in its locker.
Its output, at present around 20 Mbd, is due to double by 2010; but then the Middle East, too, will reach its peak in 2014 (at 49 Mbd), beginning the long decline towards depletion. Half-way mark for the total crude oil resource will be passed between 2005 and 2010.
Not to worry. More than half the total resource is still in the ground. Everyone knows that oil is a finite resource, and if supplies gradually begin to fall off in twenty years' time, with the Middle East sustaining the flow throughout the period, that fits in nicely with the new technologies that are coming to take its place, and with the need to reduce our dependence on fossil fuels and so to protect the climate.
And yet, there is something wrong here. Could this–to quote an earlier sleuth–be a case of the dog that didn't bark?
We know, because the Outlook has told us so, that in the future there will be a very, very big role for the "Big Five" Middle-East producers. This group is about to break through to a market share of more than 30%, putting it back into the position of power it enjoyed so much in the 1970s. By 2009, according to the IEA, this share will reach 50%.
The Middle East, with merely five members, is about to become a giant. Its hour has come 'round at last. It is growing in stature like a sumo wrestler. And yet, according to the Outlook's forecasts, this will be a sumo wrestler with a difference. This one will not throw his weight around: he will do everything he can to avoid inconveniencing anyone in any way.
Odd behaviour in a heavyweight, you might think. Especially odd for the five heavyweight oil producers in the Middle East.
Not all of them are famous for the warm affection with which they regard the West. They feel they've been almost giving away their one priceless asset for the last 50 years.
They are within a few years of the half-way mark in the depletion of their oil. They are about to find themselves with a prize in their hands which they have craved for a long time. And the prize is–control over the price of oil.
Oil prices will begin to rise, and once they have started, they will move fast. There is a "positive feedback" in the oil market. The oil-producing countries depend on their oil revenues, and when prices fall, they are tempted to increase sales to maintain their revenues, and this makes prices fall still further.
The problem is that the converse is also true: when prices rise, producers can maintain their revenue with reduced production; lower production leads on to higher prices. This makes the oil that is still in the ground more valuable–an appreciating asset which should be conserved. This tends to raise prices still further.
The driver of this is not the bomb or the gun, but the "slow" lever at the top of the oil wells.
Oil producers will not want to destroy their customers' economics, but if prices rise enough, producers will be able to sustain their revenues even if the quantity they sell declines.
Here is an "oil price shock" of a new kind. In the 1973 price shock, oil prices rose more than eightfold from their starting-point of around $2 a barrel; after settling back some way they surged ahead again in 1979 to three times the peak they had reached in 1973, reaching nearly $50 a barrel. In both cases, prices fell back again– not all the way, but far enough to restore business as usual.
There were too many producers around to allow high prices to be sustained; new fields were clearly identified or were opening up–for instance, in Alaska and the North Sea.
But now there are no major new fields to be discovered; the IEA acknowledges this, so it can be taken as settled. The rest-of-the-world producers are past their prime, and we are dealing with the heavyweight end of an industry which has two shattering price mark-ups, briefly achieving a 25-fold increase, on its record.
Where the heavyweights lead, the others will follow. The rest-of-the-world producers too, will see their chance; they will be only too delighted to get a decent price for their oil and to ease-off the rate at which it is being depleted.
As for the "natural gas liquid" which, according to the table, is scheduled to play such an important part in 10 years time, its price will follow exactly in step with crude oil prices.
We can now put all these clues together and discern the bold outlines of the case: an oil price "shock" will lift-off in the first decade of the coming century. This time, there will be no return ticket. A reasonable expectation is that it will happen within the first three or four years.
All we have done here is read the graph above from the Outlook, we have mixed in a bit of deduction, and added some experience of what people do when they possess power without accountability.
The sequence of cause-and-effect follows: a market close to its peak, the Big Five with a dominant share, higher prices, reduced production, even higher prices, a rapid transformation of the oil market.
The logic leaves the reassuring data in the Outlook in ruins. There is a real possibility that it leaves the basic assumptions of economic growth, employment policy, and sustainable development also in ruins.
Now, what is to be made of an argument which is based on official statistics, but which claims to show that some of the critical numbers are sufficiently wrong to turn the message of the whole table on its head?
To answer this, we need to understand the nature of the problems faced by the International Energy Agency.
As the most influential policy body in the oil business, it is in a delicate position. It cannot just blurt out "We are looking at a major, permanent oil deficit, for which we can offer no solutions."
What it can do is to provide data which signals the gaps and inconsistencies clearly, and allows–nay, invites–readers to draw their own conclusions. The IEA has done this and revealed the situation in coded form.
This means that we have vital new information about the prospects for oil, and from the most authoritative possible source.
Moreover, this is information that the UK government is treaty-bound to take seriously.
The IEA was established under a treaty–the "Agreement on an International Energy Programme"–which obliges it to provide detailed information about developments in the energy market, and the signatories are required to take appropriate action by, for instance, restraining energy demand in their economics. The UK is a signatory. It is therefore under an obligation to read the report, that is, to read between the lines of the report, and then to take action.
The prospect is of a one-way oil price shock early in the next decade that changes the present economic and political agenda profoundly.
The assumptions of sustained economic growth and stabilized unemployment will be blown out of the water. Britain has some protection, because of its own North Sea oil reserves, but it is entirely exposed to the effects of a one-way oil shock on its trading partners and food suppliers.
The UK's own oil and gas supplies will themselves be affected: their prices will follow world prices, and serious price intervention by the government would imply rationing.
The immediate impact of the shock will take the form of serial disruptions in transport and distribution, heating, lighting, manufacturing and all other energy-dependent functions; much higher costs will ripple through the UK economy, as indeed through every economy in the world.
Certainly, something can be done, not to prevent it, but to deal with it.
Under extreme pressure of circumstance, astonishing leaps forward can be made in technology, organization and living patterns. But they will not happen unless there is intensive preparation and, so far, there has been none.
There is a raft of new energy technologies, gently drifting along on the tide, waiting for their costs of the technology to fall, or for the price of oil to rise. Only when the price of oil has shifted far enough will they become economic, which means that a rapid price rise would leave them, along with the nation as a whole and its trading partners, totally unprepared.
It follows that a single-minded lead from government is needed, on at least five fronts. Beginning now, it should analyse the IEA's numbers, and the prospects for oil, in detail. My own reading of them could be wrong; we need to be sure.
If it is confirmed, then the government should immediately push ahead with the energy technologies and get them widely applied; it should develop a strategic response in critical areas such as food, transport and employment; it should fully involve the whole electorate in the process; and it should coordinate action between nations.
Most of the really major events of this century have caught the world unawares. A general sense of relaxed business-as-usual immediately beforehand is almost the signature of a decisive turning-point.
The IEA's figures are so astonishing that they seem to have caught the agency itself unawares.
At first sight, the table looks all-innocent. We see a routine exercise. And then the penny drops.
* David Fleming obtained his PhD from the University of London in 1988,and has worked as a consultant in investment management, in the environment movement as economics spokesperson of the Ecology (Green) Party, chair of the Soil Association, and as a contributor on environmental matters to Country Life. Ph: 0171-794 5644; fax: 0171-435 3818; email: ellerdale@gn.apc.org