The coming glut in oil – and its impact

August 9, 2012

Forget America’s fiscal cliff, Europe’s currency troubles or the emerging-markets slowdown. The most important story in the global economy today may well be some good news that isn’t yet making as many headlines – the coming surge in oil production around the world.

Until very recently, our collective assumption was that oil was running out. That was partly a matter of what seemed like geological common sense. It took millions of years for the earth to crush plankton into fossil fuels; it is logical to think that it would take millions of years to create more. The rise of the emerging markets, with their energy-hungry billions, was a further reason it seemed obvious we would have less oil and gas in 2020 than we do today.

Obvious – but wrong. Thanks in part to technologies like horizontal drilling and hydraulic fracking, we are entering a new age of abundant oil. As the energy expert Leonardo Maugeri contends in a recent report published by the Belfer Center at the John F. Kennedy School of Government at Harvard, “contrary to what most people believe, oil supply capacity is growing worldwide at such an unprecedented level that it might outpace consumption.”

Maugeri, a research fellow at the Belfer Center and a former oil industry executive, bases that assertion on a field-by-field analysis of most of the major oil exploration and development projects in the world. He concludes that “by 2020, the world’s oil production capacity could be more than 110 million barrels per day, an increase of almost 20 percent.” Four countries will lead the coming oil boom: Iraq, the United States, Canada and Brazil.

Much of the “new” oil is coming on-stream thanks to a technology revolution that has put hard-to-extract deposits within reach: Canadian oil sands, U.S. shale oil, Brazilian presalt oil.

“The extraction technologies are not new,” Maugeri explains in the report, “but the combination of technologies used to exploit shale and tight oils has evolved. The technology can also be used to reopen and recover more oil from conventional, established oilfields.”

Maugeri thinks the tipping point will be 2015. Until then, the oil market will be “highly volatile” and “prone to extreme movements in opposite directions.” But after 2015, Maugeri predicts a “glut of oil,” which could lead to a fall, or even a “collapse,” in prices.

At a time when the global meme is of America’s inevitable economic decline, the surge in oil supply capacity is an important contrarian indicator. Maugeri calculates that the United States “could conceivably produce up to 65 percent of its oil consumption needs domestically.” That national energy boom is already providing a powerful economic stimulus in some parts of the country – just look at North Dakota. Crucially, at a time when one of the biggest social and political problems in the United States is the disappearance of well-paid blue-collar work, particularly for men, oil patch jobs fill that void.

What Maugeri dubs the next oil revolution also has tremendous geopolitical implications. One way to understand the battlegrounds of our young century is through the pipelines that flow beneath them. The coming surge in oil production, particularly from North America, will transform that geopolitical equation.

Equally significant is the impact of oil on the most important human problem of our times: protecting the environment. The sources of oil that will fuel the coming boom are harder to reach than the supplies of the 20th century, and the technologies required to extract them are more invasive. That will be one fault line in what is sure to be the escalating battle between environmentalists and the oil industry.

The implications for the climate change debate are even more fraught. Until now, the arithmetic of oil supply and the agenda of environmentalists conveniently dovetailed. Since we were running out of oil anyway, environmentally motivated efforts to limit fossil fuel consumption and increase our use of renewable energy boasted the additional virtue of being inevitable. In an age of abundant oil, those economically utilitarian arguments lose their power.

For environmentalists, and for the liberal political parties with which they are usually aligned, that poses a serious challenge. The temptation will be to oppose new oil production projects indiscriminately. That instinct could be politically dangerous. Political progress in combating climate change has been slow, but the battle for hearts and minds, especially of the younger generation, is being won. That political capital can be lost in an instant if the environmental movement allows itself to be equated with opposition to one of the lone sources of growth – and of good blue-collar jobs – at a time of global economic stagnation.

A final conclusion to draw from the next oil revolution is a little more existential. This is yet another reminder that what both common sense and expert consensus assure us to be true very often isn’t. It was obvious that efficient markets worked and financial deregulation would stimulate economic growth, until the financial crisis and the subsequent international economic recession. It was equally apparent that we were running out of oil – until we weren’t.


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Good for America, bad for Russia.
There’s also a similar thing going on with natural gas –
Another good thing for America.

Posted by reality-again | Report as abusive

Wonderful articles – but how do they combine to the “big picture”? This article, combined with the lovely and lousy job article, paints a rather grim and unfortunately quite realistic portrait of the future. So environmentalists lose, we deplete our planet more and more, the climate keeps changing in a more and more extreme way, natural disasters keep happening more often and are much stronger, and the few rich get richer and most everybody else goes down the drain. What I miss in this picture is one thing: WE need the planet to go on living, but the planet does not need us; on the contrary, Earth does much better without us and might just shrug us off, rich, or not.

Posted by VeraL | Report as abusive

The parallel/companion story might be the reality of vast, low cost natural gas reserves. All the new technologies supporting oil supply growth are relatively high cost while the increase in natural gas reserves is being driven by low cost supply. It is hard to predict how natural gas might compete with oil to capture energy demand in the long run, but at the current price differential per energy molecule of 5:1 in the US it looks like natural gas will play a major role. Your point regarding the response of environmentalist and liberal politicians is spot on as we have seen considerable opposition to hydro fracking despite the dramatic positive impact natural gas is having on US carbon emissions and air quality as coal-fired electricity generation is being displaced by natural gas fueled generation. There are some interesting choices ahead for those concerned about the environment and skeptical of the oil & gas industry.

Posted by sfbrion | Report as abusive

The ‘steady state’ solution should be in force before maximum load (largest population, equivalent living standards) so that rather than seriously overshooting the demands of our giant final step in population and causing manifold disasters we live within our large Petri dish knowing it has limits. Free enterprise will not do this. External regulation must.

Posted by JimTheDiver | Report as abusive

Since whale oil was discovered, the unit cost of energy is on average constantly falling (in the longer term). The collective assumption is rarely correct- we all used to “know” that oil came from mastadons falling into pits.
What if oil is actually a renewable resource?

Posted by 54forty | Report as abusive

“Good for America, bad for Russia.
There’s also a similar thing going on with natural gas –
Another good thing for America.”

It will stimulate country(its intelligence, human and financial resources) to invest time, money, brain power into more technology, financial sectors, etc. etc. Same way like the rest of developed European countries did and not just sell to the West its natural resources

Posted by studebekker | Report as abusive

In the 1970’s my university graduate liberal friends were lapping up the “Future shock” scenarios and I looked at what was being achieved in the North Sea and said, ” We will develop new techniques and maintain supplies for at least a century past your supposed deadline”. At the time of the “credit crunch” the same set declaimed the death of the U.S.A as a major economic force and I said, ” As ever you vastly underestimate the ability of the U.S to “Adapt and Overcome”, it is simply too dynamic and massive to not recoil and re-load as in the past.” Those who gleefully look at the surge in human population in their death-wish, love of approaching Armageddon I told, “Look at the sub-replacement breeding rates of Europe and white Americans, and the decreasing birthrates wherever economic progress is best in the developing world, post subsistence living slashes birthrates”. As ecological degredation impinges economically it will create a market for defensive and remedial texhnologies and the suppliers of such skills will appear. Adapt and Overcome is what we do; We are Humankind.

Posted by paulsageordie | Report as abusive

I don’t think there will be an “oil glut” any more than I took with any credibility the prediction, a few years ago, that there would be a global glut of manufactured consumtion and capital goods. Yes, the demand for manufactured goods in advanced countries has fallen short of global supply because of the shift of production to low-cost, high-volume emerging countries and the parallel decline in income and employment in advanced countries. But excess (unfulfilled) demand persists in low income countries. Similarly, the 20% surge in oil supply predicted will likely cause the production of superior quality manufactured goods to be shifted back to the advanced economies of North America and Europe, stimulating job creation possibly to near-full-employment level by 2017/18. In parallel, the increase in unit cost of East Asian manufactured goods will likely cause a significant shift of such production to low-income countries like Bangladesh and African countries, while the economic competition between the Asian emerging countries and those of Europe and the Western Hemisphere will morph from its present near-confrontational one to a rather convivial. But, yes the dark, existential cloud of climate change will hand ominously on this otherwise pleasing scenario. Yet, the technology for geo engineering the Plane already exists. But, greed, cursed greed might spoil everything for humanity

Posted by MohamedMalleck | Report as abusive

Why is this kind of spin/hype, not backed up by one peer-reviewed fact or figure, on Reuters?

Where did the ‘truth’ go?

The writer could start with an examination of the expected EROEI (Energy Return on Energy Invested)from the lauded sources. Note: that’s on energy invested, not dollars invested. Below a certain EROEI, you don’t maintain BAU. As we are witnessing.

One can understand the panic, and the need for such hype-pieces, but we’d be better addressing reality.

Posted by murrayg | Report as abusive

do a web search on “smog in shanghai”

Got oil?…

Posted by UauS | Report as abusive

If you look to non-partisan geologists for analysis (instead of Ph.D. economists like Mr. Maugeri, who is on sabbatical from Eni), you will find the results to be far less optimistic. Yes we discover all sorts of tertiary techniques to retrieve ever greater percentages of oil from old fields, and yes we discover ways to access resources trapped in rocks which we never thought would yield their riches to our desires, and yes there is lots of oil and gas in many severe (and unexplored) environments (deep water and polar continental shelves), but we all-too-often end up with situations like the Deep Water Horizon and the catastrophe on the Niger delta. We, in the “first world” have become ever-more adept at moving our “mess-making” into the third world, where lax regulations and abject poverty make our resource exploration and development temporarily, environmentally, invisible. Most non-partisan geologists will tell you that the resource potential in shale-basinal gas and oil deposits is, as of the best current analyses, not nearly of the magnitude the pro-development folks would have us believe. While methane is better than coal as a fossil fuel, from a short-sighted environmental standpoint, development of new long-term gas resources is far from certain, and methane still adds carbon dioxide to the atmosphere. Carbon dioxide IS a greenhouse gas, regardless of how one feels about anthropogenic global warming. It DOES trap heat in the atmosphere. How much of our warming Earth can be attributed to man-made sources may be debatable, however, if we continue to massively burn fossil fuels, we will, at some time, add enough carbon dioxide to the atmosphere to undeniably affect our atmosphere’s heat-trapping ability. The time has come to begin to diverge from our old habits and look for new paths into our energy future. It is a very long path when one looks at the monstrous magnitude of our coal, oil, and gas consumption. As we begin to build infrastructure to utilize “new” basinal gas supplies, we may find ourselves with “sticker-shock” in a few years, if we find the supply comes nowhere near the new demand curve. And do we really, seriously, think that development of fossil fuel resources on the Siberian Shelf and in Africa will be completed without an “invisible” catastrophe? I doubt that the remnants and descendants of the Seven Sisters or national companies like Rosneft actually care, as long as we Pollyannas in the “first world” don’t have to see it.

Posted by brein | Report as abusive

Oil isn’t the “big battle” for the hearts and minds that will ultimately determine the “future of human life on earth”. The REALLY BIG loss by the environmentalists is the radical religious right’s navel-gazing fixation on eliminating “family planning” and meaningful access to birth control. Once our message was “The sperm stops here”.

These people have systematically dismantled America’s previous leadership to help “third world countries” reduce unnecessary, inappropriate and unsustainable “traditional” rates of human reproduction through education. Do not Somalia, Haiti, and other failed “states” prove, again and again, year after year, that God does not “provide” (unless man’s primary purpose is to turn our big blue marble into a big brown marble by covering every open space with human protoplasm)?

At SEVEN BILLION and exploding, the lion’s share of “new earth citizens” lack land, money, skills, education, clean water, basic sanitation, adequate food or ANY reasonable expectation of same. Their “future” is not “equal” because all these multitudes of open mouths and empty stomachs offer their world is more urine and feces.

Their lives are preordained to be as life was for the majority of humans two hundred years ago and before…brutal,nasty and short. They will experience primarily hunger, rejection, envy, hate, pushing and shoving to survive, and killing or being killed.

China recognized the problem and addressed it successfully with their “one child” policy. India has not, and it’s ongoing good faith efforts to raise the standard of living for it’s people will continue to be overwhelmed by their birth rate.

In America we seem well on the way to the day when fertile females must report to have the government harvest their eggs to protect them from any possibility of harm so that every one can be “appropriately” fertilized and brought to term by the most appropriate means. Why?

Isn’t it obvious that the one way this planet can support SEVEN BILLION people is by adopting and enforcing a universal standard of living that, to any American, equates with permanent, hopeless poverty? No thanks!

Posted by OneOfTheSheep | Report as abusive

If the earth is better off without us Vera… do gia a favor and commit suicide.

Humans are as natural to this planet as is the pondscum the envirofreaks want to replace them.

Posted by mmercir | Report as abusive

It’s also worth reading the article in Rolling Stone magazine (by Bill McKibben) regarding climate change and the numbers involved. s/global-warmings-terrifying-new-math-20 120719

We may not have time to burn all of the existing known oil reserves, much less the promised excess. Pity this article reads like a fuel company press release, (berating the environmental lobby’s concerns), rather than taking a more balanced view.

Posted by GCoughlan | Report as abusive

This piece leaps to conclusions based on the optimistic projections of one current (not former) oil executive who has a financial stake in the continued use of fossil fuels for as long as possible. Freeland, whom I had thought was a better (and more intelligent) journalist than this, takes the assertions of Maugeri, who has taken up residence at Harvard to, it seems, provide himself with a more “respectable” title than “oil executive”, and draws the conclusion that there will be an “oil glut” without engaging with critical voices within the petroleum geology field that strongly suggest otherwise. There is no suggestion here that Freeland has an understanding of terms such as “decline rate” and “energy return on energy invested” with which she could interrogate the claims of Maugeri; she simply has taken his assertions at face value. Euan Mearns has noted that Maugeri uses decline rate assumptions of 1-2% of existing fields when 4% is more likely.

Ultimately Freeland is offering energy investors and the public who themselves invest in equipment that uses oil a misleading picture of the “realism” of using oil into the near future. Besides climate concerns, it isn’t “realistic” to project oil use into the future, especially if we believe in concepts like “due diligence” let alone journalistic research. If this is typical of Freeland’s level of engagement with her subject matter, I have a bridge in Brooklyn that I’d like to sell her!

Posted by MichaelHoexter | Report as abusive

When quoting from articles by the American Petroleum Institute, it is common practice to note the source. Maugeri is a well-known shill for that industry.

This information is so out-of-date. For example, horizontal drilling has been common practice for half a century.

Also, the States have been blocking much domestic drilling because of “frivolous” concerns over the environment for decades. As with fracking, is Congress going to override these concerns?

What about the hundreds of other fossil fuel experts who disagree with the optimist industry spokesman Maugeri? What about all those estimates by all those experts both within and without the petroleum industry that proven oil reserves are declining?

What difference does it make that production goes up or down over a short period of a few years? In a 24-hour newscycle, a few years is an eternity.

Posted by ptiffany | Report as abusive

Maybe I should go and buy the car that I had decided not to buy. Sounds unbelievable. But India and china need lots of fuel. So also vietnam, bangladesh, indonesia… And Irans belligerence will cool off.

Posted by kpvidya1999 | Report as abusive

One only needs to look at hydrofracking of natural gas to understand that “tight oil” or “pre-salt oil” might also be illusory.

Sure, it is possible to deploy new technologies to extract more fossil fuels. Look at the dirty tar sands. Almost anything is possible if you throw enough money (and energy) at it.

But the price of fracked gas is well below its production cost (John Dizard wrote about this at the FT many times before Chesapeake’s crash-and-burn). Same is probably true of fracked oil.

Fossil fuel nirvana doesn’t exist; it is something peddled by corporations dedicated to maintaining business-as-usual — socialized losses, privatized gains.

Posted by upstater | Report as abusive