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Jewish World Review June 14, 2004 /25 Sivan, 5764

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Oil: How bad do you want it? | Oil produced the modern world — its ways of work, warfare and recreation — and soon, we are told, the end of cheap oil will produce abrupt, wrenching changes in the way we live. Changes, certainly, but not convulsions, because the modern world responds to price signals.

That is why U.S. energy efficiency — the energy consumed to produce a dollar of gross domestic product — has roughly doubled since the oil shocks of the 1970s. America's less than 5 percent of the world population consumes more than 20 percent of all oil. Surging demand by India and especially China will cause prices to rise. And terrorists, or chaos in Venezuela — America's fourth-largest supplier, behind Canada, Saudi Arabia and Mexico — or Nigeria, the fifth-largest, could cause prices to soar.

However, in 1920 the inflation-adjusted price of gasoline was twice today's. To match 1981 prices, a gallon of gasoline today would have to be $3.50. Inexpensive gasoline is one reason why the average gas mileage of U.S. passenger vehicles has declined since 1988 and why in the 2003 model year, for the first time since the mid-1970s, the average weight of a new car or light truck was more than two tons (4,021 pounds).

In 1977 President Carter said we "could use up all the proven reserves of oil in the entire world by the end of the next decade." But today known reserves are larger than ever. Reserves and production outside the Middle East are larger than they were 31 years ago, when a State Department report was titled "The Oil Crisis: This Time the Wolf is Here."

In 1971, a year before Texas output passed its peak, U.S. production met more than two-thirds of the nation's needs. Today the nation imports 54 percent of the oil it uses. M.A. Adelman of Massachusetts Institute of Technology notes that in 1971 non-OPEC countries had about 200 billion barrels of proven reserves. In the next 33 years they produced 460 billion "and now have 209 billion 'remaining.' " Note Adelman's quotation marks. To predict actual reserves would require predicting future exploration and development technologies.

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However, the rate of discovery has been declining for several decades. Of course, oil supplies are, as some people say with a sense of profound discovery, "finite." But that distinguishes oil not at all from land, water or pistachio nuts.

Russell Roberts, an economist, says: Imagine that you love pistachio nuts and are given a room filled 5 feet deep with them. But you must eat them in the room and must leave the shells. When will you have eaten them all? Never. Because as it becomes increasingly difficult to find nuts amidst the shells, the cost of the nuts, in time and effort, will become too high. You will seek a substitute — pistachios from a store, or another snack.

Oil over $40 a barrel accelerates exploration for new fields, and development of known but technologically inaccessible fields, including some fields four miles below the surface of the Gulf of Mexico, where there may be at least 25 billion barrels. High prices may also prompt development of hitherto economically unfeasible sources, such as U.S. oil shale and Canadian tar sands. Tim Appenzeller, writing in National Geographic, says tar-sand deposits in Alberta "hold the equivalent of more than 1.6 trillion barrels of oil — an amount that may exceed the world's remaining reserves of ordinary crude." Alberta, a future Saudi Arabia? Perhaps. Full-throttle production of oil from tar sand is not economical. So far.

John Kerry, whose idea of the future extends only to Nov. 2, says we should use less oil but gasoline should be cheaper, so President Bush should stop filling the Strategic Petroleum Reserve. But that is taking just 0.2 percent of the oil in the world market. Were Bush to stop topping off the reserve, as President Bill Clinton did to help Al Gore's 2000 campaign, Kerry would accuse Bush of manipulating prices for political advantage.

The futures market is wagering that a barrel of oil in the summer of 2005 will be about $35. The more distant future will be shaped by how much various nations have inflated estimates of their reserves. But, then, Alaska may have three times more reserves than originally estimated.

MIT's Adelman notes that even before 1800 — before the coal-fired Industrial Revolution — Europeans worried about exhausting coal supplies. "European production actually did peak in 1913 and is nearly negligible today." Billions of tons remain beneath European soil but are uneconomical to remove. So far.

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