x Abu Dhabi, UAEWednesday 26 July 2017

We're running into oil rather than running out

The "peak oil" frenzy of the 1970s has reared its head again. The world's increasing demand and a fixed, finite supply should have led us to a point of no return by now. So what happened?

What? No more oil? How will we find our way at night? How will we heat our homes? Will we be doomed in eternal darkness? These were common apprehensions raised in the middle of the 19th century - and also by many of those gathered in Davos last month. The oil in question in the 1850s was not today's black gold but the sperm whale's, which had fuelled the world for more than a century. At a time when whale oil was running threateningly low due to over hunting and with coal becoming increasingly expensive, people were in search of a substitute to supply the energy that sustained their societies. But 1859 marked a new era when Pennsylvania crude was haphazardly found to be useful. Driven by John D Rockefeller later that century, the oil race soon began.

Not only was it cheaper than its counterparts, but being a heavily concentrated source of energy, it was also more efficient and easier to transport. Most, if not all industrial processes, began to structure themselves around the use of oil and access to it. Oil has been the cause for some of the most radical economic and political transformations in human history. Of course, had it not been for oil, the Middle East would not be of such global importance and a focal point for tensions, nor would the economies of the Arabian Gulf have grown so quickly.

Oil pessimists explain that given its finite nature, the world's growing reliance on oil could soon lead us into a cold, 21st century Dark Age. They are far from the first to believe that they are Cassandra. When Jimmy Carter was in the White House, he warned that the world's reserves would run dry by the turn of the millennium. The "peak oil" frenzy of the 1970s has reared its head again. The world's increasing demand and a fixed, finite supply should have led us to a point of no return by now. So what happened?

The gross demand for oil has remained well below the amount of the world's oil reserves. In 1971, the demand for oil was at 49.4 billion barrels per year and world reserves were estimated to hold 521 billion barrels, according to the US department of energy. According to the theories of the oil pessimists, this would mean that the world would be out of oil in a little more than a decade. Instead of facing doom in the 1980s as the depletionists predicted, the amount of oil in reserves increased to approximately 700 billion barrels as demand increased. Since 1971, when reserves held 521 billion barrels, the world has consumed 900 billion barrels of oil, and today, reserves are currently at an estimated 1.36 trillion barrels.

As the petroleum geologist Peter R Odell put it, "if anything, the world is running into oil". Just look at last week's discovery of oil in Dubai. Estimating that only 1.5 per cent of the Earth's total physical resource base has been used since 1860, the Intergovernmental Panel on Climate Change (IPCC) declared that since fossil fuels are in abundance, they would not impose limits on carbon emissions during the 21st century.

Some may be inclined to buy into the pessimist's argument, and agree that increased prices are a sign of increasing oil scarcity. However, the flip-side of the phenomenon tends to go unnoticed. These higher prices give incentive for exploring new reserves, which in turn eventually push prices back down, according to the resulting new level of supply. Nonetheless, environmentalists continue to wail about the effects of carbon emissions resulting from fossil fuel production. Alternative energy sources are proposed to derail the world's dependence on oil and on oil-rich nations.

We mustn't forget what makes the world go round: money. Oil's appeal is merely a matter of how it minimises costs. If alternative energies are to replace oil, it will be on account of their cheaper cost in production relative to others. As the cost of alternative energy decreases and oil becomes relatively more expensive to extract, the transition will take place with reserves left in the ground. We won't run out of oil; it will just become obsolete. But that won't happen any time soon. Technology is improving but renewable energy still has a long way to go before it is able to compete with oil.

Besides, even if we were to entertain the arguments of the pessimists and assume their depletionist argument, we must not forget that necessity is the mother of invention. A century ago, who would have thought that so much energy could result from the splitting of an atom? The same way oil replaced its predecessors 150 years ago, human ingenuity will find its substitute. This will not be motivated by the arguments of the depletionists, environmentalists, or politicians, but by the search for efficiency through the market.

Hanan Alawadi is a researcher for the Dubai Economic Council