oil

There's a nice piece in the New York Times magazine about the current oil situation - here. It's a long piece but very interesting and worth reading. In short it makes a number of interesting points:

1. Saudi Arabia produces 10.5mm barrels of oil and the world consumes 84.0mm barrels of oil (12.5%). If we could extract every single drop of the oil in the Alaskan National Wildlife Refuge we could match the Saudi's level of output for only about 3 years. Half of Saudi Arabia's oil production is from a single oil field (Ghawar).
2. The oil question centers not around oil reserves (how much is in the ground) but oil capacity (how much can be pumped out). In particular the concept of 'peak capacity' drives the entire discussion - the point at which oil fields can no longer produce increasing amounts of oil After this point, you can drill all you want but it won't increase the flow of oil. Therefore you cannot meet any increase in demand.
3. None of the major oil producing nations allow audits or provide information that would allow others to accurately calculate future oil production or to estimate a peak. That's why there is such confusion and wildly different answers regarding when oil production will be a problem.
4. While oil producers have an oligopoly or cartel, they cannot necessarily raise prices on oil (by cutting back on production) to make more profit. Two things happen. One you can get a recession if the price is too high - a worldwide recession. OPEC has had to deal with something like this before and racked up massive amounts of debt when they couldn't cover their fixed costs because demand had dropped so much. And also other energy substitutes (including oil that's too expensive to extract) and research on energy substitutes become more attractive.
5. Oil producing nations and refining companies are outwardly optimistic about their ability to produce oil and oil byproducts in sufficient capacity because of this. To keep the price down. Even expectations that there may be a future problem drive up oil prices. That is partially what is driving them up now.
6. Oil production on individual fields can drop dramatically and suddenly. It doesn't always taper off slowly. If this happened to Ghawar it would introduce a large shock to the system and the price of oil would increase accordingly.
7. [update] I forgot one more point that's been running around my brain since I read the article. The most important role of Saudi Arabia is the ability to act as a price setter. They historically have had the ability to crank up oil production so much that any supply issue could be eliminated by them. When Iraq went offline during the war, the Saudi's came to the rescue. Once they start hitting against their maximum output, they no longer have the ability to control prices. It's one reason that oil is so jittery on the slightest news. It's believed that the Saudi's now will have trouble offsetting supply issues so any indicator of those issues (e.g., a hurricane, inventory levels dropping) set the traders off. Where's a Kwisatz Haderach when you need one?

There are some wonderful quotes as well.

Simmons didn't let up. ''We're going to look back at history and say $55 a barrel was cheap,'' he said, recalling a TV interview in which he predicted that a barrel might hit triple digits. He said that the anchor scoffed, in disbelief, ''A hundred dollars?'' Simmons replied, ''I wasn't talking about low triple digits.''

''You want to have the price [of oil] as high as possible without sending the consuming nations into a recession and at the same time not have the price so high that it encourages alternative technologies.''

The Stone Age didn't end for lack of stone, and the oil age will end long before the world runs out of oil.

The article doesn't spend as much time on the impact this would have one our daily lives. There's been a lot of discussion elsewhere why the increasing price of oil hasn't impacted the US economy drastically yet. Two simple answers are oil-related productivity isn't as significant in the US as it was in the past (we've become more of a information based economy) and real prices of oil are much lower than they were during other dislocations of oil prices. Nevertheless, there is a price at which we will feel it and drive less. But while much of the oil the US uses goes into cars, most synthetic materials (plastics in particular) are derived from oil. Imagine plastic being an expensive commodity? I suspect I'll see this in my lifetime. I can't imagine what the world will look like well into this transition. How ironic that I'm rereading Dune right now.