Are We Running Out of Oil and Gas?

Crude oil and natural gas, like other natural resources, have a finite supply. Because we are consuming more and more of these fuels each year, there is concern that we may exhaust them in the near future. In this section we review the current supply of crude oil and natural gas and consider when we might run out of these valuable energy supplies.

Crude oil and natural gas are finite resources. We know how much are produced and how have been discovered. The discovered oil and gas which have not bee produced are called reserves. The reserves of oil and gas exist in reservoirs below the earth's surface. Scientists estimate how much are left by trying to judge the reservoir's size and the amount of hydrocarbons that can be recovered. The reserves are determined based on current economics and technology. The reserves are those that can be economically produced using present technology and current costs and prices. Therefore, this value has a lot of scientific guesswork associated with it and can change with new technology like 3-D seismic and oil and gas prices.

As is seen in the chart, most of the world's oil reserves are in the Middle East (65.4%) with Europe & Eurasia having 9.3% and South & Central America with 9.4%.

The world's natural gas reserves are found in Europe & Eurasia (39.2%) and the Middle East (36%). The Russian Federation has 30.5% of the world's gas reserves followed by Iran with 14.8% and Qatar with 9.2%.

If we divide the reserves of crude oil in units of billion barrels by the annual production in billion barrels per year we get the number of years of production left at this production rate. This is called the reserve lifetime or R/P ratio. This value can be calculated for the world, a country, a state, and a field. It is an important indicator. We would like this number to be as large as possible because that means we could produce from this field for many years. As we produce a field the R/P ratio (reserve lifetime) will decline. The same situation can be used to describe natural gas except we measure the reserves in trillion cubic feet and the production in trillion cubic feet per year.

At the end of 2005 there were 1,200.7 billion barrels of proven oil reserves. In 2005, the world produced 29.6 billion barrels of oil. That means that we had 40.6 years of oil left at the current rate of production.

The reserve lifetime for natural gas is 67.1 years (6,337.4 trillion cubic feet of reserves at the end of 2004 divided by 94.5 trillion cubic feet of production in 2004).

This means that if we keep on using oil and gas at the rate we did in 2004 we will run out of oil in 2044 and natural gas in 2071.

Before we relax too much, there are a couple of problems with this prediction. First, the world keeps on using more and more energy. Forecasters predict that oil consumption will increase 1% annually and gas consumption 3% annually. With this forecast we would run out of oil by 2037 and gas by 2040. Before we panic and wonder how fast scientists can develop other energy sources, we need to consider another part of the equation.

Reserves _end-of-year = Reserves _{beginning-of-year} - Production + Additions

This equation says that the reserves at the end of the year are equal to the reserves at the beginning of the year less production plus additions. What are these additions? Scientists aren't sitting idly by and waiting for the reserves to run out. As we have learned in earlier sections, they are looking for oil and gas all around the world and using sophisticated technology to find more oil and gas. Let's suppose that these scientists can replace 75% of the production each year. (This may seem like a pretty high number but companies that average this kind of performance would soon be out of business.) On this basis, we would run out of oil in 2100 and gas in 2077. Natural gas runs out sooner because it has a higher growth rate.

The reserves of crude oil and natural gas are not equally distributed among all continents and all nations. As you might have guessed most of the world's oil reserves are in the Middle East.

The Middle East has 65.3% of the world's crude oil reserves. Oil exporting nations who belong to the Organization of Petroleum Exporting Countries (OPEC) control 78.2% of the world's oil. The top ten reserve holders have 84% of the world's oil.

Of the world's natural gas reserves, 30.5% are located in the Russian Federation and 36.0% in Middle East. The top ten reserve holders have 76% of the world's natural gas.

Unfortunately the United States is not in as good a position as Middle Eastern countries when it comes to crude oil and natural gas reserves. Current estimates indicate that America has 11 years of crude oil reserves (30.6 billion barrels of proven reserves and 5,646 thousand barrels per day of production). Sixty five percent of US crude oil resources are located in US PADD's III (Texas, Louisiana, New Mexico and Arkansas) and V (US West Coast).

At the end of 2002, the United States had 9.8 years of natural gas reserves remaining (186.9 trillion cubic feet of reserves and 52,183 million cubic feet per day of production).

According to the Energy Information Administration, United States crude oil reserves in the Lower 48 (excluding Alaska) are expected to decline 1.5% annually from 18.04 billion barrels in 2000 to 13.48 billion barrels in 2020. U.S. oil production will decline from 5.89 million barrels per day in 2000 to 5.05 million barrels per day by 2020. The life of the remaining Lower 48 reserves will be 8.4 years.

The Energy Information Administration expects Lower 48 natural gas reserves to increase to 190.07 trillion cubic feet in 2020 from 157.41 trillion cubic feet in 2000 and production to grow 29.04 trillion cubic feet from 18.61 trillion cubic feet. The reserve lifetime is expected to decline to 6.6 years as production increases.

While no one really knows how much crude oil and natural gas remain to be discovered, scientists estimate that we have around 582 billion barrels of oil yet to be discovered.

Region	Billion Barrels	Percent
US	43.8	7.5
South America	56.1	9.6
Canada	28.1	4.8
Mexico	35.5	6.1
Europe	23.9	4.1
Former Soviet Union	131.3	22.6
Africa	50.8	8.7
Middle East	141.1	24.3
Asia/Oceania	70.9	12.2
Total	581.5	100.0

These same scientists compute that there are around 5,791 trillion cubic feet of natural gas that have not yet been discovered.

Region	Trillion Cubic Feet	Percent
US	303.0	5.2
South America	291.0	5.0
Canada	399.0	6.9
Mexico	154.5	2.7
Europe	299.9	5.2
Former Soviet Union	2357.3	40.7
Africa	411.4	7.1
Middle East	561.3	17.5
Asia/Oceania	70.9	9.7
Total	5791.1	100.0

These calculations always seem to trouble people. How do we know how much oil and gas are waiting to be discovered if we have discovered them? Is this a wild guess or is there some science involved in making this estimate? Actually, it's a little of both. Let's call it scientific guesswork. Scientists know where other rock formations may be located that could contain hydrocarbons. They have information on production from wells around the world that helps their assessment. These scientists also consider the latest technological developments that improve our ability to find and recover hydrocarbons. Of course, it is a lot more complicated than this and considerable effort is made in preparing a range of estimates.

Oil companies spend billions of dollars searching for new oil fields. Each year companies try to replace the oil that they produce. If a company fails to replace and add to reserves they will not be able to increase production and revenues. According to statistics compiled by Houston investment banking firm, Simmons & Company International, major oil companies have spent about $260 billion over the past decade just to maintain the same level of production. Independent producers spent $16 billion over the same time period and were able to increase production by 6%.

Why are these results so disappointing? First of all oil companies are dealing with resources that are depleted or used up. The reserve lifetimes in the above table indicate how long it will take before the reserves are depleted. In the case of the United States, the oil reserve lifetime is 7.8 years. This means that 12.8% (1/7.8) or 2.35 billion barrels of the oil is produced each year. To replace these US oil reserves companies must find 2.35 billion barrels of oil. If the industry wanted to increase production to keep up with the increase in U.S. oil consumption, the industry would have to find 3.11 billion barrels (2.35 billion barrels + 6.78 billion barrels consumed in 1998 x 1.0% growth rate = 3.03 billion barrels).

The cost to achieve this is rather large. In spite of tremendous improvements in exploration technology, based on a finding and development cost of $5/B it would cost $15.15 billion a year. Where does this money come from? It comes from company profits and private investors. When oil prices are low companies don't have enough profits to look for more oil and gas. The laws of supply and demand tend to balance things out because when supply drops, prices increase to encourage companies to find more oil and gas. So when gasoline prices are low, remember that this means less money to find the crude oil necessary to make gasoline in the future.

One of the questions hotly debated in oil and gas circles is when will crude oil production peak. The date an level of this maximum production are considered significant because 1.) supplies of oil will start to decline, 2.) the cost of the remaining production will increase, and 3.) the world better have a contingency plan to move to new fuels or suffer an economic meltdown.

The milestone is probably less significant than one might first guess. First of all the date is for conventional oil production and does not include supply from unconventional sources such oil sands and very low gravity crude oil or bitumen. The forecast also does not consider conversion of coal and natural gas to crude oil.

A recent study from scientists at the University of Newcastle, suggested that conventional production will peak between 2012 and 2024 ("Mathematical model forecasts year conventional oil will peak," Oil & Gas Journal, May 7, 2007). Forecasters at the Energy Information Administration predict the peak will be between 2033 and 2067. Analysis performed by PetroStrategies indicate the peak will occur between 2033 and 2047. The subject is treated in more detail in an excellent article on Wikipedia called Peak Oil.