NO OIL PAINTING

Within ten years, the world will begin to run out of its principal

fuel, says James Srodes Washington DC MOST news analysts got it wrong when they attributed the $43 billion takeover by British Petroleum of Amoco to low oil prices. What's driving this mega-merger and the others surely to come is an impending global oil shortage that has pro- found economic and social implications.

The BP-Amoco merger makes perfect short-term sense. One motive force is shared by other European companies in the recent rush to find American merger partners: these marriages of convenience offer shelters to profits from the uncer- tainties of EMU. Also there will be cost savings from cutting staff and consolidat- ing offices in London and Chicago. Amoco brings as dowry an immense US retail petrol station network and a number of large refineries.

But, most of all, the new hybrid giant will have the muscle to survive dark days that loom ahead in the not-too-distant future. For what is driving BP's pursuit of an American base is a recent series of doom alerts coming from respected petroleum engineers. Indeed, the merger is just the latest in a series of acknowledg- ments by oil industry executives and gov- ernment energy planners that we are rapidly approaching the point where the global output of oil will begin to contract sharply as the demand for petro-energy products becomes even more acute.

Put simply, a consensus has formed in recent months that some time soon between the years 2005 and 2010 — the supply of conventional oil energy will at first be outstripped by a surge in world demand. Very soon after that the real vol- ume of output will begin to shrink abruptly even as demand goes a bit higher. The supply cut-offs and soaring prices of the Opec crunches of 1973 and 1979 will be dwarfed by comparison.

Contemporary oil industry estimates are that there are 1,020 billion barrels of oil as of January this year in 'proved' reserves around the world. At the current produc- tion rate of 23.6 billion barrels a year, world supplies will only last another 43 years at the most optimistic of estimates. With the help of space satellites and a new age of discovery technology, most oil geol- ogists now agree that 90 per cent of the globe's oilfields have already been tapped and many are already exhausted. No new North Seas or North Slopes are there to bail us out.

But there are several things wrong with the current public consensus. Official industry-stated estimates of 'proved' oil reserves have been wildly inflated by many of the Opec partners in recent years. World consumption of oil products has already jumped by 50 per cent in Asia and by a third in Latin America. By the estimated peak production year of 2010, world demand will have risen by more than 60 per cent to as much as 40 billion barrels per year. And, most alarmingly, there is the geological truth that once a mature oilfield reaches the midpoint in its productive life cycle it becomes increasingly hard to pump out each final barrel before it goes dry.

Two remarkable things about this latest outcry over a crisis in oil supply are how recent it is and how authoritative are the alarmists. It was only last November that two top oil geologists presented papers on the impending oil depletion to a confer- ence of the International Energy Agency (IEA) of the United Nations in Paris. Colin J. Campbell, an Oxford-trained geologist, and his French counterpart, Jean H. Laher- rere, have been senior geologists for firms such as Total, Texaco and Amoco for more than 40 years. Currently they work at the industry think-tank PetroConsultants in Geneva.

The two geologists were so convincing with their analysis that the IEA dropped a generation-old policy that considered oil discoveries to be merely a function of price; the higher the price, the more oil one finds. Last March, at the Moscow sum- mit of the Group of Eight major industrial nations, the IEA presented its own paper to the national leaders, accepting the Campbell-Laherrere view that some time between 2010 and 2020 the crisis will be upon us full-blast. The Campbell- Lahererre analysis also cut the reserve of oil currently known to be in the ground to about 850 billion barrels. Since then, others have joined in the public debate. In a recent interview in Forbes, the US investment magazine, Fran- co Bernal* chief executive of the Italian oil company ENI spa, moved the dooms- day clock forward to between 2000 and 2005. He forecast that today's world price for a barrel of oil would soon begin to rise from its $15 base and quickly pass the $30 mark which so disrupted the world econo- my in the 1970s. He also forecast that both the British and Norwegian sides of the North Sea will begin to see production decline within three years; the United States passed its peak (even with Alaska) decades ago.

Other voices have joined in. There is even a website in the United States grimly named www.dieoff.org — that col- lects articles like the Campbell-Laherrere analysis. Last month the Observer reprised much of what www.dieoff.org carries, but made the same mistake as many of the analysts in concluding that industrial gov- ernments must move quickly to find alter- native sources of energy in the more politically acceptable areas of wind, hydro and solar power before the oil dries up.

The trouble is there is no such substi- tute. The paradox of the oil dilemma is that economic progress depends on the exploitation of energy, and energy from hydrocarbon sources (oil, coal, wood et al.) accounts for 80 per cent of what makes our world go. But it is oil (which accounts for 38 per cent of all energy used) which truly powers economic activity because it produces so much raw lift for activities, because it is so movable and can be used in so many ways.

Most analysts agree that our ability to replace the energy units lost from declin- ing oil reserves by chopping down trees or digging deeper coalmines ended more than a decade ago. Besides, most `alterna- It wasn't the sprint, it was carrying the medals.' tive' energy sources require more energy to get them running than they ever pro- duce; for instance, it takes 71 per cent more energy to produce a gallon of ethanol petrol from grain sources than the energy that gallon of ethanol will produce. A barrel of oil routinely offers ten or more times the raw power for our activities than the power needed to get it.

Most 'alternatives' are net losers: it costs more to get the energy than one gets in energy returned. Projects to build fast- breeder nuclear reactors or to wrench oil from shale deposits have mostly been can- celled by government funding cuts. Some sources, solar and wind in particular, if fully exploited would, on an official US estimate, provide the energy needs of only 100 million of America's current popula- tion of 260 million.

Against this background, the bigger the major oil producers become, the longer they can hold out against the gathering gloom. One can see that very soon the giant oil conglomerates of the next decade will find themselves doing battle with the likes of Al Gore and Tony Blair over what happens next. There will be an irresistible impulse to squander billions of dollars on vegetarian-style alternative energy sources, billions that will come out of the 'windfall profits' from rising prices.

But very quickly the fight will be over the dwindling petro-reserves themselves. There will be winners, to be sure. Those nations rich in oil and strong in resolve will get their energy fix. America will thrive, so too can Britain and South Africa. Other European Union members will fare according to their ability to command and pay for it (and not in euros, thank you). Much of the social safety-net that defines the industrial West will be at risk.

There will be losers too. Some are already visible on the horizon. Russia, which has lost control of its own energy subsidies, is imploding. Japan, which must ship in each barrel of economic growth it utilises, is adrift. Even nations which have oil — one thinks of Indonesia and Nigeria — must show they can control it, lest it be poured down the drain of civil strife.

Other oil-rich regions are even more dubious. The Middle East, with its easy pickings, grows increasingly unstable with each passing day. Even new fields such as the Caspian Sea area are hostage to rival bands of terrorists, whichever way its pipeline heads.

And then there are the have-nots, those poor nations strangled by a poverty that can only be alleviated by massive injections of ever more and even cheaper raw energy. Here one thinks of China, or of India and Pakistan, and the picture grows dark indeed. The struggle for national prosperi- ty fuelled by energy will not automatically go to the rich and already powerful. The nuclear wild card makes players of all nations. The survival of our industrial cul- ture is the stake.