THE OIL PRICE BUBBLE

June 14, 2006

The surge in oil prices over the last two years is not a sign the world is beginning to run out of oil. On the contrary, it is a positive indicator of increased economic activity. High prices will encourage development of more of the world's enormous petroleum reserves, says David Deming, a geologist and adjunct scholar with the National Center for Policy Analysis.

In 2000, the U.S. Geological Survey estimated the amount of conventional oil that would ultimately be withdrawn from the Earth's crust was 3 trillion barrels. One-third of this has already been produced. Another third consists of petroleum reserves that have been identified and can be extracted using current technology. The last trillion barrels remains to be discovered.

One way to determine if the world is beginning to run out of oil is to look at the ratio of petroleum reserves to annual production, says Deming:

  • In the 1960s, the average ratio of annual production to world petroleum reserves was 1 to 35 [that is, one-thirty-fifth of currently estimated reserves were extracted each year].
  • During the energy crises of the 1970s, the ratio decreased to 1:32. In the 1980s, it increased to 1:37.
  • During the 1990s, the ratio of annual production to reserves rose to 1:45.
  • In 2005, the ratio of annual production to oil reserves was 1:49, nearly a record high.

Not only do we have a trillion barrels of conventional oil in reserve, says Deming, there are huge unconventional oil resources awaiting development. The International Energy Administration recently estimated that, at a current price of $60 a barrel, it will be economic to recover at least another 2 trillion barrels of petroleum from tar sands and oil shales.

Source: David Deming, "The oil price bubble," Washington Times, June 14, 2006.

 

Browse more articles on Environment Issues