What Lies Below?

How much oil lies beneath the Earth's crust? The only thing we know for sure is that history is littered with estimates so far off the mark--usually below the mark--that they border on the comical. In the 1920s, for instance, the Anglo-Persian Oil Co. (now BP) refused to take a stake in Saudi Arabia, thinking that the country didn't hold a single drop of oil. In 1919, the U.S. Geological Survey predicted that the United States would run out of oil in nine years. Yet by the time nine years had passed, huge discoveries, topped by the Black Giant field in Texas, had created a massive oil glut that almost destroyed the industry. In the 1970s, the consensus turned grim again: oil production would peak in the mid-1980s and then drop precipitously. A famous CIA report predicted the "rapid exhaustion" of accessible fields, while President Jimmy Carter warned that oil wells were "drying up all over the world." Instead, in 1986, oil prices collapsed in the midst of a huge supply boom, as they had done many times before.

Now doomsday forecasts are back, predicting the end of oil in this decade or the next. The verdict of the new catastrophists may appear more convincing because they use statistical and probability models that appear to penetrate the mysteries of our planet's subsoil. In fact, they do no such thing. In sum, what little is known about the world's underground resources justifies a positive view of the future.

Historically, high oil prices have always led to booming investment and a slowdown in consumption, and this is exactly what we are seeing today. Investors are pouring hundreds of billions of dollars into energy, from conventional oil to unconventional oil (tar sands, shale oil) to all its alternatives, from natural gas to biofuels and liquefied coal. In other words, high prices are not necessarily bad news for the global economy, because they are boosting innovation and efficiency while encouraging conservation. In industrial nations, estimates of growth in demand for oil are falling for 2006 and could come in flat, as even American drivers turn their backs on gas-guzzling vehicles.

Still, no one can be sure how long this era will last. Given our fundamental ignorance of what lies below, the best bet is that the oil market will remain cyclical, characterized by boom-and-bust periods, for decades. We are in a period of high prices similar to the '70s, yet there are critical differences. Today more than 90 percent of oil reserves are under the control of producing countries, many embracing a policy of resource nationalism. Aimed at sustaining prices, this nationalist tendency could choke off new development. It could also raise the already growing tension we see between producing and consuming nations, pitting the West against Russia, the United States against Venezuela and so on. Put simply, the oil problem is not beneath the surface but above it.

Yet the perception that we are running out of oil retains such a deep hold on the popular psyche, it's worth correcting. The reason we have seen so many bad guesstimates is that even the most advanced technology can't tell us how much crude the Earth holds. No method has been devised to search for new reserves with precision, or even to gauge the true size of known reservoirs. While the mainstream view is that oil resources are finite, no one knows just how finite they are. And to complicate matters further, we are witnessing a minor revival of interest in an old Russian theory that oil can be born of chemical reactions in deep inner Earth, not of fossils decaying closer to the surface. This holds the dim but intriguing prospect that oil might be a renewable resource. (See the interview with Nobel laureate Dudley Herschbach for a critique.)

Even the standard fossil theory leaves many mysteries. It traces oil's origins to organisms dying and decomposing, to be covered through many millenniums by layers of sediment and rock, and gradually filtering deeper into the Earth until they hit an impermeable rock barrier, somewhere between 2,100 and 4,500 meters down. There, pressure and high temperatures trigger chemical reactions that turn the organic sediments into oil and gas. The oil is trapped in minuscule cells of porous subsurface rocks in so-called sedimentary basins. So far, only about 30 percent of the sedimentary basins that are believed to exist have been adequately explored.

Even the most advanced technologies for mapping the subsoil--based on 3-D seismic reflection--only suggest the possibility of hydrocarbon deposits. Although seismic methods are sometimes compared to medical ultrasound scans, which can provide images of the human body's inner secrets, they do not offer the same relatively clear results. The seismic waves bounce off the inner strata of the subsoil and bring back mere traces that are processed through sophisticated computer software to produce rudimentary images that are open to interpretation. This method is still relatively new and very expensive, and may be useless if, for example, salt formations block the seismic waves. So far it has been applied to only a few sedimentary basins. In short, the depth of our knowledge of petroleum geography is even shallower than our grip on the topography of the bottom of the oceans, for which our maps are still mainly fanciful artists' renderings.

Only exploration wells can provide more precise indications of what lies beneath the Earth. But exploration through wells is much less widespread than people think, and historically has been centered in North America. By the 1930s, wildcatters were digging everywhere in oil towns like Kilgore, Texas, where derricks went up even in the churchyard. All told, about 1 million exploration wells have been drilled in the United States, as against only 2,000 in the Persian Gulf, 300 of them in Saudi Arabia.

Even today, more than 70 percent of exploration activity is concentrated in the United States and Canada, which together hold only about 3 percent of the world's oil reserves. Conversely, only 3 percent of exploration wells drilled between 1992 and 2002 were in the Middle East, which holds more than 70 percent of the world's oil. Furthermore, the analysis of core logs from exploration wells may lead experts to opposite conclusions. In the early 2000s, Shell and its partner on an exploration project in India, Cairn Energy, disagreed over whether the core logs indicated oil. Shell turned over the area to Cairn, which has since made finds of 380 million to 700 million barrels of oil.

So oil exploration is still dependent on human judgment. At the same time, oil recovery from known fields may offer some startling surprises. Given its complex nature, a reservoir will always entrap a part of its oil, even after very long and intensive drilling. This means fields that no longer produce oil, and are considered to be exhausted, still contain more or less ample supplies of hydrocarbons that simply cannot be recovered with current technology or in a cost-effective way.

Today the average recovery rate for oil is about 35 percent of the estimated "oil in place," which means that only 35 barrels out of 100 may be brought to the surface. And only a part of those 35 barrels is considered "proven reserves," which means they are immediately available for production and commercialization. The role of technology is critical. Over the decades, technology has greatly expanded the quantity of oil that can be extracted--through the injection of water and natural gas as well as horizontal drilling, hydraulic fracturing and more. All this progress has boosted the average recovery rate, which was only around 20 percent as late as 30 years ago, and less than 15 percent 60 years ago. In the future, further gains are expected from technologies that are still in their infancy.

Simply put, new exploration methods have increased existing reserves over time, even without any new discoveries. The oil literature is full of examples. A most astonishing one is the Kern River field in California, discovered in 1899. In 1942 its "remaining" reserves were estimated at 54 million barrels. Yet from 1942 to 1986 it produced 736 million barrels, and still had another 970 million "remaining." The one thing we can be certain about is that our knowledge of oil reserves is subject to constant revision, usually upward. That's why, over the decades, all attempts to evaluate our planet's oil endowment have proved too conservative, even when those estimates have included probabilistic assumptions about future discoveries and increases in recovery rates.

So what lies below? The most recent estimate of probable recoverable oil resources made by the International Energy Agency, based on previous work by the U.S. Geological Survey, suggests a figure of about 2.6 trillion barrels, about 1.1 trillion of which are considered to be proven reserves. The remainder consists of resources that have been discovered but not yet developed, and assumptions about both future increases in the rate of recoverability and the size of fields that have yet to be discovered. Today the world consumes about 30 billion barrels of oil per year, with a projected growth of less than 2 percent annually; this means that if the IEA projections are correct, there is enough oil to last for most of this century.

My guess is it will take a lot longer. The figures above do not take into account the additional estimated 1 trillion barrels of technically recoverable, so-called unconventional oil like ultraheavy oil, bituminous schist and tar sands. Yet production from these sources is increasing as high prices and new, cost-effective technologies make it commercially viable. What's more, the probabilistic assumptions made by the IEA are probably too conservative. So we may be in a new era--meaning a period of high prices that, if long-lasting, could dramatically change the energy market, and the way it powers the world. But this is a new oil age, not the end of oil as we know it. Not in this century, anyway.