Are We Running Out of Oil?

For many years, a number of industry experts have been sounding the alarm that America, and the world, are about to run out of oil.

This is nothing new. In 1914, the Bureau of Mines said that U.S. oil reserves would be exhausted by 1924. The Interior Department said global reserves would last 13 years... and that was in 1939. In 1956, Shell Oil geoscientist Marion King Hubbert advanced his peak oil theory, which said that world oil production had peaked and would begin to decline until all of the oil was gone.

Every expert who's predicted "the end of oil" has been wrong in the past. But with global energy consumption at an all-time high, and much of the world's economy dependent on oil, the question needs to be asked:

Are we running out of oil?...

The Peak Oil Theory

Hubbert (shown at left), whose distinguished career also included stints as a senior research geophysicist for the United States Geological Survey and professorships at Stanford University and UC Berkeley, believed that oil production looked like a bell curve.

Just as the production from an individual oil well will peak and then decline, so, he theorized, would global oil production. He called his bell curve "peak oil" - global oil production had peaked in the 1950s, he stated, and would begin a slow, but inevitable, decline to zero.

Most readers of Oil & Energy Investor know that I don't subscribe to the peak oil position. Hubbert argued that we were running out of crude oil and would be moving to bicycles in short order.

Let me explain why I disagree.

Now don't get me wrong, oil is a diminishing commodity. It has taken millions of years to provide what we are taking out of the ground. Aside from the occasional algae or biofuel farm, you can't just grow an oil alternative in a matter of weeks.

Even if we could, current technology can't provide more than a fraction of what would be needed if oil disappeared.

Yet that "disappearance" isn't going to take place anytime even remotely soon.

Granted, 10 years ago I might have been more sympathetic to the Chicken Little ("The sky is falling") approach when it came to the amount of crude oil remaining. In those days, I did say (and wrote) that we had about enough oil to possibly last one more generation.

But what I saw as the real issue back then was not the amount of oil remaining, but the reliability of the supply. I foresaw unpredictable disruptions, spot shortages, and a lot of uncertainty in the market.

One factor changed all of that.

Technology Changes Everything

The new "800-pound gorilla in the room" has been the arrival of formerly unconventional oil supplies, such as tight and shale oil. We're now able to extract huge amounts of oil from shale formations, a technology the late Hubbert never saw coming.

That oil is seemingly almost everywhere. According to the U.S. Energy Information Administration (EIA), 86% of those "new oil" reserves are located someplace in the world other than North America.

That translates into a broader availability of oil than we could have possibly foreseen a decade ago.

The problem now, as I see it, is not an outright decline in supply. Today, the stumbling block is the ability to meet the current spurt in demand.

Once again, I'm not saying that demand will be outstripping supply. I'm not saying there's an imminent worldwide conflict over remaining resources.

Look, there's plenty of oil to go around. It's just that from now until the first quarter of 2015 (or thereabouts), the global market will have trouble maintaining a balance between the available oil and specific regional needs.

This is what I call a supply constriction.

In other words, there's enough oil, but it isn't always going to be where it's needed in a timely fashion.

The ability to move new oil from where it's produced now (North America, primarily) to where the demand is growing quickest (developing areas, especially Asia) will be difficult in the short term.

The United States, for example, recently started lifting the ban on crude oil exports, but ramping up exports will take some time. Canada, on the other hand, is eager to export more oil, especially to Asia, but it needs new major pipeline spurs to the Pacific coast before that can happen.

Meanwhile, global demand is accelerating much quicker than anticipated, racing past just about everybody's earlier estimates (including mine). In a somewhat rare show of consensus, OPEC, the International Energy Agency (IEA) in Paris, and the EIA are all projecting daily crude demand internationally at more than 91 million barrels a day by the end of this year.

That's the highest total on record, and 4.5% more than the end of last year.

However, I believe that figure is a temporary spike, and not a "new normal." That's because the spike will translate into some hefty price increases in certain regions of the world, a quick way to put the brakes on continuing increases in consumption.

Unfortunately, unlike past periods, such a play between supply and demand will not end in a nice, neat Economics 101 fashion. I predict that price swings will be more rapid. The result will be greater overall instability in supply availability and pricing among regions.

You and I, at least, can usually drive past a number of gas stations looking for the best price. Countries and regions, especially those desperate for oil, don't have that same flexibility. In many parts of the world, oil transportation - such as pipelines, seaports, and railways - constrains oil sources and supplies.

You see, it used to be that the old adage of price encouraging or discouraging additional production would be sufficient to provide market equilibrium. At one time, the market price level was equivalent to the actual relationship between how much oil was available and who was prepared to buy it at what price.

No more. With the advent of "paper" barrels (futures contracts) now outnumbering "wet" barrels (actual oozing oil for sale) by 10 or 20 times, market traders' expectations now determine the price. When those expectations meet regions that are being challenged to quickly find additional supply to meet growing demand, market volatility just increases.

What Really Affects Crude Oil Prices

In other words, speculators, not supply and demand, are driving crude oil prices (and ultimately the price you pay at the pump).

Having said that, it's important to understand that temporary supply constrictions can remain localized and still have a broader impact. They also only have to occur intermittently to create problems.

The market hates uncertainty.

This is the situation that's developing around the world. If you only look at annual, quarterly, or even monthly figures of supply and demand, global energy supplies and consumption may appear to be in sync. But in reality, the market is experiencing a considerable amount of instability.

Determining the genuine impact of oil constriction on investments is difficult. In fact, it poses the same difficulties as volatility indices do when looking at the stock or bond market in general.

For example, many investors just glance at the VIX, which is the index used to measure market volatility. If the VIX number is low, most investors would conclude that market volatility is under control.

But this simplistic measurement is inaccurate, sometimes wildly so, if volatility is occurring rapidly. You see, the VIX is based on a 30-day cycle. Wide, rapid fluctuations won't be "weighted" as they should, making the market, or in this case the oil supply and demand equation, look much more stable than it is.

Think of this as throwing pebbles into a calm pond. Throw one pebble at a time and it's easy to measure the resulting ripple and judge its impact. But throw a handful of pebbles into a pond at different intervals and assessing the actual size and vectors of the resulting ripples gets tricky.

Right now, supply constriction is the issue moving the oil market, not oil shortages. And that makes estimating the actual situation more difficult.

The world isn't running out of oil. But at any given moment some country or region is almost certainly facing spot shortages or price spikes.

But you don't have to swap your car or truck for a bicycle just yet.

More from Dr. Kent Moors: After more than four decades, America is getting back into the oil export business again. And the end of the U.S. oil export ban is going to be a windfall for these companies...