The subject of oil depletion keeps cropping up. Yesterday an article in the New York Times confirmed what I had heard from colleagues in the upstream oil business a few years ago: production from the largest Saudi oilfields is declining, perhaps irreversibly.
We should not overreact. Saudi Arabia is not running out of oil, nor is the world, notwithstanding the arguments of the disciples of King Hubbert. But there is a very serious issue here, with implications for the economies of all oil-importing countries. For decades we have relied on Saudi Arabia as the "swing producer" within OPEC, able to make up for shortfalls elsewhere, such as when most of Venezuela's production was shut in at the end of 2002. The future of that role is now in doubt.
No one questions the Saudis' enormous reserves. They still rank #1, with 260 billion barrels of proved reserves, roughly a quarter of the world's total. Nor do they lack the necessary technical expertise to find and develop the new oil reservoirs needed to make up for the depletion of their venerable supergiant fields. But they do have the same problem as many smaller producing countries: the social demands of their growing population are competing away the internal funds necessary to revitalize their oil industry. In this light, the Kingdom's persistence in keeping out all foreign investment in the oil sector is a luxury that neither they nor we can afford.
The message the US and other G7 countries need to send the Saudis, consistently and with emphasis is, "Our oil companies have the capital you need, and together we have the expertise. Open up your oil sector, or we will do whatever we must to wean ourselves off the need for your oil. If you maintain your current posture, your oil reserves will end up locked under the sand, worthless to you or your descendants."
Without access to Saudi and Iraqi reserves, which can be developed quickly and relatively cheaply, the international oil majors will spend their investment dollars on increasingly remote and technically more challenging opportunities elsewhere, drilling in ever deeper water and finding ways to make smaller and smaller fields economical.
The same dollars that would unlock millions of barrels per day of Saudi oil will yield half or a quarter as much oil elsewhere and with longer lead times, creating the possibility that the majors will not be able both to meet growing demand and compensate for the decline of mature fields. That would lead to the kind of supply/demand collision I've referred to before, and to much higher oil prices as far as the eye can see.
In any case, this news heralds the importance of developing and deploying meaningful alternatives to oil. This must include renewable forms, such as wind and solar and the hydrogen-based technologies that would allow them to displace petroleum products, as well as fossil-based alternatives, such as gas-to-liquids and coal gasification. These actions can't replace Saudi oil anytime soon, but they would speak louder than all the diplomats we can send to Riyadh.
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