Published by Council on Foreign Relations Jan/Feb 1999
Oil is a magnet for conflict. Everyone needs energy, but the sources of the world’s transportation fuel are concentrated in relatively few countries. Well over two-thirds of the world’s remaining oil reserves lie in the Middle East (including the Caspian basin), leaving the rest of the world dependent on the region’s collection of predators and vulnerable autocrats. This unwelcome dependence keeps U.S. military forces tied to the Persian Gulf, forces foreign policy compromises, and sinks many developing nations into staggering debt as they struggle to pay for expensive dollar-denominated oil with lower priced commodities and agricultural products. In addition, oil causes environmental conflict. The possibility that greenhouse gases will lead to catastrophic climate change is substantially increased by the 40 million barrels of oil burned every day by vehicles.
Ethanol has always provided an alternative to gasoline. In terms of environmental impact and fuel efficiency, its advantages over gasoline substantially outweigh its few disadvantages. But until now it has only been practical to produce ethanol from a tiny portion of plant life-the edible parts of corn or other feed grains. Corn prices have fluctuated around $100 a ton in the last few years, ranging from half to double that amount. Ethanol has thus been too expensive to represent anything but a small, subsidized niche of the transportation fuel market. In spite of recent reductions in the expense of ethanol processing, the final product still costs roughly $1.50 a gallon, or about double today’s wholesale price of gasoline.
Recent and prospective breakthroughs in genetic engineering and processing, however, are radically changing the viability of ethanol as a transportation fuel. New biocatalysts-genetically engineered enzymes, yeasts, and bacteria-are making it possible to use virtually any plant or plant product (known as cellulosic biomass) to produce ethanol. This may decisively reduce cost-to the point where petroleum products would face vigorous competition.
The best analogy to this potential cost reduction is the cracking of the petroleum molecule in the early twentieth century. This let an increasingly large share of petroleum be used in producing high-performance gasoline, thus reducing waste and lowering cost enough that gasoline could fuel this century’s automotive revolution. Genetically engineered biocatalysts and new processing techniques can similarly make it possible to utilize most plant matter, rather than a tiny fraction thereof, as fuel. Cellulosic biomass is extremely plentiful. As it comes to be used to produce competitively priced ethanol, it will democratize the world’s fuel market. If the hundreds of billions of dollars that now flow into a few coffers in a few nations were to flow instead to the millions of people who till the world’s fields, most countries would see substantial national security, economic, and environmental benefits.
Energy is vital to a country’s security and material well-being. A state unable to provide its people with adequate energy supplies or desiring added leverage over other people often resorts to force. Consider Saddam Hussein’s 1990 invasion of Kuwait, driven by his desire to control more of the world’s oil reserves, and the international response to this threat. The underlying goal of the U.N. force, which included 500,000 American troops, was to ensure continued and unfettered access to petroleum.
Oil permeates every aspect of our lives, so even minor price increases have devastating impacts. The most difficult challenge for planners, policymakers, and alternative-energy advocates is the transportation sector, which accounts for over 6o percent of U.S. oil demand. The massive infrastructure developed to support gasoline-powered cars is particularly resistant to modifications. It precludes rapid change to alternative transportation systems and makes America highly vulnerable to a break in oil supplies. During a war or embargo, moving quickly to mass transit or to fuel-cell or battery-powered automobiles would be impossible.
For most countries, excluding only those few that will be the next century’s oil suppliers, the future portends growing indebtedness, driven by increasingly expensive oil imports. New demand for oil will be filled largely by the Middle East, meaning a transfer of more than $1 trillion over the next 15 years to the unstable states of the Persian Gulf alone-on top of the $9o billion they received in 1996.
Dependence on the Middle East entails the risk of a repeat of the international crises of 1973, 1979, and 1998-or worse. This growing reliance on Middle Eastern oil not only adds to that region’s disproportionate leverage but also provides the resources with which rogue nations support international terrorism and develop weapons of mass destruction and the ballistic missiles to carry them. Iraqi vx nerve gas and Iranian medium-range missiles show how such regimes can convert oil revenues into extensive and sophisticated armament programs.
Optimists about world oil reserves, such as the Department of Energy, are getting increasingly lonely. The International Energy Agency now says that world production outside the Middle Eastern Organization of Petroleum Exporting Countries (OPEC) will peak in 1999 and world production overall will peak between 2010 and 2020. Influential recent articles in Science and Scientific American support this projection. Some knowledgeable academic and industry voices put the date that world production will peak even sooner-within the next five or six years.
The optimists who project large reserve quantities of over one trillion barrels tend to base their numbers on one of three things: inclusion of heavy oil and tar sands, the exploitation of which will entail huge economic and environmental costs; puffery by OPEC nations lobbying for higher production quotas within the cartel; or assumptions about new drilling technologies that may accelerate production but are unlikely to expand reserves.
Once production peaks, even though exhaustion of world reserves will still be many years away, prices will begin to rise sharply. This trend will be exacerbated by increased demand in the developing world. As Daniel Yergin, Dennis Eklof, and Jefferson Edwards pointed out in these pages (“Fueling Asia’s Recovery,” March/April 8), even assuming a substantial recession, increased Asian needs alone will add enough demand by 2010 (9 million barrels per day) to more than equal Saudi Arabia’s current daily production.
The nations of the Middle East will be ready to exploit the trend of rising demand and shrinking supply. The Gulf states control nearly two-thirds of the world’s reserves; the states bordering the Caspian Sea have another several percent. Barring some unforeseen discoveries, the Middle East will control something approaching three-quarters of the world’s oil during the 21st century.
U.S. Geological Survey (It's a big pdf file that takes a while to download, but it's worth your while because it illustrates clearly why oil shortages may begin soon.)