The Quest: Energy, Security, and the Remaking of the Modern World

by Daniel Yergin

  The peak oil theory embodies an “end of technology/end of opportunity” perspective, that there will be no more significant innovation in oil production, nor significant new resources that can be developed.

  The peak may be the best-known image of future supply. But there is another, more appropriate, way to visualize the course of supply: as a plateau. The world has decades of further production growth before flattening out into a plateau—perhaps sometime around midcentury—at which time a more gradual decline will begin.

  ABOVEGROUND RISKS

  To be sure, there’s hardly a shortfall of risks in the years ahead. Developing the resources to meet the requirements of a growing world is a very big and expensive challenge. The International Energy Agency estimates that new development will require as much as $8 trillion over the next quarter century. Projects will grow larger and more complex and there is no shortage of geological challenges. 2

  But many of the most decisive risks will be what are called “above ground.” The list is long, and they are economic, political, and military: What policies do governments make, what terms do they require, how do they implement their choices, and what is the quality and timeliness of decision making? Do countries provide companies with access to develop resources and do companies gain a license to operate? What is happening to costs in the oil field? What is the relationship between state-owned national oil companies and the traditional international oil companies, and between importing and exporting countries? How stable is a country, and how big are threats from civil war, corruption, and crime? What are the relations between central governments and regions and provinces? What are the threats of war and turmoil in different parts of the world? How vulnerable is the supply system to terrorism?

  All of these are significant and sober questions. How they play out—and interact—will do much to determine future levels of production. But these are not issues of physical resources, but of what happens above ground.

  Moreover, decision making on the basis of a peak oil view can create risks of its own. Ali Larijani, the speaker of Iran’s parliament, declared that Iran needs its nuclear program because “fossil fuels are coming to an end. We know the expiration date of our reserves.” Such an expectation is surprising coming from a country with the world’s second-largest conventional natural gas reserves and among the world’s largest oil reserves.3

  This peak oil theory may seem new. In fact, it has been around for a long time. This is not the first time that the world has run out of oil. It is the fifth. And this time too, as with the previous episode, the peak presumes limited technological innovation and that economics does not really matter.

  RUNNING OUT AGAIN—AND AGAIN

  The modern oil industry was born in 1859 when “Colonel” Edwin Drake hit oil near the small timber town of Titusville in northwest Pennsylvania. It grew up in the hills and ravines surrounding Titusville in what has become known as the Oil Region. Other production centers also emerged in the late nineteenth century—in the Russian Empire, around Baku, on the Caspian Sea and in the Caucasus; in the Dutch East Indies; and in Galicia, in the Austro-Hungarian Empire. But Pennsylvania was the Saudi Arabia of the day—and then some—supplying Europe and Asia, as well as North America. The primary market for oil its first 40 years was illumination, to provide lighting, replacing whale oil and other fluids used in oil lamps. Petroleum quickly became a global business. John D. Rockefeller became the richest man in the world not because of transportation but because of illumination.

  Yet oil flowing up from the earth’s interior was mysterious. Wells might send oil shooting up into the sky and then run dry for reasons no one knew. People began to fear that the oil would run out. The State Geologist of Pennsylvania warned in 1885 that “the amazing exhibition of oil” was only a “temporary and vanishing phenomenon—one which young men will live to see come to its natural end.” That same year, John Archbold, Rockefeller’s partner in Standard Oil, was told that the decline in American production was almost inevitable. Alarmed, he sold some of his Standard Oil shares at a discount. Later, hearing that there might be oil in Oklahoma, he replied, “Why, I’ll drink every gallon produced west of the Mississippi.” Yet not long after, new fields were discovered—in Ohio, Kansas, and then the huge fields of Oklahoma and Texas.4

  Those new supplies appeared just in time, for an entirely new source of demand—the automobile—was rapidly replacing the traditional illumination market, which in any event was being crushed by electricity. The arrival of the motor car turned oil from an illuminant into the fuel of mobility.

  In 1914 the European nations went to war thinking it would be a short conflict. But World War I turned into the long, arduous, and bloody battle of trench warfare. It also became a mechanized war. The new innovations from the late nineteenth and early twentieth centuries—cars, trucks, and planes—were, more rapidly than anyone had anticipated, pressed into large-scale military service. One of the most important innovations first appeared on the battlefield in 1916. It was initially code-named the “cistern” but was soon better known as the “tank.” As oil went to Europe to support the mobility of Allied forces, a gasoline famine gripped the United States. In fact, 1918 saw the highest gasoline prices, in inflation-adjusted terms, ever recorded in the United States. In order to help relieve the shortage, a national appeal went out for “Gasolineless Sundays,” on which people would abstain from driving. In response, President Wilson ruefully announced, “I suppose I must walk to church.”

  By the time the war ended, no one could doubt oil’s strategic importance. Lord Curzon, soon to become Britain’s foreign secretary, summed it up: “The Allied cause had floated to victory upon a wave of oil.” But for the second time, the fear took hold that the world was running out of oil—partly driven by the surging demand growth from the internal combustion engine. Between 1914 and 1920, the number of registered motor vehicles in the United States grew fivefold. “Within the next two to five years,” declared the director of the United States Bureau of Mines, “the oil fields of this country will reach their maximum production, and from that time on we will face an ever-increasing decline.” President Wilson lamented, “There seemed to be no method by which we could assure ourselves of the necessary supply at home and abroad.”5

  Securing new supplies became a strategic objective. That is one of the major reasons that, after World War I, the three easternmost oil-prospective provinces of the now-defunct Ottoman Turkish Empire—one Kurdish, one Sunni Arab, and one Shia Arab—were cobbled together to create the new state of Iraq.

  The permanent shortage did not last very long. New areas opened up and new technologies emerged, the most noteworthy being seismic technology. Dynamite explosions set off sonic waves, enabling explorers to identify prospective underground formations and map geological features that might have trapped oil and gas. Major new discoveries were made in the United States and other countries. By the end of the 1920s, instead of permanent shortage, the market was beginning to swim in oil. The discovery of the East Texas oil field in 1931 turned the surplus into an enormous glut: oil plunged temporarily to as little as ten cents a barrel; during the Great Depression some gasoline stations gave away whole chickens as premiums to lure in customers.

  The outbreak of World War II turned that glut into an enormous and immensely valuable strategic reserve. Out of seven billion barrels used by the Allies, six billion came from the United States. Oil proved to be of key importance in so many different aspects of the struggle. Japan’s fear of lack of access to oil—which, in the words of the chief of its Naval General Staff, would turn its battleships into “nothing more than scarecrows”—was one of the critical factors in Japan’s decision to go to war. Hitler made his fateful decision to invade the Soviet Union not only because he hated the Slavs and the communists, but also so that he could get his hands on the oil resources of the Caucasus. The German U-boat campaign twice came close to cutting the oil line from North America to Europe. The Allies, in tur
n, were determined to disrupt the oil supplies of both Germany and Japan. Inadequate supplies of fuel put the brakes on both General Erwin Rommel’s campaign in North Africa (“Shortage of petrol,” he wrote his wife; “It’s enough to make one weep”) and General George Patton’s sweep across France after the D Day landing.6

  World War II ended, like World War I, with a profound recognition of the strategic significance of oil—and, for the third time, widespread fear about running out of oil. Those fears were heightened by the fact that, immediately after the war, the United States crossed a great strategic divide. No longer self-sufficient in petroleum, it became a net importer. But for a number of years, quotas limited imports to about 10 percent of total consumption.

  Once again, the specter of global shortage receded, as the opening up of the vast fields of the Middle East and the development of new technologies led to oversupply and falling prices. This downward trend culminated in cuts in the world oil price in 1959 and 1960 by the major oil companies that brought five oil-exporting countries together in Baghdad in 1960 to found the Organization of Petroleum Exporting Countries—OPEC—in order to defend their revenues. Oil remained cheap, convenient, and abundant, and it became the fuel for the postwar economic miracles in France, Germany, Italy, and Japan.

  But by the beginning of the 1970s, surging in petroleum consumption, driven by a booming world economy, was running up against the limits of available production capacity. At the same time, nationalism was rising among exporting countries, and tensions were mounting in the Middle East. The specter of resource shortage was in the air, prominently promoted by the Club of Rome study The Limits of Growth on “the predicament of mankind.” To wide acclaim, it warned that current trends would mean not only rapid resource depletion but also portended the unsustainability of industrial civilization.7

  In October 1973 Arab countries launched their surprise attack on Israel, initiating the October War. In response to U.S. resupply of armaments to a beleaguered Israel, Arab exporters embargoed oil shipments. The oil market went into a hyperpanic, and within months petroleum prices quadrupled. They doubled again between 1978 and 1981 when the Iranian Revolution toppled the pro-Western shah and disrupted oil flows. All this seemed to be proof of the Club of Rome thesis of looming shortages. One most prominent scientist, a former chairman of the Atomic Energy Commission, warned: “We are living in the twilight of the petroleum age.” The CEO of a major oil company put it differently. The world, he said, had reached the tip of “the oil mountain,” the high point of supply, and was about to fall down the other side. This was the fourth time the world was said to be running out of oil.8

  The fear of permanent shortage ignited a frantic search for new supplies and the double-time development of new resources. Major new provinces were discovered and brought on stream from Alaska’s North Slope and from the North Sea. At the same time, government policies in the industrial countries promoted greater fuel efficiency in automobiles and encouraged electric utilities to switch away from oil to increased use of coal and nuclear power.

  The impact was enormous—and surprisingly swift. Within half a decade, what was supposed to be the permanent shortage turned into a huge glut. In 1986 the price of oil collapsed. Instead of the predicted $100 a barrel, it fell as low as $10 a barrel. Prices recovered in the late 1980s, spiked with the Gulf crisis in 1990, and then seemed to stabilize again. But, in the late 1990s, the Asian financial crisis precipitated yet another price collapse.

  THE FIFTH TIME

  By the beginning of the twenty-first century, oil prices were once again rebounding. It was around that time that fear about running out of oil began to gain prominence again, for the fifth time. But it was no longer “the oil mountain.” It was now something loftier—“the peak.” Accelerated growth of oil consumption in China and other emerging economies—and the sheer scale of prospective demand—understandably reinforced the anxiety about the adequacy of future supplies. Peak oil also became entwined with the rising concerns about climate change, and the specter of impending shortage provided further impetus to move away from carbon-based fuels.

  The peak theory, in its present formulation, is pretty straightforward. It argues that world oil output is currently at or near the highest level it will ever reach, that about half the world’s resources have been produced, and that the point of imminent decline is nearing. “It’s quite a simple theory and one that any beer drinker understands,” one of the leaders of the current movement put it. “The glass starts full and ends empty and the faster you drink it the quicker it’s gone.” (Of course, that assumes one knows how big the glass is.) The theory owes its inspiration and structure, and indeed its articulation, to a geologist who, though long since passed from the scene, continues to shape the debate, M. King Hubbert. Indeed, his name is inextricably linked to that perspective—immortalized in “Hubbert’s Peak.”9

  M. KING HUBBERT

  Marion King Hubbert was one of the eminent earth scientists of his time and one of the most controversial. Born in Texas, he did all his university education, including his Ph.D., at the University of Chicago, where he folded physics and mathematics into geology. In the 1930s, while teaching at Columbia University in New York City, he became active in a movement called Technocracy. Holding politicians and economists responsible for the debacle of the Great Depression, Technocracy promoted the idea that democracy was a sham and that scientists and engineers should take over the reins of government and impose rationality on the economy. The head of Technocracy was called the Great Engineer. Members wore uniforms and saluted when the Great Engineer walked into the room. Hubbert served as its educational director for 15 years and wrote the manual by which it operated. “I had a box seat at the Depression,” he later said. “We had manpower and raw materials. Yet we shut the country down.” Technocracy envisioned a no-growth society and the elimination of the price system, to be replaced by the wise administration of the Technocrats. Hubbert wanted to promote a social structure that was based on “physical relations, thermodynamics” rather than a monetary system. He believed that a “pecuniary” system, misinformed by the “hieroglyphics” of economists, was the road to ruin.

  Although cantankerous and combative, Hubbert was, as a teacher, demanding and compelling. “I found him to be arrogant, egotistical, dogmatic, and intolerant of work he perceived to be incorrect,” recalled one admiring former student. “But above all, I judged him to be a great scientist dedicated to solving problems based on simple physical and mathematical principles. He told me that he had a limited lifetime in which to train and pass on what he knew, and that he couldn’t waste his time with people that couldn’t comprehend.”

  Hubbert did not have an easy relationship with his Columbia colleagues. When Columbia failed to give him tenure, he packed up and went to work as a geologist for Shell Oil.10

  Collegiality was not one of his virtues. Coworkers found him abrasive, overly confident in his own opinions, dismissive of those who disagreed with him, and ill disguised in his contempt of those with different points of view.

  “A gifted scientist, but with deep-seated insecurities,” in the words of one scholar, Hubbert was so overbearing that it was almost painful for others to work with him. At Shell, the young geologists assigned to him never managed to last more than a year. Finally, the first female geologist to graduate from Rice University, Martha Lou Broussard, was sent to him. “Overpopulation” was one of Hubbert’s favorite themes. During her job interview, he asked Broussard if she intended to have children. Then, in order to convince her not to, he told her to go to the blackboard to calculate at exactly what point the world would reach one person per square meter.

  From Shell he moved to the U.S. Geological Survey, where he was in a permanent battle with some of his colleagues. “He was the most difficult person I ever worked with,” said Peter Rose, his boss at the USGS.

  Yet Hubbert also became recognized as one of the leading figures in the field and made a variety of
major contributions, including a seminal paper in 1957, “The Mechanics of Hydraulic Fracturing.” One of his fundamental objectives was to move geology from what he called its “natural-history phase” to “physical science phase,” firmly based in physics, chemistry, and in particular, in rigorous mathematics. “King Hubbert, mathematician that he is,” said the chief geophysicist of one of the oil companies, “based his look ahead on facts, logically and analytically analyzed.” Four decades after turning him down for tenure, Columbia implicitly apologized by awarding him the Vetlesen Prize, one of the highest honors in American geology.11

  AT THE PEAK

  In the late 1940s, Hubbert’s interest was piqued when he heard another geologist say that 500 years of oil supply remained in the ground. This couldn’t possibly be true, he thought. He started doing his own analysis. In 1956 at a meeting in San Antonio, he unveiled the theory that would forever be linked to his name. He declared that U.S. oil production was likely to hit its peak somewhere between 1965 and 1970. This was what became Hubbert’s Peak.

  His prediction was greeted with much controversy. “I wasn’t sure they weren’t going to hang me from the nearest light post,” he said years later. But when U.S. production did hit its peak in 1970, followed by the shock of the 1973 embargo, Hubbert appeared more than vindicated. He was a prophet. He became famous.12

  The peaking of U.S. output pointed to a major geopolitical rearrangement. The United States could no longer largely go it alone. All through the 1960s, even with imports, domestic production had supplied 90 percent of demand. No longer. To meet its own growing needs, the United States went from being a minor importer to a major importer, deeply enmeshed in the world oil market. The rapid growth of U.S. oil imports, in turn, was one of the key factors that led to the very tight oil market that set the stage for the 1973 crisis.