When Daniel Lacalle, in his early 20s, took a job with Spanish oil company Repsol YPF SA in 1991, friends chided him for entering a field with no future. "They all said, 'Why do you want to do that? Don't you know only 20 years of oil is left in the whole world?'" he recalls.
Two decades and four energy crises later, the U.S. Geological Survey estimates that more than 2 trillion barrels of untouched crude is still locked in the ground, enough to last more than 70 years at current rates of consumption. Technological advances enable companies to image, drill and shatter subterranean rocks with precision never dreamed of in decades past. Trillions of barrels of petroleum previously thought unreachable or nonexistent have been identified, mapped and in many cases bought and sold during the past half decade, from the boggy wastes of northern Alberta, to the arid mountain valleys of Patagonia, to Africa's Rift Valley.
"Betting against human ingenuity has been a mistake," says Lacalle, who today helps oversee $1.3 billion as a portfolio manager at Ecofin Ltd. in London. "The resource base is absolutely enormous, so much so that we will not run out of oil in my lifetime, your lifetime, our children's lifetimes or our grandchildren's lifetimes."
Worries about energy supplies have abated, several years after the 9/11 attacks and Iraq war made them central to daily chatter about the U.S. economy and homeland security. In that environment, the late Texas investment banker Matt Simmons was able to jolt traders, policy makers and media with a prediction that global oil production was on the cusp of a death spiral. Goldman Sachs warned that crude price were headed for a $200-a-barrel "superspike." Concerns about Peak Oil dominated environmental conferences, academic debates about natural resources, and energy-policy discussions for much of the 2000s. They still persist despite dramatic transformation within the industry.
What changed? Engineers at Brazil's state-controlled oil company, Petrobras, figured out how to bore holes in mountains of salt beneath the ocean floor that concealed vast reservoirs of crude. In the Gulf of Mexico, prospectors such as Chevron and Shell were doing similar things hundreds of miles offshore, farther out and in deeper water than anyone envisioned just a few years earlier. Ultra-deepwater drilling vessels that cost $750 million and can remain at sea for months at a time enabled explorers to burrow 5 miles into the Earth's crust to strike their pay zones.
Small-time explorers such as Kosmos Energy Ltd. reckoned that since the South American and African landmasses had once been conjoined, Africa's Atlantic coast probably held oil deposits similar to those off Brazil. About that same time, a Texas oil man named George Mitchell was perfecting a 40-year-old technique known as hydraulic fracturing that would trigger a renaissance in U.S. oil and natural-gas production.
The Peak Oil hypothesis got its start in 1956 when M. King Hubbert, then a Shell Oil geologist, suggested that all oil fields were subject to peaks followed by inevitable, irreversible and predictable declines. U.S. oil production did peak in 1970. Hubbert’s prediction turned out to be correct, though not entirely for the right reasons, and he gained widespread renown, particularly among environmentalists, whom he gave a data point about nature’s limits just when they were looking for one.
Hubbert’s ideas gained currency as oil prices tripled from 2000 to 2007 and producers struggled to keep pace with rising demand in China and India. The geologist’s work leapt from history to current events through media and books, including "Hubbert’s Peak" in 2002 by Kenneth Deffeyes, a Princeton University geologist who worked with Hubbert. The word “peak” became commonly applied to many strategic natural resources in media and on the Internet, often without rigorous consideration of whether it was technically applicable.
Another of Hubbert's most ardent apostles, the banker Simmons, expanded on the theme in his 2005 book, "Twilight in the Desert: The Coming Saudi Oil Shock & the World Economy." The crux of Simmons's particular variant of the Peak Oil argument was that Saudi Arabia, the world's biggest exporter of crude and home to the largest pool of reserves, was less than transparent about its capacity to grow or even sustain production. It was only a matter of a few short years, Simmons argued, before the Saudi juggernaut would falter, tipping the world oil market into an apocalyptic frenzy of panic buying, shriveling supplies and skyrocketing prices.
Simmons's ideas really began to resonate in 2007 as crude prices marched steadily higher, touching a record $147.27 a barrel in July 2008, and investors, analysts, policy makers and consumers struggled to understand why, says David Arseneau, senior economist with the Federal Reserve Board of Governors in Washington. "We were experiencing price spikes, and people had a hard time dealing with it," Arseneau says. "That's where the Peak Oil scare came from -- it was trotted out as an explanation."
Simmons' fellow-travelers included Colin Campbell, founder of the Association for the Study of Peak Oil & Gas, and Jeffrey Rubin, who during his tenure as chief economist at CIBC World Markets Inc. had been warning clients of an imminent peak in world crude output since October 2000. In February 2007, the U.S. Government Accountability Office, the research arm of Congress, issued an 82-page report urging the Energy Secretary to "prioritize federal agency efforts to reduce uncertainty about the likely timing of a peak and to advise Congress on how best to mitigate consequences." The International Energy Agency, the Paris-based adviser to 28 oil-importing nations, warned in November 2008 of an "oil-supply crunch" by 2015.
Critics Weigh In
The theory was castigated as "misleading" and based on incomplete data in a November 2006 study by Cambridge Energy Research Associates, a consulting firm founded by Daniel Yergin, author of "The Prize," the Pulitzer Prize-winning history of the oil industry. The study forecast a 50 percent increase in global crude output by 2030, to 130 million barrels a day. Six years later, production has risen nearly 5 percent, just shy of 90 million barrels a day, according to IEA figures. CERA now is a unit of IHS Inc.
Oil prices dipped last week, but diplomatic tensions over Iran’s nuclear program have pushed them 7 percent higher than a year ago. Even with crude down 50 percent from the record high set in the summer of 2008, producers have plenty of financial incentive to continue searching for reserves in such places as the Bakken shale beneath North Dakota and the deepwater Gulf of Mexico. Harvesting such fields costs $50 to $60 per barrel, says Guy Caruso, the former head of the Energy Department's statistical arm and now a senior associate at the Center for Strategic International Studies.
As Peak Oil debates recede, petroleum will remain an object of both passion and logical debate for reasons that have less to do with production histories and reserve estimates than with geopolitics and geophysics: How does the U.S. rely less on unfriendly oil-producing nations? How much oil can we save as more cars run on both gas and electricity? How can we reconcile fossil fuel combustion with the risks of climate change?