Doing the math

Iraq’s sudden decision to halt oil exports Monday in protest of tighter United Nations sanctions jolted crude oil prices sharply upward. The other OPEC nations, gathering in Vienna for a meeting on production quotas, promptly announce they’ll pump more to make up the 2 million barrel daily difference, even if it means offending one of their own. By nightfall, prices settle back pretty much to where they started and a crisis has been averted. Or, as Saudi Arabia’s Saudi Arabia’s Oil Minister Ali Naimi put it, “The market is stable and everybody is happy.”

Meanwhile in the United States, everybody in the oil business certainly is happy with the National Energy Policy developed by Vice President Dick Cheney and his commission of industry experts. After years of worrying about this country not having any energy policy at all, it now had one based on the concept of drilling more wells, building more refineries and all the tax incentives and regulatory relief those things imply.

In fact, the American Petroleum Institute trumpets, with a few breaks, this strategy could result in world oil reserves lasting for many generations to come, as long as 95 years, up from the current estimate of 70. And, the institute notes, the strategy includes some talk about conservation, for those who go in for that sort of thing.

The present-day happiness observed by Mr. Naimi and the future abundance predicted by the API are based upon current levels of consumption, which is precisely where both go wrong. When it comes to oil, the only thing that remains the same about consumption is that it goes up – about 2 percent a year worldwide, 5 percent in the United States.

That’s increase upon increase, year after year. It’s the downside of the concept of compound interest and, as deftly explained in a recent New York Times op-ed by Evar D. Nering, professor emeritus of mathematics at Arizona State University, it’s the reason why the energy problem won’t be solved by drilling and building.

For the sake of using nice, round numbers, Dr. Nering lays out a hypothetical situation of there being, based upon current levels of consumption, a 100-year supply of oil. Based upon annual growth in oil consumption of 5 percent, 100 years’ of oil lasts only 36 years and many generations becomes just one. Further, since the economy almost never grows at 5 percent, this increase in consumption is not producing a good return on investment and by covering the Iraq cutback, OPEC is just encouraging waste.

But suppose all this new drilling hits some gushers and the supply suddenly explodes to 1,000 years, at current levels of consumption. At 5 percent growth it gets gobbled up in 79 years. How about a bonanza and, at current consumption, a 10,000-year supply? At 5 percent growth, it’s 125 years.

The professor’s point, obvious to anyone whose interest in numbers goes beyond oil company profits, is that it really does not matter what the estimates of reserves are; as long as demand continues to increase, a supply-side solution cannot work. That’s the exponential truth.

No matter its size when you start, double the amount of the oil supply and that increased amount gets gobbled up by 5 percent growth in consumption in just 14 years. On the other hand, halve the growth in consumption to 2.5 percent and you almost double the life of the supply. Reduce growth in consumption to zero, even begin to consume less, and those 100, 1,000 and 10,000 life expectancies actually start to mean something.

That, of course, would require investment in new energy and transportation technologies, responsible lifestyle choices, real conservation and a national energy policy based upon something besides just making everyone happy, such as reality. For those who go in for that sort of thing.