Oil is essential to the United States and world economies because it is the primary source of energy for transportation via auto, truck, and airplanes. In Maine it is also widely used for home heating. Thus any limitations in supply and-or major increases in price could have major effects on Maine and U.S. citizens.

When the price of oil reached high levels two years ago, many thought that it would soon decline as new oil wells began production. However, world oil supply has not increased very much, and prices have remained high. The question now facing the world is whether oil production is approaching a peak, where oil production from new wells is no longer sufficient to replace declining production from older wells. If we are approaching a peak, this could have a severe impact on the world and Maine economies.

The International Energy Agency advises its 26 member nations, who are mostly oil importers, on energy policy. In the past the IEA has been relatively optimistic in its prediction of future world oil supplies. However a recent five-year forecast by the IEA predicts an increasingly tight oil market, with decreasing OPEC spare capacity. This could mean much higher prices and major shortages of oil in the event of hurricanes, wars, etc.

Fatih Birol, the chief economist of the IEA, stated in a June interview that oil production by non-OPEC producers will peak in the next five or 10 years. Thus any major increases in world oil supply will need to come from OPEC. According to the IEA forecast, half of the increase in OPEC production over the next five years will be from Saudi Arabia.

However some believe Saudi Arabia may be having difficulties in maintaining even its current levels of production. Matthew Simmons, an oil investment banker and a member of the National Petroleum Council, concludes that it is unlikely that there will be any large new oil fields discovered in Saudi Arabia, and that production is only being maintained “by using advanced drilling and completion technologies in the mature giant fields.” Details are given in his 2005 book, “Twilight in the Desert – The Coming Oil Shock and the World Economy.”

After producing at a constant rate of 9.5 million barrels of oil per day from June 2004 until February 2006, Saudi production has decreased, with a rate of only 8.6 million barrels per day in June 2007. Matt Simmons suggests that in fact the 9.5 million barrels per day may represent the peak of Saudi oil production. The Saudis maintain that they have reduced production voluntarily, because of a surplus of oil on the market. However, during the past two years drilling activity has increased sharply in Saudi Arabia. Only time will tell whether this drilling results in increased capacity (12.6 billion barrels per day in the five-year IEA forecast), or represents a struggle to maintain current Saudi output. If the latter is true, world oil supply will be even tighter than is predicted by the IEA.

The trend in the rate of Saudi oil production over the coming months and years will be critical in determining world oil supply and price. If the Saudis do not markedly increase production there may not be sufficient oil to supply the demand, and oil may become much more expensive. To prevent a possible crisis we should pay attention to Matt Simmons. Simmons suggests that an “energy war footing” is needed, with a Manhattan-type project for energy R&D, and a major reduction in both long-distance commuting and shipment of goods.

To the credit of both the federal and Maine state governments, many actions are being taken to reduce our oil demand. However much more needs to be done, and soon. Otherwise the cost of oil and gas may consume an ever-increasing fraction of household income. As things stand, the price of gas could rise much more rapidly than any increase in average mileage of the cars being driven. Rapid increases in oil heating bills could make it difficult for many to meet their home mortgage payments.

Fortunately there are many options for reducing oil demand. Increased efficiency of use is one approach. For example, auto excise taxes could be based in part on fuel efficiency rather than the sales price of a vehicle. Greater publicity could be given to tax incentives for energy efficiency in home construction and remodeling. A top priority in Maine should be to take advantage of our abundant wood resource to make a rapid transition away from oil heat.

One possibility is wood pellets. In Austria it is estimated that two-thirds of new homes have wood-pellet furnaces. The use of wood for energy will also stimulate the state economy by keeping the dollars spent on home heating within the state, rather than sending them abroad for imported oil.

John Tjepkema is a professor of plant physiology at the University of Maine.