The status of conventional world oil reserves—Hype or cause for concern?

Abstract

The status of world oil reserves is a contentious issue, polarised between advocates of peak oil who believe production will soon decline, and major oil companies that say there is enough oil to last for decades.In reality, much of the disagreement can be resolved through clear definition of the grade, type, and reporting framework used to estimate oil reserve volumes. While there is certainly vast amounts of fossil fuel resources left in the ground, the volume of oil that can be commercially exploited at prices the global economy has become accustomed to is limited and will soon decline. The result is that oil may soon shift from a demand-led market to a supply constrained market.The capacity to meet the services provided by future liquid fuel demand is contingent upon the rapid and immediate diversification of the liquid fuel mix, the transition to alternative energy carriers where appropriate, and demand side measures such as behavioural change and adaptation. The successful transition to a poly-fuel economy will also be judged on the adequate mitigation of environmental and social costs.

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The status of conventional world oil reserves—Hype or cause for concern?
Nick A. Owen
n
, Oliver R. Inderwildi, David A. King
Low Carbon Mobility Centre, Smith School of Enterprise and the Environment, University of Oxford, Oxford, United Kingdom
article info
Article history:
Received 13 January 2010
Accepted 10 February 2010
Available online 12 March 2010
Keywords:
Liquid fuels
Peak oil
Conventional oil
abstract
The status of world oil reserves is a contentious issue, polarised between advocates of peak oil who
believe production will soon decline, and major oil companies that say there is enough oil to last for
decades.
In reality, much of the disagreement can be resolved through clear definition of the grade, type, and
reporting framework used to estimate oil reserve volumes. While there is certainly vast amounts of
fossil fuel resources left in the ground, the volume of oil that can be commercially exploited at prices
the global economy has become accustomed to is limited and will soon decline. The result is that oil
may soon shift from a demand-led market to a supply constrained market.
The capacity to meet the services provided by future liquid fuel demand is contingent upon the
rapid and immediate diversification of the liquid fuel mix, the transition to alternative energy carriers
where appropriate, and demand side measures such as behavioural change and adaptation. The
successful transition to a poly-fuel economy will also be judged on the adequate mitigation of
environmental and social costs.
&2010 Elsevier Ltd. All rights reserved.
1. Introduction
Fossil fuels have been at the centre of growth and trade since
industrialisation re-organised economies for the purpose of
manufacturing goods (O’Sullivan and Sheffrin, 2003). In many
applications, energy dense crude oil-derived fuels displaced coal
and have long since dominated as a transport fuel. In recent years,
however, concerns have grown over the environmental conse-
quences of burning large volumes of oil, and whether reserves
have the capacity to service growing demand (Alekkett, 2007;
Campbell and Laherrere, 1998;Laherre
´re, 2009a;Robelius, 2007;
Sperling and Gordon, 2007;USGAO, 2007).
Here we review the status of conventional crude oil reserves.
As crude oil is a finite non-renewable resource, by definition it
cannot continue to meet ongoing demand. Of particular interest is
the point at which oil production becomes limited by the capacity
of extraction technology, causing supply and demand curves to
diverge. To determine when this may occur requires access to a
number of contentious and inherently uncertain data sets.
Although it is not the intention of this report to discuss
motivations for reserve misreporting, it is necessary to investigate
ambiguities and sources of error that are broadly acknowledged
but not taken into account in public data
1
due to the politically
sensitive nature of reserve information.
It was found that the failure to report according to guidelines
set out by the Society of Petroleum Engineers (SPE) and the World
Petroleum Council (WPC) together with intentional false report-
ing, could go a long way to explaining the polarised views on the
status of conventional oil reserves.
Evidence suggests that conventional oil production has a
limited capacity to meet growing demand, and most additional
demand will have to be met by unconventional sources (IEA,
2008). Unconventional resources are abundant and may meet
supply deficits, although the capacity for substitution is also
contingent upon the effective mitigation of environmental, social,
and technical challenges associated with the production of
ARTICLE IN PRESS
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doi:10.1016/j.enpol.2010.02.026
Select terms and abbreviations: API, American petroleum institute gravity
(141.5/specific gravity—131.5); BPSR, BP statistical review; Conventional oil, Oil
that is less dense than water (above 101API); Gb, giga barrel (one billion barrels);
Giant oil field, contains 0.5 Gb of 2P conventional oil reserves; IEA, international
energy outlook; Information agencies, organisations that republish data from
reporting agencies (some times with small amendments); NGL, natural gas liquids,
the liquid or liquefied hydrocarbons produced in the manufacture, purification and
stabilisation of natural gas; OGJ, oil and gas journal; OPEC, organisation of the
petroleum exporting countries; Reporting agencies, organisations that gather oil
reserve data from producers; Reserves, commercially exploitable oil that is in-situ;
Super-giant oil field, contains 5 Gb of 2P conventional oil reserves; Unconventional
oil, oil that is below 101API; Ultimate recoverable reserves (URR), The total
volume of reserves expected to be recovered, past and present; WEO 2008, world
energy outlook 2008; WO, world oil; 1P, ‘proven reserves+ P90’; 2P, ‘proven +
probable reserves’= P50; 3P, ‘proven + probable+ possible’ = P10
n
Corresponding author.
E-mail address: nafowen@gmail.com (N.A. Owen).
1
Includes data presented in the BP Statistical Review (BPSR), Energy
Information Administration (EIA), Oil and Gas Journal (OGJ), World Oil (WO),
and the International Energy Agency (IEA).
Energy Policy 38 (2010) 4743–4749

ARTICLE IN PRESS
unconventional resources (Bergerson and Keith, 2006;NEBC,
2006).
2. Literature survey
A literature review reveals that opinion is divided over the
volume and grade of oil remaining in reserves. Data available in
the public domain originates from surveys conducted by the OGJ
and WO magazine, and the OPEC Secretariat (Haider, 2000;
Laherre
´re, 2009a). In general, these sources give more optimistic
estimates compared to independent parties that assess reporting
methodology. They do not question surveyed reserve estimates,
and probably regard such queries as being outside their jurisdic-
tion and politically sensitive; to question them could be inter-
preted as a diplomatically offensive. For example, data published
by the OPEC secretariat has never been subject to independent
audit (Simmons, 2007) and is widely considered inaccurate but is
still included in public data (Bentley et al., 2007;Campbell and
Laherrere, 1998;IEA, 2008;Leggett, 2005).
A second tier of reporting is carried out by information
agencies (including IEA, EIA, and BP Statistical Review). In some
cases, information agencies acknowledge sources of reporting
error described by independent authors as a caveat to published
figures. For example, the WEO 2008 stated ‘the world is far from
running out of oil; remaining oil and natural gas liquid proven
reserves totaled 1200–1300 Gb by the end of 2007 (including
about 200 Gb of Canadian oil sands) ythough most of this
increase has come from revisions made in the 1980s in OPEC
countries rather than new discoveries’ (IEA, 2008). In general,
information agencies reproduce data referenced from reporting
agencies, sometimes with small amendments that attempt to
account for different oil grades.
Data on individual fields may also be purchased from scouting
companies, such as the IHS. It is generally considered the most
accurate by independent authors and academic institutions, and
was relied upon by Robelius (2007) from Uppsala University to
compile a database of giant oil fields to study production.
A literature survey of independent authors revealed consensus
that reserve estimates published by reporting and information
agencies are likely to be over-inflated. Publications by separate
authors (Alekkett, 2007;Bakhtiari, 2004;de Almeida and Silva,
2009;IEA, 2008;Laherre
´re, 2009a;Robelius, 2007) were reviewed
and showed that on average, conventional oil reserves should be
revised downwards to 903 Gb, and production is expected to
decline between 2010 and 2015
2
. A summary of published oil
reserve estimates is given in Table 1.
3. Sources of ambiguity
Ambiguity in public data mostly arises from: (1) a lack of
binding international standards to report oil reserve volume and
grade (Alekkett, 2007;Bentley et al., 2007;Laherre
´re, 2009a;
Robelius, 2007;Society of Petroleum Engineers (SPE), 2007);
(2) the point at which resources may be classified as commercially
exploitable reserves (Hirsch, 2005); (3) intentional mis-reporting
to further a financial or political agenda (Alekkett, 2007;IEA,
2008;Laherre
´re, 2009a, 2009b;Robelius, 2007;USGAO, 2007);
and (4) inherent technical assessment uncertainty (Laherre
´re,
2009a;Meng and Bentley, 2008;Mitchell, 2004).
The following section discusses the main flaws in reserve
reporting. In doing so it defines conventional crude oil grade and
best practice reporting methodology.
3.1. A question of cost: resources vs reserves
To address technical assessment uncertainty, the SPE and WPC
has set out a best practice oil reserve assessment methodology
framework. The framework uses a probability based system that
classifies resources into prospective (undiscovered), contingent
(sub-commercial), and reserves (commercial) categories (Society
of Petroleum Engineers (SPE), 2007;SPEE et al., 2007). It is
significant to note that ‘reserves’ are defined as volumes that are
commercially exploitable irrespective of grade, and may include
conventional or unconventional oils.
As oil prices rise and extraction technology improves,
unconventional resources become reclassified as commercial
reserves. This is commonly referred to as the price-reserve
relationship (Hirsch, 2005). There is no consistency regarding
when reclassification should occur, as evident by the range of
estimates given for commercially exploitable Canadian tar sand
volumes in the most recent reporting agency estimates that range
from 4.9 Gb (WO) to 172.7 Gb (OGJ). These figures represent 20%
and 660% of current annual global oil demand, respectively.
3.2. A question of chance: reserves vs production
The SPE and WPC further subdivide reserve estimates into
categories that describe the probability of extracting an estimated
volume. This system was developed to address inherent evalua-
tion and production uncertainty, and considers three categories:
1P, 2P, and 3P (see selected terms and abbreviations). The number
assigned to each category is the probability of successfully
producing an estimated volume. For example, proven reserve
estimates should be recognised with 90% certainty.
Assuming estimates are accurate, 1P reserves would be
expected to be revised upwards over time and 3P reserves
downwards to converge at the estimated 2P volume. For this
reason, 2P reporting should represent actual reserve volumes
most accurately (Bentley et al., 2007;Meng and Bentley, 2008;
Mitchell, 2004). Confusion between 1P and 2P data sets is
Table 1
‘Proved
a
’ world oil reserve estimates from select sources and information agencies.
OGJ Jan 2009 WO Year end 2007 IEA WEO 2008 BPSR June 2009 Independent authors
Billion barrels (Gb) 1342
b
1184
c
1241 1258
d
903
a
In this case ‘proved’ is defined as ‘reserves that can be recovered with reasonable certainty from known reservoirs under existing economic conditions’ (EIA, 2009b).
Correct reporting protocol also demands that ‘proved’ reserves must be defined by a stipulated probability of achieving estimated volumes, hence the term ‘proved’ in this
table is somewhat obscure.
b
Includes tar sands (172.7 Gb), crude oil, condensate.
c
Includes tar sands (4.9 Gb), crude oil, gas condensate, and natural gas liquids.
d
BPSR figure includes tar sands (22 Gb), crude oil, gas condensate, and natural gas liquids.
2
Authors commonly gave URR estimates that were used to approximate
reserves by subtracting 1128 Gb of cumulative oil production according to IEA
(2008). Authors include Alekkett (2007);Bakhtiari (2004);Campbell and Laherrere
(1998);de Almeida and Silva, 2009;Deffeyes, 2009;Laherre
´re (2009a);Leggett
(2005);Robelius (2007);Skrebowski (2009).
N.A. Owen et al. / Energy Policy 38 (2010) 4743–47494744

ARTICLE IN PRESS
widespread and has fuelled nearly every aspect of the oil reserves
debate (Bentley et al., 2007). 1P estimates more closely represent
oil that can be extracted using the infrastructure in place, rather
than volumes of accessible oil in the ground. For this reason, 1P
reporting has given the false illusion that reserves have been
increasing when in reality estimates have just been converging at
the 2P estimate as expected. The relevance of the ‘2P effect’ on
current reserve estimates is shown by using backdated 2P reserve
data in Figs. 2 and 3. To add further complication, some countries
report a mixture of 1P, 2P and 3P reserves and data presented in
the public domain does not adequately explain discrepancies
between reporting methodologies (Alekkett, 2007;EIA, 2009a;
IEA, 2008;Laherre
´re, 2009a). Although information agencies
qualify reserves as ‘proven’, such statements lack credibility
without specifying the probability of attaining quoted production
volumes (Graefe, 2009).
3.3. A question of grade: conventional reserves vs unconventional
resources
Conventional oil reserves are the most accessible and least
technically challenging to bring into production. In contrast,
unconventional oils cease to flow at surface temperatures and
pressures (Mommer, 2004) and are not readily recovered because
production is capital intensive (Hirsch, 2005) and requires
supplementary energy (Brecha, 2008). These factors also increase
the carbon footprint of such resources.
To avoid grade ambiguity, conventional oil is defined as oil that
is less dense than water (above 101API) in accordance with
Mommer (2004) and Laherre
´re (2009a, 2009b) who subtract
extra-heavy oil from reserve calculations. This definition includes
heavy oil (10–201API), medium oil (20–301API), light oil (above
301API), and condensates (Robelius, 2007). Data from reporting
agencies does not distinguish between oil grades according to
density and commonly includes a range of ‘conventional liquids’
including extra heavy oil (0–101API), tar sands, and natural gas
liquids (NGLs).
3.4. Intentional mis-reporting and withheld information
Political and financial objectives are known to encourage
reserve misreporting. The most well known example of this
occurred in the 1980s during the OPEC ‘fight for quotas’. The IEA
now acknowledges that misreporting occurred because OPEC
countries agreed to set export quotas in proportion to reserve
volumes, which provided a strong incentive to inflate reported
reserve figures to gain market share (IEA, 2008;Leggett, 2005).
Most sources estimate such additions to have contributed
between 287 Gb (Campbell and Laherrere, 1998) and 300 Gb
(Salameh, 2004) to world oil reserve figures, which is not
accounted for in public data.
3.5. Caution: reserve–production ratio (R/P)
Oil field production rates averaged over a large region follow
an approximate bell-shaped curve, as first identified by Hubbert
who accurately predicted US peak production in 1970 (Deffeyes,
2009), and has since been observed in a large number of post peak
fields (Robelius, 2007). Production does not stay constant until
resources are exhausted because geological constraints confer a
characteristic extended tapering off period.
For this reason statements such as ‘proved oil reserves are
sufficient to match production levels for 42 years’ (BP, 2009b) that
were made at the June 2009 BP Statistical Review are misleading.
With closer consideration it was found this figure was calculated
by dividing reserve and production figures given in the same
report (BP, 2009a)
3
. Reserve-production ratios are not sensitive to
increasing demand and declining production rates. While the net
amount produced over an extended period should reflect reserve
estimates, engineers cannot access reserves on demand.
3.6. Caution: contradictory figures
Data in the public domain consistently reports increases in
annual reserves despite simultaneously reporting that consump-
tion has exceeded additional discovery volumes of conventional
oil. Such discrepancy in reporting is mostly due to the volatile
price-reserve relationship described above, and reflects the
addition of unconventional sub-commercial resources into re-
serve estimates. The WEO 2008 states ‘in the last two decades,
volume discovered has fallen well below volume produced’ (IEA,
2008), indirectly acknowledging these inconsistencies.
Fig. 1 shows additional 2P conventional oil discoveries less
demand, which gives the flux of oil into, or out of, the world
conventional oil reserve inventory. Data below the zero flux axis
indicates periods of net withdrawal from reserves. This first
occurred in 1972 and has consistently occurred since 1980,
indicating that conventional oil reserves have been in decline
since then.
The turning point of conventional oil reserve status is also
illustrated in Fig. 3, together with contrasting public data that
shows reserves increasing. Since 2007, the volume produced
exceeded volume discovered by a factor of three according to data
provided (Laherre
´re, 2009b), which was used to construct Fig. 1.It
should also be noted that the trend is for this relationship to
widen.
4. Global oil reserves
Until now, the widening gulf between discoveries and
production can be almost entirely attributed to reduced discovery
rates as shown in Fig. 2. In the near future, however, this rift could
be driven further apart by forecasted declines in production from
the relatively few fields that support supply.
World oil reserves are unevenly distributed between 70,000
fields (IEA, 2008). In total 507 fields are classified as ‘giant’ and
account for 60% of conventional oil production (Robelius, 2007).
Fig. 1. World 2P conventional oil reserve flux: additional volumes discovered less
volumes consumed. Source: Data provided by Laherre
´re (2009b).
3
The June 2009 BPSR stated global reserves (R) of 1258 Gb and production (P)
of 29.7 Gb in 2008, giving an R/P value of 42 years.
N.A. Owen et al. / Energy Policy 38 (2010) 4743–4749 4745

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The top 110 producing fields constitute over 50% of global supply,
the top 20 contribute 27%, and the most productive 10 fields
contribute 20% (IEA, 2008).
Of the 507 giant oil fields, 430 are in production (Robelius,
2007) of which 261 are in decline (H¨
o¨
ok et al., 2009a). In 2007,
production from 16 of the top 20 producing fields was also in
terminal decline (IEA, 2008). The average post-peak decline rate of
giant fields is critical to determine future productivity, and has
been estimated by several studies at 4.5% (CERA, 2008), 5.5%
(H¨
o¨
ok et al., 2009b), and 6.7% (IEA, 2008). This rate would result in
a cumulative gap between BAU demand and declining production
rates of approximately 925 Gb over the period 2010 to 2050. The
average decline rate for all producing fields was extrapolated from
Fig. 4 at 4.07% p.a.
According to the WEO 2008, the world’s 20 most productive
fields were discovered in 1959 (IEA, 2008), which suggests that
the chance of finding fields of similar size is remote. Fig. 2 shows
the peak of conventional oil discovery occurred in the early 1960s.
1948 was the most successful year for discoveries, with finds
totaling 107 Gb including the Ghawar field (world’s largest and
most productive field ever discovered) in Saudi Arabia. Very few
giant oil fields have been found since the early 1980s, and the last
of the super-giants was found in the 1960s (Hirsch, 2005).
The following section will examine the status of conventional
oil reserves through two independent methods. The first will
review backdated 2P conventional oil data, and the second will
amend public data to account for speculative and false additions.
4.1. Review of corrected 2P discovery data
The first approach uses corrected 2P conventional oil discovery
data provided by Laherre
´re (2009b). Laherre
´re used the Hubbert
linearisation methodology to forecast a URR of 2000 Gb, which is
close to the average found in the literature survey of independent
authors of 2030 Gb. This methodology is deemed accurate, though
not completely without difficulties, in publications by Bently and
Boyle (2008) and Robelius (2007).
The discovered volume of 2P conventional oil is given by the
area under the ‘world discoveries’ line in Fig. 2 and totaled
approximately 1860 Gb in 2007. If the assumed URR is 2000 Gb,
conventional oil discoveries after 2007 should total approxi-
mately 140 Gb.
The forecasted production line was constructed using an equal
area approximation with the discoveries curve in Fig. 2. Given that
the total volume of conventional oil produced to date is
approximately 1130 Gb (IEA, 2008) by deduction 870 Gb of
conventional oil remains in-situ. As the volume produced exceeds
half (55%) the URR, conventional oil production may have already
plateaued, although the equal area curve may exhibit an
asymmetrical profile allowing for higher production rates before
a steeper decline.
4.2. Published reserves less acknowledged error
The second method approximates conventional oil reserves by
amending public data to account for reporting inconsistencies
acknowledged by the WEO 2008 and independent authors.
Fig. 3 gives a history of cumulative backdated 2P conventional
reserve data together with data from the OGJ. OGJ data shows two
distinct jumps in reserve estimates in the 1980s and again in
2004. The first reflects false additions during the OPEC fight-for-
quotas years (which contributes 287–300 Gb) and the second
shows the inclusion of tar sands into reserve estimates. The
adjusted line accounts for these false and unconventional
additions.
It is important to note that simply accounting for these large
distortions in public data does not accommodate detail in
reporting error. For example, convergence of 1P estimates to
more correct 2P volumes over time explains why the adjusted line
incorrectly shows reserves increasing. It does, however, validate
present conventional 2P reserve estimations provided by
Laherre
´re (2009a) and average reserve estimates from independent
institutions. Table 2 gives amended reserve estimates for values
presented in Table 1, which account for these false additions.
Fig. 2. Annual backdated 2P conventional oil discovery, conventional oil consumption, and forecasted production and discovery. Sources:(Campbell and Laherrere, 1998;
EIA, 2009b;IEA, 2008;Laherre
´re, 2009b).
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ARTICLE IN PRESS
The two methods presented independently show that 2P
conventional world oil reserves should be revised downwards to
between 850–900 Gb.
A third method that was developed by Campbell and Heapes
(2008) considers oil depletion in the context of production,
whereby avoiding the difficulties associated with estimating
world URR. Although still subject to uncertainty, it estimates that
the peak production of conventional oil passed in 2005, and that
the peak of all liquids (excluding gas) will follow around 2010
(Campbell and Heapes, 2008). These results also support the
evidence provided in this report.
4.3. Liquid fuels demand and production forecast
Having established that conventional oil reserves are probably
less than previously thought, it is necessary to discuss what the
future may hold for liquid fuels production. Fig. 4, published by
the IEA, shows that the capacity to meet demand is contingent
upon rapid and immediate diversification of the liquid fuels mix.
Total liquid fuel consumption in 2008 averaged 85.41 Mb/day
(IEA, 2008), which is equivalent to 31.2 Gb over the year. Since
1985 consumption has grown at an average rate of 1.42% p.a
(BAU) according to EIA figures (EIA, 2009c). At this rate, Fig. 4
shows that by 2030 the world will consume 42.5 Gb per year.
It is expected that almost all additional demand will come
from China and India (IEA, 2008) and be met by non-conventional
oil, enhanced oil recovery (EOR), and natural gas liquids. However,
it remains unclear why the IEA expects near zero demand growth
in industrialised countries, especially since previous IEA forecasts
predict much higher demand growth.
According to Fig. 4, conventional oil production rates will
maintain current capacity (not grow) until 2030, though it is
critical to note this is dependent upon the development of known
crude oil reserves, the discovery and development of new crude
oil fields, and EOR. Conventional oil from producing fields
currently constitutes approximately 85% of the global liquid fuel
mix and is expected to decline at a rate of 4.07% per year after
2010.
At this rate, current sources of liquid fuel (crude oil from
producing fields, non-conventional oil, natural gas liquids) will
only have the capacity to service just over 50% of BAU demand by
2020. The implication is that the remaining 50% (approximately
18 Gb) will have to be met by sources that are not in production
today.
5. Oil price and future resources
Restricted crude oil production will obviously affect crude oil
price. Fig. 5 shows a history of the nominal crude oil price and
price adjusted to 2009 dollars. Oil prices reached record highs in
both measures in 2008.
Prominent price fluctuations in Fig. 5 are labeled. Past surges
have been abrupt and commonly reflect a single event; either
supply shortages from conflict or deliberate restrictions on
production to inflate prices. The most recent price escalation that
began in 2002, however, has been more gradual indicating a
number of contributing factors. Although speculation in futures
Fig. 3. World cumulative crude oil reserves: backdated 2P data, OGJ data, and
amended OGJ data. Sources: Constructed from data provided by Laherre
´re (2009b).
Table 2
Amended conventional world oil reserve estimates that account for OPEC false additions and the inclusion of Canadian tar sands.
OGJ Jan 2009 WO Year end 2007 BPSR June 2009 Independent authors Independent authors
Liquids Crude oil, condensate Crude oil, condensate Conv. crude
a
Conv. crude Conv. crude
Billion barrels (Gb) 882 892 830 903 872
a
This figure was further reduced by 12.5% to account for Natural Gas Liquids according to the WEO 2008.
Fig. 4. Projected world liquid fuels demand and supply. Sources:IEA (2008).
N.A. Owen et al. / Energy Policy 38 (2010) 4743–4749 4747

ARTICLE IN PRESS
markets is likely to have played a significant part (Engdahl, 2008),
the speculative bubble experienced recently is superimposed on
an upward trend in oil prices due to fundamental demand and
supply factors (Soros, 2008).
The WEO 2008 forecasts an oil price of US $200 per barrel by
2030, which is an increase of $135 on the WEO 2007 estimate of
$65 per barrel. While such broad predictions give little confidence
in quantitative forecasts, all qualitative indicators suggest there
will be considerable price rises in the future.
Forecasted price rises are inevitable according to the law of
diminishing returns. Although new extraction technologies may
delay the period and severity of price increases, there is no
escaping the problem of using up a limited non-renewable
resources (Taylor, 2008). As prices rise, the business case for
developing unconventional, lower grade, resources improves. This
is the main reason why Canadian tar sand and deep-sea resources
have come into production over the past decade.
4
Saving the best
(conventional oil) until last works in opposition of the free
market, and part of the reason why such resources have come into
production is because the best reserves are in rapid decline.
Therefore, pursuing oil for energy security is pursuing a policy of
diminishing returns–except that the diminished returns are not
just economic, but also affect the environmental and energy
security pillars of a functioning energy market.
A second school of thought, based on the observation that oil is
inextricably linked to global economic activity, should also be
considered. It contends that a sustained oil price of greater than
$100 per barrel could induce global recession (Rubin, 2009)
driving oil prices downwards and paradoxically reducing invest-
ment in alternative fuels. The exact price threshold is difficult to
estimate, however, as volatile oil prices cannot adequately be
described by traditional linear and aggregate economic models
(Jones et al., 2004). Rather a systems approach is required to
quantify the asymmetrical effects of price fluctuations, with
particular emphasis on the physical work it delivers (Ayres and
Warr, 2005). Although rising oil prices are associated with a loss
of economic growth, declining oil prices tend to have a
disproportionally small effect on stimulating growth (Awerbuch
and Sauter, 2005;Mork, 1989). Sources of asymmetry derive from
inter-sectoral resource reallocation costs (e.g. retraining labour
forces, sourcing interchangeable materials), demand composition
(demand for durable goods, e.g.,large automobiles), and the
investment pause effect (e.g. households and firms that defer
major investment in the face of uncertainty) (Jones et al., 2004).
The magnitude of a rise in oil price on GDP is described by oil
price–GDP elasticity, which is defined as the percentage change in
GDP divided by the percentage change in oil price. World average
oil price–GDP elasticity is estimated at 0.055 (70.005)
(Awerbuch and Sauter, 2005;Birol, 2004;Jones et al., 2004;Mork
et al., 1994). This would mean a 10% rise in oil price would
translate to 0.55% GDP loss. Considering that real oil prices are
now stable at more than 300% of pre-2000 levels, and forecasted
to rise further, absolute losses are significant. Additionally
developing economies that rely heavily on imported oil that is
often used in inefficient manufacturing processes are charac-
terised by higher oil price–GDP elasticities (Birol, 2004), and will
therefore suffer disproportionally more than developed countries
from high oil prices.
It follows that effective and co-ordinated international policy
mechanisms have to be devised with a tacit understanding of oil
price–GDP elasticity in the context of an oil supply constrained
economy. Such policies would recognize the business case of
reducing consumption, and operate with a sense of urgency to
introduce alternative energy carriers and effective demand side
measures. Hesitation will risk high oil price induced negative
macroeconomic consequences in the future, which will demand
even more drastic policy measures to reduce oil-price GDP
elasticity. The self regulating relationship between oil price and
economic activity will have to be broken to promote investment
in alternative fuels and demand side measures, which could
complicate and extend the transition away from conventional
fuels.
6. Key conclusions
This paper supports the contention held by many independent
institutions that conventional oil production may soon go into
decline (Alekkett, 2007;Campbell and Laherrere, 1998;IEA, 2008;
Laherre
´re, 2009a;Robelius, 2007;Sperling and Gordon, 2007;
USGAO, 2007)and it is likely that the ‘era of plentiful, low cost
petroleum is coming to an end’ (Hirsch, 2005). Significant supply
challenges in the near future are compounded against a backdrop
of rising demand and strengthening environmental policy. Key
conclusions include:

The age of cheap liquid fuels is over. A condition of meeting
additional demand is to develop unconventional resources,
which translates to an increase in the price of petroleum
products.

Oil reserve data that is available in the public domain is often
contradictory in nature and should be interpreted with
caution.

World oil reserve estimates are best described by 2P reporting.
This means public reserve figures should be revised down-
wards from 1150–1350 Gb to 850–900 Gb.
Fig. 5. A history of world oil prices. Sources:(BP, 2009a;Lopez-Bassols et al., 2007;
Louis, 2009).
4
At present tar sands require 1 GJ (in-situ extraction phase) + 0.25 GJ (mining
extraction phase) + 0.01 GJ (electricity)+ X GJ (site construction and operation,
upstream products, material support) = 1.26 GJ per barrel of synthetic oil
produced, which contains 6.12 GJ (21%) (Bergerson and Keith, 2006).
N.A. Owen et al. / Energy Policy 38 (2010) 4743–47494748

ARTICLE IN PRESS

Supply and demand is likely to diverge between 2010 and
2015, unless demand falls in parallel with supply constrained
induced recession.

Reserves that provide liquid fuels today will only have the
capacity to service just over half of BAU demand by 2023.

The capacity to meet liquid fuel demand is contingent upon
the rapid and immediate diversification of the liquid fuel mix,
the transition to alternative energy carriers where appropriate,
and demand side measures such as behavioural change and
adaptation.

The negative effect of oil price on the macro-economy is
significant, and should be used to build the business case to
invest in alternative energy carriers. Many alternative fuel
carriers also present the double dividend of improving energy
security (i.e. utilize local resources) and reducing emissions
(i.e. electricity, hydrogen).
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