The End of Oil: Interview with Paul Roberts

Oil, besides being a whole lot of political trouble, is approaching its production peak. What to do?

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Not since the OPEC embargo of the 1970s have Americans been forced to take such a hard look at the nation’s reliance on oil, particularly the Middle Eastern variety. With gas selling at more than $2 a gallon, and a barrel of oil trading at $40 or more, the U.S. economy is feeling the pain at every level. And of course, the need to secure a reliable supply of oil from the Middle East explains, in large part, the presence of U.S. troops in Iraq.

Now comes Paul Roberts to tell us in his new book, The End of Oil, that crude, besides being at the core of a host of political and economic problems, is getting harder to find, both in the Middle East and (especially) outside it — meaning that high prices are here to stay, and that the United States can expect to become more, not less, dependent for its oil on volatile Middle Eastern countries.

Roberts says that Americans are “energy illiterate” — we only think about the nation’s energy policy when oil prices hit us hard in the pocket. If the high price of oil keeps up, it may be just be the rude awakening needed for us to pressure politicians and in turn, the energy industry, to undertake massive investment in the alternatives to oil. If we don’t, the consequences will be disastrous: economic recession, environmental devastation, and further upheaval in the Middle East.

Roberts sat down with to talk about the oil economy, the viability of alternative energy sources, and how the price of oil might play out as an election issue this year. How much time do we have until the oil runs out?

Paul Roberts: We won’t really run out of oil, because before oil runs out, it will become too expensive to use. Another way to ask that is: When will we hit peak production? The estimates range anywhere from 30 years, to 35 years, to it’s already happened. I think that we’re going to hit peak production in probably about 25 years. But that’s worldwide, and really the one you want to think about is when do we hit production peak outside of OPEC? Because when that happens — when we can’t get any more oil out of the ground outside of OPEC — then we have to turn to OPEC. And that’s a tough thing for America and other countries to have to do, because they don’t trust OPEC. The non-OPEC peak will be in about 10 years. Although OPEC countries will still have a lot of oil, they may still be as unsympathetic and as an unfriendly to Western countries as they are today. So the other oil fields we hear about – in Africa and the Caspian, for example – aren’t going to diminish Saudi Arabia’s power?

PR: That’s right, because even now we are getting a lot of new oil out of Angola and Nigeria and Russia, and other places, but its being sucked just as quickly as it comes out of the ground by demand from China, and India, and the United States. China and India in particular are growing much faster than anyone had anticipated. China is already the second biggest user of oil right now. It passed Japan just recently, which people expected would happen sooner or later, but they did not expect it to happen this quickly. I think even Beijing was caught by surprise. John Kerry criticized President Bush over the high oil and gas prices, but how much power does a U.S. president really have over the price of oil?

PR: Well, traditionally very little. There is not much the president can do to rapidly raise production. It takes six years from the time you decide to drill in a particular area before you start bringing on lots of oil, and that’s assuming that you find a lot of oil. And although the president can release oil from the Strategic Petroleum Reserve, to do that in anything but an emergency would set a terrible precedent. And this isn’t really an emergency — it’s an election emergency, it’s a political emergency. I don’t think the Bush administration will do that. Can the U.S. government pressure the Saudis?

The Bush administration came in saying that what would be different about them was that they had this relationship with the Saudis — family relationship, political relationship — and that they would use that relationship to jawbone OPEC. One suggestion is that the Bush administration is so pleased with the Saudis and their cooperation on terror, and on stopping money-laundering, and doing other things, that they don’t want to lean on them for oil because the Bush administration knows how complex that is for the Saudis. The Saudis have so much domestic opposition they can’t appear to be pro-American. The other school of thought is that the Bush administration doesn’t have any sense of what to do right now and that it has completely lost control — and in fact never really had the control it claimed to have. The president believed he would be able pick the phone and get a lot of oil, but the truth of the matter was that the situation was always been more complex, and that the Saudis and the U.S. had never been more aligned in their agendas. Right now, they are allies in name — they have a customer-vendor relationship — but in many other ways, they’re going in completely different directions. So it appears that the Bush administration doesn’t have the connection it thought it did. Is the price of gasoline, and energy policy in general, more important as an election issue now than in previous years?

PR: We’re going to find that out. Certainly I thought — and I think a lot of other observers thought, going in six months ago, that Kerry would be able to hammer the Bush administration on gasoline prices, but the fact is that as soon as you raise the issue, you have to present a solution. Kerry knows that presidents are very limited in what they can do. It really requires a long-term policy, and Kerry is in the process of working on it, but he recognizes that it’s complex. As much as Kerry would like to give a bumper-sticker answer, he knows that, really, you need a comprehensive energy policy. The Bush administration — as much as I happen disagree with the way they approached it — they did have a comprehensive energy policy. They came in and said: “We’re not going to preserve. We’re not going to waste our time thinking too much about the alternatives. Efficiency is great, but we’re not going to bet the farm on it. What we’re going to do is to increase production — past administrations have let the country down because they have not emphasized production. We have not been drilling as much as we should; we aren’t building enough refineries and power plants; and we have not been as careful in building up relationships with oil-supplies — not just the Middle East, but diversifying our relationships. We need people outside the Middle East, so therefore, we’re going to be working with Africa, the Caspian, and Russia.” How does Iraq figure into this vision?

PR: Iraq is the centerpiece [of it]. It automatically marks you as a leftist-green-Nader-anarchist in Seattle if you say that it’s a war for oil. But the problem is that it’s been left in this very narrow political context. That’s to say, if you say it’s a war for oil, that means that you’re against Bush, and if you claim that it’s a war to promote democracy, than you’re for Bush. But you have to give it a much wider context and say that: given that the U.S. uses as much as oil as it does and has done nothing to reduce its demand and given that the global economy on which U.S. power depends entirely; given that global economy depends entirely on oil, mostly from Middle East, the U.S. has no choice but to be intimately connected with Middle Eastern policy, and to intervene — either diplomatically or economically or worse — if the stability of the region is threatened. And that this has been the case under any administration. The U.S. has not cut its demand, so it must involve itself in the affairs of its suppliers of oil. But it’s been allowed to be staged so narrowly focused that as soon as you raise the war-for-oil rhetoric, you are unpatriotic. But the fact is that the issue is much larger than that and always has been. With the occupation and the insurgency, there have been attacks on oil terminals. You can make the argument that the Iraq war hasn’t stabilized the Middle East.

PR: No, I think it has done just the opposite. Right now we have attacks on oil installations in Saudi Arabia, attacks on oil tankers, and oil-loading ports, such that the oil market now assigns what it calls a “war premium” to the price of oil. It’s between $5 and $10 dollars a barrel. So the market thinks that it hasn’t worked. I happen to think that this war premium is overstated. The contention there is that were it not for the instability in the Middle East, the price of oil would be much, much lower. And I think that although it would be somewhat lower, there is a fundamental tightness in the oil market — it’s not simply driven by politics. The market is aware that we use 80 million barrels of oil everyday and that our maximum production at this point is 82.5 million barrels of oil a day. So it’s two and a half million barrels of margin — that’s our cushion, what we call our spare capacity. Most of that margin is in the Middle East, particularly in Saudi Arabia and Kuwait. What that means is that if Venezuela — which produces two and a half million barrels of oil a day — were to fall into civil unrest, as it did a year and a half ago and let’s say it took off its oil production, which happened — Venezuela basically shut down its exports a year and half ago. The market simply lost that oil. Saudi Arabia and Kuwait were able to pump up their production and fill that gap before the prices went too high. Now if that happened, that would pretty much tap out all the spare capacity we’ve been talking about. There would no more room for accidents. There would be no more room for disruptions. What if production in Iraq fell because the chaos continued to grow and oil companies stopped wanting to send their people there? What if Saudi Arabia has some sort of political upheaval?

The market recognizes that the oil economy is really tight. You can get a sense of what the market thinks is going to happen based on what future prices are doing. For the last ten years the six-year future price for oil has been about $20 a barrel. Now compare that with $40 dollars today. And what that means is whatever was happening day-to-day in the market, oil traders still believed that within six-years things would be calm, things would be back down to this low price. Well, in the like month or so, these six-year contracts have been at $28 a barrel. It’s a huge increase. And that’s a pretty good sign that the market itself is coming to look at the situation as not just temporary. Following the oil shock in the 1970s, the U.S. scaled back demand. Why have we backtracked since then?

PR: There were two things that drove the U.S.’s decline in consumption back then. And the one that we think about is the one about policies. We got serious about conserving oil. We made our cars more efficient. We switched to a lot of coal back then, which had its own kind of side-effects. But the main thing that was driving all that change and policy was high prices. As soon prices came up, people switched. It’s what markets do. We tend to think mostly that it was some sort of patriotic effort by the country. You know, the good guys got in there and decided to use less oil and we did, but only after it cost a lot. As soon as price drops, people stop paying attention. Over the 80s, you see people gradually forgetting about oil or energy in general. So by 1990, the SUV craze begins. You call this obliviousness “energy illiteracy.” Talk more about it.

PR: People become energy literate — or energy aware — only when they have to be, and that’s when energy balloons in terms of their household budget or their business expenses. Even now, it’s still not that big of a chunk of our costs. It will slow our economic growth, but it’s not at a point of being disastrous. Because prices were down back in the late 80s and early 90s, consumers didn’t worry about it anymore. And if they are not worrying about it, then the politicians aren’t. Politicians basically lost any incentive to come up with any long-term policy.

America is right back where we started. We are pretty much where were in the 1970s. We are much more energy-efficient, but our cars are bigger. Our refrigerators are much more energy-efficient, but now we have several of them. Our light-fixtures are more energy-efficient, but now we will our houses with track-lighting. Our houses are bigger. Every gain in energy-efficiency has been undercut by an increase in the use of energy. There are a lot of commercials lately from energy companies, as in “BP: Beyond Petroleum.” There is almost a sense of comfort, it seems like the companies have it covered. Do they?

PR: For them, they’re in fat city. On the one hand, they are struggling to find more oil, so they know that they will need a new line of business in the next ten years or so. That’s why a lot of them are moving into natural gas. Not because it’s the clean fuel of the future, but because that’s what’s easy to discover out there. But for right now they’re making boat-loads of money and they are going to re-invest that money in whatever they choose. They can reinvest it in alternative energy, they can reinvest it in gas, they can reinvest it in R&D. Mainly, they’ll reinvest it in advertising to tell you how they are reinvesting it. As far as they are concerned, there will always be demand for oil, at least in the near term. U.S. demand may drop, but they can always sell it to the Chinese. They have people within these companies who are working on alternatives and are pretty serious about it. I was really impressed by the people I talked to at BP. They know so much about exactly what’s required for hydrogen economy and they know why it’s not going to be here anytime soon. They know that you can position yourself to be ready to jump into hydrogen economy right now, you can hire the people who know a lot of hydrogen, you can begin investing in a lot of natural gas, but you would be killed by your competitors who hadn’t made the jump. You’ve criticized Bush on hydrogen — for promoting it but not investing in it.

PR: The Bush administration has done two things with hydrogen. It hasn’t invested significantly. You need to consider it a national program, give it billions of dollars a year, and give it the same priority as you do your other energies. The other problem is that hydrogen has so many obstacles to overcome, and they don’t talk about that. I think the point is to distract political opponents and consumers from the current reality, which is that we are using too much oil and gas now. There is no time to wait for the hydrogen economy to show up. What are these obstacles to hydrogen?

PR: A hydrogen fuel cell is like a battery that just happens to burn hydrogen. The fuel cell itself, although it works well in the lab, it’s still very expensive. There are so many things that we don’t know about how reliable it is. We don’t know how to put a fuel tank on a car that actually lasts long enough. These are all engineering hurdles that can be solved with additional research, but still, it takes time. Then you have to figure out how to manufacture these cars at a scale to bring the price down. Then you have to figure out a way to fuel them. Hydrogen can be made in a laboratory from water, but you need electricity, and you have to get electricity from somewhere. So you burn coal to make the electricity. Or you can make hydrogen from gasoline, so you’re still using gasoline. Or you can make hydrogen from natural gas, but natural gas is in short supply in this country.

Then you have to create this vast network of pipelines to move hydrogen all over the country and then you have to figure a way of dispensing it at a service station. It’s a gas, so you have to liquefy it — which usually means freezing it — opening it at enormous pressure, which means it has the potential to explode, and then you have to get it at such a way so that people don’t kill themselves when we are dispensing it. It’s going to take decades to figure all this stuff out and all we need is one accident at a service station, and then it sets it back. Hydrogen probably has a lot of potential and it will probably be an important part of the energy mix sometime in the future, but it’s not going to happen anytime soon. So what is going to happen soon?



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