Where will the world find all this energy? Oil, like water, is a finite resource. However, unlike water, we have been reasonably successful in finding more of it. Thanks to intensive exploration, the world’s proven oil reserves grew from 660 billion barrels in 1980 to more than 1 trillion in 1990. Despite consumption, oil reserves have hovered over 1 trillion barrels ever since. Technology makes it possible to stretch existing oil fields further than ever before. While conventional drilling techniques can leave up to 70 percent of oil in the ground, more sophisticated drilling techniques can help lower this “leave rate” to below 30 percent. Deepwater drilling ships are extracting oil from the shores of Texas, Brazil, and West Africa at ocean depths of 8000 feet. All told, technologies that have already been developed could increase the world’s recoverable oil supply by another 50 percent.

Although the world is not about to run out of oil, our continued reliance on this fossil fuel carries several hidden costs. For starters, there are the environmental effects. Oil use contributes to local air pollution and climate change. Pipeline and roadway construction, seismic testing, or the routine operation of oil facilities can disrupt sensitive natural habitats. Oil spills are extremely damaging to rich marine environments, harming fish, aquaculture, and marine mammals, as well as polluting beaches and marinas. The journal Science reported in December 2003 that the Exxon Valdez oil spill continues to have an impact on the ecosystem in Alaska’s Prince William Sound, 15 years after the disaster took place.

Second, while we have become more adept at finding and extracting oil, most of the world’s proven crude oil reserves (67 percent) remain in the politically volatile Middle East. The IEA estimates that by 2030, 43 percent of the world’s oil will come from the region—a 50 percent increase from today. Saudi Arabia alone sits atop of 25 percent of the world’s oil reserves and maintains a large amount of excess production to manage sudden price shifts. It was the rapid release of excess Saudi oil in 2003 that kept prices from rising exponentially in the aftermath of the U.S. invasion of Iraq and political turmoil in Nigeria and Venezuela.54 That much oil concentrated in just one country has some analysts worried. Saudi Arabia’s King Fahd is 81 years old and not in good health, and his brother Abdullah, 80, is next in the line of succession, followed by another brother, Sultan, who is 76. Beyond that, it’s anyone’s guess who will be the next Saudi leader.

The uncertain succession of the monarchy is coupled with economic malaise. While 12,000 Saudi princes live richly off the national output of oil and taxes, the country has an unemployment rate of 20 percent. As a result, Saudi Arabia, a conservative religious country, is full of young people who don’t have enough to do, truly resent the dominance and incursion of Americans into their society, and have learned from their textbooks about the duty of Muslims to wage jihad.

Opinion is divided as to whether a reactionary, anti-Western regime in Saudi Arabia would go so far as to refuse selling oil to the United States or Europe again, as occurred during the oil embargo of 1973. It’s not outside the realm of possibility. Nor is it unthinkable in the post-9/11 world that militants could strike at the heart of the monarchy’s power by decimating the oil fields with weapons of mass destruction.

Similar risks are at play in Central Asia, where conservative estimates indicate there could be some 100 billion barrels of oil in the Caspian basin. However, the oil wealth in the region could prove more of a curse than blessing. The region is already home to a number of authoritarian regimes. As we’ve seen elsewhere, oil brings with it the possibility of political instability, corruption, environmental degradation, and civil wars. Russia, which at 60 billion barrels has the largest oil reserves of any country outside the Middle East, is the “X factor” in the great oil supply equation. Russia’s daily oil output is comparable to that of Saudi Arabia’s. However, to continue to be an oil power after 2010, Russia will need to invest in new fields, which will require a huge influx of foreign investment. Foreign investors, however, remain somewhat skittish about pouring money into Russian oil development, owing to the country’s endemic corruption, bureaucratic infighting, weak laws protecting property rights, and economic volatility.

“The rule of law is not widespread; corruption is widespread,” observes BP CEO John Browne.57 BP lost $200 million in what it claims was a rigged Russian bankruptcy case in 1998. But Browne believes that the risks of investing in Russia are still less than doing business in the politically turbulent Middle East or West Africa. In February 2003, the company announced it had returned to Russia in a $6.75 billion deal to acquire a 50 percent stake in a newly merged company formed from Tyumen Oil and Sidanco Oil. “Where everything is cut and dried there is no opportunity,” Browne notes. Even if Russian oil production rises to its full potential, it is far from clear that the country could be a surplus swing producer like Saudi Arabia.

Given all of the volatility surrounding oil, it is fortunate that oil’s share of the world energy pie continues to decline, from 50 percent in 1975 to 40 percent in 2003. This trend is due to consumers substituting natural gas, coal, and other more efficient, stable, and cheaper fuels for oil. For example, the Royal Dutch/Shell Group is likely to expand its natural-gas operations to take advantage of rising demand in the United States and the Asia-Pacific region. According to Shell’s former Chairman, Sir Philip Watts, “demand for gas as a fuel may outstrip oil in the next two decades, and Shell is moving aggressively to establish positions in regions that are already experiencing that growth.”