Oil, gas and coal: how they form, are found, moved and priced: How long will oil last, and why does its price swing?

Understanding Energy / Module 6: Oil, gas and coal: how they form, are found, moved and priced Part 4 of 5

How long will oil last, and why does its price swing?

Two questions about oil recur in every decade: when will it run out, and what will it cost? Smil's answers are that it will not run out in any sudden way, and that its price cannot be forecast. The years 2024 to 2026 tested both answers, swinging from fears of a glut to the largest supply disruption on record.

4.1 Reserves are an economic category, and peak-oil forecasts keep failing

The key distinction is between resources and reserves. Resources are all the oil that exists in the ground, discovered or not, recoverable or not. Reserves are the part that is known and can be produced profitably with today's technology and prices. Reserves therefore change. They grow when new fields are found, when better methods raise recovery from old fields, and when higher prices make expensive oil worth producing.

A common measure is the reserve-to-production ratio, or R/P: reserves divided by a year's output, giving the number of years current reserves would last at the current rate. It is often misread as a countdown. In fact the global R/P for oil was just over 25 years in the late 1940s, and above 40 years by the 2000s, even though annual extraction had risen about twelvefold. Reserves were added faster than oil was consumed.

M. King Hubbert, a geologist at Shell, predicted in 1956 that conventional US oil output would peak around 1970. He was right, and his bell-shaped curve became the basis of many forecasts that global output was about to peak. These have repeatedly failed. The biggest reason is that non-conventional sources keep being added: the Canadian oil sands, mined or produced with steam, Venezuela's heavy oil, and above all US tight oil, which pushed American production past its 1970 peak in the late 2010s.

Smil calls catastrophic peak-oil scenarios a myth. He expects oil's role to shrink gradually, through a long plateau and decline shaped by demand, prices and policy, not by geology. The tighter limit may be the atmosphere: burning all known fossil resources would push carbon dioxide far beyond safe levels.

Value chain From resources to reserves

Total oil resource in the ground
- Undiscovered estimated from geology
- Discovered oil in place
  - Not recoverable with current technology may become reserves later
  - Recoverable
    - Already produced
    - Reserves economic at today's prices and methods; grows with technology and price

Source: Smil, Oil: A Beginner's Guide (2008), via Smil Mastery Course, M6 'How long will oil last?'

Smil, Oil: A Beginner's Guide (2008) · via Smil Mastery Course, M6 'How long will oil last?'
Smil, Energy Myths and Realities: Bringing Science to the Energy Policy Debate (2010) · via Smil Mastery Course, M6 'How long will oil last?'

4.2 Oil prices move mostly on politics and surprise

For most of the 20th century the posted price of oil was low and stable, set by the large Western oil companies. That changed in 1973 to 1974. Arab members of OPEC embargoed shipments to countries that supported Israel in the October war, and OPEC raised prices. The posted price went from under $2 a barrel at the start of the decade to over $11 by early 1974. A second shock came with the Iranian revolution and the Iran-Iraq war in 1979 to 1981. Smil stresses that these were political events, not physical shortages: there was plenty of oil in the ground.

Prices then collapsed in 1986 when Saudi Arabia raised output, spiked during the 1990 Iraqi invasion of Kuwait, fell below $20 in the late 1990s, rose to nearly $150 in mid-2008, crashed later that year, fell sharply again in 2014 to 2016, and briefly went negative for US futures during the 2020 pandemic lockdowns.

Smil's analysis of year-to-year price changes between 1981 and 2007 shows them to be essentially random, swinging from falls of about 50% to rises of about 60%. No model has forecast them reliably. The reason is structural. In the short run neither supply nor demand responds much to price: wells and refineries cannot be built in weeks, and people cannot quickly change their cars or commutes. So a small surplus or shortage produces a large price move until spare capacity, stocks or reduced demand restore balance.

For an investor the lesson is to distrust oil price forecasts and test projects against a wide range of prices.

Smil, Oil: A Beginner's Guide (2008) · via Smil Mastery Course, M6 'Oil's benefits, burdens and prices'
Smil, Energy at the Crossroads: Global Perspectives and Uncertainties (2003) · via Smil Mastery Course, M6 'Oil's benefits, burdens and prices'

4.3 From a looming glut to the largest supply disruption on record

In June 2025 the IEA's medium-term report, Oil 2025, painted a picture of abundance. It expected world oil demand to grow by only about 2.5 million barrels a day between 2024 and 2030, levelling off at around 105.5 mb/d, with China's consumption peaking in 2027 and electric vehicles displacing about 5.4 mb/d of demand worldwide by 2030. Meanwhile supply capacity was set to rise by more than 5 mb/d to about 114.7 mb/d by 2030. The worry was a glut and weak prices.

That changed on 28 February 2026, when the United States and Israel began strikes on Iran and flows through the Strait of Hormuz fell from about 20 mb/d to a trickle. The IEA's March report called it the biggest supply disruption the oil market had ever seen, with world supply expected to drop about 8 mb/d in March alone. On 11 March IEA members agreed to make a record 400 million barrels of emergency stocks available. By April, output from the affected Gulf producers was 14.4 mb/d below pre-war levels, and cumulative Gulf losses had passed 1 billion barrels.

Prices reacted as theory predicts. North Sea Dated averaged about $120 a barrel in April and peaked near $144, and jet fuel prices nearly tripled. A US-Iran ceasefire let some tankers through in June, but attacks resumed in early July and the strait was again effectively shut. In August only 7.6 mb/d crossed it, and Gulf supply was 10.1 mb/d below pre-war.

By October the picture had shifted to a fragile, partial recovery. Ships crossed under US military protection, about 17 a day in late October, while attacks continued. Saudi Arabia's East-West pipeline to the Red Sea, knocked out by drone strikes in early September, was back at 5.8 mb/d on 6 October. Much of the crude leaving the Gulf was moved ship to ship in the Gulf of Oman, and average VLCC earnings hit a record of about $805,000 a day, against tens of thousands before the war. The IEA's October report put world stocks about 509 million barrels below their February level and expected 2026 demand to shrink by 2.6 mb/d, the steepest fall since 2020.

Data The 2026 Hormuz disruption in numbers

Indicator	IEA figure	Report
Oil flow through Hormuz, 2024	about 20 mb/d, about a fifth of world consumption	US EIA, June 2025
Emergency stock release agreed 11 March	400 million barrels, a record	IEA, March 2026
Gulf output below pre-war, April	14.4 mb/d	IEA, May 2026
North Sea Dated, April average and peak	about $120/bbl; peak near $144/bbl	IEA, May 2026
Oil through Hormuz, August	7.6 mb/d	IEA, September 2026
Gulf supply below pre-war, August	10.1 mb/d	IEA, September 2026
Saudi East-West pipeline, 6 October	5.8 mb/d (capacity 7 mb/d)	Saudi energy minister via Al Jazeera
Average VLCC spot earnings, early October	about $805,000/day, a record	Clarksons Research
World observed stocks vs end-February, end-September	about 509 million barrels lower	IEA, October 2026
2026 world oil demand change (forecast)	about -2.6 mb/d	IEA, October 2026

Status as of late October 2026; the strait was open only partially, under military protection, with attacks continuing.

Source: IEA Oil Market Reports, March-October 2026; US EIA; Al Jazeera; Clarksons Research, see section sources

4.4 Oil's benefits came with heavy burdens

Oil's benefits came first, and they were enormous. Cheap, dense, liquid fuel made mass car ownership possible, then trucking, which carries most of the goods in every modern economy. It made global aviation possible, and with it tourism, business travel and fast freight. Diesel tractors, combines and irrigation pumps mechanised farming and freed hundreds of millions of people from field labour. Oil also supplies the feedstocks for plastics, synthetic fibres, lubricants and asphalt.

The burdens are also large. Spills from tankers and wells, such as the Exxon Valdez in 1989 and the Deepwater Horizon blowout in 2010, damaged coasts and fisheries. Refineries and vehicles emit sulfur dioxide, nitrogen oxides, particulates and volatile organic compounds that form urban smog. Oil accounts for roughly a third of fossil carbon dioxide emissions, with coal the largest share and gas the rest.

Smil also points to oil-rich states whose economies, education systems and institutions lag far behind what their revenues might suggest, a pattern often called the resource curse. Income that does not depend on taxing citizens can weaken accountability and crowd out other industries. Oil is linked to conflict too, through supply security, the 1990 Iraqi invasion of Kuwait and the fuel needs of modern armies.

For importing countries, oil brings a different burden: exposure to price shocks they cannot control. That exposure, more than any geological limit, is what makes energy security a central policy concern in India and elsewhere.

Smil, Oil: A Beginner's Guide (2008) · via Smil Mastery Course, M6 'Oil's benefits, burdens and prices'
Smil, Global Catastrophes and Trends: The Next Fifty Years (2008) · via Smil Mastery Course, M6 'Oil's benefits, burdens and prices'

See it in the table

S Sulfur CO2 Carbon dioxide

Check your understanding

What is the difference between oil resources and reserves?

Reserves grow with discoveries, better recovery and higher prices.

Why do oil prices spike so sharply when supply is disrupted?

With low short-run elasticity, a small gap needs a large price change to close it.

According to the IEA's October 2026 report, how was 2026 world oil demand expected to change?

Shortages and high prices cut demand; before the war the IEA had expected growth.

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