Oil is not only the lifeblood of the global economy, it is the source of international tensions, and these can only increase as finite reserves dwindle, writes Colin Campbell.

The Middle East is today the vortex of a storm that envelops us all for the simple reason that it controls the world's supply of oil. Oil is not just another commodity obeying the normal laws of supply and demand as entrenched in economic theory and dogma, it is the very lifeblood of the global economy, providing 40 per cent of all traded energy and 90 per cent of transport fuel. Furthermore, it is a finite resource for which no better substitute is in sight.

The physical attributes of oil are now well understood from great advances in petroleum geology. The bulk of the world's oil was formed in no more than two short epochs of extreme global warming, 90 million and 145 million years ago, when prolific algal growths poisoned seas and lakes and provided the organic matter that became oil and gas after its burial beneath younger sediments. Once formed, the oil was preserved only in certain tectonic settings, mainly in rifts that opened as the continents split apart. These geological facts underline how finite oil is.

Oilfields are concentrated in clusters, which are separated by vast barren tracts. The world has been so extensively explored that virtually all the sweet spots have been identified, save perhaps some in deepwater and polar regions. About 40 per cent of the world's endowment of so-called "conventional" oil lies in just five Middle Eastern countries surrounding the Gulf.

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We need to know the size of the world's oil endowment to plan for the future. The information could be provided without particular technical challenge, but it is denied us through ambiguous definitions and lax reporting standards by an industry desperate to conceal the truth and by governments who prefer not to know.

We need a detective more than a scientist to sift the reports for clues. Such a detective would likely present evidence to define "conventional" oil as the easy, cheap stuff - excluding oil from coal and shale, bitumen, extra-heavy oil, heavy oil, deepwater oil, polar oil and liquids derived from natural gas. It has supplied most to date and will dominate all supply far into the future. Our detective would go on to explain that "proved reserves", as reported for financial purposes, mean only "proved so far", based on current wells, which may or may not say much about what the fields will eventually deliver over their full lives. He would stress the need to backdate the results to obtain a valid discovery trend, by which to project future discovery. Current best estimates suggest that the world has consumed almost half its endowment; and that half of what is left will have to come from Abu Dhabi, Iran, Iraq, Kuwait and Saudi Arabia.

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Two of these countries, Iran and Iraq, are declared enemies in the US war on terror, and the others are near-feudal monarchies with a growing sub-class of exceedingly disaffected youth, living on declining royal patrimony derived from oil revenues - an arrangement that does not exactly give confidence for security of supply.

Evidently, the world is not about to run out of oil, having slightly more left than it has used during the first half of the oil age. Vested interests like to comfort us by pointing out that existing reserves could support current production for more than 30 years. But it is absurd to imagine that production can be held constant for a number of years and then stop dead overnight, when all oilfields are observed to reach a peak in production before declining towards exhaustion.

The natural pattern is for a correlation between peak discovery and peak production. Discovery in the 48 contiguous US states peaked in 1930 and led to a corresponding peak in production 40 years later. Discovery in the North Sea peaked in 1973, but advances in technology reduced the time lag to peak production to just 28 years. Production in the UK is falling fast, and Norway is not far behind. At the present rate of depletion, North Sea production will have halved within about ten years, forcing Europe to compete for growing imports. With world discovery having peaked in 1964, it should surprise no one that the corresponding peak of production is imminent.

Had the international oil companies kept control of the Middle East with its abundant reserves of cheap and easy oil, they would have depleted it before moving on to the more difficult and costly oil. Such a natural progression would have alerted us to gradually rising cost and growing scarcity. But when they lost control through sequestration, they turned to the difficult and costly sources, and they worked flat out, leaving the Middle East governments with the difficult task of managing swing production to make up the difference between world demand and what the other countries could produce.

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This in turn introduces the issue of spare capacity, which is another confused subject. No company or government wants to drill oil wells only to shut them down or choke back production, but it is only such wells that can be most easily turned back on if the need arises. It seems that the world was about to run out of spare capacity two years ago, causing oil prices to begin to soar. They could have gone much higher had recession not intervened, cutting demand and reducing pressure on price. This pattern is likely to repeat itself in the coming years with economic recovery stimulating new oil demand until it again hits the falling ceiling of supply capacity in a vicious circle, re-imposing successive and deepening recessions.

It appears that the US government has yet to grasp these ineluctable facts, as it forges a short-term foreign policy to meet domestic political pressures for cheap gasoline, considered by many voters to be a birthright. The country now imports almost 60 per cent of its needs, which can only rise as domestic production continues its long natural decline, save for a brief respite as its new deepwater oil begins to flow.

Future historians may look back and identify a degree of choreography in the present war on terror. At all events, the US is paying for troops to defend a Colombian export pipeline; it was implicated in a failed coup to depose the Venezuelan president, who was taking a tough line on oil; it has overthrown the government of Afghanistan on a proposed pipeline route; it has established military bases around the Caspian oilfields; and it threatens to invade Iraq, one of the last places left with substantial oil.

The US government may also be trying to hold down the price of oil by trying to undermine the confidence of the Middle East and the Organisation of Petroleum Exporting Countries in exercising their swing control. The otherwise respectable US Geological Survey supported this interpretation when it issued a report on the eve of a critical Opec meeting, suggesting that supply from new discoveries and "reserve growth" from existing fields would more than meet demand until 2025. The International Energy Agency and several governments were duped by this apparently scientific study, but the sad truth is that average annual discovery since 1995 has been only 10 billion barrels, far short of the 25 billion claimed. The results are doubly damning because early-years production should be above average as the larger fields are usually found first. In fact, the balance between world consumption and discovery has been in growing deficit since 1981, as we eat into our inheritance from past discovery with a growing appetite.

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The stone age did not end because we ran out of stone. It ended because we found better options as we moved through the bronze and iron ages to reach the computer age at the pinnacle of the industrial revolution. This last chapter, which opened only 250 years ago, was fuelled by cheap energy from coal, oil and gas.

Now, we have to retrace our steps to find ways to live with less energy from these sources. This time, there is no better substitute fuel in sight that comes anywhere close to matching oil in terms of cost and utility. It is a shattering discontinuity as option gives way to raw necessity. It is also a time of growing international tension, the first salvoes of which are already being fired.

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Colin Campbell is a board member of the Oil Depletion Analysis Centre in London. He will take part in a workshop on oil depletion organised by the Association for the Study of Peak Oil and Uppsala University in Sweden on May 23-24.