Peak Oil Panic

abarrelfullabarrelfull wrote on 15 Feb 2010 08:58
Tags: energy oil peak security

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When captains of industry get together to warn the world of potential doom, everyone listens. When said captains include the publicity seeking Richard Branson, the impact is even more pronounced. So what are we to make of The Oil Crunch?

As we reach maximum oil extraction rates, the era of cheap oil is behind us. We must plan for a world in which oil prices are likely to be both higher and more volatile and where oil price shocks have the potential to destabilise economic, political and social activity.

It sounds like a doomsday scenario. In fact they continue in this vein, painting a bleak picture.

we face a situation during the term of the next government where fuel price unrest could lead to shortages in consumer products and the UK’s energy security will be significantly compromised.

How realistic is this view of the oil market?

It rests on the idea that oil demand will continue to increase, whilst supply will be unable to keep up. This view is underpinned by the following ideas.

  1. The worlds biggest oil fields have been discovered, and are drying up
  2. Demand for energy is increasing
  3. Finding and producing new oil is more expensive.

Whilst I don't dispute these points, I do find issue with some of their conclusions.

The underlying problem that I have with all of these is they ignore many of the feedback loops that exist. They also have their own preferred solutions, which creates more problems. If you think that solar is the solution, you might panic, even as the country is covered in wind turbines.

Other commentators have very different outlooks on the market. CERA, is a well known optimist. They see the end of demand growth in the OECD as very significant.

As the world moves from recession to growth, oil demand will grow once again. However, all of the demand lost in the developed world (countries in the OECD) is unlikely to return, even over the long term, and 2005 could be the peak year of OECD oil demand.

Now this is extremely important, and has a conclusion which seems to be in complete contrast with the peak oil task force.

  • There is no reason to believe that the strong emerging economies of the developing world cannot live with oil prices in excess of $120/b (POG)
  • As the oil intensity of OECD economies declines, economic growth will be more insulated from the impact of oil price swings. (CERA)

CERA believe that OECD economies can live with higher oil prices, whilst the peak oil group thinks the opposite. Whilst the emerging markets may seem unstoppable as viewed from the stagnant developed world, their energy intensity is much higher than their richer counterparts. A comparison is given in the table below.

Country Energy Intensity (BTU/$)
Canada 16.486
United States 8.841
France 7.767
Germany 7.260
Italy 6.913
United Kingdom 5.810
Japan 4.467
Russia 80.923
China 34.931
India 24.616
Brazil 12.561

Source: IEA

The UK, is not only the G7 member with the second lowest energy intensity, but has an energy intensity of just 17% of China, or 24% of India. It seems like the wrong people might be worrying about oil prices.

The biggest reason to be sceptical of the doom merchants is the global natural gas glut. It means that for many uses, there is an alternative, a factor that will impact very heavily on future fuel oil & heating oil demand. Heating is still a major use for oil.

If we take a look at the suggestions that are made, we get into even worse territory.

Continue measures to improve energy efficiency and wean transport from its dependence
on oil. These include promoting technological developments such as hybrid engines, vehicle electrification and weight reduction

If we are to use oil at all, then it should be as a vehicle fuel. The energy density of gasoline and diesel far exceed that of the alternatives, particularly electric cars. The alternatives are also significantly more expensive. It is unfortunate that so much focus is placed on transportation, when

  1. The effect of high excise duties has already had a massive impact here, and will continue to do so.
  2. These duties seriously reduce the impact of higher oil prices on consumers
  3. There is so much low hanging fruit elsewhere.

Take this simple statistic.
Share of transportation in global oil consumption in 2006 was 50%, expectations for 2030 is 56%. We are wasting nearly half of the world's oil in areas where there are better alternatives, whilst trying to replace it in the one area where it is the best option.

The whole report sounds like special pleading to me, companies that could benefit from the reports conclusions are those that have prepared it.

Throughout there is a sense that they are trying to have it both ways. Oil prices will rise, but that will not put the expensive unconventionals in play. Natural gas is cheap and abundant, but that will not cause switching from more expensive oil. Most of all, traditional fuels are going to get expensive, so let spend money on even more expensive alternatives.

I have no doubt that there is much that governments might need to do to enhance energy security, but I don't think that trying to have it both ways will work. The best way forward would be carbon taxes, and storage investments combined with much greater support for research to speed up the commercialisation of new technology. In many countries, though not the UK, much greater use of natural gas is called for. Above all, if we really believe that CO2 is a problem, then we need to embrace higher energy prices, yet they same wets that bleat incessantly about emissions are always the first to complain about high oil prices.


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