Major Industry Trends
Extracting Meaning from the Oil Price Roller Coaster
The oil price has had a wild ride over the last year and a half. At one point in June 2008 it was heading past US$140 a barrel, and in December 2008 it looked like the world would see the return of sub-US$30 pricing for a barrel of oil. By March 2009, it was hovering around US$51 a barrel, and giving some signs of straining at the leash to be off and away again as soon as the world’s stock markets start moving reliably upward once more.
The statistics of the global oil industry provide interesting reading. There are some 687.44 billion barrels of oil (bbl) in proven reserves around the world, and exactly 40 countries have reserves in excess of 1 billion barrels (source: www.nationmaster.com). That sounds like a great deal of oil, but as Nationmaster’s editor, Ian Graham, observes, the scale of those reserves diminishes when attention turns to how fast oil is being consumed.
In 1980, according to the US Energy Information Administration (EIA), worldwide consumption of oil amounted to just 63 million barrels of oil a day (mb/d). By 2009, that had risen to 83 mb/d. The International Energy Agency (IEA), which publishes the World Energy Outlook (WEO) each year, estimates that by 2030, if we continue on the same path, that total will have increased by 45% to 106 mb/d.
Dividing 687.44 billion (the total of proven reserves) by 106 million (the daily consumption rate in 2030) to get the number of days of consumption left, then dividing again by 365 to turn that into years, produces the rather surprising figure of 18 and a bit years before existing proven reserves are 100% depleted. Of course, the starting point here is 2030, which lies 21 years off from this point in time, so the whole projection is not a particularly likely scenario. The world will not be consuming 106 mb/d of oil in 2030, as the existing reserves would not support demand on that scale for that length of time. The laws of supply and demand would price oil out of reach as a source of energy well before any theoretical depletion point could be reached.
Other factors that have to be taken into account include the world’s refining capacity, and the leeway—or lack of it—between productive capacity and demand. In fact, demand is already pushing at the absolute limits of existing refinery capacity. As Nobuo Tanaka, the executive director of the IEA says, “Current trends in energy supply and consumption are patently unsustainable—environmentally, economically, and socially. They can and must be altered.
“Rising imports of oil and gas into OECD regions and developing Asia, together with the growing concentration of production in a small number of countries, would increase our susceptibility to supply disruptions and sharp price hikes. At the same time, greenhouse-gas emissions would be driven up inexorably, putting the world on track for an eventual global temperature increase of up to 6°C.”
To make oil last another 100 years, according to Nationmaster’s Ian Graham, worldwide oil consumption would have to be cut to 6.87 billion barrels of oil per year, or just over 8% of our current rate of consumption (6.48% of the projected figure for 2030). By any standards, that looks to be an extremely difficult feat to pull off, but it may well be that pricing alone will drive the world to find alternatives or to cut back drastically on its usage.
In the short term, cutting back does not seem to be the way the world is going. In an article published in the European Tribune, and on www.energybulletin.net, Jerome Paris pointed out that there were some 7.3 million new car owners in China in 2008. Assuming that they each drive 5,000 miles a year at 40 miles to the gallon, this alone would generate demand for an additional 45.6 million barrels of crude. “In other words, new Chinese drivers alone will take up 25–30% of the Saudi 2008 production increase (before OPEC cut production to try to drive up falling oil prices),” he said.
Paris argued that the supply situation is being aggravated not just by the appearance of new consumers of oil, but by the fact that the producing nations themselves are turning into avid consumers of oil at the same time as their production is stagnating or going into reverse. “The biggest increases in oil demand, beyond the ‘usual suspects’ of China and India, comes from the oil producers, Saudi Arabia, Brazil, Russia, and the UAE,” he argued.
Market Analysis
Peak Oil—and Its Alternatives
The peak oil theory, formulated in the mid-1950s by one-time Shell geophysicist M. King Hubbert, is based on the Hubbert curve, which sees oil production peaking at a definite point in time, then tailing off. The curve itself works for any limited natural resource, and is frequently cited in “peak oil” debates in the sector. What makes the Hubbert curve significant for discussions about the future of oil and gas as energy reserves is that it predicts a steep fall off, or a high rate of decline of production as existing assets wind down. Peak oil debates tend to have an “Armageddon” quality to them, because they use the steep fall off predicted by the Hubbert curve to argue that global oil production will decline too fast for the world to develop sufficient alternative sources of energy to replace that gained presently from oil.
Shell itself does not subscribe to peak oil theory (see www.shell.com) but does agree that since 2000 demand for oil has accelerated. “Looking forward and assuming adoption of alternative policies, even the lowest projection shows that energy demand will continue to grow at 1.4%, while the highest projection is that demand will grow 2.5%. At that rate, demand in 2030 will be more than double what it was in 2000. While we do not subscribe to the peak oil theory, the truth is that, particularly outside the Middle East, the readily accessible sources of conventional oil are being depleted,” Shell says.
The answer is not to trot out the Hubbert curve and wring one’s hands, Shell says, but rather to look to some hard choices, including converting oil sands to useable oil fluids, as Shell is doing in Canada. Other options which should also be explored, according to Shell, include stepping up the progress on renewables and introducing a “cap and trade” carbon tax.
The environmental lobby, however, is massively opposed to oil sands exploitation, arguing that they are easily one of the worst (most polluting) forms of energy. WWF, for example, argues that the extraction of oil from oil sands creates “three times the carbon emissions of conventional oil production and destroys the local environment, devastating forests, and using massive amounts of river water. Oil sands production contributes to climate change, and creates dangerous waste, including poisonous water that leaks into the wider environment” (see More Info).
Oil shale is even worse, WWF argues, producing up to eight times the carbon emissions of conventional production. It quotes NASA’s comment by Jim Hansen: “Squeezing oil from shale mountains is not an option that would allow our planet and its inhabitants to survive.”
The Institute for Security and Development Policy (ISDP), a Stockholm-based independent research and policy institute, has done a study titled “The global race for oil and gas—Power politics and principles in Asia.” It argues that whether or not global oil and gas is actually now in decline rather than on the increase, with the consequent gap between demand and production widening, it remains true that some countries and politicians are acting as if this was the case. This is creating a global “dash for oil.”
In particular, the Institute argues, “Competition between consumer states over energy raw materials has already resulted in a race for oil and gas in Central Asia and Siberia.”
What could this mean for the global economy? According to the ISDP, in the absence of some serious geostrategic thinking, we face some unattractive alternatives: “It is likely that China and India, ultimately even the US, the EU, and Japan, will begin to ‘play hard-ball’ in the race for raw energy materials.”
The ISDP hopes that the EU’s example of adhering to the Energy Charter Treaty, an international agreement that was signed in the Hague in December 1991, offers a way forward for the world, as it works its way through the traumas associated with moving from dependence on oil to other energy sources. The Treaty’s essence is the peaceful implementation of non-discriminatory conditions for trade in energy materials, based on World Trade Organization rules, and provisions to ensure reliable cross-border energy transit flows. The world has already had several examples of how difficult such cross-border agreements can be, the most recent being Russia’s spats with Ukraine and Belarus, both of which had the potential to have a serious impact on the supply of oil and gas to Europe.
One interesting fact that outlines the pressure that is starting to be felt on the world’s oil reserves, the ISDP says, emerges from a study of the reserves declarations of four oil companies, Exxon-Mobil, BP, Shell, and Chevron/Texaco. Together, these four account for 15% of the world’s energy production. “The annual added capacity of their collective purchasing of new oil fields as compared to their combined sales of oil was 153% in 1997 (reserves in excess of consumption). By 2000, that figure had decreased to 125%, and in 2004 it was just 70%,” the ISDP says.
This dramatic decline in reserves versus consumption goes away if the view is opened up to include “unconventional assets” such as oil sands and oil shale, already discussed above, or oil from coal, a process that South Africa has used for years. Cambridge Energy Research Associates (CERA) has calculated that, by 2010, the contribution by unconventional assets to oil production could be as high as 35% of the total. The oil reserves in tar sands and bitumen match or exceed the total reserves for conventional oil. The ISDP estimates that production of oil from bitumen works out at around US$70 a barrel—not exactly attractive when the price of oil is US$53 a barrel, but very attractive at prices above US$90 a barrel. The environmental impact, though, can be expected to generate tremendous opposition to this energy source if production threatens to become mainstream.
The Global Gas Position
According to the EIA’s “International energy outlook 2008,” natural gas consumption is growing twice as fast in non-OECD countries as in the OECD. Moreover, the EIA expects production increases in the non-OECD region to account for more than 90% of the growth in world production between 2005 and 2030. Worldwide, natural gas consumption will increase from 104 trillion cubic feet in 2005 to 158 trillion cubic feet in 2030, about a 51% increase.
The EIA expects high and rising oil prices to cause natural gas to be used increasingly as a replacement for oil. The spin-off benefit of this, for global warming, is that natural gas produces less carbon dioxide when burned than either coal or petroleum, making it a cleaner fuel. Industry is the world’s largest consumer of natural gas, and is expected to account for 43% of world usage by 2030. Electricity generation from gas-fired power plants will account for 30% of this consumption, the EIA predicts. Today, in both China and India, natural gas accounts for just 3% of the energy mix. This will grow by 5.5% per year in the case of China, and by 4.6% in the case of India, up to 2030. The Middle East is already looking to ramp up liquefied natural gas exports. In Qatar, for instance, export facilities with a total capacity of approximately 3.6 trillion cubic feet of natural gas (77 metric million tons of LNG) are expected to be in operation by 2015, compared with the country’s 2005 LNG exports of 1 trillion cubic feet. The increase in exports from Qatar alone would account for 14% of the total projected increase in production from 2005 to 2015 for non-OECD countries, excluding non-OECD Europe and Eurasia, the EIA says.
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