Mark Mills, Forbes
Time was, not so long ago, that energy economists and pundits went practically apoplectic at the thought that oil might cost US$80 a barrel.
In the recent political sturm und drang, energy and oil in particular have moved off of center stage, but before this fall's mid-term elections oil will move back into the spotlight at or likely beyond the transformational US$100 per barrel price. Well before the next presidential election cycle, oil markets will almost certainly test new highs, set last time in July 2008 at a heretofore peak of US$147 a barrel.
Time was, not so long ago, that energy economists and pundits went practically apoplectic at the thought that oil might cost US$80 a barrel. That's a price the world seems blissfully unexcited about today. The magic US$100 number will change all that, reviving and reshaping long-standing debates around every aspect of energy policy.
The Top 10 Oil Fields Of The Future
The World's Biggest Green Energy Projects
Best Energy Savers For The Buck
Cars With The Best Gas Mileage
How likely is US$100 in 2010, considering that the U.S. Department of Energy's recently released oil price forecast for 2011 is US$85 a barrel? As I write this, oil was already hovering at US$80 a barrel.
The oil price hiatus of the past couple of years came from the global recession (demand reduction) not from a supply increase from oil, or alternatives to oil. The past two years eviscerated 6 million barrels per day of Western oil demand. The emerging economies are of course the entirely new factor in the century-plus world oil market. At the same time as industrial-world demand collapsed, oil use in emerging economies grew some 5 million daily barrels per day.
Now all the world's economies are largely in recovery, with some nations notably in Asia moving sooner and faster. Nearly every economic forecast sees 2010 global GDP growth over 4%, Goldman Sachs figures 4.5%. A half percentage point here or there is market-moving in the world's US$2.5-trillion per year oil market. So this year, economic forces already take global oil demand back to the peak set in 2007 and 2008. Prices soared last time demand was at those levels because supply just couldn't match the pace. Wither supply now?
Oil supply can be divided in two basic buckets: OPEC, and everyone else. For the latter category, from Russia to Brazil, and Mexico to Canada collectively, over the last half-decade total oil production has remained essentially flat, and did so even during the last cycle of record prices and presumably incentives to produce. OPEC absorbed nearly all the production cut-backs during this recession to follow declining demand. And, more importantly, before the recession hit, nearly all the increase in supply to meet demand growth from 2005 through 2008 came from OPEC. OPEC is now almost back to its previous peak production, and will reach that level later this year to fuel recovering economies.
So, in 2010 the world's oil production machinery will be running flat out, again. And while oil exploration in most places (outside of the U.S.) will likely go beyond flat out to bubble-like pursuits, and more oil will be found, the time-lag between discovery and delivery to the pump is measured in years, perhaps decades. The latter time frame is particularly true in the case of the tantalizing but staggeringly deep and technologically challenging offshore finds in the Gulfs of Mexico and Brazil. Drilling a single well in ultra-deep waters can cost US$100-million. Finding new ever-deeper and remote fields, and stretching existing fields will create a bonanza for oil service and exploration companies like Schlumberger and Transocean.
Then there is the reasonable possibility that many oil producing nations (keeping in mind that the majority of the world's oil supply is controlled by nation-states, not private companies) may make the rational decision to limit increased production. Why sell more today that you could sell later at much higher prices, especially given the cash gusher that US$100 or more per barrel already represents?
One key price bellwether can be seen as activity heats up at the world's largest known single resource of hydrocarbons, Canada's several thousand billion barrels of hard-to-extract and thus expensive Athabasca oil sands in Alberta. Devon Energy recently announced buying half of BP's billion-dollar level oil sands acreage. Similar billion-dollar-class acquisitions or production plans have also just recently come from France's Total, ConocoPhilips and PetroChina. While Athabasca's output has doubled in the last half-decade, and current capital plans will double it again in another five years, all that growth will be absorbed in just a year or two of increased Asian demand.
Whatever the debate about the ultimate total physical hydrocarbon resources on this planet, using technology we have, equipment and infrastructure that exists or could be built under any scenario in a few years, 2010 probably marks "the peak" production of oil as we know it today. You don't have to be an economist or pundit to know the implications of demand continuing to grow against an essentially fixed supply base. (Readers familiar with my views on long-term energy supply -- noting the title of the book I co-authored, The Bottomless Well, should not confuse what's possible, eventually, with what is today practical, in particular in the politically meaningful time-frames.)
With no short-term salvation derived from a dramatic growth in oil production, then all the world has to do to avoid the next oil price apocalypse is cut demand, or find alternatives.
Cut demand? We did that experiment. It's called a recession. The only other short-term fixes are all behavioral, few of them pleasant. President Nixon tried that with the infamously unpopular and wildly ignored imposition of a national 55 m.p.h. speed limit.
Demand can also be cut more palatably with technology-driven efficiency, and technology-derived substitutes. Think of the former as radically better internal combustion engines, and the latter as biofuels and synfuels. Neither can be implemented quickly, at any price, even though both will be used more extensively if oil prices stay north of US$100 a barrel. Infrastructure and economic inertia are what they are. Vehicle fleets take time to turn over, and we already use one-third of our corn crop to make biofuel that supplies only a few percent of U.S. transportation needs.
Absent a nuclear war, a pandemic or another Great Recession, there's little that can be done about the near future demand-supply balance. Demand is going back up faster than supply.
Much of what has become a debate about the "best" alternatives will be rendered moot in an environment where we will need every alternative and will want to first pursue the least politically and economically painful. In reality, the most effective way to insulate America from high-priced oil will be a growing economy rendering energy costs in general, a declining share of GDP.
That said, most debate will focus on both physical resources and technologies to supply the world's energy appetites, both of which are abundant and subjects for another day and column. As they say, timing is everything. The road to a bright energy future is almost certainly going to be bumpy. Buckle your seat belts.
Mark Mills, a physicist, served in President Reagan's White House science office, is cofounding partner of Digital Power Capital, an energy tech venture fund, and coauthor of The Bottomless Well, Basic Books (2005). Mills may hold positions in companies discussed in this column and may provide technology assessment services for firms that have interests in the companies.
No comments:
Post a Comment