Running out of Oil?

Oil importing countries faced an unassailable challenge with the “historic high” price of oil. In 1864, a barrel of Pennsylvanian oil traded for 8.06 in dollars of the day ($97.79 of 2004) and in 1980, a barrel of Arabian light (posted at Ras Tanura) sold for 35.69 in dollars of the day ($82.15 of 2004). The world has not yet faced a “fourth oil shock” mainly because the price went up gradually to over $70 a barrel over a full three-year period, unlike in 1979-80.

There is a “fear” premium of $7 to $15 due to the destabilisation of the Gulf region. The world energy growth started to increase significantly from 1995. Especially since 2002, the real trend of growth rate of world oil demand is well above 2.25 per cent a year. For some countries, notably China, Iran and Brazil, the growth rate is at least 4 per cent a year.

ยป Source: Rediff.com

The question that naturally arises is whether the high price of crude oil is due to its physical shortage, the geo-political “risk” or demand exceeding supply in the short term. Or has the time for peaking of crude oil arrived?

Peak oil

A study of the reserves to production (R/P) ratios - the number of years that reserves of oil will last at current production rates - shows that the R/P ratio of non-OPEC countries is about eight to 10 years (for instance, in the case of the US and Norway). For the Organisation of Petroleum Exporting Countries (OPEC), it is over 55 years. Indonesia and China are now net importers of crude oil. Chinese, Mexican and Canadian production will peak in the next few years. Former Soviet Union’s production peaked in 1988. OPEC production is likely to peak between 2025 and 2030.

Global demand has grown by more than 14 million barrels of oil a day in 10 years. Saudi Arabia has produced 63 billion barrels out of its 110 proven reserves since 1979, that is, more than 57 per cent of the proven reserves.

In his book, The Hydrogen Economy, Jeremy Rifkin, writing about “when there is no more oil”, notes that after the Yom Kippur war in 1974, OPEC revenues were $340 billion; by 1980, they had grown to $438 billion and are currently over $650 billion a year.

Rifkin writes: “The Times of London on April 8, 2006 ran a story headlined, ‘World cannot meet oil demand’ because it lacks the means to produce enough oil to meet rising projections for fuel demand, according to Christopher de Margerie, head of exploration for Total. Over the last four years, the world has been consuming six barrels of oil for every new one found.”

Peak oil, the day when oil production reaches its maximum and begins a steady decline until it is gone in 40-50 years, is fast approaching. Problem Day is the day when demand permanently exceeds production. It would generally happen before Peak, when demand and supply are both still rising, but when the demand is rising faster. The consequence will be a sharp and permanent rise in prices to suppress that demand, which is likely by 2010.

Mega-projects, more capacity

According to Petroleum Review (April 2006), the mega projects database shows that both Canada and the OPEC producers plan major significant new capacity additions by end 2010. The database identifies some 21.3 million barrels a day of new capacity due on-stream by 2010.

Considering that the projects that actually came on-stream in 2005 had a notional capacity of around 2.6 million barrels a day and the actual increase in 2005 was just 1.05 million barrels a day (according to IEA’s Oil Market Report, February 2006), 2006 might not be any different.

Crude oil outlook

Cambridge Energy Research Associates (CERA) sees potential for exceptional growth in non-OPEC oil production in 2006 and 2007 - a cumulative two-year increase of approximately 2.5 to 3 million barrels of oil per day. CERA concludes that the world’s oil-production capacity could increase by as much as 15 million barrels per day between 2005 and 2010 - the biggest surge in history. However, this thesis is not borne out by experience.

There are growing fears that the black gold is running dry. A small group of geologists has been claiming that the world has started to grow short of oil and that an imminent peak in production will lead to economic disaster.

Despite this obsession, what really matters to the world economy is whether we have enough affordable and convenient alternative liquid fuel to run our current fleet of transportation. The race is on to manufacture “greener fossil fuels” for blending with petrol and diesel to extend its useful life.

The EROEI factor

India is going ahead with the additives, methanol and ethanol, from jatropha plant without applying the concept of “energy returned on energy invested” (EROEI). When we substitute a source of energy - that is, oil - with a positive EROEI with another such as ethanol with a negative EROEI, there is a loss of gross energy produced.

An EROEI of one means that for every unit of energy spent or invested, you get back one unit of usable energy. When the EROEI is negative, you are actually burning up more energy than you are getting for use.

The US figures for EROEI for non-renewables are all “plus”, while for renewables, these are less than one for ethanol, switch grass and wood and negative for bio-diesel.

The Hirsch report

The Hirsch report (February 2005), by an agency of the US government deals with impacts, mitigation and risk management of “peaking of world oil production”. A sampling of recent projections from a number of eminent oil persons, geologists and energy economists predicts the peak from as early as 2006-07 (A M S Bakhtiari, Iranian Oil Company) to as late as 2025 or later (Shell). Energy economist M C Lynch says there is “no visible peak”!

Oil peaking could cost the world economy dearly. Aggressive, appropriately timed fuel efficiency and substitute fuel production could provide substantial mitigation. Peaking of world oil production presents the world with an unprecedented risk-management problem.

As peaking approaches, liquid fuel prices and price volatility will increase dramatically, and, without timely mitigation, the economic, social and political costs will be unprecedented. Viable mitigation options, involving literally trillions of dollars and requiring more than a decade of intense effort, exist on both the supply and demand sides.

Detailed quantitative studies to address the uncertainties and to explore mitigation strategies are a critical need.

Conclusion

First, India must work out the EROEI before venturing into additives.

Second, as no fuel in sight could fairly substitute liquid hydrocarbons (60 to 80 per cent of hydrocarbons use is for transportation), conservation and research in alternate fuels need precedence.

Third, India should initiate studies for oil price and oil demand forecasting for the next two decades.

Last, peaking is bound to occur; the question is of timing. India should commence preparations to mitigate peaking immediately.

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