Oil at $112 dollars per barrel. Saudi Arabia cuts production while saying the world is well supplied. Politicians put together a committee to investigate speculators, whom they blame for high prices. Sound familiar? If so, it’s because it all happened four years ago.
In 2007, oil prices were breaking new records, Saudi Arabia was unable or refused to increase production, and speculators were being blamed. A year later, oil reached $150 a barrel and, despite investigations, no speculator culprits were found. Then the world economic recession killed demand and gave us a short respite from high prices on the back of failing economies and increasing unemployment.
But now, with the world economy back on its feet, oil demand is again rising. Oil production, on the other hand, has been flat. In 2005 world crude oil production was about 74 million barrels per day. In 2010, world crude oil production was about the same – 74 million barrels per day. 2011 shows no chance of significant increase in oil output. No new oil in the face of 500 million more children worldwide since 2005 and burgeoning developing economies trying to prosper. In such a scenario, prices have nowhere to go but up.
Even worse, long term oil production output looks dismal. The International Energy Agency (IEA) estimates that world oil production from existing wells will fall to 16 million barrels per day by 2035. That’s more than 50 million barrels per day needed in the next 24 years just to keep production flat. Unfortunately, new project reports over the next five years show gross new oil production ranging between 1.2 and 1.8 million barrels per day. If this discovery rate holds, world crude oil production will fall to around 52 million barrels per day by 2035. A net decline of 1 million barrels per day every year.
The new oil is also more expensive, requiring major investments in infrastructure or expensive mining and fracturing technology. The oil has to be forced out of the ground, tapped from sea beds miles beneath the ocean, or crushed and baked out of mined rocks. It’s just not the same as poking holes in the ground and watching the stuff gush out.
Furthermore, the growing contribution of alternative liquid fuels (fuels that can be used interchangeably with oil) such as liquid natural gas (LNG) and biofuels contain less energy and are also more expensive to produce than traditional crude oil. So though unconventional liquids production increased from about 11 million barrels per day in 2005 to 14 million barrels per day in 2011, the energy available in all that fuel is roughly equal to about 9.1 million barrels of crude oil per day (7.1 in 2005). Overall, the net energy increase in oil equivalent of all fuels is only about 2 million barrels per day over six years, or 330,000 barrels of oil equivalent per year. Prior to 2005, world demand was increasing by at least 1 million barrels per day every year.
In total, a combination of zero growth in crude oil supply, slow growth in alternatives, rampant demand, rapidly growing world population, the increased cost and difficulty to access new supply, the low energy return of alternative fuels, and the failure to transition away from oil as the primary energy source for transportation has put us in this fix. Unless we make a concerted effort to speed a transition to wind, solar, and nuclear base-load electricity sources, and to all-electric and plug-in electric vehicles, we will continue to see these price shocks occurring regularly and, possibly, more violently. Repeated energy price shocks are also likely to further damage a faltering world economy at the same time human CO2 emissions wreck havoc with the climate. Such prospects make dependence on oil and other fossil fuels little less than a slow motion world civilization suicide.
As for speculators, it’s unlikely that a few large trading firms have cornered a ‘well supplied’ oil market and are forcing the world to pay such outrageous prices. If that is the case, these corporations should be broken into little pieces and their CEOs, execs, and governing share-holders sent to prison. More likely, I think, is that speculators are merely capitalizing on an existing scarcity in oil supplies and thereby increasing prices at the margins. It is possible that new rules will be needed to reduce the impact of this kind of speculation. Such market re-ordering might drop prices by twenty or thirty percent temporarily. But it will not address the underlying structural issue of over-dependence on oil and the likely decline in long-term supplies.
So it would be far wiser to set aside the political posturing and do everything we can now to transition away from dependence on oil and fossil fuels. How many more price shocks do we need to endure before our policy makers put us on a consistent path toward this goal? Or will oil company campaign money continue to enforce our decline? With each turn in this vicious cycle our resources dwindle and our time grows ever shorter.
Might be something worth calling your Congressman about.
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