Revolution or peak oil?

Having hit a low of $10.00 a barrel in 1998 and a high of nearly $150.00 in 2008, the price of oil has settled comfortably above $100.00 a barrel.

The theory of “peak oil,” that global oil production was approaching a level from which decline was inevitable, has gone from the view of an eccentric minority to almost universal acceptance.

It is accompanied by a general conviction that growing demand from emerging economies meant a relentless growth in oil demand was inevitable.

Stable or falling demand in developed economies, combined with the impact of technology in finding new sources of hydrocarbons and improving extraction rates, would help the balance of supply and demand but only delay the inevitable crunch point.

Measures to avert the looming crisis have had very disappointing results. Carbon taxes on fossil fuels in developed economies have merely resulted in energy intensive industries emigrating to other locations.

The painfully slow rehabilitation of nuclear power was dealt a severe blow by the nuclear accident at Fukushima. As a result, Germany has announced the closure of all its nuclear power stations at a cost that Siemens estimates at $3.4trn by 2030.

Subsidies

Heavily subsidised incentives for wind and solar power have proved to be poor value for money; Germany has spent $130bn on subsidising solar power, which accounts for just 0.3% of total energy production. US subsidies for biofuel production have resulted in 40% of the corn crop being diverted into ethanol production, pushing up global food prices and exacerbating political instability around the world.

While government initiatives have failed or even been counter-productive, the long-term outlook for energy may have been transformed by private sector innovation. The potential to extract oil and gas from shale deposits has been known for decades but only in recent years has significant progress been made with the development of hydraulic fracturing or “fracking” of source rocks.

This has resulted in a reversal of the decline in US oil production and a collapse in gas prices there to under $2 per million British thermal units (MBTU) compared with over $15 per MBTU for liquefied natural gas (LNG) in Asia.

Shale impact

So far the impact, even in the US has been modest. Shale gas accounts for about 23% of US gas consumption, which in turn accounts for 24.9% of US energy consumption.

US oil production from shale is expected to rise by 360,000 barrels per day (bpd) over the next five years, reducing imports by over $15bn per annum, but the US still imports over nine million bpd, nearly half of its demand.

In the long term, the potential for shale gas is significant but less so for shale oil; the impact on global energy demand will depend on the substitution of gas for oil.
This is being helped by the improved technology and reduced costs of converting gas to LNG and by the increased use of LNG in commercial vehicles; the International Energy Agency estimates the global use of gas will increase by over 50% and account for 25% of world energy demand by 2035.

The Institute for Energy Research estimates that technically recoverable oil reserves in the US could be 1.3 trillion barrels, six times the proven reserves of Saudi Arabia, and gas reserves could be 2700 trillion cubic feet (tcf). Based on more conservative Energy Information Administration country-by country estimates of gas resources, shale could double proven natural gas reserves.

All such estimates are prone to a wide degree of error; the US estimate was recently revised down from 827 tcf. On the other hand, there are probably significant reserves still waiting to be discovered or proven (the range is still 423tcf to 1230tcf) and extraction rates could easily rise as technology and expertise improves.

The EIA estimates the US may have enough gas from all potential sources to last for 95 years at the 2010 consumption rate.

Environment

Against this, there are considerable political and environmental objections, encouraged by an alternative energy industry facing a potential nemesis. Fracking has been associated with minor earth tremors in nearby locations (minor compared with the subsidence problems caused by coal mining) and there are objections to the pumping of chemicals into the ground due to the possible leakage into aquifers. Despite a lengthy list of claims by activists and a sceptical media, there is every
reason to believe that environmental issues can be overcome in almost all locations.

Incompetence

Government incompetence is at least as important an issue as the environment in preventing the extraction of hydrocarbons.