Cheap Oil: Soon to be Extinct?

Wednesday, August 6, 2008

I stumbled upon this article in The Bulletin of Atomic Scientists website and this confirms the possibilities I presented in my past article "The Root of All Our Woes". The Author Alfred Cavallo is an energy consultant based in New Jersey, Cavallo has worked at Princeton University's Center for Energy and Environmental Studies, where he studied indoor air quality, renewable energy, and transforming intermittent wind energy into a reliable power source. His article "OPEC, Peak Oil, and the end of Cheap Gas" is an eye-opener, highlighting the role of OPEC in the mockery of world economies and their contribution to the inflating price tags of oil and thus of petroleum products as well. Here is an excerpt of the Alfred Cavallo's article.

Since the beginning of the modern oil age in 1859, pessimists have warned that the oil wells would soon dry up or that oil production would peak and not be able to keep up with ever-increasing demand. Again and again, the pessimists have been proven wrong, often embarrassingly so, as science and technology have allowed more oil to be extracted from existing fields and from deposits in more challenging locations such as the Arctic and the deepest waters of the continental shelf. Indeed, oil production rates have increased, on average, by about 1.1 million barrels per day per year over the past 10 years.
But in many oil-producing nations, oil-field production really has peaked due to depletion of resources. This includes large producers such as the United States, Britain, Norway, Mexico, and Russia, and small producers such as Indonesia, Argentina, and Australia. Moreover, new oil field discoveries are generally getting smaller and more inaccessible.

Yet amid all the discussion about peak oil, one voice has been conspicuously absent, that of the Organization for Petroleum Exporting Countries (OPEC). OPEC's position on the petroleum-resource question should be the decisive factor in this ongoing and seemingly inconclusive debate. The organization now supplies about 42 percent of the world's petroleum and, unlike all other producers, OPEC members have quotas that are adjusted to insure that supply and demand are in equilibrium: If non-OPEC production were to either reach a plateau or begin to decline, OPEC producers would need to increase production substantially to meet ever-increasing world demand.
Oddly then, OPEC has been virtually silent on this issue. Their quiet refusal to comment cannot be due to lack of interest or expertise: OPEC now has its own research group that produces an annual
World Oil Outlook and a Monthly Market Report PDF that rival the work of any other energy forecasting group. Similarly, OPEC is certainly aware of the U.S. Geological Survey's World Petroleum Assessment Project, which for the first time brought industry and government experts together to evaluate world oil and gas resources. And OPEC is surely cognizant of ExxonMobil's projection PDF of a non-OPEC production peak by 2010 and the extensive discussion of petroleum resources in trade journals and the popular press.

Thus, OPEC's reasons for not publicly engaging in the peak oil debate must reside outside the rational business of drilling wells, building pipelines and refineries, and making market forecasts. Dissimulation or silence on the part of OPEC on these issues is a matter of prudence and subtle calculation.

Indeed, OPEC has a history of manipulating the oil market in response to political events. For instance, in 1973, OPEC raised oil prices by about a factor of four and embargoed oil exports to the United States in retaliation for U.S. support of Israel in the 1973 Arab-Israeli War. From 1985 to 1986, when Iran seemed about to win the war that followed Iraq's invasion in September 1980, OPEC increased oil production to drive down the price of oil in order to pressure Tehran to end the war. Following 9/11, OPEC decreased production by up to 5 million barrels per day to stabilize falling prices. In 2003, OPEC increased production by several million barrels per day to compensate for lost Iraqi supplies following the U.S. invasion and occupation of Iraq.
This history--by no means thorough or complete--demonstrates that OPEC is fully capable of taking decisive action to increase or decrease the price of oil by adjusting its production levels to protect its interests.

Since 2002, OPEC has increased its annual average basket price from about $24 per barrel to more than $125 per barrel--more than a factor of five. It has accomplished this increase with minor disruption in the world economy and without provoking significant retaliation from consumers. It's a stunning achievement.

Considering all of these factors, it's safe to conclude that the era of cheap oil is over, and that petroleum extraction rates won't increase substantially above current values. The transportation sector, which overwhelmingly relies on liquid fuels, will need to move toward much higher efficiency vehicles and electrification. Heating oil will become unaffordable, and heating and cooling using heat pumps powered with renewable electricity will have to become the new convention. Modern industrial economies will adapt to this new regime--if managed correctly, a benefit to everyone in the long run.
Furthermore, high oil prices mean that natural gas prices will also increase dramatically. In many markets, natural gas prices (including liquefied natural gas) are contractually tied to those of crude oil, while in the United States the link is informal. Since it costs as much to discover and drill for gas as it does for oil, producers in the past have obtained approximately equal prices (per unit of energy) for both.

"The Age of Expensive Oil" has finally arrived without large disruptions in the world economy, which is contrary to what many doomsayers predicted. They couldn't imagine that a modern economy could adapt to peak oil and foresaw the end of the modern industrial state, the end of large cities, and a return to a simple agrarian lifestyle coupled with a massive decrease in world population. Instead, peak oil has arrived gradually, without fanfare, and without major financial upheaval. The fundamental cause isn't primarily a limit on petroleum resources, but OPEC's long-term strategic considerations.
This development is as unexpected as it is welcome. For while it's appealing to believe that our addiction to oil will be cured by a sort of worldwide religious revival and the voluntary acceptance of limits on consumption, in practice, this is extremely unlikely. Far more certain is a market-based approach of gradually increasing prices to ration a scarce commodity and force consumers to take on efficiency, conservation, and new technologies as matters of extreme urgency.

Indeed, the truth is dire for economies that rely on oil for development and it is sad that the architects of fear themselves are those who produce and control oil and countries who don't belong in their circle are left to squander in the dark begging for their mercy. What will the future become for countries like the Philippines then? Surging oil prices is only a tiny speck in a big mosaic of problems this country faces and yet we cannot even address one so small for us to address the bigger problems that lie ahead of us.

*More of articles about oil can be found here.


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