It is widely acknowledged that crude oil resources are finite and the world will one day have to wean itself off its fossil fuel dependency. However, with advancing technologies that can extend the life of an oil well or enable deeper and deeper drilling, it’s a reality that often seems intangible.
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Nevertheless, the important debate about ‘Peak Oil’ – defined by M King Hubbert’s theory that peak oil is the point in time when the maximum rate of petroleum extraction is reached – still rumbles on.
In October 2013, two polarising reports were released, one by the World Energy Council (WEC), and another by researchers at the University of Maryland (UMD), both on the imminence of peak oil. The WEC stated that ‘reserves are sufficient to meet even a significant upturn in demand for decades to come,’ while the UMD said ‘Peak oil is, in fact, imminent, if not already here’.
Although the reports come to opposing conclusions they both highlight important issues regarding peak oil that will, in the future, affect what happens in reality. These issues are carbon emission targets, emerging technologies, oil price and estimated recoverable reserves, as well as the question of whether alternative energies grow fast enough to stave off future oil reliance.
Peak oil – sooner rather than later?
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By GlobalData"There will be fossil fuels left for a long time," concedes Klaus Hubace, one of the authors of UMD’s report ‘Economic Vulnerability to Peak Oil’, which appeared in the Global Environmental Change journal. "There are considerable stocks, but peak oil really looks at flows and compares flow-rates of fossil fuels with the increase in demand."
Hubace and his fellow researchers conducted a literature review on peak oil studies or studies, writing about the availability of fossil fuels and used economic input-output tables provided by the Bureau of Economic Analysis (BEA) for the US to plot industry sectors most vulnerable to peak oil.
The UMD team looked at several factors which could affect the onset of peak oil, such as capital expenditure, rising interest rates and declining exports and concluded that ‘the market is getting tight’ and peak oil is imminent due to cost factors.
"You can see an increase in capital expenditure over the last decade or so, it has nearly trebled in real terms since 2000 in the US," said Hubace. "Now the interest rates are low but in the future we will most likely have high interest rates, so we will have more expensive cost of exploration, as well as higher capital requirements."
He adds that globally, fossil fuel exports have been declining partly due to an increase in domestic demand.
"There is a declining rate of extraction, about 4% annually, of conventional fossil fuels and the gap is filled up with non-conventional fossil fuels, like shale gas, but shale gas has its own problems, it is highly capital intensive and it peaks even faster," Hubace added.
If production costs have risen dramatically, so has oil price. According to a Macrotrends chart in 1999 oil price was around $23, peaking at around $137 in 2008, dropping to $51 amid the peak of the economic meltdown, rising to around $96 in Jan 2013.
When oil prices peaked, so did the conversation about the imminence of peak oil.
To imagine the effects of further increases, Hubace and his team calculated a $100 dollar increase on the price of oil today to determine what effect this would have on certain industries. They determined this increase would have a significant impact on iron mills, chemical and plastic products manufacturing, fertiliser production and air transport that could, overall, put the entire US economy at risk.
These industries would have to move away from dependence on oil in order to mitigate the devastating effect of an oil price increase of $100, which they say is entirely feasible.
Researchers at UMD are not the only group who predict a peak oil problem sooner rather than later. Leader of Citi’s commodities team Ed Morse in a report said: "The tipping point for oil may come much sooner than the markets are expecting."
Citi predict demand will level off at around 92 million barrels, as long as the fuel efficiency for cars and trucks keeps improving by 2.5% a year. Currently the world consumes an estimated 89 million barrels of oil a day.
Could Peak Oil still be decades away?
Arguing the case against imminent peak oil, the WEC states global crude oil reserves are almost 60% larger today than in 1993 and the production of oil has gone up by 20%.
Its study involved 16 high level workshops in countries such as China and Brazil, and senior energy leaders in both government and business. It stated that if unconventional oil resources, such as oil shale, oil sands, extra heavy oil and natural bitumen, are taken into account, the oil endowment of the world could be quadrupled.
WEC secretary general Dr Christoph Frei said these are conservative estimate because they do not include yet-to-be found resources or technologies that may be developed in the future.
"Looking back over the history, we have seen that supply tends to outstrip even optimistic predictions," he said.
The rising oil price could delay, not bring on, peak oil because it will pay for new technologies.
"New technologies have made it more viable to extract these more hard-to-reach resources," adds Dr Frei. "We see this with deepwater drilling and even now the pre-salt layers becoming viable off the coast of Brazil."
One of the differences between WEC’s analysis and many others is it does not see a reduction in global growth and demand.
"We see energy demand will continue to increase and double by 2050, primarily driven by economic growth in non-OECD countries," says Frei.
Some also believe carbon emissions targets are likely to force a decline in oil exploration and production (E&P) activities because it is one of the biggest carbon polluting industries. It has been suggested that in order to meet targets to limit global warming to no more than 2°C, much of the remaining oil, and coal, will have to stay in the ground.
Grantham Research Institute at the London School of Economics and Carbon Tracker estimated that two-thirds of the Earth’s estimated oil, gas and coal reserves would have to stay in the ground to meet this target.
It has even been suggested that oil companies oil reserve assets could actually become a future liability. According to the Globe and Mail, the managers of 70 pension funds with assets of more than $3tn wrote a letter to the top 45 oil, gas, coal and utility companies asking them to explain how climate change would affect their business.
"As long-term investors, we see the world moving toward a low-carbon future in which fossil-fuel reserves that companies continue to develop may actually become a liability," Jack Ehnes, head of California’s State Teachers’ Retirement System, said in a Washington Post article.
Will new technologies ease future oil reliance?
The general consensus is that other technologies, renewables in particular, have not grown fast enough in recent years.
"Their contribution to global energy is really low," says Hubace.
"Fossil fuel subsidies are so much higher than fuel subsidies into renewables. For example, for 2012 fossil fuel subsidies were around $540bn dollars [globally] vs renewables, which were less than a $100bn."
The WEC estimates that renewables, solar, wind, geothermal, marine, provide only 1.5% of the energy mix overall and that development of renewables has been significantly slower than was expected 20 years ago.
Dr Frei says although ‘there is strong appetite for renewables’ and the share of renewable energy sources in the global energy mix will record the biggest growth to reach 20% in Jazz and 30% in Symphony by 2050, he still believes fossil fuels will remain the dominant resource in the future’.
Nevertheless, both agree renewables should play a significant role in the future energy mix and future investment into other technologies is vital.
"We are going to need all resources until we see significant and transformative breakthroughs in technologies such as energy storage," Frei adds.
The WEC is calling for investment in R&D and acceleration in carbon capture technology deployment.
"As we [WEC] said in our recent statement ahead of the World Energy Congress: It is essential, therefore, that there are clear and unambiguous policy and institutional frameworks to support investment in this technology to justify its inclusion in roadmaps and carbon emission reduction strategies," says Frei.
"I am concerned that without a constant and clear approach, we will not be able to meet our climate goals and the reality is that we need to get real about the trade-offs required to have a sustainable energy system."
Image: courtesy of Troy Stoi.
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