The Demand and Supply Cycle of Peak Oil
Much has been written on peak oil – the theory made famous by Hubbert which now bears its name. In 1972, Hubbert made an analysis that people born after 1965 will see the dissipation of oil use in their lifetimes. Hubbert did not see the emergence of China and its voracious oil appetite in the 2000s. Neither did he see the youthful population growth of the Middle East with its exorbitant oil subsidies. Yet, 40 years later the Peak Oil date has been pushed back time after another.
Peak Oil theory tends to parochially delve into the supply aspect. Hubbert based his theory that oil resources are finite and will eventually be depleted according to a famous bell-shaped curve below.
Peak oil advocates highlight that much of the world oil is supplied by giant oil fields – Ghawar (Saudi Arabia), Kirkuk (Iraq), Cantarell (Mexico) and Burgan Greater (Kuwait), which are rapidly aging. No new major oil fields have been discovered in the past decade. Further, Norway, Mexico and UK join a list of countries which oil production profiles follow the Peak Oil ‘curve’.
The author wrote in May 2011 that the hidden hand of economics is the best answer to peak oil. This can entail a demand and supply cycle of energy resources with an ‘affordable energy concept for all1’ dictated by price as illustrated below:
An analysis of trends in the energy sector reveals this hidden cycle at work. There was much public discourse on high oil and gas prices from the mid 2000s that partly arose from high demand in the developing countries. However it is these high prices that have hastened the development of alternative fuels (solar and wind in particular) and the present shale gas revolution. Already, the media has written a lot about about massive shale gas reserves. A massive potential exists too in new technologies eg coal-to-liquids (CTL), gas-to-liquids (GTL) and underground gasification of coal (UGC) that will greatly increase potential fossil fuel reserves.
The CTL and GTL technologies will increase the amount of transportation fuels from the more abundant coal and gas reserves2. These technologies will not be economically feasible without the higher price of oil driving the push for innovation and efficiency. UGC in particular will almost triple the amount of coal reserves, converting underground coal reserves underground to liquid fuels. These new technologies will further push ‘Peak Oil’ later to the future.
Perhaps the greatest impediment to peak oil theory is the use of renewable energy – a potential game changer. According to Bloomberg New Finance in 2011, the total investment in renewables globally reached $260b with cumulative investment of $1t over the past 7 years. It surpassed the investment into fossil fuels for the first time. Most of the investments are into solar and wind energy. It is projected that in 3-5 years, the unit costs of electricity production from PV solar will be able to compete with that from fossil fuels. This is mainly due to the deluge of investment in China into the manufacture of solar panels, which lowers its production costs substantially. Already, the most efficient form of generation of electricity from wind energy is able to compete on a cost basis with electricity from fossil fuels generation.
The increasing oil consumption in the Middle East exporting countries may decrease their available volumes for export over the next decade. Increasing consumption was partly due to subsidies which alone cost $13b in Saudi Arabia in 2010. This fact has not gone unnoticed in Arabian governments which have embarked on ambitious renewable projects recently. For example, Saudi Arabia is increasing its electricity generation mix of solar to 10% by 2020 to a few GW. Other countries like Oman and Abu Dhabi, and Egypt have embarked on similar solar and wind projects. This spurt of growth is all driven by the rising costs of oil and a need for fiscal balance. Even more interestingly, Qatar has not displayed much enthusiasm in investment in renewable generation – perhaps because of the availability of its own abundant gas reserves.
According to the BP World energy outlook 2035, renewable energy will contribute about 8% of world primary energy consumption. This compares with 1.3% in 2010.
If the trajectory of oil prices continues over the next two decades, expect this ratio to be even higher. Market capitalism will eventually dominate in this efficient allocation of resources.
1. The chief economist of Bp advocated in the recent statistical review that an affordable energy future for the world population is possible.
2. The reserves to production ratios of gas and coal are approximately 60 and 160 years presently, whilst that of oil is 50 years.