World needs better alternatives to oil (2010-02-24)
‘The Oil Age will end long before the world runs out of oil. It will end when renewable alternatives fall to a level where oil cannot compete.’
By Martin Kruse
It’s hard to understate the importance of petroleum production for the 20th century. Oil forms the backbone of our society. Without oil, the world’s largest industry, the tourist industry, would not have existed as we know it today. The process of globalization would have been limited and the many 100 million that have been lifted out of poverty into the global middle class would have remained in poverty.
Oil is unlike every other energy source. It permeates the global economy: transport, military, construction and manufacturing depend on it. It is used in the pharmaceutical industry, agriculture and by industry to produce plastic. It is an ingredient in products as different as pharmaceutical drugs, DVDs and asphalt. Oil lubricates the gears of the world’s economy. It is at the heart of manufacturing. Without it, the free movement of goods as we know it would grind to a halt.
It is easy to pick on fossil fuels in these climate-changing times, but we must also recognize that without them society would have been radically different. But that is precisely why it is a challenge to switch to other types of fuel. Oil is an integral part of the society. Over 95 percent of national transport systems are dependent on it in one form or another. One of the advantages of oil in the transport sector is its high energy value. Oil is thus difficult to replace as many alternatives do not have sufficiently high energy value.
Glimpse of possible future
A lack of oil is the worst thing imaginable. So maybe that is why we have been warned time and time again of a shortage since the 1970s, without actually experiencing one. However with the 2008 spike in prices where oil hit $147 a barrel, suddenly we had a first glimpse of a possible future.
Are things changing? Many petroleum geologists think so and increasingly whistleblowers from inside the International Energy Agency (IEA) have called the IEA’s estimates for future oil production unrealistic. A continued write-down of the IEA’s productions estimates have not helped. So what is going on?
Books and documentaries such as “The Coming Oil Crisis” and “The End of Suburbia” have conjured up a somber picture of the future when oil production peaks. “Peak oil” refers to the moment when oil production peaks, not when oil runs out. As Sheikh Zaki Yamani, the Saudi oil minister, said three decades ago,“The Stone Age did not end for lack of stone, and the Oil Age will end long before the world runs out of oil.” What he referred to is the violent price increases that will occur when oil resources are reduced. There is no disagreement about if peak oil will happen, only when.
But when is not an absolute point in time, but dependent on investment. What differentiates the oil production of the near future from that of the 1970s is not just the amount of oil, but the type of oil fields from which it is extracted. We are not running out of oil, but we are running out of cheap, easy-to find oil. Earlier, we had access to large fields with high-quality oil, which were relatively new, since the largest ones had been discovered before 1970. Today, many of these fields are aging. In other words, they approach or have passed production maximum. Because of geological conditions, oil production becomes increasingly expensive after half of a field’s reserves are extracted. Thus, new fields must be found to meet increasing demand or new technology must be put in place to extract more oil. However, these technologies are expensive and the new fields being discovered are smaller than those discovered many years ago
Security of supply
Peak oil is not a future catastrophic event, where oil will hit $200 a barrel or more. Peak oil is now. The peak oil discussion often overlooks the fact that increased oil prices make increased oil investment and thus enhanced oil recovery possible. Worldwide, the average recovery rate from oil fields is 35 percent, yet in some places on the Norwegian shelf, it’s between 50-67 percent, one of the highest in the world. For every 1 percent we manage to increase the global recovery rate we delay peak oil by six years
IEA has time and time again pointed to a need for more investment in oil in order to avert a supply crunch, however there are nations, notably Russia and several OPEC countries, who have incentives to maintain high oil prices to finance their state budgets. In other words, the oil prices hikes we see are a question of strong demand from developing countries, but that has just as much to do with a lack of investment, creating a tight market for oil.
Security of supply is a major problem for the future political world situation. Countries are committed domestically but also internationally, such as those of the European Union, to withstand a short stop in supplies. The crisis in the 1970s showed with all clarity how much power resource rich countries may have on resource-poor nations.
The increase in prices we witnessed in between 2006 and 2008, which culminated with an oil price of $147, has been a contributing factor to putting oil dependence on the agenda. Nearly 80 percent of the expected increase in production of both oil and gas is expected to come from national companies, primarily from the Middle East.
The oil price increase alone during the 2005-2008 price hike meant that the United States had to transfer $100 billion extra to the Middle East. That is more than half of the first stimulus package, which was put in place in 2008 to put the U.S. economy back on its feet.
It’s money the United States has an interest in keeping within its borders, especially considering its economy and the fact that the Middle East regimes aren’t the most stable. The same goes for the European Union, which has a strong interest in minimizing energy supplies from Russia. Since Russia has repeatedly shown its willingness to use energy supplies as a political weapon, Korea being a resource poor country has the same issues and needs to adopt policies that make it less dependent on foreign countries’ energy supply.
Special role of China
The developing world is moving into an industrialization phase of ever-increasing GDP, and with this comes a higher need for commodities, especially energy. Dependent on how you measure this, China entered this phase 10 years ago and has seen a GDP-doubling four times faster than the United Kingdom saw during its industrialization phase. In this decade, India will follow. This will create an insatiable need for commodities of all kinds. This will fuel frustration and may contribute to riots and revolutions like those witnessed in the Middle East or fuel military conflict and contribute to a less secure world.
China has become the world’s biggest emitter of carbon dioxide, which is a serious problem if we are to curb greenhouse gases. Indeed, as more companies outsource productions to low-wage countries, we see a decline in carbon dioxide intensity in the production sector in various Western countries, yet a strong increase in output, primarily in China. Since China’s carbon dioxide emissions per $1,000 GDP created is roughly double the average of OECD nations, the world’s total output from production is increasing. Scandinavian countries like Denmark and Norway are looking to employ measures to decrease emissions by as much as 30 percent, but in the great scheme of thing it means nothing. China’s monthly carbon dioxide emission increases roughly equal those of Norway for a whole year.
China alone uses more coal than the United State, Europe and Japan combined, so even though it has the world’s third biggest coal reserves it will suffer from coal depletion in the future. With 16 of the 20 most polluted cities in the world located in China, with acid rain in 50 percent of the cities and 17 percent of rivers not meeting the lowest standards for irrigation, health problems related to air pollution are on the rise. China is aware of her problems. It will suffocate in pollution and economic growth will decline. But all it not lost. Chinese demand for oil has been elevating world prices. As oil prices go up so does the market for renewable energy. China has now passed the United States in government spending on clean technology research and development. The Chinese green powerhouse has meant a rapid fall in solar cells and China heavily invested in wind and other renewable energies and countries like Korea and India have joined in. Prices of renewable energy are falling rapidly, so even though in many respects China in particular seems to be the problem, it is where we can increasingly look for solutions as well.
Oil as dominant energy
Sheikh Zaki Yamani was right when three decades ago he said that “The Oil Age will end long before the world runs out of oil.” It will end when renewable alternatives fall to a level where oil cannot compete. And that time is approaching fast. Yet oil will be with us for a long time, particularly in the transport sector, because the demand for energy for cars will grow some 3 percent a year in non-OECD countries. Already in 2009, the Chinese car market overtook the U.S. in the number of vehicle sales. Today transport accounts for 20 percent of the world’s energy consumption and 15 percent of carbon dioxide emissions, a figure which is expected to increase to 60 percent by 2030 in the “business as usual” scenario. However, the reduction potential when using renewable energy is 31 percent and unlike many other areas, we can save money in the long run by investing in an efficient fleet of vehicles and infrastructure.
As renewable energy will enter the market and replace oil either in the form of electricity created by renewable sources or nuclear, or in the form of biofuels, oil prices will fall and a new price equilibrium will appear. Cars will still be on the road 20 years from now consuming oil, but they will use only a fraction of what cars do today. This marks the end of an era for oil as the dominant source of energy and a new era where green alternatives will thrive.
Martin Kruse is a senior researcher at the Copenhagen Institute for Futures Studies (CIFS). Kruse has extensive experience in advising top management on issues of strategic concerns in various industries including retail, financial services, manufacturing and energy, as well as in the public sector. He primarily works with innovation and strategic issues concerning the water-energy-food-climate nexus. Kruse has published several articles on innovation topics, focusing on trends affecting the need for green innovation and barriers to green innovation.