District Energy - 2005 Third Quarter

Feature
Story

The Problems With The Economist speaks out

Oil:

Editor’s Note: The second quarter 2005 issue of District Energy magazine featured an article by the Energy Information Administration, an independent statistical and analytical agency within the U.S. Department of Energy. As part of District Energy’s effort to introduce energy perspectives from other organizations, this article is based on an April news release issued by The Economist magazine. Edited in London since 1843. The Economist is a weekly international news and business publication with a worldwide circulation of more than 1 million.

As oil prices surge to above $50 [oil is now above $60] – up from $10 a barrel in 1998 – a growing chorus argues that we have entered an age of sustained higher prices where cheap oil is no longer a possibility. But, according to a special survey and cover story on oil in the April 28, 2005, edition of The Economist magazine, whenever a “new era” in oil is hailed, skepticism is in order.

This in-depth report by energy and environment correspondent Vijay V. Vaitheeswaran was prepared after nearly three months of interviews with key oilmen in Russia, China, Europe, Texas and elsewhere. It is The Economist’s first survey of oil in 20 years. “It is popular to talk about permanently higher prices,” says Vaitheeswaran, “but this is wrong. The future will see far greater volatility, not ever-rising prices. Indeed, we may even be in the midst of an oil bubble akin to the NASDAQ bubble that could burst quite suddenly.”

What has driven up the price of oil? Vaitheeswaran takes a careful look at both supply and demand and concludes

that neither provides a complete explanation. What has set the market alight is the lack of spare production capacity. The ‘buffer’ that has prevented the market from overheating during unexpected supply interruptions has been in decline for some years, because OPEC has not been investing sufficiently to keep pace with growing demand. As a result, global spare capacity last year dropped to around 1million barrels per day – close to a 20-year low. Almost all of this was in Saudi Arabia. In short, the market for the world’s most essential commodity now has no safety net to speak of.

In spite of the high prices at the pump and the record profits that oil majors like Exxon are making, it is misleading to think the industry is in good shape. Conventional wisdom maintains that today’s high oil prices mean a golden era for oil majors and OPEC, and a possible economic shock for consumers. But, the reality is, Big Oil is in trouble and the industry faces wrenching change.

In fact, according to The Economist, the western oil majors are in the worst shape in decades--and now face challenges that could wipe them out altogether. They have their work cut out to cope with the rise of resource nationalism, which threatens to choke off access to new oil reserves. This is essential to replace their existing reserves, which are rapidly declining. They also will have to respond to efforts by governments to deal with oil’s serious environmental and geopolitical side effects. It is these two challenges together that could wipe them out.

Whatever problems the industry is facing, it is not that the world is running out of oil. It is inaccurate, says The

Economist, to think that there is a fixed amount of oil in the ground and that mankind has found it. Although the pessimists treat the level of recoverable oil resources as fixed, the estimates on the ultimate recoverable resource base have consistently grown over the past few decades. In addition, there are many frontiers left that remain to be explored with the aid of new technologies.

Although oil is not running out, Vaitheeswaran argues that governments have other compelling reasons to end our addiction to oil: green concerns and geopolitics. Growing concern about global warming and worries about the Middle East’s political stability are bringing the American political right and left together to argue for energy independence. And, there are already signs that a clean-energy revolution is getting under way. Whether prodded by low-carbon regulations or enticed by green subsidies, venture capitalists as well as large corporations are pouring money into low-carbon energy technologies, ranging from renewables to carbon sequestration. Even nuclear power is getting a second look because it emits no greenhouse gases.

If the majors want to stay on top, they too should take the threats to oil’s supremacy seriously and start looking at alternatives. An old industry saying goes, “The Stone Age did not end for lack of stone, and the oil age will end long before the world runs out of oil.” Concludes the survey, “Nowadays that sounds less like a joke and more like a forecast.”