Future of Oil Industry - what price for a barrel?

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* Patrick Dixon is a Futurist, conference keynote speaker on energy trends - clients include BP, ExxonMobil, General Electric, BASF, Copesul (Brazil), European Petrochemical Association (EPCA), Hindalco, Houston Energy Forum, Royal Dutch Chemical Association, SHV Gas, Sulzer andVattenfall.  The following is an extract from the book SustainAgility which he co-authored with Johan Gorecki.

The energy industry has to take a long term view of oil prices:  building gas power stations, solar farms or drilling new oil wells all require big investments with long pay-back periods.

One of the greatest challenges for our world (and for future energy supplies) is that oil is so cheap – not to buy, but to get out of the ground in many places.    Many oil wells operate profitably at around $15-20 a barrel – which is above the 1999 oil price.  But oil sold at that price encourages over-use and puts most green tech companies out of business.

Fortunately, cheap oil sources cannot keep pace with growing global demand, so price rises until energy companies are able to bring on-stream enough additional oil flow from more expensive locations.

Most green tech innovations depend on energy prices being above a certain level to be financially viable, so we need to think about what future energy prices could be.  Firstly, let us make a big assumption, which is that our world would cope well with an average energy price in real terms of around $100 a barrel of oil.  That figure is significantly less than the peak of 2008, and only around the same price that oil was in real terms in the peak of the 1970s.

There is a big difference between then and now.  Since the 1970s, we have enjoyed 30 years of green innovation, increasing fuel efficiency in vehicles by over 50%, boilers by 35% and heat loss in homes by 25% and in much of manufacturing by 50%.   So most nations are much better protected than they were a generation ago, against the impact of oil price rises.

$100 a barrel is a critical point for green tech

At $100 a barrel or above, a hundred million small steps by companies and communities make perfect financial sense, and market forces drive green innovation at every level.  Even at $75 a barrel, many green tech businesses start to become highly profitable.

Of course prices could end up far higher than $100, and stay there for a long time, and if so, we will see even faster green tech innovation.  The risk will then be another deep recession, triggered by high energy costs, leading to a fall in demand for oil, and another price collapse, which then wipes out huge numbers of green tech companies, scaring off future green tech investors for a very long time.

So why should we think that minimum oil prices of $100 barrel are both likely and sustainable? Here are three reasons why such a price is likely to be exceeded:

a)    Demographics:  1 billion children alive today becoming adults.  Population growing from 6.7 to 9 billion over next 40 years.

b)    Wealth generation: 2 billion young adults in emerging nations are fast becoming more wealthy consumers.  Energy use per person in these regions is likely to go on increasing fast.

c)    Oil limits:  oil reserves from old wells are running out.  Owners of those wells are keen to slow down the destruction of their assets by price raises.  New sources of oil are more costly to extract, and require huge capital investment.

Peak oil – and when will the wells run dry?

For years, many have warned that the world is near peak output for oil, but it depends on region.  Peak oil production was reached some time ago in Europe. What of the future?   The International Energy Authority enraged many experts by suggesting that peak oil would not be reached for at least 20 years, and that the 85 million barrels a day we used in 2009 could rise by up to 20% by 2030.

Their forecast assumed that oil prices remained high enough to drive high investment in extraction, and that the world fails to take radical steps to control CO2 emissions, or to invest in green tech.  Their “worst case” forecast would also risk earth temperatures rising by 6 degrees C by the end of the century.

No one knows how much extractable oil the world has left, because it all depends on future market price.  The higher the price, the more oil we can afford to extract.  On the other hand, as technology improves, old fields become more attractive, even if prices remain the same.

Look how technology and price have affected estimates for the size of the Kern River Oil Field, which was discovered in 1899.  In 1942, the owners thought that only 55 million of the 330 million barrels of oil still remained.  By 1995, more than 736 million barrels had been extracted – but scientists expected to remove 970 million more barrels.

By 2007, Chevron announced that more than 2 billion barrels had now been extracted, and the State of California thought that  627 million more barrels were still available.  Total figures had jumped from 330 million to 2.6 billion in 60 years.  At every stage, new technology, and higher prices enabled them to get more out.

With today’s technology and prices, around 65% of the oil in an average field has to be left in the ground.  The US National Petroleum Council estimates that although our world only has proven oil reserves of 29 billion barrels, 1,124 billion barrels are still underground of which 374 billion could be extracted with today’s technology, if the price is right.

Only a third of the geological formations which may contain oil have so far been explored, so further discoveries are also likely, some of which may turn out to be huge. But there is more to carbon stores than oil.

Oil from coal, algae and other sources

While analysts fret about when oil or gas or coal will run out, we need to realise that we already have the technology to convert any carbon source to any other kind of carbon.  For example, we can convert coal to gas and gas to solid forms of carbon.

Carbon in food can be converted to oil or gas and carbon from oil can also be used to accelerate growth of food (growing in high concentrations of CO2). So once oil prices rise above a certain point, it becomes economic to start producing oil products from coal – as they were in the early decades of the twentieth century.

What this means is that oil prices will tend to find a new level (we can debate how high).  There may be spikes and troughs during the adjustment processes, but as prices rise, the point comes where it is viable to turn coal into oil.  When that happens, there will be a natural limit to oil prices.

There are also other correcting mechanisms:  as oil prices rise, green tech also expands more quickly, providing alternative energy sources, and also saving more energy.

Adapted from book SustainAgility - read more / videos.

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Patrick Dixon
June 16, 2011 - 16:01
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