Climate change could fend off peak oil crisis

Last week, Hamish McRae, one of the world’s best economic journalists, declared in The Independent: “Hardly anyone a year ago successfully predicted the rise in the oil price to $120 a barrel—in fact I have not found a single forecast of that.” Regular readers of this column may recall that I predicted oil at over $100 a barrel in April 2006, and well north of that price in another column in July 2007.

I am the most modest of men, but I reckon this gives me the right to offer some further forecasts. So I predict that the price of oil will soon fall—a bit. So far, the economies of the “Brics” (Brazil, Russia, India and China) are still growing strongly, but the old industrialized economies are definitely heading into a recession, and they still consume most of the oil.

This recession has not actually been caused by the high oil price; the subprime-mortgage scam is to blame for that. But the recession is likely to drive the demand for oil down far enough to bring the price back down to $100 before long, or even to $85 to $90. Then in 2009 and 2010, as the “old rich” economies recover, it will go back up, probably to the $130 to $150 range.

The price will rise because demand will recover much faster than supply can grow, if, indeed, it grows at all. An allegedly giant new oil field has been found off the coast of Brazil, but even if it lives up to the advertising, it is five to 10 years away from large-scale production.

The world’s largest oil producer, Saudi Arabia, admits that there is now not enough spare capacity among the OPEC (Organization of the Petroleum Exporting Countries) producers to make any difference. Russia, the biggest non-OPEC producer, will probably see production fall this year. And practically everybody else is already pumping flat-out.

So once the recession ends, the price of oil will probably stay well above $100 for most of the time from 2010 to 2015. But it won’t hit $200, because there will be a steep rise in the supply of nonconventional oil from tar sands, oil shales, and other sources of “heavy oil”.

Even if the moment of “peak oil” is upon us, that would not mean the end of oil; it just means the end of sweet, light crude. The Alberta tar sands are profitable if the price of oil stays more than $40 a barrel; at $60, the far larger Venezuelan tar sands are a viable economic proposition; at $80, even the oil shales of the western U.S. are promising.

If the supply goes up, the price goes down. There may be little remaining possibility for increasing the supply of conventional oil, but that is not the case with unconventional oil, of which there is a massive potential supply. At a high environmental cost, of course: on average, the equivalent of two barrels of oil must be burned to liberate three barrels of oil from the Alberta tar sands.

In a world with a stable climate, ample unconventional oil supplies would bring the oil price down below $100 again, but that’s not the way it’s likely to play out. By 2015, global tolerance for any process that involves high emissions of greenhouse gases is likely to be very low. Indeed, there is likely to be a good deal of pressure to cut back on the consumption even of conventional oil.

Five years ago, global warming was a distant worry in most of the world, and in North America, where the denial industry had its headquarters, it was widely disbelieved. Now it is a high-priority concern in Europe, in the United States (at every level below the White House, where change is coming shortly), and in China, and a rapidly growing worry everywhere else.

Go seven years down the road and throw in a few dozen more climate-related catastrophes like Hurricane Katrina or the killer heat-wave in Europe in the summer of 2003. What will popular support for burning fossil fuels be in 2015? Not very high, one suspects.

Cutting back on the use of oil—and coal and gas—will not be a rapid or smooth process, because the potential substitutes are either technologically immature or too expensive. But rising demand and the passage of time will change that, and, gradually, the use of fossil fuels will fall. Most serious people everywhere now know that it must if civilization is to survive.

Several billion people live in countries that are now growing very fast economically, so demand will probably keep the price for conventional oil near the $100 level well into the 2020s, but the political pressure to shut down extra-high-emission unconventional oil production may become irresistible. (That’s why the Alberta tar sands producers now want to replace natural gas with nuclear power as the energy source for freeing the oil from the sand.)

In the still longer run—the 2030s and beyond—the demand for oil will probably fall even further, and with it the price. How do we know that? Because if it hasn’t fallen due to a deliberate switch away from fossil fuels, then global warming will gain such momentum that entire countries are falling into chaos instead. There is more than one way to cut demand.

Comments

5 Comments

Gregory Greene

Apr 29, 2008 at 7:54am

I think it is wonderful that Mr. Dyer is raising awareness of peak oil and its likely consequences. Pardon me though for being a wee bit confused. Did anybody out there read his 2004 book "Future: Tense"? In early 2005 I remember reading, and then re-reading with disbelief, Mr. Dyer's claims that America's 2003 invasion of Iraq was not motivated by a desire on the part of US neo-cons to secure access to Middle East oil. Nowhere in his analysis is there any mention whatsoever of peak oil, or the possibility that president Bush's neo-con handlers were aware of the coming conventional oil scarcity that, a scant 4 years later, is upon us.

So while it is helpful and admirable, and all those good things, that Mr. Dyer has been warning us of $100 oil since 2006, I hope he realizes, with all the humility he professes, that his earlier writing missed what seemed to the existing peak oil analysts as glaringly obvious: America's invasion of Iraq was the planet's first peak oil war.

Gregory Greene
Director The END of SUBURBIA
<a href="http://www.endofsuburbia.com/" target="_blank">www.endofsuburbia.com</a>

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kiwioil

Apr 29, 2008 at 5:43pm

Gwynne, you may care to take a peek at the latest presentations on the site for <a href="http://www.opticanada.com/" target="_blank">www.opticanada.com</a>

Oil sands are soon able to be produced by recycling the unusable portion of each barrel of bitumen and then gasifying it as a source of heating (for steam), electricity and hydrogen.

This is at a higher up-front capital cost, but the economics looked good enough for me to buy in:-)

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Samantha

Apr 30, 2008 at 10:35am

With reduced demand for fossil fuels and increasing prices in the long-term, it seems as though the time is right for an increased focus on renewable energy sources. Even big oil companies like BP and investment firms such as Credit Suisse and JPMorgan have noticed the potential for renewables, and are devoting more and more time and resources to renewables. If you're interested in learning more about renewable energy and financing opportunities, I suggest you check out the Renewable Energy Finance Forum (REFF), held this June in New York City. REFF provides financiers, renewable energy project developers, and other interested stakeholders with an opportunity to network and share ideas about the future of the industry. Over 40 high profile industry leaders will speak at the event, discussing topics such as wind energy, solar power, biofuels, market drivers, and more.

For more information, visit <a href="http://www.REFFWallStreet.com" target="_blank">www.REFFWallStreet.com</a>.

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Bytesmiths

May 1, 2008 at 5:58pm

I go a little crazy when I see stuff like <i>"The Alberta tar sands are profitable if the price of oil stays more than $40 a barrel; at $60, the far larger Venezuelan tar sands are a viable economic proposition; at $80, even the oil shales of the western U.S. are promising."</i>

Oil should be priced in units of energy, <b>not</b> dollars! We are in the beginning of a period of hyper-inflation. As people strive to make a resource pay off at $40, $60, or $80 a barrel, those dollars are going to be worth less and less.

Also, Gwynne says, <i>"This recession has not actually been caused by the high oil price; the subprime-mortgage scam is to blame for that."</i>

I've been saying since before it started, that the sub-prime mortgage thing is a <i>symptom</i> of high oil prices! I mean, you got this guy who can barely afford his sub-prime mortgage, generally out in the burbs, where he has to drive everywhere. Gas goes up, food goes up, mortgage payments go up -- which is he going to short?

But having thought this through my self, I'm gratified someone has backed me up with a study: <a href="http://www.ceosforcities.org/newsletters/files/Driven_Release_Final.pdf"... Bubble Popped by Spike in Fuel Costs, New Analysis Shows</a>

It ALL comes down to energy. Better start growing your own food and producing your own energy soon -- we are.

Jan Steinman, <a href="http://www.EcoReality.org">EcoReality</a> http://www.EcoReality.org

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