The hike in oil prices: Peak Oil or price cycle?
By Dan Percival
First what is Peak Oil? A gross oversimplification can be as follows. Let's say that all the world's oil come from only one gigantic oilfield. This oilfield is very homogeneous with a simple shape eg. round.
After careful study of the characteristics of this oilfield, a number of wells are drilled into it, placed for optimal extraction of the crude and all these wells are linked to a single pipeline with a single valve.
When the valve is first opened, crude oil gushes out under high pressure and the valve is opened just wide enough to allow a flow rate that meets demand.
Demand for oil is largely driven by the world economy and as the economy grows, the increasing demand is met by the simple process of opening the valve a little bit more, increasing flow.
Over the years, there will come a time when the valve finally reaches the fullest extent of its opening ie it is fully opened and we can then remove the valve and just let the crude flow straight through. This is Peak Oil. The simple solution of just opening the valve more to meet oil demand doesn't work any more.
In the real world, things are not so straightforward but data from oilfields show that simple oil production from an oilfield follows a bell-shaped curve, and peak oil is the top of the curve. Note that peak oil doesn't mean the oil has run out.
On the contrary, the peak is reached when half or slightly more than half of the recoverable oil has been extracted. What is important is that on the other side of the peak, production starts to decline unless additional measures to boost production are applied (drilling more wells or using secondary recovery techniques).
These measures carry a cost and do not necessarily increase the amount of recoverable oil.
The peak oil theorists had great success in predicting the oil shocks that hit the American economy (and ultimately the world economy) in the 70s, when America's oil production peaked and it had to become a net importer of crude.
Subsequent to this, the peak oil theorists extended their calculations to the world oil production, attributing the current oil price hike to a peak in world oil production.
The problem with this is that the calculation of peak oil is a mathematical exercise, and heavily dependent on the accuracy of the data.
Despite technological advances, the estimation of reservoir reserve still has a great element of uncertainty. In many parts of the world, political considerations play an important role in the reporting of the numbers and hinder efforts to fully explore all potential oil-bearing areas. Another major factor is the area of technological advances.
One good thing that came out of the 70s oil shocks was that it spurred the oil companies into research that advanced the technology of exploration and production to such an extent that estimations of recoverable reservoir reserves have been rising enough to keep up with world demand for the last two decades or more (more accurately until 1998. Increasing world oil demand thereafter was met by increases in Russian oil sales).
As such, the prediction of the timing of world peak oil has been steadily been brought forward and is still a subject of much debate.
So can we discount peak oil as a pessimistic illusion and put the blame the current price hike on something like a price cycle? A couple of important points must be made. Oil-bearing reservoirs only exist in sedimentary rocks.
Since these cover about 80% of the earth surface, the opportunities of finding oil seem considerable. But there are several constraints.
Given that oil is formed from buried organic matter, a geologic history where such matter was buried must have occurred in the places where we expect to find oil. Oil is formed with the application of pressure and heat on the buried matter.
These conditions occur when the material is buried within a certain depth range (the so-called oil window) and so there are a lower and upper depth boundary for oil formation. Too deep and the oil formed is destroyed so this negates the option for drilling deeper to find more oil.
Any oil formed is also likely to escape to the surface unless the geology of the region traps the oil below, requiring a particular geological makeup. Most importantly, the amount of oil trapped must be large enough so that the energy that can be extracted from the crude far exceeds the energy expended in bringing the oil to the surface and to market.
Interestingly, this means is that the world will never run out of crude, for there will always be pockets of oil in the ground that will never be economical to extract and can forever be discounted from the inventory of oil stocks.
Presently, the only certainty is that there is very little reserve capacity in the supply of crude oil which makes for volatility in the prices of crude. Any slight disruptions in supply will reflect greatly on oil prices.
This is unlikely to be changed anytime soon as another constraint, refining capacity, is at its maximum and will take time to build up, even if crude oil production can be increased.
With the world economy growing and demand especially in Asia growing at a fast rate, the likelihood of oil prices remaining high is almost a certainty.
Although it is difficult for an outsider to gauge the truth about the state of the oil industry, some observations at Petronas' recent Annual Oil and Gas Conference provides a glimpse at trends. A presentation by an American oil executive spent a lot of time on hybrid vehicles and CO2 sequestration.
Presently the number of hybrid vehicles on American roads is insignificant while the Hummer (a clone of a heavy military transport that barely gets 5km/liter) is sold as a personal street vehicle, so this is a very telling emphasis.
CO2 sequestration is taking CO2 out of the atmosphere and pumping it down oil wells, another surprising emphasis from an executive of a country where the government hasn't fully accepted the idea of global warming.
An Exxon executive talked about gas and gas condensates. A couple of decades ago, Exxon had almost no interest in gas. America had little LNG imports until recently, having deemed LNG dangerous. Today there are plans to build major LNG regasification plants and massive imports are being planned.
These and other presentations gives one the impression that even the oil industry is coming around to the idea that the fossil fuel future is not as rosy as the picture portrayed by this very industry until recently.
Does this mean that the peak oil pundits are correct and the future bleak? The ability of technology to meet the challenge of diminishing supply shouldn't be discounted.
We are not only talking about extracting more supply from the ground, but also increasing our efficiency of energy use to get more out of what we have.
There are also alternative sources of energy that are slowly but surely coming into the market at competitive prices. As an example, the price of solar panels is dropping constantly and the two biggest producers now are Shell and BP.
Biodiesel has many advocates and the possibility of its extraction from easy sources (like algae) may provide energy solutions to allow an easy transition to a future that is less dependant on crude.
Whether the oil situation becomes critical in the near or far future, the fact that the supply of crude is a finite resource and will become more scarce and expensive in the future behoves us to plan ahead for the day when energy isn't as cheap and readily available as it is today.
The sooner we start moving in that direction, the more painless the transition will be. We should start making the tough decisions today rather than have it forced onto us in the future, when the impacts are likely to be felt harder and there is less time to adapt.
As an example, if oil supplies were to be severely disrupted tomorrow, all inter-city transport in Malaysia would grind to a halt due to the lack of any viable alternatives to petrol and diesel.
Contrast this with Europe and Japan where alternative transport (mainly electric) are well-developed. Another area is the use of petrol versus diesel. Petrol engines have only LNG as an alternative fuel source, involving a costly retrofit and a bulky added tank.
Diesel on the other hand has a broader range of substitutes that can be made from food waste to palm oil (even algae). Diesel has another advantage, it is almost twice as energy efficient as petrol.
The lead-free petrol additive MTBE leaking out from underground petrol tanks has already become a big source of ground water pollution in the US with no easy solution for cleanup (Indeed the MTBE industry has to be protected from lawsuits by the US government.
MTBE use is now banned in the US). Must we also wait for a similar situation to arise in Malaysia?
A quick note on the issue of tough decisions. One that is staring us in the face right now is the question of the diesel/petrol subsidy. This much is true about subsidies.
Once the 'subsidy path' is taken, it is always an unpopular task to roll it back however much the situation might warrant the action, a fact that the government here has been made aware of recently.
Also inefficiencies, market distortions and abuses invariably arise with subsidy use.
As a guide towards what needs to be done, we should look at the areas of the world where energy costs are already high. That is where solutions to energy problems are being more aggressively pursued.
This brings us back again to Europe and Japan, leaders in the field of alternative energy development and deployment. In the US, one sees the hydrogen being promoted as the fuel of the future.
Not withstanding the fact that hydrogen needs to be produced from another energy source, if one looks deeper into hydrogen use, the more impossible it seems to take it as a serious solution.
As the smallest molecule in nature, hydrogen seeps out of any container with an ease that makes only one solution viable, and that is that the hydrogen is produced at the pump, either by methane gas reformers or electrical hydrolysis.
Hydrogen is used in fuel cells and the raw materials needed make enough fuel cells to convert even a small portion of the world transportation to hydrogen is not available unless new fuel cell designs are forthcoming.
Technology might triumph in the end but it is interesting to wonder if some other transport technology might be easier to adapt and deploy.
It is likely that a mix of technology will rule the future, some suited for short-range transport and some for long range. In New Delhi for instance, buses run on compressed natural gas, clean burning but short range and needing a big tank, a perfect solution for use in inner-city transport.
It would be an easy conversion for the inner-city buses in Malaysia, and will benefit the environment. The point to make is that it is incremental adjustments like this that can provide a less painful transition to a different energy future.
An English friend once remarked that Malaysians live in a paradise. In Europe, if energy supplies are disrupted, people die due to the severity of the weather. No such dire consequence exists here.
Also we are shielded somewhat from the world oil market by our own oil supplies. In other words, a 'Petronas subsidy' that will let us continue our easy lifestyle even in a tight oil market.
But it is important to remember that our oil supplies are limited and not likely to shield us for more than a decade into the future.
So the most important point to be made here is that in a decade, we will be fully exposed to the caprices of the external oil market, and the time is now to use oil monies gleaned from our dwindling reserves to prepare for the future.
Electricity (generated by our abundant gas reserves) will likely rule in the future so a push to maximise both inter and inner city electrical transport must be made now and not later.
It is interesting to speculate if a Malaysian-made car specially designed to run on LNG might negate some of the current bias and disadvantages of using LNG as a transport fuel.
Perhaps some of the current alternative technologies like wind, solar and wave power could be brought into the country as small pilot projects to familiarise our engineers with the technologies that may rise to prominence in the near-future.
Some have accused America for a lack of a coherent energy policy for the future. Is Malaysia any better? Do we have the political will and foresight to create such a plan for a very possible 'end-of-the-oil-age' future or are we going to wait until our hand is forced?
One final note. The climate change issue may also impact our energy future. CO2 concentrations are rising at an average of 2ppm per year and some extreme scenarios are predicted when the 500ppm level is reached from the present 370ppm.
Malaysia's ability to generate electricity by burning natural gas at that time may be curtailed and other non CO2 emitting means sought. Will this force us to consider the nuclear option or even complete a certain controversial large hydroelectric project? Only time will tell.