Era of cheap oil is over
By Nick Ferguson
Forget about cheap gasoline, today's low oil price masks a looming energy crisis that could dwarf the current economic problems.
If you thought things couldn't get any worse than a collapse of the global financial markets, think again. The economic meltdown is a good reason to be gloomy, for sure, but an under-reported study by the world's leading energy agency recently raised the spectre of a collapse in the global energy market too.
The steep fall in oil prices during the last few months of 2008 prompted many people to think that the run-up to $147 a barrel was an aberration – driven by speculators or another artefact of the credit bubble. But some industry analysts say that today's prices are the real aberration and, in fact, oil production is dangerously close to going into a permanent and unstoppable decline.
Indeed, the collapse in oil prices is accelerating this trend. Non-traditional projects that were profitable when prices were high, such as Canada's oil sands and fields that are deep underwater, are now being postponed or even scrapped. At the same time, the Organisation of Petroleum Exporting Countries (Opec) cut production targets in December in a desperate bid to reverse the decline. That move seems to have had some effect, but there is now a fear that supply in the oil market will be dangerously out of sync with demand when the economy starts to recover.
"We will work our way through these financial problems, but what would be really unfortunate is that once things bounce back, oil prices will bounce back too," said Matt Simmons, chairman of Simmons & Company International, at a roundtable held in mid-December. He says that supply shortages could help oil prices soar through $147 as unhindered as a hot knife cuts through butter.
It is no longer just conspiracy theorists that are worrying about a looming energy crisis. Today, even the International Energy Agency (IEA) is sounding the alarm bells. The agency, which has very close ties to the big oil companies, quietly dropped a bombshell in its World Energy Outlook 2008 when it revealed that its first ever real-world survey of existing oil fields shows production falling at a much faster rate than its earlier guesses.
At the current rate of decline, says the IEA, oil production from existing fields will fall to just 30 million barrels a day by 2030 – or roughly 73 million barrels short of the expected level of demand. New sources will make up some of the difference, but to fully meet future demand, the world's energy companies will need to discover the equivalent of six new Saudi Arabias during the next 20 years. Simply maintaining today's levels means discovering four new Saudi Arabias.
Not even the IEA expects this to happen. Its 2008 report represents the most optimistic outlook, but is nevertheless dire. Its executive summary starts with a quiet, but very important statement: "Current global trends in energy supply and consumption are patently unsustainable." And concludes with a similarly potent call to arms: "Time is running out and the time to act is now."
Put simply, there is no quick fix to meeting the world's future energy needs. "There is no fix actually," says Simmons. "The only fix is making a sprinting retreat from our use of oil today. If you get smart people looking at the data it doesn't take more than a couple of minutes for them to say, 'This is awful.'"
It may be too late already. Forecasts for production declines are based on the depletion rates of large oilfields, but almost half of the world's oil supply comes from tiny fields that produce fewer than 400 barrels a day – and these small fields are known to decline much quicker than big fields.
"Oilfields aren't like emptying a bucket or taking boxes out of inventory," says Robert Hirsch, a senior energy adviser at Management Information Services, speaking at the same roundtable as Simmons. "You can't keep pulling oil out of the ground at the rate that you did in the past because of the basic geological processes."
In the midst of a global recession, much of the explanation for falling prices has focused on the supposed collapse in demand for oil, particularly from Asia's rising economic powerhouses, but talk of China's falling oil imports is misleading. It is only growth that is falling – from 28% in October to 17% in November.
According to Simmons, the story of supply destruction is a more immediate problem. "We're unwinding supply right now just as fast as we've ever done and it's like a bulldog chewing on somebody's behind," he says.
As the IEA says in its report, the era of cheap oil is over. And, unless drastic measures are taken to reduce energy consumption and speed up the development of new energy sources, the world could be headed for a serious energy crisis as soon as 2015. If that happens, our current economic woes will hardly merit a mention in tomorrow's history books.