There is an extraordinary disconnect between what the experts write about oil prices, and what is likely to happen out in the real world.
The pundits inhabit an economist’s perfect dream-world, where oil prices respond to changes in supply and demand that are driven mainly by production costs and economic conditions. In the real world, it’s a lot more complex.
The question of price is back on the table, because oil just broke through the $100-per-barrel level for the second time in history. (The first time was July 2008, when it briefly reached $147 per barrel before falling back to a low of $33 the following December.) But the experts have concluded that this time, cheap oil is never coming back.
A typical offering was a document published by the oil industry giant BP a couple of weeks ago. BP Energy Outlook 2030 forecast that fossil fuels — oil, gas and coal — will still account for 80 per cent of primary energy worldwide in 2030.
Moreover, total world energy consumption will grow very fast. Demand in the developed countries will not grow by much, if at all, in the next 20 years, but it will rise by almost two-thirds in the larger economies of the developing world, notably China’s and India’s.
If 80 per cent of the energy mix is still fossil fuels in 20 years’ time, then the amount that the world burns will have to rise, too. Oil currently accounts for 35 per cent of primary energy in the world, and if that ratio persists then the we’re going to need a lot more of the stuff. That means the price will go up and stay up.
Finding new oil will get more expensive, for the cheap, “sweet” oil in easy-to-reach places was developed first. Most of the new oil will be found under the sea, or in the Arctic, or trapped in tar sands in Canada and Venezuela, or it will be “sour” oil with a high sulphur content. The price per barrel has to be high to make it worthwhile to develop those resources — but it WILL stay high, because the demand for oil is going to rise so steeply.
Or so it says in BP Energy Outlook 2030. Well, you didn’t expect an oil company to publish a report saying that demand for its product is going to dwindle and prices are going to fall, did you? But BP’s analysis leaves out politics, technology and even fashion.
The politics first. One major implication of a rising demand for oil is that the importance of Middle Eastern oil will grow, for this is the one place where relatively modest investments can increase production rapidly. However, the Middle East is unpredictable politically, and getting more so by the moment. The consumers hate uncertainty, and this gives them a strong incentive to move to alternative sources of energy.
Concerns about global warming are pushing them in the same direction. The key to stopping the warming is to cut the amount of fossil fuels we are burning, and ultimately to stop using them entirely.
Government programs to do that already exist in most countries, and even in the United States, where Congress blocks direct action, the Obama administration has used the Environmental Protection Agency to raise the fuel efficiency standard for American-built vehicles to 35.5 miles per gallon by 2016. (The current average is 25 mpg.) That alone will result in a 29 per cent cut in American oil usage.
Now the technology. The hunt for a substitute fuel for vehicles is already underway. ExxonMobil, for example, is investing $600 million in research into producing a cost-effective alternative from biomass — specifically, from algae that require no agricultural land and use only waste or salt water.
And finally, fashion. In the 1934 movie It Happened One Night, Clark Gable, the leading male movie idol of the day, undressed to get into bed with Claudette Colbert (they were married, of course), and under his shirt was... a bare chest! He wasn’t wearing an undershirt! Shock, horror — and then the treacherous thought: why ARE we all wearing undershirts? In less than a year, the market for undershirts collapsed.
So here we have a world where almost all the cars are oil-fuelled or at best “hybrid,” although electric-powered alternatives are beginning to appear on the market.
The electrics are still not satisfactory for long-distance driving, but mass-produced cars burning carbon-neutral oil substitutes in internal combustion engines are probably only five to ten years away.
And in ten or 15 years’ time, after we have had a couple of really big environmental disasters or a new oil embargo by Middle Eastern oil producers, might the motorized masses ask themselves: why ARE we all driving petroleum-fuelled cars? And act on their conclusions.
The BP study is a soothing bedtime story for worried oil industry execs. In the real world, the long-term future of oil prices may be down, not up.