08 March 2005
What if oil cost $200 a barrel?Simon Ratcliffe
In two years’ time the price of oil could reach $200 a barrel. Farfetched? Maybe. Although estimates of oil and gas reserves vary widely, geologists Anders Sivertsson, Kjell Aleklett and Colin Campbell, of Uppsala University in Sweden, are the latest in a growing group of experts who believe that oil supplies will peak by 2010, if not before, and gas soon after.
A study by the London-based Oil Depletion Analysis Centre concludes that world oil supplies are certain to remain tight through the rest of this decade.
It found that all the major new oil-recovery projects scheduled to come on stream over the next six years were unlikely to boost supplies enough to meet the world’s growing needs.
The centre analysed 68 “mega projects” that will add about 12,5-million barrels a day to world oil supplies by the turn of the decade. More than half of the estimated new supply would simply replace production declines elsewhere.
“With most producers operating flat out to meet runaway demand increases this year, the world’s immediately available spare production capacity has virtually disappeared,” the report read.
Production quotas are unable to keep pace with world demand of 82-million barrels a day, which is increasing as China’s and India’s economies grow.
The era of cheap oil is at an end, experts and the industry are warning. A diverse range of oil industry insiders — like Ali Bakhtiari, head of strategic planning at Iran’s National Oil Company; Dr Colin Campbell; a former executive vice-president of Total-Fina; and Matthew Simmons, an energy investment banker and energy adviser to the Bush administration — are united in their belief that global oil production is about to peak, which will signal the permanent end of cheap oil.
And they warn that this is the reason for the current rise in oil prices. Simmons believes oil is “far too cheap” and should be about $182 a barrel. The only way to control demand is to price oil realistically, allowing for time to find fuels to fill the gap between an oil economy and a renewable fuel economy.
Large new oil fields are ever more difficult to find and Campbell says endless growth is not possible. The adherents of the “peak oil theory” warn that the decline of world oil output will force oil prices higher for good, and that the knock-on effects could be catastrophic.
Bakhtiari believes there will be a sudden explosion in prices soon and the people who will be least affected will be the impoverished, who have no access to energy, and the super-rich. The middle classes will be hurt the most, he warns.
Campbell’s research into oil reserves suggests that many official oil data are either flawed estimates or at worst downright lies. Scandals like the 23% of “lost” reserves at Royal Dutch/Shell last year have boosted interest in his work. False reserves threaten the security of energy supply, just as much as bombs under pipelines.
It seems clear the world is close to that tipping point where demand exceeds supply. Elementary economics warns that when this happens prices increase.
Political events, of course, also have an effect on oil prices. But it is unlikely that the US plans to invade Iraq were calculated around oil prices at $50 a barrel. The strategists were probably hoping for $20 a barrel. In the event that oil supplies from Iraq, Iran and Saudi Arabia become unpredictable, is $200 a barrel unrealistic if the world’s largest producers are upset by war, invasions and political agendas?
A Pentagon study on the security implications of global warming, titled Imagining the Unthinkable, predicts that in the not too distant future, wars will be fought primarily over resources.
How many of us will be able afford the R1000 or more it will take to fill our cars’ petrol tanks? How will the price of food be affected when the costs of bringing it to market rise dramatically? How much of our economic model will survive, given that much of it presupposes cheap oil? Can we continue to assume that we can procure raw materials for manufacturing from anywhere in the world? Can we assume that we can sell goods anywhere?
And what of those businesses that are dependent on cheap oil for their survival? The airline industry is under severe strain with oil at present levels, and some companies could go out of business.
And what of all the oil by-products, plastics, tar and chemicals? For some of these, there are no alternatives on the market yet.
If oil prices soar, it is likely that globalisation will founder and world economies will become much more local. What we consume will need to be produced locally; where we work and where our children are schooled, too, will need to be close to home. We might end up in a world that rapidly contracts.
This may sound pretty far-fetched, but the data on oil supply seems to be telling us that we need to start making alternative energy plans.
- Ratcliffe is an independent consultant.