Financial Daily from THE HINDU group of publications
Tuesday, Jul 26, 2005
The `peak oil' controversy
The increasing energy cost of oil creates what can be called a positive feedback loop: As oil is used directly or indirectly in just about every human activity, an increase in the energy cost of oil will result in an increase in the cost of other sources of energy too.
Sooner than later, the consumption of oil is going to exceed its supply. As of now, there is no known substitute for petroleum in terms of quality. The question, therefore, is not `whether' but `when' oil will run out.
Some of those who have been trying to work out the answer have evolved the concept of "peak oil". Dr Kjell Aleklett, a physics professor at Sweden's Upsalla University, and President of the Association for the Study of Peak Oil and Gas, is among the several experts most of them former oil industry executives and geologists who hold that there is no room for complacence because the amount of oil now left in the ground is significantly less than what the oil industry would have us believe.
According to Mr Aleklett the world has burned up nearly half of all its oil an estimated 900 billion barrels of crude and that, during the next 30 years or so, we will find more than 150 billion, perhaps 200 billion, barrels of oil and that, in the same period, we will consume 1,000 billion barrels of oil. In industry jargon, that halfway point is the "peak", after which reserves no longer rise but drop.
Those sanguine about the continued availability of oil also accept the notion of a peak.
However, they are sceptical about the timing of the warning around 2008 being put out by peak oil analysts.
Thus, Mr Michael Lynch, a critic of the "peak oil" movement, argues that Mr Colin Campbell, a geologist and leading spokesperson of the movement, has a long record of making inaccurate predictions. Says Mr Lynch: "The people who predict peak oil have been predicting it any day now for 15 years.
Like Colin Campbell said in 1989 that this is the peak right now, in 1991 he said the peak is next year, and in 1995 he said it's in 1997 and so forth.
I've generally been predicting continued rise (in oil supplies) since I started working on this; really making forecasts in the late 1980s. I think over the next 30 years you won't see a peak unless it is from the demand side."
Oilmen further contend that supplies are actually growing with more oil coming out of Iraq, Russia, the Caspian Sea, Colombia, Sudan and so on.
This, again, is disputed. The US State Department in 1997 put the possible value of Caspian Sea at a staggering $4 trillion, according to Mr Mathew Simmons, an energy investment banker and one-time adviser to the US President, Mr George W. Bush.
One field, Kashagan in Kazakhstan, was touted as being particularly productive. Mr Simmons holds that the Caspian oil and Kashagan have been hyped.
In this respect, he has been quoted by the media as saying: "Now, there is an enormous project that got sanctioned to begin development spending in the middle of 2004 called Kashagan that is being billed by some people as the biggest oilfield found in the last 30 years.
Interestingly enough, three of its original partners who collectively held 30 per cent have already bailed out."
And then again, those who believe that talk of an energy crisis is alarmist insist that if supplies dip and prices rise, the industry will, quite simply, step up exploration.
Further they contend that technology will make it easier to extract oil from places difficult to reach, for instance, the petroleum locked in the sands in Canada.
The peak oil analysts have a different point of view on oil-industry investment patterns, which, they claim, seem to indicate that there is not much oil left to discover. They point out that The Financial Times in 2004 quoted a study by the Scottish energy consultant, Mr Wood Mackenzie, establishing that the major oil companies had invested $35 billion to develop existing oilfields in 1998.
Five years later, in 2003, the amount was $50 billion, a record, according to the Mackenzie study. During the same time period, spending on oil exploration dropped from $11 billion to $8 billion.
Peak oil analysts contend that the oil companies were investing in the development of existing and not exploration and that this means that they too are aware that money spent on exploration is likely to prove a waste.
Mr Lynch disagrees with this conclusion. According to him spending on exploration has fallen because companies are drilling even more oil from existing fields. He adds that there are other factors at play as well.
"When you look at oil discoveries and production, these are partly influenced by geology, but they are heavily influenced by politics, economics and infrastructure, and things like that.
So they (the peak oil analysts) are mistakenly assuming that what they are seeing is a lack of oil.
In other words, geology is determining it, when in reality what has happened is that people in the Middle East cut back drilling because they had a huge surplus of oil and they nationalised their operations in the 1970s and so forth."
The position of the oil industry and those who believe that there is no likelihood of the world running out of oil in the near and medium term is very reassuring but it does not deal with two problems.
One, the distinctly startling observation made by peak oil analysts that major oil finds (more than 500 million barrels) peaked as far back as 1964. In 2000, there were only 13 major oil discoveries; in 2001, six; in 2002, two; and in 2003, none!
Second, the notion of energy sinks. It is obvious that energy sources must produce more energy than they consume. If they do not, they are energy "sinks".
And so, in order to get a correct picture of where we stand, we have to take into account the "energy price".
Energy sources that consume more energy than they produce are manifestly worthless, without reference to the "money price" of energy.
According to peak oil analysts, the world is currently using six barrels of oil to discover one new barrel.
Mr Aleklett and other peak oil analysts assert that the West must mend its profligate ways and control the demand it generates for oil. They have a point: the US has five per cent of the world's population and burns up 25 per cent of its resources.
The US Senate, on June 29, passed with an overwhelming majority, a broad energy legislation, which its authors hope will strike a balance between traditional and alternative sources of power and break a four-year Congressional stalemate over an energy policy.
The legislation includes $14 billion in tax incentives for oil and gas production as also the development of wind, solar and other emerging energy sources, in addition to rewards for buyers of energy-efficient appliances and hybrid cars. In addition, it envisages an additional investment of $36 billion in energy-related projects although many of them will require approval by Congress.
And therein lies the pinch. On of the factors underlying the clash between the Senate and the House is the latter's own version of the energy measures, which emphasises increased domestic oil and gas production.
Further, the House has taken up a controversial plan to grant product liability immunity to producers of the gasoline additive MTBE, which has polluted groundwater extensively in the US.
Inevitably, given the man occupying it, the White House too does not much care for various parts of the Senate Bill: in specific, its cost and the component requiring utilities to use more renewable fuels to generate electricity. These and related problems are for the people of the US, who put Mr Bush in the White House to sort out.
But the problem is that the imminent energy crisis will affect people across the globe.
It would, therefore, appear that the continuation of the Bush presidency is going to prove disastrous to other countries too in many more ways than has been anticipated.
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