Oil
Oil resources
The first Gulf war very nearly occurred in the 1920s between the UK and the US, after the Middle East had been carved up post-1918. This war wouldn't have been over sand, the archaeology of great civilisations, or over fertile river valleys. Neither have all the others.
Crude oil accounts for around 40% of global primary energy use;
additionally it is used extensively in the chemical, plastics,
fertiliser and manufacturing industries. In the 1960s an
American geoscientist, M. King Hubbert, pointed out that there would come a time when
more oil had been
discovered than was left in the ground, and an illustration of most
countries' peaks is shown in this section,
accounting for slightly more than half of
global demand at that time. For the Kingdom of Saud (around a quarter of
known global reserves) and some
others we just have no idea, since they don't publish any data. Hubbert
initially chose a geological peak, which is factual and
scientific; as it turns out what is most important is peak
production, which is influenced by geopolitical and economic
factors. Globally, the effects of peak production were -
arguably - felt over the period 2005-2008, as demand from India
and China increased massively, no significant new upstream
production was brought online, and market speculators swarmed
into what they saw - rightly - as a sure bet; that prices were
only going to increase. When the price of oil went up large
energy users switched to cheaper gas and coal, with the
speculators following hard on their heels. As overall energy
prices increased the people of the United States were hit
particularly hard, partly due to their dependence on road transport, their use of inefficient cars and 'light trucks', and
the lack of a tax buffer which could have been lowered to their benefit. As
has been mentioned elsewhere on this site 'energy is everything'; when
oil costs rose so did the cost of chemicals, manufacturing, light, heat,
food and haulage.
What can be done to lower oil prices?
- Have a recession. This is known as demand destruction, and oil producing nations don't like it one bit more than the rest of us
- Start a war (preferably against an unpopular regime), with the intention of increasing a country's output, and hope that the 'liberated populace' greet you with flowers rather than RPGs. This is known as stupidity, since if it doesn't work global markets will realise that military force can never again be counted on to restore stability in an oil producing region. This creates uncertainty and therefore raises prices, to the benefit of oil companies and oil exporting nations but no-one else
- Hope that a friendly nation will dramatically increase production and flood the market with cheap oil; other producers will have to follow suit and drop prices. This is known as capacity cleansing
This
final option - capacity cleansing - is the preferred one, at least in
most instances. There are two problems with it at present. The first is
that nowadays only the Kingdom of Saud has the spare capacity to do it
(which they have done on several occasions in the past), the second is
that at a time when the global economy was desperate for cheaper oil,
and when it was in their interest to do so, they didn't. This raised the
spectre of whether, with demand as it
existed in 2007, they could. The Kingdom
of Saud may have reached (or more probably may have come uncomfortably close to)
peak production. Why is this - indeed even just the question - of concern?
Simple: a quarter of global reserves. Please note that the diagram above is from 2007. During 2008 prices
firstly went off the top of the scale, to $147bbl for West Texas
Intermediate (WTI - the 'headline' oil price generally seen on the news); due to impending
demand destruction they then retreated to less than $40bbl; all in less than one year,
and with no obvious geopolitical cause.
The future of oil
Whether oil is used to make fertiliser, plastics, chemicals, aspirin; whether we just burn the stuff; crude oil is a necessary commodity and will remain so for decades, probably more than a century. Price stability is essential for long term economic growth. Seven of the last eight global recessions have been preceded by a spike in oil prices.
The major issue is that significant upstream production increases would, will be needed, as economies and populations grow. Outwith OPEC there isn't a country in the world that can do it within a decade. Opening Alaska to further exploration and exploiting those reserves would take longer, as will bringing Albertan oil shale reserves fully online. Neither one, nor both together, nor any new oil finds that can be anticipated, will be able to significantly alter the projected balance between supply and demand in the long term - though projections at the moment are not so much scientific forecasts; far more like a game of pin-the-tail-on-the-donkey.
Venezuela has oil - like Alberta it's heavy, dirty oil - available. Again it takes time to exploit such resources, especially since most refineries are set up to process lighter 'sweet' crude. The rest of OPEC could up production in some instances, and a stable Iraq will make some difference to availability. The Kingdom of Saud has made it clear that it will not squander its resources at the expense of its future generations.
There's a secondary issue - although large non-OPEC oil companies are making plenty of money they don't know what to do with it. Counter-intuitively, this isn't a great situation for them to be in at the moment. Seeing the price of oil double and then halve again within the space of two years, along with a disastrous banking crisis, has left them hoarding cash - it's difficult for them to plan ahead, therefore investment in exploration and new production is limited.
The good news?
That
was the good news. When
the demand destruction of the global recession that began in 2008 ends,
and requirements for oil increase again, capacity cleansing could once
again become impossible and prices could fluctuate far more than thus
far experienced. Is there anything that could mitigate this risk in the
short term, within the next ten years? Yes. There's a place in the
United States that has truly massive oil reserves, and knows all about
efficiency, although until now it's only seemed to export that knowledge, rather
than using it at home. It's called Motown. When US drivers buy US (and
other) vehicles originally designed for global markets, the US should not
need to import any oil for transport. That mitigates the risk for everyone in the short
term. It's the only thing that can - though it doesn't obviate the
responsibilities of the rest of us.
Addendum - a paper written on next generation vehicles is available here.
Natural gas
Gas resources
Natural gas is of very particular relevance to the UK, and the UK has no 'Detroit', no speedy means of demand control, to fall back on.
