The ability to harness energy sources and put them towards a productive use has played a crucial role in economic development worldwide. Easily accessible oil helped to fuel continued expansion in the 20th century. Agricultural production was transformed by motorised farm equipment and petroleum-based fertilisers and pesticides. Cars, trucks and airplanes powered by oil products revolutionised the transportation of people and goods. Oil provides fuel for home heating, electricity production, and to power industrial and agricultural equipment. It also provides the source material for the construction of plastics, many fertilisers and pesticides and many industrial chemicals and materials. It is now difficult to find any product that does not require the use of oil at some point in the production process.
Oil has several advantages over other fossil fuels: it is easily transportable and energy-dense, and when refined it is suitable for a wide variety of uses. Considering the important role that oil plays in our economy, if persistent shortages were to emerge, the economic implications could be enormous. However, there is no consensus as to how seriously the treat of oil resources depletion should be taken. Some warn of a colossal societal collapse in the not-too-distant future, while others argue that technological progress will allow us to shift away from oil before resource depletion becomes an issue.
How much of a problem oil depletion poses depends on the amount of oil that remains accessible at reasonable cost, and how quickly the development of alternatives allows the demand for oil to be reduced. This is what the term ‘peak oil’ means the point of when the demand for oil outstrips the availability. Demand and supply each evolve over time following a pattern that is based in historical data, while supply is also constrained by resource availability. There is no mechanism for market on its own to address concerns about climate change. However, if policies are put in place to price the costs of climate change into the price of fossil fuel consumption, then this should trigger market incentives that should lead efficiently to the desired emission reductions.
A while ago the media was filed with stories about peak oil and it was even in an episode of the Simpsons. Peak oil in basic term means that the point we have used all the easy to extract oil and are only left with the hard to reach which in term is expensive to refine. There is still a huge amount of debate amongst geologist and Petro- industries experts about how much oil is left in the ground. However, since then the idea of a near-term peak in the world oil supplies has been discredited. The term that is now used is Peak Oil demand, the idea is that because of the proliferation of electric cars and other sources of energy means that demand for oil will reach a maximum and start to decline and indeed consumptions levels in some parts of the world have already begun to stagnate.
The other theory that has been produce is that with supply beginning to exceed demand there is not enough investment going into future oil exploration and development. Without this investment production will decline but production is not declining due to supply problems just that we are moving into an age of oil abundance and the decline in oil production seen if because of other factors. There has been an explosion of popular literature recently predicting that oil production will peak soon, and that oil shortages will force us into major lifestyle changes in the near future- a good example of this is Heinberg (2003). The point at which oil production reaches a peak and begins to decline permanently has been referred to as ‘Peak Oil’. Predictions for when this will occur range from 2007 and 2025 (Hirsch 2005)
The Hirsch Report of 2005 concluded that it would take a modern industrial nation such as the UK or the United States at least a full decade to prepare for peak oil. Since 2005 there has been some movement towards solar and wind power together with more electric cars but nothing that deals with the scale of the problem. This has been compounded by Trump coming to power in the United States and deciding to throw the energy transition into reverse, discouraging alternative energy and expanding subsidies for fossil fuels.
What is happening how
Many factors are reported in news reports to cause changes in oil prices: supply disruptions from wars and other political factors, from hurricanes or from other random events; changes in demand expectations based on economic reports, financial market events or even weather in areas where heating oil is used; changes in the value of the dollar; reports of inventory levels, etc. these are all factors that will affect the supply and demand for oil, but they often influence the price of oil before they have any direct impact on the current supply or demand for crude oil. Last year, the main forces pushing the oil market higher were the agreement by OPEC and its partners to lower production and the growth of global demand. This year, an array of factors are pressuring the oil markets: the US sanctions that threaten to cut Iranian oil production from Venezuela. Moreover, there are supply disruptions in Libya, the Canadian tar sands, Norway and Nigeria that add to the uncertainties as does erratic policymaking in Washington, complete with threats to sell off part of the US strategic reserve and a weaker dollar. Goldman Sachs continues to expect that Brent Crude prices could retest $80 a barrel this year, but probably only late in 2018. “production disruptions and large supply shifts driven by US political decisions are the drivers of this new volatility, with demand remaining robust so far” Brent Crude is expected to trade in the $70-$80 a barrel range in the immediate future.
The OPEC
Saudi Arabia-and Russia-had started to raise production even before the 22 June 2018 meeting with OPEC that sought to address the shrinking global oil supply and rising prices. OPEC had over-complying with the cuts agreed to at the November 2016 meeting thanks to additional cuts from Saudi Arabia and Venezuela. The June 2018 22nd meeting decided to increase production to more closely reflect the production cut agreement. After the meeting, Saudi Arabia pledged a “measurable” supply boost but gave no specific numbers. Tehran’s oil minister warned his Saudi Arabian counterpart that the June 22nd revision to the OPEC supply pact do not give member countries the right to raise oil production above their targets. The Saudis, Russia and several of the Gulf Arab States increased production in June but seem reluctant to expand much further. During the summer months, the Saudis always need to burn more raw crude in their power station to combat the very high temperatures of their summer.
US Shale oil production
According to the EIA’s latest drilling productivity Report, US unconventional oil production is projected to rise by 143,000 b/d in August to 7.470 billion b/d. The Permian Basin is seen as far outdistancing other shale basins in monthly growth in August, at 73,000 b/d to 3,406 million b/d. However, drilled but uncompleted (DUC) wells in the Permian rose 164 in June to 3,368, one of the largest builds in recent months. Total US DUCs rose by 193 to 7,943 in June. US energy companies last week cut oil rigs the most in a week since March as the rate of growth had slowed over the past month or so with recent declines in crude prices. Included with other optimistic forecast for US shale oil was the caveat that the DUC production figures are sketchy as current information is difficult for the EIA to obtain with little specific data being provided to Washington by E&Ps or midstream operators. Given all the publicity surrounding constraints on moving oil from the Permian to market, the EIA admits that it “may overestimate production due to constraints.”
The Middle East and North Africa
Iran
Iran’s supreme leader, Ayatollah Ali Khamenei, called on state bodies to support the government of president Hassan Rouhani in fighting US economic sanctions. The likely return of US economic sanctions has triggered a rapid fall of Iran’s currency and protests by bazaar traders usually loyal Islamist rulers, and a public outcry over alleged price gouging and profiteering. The speech to member of Rouhani’s cabinet is clearly aimed at the conservative elements in the government who have been critical of the President and his policies of cooperation with the West and a call for unity in a time that seems likely to be one of great economic hardship spread to more than 80 Iranian cities and towns. At least 25 people died in the unrest, the most significant expression of public corruption, but the protest took on a rare political dimension, with growing number of people calling on supreme leader Khamenei to step down. Although there is much debate over the effectiveness of the impending US sanctions, some analysts are saying that Iran’s oil exports could fall by as much as two-thirds by the end of the year putting oil markets under massive strain amid supply outages elsewhere in the world. Some of the worst-case scenarios are forecasting a drop to only 700,000 b/d with most of Tehran’s exports going to China, and smaller chares going to India, Turkey and other buyers with waivers. China, the biggest importer of Iranian oil at 650,000 b/d according to Reuters trade flow data, is likely to ignore US sanctions.
Iraq
Iraq’s future is again in trouble as protests erupt across the country. These protests began in southern Iraq after the government was accused of doing nothing to alleviate a deepening unemployment crisis, water and electricity shortages and rampant corruption. The demonstrations are spreading to major population centers including Najaf and Amirah, and now discontent is stirring in Baghdad. The government has been quick to promise more funding and investment in the development of chronically underdeveloped cities, but this has done little to quell public anger. Iraqis have heard these promises countless times before, and with a water and energy crisis striking in the middle of scorching summer heat, people are less inclined to believe what their government says. The civil unrest had begun to diminish in southern Iraq, leaving the country’s oil sector shaken but secure-though protesters have vowed to return. Operations at several oil fields have been affected as international oil companies and service companies have temporality withdrawn staff from some areas that saw protests. The government claims that the production and exporting oil has remained steady during the protests. With Iran refusing to provide for Iraq’s electricity needs, Baghdad has now also turned to Saudi Arabia to see if its southern Arab neighbor can help alleviate the crises it faces.
Saudi Arabia
The IPO has been touted for the past two years as the centerpiece of an ambitious economic reform program driven by crown prince Mohammed bin Salman to diversify the Saudi economy beyond oil. Saudi Arabia expects its crude exports to drop by roughly 100,000 b/d in August as the kingdom tries to ensure it does not push oil into the market beyond its customers’ needs.
Libya
Reopened its eastern oil ports and started to ramp up production from 650,000 to 700,000 and is expected to rise further after shipments resume at eastern ports that re-opened after a political standoff.
China
China’s economy expanded by 6.7 percent its slowest pace since 2016. The pace of annual expansion announced is still above the government’s target of “about 6.5 percent” growth for the year, but the slowdown comes as Beijing’s trade war with the US adds to headwinds from slowing domestic demand. The gross domestic product had grown at 6.8 percent in the previous three quarters. Higher oil prices play a role in the slowing of demand, but the main factor is higher taxes on independent Chinese refiners, which is already cutting into the refining margins and profits of the ‘teapots’ who have grown over the past three years to account fir around fifth of China’s total crude imports. Under the stricter tax regulations and reporting mechanisms effective 1 March, however, the teapots now can’t avoid paying a consumption tax on refined oil products sales- as they did in the past three years- and their refining operations are becoming less profitable.
Russia
Russia oil production rose by around 100,000 b/d from May. From July 1-15 the country’s average oil output was 11.215 million b/d an increase of 245,000 b/d from May’s production. Amid growing speculation that President Trump will attempt to weaken US sanctions on Russia’s oil sector, US congressional leaders are pushing legislation to strengthen sanctions on Russian export pipelines and joint ventures with Russian oil and natural gas companies. Ukraine and Russia said they would hold further European Union-mediated talks on supplying Europe with Russian gas, in a key first step towards renewing Ukraine’s gas transit contract that expires at the end of next year.
Venezuela
Venezuela’s Oil Minister Manuel Quevedo has been talking about plans to raise the country’s crude oil production in the second half of the year. However, no one else thinks or claims that Venezuela could soon reverse its steep production decline which has seen it losing more than 40,000 b/d of oil production every month for several months now. According to OPEC’s secondary sources in the latest Monthly Oil Market Report, Venezuela’s crude oil production dropped in June by 47,500 b/d from May, to average 1.340 million b/d in June. During a collapsing regime, widespread hunger, and medical shortages, President Nicolas Maduro continues to grant generous oil subsidies to Cuba. It is believed that Venezuela continues to supply Cuba with around 55,000 barrels of oil per day, costing the nation around $1.2 billion per year.
Alternatives to Oil
In its search for secure, sustainable and affordable supplies of energy, the world is turning its attention to unconventional energy resources. Shale gas is one of them. It has turned upside down the North-American gas markets and is making significant strides in other regions. The emergence of shale gas as a potentially major energy source can have serious strategic implications for geopolitics and the energy industry.
Uranium and Nuclear
The nuclear industry has a relatively short history: the first nuclear reactor was commissioned in 2945. Uranium is the main source of fuel for nuclear reactors. Worldwide output of uranium has recently been on the rise after a long period of declining production caused by uranium resources have grown by 12.5% since 2008 and they are sufficient for over 100 years of supply based on current requirements.
Total nuclear electricity production has been growing during the past two decades and reached an annual output of about 2,600TWh by mid-2000s, although the three major nuclear accidents have slowed down or even reversed its growth in some countries. The nuclear share of total global electricity production reached its peak of 17% by the late 1980s, but since then it has been falling and dropped to 13.5% in 2012. In absolute terms, the nuclear output remains broadly at the same level as before, but its relative share in power generation has decreased, mainly due to Fukushima nuclear accident.
Japan used to be one of the countries with high share of nuclear (30%) in its electricity mix and high production volumes. Today, Japan has only two of its 54 reactors in operation. The rising costs of nuclear installations and lengthy approval times required for new construction have had an impact on the nuclear industry. The slowdown has not been global, as new countries, primarily in the rapidly developing economies in the Middle East and Asia, are going ahead with their plans to establish a nuclear industry.
Hydro Power
Hydro power provides a significant amount of energy throughout the world and is present in more than 100 countries, contributing approximately 15% of the global electricity production. The top 5 largest markets for hydro power in terms of capacity are Brazil, Canada, China, Russia and the United States of America. China significantly exceeds the other, representing 24% of global installed capacity. In several other countries, hydro power accounts for over 50% of all electricity generation, including Iceland, Nepal and Mozambique for example. During 2012, an estimated 27-30GW of new hydro power and 2-3GW of pumped storage capacity was commissioned.
In many cases, the growth in hydro power was facilitated by the lavish renewable energy support policies and CO2 penalties. Over the past two decade the total global installed hydro power capacity has increased by 55%, while the actual generation by 21%. Since the last survey, the global installed hydro power capacity has increased by 8%, but the total electricity produced dropped by 14%, mainly due to water shortages.
Solar PV
Solar energy is the most abundant energy resource and it is available for use in its direct (solar radiation) and indirect (wind, biomass, hydro, ocean etc.) forms. About 60% of the total energy emitted by the sun reaches the Earth’s surface. Even if only 0.1% of this energy could be converted at an efficiency of 10%, it would be four times larger than the total world’s electricity generating capacity of about 5,000GW. The statistics about solar PV installations are patchy and inconsistent. The table below presents the values for 2011 but comparable values for 1993 are not available.
The use of solar energy is growing strongly around the world, in part due to the rapidly declining solar panel manufacturing costs. For instance, between 2008-2011 PV capacity has increased in the USA from 1,168MW to 5,171MW, and in Germany from 5,877MW to 25,039MW. The anticipated changes in national and regional legislation regarding support for renewables is likely to moderate this growth.
Conclusion
The rapid consumption of fossil fuels has contributed to environmental damage, the use of these fuels including oil releases chemicals that contribute to smog, acid rain, mercury contamination and carbon dioxide emissions from fossil fuel consumption are the main drivers of climate change, the effects of which are likely to become more and more severe as temperature rise. The depletion of oil and other fossil resources leaves less available to future generations and increases the likelihood of price spikes if demand outpaces supply.
One of the most intriguing conclusions from this idea is that this new “age of abundance” could alter behavior from oil producers. In the past some countries (notably OPEC members) restrained output husbanding resources for the future, betting that scarcity would increase the value of their holdings over time. However, if a peak in demand looms just over the horizon, oil producers could rush to maximize their production in order to get as much value for their reserves while they can. Saudi oil minister Sheikh Ahmed Zaki Yamani was famously quoted as saying, “the Stone Age didn’t end for lack of stone, and the oil age will end long before the world runs out of oil.” This quote reflects the view that the development of new technologies will lead to a shift away from oil consumption before oil resources are fully depleted. Nine of the ten recessions between 1946 and 2005 were preceded by spikes in oil prices and the latest recession followed the same pattern.
Extending the life of oil fields, let alone investing in new ones, will require large volumes of capital, but that might be met with skepticism from wary investors when demand begins to peak. It will be difficult to attract investment to a shrinking industry, particularly if margins continued to get squeezed. Peak demand should be an alarming prospect for OPEC, Russia and the other major oil producing countries. Basically, any and all oil producers who will find themselves fighting more aggressively for a shrinking market.
The precise data at which oil demand hits a high point and then enters into decline has been the subject of much debate, and a topic that has attracted a lot of interest just in the last few years. Consumption levels in some parts of the world have already begun to stagnate, and more and more automakers have begun to ratchet up their plans for electric vehicles. But the exact date the world will hit peak demand misses the whole point. The focus shouldn’t be on the date at which oil demand peaks, but rather the fact that the peak is coming. In other words, oil will be less important when it comes to fueling the global transportation system, which will have far-reaching consequences for oil producers and consumers alike. The implications of a looming peak in oil consumptions are massive. Without an economic transformation, or at least serious diversification, oil-producing nations that depend on oil revenues for both economic growth and to finance public spending, face an uncertain future.
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