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Page added on November 25, 2010

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Demand and supply in the post-peak oil world


The International Energy Agency (IEA) has delivered a confirmation of it. The agency, the energy security adviser to 28 rich nations, had dismissed imminent tapering off of production as a prediction of doomsayers in 2005.

Its 2008 report saw the earliest point of no return in 2030. Faith Birol, chief economist of the IEA, told British media last year that it could happen within a decade.

But now the energy watchdog says that oil production has already peaked. Conventional oil output will never exceed the 2006 peak of 70 million barrels per day (bpd). Output from existing wells could fall under 20 million bpd by 2035.

Even with new fields, crude oil production will enter ‘an undulating plateau’ of 68 to 69 million bpd after 2020. The gap will be met by unconventional oil and natural gas liquids before total production peaks in 25 years. In 2005, the IEA expected an output of 118 million bpd by 2030.

Thus the era of cheap oil is clearly over. A pre-recession price spiral that saw a record price of US$147 per barrel in 2008 was brief but educative in price volatility. Prices – in 2009 dollars – will rise above US$100 for good after 2015, according to the IEA.

Production is restrained by geology, opposition to exploitation of reserves and climate-change policies.

Demand is coming almost entirely from developing countries. China will claim half of the oil supplies and 75 per cent of primary energy demand. Markets will also be less sensitive to price changes as demand shifts to areas of high subsidies. Prices will average US$113 per barrel by 2035 (in 2009 dollars).

The price projection is based on the New Policies Scenario, one of the agency’s three long-term outlook studies. It assumes governments will deliver on commitments on subsidies and on climate pledges. Under the scenario, primary energy demand will grow at 1.2 per cent annually between 2008 and 2035 or 36 per cent – lower than the 2 per cent since 1980s and 1.4 per cent over 25 years under current policies. Developing countries will account for 93 per cent of the increase.

Oil dominates the energy mix, with demand at 99 million bpd by 2035. Output, including unconventional oil and natural gas liquids, will fall short by three million bpd, with processing gains filling the gap.

The demand is six million bpd less than IEA’s previous projection. Opec places demand at 105.5 million bpd by 2030.

Renewable fuels’ use will triple and, with nuclear power, take 14 per cent of the total market. Unconventional sources’ share remains at about 10 per cent in all scenarios.

Gas demand will jump 44 per cent. Caspian production and unconventional gas output outside of the United States will increase supply. But a slowly declining glut in gas may alter its pricing and even hamper the alternative energy drive.

Opec, bulked up by Saudi Arabian and Iraqi output, will keep a market share of 52 per cent instead of 41 per cent currently. Supplies will also rise from Brazil, Kazakhstan, Canada and Venezuela.

Yet, uncertainty about the size of ultimately recoverable conventional and unconventional sources remains a concern.

The agency says hope lies in encouraging energy efficiency by scrapping subsidies as G-20 nations have proposed and by fighting global warming. Implementing the near-term pledges in the Copenhagen Accord will still see the atmospheric concentration of greenhouse gases at 650 parts per million (ppm). The average temperature will rise 3.5° Celsius above the pre-industrial times.

But vigorous decarbonisation under the accord’s ambitious targets could achieve the 450 ppm goal and limit global warming to 2° Celsius, slowing oil demand growth to a rate of 0.7 per cent.

In the event, a plunge in OECD (Organisation for Economic Co-operation and Development ) demand will offset increased oil demand elsewhere. Demand will peak at 88 million bpd by 2020 – four million bpd more than now – and will fall to 81 million bpd 15 years later. Oil price is estimated to be at US$90 then.

Under that scenario, the use of oil, gas and coal must peak in 10 years. The share of renewable and nuclear energy will rise to 38 per cent from 7 per cent now.

But Copenhagen produced no formal pact. That mission demands about US$12 trillion investment and even may need newer technologies. The agency’s chief economist predicts that prices will rise faster than forecast unless oil consumption is checked, especially for transport.

‘The energy world is facing unprecedented uncertainty,’ Nobuo Tanaka, IEA executive director, has warned. The global population is growing. So time to start the tough transformation to a sustainable energy future is now. But that drive is clouded by a deep divide.

An inter-governmental agency is bound to be cautious. But last year, the IEA almost doubled the oil fields’ depletion rate to 6.7 per cent. The rate of 3.7 per cent assumed in 2007 was changed after a study of 800 fields. Robert Hirsch, who led a study on peak oil for the US Department of Energy, considers a 4 per cent decline catastrophic. He believes that US administrations have discouraged the research into ‘peak oil’ after he delivered the bad news.

Further, IEA expects Saudi production to rise five million bpd or 50 per cent. Energy investment banker Matthew Simmons, who died in August, suggested that Saudi production could be tapering off soon. British geologist Colin Campbell has contended that true oil reserve figures would set off panic on the stock markets, ‘that at the end would suit no one’. So we have forecasts of oil prices much above what the IEA is predicting.

Further, several studies have highlighted the risk this year. A US military research envisages a shortage of 10 million bpd by 2015. And Lloyd’s Insurance Market and Chatham House have warned businesses of catastrophic consequences in the near future if they do not prepare for peak oil and predicted US$200 price is imminent. It wryly noted: ‘IEA expectations (on crude output) over the last decade have generally gone unmet.’

One Comment on "Demand and supply in the post-peak oil world"

  1. KenZ300 on Fri, 26th Nov 2010 12:32 am 

    Diversify types and sources of energy.

    Our economic security and national security depend on it.

    Wind, solar, geothermal,and biofuels all need to ramp up production.

    A California-based company is building a $120 million biofuels plant near Reno Nevada. They expect the plant will create more than 50 full-time and 450 temporary jobs.

    The plant is expected to produce over 10 million gallons of ethanol AND 16 megawatts of electricity annually by processing municipal solid waste.

    This plant will create clean energy and reduce dependence on foreign oil by
    processing HOUSEHOLD GARBAGE.

    Clean, sustainable alternative energy — that is what we need — local energy, local jobs.

    If every garbage dump in the country co-located an ethanol plant we could go a
    long way toward producing local energy and local jobs.

    Why do we keep pushing oil, coal and nuclear when there are clean, sustainable alternatives? At the very least we should diversify our energy sources.

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