As the keynote speaker at the Singapore Energy Lecture, Dr. Daniel Yergin was toeing his usual line of optimism on the subject of oil and energy. As the Founder and Chairman of Cambridge Energy Research Associate (CERA), Dr. Yergin has a long career in the energy industry, though one some challenge as upholding the status quo of business and industry.
He spoke of the odd timing of the Copenhagen agenda of lowering carbon emissions (of which fossil fuel energy sources are a key contributor) by 2050, as well as projections that by 2030, there would be a substantial growth of energy needs worldwide. Some 80% of which these energy demands are to be met by hydrocarbon sources. Indeed, humanity faces some difficult decisions and conflict in the years ahead: development at what cost?
Beyond the issue of climate change, many call into question the phenomena of peak oil, that is the tipping point at which worldwide oil production peaks and eventually slips into decline. This would cause massive problems worldwide as the global economy is effectively built on the notion that cheap, abundant fossil fuel energy sources will always be available. A whopping 40% of the world’s energy comes from oil.
Dr. Yergin politely cast aside this notion that the world was running out of oil, citing amongst other examples, recent oil discoveries off the coast of Brazil. “Rather than a peak, production seems to resemble more of a plateau,” he said.
According to Yergin, the world has plenty of supply. It is a sentiment echoed by the International Energy Agency (IEA), whose most recent World Energy Outlook 2009 Report indicates that world energy resources are adequate to meet projected demand increase through 2030 and well beyond. However, any IEA projections should be taken with a pinch of salt, as there have been serious allegations their numbers have been exaggerated.
Also worth taking into account are the severe environmental implications for developing fossil fuel sources in relation to climate change. Ultimately, to combat carbon emissions that fuel climate change, the world needs to evolve away from fossil fuels.
Yergin remained optimistic that technological innovation would continue to aid in the discovery, recovery, and refinement of oil in the years ahead. He also spoke highly of the renewable energy possibilities. However, merely having technology available does not solve all energy woes.
For example, within recent decades, the nature of oil recovery operations has become increasingly complex and expensive. In the 1980’s, it was a matter of a several million dollar off-shore project drilling down several hundred feet to recover oil. Oil developments today involve several billion dollars of investment into an off-shore project go down thousands of feet to the ocean floor. The location of oil stocks is getting more difficult to access, and more costly to recover.
Enter into this scenario a global economic downturn, and suddenly investment into recovering and refining oil dries up. According to the IEA, most oil and gas companies have announced cutbacks in capital spending, as well as project delays and cancellations in 2009. Overall, investment budgets have been cut by 19% this year.
While the demand for oil has softened with the recession, it will inevitably recover. When it does, there will be a big problem as production has been substantially cut back and the implications for the price of oil are not pretty.
And what of the price of oil topping US$147 a barrel last year, amidst the onset of the financial crisis and recession?
Peak oil proponents believe that the price spike was due to an increase in demand and decrease of supply just ahead of the recession, a confirmation that peak oil’s onset was nigh. Dr. Yergin however offered another entirely plausible explanation.
With the US dollars weakness over the last several years, investors lost their usual safe haven when the financial crisis set in. As a result, they began to speculate in other areas, including commodities like oil. According to Yergin, this explains why the price stayed at record highs, even though demand was dropping due to the recession. Oil is emerging as a financial instrument, not just a commodity, and this can conjure greater volatility in price.
In the years ahead, Yergin noted that globalization of demand, centered in developing countries would be a major trend. Not only that, but climate change and a price on carbon would increase cross-border tensions. Think of China’s manufacture of many U.S. consumer goods—who bears responsibility for the cost of the carbon footprint? The manufacturing country, or the ultimate consumer?
All things considered, Yergin remains the optimist. He cites positive developments of unconventional natural gas (e.g. shale gas) and investment in renewable energy sources as great steps forward, ones that weren’t imaginable 20 years ago.
Still, the unfolding uncertainty of the global financial situation in decades ahead, as well as unforeseen impacts of climate change present formidable challenges. A global economy has tethered us all to an incredibly uncertain and unclear future.
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