“Peak Oil” …

“Peak Oil” Fears Fade Due to Technological and Economic Developments

Summary

Technological advances and high prices are transforming the oil industry, producing major shifts, not only in global economics but also in global politics. They have pushed fears about oil depletion towards the margins and opened up the possibility of a rise in the world’s supply of crude. If trends reverse in this way, U.S. reliance on foreign energy will lessen and prices could come down, reshaping economies and geopolitics with them, as energy intelligence reports explains.

Large new global oil and gas finds around the world have been bolstered by the increased use of fracking in the United States and Canada, a process almost unknown ten years ago.  As the process becomes more widespread and new oil fields begin to produce in large amounts, US reliance on foreign energy sources is likely to be substantially reduced by the end of this decade, but not ended.

Background 

Over the past decade, an old idea from the 1950s that the world would soon run out of oil and that US energy production was in terminal decline took on new life.  This doomsday fear came to be known as the “Peak Oil” theory.

This idea led to a belief that the U.S. would have to continue relying on foreign energy sources while simultaneously developing an array of alternative energy sources such as wind and solar power, or investing more heavily in nuclear power plants if it was to survive a coming oil depletion crisis.

Peak oil fears, however, are now receding.  High energy prices have encouraged and made financially affordable the search for new ways to access oil and gas reserves that a decade ago were thought to be off limits.

As a result, the expanded use of fracking, which combines horizontal drilling techniques with hydraulic fracturing (injecting high pressure fluids to crack dense rock which releases oil and gas embedded in shale), has reignited debate over whether the United States can re-emerge as one of the world’s leading energy producers.

Experts such as Robin West predict that if current trends continue, the United States by 2020 could be producing as much as eight million barrels of oil a day, not far from the current oil production by Saudi Arabia and Russia of about 10 million barrels a day.

There are caveats to this trend.  A recent report in Foreign Policy magazine shares West’s conclusion, but cautions that because current U.S. daily oil consumption—estimated by the Energy Information Administration at 19 million barrels—is unlikely to decline significantly in the near term and that U.S. dependence on foreign energy sources can be reduced significantly, but not eliminated.

Moreover, increased oil production in North Dakota and elsewhere in the continental United States will be offset to some extent by decreased oil production in the Gulf of Mexico.

At a July conference sponsored by the New America Foundation, a Washington, DC think tank, a panel of experts discussed the negative as well as positive economic consequences for some nations of a new oil boom.  The consensus is that those nations highly dependent on energy sales to support their national budgets are particularly vulnerable to long-term declines in energy prices.

In this category are Russia, Iran and Venezuela.  The Russian budget is highly dependent on oil revenues and assumes oil prices at slightly above $100 per barrel.  Dropping oil prices earlier this year therefore caused great concern for Russian leaders. Benchmark Brent oil futures fell to a 2012 low of $88.50 per barrel on June 22 but have steadily increased over the last month, closing at $106.55 on Friday, July 27.

Analysis

Given the discovery of new oil fields around the world and new oil extraction technologies that are revolutionizing the industry, peak oil fears are unwarranted in the near term.  If anything, the global supply of crude available to consumers is likely to grow over the next decade.

The big question now is not so much about supply (it clearly can be pushed upward if needed), but rather about the demand for oil in the coming years.  After 2008, the global economy entered a period of stagnation which it has still not recovered from and there is no guarantee that it will in the near future.

The demand for oil around the world will only continue to grow if national economies are healthy and moving toward to prosperity.  China’s rising economic trajectory over the last two decades has led the way, but now even its economy is slowing and its government has had to intervene to stimulate it artificially.

If the demand for oil remains relatively constant and its global supply increases over the coming decade, there could be significant downward pressure on prices.  Other factors, however, could come into play and create new forces that impact both supply and demand.

A crisis in the Middle East would trigger fears of an oil supply disruption, which in turn would cause the price of oil to spike.  Iranian threats this year to close the Strait of Hormuz or to attack Persian Gulf shipping have caused periodic, but brief oil price spikes.  Although recent Iranian threats had a smaller effect on prices, tensions in the region will remain high this year and the cycle of Iranian threats and oil price spikes is expected to continue.

While energy expert judges that the chances of an actual military confrontation with Iran is under 50 percent, increasing tensions in the region increase the potential for a military incident due to miscalculation, such as an Iranian speed boat wandering too close to a U.S. navy ship.  Israel also may still be considering whether to conduct air strikes against Iranian nuclear sites.  While LIGNET also believes the chances of an Israeli attack are under 50 percent, if Israel does attack, oil prices could spike to several hundred dollars per barrel.

Arnaud de Borchgrave assessed during that oil could rise to $400 to $500 a barrel if there is a military confrontation with Iran. 

Putting such unpredictable variables to the side, new oil extraction technologies are a mixed blessing for big oil producers such as Russia and Saudi Arabia.  On the positive side, they could help increase the size of their reserves.

On the down side, however, the new technologies will inevitably increase competition and permit new players to emerge.  Nations not on the front line of oil production right now—such as Cyprus, Ethiopia, Kenya and Sierra Leone—could become significant beneficiaries of enhanced methods of reaching underground oil and gas.  If those nations can rise up while oil production grows elsewhere, the global dominance of OPEC and Russia could erode.

For some nations the domestic effects of shifts in global oil production also are likely to be considerable.  Russian President Vladimir Putin campaigned earlier this year on a platform of salary increases for teachers and nurses, as well as promising major investments in Russia’s military capabilities.  Keeping all those promises may be difficult if oil prices stay below $100 a barrel.

Russia’s “fix” is to develop a more diverse and modern economy, but Putin did not move Russia in that direction during his first two terms as president (2000-2008) and, despite having spoken of the need to do so, it is unclear if he can accomplish this in coming years.  Putin’s failed promises due to falling oil prices will further undermine his support in a nation increasingly cynical of his governing style.

Finally, nuclear power, already subject in some nations to considerable skepticism about its utility because of safety and cost issues, in the United States and elsewhere may look less like a viable alternative energy source than was the case a few years ago. 

The Fukishima disaster in Japan has made the case for nuclear power much more difficult even without a rising global oil supply making it less viable.

But nuclear power is not dead and buried.  China and Russia are committed to keeping nuclear power in their energy mix, and regulatory authorities in the United Arab Emirates last week gave final approval for the construction of its first commercial nuclear power plant.

Alternative or renewable energy sources which appeared to be on an upswing will be challenged on cost grounds to prove their value if a new era of abundant and moderately priced oil comes to fruition.

Conclusion

Assuming unpredictable events do not abruptly intervene, emerging trends suggest oil prices can remain stable and may decline, over the course of this decade.  Technological advances are increasing the supply of oil and putting significant downward pressure on its price, but consumer demand is much harder to predict.  It is unlikely to rise appreciably as long as the current global economic stagnation continues.

 

 

 

About CHAINSOFF

Collecting, translating, producing, and disseminating open source information that meets the needs of policymakers, the military, state and local law enforcement, operations officers, and analysts through-out Governments.
This entry was posted in Uncategorized. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s