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Ominous signs on the oil horizon

Sudha Mahalingam

Speculation over when oil is expected to peak has hovered around a wide band, but even the most optimistic peak oil theorist believes it would not be later than 2030.

THE SPIRALLING oil prices of the last 18 months have begun to ring the alarm bells in the global economy nurtured for over a century by an abundant and apparently inexhaustible supply of oil. It is now widely believed that the soaring prices do not reflect a cyclical phase of supply disruptions caused by the Iraq war or hurricanes, but are symptomatic of a secular trend that is far more ominous. Geologists and energy technologists are coming round to the view that the world is nearing its peak oil production and that it can only decline hereafter. The earliest warning came from King Hubbert, a U.S. geologist, who predicted that American oil production would peak in the 1970s, which it did. However, since oil continued to flow profusely as ever from fields elsewhere, the world soon forgot Hubbert and went back to its profligate ways.

In this millennium, however, speculation over peak oil has staged a dramatic comeback. More than 20 books have been published in the West on the impending end of oil and the looming energy crisis. A whole host of institutions devoted solely to studying `peak oil' has sprung up in the physical as well cyberspace. The Internet is abuzz with theories and speculation on whether, how and when oil production will peak and what countries can do to mitigate its impact. In a situation where speculators are already playing havoc with oil futures, the strident `peak oil' debate has added to the momentum for upward price spiral.

What exactly is peak oil? It refers to the highest daily or annual production from any oilfield, typically occurring a decade or so after the commencement of commercial production from the well. In the initial years of development, output from the oilfield usually increases progressively until it reaches a peak. Once it is reached, production begins to decline rather drastically. The oilfield is past its prime and almost invariably, its production declines and altogether ceases in a few years or, at best, turns into an uneconomic trickle.

Until now, while some oilfields have peaked, there have always been new finds which would compensate by bringing online new supplies. Thus even though global oil consumption has been increasing at over two per cent annually, new supplies could always be brought on stream — from Russia, the Caspian or West Africa — to meet the growing demand. High oil prices always brought on new investments in exploration, which in turn were rewarded by new finds. However, since 1980, annual global consumption has outpaced annual new discoveries. In the last few years, new discoveries have replaced only one of every four barrels of crude consumed.

The last major discovery was Kashagan in the Caspian more than a decade ago. The world's largest oilfields were discovered more than half-a-century ago. Less than one per cent of the producing oilfields account for 75 per cent of global production. Thus what we have are a handful of giant fields and numerous trickles. The recent discoveries are pygmies compared to what was discovered half-a-century ago. Besides, major oil exporters such as Norway and Britain will soon join the ranks of importers since North Sea fields are now well past their prime. Already, Indonesia, an OPEC member, has become a net importer since 2004. Azeri oilfields are expected to peak in the next decade.

Finally, geologists are coming round to the view that the geology of hard minerals is quite different from the geology of hydrocarbons. Unlike the former, the latter is found in discrete deposits. All such discrete deposits, however remote, have probably been already mapped, thanks to advanced satellite technologies.

The paranoia over peaking oil reached fever pitch in 2004 when global energy major Royal Dutch Shell downgraded its reserve estimates by more than a third. Markets reacted violently, sending prices into a tizzy. Last year, Mathew R. Simmons, an American investment banker, confirmed pessimistic predictions about peaking oil when he published his sensational book Twilight in the Desert. It is a chilling, graphic and persuasive account of how Saudi Arabian oilfields are past their prime and are kept flowing only through heavy water injection — a claim assiduously dismissed by the Saudis. Yet it is a well-known fact that in the 1980s, virtually every OPEC member substantially revised upwards its estimates of reserves without any scientific basis because in that decade, OPEC decided that export quotas of its members would be proportional to the reserve size. If we discount that revision now, it is possible we are close to peaking oil.

Despite the polemics of the peak oil debate, there seems to be a fair degree of consensus that conventional oil might indeed be peaking and that the world will now have to reconcile itself to unconventional energy sources found in inaccessible and inhospitable terrain and perhaps in quantities inadequate to meet the burgeoning global demand.

Thus the newfound interest in Canadian tar sands, gas hydrates, ethanol, biodiesel, etc. Developing these fuels would not only be costly and time-consuming but will make no more than a marginal dent in the demand for good old crude. Energy technologists and analysts believe, on the basis of an input-output analysis of unconventional oils, that their energy content is rather meagre and therefore the economics of developing them, rather doubtful. There is little doubt that unconventional oil will cost a lot more to produce, refine and market. Energy-intensive economies may, therefore, have to brace themselves for high oil prices.

Speculation over when oil is expected to peak has hovered around a wide band, but even the most optimistic peak oil theorist believes it would not be later than 2030. But most predictions point to a shorter outlook, ranging from next year to the end of the decade, etc. The lone voice of optimism in this gaggle of despair is that of Daniel Yergin, the Pulitzer Prize winning author of Prize, a well-researched and eminently readable tome on oil politics, and head of Cambridge Energy Research Associates, a global energy consultancy. But Mr. Yergin's optimism is questioned by an increasing number of geologists and energy technologists.

Natural gas is available aplenty but can it be a substitute for conventional oil? At present, gas is used primarily in power generation, space heating, petrochemicals and in India, in fertilizer production, whereas oil is primarily a transportation fuel everywhere in the world. In fact, more than half of global oil consumption goes towards mobility — in ships, planes, trains and automobiles. Thus the two are not exactly substitutes although there are a few areas of overlap. Besides, gas is not fungible and is often located away from major consumption centres. Thus you have plenty of natural gas in the Persian Gulf — shared by Iran and Qatar, in Algeria, in Siberia and Sakhalin, Trinidad and Tobago, etc., whereas the consumption locations are far and away, in North America, India and China. Gas needs trillions of dollars of investment in pipelines or LNG infrastructure to reach the consumption centres.

`Inevitable collapse'

Assuming peak oil is nigh, what is the prognosis for an oil-dependent world? Grim, as much for exporters as for importers. When wealth squirts out of mother earth in the form of crude oil, exporting countries will have little incentive to diversify and broad-base their economies. The disincentive may even get aggravated as oil prices rise in the next few years but eventually exporters will have to come to terms with the finite nature of their resource. Peak oil theorists believe that the collapse of OPEC economies is inevitable.

What of the major energy importers, the United States, Europe, China and India? In a globalised world, more than human mobility, it is mobility of goods that consumes most of the oil. In the Western world, it is the profligate `food miles' that put Alfonso mangoes in New York store shelves or Danish dairy products in supermarkets in Japan, that have led to runaway oil consumption, apart from the fact that a vast and sprawling country like the U.S. is entirely dependent on its road networks for mobility. Not only has the U.S. failed to put in place any mass transit system, its misplaced emphasis on personalised individual transportation in oil guzzlers like Sports Utility Vehicles has led to runaway consumption that is now difficult to contain.

As for India and China, the awakening giants which unfortunately are also energy paupers — as one expert calls them — both have chosen a growth paradigm that is energy-intensive. Unless we, in India, delink growth from energy consumption, we will bear the brunt of soaring oil prices when oil peaks. Merely putting in place aggressive conservation measures will have only limited impact if we encourage and promote ever-increasing energy-based wants. As Mahatma Gandhi said, the earth has enough for every man's need, but not enough for even one man's greed.

(The writer is Senior Fellow at the Nehru Memorial Museum & Library, New Delhi.)

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