“I think that easy oil and easy gas - that is, fuels that are relatively cheap to produce and very easy to get to the market - will peak somewhere in the coming ten years.”
Jeroen van der Veer, Chief Executive, Royal Dutch Shell plc

WE ARE LEAVING THE ERA OF CHEAP OIL

By Lord Ron Oxburgh, Former Chairman, SHELL
(Foreword of the first report of the UK Industry Taskforce on Peak Oil & Energy Security (ITPOES))

There isn’t any shortage of oil, but there is a real shortage of the cheap oil that for too long we have taken for granted. During the 20th century, cheap oil - $20 – 30/barrel in today’s terms - allowed the internal combustion engine to replace the steam engine and sparked a transport revolution that fostered and fed the innate human desire to travel. We loved it.

Crude Oil Barrel price - US $ (Source: ASPO – June 2008)

By the middle of the century warning bells began to ring and some such as King Hubbert1 began to point out that world oil was a finite resource and furthermore that it was possible to estimate how much remained. At the time Hubbert was regarded by many as a crank and the industry line was that new discoveries would continue to replace what had been used. We now know differently . A great deal more oil has been discovered since Hubbert’s day but his basic thesis still holds. The difference is that today, with more exploration and more sophisticated exploration tools, we know the Earth much better and it is pretty clear that there is not much chance of finding any significant quantity of new cheap oil. Any new or unconventional oil is going to be expensive.

A more immediate concern is that today the world supply of oil is only just meeting demand and this is keeping the price very high. Earlier this year (2008) the price nearly hit $150/per barrel and even with the subsequent fall back below $100, the forward price is high. These prices partly reflect short term market jitters about political instabilities and vulnerability of supplies to natural or man-made disasters, but more fundamentally there is a concern that even though supplies may increase they may not increase as rapidly as the demand from large developing countries. It is this looming prospect of an early overhang of unsatisfied demand that is keeping forward prices high. All that could change this view of the future is a major world economic recession, and even the effects of that on demand have to be put in the context of a rapidly rising global population.

There is also another change from the past. Today around 80% of the world’s oil and gas reserves are controlled by governments through national oil companies. This is in marked contrast to a couple of decades ago when international oil companies had the major influence. Disregarding the potential use of fuel supplies as political levers, it is entirely reasonable that national governments should have legitimate policies different from those of oil majors when it comes to exploiting the natural resources of their countries. They are starting to regard their shrinking oil and gas resources as something to be husbanded. King Abdullah of Saudi Arabia recently described his response to new finds: “No, leave it in the ground … our children need it.” In other words, even those who have less expensive oil may wish to exploit it slowly and get the best possible price for it – a marked contrast with the past when oil was sold in a highly competitive market for little more than it cost to get it out of the ground.

Today’s high prices are sending a message to the world that words alone have failed to convey, namely that not only are we leaving the era of cheap energy but that we have to wean ourselves off fossil fuels. For once what is right is also what is expedient - we know that we have to stop burning fossil fuels because of the irreversible environmental damage they cause, and now it may be cheaper to do so as well!

“Easy oil is past – what’s vital now?”
Jeremy Bentham, Vice-President Global Business Environment, Royal Dutch Shell plc

1 In 1956 M. King Hubbert, a geologist for Shell Oil, predicted the peaking of US Oil production would occur in the late 1960\'s. Although derided by most in the industry he was correct. He was the first to assert that oil discovery, and therefore production, would follow a bell shaped curve over its life. After his success in forecasting the US peak, this analysis became known as the Hubbert's Peak

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