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1 December 2008
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Introduction
Crude oil is a non-sustainable fossil source of energy and
feedstock for the majority of the chemicals and pharmaceutical
industries. It consists of a wide variety of mostly aliphatic
hydrocarbons, starting with dissolved methane and ending with
solid bitumens and the proportions of the mix vary from well to
well. It has to be extracted from oil-bearing porous strata deep
below the earth's surface. After degasification, it has to
refined into the products that can be used, from the lightest
ethylene and propane, through various fuel grades, to bitumen
for road making and into various feedstock chemicals.
In recent months, the price of crude oil has more than
doubled, because of a variety of factors, some market-oriented
of supply and demand, others because of foreign exchange rates
engendered by a weak dollar and still more because of errors and
speculation by analysts. The supply was artificially restricted
for political reasons and because of a lack of refinery
capacity, with US stockpiles of some refined products running
low (unlike many other countries, the USA does not keep large
stocks of refined products, so that a shortage of, say, petrol
or gasoline, for any reason, may overload refining capacity).
As supply could not meet international demand during the first half of 2008,
this has raised the fear of "peak oil", which is something different but which
will, sooner or later, create a surge of price, this time permanent.
Over the last century, there has been a fairly constant increase of
demand of petroleum products, in terms of per cent increase per decade. This
increase is continuing, especially as large developing countries, such as
China, India and Indonesia, are requiring much greater quantities to feed
their growing economies. At the same time, the world's crude oil resources
are being depleted. While there are still sufficient reserves for a number
of decades, it is becoming increasingly difficult to extract and process the
oil and production levels are dropping in many places.
In the UK-controlled portion of the North Sea and in the USA, production
is already much lower than it used to be, because of the depletion of
reserves. Even in the Middle East, some countries are beginning to
experience lower production levels. What this means is that we shall, sooner
or later, hit a situation where world production will no longer be able to
increase, i.e., it will be at a peak level. This could be delayed by
exploiting some known untapped reserves, but this will be but a short
reprieve with the disadvantage of depleting the reserves faster and leaving
less oil for our children to use. This goes against the principle of
husbandry.
Notice that I say when and not if. It will happen and
possibly sooner than you think. Some say we are already there, but others
quote dates from 2010 to 2025, according to the model used. However, new
reserves are being discovered and new techniques are being used to obtain
more oil from old reserves and this keeps pushing the fateful date ever
forward. Some optimists see no problem before 2050; others are less
sanguine. The truth? Nobody really knows when we shall hit peak oil.
It is difficult to be certain, but there will be economic repercussions,
at least. As supplies slowly diminish, the bidding for them will result in
price increases, possibly even in anticipation. At the time of writing, the
price of Brent crude is about $115/bbl, US Sweet, slightly higher. Prices of
$200/bbl are quite foreseeable in the future, maybe in one year, maybe in 20. This
will hit the consumer most at the filling station when he has to pay a lot
more than today's $4/US
Gal or €2/l in some countries (currently about €1.15/l in Cyprus). After that, a 10-20% price hike per year would not be
abnormal, as production diminishes.
This will obviously hit the general world economy and it would be
reasonable to assume that the growth rate in developed and developing
countries alike will drop or even diminish into negative figures. However,
this will not be like recessions we have known in the past because it will
hit everyone simultaneously and there will be no recovery, in that petroleum
supplies will never be restored to their previous levels. Notwithstanding,
countries with a high per capita consumption of oil, like the USA, Canada and
Australia, will be harder hit than those with a relatively low one, like
much of the European Union, including Cyprus. As 65 per cent of the US oil
consumption goes into transport, this will obviously be a sector that will
take a beating, worldwide. The foreseeable results for Cyprus are increased
costs of imported goods and a large reduction of tourism.
There is one mitigating factor for Europe. The USA has an enormous
national debt which it cannot pay off. The dollar will drop further in
value. At the time of writing, the exchange rate is about €1 = $1.53. By the
time the effects of peak oil begin to show, the euro will strengthen further
against the dollar and I estimate that the price of oil, paid in dollars,
will increase less than half as much when converted into euros. For example,
hypothetically, at $115/bbl, we pay about €75 for the same barrel. If the
price increases to $200/bbl, we shall not be paying €130/bbl but only, say,
€100/bbl, because of the difference in exchange rates. Europe will therefore
be much better off than the USA. The danger would be if the oil-producing
countries sussed this out and switched to euros as their preferred currency.
In the longer term, peak oil will not be catastrophic. Yes, we shall
suffer initially, but the world economy will become accustomed to the change
and we shall all be poorer, with a smaller volume of world trade, thus a
heavier reliance on local goods. It is already aberrant transporting, say,
bottled water to the four corners of the globe. This kind of luxury will be
the first to go and Perrier should be replaced by Kykko or Ayios Nicolaos
water (or, better, tap water). The economy will drive us from 4x4s and
pickups with a consumption of 12 - 20 l/100 km to small diesel or hybrid
cars drinking only 4 or 5 l/100 km, so that motoring will actually become cheaper
to match any losses in salary. Equally so is importing pineapples from the
Ivory Coast when we grow magnificent fruit and vegetables on this island. We
shall have to make small adjustments and grow and consume more local
produce.
There are many doomsayers who predict that peak oil will result in total
anarchy and a wholesale bloody revolution, especially in the USA. I don't
believe this will happen because the effect won't take place overnight, but
over several years, even more than a decade, allowing people to adjust to the changed circumstances.
Certainly, natural gas will follow a similar curve. At the present rate
of consumption, we have known reserves for well over 50 years. However, this
figure may be too comforting. As oil becomes more expensive, many people
will switch to gas for heating. Some oil products, especially liquid fuels,
could be synthesised from natural gas. This increased consumption means that
we could easily hit peak gas within, say, 25 years and this will exacerbate
the economic problems in a second recessionary surge.
Obviously, peak oil and peak gas will have a favourable effect on
greenhouse gas emissions and public health but there is a grave danger. The
three major nations which have not ratified the Kyoto Protocol, the USA,
China and India also happen to be major coal producers and
produce a large proportion of their electricity from coal. As other fossil
fuels decline, there will be a big temptation to increase their domestic
coal consumption for generating electricity and synthesising liquid fuels.
This will inevitably increase carbon dioxide and sulfur emissions, because
all coal is a dirty fuel, rich in carbon. This is a very real potential
danger for the global environment and it is to be hoped that international
pressure by the Kyoto signatories will prevent this from happening.
Forewarned is forearmed. Peak oil and gas are imminent, at least in the
medium term, whether we like
it or not. Cyprus should reduce its fossil fuel dependence as rapidly as
possible and every effort should be made to increase local food production
and quality, so that we become more autonomous. Wherever possible, reduce
your purchases of imported goods in favour of locally-produced ones. The
tourist industry will be hard hit as air fares will rise higher than the
aircraft.
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