Thursday, April 28, 2016

A Cautionary Tale - Oil's Days are Numbered

Sorry, Rachel. Sorry, Justin. Sorry, Brad. The heyday of high-cost, high-carbon oil is drawing to a close. Not your fault. You just happen to be stuck with the filthiest, costliest faux oil there is in a world market awash in cheap, lower-carbon oil.

There are plenty of places around the world where they just pump good old crude oil right out of the ground. They don't have to mine it. They don't have to boil it out of the ground. They don't have to "upgrade" it and mix it with light oil and heat it just to get it moving through special pipelines.

The Saudis have loads of that good crude oil, "sweet oil." Yet they know that oil's days are numbered, even for their stuff. It pains me to suggest that we might learn a thing or two from a group as odious, even barbaric as the Saudis but, hey, they might just be the canary for our bitumen mines.

The Saudis peered into the future and what they saw convinced them there was no time to waste, they had to break their dependence on oil revenues. They even used the word "addiction." And so they've set a target of 2030 to be independent of oil revenues. That means a transition to a post-oil economy and in an almost breathtakingly short time frame.

Meanwhile, Michael Klare suggests we've hit a form of "peak oil" - on the demand side, not supply. Just as all this unconventional energy from fracking fields, bitumen mines and seabed wells is flooding the markets, demand is stagnating. That, in turn, leaves those who are blessed with fields of low-carbon, low cost conventional oil with the market whip hand.

Klare contends that the recent OPEC summit in Doha shows that the days when western producers could count on Middle East oil solidarity to prop up prices are over.

It is hard to overstate the significance of the Doha debacle. At the very least, it will perpetuate the low oil prices that have plagued the industry for the past two years, forcing smaller firms into bankruptcy and erasing hundreds of billions of dollars of investments in new production capacity. It may also have obliterated any future prospects for cooperation between OPEC and non-OPEC producers in regulating the market. Most of all, however, it demonstrated that the petroleum-fueled world we’ve known these last decades -- with oil demand always thrusting ahead of supply, ensuring steady profits for all major producers -- is no more. Replacing it is an anemic, possibly even declining, demand for oil that is likely to force suppliers to fight one another for ever-diminishing market shares.

On the structural side, global demand for energy had, in recent years, ceased to rise quickly enough to soak up all the crude oil pouring onto the market, thanks in part to new supplies from Iraq and especially from the expanding shale fields of the United States. This oversupply triggered the initial 2014 price drop when Brent crude -- the international benchmark blend -- went from a high of $115 on June 19th to $77 on November 26th, the day before a fateful OPEC meeting in Vienna. The next day, OPEC members, led by Saudi Arabia, failed to agree on either production cuts or a freeze, and the price of oil went into freefall.

The failure of that November meeting has been widely attributed to the Saudis’ desire to kill off new output elsewhere -- especially shale production in the United States -- and to restore their historic dominance of the global oil market. Many analysts were also convinced that Riyadh was seeking to punish regional rivals Iran and Russia for their support of the Assad regime in Syria (which the Saudis seek to topple).

The rejection, in other words, was meant to fulfill two tasks at the same time: blunt or wipe out the challenge posed by North American shale producers and undermine two economically shaky energy powers that opposed Saudi goals in the Middle East by depriving them of much needed oil revenues. Because Saudi Arabia could produce oil so much more cheaply than other countries -- for as little as $3 per barrel -- and because it could draw upon hundreds of billions of dollars in sovereign wealth funds to meet any budget shortfalls of its own, its leaders believed it more capable of weathering any price downturn than its rivals. Today, however, that rosy prediction is looking grimmer as the Saudi royals begin to feel the pinch of low oil prices, and find themselves cutting back on the benefits they had been passing on to an ever-growing, potentially restive population while still financing a costly, inconclusive, and increasingly disastrous war in Yemen.

...Until very recently, it was assumed that the demand for oil would continue to expand indefinitely, creating space for multiple producers to enter the market, and for ones already in it to increase their output. Even when supply outran demand and drove prices down, as has periodically occurred, producers could always take solace in the knowledge that, as in the past, demand would eventually rebound, jacking prices up again. Under such circumstances and at such a moment, it was just good sense for individual producers to cooperate in lowering output, knowing that everyone would benefit sooner or later from the inevitable price increase.

But what happens if confidence in the eventual resurgence of demand begins to wither? Then the incentives to cooperate begin to evaporate, too, and it’s every producer for itself in a mad scramble to protect market share. This new reality -- a world in which “peak oil demand,” rather than “peak oil,” will shape the consciousness of major players -- is what the Doha catastrophe foreshadowed.

At the beginning of this century, many energy analysts were convinced that we were at the edge of the arrival of “peak oil”; a peak, that is, in the output of petroleum in which planetary reserves would be exhausted long before the demand for oil disappeared, triggering a global economic crisis. As a result of advances in drilling technology, however, the supply of oil has continued to grow, while demand has unexpectedly begun to stall. This can be traced both to slowing economic growth globally and to an accelerating “green revolution” in which the planet will be transitioning to non-carbon fuel sources. With most nations now committed to measures aimed at reducing emissions of greenhouse gases under the just-signed Paris climate accord, the demand for oil is likely to experience significant declines in the years ahead. In other words, global oil demand will peak long before supplies begin to run low, creating a monumental challenge for the oil-producing countries.

This is no theoretical construct. It’s reality itself. Net consumption of oil in the advanced industrialized nations has already dropped from 50 million barrels per day in 2005 to 45 million barrels in 2014. Further declines are in store as strict fuel efficiency standards for the production of new vehicles and other climate-related measures take effect, the price of solar and wind power continues to fall, and other alternative energy sources come on line. While the demand for oil does continue to rise in the developing world, even there it’s not climbing at rates previously taken for granted. With such countries also beginning to impose tougher constraints on carbon emissions, global consumption is expected to reach a peak and begin an inexorable decline. According to experts Thijs Van de Graaf and Aviel Verbruggen, overall world peak demand could be reached as early as 2020.

In such a world, high-cost oil producers will be driven out of the market and the advantage -- such as it is -- will lie with the lowest-cost ones. Countries that depend on petroleum exports for a large share of their revenues will come under increasing pressure to move away from excessive reliance on oil. This may have been another consideration in the Saudi decision at Doha. In the months leading up to the April meeting, senior Saudi officials dropped hints that they were beginning to plan for a post-petroleum era and that Deputy Crown Prince bin Salman would play a key role in overseeing the transition.

We know from prince Salman's announcements over the past week that Saudi Arabia has instituted a post-petroleum plan with ambitious target dates. The Saudis will continue to supply conventional crude that costs them just $3 per barrel to produce but woe betide high-cost, high-carbon heavy oil such as Athabasca bitumen.

When the Saudis, who can stay in the oil game far longer than we can ever hope to last, are moving to build a post-petroleum economy what conceivable argument is there for Canada constructing hazmat pipelines intended to stay in service 40-years or more? Are Canada's leaders, federal and provincial, so bereft of vision that they're incapable of imagining how we go ahead after the heavy machinery of Athabasca falls silent?


Anonymous said...

As the Saudis have shown, there's sometimes a great advantage in not having to go to the voters every few years. Here, the political strategy seems to be to stall as long as possible, hope that market fairy dust will sort things out and the party in power doesn't get blamed for the fallout.

The Mound of Sound said...

I thought much the same thing, Anon. When you're afraid to speak truth to the public lest it cost you in the next election, you benefit yourself at the expense of the country and its people. This sort of thing, however, has become so common that it's not routine.

Owen Gray said...

The Saudis plans for the future should be a signal that all those bets which have been placed on oil are turning into bad debt, Mound.

cyloke said...

Here's a good one as well mound.

The Mound of Sound said...

Owen, it sure looks that way. Who can forget Ignatieff who, just a few years ago, proclaimed the Tar Sands "the beating heart of the Canadian economy for the 21st century"?

We have clung to this ridiculous notion of Canada as energy superpower. When you have a discounted product that requires $50 per barrel to produce and another guy is awash in $3 per barrel oil, you're only relevant at the sufferance of the other guy. Some superpower.

The Mound of Sound said...

@ cyloke. Yes I read that essay on AlterNet. It's essentially what the current and past governors of the Bank of England, the chief of the British stock market, Lord Nicholas Stern and others have been warning about for at least four years now. There's a huge carbon bubble that threatens every exchange around the world. By some estimates there's $27-trillion in notional wealth in fossil fuel reserves into which banks, institutional investors, pension funds, etc. are heavily invested and terribly exposed. Imagine two thirds of that sum being wiped out in a matter of days from a collapse in investor confidence and a stampede to dump shares. That's what Carney and Stern fear. No one knows how the global economy would recover from a blow of that magnitude.