09 July 2015
Surplus Energy
by J R Thomas
Apologies to those who think the Shaw Sheet is developing an obsession with what lies under our feet. Last week potash, this week oil. Potash is something we don’t think about very much in normal life, but it is vital to how we feed our ever-growing world population – and the UK controls a very significant proportion of the world’s potash resources. Oil we do think about but, even while recognising its importance, we probably still underestimate how dependent we now are on it, in transport, heating and cooling, plastic and materials manufacture, and specialist chemicals and complex compounds. We certainly could not sustain more than a fragment of the current world population without it.
In twenty or thirty years that may look very different. Every developed economy in the world is investing billions in trying to find alternatives to oil, and the technological advances in the sector are astonishing. The drivers to topple Queen Oil and King Coal are at least twofold; economic (sources of both are diminishing and increasingly difficult to get at) and conservationist (the side effects of burning fossil fuels are increasingly unacceptable in terms of pollution and even more so to the green agenda). A third reason may well be political – the old joke about God’s sense of humour in putting the world’s carbon energy reserves under some of the most hostile environments and unfriendly regimes seems increasingly valid. Certainly the West would prefer not to rely for something so vital on sources that are so tricky.
The good news is that we are close to being able to harvest energy from truly renewable sources at economical pricing. Probably top of the list are solar panels, increasingly efficient and cheap and disfiguring house roofs near you, and the new and more elegant generation looking surprisingly comely on industrial sheds, supermarkets and farm buildings. The Heron Tower in the City has its south façade composed of them and they look pretty good. Not so hot, in any sense, are wind turbines, which now feature in many classic views of the British Isles and increasingly in many seaward vistas. Nuclear power, beloved of the French and at one time the apparent answer to Britain’s declining coal production and its associated smog, has fallen from favour in the UK, mainly on safety grounds, and the existing nuclear power stations, now nearing the end of their economic life, are unlikely to be replaced in the near future. But nuclear still supplies most of France’s power and a significant part of the requirements of the Americans and the Russians.
Two years ago the need for economic replacements for oil looked very urgent indeed. The oil price, after a period bobbing along at around US$80 a barrel, suddenly moved to a new trading band in early 2011, varying between $105 and $125. For Western economies still struggling with recession that was very bad news. But it had one side-effect, that factor which naturally comes into play when any commodity increases significantly in price: people start looking for alternatives (Potash miners, please take note). The alternatives were already on hand, economists having long predicted that oil would continue to increase in price as it became scarcer and world growth powered on. So new sources were appearing – not just the renewables, but others meeting green and economic targets to a greater or lesser extent. Biomass is one – growing plants and trees to burn in power stations, economically viable only with low land prices or subsidies. But the real alternative as far as the West is concerned is shale oil and gas. The technology of extracting this is now proven and although fears over possible side-effects such as contamination and minor earthquakes remain, the USA is now extracting a rapidly increasing proportion of its oil from shale. Indeed, it is forecast that at “current prices” (which drive viability) and with plenty of regular oil flowing from Texas and the Gulf of Mexico, the USA will shortly be self-sufficient in oil and with reserves said to amount to 200 years supply.
“Current prices”; there’s the rub. Current prices were very helpful indeed when oil was over $100 a barrel, and at anything over $80 a barrel the shale fields were economic. The same applied in the UK, which also appears to have huge unsuspected reserves, though the cost of extraction will be more than most US fracking wells. Another UK problem is that the oil shale seems to be mostly under areas of outstanding natural beauty inhabited by resourced and articulate campaigners who do not want the risk of gassy water supplies or of minor earthquakes shaking their period residences – God’s sense of humour seeming to extend to the Sussex hills and Lancashire dales.
The oil price reacted dramatically to the potential increase in supply, down from $112 a barrel in August 2014 to $50 by the end of that year. That is a truly remarkable fall for such a popular product and it proved not sustainable, bouncing back within a month to around $65. There it has stayed. This has puzzled economists as world demand for oil is increasing. The reason for this new price stability probably has several components. On the supply side some complex politics have meant that the traditional oil producers have not done what they have done in the past when the oil price slumped – that is, cut the supply and force the price back up. Some oil producers are in financial difficulties, Venezuela, Iraq, and Nigeria among the sovereign producers, and also a number of oil companies who have expensive specialist facilities to pay for, especially those with ocean rigs. Some sovereign producers may be pumping the black stuff out as fast as possible to cash in whilst they can, fearing that regime change may sweep them away. In the Persian Gulf, putting the family jewels in a safe place by converting oil to cash might sensibly occur to a prudent monarch. The shale oil producers are still fracking their existing wells; the money once sunk has no recovery value. Russia – well, who knows what motivates Mr Putin, but cash flow might be a factor even there.
And of course, we are better in the ways we use oil products now. Our cars do double the miles per gallon they did ten years ago – and then they did twice as many as our father’s cars did. Most uses are more efficient so, although we continue to use more, the rate of oil use growth is slower than expected. At school in the late 1960’s we were told that the oil, at current rates of usage, would run out in less than 50 years time; now we seem to have over 200 years supply, reflecting both massive new discoveries and more economic use.
None of this convinced the economists and forecasters that the oil price would be around $65 for long. The general feeling was that the “right” level was around $100, and those who follow trends and graphs saw several attempts to break out of the current trading range and head back to the peaks. Instead, over the past week, the price suddenly took a further lurch down, to $56. In percentage terms that is a serious drop, of around 12% and the market is trying to find reasons why this might have occurred. We can’t blame it on Greek financial difficulties and although the oil price often does weaken a little in early summer that does not really account for it either. No sudden supply increase or abrupt reduction in demand is known. It may well turn out to be a concerted speculators attack, and the best guess is that we may soon see a rebound carrying the price back up to the $80 level. But even a modest period at current levels will certainly help recovering economies, to say nothing of airlines and Greek shipowners.
