Trends in Oil Supply and Demand - Case Study Example

Introduction The purpose of this project is to discuss the concept of “Peak oil” that was introduced by M. Hubbert. This concept had shown that use of petroleum will soon begin to decline if the current level of consumption is not arrested. Though validity of the hypothesis has been debated, yet there is no denying the fact that petroleum production is falling. This essay is divided into two parts. The first part discusses the concept of peak oil and the next part focuses on impact of the peak oil concept on the transportation sector. In this regard, feasibility of production of alternative fuels has also been addressed. What was the basis for the Peak Oil concept? Geologist, M. King Hubbert had first developed the concept of “Peak oil” while he was working for Shell Ltd., an oil company. The main hypothesis of Hubbert is that production of petroleum products can only increase up to a certain point, the maximum production. After that, production will surely decline. Hubert had originally predicted in 1956 that oil production of the United States will begin to fall from the period of 70s (Näf, 2010). Though initially rejected, validity of this hypothesis had begun to gain momentum when this possibility showed signs of reality. Since then, various analysts had used the background of Hubbert to predict the peak year for world oil decline. The expected time frame for the decline is 2004 to 2008 (National Research Council, 2006). The following graph shows the initial hypothesis of Hubbert. Figure 1: Hubbert's graph of peak oil (Source: Deffeyes, 2003) According to current estimates, the peak year of production depends heavily on the future demand. The exact time frame has not been commonly agreed upon, but estimates claim that it is likely to happen before 2020 (Mobbs, 2005). The current estimates have suggested that assuming the world economy to grow at 3-3.5% per annum, the consumption of oil in developing countries will rise from 84 bbl/day in 2005 to 120 bbl/day in 2025. Additionally, assuming depletion of oil at 3-3.5% per annum, the current demand can only be met if 98 bbl/day is produced from sources other than the existing ones, which are almost impossible (Graefe, 2011). The peak oil debate has continued for too long and no concrete results have been reached. The ones for the notion debate that the production will always lag behind discovery and the decline is terminal (Kaufmann, n.d.). Over the last few decades, newer sites that had been discovered had shown that reserves in them are not too high and cannot be sustained for a long-term. The Kuwait oil company has also decided on using multi-cyclic models to overcome previous restrictions associated with the previous models. Their study has shown that the world production is likely to peak in 2014. The study of other oil companies and analysts had estimated the time to be around 2020. At present, most of the oil reserves remain with the government and only 10% of the reserves are with the private companies (Oil Decline, 2014). The political instability of Middle East had persuaded the government to use their political influence so as to create price instability of petroleum in the world market, which has in turn complicated the energy scenario of the world (Allmendinger, 2007). The non-transport use of petroleum includes (Office of Oil and Gas, 1991): Use as solvents for making paints and inks. Lubricants in the engines of automobiles. Petroleum wax used in making candles. Petroleum coke that is used in chemical laboratories. Petroleum feedbacks used for the purpose of making chemicals, rubber and plastic. The impact on transportation The following pie-chart reflects consumption of petroleum for different modes of transport. It can be seen from the chart that majority of the consumption of petroleum comes from passenger cars. This is followed by the use of petroleum in medium and heavy duty trucks, which is slightly ahead of the light duty ones. Aircraft uses less petroleum compared to road vehicles and the least demand arises from ships and boats. The study from the articles suggests that land transportation uses maximum petroleum and is followed by the aviation industry. Next in line stands the maritime industry (McCullough, 2013). The use of petroleum among land transport is not uniform and it has been found that railways use lesser fuel compared to the passenger cars (approximately four times more energy efficient) and freight trucks (approximately two times more energy efficient). Figure 2: Share of petroleum consumption (Source: McCullough, 2013) There are various reasons for the rise in petroleum use in the passenger cars. It has been observed that from the period of 70s, there has been an increase in the income of people, which has been directly correlated to the ownership of cars (Diem, 2013). This had inevitably raised the level of fuel consumption by the households. The rise in efficiency of fuel consumption is related to fall in marginal gains, which can be obtained from fuel consumption as such consumption is characterized by diminishing returns in fuel consumption. Alternative fuels Some of the alternative forms of fuels include: Bio-fuels: This can be an efficient alternative fuel for road transportation. This includes ethanol, methanol and other types of biodiesels, which can be produced from fermentation of crops such as, cereals and sugarcane. This can be used not only for the passenger cars, but also for freight transport. The issue of aviation fuels is a little more sensitive and research from NASA has shown that there can only be one type of synthetic fuel that can be used for the planes (NASA) (Daggett, et al., 2006). Hydrogen: This can be used as an alternative fuel to run different modes of transportation. The process of production can be broadly summarized in three steps (Rodrigue, Comtois and Slack, 2013): Extracting hydrogen from the hydrocarbons exploration or producing it from the electrolysis of water. Conversion of gaseous hydrogen into the liquid form and storing it into adequate mobile vessels. Using fuel cells to produce electricity from liquidated hydrogen in order to move the vehicle. Electricity: Electricity can act as an extremely convenient form of alternative to petroleum. It is also considered to be superior to the hydrogen fuel cells, primarily because there is no need to convert electricity from hydrogen as energy is stored in ready-to-use state in this alternative form. The cost of production of electrically run vehicle is also much lesser than the hydrogen fuel cars (Samaras and Meisterling, 2009). Hybrid vehicles: These vehicles intend to use an internal combustion engine coupled with batteries and electricity. These kinds of vehicles can provide the dual technology of electricity and combustion. These vehicles use fuel as the primary source of energy; yet, the propulsion can be provided by electricity in the battery. These type of vehicles, therefore, help in saving fuels; if not completely eliminate the use of it (Samaras and Meisterling, 2009). Feasibility of using alternative fuels It seems that there are several alternative uses of petroleum, which can be employed by vehicles for the purpose of transportation. Nevertheless, on a closer analysis, problems of substituting petroleum surfaces, along with the doubts regarding the extent to which use of petroleum can be substituted. Bio-fuels: Production methods have shown that bio-fuels are hugely land-intensive and there arise debates about alternative land use. Statistics suggest that to produce 1000 litres of oil (which is required for a car to travel 10000 kilometres), nearly one hectare of wheat needs to be cultivated. This task represents severe challenges in feasibility of the plan. Then again, in order to produce one thermal unit of ethanol, it requires combustion of 0.76 units of petroleum and natural gas. Although demand of fuel from the transportation sector is the highest, such massive biomass production for the entire sector is not feasible. There are two main factors, which limit this alternative use: firstly, sustainability of the production process; and secondly, efficiency of production (Amjid, et al., 2011). Hydrogen: This alternative is superior to petroleum fuels and produces almost no pollutants. However, the problem with this substitute is that process of production is highly energy and cost intensive. If cars are made to run on hydrogen, then more energy will be consumed than cars running on electricity. In addition to this, the process of storage of hydrogen requires well-equipped storage tanks with extremely low temperature and high pressure, thereby rendering hydrogen more convenient for water transport (Crabtree and Dresselhaus, 2008). Electricity: The batteries that are presently available in the markets do not have high storage devices. This makes hydrogen driven vehicles slower than petroleum driven ones. This implies that high storage devices for storing electricity will be required if they have to provide the same speed as the petroleum driven combustion engines. Also, there are certain debates regarding the conventional process of producing electricity by using fossil fuels. Alternative methods for production of electricity through hydro-electric power are precursor to cost-effective electric driven cars (Crabtree and Dresselhaus, 2008). Hybrid Vehicles: In case of these vehicles, it has already been seen that petroleum needs to be used in addition to electricity or batteries. Therefore, use of petroleum cannot be fully substituted in this alternative (Crabtree and Dresselhaus, 2008). Rate of technology change The biggest challenge of cost effective production of the alternative fuels are the rising prices of oil globally. The research of International Energy Agency has shown that if prices of oil are considered to be constant, then rate of production of alternative fuels can be very high. Apart from the oil costs, there are other production costs as well; these make production of the alternative fuels very expensive. The chart below shows cost of production of the various alternative fuels including various components of production costs. Figure 3: Cost of production at current technology (Source: IEA, 2013) The analysis of present technologies has shown that only natural gas, ethanol and big CTL firms can thoroughly compete with gasoline, in terms of energy efficiency, if cost of oil is kept constant. Nonetheless, if technological advances are made in the future, then the costs of production of alternative fuels will fall and nearly all of them will become cost-efficient. The assumption of mature technology in the research had considered efficient technology of production, greater crop yields and reduced distance from point of extraction to that of conversion. The chart below shows the production costs under matured technology. Figure 4: Cost of production at mature technology (Source: IEA, 2013) Policy Change The proactive promotion by the government to use alternative fuels policies is a precursor to changing behaviour of the consumer. The decline of petroleum production in the United States had made the government practice policies like, higher gasoline tax and promotion of alternative fuels, in order to arrest rising consumption of petroleum. Europe and Japan are also among the countries, which have introduced high taxes on gasoline to alter behaviour of the consumers (Anon, n.d.). The governments of developing countries must also try to bring down the level of petroleum use as these countries have been noted to consume more petroleum products. Direct financial incentives from the government can impact cost of production of the alternative fuels and make them feasible for use. The policies of the government can also direct the large oil companies to use alternative uses of energy. Carbon-pricing of the U.S. government can be considered as an example of such a policy, which is committed to cut down the carbon emission of oil companies by persuading them to use renewable sources of energy. Conclusion This essay has analyzed the peak oil problem for the global economy. After the analysis, it was found that road transportation will be affected the most, given that this sector consumes most of the petroleum. In this sector, the passenger cars use most of the fuel; so active measures must be promoted to reduce the consumption of alternative fuels in this sector, such as, bio fuels. The present situation indicates that the cost of production of these fuels is higher than gasoline; but, with committed government policies and technological innovation, this situation can improve and the “peak year” can be stalled. Reference List Allmendinger, R. W., 2007. Peak Oil? [online] Available at: [Accessed 11 March 2014]. Amjid, S. S., Bilal, M. Q., Nazir, M. S. and Hussain, A., 2011. Biogas, renewable energy resource for Pakistan. Renewable and Sustainable Energy Reviews, 15, pp. 2833-2837. Anonymous, n.d. Government policies and incentives. [pdf] Sustainable Conservation. Available at: [Accessed 11 March 2014]. Crabtree, G. W. and Dresselhaus, M. S., 2008. The hydrogen fuel alternative. [pdf] Agilent Technologies. Available at: [Accessed 11 March 2014]. Daggett, D., Hadaller, O., Hendricks, R. and Walther, R., 2006. NASA: alternative fuels for aviation. [online] Available at: [Accessed 11 March 2014]. Deffeyes, K. S., 2003. Hubbert's peak: The impending world oil shortage. New Jersey: Princeton University Press. Diem, C., 2013. Chart of the day: Rising household vehicle ownership over time belies the “middle class stagnation” narrative. [online] Available at: [Accessed 11 March 2014]. Graefe, L., 2011. Peak oil debate: A reprint from the “Economic Review” Atlanta: Diane Publishing. IEA, 2013. Production Costs Of Alternative Transportation Fuels. [pdf] International Energy Agency. Available at: < http://www.iea.org/publications/freepublications/publication/FeaturedInsights_AlternativeFuel_FINAL.pdf > [Accessed 11 March 2014]. Kaufmann, J., n.d. Peak oil – An overview. [pdf] Oregon.gov. Available at: [Accessed 11 March 2014]. McCullough, J., 2013. Webinar: Handbook for estimating transportation greenhouse gases for integration into the planning process. [online]. Available at: [Accessed 11 March 2014]. Mobbs, P., 2005. Energy Beyond Oil. Leichester: Troubador Publishing Ltd Näf, D., 2010. Option values and exhaustible resources: The example of peak oil. London: Routledge. National Research Council, 2006. Trends in oil supply and demand, potential for peaking of conventional oil production, and possible mitigation options: A summary report of the workshop. Washington D. C.: National Academies Press. Office of Oil and Gas, 1991. Petroleum: An energy profile. Atlanta: Diane Publishing. Oil Decline, 2014. Peak oil- Info and strategies. [online] Available at: [Accessed 11 March 2014]. Rodrigue, J. P., Comtois, C. and Slack, B., 2013. The Geography of Transport Systems. London: Routledge. Samaras, C. and Meisterling, K., 2009. Life Cycle Assessment of Greenhouse Gas Emissionsfrom Plug-in Hybrid Vehicles: Implications for Policy. Environ. Sci. Technol, 42 (9), pp. 3170-3175. Read More