Peak Oil Phenomenon and Issues - Essay Example

?Major oil issues Introduction In recent years the price of crude oil have been facing a trend what may be called a ‘run- up- spree’. Strong drift upward, a volatility of a very high rate along with jumps with high intensities were the characteristic features of the dynamics of the oil prices in the international market. These huge fluctuations in the international price of crude oil, more specifically this upward trend indicates that the market for crude oil was not in proper equilibrium in a constant way. With increasing modernization and automation the demand for crude oil has been on a constant increase and the world demand is expanding. However the supply of crude oil in the international market has been rigid. This creates the pressure on the prices of the oil. This fundamental theory of the international market as well as the economy of the world provides the explanation for the process or the trend of the fluctuation in the price of crude oil. Within the period 2004 - 2006 the capacity of the production of the global oil had not been able to keep in pace with its demand that had been increasing rapidly. The demand for oil had been on an increase more for the emerging economies of the continent of Asia, China, and also the United States of America. The demands for oil have an increase of 1.4 million barrels per day for the year 2005 as compared to 2.7 million barrels per day increase in 2004. This increased demand of oil had been accompanied by a continuous increase in the price of the same. According to the market specialists the price of oil is expected to remain jumpy and almost volatile. Moreover the price of this particular resource is expected to face a continuous rise rather than decrease. There is a high probability that the price will remain above the expected mean value of the price. (Krichene, 2006, pp 3- 4: Gautier, 2008, p 110) However predictions about the persisting trend of oil price vary among scholars. In the words of Xu, Chen and Han the main obstacle that arises in the prediction of the price of the crude oil is uncertainty. The various models along with the methods for computation that are present help to forecast the price trend in literatures. However most of the methods have not been able to predict the existing and the future variability of the prices of crude oil in the most effective way. For the betterment of the methods of computing the variations in the price econometricians have made several attempts and they have suggested different methods that are suitable for measuring and predicting the volatility. (Huynh, 2008, p 353) The paper aims at studying the expected trend of the oil price in the recent future with special emphasis to Australia. Peak Oil Phenomenon and Discussions around the World The past century had experienced a major growth of population but lesser instances of food shortages. The material requirements of the people had also surged. All this was achieved due to the growth of production of oil. The immense growth of oil production hugely benefited the food productions, wiped out the occurrence of famines, and made other daily human activities simpler (Hall & Day, 2009). The huge oil production made oil cheaper and the civilization moved forward based on oil-based energies. However, this also led to a huge depletion of oil reserves and ecologists predict that Peak Oil is not far away. Peak Oil is a phenomenon by which the global oil production will reach its highest stage and then it will start to fall at a very fast rate (Cork, 2010). M King Hubbert, a geologist working with Shell predicted a bell like life span of petroleum production in United States in 1956. According to Colin Campbell, the peak of discovering new fields had reached during the 1960s. He gives a fair assessment of the situation. According to him, the peak depends on the discovery of new fields, which has slowly decelerated, and the extraction rate of oils, which depends on the nature of the reservoir (Campbell, 2002). Presently the world consumes about four times the oil that is discovered. Using the Hubbert’s theory on oil peak, the estimates suggest half of the oil that could have been recovered has already been done. The peak phase is either looming in the recent future or it has already occurred. (Exploring Hydrocarbon, n.d.) Dr. Campbell had also mentioned that the highest stage of extraction of cheap and easy oil had already been achieved in 2005. Now the oil that is extracted is relatively difficult to obtain. They are either heavy oils or the reservoir lies under deep sea or in Polar Regions. There are also liquids that have to extract from gas (Howden, 2007). However, he predicts that even all this extraction can delay the peak until only 2011. All this has made oil more expensive and has made oil prices fluctuate tremendously in recent years. Reaching the peak of oil extraction is a real threat and has been acknowledged by all. However, worries about reaching the peak sooner than expected have been echoed by several other individuals and organizations. Wikileaks recently posted cables where a senior executive of Saudi Arabian oil producing company Aramaco, mentions that the country had overstated their oil reserves by as much as 40% (Frank, 2011). However, such news can hardly be verified from other sources. They always leave a scope for incredibility. Nevertheless, overestimation of the reserve continues to be a problem for predicting the time of reaching the peak oil. Investment analysts reported that the United States Geological Survey had overestimated the stock of reserve in Alaska in their National Petroleum Reserve by about 90%. (Kohl, 2011). There are also some organizations and people who hold a more optimistic view about the peak oil theory and the rate of depletion of oil reserves as well as future exploration and extraction. The management of the renowned oil company British Petroleum gives a brighter picture about the future of the oil reserves of the world. According to their Statistical Review of World Energy of 2007, the world can sustain the current rate of consumption of oil for another forty years. (Howden, 2007) According to them, the world still has huge reserves of oils. They are waiting to be opened and explored. He also emphasized on the role of technology for the extraction of oil in the future. Improvement in drilling technology had made it possible to extract more oil than was possible earlier. Development of geosciences has also enabled the oil companies to find new oils or better estimate the stock of reserve in the existing reservoirs. Proper field imaging helps the geologists identify the new dimensions in the existing oil fields. In addition, other technologies help in the process of recovering of oils. According to him, the real hindrance to the supply of oil is caused by the international politics (Dali, 2007). Peter Davies, the chief economist at BP., had also made similar claims. However, Dr Campbell, who had acted as a chief geologist and vice president at various oil companies including BP and Shell, refutes such claims. According to him such claims needs to be made for the sake of the company. (Howden, 2007) He accepts the advancement of technology in oil drilling processes. Nevertheless, at the same time he points out the limitations of such technologies. According to him though technological advancement can help in identifying the potential reserves or better extraction to produce more oil steadily, it does not replenish the exhausted reservoirs. A large proportion of the oil trapped inside the reservoirs cannot be recovered because of several physical and geological constraints. New technology enables us to recover a higher proportion of oil from the fields. However, these technologies cannot be applied to all the fields. Moreover, most of the reservoirs in operation are treated with state of the art technologies. They operate at maximum capacity right from the beginning. So increasing production through the adoption of upgraded technologies will be hard to achieve. He cites the example of the Prudhoe Bay field, which is the largest field in North America. Initially it was estimated to have a reserve of 12.5 giga barrels of oil. Soon the estimate fell to nine giga barrels. In spite of the use of various technologies the production could not be arrested at a specific level and production decreased from 1988. The initial estimates could hardly be achieved. Similarly, technology does assist the discovery of new oil fields. However, Dr Campbell differs from Dr. Michael Dali to say that the new findings are not large oil fields but new potential in the old oil fields. One of the technologies helped to identify the oil generating belts of the earth. However, since then all the generating belts have been identified and we hardly find a new generating belt now. Similarly, seismic technology helps to identify the size of the fields and give new estimates about the proportion of oil fields. As Dr Dali mentioned, reserve growth is a usual characteristic of all the fields, especially the large fields. For example, he states that the Cerro Dragon reservoir of Argentina exhibited a much higher volume of oil reserve after it was remapped. Application of technology to enhance the oil production and size of the field will lead to a sustained supply of oil reserves for a much longer period. Nevertheless, Dr. Campbell gives a different opinion about the impact of technology for discovering new fields. He states that though a technology helps to identify the potential of the existing fields, but such discoveries are much less than the previous discoveries of large fields. Most of the large fields have already been discovered and so there is little technology can do to help in this discovery process. (Campbell, 2002; Dali, 2007) According to his forecasts, this will affect the entire globe especially the countries that achieved a high growth rate depending on oil import. This might spontaneously influence of change the behavioral patterns of the people. Oil Price and the behavior of the people of Sydney Sydney among the other capital cities experiences the highest level of transport that belongs to the public authority as per the data for 2006. Over one quarter of the total population of the country are in the use of the public transport for travelling in their needs. Besides being considered as more convenient and comfortable option of travelling, this mode of travelling also saves the spending of the households in consumption of Fuel. Thus cost consideration is one of the important reasons behind the increasing choice of public transport. (Australian Social Trend, 2008) A study had been made by the researchers of the Griffith University attempting in the determination of the impact of the increase in the price of oil on the Sydney residents along with some other capitals. The best qualities of the public transport system of the country have been able to be afforded by only the high socio economic group of the society. However the economically poor people are not advantageous of the public availability of the transport in the capital. The need is increasing the availability for reduction in the cost because of the fact that it is a social as well as environmental imperative to provide public transport adequately for all communities of the society. (Socialist Alliance policy, n.d) In a study made by Big Gav, if the price of the petrol becomes 2 dollars per liter then the residents of the area of western Sydney will be in a position of spending more than 6 percent of their total income in the consumption of the fuel. The budgets of the households of western Sydney that are basically dependent on their personal cars are facing carve because of the soaring prices of the oil. This is also resulting in the problems of insufficiency in the options of system of public transports along with exacerbating the problem that remains with the long distances of the work place of the people of the western region of the country. This is forcing the people of the region to make them drive their personal vehicles to about 20 times more a distance than the people of the other region of the country. In contrast to the people of the western region the spending on oil of the people of the inner areas are about 2 percent or even less of their total income. Struggle for the repayment of the mortgage has been the recent experience of the people of the outer western ring of the city. There is the need of the government of the country to be alarmed with the increased spending of the residents on oil. The problem had been increased because of the failure of the establishment of a proper system of public transport in the western region. Thus the government is in the need of expanding the need of the public transport the western suburb along with finding for a suitable option for an alternative fuel that can act as a proper substitute. (Gav, 2008) Moreover the impact of the increase in the price of the crude oil on the refiner margin that is the margin that remains in turning crude into proper fuel for the ultimate consumption have been materially negative for the month of January and February in the present year. (Paton, 2011) Thus the trend of using public transport, though different for the western ring has been experiencing an increase in recent years for Sydney. Though a single factor cannot conclude the diverse trend of the use of public transport by the Sydney people one of the important factors is definitely the price of oil that is increasing continuously. (Davies, 2010) Effect of the Crisis on Australia: Exchange Rate and New Taxes The peak oil phenomenon is destined to hit all the countries including Australia. The Australian Energy Resource Assessment published on 1st March 2010 reveals some startling facts about the country. The production of crude oil from the usual oil fields will fall by 85% in 10 years. There are also little chances of discovering new fields to compensate the decline. Australia is relatively well off than rest of the world with regard to natural gas. Nevertheless, the decline in the world export of oil should also affect Australia. (Peak Oil Recognized in Australia – 15% Oil supplies left in 10 Years – Economy Collapses, 2010). Professor Peter Newman, a member of the Infrastructure Australia Council, the rise in the fuel price in Australia is due to the decline in the supply of oil. According to him, the peak oil had been reached n 2008. It was evident from the fact that oil reached a price as high as $140 a barrel. This, he opines, is not a result of a supply obstruction by any particular country but an overall dearth of oil. The supply fell short of demand due to this (Robinson, n.d.). British Petroleum Australia offers us components of the price of fuel in Australia. The price of fuel in Australia is determined by the price of oil in the Singapore market, which is the price of crude oil in the global market. Australia follows the benchmark in price of fuel that is set in the Singapore Market. Since the oil is a commodity of global trade, the price of oil is also determined by the international exchange rate or the United States dollar standard. Therefore, any change in the exchange rate of the Australian currency also leads to a change in the oil price. The Australian petroleum market is highly competitive in this respect with many global operators having their businesses. However, the effect of a rise in household will still be severe. Apart from a rise in the fuel price for cars and other modes of transport, it will also affect the prices of all the commodities that are transported. The Australian Council of Social Science gives us the impact of an increase in the fuel price in the context of the introduction of a new tax. According to them, a price rise will affect all the sections of the society. However, the lower income households belonging to rural and regional communities will be affected disproportionately. These people spend a higher proportion of their income on transport, logistics, and the essential commodities than the higher income groups. According to the Council, the fuel price hike leads to a rise in the price of goods available in the grocery shops. Because of fuel price rise, all the goods that they consume will become more expensive. However, the Australian government is not very active to the imminent threats. Activists have suggested various methods to prepare the country for the peak oil crisis that may emerge in near future. Some of them policies suggested are making the citizen aware of the problem and trying to influence there traveling patterns. Projects that have tried to empower the people to understand and review the way they travel have successfully reduced 12% of the distance traveled by a car. Other options that have been suggested are fixing a ration of petrol for all individuals. The activists have also suggested the implementation of a fuel tax. They noted that though oil prices in Australia is more than United States, but it is less than Europe. They have advised that the tax rate should be raised at the European level. The British Prime Minister Margaret Thatcher adopted one of the strategies in 1988. By this strategy, the prime minister increased the fuel tax in small amounts at regular intervals. The benefit of this rise in fuel was that the countries cars were designed to be more fuel-efficient than there United States counterparts. The rise in price will make the Australians aware of the imminent global shortage and give them time to adjust to the fuel shortage. They can accordingly change their transport habits beforehand. It will also generate some revenue for the government. A price rise is inevitable. If the country waits until the oil price rises internationally, the citizen will be more exposed to the global price fluctuations. The government will also have to forsake the money they could have utilized for other developments in the country. This was also seen in the case of Germany where small increments in tax of the amount 10 cents were made from 1999 to 2003. As a result, the oil consumption habits as well the types of car produced in Germany changed. The cars became more fuel-efficient. The Germans shifted to more economic modes of transports like carpools and public transport (Morris, 2006). The German policies have made it possible for the country to make an easy transition to alternative and renewable forms of energy. Estimates suggest that Germany has the potential to substitute 60% of their energy requirement from the renewable energy sources. Governments and energy companies around the world are considering various sources of alternative energy that will compensate for the drop in supply of oil. Some of the sources of energy have existed for centuries like waterpower, wind power etc. Technologies are being developed to increase the efficiency and amount of power that can be generated from these sources. Other forms of energy that are being considered are tapping the solar radiation directly or from the ground heat. The potential of extraction of energy from biomass are also been considered (Wengenmayr & Buhrke, 2008). Projection on the price of oil According to the projections of the Annual Energy Outlook for the year 2009, the prices of oil in the international market have been expected to experience an increase of about 80 dollars per barrel from the level of the year 2009 approximately. Furthermore the projection for the year 2015 is about 110 dollars per barrel, which is again expected to increase by about 20 dollars per barrels further within a span of 15 years implying more than one dollar per barrel increase every year. This range of the projection of the oil prices for both the short term and also for the long term reflects the volatility of the international market for oil and the assumptions about the economy of the world and its future that differ among economists and scholars. According to the Institute of Energy Economics and the Rational Use of Energy that exists at the University of Stuttgart the price of the resource will get stabilized by the year 2020 at a value of about 70 dollars per barrel. Moreover it is expected by the institution that the price will remain constant relatively till the year 2030 and also through it. However in the projection of Energy Ventures Analysis, Inc the process of the product will experience a continuous rise for over the entire period of the projection made by the previous group of the forecasters. Various others institutions as well as groups have made projections and prescribed forecast on the prices of oil in the international market. The projections of these organizations like DB, IHSGI, IER, EVA along with SEER vary among each other within a range of 47 dollar per barrel as the minimum expected price to about 102 dollar per barrel as the highest expected price of the product. These projections have been made by these organizations for the year 2010 with a span of 55 dollar per barrel. The actual price of crude oil for the year 2010 has been within the range of 70 dollars to 85 dollars a barrel. This implies that the actual price had been within the range of projection. (Panandikar, 2010) The projection made by these organizations for the year 2015 has a range of 67 dollars per barrel as the lowest value along with 100 dollars per barrel being the maximum. For the year 2030 the lower limit of the range is 68 dollars per barrel along with the upper limit of 122 dollars per barrel, thus resulting in a range value of about dollar 55 for each barrel. The volatility in the market of oil and the uncertainty associated with the methods of the projection has been the main reason for the wide range of variability of the forecaster price of the product. (U S Energy Information Administration, 2009, pp 88- 89) In the words of Panandiker the sources that are an alternate to crude oil will in the future be more economical for the consumers than the later as the price of the oil is expected to follow the climb also into 2015. (Panandikar, 2010) The main reason for this high trend in the price of the oil is the reducing availability and hence the supply of the same. The resources of this product are on the verge of a continuous decrease and hence the reserves for crude oil are experiencing a decline. However there is an expectation that with the advancement of the technology of production the supply of the crude may experience a slight increase. (Annual Energy Outlook 2004 with Projections to 2025, 2004) Search for Alternative Sources by the Oil Companies Energy supplying enterprises like British Petroleum has invested heavily in the development of biofuel as an alternative to oil. They acquired Vercipia Biofuel in 2010 and production is expected to start from 2013. The company has decided to invest $8 billion by 2015 to develop their potential in the alternative energy business and provide energy to the world for a long time in the future. Until 2010, it invested around $5 billion towards this. The company has also established power-generating stations from wind at various locations of United States. This has allowed them to successfully increase their power generation capacity by 9% in 2010. British Petroleum has also popularized their solar energy supply and demand has increased by 60% in 2010. The company had also adopted a branding campaign they called Beyond Petroleum, which essentially highlights their commitments towards green energy (Beyond Petroleum, n.d.; BP in 2010 – brief overview of BP’s 2010 performance, n.d.). Similar concerns are also shared by Shell, another global energy company. According to them by 2015, the growth of production of easily extractable oils will fall less than demand. However, there is a large store of coal in various parts of the world, but their extraction and transport is expensive and harmful for the environment. In this context, alternative energy sources like bio fuel will constitute a large part of the source of energy for the world. Their estimates suggest that the growth of population and GDP especially in the emerging countries like India and China will increase the demand for energy consumption largely. They have given a complete scenario of the world where energy securities will drive the governments of the world to shift to renewable forms of energy. The most preferred source of energy for the governments will remain coal. It will be followed by bio fuel. They predict that biomass will comprise of 15% of the energy sources by 2050. They will be an important source of transport fuel and become a very important source along with liquid fuels that are derived from fossils. Other sources of renewable energy will also try to make up for the gap between the demand and supply of energy. However, they forecast that the transition might be rough and the government may have to intervene to introduce efficiency into the process. Their estimates shows that while the supply of energy from oil and coal remains constant or falls slightly from 2000 to 2050, the share of other sources of alternative energies like coal, nuclear power, biomass and other sources increases considerably. Of them coal as a source for energy and the other sources will grow significantly. The decrease in the supply of oil can lead to economic slowdown for many countries used to achieving high economic growth based on the energy supplied from oil. However, eventually all the countries will resume their paths of growth though through a less energy intensive route (Shell energy scenarios to 2050, 2008; Walker, 2004). ACCC investigation into the Petrol Pricing in Australia The Australian Consumer and the Competitor Commission initiated an inquiry into the Australian petroleum industry. The made an overall study of the industry structure, pricing strategy of the firms, factors affecting the prices and submitted their report. They made an inquiry into several market distorting allegations and the code of conduct for the petroleum industry. They broadly categorized the industry into three broad functions - refining and import of oils, wholesaling and distributing and retailing. They also investigated the weekly price cycles and the system of trade of information between the refiner-marketers. (Petrol Prices and Australian Consumers, 2007) Their most important finding was that the price of petrol in Australia was relatively fair and low compared to the rest of the world. They determined that the prices of petrol are mostly determined by the world crude oil prices. The other costs are the freight costs and operation cost. They concluded that the higher prices in the country compared to the cities is due to the high cost of transport and less competition in the outskirts. They also found out that the new entrees to the market face barriers to entry from the existing players. In spite of huge demand for petrol, large-scale import by players other than the established refiner-marketers is absent due to such obstruction. Only 4 major refiner-marketers meet 98% of the total demand for fuel. These 4 major players are Shell, Caltex, Mobil, and BP. The absence of any other importers have made these companies dominate the sector and make people dependent on them. These companies also hold a large section of the retailing business. The report also mentions that the four large companies have established an oligopoly. (Petrol Prices and Australian Consumers, 2007) Considering all the aspects of petrol pricing in Australia the commission came to the conclusion that there are some issues in the petroleum industry that needs to be addressed. But they also mention that addressing these issues will have only a marginal impact on the petrol prices. The industry in spite of the deformities is fundamentally competitive and any correction in the structure would only lead to a few cents discount on the petrol price. They have pointed out that the primary factors that influence the prices of petrol in Australia are the price of crude oil in the international market, the exchange rate of the Australian Dollar as well as the global market for refining of petrol. Above this the there are the country taxes and excise duties. The Australian taxes on petrol are one of the lowest in the world. Therefore even if all the issues are addressed its impact on price fall will be very less. Moreover the government or the commission can play very little role in the reduction of price because of the already low price of petrol.( ACCC issues reports on unleaded petrol prices, n.d.; Sweeney, 2007). Conclusion Ecologists, activists, experts and several global organizations are warning the different governments about the imminent danger of peak oil. The crisis, without adequate initial preparation can take gigantic magnitude and cause economic slowdown or even stagnation for several decades. The countries, which have experienced a high growth in the past centuries, have highly exploited the oil resources of the world. Both United States and Europe are the largest consumers of oil, though they do not have as much reserve. On the other hand the emerging countries like China and India have experienced a high level of industrialization in the past decade. As their GDP swelled there demand for oil has also increased considerably. The continuation of the growth of these emerging countries as well as the maintenance of the high GDP of the advanced countries gives rise to a heavy rise in the demand for fuel. However as the peak oil stage looms at large, new sources energy needs to be discovered. But the biggest problem faced in this regard is that not all kinds of fuel is as efficient as oil. There are many fuels that consume a large amount of fuel for their production. These are not efficient or economic ally viable. However the recent steps of the refiner- marketers and the awareness of the governments is ensuring that not only the transition to alternative fuel is smooth but also there impact on global warming is not much. References 1. ACCC issues report on unleaded petrol prices (n.d.), ACCC, retrieved on May 11, 2011, from: http://www.accc.gov.au/content/index.phtml/itemId/906912 2. Annual Energy Outlook 2004 with Projections to 2025, (2004), market trends oil and natural gases, retrieved on 11 May, 2011 from http://www.hubbertpeak.com/us/eia/2004/ 3. Australian Social Trend, (2008), Public Transport Use for Work and Study, Australian bureau of Statistics, retrieved on 11 May, 2011 from http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/4102.0Chapter10102008 4. 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