15 Feb 12 Eddie's Blog Global

The state of energy in the world

Oil is trading at $117 per barrel of Brent crude. 

It is reliably reported that capacity utilisation in the oil industry stands at over 99% and furthermore that stocks have been run down to half in the previous 6 months (Barclays commodities).

These issues have been brought together in a recent article in Nature which concluded that the global oil industry has been unable to respond to increases in demand, and has been in this condition for 5 years.

Demand for energy continues to surge.  At the stage of development that China and India are at, and that is quite different (China’s GDP is $7.31 trillion, whereas India’s is $1.84) demand for energy usually comes in at twice the annual growth rate in GDP.  Growth in China is running at near 10% whereas India is almost 8%.  35% of the world’s population lives in these two countries.  A crude calculation indicates that their energy demand would double every 5 to 6 years if it could.  For a variety of reasons this cannot happen.  The oil to allow this isn’t there.  Coal is nominally plentiful.  However the methodology for estimating coal reserves has been challenged and some recent reports are casting doubts on the amount of coal available in the Earth’s crust.  There is gas for now, but one would like to see an independent source give an objective measure of recoverable reserves. 

The only accurate price signal is that relating to oil.  It would do national and continental (Blocks such as EU, India, US, and China) political economists well to heed this signal, and to plan their energy strategies carefully. 

I like to pose this question “is it a coincidence that of the 11 recessions in the US since the Second World War, 10 were preceded by an oil price spike?”  Energy is the primary input into economic growth.  It wasn’t identified as such throughout the industrial revolutions, simply because fossil energy was so prevalent in the earth’s crust.  It was cheap.  So cheap in fact, that when the  Shah of Iran, at the funeral of President Eisenhower in 1969 offered President Nixon a 10 year contract for oil at $1 per barrel, Henry Kissinger reported that  Nixon refused the offer because he, and every oil economist  thought that the price would fall well below this figure over the course of the coming 10 years.  Today most commentators still live in this misplaced cocoon. 

Part of the reason for this overconfidence in the supply of fossils is the fear factor.  What will happen in a world without the energy that got us here?  Another reason for the overconfidence in fossil supply is the attitude of the oil and gas companies.  They know that at elevated prices drilling for smaller quantities of oil in deep offshore is economically justifiable.   They also know that drilling in environmentally sensitive areas would now be hugely profitable, and gets to be worth the effort and public opprobrium.  They reassure policy makers and the general public that further drilling will stabilise prices.  If one looks at most market projections it can be seen that their propaganda is winning.

There has been alot of debate in recent years about peak oil.  It has been immensely reassuring  to those of us who believe the market has its price right, that the leaders in the peak oil debate were always the geologists.  Better than oil company marketing executives or indeed anyone else they are familiar with the geological science underpinning oil well performance and output.  They coined the term and lead the peak oil debate.

The net outcome of the above is that we have a full throttle energy crisis on our hands. How will ever scarcer energy resources be allocated between the advanced economies and the emerging ones?  Does any plan exist for this eventuality?