File under “wishing oil was cheap” will not make it so

The boomers will recognize this as a grown-up version of “I want my Maypo!” 

“Opec’s greed will herald the end of the oil age“, Bill Emmott, op-ed in The Guardian, 20 August 2009 — “If producers keep prices high even when demand is slack, the world will be surprisingly quick to wean itself off fossil fuels.”  Excerpt:

Given how bleak the world looked as this year began, it feels remarkable to be seeing growth again so soon. But it is even more remarkable that the world is emerging from such a severe financial shock and slump with its most basic fuel, crude oil, priced at close to $70 a barrel, seven times its price of a little over a decade ago and double the level it was as recently as March.

… The oil producers’ cartel has deliberately cut production by nearly five million barrels a day, which is more than the drop in global demand, to keep prices high. OPEC members account for only about 35% of world supply, but Russia, a non-member, accounts for a further 11.5% and is co-operating with their efforts. Moreover, the Gulf states that dominate OPEC have the largest oil reserves and lowest production costs, so can most easily and painlessly turn their taps on and off.

… Brazil has discovered a huge new offshore oilfield and Angola has shown just how quickly development can occur. In seven years it has trebled its oil output, joined Opec and is now challenging Nigeria for its status as sub-Saharan Africa’s biggest oil producer — and hence as the leading oil-rich basket case.

… Yet by the time non-OPEC oil supply has been boosted, something even more important will have occurred, if OPEC continues to overplay its hand and support painfully high prices. In the 1970s, the rather quotable Saudi Oil Minister, Sheikh Zaki Yamani, had a nice saying: “The Stone Age did not end because the world ran out of stones. Nor will the oil age end because we have run out of oil.”

It will end when oil consumers run out of patience with greedy oil producers, and develop substitutes instead. The Arabs should surely see a warning sign in the fact that the first new product of which Fritz Henderson, boss of the fresh-out-of- bankruptcy (and quasi-nationalised) General Motors, emerged to boast was the Chevrolet Volt, a petrol- electric hybrid, which is claimed to do 230 miles per gallon.

Analysis

 Unfortunately much of  this is probably not accurate.  (update:  my misinterpretation about Brazil deleted}

(a)  OPEC is limiting supply in order to boost prices.

Emmott whines that OPEC keeps oil prices higher than he prefers.  He does not comment on the pricing of pharmaceuticals by the big western drug companies.  Probably many emerging nations consider this greedy; fortunately they can manufacture substitute drugs more easily than we can produce alternative liquid fuels.  Which in its own way also trashes Emmott’s point.

They are limiting production because they are smart.  It’s called political peaking, and is a rational policy for nations having one resource, a finite one.  For more on this see:

1. The most dangerous form of Peak Oil , 8 April 2008
2. The three forms of Peak Oil (let’s hope for the benign form) , 23 April 2008
3. The world changed last week, with no headlines to mark the news, 25 April 2008
4. When the King of Saudi Arabia talks about oil, we should listen , 2 July 2008
5. Red Alert: the Saudi Princes have annouced the arrival of Peak Oil , 11 July 2008

(b)  Non-OPEC supply has not “been boosted.”

Excerpt from the Oil Market Report, International Energy Agency, 10 July 2009, page 22:

Non‐OPEC supply in 2010 is forecast to grow by 410 kb/d to 51.2 mb/d, led by increases in the Caspian region, Brazil (both crude and fuel ethanol), the US, China, India and Australia. This magnitude of yearon‐ year growth would bring 2010 approximately in line with 2006 and 2007, the last two relatively hurricane damage‐free years. Total non‐OPEC supply declined in 2008 and growth is assumed to be less pronounced in 2009 (indeed, until recent upward revisions, we had assumed a year‐on‐year decline in 2009).

As is true for the 2009‐2014 period highlighted in the 2009 Edition of the MTOMR, net 2010 growth almost exclusively stems from higher NGL and non‐conventional output (together +260 kb/d) and global biofuels (+190 kb/d).

Notes:

• NGL:  natural gas liquids
• Biofuels:  aka burning our food

(c)  “It will end when oil consumers run out of patience with greedy oil producers, and develop substitutes instead.”

Even after substitutes for liquid fuels are developed — we have none today — it will take decades to roll them out.  during that time non-OPEC supply is projected by almost all experts to crash.  This is not something OPEC need worry about.  For more on the myths embedded in Emmott’s forecast, see:

1. An urban legend to comfort America: our massive reserves of unconventional oil, 29 August 2009
2. An urban legend to comfort America: crash programs will solve Peak Oil, 5 September 2008
3. An urban legend to comfort America: demand for oil creates new supply, 8 September 2008
4. An urban legend to comfort America: oil is oil, even if it is not oil, 10 September 2008
5. An urban legend to comfort America: alternative energy will save us, 16 September 2008

(d)  The 230 mpg Volt

This is absurd.  The Volt’s battery powers trips for the first 40 miles; after that it burns gas at normal mileage.  Also, widespread adoption of electric-powered cars might require the construction of new power plants (even assuming they were charged only during off-peak hours).

Nor is it a bargain.  From CNN, 11 August 2009:

The Volt will need to be plugged in at night to recharge. The company said it estimates it will need 8 kilowatt hours for the recharge necessary to travel 40 miles (off highways). That should cost a total of about 40 cents at off-peak electricity rates in Detroit, Henderson said. National figures from the Department of Energy suggest most consumers would pay more than that, probably around 88 cents per recharge.

Even at those modest recharging costs, and limited use of gasoline, it will be difficult for the Volt to save money for their owners, according to auto sales service Edmunds.com.

“Even if the Volt’s fuel savings could possibly be as dramatic as today’s numbers suggest, the expected purchase price will be much higher than that of existing hybrids, and it will take years to pay off its price premium,” notes Edmunds.com senior analyst Jessica Caldwell.

(4a)  Afterword

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(4b)  For more information

To read other articles about these things, see the FM reference page on the right side menu bar.  Of esp relevance to this topic:

• about Peak Oil and Energy – my articles
• some Peak oil and energy – studies and reports

Some posts about the energy transition:

1. The most dangerous form of Peak Oil , 8 April 2008
2. Peak Oil Doomsters debunked, end of civilization called off , 8 May 2008
3. The secret cause of high oil prices , 6 August 2008
4. Another example showing how energy research is just inspired guessing, since America prefers being blind, 23 September 2008