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Gaurav Agnihotri By

Gaurav Agnihotri

Gaurav Agnihotri, a Mechanical engineer and an MBA -Marketing from ICFAI (Institute of Chartered Financial Accountants), Mumbai, is a result oriented and a business focused…

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How Much Longer Can The Oil Age Last?

How Much Longer Can The Oil Age Last?

History has been so fascinated with oil and its price movements that it is indeed hard to imagine our future without oil. Over the last few months, we have witnessed how oil prices have fluctuated from a 6 year low level of $42.98 per barrel in March 2015 to the current levels of $60 per barrel. It is interesting to note that, in spite of the biggest oil cartel in the world deciding to stick to its high production levels, the oil prices have increased mainly due to falling US crude inventories and strong demand. However, the current upward rally might be short lived and there may yet be another drop in the international oil price when Iran eventually starts pumping its oil into the market at full capacity, potentially creating another supply glut. In these endless price rallies, it is important to take a holistic view of the global energy industry and question which way it is heading. Are the dynamics of global energy changing with current improvements in renewable energy sources and affordable new storage technologies? Can the oil age end in the near future? Will we ever stop feverishly analyzing the rise and fall of oil prices? Or, will oil remain irreplaceable in our life time?

Are Renewables ready to take over?

With little or no pollution, renewables like solar, wind and biofuels are viewed by many as a means to curtail the rising greenhouse emissions and replace oil as a sustainable alternative. There is little doubt as to why China, US, Japan, UK and Germany, some of the world’s biggest energy gluttons have invested heavily in renewables. 

EIAENergyConsumption

Image Source: EIA

Related: Oil Sector May Not Cause Financial Apocalypse After All

However, according to a study conducted by Frankfurt School-UNEP Collaborating Centre for Climate & Sustainable Energy Finance, the United Nations Environment Program (UNEP) and Bloomberg New Energy Finance, the total global investments in renewables fell by 14% to $214 billion in 2013. One of the major reasons of this fall was the backing out of some big oil firms such as BP, Chevron and Conoco Phillips. These companies significantly reduced their investments in renewables and decided to focus on their ‘core’ business; that is, oil and gas. As per Lysle Brinker, an oil and gas equity analyst at IHS "It's not their (Big oil majors) strong suit to be spending a lot of money and time on renewables when they are definitely challenged in their core industry."

GlobalNewInvestmentInRenewables

However, if we take the example of the solar industry, where the cost of an average photo voltaic panel is declining at a rate of more than 10% per annum we see that, in spite of reduced global investments, renewables still hold a lot of promise. Some of the major integrated oil and gas companies such as Shell, Total and Statoil have actually been slowly and steadily increasing their renewable related investments. Shell is investing big time in biofuels, while Total, with its stake in Sunpower, is investing substantially in the solar sector while Statoil is placing its bets on wind energy. This shows that renewables are a phenomenon that many believe can give oil a run for its money.

Is Saudi Arabia sensing an end of oil age?

“No one can set the price of oil – It is up to Allah”, this is what Saudi Arabia’s oil minister Ali Al Naimi had to say while speaking to CNBC recently. OPEC, which holds around 40 % of the world’s crude output, is showing no signs of reducing its production levels, even if Iran starts pumping more oil after sanctions are lifted should the international nuclear deal with P 5+ 1 counties prove successful. Many see this move by OPEC as a means to protect its market share and drive US shale players out of business. But is the decision of OPEC (especially Saudi Arabia) part of a much bigger game? The Saudis, who lead OPEC, would obviously be very interested in delaying ‘Peak Oil Demand’ after which global demand for oil would start declining steadily, along with Saudi oil revenues.

Related: Germany’s Nuclear Cutback Is Darkening European Skies

According to Bank of America and Merrill Lynch commodity researchers, if crude prices stay in the range of $50 - $70, peak oil demand would be pushed beyond 2030. This delay in peak oil demand would definitely hurt renewables and anyone who is investing in them. As per Alex Thursby, Chief Executive at the National Bank of Abu Dhabi, “Renewable energy technologies are far further advanced than many may believe: solar photovoltaic (PV) and on-shore wind have a track record of successful deployment, and costs have fallen dramatically in the past few years. In many parts of the world, indeed, they are now competitive with hydrocarbon energy sources. Already, more than half of the investment in new electricity generation worldwide is in renewables. Potentially, the gains to be made from focusing on energy efficiency are as great as the benefits of increasing generation. Together, these help us to reframe how we think about the prospects for energy in the region.”

Yes, OPEC has sensed the end of its glory days. And it is obvious that Saudi Arabia, with 85% of its export revenues coming from petroleum exports does not want the oil age to end anytime soon.

What can we expect?

If we look at China, the second biggest global consumer of oil, we find that its oil consumption rate constitutes about one third the world’s total consumption rates and shows no signs of slowing. In fact, EIA even predicts steady growth of China’s oil production reaching 4.6 million barrels per day in 2020 and 5.6 million barrels per day in 2040.

ChinaOilProductionAndConsumption

China has also invested heavily in building its strategic petroleum reserves and plans to expand them to 500 million barrels by 2020.

Related: Is This The Top For Oil Prices For Now?

Now take India, a country that is considered by many as the next solar investment hotspot. India has been investing heavily in building its own strategic petroleum reserves and its public sector undertaking, Oil and Natural Gas Corporation Limited (ONGC) is planning to invest about $62 billion on its discoveries in Krishna Godavari Basin block KG-D5.

These are two of the world’s fastest growing economies that are investing heavily in renewables but also safeguarding their oil and gas aspirations. Moreover, when we analyze past oil price trends, we find that volatility related to geopolitical equations, speculations, wars, economic sanctions and climate change have always kept the global energy markets guessing about the future. The world is still myopic when it comes to energy. Yes, it wants to embrace renewables but not at the cost of oil. Whatever happens to oil prices in the coming years, one thing is certain: that the age of oil isn’t ending anytime soon, at least not in the next 30 years.

By Gaurav Agnihotri of Oilprice.com

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  • Steve on May 11 2015 said:
    A couple of concerns in this article over an assumption stated as definitive fact and what appears to be an oxymoronic conclusion.
    First, to state "...With little or no pollution, renewables like solar, wind and biofuels..." completely ignores the production and distribution costs of these alternatives. From the mineral extractions processes, to manufacturing, to the transportation of all the components and end-product, and the ongoing maintenance of these alternatives, there are some good arguments to be made that they are actually more carbon intensive than fossil fuels. For example, in another article published today, the following statement is made: "...A more critical analysis shows that the cumulative energy and CO2 balance of the industry is negative, meaning that solar PV has actually increased energy use and greenhouse gas emissions instead of lowering them...." (see: http://www.lowtechmagazine.com/2015/04/how-sustainable-is-pv-solar-power.html).
    Second, to argue that "...that the age of oil isn’t ending anytime soon, at least not in the next 30 years...." after just stating that "...when we analyze past oil price trends, we find that volatility related to geopolitical equations, speculations, wars, economic sanctions and climate change have always kept the global energy markets guessing about the future...." seems to be oxymoronic. Oil and gas are finite resources and their age must come to an end sometime; when that ending occurs is anybody's guess and it could be before three decades passes. In fact, there are a number of analysts who argue it will occur sooner rather than later. No one really knows and it will not likely be a 'smooth transition' to 'renewables' since there aren't enough resources to manufacture them to replace the edifice created by oil/gas anyways.
    http://olduvai.ca
  • john samford on May 11 2015 said:
    The OIL as dead dinosaurs theory ended with the discovery of oceans of OIL (hydrocarbons) on Titan;
    http://www.nasa.gov/mission_pages/cassini/media/cassini-20080213.html
    Unless you postulate dinosaurs going to one of Saturn's moons to die. Maybe just the poor ones stayed on earth to die?
    A better theory is that the heat and pressure of Earth's mantel sliding over the molten core produces hydrocarbons. This would also explain why near surface deposits are found where the plates meet.
    http://rationalwiki.org/wiki/Abiotic_oil
    There are many abiotic theories of OIL formation. Most are wacked but so is the dead dinosaur theory. Until technology can drill down a few hundred km's we won't know for sure. The theory will live on as long as there are professors teaching it.
  • jamesB on May 13 2015 said:
    kind of a strange article that cites no hard numbers to back any position.

    There is no shortage of oil. the world is flooded with oil. And the reason is there never was a "Peak Oil" in reality. the reason is simple. Oil is not a finite resource, but one that is produced on a continuous basis deep under ground from natural gas. the only reason oil was thought of as a fossil fuel was because the first major oil fields were in Pennsylvania and Ohio next to the huge soft coal basins which are fossil fuels. oil fields abandoned 30-40 years ago are now producing at rates equal to their best in the past and the oil is better quality. most oil fields prduce better oil as they age which in realitty is new oil rising from below.
  • Mike Dedmonton on May 14 2015 said:
    In the comments from Steve, he is arguing that PV increases CO2 emissions. I guess that is true if you forgo electricity, but is not true if you are substituting electricity production from one technology for another. Wikipedia has some good information comparing the emissions from various technologies. Off the top of my head, it is about 100 g CO2 per KWhr for PV, 600 gm for natural gas, and 1100 gms for coal. The lowest is hydro (I think its like 10 gm for the CO2 used making cement). I would agree that renewables are not a panacea, but are a better choice. Natural gas is a good choice as long as there is no leakage, since methane is a powerful greenhouse gas.

    Most experts in the field believe hydrocarbons are created from organic decay.

    The author suggests in his opening paragraph that oil prices increased in the US due to falling inventories and rising demand. There has been an increase in demand, but inventories are at record levels.

    I do agree that renewables have dropped in price that they can compete with hydrocarbons. If the world practiced full cost accounting for the burning of hydrocarbon via taxation, renewables would be lower in cost.

    We can point to China's poor air quality and the numerous health effects as an example of what poor air quality brings (does anyone remember smog in LA?). Soon, we will need to account for CO2 emissions, and oil demand will start to drop.
  • Mindy on April 09 2016 said:
    Oil is constantly replenishing itself? Out of natural gas? The density of oil tells you that very ancient organic matter is breaking down. And it's not dinosaurs. It's plankton. Get a book on paleontology and one on biology, too, while you're at it. Dinosaurs! What a brainy bunch you all are.

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