Is the end of fossil-fuel era really close?
Syed Rashid Husain I Arab News
Sunday 14 February 2010 (29 Safar 1431)


Global energy dynamics are changing — and changing fast. And these carry tremendous implications for both producers as well as consumers. Over the last few months, the energy world has undergone a complete metamorphosis. Hardly 19 months ago, crude was almost $147 a barrel — and pundits were clamoring that the world was about to enter the phase of supply being less than demand.

That Peak Oil had arrived and crude could even cross the $200 mark. All this now seems a matter of distant past. The recession that enveloped the world in the meantime, added with fast changing global consumption pattern, has changed the sentiments from bullish to bearish — to say the least.

But is it a temporary phase or is it here to stay? That is a big question haunting the energy world. However, indications are that dynamics have changed — and changed for ever.

The debate on Peak Oil in the meantime, has been pushed to the sidelines — if not rejected outright. We are living in a new world. Supply is no more the issue. Instead, the issue of demand having peaked is being discussed all around. Peak Demand and not Peak Oil seems to be the real concern at the moment.

Global demand is not growing fast enough — if not dwindling. In fact in the established economies it is already on retreat. Demand in the world’s largest market, the US, is still nearly 10 percent below the peak it touched before the recession.

The Paris-based International Energy Agency is now projecting that the combination of improved fuel efficiency and the increased use of renewable energy meant demand for oil from developed countries would never return to the record levels seen in 2006 and 2007.

“When we look at the OECD countries — the US, Europe and Japan — I think the level of demand that we have seen in 2006 and 2007, we will never see again,” says Fatih Birol, the chief economist at the Paris-based International Energy Agency (IEA), the OECD energy watchdog. “There may be some zigzags up and down but as a trend I think it will be a downward trend in terms of oil consumption,” Birol said.

The BP chief executive Tony Hayward also concedes that the oil industry will never again sell as much in developed markets as it did in 2007.

Cambridge Energy Research Associates, a consulting firm, predicts that petroleum demand in the world’s rich industrial nations probably won’t ever rebound as high as its 2005 peak. Total demand will grow, but only because there’s still rising consumption in industrializing nations, mainly China. And despite the fact that China is today referred to as the emerging global gas guzzler, the fact remains that as the mainland devours oil and coal, Beijing is also very seriously pursuing a green agenda. China has the world’s top solar panel industry — a power plant in Beijing is one of the world’s most efficient — and auto emission standards there are now tougher than those in the US. China’s official policy mandates that alternate sources support 15 percent of the country’s energy needs by 2020, up from 9 percent now. So China’s petroleum consumption will keep increasing, but perhaps at not so steep a rate as expected. Indeed, CERA suggests in a recent report that the limit on oil production over the next 20 years could well be a peaking in demand, not supply, as lower birthrates, improved energy efficiency and changing values reduce the globe’s use of oil without the need for shortages and skyrocketing prices.

Peter Buchanan, an economist at CIBC World Markets, sees a similar scenario. “It’s going to take a long time for demand to get back to pre-recession levels in the industrial world, if indeed it ever does,” he said.

If today’s worldwide talk about limits on carbon emissions, alternative energy and improved conservation efforts proves to be serious, it’s possible that world oil demand will never rebound to its previous level, most now appear in agreement. And there are reasons for this. In the fast changing environment, with stress on alternatives and renewables, for both political and environmental reasons, the dominance of fossil fuel in the overall global energy mix is definitely under cloud. As per the IEA by 2030 electricity generation from fossil fuel will go down and renewable such as nuclear, hydro and others would fill in the gap.

The car industry is also to undergo massive and rapid changes in the years to come. Currently 99 percent of cars have internal combustible engines. Now that is undergoing revolutionary changes, with stark implications for fossil fuel markets. After all 70-75 percent of fossil fuel today is used in the transportation sector. And for the world to achieve the IEA 450 scenario, limiting the global temperature rise to around 2°C from the current 6°C, almost 60 percent of cars would need to be based on advanced technology, mainly electrical, by 2020. All this is changing the very energy milieu — and indeed permanently.

The emphasis on alternatives and renewable is also contributing adversely — as far as fossil fuel is concerned — to the emerging picture. President Obama says the US should depend less on oil and more on so-called clean energy technology. The president is also encouraging increased production of coal, urging to move quickly to alternative fuels. A presidential panel advocates greater use of biofuels and clean coal technology. The US is now producing about as much ethanol as it is importing crude oil from Saudi Arabia, and on the current trend, one could expect the US ethanol production to be over the US import of Saudi crude oil in 2010, analysts feel.

Over and above those key trends, the increasing push for environmental change coupled with the high price of oil energy is also delivering new, and in some cases the re-use of old, technologies. Most European countries are now offering subsidies to a variety of green energies. The US has also legislated recently to raise mileage per gallon on new vehicles.

Already there is a project to generate energy from sun in Sahara deserts, and then connect it to a grid taking the energy to Germany and other parts of Europe. The South Korean government is also committed to securing new sources of energy and Seoul recently announced that it will be spending 50 trillion won ($38 billion) over the next four years in a “Green New Deal”.

Even in Saudi Arabia, as in rest of the Gulf, there is a growing emphasis on tapping the solar riches. The objective is to stay as the energy supplier to the world. Under the Masdar initiative, Abu Dhabi is embarking on the first carbon neutral and zero waste city of the world. The $50 million project produces 17,500 megawatts of clean electricity and offsets 15,000 tons of carbon emissions per year. Qatar is also to build a $1 billion solar power plant. Last year, the World Bank announced plans to invest $5.5 billion in solar energy projects in the region. Two major energy deficient countries in the region, Pakistan and India also, are serious in tapping their solar riches.

There is a growing emphasis on nuclear energy, too. While the Iranian nuclear program has assumed a political and belligerent tone, countries of the Gulf are embarking on projects to develop and generate nuclear industry so as to meet the growing electricity needs of the region. And from the supply side too, emerging factors are impacting the long-term scenario. Already the spare capacity in Saudi Arabia is touching the 4.5 million barrels per day. Saudi Arabia says it could definitely take production to even higher levels — 15 million bpd — but there don’t seem to be many takers in the market place. And this is interesting.

The nearby Iraq is often termed as virgin as far as oil exploration is concerned. There are now indications that if things go as per plans, the Iraqi production could quadruple by 2020 to 10 million barrels a day from the current 2.5 million barrels. Oil Minister Hussein Shahristani believes production could even touch 12.5 million bpd.

Scientists working for the US Geological Survey believe Venezuela’s Orinoco belt region holds twice as much as previously thought. The geologists estimate the area could yield 513 billion barrels of “technically recoverable” oil in the Orinoco belt. This is more than double the Saudi proven reserves. In addition, there are a number of new entrants into the top league of global oil producers. Canada, in view of its technological advance and indeed a higher oil price, is now being recognized as having the world’s second largest oil reserves. Brazil, with its recent discoveries, is looking to double production by 2020 (to about 4m bpd) while Angola — which has doubled production in the last six years — is expected to add another 50 percent by 2015. Kazakhstan has also rapidly ramped up production, from 0.5 to 1.5m bpd in the last decade.

Energy markets are undergoing massive transformation. While the need of fossil fuel would definitely be there, for many decades to come, yet the fact remains that signs of change are there. A lot of serious work seems to have definitely gone into the transformation.

But does that necessarily mean the end of the fossil fuel era? No, not at all.

In fact, despite the growth of renewable and alternatives, the need for fossil fuel would stay for many more decades to come. But indeed the intensity is changing — and that too carries serious implications for the regional producers — the single product economies of the Gulf.


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