Can Economy Bear What Oil Prices
Have in Store?
1/26/2012 - Stop wrangling over global warming and
instead reduce fossil-fuel use for the sake of the global economy.
That’s the message from two scientists, one from the University of
Washington and one from the University of Oxford in the United
Kingdom, who say in the current issue of the journal Nature (Jan.
26) that the economic pain of a flattening oil supply will trump the
environment as a reason to curb the use of fossil fuels.
“Given our fossil-fuel dependent economies, this is more urgent and
has a shorter time frame than global climate change,” says James W.
Murray, UW professor of oceanography, who wrote the Nature
commentary with David King, director of Oxford’s Smith School of
Enterprise and the Environment.
The “tipping point” for oil supply appears to have occurred around
2005, says Murray, who compared world crude oil production with
world prices going back to 1998.
Before 2005, supply of regular
crude oil was elastic and increased in response to price increases.
Since then, production appears to have hit a wall at 75 million
barrels per day in spite of price increases of 15 percent each year.
“As a result, prices swing wildly in response to small changes in
demand,” the co-authors wrote.
“Others have remarked on this step
change in the economies of oil around the year 2005, but the point
needs to be lodged more firmly in the minds of policy makers.”
For those who argue that oil reserves have been increasing, that
more crude oil will be available in the future, the co-authors
wrote: “The true volume of global proved reserves is clouded by
secrecy; forecasts by state oil companies are not audited and appear
to be exaggerated.
More importantly, reserves often take 6 - 10
years to drill and develop before they become part of the supply, by
which time older fields have become depleted.”
Production at oil fields around the world is declining between 4.5
percent and 6.7 percent per year, they wrote.
“For the economy, it’s production that matters, not how much oil
might be in the ground,” Murray says. In the U.S., for example,
production as a percentage of total reserves went from 9 percent to
6 percent in the last 30 years.
“We’ve already gotten the easy oil, the oil that can be produced
cheaply,” he says. “It used to be we’d drill a well and the oil
would flow out, now we have to go through all these complicated and
expensive procedures to produce the oil.”
The same is true of alternative sources such as tar sands or
“fracking” for shale gas, Murray says, where supplies may be
exaggerated and production is expensive.
Take the promise of shale
gas and oil: A New York Times investigative piece last June reported
that “the gas may not be as easy and cheap to extract from shale
formations deep underground as the companies are saying, according
to hundreds of industry e-mails and internal documents and an
analysis of data from thousands of wells.”
Production at shale gas wells can drop 60 to 90 percent in the first
year of operation, according to a world expert on shale gas who was
one of the sources for the commentary piece.
Murray and King built
their commentary using data and information from more than 15
international and U.S. government reports, peer-reviewed journal
articles, reports from groups such as the National Research Council
and Brookings Institution and association findings.
Stagnant oil supplies and volatile prices take a toll on the world
economy. Of the 11 recessions in the U.S. since World War II, ten
were preceded by a spike in oil prices, the commentary noted.
“Historically, there has been a tight link between oil production
and global economic growth,” the co-authors wrote.
production can’t grow, the implication is that the economy can’t
Calculations from the International Monetary Fund, for example, say
that to achieve a 4 percent growth in the global economy in the next
five years, oil production must increase about 3 percent a year.
“Yet to achieve that will require either an heroic increase in oil
production, ... increased efficiency of oil use, more
energy-efficient growth or rapid substitution of other fuel
sources,” according to the commentary.
“Economists and politicians
continually debate policies that will lead to a return to economic
growth. But because they have failed to recognize that the high
price of energy is a central problem, they haven’t identified the
necessary solutions: weaning society off fossil fuel.”
The commentary concludes: “This will be a decades-long
transformation and we need to start immediately. Emphasizing the
short-term economic imperative from oil prices must be enough to
push governments into action now.”
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