Affluence

Oil Depletion Index

Minimum Future Oil Price Estimates to 2010

by Danny Hannan

  15 March 2005

As you can see from the table, my past estimates of price/timing points for the price of oil have been realised two to five years earlier than expected. This indicates that the situation of world demand exceeding the world supply capacity is happening two to five years earlier and more quickly than my 2001 estimates (Hannan 2001 ). In analysis of the 1998 to 2005 West Texas Intermediate (WTI) crude spot prices it has become apparent that the energy paradigm shift took place in 2001-2002, oil changed from supply surplus before 2001 to supply challenged after. The next paradigm shift is to supply deficit. To 2001 oil declined in both inflation and GDP adjusted prices; since 2002 prices have increased using both measures.

Oil has increased in price from January 2002 till present at a reasonably consistent rate. I have considered only the low price points of WTI crude spot prices for the three years January 2002 to January 2005 (EIA ). The low price points represent periods of base demand and maximum supply without supply interruptions. Using only the low price points there has been an average of a 33% pa increase in the price of oil. Each year the high price point is roughly 1.7 times the low price point. World demand is growing at 3-4%pa (BP 2004 ) and is bumping up against a limited supply capacity. At a current world consumption of 84 million barrels a day, there is little more than 1 million barrels a day spare production capacity (Energy Economist 2005 ).

The rate of price rises is more likely to accelerate than decline. Assuming this trend continues it is easy to forecast oil price ranges into the future. These are the minimum price rises we can expect. The major problem is the timing of peak production or the Rollover; basically this will be when Saudi Arabia's oil production, and in particularly the Ghawar1 oil field (about 60% of Saudi production), starts to decline. The price of oil will rise much more rapidly after that point.

Minimum world oil and Australian unleaded petrol price estimates to 2010

Oil has been historically cheap, even at US$50/barrel it is not expensive in real or historical terms. Part of the price hike is the declining value of the US dollar. The other issue is that oil is a commodity and as such should be costed in terms of GDP. In GDP terms prices near US$50/b is about half of the all time high price of 1980 (Energy Economist 2005 ). At US$100/barrel things will start to hurt a bit and I think it will be quite unlikely for the Australian and the global economy to be positive at US$150/barrel for oil. According to many petroleum geologists, oil production will peak and then decline sometime between 2003 and 2008, but we will not know till well after the event. My guess is that the endless recession will hit some time between US$100-$150/barrel. Declining oil and natural gas production will cause energy prices to continue to rise, stopping any chance of a sustained economic recovery, "The Great Energy Depression of The Twenty-first Century". The way things are going that's only a few years away. Any time 2006 to 2010 but with unstably high debt levels in the world's two largest economies, USA and Japan, I would not be surprised if the wheels fell off tomorrow.

References:

Energy Information Agency (EIA). West Texas Intermediate (WTI) crude oil spot prices, History

BP Statistical Review of World Energy 2004 & 2005

Energy Economist 28/04/05

http://www.wtrg.com/ - Crude

"Why Are We Still Building Roads?"

Danny Hannan 2001

1. Ghawar oil field was surveyed in 1975 by Exxon-Mobil producing a reserve estimate of 65 billion barrels of oil. Since 1975, 55 billion barrels of oil have been pumped from Ghawar. The current Saudi stated reserve for Ghawar is 125 billion barrels. "Twilight in the Desert" Matt Simmons 2005

Matt Simmons is the founder and chairman of Simmons International. The largest privately owned international energy banking company in the world.

The Energy Costs Of Producing Energy

All energy production requires an energy input. The amount of energy input for that energy production determines the energy profit ratio or effectiveness of that energy source. The following table gives a comparison of the energy costs of various energy production industries.

The energy requirements to produce 1 mega Joule (1.0 mJ) of energy

Studies of both coal mines and depleted oil fields find that once their energy profit ratios fall to 1:5 or 0.2 mJ input to produce 1 mJ of output they are no longer economically viable. This indicates that an energy production industry that requires an energy input of 0.2 mJ to produce 1 mJ is not economically viable. If all energy production were at this level, energy production would make up 25% of our total industrial effort and probably an even larger percentage of the GDP.

Renewable sources of energy are dispersed, except where they are concentrated by natural forces. The high energy input into the infrastructure needed to collect the dispersed natural energy, removes the economic viability of most renewable energy sources. Notable exceptions are Geothermal in volcanically active areas, wind power in particularly windy areas (400 latitudes) and hydro electricity from high rainfalls in high elevations.

Other possible alternate energy sources are:

1.       Anti-matter, requiring a space factory in close orbit to the Sun

2.       Fusion is not even energy positive for the fusion reaction on Earth at this stage, let alone the infrastructure.

3.       Tidal power in zones of large tide differences and wave power, both are dispersed energy requiring a large energy input into infrastructure to collect the dispersed energy.

4.       Hot rock, energy profit ratios are not available yet but it is another example of collecting dispersed energy.

5.       Nuclear, three possible alternatives, natural uranium, and enriched uranium both rely on U235 to provide the alpha particle to run the fission reaction. Both have the problem that there is not enough uranium on Earth to power more than about one third of our power demand for more than a few decades and the energy input for the infrastructure, disposal of wastes and decommissioning is too high compared to the energy out put.

Fast breeder nuclear relies on Plutonium for the alpha particle to run the fission reaction. We have enough uranium out of the ground to run fast breeder technology for a hundred years or more, but the energy input into the reprocessing, waste disposal, and the fast breeder reactors themselves makes fast breeder technology less energy profitable than either natural or enriched uranium reactors.

While all these alternative and renewable energies are technically possible they are a long way off being viable in either energy economic terms or financial economic terms.

Producing power from renewable sources is often intermittent, eg wind or solar. The off periods need to be covered by conventional power generation. The energy cost of duplicating the generating infrastructure to supply more than about 20% of the base load from intermittent renewable sources makes it not viable in energy economic terms.

There is nothing, even in the conceptual stages, that has the potential of a large-scale replacement for the energy from fossil fuels. And fossil fuels are fast approaching their peak production after which the supply will decline at an exponential rate.

   Oil Depletion Index