There is no doubt that the position of crude oil in the global energy mix is still prominent, and will continue to be so despite the slow erosion of its share, which started more than 40 years ago.
But to say that the “oil industry [is] on borrowed time as switch to gas and solar accelerates” is no more than a sensational title of an article that appeared in the UK’s Telegraph newspaper on August 20. It goes on to say that Citigroup warns that “world energy markets are entering a period of “extreme flux”, with oil caught in triple encirclement by cheap natural gas, much more efficient vehicles and breathtaking advances in solar power as scientists crack the secrets”.
I have no problem with this statement except the word “encirclement”. The competition between oil and other energy sources is a fact of life and has always been with us. Even further into the future, we cannot expect the current and expected level of oil prices not to generate and continue the competition with other energy sources.
At the same time, every oilman knows very well that oil alone cannot under any circumstances supply all the energy needs of the world. Therefore, I consider all energy sources as complementary to each other rather than adversary.
To put all this into context I shall use the latest estimates and forecasts of the International Energy Agency (IEA) as they are reported in its World Energy Outlook 2013. In 2011, the world total primary energy demand (TPED) was 13,070 million tonnes of oil equivalent (mtoe) where oil, gas and coal shares were 31, 21 and 29 per cent respectively. The rest is for nuclear, hydro and renewable energy sources.
Low prices
In the “current policies” scenario of the forecast, TPED in 2035 is expected to be 18,646 mtoe and oil, gas and coal shares are expected at 27, 23 and 29 per cent respectively reflecting the abundance of gas and coal and their low prices with respect to oil in addition to the technological development of clean coal power generation.
In the “new policies” scenario where governments are to encourage efficiency of use, reduce or remove subsidies and adopt some environmental measures, TPED is expected at 17,387 mtoe and oil will regain its top position at 27 per cent while gas and coal shares are expected at 24 and 25 per cent respectively.
Therefore, the assertion in the Telegraph article that “The props beneath the global oil industry are slowly decaying” has no foundation as the above forecast has taken care of the advances in gas production and the shale revolution in the US especially and its world implication generally.
Gas prices are now low which encourages consumption even in the transportation sector, the safe haven for oil. But this is a welcome development because of its environmental advantages overall. The lost demand of gasoline and diesel is tolerable going by the article’s projection that the “global gas fleet will reach 1.9 million lorries and 1.8 million buses by 2022. The switch to gas is spreading to pick-up trucks and passenger vehicles as the technology gets cheaper”.
Still this is only a small percentage of the hundreds of millions of vehicles still relying on liquid fuels. In the US where gas is abundant and prices are low, natural gas lorries are probably only 4 per cent of the total fleet now.
Efficiency of oil
Prices of natural gas elsewhere in the major consuming nations are higher than those in the US and, as gas demand rises, it is even possible that gas prices will rise in the future to converge with those of oil.
The advances in the efficiency of oil use in vehicles is undeniable. Citigroup’s report that “the average efficiency of new cars in the US has risen by 4.6 miles per gallon (mpg) since 2008 under fuel economy mandates” has led to decline in gasoline demand in that country. (The loss is also due to economic conditions rather than strictly due to improved efficiency.)
Other countries and regions may follow suit, but historical experience has shown that it takes a long time to replace the vehicle pool as users may not necessarily be ready to change their vehicles prematurely. At the same time, the drop in oil demand due to the rising efficiency of use is often moderated by demand gains from population increases and that generated by economic growth as well.
Oil and gas are immediate cousins, and where there is oil there is definitely going to be gas. And where there is gas, oil is probably close too. In the long run, there is no threat of either on the development of both.
The “threat” of solar energy on oil demand will be discussed next week.
The writer is former head of the Energy Studies Department at the Opec Secretariat in Vienna.