23 November 2019
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The time has come. A fact’s a fact. There are problems with oil. Can we get supply back?

Midnight oil

Andrew Main
24 October 2018

So the price of petrol in Australia is at a 10-year high at $1.59 a litre.

That looks like bad news and there’s a fair bit of it about in the oil sector at the moment.

The man running Saudi Arabia appears to have taken to sawing up dissidents, and the man running the US is trying to reimpose sanctions on another major oil producer, Iran.

Just to cheer you up, Saudi and Iran are respectively the second and fifth biggest oil producers in the world, in a descending order that starts Russia, Saudi, the US, Iraq and Iran.  Pick your stable regime there. 

But there is some good news about.

First of all, if petrol’s at a 10-year high, it means we’ve been there already and survived. Not only that, but once you adjust for the effects of around 21%  inflation over those 10 years, it’s a very different story.

That’s scant consolation to people who have long commutes or drive long distances per year, but it puts the price rise into perspective.

However, the immediate future doesn’t look all that rosy.

As the International Energy Agency put it in a recent report:  “expensive energy is back, with oil, gas and coal trading at multi-year highs.”

Brent crude is just under $US80 a barrel, which is, of course, round about $113 in our sagging currency, so don’t expect the refiners to start discounting any time soon.

What about supply and demand?

The agency states that for the time being global supply is just ahead of demand at about 100.2 million barrels of oil a day against demand of 100.1, but that’s assuming constant output by the original producers’ cartel, OPEC.

And you would have to be a cockeyed optimist to think that countries like Iran and Saudi Arabia will be able to keep supply steady, given the political ructions looming in those countries and others.

US sanctions against Iran for what Donald Trump says are breaches of the Iran nuclear agreement are due to come into force on November 4, although there’s still a chance that Iran will still be able to export some of its 3 million barrel a day production to other nations, such as China, after that date.

The Agency says the global oil market is “adequately supplied for now”, thanks to an overall increase in supply since May of around 1.4 million barrels a day, thanks mostly to Saudi Arabian exports, but then throws a dark cloud over the immediate future.

“With Iran’s exports likely to fall by significantly more than the 800,000 barrels a day seen so far, and the ever present threat of supply disruptions in Libya and a collapse in Venezuela, we cannot be complacent and the market is clearly signalling its concerns that more supply might be needed.”

Thanks for that, but we did ask.

Of course, the improving circumstances of consumers in places like China have given global oil demand a significant shove along in recent years, and that’s not going to go away any time soon.

The Chinese National Bureau of Statistics states that Chinese apparent demand for oil has risen from around 10.5 million barrels a day in 2015 to more than 13 million barrels today in late 2018. It’s not much of a domestic producer.

It’s easy to doubt official Chinese statistics but they’d have absolutely no reason to overstate what’s a fairly nervous-making trend.

The biggest factor in increasing oil output in recent years has been the US fracking boom, which has kicked US production up from 5 million barrels a day in 2008 to about 10.7 million now, a startling increase of more than 100%.

However, and there are lots of ‘howevers’ here, the US is now bumping up against  full capacity in terms of production and according  to the Energy Information Administration in the US, the US economy consumes approximately 20 million barrels of oil every day. It’s using almost twice as much as it’s producing. 

Conclusion: producers are currently able to keep up with demand but don’t assume that will continue. 

What about the bigger picture, and all those predictions we used to get around 10 years ago about the world running out of oil?

Clearly it hasn’t, yet. As Saudi Oil Minister Sheikh Yamani memorably noted in 1974, the Stone Age did not end for want of stone, and the oil age should go the same way. Let’s hope he was right.

A very good report has just come out from Edinburgh-based energy consultancy  Wood Mackenzie indicating that in the next 20 years the rise of electric vehicles will see oil demand finally peak.

Entitled “Thinking global energy transitions: the what, if, how and when”, it notes that while the move to electric vehicles is well behind the move to  renewable energy for static electric power generation, it will catch up by 2035.

It states that by the end of this year, there will be a mere five million electric vehicles on the world’s roads, versus a vehicle stock of 1.2 billion cars.

It says however that by 2035, 20% of global electric power will be provided by wind and solar, and 20 per cent of road miles travelled will be by electric powered cars, trucks, buses and bikes.

“By 2040, oil demand displaced from electric vehicles will have doubled to almost 6 million barrels per day,” it states, on the basis of a 3 million barrel a day saving by 2035.

Wood Mac analyst Prajit Ghosh makes it clear that there are lots of moving parts to consider in looking so far forward, but he notes the transition might be even quicker depending on increased cost competitiveness on renewables and technological breakthroughs in batteries and storage.

What I found particularly interesting in the nine-page report was that there was almost no mention of climate change in it .

I assume that was not because the authors were choosing to ignore it: rather, that they assumed the move to address global climate change was a given, an agreed position.

Nor, incidentally, was there much mention of government intervention. Clearly, these analysts are assuming that the market will resolve most energy dilemmas once governments set sensible policies.

Now there’s a thought. Let’s hope some of the fans in Australia of Tony Abbott’s  Monash Forum, which wants our government to build at least one new coal-fired power station, despite the fact that going solar would be cheaper, have a close look at the report.

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