2005 March 29 Tuesday
Have We Entered An Era Of Sustained High Oil Prices?

Robert Samuelson of Newsweek asks will oil prices stay high as a consequence of rising demand in China?

Americans consume almost 21 million barrels of oil a day, a quarter of the world total of 84 million barrels a day, reports the International Energy Agency. But China is now second at 6.4 million barrels a day, and its demand could double by 2020, various analysts told a conference held last week by the Center for Strategic & International Studies (CSIS) in Washington.

China currently produces 3.5 million barrels of oil per day. That production probably will not rise. So all of China's increase in demand is likely to come from imports.

In 15 years China may have 6 times as many cars and trucks as it has now.

China now has about 20 million cars and trucks, energy consultant James Dorian said; by 2020, it could have 120 million. (In 2001, the United States had about 230 million cars, vans and trucks.)

Demand from America will rise. Demand from many other parts of the world will rise. At the same time, production will decline in most countries that produce oil as their oil fields become more depleted.

You can read texts from the CSIS conference (PDF format) that inspired Robert Samuelson's column.

From the conference James Dorian's speech on China's present and future energy usage is particularly interesting. Coal is currently China's biggest source of energy and in part due to expected growth in coal consumption China may surpass the United States in carbon dioxide emissions by 2020. (PDF format)

Coal makes up roughly 70 percent of China’s energy mix and will remain the most dominant energy source over the next few decades. Coal accounts for about 70 percent of China’s power production as well, in addition to hydro and nuclear. This is very important as much of the attention paid to China by the international media seems to focus on oil and gas—yet coal represents the backbone of the nation’s economy. At least 6 million persons are employed in China’s huge coal industry, and thousands of mines of all sizes dot the countryside. Coal provides a significant 7 percent of urban industrial jobs, in a country with rising urban unemployment. In recent years, however, numerous coal mining accidents, transportation bottlenecks, and inefficient pricing mechanisms have plagued the sector, putting additional stress on an already highly strained electric power generation system. China’s future economy may indeed be affected by coal industry bottlenecks—assuming that they are not adequately dealt with by the Chinese leadership.

...

A huge majority of Chinese power plants are in fact coal-based or coal-fired--reflecting coal’s overwhelming importance to the country’s economy—and since coal will likely remain the primary power source for decades to come, there is some likelihood that air quality will not improve noticeably in the immediate years ahead. With regard to China’s air pollution problems, on its present course, China may overtake the US in emissions of carbon dioxide by 2020, which poses some difficulty for the world community considering that China—as a developing country—is exempt from cutting greenhouse gas emissions under the Kyoto Protocol.

Dorian sees increasing competition for oil.

Clearly, rapid energy growth in China is leading to dramatic impacts throughout the world in terms of commodity markets and prices, and within China, growing thirst for energy is creating a new sense of urgency and energy insecurity. Indeed, the means by which Beijing chooses to deal with its energy security will not only affect the Chinese economy, but the global economy as well. China’s energy needs have global implications today, as was witnessed last year through competition with Japan for imported oil from Russia. Ultimately the US, China, and Japan will be vying for the same Middle Eastern crude oil. Over the next two decades, China will play a larger and larger role in the Middle East since the country is so dependent on foreign oil imports, as well as Central Asia, West Africa, and other parts of the world which could help meet China’s growing energy requirements.

At an earlier January 11, 2005 CSIS presentation Herman Franssen argued that independent oil companies (IOCs - not government owned) expect long term oil prices to be well above previous expectations of $20 per barrel.

First and foremost is the tightening of the entire oil supply chain from the upstream to the mid and downstream. One does not have to be a convert to the “Peak Oil” concept to be aware that outside the FSU oil production appears to be very near peaking, with output from new discoveries just barely offsetting depletion in mature producing conventional oilfields. Several recent well-documented technical assessments of FSU production capacity point in the direction of output peaking in the FSU sometime by the middle of the next decade. Within OPEC perhaps one third of the countries have either reached or are likely to reach peak capacity sometime in this decade. As for the other, high oil reserve OPEC countries, the pre-2000 prevalent perception of ever expanding OPEC conventional oil production capacity to meet ever growing future oil demand, has been gradually been abandoned in favor of more constrained scenarios.

...

Up until recently IOCs used $18-20 ($16-20 prior to 2000) as a benchmark/hurdle rate price to test the economic viability of upstream projects. While they are still cautious, most IOCs now use a price level closer to $25 for this purpose and several CEOs of major IOCs have publicly stated that we are now in a $30-plus oil market. The $18-20/B long term equilibrium price has disappeared from the literature.

For the United States 21 million barrels per day times 365 days per year is 7,665 million barrels per year. Therefore each 1 dollar increase in oil prices costs $7.665 billion dollars to the US economy. Since the United States imports almost 60 percent of its oil each dollar increase in oil prices worsens the yearly US trade deficit by about $4.6 billion. The percentage of oil which is imported will continue to rise as US production declines and demand increases.

Currently oil prices are bouncing around north of $50 per barrel. A recession in China and the United States may eventually temporarily dampen demand. But I think we have entered a period of sustained high energy prices that will last until cheaper non-oil energy sources are developed. We could hasten that day with an aggressive and wide-ranging program of energy research to the tune of about $10 billion per year. The cost would be equivalent to less than $2 per barrel of oil consumed in the United States. The future benefits would include much lower energy prices, higher living standards, a cleaner environment, a more favorable trade balance, and a lessened need for the United States to involve itself militarily and diplomatically in the Middle East.

Share |      By Randall Parker at 2005 March 29 02:32 PM  Economics Energy


Comments
GUYK said at March 29, 2005 4:15 PM:

Works for me! Borrow the ten bil a year from the Saudis (while we are using all of their oil reserves) and by the time wwe get the new cheap energy the Saudis will be needing their money. Pay em back with the cheap energy at the same prices they charged us for the oil. Yep, works for me.

PacRim Jim said at March 29, 2005 5:30 PM:

Why is it that, no matter how high the price of oil, photovoltaic energy is never competitive?

Stephen said at March 29, 2005 5:46 PM:

I say, blame the Canadians....
Total US Imports of Petroleum (Top 10 Countries) in housand Barrels per Day avg 2004

CANADA..............2,118
MEXICO..............1,642
SAUDI ARABIA......1,556
VENEZUELA.........1,521
NIGERIA..............1,119
IRAQ.....................652
ALGERIA................439
UNITED KINGDOM....369
VIRGIN ISLANDS.....324
ANGOLA................316

PS: Can MT blog comments do tabs??

Stephen said at March 29, 2005 5:51 PM:

The vast majority of oil is used in mobile power plants - ie transport. If prices stay high then I'd expect new car sales to favour greater fuel efficiency - goodbye SUV. It'll be interesting to see how much the US consumer is willing to pay for the benefit of running a fuel guzzler.

Randall Parker said at March 29, 2005 6:20 PM:

PacRim Jim,

First of all, oil is not competitive with coal, natural gas, and nuclear for making electricity. Photovoltaics are for making electricity. Therefore high oil prices have little impact on what photovoltaics actually compete with.

Second, if we had much better battery technology then electricity made by everything from coal to photovoltaics could compete with gasoline as a mobile power source. I have repeatedly argued for more battery research in large part to allow oil to be displaced by other energy source.

Third, photovoltaics really are expensive. The price has dropped. But it is my impression that photovoltaics still need to drop at least another order of magnitude in price to really start to compete with other energy sources.

Dan P said at March 30, 2005 8:03 AM:

Here are two articles for comment:

http://www.lifeaftertheoilcrash.net/

and

http://www.elon.edu/brazilmagazine/article9.htm

GUYK said at March 30, 2005 11:47 AM:

I certainly believe that more funds should be spent on reseach for an alternative to crude oil. And, a better battery would definity help.

But, although we do complain about the price of motor fuels we in the USA actually have it pretty good. What would the price of gas be today if it kept up with the the inflated prices of other products. I 1955 I paid less than 25 cents a gal for regular leaded gasoline. A candy bar cost fife cents and so did a bottle of soft drink. A bottle of beer was a quarter. Looks like if gasoline prices had gone up accordingly we would paying double tha what we pay now.

Noone knows for sure when the 'peak' will come. But no doubt it will come and it would be best if we had an alternative to oil when the peak does come. But, the best argument I have heard for a crash research program for an alternative energy source is that such energy would make the country self reliant again. Oil doesn't go down to well if forced to eat it-even with salt and pepper. And eat they would have to do if there was a viable alternetive to crude oil.

Invisible Scientist said at March 30, 2005 7:37 PM:

Although I am not going to go as far as claiming that the oil industry
uses secret agents to silence people who invent new alternatives to oil,
it is clear that George Bush and his entourage who are connected with the
oil industry, would not go out of their way to fund truly useful
research projects. It seems that Bush actually deflected attention from truly
viable alternatives to oil, when he said he would fund a tiny project
for hydrogen (which is not seriously viable like battery research, and the
need for power sources to generate the hydrogen in the first place.)

PacRim Jim said at March 30, 2005 8:51 PM:

For 30 years, I've heard that if photovoltaic energy were only 15% or so more efficient, it would be competitive with oil-generated electricity. In the meantime, efficiency has increased more than 300%. Competitive PV power is a hoax perpetrated by researchers seeking fund.

Randall Parker said at March 31, 2005 9:42 AM:

PacRim Jim,

It has always been my impression that photovoltaics were nowhere near close to competitive. Some enthusiast environmentalists have argued otherwise for a long time. I do not base my advocacy of photovoltaics research on the pronouncements of those folks.


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