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Vol. 232 No. 1 |
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HENRY TERRELL, CONTRIBUTING NEWS EDITOR
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Supply and demand. Lots and lots of demand
This column is ostensibly about oil and gas production, but you can’t talk about production without bringing up demand and consumption, since that’s the only reason we have production in the first place. Demand for oil and gas has driven people to burrow and bore into pockets of the Earth that even a few decades ago were so inaccessible that no one could imagine it. The average person, even the reasonably educated person, has no idea what’s involved in extracting a barrel of crude or a cubic foot of gas from the depths, though he or she may show appreciation and awe when it is explained. But really, in the end, they don’t care. They want the Daewoo to back out of the driveway and they expect the CFLs to light up when the switch is flipped. How this is achieved is immaterial, as long as the cost is bearable.
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In 2007, energy demand outside the OECD exceeded that of the OECD for the first time. In the 2008 recession, non-OECD demand barely dipped.
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Paying the tax collector. In 1960, Harvard lecturer Theodore Levitt wrote an article for the Harvard Business Review titled “Marketing myopia,” and it proved so popular that it has been reprinted endlessly and studied by business majors ever since. In the article, Levitt makes the now-famous observation that railroad companies find themselves in trouble today (“today” being 1960) because they thought they were in the railroad business instead of the transportation business. Therefore a mighty industry that defined civilization at the start of the 20th century found itself, barely past the mid-century mark, flat on its back begging for government help.
Actually, Levitt also gave a great deal of thought to the oil industry. Although his timing was sometimes askew, his points are still valid: “People actually do not buy gasoline … what they buy is the right to continue driving their cars. The gas station is like a tax collector to whom people are compelled to pay a periodic toll as the price of using their cars. This makes the gas station a basically unpopular institution … To reduce its unpopularity completely means eliminating it. Nobody likes a tax collector.”
Levitt’s point was that people drive vehicles with combustion engines because nothing better has come along. When it does, people will abandon their gasoline engines, quickly and with few regrets.
I’d take that idea one step further and suggest that, except for motoring in the countryside with the top down on a nice day, the object is not to drive cars. What people want is to get themselves and their possessions from here to there and back again with the least aggravation possible. To achieve this, people require energy in some form. The questions we have to ask are: How much energy will be required? What forms will it take? What part will oil and gas play? What are the options?
A demanding world. Since energy is provided in a variety of forms, we have to stop talking about barrels, tons, Mcfs and other specific measures and find a common unit, since the number of barrels of oil that a Vestas V90 wind turbine can produce is exactly zero. You could choose joules (or, more usefully, exajoules), but the traditional measure is the reliable old British thermal unit (Btu), defined as “a unit of heat equal to the amount of heat required to raise one pound of water one degree Fahrenheit at one atmosphere.” That’s a pretty functional measure, because a very large share of the world’s energy goes toward just that—heating water, whether it’s for steam turbines or boilers.
The US Energy Information Administration (EIA) estimates that world energy demand will increase an average 1.4% per year between now and 2035 (see graph). Some 34 countries are members of the OECD, and, excluding those that have joined the organization since the year 2000 (for the sake of accurate comparison—sorry, Slovenia), we see that demand rose only modestly in the 1990s, took a slight dip in the 2001–2002 recession, then climbed again to peak in 2007–2008 before stalling sharply in the global recession.
By comparison, we see the non-OECD countries (everybody else) taking off like a Lear jet beginning in the new century, and mostly shrugging off the recession before resuming their trajectory. China and India led the pack, and will continue to do so, but growth in the Middle East, Africa and South America is expected to accelerate sharply. Altogether, demand is projected to rise from 495 quadrillion Btu (quads) in 2007 to 739 quads in 2035. Even in EIA’s “low growth case,” demand is still estimated to reach 680 quads in 2035. Enormous no matter how you measure it. (Why trust EIA, by the way? It’s simple. They’ve been accurate in the past.)
Paying the bills. Global fuel liquids production, based on a “reference” (average) price scenario, may increase from 85.5 million bpd in 2008 to around 110 million bpd in 2035. This includes conventional and unconventional (gas-to-liquid, bitumen, soy beans, whatever). Liquids’ share of world energy in 2035, by almost anyone’s estimate, is expected to drop—from 35% today to around 30% in the average-case projection. But it is still an absolute increase that has to come from somewhere. Check the graph again. No scenario short of apocalyptic is going to make much difference to crude demand in the next 20 years. It almost doesn’t matter what the OECD does.
So, what’s the answer? Should we develop solar energy, invest in wind and wave power? Make trains, planes and automobiles more efficient? Should we reduce the use of plastic bottles and bags, ride bikes and walk more? Develop biofuels, switchgrass fuels, sugar fuels? Should we turn toward newer, better designs for—heaven forbid—nuclear power plants? Should be develop shale gas, find more economical ways to convert bitumen, drill more, drill deeper, drill safer?
Hint: Yes. 
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