Mark Twain once famously said that reports of his death had been exaggerated. Is the same true of the impending demise of oil as one of our primary energy sources, neatly encapsulated in the concept of Peak Oil? The unexpected dramatic recent fall in the price of oil has brought the future of fossil fuels into sharp focus once again and must give pause for thought.
Oil is a resource which is finite in the strict sense of the word, but whose supply has in practice been increasing year by year. The effective level of resource is determined by economics. As supplies get tighter, prices rise and it becomes economic to exploit reserves which are more difficult and costly to get at. Cheap oil from the OPEC countries, particularly Saudi Arabia, at one point dominated the market. As OPEC controlled the rate of extraction, so it could push the price higher.
As prices rose, then so did exploration in more demanding environments, including initially the shallow offshore waters of the Gulf of Mexico and similar fields, but soon followed by deep water drilling in more inhospitable places such as the North Sea. A further source is Canada’s deposits of tar sands, a mixture of clay, sand, water and bitumen, which can be mined and refined to yield oil, but at a significantly higher price than for conventional reservoirs.
More recently, the large reserves of oil held in shale have begun to be exploited in earnest in America. Conventional oil reserves are released by drilling into the reservoir, where the pressure is sufficient to bring the oil to the surface, at least initially. Shale offers more of a problem, since the rock is in effect a vast sponge with oil held in the tiny gaps between particles.
Development of fracking allows this to be released, but only from relatively small sections of a shale bed penetrated by a horizontal well. So, in contrast to conventional reserves, tapped via a fairly small number of wells, each of which yields for an extended period of time, shale oil is extracted by drilling a small number of vertical wells and, from each single axis, drilling a number of horizontal wells in different directions and at different depths. The structure of the shale is disrupted by injecting high pressure water and sand down the well; the sand keeps the expanded pores open and allows more oil to be extracted.
However, each horizontal well produces oil for a relatively short time, making shale oil intrinsically more expensive because of the costs of repeated drilling and fracking. Nevertheless, with oil at $100 a barrel or more, shale oil is a profitable commodity, and the expansion of production in America led to the US once more becoming the world’s largest oil producer, decades after losing the crown to Saudi Arabia.
Some commentators have been calling the arrival of Peak Oil – the point at which production is at a maximum – for some time. I have a book on my shelves published in 2004, called The End of Oil – The Decline of the Petroleum Economy and the Rise of the New Energy Order. This made what seemed a fairly convincing case for the need to find other energy sources because reasonably-priced oil was becoming too scarce. This was no doctrinaire diatribe extolling the virtues of renewables or the ‘hydrogen economy’ but a fairly sober book about a looming energy crisis in the USA which demanded a transitional move to gas while a different mix of technologies was developed.
Fast forward a few years, and America was no longer facing an oil supply crunch, but it was also making a rapid transition from coal to gas for electricity generation, with domestic gas supplies booming and prices plummeting because of exploitation of shale reserves. Cheap American gas has not yet had a big effect on world prices, because gas is difficult to transport between continents and pricing is regional.
Shale oil, on the other hand, has been a disruptive force in the global market, bringing severe economic difficulties to countries such as Venezuela and Russia. The normal response to this would be for low-cost suppliers in the Middle East to cut back on production to push the price back up, something regularly done by OPEC in years gone by. This time is different. Saudi oil is being pumped as fast as ever and the price remains low. The received wisdom is that the Saudis hope to push down shale oil extraction and retain their own market share. Some commentators suggest the agenda goes deeper: to make investors wary of putting money into any non-conventional energy source and so maintaining the dominance of OPEC suppliers for a while longer.
While we don’t know the real motivation, the effect of the policy is highly disruptive. One aspect which has had relatively little attention is the impact on renewable energy policy. Wind, solar and biomass all receive significant subsidies to incentivise investment. Longer term, governments’ projections are based on high and rising conventional energy prices, eventually removing the need for subsidy. If oil prices stay low and gas prices begin to fall further as more countries allow shale gas exploration and the US exports more LNG, at what stage does the expensive renewable energy policy get questioned?
Time will tell. Energy is not (yet) a serious issue in the forthcoming UK general election, in part because we have had no serious threat of extended power cuts (so far) this winter and also that energy bills seem to have plateaued for the time being. But sooner or later, as the cost of putting in more and more wind capacity becomes more evident, consumers and industry will begin to complain. The key question is how far can politicians continue with current energy policy at a time of unexpectedly cheap oil?
Martin Livermore
The Scientific Alliance
St John’s Innovation Centre
Cowley Road
Cambridge CB4 0WS
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