The end of the oil era

On the eve of the big climate conference in Copenhagen a special train left the city of Utrecht for the capital of Denmark. Over 200 well meaning, journalists and various politicians boarded this train. They want to put pressure on the Copenhagen-attendants to take ‘the right’ decisions and to draft a successor of the Kyoto treaty. This makes clear that
Copenhagen had turned into a fun fair, where activists of different feathers tried to bring their own little shop to the attention of an ever eager press. In the Netherlands, various media tried to outdo each other by painting the most blood-curling pictures of a possible failed Copenhagen summit. In the United Kingdom a Judge has decided that environmental convictions equal religion. All in all Copenhagen started to get traits of hysteria and religious fervor.

Back to the Stone Age
In a climate, where scientists, reporters, politicians and activists are trying to outbid each other in order to paint the approaching environmental catastrophe it is always nice to read a
few articles or reports that put things into perspective. And this is exactly what Deutsche Bank does in its document titled ‘the Peak Oil Market’. The authors observe that the oil era
is coming to and end. Contrary to popular thought this is not due to a low supply. On the contrary. In their opinion there will be enough oil to meet today’s and tomorrows demand.
Now what causing the end of the oil era? The analyst expects that the economic recovery will remain weak in the years to come. A weak economy demands less oil anyhowMoreover, many effiency measures are starting to bear fruit. This makes the oil price per barrel likely to drop in 2010 and 2011. Great news for car owners.
This is, however, only part of the story. Using understatements the authors conclude that de
The Stone Age did not end because people ran out of rocks.Progressing technological development caused a ‘goodbye Stone Age’. And that is the reason why the Oil Age is coming to its end. Not because we are running out of oil, but because of the fact that in the coming decades oil will play a less important role in our economy.

Energy intensity
What causes oil to lose importance? According to Deutsche Bank energy intensity is the key word, that is, the quantity of oil consumed in relation to the economy. That intensity is diminishing, even in countries like the United States. In the United States the energy intensity has been decreasing at an average rate of 2% per year since the 1980s. This percentage is likely to increase to 3% if the economy remains weak. But Deutsche Bank takes it even further by predicting that the demand for oil in the United States will actually decline.
According to the International Energy Agency (IEA), the American thirst for oil has dried. In 2005 the United States ‘drank’ 21 million barrels a day. Nowadays the country only consumes 19 million barrels a day, causing the biggest diminution since the 1970s and the decade of the oil crises.
The same agency only expects the US to reach the level of 21 million barrels a day in 2029!
The lower energy intensity is especially apparent in cars. Thanks to hybride and electrical
variants, cars have become more economical. In 2020 the demand for gasoline will have fallen by more than 50% compared to 2009. Deutsche Bank assumes that the size of the American gasoline market, which is the largest in the World, will almost be 50% of its size today by 2030.

Under investments
The demand for oil will also fall, because of the rise of gas. Gas is cheaper, easier to
extract and not all of the world’s gas supplies are owned by OPEC. OPEC may play a key role
in the current shortage of oil, it can also fulfill a central role in solving it.
OPEC countries have been behaving politically in a very capricious manner. This will lead to a decline in investments by external parties.
That trend is reinforced by the acts and polices of, for example, Western governments. It is still not sure what environmental laws will look like during the next couple of years.
Problems in the Middle East combined with uncertainty [at home] will force the large oil companies to lower their investments in the oil market. And because of those under investments the oil production will reach its peak of 90 million barrels a day in 2016.
This is only 5% more than today’s output. The output of 90 million barrels a day will be accompanied by a high price of $ 175 per barrel. According to Deutsche Bank this is essential to change the nature of the American oil consumption and to make it more efficient.
If the Americans are able to kick their oil habits, the price per barrel will likely dropafter 2016.

Implications

Is it feasible that the price of a barrel of oil will be the same in 2030 as it is today?
That would have increasing consequences for the oil sector itself. How much will the
Canadian tar sands or the large oil supplies that are hidden under our oceans be worth?
Those sources are likely to depreciate.
Refineries will also have to adapt if the demand for oil drops structurally and if oil prices remain under pressure. It could be that the site itself will be more important than its complexityor state of the art. Maybe refineries will en masse move the middle east.
Consequently, the international trade in crude oil will decrease, but the demand for oil products will skyrocket. After all, there will always be a demand for oil products.
But keep in mind, 2020 is close, but 2016 is even closer.


Sources:
CNNfn, Why cheap oil is here to stay, 3 December 2009`
The Deutsche Bank, the Peak Oil Market, October 2009
The financial times, Deutsche: the end is nigh for the Age of Oil, 6 October 2009