Local Commentary, National Commentary

The Great Energy Transition: A Volatile World

Twenty years ago, it looked as if the world was about to start running short of oil that powers some 94 percent of our transportation. For a while, it seemed the forecast of oil shortages would come true as the price of oil climbed many-fold, and for a short time, motorists in the U.S. were paying $4+ for a gallon of gasoline. 

Around 2008 there was a technological breakthrough as oil producers discovered how to extract light oil (commonly known as shale oil) from deposits that were in rock so tight that oil could not be brought to the surface by drilling conventional wells. Many came to believe that this new technology, a combination of fracking/horizontal drilling, had saved the world and that now there was enough oil to last for decades. U.S. shale oil production grew by nearly 9 million barrels a day in the last 10 years which was enough to allow the world’s consumption of oil to continue growing despite the stagnation of conventional oil production during the 10 years.

In the euphoria and hype over fracking, several facts about shale oil were largely overlooked. Shale oil is unsuitable for making some grades of oil products and is too light to be processed profitably in many U.S. refineries. This inability to refine all the shale oil we produce is the reason the U.S. is exporting some 3 million barrels of shale oil a day to foreign refineries that can handle the lighter oil and at the same time importing about 6 million barrels a day of heavier oil that can be processed in our refineries.

The biggest problem with shale oil is that it costs too much to produce even when oil was selling for over $100 per barrel. In the last few years, drillers have tried hard to lower costs and increase production through “technological innovations.” However, with oil hovering in the $50s, small and medium-sized shale oil drillers are still losing money. 

In recent months there has been little increase in U.S. shale oil production, and some believe the 10-year boom is drawing to a close, leaving the world in a dilemma as to how we can continue to grow our economies. The only, albeit temporary, hope for the industry is that Chevron and Exxon are moving into the Permian Basin, which is the last shale oil field still growing. These giant oil companies have large revenues from conventional oil production, and do not have to borrow money to drill for shale oil. They also have more than a century of experience in oil drilling and maintain they can make money in the shale fields where smaller drillers have gone bankrupt.

Thus, unless the oil supply continues to grow significantly, which now seems unlikely except in the eyes of the optimists, the question for the next decade is, “how long will affordable oil last?” Until recently, this question had seemed to be primarily concerned with prices and rates of oil production; however, new problems have arisen which may turn out to be more significant than the prices and availability of fossil oil.

A major threat to the growth of oil production is geopolitical instability. Insurrections and trade embargoes have already reduced oil production markedly in Iran and Venezuela. Iraq has seen nationwide riots in the last week, and the Saudis’ had a critical oil facility blown up, likely by the Iranians and appear to have retaliated against an Iranian tanker. There are several wars sputtering along in the Middle East spawned by the 1,400-year-old Sunni-Shiite dispute. Libya, Nigeria and many other oil-exporting states have continuous disputes over the division of their oil revenue. In most oil-producing countries, there is endemic corruption among those handling oil revenues.

Another problem for the future of oil production is climate change. As temperatures rise, most of the Middle Eastern oil-producing states are beginning to reach summer temperatures that not only destroy agriculture but will make oil production difficult. Powerful storms periodically threaten offshore oil production and coastal areas. The need for ever-increasing amounts of air conditioning in many Middle Eastern countries will reduce the amount of oil available for export. Growing political tensions, wars, and embargoes are slowly reducing the world’s conventional oil supply. 

While several European nations are making serious efforts to reduce the use of fossil fuels, few other countries, including the U.S., are making an effort to reduce carbon emissions. In most countries, the goal of fostering economic growth through the consumption of ever-increasing fossil fuels trumps concerns about the effects of global warming. However, as destructive storms, floods, droughts, sea-level rise, and forest fires continue to increase, it is only a matter of a few decades or less before the damage caused by these phenomena forces a reduction in the combustion of fossil fuels.

In recent months trade wars and their impact on the global economy have received much attention. Should these confrontations continue, they will likely lead to a worldwide recession, and reduce the demand for oil. A recession could, in turn, lead to lower prices and production as some of the world’s oil is already selling at marginal profitability. 

The last factor that will bear on the fossil fuel situation is the pace at which replacements for fossil fuels come. Wind and solar power, which require no fuel to operate, are already cheaper than fossil fuels. However, to make these intermittent sources of power more useful, we need to develop better batteries to store intermittent electricity and better power grids so that electricity can is moved to deficit areas from those of active production. 

There are also exotic sources of energy based on new ways of extracting energy from atoms under development. Progress is being made on at least two projects based on new cheaper and non-polluting sources of energy, but for now it is impossible to say whether these are months, years, or decades away from coming into commercial use.