Petroleum: A Crude Estimate of the Value of Oil

Last Month I wrote about the need to act on energy consumption far beyond the recommendations of experts and advisors in order to mitigate against climate change effects considerably worse than those anticipated by the advisors that policy makers rely on.  One issue that represents the difficulty, opportunity and necessity of changing the way we consume energy is our use of petroleum, or put another way, our dependence on crude oil.

What is left to say about petroleum that isn’t already obvious? It is a valuable resource that can be converted into many vital commodities very cheaply, not just pharmaceuticals, plastics, fertilisers, solvents and similar products, but thousands of different components of vital technologies and products.  It provides most of the world’s fuel for transport and contributes considerably to the heating and power capacity of our energy supply.  Burning it produces lots of energy, but also CO2 and other undesirable emissions.  It is being used at a rapid rate – best guess is about 84 million barrels a day.  It is a limited – and non renewable – resource, with total oil reserves amount to around 1.2 trillion barrels, with much of these reserves (around sixty percent) in the Middle East, and other reserves concentrated in the former Soviet Union, Venezuela and Africa, leaving only around 20% of oil reserves in countries that the US senate would consider unambiguously stable. 

Another consideration is that while global demand is remains high, easily extractable reserves are declining, and declining rapidly.  High demand, coupled with limited supply, uncertainty over production, a cartel controlling much of the available supply, uncertainty over the existence and viability of extraction, uncertainty over the costs, risks and efficiency of extraction, the growth of a number of emerging economies, institutionalised speculation and changes in the terms of trade between different consumer nations, coupled with greater mobility and more intense global trade has meant that prices are at present both high and volatile.  In short, the price of a vital commodities on which trade and the economy depend, is very difficult to forecast.

In addition to price volatility and limited supply of oil, there are other issues we need to consider in assessing if our relationship with oil is a healthy one. For example, meeting our various climate change agreement targets will require using considerably less fossil fuel; ensuring that the limited landfill space isn’t crammed full of plastics will mean reducing our dependence on plastic packaging; reducing the use of chemicals in the atmosphere is also an opportunity to use fewer petroleum based products.  True, our dependence on oil is deep, but motives for reducing this dependence are strong and multiple. 

This brings me to the subject of climate change, or more specifically to the relationship between climate change and oil.   

One obvious point is that as a fossil fuel, burning it contributes to carbon emissions, which, in turn, contributes to climate change.  Another is that the world’s transportation system depends upon oil and switching to another type of power is neither easy nor low carbon.  There is though, a more intriguing issue to consider: if easily extractable oil is running out anyway, what should we do to ensure that the economic and political consequences are not damaging.  The question, then, is twofold: what are governments doing about the end of easy oil and what should they be doing.

The answer to the first part is easy – governments are doing lots and lots of little things to modify the way we consume, the way we generate and use energy, the way our transport system works and incentives are in place to use less oil/use alternatives to oil.

The second part of the question is a bit more difficult to answer.  We are divided on the topic.  Strangely, those who are most sceptical about climate change (who question the science and scientists or argue that the IPCC has ulterior motives) seem to be least sceptical about oil – they seem to argue that we have hundreds of years worth of the stuff, we can just dig a new well when we need it and as long as we have money countries will be happy to sell us as much as we need, when we want it at a price fair to all (there is no question that Saudi Arabia might have ulterior motives for inaccurately estimating the size of their reserves).  So, do nothing, everything will sort itself out, peak oil is all about misdirection or a taxation conspiracy and long before oil runs out we will have moved on to new fuels and technologies: “the stone age didn’t end because of a lack of stones!” to mention to popular quote.

My view is an alternative to this – we must start thinking of oil as a substitute for sustainable and renewable products/resources and it must be valued – and thus priced – accordingly.  A multi-government transition plan must be developed to end the age of cheap oil long before the succession of empty oil wells decide this for us.  High prices to consumers means reduced world consumption, increased attractiveness of sustainable alternatives, oil price stabilisation, more effective planning in unstable oil producing countries, and government tax revenues able to address fuel poverty in a more fundamental and equitable way and more time for the global economy to become more oil independent. 

The political leadership required to revalue petroleum products is immense as it is a message that voters do not want to hear and have never voted for but, to return to the quote above: no, the stone age didn’t end because of a lack of stone, but civilisations more advanced than those even emerging from the stone age have collapsed because of deforestation and other unsustainable uses of previously abundant resources.  That is a more pertinent analogy.