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New Zealand report: Dwindling Oil Supplies threaten economies
Martin Kay, Stuff (New Zealand)
The world faces decades of economic turmoil and a vicious cycle of recessions as oil supplies run low and prices spike, according to a Parliamentary research paper.
The paper, The Next Oil Shock, says that known oil reserves would last for another 25 to 32 years, but an oil ”supply crunch” could occur in 2012 or shortly afterwards as demand rises and supplies fail to keep pace.
It was likely to be followed by a pattern of supply and demand crises.
”While the world will not run out of oil reserves for decades to come, it cannot indefinitely continue to produce oil at an increasing rate from the remaining reserves. Forecasts indicate that world oil production capacity will
not grow or fall in the next five years while demand will continue to rise.
”There is a risk that the world economy may be at the start of a cycle of supply crunches leading to price spikes and recessions, followed by recoveries leading to supply crunches.”
The paper, by Parliamentary Library economics and industry research analyst Clint Smith, is based on international research, reports and data.
… The report can be found at www.parliament.nz
(13 October 2010)
An excerpt from the report follows. -BA
The next oil shock?
Clint Smith, New Zealand Parliament
- Oil is “the lifeblood of modern civilisation”. This paper provides an overview of the global oil market. In particular, it examines the outlook for oil supply and demand over the next five years, and the economic consequences.
- Low-cost reserves of oil are being rapidly exhausted, forcing oil companies to turn to more expensive sources of oil. This replacement of low-cost sources of oil with higher-costs sources is driving the price of oil higher.
- While the world will not run out of oil reserves for decades to come, it cannot indefinitely continue to produce oil at an increasing rate from the remaining reserves. Forecasts indicate that world oil production capacity will not grow or fall in the next five years while demand will continue to rise.
- If oil production capacity does not rise as fast as demand, the buffer of spare production capacity disappears. In such a ‘supply crunch’ the price of oil ‘spikes’ to high levels. High oil prices can induce global recessions.
- Organisations including the International Energy Agency and the US military have warned that another supply crunch is likely to occur soon after 2012 due to rising demand and insufficient production capacity
- There is a risk that the world economy may be at the start of a cycle of supply crunches leading to price spikes and recessions, followed by recoveries leading to supply crunches.
- New Zealand is heavily dependent on oil imports and will remain so for the foreseeable future. While there is potential to substantially increase domestic production, domestic oil production cannot insulate New Zealand from global oil price shocks because New Zealand pays the world price for goods like oil.
- Key export-generating industries in the New Zealand economy including tourism and timber, dairy, and meat exports are very vulnerable to oil shocks because of their reliance on affordable international transport.
The global economy is heavily dependent on affordable oil.
It may seem counter-intuitive that, when oil reserves and production capacity are higher than ever, the future of the oil market appears bleak. The problem is that production capacity is not expected to keep up with demand. That fact leads to severe economic consequences.
To replace the declining production from existing oil wells and increase production, oil companies are forced to extract oil in more difficult and expensive conditions (deep-water, oil sands, lignite to liquids) from smaller, less favourable reserves. The marginal (price-setting) barrel of oil costs around US$75-$85 a barrel to produce. This will continue to rise with higher demand and exhaustion of reserves.
Although there remain large reserves of oil which can be extracted, the world’s daily capacity to extract oil cannot keep increasing indefinitely. A point will be reached where it is not economically and physically feasible to replace the declining production from existing wells and add new production fast enough for total production capacity to increase. Projections from the IEA and other groups have this occurring, at least temporarily, as soon as 2012.
The difference between the global capacity to produce oil and global demand is the supply buffer. When the supply buffer is large, oil prices will be low. When the supply buffer shrinks – due to demand rising faster than production capacity or production capacity falling – prices will rise as markets add in the risk that supply will not be available to meet demand at any given point in time.
When a supply crunch forces oil prices beyond a certain point, the cost of oil forces consumers and businesses to cut other spending, inducing a recession. The recession destroys demand for oil, allowing prices to drop. Major international organisations are warning of another supply crunch as soon as 2012.
The world may be entering an era defined by relatively short periods of economic growth terminating in oil price spikes and recession.
New Zealand is not immune to the consequences of this situation. In fact, its dependency on bulk exports and tourism makes New Zealand very vulnerable to oil shocks.
Research Analyst, Economics and Industry Team
Online PDF of this report for the New Zealand Parliament. 12 pages. -BA
Congressional Briefing: Can Oil Production Meet Rising Demand?
Gail Tverberg, The Oil Drum
On Thursday, October 7, the Environmental and Energy Study Institute (EESI) conducted a congressional briefing on challenges of the oil industry to keep pace with rising global demand, and the potential implications for oil prices, national security and the world economy.
The panelists included a combination of some people in Washington DC for the ASPO-USA meeting (Robert Hirsch, Tad Patzek, and Arthur Berman) and some people currently or recently involved with government offices (including Franklin Rusco, Director of Energy at the GAO, and Guy Caruso, Former Administrator of the EIA). I found it especially interesting that the latter two, especially Guy Caruso, were concerned about oil supply. As head of the EIA from 2002 to 2008, Guy Caruso did not seem to voice these concerns.
This video can be found at Can Oil Production Meet Rising Demand? An mp3 recording and copies of presentations can be found at the EESI site. Below the fold I show some of the slides and mention a few of the comments made by the presenters.
The overall theme of the presentations seemed to be that there are many types of risks that supply will be inadequate to meet demand–rising demand from emerging economies, inadequate investment, and oil that cannot be pulled out of the ground fast enough, even though the appearance is that there is plenty of oil available. The result is likely to be high prices leading to recession. Alternatives are not scaling up quickly enough to be likely to be very helpful for a very long time – 25 years according to Art Berman.
Below, I summarize the presentations. Note that I have not shown all of the slides. You will need to look at the individual presentations (linked for the individual presenters) to get all of the slides.
(15 October 2010)