Rising hydrocarbon costs: A quick summary for policy makers
During the past century, world economic growth has depended largely on ever-expanding use of hydrocarbon energy sources: oil for transportation, coal and natural gas for electricity generation, oil and gas for agricultural production. It is no exaggeration to say that the health of the global economy currently hinges on increasing rates of production of these fuels. However, oil, gas, and coal are non-renewable resources that are typically extracted using the “low-hanging fruit” principle. That is, large concentrations of high-quality and easily accessed fuels tend to be depleted first. Thus, while the world is in no danger of running out of hydrocarbon energy sources anytime soon, oil, gas, and coal extraction efforts are increasingly directed toward low-quality, hard-to-produce fuels that require higher up-front investment and entail increasing environmental costs and risks.
These trends are easily demonstrated in the case of oil.
Dependency: The dependence of the world economy on oil is illustrated by the close correlation between oil price spikes and US economic recessions that has been noted by several analysts.
Declining resource quality: The pace of world oil discoveries has been declining since 1964. Oilfields found during the past decade have tended to be smaller, on average, than those located decades earlier, and tend to require expensive new technologies (including horizontal drilling, deepwater drilling, and hydrofracturing) for their development. As Jeremy Gilbert, former chief petroleum engineer for BP, has put it, “The current fields we are chasing we’ve known about for a long time in many cases, but they were too complex, too fractured, too difficult to chase. Now our technology and understanding [are] better, which is a good thing, because these difficult fields are all that we have left.”
Increasing upstream production costs: The cost of developing a new barrel of oil’s worth of production capacity has increased dramatically in recent years. In 2000, the oil industry remained profitable with prices pivoting around $20 per barrel. Today it is estimated that oil prices of $60 to $80 per barrel are required in order to incentivize new exploration and production in many prospective regions.
Increasing environmental risks and costs: As drillers operate in ever more hostile and fragile environments, accidents can have far worse consequences on ecosystems and human economies that depend on ecosystem services. This trend was forcibly illustrated by the Deepwater Horizon blowout in the Gulf of Mexico in 2010. Lower-quality hydrocarbon resources typically also entail higher carbon emissions per unit of energy produced.
Coal and natural gas likewise exemplify these trends, though in somewhat different ways. While global coal reserves estimates have been used to justify the oft-repeated assertion that the world has hundreds of years of supplies, recent studies suggest world coal production could peak and begin to decline within the next 20 years. The most heralded recent development in natural gas industry is the application of hydraulic fracturing technology to production from low-porosity formations to boost reserves; however, this new technology poses increased environmental risks while entailing higher production costs.
Together, coal, oil, and gas contribute to the overall societal cost of anthropogenic climate change. The ultimate burden of climate change on the world economy has been variously estimated; in the worst-case scenario (a global average temperature increase of five or more degrees Celsius), the economy simply would not survive. On the other hand, however, action by governments to limit climate change will almost certainly directly or indirectly increase the price of fossil fuels, adding to price increases resulting from depletion
As fossil fuels become more scarce and expensive, international conflict over remaining supplies, especially of oil and gas, is likely to become more heated—a trend already clear in the South China Sea and Central Asia.
The replacement of fossil fuels with alternative sources of energy is clearly necessary, but presents the world with an unprecedented technical challenge. Transport systems (autos, buses, trucks, trains, aircraft, and ships) can in some cases be electrified; in other cases, petroleum-based liquid fuels can be replaced with biofuels. Electricity can be produced from sunlight and wind rather than coal and gas. However, alternative energy sources currently provide only a tiny portion of current world energy, so a build-out will require enormous investment over several decades. Moreover, when the prospects of alternative energy sources are evaluated using all important criteria (including the amount of energy returned on the energy invested in energy production, or EROEI; environmental impacts; size of the resource; and variability in flow rates), it is difficult to identify a realistic scenario in which total world energy supplies can continue to grow—or even remain constant—as fossil fuels deplete
Thus, even if governments act wisely now to develop energy alternatives at maximum possible rates, the world faces a nearly inevitable energy crunch during the next few decades. Governments must therefore develop strategies for energy conservation. Not only must much greater efficiency be brought to energy production and usage, but essential and non-essential uses of energy must be differentiated, with essential uses prioritized and non-essential uses discouraged.
1. James Hamilton, “Historical Oil Shocks.” National Bureau of Economic Research working paper no. 16790 (2011). http://www.nber.org/papers/w16790.pdf
2. Jeremy Gilbert, “No We Can’t: Uncertainty, Technology, and Risk,” lecture presented at ASPO-USA Conference, Washington, D.C., October 9, 2010. Quoted in Richard Heinberg, The End of Growth. Gabriola Island, B.C.: New Society Publishers (2011), p. 104.
3. Chen Rui, “Analysis on ‘New Fundaments’ and Range of Oil Price Trend,” World Energy Council, 2009. www.worldenergy.org/documents/congresspapers/84.pdf
4. P. Moriarty and D. Honnery, “What Energy Levels Can the Earth Sustain?” Energy Policy 37, no. 7 (July, 2009), 2469-2474.
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