If oil is priced at about $47 a barrel during the recessionary conditions associated with the global financial meltdown we have experienced in recent months, what will the price be when the world economy starts growing again?
Will the price of a barrel quickly return to its pre-crisis level of $150, or even higher?
Although the global economy may be a source of confusion and contention, there is a body of research and analysis that provides a compelling understanding of what is shaping markets and will define them in future.
This is peak oil, the idea that world oil production has peaked or soon will, whereas demand, led by China and India, will continue to grow inexorably. Peak oil has moved recently from being embraced by the fringe to the mainstream.
The main debate around peak oil now is not if, but when, with analysts increasingly accepting peak oil as a truism while debating the timing of the peak.
Some pundits believe the peak was reached in 2008; others see world production reaching its plateau during the next decade. World population numbers, now at six billion, are expected to plateau only by 2050 at nine billion people. That’s more and more people making greater demands on energy and other resources.
Meanwhile, 64 of 85 oil-producing countries have already reached their peak oil production and have recorded declining production since then.
Critics of the peak oil theory point to large discoveries, including in recent times, in fields such as the Gulf of Mexico and Brazil. But, notes Michael Klare, writing in Salon, although these are big fields, they are so deep that they require great investment and technical sophistication to exploit.
‘To get to the oil, BP’s engineers will have to drill through miles of rock, salt and compressed sand using costly and sophisticated equipment,” says Klare.
‘To make matters worse, Tiber is located smack in the middle of the area in the Gulf regularly hit by massive storms in the hurricane season, so any drills operating there must be designed to withstand hurricane-strength waves and winds, as well as sit idle for weeks at a time when operating personnel are forced to evacuate.”
So the oil may be there, but will cost increasingly large sums of money to extract. For Klare, we have entered the age of extreme energy, the time between the petroleum age and renewables.
‘In just about every sense imaginable, from pricing to climate change, it is bound to be an ugly time,” he says. Think of this as the age of the stop-go economy: short bursts of acceleration followed by braking as energy costs soar. Although the discussion here is about oil, the analysis applies equally to all sources of energy.
In South Africa we know that in recent times Eskom has battled to keep the lights on. After its infamous shutdown at the beginning of 2007, it rationed electricity for a while.
Then the global meltdown came to its rescue in the form of reduced demand. But now increased economic activity internationally has again seen Eskom warn that its reserve margin, its spare capacity, is at unacceptably low levels.
From a household, business and government point of view, it is time to throw out the business-as-usual plan and develop a new strategy. For households it means both reducing and diversifying energy inputs to make them as independent of that giant utility as they can be.
Businesses likewise need to be as energy-independent as they can in the extreme-energy era.
Governments need to plan on the basis that high energy prices may mean a set of continuing body blows to the economy.
In South Africa we may have some policies that are moving in the right direction, notably the Gautrain and bus rapid transit systems. Tax policy is also facilitating the move to more fuel-efficient vehicles.
A study in 2007 by the Association for Peak Oil (Aspo) for the South African government states that the country has both strengths and weaknesses in terms of the threats peak oil would bring.
Strengths include relatively low oil dependence, a well-established synthetic fuels industry, abundant solar energy and substantial wind, uranium and coal resources.
Weaknesses include the country’s high dependency on imported oil and liquid fuels for transport, as well as the energy intensity of South African industry.
Peak oil theorists see an inter-relationship between the financial crisis, peak oil and climate change. One of the challenges in the era of extreme energy is financing large projects, which have both a high capital cost and a long lead time to complete.
The financial crisis, peak oil supporters say, has adversely affected the ability to finance big energy projects. This is also evident in South Africa, where Eskom has yet to secure the finance required for its next round of funding.
In this special report we highlight the case studies of cement manufacturer Afrisam, which is lowering its carbon footprint, and evaluate Fernmill Forest’s rock store as a natural cooling mechanism for offices.