A long-term decline in the demand for oil could undermine the huge investments in Canadian tar sands, which have been heavily opposed by environmentalists, according to a recently published report, Shifting Sands. The report, by Greenpeace, will make uncomfortable reading for the companies that are investing tens of billions of dollars to exploit the hard-to-extract oil in the belief that demand and the price would climb inexorably as countries such as China and India industrialise.
Citing projections from the oil producers’ cartel OPEC — the Organisation of Petroleum Exporting Countries — and the International Energy Agency (IEA), as well as various oil experts, the report casts doubt on the conventional assumption that consumption and prices will begin gathering pace once the world pulls itself out of recession.
It argues that alongside the cyclical fall in the oil price there are more fundamental structural changes taking place. These are driven by advances in energy efficiency and alternative energy, cleaner vehicles, government policies on climate change and concerns over energy security. Greenpeace posted the report to 200 shareholders in Shell and BP, including pension funds, in an effort to put pressure on the companies to think again.
Lorne Stockman, the author of the report, said: “A peak in oil demand was barely discussed even a year ago, but now it is a viable idea. When it happens, I wouldn’t want to guess, but it will happen sooner than we thought. There has been lots of talk about a supply peak, but it is good to start talking about a demand peak, and that has huge implications for these companies.
“All of the international oil companies, as you look beyond 2020, need a high oil price to be profitable, because they are increasingly being pushed to develop expensive resources in not just the tar sands, but in deep water and offshore Arctic sites.”
“But there is something more structural going on,” he added. “Governments are beginning to act, and not just the Obama administration. In the EU, the policy driver is climate change, and in China and the US, it is about energy security and the vulnerability of the economy to volatility in the oil price.”
The rush to exploit the tar sands in Canada has been described as a modern-day gold rush that has led to a huge boom in once sleepy towns in the province of Alberta. The oil was once considered too difficult and expensive to extract as it is a mixture of clay, water and bitumen.
Many of the projects have been deferred indefinitely until the oil price recovers. It has fallen from a peak of US$147 a barrel and is currently at about US$64. Merrill Lynch estimates that the price would need to settle at about US$80 to make further investment viable. Critics argue that tar sands extraction is disastrous to the environment, causing deforestation, requiring huge amounts of water and greenhouse emissions three to five times greater than conventional crude.
The report notes that OPEC and the IEA have been revising projections for oil demand downwards since 2006, with by far the sharpest revision this year. OPEC has revised its 2025 oil forecast down by 12% within the past four years.
Peter Hughes, who spent much of his career at BP and BG, and is now director for global energy at the consultancy firm Arthur D Little, recently wrote a report titled The Beginning of the End for Oil? He supports the Greenpeace view and said the correlation between oil demand and GDP growth has been weakened.
“It is widely accepted that demand in OECD countries has plateaued and is going into decline but it has also been thought that would be massively outweighed by growth in China,” according to Hughes. “But the Chinese think long-term and identified some time ago that the biggest threat to their economic growth was an increasing dependency on imported energy, which is anathema to them. The conclusion is clear – to reduce the reliance on hydrocarbons through energy efficiency and fundamental technology change. I think we will reach peak oil demand in the middle of the next decade.
About 50% of oil demand in the United States fuels cars and the report takes hope from the Obama administration having tied recent bailouts for the industry to the development of cleaner vehicles. But it notes the United States is far behind China, where government mandates mean new Chinese cars are 56% more fuel-efficient than those built in Detroit, the traditional automotive centre. Fuel-efficient cars in China attract 1% sales tax and sports utility vehicles, 40%.
Greenpeace also contends that a high oil price is simply unsustainable. It cites research from Cambridge Energy Research Associates (CERA), which suggests that economies become constrained when the price moves into a band between US$100 and US$120 a barrel, causing the price to fall back. Another report from energy business analysts Douglas Westwood puts the “recession threshold” even lower, at US$80 a barrel.
Shell, which has delayed a number of tar sands projects, argues that energy supply will struggle to keep up with the demands of a growing global population and that in the long term there will be upward pressures on energy prices that justify investing in the Canadian tar sands. “Our first oil sands operation, the Athabasca Oil Sands Project [60% Shell share] was built between 1999 and 2003, when the oil price was considerably lower,” a spokeswoman said. Shell has the highest exposure of the major oil companies to the tar sands and is most at risk from a decline in demand. There are contrary views. The Saudi oil minister, Ali Al-Naimi, warned in May that the world could be facing another oil shock, with prices above US$150 within two to three years through a lack of investment in new capacity. The International Monetary Fund has expressed similar concerns. Even Greenpeace does not suggest that there will not be temporary squeezes on demand and price spikes. But it believes that the world might fast be approaching a tipping point.
Copyright Guardian News and Media Limited 2009
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