BP review lays out world energy future

Economist: Oil, gas resources hold strong; coal on the rise

Posted: Sunday, June 25, 2006

Oil prices today aren’t as high today in real terms as they were during the crisis of the late 1970s, but they’re getting close.

Oil reserves worldwide continue to increase, despite concerns about running out.

A worldwide shift to “alternative energy” will likely mean a shift to coal and fuels derived from it — not to ethanol, solar or wind power.

Those are just a few of the findings laid out in BP’s Statistical Review of World Energy for 2006, as presented by the energy giant’s Deputy Group Chief Economist Christof Ruehl.

The review, which has been put out since 1951, is a comprehensive report on energy supply, demand, trade and prices whose findings are offered to U.S. and European government institutions, economists and energy industry figures each year.

Ruehl, visiting from London, offered his presentation of the report’s findings to members of the Kenai Chamber of Commerce and the Kenai Chapter of the Support Industry Alliance at the Riverside House in Soldotna on Friday.

The former World Bank and European Bank for Reconstruction and Development economist, who joined BP in 2005, began his Power Point-assisted presentation with a graph showing oil prices from 2000-05. The average price in 2005 was $56.59 per barrel, and the first few months of 2006 have the average price at around $66 per barrel. In early May, the price peaked at over $74.

“That’s the highest price for crude oil ever in nominal terms,” Ruehl said.

That means the oil crisis of the late 1970s saw higher prices when those prices are adjusted for inflation. Still, the review shows that those records, too, could be broken.

“In today’s prices, ‘79 was close to $100, so we’re not there, but we’re getting there,” he said.

The intense spike in the price of oil for consumers, he said, was a result of intense economic growth worldwide in 2004, a year in which a massive growth spurt led to an increase in the consumption of all fuel types. 2004 was more than just a good year, Ruehl said. The world economy grew faster that year than it had in more than two decades, sponging up the industry’s excess energy supplies.

“It’s basically like folding two years into one,” he said. “As a consequence, the industry lost its spare capacity.”

That spare production capacity amounts to about 3 billion barrels annually, he said. In 2005, that number was cut in half to approximately 1.5 billion barrels. That remaining spare capacity is located in Saudi Arabia, Ruehl said.

In addition to having less oil to spare, weather events such as Hurricane Katrina and geopolitical strife in the oil-producing nations of Iraq, Nigeria and Venezuela are driving the rising prices.

Katrina, for example, cut yearly offshore production in the Gulf of Mexico by 15 percent in 2005. Venezuelan President Hugo Chavez recently nationalized his country’s oil and gas supplies, which removed access from private producers to the oil-rich nation’s large, proven reserves.

“All signs are that it will become more, not less difficult to secure access to those reserves,” he said. “This (oil price rise) is driven by a risk premium, a fear premium.”

Still, he pointed out, the review’s estimates of world oil reserves, which Ruehl called conservative, show an increase, and predictions of the imminent disappearance of the resource are misguided, he said.

“Year after year, every barrel of oil which has been produced and every cubic foot of gas that has been produced is more than replaced,” he said. “In the year 2005, we again had a replacement ratio of more than 120 percent. Proved reserves keep on increasing.”

Increasing proved reserves involves ramping up exploration worldwide, which the industry has invested huge sums of capital to do. The application of new technologies to extract more oil and gas from existing reserves — such as injecting carbon dioxide into rocky wells to force out more crude — also adds to proved reserve totals. But price increases are beginning to have an affect on consumption.

“In 2005, you have an increase in economic growth and a decrease in consumption growth for the first time since 1985,” he said.

U.S. oil consumption fell in 2005. Natural gas consumption fell. So did nuclear and hydroelectric power consumption. The consumption of coal, however, jumped 1.9 percent.

“When we think of alternative energy, we tend to look at nice things like solar and wind, but as economists we see that the increases are in coal,” he said.

Coal, according to the review, is the world’s fastest-growing fuel, and has been for a decade. This is mostly as a result of China’s fast-growing, coal-fueled economy, as natural gas consumption still grows slightly more than coal consumption in the rest of the world. Lower prices for coal have, however, served to redirect the focus of many nations toward the readily available resource.

Alaska is no exception. Agrium USA is looking into whether opening the Beluga coal fields across Cook Inlet from the Kenai Peninsula and building a coal gasifier to make feedstock for its two ammonia and two urea plants represents an affordable option for continued operations. The project is called “Blue Sky,” a reference to the purportedly environmentally sound technology being studied.

According to Ruehl, many countries — including the U.S. — are now offering tax incentives for such coal-based research projects.

“We should not be surprised if the next breakthrough is in a fuel we have already written off,” he said.

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