Soaring fuel prices – threat or opportunity?
By Patrik Löwnertz, VP Marketing & Sales, Chemrec
At the depth of the financial crisis in the spring of 2009 very few could imagine that we less than two years later again would see crude oil prices approaching $100 per barrel. And that before the turmoil in the Middle East started. The rapid recovery in oil prices reflects the realities on the ground – in a few years we have gone from a market that was essentially demand-led to a market that has long-term supply constraints.
This is now also recognized on the international political arena where the International Energy Agency in their
World Energy Outlook 2010 stated that we are now
past the peak for conventional oil and that added supplies such as synthetic fuels from natural gas or coal, crude oil from tar sands and bitumen and biofuels from agriculture and forestry will be moderate in volume. Total production of liquid fuels forecasts was consequently drastically cut compared to earlier Energy Outlook forecasts, in 2035 from 130 million barrels per day to 99 million barrels per day. The oil company BP has come to similar conclusions in their recent report
BP Energy Outlook 2030.
Diagram 1. Supply of total liquids, crude oil and crude oil spot price development 2001-2011. Data source: Energy Information Agency. Note that crude oil production has been flat since 2005.
Need to secure domestic fuel supply
What does this mean for the liquid fuels market in the intermediate term? Well, obviously the market will be tight for all automotive fuels, both conventional and biofuels. Biofuels demand is further boosted by ambitious and increasing mandates already in place in the US, EU and Brazil and the realization in many other countries that they have an urgent need to secure some domestic supply of renewable automotive fuels. Among these countries with recently established domestic biofuels mandates we find Argentina, Colombia, Thailand, Indonesia, China, India and others. Some of these countries are or have been regarded as possible major biofuels suppliers to Europe. With domestic mandates in place the potential export volumes are drastically cut, putting more pressure on Europe to develop its own biofuels production.
Oil price impacts on world economy
How will oil prices at the $100 per barrel level affect the world economy? Some economists give dire predictions, others play down the impact. What is certain is that the impact in different parts of the world varies. In developed economies consumption of oil products in most cases accounts for a rather small portion of the GDP. With crude at $100 per barrel total liquids consumption in Sweden accounts for about 2% of GDP and in the US for about 5% of which about half is domestically produced. The GDP share of oil imports in most developing economies without domestic oil production is also around 5%.
What conclusions could be drawn from this? Well, obviously transportation fuels and fuel for power generation are essential for economic development, especially where non-essential use is low. The low share of the actual GDP means, at least in developed countries, that the ability and willingness to pay more to get the needed product is considerable. The flexibility on the supply side is however not so great – even at $100 per barrel the production probably will not increase much in the short term.
Investment in fuel production
So we will probably before long pay close to $4 per gallon for US gasoline. While it in the short term will upset the consumer the good news is that the objective impact on the overall economy is small.
In the longer term a high price can mean a lot both for investment in the fuels production sector and to improve efficiency in use of fuels. In fact, what the IEA and other forecasters count on is that the developed world will actually increase its efficiency so that the production freed up can be used to support continued economic development in the third world where per capita consumption is still very low.
Substitution spurred
Improved mileage and smarter transport solutions is one part of the solution, substitution is another. Huge cost differences between petroleum products to alternatives for power generation and industrial or transport use will spur substitution. Right now we have this situation with natural gas. On an energy content basis it costs less than half of heavy fuel oil in a US industrial setting. In the transport sector natural gas cost including taxes is in the US also about half of that of diesel or gasoline.
So even if soaring fuel prices and the limitations of traditional petroleum in meeting the demands of rapidly growing global economy may be seen as a threat, it is also a challenge and opportunity to develop new ways of meeting our energy needs. Chemrec is taking on this challenge and invite you to join us in reaping the benefits of this opportunity.
Recommended reading:
IEA
World Energy Outlook 2010 – Presentation to the Press
BP Energy Outlook 2030