Wednesday, September 02, 2009

Daniel Yergin On The Future of Oil

Daniel Yergin, the esteemed oil analyst, wrote a wonderful editorial in Monday's Wall Street Journal. In it, he reminded us why oil, for all its problems, will still be with us as the world's dominant energy source, for some time to come. Meaning decades.

He noted, in his piece,

"Why this debate about the single most important source of energy—and a very convenient one—that provides 40% of the world's total energy? There are the traditional concerns—energy security, diversification, political risk, and the potential for conflict among nations over resources. The huge shifts in global income flows raise anxieties about the possible impact on the global balance of power. Some worry that physical supply will run out, although examination of the world's resource base—including a new analysis of over 800 oil fields—shows ample physical resources below ground. The politics above ground is a separate question.

But two new factors are now fueling the debate. One is the way in which oil has taken on a second identity. It is no longer only a physical commodity. It has also become a financial asset, along with stocks, bonds, currencies and the rest of the world's financial portfolio. The resulting price volatility—from less than $40 in 2004, to as high as $147.27 in July 2008, back down to $32.40 in December 2008, and now back over $70—has enormous consequences, and not only at the gas station and in terms of public anger. It makes it much more difficult to plan future energy investments, whether in oil and gas or in renewable and alternative fuels. And it can have enormous economic impact; Detroit was sent reeling by what happened at the gas pump in 2007 and 2008 even before the credit crisis. Such volatility can fuel future recessions and inflation."

So much for two key reasons why Americans might wish for oil to be less important than it is. But then Yergin goes on to analyze the likelihood of such change,

"But are big cuts in world oil usage possible? Both the U.S. Department of Energy and the International Energy Agency project that global energy use will increase almost 50% between 2006 and 2030—with oil still providing 30% or more of the world's energy.

The reason is something else that is new—the globalization of demand. No longer are the growth markets for petroleum to be found in North America, Western Europe and Japan. The United States has already hit "peak gasoline demand."

The demand growth has now shifted, massively, to the fast-growing emerging markets—China, India and the Middle East. Between 2000 and 2007, 85% of the growth in world oil demand was in the developing world. This shift continues: This year, more new cars have been sold in China than in the United States. When economic recovery takes hold, what happens in emerging countries will be the defining factor in the path for overall consumption.

There are two obvious ways to temper demand growth—either roll back economic growth, or find new technologies. The former is not acceptable. Thus, the answer has to lie in technology. The challenge is to find alternatives to oil that can be economically competitive—and convenient and reliable—at the massive scale required."

Mr. Yergin has basically alerted us to the fact that the marginal uses of oil will now be determined by other countries, not the US. Our own management of demand no longer will determine world prices.

Zeroing in on oil's role in energy even further, Yergin observes,

"For oil, the focus is on transportation. After all, only 2% of America's electricity is generated by oil. Until recently, it appeared that the race between the electric car and the gasoline-powered car had been decided a century ago, with a decisive win by the gasoline-powered car on the basis of cost and performance. But the race is clearly on again.

Yet, whatever the breakthroughs, the actual impact on fuel use for the next 20 years will be incremental due to the time it takes to get large-scale mass production up and running and the massive scale of the global auto industry.

My firm, IHS CERA, projects that with aggressive sales volumes and no major bumps in the road (unusual for new technologies), plug-in hybrids and pure electric vehicles could constitute 25% of new car sales by 2030. But because of the slow turn-over of the overall fleet, gasoline consumption would be reduced only modestly below what it would otherwise be. Thereafter, of course, the impact could grow, perhaps very substantially.

But, in the U.S., at least for the next two decades, greater efficiency in the internal combustion engine, advanced diesels, and regular hybrids, combined with second-generation biofuels and new lighter materials, would have a bigger impact sooner. There is, however, a global twist. If small, low-cost electric vehicles really catch on in the auto growth markets in Asia, that would certainly lower the global growth curve for future oil demand."

Again, Yergin points out that developments in, well, the developing countries, e.g., India and China, will have more impact on oil demand than will what happens onshore in America. Precisely because of our mature demand for automobiles, any new, rapid incursion by electrically-powered vehicles won't likely happen in the US. I am presuming that Yergin believes that any draconian federal action to mandate against new gasoline-powered cars will simply result in Americans holding on to the ones they already have for longer, thus further increasing average vehicle life, and reducing turnover. Especially at current prices for electric vehicles, and the non-existent infrastructure for recharging them.

He closes with this passage,

"As to the next 150 years of petroleum, we can hardly even begin to guess. For the next 20 years at least, the unfolding economic saga in emerging markets will continue to make oil a global growth business."

Daniel Yergin doesn't write in the Journal very often, but he never disappoints with the quality and focus of his insights. In this editorial, he reminds us, with factual support, why oil will be powering American vehicles for the next several decades. And why, regardless of our energy policies for the next few years, other countries will have greater impact on the larger issues of vehicular power sources than will Americans for the future.

It puts the current federal government preoccupation with energy policy, cap-and-tax, and other related matters in a whole new light, doesn't it?

If you thought those initiatives were misguided and pointless before, you probably are even more convinced of that position after reading Yergin's thoughts.

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