Late last year, Chevron, one of the world's largest oil extraction and distribution companies, began running a series of advertisements with a distinctly non-oil company theme: the planet has a finite amount of crude oil and consumers of oil products should be concerned. Perhaps the most surprising of these advertisements stated:
It took us 125 years to use the first trillion barrels of oil. We'll use the next trillion in 30. So why should you care?
These numbers are interesting, both in what they tell us, and what they don't.
One of the things that the advertisement doesn't say is that consumption of the first trillion barrels of oil was not distributed evenly over those 125 years; with ever increasing demand for oil products, it took about one hundred years to consume the first half-trillion barrels, and about 20 years (1986 to 2005) to consume the second half-trillion.
The advertisement also implies that the planet has at least two trillion barrels of oil that can be extracted and refined into oil products. However, if Chevron believes that there is much more than two trillion barrels to extract, the question that comes to mind is why is Chevron raising this issue at all?
The answer may lie in the growing belief, expressed by many petroleum geologists, that the world's endowment of crude oil probably lies between two and three trillion barrels, with most projections closer to two rather than three trillion.
In many respects, it doesn't matter whether the world has two or three trillion barrels of crude oil that can be extracted, what matters is that we are rapidly approaching the midpoint of the total volume of crude oil that is available to us. When that midpoint is reached, crude oil production will peak, probably stay constant for a few of years, and then start to decline. Since the demand for crude oil products is driving production, as production falters, it will be impossible to meet the world's demand.
The peaking of world oil production is expected cause the price of oil products to rise to unprecedented levels: some estimates are expecting a price of five dollars for a litre of gasoline by the end of this decade. Given our overwhelming dependence on oil, the impact of rising oil prices will be felt throughout the economy; anything using oil, either directly or indirectly, will see its price rise.
Many economists argue that rising oil prices will eventually lead to a price collapse, since high prices will encourage the development of new technologies, both to obtain more oil and to find substitutes for it. The good news is that this is already taking place, with technologies designed to extract as much oil as possible from existing wells. Similarly, as conventional crude oil production declines, less attractive forms of oil-like sources are being brought on stream, most notably Alberta's tar sands, which can be "upgraded" from bitumen to make synthetic crude oil.
However, one of the major problems associated with these technologies and substitutes is that they require a great deal of energy to obtain the oil product. Quite simply, the less like oil something is, the more energy required to make it appear like oil. In most cases, the energy being used to obtain oil is natural gas.
On one hand, using natural gas to obtain oil seems like a reasonable thing to do, as oil can do just about everything natural gas can and, more importantly, is easily transportable. There is another catch: natural gas, like crude oil, is finite and production will eventually go into decline. Both the reserves and production in some of the world's major natural gas regions are already in decline, notably North America and the UK's North Sea fields.
The world's increasing demand for natural gas, as a feedstock for petrochemicals, a source of "clean" energy for electrical generation, and as a means of space heating, has put a great deal of power in the hands of Russia, which has 27 percent of the world's known natural gas reserves. Russia has already demonstrated this power by raising the price of natural gas to Ukraine and reducing flow to parts of Europe. With pipelines that can reach both Europe and Asia, and with plans to ship liquefied natural gas (LNG) to North America, Russia will be the world's swing-producer, dictating who-gets-what and at what price.
So, putting Chevron's question on a regional level "why should Atlantic Canadians care?"
Atlantic Canadians should care because Nova Scotia's offshore natural gas projects are failing to meet expectations, over 85 percent of Newfoundland's offshore oil production is destined for refineries outside the region, and any further hydro-electric development in Labrador will be producing power for Ontario.
Atlantic Canada's business and political elite need to understand that we are entering an era of escalating energy costs and falling supply. The way we construct and heat buildings, move goods and people, and generate electricity, must change. Whether these elites show the leadership needed to address these issues will determine the future of our region.
Published, Atlantic Construction and Transportation Journal, February 2006