Oil: It’s the supply, stupid

The past decade saw an unprecedented growth in the demand for crude oil. In 1997, world demand for oil was 73.7 million barrels a day; a decade later, in 2006, it had increased by almost 11 million barrels, to 84.5 million barrels a day. Much of this has been attributed to China’s rapid development; however, during this period other countries including the United States, Canada, Venezuela, Austria, Ireland, Iran, Qatar, Kuwait, and Saudi Arabia all exhibited double-digit increases in demand.

Future growth in world oil demand will continue past trends. The most recent International Energy Agency (IEA) five-year forecast projects that by 2012, it will increase by another 11 million barrels to 95.8 million barrels a day. Although an increase of 11 million barrels a day is staggering in itself, what is even more astounding is the suggestion that this increase will take place over six years, whereas the previous one took 10 years.

This seemingly insatiable demand for oil has piqued the interest of a number of politicians, policy makers, and energy analysts, causing them to ask the question, “How will this growing demand be met?”

This past July, two reports were released that examine the question. The first, the Medium-Term Oil Market Report from the IEA, forecasts a gradual slowing in oil supply from non-OPEC countries between now and 2012 (in percentage terms, world supply of oil from non-OPEC countries is projected to drop from about 56 percent to 53.6 percent during this period). The IEA expects any shortfall to be met by increasing output from OPEC countries and a marked growth in the use of biofuels, notably ethanol and biodiesel. Despite the availability of these resources, a “supply crunch” is expected as early as 2009, continuing until 2012 as OPEC’s spare capacity falls, potentially resulting in supply shortages.

The second report, Facing the Hard Truths about Energy, was published by the National Petroleum Council (NPC) in response to a request in 2005 from US Energy Secretary Samuel Bodman. It examines a wide range of energy supply options to 2030. One of the more troubling findings continues on where the IEA left off, “Oil production growth after 2015 appears subject to increasing risks as both subsurface and above ground issues become more challenging. The risks include production declines of many of the world’s maturing fields, increasingly restricted access to resources, and unprecedented investment requirements under uncertain fiscal regimes.”

In addition to declining production in the few remaining non-OPEC oil exporting countries and production shortfalls caused by internal political tensions in Iraq and Nigeria, there are two principal drivers behind the IEA’s “supply crunch” and the NPC’s “increasing risks”. First, growing internal demand for oil products is expected to reduce oil exports from countries such as Saudi Arabia, Iran, and Russia. Second, the rise of resource nationalism has resulted in some of the world’s most technologically advanced oil companies leaving countries—notably Russia and Venezuela—raising the concern that without the technological expertise, exports will fall.

With supply problems looming large, it should not be surprising that there is a push for developing non-conventional sources of oil, some of the better known being ethanol, tar sands, and oil shale; however, even these have their limitations. For example, in the US, ethanol derived from corn is having a marked impact on the cost of food, while much of the output from Alberta’s tar sands will simply make up for production losses from Canada’s conventional supplies of oil. Furthermore, the production of oil from oil shale, found primarily in Colorado, is at least a decade away from being commercially viable.

If the IEA and NPC reports are correct, there is an increasing likelihood of periodic supply shortages and price volatility as the gap between demand and supply shrinks. The prospect of supply shortages and price volatility should be of concern to everyone living in the Maritimes because of the region’s overwhelming reliance on imported oil for transportation and heating.

Research carried out by the Energy Research Group at Dalhousie University has shown that addressing supply and price volatility will require energy security policies based on the three “Rs”: review current and projected energy supply and demand, reduce energy demand, and replace the remaining energy demand with as much domestic supply as possible. Although most reduction and replacement strategies will take at least a decade before significant changes in energy consumption are evident, there are policies that can be enacted now to improve energy security. For example, lowering the highway speed limit to 90 kilometres-per-hour would reduce transportation energy demand by about seven percent, while changing building codes to require new buildings to maximize their use of solar energy for space heating would replace significant volumes of fuel oil.

Both the IEA and NPC are mainstream organizations that have traditionally had optimistic views on oil supplies. This change in outlook, coupled with the fact that the two groups came to similar conclusions on supplies independently, means that these reports should not be taken lightly. Their projections show that the world is entering a period of supply constraints that, given the importance of oil to the world’s economy, will impact almost everyone on the planet. Regions, like the Maritime Provinces, relying heavily on supplies of imported oil, will be among the most vulnerable in the developed world to the impending supply shortfalls.

Atlantic Construction and Transportation Journal—August 2007