Thursday, June 14, 2012

Oil depletion, oil prices and energy transitions

What is happening in the oil market has important effects on the world economy. This is not going to change in the immediate future.

According to the IEA: “Global primary energy demand grows by 40% between 2009 & 2035, oil remains the leading fuel though natural gas demand rises the most in absolute terms” (IEA, WEO 2012)

However, another dynamic is that physical depletion effects are starting to filter into oil markets. Energy return on Energy Invested (EROI) is dropping and production costs are rising. There is a very close inverse correlation between EROI and oil production costs as well as with oil prices (at least for the US) (see this paper published earlier this year).

Key points are:

Rising oil prices are correlated well with decreasing EROI and increasing production costs

Expect exponential oil price increases for EROI below 10

Although proved oil reserves are rising, the important socio-economic question is whether economies are able to internalise rising costs as EROI declines

Additional burden to economy provides incentives for transitioning to increased efficiency and oil substitutes

Due to reliance on oil, transportation will be hit hardest

Resource-economics dynamics may be surprising.

The CRSES at Stellenbosch University hosted a forum to further discuss implications for South Africa.