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.

Quote of the day: On Scarcity and Oil Prices

"..if demand growth resumes in China and other countries at its previous rate, the date at

which the scarcity rent will start to make an important contribution to the [oil] price, if not here

already, cannot be far away."

JD Hamilton, 2008. Understanding Crude Oil Prices. NBER Working Papers.

Poverty in sub-Saharan Africa: Hydrocarbons to the rescue?

Sub-saharan Africa is going through a hydrocarbon boom. Will this help alleviate poverty? The potential is there, but do not expect miracles without open and transparent governments.

From Fact sheets for World Energy Outlook 2008:

H/T: Common Tragedies

WORLD ENERGY OUTLOOK 2008 FACT SHEET: SUB-SAHARAN AFRICA 

Could revenues in oil- and gas-rich sub-Saharan African countries 

alleviate energy poverty? 

n Oil and gas exports in the top-ten producing sub-Saharan African countries are set 

to grow steadily to 2030, providing the means for alleviating poverty and expanding 

energy access. In the Reference Scenario, in which no change in government policies is 

assumed, their oil exports rise from 5.1 mb/d in aggregate in 2007 to 6.4 mb/d in 2030. Gas 

exports, largely as liquefied natural gas (LNG), increase from 21.6 bcm in 2006 to 130 bcm 

in 2030. These projections hinge on a reduction in gas flaring, adequate investment and 

avoidance of disruption to supplies through civil unrest. The ten countries flared 40 bcm 

in 2005 — almost three times the entire region’s gas consumption. These countries could 

make direct use of their gas resources by using currently flared gas for power generation 

or distributing it in cities. The liquefied petroleum gas (LPG) extracted from natural gas or 

produced in refineries can provide a low-cost source of supply for distribution networks. 

n Less than a third of households in the majority of oil- and gas-rich countries have access 

to electricity or to clean fuels for cooking, like LPG, kerosene, biogas and ethanol 

gelfuel. About 150 000 people, mainly women and children, die prematurely each year in 

these countries because of indoor air pollution from burning traditional fuels – essentially 

fuelwood and charcoal – for cooking in inefficient stoves or open fires. In the absence of new 

policy initiatives, the number of people living without electricity and relying on fuelwood 

and charcoal for cooking rises over the Outlook period, as the population grows. 

n Government revenues from oil and gas are set to rise strongly, giving these countries 

the means to speed up economic and social development and alleviate poverty. The 

government take in the top ten oil- and gas-producing countries is projected to rise from 

some $80 billion in 2006 to about $250 billion in 2030. Nigeria and Angola account for 86% 

of the $4.1 trillion cumulative revenues of all ten countries over 2006-2030. All these 

countries desperately need sustained and sustainable economic development. Modern 

energy services are a crucial prerequisite, bringing major benefits to public health, social 

welfare and economic productivity. In most of the countries, improving energy access 

will entail fundamental political, institutional and legislative reform, as well as efforts 

to strengthen the capability of regional and local authorities to implement programmes 

and to expand access to credit. 

n The upfront cost of expanding access to modern energy is small relative to the wealth 

that these countries’ hydrocarbon resources will generate. An estimated $18 billion is 

needed to achieve universal access to electricity and to LPG cooking stoves and cylinders 

– a mere 0.4% of the projected cumulative government revenues from oil and gas export 

revenues in 2007-2030. The cost relative to the government take in Equatorial Guinea, 

Angola and Gabon is only 0.1%. 

n Sub-Saharan Africa’s hydrocarbon-resource wealth will lead to economic development 

only if governments manage wisely and honestly the development of the sector 

and the revenues that accrue. An improvement in the efficiency and transparency of 

revenue allocation and the accountability of governments in the use of public funds 

would improve the likelihood that oil and gas revenues are actually used to alleviate 

poverty generally and energy poverty specifically.