Oil and Water

Like a science fiction novel, one could imagine a world where the valuation for oil and water was reversed. Such a scenario would change the face of the planet. Oil defined global politics and economics for the last hundred years. Humanity struggled during two World Wars, along with countless other conflicts, to control it. Abundant oil reserves allowed young countries, such as the U.S. and Russia, to become superpowers. Meanwhile, a lack of oil limited the ambitions of highly industrialized countries, such as Germany, France, Great Britain and Japan. The oil industry gave enormous resources to the development of small states, such as Singapore and St. Martens, as refining hubs for Indonesian, Malaysian and Venezuelan crude. It showered countless riches on the nomadic tribes of the Middle East, and sponsored tyrants in North Africa and South America. Yet, what if the supply of oil became so plentiful that it lost its significance? It would lead to a new world order. Interestingly, not only is such a scenario possible, it is now becoming probable thanks to the development of new technologies.

Oil prices collapsed after the first Gulf War, as traders’ concerns with supply disruptions waned and an economic slowdown in the U.S. and Europe reduced demand. Oil prices did not recover until a decade later, with the ascendency of China and the other emerging market countries. It then rose steadily, sending the price of Brent Crude well above $140 per barrel in 2008. It later plunged to $40 per barrel during the global credit crunch, before recovering to the $100 mark with the stabilization of the global economy in 2010. Yet, we may be on the cusp of a secular decline that could send the price of crude to new lows. Total oil demand continues to inch up, but the development of new technologies is significantly adding to the supply of energy sources. For example, the production of alternative hydrocarbon sources, such as bio-diesels and sand oils, helped take some of the edge off the market. New oil and gas fields in Latin America, Africa and the Middle East recently expanded the supply of energy. However, fracking technology is unleashing a torrent of oil and gas that was encrusted in shale deposits around the globe. The U.S. is the technological leader and has boosted the production of natural gas by 52% since 2006. This helped explain an 85% plunge in natural gas prices, and there is more supply coming on line. The major automobile manufacturing companies are preparing new vehicles that will run on natural gas, which will further reduce the country’s demand for oil. With the U.S. and Europe representing more than half of the total demand for oil, this will be a game changer. The demand for oil was already on the decline in Europe and the U.S., and it will only go lower. Most of the additional demand is being generated by the developing world. However, new fracking techniques will further optimize the production of oil, and this will boost the global output above the current level of 90 million barrels per day. Therefore, more supply along with lower demand means lower prices.

Oil engineers and geologists always knew that this day would come. There was always more of a chance of developing alternative energy sources than running out of oil. The planet brims with hydrocarbon deposits. Extraction processes have been primitive, leaving 60% to 70% of the available oil in the ground. Engineers always feared that the development of more efficient extraction processes or alternative energy sources would lay low the oil industry. Interestingly, fracking could trigger the demand for a commodity that has always been plentiful—until now. If the proper precautions are not taken, fracking can contaminate the water table leading to the destruction of aquifers. This is the reason why the European governments decided to forgo the process. Europe is a relatively small land mass with a large population that is dependent on artesian wells. The U.S. is much larger, and most of the population is concentrated along the coasts. That is why most of the fracking takes place in rural areas. The same goes for China. Most of the population is along the littoral, and the interior consists of desolate regions. Nevertheless, there will be some contamination and the demand for fresh water will rise. This will give new relevance to countries with abundant sources of fresh water, such as Argentina and Brazil. One can imagine scenes where super tankers steam to Manaus to fill their holds with fresh water. Such images are only the stuff of science fiction, but they could become a reality in the years to come.

3 Responses to "Oil and Water"

  1. Econundertow   February 2, 2012 at 11:09 pm

    More happy talk, the evidence of oil-driven decline can be see in Greece and elsewhere in Europe as the continent becomes car-free. Access to crude oil has been rationed by access to credit, as the credit system unravels due to the high cost of fuel, the outcome is physical rationing and shortages.

    Technology does not provide crude oil where it is not. The 'new fields' off the coast of Africa and elsewhere do not replace depleting super-giant conventional fields such as Cantarell in Mexico- developed with latest of extraction technology, BTW.

    Biofuels and tar sands do not produce effective net surpluses of usable fuel. Alberta enterprises turn natural gas into bitumen which has the same energy content as the gas. Biofuels turn natural gas into ethanol and a poor diesel substitute. Net energy returns on both are near parity.

    Shale gas is a ponzi scheme: http://www.nytimes.com/2011/06/26/us/26gas.html?p

    Auto industry is able to create demand faster than oil industry can increase extraction. It destroys value for entertainment purposes except for those who drive taxis and delivery vehicles..

    The worth of oil in ground is greater than the worth of wasteful enterprises that burn it up for nothing. This is the definition of Peak Oil and the background condition of the ongoing credit collapse.

    Here is the core problem: there is no return on the waste of the fuel itself by end users only rationalizations. Very disappointing for an economics forum.

  2. zleo99   February 6, 2012 at 8:36 am

    I quite agree with Econundertow: the unconventional sources such as shale gas, tar sands etc do not replace the declining production of the cheap and easy giant oilfields which are being depleted. Easy oilfields produce 100 barrels of oil for every 1 barrel of energy invested in obtaining it; in the Alberta tar sands it is about 7 barrels gained for 1 barrel invested. Peak Oil is here already: world output has been stagnant at about 74mbpd since 2004, with China demand met by decrease in US & EU demand.
    Walter Molano doesn't know what he's talking about.

  3. Xerxes   April 26, 2012 at 4:00 am

    Pure idiocy. You know, $120/bl Brent in the face of the biggest economic crisis since the 1930s might be a clue as to the state of oil supply/demand. Who is this halfwit you have writing here? I have read three of his pieces this morning and they are all garbage.