Only it isn’t happening like that!
For years – for decades – we all assumed that oil was a finite resource, that global supplies were being progressively depleted, that oil would become scarce, and that oil prices (and by association other fossil fuel Prices) would progressively rise. In 1970, ecologist Kenneth Watt declared “By the year 2000, if present trends continue, we will be using up crude oil at such a rate…that there won’t be any more crude oil. You’ll drive up to the pump and say, “Fill ‘er up, buddy”, and he’ll say, “I am very sorry, there isn’t any.’”
This was the assumption behind the widespread adoption of expensive and intermittent renewables technologies. People like Chris Huhne and Ed Davey former UK Secretaries of State for Energy and Climate Change, knew perfectly well that wind and solar were expensive, but they believed that as fossil fuel prices rose, renewables would become competitive. It was a great theory, but with one minor snag: fossil fuel prices are going the other way.
Of course it is true that terrestrial fossil fuel reserves are indeed finite, and if we continue to exploit them on the current scale, they will run out. But the reserves are far greater than we used to think, and “Peak Oil” – if we ever get there – is many decades, and maybe centuries, away.
I have been castigated by some readers for repeating the line that “The Stone Age didn’t end because we ran out of stones: it ended when we found a better technology”. But I don’t apologise for repeating it here, because it sums up the case perfectly. I am convinced that we’ll stop burning oil as and when we find better, cheaper technologies. That may be nuclear fusion, but it may also be some other technology of which our science fiction writers have not yet dreamed.
On Jan 20th I attended a “Kangaroo Lunch” where a spokesman for an oil major (naming no names) made a presentation about low oil prices. I heard more common sense in half an hour than I normally expect in half a year in the European parliament. He described the “Peak Oil” theory as “The Old Principle”.
The New Principle is based on a number of developments. Firstly, for the past 35 years, for every barrel of oil consumed, another two barrels have been added to reserves. This is not necessarily true of the audited reserves that appear in company balance sheets, but it is true of the reserves which the oil majors know are there.
Secondly, the pace of technological development has been rapid both in both traditional extraction techniques and novel techniques like shale gas/oil.
The Saudis thought they could kill the nascent US shale oil business if they kept the oil price at $50 for a couple of years. Instead, they drove innovation and development. The time and cost to drill a new well has fallen dramatically, as has the price of the oil. New techniques have greatly extended the life of shale oil wells. Horizontal drilling has cut costs and increased capacity whilst reducing the visual and environmental impact on the ground.
Average production per rig in the US has increased by a factor of twelve or more in the last eight years – an extraordinary result. The US is now self-sufficient in oil and about to become a net exporter.
The geo-political implications are vast. Suddenly the price of oil ($28 as I write) is below the Russian production cost. This will have a massive impact on the Russian economy. Suddenly the theocracies of the Middle East no longer have a stranglehold (“With one bound, we were free”). Suddenly ISIS will have great difficulty selling oil on the Black Market, because it’s so cheap and plentiful elsewhere.
I have been arguing for years that renewables were unaffordable. The renewables industry is desperate to announce “grid parity” (though they seek to ignore the massive costs of intermittency). But they’re facing not a fixed end-point, but a moving target. Yes, they’re improving the efficiency of renewables (and about time too), but the cost of conventional energy just keeps going down.
We are left with a vast fleet of wind and solar that could soon be irrelevant – rusting hulks that represent a sunk cost, and a vast mis-allocation of resources.
So why are stock markets reacting so negatively to the positive news of lower oil prices? Of course there are other factors, like the slow-down in China. But a key point (which Roger Bootle has often made) is that the negative impact of low oil prices on oil majors is immediate, while the benefits to consumers and to non-oil companies take a little while to work through. But the reduction in the oil price amounts to a massive transfer of value from oil producing countries to oil consuming countries, which will certainly stimulate Western economies.
One other key point. Let’s say you buy the whole Climate Change story, as per Michael Mann and Al Gore. Then by far the most cost-effective way to switch to a lower CO2 economy would be to transition from coal to gas. We could have done that with little negative economic impact. But we chose instead the disaster of renewables.