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Since
2005 the average price for a barrel of oil has doubled ($55 per barrel 2005 vs.
$111 per barrel 2011). Historically a doubling in price has lead to substantial
increased production. Not this time.
Since 2005 production of the
conventional crude oil has been stuck at 75 million barrels per day. The world
demands about 89 million barrels a day. The gap is being filled by
unconventional "oil" - tar sands, ethanol, ultra-deep water, tight oil
requiring enhanced oil recovery technologies and natural gas liquids.
None of these unconventional
sources are viable without high prices. Taken together they will not offset the
annual depletion from existing oil fields, the unrelenting demand increases
from the developing world and the decline in net oil exports as exporting
countries face both depletion and increasing internal consumption.
Assuming a 3% depletion rate,
1.25% demand growth and a declining net export rate of 1.25%, the world must continually
find and produce about 5 million barrels a day just to stay even. Industry
analysts estimate that developing fields will add 3.5 million barrels a day per
year over each of the next five years.
Simple math can be annoying, but it is hard
to argue - production needed 5 million barrels a day minus anticipated
production 3.5 million barrels a day equals 1.5 million barrel a day shortfall.
With the developed world stockpiles
of about 2.6 billion barrels, plus the new reserves being accumulated in China,
this 1.5 million barrel a day shortfall is not a problem yet. But there is no
slack and we are one geopolitical event or natural disaster away from an oil
shock.
Yet 2011 was a year that saw articles,
statements and government actions that point to a naiveté and deep denial about
the reality of the world oil situation.
The written barrage started in
September with Daniel Yergin's, "There Will Be Oil" in The Wall Street
Journal. October was Ed Crooks with, "Pendulum swings on American oil
independence" in Financial Times. November saw Edward Luce's, "Look away, Greens: America is entering a new age of plenty" in Financial Times and Mort Zuckerman's, "How America Can Escape the Energy Trap" in The Wall Street
Journal.
Read the articles, but do so with
the numbers shown above as context. There
is nothing in any of these that changes the conclusion that the world is close
to another oil shock. Yergin posits that technology and higher prices will
bring vast amounts of oil on line quickly. Crooks ignores depletion. Luce takes
a cheap shot at clean energy. Zuckerman assets that that shale gas has
dramatically reduced oil consumption. They all tout the US energy independence
meme.
Art Berman, a geologist and
contributor to The
Oil Drum, uses our old friend math again to
clearly show that crude oil imports - relative to total consumption of crude
oil and products - were only 2% lower in 2010 than in 2005.
He also shows that Zuckerman's claim
that "...natural gas is already putting downward pressure on oil prices"
is untrue. Since early 2009, there has been no relationship whatsoever between
natural gas and crude oil prices. In fact, the opposite is true, shale-gas
producers have been shifting their drilling to more oil-prone prospects because
of the rising price of oil and the falling price and economics of gas.
The publication of clueless
articles by The Wall Street Journal and Financial Times is frustrating,
but more frustrating and even dangerous is the utterances and actions of our
political elites.
On the Republican side, Rep.
Michele Bachmann, when she was still a candidate, promised a return to
$2/gallon gasoline if she was elected president.
In the November 23 CNN Republican presidential
debate, Newt Gingrich stated that the United States could discover and produce
enough oil in 2012 to cause a worldwide oil price collapse.
The US imports a net of about
9 million barrels of crude per day. We would need 5 new Gulf of Mexico's in one
year to become oil independent and bringing about a collapse in world oil
prices would mean increasing production by substantially more.
These statements by
supposedly reputable candidates for President of the United States show either
total ignorance of our energy reality or dangerous dishonesty and demagoguery.
On the Democrat side, the
Obama administration's knee jerk release of 30 million barrels (about 8
hours of world consumption) from Strategic Reserves and putting the
Keystone XL pipeline on hold shows again either total ignorance of energy
reality or dangerous dishonesty and political expediency.
While there are legitimate
environmental concerns with oil sands development, the Canadian tar sands will
be developed and current production will grow from 1.5 million barrels per day today
to over 5 million in 2030. None of this growth is contingent upon the US
approving this pipeline. If we don't build the pipeline, the oil will go to
Asia and the US will continue to rely on countries like Saudi Arabia, Venezuela,
Nigeria and Iraq and the Straits of Hormuz.
While we play political
games, China is laughing and we miss out on securing a secure oil supply and the
jobs related to building and maintaining the pipeline. It would be a far better
strategy to build the pipeline and use some of the revenues to support demand
reduction and renewable alternatives.
So we enter 2012 with
tightening supply, increasing demand, no leadership and no vision.
For supply chain professionals, 2012
will be another volatile year. During 2011, in spite of the supposed global
slowdown, worldwide demand for diesel surged. The US average price was $3.85
per gallon up from $3.00 in 2010.
This demand will continue and
accelerate in 2012 as the US Federal Reserve, China, the European Central Bank
and other emerging markets and will do everything possible to spur growth. These
government actions set the stage for sustained and perhaps higher demand for oil
in 2012. As an example, US manufacturing grew in December at its fastest pace
in six months showing growth for the 29th consecutive month according to the
Institute for Supply Management.
Coupling this demand growth with the
continuing low-level short fall in supply mentioned earlier suggest an average
oil price of $125 - $130 a barrel in 2012. Diesel is not only a transportation
fuel but is increasingly used to generate electricity. Also, natural gas
liquids and ethanol two of the unconventional sources used to replace
decreasing conventional crude are not commonly used to produce diesel, reducing
the quantity of feedstock for diesel production and impacting supply. So expect
diesel prices to average $4.65 per gallon.
This forecast assumes no hot wars erupt in the
Middle East, the Straits of Hormuz stay open and Iraq, Venezuela and/or Nigeria
don't collapse in civil turmoil. It also ignores natural disasters e.g. Katrina
and the many other possible Black Swans lurking. If any of these happens, the
$125 - $130 will be a minimum price.
In closing, supply chain
professionals should understand that Business As Usual will not continue
indefinitely. We are reaching a point where a forced transition off oil is not
far away. Every supply chain strategy should recognize this and begin planning
for much higher oil prices and a moving away from oil.
Conservation, efficiency and
natural gas for transportation appear to be the only viable alternatives at
this time. It is time to begin all three.
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Who is Chuck Taylor?:
Supply chain consultant Chuck Taylor enjoys
being in demand as a supply chain and operations consultant to some of the
world's largest companies. However, even though he is winning raving fans, he
often leaves his audiences feeling uncertain about their future and queasy.
Chuck's focus has gain him one of the highest achievement honors
by a supply chain professional: the Council of Supply Chain Management
Professionals' (CSCMP) 45th annual Distriguished Service Award.
Taylor's now famous presentation, The End of Cheap Oil: Is Your Supply Chain
Obsolete?, not only aims to inform his audience about the factors leading
to rising oil prices, but to encourage supply chain professionals to seriously
investigate alternatives to current practices and to aggressively explore new
supply chain and fuel management strategies.
Awake! Consulting was founded in 2005 in
order to provide senior supply chain and transportation professionals with
unvarnished information about rising oil prices and strategies for overcoming
the growing energy challenges facing the transportation industry. Led by
CSCMP Distinguished Service Award winner Chuck Taylor, Awake! Consulting works
with senior managers that are committed to preparing their organizations for a
sustainable future. For more information on Awake!, visit Chuck's blog at http://blogs.dcvelocity.com/energy/ or send him an
email: chutay at msn.com.
Taylor's
upcoming speaking engagements include:
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