The uncertainty surrounding oil markets has been demonstrated by an intervention last week from the International Energy Agency (IEA) calling for the release of 60 million barrels of oil from emergency reserves of its member nations. The intervention is only the third in the 35 year history of the IEA and is intended to ameliorate oil supply after disruption caused by events in Libya. While some analysts have questioned the need for the stock release at this time, it reminds us that oil supplies, the lifeblood of most economies, are a fragile balancing act. The release also follows a report issued by the IEA suggesting that we are entering a ‘golden age’ of natural gas. From an overall fuel supply perspective it highlights what the IEA refers to as “oil’s twilight” and the need for new mainstream alternatives.
Libya accounted for only 2% of the world’s oil production in 2010*. Of the remaining 12 OPEC nations, 5 have been subject to large scale unrest over the past 6 months. Given Iran’s long term social unrest it would be reasonable to add Iran to this list of politically unstable OPEC countries. These countries were responsible for more than 27% of the world’s oil production in 2010.
It’s a stark reality that the world’s economy is in such unstable hands. If disruption to only 2% of the world’s supply can trigger a dip into emergency reserves, what would be the impact of another 2% disruption? Or even 4, 6 or 8%, let alone 27%. The 27% all at once is an unlikely prospect but the smaller numbers are quite feasible, and would have a dramatic impact on world economies.
The IEA move is as much a preemptive measure as it is a reaction to the current situation. Announcing the release last week IEA Executive Director Nobuo Tanaka said that the normal seasonal increase in refiner demand expected for this summer will further compound the shortfall and that greater tightness in the oil market threatens to undermine the fragile global economic recovery.
As well as the ‘normal seasonal increase’, we are also in the early stages of the US hurricane season. Hurricanes in the Gulf of Mexico were also the trigger for the last emergency stock release in 2005 (Hurricane’s Katrina and Rita).
With the political unrest in the Middle East, seasonal increases in demand and the possibility of weather disrupting supplies from the Gulf of Mexico sometime in the next 5 months, this could be the making of another ‘perfect storm’ for the oil economy. Though some would argue we are ‘well prepared’ – IEA member countries’ emergency reserves are well stocked with 146 days of net imports stashed away vs the 90 days mandated under the IEA agreement – it’s time for IEA member nations to seriously consider breaking the stranglehold oil has on economies around the world.
The IEA and the emergency reserve programs were established at a time when there were few viable large scale alternatives available. That’s no longer the case though. Alternative fuels, natural gas in particular, are in a position now to provide a significant proportion of the world’s transport energy demand. The problem is that governments continue to ‘think small’ with their alternative fuel programs. The last ten years in particular have seen extensive trials of all sorts of fuels and technologies in the quest for ‘the perfect solution’. Billions of dollars have been spent exploring options, some of which will never be viable, some of which are marginal but worthy of continued exploration, and some of which are well proven from a technology point of view. We have enough information now for governments to ‘pick favorites’ and make serious choices and serious commitments to large scale alternative fuel programs.
The stand out performer is natural gas and natural gas vehicles. The technology has proven itself in literally every surface-based transport environment. Importantly it is available in a scale no other fuel can match, both as a low carbon fossil fuel and a very low carbon bio fuel (as biomethane).
As well as ticking most environmental boxes, natural gas is a stand out performer where it’s currently needed most – oil displacement. The graphic below, based on US Clean Cities Annual Metrics Report data (2008) shows the relationship between vehicle numbers (yellow bars) and the amount of oil displaced (the blue line). The blue peaks, representing compressed natural gas and liquefied natural gas, depict this fuel’s broad application — capable of doing the heavy lifting, moving the largest of trucks, transit buses, from a to b while most other alternatives struggle to move anything larger than a pick-up truck. Excluded from this data are ships and rail locomotives, both of which consume massive amounts of fuel and which can be operated on natural gas. (more below)
Natural gas can thus address the oil displacement dilemma on a scale and to a capacity that no other fuel can match. It’s not just theory, it’s proven.
Governments remain hesitant about committing to NGVs on a large scale though, often citing cost as a major impediment. Yet the cost of an NGV program is small compared to the cost of propping up the oil economy with ’emergency reserves’.
The US Strategic Petroleum Reserve (SPR) for example, has been created at a cost of more than $22 billion and currently has a ‘market value’ of more than $85 billion. There is a legal commitment to increase the reserve by another 1/3 in the coming years, which would come at a cost of at least $15 billion. Compare that to the estimated cost of only $5 billion for the proposed NAT GAS Act, which would see imports of OPEC oil into the US reduced by 50% within 5 years and provide enough momentum to wipe out the other half within another 7 years. The NAT GAS Act has the potential to eliminate the need for a strategic reserve in the US yet it languishes in the corridors of Congress while the SPR continues to grow and continues to prop up the oil industry.
In this the US is not alone. Of all the 28 IEA member nations (and all 34 OECD nations), Italy with 730,000 natural gas vehicles (NGV) is the only one that ranks in the NGV population ‘top ten’. All of the other top ten NGV nations, which combine to represent more than 80% of the global NGV count of more than 12 million vehicles, are often referred to as developing nations. In respect to fuel strategy though, we’d have to consider them far more developed than others.
IEA/OECD nations have become the most dependent on crude oil and in the process have become the most ‘at risk’ as ‘oil’s twilight’ continues to descend upon us. The options for dealing with this are simple – carry on as we are and wait for the real crunch to come in the form of a long term threat to oil supply or put measures in place so that oil represents a much smaller portion of the transport energy equation.
In the IEA Golden Age of Natural Gas report mentioned above, their World Energy Outlook team considered a range of NGV scenarios for the first time. One of those scenarios suggests a total NGV population by 2035 of 186 million vehicles. Under this scenario, more than 5.7 million barrels of oil, over 12% of global demand, would be displaced.
Unfortunately, this is considered a ‘high-impact low-probability [HILP]’ scenario. Their base case scenario suggests only 30 million NGVs on the road by that time, thus displacing less than 1 million barrels per day and less than 2% of demand.
Just how sensitive world oil markets will be in 25 years is anyone’s guess but if a 2% drop in supply triggers emergency supplies now, what would it take in 2035? Will there even be any emergency supplies to call upon?
The HILP scenario should perhaps be renamed the Highly Essential Long-term Plan scenario – HELP. It represents an absolute minimum government commitment to ensure the economic and energy security needs of their citizens. There is no reason why this can’t be achieved. The fuel is available, the technology is proven and the need is dire.
*BP Statistical Review 2011