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A decade in energy

The oil spill in the Gulf of Mexico will impact more than just the economy, BP and the US oil patch

The immediate effects of the oil spill in the Gulf of Mexico – deaths, pollution, economic carnage – have been devastating and tragic. But the disaster's consequences could reach far beyond the local economy, the US oil patch and BP.

The spill symbolises a bigger oily mess in the West, especially in the US: how the rich world consumes energy and where it sources it from. Companies are exploring in thousands of feet of water off the Gulf coast partly because of the US' unchecked appetite for energy. Added to that is its political desire to reduce oil imports, but without a commensurate determination to use oil more efficiently. The US, as President Barack Obama said in his Oval Office speech last month, is addicted to fossil fuels. The parallel with the drugs trade is apt and, as in the war on drugs, consumption is the true demon.

Replacing oil is a long-term endeavour, but the spill is a wake-up call to the excesses of an economy built on cheap energy and a cavalier attitude to its availability. Up to 75,000 barrels a day of oil could be spewing from the seabed to devastate the Gulf's ecology; yet such volumes are a fraction of the 19.4m barrels the US gulps every day. And with each hour, each news reel and each visit to the live images of the spill, the US – and other oil-dependent countries – are confronted with a ghastly image of their own profligacy and the vulnerability of the platform on which their economies are built. Something must change beyond fiercer regulation of safety procedures. The spill could prove a tipping point.

The hastening end

Peak demand for oil is a revolutionary notion in the context of recent history, as dramatic and counter-intuitive a reversal as could have been imagined three years ago. Then, demand was surging and oil supply was struggling to keep up. Then, suppliers and consumers were panicking about oil shortages. Then, peak-oil theory – a theme that has orbited the oil industry, at a distance, since mass oil production began 150 years ago – hit the mainstream.

Even if geology were not the problem (although this too is an area of contention: peak-oilers say it is; oil companies generally say it isn't) resource nationalism, labour shortages, bottlenecks in the contracting industry and numerous technological barriers certainly had the potential to prevent oil supply from growing rapidly. Following the recession, however, bigger questions are emerging about long-term demand and the spill will accelerate oil's decline.

At the time of the 11 September 2001 terrorist attacks in the US, Opec's target price for oil was $25 a barrel. Now it's three times that level and a fall in the oil price to below $20/b – which happened after the attacks – seems unthinkable (and it is only 12 years since oil was at $10/b).

It's hard not to see the geopolitical cataclysm brought by George W Bush's "War on terror" as a force behind the great bull-run in energy markets during the past decade. Between late 2001 and mid-2008, oil prices rose almost eightfold, to nearly $150/b, bloated on a diet of seemingly uncontrollable demand growth, edgy geopolitics (on top of Iraq, consider Iran, Nigeria, and the advent of Putinism in Russia) and – most influentially – the growing use of oil futures as a speculative financial investment. This has become such an inflationary virus that governments are now attempting to legislate against it.

Resource nationalism ebbed during the recession, but is gathering steam again. But it is the combination of these trends, together with the wars, the recessions, the battles over climate policy, and the ever-declining power of the Western consumer nations that makes the past decade the most momentous years in the history of oil.

I was editor of Petroleum Economist on the day the Twin Towers fell. We watched Enron's decline, and the invasions of Afghanistan and Iraq. We followed the rise of Putin and Chávez. We saw an oilman rebrand his company as "beyond petroleum". We watched as another was crushed on the wheels of history in Russia.

The last years of the 20th century saw the creation of the supermajors. But the years that followed saw them humbled by politics. Shell, BP, ExxonMobil and the others: the rise of producer power chastened each of them. And as their power waned, new stars rose in the east, where a seemingly unquenchable thirst for oil brought Chinese firms decisively onto the world stage. In all of this, I wanted Petroleum Economist to give clear analysis of the events.

My first editorial as editor, in June 2001, was entitled "Domestic expediency". It concerned the habit of governments to subordinate international aims and interests to national priorities. That hasn't changed and it won't: governments have agreed climate change is a man-made problem (even though some credible scientists continue to say it might not be), but they can't agree on what to do about it. The EU's energy integration project had only patchy success, despite the Commission's assiduous efforts to force gas and power markets to open themselves up to competition. There is even an ugly tinge of nationalism in the US government's reaction to the Gulf of Mexico oil spill.

The spill will act as a catalyst for more rapid change, yet a drawback in oil use already seems to be occurring in some countries. The International Energy Agency says oil demand in the OECD probably reached a peak in 2007. There are several reasons for that: persistently high oil prices, economic weakness and energy diversification, partly motivated by environmental considerations.

A shift is also occurring in the make-up of energy supply, caused indirectly by the rise of national oil companies (NOCs), one of the past decade's most transformative trends. Resource nationalism changed the make-up of the industry at a corporate level by making international oil companies (IOCs) more peripheral to supply and gradually draining value from a private sector heavily dependent on revenues from oil sales. The IOCs – used to cyclicality and change, and adept at adaptation and reinvention – responded by focusing on areas in which technology gives them an edge: deep water, Canada's oil sands and the Arctic.

Now the IOCs are also enthusiastically backing into a shale-gas industry whose prospectivity they initially ignored. This unconventional-gas revolution might even be the most significant innovation in energy supply since the start of the oil economy; and its influence could grow beyond North America, ground zero of the burgeoning shale industry, as it was of the oil industry in the early 20th century. Many IOCs now increasingly see themselves as gas-led – as IGCs, perhaps, and not IOCs. Resource nationalism has indirectly helped make the world a gassier place. The drawback from oil that the US public craves as it watches oil spoiling its coastline is already under way.

With assumptions about oil demand wobbling – and with them the basis of the oil economy – it is ironic that the outlook for oil supplies has suddenly grown more robust. Iraq, whose recent history is intertwined with that of the global oil market, is a particularly good prospect. This is true despite years of underperformance, caused by the US-led coalition's poor planning for the aftermath of Saddam Hussein's removal in 2003 and the struggle of Iraq's fractious political classes to construct a coherent framework for investment.

Expansion into deep water and the development of unconventional resources have also strengthened supply. An excess of supply usually means lower prices. Speculation has helped override the fundamentals in recent years, but that won't last if banks decide oil is no longer a valuable asset class. That sentiment could yet emerge if those kinds of investors sense oil's decline is approaching more quickly than expected.

Some "known unknowns", to borrow Donald Rumsfeld's phrase, still abound. A big one is the prospect of so-called green energy. The spill seems to have galvanised the resolve of President Obama, leader of the world's biggest oil consumer: "Countries like China are investing in clean-energy jobs and industries that should be right here in America," he said. "The transition to clean energy has the potential to grow our economy and create millions of jobs – but only if we accelerate that transition. Only if we seize the moment."

But he also says previous attempts to reduce the US' oil dependency have failed because of a "lack of political courage and candour". If Obama and other leaders can overcome those barriers – and the domestic expediency that has hampered a coherent, global plan for climate change – it will hasten the end of oil. Indeed, how long the world spends in the twilight of the oil age depends to a large extent on the courage of leaders such as Obama – and on the obduracy of their opponents.

Yet a geopolitical realist – and Petroleum Economist has always sought to be one – would say decisions in the US will not determine oil's position in the global energy matrix in the years to come. The direction will come from China, the emerging swing consumer to Saudi Arabia's swing producer. China's acquisitive companies have already changed the corporate energy world, pushing up asset prices, generating new streams of funding for energy infrastructure and providing competition for the Western majors.

But does their seemingly relentless international expansion signal an inflexible policy decision to depend on oil? Perhaps not: another price shock, and concerns about the environment and the sustainability of oil imports might force China to rethink its energy policy. Given the scale and ambition of China's consumer economy, incremental changes in the country's strategy on oil – or on pollution – would yield dramatic shifts in the world's energy outlook.

A decision by China to encourage, for instance, the use of electric vehicles could transform the future of oil, not just because China's need for crude imports would be lower, but because cheap electric vehicles would be available to the rest of the world. China's manufacturing power could also give fresh impetus to the development and production of solar technology or other renewable-energies. Unencumbered by the inconveniences of democracy or the sway of industry lobbyists, the Chinese government has the power to accelerate the end of oil, or to extend the commodity's life. If we know one thing about the country's opaque energy policy, it is that when Beijing decides, action follows swiftly.

China's oil consumption was a central force in energy markets over the past 10 years. It will remain so for the next decade, but perhaps for different reasons. Decisions taken in Beijing will increasingly affect the lives of all other energy consumers, from the Mideast Gulf to the shores of Louisiana. Like the rest of the world, China has compelling environmental, strategic and economic reasons to reduce oil consumption. But will it? That's a trillion-dollar question.

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