It was always going to happen. Like a lover fearful they are about to get dumped for a younger rival, the Organisation of Petroleum Exporting Countries (Opec) appears to have its scissors poised and ready to cut up the rest of the world's suits unless it stops flirting with those wanton biofuels.According to the Financial Times, the cartel is now considering getting its retaliation in early by cutting investment in new oil production - a move that would drive oil prices "through the roof" - in response to the West's plans to increase consumption of biofuels.
Quoted last week in the FT, Abdalla El-Badri, secretary general of Opec, warned that the cartel may reduce investment in new oil production if the US and Europe continues its strategy of replacing a sizable proportion of the oil it uses with biofuels.
"If we are unable to see a security of demand… we may revisit investment in the long term," he said.
You almost feel a bit sorry for Opec. Its biggest customers are telling it that it should continue to invest heavily in expanding production, while at the same time implying that as soon as workable alternatives present themselves they are off, leaving Opec to pick up the bill for its now worthless investments. It is a scenario that has already hit Opec once in the past when it ramped up investment in the late seventies in response to soaring prices only to find that by the time the new supply came on line in the eighties western countries had responded by diversifying their energy mix with their own investments in nuclear and gas.
Faced with this demand uncertainty it is perfectly understandable why Opec may scale back on investment, limit supply and thus drive up prices. And it is equally understandable why it should use this fact as an act of brinkmanship to try and stop its main customers eyeing up alternatives.
It could even be argued that anything that encourages governments to back away from the potentially environmentally disastrous biofuels is A Good Thing, however, the bigger concern is that El-Badri's comments give us a taste of what is to come as businesses and governments attempt to move towards low carbon alternative fuels.
Whether its hydrogen or biofuels, some other oil alternative not yet envisaged or simply energy efficiency measures every time countries make substantial green investments with a goal of reducing oil demand Opec will issue the same warnings about reduced supply and soaring oil prices.
This economic conundrum means transition towards a low carbon global economy is bound to be less than smooth. Oil producers need to be confident demand is guaranteed if they are to invest in exploration and production, both of which are becoming ever more expensive as the most accessible sources are tapped. This certainty over demand is being eroded and it would be perfectly understandable for Opec to decide at some point over the next decade that the risk of getting insufficient returns from large scale investments had become too great. Reduced supply would ensure oil prices soared and with alternative fuels unlikely to be in a position to seamlessly meet the extra demand for energy economies would suffer.
From Opec's point of view it makes sense to remind everyone of this reality and increase pressure on customers to be more explicit in guaranteeing future demand. However, as the renewable Energy Association pointed out in a letter to the FT, the threat of more price volatility and the assertion of Opec's influence also serves to remind everyone why there are economic as well as environmental reasons for limiting our reliance on oil.
It will be interesting to see how governments react to Opec's veiled threat. In the short term it seems they want to repair bridges with the International Energy Agency already attempting to reassure Opec that demand will remain solid. But it is to be hoped that over the longer term governments refuse to back down and use higher oil prices to justify a massive investment programme in green energy alternatives. It may be a recipe for considerable short term economic hardship, but it could be sold to the business community on the grounds that not only is such a transition environmentally essential but it is also a shift that would have to have been made sooner or later anyway as oil supplies begin to run out.
The threatened reduction in oil supplies resulting from a fall in projected demand would simply bring forward inflation in oil prices that would prove inevitable once we pass the point of peak oil production.
Opinion is divided on when oil production will peak with some experts claiming we have already passed the peak and can expect oil prices to begin to climb exponentially and others insisting we have several decades before supplies begin to decline.
Those that claim supply is secure argue that there are large oil reserves that currently are too difficult and expensive to discover or tap, but will become economically viable as technology improves, oil prices rise and, irony of ironies, Arctic ice sheets covering oil reserves recede.
Those that argue peak oil is almost upon us accuse the oil industry of an "institutional jubilance" whereby it is in their interests to make optimistic predictions about supply up to and beyond the point where it begins to dwindle. They also point to the work of Marion King Hubbert, an American geophysicist who unveiled a theory in 1956 that correctly predicted that US oil production would peak in the late sixties or early seventies. Applying the same theory to global production suggests that production is peaking pretty much now and as a result we can expect prices to continue to climb.
Speaking at the recent Library House Cleantech conference, Jeremy Leggett of Solar Century said that while predictions that supply is peaking remain a minority view within the oil industry such forecasts are gaining credence. "[Oil industry] whistleblowers suggest that there is not nearly as much oil out there as we have been led to believe," he said.
It is worth noting that if we are fast approaching peak oil the OPEC statement would represent a particularly cunning ruse, blaming customers for reduced investment in exploration when there is not much oil left to find.
It is in the context of this uncertainty around when peak oil will begin to bite that the transition towards a low carbon economy becomes as important for economic as much as environmental reasons. It should give governments all the incentive they need to stand up to Opec's brinkmanship, take the short term pain that will come with increased oil prices on the chin, and increase investment in the development of the alternative fuels that will hopefully allow us to spurn oil once and for all.
Posted by James Murray on June 11, 2007 |
http://green.itweek.co.uk/2007/06/opec_biofuel_br.html
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