Fossil Fuels

Petroleum

World petroleum prices are generally low in historic terms, thanks to the opening up of new oilfields in Nigeria, around the Caspian Sea, and elsewhere. At present, the supply of oil exceeds the demand, and this situation is expected to persist in the short term. There is, however, always the danger of prices collapsing completely,

particularly if Iraqi oil is produced in abundance. The market for oil is extremely inelastic and, as has been seen in the past, small shortfalls in supply can lead to rapidly escalating prices, while over-production results in an equally sharp decline in the spot price. The problem facing oil-producing nations is that each individually wishes to maximize its income by exporting as much oil as possible, but if all do this collectively there is a glut and the price falls sharply. It was for this reason that OPEC was set up in the 1970s, to act as a quasi-cartel and to control the price of crude oil by allocating supply quotas to each of the participating countries. This strategy has been only partly successful. From inception, OPEC has faced the dual problem that not all of the prospective members have joined and that new producers have come on line in recent years. The latter are not constrained and may produce as much oil as they choose, or regard as prudent. The consequence of low oil (and gas) prices is that the bulk energy is cheap and there is little financial incentive to invest in new technology for non-conventional forms of energy. Over the past 30 years, however, the price of crude oil has fluctuated wildly from less than US$ 10 to US$ 40 per barrel. By contrast, OPEC would like to stabilize the price in the range of US$ 20-25 per barrel, which would provide some reassurance for consumers as well as producers. Nevertheless, so long as the possibility of a short­fall exists, whether politically inspired or otherwise, future high prices cannot be ruled out. For this reason, if for no other, it is prudent for oil-importing nations to be developing alternative energy and transportation technologies.[24]

There is, of course, a close interaction between the technology employed in discovering and producing oil and the size of the reserves available. In the 1920s, a Hungarian physicist, Baron von Eotvos, developed a device for detecting slight changes in gravitational attraction. This led to the discovery of the huge oil reservoirs of Texas and Oklahoma, and to many others since. Then, in the 1940s and 1950s, off-shore exploration and drilling were carried out in the shallow waters of the Gulf of Mexico. As off-shore technology improved, it became possible to look for oil in deeper water and in rougher seas, which led to the development of the North Sea oil and gas fields. By building on this expertise, and using further technical advances in oil prospecting such as 3D seismic analysis and horizontal drilling techniques, oil companies are opening up more off-shore fields around the globe. Greater scientific understanding of the structure of sedimentary basins, and of the interface between oil droplets and the porous rock, has resulted in dramatic improvements in rate of oil recovery, as well as the quantity obtained before a well is no longer economically viable. Much of this technology is now mature, but there is no reason to believe that further research and development will not lead to improved techniques for the exploration, drilling and recovery of oil. Although society should not be complacent about the future availability of oil supplies, especially in the face of political uncertainties and growing demand, neither should it rely upon shortages of petroleum in the period to 2020 to drive the alternative energy scenario.

Another aspect of the developed world’s almost total reliance on oil and gas is that individual countries or regions are vulnerable to interruptions in supply caused by factors quite distinct from resource availability. Such factors might include unusually severe weather, war or terrorism, mechanical breakdown or fire at the refinery or power station, and industrial action by operatives or delivery drivers. Disruption through industrial action has already been experienced in the UK – in 1974, when a general strike in the coal mines had a major impact on the electricity generating industry; and again in September 2000, when a strike of petroleum tanker drivers disrupted supplies of fuel to service stations. On such occasions, the public becomes acutely aware of its dependency on fossil fuels for all aspects of modem life. Similarly, there have been occasions in France and the USA when supplies have been disrupted locally and have led to long ‘gas lines’ at service stations. With these experiences in mind, security of supply is an important consideration; diversity of energy type and source enhances this security.

With regard to oil supplies, it is worth observing that much of the world’s cmde oil has to pass through two narrow straits on its way to market. In 2000, 15.5 million barrels per day passed through the Strait of Hormuz and 10.5 million barrels per day through the Straits of Malacca. The latter is only 0.5 km wide at its narrowest point and carries 20 000 tankers (oil or liquefied natural gas) annually. Any obstruction of these two seaways, whether as a result of accident, natural disaster or political action, would constitute a major disruption to energy supply.

Since the USA has been obliged to import oil, its consumption pattern has changed radically. Before the 1970s, 20% of the US electricity was generated from petroleum; now it is less than 1%. In 1973, 25% of homes were heated by oil; now it is less than 10%. Today, most of the output from the US oil refineries is used in the transportation and chemical sectors of the economy. This is a trend that is likely to occur worldwide, and by 2020 it is expected that most of the liquid fuel will be consumed in these two sectors.

One of the problems for any new energy technology in competing with fossil fuels is that the users of the latter are not generally required to pay for the cost of disposal of the products of combustion. Carbon dioxide is a greenhouse gas but, as noted above, there are at present few restrictions or cost penalties on releasing it to the atmosphere. Contrast this situation with that of nuclear electricity where the radioactive waste has to be stored in perpetuity by, and at the expense of, the generating company. Clearly, this is unfair competition. A carbon tax, as discussed in Section 11.1, would go some way towards redressing this imbalance, and it seems possible that such a tax will be imposed in the next 20 years, at least on the major fuel users. The level of tax will be determined by political considerations rather than by cost estimates of the externality. As a very small step in this direction, vehicles in the UK are now taxed on the basis of the amount of carbon dioxide they emit. This is an inducement to purchase smaller cars with more efficient engines.

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