By Gareth Vaughan
Oil producers will be "begging" people to buy their oil in 10 years time as new technologies and fuels are developed, says a prominent oil focused economist.
Speaking in Wellington at Greenstone Energy co-owner Infratil's annual investor day, Philip Verleger, Professor of Strategy and International Management at the University of Calgary, said while in Wellington he had been asked by Treasury officials where the price of oil would be in 10 years time.
"I said I thought oil producers would be begging to sell their oil," said Verleger who has previously held positions at the US President's Council of Economic Advisers, the US Treasury, the Institute for International Economics, Yale University, the University of California, and the National Petroleum Council.
"The reason I think this is the case is that technology is so good," Verleger added.
"My expectation is that oil prices, energy prices, will probably be some place in today's dollar (terms) whether it's US or NZ dollars, below $100."
Verleger acknowledged his view wasn't the mainstream view. His New Zealand visit coincides with a worsening crisis in oil producing nation Libya, which has helped push US oil prices to their highest levels since September 2008 at US$106.95 a barrel and the European benchmark Brent Crude to US$118.50. In New Zealand petrol prices have topped NZ$2.15 for a litre of 91-octane.
Verleger said the energy policy pursued by the United States, and the world in general over the last 40 years, had been "disastrous." Better coordination in economic, environmental and oil policies would also be needed to reduce prices. Nonetheless a big reason he held his "begging" view was technological developments.
"For one thing take the Chevy Volt. It's subsidised and everything else, but this is a car that has a gasoline engine that runs a generator and can go substantial distances and doesn't risk running out," said Verleger.
"Essentially it's going to be getting 200 miles to the gallon because of the way it's running on electricity. Okay, it's running on coal fired electricity but that may become natural gas fired electricity."
Porsche, meanwhile, had come out with a car that gets 86 miles to the gallon.
"Technology is moving so quickly. What were facts about the future last year aren't facts about the future next year."
'Peak oil? So what?'
Asked for his views on peak oil, Verleger said: "Yeah, production's going to peak sometime. So what?"
"There's going to be substitutions. That is what innovation is about."
People worried about peak oil were frozen in a history that didn't exist.
"The best thing I can think of is an economist named (Stanley) Jevons who 200 years ago (in 1865) warned England it had a terrible future because it would run out of coal and you had to have coal to grow," said Verleger.
"He was wrong. They found more coal and they found other ways of moving ahead."
'Forty years of folly'
The energy policy pursued in the US, and most of the world, for the past 40 years has been a disaster, Verleger argued. He noted President Richard Nixon had spoken of the challenge of facing higher energy prices 40 years ago and said the focus should go on nuclear power, shale oil and developing offshore oil.
"Natural gas was taken off the table, we were going to run out by 2010," said Verleger. "Now the US has more natural gas reserves than Saudi Arabia has oil. The turnaround is just fantastic."
Furthermore, he predicted China would aggressively pursue the development of shale gas as a source of cheap electricity where they can invest money in their own country and continue export led economic growth.
"They're looking at this as the game changer it is."
Although environmental issues, notably water pollution, might slow down the development of shale gas in the US, this wouldn't be the case in China.
"The Chinese will look at the fracking (hydraulic fracturing) and say 'okay, there's a little radium getting in the water. Okay we'll glow a bit in the dark. So what? We're going to go that way'," said Verleger.
Diesel push to blame
Meanwhile, one of the main reasons the world was in a mess over energy now was because many governments had pushed dieselisation. Economic policies and energy conservation policies had been to switch to diesel.
"So the Europeans offer diesel fuel retail prices at about 75% the price of gasoline," said Verleger.
Some 85% of new vehicles in Europe are now diesel powered when European oil refineries have limited ability to make diesel. Essentially this left economic and energy policies pushing demand for a product that supply can't keep pace with.
"So prices go up."
This was why the strife in Libya, even though it only produces about 1.5 million barrels of crude oil per day or 2% of global production, had caused such a price spike. The Libyan oil, used to make diesel in Europe, is sweet and has little sulphur in it. In contrast Saudi Arabian crude has a significant amount of sulphur.
"European refineries take that Libyan crude and make diesel and the environmental authorities have been pushing to remove sulphur from diesel fuel," said Verleger. "They use 10 parts per million. That's hard to make diesel fuel with 10 parts per million, particularly if you start with Arab heavy crude."
He estimated that using Nigerian or Libyan crude oil, making a metric tonne of diesel requires about two barrels with about three kilogrammes of sulphur removed.
"I have to take five barrels of Arab heavy crude to get the same amount of diesel. It's like taking a different cut of meat. And when I'm done with it, how much sulphur do I have to take out? 180 kilos."
The same problem had struck when oil prices went through the roof in 2008 with an increase in diesel demand, a "small scale civil war" cutting production in Nigeria, and the US government taking sweet crude off the market from August 2007 and putting it in its strategic petroleum reserve just when it was really needed.
After pursuing a "disastrous" energy policy for the past 40 years, the world needed much greater coordination between countries and on economic policies, environmental policies and oil policies.
"We got ourselves into this mess, where diesel fuel threatens to drive the international economy back into recession, because there was no coordination in economic policy, no coordination in environmental and oil policy. You can pursue, and should pursue the best possible strategies to reduce emissions in the environment. You should also pursue conservation strategy and you want to make this all work in a period where you get economic growth," said Verleger.
"We haven't done it. Our energy policy in the United States and in the world, for the last 40 years has been a disaster. Essentially what we have is an economic policy and an energy policy pushing demand for a product that we can't make enough of. So prices go up."
What if Steve Jobs was in charge of energy?
He asked the audience to imagine that in 1971 a brilliant group of people like the executives running Apple had taken over oil and energy policies.
"Think of what the world oil market would look like today. You would have your ePad with systems on it with transportation applications. Where the Apple oil industry worked with the transportation industry, worked with the environmental people to produce cleaner fuel and make sure the system worked in a way where prices remained relatively stable and customer demands were met."
The world was now in a situation where it couldn't afford battles back and forth between the oil industry, environmentalists and economic policy makers.
"We need to have a more cooperative view, where you're managing the price risk using strategic stocks, you're managing the demand saying 'we can't make all this diesel fuel and if we do need it we have to go to natural gas'," Verleger said.
"What we're seeing is the clash, again, of environmental regulations, fuel demand decisions and the incapability of the crude supplies which are going to lead us, unfortunately, probably to several years of sub-par economic growth."
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