So why should energy costs be rising again already? Last week’s post about the oil price shock of 2008 described a fall from a $147 peak last summer to $34 in February 2009.
In concluding, I noted that although a $60 oil price looks ‘low’ today, in relation to past prices, it’s still way above the average.
In fact, the oil price has only exceeded $60 for some 15 months across the whole of recorded history. What has happened to keep the oil price high?
The answer is simple, and depressing. What’s happened is that another year has gone by. Another year when we did almost nothing to transform our energy infrastructure. Another year of oil depletion, with no meaningful initiatives or much co-ordinated action to diversify supply.
Energy demand now stands around 2% lower than in 2008, but — and this is important — that only puts it back to 2006 levels.
Look at it another way. In the deepest recession we’ve seen for decades, we’re still using 98% as much oil as during the biggest of all the boom years in 2007.
Despite the bleak economic news last winter, when I looked outside the window there always were cars driving up and down the street. We kept our houses warm, and our factories running (well, most of them).
The truth is that even within an economic downturn, our energy resources continue to be used up, on a daily basis, and at almost the same rate. But what’s more worrying is that we’re now making even less effort to replace them.
Amidst plummeting energy prices, investment in renewables has fallen. Several large companies have withdrawn from new wind farm projects altogether.
Across the hydrocarbon industry, exploration has been hard hit, too. The number of active drilling rigs is down by a quarter. But for all the technological advances of recent years, you still can’t find hydrocarbons unless you drill.
It might seem surprising that an extractive industry with a 20-30 year production cycle should think on such a short-term basis. But the cash that global energy companies can invest across the year ahead largely depends on the amount of money they can pump out of the ground in the year before.
That’s why falling energy prices kill new investment. As profits fall and capital funding dries up, companies are forced to become more risk-averse.
The implications of that are easy to miss — but let’s state them clearly: amongst the likes of BP, ExxonMobil, Statoil, Total — none of these giant companies now expects to produce more oil tomorrow than they are pumping today.
Over the past decade, exploration for new reserves has increasingly been carried out by smaller independents. But offshore drilling is a capital-intensive business, and several of the more aggressive and innovative explorers have gone bust as their production earnings fell and credit facilities were withdrawn. Many others have struggled to raise new capital for exploration.
And so another year has seen us draining our existing hydrocarbon reserves, whilst exploring less and canning new alternative energy projects which could replace them. With declining demand, the focus on diversifying and renewing our energy supply has fallen with it.
How far will it rise? A straight repeat of this year’s rise could see $100 oil by the autumn. Although a modest correction below $60 seems more likely, the signs are that once economic activity begins to recover, then $100 oil really will be here again before too long.
If demand starts to rise again in 2010, the certainties of continued oilfield depletion and reduced investment mean that energy supply will still be limited. It’s within this timeframe that a return to $100 looks more likely.
Looking ahead five years from there, we might expect oil prices to hit $200, with $400 in sight within a decade. And after that, you can just keep on going.
Those figures won’t arrive tomorrow, and a steady rising trend looks unlikely.
But the fundamentals will remain the same. We’re using up our oil, and making increasingly scant attempts to replace it.
That sounds depressing, yet there might be a flicker of hope as well. Perhaps the most hopeful news to emerge from the past year’s shocks is that rising energy costs have belatedly led consumers to start changing their behaviour, putting them far ahead of governments and industry who for now are doing very little.
Over the past year, new car sales have slowed dramatically. And behind the appalling UK figures lay one tiny hidden gem — that the average fuel consumption of new cars sold fell by 4.1% within the last year alone.
That compares with an annual decline of only 1.5% across the preceding decade. 2008 may have been the year when we finally made a gearshift towards greener vehicles.
One year of high energy prices has done more to focus consumer minds than the three decades of government initiatives which came before it. Consumer demand is finally forcing manufacturers to build more fuel-efficient cars.
Beyond a certain point then, economics still has the power to change the world. But as the calendar unwinds — can our consumer attitudes change still further?
Because higher oil prices are coming soon. And after that, they’ll likely keep on rising, far along the road ahead.
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