BP for Breakfast


BP for Breakfast

Over breakfast on Friday 29th June, I was fortunate enough to hear Christof Ruehl (Group Chief Economist, BP plc) present the BP Statistical Review of World Energy 2007 in Melbourne. This is not intended as a complete summary of the presentation, since the slides and full speech notes are available from the BP Website.

Economic Growth and Intensity

Christof's key message was that the global economy continues to grow strongly. Until recently that economic growth was closely matched by growth in energy consumption. But in 2005 and especially 2006 that trend began to change – record economic growth in 2006 (highest since 1973) was achieved despite growth in primary energy consumption falling to half the rate of 2004.

While the energy intensity of the world economy decreased in 2005 and 2006, the carbon intensity of the world economy has gotten worse: exactly the wrong trend for a world supposedly taking climate change seriously. This is partly the result of rapidly increasing demand for electricity, and consequently coal, in developing economies. However, it is also the result of European countries switching some generation from gas to coal in the face of high gas prices (after a cold winter and declining North Sea production). This was all seen as a sign that the market is responding to price signals just as economists would expect, and that a price on carbon will be needed to improve the carbon intensity trend.

Oil Consumption and Exports

World oil production (including natural gas liquids) was up just 0.4% on 2005 (410,000 b/d). However, the economies of the major oil exporting countries were enjoying record oil revenues and economic prosperity, which saw their oil consumption grow strongly. In the face of flat supply, somebody else had to lose out. Consequently, consumption of oil in OECD countries was actually down 0.9% on the previous year, the biggest decline since 1983. This also seemed to be of little concern, just another example of price signals having their effect.

For the record (and not part of the presentation), the BP stats indicate the following export trends, comparing 2006 to the previous year.

in top five exporters was up 0.1%.
in top fifteen exporters was up 0.9%.

in top five exporters was up 4.8%.
in top fifteen exporters was up approx 2.4%

from top five exporters were down 1.3%
from top fifteen exporters were up 0.4%

It is certainly likely that consumption in exporting countries will continue to grow strongly, with their economies supported by high oil prices, even as their production declines. The result will be a squeeze on the volume of oil exports available to the world's importing nations, but the squeeze was not too tight in 2006.

Oil Reserves and Peak Oil

Christof repeated the BP view of the world, which is that oil reserves are sufficient for 40 years at current production rates, and that reserves continue to increase. He did acknowledge that reserves weren't going up as a result of new discoveries, but by technological advances allowing the booking of additional reserves. Peak oil was only mentioned in passing during his presentation, but discussed more directly during questions.

He didn't give much credence to the idea of a 'demand led' peak in oil production, in response to high oil prices. Spare capacity, which was still strong in 2003 (eg. oil prices didn't rise much despite invasion of Iraq) disappeared in 2004 leading to high and volatile prices in 05/06 in the face of numerous geo-political concerns. OECD countries responded to a lack of spare capacity by increasing stocks. As the risk premiums dissipated after August 2006 and with stocks high, oil prices fell steeply and OPEC were forced to “re-engage”, with quota cuts in Q4 2006, in the middle of a period of strong economic growth. It wasn't until follow-up cuts in January this year that the market viewed OPEC efforts as serious and the price began to rise again. Apparently this was all a marvellous example of economics and the market at work.

He seemed quite comfortable explaining that economists and geologists (with PhDs in their respective fields) can sit around a table looking at the same data and “come to completely different conclusions” (guess who is in charge at BP?). He made light of those who estimate the size of the resource base, extrapolate consumption and deduce that oil peaks on the 12th December; earning a smug chuckle of support from the audience.

He described it as a philosophical difference; that the amount of oil depends on technological advances and improving recovery and that the consumption rate depends on the price. His view was that there is “no immediate resource constraint”, nor even for the “next few decades” and that eventually we would switch to another technology as we have always done. He even seemed to boast that the economists had been winning this argument for 120 years.

At least I could agree with Christof on ethanol and biofuels. Brazil and the United States account for 90% of global biofuels production, but it amounts to just 0.5% of total world "oil" supply. Yet achieving that 0.5% has required a third of the US corn crop and caused 'tortilla' riots in Mexico. Imagine the consequences of diverting ten times as much primary food production towards fuel consumption, and we'd still only have replaced a few percent of world oil production. Consequently, BP don't invest in corn-to-ethanol, but they are funding next generation biofuels.

It's been a very successful fortnight for the Australian Association for the Study of Peak Oil, with government and corporate briefings, public events and media coverage during Dr Roger Bezdek's tour (www.aspo-australia.org.au). Attending this BP breakfast put a slightly damp note on all that though, underscoring how far there is to go to affect the dominant economic view of the world and of the production of oil.

Congratulations and thanks to the Australian Institute of Energy (www.aie.org.au) for putting on this breakfast function with BP. My detailed peak oil analysis explains why I think the geologists are right. Economists may be very unpopular in about ten years time.