Energy prices are extraordinarily volatile. Politicians raise alarms about the security of foreign oil and gas supplies. Scientists warn of irreversible damage to the earth from the uncontrolled use of fossil fuels. Welcome to…the late 1970s.
For anyone who remembers that time, the crisis atmosphere surrounding energy today evokes more than a little déjà vu. But back then, there was a gradual return to normalcy as prices set by the Organization of the Petroleum Exporting Countries (OPEC) fell and the economy recovered.
Now, several factors make the energy outlook different from what it was then: global climate change, energy insecurity, and growing worldwide demand. A soft landing won’t occur this time without an unprecedented energy shift — a shift away from the carbon-intense fuels and technologies of the past.
Life during an energy shift is tense, and for good reason: The forces that determine how quickly it can be accomplished are difficult to see clearly. One way to understand the options is to examine some of the persistent myths about energy, and the constituencies that benefit from their promulgation. These myths are relevant because they can drive public opinion, — and, hence, public policy — and because business practices may also be based on them, which in some cases can lead to severe competitive disadvantage.
1. The Peak Oil Myth: The world is running out of oil.
Reality: This myth has become popular among some environmentalists and others who hope to promote alternative energy and conservation. It has also been popularized by an ongoing argument, based on some supply estimates, that the world has passed the maximum global petroleum production rate.
Although a tempting notion, that scenario is not true. Despite the current imbalance between supply and demand in oil and other fossil fuels, long-term supplies will be available. Existing reserves still hold plenty of fossil fuels, and new reserves continue to be discovered in regions such as Central Asia and South America. There are also vast proven reserves of “nonconventional oil,” derived from tar sands, oil shale, and even coal. Using known technology, these could provide enough hydrocarbons to fuel a petroleum-based economy for many decades to come.
However, in one sense, the “peak oil” argument is right. Nonconventional oil sources are expensive, and also likely to prove unacceptable from an environmental perspective unless costly new technologies are deployed to limit greenhouse gas emissions. Therefore, although oil will remain abundant, it will not necessarily be easy to retrieve in the near future, and basing the drivers of industrial society on oil will not be sustainable beyond, probably, the next 35 years.
2. The China Myth: Rising prices are all Asia’s fault.
Reality: This myth has gained currency because it makes it easier for people in the West to ignore their own role in boosting energy prices. Instead, it focuses all the blame on the newly industrializing nations of Asia. It is true to some extent that growth in energy demand in China, India, and other developing nations has been a major factor in rising prices. Mainstream forecasts project that energy demand in emerging Asian countries will more than double over the next 30 years. But the whole truth is more complicated. For one thing, price pressures can just as easily be blamed on growing energy demand in the developed world. In the past 10 years, energy usage in North America, for instance, has increased as much as it has in China.
Demand is only part of the price equation. Prices remained low during the 1980s and 1990s because oil production from nations outside OPEC — drilling in areas including Alaska, the North Sea, and Russia — grew steadily. Non-OPEC production, however, began to decline in 2002. Since then, the OPEC producers that control the most economical and easily recoverable oil and gas reserves in the Middle East have been straining to increase their capacity to produce more oil, but have not been able — or willing — to keep pace with demand. More broadly, the supply crunch has extended across the energy spectrum. The costs of providing other forms of energy have climbed in recent years owing to a dramatic rise in the cost of production equipment such as coal mining machinery, refinery vessels, and infrastructure of all kinds.