This past week, a friend of mine who happens to be a stockbroker dropped me an email with a link. The link led to a press release from ExxonMobil that contained the energy giant’s annual long term outlook for energy, the 2014 edition. The 58-page report, which contains an overall company view of world energy supplies and demand through the year 2040 and beyond, is a broadly optimistic one, painting a picture that fossil fuels — primarily crude oil and natural gas — will continue to supply about 60 percent of the world’s energy demands through the next 30 or so years. The Houston Chronicle also ran a story this past Friday highlighting the report, with a byline stating that the energy giant says that there are decades of life in fossil fuels.
The highlights of ExxonMobil’s report are that:
1) The world population will increase from 7 billion in 2013 to 9 billion by the year 2040. World demand for energy will increase by around 35 percent from today’s levels, but this figure assumes strong conservation efforts. Vehicle miles per gallon are envisioned by ExxonMobil to increase to an average of 45 miles per gallon by 2040. The ExxonMobil report correctly notes that higher energy use is strongly statistically correlated with higher incomes and living standards, and envisions the world motor-vehicle fleet growing from 800 million motor vehicles in 2010 to 1.7 billion in 2040. This growth in the number of vehicles will be driven by increasing prosperity in the developing world, and increasing incomes are also correlated with higher levels of vehicle ownership and use.
2) ExxonMobil envisions an increased interest in natural gas as a vehicle fuel, but only in certain markets and areas of the world. Electricity demand will also rise and is linked to increased urbanization.
3) The report asserts that some 35 percent of all crude oil and condensate that will ever be produced will be consumed by the year 2040. Since some estimates are that Mankind had consumed some 15 percent of all the oil that has ever been produced, the report implies that another 20 percent will be consumed over the next 25-30 years. That in turn would imply that the world will deplete all of the world’s known crude oil by sometime around the end of this century, or sometime into the 22nd century. The world’s supply of natural gas is envisioned to last about 200 years.
So what does this mean for Houston, the energy capital of the world? Well, the reason for the existence of cities is that they are agglomerated labor markets. The Houston of the 19th century was a small town, which operated as a trading hub for agricultural goods (like rice, sugar, and cotton) that were grown from around Houston and southeast Texas. However, during the 20th century, Houston grew up and roughly 50 percent of all the jobs in the Houston metropolitan area are now tied to the oil and gas industry. Assuming the broad outlines of ExxonMobil’s report are generally correct — and trying to make predictions about the far future is always a very risky business — it means that the Houston area will likely grow and thrive for many decades — perhaps another century — in its present form. After that, the Houstonians of the 22nd century and beyond will have to come up with some other reason to justify our great City’s existence.
The problem with this optimistic view is that they don’t talk much about price. You can have trillions of barrels of oil in the ground, but they’re worthless to our economy if they’re too expensive to get at. You can have trillions of barrels of oil in the ground, but the economy is still in trouble if you can’t produce oil at a fast enough rate to satisfy global demand.
Already we see that the oil companies need to charge a premium to keep the oil flowing fast enough to power our economy, and the premium is only set to be higher as the easy oil is depleted and they look more and more to fringe oil sources. Houston’s destiny is tied to whether businesses and individuals are willing to pay these high costs to fund all of the engineers, labor, refinery improvements, deep water drilling rigs, advanced drilling equipment, etc. needed to keep the oil flowing, which is coming from more technically challenging places. If the economy can’t bear these costs, Houston is in big trouble. If it can, we may not really have a century to play with. It’s likely that we’ll max out global oil production rates by 2020 and see a decline in overall production following that. This scarcity (you could see it as demand or producer-driven scarcity) could be disastrous for the overall economy.
There’s a good overview of the oil majors’ historic record of embarrassingly over-optimistic forecasts: http://www.smartplanet.com/blog/the-take/oil-majors-are-whistling-past-the-graveyard/
To keep enough oil flowing through 2040, you have to have some very rosy glasses on and perhaps a faith in leprechauns that hand out patents for revolutionary oil recovery technology instead of pots of gold.
Even if projections of increases through 2040 are correct, Houston faces increased regulatory risk as more governments try to curb greenhouse gas emissions.
It’s downright foolish for Houston to place its bets on fossil fuels in the long term.
Carpetbagger,
You do make a very good point about the pricing mechanism. We have witnessed the price of crude oil rise from $20 per barrel at the turn of the century, spike during the past decade to over $140 per barrel, before seemingly settling down to the current price band of around $95 – $100 per barrel. I, for one, still believe that much of the current economic slowdown that has occurred starting in late 2008 is tied to this spike in the price of crude oil, something that very few of the talking heads seem to want to discuss. Instead, there were all kinds of other issues that were the cause of the economic downturn.
The evidence does point towards a stalling in the amount of crude oil that is consumed in the United States since around 2006-2007, after having steadily grown during the entire past century. However, the price spike in crude oil at the same time has spurred the innovation of fracking, which has unlocked new crude oil and gas.
I do point out in my post that predicting the future is a very risky proposition. There have been plenty of predictions of the future of fossil fuels that have proven to be bunk, both on the side of optimism and pessimism. But I do think that it is pretty safe to say that the days of $20 per barrel of crude oil are now in the rear view mirror.
And you are correct about local governments placing bets on fossil fuels. Since the 1980’s, Houston has followed many cities in placing bets on a ever growing river of government largesse flowing into medical care and schools, and local elites have concentrated on trying to capture those monies.
I also find it hilarious to see a publication very much in favor of the free market economy’s creative destruction, and yet take a stance very similar to what a Detroiter would have had in the 1960s: “people will always be driving cars, so Detroit will always be a booming economy!”