Peak Oil & Shipping: Not Such a Livid Prospect
Bill Becken weighs in on the risks and opportunities associated with so-called “Peak Oil.”
For awhile now, peak-oil believers have warned, among other things, that 2010 would be the year that world oil production would peak and begin its gradual decline, eventually hitting the shipping business hard.
But even peak oilers admit that the peaking of oil and its decline will present opportunities along with risks. In 2001, a covey of peakists founded the Association for the Study of Peak Oil (ASPO), an unlikely alliance of geologists, physicists, and petroleum engineers, to expose such risks and opportunities. ASPO held its 7th annual conference late last year in Denver, CO.
One presenter, Michael Rodgers, a Beijing-based partner and head of Asia-Pacific for PFC Energy, a Washington, D.C.-based oil industry consultant, pointed to the current plateau in world production of crude oil. He also cited the ominous runup in prices over the last decade to today’s roughly $70/barrel. But he also stressed the rapidity with which a variety of new oil projects, including offshore and deep-sea projects, are coming on stream. It all portends pent-up demand for maritime services, he says, in support of exploration by private and national oil companies.
Still, overall, the oil industry service sector has yet to expand its capacity sufficiently to meet the companies’ inevitable new exploration needs. “The service sector for nearly 20 years was getting only single-digit returns. And so they were just not investing in capacity,” says Rodgers. Then oil prices rose. The oil companies wanted to ramp up quickly.
But, due to long lead-times, the service sector merely raised its prices. Then oil prices hurriedly came back down from their peak of $147/barrel in July, 2008. Thus, says Rodgers, the oil companies remain poised to expand net exploration, but servicers’ capacity lags. “What companies are now doing,” says Rodgers, “is simply waiting for the service costs to creep back down into equilibrium with oil prices at $70/barrel. Then they will undertake further projects.”
After 2015, says Rodgers, the peak in crude oil will be more evident. There will be a resurgence in demand for oil but limited new supply. It will be much more likely that prices will head up to $100/barrel and begin posing problems again for the world economy. “There are already a lot of projects, nearly 8000 of them, including petroleum liquids, that will, in aggregate, tend to support the current daily consumption level of 84 million bbl/day and higher. But the system has limitations even when you build in optimistic factors. You still run into a supply problem. It’s not a crisis tomorrow, but a longer-term problem that both the public and private sectors must clearly plan for.”
A respected mainstay of the ASPO group is a redoubtable former actuary from Atlanta, Gail Tverberg, editor of the well-regarded website The Oil Drum (TOD), whose approach is considerably more gloves-off than Rodgers’. Tverberg and the other TOD contributors form an increasingly credible virtual think tank of geologists, engineers, and activists. Other luminaries of ASPO and the peak oil scene include investment banker Matthew Simmons, author of Twilight in the Desert, which pierces the veil of secrecy surrounding Saudi Arabia’s formidable oil reserves; and David A. Summers, a professor at the Missouri University of Science and Technology (MST) in Rolla, MO, who specializes in the development of algal biofuels for the freight/passenger airline industry.
Tverberg is known for her hands-on, succinct, canny forecasts of long-term declines in supplies of oil and other fossil fuels. Her forecasts are no less dire than those of the more frenetic peakists, but she’s a calmer, cooler head whose spare prose, featured over scores of web posts, manages to soothe and charm.
Over the long term, she says, there will be less long-distance ocean transport—of oil, certainly, but also of all other types of cargo. Of course, it does depend on the type of goods. On the long downside, there will also be growth niches, such as liquefied natural gas (LNG), coal, offshore oil exploration, and swifter and more efficient, if more Spartan, passenger vessels.
Nothing will avert the reality that maritime transport’s fortunes will have to contract, “as they did in 2009,” she says, “only worse.” It is not clear to Tverberg that the contraction will necessarily be associated with an oil price spike. But it could be. It could also be associated with debt defaults or a worse recession.
Nor is it clear that there will be shortages specifically of bunker fuel. But clearly if bunker fuel rises in cost, long-distance shipping of lower-valued goods will drop accordingly. This will add to the most salient problem of the industry in a post-peak world, says Tverberg-- overcapacity, which will lead to bankruptcies.
There will be many ships that a company owns but cannot fully utilize. Bankruptcies in shipping would follow fast on the heels of those in the airline industry (peak oil’s canary in a coal mine, wherein fuel accounts for roughly 40 percent of costs, versus its roughly 10-15 percent share in, say, passenger shipping). Highly leveraged companies would feel the pinch first. Although, after bankruptcy, certain new or restructured companies, turned around and retasked, buying the old, castoff ships for pennies on the dollar, could grow and possibly prosper longer-term.
Tverberg and the others acknowledge that fuel switching might also be helpful. Ocean shipping represents mankind’s primordial wind-powered transportation. But well before there is a substantial reversion to wind, lines may economically switch to alternative fuels or blends of old and new fuels, even coal. Coal-based fuels would likely be cheaper than oil-based, but would raise a whole new set of issues. “I doubt that environmental groups would allow ships to burn pulverized coal mixed with water,” she says.
However, Summers says that while, say, algal fuels will likely be far too expensive and rare for maritime use, pulverized coal mixed with water is actually a well-developed, proven technology whose emissions problems are manageable. Pulverized coal could power ships, says Summers. “Basically now it’s a technology just waiting for the price of crude oil to go higher. It can slide very easily into the marketplace. If there is a hurdle associated with the technology, he says, it’s not dirty engine emissions but the cost of grinding coal into particles with the necessary diameter of five microns. However, he says, half-inch coal can now, in a simple, single step, be brought down to five microns via a process developed at MST known as pressurized cavitation.
Coal shipments themselves represent an opportunity for shipping in a post-peak world, says Summers,. since coal is such a relatively inexpensive fuel for land- based electrical generation. “The world market in coal will continue to grow and that will involve a growth in shipping,” he says, citing a growth in coal exports from Australia and Columbia.
Reinforcing the point, Summers says that countries like India and Pakistan will need to maintain electric power at the lowest possible cost. “Places like Karachi are load-shedding three hours a day now,” he notes. In the absence of adequate infrastructure to maintain renewable technologies in developing countries, sustaining electric power requires reliable, inexpensive fuel; Summers is convinced coal will increasingly fill that bill for developing countries.
In contrast to crude oil production, there have been significant and realistic projections for growth in coal production over the next decade. “Although world oil production is merely peaking, production outside of the OPEC countries is clearly declining,” says Summers. As oil becomes more expensive, the poorer nations will take a much closer look at coal.
In addition, renewable energy facilities up to the task of maintaining power are hard to imagine in many developing countries, since the infrastructure to maintain such facilities is often minimal or nonexistent. “By contrast, coal-fired and natural gas power plants are power stations that people there have built, they know how to run, and they know are relatively inexpensive. Renewable energy also requires an educated workforce that can deal with these sophisticated power sources,” adds Summers.
In any case, it is reassuring to the business that offshore oil development is astir, the longstanding shortage of vessels both to explore and to service drilling rigs is abating; that the world population continues to grow, requiring that electric power facilities continue to be maintained, and that, for example, bulk food items will need to be shipped. All are opportunities for global shipping. Even climate change research, with its lively funding and pelagic focus, can be considered a growth area for shipping, a boon of sorts, as the new decade unfolds.
On the other hand, of course, post-peak, tax dollars for governments will drop off, universities will struggle with costs, and so basic ocean exploration and research are not likely to grow. “Long term, this is going to get worse, not better, in a post-peak world,” says Tverberg. “The world will trend more and more toward the basics--products made closer to home, more applied science than basic research,” she says.
Bill Becken is a contributing editor to energy, travel trade, and transportation media.