The Deepwater Horizon accident and its sequel of 5000 barrel a day leakage, and spiraling estimates for the final cost of this disaster underlines a simple fact of world oil: deep offshore, extreme environment, and high tech oil production carries high risk. Wherever there is risk, final user prices have to include cover of this risk. When risk rises, final user prices have to rise.
We can take all kinds of explanations, causes and factors for Big Oil moving offshore, with output growing at rates estimated by the IEA and other sources at up to 15% a year since year 2000, offsetting stganation or decline of global onshore production. These causes can include environment activists adding legislative pressures for onshore operations, OPEC states limiting access to reserves or setting high "resource rent" revenue shares, greater security for operating in African countries facing rebellion - but lower costs never figure in the list.
To be sure, we can quickly sum the move offshore as another example of "oil addiction" working its somber magic, but this addiction faces geological limits, and strong energy economic factors shifting the energy mix away from oil as its price rises faster and higher than other fossil energy supplies. Likely the single biggest reason for Big Oil moving offshore is simple geology: despite the costs, the high tech and its risks, and extreme environment conditions, global oil reserves available in deep water remain attractive. Only at times of national environmental catastrophe like the present for the USA will we hear the basic reason for these risks being taken every day: oil is still too cheap.
Cheap Oil and Energy Economics
Oil is expensive relative to coal and natural gas, which in the US due to onshore fracture and shale gas is now at extreme low price. Oil is also expensive relative to uranium, which languishes at about one-third its most recent peak price of 2007. Facing this competition, the oil major corporations and OPEC NOCs must take all risks and shortcuts to maintain oil supply, to prevent oil being priced out of the energy business.
This only however applies to oil as an energy mineral - not a petrochemical base, where the price per unit weight or volume (for example barrel of 159 litres) can be 4 times the price of oil as an energy commodity. World oil demand for petrochemicals is likely below 7.5 Mbd although growing fast, compared with total oil demand at 86 Mbd and growing at maybe 1% a year in 2010 after a 3.5% a year fall in 2009.
Shifting away from oil energy is a nice idea, for example to protect us from what Al Gore calls the "unimaginable calamity" of global warming. The favored target is non-hydro renewable energy, but here we get a taste of real world energy economics. IEA estimates for 2009 suggested global investment in renewables dropped by as much as 35% on a year earlier. In some cases however, Spain is a big example, this was offset to some extent by debt-financed government fiscal and subsidy packages, leaving a trail of future debt to hide present high renewable energy costs.
To be sure, while oil prices ran wild and free from 2004 in a one-way rise to an ultimate (or we should say most recent) peak in July 2008, investment in renewable energy assets also surged, recording year-on-year growth of at least 60%, perhaps 75% in 2006-2007. But activity slumped in 2008, with the oil price, as sources of finance contracted. This was further impacted by low fossil-fuel prices from mid-year 2008, reducing the economic incentive for new and often high cost investment in renewable energy. Only from late 2009 has there been any shift away from decline, as oil prices rebounded but in an unsure, confidence sapping macroeconomic context.
High and Stable Oil Prices
The answer to this lies in high and stable oil and other fossil energy prices. Instead, we have the Faustian bargain of oil prices spiraling when the economy recovers, and collapsing when the economy slumps - dragging renewable energy investment with it. To be sure, this is pure and rational market price setting, possibly with advice and financial products supplied and sold by Goldman Sachs and other commodity index providers.
OPEC, to be sure, is still a handy bogeyman to bring in any time oil prices rise above a psychological ceiling, and Big Oil can take the flak when it destroys the environment closer to home, in its quest to max production anywhere it can.
Breaking out of this no-win, to a global energy win-win that integrates all parties may in fact be helped by this latest oil catastrophe. No energy producer can, or should live with prices that can shift from US$ 145 a barrel to US$ 38 a barrel in a few months, and similar price swings apply to coal, gas and uranium. Consumers and users also do not need wild price swings of basic need commodities, raw materials and services.
Shifting the global energy mix away from the fossil fuels will happen this century, even if global warming catastrophe may be late to the party, or never come at all. In this real world perspective for energy transition, international action and effort to bring producers, exporters, importers and consumers and users together is the big need. We still have time, but avoiding real catastrophe makes it necessary to act soon.
