Oil and the Future - A lunchtime address by John Hess
This is an abridged version of Hess’ remarks from October 21 at the Oil & Money Conference. For the full version, see item #18 in the October 22 issue of the Peak Oil News.
Our industry is at a crossroads. In the past few years, oil supply has struggled to keep pace with demand. But the financial crisis has reduced demand by 2 million barrels per day, creating excess inventories and lower prices. But once economic growth recovers, it is likely we will return to the market conditions of one year ago. The price of $140 per barrel oil was not an aberration; it was a warning.
Over the past several years, many people in our business have expressed confidence that we can meet the challenges ahead. Oil producers have suggested that the remaining global endowment of up to 3 trillion barrels of recoverable oil meant that we should not be concerned with a prospect of shortages. Higher prices, advancing technology and sound government policies would enable supply to keep up with demand. Consuming nations viewed these issues quite differently, criticizing producers for rising prices, blaming oil for climate change and implementing policies to develop alternatives to hydrocarbons.
The approaches of both consumers and producers are based on hope, but what we need is a sober reality. Given the long lead times of 5-to-10 years from oil discovery to production, we need to act now to avert an oil crisis.
When my good friend Nick Brady was Secretary of the Treasury in the United States, he sometimes referred to the need for “Truth Serum.” Nick knew that good facts lead to good policy; bad facts lead to bad policy. In the interest of creating good energy policy, let us administer the truth serum and establish the facts.
Fact No. 1: Eighty-five percent of the world’s energy comes from hydrocarbons. While renewable energy will be needed to meet future energy demand and contribute to reducing our carbon footprint, hydrocarbons will fuel the world’s economy for decades to come. Renewable energy does not have the scale, timeframe or economics to materially change this outcome.
Fact No. 2: Once the economy recovers, oil demand is projected to increase by 1 million barrels per day each year, as world population grows from 6.8 billion today to 9 billion by 2050. The introduction of higher mileage standards in the U.S. and the gradual phasing in of electrical power into automotive drive trains will only moderate growth in automotive fuel demand. That is because nearly one billion vehicles on the road today could grow to approximately two billion vehicles in the next 30 years. Keep in mind: The U.S. has 1000 cars for every 1000 people; China has 10 cars per 1000.
Fact. No. 3: Supply. We are not running out of oil. The issue is not our endowment of oil resources, it is the world’s production capacity. Additions from exploration last replaced annual production in 1987. The easiest oil has been discovered. Costs are increasing for new barrels, where wells can be drilled in water depths of over one mile to targets up to six miles deep, and discoveries can take over a decade to develop.
Oil field declines are running at more than 5 percent per year. That means we have to add at least 4 million barrels per day each year just to keep production flat. Yet non-OPEC production is in the process of, if not peaking, reaching a plateau. The U.K. Energy Research Centre just published a report that there is a significant risk that worldwide production of conventional oil could peak before 2020 and enter terminal decline. If we do not act now, we will have a devastating oil crisis in the next 5-to-10 years.
We will need the courage to act to prevent this crisis and make the commitment to change our behavior – not just in demand; not just in supply; but both.
The United States must take a leadership role. With five percent of the world’s population but 25 percent of its oil consumption, the United States can no longer blame oil producers for rising prices. We need to have the courage to demand 50 miles per gallon as the national standard for all vehicles; gasoline hybrids and diesel could get us there. A gasoline tax of $1 gallon would boost conservation and help pay down the federal deficit by $120 billion per year.
In non-OECD nations, energy subsidies that the International Energy Agency (IEA) estimates cost $310 billion per year unnecessarily inflate world oil demand and obscure the true cost of energy, resulting in wasteful energy usage.
In terms of supply, the petroleum industry spends about $400 billion a year to find and produce oil, but that is not enough. With 80 percent of global reserves essentially off limits to outside investors and only 6 percent of OPEC’s oil revenues reinvested in energy infrastructure, something has got to change. The role of the national oil companies is critical; they need to invest more or allow others to partner with them.
We need a balanced approach going forward. It is not a decision of “either/or” but “and.” In addition to more oil supply and energy efficiency, we need a greater role for natural gas AND cleaner coal AND nuclear energy AND renewables.
Meanwhile, we must also establish realistic objectives for reducing greenhouse gas emissions that do not throw the world economy into reverse. Many governments want to limit global warming to no more than 2 degrees Centigrade. To meet this target, annual CO2 emissions would have to be reduced from today by more than 80 percent by 2050. But is this realistic? With world population growth and rising living standards, holding global CO2 emissions flat by 2050 would be a huge achievement in itself.
As the global system gets increasingly stressed over competition for resources, there is more and more protectionism among consuming nations and resource nationalism among producing countries. Nations are building walls to disengage from one another when they should be building bridges to collaborate.
Going forward, we need new models of collaboration. Over many decades, international oil companies and producing countries have worked together in a way that has been purely financial – through contracts that are either tax and royalty or production sharing. In the future, we need to build stronger bonds of trust. The investment model needs to be focused not only on oil resources but building the capabilities of host country’s human resources. We must redefine what it means to get a return on investment.
Second, we also need a global forum dedicated to energy policy. Without a common framework on energy, sustainable economic development will be impossible. I would suggest this challenge for the G-20, which represents represent six of the seven biggest oil producers and the 14 largest oil consumers. Its mission is sustainable economic growth. Energy not only fits this objective, it is essential for its success.
In conclusion, what kind of world do we want to leave to our children? If we do nothing, there will be severe consequences. Skyrocketing prices could become a way of life in a crisis-led world.
In a world where we all make concessions and put global interests first, we will all win. If consuming nations led by the United States commit to conserving energy, we could save 5 million barrels per day of incremental demand over the next 10 years. If producing nations led by OPEC commit to building more oil production capacity, we would add over 5 million barrels per day of incremental supply over the next 10 years. In this world, prices would be stable and our global economy could prosper. Does this scenario sound impossible? I do not think so.
The stakes have never been higher. We must build a balanced and comprehensive approach to energy security and protection of the environment to ensure sustainable development. We must unite and work together as an industry, communicating one message, having the courage to act and collaborating for the global good. In this world, there will be a bright future, not only for oil, but for many generations to come.
John Hess has been Chairman and CEO of Hess Corporation since 1995. Headquartered in New York City, the Hess Corp. is an integrated oil and natural gas company with operations in 18 nations. The company explores, produces, transports, and refines crude oil as well as natural gas.
Comments
By Bill Simpson in Slidell on October 29th, 2009 at 7:28 pm
Noble goals, but let me tell you what I fear will happen in the real world. People have been programmed by evolution to be selfish and to seek power over others so as to maximize their chances of survival. So why did we develop morality and laws? To organize, so as to be able to protect ourselves from the greed of other groups. One reason that Neanderthal man is extinct might be because modern humans realized that they needed to organize in order to compete for resources against a physically stronger hominid during the last ice age. We are greedy by nature. We shouldn’t expect that to change for oil.
Human nature has not changed, so today we organize into countries instead of tribes. We thus protect our possessions, social systems, and concepts of morality from what we think are external threats.
So how does this selfishness relate to future oil availability? Up until recently, the supply of oil could be thought of as being unlimited. If you needed more oil, you just went out, did some seismic work, and drilled more wells. Remember what happened after the first oil shock in the 1970’s. Before then, the oil importing countries just assumed that all the oil they needed could be obtained by drilling more wells in the Middle East. But suddenly the rules were changed by an oil embargo, and an extensive worldwide search for more oil was launched.
Within about a decade, enough oil was found to severely depress the price of oil for about 20 years. Some of the new oil producing countries were ruled by autocratic regimes. Once oil was found, the new oil producers had every incentive to produce as much oil as possible, as fast as possible, in order to live as comfortably as possible. After all, life is finite. And why remain mired in poverty when easy oil money is available. There was no incentive to restrict oil production by the new producers, many of whom were not OPEC members, since the reduction of output by one oil producing country would not increase the oil price. If one country cut oil output, other countries would soon take up the slack. Your wealth could only be maximized by producing as much oil as possible.
At the same time, industrial development gradually spread from Europe, Japan, Russia, and the USA to many other countries all over the globe. The demand for oil increased until today, without the current recession, the supply could barely meet the demand.
Once it becomes obvious that peak oil has been reached, a new selfish oil production logic will soon begin to manifest itself. Once the supply of oil can no longer meet the new demand from the rapidly developing countries in Asia and Africa, oil exporting countries will find it in their self-interest to reduce oil exports, not to increase them, as the oil importing nations now naively expect. They will do this for two logical reasons.
First, the less oil that is produced, the more the price will increase. The oil exporters know that the oil importing countries can only cut back on fuel usage so much, before their entire economies collapse. People have to go to work, grow and transport food, etc. The oil exporters know that it will take the importers decades to replace liquid fuel with natural gas, coal to liquids, algae, or something else. This will be a very dangerous new development. I don’t know that it has ever happened with any other critical resourse, but it may have. There aren’t many things, where the less of it you produce, the more wealth an individual producer can accumulate.
Second, it doesn’t take a rocket scientist to figure out that the oil under your country is finite. Once it is gone, the flow of easy money into your country will stop. If you don’t have the ability to replace that oil with another export, you will find yourself back in the undeveloped third world in a hurry. Why would you not slow down you oil exports as the price continually increases? As you cut back your exports and the price rises, your income will at least remain constant, if not still increase. Only a fool would not try to save their oil as long as possible by slowing exports under such conditions. The leader of Brazil has recently practically said as much, repeating that the recent sub-salt discoveries were for Brazil’s use, first. That is code for, ‘if we ever get really desperate for money, we might export whatever we don’t need, until we get back on our feet.’ It is rather difficult to force countries to sell oil. Does anyone think that the US would have supplied the world with exported oil until after WW II, if the concept of peak oil had been accepted back then?
I hope that I have demonstrated that the world of oil is about to undergo a profound and dangerous change. After peak oil, it will no longer be in the best economic interest of the oil exporters to produce more oil. For the first time since the Texas oil boom, all exporters will gain if only one small exporter decides to trickle it out. The trick will be for the exporters to prevent a cataclysmic worldwide economic collapse, brought on by a price explosion as a result of too little oil production, as many exporters decide to try and cash in by lowering exports at the same time.
It amazes me, that I have never heard this scenario discussed in the mass media. Nor do I recall reading it in any books on peak oil. But if I can figure it out, you can bet that others have, long ago. I just hope that it is being discussed at the highest levels of government, just in case that I might be right.
By gordong156 on October 31st, 2009 at 3:45 am
Hess:
- understates the importance of tax revenues from oil to governments (about 30% in the UK). Our public services depend on them.
- makes no mention of the monopoly that Western corporations have over refining energy resources. This adds a huge slab to the cost of the end product, so it is no good at all pointing fingers at poorer countries which have to subsidise the price of cooking fuel and petrol for their citizens as a result.
- doesn’t say explicitly that, all things being even, when shortages begin, the world’s greediest per capita energy consumer of oil will find it hardest to adjust.
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