Successful Business Leadership

By Alan K Rudi

Dependence on oil will likely continue for the long term, but are we beginning to create the environment for alternative energy as a result of higher oil prices? In ExxonMobil’s The Outlook for Energy: A View to 2030, they state: “The world’s economy literally runs on energy. To support continued economic progress for the world’s growing population, more energy will be needed. Even with significant improvements in energy efficiency, the world’s total energy demand is expected to be approximately 40 percent higher by 2030 than it was in 2005. The vast majority of this demand increase will take place in developing countries, where economies are growing most rapidly and modern energy supplies are still a precious commodity for millions of people.”

According to the Energy Information Administration, “Together with strong economic growth, China’s demand for energy is surging rapidly. EIA forecasts that China’s oil consumption will increase by almost half a million barrels per day, or 38 percent of the total growth in world oil demand. China is the world’s third-largest net importer of oil behind the United States and Japan, an important factor in world oil markets.” During the last decade, China has added over 200 million people to their middle class. Given the size of their population and their continued economic development, the long term growth in energy demand will likely continue, forcing continued pressure on the supply of oil and its price.

In 2004, the Energy Information Administration studied oil supplies and concluded “the world production peak for conventionally reservoired crude is unlikely to be ‘right around the corner’ as so many other estimators have been predicting. Our analysis shows that it will be closer to the middle of the 21st century than to its beginning. Given the long lead times required for significant mass-market penetration of new energy technologies, this result in no way justifies complacency about both supply-side and demand-side research and development.” In 2007, the US is importing oil to meet 64% of total domestic demand. Persian Gulf imports are 18% of total imports.

According to the American Petroleum Institute, “the eight largest (oil) companies are all OPEC members, collectively representing 65 percent of the world’s oil reserves. Saudi Aramco, Saudi Arabia’s state-owned production company, alone owns over 21 percent of the world’s oil reserves. In contrast, none of the (U.S. based) multinational companies has more than 1.1 percent of world’s oil reserves.”

In 2007, the Association for the Study of Peak Oil and Gas (ASPO-USA) stated: “Peak Oil experts don’t claim that we will ‘run out of oil,’ but that we’ll run out of cheap oil, as production decreases and demand increases. They note that below-ground limitations and above-ground disruptions could create a perfect storm of constraint, as rapid depletion of major oil fields continues to fuel resource nationalism, geopolitical turmoil, and rising oil and gas prices.”

Markets have a way of indicating current and future events. How are oil prices determined? Again according to the American Petroleum Institute: “Today it is from the spot and futures markets that the global oil market – producers, refiners, marketers, traders, consumers, investment banks, hedge funds, and so forth – receives competitively determined market signals that inform buyers and sellers on current and future supply and demand conditions. In sum, the interactions of well-informed traders on spot and futures markets assure that the global price of crude properly reflects its market value. If, for example, the price today of an oil futures contract for the delivery of oil three months from now is $65 per barrel, that ‘futures’ price represents thousands of buyers’ and sellers’ best estimate of what the price of oil will be for physical delivery three months hence.” In February 2007, Matthew Simmons predicted that the supply of oil has peaked and that prices could rise to $300 per barrel. See his video.

It is highly likely that the US will remain dependent on foreign oil supplies for at least the next 25 years. Alternative energy sources are compared with oil when substitution is considered. No alternatives have yet to equal or beat oil economics. But as oil supply and demand conditions change, the economics for alternative energies will become more attractive. Thus energy market demand growth and higher oil prices will likely cause a shift in the source of energy supplies over the long term, it won’t occur easily or quickly. The key question is whether or not we are seeing signs of a shift in the supply and demand alternatives beginning to occur? Here are some observations:

• Shell Oil indicates that “Making electricity with wind turbines is becoming more cost-effective. The remaining challenges include securing suitable locations for industrial-scale developments that reduce local concerns and preparing transmission grids to take large amounts of power from this intermittent source… Solar energy is abundant, available in every country and emission-free. At the moment the costs of turning sunlight into electricity are too high for large-scale use. The most widely used solar panel technology uses silicon and a complicated manufacturing process, making it far more expensive than many other forms of renewable energy…Bio-fuels are produced from biomass such as plants or organic waste. They can be blended at low concentrations with petrol (gasoline) or diesel for use in today’s vehicles. If they are used at high or 100% concentrations adapted vehicles are typically needed…Hydrogen is the simplest element and the world’s most plentiful gas and can be used as a non-polluting and potentially sustainable fuel. It could provide economic and efficient power derived from renewable energy sources, and it has just one by-product: clean, distilled water. While the technology for cleanly producing hydrogen and powering vehicles is still some way off, we expect hydrogen cars will be widespread within the next 20 to 25 years.”

• Thru October 2007, 277,142 hybrid cars have been sold or 2% of overall vehicle sales (hybrid sales grew 38% while the general auto market decreased 3%). Hybrid vehicles “combine two or more sources of power. Hybrid cars run off a rechargeable battery and gasoline. Hybrid engines are built smaller to accommodate the 99% of time when not going uphill or accelerating quickly. They use the battery to provide extra acceleration power when needed. When the car is stopped, hybrid gasoline motors can shut off and run off their electric motor and battery.” Today there are 13 different models of hybrid cars, 5 more expected in 2008, and 4 more planned for 2009. Believe it or not, even a full-size hybrid SUV just won “Green Car of the Year.”

• We are beginning to see the first decline in miles driven as a result of higher oil and gasoline prices. According to the USA Today (February 2007),“The growth in miles driven has leveled off dramatically in the past 18 months after 25 years of steady climbs despite the addition of more than 1 million drivers to the nation’s streets and highways since 2005. Miles driven in February declined 1.9% from February 2006 before rebounding slightly for a 0.3% year-over-year gain in March, data from the Federal Highway Administration show. That’s in sharp contrast to the average annual growth rate of 2.7% recorded from 1980 through 2005.” The Federal Highway Administration’s data continues to show this trend.

• Both Boeing and Airbus’s new planes are designed to lower fuel consumption. The 787 Dreamliner is designed to “Use 20 percent less fuel per passenger than similarly sized airplanes, the 787 is designed for the environment with lower emissions and quieter takeoffs and landings.” The A380 “represents a 20-year advance in fuel savings and lower emissions. Its highly efficient operation result in much lower fuel consumption per passenger than any other aircraft.”