Books - Past and future of the oil

The new book by Daniel Yergin “The Quest", Allen Lane 2011, is in a way similar to his famous “The Prize” the book that had a great success in the early nineties; and in some ways it is not. “The Quest”is a search of something that has to be found, the attempt to map the future development of the energy system in the world. Put simply, “The  Quest” seems written to reassure the uncertain and to fortify the believers. Both books tell interesting stories, and tell them very well, with great precision and sometime with excessive information. This   second not only tells a story, but also gives the Author’s well thought opinion on the possible future. So, it  is less  a celebration   of a long story of success , although it sometimes it does just that,  and more a problematic search for the future , and an attempt   to tell how the  situation will evolve , and the  problems that must be solved in order to  plan correctly for the future.

“The Quest” is written with reasoned optimism. The oil industry has changed the world a century ago, and will be able to do something similar in the first part of the new Millennium.  The book, and hefty 800 pages, is made up of five parts. The New World of Oil, the first two hundred pages, tells in detail what happened   from 1991, the demise of the URSS, the new sources of oil, the development of the “Supermajors “and of the “Petrostates”, the “War in Iraq”, “The demand shock”, “China’s rise”, “China in the fast lane”. It is a detailed chronicle of what happened in that stretch of time in the oil and energy business, and it will be the reference book for many years from now.

Part two, “Securing the Supply”, starts  with the long debated question on the possible exhaustion of oil reserves, concluding that “the world has decades of further production growth,  before flattening out  into a plateau – perhaps  sometime about mid century- at which time a more gradual  decline will begin”.  A conclusion that will probably be approved by the majority of the world experts.  Part Three, Four and Five   discuss   the non oil questions: The Electric Age, Climate and Carbon, New Energies. It contains a very detailed  report  on the discussion on the  global warming , and  a chronicle of the  political fight about it,  with an attention to detail which is quite rare, although the  story is quite, but not totally,  concentrated  on  the  events in the USA. The last part “The Road to the Future “, opens the way to the “Conclusion: “A Great Revolution “which presents the perspectives of the energy sector   and of its sources.  

The first chapter “Carbohydrate Man” deals with   the energy from plants, including the section "Food versus Fuels" and the others discuss each one or two of the new energies .The “Conclusion” starts by remembering Carnot’s opening the era of the fossil fuels and formulates a forecast. The demand of energy will grow   strongly in the next decades, the increase will be bigger than all the energy used up in the year 1970. This increase will be pushed by   the economic growth all over the world, which is both cause and effect of the increase of energy demand and its “globalization”.

The security of supply will become even more important, and the perception of risk will be translated in a growing risk premium on the price of oil, which will reflect the new geopolitics of the productive regions. The development of technology and the growing price have reduced the imports of crude oil to the USA, from two thirds to half of demand. This tendency  goes together with the drive  to  “decarbonizes” energy - an answer to pollution and  CO2 accumulation in the atmosphere -  which  will give clean fuels, greater efficiency of energy use and  renewable. But the change will require time. “By 2030, overall global energy consumption may be 35 or 40 percent greater that it is today. The mix will probably not be too different from what it is today. Hydrocarbons will likely be somewhere between 75 and 80 percent of the overall supply” (pg.715). Things may perhaps happen faster.  “But the law of long lead times still remains. It is really after 2030 that the energy system could start to look different as the cumulative effects of innovation and technology advances makes its full impact felt.”  Daniel Yergin is an optimist, and he later quotes a famous geologist who said “Oil is found in the minds of men“.

The historical part of the book is very comprehensive, and tells in great detail the various steps that led to a completely different energy scenario. In any case the abundance of information makes this book  a necessary read for anybody wanting to  get to grips with the world’s energy problem  , and not only for reading the history, but also to have actually a  full scenario of the future situation of the energy in the world.  Of course the story is told from a definite point of view. "The Quest"  always takes a strong position in favor of the “market forces” and always discovers   how inefficient and ineffectual is any solution involving Government actions.  The private mistakes or fraud of private initiative are not hidden, but are  never the kernel of the problem. The fundamental concept seems to be “business as usual” which is applied to the future  in a way  that could very well be  prophetic, but sometime  gives the impression that the problems are being   minimized . However, on certain difficult points, like the relation of crude oil price and financial speculation, the book is extremely clear. Talking about the great increase of the price of crude oil from 2004 to 2008, it says: 

“As with most great developments, there is not a single explanation for the massive leaps in prices. It was first driven by supply and demand  ...a huge unanticipated change in world economy. ... A return of resource nationalism.... But then, more and more momentum was provided by forces and innovation coming out of the financial market...” (pg 128) and it seems to conclude that “The story of what happened to the price is also a narrative about profound changes  both in the oil industry and in the wider world.” Few pages after , at page 165, the book dedicates a  small chapter  to the  “Financialisation “ of oil, which concludes : “More generally,  the financial markets and  the rising tide of investor money  were having an increasing impact  on the oil price. This is often described as speculation.  But speculation is only part of the picture, for oil was no longer only a physical commodity; it was also becoming a financial instrument, a financial asset. Some call this process the “financialisation” of oil. Whatever the name, it was a process that had been building up over time.”

However, the “financialisation” of  oil may bring the price at level that  will react on  demand , as prices would, and produce  misalignment  of oil in the  global  energy market , with results that the book  does  not discuss . The structure of oil prices and the mechanism that has been created by OPEC by forbidding further negotiation of their crude are not discussed. This is an important point that should be debated, because the present volatility and high level of price of oil might reduce the oil role in the energy mix. This point is not taken by Yergin probably because of the well rooted  conviction of the oil industry that whatever oil there will be, it will have a market.  Which might eventually be true, but it may be dangerous to take it for granted.