Will oil be coal?

Oil might just follow coal’s historical lead in pricing and speculation By Uday Gupt On the face of it, a bumper two decades lie ahead for oil exporting countries.

Led by relentless appetite from China and India, world demand is growing by a steady 1 to 2 % annually; even the Great Recession hasn’t been able to peg back the oil- hunger.

Peak Oil, a point where the world’s oil production tops off, may be around the corner, somewhere between now and 2025.

Add political uncertainty and speculative frenzy to the mix. The no-brainer result: bumper prices for the world’s primary energy source.

There is growing consensus that a barrel of oil at $100 (and plus plus at times), at constant 2008 prices, might be the norm for a large part of the next 20 years.

For a foretaste of possible hubris, look no further than the world’s last primary energy source: coal.

Until World War I, coal occupied the energy centrestage that oil does now. The concerns then about coal’s non-renewability and future pricing were similar to those about oil today.

However, instead of a bumper half century, coal’s rise was faced down by the explosive rise of the internal combustion engine and other developments.

Coal continues to be a vital energy source, of course: it generates upto 45% of the world’s electricity for example.

A coal-less world would perhaps not do the full-stop halt that a suddenly oil-less one would.

But with potentially half the world blacked out for starters, the consequences of sudden coal-lessness would be truly cataclysmic. And yet, when was the last time coal pinged on the consciousness of the average TV-news-watching, newspaper-reading person?

And there’s the central issue. Oil’s indispensability leads to top-of-the mind obsessiveness and insecurity about perceived future demand-supply equations on the part of end users.

Which prompts a truly massive army of speculators to jump on to exploit those insecurities. Which loops back to further insecurity, which loops back again to further speculation and so on.

The insecurity-speculative premium is obviously difficult to estimate, but it’s huge.

Here’s a pointer: oil soared to $ 147 a barrel in 2008, and bottomed at $ 37 in 2009. And yet, demand grew at just a steady 1 to 2% or so annually during the boom, and contracted by less than 1.5% in the 2008 bust.

The sizzle and fizzle resulted purely from hugely magnified expectations of future demand and supply and from speculation.

Remove- or just reduce- the indispensability, and end-users get cured of their insecurity complex, speculators lose interest, and the insecurity-speculative premium withers.

Prices settle into the relatively stable patterns that coal has had for decades.

This is staid-burgher country of cost-plus pricing, a decent, not extravagant, profit, and relatively minor premium windfalls, sometimes. (Coal prices have soared in the past 2 years as it happens, but the issues are different).

Could oil then be coal-ized? For that, it needs to become less indispensable.

This looks increasingly plausible today, perhaps within the next generation.

Governments get into the act

The most in-your-face reason has to be the urgency that Government efforts to control climate change have acquired in the last 3 years.

There have been over a dozen climate-change related world summits since 2007, with progressively less wishy-washy rhetoric. Many important meetings of world leaders now close with communiques that throw at least a nod to the issue.  

The intensity and commitment of the flat-out midnight-oil-burning efforts at the Copenhagen conference of 2009 were remarkably different from the stately pace of pre-2007: George Dubya Bush, for example, circa 2006, could still publicly wonder whether the entire thing was not grossly overdone.

It’s still stop, go, and step back one for every two paces: Copenhagen ended, for example, without unanimous agreement. What is indisputable, however, is that the commitment to climate-change control of Governments worldwide is crystallizing rapidly. 

And as the primary source of carbon emissions, oil can expect a ratcheting up of controls - restrictions, rules, regulations, taxes, incentives for alternatives- everything that Governments can throw at it.

And others follow

The world’s carmakers have already scrambled to respond. Ten years ago, if you wanted a Hybrid car that ran on oil plus something else, your choices were basically Toyota’s Prius, in colours a, b and c.

Five years ago, major carmakers had perhaps one or maybe two slightly impractical models each, to tug forelocks to political correctness. Today, Hybrid is mainstream: every serious carmaker has multiple options on offer.

Hybrid is, in fact, only-stream in at least one major country, Brazil where virtually all cars sold are ‘full flex’, with engines that can run on either oil, or the biofuel, ethanol, or a combination.

The greater part of many carmakers’ R&D staff and budgets, and many, mushrooming, independent research units, are now in a race for the better, shinier Hybrid; or practical Alternative, that does away with oil altogether.

The other major area where R&D has truly taken off in the last few years has slunk past under most radars, perhaps due to its nerdish associations: biofuels and alternative fuels.

The eggheads are truly into Avatar-Pandora territory these days, with possibilities that include plants that produce biofuel ‘fruit’, ‘dual crops’ that produce food first and then evolve into a biofuel producer, cropping each level of custom built multistoreyed ‘farm’ buildings to beat the shortage of agricultural land, DNA-modified fuel producing algae, bacteria that convert waste to fuel, dozens of others.

These are not a mad scientist’s harebrained schemes, but serious, well-funded, grounded-in-business-realities experiments.

It’s early days yet, of course, and an entire Himalayas of problems lie ahead.

However, the game changer, as a casual internet-trawl will show, is the intensity ramp up all-around of the last 3 years.

With Governments, big business, big money and concentrated international brainpower now searching for answers insistently, how long before the alternatives match, or better, the oil-based originals? How long, after that, for the coal-ing of oil? Food for thought indeed, for the GCC.

The author is a senior executive with the National Bank of Abu Dhabi. The views expressed are his own and not those of his bank. He may be contacted at uday.gupta@nbad.com

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