Oil shortage spills into water

Maximising output of one will worsen the scarcity of the other, says the research conducted by the author of Twilight in the Desert.

Looming oil and water shortages are interconnected and the world is only just waking up to the fact, says a leading proponent of the "peak oil" hypothesis. Matthew Simmons, the chairman emeritus of the US consulting firm Simmons and Company International, says oil production consumes large amounts of water, while boosting clean water supplies is energy-intensive.

"The inter-twining of oil and water is something we all missed," he told the Marsh National Oil Companies Conference yesterday in Dubai. Mr Simmons, a former investment banker and the author of Twilight in the Desert, the controversial book examining the implications of Saudi oilfield depletion for global crude supplies, said the world was not running out of oil or water. But he believed that oil production had peaked worldwide in 2005, due largely to declining flows of easily extractable, high-quality light oil. Fresh water was also in short supply.

"Quality crude is rapidly being replaced by junk crude," Mr Simmons said, referring to the stickier crude grades that are harder to refine into transport fuels. "Most of the world's remaining usable water is brackish or saline," he added. To render such water drinkable on a commercial scale requires electrically driven "desalination", which is already the main source of fresh water in the GCC. With respect to increasing water shortages in major cities and population centres, "the Middle East is at the epicentre of this scarcity", Mr Simmons said.

"There is still the impression of the Middle East as this sparsely populated region, but there are now more people in the Middle East than in the US and Canada." The implications of the region's recent population boom for future oil supply is that more oil output is likely to be kept for domestic use. "As prosperity and jobs finally spread throughout the region, per capita oil use could soon surge," Mr Simmons said. "Oil exports will wane if Middle East oil supply does not grow."

If current population and consumption trends continued, the drop in exports could be as much as 28 per cent over the next 20 years, he predicted. The lack of market pricing for water, and oil during most of the past century, have contributed to the twin global oil and water crises that Mr Simmons expects. "There are few resources that are invaluable, in the sense that there are no ready substitutes," he said

"The two that top the list are oil and water. "Sadly, we gave away both precious resources throughout the 20th century. We were hoodwinked by low prices." If fresh water were priced to reflect its scarcity and cost of production, the incremental replacement price for oil would be "far higher" than the peak price of US$147 a barrel for crude reached in July 2008, and US petrol could reach $75 a litre, Mr Simmons said.

As a solution to the problems posed by growing world energy demand, he suggested exploiting "ocean energy", including offshore wind farms, power plants that harness ocean currents and the production of gas from "hydrates", the concentrated ice-like natural gas deposits that can accumulate on the sea bed with the right combinations of high pressure and low temperature. "We know the oceans contain vast amounts of energy," Mr Simmons said. "Unfortunately, in my view, ocean energy is our last frontier. If that doesn't work, we have some severe problems that are going to be overwhelming to deal with."

Petri Pentti, the chief financial officer of Emirates National Oil Company, the Dubai Government-owned petroleum refiner and marketer, told the conference that the depletion of natural resources was among the biggest financial challenges facing national oil companies in coming years. "Arguably this could create a supply gap which can hardly be closed by growing contributions from other fossil fuels, nuclear power, and alternative energy sources in this time frame," Mr Pentti said. "We really need to ask some strategic questions. When do you start transforming your asset base to cope with the changes in feedstock that are inevitable?" @Email:[e-mail]

What is the "peak oil" hypothesis? It is the theory, first proposed in 1949 by M King Hubbert, a US geologist working for Shell, that we will soon reach the point at which global oil production can no longer increase and crude output begins to level off or decline. Why is peak oil controversial? The disagreements are not so much about whether the world's reserves of oil, a geological resource, will eventually be exhausted. Instead they centre on uncertainties about supply constraints above ground and oil demand. On the supply side, how much will oil companies invest in developing new production capacity? How will the technology for finding, extracting and refining oil advance? Will natural disasters, wars or resource nationalism in oil producing regions constrain supplies? On the demand side, how fast will the world's economy grow? What impact will environmental policies and the adoption of low-carbon energy alternatives have on oil consumption? What do the peak-oil sceptics say? The non-believers point out that people have been calling for the end of the petroleum age for more than half a century, but world oil production still reached a record high in 2008, debunking a popular prediction that it would peak in 2005, and could rise even further. The sceptics do not dispute that oil is an exhaustible resource, but argue that demand for crude will peak ahead of global production capacity. Who believes in peak oil? Prominent proponents of the theory include: Matthew Simmons, the chairman emeritus of the consulting firm Simmons and Company International; Fatih Birol, the chief economist of the International Energy Agency, which advises developed countries on energy issues; and T Boone Pickens, the Texas oilman and financier who has recently called for the US to reduce its reliance on "foreign oil" by investing in wind power and domestic gas production. Who disagrees? Some prominent sceptics include: Daniel Yergin, the co-founder and chairman of the energy consulting firm Cambridge Energy Research Associates; Abdalla el Badri, the secretary general of OPEC; and Michael Lynch, the former director for Asian energy and security at the Centre for International Studies at the Massachusetts Institute of Technology. Why have the experts so far been unable to settle the debate about peak oil one way or the other? The data are fuzzy. Oil is often found deep below the earth's surface, making reserves hard to estimate. Production estimates rely heavily on factors that are difficult to predict, such as the state of technology, the economy, environmental factors and geopolitics. Some countries are reluctant to share information on oil production or inventories, leading to speculation over whether they have overstated or understated reserves or energy needs. Crude prices are no longer a reliable indicator of whether oil supply and demand fundamentals are in balance, as they are now heavily influenced by a number of extraneous factors such as capital flows between currency, commodities and equities markets. Moreover, even if oil production does start an inexorable decline, experts disagree on what form this will take. Will production slowly taper off, or will it drop precipitously? Why is the peak oil debate emotional? Because it concerns our quality of life. Currently, oil supplies determine our freedom to travel, the quantity and variety of the foods we eat and the materials and colours of our clothes, to name only a few examples. [e-mail]