ALKHOBAR: Approaching $150, crude oil prices have taken the attention of most media reports. The acceleration of the upward prices made the top swing producer, Saudi Arabia, an arena to establish a discussion for variables for and solutions to the recent development in the energy market.
Previously, Saudi Arabia has taken serious efforts to institute mutual understanding among oil producers and consumers regarding the development in the energy market. The most visible effort was the establishment of the International Energy Forum where the Joint Oil Data Initiative (JODI) has considerably provided more transparency to decision makers, and facilitated more productive dialogue.
One of the major issues that should be observed is the concept of energy intensity. The energy intensity of a process (energy consumed per unit of output) is the inverse of the “energy efficiency” of the process (output per unit energy consumed). This term is defined as the energy use per unit of GDP, which leads to describe it as the ratio of energy consumption to a measure of the demand for services.
The US Department of Energy explains, “The national system of energy intensity indicators captures the changes in intensity due to efficiency improvements relative to the influence of other explanatory factors unrelated to efficiency improvement. One example of such an ‘other explanatory factor’ is the shift of economic activity out of the industrial sector and manufacturing, that use large amounts of energy per unit of output, into service industries that use only very small amounts of energy.”
In other words, energy costs less nowadays to produce one dollar GDP compared to the 1970s and this is due to the fact that 70 percent of the total activity in the US economy comes from the non-goods producing sectors such as retail trade, wholesale trade and services sector, which account for 55 percent of the United States economy.
Optimistically, the industrial countries have experienced an increase in energy efficiency with an upward curve since 1970. According to the Energy Information Administration, the US has experienced strong energy efficiency where the energy consumption per real dollar of GDP reached 8.78 compared to 17.44 in 1973. This reduction in energy negative exposure was explained by Ben Bernanke, chairman of the US Federal Reserve, in a speech given at Harvard University two weeks ago.
“A good deal of economic research has looked at the question of why the inflation response to the oil shock has been relatively muted in the current instance. One factor, which illustrates my point about the adaptability and flexibility of the US economy, is the pronounced decline in the energy intensity of the economy since the 1970s. Since 1975, the energy required to produce a given amount of output in the United States has fallen by about half. This great improvement in energy efficiency was less the result of government programs than of steps taken by households and businesses in response to higher energy prices, including substantial investments in more energy-efficient equipment and means of transportation. This improvement in energy efficiency is one of the reasons why a given increase in crude oil prices does less damage to the US economy today than it did in the 1970s,” he said.
JODI initiative
The second issue is that many oil producers refrain from investing in the oil sector without a solid tangible evidence of growing demand. The first step to approach the solution for such uncertainty was the JODI initiative in which contribution to more oil data has taken place. The JODI initiative gave OPEC a framework to establish a long-term strategy. One of the long-term strategy goals is the expansion of the downstream oil industry (refining, petrochemical plants) where OPEC can obtain added value to their fossil fuel.
Limited refining capacity added additional pressure to include downstream projects. The limited refining capacity is due to the limited ability to most refineries in accepting other than light crude as a raw material. Most of these refineries have distillation column only. Thus, other form of crude oil (heavy, sour) will result in equipment corrosion. More pressure is being added to the energy market since light crude oil represent just 20 percent of the total global oil production. The remaining oil production is in the form of heavy sour crude where technological advancement is needed to process such raw material. Recently, Saudi Aramco decided to open its downstream operation for foreign investments. The foreign investments are considered a security to the forecasted expansion in future demand proposed by consumer organizations where petroleum products can be the future of the widely averted heavy crude.
The third issue is energy sources. The idea of diminishing fossil fuel demand by introducing other forms of energy, such as renewable energy, has been under question recently. From consumption perspective, the transportation sector plays a major role in keeping fossil fuel as a major source of energy. OPEC data shows that more than 53 percent of the fossil fuel demand comes from the transportation sector. This portion of demand can keep the oil industry robust. Therefore, shifting other form of energy sources to meet other sectors demand is a crucial challenge. Recent developments in climate change and its implications to the limited harvest show additional challenges to the bio-fuel industry. Not to mention the fact of energy yield in which more research is needed to assure its advantage to the energy market. The Institute of Science in Society, a UK based organization, said the following: “There is a huge debate over the energy balance of making ethanol or bio-diesel out of energy crops, with David Pimentel and Tad Patzek presenting negative energy balance for all crops based on current processing methods, i.e., it takes more fossil energy input to produce the equivalent energy in bio-fuel.
Thus for each unit of energy spent in fossil fuel, the return is 0.778 unit of energy in maize ethanol, 0.688 unit in switchgrass ethanol, 0.636 unit in wood ethanol, and worst of all, 0.534 unit in soybean bio-diesel.”The Jeddah Energy summit should discuss these developments to reach the desired mutual understanding. Once oil producers’ rights for equitable return in their exhausted commodities as well as consumers’ obligations toward containing excessive energy demand are addressed in a more research based approach, then we can deliver the concept of sustainable economic development.
(Tariq Qais Alsuqair {[email protected]} is an energy economics analyst at Trace Data International LLC, Alkhobar.)
