The future of oil

Oil is very much in the news these days, with prices falling to record lows, around US$ 36 a barrel of crude. There are indications that good grades of crude oil might slide further down this slippery slope to reach around US$ 30. Oil has slumped to levels last seen in the global financial crisis in 2009 amid a global supply glut. While the prices of benchmarks West Texas Intermediate and Brent hover in the US$ 30s, they represent a category of crude - light and low in sulfur - that is more highly valued because it is easier to refine. Some producers of thicker, blacker and more sulfurous varieties have suffered heavier losses and are already selling a barrel for around US$ 25.

This is good news for net oil importing countries such as Sri Lanka and Japan, though it is not so good for oil producing countries. In fact, State oil authorities in Sri Lanka are mulling yet another price reduction, even though the hedging deal and other problems have created a mess at the Ceylon Petroleum Corporation (CPC). It does not help that the CPC is saddled with huge losses (Rs. 5 billion in the first four months of 2015 alone) and debts (Rs.350 billion rupees as at April 30, 2015 to State banks) due to a variety of factors such as fuel subsidies, non-payment of dues by certain government clients, inherent inefficiency and overhead expenses.

Vehicle users and other users of fuel (such as boat owners, machinery operators, and generator operators) will welcome any move to bring down fuel prices. The Government has already announced price cuts for kerosene, the poor man's fuel and LP Gas, now used by a large number of households for cooking purposes.

Pump

Granted, the prices at the fuel pump should reflect the cost of import, transport, refining, duties/taxes and dealer commissions, but even with all these factored in it should be theoretically possible to provide fuel at lower prices than those prevailing now. People have every right to expect a fuel price reduction in the prevailing world market scenario and the Government too is planning to introduce a new price formula system to cope with the adjustments in prices.

Low oil prices are a stimulus to any economy; it puts more money in people's pockets for spending on other goods and services and by pressing down on inflation, it provides a further boost to growth. How long this will last is another matter altogether.

Sri Lanka is a net importer of oil to the tune of US$ 6 billion a year, which is more or less the same amount remitted by our expatriate workers.

We must therefore look for new ways to reduce our fuel and energy bill - do not forget that local electricity generation still relies heavily on fossil fuels. Even a small step matters a lot in terms of energy conservation - if you leave your car at home and walk to the junction to buy this newspaper or turn off an unwanted bulb, that leads to a saving in our fuel import bill. These moves could collectively lead to a major reduction in fuel usage and hence, a much-needed lowering of our fossil fuel bill.

Summit

But we also have to look at the wider picture. At the recent COP21 climate change summit in Paris, all delegates agreed on the goal of a carbon free future which will essentially see the minimal use of oil. For now, however, oil very much retains its power to shock us, both positively and negatively. Indeed, the oil price drop is unlikely to last forever. The apparent glut in supply, spearheaded by Saudi Arabia and OPEC, which recently scrapped its oil production ceiling, means the amount of spare production capacity globally is quite small. It would require only a relatively minor disruption to the supply for the situation to reverse and prices to skyrocket. We have seen this phenomenon in the past in any case.

But cheap oil can be more damaging than we think. For starters, it can wean people away from beneficial moves such as electric cars and renewable energy. If oil is cheap enough, it might be more economical to run a petrol or diesel car than plugging in an electric car at night, when one considers the increased electricity bill. It can also drive people away from newer technologies such as hydrogen fossil fuel powered cars, which have just been launched.

Why pay a premium for a hydrogen car (which are still more expensive than even electric cars) when you can buy a cheap petrol car and run it on cheap petrol? That kind of thinking cannot be good news for the automotive research sector. Worse, cheaper oil encourages people to undertake more journeys by their personal vehicles instead of using public transport - which some people suspect could be another cause for severe traffic congestion. But there is no denying that everyone loves a good bargain while it lasts.

Consumption

But remember, oil is not an infinite resource. At present rates of consumption, oil will probably run out in less than 100 years, not counting the reserves zealously protected by many countries.

Even if these reserves are taken into account, all petroleum products including natural gas and coal are likely to disappear in the next 200 years, unless scientists can develop viable artificial alternatives or even explore (exploit ?) another planet, Star Trek style, that has these resources in abundance - and that is not likely to happen that soon.

True, none of us will be alive by that time but it should already send alarm bells ringing - are we really ready for a world without oil? The key is to rely more and more on renewable energy sources that will never really run out, such as solar, geothermal and wind.

As a bonus, these are non-polluting. It is thus the only way to preserve Planet Earth for the future for the benefit of generations to come.