London, 12 November 2009 

The alarmism and defeatism pervading previous editions of the International Energy Agency's (IEA) World Energy Outlook (WEO) have been partly replaced this year with an optimistic emphasis on new sources and technologies. 

If previous editions owed their inspiration to Thomas Malthus ("we're all doomed"), this year's is an implied tribute to the great Victorian engineer Isambard Kingdom Brunel ("yes, we can").

WEO2008 examined the challenges of finding and developing enough new oilfields to meet growing demand and replace output lost from the aging super-giants . WEO2009 takes an in-depth look at the transformative impact of the huge new gas resources being opened up and how to square growing energy consumption with restricting the build up of carbon dioxide (CO2) and other greenhouse gases in the atmosphere.

In line with the rest of the industry, recession has helped banish fears about physical scarcity (peak oil supply) in favour of a recognition conventional oil consumption is peaking in the developed world. There is instead an emphasis on how to meet continued growth in both oil and energy demand in developing economies in a sustainable way.

Technology Shift Alters Debate ... 

Britain's Guardian newspaper blames the shift in WEO on American pressure. It cites conspiracy theorists and peakoilers who claim risks are being downplayed to avoid another speculative spike while the recovery remains fragile .

In reality, the shift has been driven by technological and price changes that have already revolutionised the energy industry and promise even greater adjustments in the years ahead. The problem with peak oil is that it is the right answer to the wrong question . With its exclusive focus on "conventional" oil production it frames the question in the wrong way:

(1) Conventional oil production peaked years ago, if by conventional we mean output from land-based wells. Most of the marginal supply growth is coming from offshore fields that would have been considered anything but conventional 30 years ago. Improvements in technology have opened up new sources of crude that were previously unthinkable. There is no reason to think the technological revolution will stop now.

(2) The focus on conventional crude obscures the much larger reserve base of other hydrocarbons -- natural gas, coal, bitumen (oil sands) and kerogen (oil shale), let alone methane hydrates (natural gas trapped in ice formations at the polar caps, in the permafrost zone and on the ocean floor). Using the IEA's own conservative assumptions about recovery rates, conventional crude accounts for only 10-20 percent of the world hydrocarbon reserve base.

Traditionally, each of the main primary energy resources (oil, coal, gas, hydro and nuclear) was analysed in isolation (hence the worry about peak oil). Crude for transport fuels, coal and natural gas for heating and electricity generation.

But technology and the policy imperative to cut CO2 emissions is changing the landscape and forcing a more integrated approach.

The energy sector is evolving towards a world in which the full range of primary sources (oil, coal, gas, hydro, nuclear, wind and solar) are used to produce just two high-quality forms of energy: liquid fuels for transportation (gasoline, diesel, and perhaps in the far future hydrogen); and electricity (for all other including heating, lighting and mechanical power).

Questions of Cost & Engineering ... 

It is already possible with existing technologies to break down barriers between primary energy in different forms, converting coal, gas or solar to electricity or liquid fuels (via  gasification, Fischer-Tropsch synthesis and steam reforming).

From a physics perspective, it is simply a question of applying sufficient heat and pressure, transforming solids into liquids or gases, and re-arranging carbon and hydrogen atoms. The main constraints are energy consumption and cost. But credible engineering studies suggest an almost unlimited amount of energy could be available at prices less than $100 per barrel oil-equivalent . The main practical constraint is financing and uncertainty.

The capital cost of deploying these technologies widely is enormous and they are only really commercially viable at oil prices of $70-100 per barrel. For the private sector to make these investments, investors would need to be fairly certain oil prices will remain high in the medium term, and government policy will set a high price on carbon emissions (otherwise straight coal and gas combustion will dominate everything else).

The reason Fischer-Tropsch coal-to-liquids (CTL) technology has never been widely deployed in the past is because every time surging oil prices rekindle interest in it, the price crashes making the technology uneconomic again. Investors will not commit funds to plants capturing and storing CO2 emissions or turning second-generation (cellulosic) biofuels such as switchgrass into ethanol and electricity unless policy guarantees them a market (either through mandates such as the Renewable Fuels Standard or a permit-driven high carbon price).

Prices & Uncertainty 

The energy industry does not need ever-higher oil prices to bring onstream all these new resources (unconventional oil and gas, nuclear, solar and wind) and deploy the means to capture and store CO2 emissions. Real prices in the $70 - 100 per barrel range should be sufficient.

But it does need a reasonable degree of assurance prices will not collapse again to $20 and that the playing field will be decisively tipped in favour of low-emission forms of energy for the long-term.

The need to reduce uncertainty and provide a stable framework for investment is the primary reason it is so important for policymakers to start making firm decisions about what (if any) action they are going to take to price and curb CO2 emissions. The current dithering and indecision is paralysing investment even as the old infrastructure ages and becomes obsolescent.

Even with an early decision on policy, full transformation of the energy industry will take 30-50 years since so much of the technology on both the supply and demand sides is embedded in long-lived infrastructure (from power plants to homes) that turns over only very slowly.

But investors betting on ever-escalating energy prices are likely to be disappointed. Inflation will eventually push nominal oil prices to $150 and even $200 per barrel. But in real terms prices are already high and there is no reason to believe they need to rise much above their current level of $80 to encourage the development of sufficient energy supplies and provide incentives for conservation.

Prices may spike above this level for cyclical reasons for short periods. Goldman Sachs has predicted strong returns from commodities over the next two years as a result of cyclical recovery .

However, an investment strategy based on ever-rising oil and energy prices over the next 5-10 years is based on a profound misunderstanding about the challenges and opportunities facing the industry. A better strategy recognises there will be short-term cyclical opportunities, as well as strong returns on companies that control the new technologies or make best use of deploying them in the field.

Ends --

By John Kemp, Reuters columnist. The views expressed are his own