There’s a quiet crisis going on in Uganda. Things aren’t looking so good for our oil dreams. In the last 6 months the global price of crude oil has plummeted by close to 50%. Consequently, the estimated value of Uganda’s recoverable oil reserves has also fallen by over $70 billion. True to form however, pump prices in Uganda only ever seem to respond to increases in global prices and have barely moved. Many other nations are in trouble because of this. Venezuela with the worlds largest proven oil reserves requires crude oil to be above 100$ a barrel to balance its budget. Uganda’s problem is that it might not be able to produce oil profitably if global prices keep falling. Even worse for Uganda is that since we haven’t started producing oil yet, inertia is against us as investors have less incentive to invest in new areas.
The fall in the price of oil is mainly due to a price war between the US and OPEC. However, technology might also have a significant role to play in this price war. Particularly interesting is that it’s not necessarily technology on the market today that could be driving global oil prices down, it’s technology that might be as far as 10 years from the market. Consider what happens when an oil producer realises that the technology to replace oil is 15 years away from doing so. The oil producer will ramp up production to sell as much oil as possible in those 15 years so he isn’t left holding oil that no one wants. In this scenario the few countries that can meet world demand at the lowest cost of production will likely be the only ones exporting oil. The likes of Venezuela (and Uganda?) that require oil to be above 100$ a barrel will be unable to make money from their reserves. It might also mean that oil might never be profitable for Uganda to export unless we can pull off the miracle of having one of the most cost effective production processes.
Is there any evidence out there that shows technology is close to making oil obsolete? Let’s have a look at the last 2 years in renewable and alternative energy news. Note that most of the news linked to below is from just the last 8 months.
In the next 10 years Germany intends to produce 40-45% of its electricity from renewable sources. Wind power in the Nordic and Baltic states is set to significantly drive down the demand for fossil fuel based energy sources. There are solar energy breakthroughs and innovations coming through at a faster pace than ever with more than 1 breakthrough a month on average the last 6 months. One study by Deutsche Bank predicts that solar energy will be competitive with fossil fuels by 2016. Yet another financial advisory firm actually says solar and wind have already reached parity(pdf) with fossil fuels.
Electric Vehicles (EVs)
Back in June, Tesla open sourced all its patents. This is significant because it means that other car manufacturers can use Tesla developed technologies to build their own EVs without fear of patent infringement suits or costly licensing fees. With tesla patents out there for the taking, it’s no wonder other manufacturers are considering building hybrid and all electric vehicles as well. Tesla itself plans to be producing half a million cars a year by 2020.
All this means there is a chance demand for internal combustion engines might start to fall as more and more people buy electric. Currently, more than half of crude oil refinery products ends up in internal combustion engines.
However, falling oil prices typically negatively affect the electric vehicle market. Cheap oil means less of a reason to go electric, due to this Tesla stock has fallen close to 20% since mid November.
Compared to the electric car industry, advances in battery technology are relatively immune to drops in global oil prices. This is because modern demand for electronic gadgets (think tablets and smartphones) is more than enough to drive innovation in batteries since these devices largely ran on Lithium Ion battteries.
Currently, electric batteries just don’t have the energy density of oil products, so petrol driven cars still have more range than their all electric counterparts. This is set to change soon due to what’s happening in the world of batteries. Here’s a quick list of battery news mostly from the last 8 months.
Nanyang Technological University (NTU) in Singapore has developed a lithium ion battery that can be recharged to 70% capacity in just 2 minutes. The battery also has a lifetime thats up to 20 times longer than that of current Lithium ion batteries. It gets even better, the manufacturing process for this battery is compatible with that of current batteries. It also replaces the graphite anode with the cheaper titanium dioxide. Don’t be too surprised if Tesla includes this in it’s Giga factory.
Another notable breakthroughs came from a Stanford University team with a design that could triple the capacity of existing lithium ion batteries.
Tesla is targeting to reduce the cost of EV batteries by 30% with its Giga Factory by 2020. Fuel and maintenance costs for EV batteries and motors are already much lower than for combustions engines. Some analysts believe that if tesla surpases its 30% target and the cost of batteries drops to around 100$/KWh, then EVs will be cost competitive with combustion engine vehicles. With recent and future breakthroughs in battery technology, it is entirely plausible that Tesla will significantly surpass 30%. 5 years is a very long time in technology.
There’s been significant developments in nuclear fusion as an alternative energy source this year. From the controversial Energy Catalyser of Andrea Rossi that many say is just too good to be true; to LPP fusion’s focus fusion and Lockheed Martin’s Compact Fusion. All of these are to be more compact and orders of magnitude less costly than the 20 billion dollar ITER that most believed would be the first to reliable fusion power. Lockheed Martin in particular is promising market readiness as in soon as a decade.
Regular nuclear fission isn’t standing still either. Leslie Dewan’s transatomic power is designing a Molten salt reactor that consumes nuclear waste. TerraPower a company Bill Gates has invested in, is developing a travelling wave reactor that needs to be refuelled only once every 30 to 40 years and reduces nuclear waste by consuming depleted Uranium. Toshiba’s 4S reactor is a small reactor that is inherently safe and also doesn’t require refuelling for up to 30 years. Other companies such as NuScale Power, Gen4Energy and Babcock &Wilcox are also working on the next generation of safe, modular reactors. Some of which are small enough to fit on a truck.
With modular nuclear surpassing the energy density of petroleum by several orders of magnitude, certain remote areas in the developing world might already find nuclear the cheaper energy option if they knew to look into it.
The bottomline here is that when you consider technology the relevance of oil has a finite lifespan that might much be shorter than the lifespan of global reserves. If renewables have already reached parity with oil, then we can be sure that oil is unlikely to fully recover from the drops of the last 6 months and our government had better have a good plan B.