Construction Clients Group The Impact of Oil Supply Constraints on Capital Investment Strategy Archer Davis 1
• False Alarm !! • Oil below US$ 70 • Problem Solved • Save the SUV Archer Davis 2
If Only That Was So …….. Recent Events Demonstrate the System Dynamics • Supply & Demand Now Finely Balanced • Rising Demand Drove Prices Through the Roof • High Fuel Prices Destroyed Demand – after a while • Falling Demand Caused Rapid Fall in Prices • Volatility Will Continue to Keep the Balance • High Fuel Prices Made the Collapse Worse ?? • All Previous Price Spikes Linked to Recessions Archer Davis 3
What Happened to the Traffic ? 145 Figure 1 - Moving 12-Month Total on ALL Roads Auckland Traffic 140 Monthly Fuel Sales 3,150 135 Million litres/mth 3,100 130 3,050 125 3,000 2,950 120 2,900 115 2,850 110 2,800 2,750 105 Jul-98 Jul-99 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 2,700 2,650 2000 2001 2002 2003 2004 2005 2006 2007 2008 Archer Davis 4
If Only That Was So …….. All we Need is Recession to Keep Prices Down ?? • Supply may be in Still Rising - Very Slowly • Or in the Plateau Stage Now • But After “Peak” Oil Supply will Start Falling • Slowly at first then maybe Faster • The Only Way to Exit Recession & Settle Volatility ?? • Proactively Lower Demand – Ahead of Falling Supply This is Oil Depletion – this is the Energy Descent Archer Davis 5
What is Oil Depletion ? WE ARE NOT RUNNING OUT OF OIL • But there will be Max Rate of Production – Peak Oil • Now 86 m bbl/day = 31.4 bn bbl/yr • After Peak Oil rate of production will start to decline • But demand continues to grow • Example: Chindia phenomenon • So, A Growing Supply/ Demand Gap • Unmet demand = High Prices Archer Davis 6
Peak Oil Rules : It’s a Game of Two Halves 1. Production rate increases with added wells to max geological yield 2. Max production rate @ half way thru & can never return 3. The first half of the oil resource is higher quality & easier to extract 4. After Peak • production will decline • quality will decline • Risk profile will decline Archer Davis 7
Players in the Theatre of Peak Debate • Denialists • PollyAnnas – Cornucopeans – Petro Prozac – Abiotic Oil – Techno Mirage – Conspiracy – Market Mystic – Not yet Proven – Climate Change ? Will – Drill, Baby Drill Reduce CO 2 • “Doomers” – • Life Boats – External Locus of – Internal Locus of Control Control – Catabolic Collapse – Catastrophic Collapse – Managed Depletion – End of Times – Energy Descenders – Armageddon – Transition Townies – Head for the Hills Archer Davis 8
Forecasts of Supply, Demand & World GDP International Energy Agency (IEA) • Set up by OECD countries (includes NZ) in 1970s • Agent for oil management • Annual, semi-annual and monthly reports • Focus on Supply and Demand related to world GDP • Many others, including – Energy Information Administration EIA – US Dept of Energy – Oil Drum – ASPO Archer Davis 9
Supply / Demand Shortfall OPEC 2.75 Medium Term Supply & Demand Growth (IEA) Crude = $$ Price Gains New Projects Delayed All Very Complex OPEC 2.25 • Gas High Cost Liquid • High Risk • Biofuels New Technology 1.75 • Credit Squeeze ?? 1.45 mb/d mbbl/d Non- 1.25 OPEC Crude Demand 0.75 @ 4.5% GDP High 0.25 Demand @ 5.9% GDP Low 2007 2008 2009 2010 2011 2012 2013 Archer Davis 10 Demand -0.25
Draft ARC Study of Future Oil Prices (July 2008) Scenario History (McCormack Rankin) 35 $1,000 Long Term Demand Drop Due to $900 Falling Supply, High Price & Falling GDP 30 $800 25 $700 Volum e (Gbbl/yr) Price ($2007/bbl) Short Term $600 20 Price Dip $500 (+ US$80) 15 $400 Due to new Projects $300 10 $200 5 Long Term Sustained Price Rise $100 - $0 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 Archer Davis 11 Production Capacity Actual Production Demand Sold Cleared Price
WORLD (Excludes Biofuels) What Happens After the Peak ? Conventional Oil Peak 2006 Total Oils Peak 2010 Archer Davis 12
What Happens After the Production Peak ? SOME SCENARIOS TO EVALUATE “WHAT IF ?” • Portland, Oregon (2007) approx 2.5% pa (50% by ’32) • Average long term World Decline 4% • Scenario for War or Disaster not considered • ------------------------------------------------------------------------ 1. Risk & Probability Scenario (+ IEA Reduction stages) 2. Scenario “Progressive 2+4+8” 3. Electric Vehicle Replacement Scenario Archer Davis 13
Portland Plan to reduce by 50% In 25 Years Many Other Cities incl London, Hamilton, Ontario, Ventura, Calif have similar initiatives Final report 7 th March 2007 Archer Davis 14
Risk & Probability Approach to Energy Descent Meta Forecasts & IEA Fuel Reduction targets (Dantas, Krumdieck) Risk Appetite with p = 50% Allow 10 years preparation Archer Davis 15
What Happens After the Production Peak ? • Scenario “Progressive 2+4+8” – Assumes – Supply/Demand Squeeze from 2012 (IEA date) – Initially 2% only decline (new fields still added) – 2007 IEA 4% net annual decline – Then Avge 8% (>10% OECD & some national limit) – Result is 70% decline by 2032 (Graph Shows %age daily Oil Production rate remaining) Archer Davis 16
Why the Steep Production Decline Later ? � Global net decline 5% pa for 2008-2013 � Need > 3.5mb/d new start-ups every year to stand still � OECD facing mature field decline >10% pa Archer Davis 17 International Energy Agency MTOMR Sept 2008
Energy Descent Scenarios 100% 2%, 4%, 8% Progression 90% 80% 70% 4 % Regular Descent 60% 2.5 % - Portland Energy Plan 50% 40% 30% 20% 10% 0% 2012 2017 2022 2027 2032 2037 Archer Davis 18
The Economic Effects of Energy Descent in NZ Economy & Energy Growth Closely Related MED: - Energy Data file June 2008 Archer Davis 19
Energy Use & GDP Are Tightly Coupled governments try to “uncouple” GDP & Energy (In NZ 50% of energy is from Oil in 2007) If NZ Can’t Decouple 14% DECOUPLED = 9% GDP Decline 50% Energy demand (Consumer) 0.6% GDP Decline/yr GDP = Sustained Recession 20% 4%Oil = 1.5% avge Energy Decline 0% 23% Energy Supply Drop 1990 2005 2012 15 years 15 years 2027 Archer Davis 20 (MED Energy data 2006)
#1. Improve Energy Efficiency Sustain Economy #2. Energy Efficiency Slides Economy Slides Archer Davis 21
The Electric Vehicle Scenario 3,000,000 2,500,000 Lower /cap 2,000,000 Ownership ICEs 1,500,000 EVs 1,000,000 500,000 0 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 BEV replacement can be achieved But: • New Vehicles vs Second Hand Imports • Cost 2 - 3 times • Break even with ICE not before $4 / litre Archer Davis 22 • Probably Recession Conditions
Planning to Decouple in Progressive Energy Descent Scenario 100% 2%, 4%, 8% Progression 90% 2.5 % - Portland 80% Energy Plan 70% Roll-Over Transition 60% 50% Orderly Descent 40% 30% Rapid Production Decline 20% 10% 0% 1 6 11 16 21 26 Archer Davis 23
How to Decouple ? Reverse Transport & Land Use Hierarchies Link Land Use & Transport Planning Short to Medium term 2016 - 2022 • No More Subsidy for Personal Car infrastructure • Stop & Withdraw Free Parking • Invest in PT – include operations, e.g. frequency • Convert PT to Electric – Rail – Trolley buses - Trams • Safety, Amenity for Vulnerable Modes – Walking – Cycles - Motorcycles • Freight Management Strategy with Business • Focus on Small town Centres – Counter “Big Box” • Energy Sensitivity in Planning – Shorter Travel • More Mixed Use & TOD with Mixed Use • Defend MUL & Avoid Distant Dormitory Cities Archer Davis 24
A Vision of Transport in Rapid Descent Period Medium to Long Term - Progressive 2022 - 2038 • Liquid Fuels - Expensive, Rationed • Private Cars - Electric, HOV, Workshop, PT • Electric PT Backbone & Feeders - Electric Rail, Trolley Buses & Trams, CNG Buses • Electric Rail to North Shore – with Freight Capacity • Convert Arterial lanes for Trams & Trolleys • Convert Motorway Lanes to Trolley Bus & Light Rail • Freight using Trolley network & CNG distribution • Road Maintenance Cost Crisis: - Abandon No Exits / Minor Roads, Preserve Footpaths for Cycles, Carts Archer Davis 25
What About That Rapid Descent Scenario ? (Portland Chose not to Plan for this) 100% USA / Canada & China Bilaterals 80% 60% EU & India Bilaterals 40% 20% 14 m bbl/day production extracted each time 0% 2015 2020 2025 2030 2035 2040 Archer Davis 26
• Oil is a Limited Resource – It Will Run Out • Oil won’t Suddenly End – It Will Gradually Deplete • The Peak Moment is Uncertain, but not Far Away • Oil = Transport = Economic Activity • Energy and Economy Are Closely Linked • Energy Descent Could Mean Economic Descent • Risks of “Inaction” Higher than “Action” to Decouple • Transport Infrastructure Must Change to Decouple • City Structure Must Change to Decouple • How Does Your Client’s Business Fit the Challenge ? Archer Davis 27
Thank You ! • Any Questions ?? Archer Davis 28
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