Perspectives on the pricing of Energy

by
Mahmud S. Amin, Assistant Secretary General

Util the prices of various alternative sources of energy are linked by a specific formula, the world will continue to move perilously close to the precipice of a real energy crisis. Lacking such a formula the crisis will result from the interplay of the following factors :

1) Inordinate Consumption of Energy Resources

Oil reserves account for only one-fourth of the world’ s total energy reserves, yet they go meet the greater part of world energy needs. On the other hand, the dominant commercial fuel of past days - coal - makes up 70% of the world’ s energy reserves but meets only one-fourth of its demand. The ideal situation would be for each energy source to be consumed in proportion to its share in total world reserves. This was the case prior to World War II, but in the postwar period pressure was applied to keep the price of oil low, which led to its inordinate consumption during the’ 50s and ’60s. Because of its unique qualities, the use of oil should be confined to internal combustion engines and to feedstock for the petrochemical industry, and not for power stations or as boiler fuel, for which coal is more appropriate.

2) Failure to Develop Sources of Energy
Incentives to develop energy alternatives, such as coal, tar sands and oil shale, were killed or, at least weakened, by the policy of cheap oil and the abnormal haste in its consumption. Resarchers and industrialists, enticed by the advantages of cheap oil, worked to develop new methods for its production and transportation. Pipelines replaced railroads as the means of transport of oil, and the less efficient method of percussion drilling gave way to the rotary method, making it possible to drill more and dreeper wells at lower cost. On the other hand, despite the technological developments required for the production, transportation and processing of coal and other sources, their technology was allowed to languish.

3) Failure to Develop Offshore Exploration, Drilling and Production Technology
Even for petroleum, efforts forcused on the exploration and development of easly explorable areas, because the freezing of oil prices in the ’50s and ’60s discouraged exploration and production in inacessible areas and in the polar regions and deep waters where operating costs were high, or adequate exploration and production technology was lacking.

Although the ultimately recoverable reserves of oil contained in the earth’ s crust are recognized to be in excess of 2000 billion barrels, only half of this volume has been explored to date. The remainder is awaiting the development of new exploration and develpment tools. These tools cannot be developed, however, unless oil prices are increased. As is well-known, the high cost of production og oil from the North Sea - around $ 7 a barrel - would have deterred the exploration and development of most of the North Sea oilfields had it not been for the 1973 oil-price increase.

4) Drop in Oil Recovery Rates
The rate of recovery of oil in place varies from 25% to 30%. While secondary and tertiary recovery methods can increase this rate, the cost involved is so prohibitive as to exceed the cost of oil produced Oil reserves thus have remained largely untapped.

During the 1960s, the employment of methods for enhanced recovery was scarcely promoted by the freeze on and later drop in oil prices. In this connection it is worth noting that, as a result of the relative increase in oil prices in 1974, a great quantity of oil was produced in the U.S. from wells abandoned when oil was cheap.

5) Wasteful Use of Rnergy
It is perhaps here that the consequences of the freeze on and low prices of oil are most visible, especially in the U.S. , where consumption of energy per capita is almost double that in West Germany. Prodigality in consumption is seen everywhere : in the dearth of adequate insulation in buildings (since enrgy for heating and cooling is still cheaper than insulating material), in the use of "gas guzzlers" and in industry. The efficient use of energy in cars, electrical gadgets, household equipment and other machinery can only be achived trough higher prices

It is evident that the relatively cheap price of oil is the stimulator of elements that could ultimately precipitate a real energy crisis. What is needed is a formula linking the price of oil with the prices of alternative enrergy sources, taking into account the comparative costs of production, available reserves and the unique characteristics of oil. Such a formula would have the effect of raising oil prices, and thus influence economic growth in the consuming countries. But the experience of the quadrupling of oil prices in 1974 indicates that, altough the rise had a definite impact on economic growth, this impact was reflected with greatest intensity during during the years 1974 and 1975 and declined there-after. If the price of oil is linked with the prices of alternative sources of energy, making sure that the link is gradual, say over a five to ten-year period, the effect of rising oil prices on economic growth could then be contained.

With this formula, alternative sources of energy would meet their fair share of world demand, exploration techniques would be improved, and ates of recovery would be enhanced. Also, the consumer would be made minful of the need not to waste energy.