When will fossil fuel reserves be diminished?

Abstract

Crude oil, coal and gas are the main resources for world energy supply. The size of fossil fuel reserves and the dilemma that “when non-renewable energy will be diminished” is a fundamental and doubtful question that needs to be answered. This paper presents a new formula for calculating when fossil fuel reserves are likely to be depleted and develops an econometrics model to demonstrate the relationship between fossil fuel reserves and some main variables. The new formula is modified from the Klass model and thus assumes a continuous compound rate and computes fossil fuel reserve depletion times for oil, coal and gas of approximately 35, 107 and 37 years, respectively. This means that coal reserves are available up to 2112, and will be the only fossil fuel remaining after 2042. In the Econometrics model, the main exogenous variables affecting oil, coal and gas reserve trends are their consumption and respective prices between 1980 and 2006. The models for oil and gas reserves unexpectedly show a positive and significant relationship with consumption, while presenting a negative and significant relationship with price. The econometrics model for coal reserves, however, expectedly illustrates a negative and significant relationship with consumption and a positive and significant relationship with price. Consequently, huge reserves of coal and low-level coal prices in comparison to oil and gas make coal one of the main energy substitutions for oil and gas in the future, under the assumption of coal as a clean energy source.

Introduction

Fossil fuels play a crucial role in the world energy market. “The world's energy market worth around 1.5 trillion dollars is still dominated by fossil fuels” (Goldemberg, 2006). The World Energy Outlook (WEO) 2007 claims that energy generated from fossil fuels will remain the major source and is still expected to meet about 84% of energy demand in 2030. There is worldwide research into other reliable energy resources to replace fossil fuel, as they diminish; this is mainly being driven due to the uncertainty surrounding the future supply of fossil fuels. It is expected, however, that the global energy market will continue to depend on fossil fuels for at least the next few decades.

“World oil resources are judged to be sufficient to meet the projected growth in demand until 2030, with output becoming more concentrated in Organization of Petroleum Exporting Countries (Chedid et al., 2007) on the assumption that the necessary investment is forthcoming” (IEA, 2007b). According to WEO 2007 oil and gas supplies are estimated to escalate from 36 million barrels per day in 2006 to 46 million barrels per day in 2015, reaching 61 million barrels per day by 2030. In addition, oil and gas reserves are forecast at about 1300 billion barrels and 6100 trillion cubic feet in 2006, respectively (BP, 2007b). The World Energy Council (WEC) in 2007 estimated recoverable coal reserves of around 850 billion tonne in 2006 (WEC, 2007).

Table 1 shows the distribution of remaining reserves of fossil fuels. All figures are presented in giga tonnes of oil equivalent. Firstly, as seen in Table 1, coal constitutes approximately 65% of the fossil fuel reserves in the world, with the remaining 35% being oil and gas. Secondly, while the size and location of reserves of oil and gas are limited in the Middle East, coal remains abundant and broadly distributed around the world. “Economically recoverable reserves of coal are available in more than 70 countries worldwide, and in each major world region” (WEC, 2007). In other words, coal reserves are not limited to mainly one location, such as oil and gas in the Middle East. These two geological reasons support the fact that coal reserves have potential to be the dominant fossil fuel in the future.

Fossil fuel reserve trends tend to mainly depend on two important parameters: consumption and price. The Energy Information Administration (EIA) has projected that energy consumption will increase at an average rate of 1.1% per annum, from 500 quadrillion Btu in 2006 to 701.6 quadrillion Btu in 2030 (EIA, 2007b). Currently, the growth in world energy consumption is approximately 2% per annum (Mason, 2007). “In terms of global consumption, crude oil remains the most important primary fuel accounting for 36.4% of the world's primary energy consumption (without biomass)” (BP, 2007a). The International Energy Agency (IEA) claims oil demand as the single largest consumable fossil fuel in the global energy market will fall from 35% to 32% by 2030. Coal is the second largest consumable fossil fuel relative to the three main fossil fuels; in part largely due to consumption over the past couple of years. According to WEO 2007, “coal is seen to have the biggest increase in demand in absolute terms, jumping by 73% between 2005 and 2030” (IEA, 2007b). “Coal accounted for about 28% of global primary energy consumption in 2005; surpassed only by crude oil” (BGR, 2007). Reserves of gas in comparison to oil and coal will moderately increase for the next two decades, from 21% to 22% (IEA, 2007b). Although other energy resources are expanding in the world, the rate of fossil fuel consumption for energy will also continue to increase through to 2030 (Shafiee and Topal, 2008a).

The next important issue after global consumption of fossil fuels is fossil fuel price movement. Proven fossil fuel reserves will fluctuate according to economic conditions, especially fossil fuel prices. In other words, proven reserves will shrink when prices are too low for fossil fuels to be recovered economically and expand when prices deem fossil fuels economically recoverable (IEA, 2007a). In addition, the trend of fossil fuel prices significantly affects fossil fuel consumption. On the other hand, fossil fuel price fluctuations affect other variables such as international inflation, global GDP growth, etc. Consequently, the size of fossil fuel reserves depends on their prices.

The oil price is currently very high at around $140 per barrel in nominal terms. This is much higher than after several other oil price crises, such as the Iran/Iraq war, Gulf war and 9/11(WTRG, 2008). According to OPEC (2007), “OPEC benchmark crude price is assumed to remain in the $50 to $60 per barrel range in nominal terms for much of the projected period and rising further in the longer term with inflation” (OPEC, 2007). Therefore, the oil price at the moment is much higher than the OPEC prediction. Moreover, WEC (2007) forecast “the oil price based on the assumption that the average crude oil price will fall back from recent highs of over $75 per barrel to around $60 (in year 2006 dollars) by 2015 and then recover slowly, reaching $62 (or $108 in nominal terms) by 2030” (IEA, 2007b). Coal prices have had less fluctuation in comparison to oil in the last 50 years. The coal market depicts relatively constant coal prices in historical data.¹ WEC (2007) assumes that this trend will remain flat until the middle of the next decade, then increase very slowly, reaching just over $60 per tonne by 2030 (IEA, 2007b). Gas prices have generally followed the increase in oil prices since 2003, typically with a 1 year lag. Annual Energy Outlook 2007 predicted that the average transmission and distribution margin for delivered gas is projected to change from $2.38 per thousand cubic feet in 2006 to between $2.07 and $2.44 per thousand cubic feet in 2030 (2005 dollars) (EIA, 2007a). As a result, forecasting fossil fuel prices are uncertain and for the future are unpredictable.