Markets

Week in Oil & Gas: Peak Oil Vs. Peak Demand, Obama's Budget and Ethanol Gets a Pass

By Kirsten Korosec

Updated on: February 8, 2010 / 11:31 AM EST / MoneyWatch

BP CEO Tony Hayward -- just a week after warning the oil and gas industry was facing a supply challenge and would need to increase output to 100 million barrels per day -- delved a bit deeper into the peak oil debate. In short, the head of Europe's largest oil and gas company said the world has plenty of oil and is not approaching peak oil supplies. But ... he believes some time beyond 2020 the industry will experience peak oil because of demand.

Hayward's peak oil thoughts in The Guardian:

"I personally â€" and BP â€" have never believed we will see peak oil because of supply. We always believed we would see peak oil because of demand. There will come a time â€" I believe it is beyond 2020 â€" when because of the changes in the energy portfolio, because of the drive for energy efficiency, because of the introduction of biofuels, demand for oil will peak."

What's so different between peak demand and peak supply, FT's Energy Source asks? The blog notes that the "demand/supply dichotomy can be see as a matter of semantics". For example, peak oil economist Jeff Rubin writes about the effect that more expensive oil will have on the world -- which blurs the line between peak demand and peak supply.

Hayward is not alone in his thoughts on peak demand. The International Energy Agency's chief economist recently said in a Reuters report, oil use in the developed world will never return to 2006 and 2007 levels because of a greater use in alternatives and greater fuel efficiency. Hayward sees world demand for oil will hit 100 million barrels per day sometime after 2020 before it peaks. Supply, meanwhile, will remain abundant.

Hayward did, in an interview with BBC, hit on the crux of access.

"There are some challenges getting out in some places, mainly to do with geopolitics. But there's plenty of oil in the world and its going to be demand side phenomena.

In the U.S., the focus was on government investment in energy. President Obama released his fiscal 2011 budget. The budget provides $28.4 for the Department of Energy to develop clean energy technologies, invest in science and nuclear energy. The budget included $36 billion in new loan authority to expand support for loan guarantees for nuclear power facilities.

For all of the items included in Obama's budget, it was the proposal to end $36.5 billion in tax breaks for oil and gas companies that received much of the attention. The budget proposes ending deductions for some drilling costs, tax credits for low-volume oil and gas wells and a manufacturing tax deduction for oil and gas companies.The manufacturing tax deduction would hit already struggling refiners where it hurts the most. The White House Office of Budget and Management estimates the removal of the manufacturing tax deduction would raise $17.3 billion over 10 years if enacted, the Oil and Gas Journal reported.

American Petroleum Institute President and CEO Jack Gerard summed up the industry's concerns about ending the tax breaks. In short, the move would kills jobs, hurt the industry and ultimately injure a still-recovering industry.

Another industry received what the Houston Chronicle's energy blog called "a big wet kiss" from the federal government. The government announced a major policy announcement on biofuels last week, which included the EPA's release of its final Renewable Fuel Standard program rules. The RFS2, as it's called, increases the required volumes of renewable fuel to 36 billion gallons by 2022, among other policy moves. It also gives corn-based ethanol a pass and drops the cellulosic ethanol requirement for 2010 by 93 percent. The cellulosic target is now 6.5 million gallons for 2010. The drop in the cellulosic mandate came after EPA officials canvassed 30 advanced biofuels companies and found delays in production plans.

The corn-based ethanol industry has anxiously awaited the EPA's RFS2 rules, which could have -- but did not -- derail new producers from coming on line. The EPA ruled that all corn-based ethanol meet the requirement that renewable fuels save at least 20 percent of greenhouse gas emissions.

There was fear among ethanol producers that the so-called lifecycle assessment, which measures the impact of fuels from the time the feedstock is planted to its eventual use in vehicles. Under proposed rules last year, corn-based ethanol would have fared poorly because it included indirect effects of using food crops for energy. This would presumably cause farmers in other countries to convert forest, peat and grasslands rich in carbon into land suitable for growing crops and inadvertently release more greenhouse gases.

Additional BNET Energy coverage from last week: