June 17, 2008 | posted by Michael Baxter in Climate change, Oil |

Oil touched $140 a barrel yesterday, and still the debate roars on:  is it a bubble or is expensive oil here to stay.

We have argued that, actually, neither is right.  Sure, the way oil has soared in recent years does feel bubble-ish, but there is no doubt that the fundamental reason for expensive oil is demand outstripping supply.

We have argued though, that just like in the housing market, when something is so expensive that people struggle to be able to afford it, it will fall in price eventually.

It is like that now.   Then again, our spending on oil as a percentage of GDP was higher in the 1970s – it would need to close in on $200 before we reached a comparable percentage today. 

Even so, evidence is mounting that consumers are reining in on their journeys.  In the automobile world demand for fuel efficient cars is on the rise.

The subsidies imposed on oil in some Asian countries are distorting the markets – but remember, subsidies come with a price.  Governments have to find the money to fund subsidies – and this money will usually come from taxes.    The longer oil stays above $100, the more likely it is these subsidies will fall.    They key of course is China, but a cut in subsidies is unlikely this side of the Olympics.    An appreciating yuan will make oil cheaper in terms of China’s currency – so this will probably help support demand too.

But then there is another side of the equation.

While demand falls, in most parts of the world, the hunt is on for new sources of supply.

In today’s Independent, Margareta Pagano wrote about the deposits of oil sitting in the Barents Sea, between Norway and the Arctic.  Apparently, around a fifth of the world’s proven reserves dwell here, but it is expensive to get at – and dirty too.

Ms Pagano quoted Daniel Yergin, a recognised expert on oil.  He is dismising talk of peak oil, and saying that theories saying we are running out of oil have done the rounds four times before. 

But perhaps the real hope comes from technology.  There is nothing like oil going for $140 a barrel to enourgage innovation.

In Japan, Professor Makoto Watanabe at the University of Tsukuba reckons he has found the answer.   Have you ever heard that saying: “horses sweat, men perspire, and ladies glow”?  Well here is one to add to that list – algae sweats oil.

The Japanese government has been beavering away since 1973 trying to investigate a method of creating oil from algae.    According to an article on Nikkei Net, Professor Makoto Watanabe’s laboratory, the place where he is trying to discover the solution to the oil crisis, is full of – “litre flasks filled with pale green liquid frothing in the light from fluorescent lamps.”

Apparently, the US government has calculated that over  a year a, “10,000 square-metre site can throw up 0.2 ton of oil from corn and 6 tons of oil from oil palm, but 47-100 tons from algae,” or so says Nikkei Net.

But while one Japanese prof tries to find the answer floating in the sea, a Japanese company has come up with a different fix.

Yesterday, Honda launched its first hydrogen car.  It is powered by electricity produced by combining hydrogen with oxygen.  Mind you, don’t expect an instantaneous effect.  The company only has plans for 200 of these vehicles over the next three years.

The car may be from a Japanese company, but it is targeted at the roads of California.    When he was fighting for re-election, Arnold Schwarzenegger promised a hydrogen highway with 200 hydrogen filling stations.

The trouble with running cars by electricity is that you have to store the electricity – and batteries are heavy.

Presumably, hydrogen cars enable the generation of electricity, as it were, on the fly.

It is promising technology, but as ever there are snags.

Sure, while you are on the road driving your hydrogen car you are not burning up any significant quantities of fossil fuel.

But the process of creating hydrogen is problematic.  Hydrogen’s strength is also its weakness.

Remember chemistry from school, and in that top row of the periodic table, sat carbon.  So small are the carbon atoms that they can squeeze out of the tiniest containers.    Hydrogen is a friendly gas too; it likes to link up with other elements, such as oxygen, for example, when it can of course form water.

You can develop hydrogen by freeing up the hydrogen in water through vaporising the liquid, but that comes at a cost.  How do you heat it?  The cheapest way is through burning fossil fuels. 

Ultimately, the solution might lie with solar power, but that is some way off yet.

Hydrogen is tricky to transport too, and requires much larger containers than oil.     The answer may be with high-pressure hydrogen storage – but that carries a risk, a massive risk, for high-pressure hydrogen can be highly dangerous.

But the point is this.  There are solutions out there.    If governments and companies who control the budgets think oil will stay high, then research budgets will grow, and long-term fixes will be found.

Bizarrely then, the high price of oil is a good thing for the long-term.  If it does all prove to be a bubble, and bursts, and the price comes crashing down, the search for alternatives will go on hold.

In some ways we are better off hoping oil stays high for some time yet.