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Wednesday, July 06, 2005

Back to the oil peak

The black stuff has world order over a barrel

Everyone knows oil will run out one day, but some industry experts predict the decline will start as soon as 2008

Larry Elliott, Monday June 27, 2005, The Guardian

Crude oil is at $60 a barrel and rising. British motorists are paying record prices on the forecourts. The £1 litre may not be that far away. Traders on commodity exchanges are warning that a cold winter in the northern hemisphere could see prices, already up 38% since the start of the year, rise a lot further.
Policymakers are clearly worried by the short-term picture. The G8 summit at Gleneagles next week will discuss the likely impact of high oil prices on the global economy and what the rich countries of the west ought to do in response. Every other surge in the price of oil in the past 30 years has been associated with a slowdown or full-scale recession in the world economy, and the fact that the increase seen since the start of 2003 has so far been shrugged off is no cause for complacency. Higher oil prices raise business costs and cut the real incomes of consumers; that means profit margins are shaved and consumer spending is blunted.

The real problem, however, concerns the longer term. There is a strong possibility that what we are facing now is not simply a temporary mismatch between demand and supply that can be sorted out by Opec pumping more oil or by exploiting marginal fields in the world's most inhospitable places. Rather, it is that we are in the early stages of an energy crisis that will fundamentally affect our lives over the next few decades. If that is so, western policymakers need to be thinking hard - and thinking hard now - about what life is going to be like when the oil and gas run out.
Everyone knows that oil will not last for ever. The world is not going to move from current levels of production to zero overnight; there will be a long process of gradual decline. Using techniques originally developed by M. King Hubbert to assess the profile of US oil production, industry experts can estimate, with a high degree of certainty, the high point of global output - or peak oil, as it is known.

Hubbert calculated this with accuracy for the US, pinpointing the 1970s as the zenith of production. For the North Sea, peak oil was at the end of the 1990s.

The world as a whole has yet to reach that point. But before you breathe a sigh of relief, consider this. If the experts are right, global peak oil could arrive in 2008.

The estimates cannot be precise. It could be that a big fall in demand or the exploitation of new reserves could push the date back, but the experience of the US is that the opening-up of the Alaskan fields and drilling in the Gulf of Mexico merely shifted the date of peak oil back a few years.

Once peak oil has passed, the models suggest stocks will dwindle over a period of three decades at a time when, on current trends, demand for energy will be rising strongly. In 30 years, oil production could be down by three quarters.

This is a staggering figure. Two hundred and fifty years of industrialisation have been built on the availability of cheap fossil fuels, first coal, then oil and gas. It is not just our cars that depend on oil, it is our entire way of life. To take one example, the massive increase in agricultural productivity would not have been possible without oil-based fertilisers. Fossil fuels have made it possible to sustain a world population that has tripled since the 1920s. For the past century oil has been the lubricant for capitalism in a period which has seen the fastest growth, by far, in history.

A world without oil is bound to represent a massive economic, social and political shock. It's not hard to construct a dystopian vision. First, there will be a power struggle over dwindling oil stocks. Already, there are signs of a new Cold War emerging as the US and China seek to curry favour with poor African countries that are seen to have potential as oil suppliers. It could get a lot worse that that. The oil junkies of the west will be like heroin addicts suffering from cold turkey: prepared to do whatever it takes to get a fix. Given that reserves of oil and gas are concentrated in parts of the world that could hardly be called politically stable, this does not bode well.

Second, there is a threat of economic retrenchment. As the British scientist Colin Campbell puts it in a book published today* "Cheap and efficient transport opened the world to trade, while the manufacture of consumer goods exploded. The new energy also transformed agriculture, providing the food for a growing population that has expanded sixfold, exactly in parallel with oil production. Oil was in turn followed by gas, increasingly used for electricity generation, which brought power and light to households throughout the world. Now as the 21st century dawns we face the onset of the natural decline of the premier fuel that made all this possible, and we do so without sight of a substitute energy that comes close to matching the utility, convenience and low cost of oil and gas."

When we fret about whether the economy is growing by 2.5% a year or 3% we are ignoring the gorilla in the room: our way of life is unsustainable without a cheap and reliable form of energy. We may soon be waking up to lower growth, falling populations and a reduction in living standards. Indeed, without urgent policy action we are likely to get all three.

So what are we doing to prevent this? Well, not a lot. The first response is to deny there is a problem and dismiss talk of a pending energy crisis as scaremongering. A second response is to say that it might be a possibility, but will occur on somebody else's watch. A third is to follow the example of Mr Micawber and assume that something will "turn up". That "something" is normally nuclear power. In the light of the potential challenge, this is an inadequate response.

There is both a practical failure and a conceptual failure here. The practical failure is to see nuclear power as a magic bullet. Where it exists, nuclear has only been possible through enormous public subsidies and, as a report due to be published by the New Economics Foundation will outline later this week, the true cost of nuclear has been underestimated by a factor of three (even leaving to one side the possibility of terrorism or accidents).

There has been an opportunity cost, of course. Every pound spent on nuclear could have been spent investing in cleaner alternatives such as wind, wave and solar power. Some countries have seen the light. Germany has abandoned nuclear and is heavily subsidising solar energy produced by photovoltaic cells, currently 30 times as expensive as energy produced by fossil fuels, in the expectation that the long-term investment will pay dividends. Germany, Japan and the US are the world leaders in solar power; the UK is nowhere.

The conceptual failure is to assume not only that business as usual is possible, but that it is also desirable. Peak oil is likely to be the point of diminishing returns for the entire big-economy, growth-at-all-costs, free-trade, globalised model of capitalism. Factor in a 75% drop in oil production and the current strategies for production, distribution, transport and town planning don't look so clever. As energy prices soar, it will seem ludicrously wasteful to cart goods halfway round the world. Countries that do not have their own local supplies will have to pay through the nose. Protectionism will cease to be a dirty word. Localisation will be all the rage.

*The Final Energy Crisis; edited by Andrew McKillop and Sheila Newman; Pluto Press; £15.99.


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