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Peak oil

A peak in the production of oil is a real possibility before 2020, say observers

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Peak oil is 'getting closer' but the world is not ready

Tom Levitt

28th June, 2011

The end of cheap oil has got governments panicking to control prices rather than planning for a post-oil era. Tom Levitt reports

Was it a sign of desperation or show of strength?

In a surprising move, the major oil consuming countries, principally Europe and the US, agreed last week to release some of their emergency reserves of oil in an attempt to try and cut the high market price of oil.

It was only the third time in history such collective action had been taken, the previous being during the Gulf War in 1991 and in 2005, after Hurricane Katrina damaged offshore oil rigs, pipelines and refineries in the Gulf of Mexico.

Officially, it was to offset the loss of oil from Libya as a result of the ongoing conflict in the country. But there are suggestions the US and others had lost faith in the World's biggest oil exporter, Saudi Arabia, being able to increase oil production enough to keep prices from rising.

This comes after a leaked memo from a senior Saudi oil executive in February alleged the country's oil reserves were being overstated.

New era of oil

Regardless of the motives, the decision is being seen as the start of a new era of government intervention in the oil market.

'We have learnt a big lesson. This is a dry run for how governments will respond in a few years time when we get a permanent oil price rise,' says John Miles, chairman of the UK Industry Taskforce on Peak Oil and Energy Security.

Some observers go further in saying the move is evidence that we may already be entering a 'peak oil' period.

They say rising market prices reflect a falling confidence in the ability of key oil producing countries to increase production to meet the rising demand for oil from emerging nations like China (already the world's second largest oil consumer after the US) and India.

David Strahan, author of The Last Oil Shock, says while not definitive proof of peak oil, 'it shows doubts amongst countries about oil supplies and suggests we may be very close to peak oil'.

Tar sands no answer

This new period, the 'approach to peak oil' as Dr Richard Miller from the Oil Depletion Analysis Centre (ODAC) refers to it, has eroded spare capacity and reduced the amount of new oil coming on stream to replace declines from existing fields around the world.

Without cheap alternatives, the oil industry is being forced to look at more unconventional sources of oil, such as tar sands.

The ODAC say these are not sufficient to be able to fill the future gap between supply and demand. What's more they come at a high cost. Both in economic terms and in the, as yet unaccounted for, environmental costs.

It's production process is three times more carbon-intensive than conventional oil sources - with extraction requiring the creation of vast open mines to get to the mixture of oil, clay and sand. In Canada, which holds the largest known deposits, extraction has also been linked to rising incidence of cancer and the pollution of major rivers with arsenic, lead and mercury.

None of this has stopped BP, Shell, Total and others from looking to invest.

Our economy is locked into oil


While the approach of the oil industry is not surprising, the recent government intervention is more unexpected.

It shows the real worry governments have about high oil prices 'putting the brakes' on economic growth. It also shows how dependant and reliant industrialised countries like the UK, have become on oil.

David Korowicz, from the environmental analysts Feasta, explains: 'Firstly, rising prices squeeze out less essential consumption leading to business closures and unemployment. Secondly, higher oil prices mean more money flows out of oil consuming countries into oil producers. Less money flowing around the economy means less money for businesses, and less money for people to service their debts. Growing defaults further destabilise banks and government debt loads. The Eurozone, the US, and the UK are all suffering under massive debts, rising oil (and food) prices could effectively push them over the edge.'

The UK and world economies are effectively 'locked into' an unsustainable position. But rather than tackle the enormity of the crisis peak oil presents, the UK and others have decided to use any means possible to 'wriggle out of a high oil price'.

John Miles, from the Industry Tasforce, says the government's reaction shows it continues to be 'behind the curve' on peak oil. 'They should be getting ready for how to deal with it, but my fear is they will wait and try to respond to it in a few years time.'

Willy De Backer, head of the influential 'Greening Europe Forum', believes it will take a major shock before countries look to a post-oil future. He fears we are already entering a period of unpredictable developments or 'black swan events', which could stifle economic recovery and lead to civil unrest.

He says the problem is compounded by the lack of transparency amongst oil producing countries and the difficulty in knowing how much oil is really out there. This has left politicans scared about speaking out on the issue for fear of being too alarmist and frightening people, says De Backer.

Oil era will end in riots


In summary, the future of oil, say peak oil observers, is caught between society's long term need for a divorce, its current addiction, and the short term priorities of politicians and investors.

As a report by Deutsche Bank, 'The Peak Oil Market: Price Dynamics at the End of the Oil Age', pointed out, with so many parts of our economy, especially food prices, closely linked to oil prices, our eventual divorce from oil is likely to be messy.

The findings are similar to a recently revealed report that UK ministers commissioned but then refused to publish, which warned of civil unrest from 'peak oil' energy shortages.

Despite all the warnings about supply and volatile prices, the Deutsche Bank report still did not expect governments to prepare for the post-oil era.

'I think some governments are already spooked by high oil prices,' says Mike Childs, head of climate change at Friends of the Earth. 'Trying to keep oil prices down is a failure to recognise that oil prices are only going one way and that is up. Increasing demand and dwindling supplies paint an ugly picture.'

The UK department for energy and climate change insist last week's intervention was a 'short-term measure' which, 'does not alter out position or commitment to move to a low carbon economy'.

Others disagree. Shaun Chamberlin, author of 'The Transition Timeline' and a DECC advisor, says the department is caught between two conflicting aims: keeping energy available and at a low cost while trying to reduce emissions, primarily through a high carbon price.

'The two aims are pulling against each other,' he says. The question for him is whether the UK will take on ideas like the transition town movement and adapt to a post-oil era or wait for the crisis?

 

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