Some Conclusions on Peak Oil – Urgency Needed

Over the past few weeks I have tried to summarize the peak oil debate as best as I can given that it is complex and highly pertinent. Never before have we faced such a large impact on so many sectors of the economy on such a global scale. (This is Part 4)

The Last Oil Shock book by David Strahan prompted this series of posts is still an excellent book and a great place to start as it is moderate, considered and well researched.

While there is still considerable debate about when oil might peak there appears to be a consensus that even if we were able to produce more oil from unconventional sources that prices for oil are still going to shock many economies into recession or worse. With the continued growth in demand for oil alternative energy sources can’t keep up either.

In simple terms our reliance on oil is so extensive that almost every aspect of civilisation as we know it will be changed in some way. The latest prices for oil are here As I write this the exchange rates in N.Z against the $US have dropped $NZ1=.80 US down to .69 cents in a little over 2 weeks. See this series of charts. This is great for exporters but means more pain at the petrol pump almost immediately.

We have seen before in 1973 and 1979/80 and again in 2005 when Hurricane Katrina damaged or destroyed 30 oil platforms and caused the closure of nine refineries what relatively small shocks can do to oil prices. By my calculations prices jumped $US13 after Katrina and as refinery capacity was severely squeezed we have all been paying those higher prices and due to other factors have pretty much carried on increasing since then. And right now is the Hurricane season with a Catergory 4 Hurricane heading through the Gulf of Mexico.

By way of comparison prices in 1980 reached the equivalent of US$90 per barrel (Source:Worldbank) when adjusted for inflation.

What is different about oil prices now compared to say in 1980 is that we know a whole lot more about the limits of supply than we ever did and the news is not good. As we can see from the various oil reports available – the market is extremely volatile and close to a tipping point.

Also in the last 5-10 years the significant catch -up use of cars in India and China has fuelled enormous demand for oil worldwide. I did hear one commentator mention a figure of 3b new oil consumers that we just didn’t factor in before. Thankfully not all of them have cars but that is changing fast and not surprisingly they want the same access to oil that developed nations have.

Clearly the U.S with 5% of the worlds population can no longer continue to use 25% of global oil production and 40% of the world’s gasoline. Still with a price of $6/gallon in the UK and still only $3/gallon in the US it is no surprise that many Americans don’t quite understand the pain or the urgency that other nations are experiencing.

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What Happens Next

Much of the writing about peak oil and energy futures seems to fall into two extremes.

Scenario one is that somehow we will get through even though prices will go much higher and cause extreme pain in many economies. In this scenario technology comes to the rescue with alternative energy sources helping with many of our current energy needs. Non conventional oil extraction needs to be achived much faster and more easily than we have seem so far. Despite positive signs it is clear that such a wide-scale transition especially in transport of not just people but goods and services (global trade) we need decades to make this a smooth transition and we don’t have that much time.

Scenario two seems to be very bleak with the extreme pessimists hiding in the countryside and hoping to grow their own food while defending themselves from hungry people who are desperate. I really don’t like that scenario but the volatility of human nature would suggest that in some places there will be wars and severe effects.

I’m personally hoping that there is a more moderate scenario possible. It goes like this. Responsible governments step in with a real energy strategy that reinforces market signals and favours renewables. At the same time efficiency and conservation is also improved as a short term transition strategy. Hopefully the government in NZ and the UK and Europe where petrol taxes are very high (about half the pump price or more) will be able to reduce some of those taxes to smooth the shock to individual consumers.

See the Draft New Zealand Energy Strategy final version still to be presented in September. I hope the final version is much better than biofuels and electric vehicles. This paragraph from page 26 seems to understate the challenges of finding new transport sources. Download the PDF version of NZ draft Energy Strategy. Also this PDF printable chart on Energy flows based on 2005 use is a good summary of the overall energy situation in New Zealand.

“The second renewable substitute for oil in transport is electricity, provided it is generated from renewable sources. Plug-in hybrid vehicles are already being produced, and the government expects them to become widely available within a decade. Electricity in New Zealand is cheaper than oil, and electric motors are more efficient than petrol or diesel motors. As a result, the cost to run electric cars is expected to be much lower than conventional fossil fuels.”

This might explain why government owned utility Meridian Energy has announced plans to trial electric cars. Hope they include these in the trial from Th!nk in Norway. See also this summary from page 30 of the Draft NZ Energy Strategy. What is your country doing? Now would be a good time to find out and work on a personal action plan.

From vision to action
* Public consultation on a minimum biofuels sales obligation with decisions and announcements in late 2006.
* Consider establishing a group of experts to advance planning for a higher percentage of biofuels post 2012 and the introduction of new technologies such as plug-in electric (hybrid) vehicles.
* Consult on mandatory point-of-sale labelling of fuel efficiency for vehicles.
* Consider a sales-weighted fuel economy standard for vehicle imports and pricing mechanisms to influence purchase decisions.
* Consider restricting the importation of second-hand vehicles in conjunction with air quality control measures, including considering restrictions based on age.
* Consider restricting the importation of vehicles unable to accept a minimum level of biofuels.
* Consider economic incentives to influence fuel efficiency through consumer purchasing.
* Investigate ways to improve driver behaviour to maximise fuel economy.
* Increase support for public transport and non-motorised forms of transport.
* Investigate options for encouraging the use of different ways to move freight, and develop a New Zealand Shipping Strategy.
* Continue to monitor and develop emerging transport fuels.
* Restore oil reserves to 90 days and develop an updated emergency response strategy to respond to international and national disruptions in oil supply.

Alternatively those governments could divert their massive windfalls from petrol taxes to fund massive renewables projects. I suspect a mix of both tax reduction and renewables subsidies would work. The key objective should be to ease the transition as much as possible. Even so the expected price rise to say $100 could still tip some economies into depression and temporarily reduce demand.

Finally for those of you who haven’t got the time to read a book or spend hours at the Energy Bulletin or Oil Drum there is a also some video that you can watch.

There is very good Australian 4 corners documentary on Peak Oil is and what the future of less oil means. It runs for 45 minutes and there are also 4 supplementary interviews covering an additional 40 minutes.

Featured experts include Dr Colin Campbell who founded ASPO – who talks about the full significance of the end of cheap oil. Much of the peak oil debate is because the numbers are political and especially with regard to Opec we just don’t know what the real numbers are. He believe the future will be highly volatile with severe price shocks. He see the peak as an event “without historical precedent.”

Also featured are Dr Sadad-Al Husseini speaking about Saudi Arabia who still seems to think we will believe the story about Saudi reserves still being 260b barrels after 20 years and 100b barrels have already been extracted. Husseini does concede that reserves are finite and that it is harder to maintain production levels. As Dr Robert Hirsch says – just trust us is not good enough from the Saudis and Opec generally. The Saudi views are still worth listening to though given they sit on 25% of the current usable supply.

Hirsch reinforces the view that we are in decline because the geology is known and oil is a finite resource. He argues that government intervention is absolutely needed. The market is too slow and the problem is too urgent. Many of the things we need to do will take 15-20 years at least and we need urgent action now.

The last interview is with Dr Peter Jackson of CERA who believes there is a problem but peak oil isn’t one of them. He seems to think that unconventional sources will rescue us and that there will be no peak despite a mountain of evidence to the contrary.

Background to the 4 Corners programme contains many links see here for details.

This story is growing in urgency and won’t go away so denial doesn’t work. In New Zealand ASPO is a useful place to keep an eye on. As always let me know your thoughts.

What happens next depends on all of us. It is business as unusual. There will also be new business opportunities flowing on from the renewables sector and other alternatives so the news is not all bleak. See also What Should We Do Now?PDF Version

This post is Part 4 in a series see also the 3 earlier posts.

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