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Inflaming the oil crisis

Are we running out of oil? Terrorism in Saudi Arabia, the world's largest oil producer, and ongoing instability in Iraq have put oil security back in the headlines. Prices have risen to over $40 a barrel and the Organisation of the Petroleum Exporting Countries (OPEC) is under pressure to increase quotas. Many fear that a catastrophe in the Middle East could cut off oil supplies.

Worries about supplies have been slowly building for some time; recent events have brought them to a head. But to the extent that real problems exist, they are less the result of oil scarcity or instability in the Middle East than of more general fears within the West.

In the USA high petrol prices are a talking point of the election, where the subtext is that intervention is Iraq created the problem. But some argue that what makes the apparent oil shortage really scary is an underlying problem of oil depletion. Economist Paul Krugman argues that, 'the disastrous occupation [of Iraq] is only part of the reason oil is getting more expensive; the other, which will last even if America somehow finds a way out of the quagmire, is the intensifying competition for a limited world oil supply' (1).

Fears about running out of oil have become widespread in America. A slew of books have recently put forward the imminent oil depletion argument: Hubbert's Peak by Kenneth Deffeyes (2001), The Party's Over by Richard Heinberg (2003), and Out of Gas by David Goodstein and The End of Oil by Paul Roberts, both published this year (2).

Like earlier concerns about oil depletion, the current panic has little basis in the geology of oil. The argument that we are about to run out of oil has been around for as long as oil has been produced. But the depletion argument becomes popular at different times for different reasons. The last time oil depletion became a major concern was during the OPEC boycott of 1973/4, and carried on through the recession of the early 1980s. From the mid-1980s, concerns about global warming took over - and instead of worrying that we had too little oil many fretted that we had too much. Burning all that oil would disrupt the climate, they argued, by adding carbon dioxide to the atmosphere.

Today we have a synthesis of these two arguments. We apparently have both too little oil and too much. The most pessimistic forecasters argue that, not only is industrial civilisation about to collapse as it runs out of oil, but it will be tipped over the edge by global warming as a consequence of past energy use.

On a technical level, the new pessimism about oil draws heavily on the work of two retired petroleum geologists, Colin Campbell and Jean Laherrère, and the earlier work of Shell geologist M King Hubbert. But the theoretical basis of the pessimistic predictions is weak; and the empirical track record of their approach has been a failure. In order to present potential oil depletion as a coming catastrophe, the pessimists have both to dismiss alternative energy sources and to portray society as fragile and on the point of collapse.

Looking at accepted figures for known reserves of oil, at first it is hard to see any basis for pessimism. At present rates of consumption there are 30 or 40 years' worth of oil known to be retrievable using present methods. But, say the pessimists, we have been consuming oil for over 100 years. What's left is only half of all the oil that ever existed, and the half way point is what matters. At the half way point, the argument goes, oil production will peak and then begin to decline. This is the 'big rollover'. Demand will continue to rise while supply falls, resulting in a permanent oil shortage.

How would we know we are reaching the half way point? There are two arguments: first, we can try to work out how much oil is left and measure it against how much has been used; second, we could detect a slowing down in the growth of oil production and project the figures forward to predict a peak. But neither of these methods are reliable.

The pessimists' claim that we know how much oil is left because known reserves amount to 90 per cent of all that will be discovered is also unduly catastrophist. It is a result of one-sidedly highlighting only bad news. For example, while it is probably correct that many figures for known reserves in the Middle East are politically inflated, it is also the case that, because known reserves are large enough for the foreseeable future and as a result of war and political instability, there has been little serious exploration in the Middle East for over 20 years.

The second argument, that we can predict a peak by projecting from past production, is even more problematic. It relies on the idea that production is determined by the amount of oil available, rather than by broader economic or political considerations. It is true that oil production in the USA (outside Alaska) peaked in the early 1970s, and that growth in global oil production is now slowing. But the pessimists simply assume the cause is geological, and that this implies a decline in production after the peak. Their only response to economists is to accuse them of not understanding the laws of physics.

Not only does the argument rest on a flawed theory, it is empirically wrong. In his paper 'The New Pessimism about Petroleum Resources', Michael Lynch, president of the consulting firm Strategic Energy and Economic Research, illustrates how Colin Campbell's ongoing predictions of an imminent peak in production have consistently proven wrong while his estimates of total reserves have had to be revised upwards (3).

Also, in order to create a crisis, the pessimists have to discount so-called 'unconventional' sources of oil, such as tar sands, as too dirty or uneconomic; methane hydrates are apparently too speculative; coal liquefaction would take too long to come on line; and so on. Every alternative is shot down.

In fact, maybe tar sands would be more expensive to extract oil from or harder to clean up - but this wouldn't stop us using them if we needed the oil. Various problems that often occur with the development of new technologies are inflated into insuperable obstacles. Tar sands and coal liquefaction are both sufficiently advanced that they could absorb investment in production if it were needed.

So what is driving the wider popularity of the oil depletion argument? It is not, strictly speaking, all about the oil. Rather, a wider social pessimism, the idea that we are collectively messing up the world and are too short-sighted or greedy to do anything about it, is expressing itself in fears about oil. That is one reason why the motif of addiction to oil is so common. The Rainforest Action Network recently included the following idea in its suggestions for political theatre attacking Ford: 'Oil Addicted Bill Ford: Have someone playing the role of Bill Ford and have him "guzzling" liquid out of cans marked "oil". Have people wearing lab coats marked "Rehab" come haul him away.' (4)

The social pessimism behind the depletion argument is most clearly displayed in Richard Heinberg's The Party's Over. Heinberg fears a collapse of civilisation back to the stone age, and a reduction of global population by two thirds in the next 50 years - implying that four billion people will die by plague and famine. To avoid the worst consequences he recommends retooling the advertising industry into a stream of anti-consumer propaganda as a form of mass therapy.

Heinberg's explicit goal is to diminish our expectations. Aspiration to unrealistic goals, he says, only brings unhappiness. As a replacement for civilisation Heinberg hopes that we can find purpose in energy conservation: walking and cycling, growing our own vegetables and composting waste. 'Your primary duty is to a higher cause: personal and planetary survival', he writes.

But this sort of propaganda only makes us feel worse. A far more sensible approach would be to see potentially declining oil supplies as simply a practical problem. From this perspective there are reasons not to panic. Headlines suggesting that prices are at record highs are misleading, since they do not take inflation into account. Corrected for inflation, today's prices are around half the high of the early 80s price spike. Also, today's economy is less dependent on energy in the sense that it is much more efficient; we get much more useful work out of the same amount of oil. Higher efficiency gives us more flexibility if problems do arise.

The potential for a successful terror attack on infrastructure in Saudi Arabia cannot be discounted. But by focusing on such peripheral risks, we are distracted from key and ongoing negative trends in the economy, which are far more important. The rise in oil prices illustrates the increasing centrality of risk aversion in determining economic activity:

  • Oil markets

    Traders in oil markets add a 'risk premium' to prices, reflecting fears about political stability. One energy strategist told the New York Times that he 'estimated that worries about Nigeria contributed about $1 a barrel; Venezuela another $3; the situation in Iraq, $4 more; and jitters about new trouble in Saudi Arabia, $5 a barrel' (5). Risk premiums are not new - but in recent years the oil market has become more influenced by financial markets, as banks and hedge funds have entered trading. For these traders in particular, risk is a determining factor.

  • Filling of the US Petroleum Reserve

    After the 9/11 terror attacks, President George W Bush decided to fill the US Strategic Petroleum Reserve, which has a capacity of 700million barrels of oil. The reserve is for emergency use if oil supplies were to be cut off. It currently contains 660million barrels, and is still being filled. Critics have rightly pointed out that this is pushing up prices. Continuing to fill the reserve is a prioritisation of risk aversion over normal economic activity (6).

  • Low investment

    Part of the explanation for high prices at US petrol pumps is a lack of investment in new refineries, where profitability is low. No new refineries have been built in the USA for three decades. In a broader sense, low investment applies not just to the oil industry but to society as a whole, which has been unable fully to develop alternative energy technologies and systems (most obviously nuclear power). The overall trend is that the risk entailed by new investment is increasingly seen to outweigh the benefit.

  • Environmental regulation

    The other side to low investment is environmental regulation. The refusal to allow drilling in Alaska's Arctic National Wildlife Reserve (ANWR) is a good example. Like most other oil fields, on its own ANWR would only provide a relatively small amount of oil. But the failure to open up the reserve to oil exploration is symbolic of environmentalism's influence. Bush's critics have lambasted him as a reckless oil man determined to push ahead with exploration at any cost. Yet with his first term coming to an end, he has failed to push through the oil policy he has been most publicly identified with since his election in 2000.

Today's less dynamic economy is a cause of less rapidly growing oil consumption, rather than its consequence. As long as we feel guilty about improving our lives, energy will always seem to be a problem. But running out of oil isn't something we need to worry about.

Read on:

spiked-issue: Economy

(1) The oil crunch is not going to go away, Paul Krugman, New York Times, 8 May 2004

(2) Many writings on oil depletion are collected at the End of fossil fuels section of the Die Off website. See Hubbert's Peak : The Impending World Oil Shortage, Kenneth S Deffeyes, Princeton University Press, 2003 (buy this book from Amazon (UK) or Amazon (USA)); The Party's Over: Oil, War and the Fate of Industrial Societies, Richard Heinberg, Clairview Books, 2003 (buy this book from Amazon (UK) or Amazon (USA)); Out of Gas: The End of the Age of Oil, David Goodstein, WW Norton & Co, 2004 (buy this book from Amazon (UK) or Amazon (USA)); The End of Oil : On the Edge of a Perilous New World, Paul C Roberts, Bloomsbury, 2004 (buy this book from Amazon UK or Amazon USA)

(3) The New Pessimism about Petroleum Resources: Debunking the Hubbert Model (and Hubbert Modelers) (.pdf 378 KB), Michael C Lynch, Strategic Energy and Economic Research

(4) Jumpstart Ford (.pdf 1.17 MB)

(5) If oil supplies were disrupted, then..., Siomon Romero, New York Times, 28 May 2004

(6) Debate flares over strategic oil stockpiles, John W Schoen, MSNBC, 19 May 2004

Editorial Notes: In some senses Kaplinksy does a better job here of stating the Peak Oil case than his own. There are however, several points that could be addressed. One is that coal liquefaction, extracting oil from tar sands, and any energy resource that requires a lot of processing should be viewed with some suspicion when posed as a widely effective energy solution. The energy investment in such processes is huge. Production bottlenecks are likely to form around extraction of these substances, which are less easily mined than liquids. In the case of tar sands, processing depends on lots of clean water and natural gas. The Energy Return on Energy Invested of tar sands, is reportedly something in the league of 2:1 – 1.5:1, which makes them seem hardly worth the effort - at least in comparison to conventional oil which historically has been around 50:1. Walter Younquist addresses some of these issues here: “As long as we feel guilty about improving our lives,” Kaplinky writes, “energy will always seem to be a problem. But running out of oil isn't something we need to worry about.” To reverse his point: reducing excessive consumption is no longer merely an ethical or ecological endeavor. It will sooner or later be forced upon us. - AF

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