Should we heed warnings that the oil age is coming to an end?
For most of us, the recent high oil prices mean nothing more than forking out a few extra bucks at the petrol station, but for Robert Atack, a 47-year-old builder from the Kapiti Coast, they are the harbinger of a global apocalypse.
Atack, who admits that he is a glass-half-empty type of guy, foresees a future in which skyrocketing oil prices lead to the breakdown of international trade and to conflict as states compete for dwindling oil stocks. For the past few years, Atack has been issuing dire warnings to anyone who’ll listen. In a recent letter to Nandor Tanczos, Atack castigated the Green MP over the birth of his daughter, calling him irresponsible for bringing a child into a world on the verge of collapse.
Atack is at the extreme fringe of a growing movement known as “peak oil”. Led by retired Irish oil industry geologist Colin Campbell, peak oil theorists contend that the oil age is rapidly coming to an end. If we don’t switch to alternative energy sources soon, their argument goes, dwindling oil supplies and rising prices will result in a global economic slowdown, which will make the 1970s oil shocks look minor in comparison.
The peak oil movement traces its lineage back to American oil geologist M King Hubbert. In 1956, Hubbert published a graph predicting that US oil production would peak in the early 70s. Although ridiculed at the time, Hubbert’s predictions subsequently proved correct, forcing the US to become reliant on overseas oil.
A few years ago, when the oil price was as low as $US10-12 a barrel, Campbell and his fellow travellers were similarly derided. But with current oil prices currently approaching $US60 a barrel, the world is suddenly taking notice. The Wall Street Journal recently published a major piece on peak oil and in the past year Campbell has spoken before a joint committee meeting of the British House of Commons, addressed a group of J P Morgan Chase & Co investors and been visited by officials from Swedish auto manufacturer Volvo.
Norwegian Kjell Aleklett is the president of the Association of Peak Oil (ASPO), a network of academics, geologists and ex-oil industry people. On the line from Uppsala University in Sweden, where he is a professor of physics, Aleklett is keen to distance ASPO from those on the doomsday fringe of the movement. “There’s no cause for panic,” he says. “It’s about opening our eyes so we can make a smooth transition [away from oil to other energy sources].”
Aleklett reckons that oil production in 2020 will be about the same as it was in 2000 and somewhere in the middle there will be a peak. But, although production remains relatively static, increasing demand, especially from the rapidly growing Chinese economy, will push up prices.
“The US Energy Department’s Energy Information Administration is saying that, in the future, oil production must come up to 120 million barrels a day to meet rising demand. But I’m saying that’s just not possible.”
Aleklett takes issue with the long-range forecasts coming out of organisations like the US Energy Department and the Paris-based International Energy Agency, which are used by governments around the world to inform policy.
The IEA’s just-released 2004 World Energy Outlook forecasts worldwide oil demand growth of 1.6 percent a year, reaching the 120 millon barrels-a-day level by 2030. Despite its prediction that oil prices will peak this year and then decline, the IEA is confident that production can keep up with demand without spiralling prices if the necessary investments are made.
But Aleklett says that expecting prices to stay down in the long term is akin to believing in Santa Claus. $US60 a barrel is a realistic long-term oil price, he says.
Part of the problem, he explains, is that the data available on oil reserves and production estimates is not very reliable. “For the North Sea [oil fields], the data is beautiful. But it’s not transparent in the Middle East. It’s very hard to get data. Saudi Arabia, for example, considers [the size of its oil reserves] a state secret.”
Aleklett was in Abu Dhabi in the United Arab Emirates recently and likens it to a gold-rush town in the 19th century. “They don’t want to increase production too much because they want to protect their reserves for coming generations. Iraq is probably the only country in the Middle East that can push production up significantly if they can get stability.”
The IEA and the US Department of Energy are also overly optimistic about how much more oil can be extracted from existing fields and the chances of finding new ones. “With improving extraction technology,” says Aleklett, “they can probably keep supply constant, but you need to find new fields for production to go up and that’s not likely.”
Governments, the US in particular, don’t want to to face up to the fact that there might not be enough oil to fuel growth. “If the US just increased its taxes on petrol to European levels, demand would drop and we wouldn’t have a problem. But what US President is going to raise petrol taxes?
“What’s really needed is a completely independent investigation of the situation.It should be handed to the UN – the same as with climate change.”
Green parties around the world have embraced the peak oil message and New Zealand is no exception. Greens co-leader Jeanette Fitz-simons says she is leaning towards a peak in oil production some time in the next 10 years. “I’m not going to say Colin Campbell must be right and the IEA and the US Geological Department must be wrong,” she says. “But it seems there are sufficiently reputable scientists behind this that we have to take it seriously.”
Fitzsimons says that peak oil, like climate change, has been driving a lot of Green policy aimed at improving energy efficiency and public transport.
Because of more expensive air travel we should be preparing for fewer but longer-staying tourists, says Fitzsimons. We’ve got to think carefully about how we expand different industries, she says. Dairy, for example, is very reliant on energy-intensive processing and long-distance transport.
On the other hand, forestry – which can be more energy self-sufficient – may have a brighter future. “There are all sorts of adaptations we should be considering. But the government doesn’t have any strategy to look at it yet. I think if peak oil hits before we’ve done a lot of preparation and planning work, then we’re heading for a period that will be very nasty indeed.”
In a recent speech, Energy Minister Pete Hodgson estimated world oil production would peak sometime between 2021 and ’67. He says this was based on numbers from fairly mainstream sources.
Hodgson agrees with Fitzsimons on the need for more public transport. “But when you run out of oil you will not run out of cars.” There’s currently policy work being done on how we might look to encourage fuel alternatives, such as the manufacturing of bio-diesel from dairy waste. “We’re also piloting vehicle emissions testing, which will give us data on vehicle fleet emission that can be used to promote better fuel efficiency.”
Hodgson points out that the Think Big energy projects of the 1970s were a bet against the future price of oil that turned out to be wrong and ended up costing the taxpayer a lot of money. “But the opposite of Think Big would be doing nothing and that’s not necessarily the optimal policy.
“Markets rely on good information and it’s not a perfect market because the information is not perfect. All I can do is be aware of what the different views are and attempt to influence public policy accordingly,” he says.
Economist Gary Eng is wary of an over-reaction by governments to the current high oil prices. A New Zealander, Eng was formerly an energy sector expert at the Asia Pacific Energy Research Centre in Tokyo – an organisation that provides energy advice to APEC governments. “I think the concept of peak oil is fine,” he says. “There will be a peak in oil production sometime in the foreseeable future, but so what?”
Eng says that a period of sustained high oil prices will make more marginal oil sources – such as oilsands common in Canada – and synthetic oil substitutes more economic. “At sustained prices of $US50 a barrel, making synthetic petrol from gas becomes viable. Producing liquid fuels from coal also becomes likely at these prices.” Although, he says, unless there are significant improvements in the coal sequestration process, the resulting pollution from coal liquifaction would blow the Kyoto Protocol out of the water.
“If you get a long period of high oil prices, things will move in that direction. Even if these types of fuels only account for two to five percent of global energy consumption, that would have a significant downward impact on oil prices.”
Geologist turned investment banker Chris Stone says the current high oil prices will have a major impact on New Zealand. Stone is the executive director of investment bank McDouall Stuart, which specialises in the energy and infrastructure sector. A presentation he gave at the New Zealand Gas and Petroleum Conference earlier this year predicted sustained oil costs of $US35 a barrel would wipe about $3 billion a year off New Zealand’s annual GDP of $110 billion. The costs will be borne across the whole economy, says Stone. “Very few industries can do without transportation.”
But, like Eng, Stone has faith in new technology, such as the oft-touted gas or hydrogen-powered fuel cells for cars, and the market to deliver oil substitutes. “How long is it going to take for alternative transport fuels to play a significant role?” he asks. “I would say it’s going to be about 20 years.
“But there’s a risk in investing heavily in those technologies because as they start to take off oil demand and price drop, so it could leave people stranded with expensive investments.”
Indeed, even the oil majors are of the view that the end of the age of oil is inevitable. In 2002, Shell published a couple of scenarios of global energy consumption patterns to 2020. In one scenario, “Business Class”, US-led globalistion and liberalisation continue apace. Oil prices rise gradually, gas exploration and production increase and there is a relatively smooth transition to gas-powered fuel cells for domestic use and transport.
In the second scenario, “Prism”, a more regionalised world evolves, with governments pursuing interventionist energy policies encouraging secure, stable and clean energy. Towards 2020 competition from advanced coal, renewables and nuclear power slows oil demand, resulting in a drop in oil prices, leading to a long end game for oil, with it remaining as the dominant fuel for another two decades.
Ultimately, whether you favour a more hands-on approach to energy problems, like the peak oil theorists, or take a more neo-liberal approach and bet on improving technology, depends on your faith in the efficacy of the market to deliver solutions. “People should be making preparations,” says Fitzsimons. “Don’t make your next vehicle a gas-guzzling SUV, because you might not be able to afford to drive it.”
But according to Stone, markets are pretty canny at coming up with solutions that soften the blow. “The Stone Age didn’t end because we ran out of stone. And the oil age won’t end because we ran out of oil.”