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The twilight zone

We've been warned about 'peak oil'- the day that heralds the end of cheap energy. It's the biggest threat to our lives and livelihoods, but no one is listening. Former industry insider Jeremy Leggett outlines the six reasons why we need to act now

From time to time, the world is taken by surprise by a high-impact phenomenon that ought to have been foreseen. How, for example, did governments not manage to spot that CFCs would attack the ozone layer? What about global warming?

The answer is that some scientists do know these things are happening, but nobody listens. We have failed to learn the lessons made clear by such "oversight phenomena", and are currently facing the biggest short-term threat to our economic wellbeing that the modern world has ever seen, involving the commodity that society is most dependent on.

Almost nothing, however, is heard of the phenomenon of "peak oil". According to conventional wisdom, we have plenty of oil left. The current high oil prices will come to an end, whereafter we will be able to look forward to a return to cheap oil, and continuing supplies of it well into the century. Ergo, our oil-addicted economies can remain healthy and continue to grow. We have plenty of time to develop alternatives to oil. No need for concern, much less panic.

Yet, according to increasingly vocal whistleblowers, oil is depleting fast, and the age of cheap oil will soon be over. Economies can't function without cheap oil. We have no time to develop energy alternatives. Economic depression akin to that of the 1930s lurks around the corner.

But no one can agree when we'll reach the point at which half our oil reserves are used up. Controversy rages as to when "peak oil", or the "topping point", will occur. On that day, the world will pump the most oil ever produced in a 24-hour period. The day after, we will officially be running out.

Natural resources tend to deplete in a bell-shaped curve, and oil is no exception. "Peak oil" is the day when we reach the top of the curve, and the upward arc of expanding use meets the downward arc of shrinking use - the day when growing supplies of generally cheap oil turn into fast-depleting supplies of ever more expensive oil.

According to the "late toppers" - most people in the oil industry, most economists, most in government, indeed almost anybody who claims to know anything about oil - we have more than two trillion barrels of recoverable oil left underground in discovered and yet-to-be-discovered reserves. We can go from the 84 million barrels we burn per day in 2005, to more than 120 million barrels per day by 2025. The topping point will not happen until the 2030s. But, according to the "early toppers" - a few experts, most of them retired or senior oilmen - we have as little as one trillion barrels left, and we will never produce much more than we are at present. Peak oil will happen this decade - probably sooner rather than later. Because of the human propensity to panic, especially if trading floors are involved, there will be no escape from the falling economic dominoes once those in denial wake up to the problem.

I, like most people, have been in denial about oil depletion for years. I was once a creature of the oil industry. I taught for 11 years in one of its elite training houses, at the Royal School of Mines. I did so much consulting for big oil companies that I was once able to buy my daughter two horses. I did not believe the early toppers when their stories first became public in the late 1990s. I was an environmentalist by then, but still had a healthy respect for the oil industry. I made the snap judgement that the early toppers couldn't be correct. How could the industry I had grown up in be so wrong?

Then the Shell reserves fiasco began to unfold in January 2004. [The company admitted overstating its proven reserves by 20 per cent.] It might be a good idea, I thought, to take a closer look at this. Over the year of spare-time investigation that followed, I discovered many shocking things. Here are six of them.

1: No new oilfields

The record of oil discovery shows clearly that all is not well. The world's biggest oil-fields, the giants of Saudi Arabia and Kuwait, were discovered way back in the 1930s and 1940s. The last time a major oil province was discovered was in the 1970s. The last time we discovered more oil in a year than was used was a quarter of a century ago. Half the world's current production comes from the 100 biggest fields, and almost all of these are more than 25 years old. The recent rate of discovery of "giant" oil-fields, of more than 500 million barrels, is as follows: in 2000 there were 16 discoveries, in 2001 nine, in 2002 just two, and in 2003 none. It takes six years from the discovery of an oil-field for the first oil to come to market. And even if they're called "giant", they still represent less than a week's global supply at current demand rate.

2: Opec claims

The Opec countries have been exaggerating reserves for almost two decades. The common understanding is that the Middle Eastern Opec countries are overflowing with proved reserves. However, a growing number of oil industry insiders claim that they have been inflating their statements of reserves ever since Opec agreed a quota system for production based on the size of national reserves.

A former energy advisor to the Bush administration, the investment banker Matt Simmons, thinks that the Saudis - the nation with the largest reserves in the world - are already past their topping point.

3: BP exaggeration

BP, which publishes one of the bibles of energy statistics, echoes this exaggeration. This year, for the first time in its annual Statistical Review of World Energy, it makes clear that the data produced is anything but its own. It simply copies data used by the Opec Secretariat and other official sources.

4: False hopes

Enhancing reserves by using advanced drilling technology to boost production is commonly put up as a solution, but is in fact a false hope. Techniques such as steam injection and horizontal drilling do enhance flows from oil-fields, but they tend only to be useful in the older fields, because newer fields are developed more efficiently from the outset. As one expert says, those wheels have long since been invented. They are not going to close the gap between shrinking supply and growing demand.

5: No alternatives

Making up the gap by exploiting "unconventional" oil is also a false hope. Unconventional oil exists in huge quantities in several big deposits, notably Canada's tar sands and Venezuela's Orinoco oil belt. Tar sands have to be mined, not drilled, and heavy oil is very difficult to pump and refine. To melt the tar in Canada you would need to heat much more water than Alberta's farmers can possibly spare, and burn more Canadian gas than makes the process worthwhile in terms of net energy, even if you care nothing about the greenhouse implications. Even if you do all this, the International Energy Agency expects only 10 million barrels a day by 2030 from unconventional oil sources. That doesn't come close to bridging the gap between supply and anticipated demand.

6: Global demand

Even if the early toppers are wrong, there is probably no time left to bring enough oil to market anyway. Global oil demand is closing fast on tanker capacity, which was at its highest way back in 1981. Refinery capacity tells the same story. The investment banking firm Goldman Sachs has calculated that the oil industry needs to invest $2.4 trillion every year for the next 10 years to do the exploration and put the infrastructure in place to meet projected global demand. Vastly rich as the industry is, it has never come close to investing such prodigious sums historically. An investment of $24 trillion in a decade is nearly three times the level of 1990s spending. Do the oil companies really believe there is enough oil out there to justify such investment? We will see, in the next few years.

The last energy crisis in 1978-1981 resulted in panic and widespread fears of a depression. But at the time there was plenty of spare capacity, large stockpiles and more oil to come from the North Sea and elsewhere, so the crisis did not last. None of those escape clauses apply today.

The irony is that we have to retreat from oil anyway. Gas and coal cannot be alternatives because they, too, give off greenhouse gases when burnt. This is the point at which the oil depletion and global-warming issues conflate. The more optimistic practitioners in the embryonic clean energy industries believe that, 10 to 20 years hence, our technologies could probably power and fuel the world in its entirety, if the political will is strong enough. We certainly couldn't plug the gap in five years, and the grim reality seems to be that the shortfall between expectation of oil supply and actual availability will be such that gas, renewables, liquids from gas and coal, or nuclear - in themselves, or in any combination - will not be able to plug the gap in time to head off economic trauma.

Many will try to turn to coal. Oil can be extracted from coal, at the expense of much cash and greenhouse emissions. Use of renewable energy and alternative fuels, alongside energy efficiency, will increasingly substitute for oil and gas, growing explosively whatever happens. Whether this growth occurs instead of coal expansion, or alongside it, will determine if economies and ecosystems can survive the global warming threat. For environmentalists, this will be the final battleground.

Dr Jeremy Leggett is chief executive of Solar Century, the UK's largest independent solar electric company, and a member of the Government's Renewables Advisory Board. His book Half Gone: Oil, Gas, Hot Air and the Global Energy Crisis will be published by Portobello Books in November. He will be addressing a conference, Peak Oil UK: Entering the Age of Oil Depletion, in Edinburgh later today

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