From the website:
On 10 February 2010 at the Royal Society, six UK companies – Arup, Foster + Partners, Scottish and Southern Energy, Solarcentury, Stagecoach Group and Virgin – joined together to launch the second report of the UK Industry Task-Force on Peak Oil and Energy Security (ITPOES).
The report, titled “The Oil Crunch – a wake-up call for the UK economy”, finds that oil shortages, insecurity of supply and price volatility will destabilise economic, political and social activity within five years.
The Task-Force warns that the UK must not be caught out by the oil crunch in the same way it was with the credit crunch and states that policies to address Peak Oil must be a priority for the new government formed after the 2010 election.
From the executive summary:
This is the second report issued by ITPOES (the UK Industry Taskforce on Peak Oil and Energy Security). The interpretation of the current position, and the viewpoints expressed in the final recommendations, are those of the ITPOES membership – a group of private British companies whose interests span a wide range of business sectors. The work thereforerepresents an independent, business-minded, view of the national position.
Like its predecessor, published in the autumn of 2008, this report addresses the question of future oil supply and its potential consequences for the UK. It does not address the questions of climate change and carbon reduction directly – there are many other texts which do that – but there are massive areas of overlap between the distinct issues of resource depletion and atmospheric pollution. In some parts of our report that overlap is recognised but the main thrust of the report focuses on the questions of oil price and availability over the coming decade. In particular, it seeks to highlight issues which are likely to confront the new government following the General Election in 2010. It follows the style of the first ITPOES report, titled “The Oil Crunch, Securing the UK’s energy future” in that two expert opinions have been commissioned and used as the basis for an analysis by the ITPOES membership.
Opinion A has been prepared by Chris Skrebowski, a recognised independent oil-industry expert. He looks in some detail at the evidence which defines global oil reserves and extraction rates, and concludes that the global peak production rate for oil is likely to occur within the next decade (maybe within 5 years) at a value no higher than 92Mb/d (million barrels per day). This compares with the current record extraction rate of 87Mb/d set in July 2008, and the conclusions drawn are essentially the same as those reached in the previous ITPOES report. At first sight, this is surprising but on closer examination it is clear that the fundamental issues identified in the 2008 report remain unchanged.
- The net flow rate data shows that increases in extraction will be slowing down in 2011-13 and dropping thereafter. Given the long lead-times involved in developing the necessary infrastructure, this trend is unlikely to be reversed within the next 5 years.
- The industry is not discovering more giant fields at a sufficient rate.
- There are concerns about the levels of reserves quoted by the OPEC countries (which are critical to the confidence levels associated with future production capacity).
- There are indications that underinvestment in the oil industry over the past decade has led to infrastructure and under-skilling problems that will make it particularly difficult to increase production capacity rapidly in the short-term.
The intervening economic crash has done little to blunt our expectations; the time to a peak in global production is, essentially, little changed as cancelled new capacity broadly offsets recession deferred demand. When combined with current demand projections, a price crunch is still projected to occur following the peak.
Opinion B has been prepared by Dr Robert Falkner of the London School of Economics (LSE). He considers the likely effects of tighter supply conditions and rising oil prices on the British economy, particularly focusing on the coming 5 years. He concludes that the economy is not as prey to the price of oil as might be expected at first sight, but there are fundamental issues which could nevertheless spring a nasty surprise on the incoming government.
Following the presentation of these expert opinions, the key findings from several other reports and reviews of the oil-supply situation, all of which were published in 2009, are presented. In particular, these reports include the Wicks Review on Energy Security for the UK Prime Minister in August, and the latest major research report by the UK Energy Research Centre (UKERC), called “Global Oil Depletion”, in October.
The second half of the report reviews the material put forward above and tries to assess the implications for business in the UK. Looking through the eyes of the Taskforce members, it expresses a view that the price of oil could rise to a new and sustained, level which is well above US$100/b and that this is very likely to be the case within the next 5 years. In our view, this could have a significant impact on a number of important UK industry sectors. It could also have a significant impact on several key societal indicators such as fuel poverty and mobility. The penultimate section of the report looks at some of the particular negative effects which might afflict industry in the UK and suggests some actions designed to combat them.
The report concludes with a clear message to the incoming UK government that, although the immediate slow-down in the global economy has removed short-term pressures on oil consumption, the underlying issues highlighted in last year’s report have not changed. Therefore, future government policies must explicitly recognise the potential for:
- Oil prices on the world markets that are significantly higher than historic averages as soon as global economic activity revives.
- The possibility of significant price volatility, with high peaks and (possible) supply disruptions…
From Opinion A (Chris Skrewbowski):
There are now serious concerns that the free flow of relatively low cost oil, which has underpinned OECD countries economic growth since 1945, may not be sustainable for very much longer. It will be shown in this section that low-cost (under $25/b) oil supplies effectively ended in early 2005 and are unlikely to return. The actual global supply of oil is now expected to be limited to 91-92Mb/d (million barrels per day) of capacity that will be in place by end 2010/early 2011. Global capacity will then remain in the 91-92Mb/d range until 2015 from which time depletion will more than offset capacity growth from then onwards.
Between July 2008 and January 2009 virtually all the world’s economies went from vigorous growth to economic recession. This has radically changed the short-term outlook for energy demand in general and oil demand in particular. The recession has changed the market dynamics and potentially moved the ‘oil crunch’ point (when demand exceeds production capacity) out by around two years. This in turn provides one of the few positive aspects to the recession – it gives companies and individuals more time to prepare and adapt to the coming oil supply crunch. The great risk is that as prices may remain fairly low for the next year or so, and complacency may set in thereby postponing decisions on making adaptive investments being postponed until oil prices start spiking again.
The next major supply constraint, along with spiking oil prices, will not occur until recession-hit demand grows to the point that it removes the current excess oil stocks and the large spare capacity held by OPEC. However, once these are removed, possibly as early as 2012/2013 and no later than 2014/2015, oil prices are likely to spike, imperilling economic growth and causing economic dislocation.
Oil supply over the next five to six years is predictable owing to the slow-moving nature of oil supply and the long lead times for major projects. The primary risk is from supply shortfalls caused by project delays over and above those already announced. The demand side is rather less predictable as the path of economic recovery from the recession is uncertain and because 80-90 percent of future demand is expected to come from non-OECD countries such as China and India where consumption data is rather less reliable. In contrast OECD demand, which makes up 55 percent of global demand, is expected to see little demand growth going forward and may even decline.
The last 15 months have seen unparalleled levels of price volatility in the three main hydrocarbon fuels. Oil prices have swung from $147 in July 2008 to $32 in late December 2008 and then back up to $70-80 from late August 2009.
As both UK Prime Minister Gordon Brown and French President Nicholas Sarkozy have publicly observed in their calls for greater price stability, this sort of volatility is very damaging to economic activity and one that is becoming increasingly expensive for companies to hedge against. It is also true that great price volatility makes investment by both end users and energy suppliers more difficult.
As this section will make clear, energy price volatility is set to continue for some time simply because small mismatches in energy supply and demand produce wide price swings as there is no economic actor strong enough to absorb and damp the mismatches. When the ‘Seven Sisters’1 dominated global oil supplies in the 1960s, they were in a position to ensure price stability. Now there is no group in this position in terms of oil or energy supply. OPEC has limited pricing power but only when it holds capacity off the market and this requires key players, usually Saudi Arabia, to hold spare capacity to enforce discipline. As demand rises and spare capacity disappears, OPEC has to cede pricing power to the market as happened in mid-2008.
The UK, because it is now a net and rising importer of oil, gas and coal, is becoming increasingly exposed to competition for supplies from other energy importers. The insulation from international supply pressures provided when the UK was self-sufficient in oil and gas supply is now eroding quite quickly. This is likely to put pressure on the UK balance of payments and in a world of floating exchange rates is also likely to put downward pressure on the valuation of the pound sterling. In other words the positive benefits to the valuation of the pound as a petrocurrency are now disappearing…
From Opinion B (Dr Robert Falkner):
For the UK, ‘peak oil’ is no longer a matter of theoretical debate. Ever since oil production in the North Sea started to decline just over a decade ago, the prospect of continuously dwindling petroleum reserves has become part of the country’s new economic reality. As the UK is becoming more dependent on energy imports, the parameters of energy policy are shifting. Peak oil has emerged from the fringes of political and economic debate, and security of energy supply has risen to the top of the political agenda. Will the next government face up to this new reality?
4.2 Beyond the peak: the UK experience
Few analysts doubt that the UK passed its regional oil peak in 1999. Annual oil production in the North Sea has since fallen from 137 million tonnes to 72 million tonnes in less than a decade. Responding to this challenge is as much an international as a national issue. As the UK is facing growing dependence on oil imports (it became a net importer of crude oil in 2005), it will have to tackle the growing global supply constraints head on, with an ever smaller cushion of a safe source of domestic oil. Not only will this put pressure on the country’s balance of payments, but it will also turn energy policy firmly into a foreign policy concern. As more and more global oil reserves are concentrated in countries that are either unstable or unpalatable, hard choices will have to be made to fill the growing gap in the country’s oil trade balance.
Is Britain facing a knock-out blow from peak oil? A future tightening of oil supply conditions is unlikely to produce a sudden and catastrophic effect in the short-term (5 years) to medium term (10 years) term, and the global economic recession has delayed the ‘oil crunch’ point by at least two years. Still, the short-term consequences, i.e. over the likely lifetime of the next government, are serious enough and will be felt in important sectors of the economy, as well as among some of the poorest parts of society. As the world begins to feel the consequences of tightening supply conditions, the UK may have to deal with a toxic mix of greater oil import dependence, rising yet volatile oil prices, inflationary pressures and the risk of sudden disruptions to the transport system.
4.3 Economic consequences for the UK
Of all the different sectors of the British economy, transport is most exposed to the effects of global supply constraints and price shocks. Despite efforts to promote energy efficiency and the use of alternative fuels, ground and air transport remain stubbornly dependent on petrol, diesel and kerosene. These oil-based liquid fuels simply cannot be substituted in the short to medium term. Biofuels, for example, currently only account for 2.6 percent of the fuel supplied for road transport in the UK (for more details about biofuels, see Appendix C). If anything, current trends in the growth of air travel and road haulage suggest that future demand growth will more than compensate for any energy-saving or oil-substitution measures. Global supply restrictions and price volatility will therefore pose a growing threat to the UK’s transport sector as the global oil crunch hits home.
The vulnerability of the transport sector has important knock-on effects throughout the UK economy. A wide range of businesses, from supermarkets to manufacturers, has come to rely on a highly integrated transport system that delivers goods in a time-sensitive manner. The adoption of so-called ‘just-in-time’ business models has led to a situation where companies have reduced inventories to minimal levels and intermediate and final goods are delivered at more rapid and frequent rates, be it to producers or consumers. Any disruption to this complex distribution network would have far-reaching economic consequences, as the fuel protests of 2000 vividly illustrate. Back then, supermarkets ran out of essential food products as supplies dried up and consumers resorted to panic-driven hoarding. (For more details about possible disruption to oil supplies, see Appendix B.)
The lesson from this experience is clear. Sudden supply-side shocks generated by oil supply restrictions or hikes in oil prices would not be isolated economic events. They would quickly reverberate throughout the UK’s supply chain, affecting many more companies that are not directly dependent on oil. Even if the UK continues to gradually move away from energy-intensive manufacturing, the central importance of oil-dependent transport to the economy will tie its economic fortunes to the future of the ‘black gold’.
Vulnerability to oil-related shocks would continue to pose a threat even if oil consumption continues to fall in the UK as it has done in recent years. This is because the downward trend in oil demand masks a structural shift in energy consumption. While electricity generation and heating have been moving away from oil and towards gas, the transport sector is consuming an ever larger share of the UK’s oil-based energy demand. Official statistics show that from the time of the first oil shock in 1973 to today, domestic households, industry and services have been able to reduce their reliance on oil products. Not so in the case of transport. Road and air transport’s share of oil demand in the UK has been rising steadily, exceeding 50 percent of overall consumption in 2008. Air travel and road haulage are now the key reasons behind our dangerous addiction to oil.
Continued dependence on oil, coupled with a more uncertain global energy environment and fluctuating oil prices, will cost the UK economy dearly. The recent rollercoaster ride of oil prices marks a significant increase in price volatility and is set to continue in the coming years as supply constraints become a more permanent feature of the oil market. While key sectors of the economy remain highly dependent on a secure and stable supply of oil at predictable prices, the return to boom-and-bust cycles in which commodity price rallies give way to periods of economic downturn would significantly increase the costs of doing business in the UK. The uncertainty about future prices will drive up the costs of capital and raise hurdles for investment.
The effects of increased price volatility will be felt throughout society. With ever more consumer products being delivered through oil-dependent and vulnerable transport systems in the retail sector, sudden oil price hikes can feed quickly through the supply chain into higher prices for consumables.
Where food is concerned, the poorest households will be particularly hard hit. They have already felt the pinch of rising energy prices in the last five years, as is evident from the dramatic rise in the numbers of households trapped in fuel poverty. Because oil and gas prices have been closely linked in the past, the recent price rally in the oil market has driven up this number to an estimated 4.6 million in 2009. The Office of Gas and Electricity Markets (Ofgem), the government’s energy regulator, warns that domestic energy bills may rise by up to 25 percent by 2020 due to rising commodity prices with up to £200 billion needed for energy infrastructure investment.
The current glut in global gas markets and a widely predicted de-coupling of gas and oil prices should mitigate against further dramatic increases in domestic fuel costs. This would offer a welcome reprieve to the most hard-pressed households in the UK. Nevertheless, a rise in living costs – in the form of higher travel and transport costs and consumer prices – is firmly on the agenda.
Are we likely to see a re-run of the 1970s scenario, when two OPEC-induced oil shocks drove up the oil price and double-digit inflation rates ensued in many industrialised countries? To some extent, circumstances are more favourable today. The monetary policy environment has changed and is likely to keep inflationary expectations lower than they were in the 1970s and 1980s, and the UK economy’s overall oil intensity has declined.
But the experience of the most recent hike in oil prices nevertheless offers a sobering lesson. Rising oil and food prices pushed up consumer prices well above the Bank of England’s 2 percent inflation target to a peak of 5.2 percent in September 2008. While this inflationary push was comparatively lower than in past decades, a sustained rise in oil prices over the next five to ten years will eventually feed through into higher price levels overall. Economic recovery after the recession and a decline in the current output gap will soon return the UK economy to a situation where sudden and persistent oil price rises require monetary authorities to apply a bitter medicine, with a further economic downturn and rising unemployment in tow…