The Chief Executive Officer of insurance giants Lloyds is warning that the world is facing a “period of deep uncertainty” over the decline of fossil fuels – and may soon be coping with $200-a-barrel oil.

It may be hard to believe now, writes Dr Richard Ward in his introduction to a “stark” report just published by Lloyds and an influential UK think tank, but that’s because “the bad times have not yet hit.” He warns business managers to be ready for “dramatic changes” as oil, gas and coal supplies will soon be “less reliable and more expensive.” The world “has entered a period of deep uncertainty in how we will source energy for power, heat and mobility, and how much we will pay for it,” he states.

And that’s just CEO Ward’s introduction. The rest of the report does not disappoint.

Titled Sustainable Energy Security: Strategic Risks and Opportunities for Business, it urges business leaders to adopt a “transition to a low carbon economy.” Those that do will thrive; the report talks of opportunities for forward-thinking managers that “prepare for and take advantage of the new energy reality.” However, “failure to do so could be catastrophic.”

Lloyds, which provides business services in more than 200 countries and territories (reporting profits of 3.9 billion UK pounds in 2009) produced this report with Chatham House, a London, England “world-leading source of independent analysis, informed debate and influential ideas.” Formerly know as the Royal Institute of International Affairs, Chatham House is independent, but works closely with the British Parliament. For instance, the organization facilitated the March 2010 meeting between British energy ministers and peak oil proponents.

It’s a report for business leaders, so emotive writing is perhaps not to be expected; instead, we get the occasional “new energy paradigm”. The term peak oil is largely avoided in favour of global oil supply crunch – which is emerging as a kind of Brit euphemism of choice for those wanting to attract the business community.

Sustainable Energy Security does not get hung up on predicting a date for this decline in oil production, but states that it is an urgent issue. It quotes from a 2009 study from the UK Energy Research Centre suggesting “that a peak in conventional oil production before 2030 appears likely, and there is a significant risk of a peak before 2020,” and also that “some suggest that this ‘peak’ has already occurred, while others maintain it is either impossible to predict or shows no sign of appearing.”

Having said that, it doesn’t pull any punches. For instance:

Modern society has been built on the back of access to relatively cheap, combustible, carbon-based energy sources. Three factors render that model outdated: surging energy consumption in emerging economies, multiple constraints on conventional fuel production and international recognition that continuing to release carbon dioxide into the atmosphere will cause climate chaos.

Energy markets will continue to be volatile as traditional mechanisms for balancing supply and price lose their power. International oil prices are likely to rise in the short to mid-term due to the costs of producing additional barrels from difficult environments, such as deep offshore fields and tar sands. An oil supply crunch in the medium term is likely to be due to a combination of insufficient investment in upstream oil and efficiency over the last two decades and rebounding demand following the global recession. This would create a price spike prompting drastic national measures to cut oil dependency.

The report looks at declining “extractive energy sources” – hydrocarbons and nuclear – along with climate change, and the likelihood of government carbon regulation. It repeats that fossil fuel energy is going to get more expensive, due to both diminishing supply and carbon taxation, so that “the most cost-effective mitigation strategy is to reduce fossil fuel energy consumption.” It argues for efficiency and for renewable energy, and against just-in-time manufacturing models.

While written in a positive, pro-business frame of mind, Sustainable Energy Security makes it clear that we are fast approaching a transition away from “extractive” energy sources that currently make up “90 per cent of the world’s traded energy” and into uncharged territory:

These changes will naturally impact jobs, profits, national economies and the
environment, just as the dramatic increase in coal use during the industrial
revolution and the onset of the ‘oil age’ did in the first part of the 20th
century. This means that there will be push and pull factors from stakeholders.
This will form the political context for many business transactions and
operations over the next 30 years.

This is a well-researched document. It’s all here: the growing demand for energy within the Middle East, China and India; the scramble for oil in Africa and Central Asia; the growing importance of Russia as a source of oil and natural gas (“EU depends on Russia for 33% of its imported oil and 42% of its gas”); the rise of coal and natural gas as transition fuels, and question over their longterm availability; the Deepwater Horizon explosion and subsequent oil slick, and the inherent risks of deepwater operations; the lack of investment in the oil industry; and the latest on unconventional sources of hydrocarbon. As it states on shale gas:

But the full impact is highly uncertain. Production from shale gas wells seems
to peak much faster than conventional gas, and data is limited. Assessments
of the Barnett wells in the US using horizontal drilling showed that most of
the recoverable gas is extracted in the first few years.

Is the US experience set to become a global phenomenon? Some suggest that resources in OECD Europe are large enough to displace 40 years of imports of gas at the current level, assuming recovery rates in line with those in North America. Exploration is already under way in Europe (including in France, Germany, Poland
and the UK) to assess this potential.

The document even enters into some speculation over oil prices, quoting a range of views. The highest, and most immediate, oil price is suggested by Chatham House’s own professor Paul Stevens: “A supply crunch appears likely around 2013…given recent price experience, a spike in excess of $200 per barrel is not infeasible”

This is highlighted in the document and referred to in Dr Richard Ward’s introduction. It subsequently states that while there is a “huge variety of opinion on how high the oil price will rise, and when it will reach these figures, most commentators agree that the trajectory is upwards.”

An interesting aside on the importance of fuel to the modern economy comes from a brief flashback to a September 2000 fuel tax protest in Britain, during which an informal coalition of truckers and farmers blockaded oil depots around the country, stopping deliveries to gas stations. Sustainable Energy Security states:

As supermarkets tend to keep only two–three days worth of perishables on their
shelves, a transportation fuel disruption lasting just a few days would affect
availability. This happened during September 2000 when protests over fuel price
rises prevented the distribution of fuel from depots to the rest of the country.
Supermarkets were obliged to put the government’s priority user scheme in place
at its petrol stations. They also faced ‘panic-buying’ which in some cases ran
down stocks before replacements arrived. Several stores decided to implement
rationing of basic goods like bread and milk. Companies that prepare and deliver
fresh goods to retailers daily were particularly vulnerable. UK food group Geest
announced that its deliveries would be unlikely to reach the supermarkets if
fuel supplies were not restored in a matter of days.48 The chief executive of
Sainsbury’s wrote to the Prime Minister to warn that the petrol crisis was
threatening Britain’s food stocks and that stores were likely to be out of food
in “days rather than weeks”. Fuel disruptions in other parts of the world also
affects transportation of goods to markets, and higher energy prices could push
up the price of basic food commodities, such as rice, soya and wheat – as they
did in 2008.

(I’ll declare an interest: working as a journalist in Derby, England, at the time, I was given a pass to enable me to buy fuel – most cars were off the road after only a couple of days. I guess the government wanted to keep the presses running; if we’d stopped printing, people would have thought civilisation was ending. . . And yes, there was panic buying; I seem to remember bread ran out first, then milk.)

Time and space considerations prevent me from looking at the climate change sections in Sustainable Energy Security, but needless to say, they are equally well put together.

I cannot recommend this report highly enough. It’s a complete introduction to the whole peak debate. Sustainable Energy Security is an essential, must-read document. In the words of Rob Hopkins of Transition Culture it’s “the Hirsch Report for British business… and provides the perfect case for the work that Transition Training and Consulting are now doing with businesses.” (Now that’s damning it with faint praise, considering the Hirsch report is one of the most neglected government documents about a contemporary issue of all time.)

I’ll leave you with just two of the document’s conclusions:

Traditional fossil fuel resources face serious supply constraints and an oil
supply crunch is likely in the short-to-medium term with profound consequences
for the way in which business functions today. Businesses would benefit from
taking note of the impacts of the oil price spikes and shocks in 2008 and
implementing the appropriate mitigation actions. A scenario planning approach
may also help assess potential future outcomes and help inform strategic
business decisions.

Energy infrastructure will be increasingly vulnerable to unanticipated severe weather events caused by changing climate patterns leading to a greater frequency of brownouts and supply disruptions for business. This throws out a critical challenge to energy providers, investors and planners in terms of choosing the location of new infrastructure and fortifying existing plants and networks. Those businesses for which uninterrupted access to energy is of fundamental importance should actively consider investing in alternative energy supply systems.