We appear to be in rather peculiar and unsettling times. A year ago, conversations and fears were over the high oil price, which until September 2014, had been above $100 a barrel. Since a high of $115 in July 2014, it has plummeted, with West Texas Intermediate falling to $43 and North Sea Brent Crude marginally higher at $47 earlier in the week. Today, both have rallied to around $48, with an untypical mere 21 cents between them. Since Brent normally trades at least several dollars above WTI, any apparent synchrony of the two often reflects price-volatility, as indeed is the case now.

It is fair to say that the crash in oil price was not anticipated by most people who keep an eye on the oil supply situation, and accordingly, its cause is a matter of intense speculation, with the future prognosis even more so. Among the various factors that have been brought culpable for it, we may list: a slowing of the Chinese economy, and little recovery in Europe, so that demand has fallen, and that moreover, supply of crude oil has soared ahead of expectation. The latter is accounted for by supplies of oil returning from Iraq and Libya, and overwhelmingly, the ramping-up of oil-production in the U.S., principally released from impermeable shale-formations by hydraulic fracturing ("fracking"). While the U.S.is not a major exporter of oil, the increase in its own domestic production has reduced the amount of oil it needs to import, so leaving a bigger surplus on the global market. Saudi Arabia produces around 10 million barrels a day, or one third of the output from OPEC, which has refused to cut back on production primarily to avoid losing its market share. Thus the result is overproduction against demand, leading to a glut of oil, and this has pushed the price down markedly.

Although, from the perspective of "price at the pump", a low oil price is widely being seen as positive, i.e. sales of Hummers have increased, and the British Prime Minister has promised that cheap oil and gas will lead to reduced energy bills there are various reasons to infer that the situation is but metastable and temporary. The main factor is that the world’s currently producing oil fields are showing a production decline of 4.1% per annum, meaning that year on year we need to find another 3.5 mbd, or the equivalent of the production from Saudi Arabia about every 3 years.

This surely will eat into the glut, and in addition, we are already seeing oil companies pull back on investment in new production to the tune of $150 billion in 2015, because the price they can sell oil for is less than the breakeven price (how much it costs to produce it). Any failure to inaugurate new production now must reduce the supply of oil a year or more down the line, and it is unlikely that U.S. shale oil output, impressive though it has been (now providing 30% of U.S. domestic  production), can grow in perpetual step, to offset the decline from existing fields. Indeed, along with deepwater production, it is the relatively expensive shale oil projects that are vulnerable to a curtailing of new investment in them. It is speculated too, that the resurfacing of troubles in Libya will reduce its exports of oil, further attenuating overall global oil supply. Once the supply surplus is reduced against demand by these combined forces, the price will go back up: it has to, in line with actual and rising production investment costs, and the real speculation is only over "when".

This may well sound like a "peak oil" argument, laid bare once more, as the oil surplus which has shrouded it drains away, but the technical and economic viability of production of oil may not be its limiting element. Rather, the determinant of how much oil we can produce may be the amount of carbon dioxide that we are allowed to release into the atmosphere if we are to keep the mean global temperature from exceeding another 2 deg. C warmer than it is now, which is predicted to drive catastrophic climate change. In a paper published in the prestigious journal Nature, Christophe McGlade and Paul Ekins, researchers at University College London, conclude that it will be necessary to leave some two thirds of the fossil fuels available to us unburned, to achieve just a 50% chance of keeping global warming within the 2 degree C limit. From their analysis, they deduce more specifically that it is necessary to leave one third of the oil, half of the gas and more than 80% of the world’s coal in the ground, up to 2050.

This is in line with previous studies, but the real significance of the work is the particular geographical regions that will be most affected, if these findings are turned into global policy. In particular, the Middle East would have to leave half of its oil and gas unburned, while Russia and the U.S. could only burn about 5% of their coal reserves. 85% of Canadian oil sands (bitumen) reserves and 95% of Venezuelan extra-heavy oil reserves are described as "unburnable". The study is based on a model which limits the total amount of carbon emitted to the atmosphere at 1,100 Gt in the form of cumulative carbon emissions between 2011 and 2050.

While such a static reckoning of the distribution of the oil, gas and coal reserves across the world is extremely informative and undoubtedly salutary, it is of interest to examine the production rates of the three fuels that the model implies. To make an estimate of this, I have simply "blown up" the various charts (Figure 3 in the paper) on the computer-screen and measured them with a ruler, with the following results. EJ = Exajoule = 1.0 x 10^18 J:

            2010 (EJ)                   2050 (EJ)               Change

Oil       164                             156                            -5%

Gas      109                             172                           +58%

Coal     142                              46                            -68%

Total     415                             374                           -10%

Thus, we see that it is predicted that the oil-supply will remain robust (falling by only -5% over the 40 year period), fuelled by mostly fields already in production and those scheduled (from which production has halved by 2050), with "reserve growth", "undiscovered", light tight oil (shale oil), and natural gas liquids mainly filling-out the supply.

The major change is the replacement of coal by natural gas, the supply of which must increase by more than half up to 2050, with a significant increase by 2025. (It is predicted that shale gas, tight gas and coal bed methane will form a substantial proportion of the gas supply out to 2050). Since the carbon emissions per unit of energy are only half that of coal, the production of which is curbed by two thirds, the impact is large.It is predicted that the strategy would decrease the annual carbon emissions from 48 Gt CO2-eq (2010) to 21 Gt CO2-eq (2050), a reduction of 56% from start-to-finish year. The overall use of fossil-fuel energy is predicted to be reduced by 10%! This may be compared with the figure from the B.P. Statistical Review of World Energy (2014) that by 2035, although there will be some replacement of coal use by gas, global carbon emissions will increase by 29%.in accord with our increasing use of fossil fuel.

The authors further conclude that: "developments of resources in the Arctic and any increase in unconventional oil production are incommensurate with efforts to limit average global warming to 2 degrees C."

They also warn that continued substantial expenditure on fossil fuel exploration is pointless, because it would not be possible to increase the amount of them available to burn (since the limits are already exceeded by the amounts of them we already have!).

It is salient that at a time when policy-makers are intent on exploiting their fossil fuel reserves to the limit of availability and production, they should in fact be setting limits to production. Thus, the difference between the decrease of 56% in CO2-eq emissions from 2010 to 2050, predicted by the model, and the increase of 29% by 2035 (B.P. Statistical Review) – probably +50% or so by 2050! – emphasises the disparity between what must be done and business as usual.

In the U.K. we await the outcome of the Infrastructure Bill, which forces governments (both the present and future incumbents) to produce strategies for “maximising the economic recovery of UK petroleum”. This means producing as much oil as possible, albeit how difficult that will be do, once the price escalates, once more, and the supplies (increasingly furnished by unconventional oil) become less and less affordable to buy.