Is peak oil a reality?

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Last month in CBJ’s Clean 15 Series, I very briefly mentioned the concept of using more resources than we replenish as a major premise of our current business paradigms. In the article, I quoted the International Energy Agency’s Chief Economist, Dr. Fatih Birol:

“The public and many governments appeared to be oblivious to the fact that the oil on which modern civilization depends is running out far faster than previously predicted, and that global production is likely to peak in about 10 years.”

The article went on further to say, “This quote was made in 2008, however the IEA’s first detailed assessment of more than 800 top oil fields in the world (this represents about 75 per cent of global reserves) have found that the biggest fields have already peaked and the rate of decline is faster than previously thought. The late Matthew Simmons believed that production peaked in 2005 and he went on record to say that the world would need approximately four Saudi Arabias worth of oil to keep pace with the predicted demand. The exact moment that we experience this peak is obviously up for debate, however this is concerning because all of our economic and social systems are based on oil. From our consumer products to our food, to our transportation and our energy with its aging infrastructure and from our viewpoint many of the world’s giant companies are taking notice. We know that we extract more resources than we replenish and it appears we will need a very focused global effort to shift our relationship between resources and business.”

The idea spreads

Interestingly enough, there was a major announcement leaked last month surrounding the topic. In the German newspaper Der Spiegel a leaked report ran that was done for the German military by the Future Analysis department of the Bundeswehr Transformation Center (a branch of the German Military). The document was leaked in August, and its authenticity was reportedly confirmed by Der Spiegel in September. The document states that there is some probability that the world could be facing peak oil in 2010 and it went on to paint a very bleak picture of a potential future with this reality. The report warns of dire global economic crisis in as little as 15 to 30 years as a result of declining oil production. The ramification of this outlook is extremely serious. According to the leaked study, 95 per cent of all industrial goods are directly or indirectly connected to oil. Price shocks could be experienced in almost every industry, which would lead to a high potential for instability in global stock markets. This report is concerning on its own, however, what is more concerning is that it comes five years after The Hirsch Report, which was done for the U.S. Department of Energy under the George W. Bush Administration. The Hirsch Report summary starts off with a very grave warning that states:

“The era of plentiful, low-cost petroleum is approaching an end. The good news is that commercially viable mitigation options are ready for implementation. The bad news is that unless mitigation is orchestrated on a timely basis, the economic damage to the world economy will be dire and long lasting. Oil is the lifeblood of modern civilization. It fuels most transportation worldwide and it is a feedstock for pharmaceuticals, agriculture, plastics and a myriad of other products used in everyday life.” Dr. Robert Hirsch goes on to say that “waiting until world oil productions peaks before taking crash program action leaves the world with a significant liquid fuel deficit for more than two decades.”

According to Simmons, supply will need to increase by 49 million barrels a day just to support the growth of China and India over the next 20 years, which works out to be 7.8 billion litres of extra oil per day by 2030. This figure did not include the other emerging economies of world. With such a high demand jump and declining production in 75 per cent of the world’s largest fields, it seems very likely that oil production may be peaking.  It also seems likely because even with large oil finds, there have been no “Super Giant Oil Fields” discovered since the 1960s. Birol says:

“We have found that if we want to stand still–that is, continue producing 85 million barrels per day–for the next 22 years, we need new production of 45 million barrels per day to compensate for the decline. That means four Saudi Arabias.”

Add on a demand increase of the sort seen the past couple of decades–equivalent to another two Saudi Arabias–and the world will have to work that much harder to meet rising demand.

Expectations and scenarios

If oil is peaking right now, or has peaked some time in the near past, or is about to peak within the next 20 years, what can we expect? According to translations of the Bundeswehr on Der Spiegel this is a potential scenario:

Oil will determine power: The Bundeswehr Transformation Center writes that oil will become one decisive factor in determining the new landscape of international relations: “The relative importance of the oil-producing nations in the international system is growing. These nations are using the advantages resulting from this to expand the scope of their domestic and foreign policies and establish themselves as a new or resurgent regional, or in some cases, global leading powers.”

Increasing importance of oil exporters: For importers of oil more competition for resources will mean an increase in the number of nations competing for favour with oil-producing nations. For the latter this opens up a window of opportunity which can be used to implement political, economic or ideological aims. As this window of time will only be open for a limited period, “this could result in a more aggressive assertion of national interests on the part of the oil-producing nations.”

Politics in place of the market: The Bundeswehr Transformation Center expects that a supply crisis would roll back the liberalization of the energy market. “The proportion of oil traded on the global, freely accessible oil market will diminish as more oil is traded through bi-national contracts,” the study states. In the long run, the global oil market will only be able to follow the laws of the free market in a restricted way. “Bilateral, conditioned supply agreements and privileged partnerships, such as those seen prior to the oil crises of the 1970s, will once again come to the fore.”

Market failures: The authors paint a bleak picture of the consequences resulting from a shortage of petroleum. As the transportation of goods depends on crude oil, international trade could be subject to colossal tax hikes. “Shortages in the supply of vital goods could arise” as a result, for example in food supplies. Oil is used directly or indirectly in the production of 95 per cent of all industrial goods. Price shocks could therefore be seen in almost any industry and throughout all stages of the industrial supply chain. “In the medium term the global economic system and every market-oriented national economy would collapse.”

Relapse into planned economy: Since virtually all economic sectors rely heavily on oil, peak oil could lead to a “partial or complete failure of markets,” says the study. “A conceivable alternative would be government rationing and the allocation of important goods or the setting of production schedules and other short-term coercive measures to replace market-based mechanisms in times of crisis.”
Global chain reaction: “A restructuring of oil supplies will not be equally possible in all regions before the onset of peak oil,” says the study. “It is likely that a large number of states will not be in a position to make the necessary investments in time,” or with “sufficient magnitude.” If there were economic crashes in some regions of the world, Germany could be affected. Germany would not escape the crises of other countries, because it’s so tightly integrated into the global economy.

Crisis of political legitimacy: The Bundeswehr study also raises fears for the survival of democracy itself. Parts of the population could perceive the upheaval triggered by peak oil “as a general systemic crisis.” This would create “room for ideological and extremist alternatives to existing forms of government.” Fragmentation of the affected population is likely and could “in extreme cases lead to open conflict.”

The U.S. Department of Energy paints a slightly more optimistic view but conveys a stark warning to add context:

“Over the past century, world economic development has been fundamentally shaped by the availability of abundant, low-cost oil. Previous energy transitions (wood to coal, coal to oil, etc.) were gradual and evolutionary; oil peaking will be abrupt and revolutionary.

The world has never faced a problem like this. Without massive mitigation at least a decade before the fact, the problem will be pervasive and long lasting.” The report goes on to say that  “a number of technologies are currently available for immediate implementation once there is the requisite determination to act.

Governments worldwide will have to take the initiative on a timely basis, and it may already be too late to avoid considerable discomfort or worse. Countries that dawdle will suffer from lost opportunities, because in every crisis, there are always opportunities for those that act decisively.”

Slashing oil demand via new technologies, new paradigmatic business models (see Better Place) and systems would seem to be imperative. Bringing clean technology to market faster has never been more critical. Smart Global 1000 companies and SMEs in the last two to three years are bringing on Chief Sustainability Officers at a rapid rate to look at sustainability issues relating to their companies and to explore new ways of doing business that will mitigate the risk of petrochemical inputs as well as transportation and ultimately reduce their exposure to oil.  Governments face extremely tough decisions as they will all have to deal with this issue somewhere in the near to mid term. Andrew Gould, CEO of Schlumberger said that if the world is to have any chance of meeting aggressive demand growth for energy, oil companies will need to provide massive investment and will need  more advanced technology. Gould believes that the industry would have to spend approximately $350 billion a year for the next 20 years. Of course predicting the future is an art not an exact science, however if these pundits are right we will have a very challenging and character-defining few decades ahead.

BY DWAYNE MATTHEWS

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