Better To Cry Wolf Than To Fall Off the Olduvai Cliff  

Posted by Big Gav

George Monbiot has a new article out on peak oil (which doesn't focus on any particular company, no doubt much to the relief of Shell and its shareholders, and also fails to mention the post-peak period, which is a shame, as it would be a good excuse to trot out the "fighting like cats in a sack" quote again). He largely concentrates on the Hirsch report, and also debunks some of Bjorn Lomborg's fatuous claims by quoting The Economist (ah, sweet irony).

Monbiot also mentions Chris Vernon's analysis that production of light sweet crude has peaked, along with the ever annoying quote that "current high oil prices are the result of a shortage of refineries". I really wish people would stop saying this - you could perhaps say there is a shortage of refineries that can process the heavy crude that is all we have left to boost production with (which would increase the price of the limited supplies of light sweet crude and depress the price of heavier grades), but in general a refinery bottleneck offset against an excess supply of crude would result in lower crude prices, not higher ones.

Jeff Vail did a post on this topic a few days ago (he also has an interesting paper up on what he calls the "New Map" which expands on his idea of Rhizome and the future of the nation-state).

In 1985 Kuwait announced that it possessed 50% more oil than it had previously declared. Had it just discovered a new field? Had it developed a new technology that could extract more oil from the old fields? No. Opec, the price-fixing cartel to which it belongs, had decided to allocate production quotas to its members based on the size of their reserves. The bigger your stated reserve, the more you were allowed to produce. The other states soon followed Kuwait, adding a total of 300bn barrels to their reserves: enough, if it existed, to supply the world for 10 years. And their magic oil never runs out. Though extraction has long outstripped discovery, Kuwait posts the same reserves today as it claimed in 1985.

So we turn to the US Geological Survey for an answer, and find that its estimates of global oil supply are as reliable as the Pentagon's assessments of Iraqi weapons of mass destruction. In 1981 it said we possessed 1,719bn barrels of oil. In 2000, 2,659. Yet the discovery of major oilfields peaked in 1964. Where has it come from?

It is true to say that oil reserves are not fixed. As technology improves or the price increases, oil that was formerly too expensive to extract becomes available. But the oil geologist Jean Laherrère points out that the survey's estimate "implies a five-fold increase in discovery rate and reserve addition, for which no evidence is presented. Such an improvement in performance is in fact utterly implausible, given the great technological achievements of the industry over the past 20 years, the worldwide search, and the deliberate effort to find the largest remaining prospects."

The current high oil prices are the result of a shortage of refineries - exacerbated by the hurricanes in the Gulf of Mexico - rather than a global shortage of crude. But behind that problem lurks another. Last week Chris Vernon of the organisation PowerSwitch published figures showing that while total global oil production has risen since 2000, the production of light sweet crude - the kind that is easiest to refine into motor fuels - has fallen, by 2m barrels a day. This grade, he claims, has already peaked. The refinery crisis results partly from this constraint: there aren't enough plants capable of processing the heavier grades.

And next in the queue? Who knows? All I can say is that George Bush himself does not appear to share the US Geological Survey's optimism. "In terms of world supply," he said in March, "I think if you look at all the statistics, demand is outracing supply, and supplies are getting tight." What has he seen that we haven't?

If the figures have been fudged, we're stuffed. That might sound extreme, but it is not my conclusion. It is that of the consultants hired by the US department of energy. In February this year the department released a report called Peaking of World Oil Production: Impacts, Mitigation and Risk Management. I say "released", for it was never properly published. For several months the only publicly available copy was lodged on the website of the Hilltop high school in Chula Vista, California.

The department's consultants, led by the energy analyst Robert L Hirsch, concluded that "without timely mitigation, the economic, social and political costs will be unprecedented". It is possible to reduce demand and to start developing alternatives, but this would take "10-20 years" and "trillions of dollars". "Waiting until world oil production peaks before taking crash programme action leaves the world with a significant liquid fuel deficit for more than two decades", which would cause problems "unlike any yet faced by modern industrial society".

Of course, we have been here before. Oil analysts and environmentalists have warned of disappearing reserves ever since drilling began, and they have always been proved wrong. According to people such as the Danish statistician Bjorn Lomborg, this is because the industry is self-regulating. "High real prices deter consumption and encourage the development of other sources of oil and non-oil energy supplies," he says. "Since searching costs money, new searches will not be initiated too far in advance of production. Consequently, new oilfields will be continuously added as demand rises ... we will stop using oil when other energy technologies provide superior benefits."

It is beginning to look as if he is wrong on all counts. As the Economist magazine pointed out on September 10, "demand for petrol is pretty inelastic in the short term", because people still have to go to work, however much it costs. According to the analyst it cites, "it would take a doubling of petrol prices to reduce American petrol consumption by just 5%".

The problem with that final bit is the demand destruction due to high prices must happen eventually - in this case the release valve probably comes in the form of people not going to work, either by losing their jobs due to a recession, or simply not being able to afford to pay the bills (a responsive government would adapt by providing efficient public transport, but unfortunately the lead time for can be quite substantial) - which is the situation already facing people in the third world.

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