Do not discount the threat posed by peak oil  

The FT has an article from Will Whitehorn and Jeremy Leggett on peak oil - Do not discount the threat posed by peak oil.

Last week, the government published a review of the UK's energy security situation. In a report commissioned by the prime minister, Malcolm Wicks, the former energy minister, pronounced that "there is no crisis".

His findings were in marked contrast to those of the UK Industry Taskforce on Peak Oil and Energy Security, which concluded last year that the economy faces a clear and present energy-security threat. The taskforce, a group that includes Virgin, Scottish and Southern Energy, Arup, Stagecoach and Solarcentury, was set up in 2007 on the basis of our shared opinion that peak oil merited serious study as a business risk. Some began with the assumption that the issue was low-risk but high-consequence. Sadly, we are now of the collective view that peak oil is a high-risk, high-consequence issue.

How can government be so out of tune with such a wide spectrum of companies? The core of the disagreement is the point at which the world pumps as much oil in a day as it is ever going to pump. Beyond the peak, or plateau perhaps, lies a descent that would pose huge challenges for oil-dependent economies. There is a grave danger, in the view of the taskforce, that this will happen earlier than widely expected. In the words of its report: "The risks to UK society from peak oil are far greater than those that tend to occupy the government's risk-thinking, including terrorism."

We fear this is because of over-estimation of reserves by the global oil industry, underinvestment in exploration and production, or a combination of the two. Once the descent begins, the realisation would sweep the world that another leading industry has its asset assessment systemically wrong. The danger is that producing nations then start cutting exports. At that point, for some oil-consuming nations, energy crisis becomes energy famine.

The taskforce will produce a second report this November, studying among other topics the impact of the recession on oil production, which we concluded ( www.peakoiltaskforce.net ) last November was most likely to peak in 2013. Early indications are that the recession has moved the peak a little further into the next decade, but steepened the descent in production thereafter. Most leaders in the oil industry put the peak well beyond the next decade, a view that we know senior civil servants share.

The Wicks review mentions peak oil only once. The relevant passage concludes: "Few authors advocating an imminent peak take account of factors such as the role of prices in stimulating exploration, investment, technological development and changes in consumer behaviour."

The UK industry taskforce report ignored none of these things. Prices do stimulate exploration but - we argue - not enough. We discuss the intervals between oil discoveries and bringing capacity to the market. We discuss investment, and conclude that there have been dangerous shortfalls even when prices have been high. We discuss technological developments such as enhanced oil recovery and conclude that they tend only to slow depletion rates. We discuss changes in consumer behaviour and worry that they will not be sufficient, especially in India and China, to shrink global demand in parallel with supply.

If we imagine a review of financial security in 2006, the equivalent of the cursory dismissal of peak oil in the Wicks review might have read as follows: "Few authors advocating the toxicity of derivatives take into account factors such as the investment banking industry's sophisticated treatment of risk, and the extent of the due diligence involved in awarding triple-A investment grading."

We believe there are profound cultural problems in this debate. The FT's Gillian Tett has argued that the banking elite cocooned itself in a "social silence" over the true worth of its assets in the run-up to the financial crunch. We worry that the oil industry is wrapped in a social silence on the depletion of its own assets. If we are right, a dire energy crunch awaits us and we need to act now.

The most perplexing thing about this fundamental difference of opinion is this. The UK taskforce held two meetings with Department of Energy and Climate Change officials, one of which Mr Wicks attended himself. Yet his review ignores not just our conclusions, but our very existence.