If eight companies across a broad spectrum of UK industry had warned, five years ago, that a ruinous credit crunch would hit the global economy this year, might the government have taken the warning seriously? Might UK leadership in damage limitation have been proactive, rather than reactive? Could a softer landing and a faster recovery have been possible as a result?
Today, eight British companies are warning of a ruinous oil crunch five years from now. We warn that the global peak of oil production will arrive unexpectedly early, resulting in not just a global energy crisis, but potentially the withholding of exports by oil producers and energy famine in oil-importing countries. Previously unimaginable policy interventions in financial markets have suddenly become imperative, and similar interventions in energy markets today may be worth their weight in gold tomorrow, in terms of economic and social damage avoided, especially as this would also help tackle climate change.
The prevailing oil industry view, echoed by the government, is that there are well over a trillion barrels of proved reserves, and several trillions more in tar sands. In a world burning just over 30bn barrels a year, that means decades of supply before we need worry. But peak oil happens when flow-rate capacity coming onstream from oil discoveries fails to exceed declining flow-rate capacity from depletion of existing reserves. Peak oil is as much a problem of flow rates as it is of reserves. In our report, the consulting editor of Petroleum Review – a flagship oil-industry journal – shows how the flow rates from reported discoveries will drop below depletion rates no later than 2013, and possibly a good deal earlier.
As for tar sands, operators have to melt the tar. This is far from easy, and is far slower than lifting liquid crude out of the ground. Easy oil is being depleted by at least 3.5m barrels a day of capacity each year, and seven years from now the oil industry won’t be able to squeeze more than 2.5m barrels of capacity from the tar sands, even if all goes to plan and the industry isn’t reined in because mining tar sands creates huge greenhouse gas emissions. Think of global oil reserves as a water tank: if the tap is faulty, you won’t get enough water out. We fear the oil tap is faulty.
But, some will say, demand has been falling fast since oil hit $147, and that will head off the problem. It is true that the transport sector is changing, and it shows the scope we have for cutting global energy demand and changing supply if we try. But there are problems with relying on this market mechanism.
First, continuing growth in demand in China and India is likely to drown out any reduction in demand from structural changes in the west. Second, the oil industry has – almost incomprehensibly – been investing less in exploration in recent years. Too much of the vast profit we saw from BP earlier this week goes on share buybacks. Third, the industry is relying on aged oilfields, aged infrastructure and an aged workforce just at the time when oilfields are becoming more difficult to find and are taking ever longer — sometimes more than a decade — to bring onstream even when found. Fourth, the oil- and gas-producing nations have massive and growing infrastructure programmes that increasingly cut into their scope for export. Fifth, we worry that Opec has been subject to the same irrational exuberance about delivery capacity as the international oil companies have been.
If we accelerate the green industrial revolution, we believe we can soften the blow of the oil crunch, set up the recovery and get out of oil dependence surprisingly quickly. We hope industry and government can plan for an industrial green new deal, starting now.