BP may think that a demand crunch will happen before a supply crunch.
But others disagree. Today, six UK leading companies have launched the second report of the UK Industry Task-Force on Peak Oil and Energy Security.
The report, entitled “The Oil Crunch – a wake-up call for the UK economy”, argues that oil shortages, insecurity of supply and price volatility will destabilise economic, political and social activity within five years.
Peak oil – the point where the highest practicable rate of global oil production has been achieved and from which future levels of production will either plateau, or begin to diminish – could happen within as little as three years, they argue.
The Task-force contends that the risks to UK society from peak oil are far greater than those that tend to occupy government risk-assessment, including terrorism.
As easily and cheaply available oil supplies fall off, high oil prices will become a long-term trend having profound direct and indirect economic impacts.
It will be the poorest to be hit hardest by significant price rises for travel, food, heating and consumer goods. They argue that after peak oil hits, the price of oil will be far higher than $150.
They also argue that peak oil is more of an “immediate threat” to the economy and people’s lives than climate change. The Taskforce is not saying that climate change is less important but that the impacts of a decline in easily and cheaply available oil will hit us before the worst impacts of climate change. The Government needs urgently to reflect this threat in their analysis and planning.
The Task-force believes that the policies to address Peak Oil must be a priority for the new British government formed after the 2010 election. The new Government must acknowledge the risks to the economy and to produce contingency plans for transport, retail, agriculture and alternative power.
“Unless we do so, we face a situation during the term of the next government where fuel price unrest could lead to shortages in consumer products and the UK’s energy security will be significantly compromised,” it said.
Key recommendations from the report include the acceleration of the “green transport revolution” to see the ongoing introduction of lower carbon technology and trials of “sustainable” biofuels.
“Working together, we must ensure that the Government takes action to address the impact of the oil crunch and ensure the UK is better prepared to withstand higher and more volatile oil prices. UK competitiveness will be hampered unless we can develop viable, affordable and secure long term sources of alternative energy.” argues Richard Branson, Founder of Virgin Group and one of the Task-Force members.
Any discussion about peak oil and oil prices over the next decade must include an attempt to quantify emerging economy demand as an important driver at the margin. Here is a simple thought experiment using Chinese demand to give some idea of the magnitude of the supply issues we face:
– China moves from 3 bbls/person/year to the South Korean per capita consumption level of 17 bbls/person/year
– Transition takes 30 years
– No peak in global production
In next 10 years we must find 44 million BOPD. If you superimpose peak production on top of this demand profile using the following parameters oil prices would increase approximately 250% in real terms over next 10 years:
– Oil demand elasticity of -0.3
– Current production 84 million BOPD, current price US$ 80
– Peak production 100 million BOPD
– Post peak decline rate of 3-4%
If you want to try the model for yourself using your own assumptions it can be found at Petrocapita Income Trust:
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