Contents: (Introduction, Consequences, Solutions, Conclusions)
This section of the website moves away from straightforward data and analysis into less chartered waters. It considers what might be the consequences of global oil supply difficulties, and what solutions society might apply.
This discussion is needed. At least two senior UK government officials, on being told of the oil depletion calculations, have each said, in effect: ‘Well, I don’t agree with your analyses on oil, but even if you are correct, I would not know what the government should do.’ 1 This section sets out a preliminary list of what might be done.
First, however, we look at some of the possible consequences of the oil supply becoming increasingly limited.
The Consequences of Oil Supply Limits
The implications of a one-way oil price shock early in the next decade are likely to be serious.
There is, first, the real possibility of a profoundly de-stabilised economy. The current assumptions of economic stability and sustained growth well into the century must now be re-evaluated. Oil is the primary energy source for the global market economy, and a significant rise in price will raise industrial costs, reduce real incomes, and derail business-as-usual growth expectations.
All industries will be affected, beginning with air transport and related sectors, including tourism which, taken as a whole, is, surprisingly, the world’s biggest employer. Transport in all its forms is also in the front line of risk; massive fuel price increases, and actual interruptions in supply would threaten a breakdown of distribution systems and have economic consequences far in excess of any experienced in the developed economies in modern times. These consequences would include high unemployment and inflation.
Secondly, there are implications for the costs, and perhaps even availability, of food. The food chain is massively hydrocarbon-dependent at every stage: fertilisers, chemicals, equipment, transport and processing. A rise in the price of oil will knock-on immediately to a comparable rise in the price of food. Political and social instability as a consequence cannot be ruled out.
Thirdly, the coming oil shock transforms the climate-change agenda. The Kyoto process has been built on the assumption that oil supplies will not be the constraint that will limit carbon emissions in the future, and that if the latter are to be reduced, this will have to be through deliberate limitations on demand. In this new situation, however, the problem is transformed: reductions in affordable oil may turn out to be faster than the most ambitious targets that have been conceived in the context of climate change. The CO2 implications of reduced conventional oil use, vs. the increased use of gas, non-conventional oils, coal, and perhaps nuclear, need examination.
Fourthly, there are implications for alternative supplies of energy. Effort will need to be devoted to energy conservation technologies, and to the renewables. One of the great missed opportunities of the 1980s and 1990s has been the slow development of these technologies. There have been important advances, but, relative to the need, a massive job of development lies ahead.
One of the main reasons for this slow development has been that energy conservation and the renewables have suffered a price disadvantage relative to conventional energy sources. This is about to change, and these alternatives will soon look very cheap indeed. The problem is that the programme of shifting a mature market economy away from oil-dependency and into conservation and renewables would normally require about fifty years of intensive investment and training. 2 This will now have to be compressed into a decade or so.
Fortunately, as a number of both war-time and civilian programmes have shown, rapid results can be achieved if government gives a determined lead.
So, what should we do? Here we indicate the kinds of action required.
The first step must be to properly evaluate the near- and medium-term hydrocarbon supply prospects, and the potential for hydrocarbon substitution and energy-use reduction. As important, a range of national and international bodies need to be able to understand these calculations, and subscribe to the conclusions drawn. The topic is relatively easy, and well within the competence of various organisations active to-day, provided their attention is directed to the problem. Some suggested lines for the evaluation are indicated in the Notes, below. 3
Once the problem is understood, there will be a need to communicate what is known, and what is uncertain, across government, and to industry and the wider public. 4
(c). Precautionary Measures
As research results gain increasing acceptance, there is a range of low-cost, and often (to use Nick Hartley’s phrase) ‘no-regret’, policy actions that could be taken. These include investigating the energy and economic impacts, social acceptability, legality, and implementation mechanisms of measures that would not be implemented until serious energy shortages occur. From a UK perspective, precautionary measures include the following (with similar considerations applying in most other countries):
(i). Quantifying current best-practice in energy conservation; getting an accurate handle on the likely timescale such energy-savings actions could be implemented; and quantifying the cost, and energy savings, that would result. 5
(ii). Identifying the additional research required for the implementation of ‘quick-fix’ projects that would have significant energy impact. 6
(iii). Setting up an Energy Board, perhaps under an ‘Energy Czar’, tasked with looking in far more depth at the UK’s energy options than is possible with to-day’s Departmentally-fragmented, and market-driven, structure. Such a Board could also, with a changed remit, be in a position to mandate actions should this become necessary. 7
(iv). Check the reliability of, and extend, the 90-day IEA committed oil stock. (The IEA’s 1998 World Energy Outlook suggested action along these lines.) 8
(v). Look into the legality, within EU, and World Trade Organisation rules, of restricting exports of UK oil and gas (and of other countries doing the same). 9
(vi). Develop, within the Bank of England, and by consultation with the Treasury and others, a robust strategy for setting UK interest rates, and for handling other fiscal measures, so as to limit the inflationary impact of a sustained rise in energy prices, while at the same time allowing the economy to sensibly adjust to the consequent recessionary pressure. 10
(vii). Ensure, with the main actuarial bodies, and other interested parties, that current accounting practices serve their desired reporting and management control functions during a period of consistent inflation. 11
(viii). Think about the social impacts of inflation, and devise strategies to minimise these.12
(ix). Devise internationally, a stable and just way to re-cycle petro-dollars. Particularly important will be the need to avoid the drastic increases in unsupportable third-world debt that happened last time. 13
(x). Develop International collaboration and Protocols, and set these in place, before the crises occur; levels of hostility and mistrust will likely to be too high during a crisis for sensible accords to be reached. The need is simply expressed: for the world to be weaned from its dependence on cheap oil as gradually and intelligently as possible, while producer countries, some now with large populations and still little alternative economic activity, are compensated reasonably for their depleting asset base. 14
(d). Longer-term measures
Longer-term measures to move the economy away from its high hydrocarbon dependence will need to be considered. Many of these are broadly similar to those envisaged for cutting greenhouse gases. For this reason, only some typical examples are listed.
(i). Longer-term actions on conservation, renewables and other energy technologies. Because lead times for significant introduction of some of these technologies are long, action will need to be considered on research, bringing forward, and training for the new energy-efficient technologies, localised systems for renewables, carbon-sequestration, and related technologies.
(ii). Appraisal of current patterns of land use and supply logistics. The dependence on oil for the production and transport of food and other goods will need to be reduced, as will the distances individuals travel for work, shopping and recreation.
(iii). Allocation, and the individual response. The transition to a low-carbon economy will require informed and positive partnership with individuals. It may be that in due course a fuel rationing or allocation system will be required, and options for the use of information technology in rationing systems should be explored. Government leadership will be needed to encourage changes in household behaviour.
(e). Possible Mandatory Measures
The following are examples of mandatory actions that may be required.
(i). Space Heating.
– Introduce a new House Building code, nearer or equal to Denmark’s.
– Bring all hosing stock up to this building code; financed by the utilities, and targeted by computer programmes based on current energy use and a simple questionnaire of number of occupants, etc. Loans for house improvements should stay with the house (i.e. pass across on house sale), and be paid out of utility bills over a reasonable payback time dependent on each technology used.
– Bring all government / industrial / commercial stock up to a new (‘near-Denmark’) code, over a phased 15 year period.
– Mandatory speed limits of 55 mph.
– ‘CAFE’ requirements (mpg goals) on vehicles, by manufacturer.
– Extended ‘vehicle efficiency’ excise tax incentives.
(iii). Electricity Generation/Use.
– Speed the introduction of increased power station efficiency; mandate waste heat utilisation where possible.
– Mandate CHP schemes for all industrial commercial users larger than a set MW.
– Establish true lifetime; and effects of short duty cycles, of home fluorescent light bulbs. If the answers warrant, place a high tax on incandescent bulbs.
(iv). Energy from Waste.
– Resolve the dioxins concerns about combustion of the plastics in domestic / industrial waste (a function of flue-gas temperature?); and, if warranted, mandate that all non-putrescent combustible community waste not recycled must be incinerated for electricity, or district heating.
– Mandate recycling of all consumer durables; encourage buy/rent options that make consumers prefer durable-life items (aluminium/galvanised vehicles; ball-bearing electric motors, etc.) over cheaper up-front items.
It is possible to shift a modern economy off hydrocarbon dependency, though a combination of conservation technologies, renewables, changes in patterns of logistics, and other measures. However it has been calculated that a change of this magnitude requires long-term planning and incremental application over a period of some half century. The task is likely to thrust upon us at short notice, and will need a programme of urgency and intensity.
A painless transformation into the post-hydrocarbon economy is probably not possible, but certainly its stresses can be mitigated.
There is an opportunity for the United Kingdom to take the initiative in designing, communicating and implementing a programme of developing post-hydrocarbon solutions. Once one government has led the way in appreciating the true urgency of the situation, others will follow.
- M. Keay, formerly with the DTI, now with the World Coal Institute, and N. Hartley, formerly on secondment to the Cabinet Office, now with OXERA; both, it must be admitted, in response to questions, with little time for these gentlemen to reflect on their answers.
- The LTE Study, Germany.
- Our greatest surprise in this whole oil depletion business has been the complete unwillingness of the government departments we have approached to consider carrying out, or funding, any investigation whatsoever into the issue.
An initial technical ‘look-see’ at the problem would take a couple of people, preferably a geologist and another scientist, only a few days; while a report looking at the substance of the topics would require perhaps a month. Additional investigation, if thought warranted, would then need to cover the following:
– Determination of when oil resource constraints will limit non-OPEC supply;
– Determination of the likely date, and production volume, of the world
conventional oil peak;
– Assessment of the potential for:
– enhanced recovery oil,
– heavy oils,
– substitution by other fuels (particularly gas),
– energy saving.
Most of these issues have already been addressed in the research reported elsewhere in this website, but if government or other organisations wish to carry out their own investigations ab initio, they would need to consider work along the following lines:
(a). When will oil resource constraints limit Non-OPEC supply?
(i). Develop a working definition of conventional oil. The avenues here are:
– Discover the definitions of conventional that are explicit, or implicit, in the databases, as analysis can only be done with the data available.
– Discuss the possible definitions in more detail with a limited number of reservoir engineers: this is an area where pragmatism is more important than consensus.
(ii). Evaluate the IHS Energy/Petroconsultants’ data.
Of all the tasks, probably the most important is to check the general validity of the field ultimately recoverable reserve (URR) figures in the IHS Energy/Petroconsultants’ database. This is because the data on the world fall-off in oil discovery, the key driver to near-term predictions of oil difficulties, are based on these numbers.
Numerous sources indicate that the Petroconsultants’ data are the only practical data available for global oil resource estimation, but there is a need to evaluate carefully the sources and assumptions used to generate these numbers, particularly as to recovery techniques envisaged.
The question breaks into three parts:
– Sources and assumptions: Understand (by country, date, and field type), how the data are processed by Petroconsultants for entry to their database.
– Cross-checking: Key data (those for all very large fields, and a sampling for large and smaller fields, and by type) need to be checked against the corresponding data held by explorers / producers; watching particularly for artefacts from ‘the U-shaped reporting curve’. It is vital to get the data directly from the explorers / producers themselves, and not to use standard in-house numbers, still less externally reported data. Experience suggests it should be quite possible to obtain data that are useful without requiring the companies to reveal commercially sensitive data. For example, data of the type: ‘25% of such-and-such a class of fields operated by our company are 30% – 50%, under-reported in the database’, etc., will be adequate in the majority of cases. In addition, other databases with more specific coverage exist, where similar ‘statistical’ cross-checking should be feasible without compromising commercial considerations.
– Reserves growth. It is possible to get a handle, to some extent, on this contentious issue by examining past Petroconsultants’ reports. Other approaches to estimating reserves growth are also available, including tracking the reporting curve for a number of typical fields to separate out genuine improvements in access and recovery factors from what have been simply reporting changes.
(iii). Checking the depletion models.
The range of depletion models needs to be evaluated; in particular the ‘decline from xx% argument’ needs additional calibration. There are many US and other basins that can be examined to examine the general validity of the approach.
(iv). New Frontiers oil.
Discussion with oil explorationists, on a non-disclosure basis, can give a view on the quantity and timing of oil from new frontiers: Greenland, Canadian / Russian polar, deep offshore not yet in play, and so on. In particular, for U.K. oil, one would aim to establish quantitative views about:
– the stratigraphic vs. structural traps discussion;
– the potential from specific geological horizons;
– the potential from WoS, and the Atlantic margin.
(v). Impact of technology and oil price on new oil exploration.
Past improvements in technology, and the decade of very high prices, did little to stem the fall in new-field find rates. However, a number of groups, including at least one U.K. consulting company, have optimistic views in this area, and though there appear to be good reasons to question such views, there is a need to examine the topic in detail.
(vi). Impact of technology and price on existing fields reserves growth
Here analysts raise a number of possibilities: better field knowledge with time, denser collection networks, horizontal drilling; 4-D seismic, etc. Approximate quantitative indications of the contributions these might make are required, and their timing. Discussion with industry reservoir and production engineers, targeting particular basin types and field sizes, will give adequate first-approximation answers. As mentioned above, past Petroconsultants’ data can help to give a quantitative guide as to the real magnitude of reserves growth.
(b). The Timing and Level of the World Conventional Oil production peak.
Much of the material for this question will have been produced by the activities described above, but for world production, additional specific data for the Middle East will have to be estimated. Data can be drawn from companies with current or past experience of the area, and from the USGS, IHS Energy, the IEA, and possibly OPEC; as well as, perhaps, the Iraq Petroleum Company database at the University of Reading.
(c). Establish Production rate limits of EOR and Heavy Oil.
The task will focus on both near-term cost of production of these oils, and on the investment levels and other constraints affecting the ability to bring forward the amounts of such oils required by the decline in conventional oil.
(d). The Scope for Energy use avoidance, and Oil-Substitution, to avoid energy shortages.
This will need to cover demand modelling, investment and pipeline limits on gas production, rate and investment limits on gas conversion technologies, and coal / nuclear substitution rates for the hydrocarbons.
- Discussion in DG-TREN following the European ‘Fuel Protests’ worried about the difficulty of getting the public to accept additional rises in fuel cost. But our impression is that much of the general public is reconciled to inevitability of hydrocarbon limits, but they need clear indications of the extent and timing, and a feeling that any burden is shared across the community.
- Technology exists today to cut space heating/cooling requirements in most buildings to very low levels, but this needs a degree of sophistication in controlling solar gain, heat loss, humidity control and air change.
- Such as retrofit of interior vapour-proof insulation, quantifying the economic loss associated with the imposition of vehicle speed limits, or tax on aviation fuel, etc.
- Within the UK, ideas for a body of this sort are being discussed. The current situation, where energy policy at the highest level (e.g., within the Cabinet Office Energy Review) is advised simply by canvassing opinion, with no scope for a solid technical evaluation of the issues, goes no way to addressing the problem. Currently, every lobbying group, oil, nuclear, environmental, CHP, energy savings (and oil depletionists!) state their case, and the governmental energy enquiries have no time, expertise, nor mechanisms to gain a coherent technically-based view of the situation, let alone address strategy.
- Some oil storage, at least elsewhere, has been questioned as to usefulness (pipelines, tank bottoms, etc.). The UK takes advantage of the fact that, as a producer, it has a lower storage requirement than 90 days.
- The UK DTI has trailed the idea of restricting exports at times of global oil shortage; the EU implications of this need examination.
- In an interview a few years back, Eddie George, Governor of the Bank of England, said his banks’ aim, given their new mandate from the then recently elected Labour government, was to keep UK inflation to within a low target band, unless some strong external pressure would prevent such a goal from being met. When asked what might be such a pressure, he replied that a significant rise in oil prices was the only one that came to mind.
- During the inflationary periods of the 70’s and 80’s, most commercial companies unwittingly consistently overstated their profit levels, as has been documented in excellent retrospective graph for that period in one of the UK government Statistical Office publications. As a consequence, most companies badly mis-understood their returns on capital, asset replacement capabilities, and general financial health.
There were subsequently a number of revisions to accounting practices to better handle inflation, but it is desirable now to review the situation to check that no significant accounting oversights, under inflation, remain.
- For example, at times during the ’70’s ’80’s interest rates fell behind inflation, leading to the pernicious effect last time Labour was in power that government effectively rewarded borrowers (frequently the rich) by allowing inflation to reduce the real value of loans; while at the same time penalising savers (often poorer people with small nest eggs) by allowing their savings to be eaten rapidly away.
Particularly inequitable, in those inflationary times, was the loss of income to people on fixed pensions.
Likewise, people in jobs with weak or non-existent unions got left behind in the pay race. Ultimately, a professor had to be called in, who recommended very large catch-up pay rises for people in these groups.
On a wider scale, inflation reduces the efficiency of the market, by adding a halo of uncertainty to every transaction, due to the inability to properly determine competitive costs and prices. There is a need for theoretical analysis to properly understand the effects of chronic energy shortage on a developed country economy.
(A parallel might be the lessons learned from the First World War, which were successfully applied at the end of the Second World War, about the economic and social problems caused by large-scale de-mobilisation. Likewise, we need to now remember, and be ready to apply, the economic and social lessons learned from the 1970’s oil shocks.)
- Initially, re-cycling petro-dollars will be a lesser problem than last time, as the main producer countries now have significant internal needs for revenue. But after a while the monies accrued may become significant, and major international re-cycling will be needed. Last time, significant monies were re-cycled to developing countries as loans against apparent in-country assets (frequently minerals) to offset their increased fuel bills. (Such loans were strongly promoted by at least one of the main supra-national financial institutions.) In practice, the loans were usually not supervised, and the economies of the counties lent to were frequently mismanaged, leading to the atrocious levels of developing-country indebtedness that subsequently developed.
(Note, the term ‘petro-dollars’ is used here generically, OPEC having asked that its oil be denominated in other currencies, and perhaps even in other commodities. But the general problem, that higher oil prices will engender global inflation, which will cause currencies to devalue, and hence an oil-producer’s revenues to fall, will need to be addressed.)
- This time, price and supply restrictions will originate from any oil or gas exporter who will be caught between a desire to continue revenue streams and employment levels, and a natural wish – in an oil-short world – to retain resources for future home use, or possible future sale at a higher price. To meet these stresses, Dr. Campbell has proposed a draft of an ‘Oil Protocol’ that has received initial support by some in OPEC.
In addition, the fundamental question of ‘whose oil is it?’ may need to be addressed. This author does not know the legal situation, but the presumption is that minerals are owned by those under whose feet they lie. But like the now CO2-threatened atmosphere, some things will have to be treated as Global Commons. Will minerals belong to this category? Which nation will give up its resources for the common good? It is going to be a testing time for international good sense.