The Coming Oil Crunch
By Jeremy Leggett
11 February, 2010
In the years approaching the credit crunch, whistleblowers were limited to a few insightful economists and financial journalists. Now whistles are blowing again about another grave threat to the global economy and the security of nations. They warn of an oil crunch: an unexpected crash in global production such that supply can no longer meet demand, even if China and India throttle back.
This time the warning is not limited to a prescient few individuals. Major British companies, led by Virgin, Scottish and Southern and Stagecoach, are flagging the danger, in today's report from the UK industry taskforce on peak oil and energy security . So too are the CEOs of oil companies themselves, in the case of Total and Petrobras, and growing numbers of other senior oil industry figures, usually recently retired. Even the International Energy Agency is sounding the alert, in a coded sort of way.
With modern economies geared to their rivets on just-in-time supply of copious amounts of affordable oil, society surely ignores this risk issue at its massive peril.
But that is what BP, Exxon, Saudi Aramco and many other institutions of the hydrocarbon era would have us do. And theirs is the perceived wisdom. I do not know of a single company, outside the taskforce group, where peak oil is on the agenda as a serious risk issue. As for government, Whitehall's official line is typical, as things stand: there is 40 years of oil supply, no need to worry, and certainly no crisis. To be fair, that view may be in the process of changing, in the light of recent events in the energy markets.
The taskforce report is the second such. The first, published during the financial crisis in October 2008, charted global production capacity coming onstream, factored in depletion, and found that overall global production would peak in 2013, and then fall rapidly while demand continued to rise. The taskforce worried that things could be worse even than this early peak in oil production, if other risks we are concerned about kick in: more giant-oilfield production collapsing in the manner of Mexico, flaws emerging in reserves estimates in Opec countries, and so on.
In 2009 came the recession, and a steep fall in global demand for oil. This has helped, in the narrow sense of that word. It may have bought us two more years. The new report projects production dropping in 2015, though the risks that it could be earlier remain.
The CEOs and chairmen of the taskforce companies have a simple message for government. This monster threat is very likely to descend on the next government in office, in their first term, and the nation needs to act now.
The stakes are arguably higher than with the financial crisis. The taskforce's worst-case fear is that premature peak oil will involve not just global energy crisis, but potentially energy famine for some oil importing nations – including the UK.
During the financial crash the world went within weeks from a received wisdom that investment banks had squeezed risk out of complex derivatives, to a spiralling doubt, to a tipping point of disbelief and panic. With peak oil, officials around the world, corporate and governmental, would experience exactly the same collapse of confidence in their cosy cultural assumptions. A second giant industry would have been found to have its asset assessment systemically and ruinously wrong. The net impact would be that oil-producing nations would begin to husband their own resources: keeping exports back for use in their own oil-hungry multi-hundred-billion dollar-and-rouble infrastructure programmes.
This is a scenario that could lead to food delivery lorries failing to reach Tesco in time for Friday-night shopping.
The lessons from the financial crash ought to be stark. The prevailing culture mocked the disbelievers, ahead of the crash. Gillian Tett, capital markets editor at the FT, saw the crisis coming because she was a trained anthropologist and knew how to recognise a cult when she saw one. She was accused of scaremongering from the stage of the World Economic Forum. The pattern is the same this time. BP, in particular, has a tendency to mock the concept of peak oil and its advocates.
Meanwhile, as with the climate crisis, there is a general desperation to believe the comforting narrative ahead of the uncomfortable one. This is why it is so important that companies who understand risk speak out, as the taskforce companies have. It is why governments – who must lead in matters of national security – should listen to the uncomfortable arguments and, given the stakes, buy insurance against them.
History is going to judge us all on how we manage the risk of premature peak oil. And soon.
• Jeremy Leggettis the chairman of Solarcentury and SolarAid, and the convenor of the UK industry taskforce on peak oil and energy security
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