Running on empty? The peak oil debate

  Like climate change, the possibility of peak oil poses an uncomfortable challenge to citizens and governments alike in the 21st century. ‘Peak oil’ is the term first used by M K Hubbert in the 1950s to describe the point in time at which the worldwide production of crude oil extraction will be maximised. But while it is inevitable that production will peak at some point, it is uncertain when that point will be reached. Peak oil concerns exploded during the rapid escalation of oil prices prior to the 2007 global financial crisis (GFC), and resurfaced recently when oil prices appeared to resume their upward trend. These concerns have been underscored by official bodies such as the International Energy Agency (IEA) warning of a possible ‘supply crunch’ brought about by a lack of new investment following the GFC. World oil field discoveries (as distinct from the amount of oil extracted) peaked in the 1960s at around 55 Gigabarrels (Gb) a year, but fewer than 10 Gb a year have been discovered between 2002 and 2007. Current demand is 31 Gb a year. According to official estimates, around 40 to 75 years of supply remains at existing usage rates but much fewer if demand continues to grow. Although usage has more or less stabilised in developed western countries, the rapid economic growth of populous nations such as China and India is creating significant upward pressure on the demand for oil products. There is not much disagreement about the concept of peak oil, but there is fierce debate about how near the world is to the peak and what, if anything, should be done about it. In fact, a substantial amount of oil remains in the earth and peak oil doomsayers have often been proved wrong in the past. But this is not a reason for complacency. Oil is a precious resource; there is a finite supply in the earth and there is no reason at all to use it wastefully. Moreover, as the IEA has argued, the world is currently embarked on a fossil-fuel future that is patently unsustainable from an environmental perspective, quite apart from the fact that rates of extraction will exhaust fossil-fuel resources far too quickly, thus ignoring the needs of future generations. World economies are built on oil. The question is what will happen when it runs out, or merely becomes difficult and very expensive to procure. The probable answer is not an acceptable one. As occurred in response to the OPEC oil shock of the 1970s, skyrocketing oil prices are likely to result in severe disruption to economies, with central banks raising interest rates to slow runaway inflation, people out of work, famine, hunger and serious civil unrest. It is a scenario that governments and their constituents should be attempting to avoid at all costs but so far very little has been done to prepare for or contend with the eventuality. Perhaps the first step is for governments to recognise that there is a looming potential problem and to begin to plan for it. Not only will this cushion the impact if it does occur, but many of the solutions to peak oil are also advantageous in the fight against climate change, thereby doubling the benefit of remedial measures. This paper outlines some of the policy options available to the Australian Government to assist in addressing the contingencies that are already confronting the country as a result of increasing oil prices and a rising population. From an international perspective, the paper argues that the important immediate steps are for countries to stop subsidising liquid fuels, and for the US to cease its profligate consumption, a result of very low fuel taxes. But countries like Australia, while small in terms of their contribution to demand, also have a role to play, and fuel and road-pricing regimes need to be altered to encourage fuel efficiency. Moreover the sustainability of the current low-density urban model, itself a reflection of the US situation, needs to be re-evaluated. Finally, some of the alternatives to conventional oil are becoming economic at current prices, and might offer a way around the impending predicament occasioned by the finite supply of the resource. But it must be recognised that they involve extremely high and possibly unsustainable costs in terms of greenhouse gas emissions, for example the extraction of oil from tar sands or its processing from coal and natural gas. This poses a potential dilemma for policy, but the answer is actually quite simple—a price on carbon. The paper suggests that a carbon tax rather than a trading system is the optimal method for pricing carbon, but ultimately the method is not as important as the existence of a price that is relatively uniform across countries and is sufficiently high to materially affect production and consumption decisions, particularly the decision as to whether or not to pursue the development of emission-intensive alternatives to oil. In the medium term, the circumstances created by a price on carbon will likely expand the use of natural gas, both for power generation and transport; in the long term, it is likely to expand the role of electric vehicles and non-fossil forms of power generation. As with climate change, the most cost-effective response to the inevitable but uncertain timing of peak oil is to invest in early adaptation. It will be impossible to redesign cities, switch the vehicle fleet to new forms of fuel and transform the location decisions of producers in a timely manner after the oil supply has peaked. Early investment in adaptation measures will pay high dividends in the future, whether in response to peak oil, climate change or simply better city design and reduced congestion on roads. The paper concludes by suggesting that the peak-oil issue is sufficiently important for regular official re-assessments of the situation to be designed and implemented. If mitigation actions are not planned in advance, the alternative may be for a future where periodic price spikes and shortages affect the nation’s ability to manage the economic cycle by causing the re-emergence of ‘stop-start’ economic conditions such as those experienced in the 1970s. Image: whiterice / flick