Energy Plan: What Will Happen After Oil Production Peaks?

Listener: 26 March, 2005

Keywords: Environment & Resources;

One day the world’s total oil production will peak, and decline thereafter. Some experts think that it will be this year or next, others predict that the peak is decades off. In 1979, British Petroleum experts predicted that it would happen in 1985. Forecasting the date involves a complicated assessment of future oil demands, production possibilities and costs of depleting fields, the discovery of new fields, and the extent to which alternative fuels will substitute.

But one day – probably in our lifetime – the world’s total oil production is going to peak.

The world as we know it will not end the following day. The peak will be signalled by rising oil prices, which will encourage further production from old fields. After the peak, the price of transport fuels will continue to rise. Substitutes – from biofuels, coal, electricity and gas, possibly hydrogen – will become economic. Users will become more fuel-efficient.

Our ways will steadily – but probably slowly – change. Suppose motorists have to pay $3 a litre for their petrol, with a 50-litre tankful costing $150. They would drive less – in smaller, more fuel-efficient cars – and walk, bike and use public transport more. Houses on the outskirts of town would become less attractive, and their relative price would fall. Inner-city accommodation may boom.

Because some of the alternative fuels have non-transport uses (and elsewhere in the world, fuel oil is used for home heating and industrial production), the price of other energy forms would also rise. Heating your home would be more expensive; you would reduce air-conditioning; industry would look for more efficient production methods; we would cut back our consumption of energy-intensive products like aluminium. Some products currently made offshore would be made locally to conserve costs of transport, although information industries would remain footloose.

But the world as we know it would not end. It would change steadily – as it usually does.

Some events may confuse us. Oil prices fluctuate, so they may sometimes go to dizzy heights before the peak production. Suppose a tanker got blocked in the Straits of Hormuz at the entrance to the Persian (or Arabian) Gulf, perhaps because of navigational error or terrorism. Countries to the east, which include New Zealand, would have their oil supplies reduced. In the nature of things, big countries like China and Japan would get more than their fair share of the available supply. There could be much public hysteria, but we plan to have 90-day stocks of oil for such emergencies, although prudence would also add some rationing, and prices would be higher. Being a member of the International Energy Association may help, too.

A longer term threat is that some country – or some interests in some country – will think that it can secure its energy supplies by invading a net energy producer. In principle, this involves only a change in ownership of the resource, not its long-term usage. In practice, war can be very disruptive.

That is what we learnt from World War II, which in part was a struggle for control of resources. Fortunately, Germany now knows that Lebensraum can be better pursued by commercial market transactions: Japan learnt the same about its Co-prosperity Sphere. Some of the American Right, with “might equals right” under its rhetoric, have yet to learn that markets are more efficient than war. But many Americans have. Let’s hope their good sense prevails.

So, what should we do? At the personal level, think about $3-a-litre petrol and electricity costing twice as much. What energy-efficient life would you choose if you knew that was the situation in 2010? The prudent will be planning their housing and transport for 2010 now, knowing that capital items take time to adjust. Businesses need to be planned, too.

As for the public sector, it seems likely that our transport infrastructure has got so far behind, much of what we are putting in today will still be viable in a decade, even if fuel prices are much higher. But we would need more public transport. The thoughtful local authority may wish to consider what its region might look like when energy prices are substantially higher, and what steps it should be taking to be prepared for that eventuality.