What Happens After Oil Production Peaks

“Peak Oil: Economic, Political & Environmental Impacts” Monday 26th September, organised by the VUW chaplaincy.

Keywords: Environment & Resources;

When we were young we assumed that our parents will live for ever. As adolescents, we realise they will die one day, but at a time so far in the future it hardly seems relevant. As mature adults we realise that day is closing in, and we wonder what it will be like when they go. And so they pass on, but you survive in the world without them – perhaps, like me, missing them.

It’s the same with oil. In our ecological childhood we thought the supplies were eternal. Later we worked out they were finite, but we thought it was a long way off before they ran out. Nowadays we know that one year the world’s total oil production will peak, and decline thereafter. My co-presenter Bob Lloyd has gone through the evidence. It is clear there is considerable room for disagreement. Some experts think it will be this year or next, others think the peak is decades off. In 1979, British Petroleum experts predicted it would happen in 1985.

Our understanding is not helped by those who cry wolf, promising that the peak would be soon, and the world will end shortly after. Any market it subject to ups and downs, but that does not prove that there will be a fundamental change in the near future. Its like the busy bodies who remind you of your parents’ impending demise every time they get the flu. I still await the doomsayers, who predicted in 1981 that oil prices would soon double, to come back to me.

In fact the oil price today is about back where it was in 1981 relative to other prices. That is a problem just as a parent in bed with the flu is a problem. But your doctor does not announce the parent is mortal and doomed. He, or she, examines the patient and diagnoses what is going on.

The diagnosis is that the world economy is in an upswing, particularly as a result of the US and Chinese economic booms and so it is using more oil. However, we seem to have the production capacity to produce enough oil, although there is not much of a margin. Where there is no margin is in refining capacity. During the last decade, it has been growing more slowly than demand and we seem to be in a situation where world demand for oil products exceeds what can be supplied, even when the Gulf of Mexico refineries return to full production after their hurricanes. More refineries can be built, but that takes time, so prices may be high for a while. But price spikes from such short term phenomenon do not presage the end of oil.

There are other events which could cause such oil price spikes. Terrorism taking out a major installation; a shipping accident blocking the Straits of Hormuz at the entrance of the Persian (or Arabian) Gulf.

Even so, Bob’s paper indicates, 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. (In any case, the peak will involve a higher level of production than today, with probably some time before it is back at current levels or lower.)

The production peak will have been signalled by rising oil prices, which will encourage further production from old fields. As the price of transport fuels continue to rise tar-sands become commercially exploitable. Substitutes – bio-fuels, coal, electricity and gas, possibly hydrogen – also become commercial, while some static fuel sources – solar energy and wind – will enable other energy forms to be switched to fuel.

When I last looked at the likely economic cost of the supply of suitable substitutes for oil, I got an estimate near $US70, around about what it is now, when they would be commerically viable. That does not mean they will cut in tomorrow. First, the figure was a projection of what the likely cost of supply would be five or so years out. It is a bit higher at the moment. Second, this is a long run figure, which is not comparable with short term peaks. Third, it takes time to build the production capacity of the alternatives.

However, the best I could judge, around $US70 a barrel was the long run level for liquid fuels, even after oil production peaks. That does not mean we wont get price spikes above that on occasions. But the likelihood is that as the new alternate fuels cut in the cost of transport energy as oil phases out will be substantially higher than it has been over the last few years, and comparable to what it is currently is.

The higher prices means users will be more fuel efficient. As a result our ways will steadily – but probably slowly – change. We will use smaller more fuel efficient cars, and drive less while walking, biking and using public transport more. Houses on the outskirts of town away from public transport will 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 so people would dress warmer. Air conditioning would be reduced – people may stop living as much in subtropical climes (and also the colder ones). Temperate zones would become fashionable again.

Industry would look for more energy 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.

After oil production peaks the world as we know it would not end. It would change steadily – as it usually does.

My intuition – I have never seen any projections – is that there will be a period of slower economic growth associated with the shift to less energy intensive technologies and changes in the expression of demand. Essentially there would be a slowing down or even a reduction of productivity during the transition. I dont know how long it would be – at least a decade I would guess. The world economy would be more difficult to manage, but there need not depression. Recall the late 1970s, when there was a world productivity slowdown.

A more serious term threat is that some country – or some interests in some country – will think 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, the costs far outweighing the returns.

That is what we learned from the Second World War, 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 learned the same about its Co-prosperity Sphere. Some of the American Right, with ‘might equals right’ just 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 to do? That is where the timing of the peak is important. Just how close does it have to be before one starts planning for the higher fuel prices that go with it. The problem is some of the adjustment will involve capital goods that will exist for a very long time. This is especially true for housing – both in terms of location and insulation. It may be for some transport. And business plant and equipment may also require forward planning.

The public sector has an important role. 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, and that may mean putting in the infrastructure now. On the other hand we need to be careful that we dont spend a fortune on infrastructure that is underutilised as people instead turn to fuel efficient cars, bike, walk, and inner city accommodation.

And we need to be realistic. Many will not give up their cars, although they will use them less. Perhaps we should focus on better commuting, so there is more fuel available for leisure.

The oil price spike may be a blessing, because it stimulates people to think about the longer term. Some have transferred to public transport – will they stay their when the spike settles back? Others will be reconsidering their location. Hopefully the public sector too will be stimulated to think more ahead.

But as the Hitchiker’s Guide said in large friendly letters ‘Dont Panic’. The depletion of our oil reserves is a problem, but it is not an unresolvable one, although we will resolve it better as we plan ahead.

To illustrate the orders of magnitude, let me talk a little about what may be a real panic. While global warming has been a concern to some for some time, my impression is that the evidence is accumulating that serious warming is occurring, and insofar as this has been precipitated by human actions, those actions are unlikely to be reversed in the near future.

(Oh yes, I am aware that there is an interdependence between global warming and oil consumption. But I skip that intricacy for a larger issue.)

The global warming problem is more serious because, unlike the oil peak which can be largely dealt with by the market mechanism, there is no natural homoeostatic mechanism to move the world back into medium term equilibrium. The necessary measures involve a political will which thus far the world has not shown, with at least two major blocs with different policies – perhaps neither able to slow down the warming. In contrast with peak oil there is a market mechanism which will cope without a lot of government intervention, although some intervention will ease the transition and help us cope better.

In the case of global warming, it is the other way around. It requires government intervention which may be facilitated by the use of market mechanisms. Thus global warming is potentially a far greater threat than the oil production peaking. Moreover unlike the peak, the warming process is not in the future but already underway.

That is not to say that we should ignore the oil production peaking. It is inevitable and the world will have to adjust to it. So while we need to ignore those who misleadingly cry wolf, we should and respond to a real threat. But it is not the greatest threat that the world economy or ecology faces.

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