How close is peak oil?

It seems politicians everywhere are suddenly waking up to the implications of peak oil. When will it arrive? Has it already passed? What does it mean for prices? And what do those prices mean for economic growth, and geopolitical risk? Most are finding that whatever action they are thinking of taking now, they should have been doing decades ago.

This week, US President Barack Obama has been pressuring Congressional leaders to remove $US40 billion of subsidies to the oil industry as he begins to rebuild the foundations of his clean energy policy that aims to rid the country of its dependence on foreign oil.

This has been a stated goal of every US President since Nixon, yet – as Ted Turner and T. Boone Pickens pointed out last week – the power and the influence of Big Oil has meant nothing has happened. Now, surprisingly, Obama appears to be gaining some sort of support from the Republicans.

Actually, it shouldn’t surprise at all. As Pickens said last week, peak oil may have already passed. “Oil’s a finite resource and it’s running out,” he told a National Press Club luncheon in Washington. “In the fourth quarter of this year, demand is projected to be 90 million barrels a day and I don’t think the world can produce 90 million. If they can’t, the only way you can kill demand is with price.” He expects that price to soar to $US400 a barrel within a decade.

Not many people will argue against it. The world’s biggest oil producer, Saudi Arabia, may quibble about the numbers, but the kingdom’s rulers are realistic enough to start planning massive investments in nuclear and renewable energy technologies that will wean their domestic energy requirements off a reliance on oil, and free up more reserves to sell into a depleted and price-inflated market in the future.

And the change in that market could be quite dramatic. The International Energy Agency, formed as a response to the oil crisis of the early 1970s, barely recognised the existence of peak oil until last November, when it declared it may already have passed – at least in terms of conventional supplies – in 2006!

This reappraisal, it says, was the result of the most detailed survey ever carried out of 800 oil fields, which concluded that the decline rate in existing fields is very, very deep. So sharp, says IEA chief economist Fatih Birol, that the world would need to develop four new Saudi Arabia’s over the next 25 years just to maintain current production levels. And there is considerable about whether deep lying and unconventional sources such as tar sands can provide that much oil.

“It is a huge, huge challenge that we continue to underline,” he told ABC Radio’s Science program last week. “And on top of that, this would mean that the world’s reliance in terms of oil supply would be on a very few number of countries in the Middle East. So you have both the financial aspect, you have the geological aspect, and you have the geopolitical aspect of the growing reliance on oil. I am afraid that there will be more and more intersection between oil and geopolitics. This is the first worry. The second worry is the sudden increase in the oil prices. This is not good news for anybody.”

On the same program, Jeremy Leggett, the author of “Half Gone,” a book about peak oil, and head of a UK-based industry group that is trying to get its mind around the implications of peak oil, has an even more dispiriting message.

“We think that this problem is actually as bad, if not worse, than the credit crunch. It’s going to come down on a world economy that is oil dependent, nay, oil addicted, as a great surprise when oil supply begins to descend, maybe even collapse. This is a huge whistle that we are trying to blow.

“There are so many problems with conventional oil and unconventional oil that on the massive balance of probabilities, by 2015 at the latest in the view of the industry task force, there will be a descent of global oil production. That will cause a crunch, it will cause the price to go through the roof, it will cause price volatility and all the downsides that come with a fabulously expensive and, in some cases, simply unavailable oil.”

Are our politicians worried? Yes. Prepared? No. Obama clearly sees the implications, but without Republican support cannot act. China is betting heavily on electric vehicles as part of it’s solution. Australia, which exports a heap of coal and gas, but imports most of its transport fuels, faces a similar challenge.

The Australian Conservation Foundation issued a report this week noting that state and federal governments are spending at least four times more on building roads and bridges than on public transport infrastructure. Its study found that while $11.3 billion was spent on road construction around the country in 2008-9, $5 billion was given away as subsidies by the Federal government through the Fuel Tax Credits program and another $1 billion was spent through the Fringe Benefits Tax to encourage the private use of company cars. Just $3.3 billion was spent on rail construction in 2008-9. The Greens have used this study to call for a national strategy that helps the country break its reliance on oil.

The only obvious winners are electric and hybrid car makers and EV network operators. Their business is almost entirely an arbitrage play on rising oil prices. Given the current forecasts – the IEA predicted itself that sales of conventional gasoline cars will be negligible by 2050 – it’s looking something like a sure bet.

Climate Spectator