The Bloodwood Tree

Peak Oil

Chicken farmers in the north of Africa forced to work by candlelight as high oil prices have limited electricity production to a couple of days per week.

Overview

Oil is a finite natural resource that will run out; however our economic growth and lifestyle makes us increasingly dependant upon it. Around the world, many oilfields have already peaked and their rate of production is in steep decline, however those countries have compensated by increasing their imports. When the remaining production peaks however, there will be no other sources from which to import. If the demand for oil does not decrease significantly before the supply falls, the economic impact and associated flow-on effect such as oil-wars will be disastrous.

Many experts believe that peak oil will occur in the next few years, some believe that it has already happened. What is clear is that the poorer nations are already suffering from the reduced supply and its effect of raising oil prices; and that without exception, oil prices continue to rise well above all of the publicly aired predictions.

Unreliability of Official Forecasts

High level government bodies such as the National Energy Administration (NEA) make regular predictions as to the price of oil per barrel, based upon projected estimates of supply and demand as well as other market influences. The current projections from the International Energy Outlook 2007 report (graph below) show a sharply rising price trend up to 2006, followed by 3 possible scenarios. The most obvious immediate observation is that all three projections break strongly with the observed trend, all predicting that the extremely sharp rise in prices will be followed by a sudden fall. In the worst case scenario, this is only a temporary fall followed by a much more gradual rise in oil price to $100 per barrel in 2030. At the time I write this however (February 2008), the media has been swamped with reports of oil prices topping $US100 per barrel. There are a few reasons suggested for this such as market speculation and politics around the giant Exxon Mobil, but note 2 things:

1) The International Energy Outlook did not expect oil to hit this price for another 22 years, and

2) If we look at the pre-2006 trend, this is simply the price we would expect oil to hit by 2008 if that trend continued.

Forecast prices

This is not an isolated error. Optomistic price projections appear to regularly make the same mistake, as shown below (taken from http://www.theoildrum.com/node/3627).

Price predictions

It does appear that there are forces at work beyond those immediate temporal ones cited, and the most obvious one is the fact that according the EIA official figures, world oil production appears to have stalled while demand continues to increase. Many experts including the vehicle manufacturers General Motors and Volvo believe that oil production has now peaked or will peak within the decade and begin to fall very shortly afterward (see graph from Volvo report below).

Oil supply figures from major net producers

The following graphs show the total oil production by the world’s leading oil producing nations. The graphs and the ranking are taken from the website of the US National Energy Administration.

In order, the countries are: 1. Saudi Arabia, 2. United States, 3. Russia, 4. Iran, 5. China, 6. Mexico, 7. Canada, 8. United Arab Emirates

1.2.3.4.

5. 6.7.8.

The graphs show that the 3 largest producers each produce at least twice as much oil as the others, but that they have either slowed in their production (Russia), stalled or peaked (Saudi Arabia) or have been in decline for many years (U.S.). This is significant because world oil consumption has not slowed and shows no signs of doing so. At the same time as Saudi Arabia’s production reached a plateau around 1990, world oil consumption was about 66.5 million barrels per day [1]. By the time Russia’s production had begun to slow in 2004, consumption had reached 82.5 M barrels [1]. The billion dollar question is that given the fact that U.S. production will continue to fall, will these other oil producers be able to make up the shortfall and keep up with the demand, and if so, for how long? In 2004, world oil production was 83.1 M barrels per day [2], but even though consumption has continued to rise, the EIA estimates that production only increased to 84.6 M barrels in 2005 and actually fell very slightly in 2006 [2].

It is to be expected that there will be periods of decline as there has been in all of the country graphs above - this does not mean by itself that production has peaked yet. What should be clear however with the most conservative observation is that demand is now either equal to or greater than supply. Unfortunately, the EIA has not released the figures for 2007 so we can only make educated guesses (update since the writing of this page - 2008 production is 84.69 M barrels/day, consumption 85.72 M barrels/day - exceeding production by 1.03M barrels per day [10]), but a simple comparison of supply and demand such as the one below taken from http://www.theoildrum.com/node/3562#more should make it clear that to catch up with demand, oil supply has to grow much faster than it has been. Considering all of these factors, a report to the U.S. Government by Hirsch et al found that of 12 separate sources predicting a peak in oil production, 6 predicted that this would occur before 2010 and another 3 saw it happening before 2020. The recommendation was that 20 years preparation for the peak would prevent a global oil crisis for 20 years.

What will be the effect of a global oil crisis?

The effects could probably be put into 2 categories -

1. Oil derived products cost more and can be harder to source, and

2. Countries that have the economic or military strength will take oil from countries that don’t.

What might these things look like in practice?

Oil derived products include fuels (whose prices have been rising with increasing speed), bitumen, shipping fuels, lubricating oils, jet fuel, many chemicals and LPG will rapidly become much more expensive. The greater the gap between supply and demand, the faster the rise in price. As the costs rise and availability falls, we will see the economic viability of road building and maintenance become prohibitive. Groceries will cost more due to increasing costs for running farm machinery or transporting goods. Bushfires (which are increasing in frequency and ferocity with climate change) will be harder to fight as helicopters are grounded due to lack of fuel or limited state budgets. Some experts in the Australian Army believe that our defences will become seriously crippled as the effect of peak oil cuts in [3]. Poorer economies will suffer first, and as they are unable to pay for oil-based products the reduced demand may slow the price rise for the rest of us, but at a serious cost to the third world who will now be crippled in many areas.
The easiest way to take something like oil is via trade. Economically strong countries with a heavy oil dependency will create trade deals that pressure smaller nations into selling them artificially cheap oil as these nations depend on the rich west for technology or materials they cannot produce themselves. History tells us that this occurs in most areas of free trade, with rich western nations taking many times more in trade than they give in aid [4]. Western nations also exercise a huge amount of control over the economies of poorer nations if these countries have borrowed money for development from the World Bank. When a country defaults on its repayments as many poorer nations will eventually, the IMF has authority to restructure their economy to improve their repayments [5, 6, 7, 8]. With the influence that the G7 nations have on the World Bank, it is unrealistic to expect that any concern they might have for poor nations will overwhelm their concern for the effect of rising oil prices within their own shores.

As our western economies begin to suffer, how many wars can we expect with the oil producing Middle East (referred to of course as Muslim nations)? Despite former Prime Minister John Howard’s denial that the war in Iraq had anything to do with oil whatsoever, former Defence Minister and current leader of the Opposition gave oil security as a reason for keeping Australian troops in the country - something John Howard worked very hard to downplay:

“Obviously the Middle East itself, not only Iraq but the entire region, is an important supplier of energy, oil in particular, to the rest of the world.” [9]

The Christian dilemma

What should be highly disturbing to us as Christians however is the way the economic effect of peak oil might influence our own behaviour. When we are faced with a government that offers us cheaper fuel and groceries, will we find out just who will be paying the bill for us, or will we just accept it blindly when we are told that the next trade deal is fair and the next war has nothing to do with oil? Will we be “Christian” and care more for the needs of others while searching for solutions, or will we allow the third world to be done over yet again to maintain our lifestyles?

Effect on developing nations

The following effects that the rising price of oil is already having on developing nations were taken from Energy and Capital.

Oil supplies in Nepal produced a crisis last July when it’s national oil supplier (Nepal Oil Company) was unable to provide fuel to petrol stations at all.
Although Iraq is a major oil producer, the US led war and IMF restrictions have caused major oil shortages for the country, to the extent that the entire energy grid may soon need to be closed down.
Another major producer, Iran has begun rationing petrol supplies as the rising cost of oil has made the government subsidies impossible to maintain.
Severe oil shortages in Sri Lanka have prevented UN agencies from using generators necessary for aid work, so that the UN is concerned that it may not be able to continue its supply of vaccines and essential medicines.
Diesel is in critically short supply in Zimbabwe, where many fuel stations went completely dry last June and the price of petrol has risen to 120,000 Zimbabwe dollars.
The cost of oil for its power stations has become too high for Senegal, which has had to borrow heavily from China to maintain its power supply.
Much transport in Kenya has been grounded due to rising fuel prices, and Gambian petrol stations are only selling now to people with a coupon from Shell.

So what do we do?

In many ways, we have already been given the answers. The world’s reliance on fossil fuels is changing the climate through global warming, and our response needs to be 1. reduce our waste and usage, and 2. find alternatives. World governments are typically responding very slowly to global warming [11], to the point that we can expect serious fallout over the coming decades. The urgency to reduce our oil dependency however should give us impetus to make some serious changes beyond our lightbulbs.

I suggest that in addition to what is necessary to combat global warming, we need to place a heavier emphasis on petrol/diesel dependencies. Support technology and policies that address this. In addition, we need to build together campaigns that will give developing nations affordable access to this technology.

As a Christian community we must remember that in the end, our own economic well-being is not the highest priority. We are the hands and feet of God himself, and if we see suffering in others such as the areas listed above, we need to look for ways to meet the need and speak in defence of the voiceless. We will become increasingly different to our society as we do this, as our society will become increasingly self-concerned. Should that shock us when 2000 years ago we were told that things were only ever going to get more that way? If things are getting darker, then our need to be “the light of the world” is only getting more urgent; let us not lose sight of the goal.

“The end of all things is near. Therefore be clear minded and self-controlled so that you can pray. Above all, love each other deeply, because love covers over a multitude of sins.” 1 Peter 4:7-8