World’s top energy economist warns peak oil threatens recovery, urges immediate action
“Oil prices leapt above $70 a barrel Monday in Asia on investor expectations a recovering global economy will boost crude demand,” the AP reports.
You might call those investors speculators – if speculation can be based on marketplace reality. The UK’s Independent opens its interview with Dr. Fatih Birol, the chief economist at the International Energy Agency (IEA):
Dr. Birol said that the public and many governments appeared to be oblivious to the fact that the oil on which modern civilisation depends is running out far faster than previously predicted and that global production is likely to peak in about 10 years – at least a decade earlier than most governments had estimated.
The warning is double worrisome because until the last year or two, the IEA had been a bastion of relatively staid and conservative and hence useless energy prognostication (like the U.S. Energy Information Administration still is). Now the IEA and Birol have joined the fact-based alarmists, warning in its World Energy Outlook 2008, “Without a change in policy, the world is on a path for a rise in global temperature of up to 6°C” and proposing aggressive clean energy solutions.
The IEA’s work makes clear that for oil to stay significantly below $200 a barrel (and U.S. gasoline to be significantly below $5 a gallon) by 2020 would take a miracle – or rather 6 miracles see “Science/IEA: World oil crunch looming? Not if we can find six Saudi Arabias!” and “IEA says oil will peak in 2020“). As the Independent reports today:
But the first detailed assessment of more than 800 oil fields in the world, covering three quarters of global reserves, has found that most of the biggest fields have already peaked and that the rate of decline in oil production is now running at nearly twice the pace as calculated just two years ago. On top of this, there is a problem of chronic under-investment by oil-producing countries, a feature that is set to result in an “oil crunch” within the next five years which will jeopardise any hope of a recovery from the present global economic recession, he said….
The IEA estimates that the decline in oil production in existing fields is now running at 6.7 per cent a year compared to the 3.7 per cent decline it had estimated in 2007, which it now acknowledges to be wrong….
In its first-ever assessment of the world’s major oil fields, the IEA concluded that the global energy system was at a crossroads and that consumption of oil was “patently unsustainable”, with expected demand far outstripping supply….
Oil production has already peaked in non-Opec countries and the era of cheap oil has come to an end, it warned.
In short, peak oil is nigh.
As a result of this analysis, Birol has gotten very blunt:
“One day we will run out of oil, it is not today or tomorrow, but one day we will run out of oil and we have to leave oil before oil leaves us, and we have to prepare ourselves for that day,” Dr Birol said. “The earlier we start, the better, because all of our economic and social system is based on oil, so to change from that will take a lot of time and a lot of money and we should take this issue very seriously,” he said.
“The market power of the very few oil-producing countries, mainly in the Middle East, will increase very quickly. They already have about 40 per cent share of the oil market and this will increase much more strongly in the future,” he said.
If you thought OPEC and the Persian Gulf producers were powerful before, wait until they control most of the oil market and have more than double their current revenues:
“If we see a tightness of the markets, people in the street will see it in terms of higher prices, much higher than we see now. It will have an impact on the economy, definitely, especially if we see this tightness in the markets in the next few years,” Dr Birol said.
So $4 and $5 gasoline – here we come.
“It will be especially important because the global economy will still be very fragile, very vulnerable. Many people think there will be a recovery in a few years’ time but it will be a slow recovery and a fragile recovery and we will have the risk that the recovery will be strangled with higher oil prices,” he told The Independent.
What needs to be done? The only way to stop oil demand from outstripping the peaking of oil production is massive demand destruction, which is itself possible in only two ways. The first way, pursued by the Bush administration, albeit (mostly) unintentionally, is to destroy the global economy. Let’s call that the short-term “non-optimal” approach.
But as IEA has noted, we need to find 4 to 6 Saudi Arabias of oil. See also “Merrill: Non-OPEC production has likely peaked, oil output could fall by 30 million bpd by 2015,” which noted,
Steep falls in oil production means the world now needed to replace an amount of oil output equivalent to Saudi Arabia’s production every two years, Merrill Lynch said in a research report.
A March McKinsey report concluded, “the potential looms for liquids demand growth to outpace supply creating a new spike in oil prices as soon as 2010 to 2013, depending on the depth of the economic downturn.”
The Obama administration certainly understands that “the equivalent to Saudia Arabia’s production every two years” can’t be found underground.
It can only be found in our grotesquely inefficient oil consumption. Hence they have advanced the most aggressive increase in fuel economy standards proposed in decades – Obama to raise new car fuel efficiency standard to 39 mpg by 2016 – The biggest step the U.S. government has ever taken to cut CO2. As has the fastest-growing market for cars (see “China plans tougher fuel standards than U.S.“).
Hence the Administration has launched a massive push toward plug in hybrid electric vehicles (PHEVs) and pure EVs in the stimulus, the budget, and the climate bill (see “Why electricity is the only alternative fuel that can lead to energy independence“). As has China (see “World’s first mass-market plug-in hybrid is from … China, for $22,000?“). No surprise, then, that the major car companies are pursuing PHEVs (see Ford expects 10% to 25% of fleet to be electric by 2020, Toyota plans up to 30,000 plug-ins in 2012, GM to “do the heavy lifting” to help Obama meet goal of one million plug-ins by 2015).
Will all this effort be too little, too late to avoid $200 a barrel oil? I think so. But it may get enough technology into the marketplace by, say, 2015 that when we get really desperate and are ready to embrace a WWII-scale deployment strategy, we will have the commercialized solutions we need. That is the best-case scenario right now.