Peak oil and an economic recovery

Peak Oil is widely known to be the point at which oil production reaches its highest point and thereafter declines. Most people expect that this point will be reached in the very near future. Others believe we reached the highest point of oil production in the first half of the present decade and that from now on it is all down hill. They are correct.

A detailed analysis prepared for The Oil Drum by Tony Erikson provides reasonable evidence that Peak Oil occurred in 2008. It contends that peak production of 74.8 million barrels per day was achieved in July 2008 and has been in decline since then. Current production is estimated to be about 71 million barrels per day, a decline of 5 per cent, with a further decline of about 7 per cent expected over the next 15 months.

Thereafter, daily production is expected to decline more steeply, to about 68 per cent of peak production or 51 million barrels per day by 2015 and to 50 per cent of peak oil by 2025. These estimates take into account future oil discoveries, including those in the Arctic, the use of heavy oils and recovery of oil from the vast Canadian oil sand deposits.

In the short term, decline in availability of crude oil is unlikely to curb recovery from the global financial crisis (GFC). However, that recovery will increase demand for oil and if this can not be supplied, it will result in rising prices for oil and its derivatives. The US Energy Information Administration estimates global demand will increase to 98 billion barrels per day by 2015 and to 118 million barrels per day by 2030. However, by 2015 all of the worlds’ major oil producing countries will have passed peak oil production.

If these estimates are correct (more recently broadly confirmed by the US Energy Information Administration and others), demand will be well above the production levels postulated by Erikson and by 2015 none of the major producers will be in a position to increase production levels. It should be expected that this will result in shortages with the potential to limit economic growth, increase the price of oil products - particularly fuels and fertilisers - and stimulate the wider use of alternatives to oil.

Oil is used by the transport, domestic, commercial and industrial sectors. World-wide, about 55 per cent of oil production is used for land, water and air transport of goods and people, land transport being the largest user. Demand for oil by China and India is expect to double by 2020, primarily because of expansion in the use of vehicles propelled by engines using fossil fuels. The next largest use of oil is for production of energy needed by non-transport sectors (30 per cent) and for fertilisers, plastics and other products.

Several countries dependent on oil for generating electricity - for example, The Maldives - have opted for solar technology to generate their electricity needs largely or in full. In so doing, they have taken into account their need to reduce dependence on oil imports for both environmental and financial reasons. The latter includes an assessment that the price of fossil fuels will rise, become increasingly unaffordable and a drain on scarce foreign exchange reserves.

Other countries - for example, China and Malaysia - have increased investment in renewable energy sources and negotiated purchase of future production of hydrocarbons, including large quantities of gas from Australia. However, sooner rather than later, all countries will be faced with an ever increasing price for oil imports as the gap between supply and demand widens, forcing development of technology which makes electric propulsion a realistic alternative to fossil fuelled engines.

It should have come as no surprise that, within a few weeks of his inauguration, President Obama announced the investment of more than $2 billion for the enhancement of electric motors and the capacity of batteries to fuel them. The United States and other countries dependent on oil imports realise that in a world of growing oil scarcity that dependency must be reduced and the only way of achieving this is to replace fossil fuels with the only practical alternative for vehicle propulsion - electricity.

Many commentators reject the view that peak oil has been reached. Some deny that it will be reached this century but the only evidence they offer is that oil prices have remained relatively stable during the last 12 months, indicating that there is no gap between supply and demand. Both are true but arise from the Global Financial Crises (GFC) and resulting economic contraction, from which the world is only now showing signs of recovery. This is confirmed by the fact that oil production is four million barrels a day less than during the 2008 peak demand.

However, the world has already begun to recover from the GFC and that recovery is growing in speed. It is very likely that by 2011 the world economy will have returned to levels of activity achieved by mid 2008 when the gap between supply and demand forced up the price of oil to almost $150/barrel. and the price of petrol to about $1.50 a litre in Australia.

In the absence of massive new discoveries of oil and their rapid exploitation (neither is likely) it can be expected that oil prices will rise to about $75/barrel by the end of 2009, to $110/barrel by end 2010 and $150 by end 2011. Thereafter an ever widening gap between supply and demand will force oil prices up to well over $300/barrel. by 2015. At these prices, petrol may sell for $6a litre, affordable only for the wealthy and for essential services.

Price increases of this magnitude will have a pervasive inflationary effect throughout the global economy. These are likely to be of such severity as to prevent full recovery from the GFC or stultify the global economy by making its balanced growth unaffordable and unattainable. The viability of industries which are totally dependent on oil, such as mining, fertiliser and plastics production and the transport of industry are all threatened.

An increase in the price of oil will have a stimulatory effect on R&D into ways of reducing our dependence on fossil fuels, particularly by the transport industry which uses 55 per cent of global oil production for propulsion. We have a very short period, no more than five years, to develop and adopt use of a substitute for petrol and diesel. The most obvious is to convert existing vehicles and produce new ones which are propelled by electricity.

We know the dire consequences which will confront us due to increasing scarcity of oil. We know what must be done to avert those risks and that we have a relatively short period in which to put those measures in place.

What has been our response? Government has provided Holden-General Motors with a subsidy of $70 million to be used in re-tooling their production line. To what end? To produce a new hybrid car propelled by electric motors, the electricity required being produced by a generator driven by, you guessed it, a petrol engine. True, petrol consumption and therefore running costs will be reduced but dependence on petrol remains.

No other action has been taken by the private or public sectors to break dependence on the use of fossil fuels by transport vehicles. Australia has abundant reserves of gas which could be used as an alternative to petrol and diesel, at least as an interim measure, reducing our growing dependence on oil and the adverse effect this has on foreign exchange reserves and the balance of trade. However, government has failed to take action to increase demand for or the production of vehicles operating on gas.

Governments could and should be taking action to promote the use of electric vehicles. Electricity is already widely available and outlets need little enhancement. It is far cheaper to use than fossil fuels and is emission-free, producing no greenhouse gases or particulates harmful to health. It is open to governments to offer cheaper registration for electric vehicles, reduced import tariffs on imported electric vehicles not produced in Australia and to renegotiate the basis of their subsidies to Holden. Will they? Unlikely.

Battery technology is already sufficiently advanced to give electric vehicles a range of up to 150km between charges and recent developments promise rapid charging and greater capacity. Pending commercial availability of such batteries, Renault intends supporting operations in Australia to provide a network of exchanges where vehicles can exchange spent batteries for fully charged ones. Will these measures persuade Holden to revise its proposal to build hybrid cars in favour of a purely electric vehicle? Doubtful.

The cost of continued dependence on fossil fuels will see world economies, including ours, in deep and increasing strife by 2015, a fate which is avoidable but only if we act to effectively counter increasing scarcity of oil. We know how to. Will we?