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Sep 2, 2010

The dirty topic of peak oil: get ready to reduce your reliance

Wouldn’t it be funny if we spent so long arguing about what to do about climate change that we ran out of cheap oil first? It is not beyond the realms of possibility, writes Dr David Ingles.

Wouldn’t it be funny if we spent so long arguing about what to do about climate change that we ran out of cheap oil first? No, it wouldn’t really, it would be catastrophic.

But given the government’s delay in producing an Energy White Paper and the steady backsliding on the need to actually reduce our greenhouse gas emissions in Australia, it is not beyond the realms of possibility. Even the usually optimistic International Energy Agency (IEA) is starting to sound a little nervous.

No one can say with certainty how much oil is left in the ground nor how much it will cost to take it out. As with climate change, the search for certainty in relation to oil supply is a fool’s errand. But while no-one can say with certainty how much is left, virtually no economists or oil industry analysts disagree with the statement that oil production cannot keep growing forever. The notion that oil production must one day peak is now referred to as ‘peak oil’.

While there is virtually no debate that oil production must one day peak, there is much debate about the timing and significance of such a peak. For those who have become accustomed to talking about emission reduction targets for 2020 and 2050 it may come as some surprise to learn that the mid-range forecasts for the peak in global oil production are 10-15 years. This does not mean that there will be no oil in 10 or 15 years time, but it means oil is going to get a LOT more expensive. Put simply, if demand continues to rise and supply starts to fall the days of the average Australian driving their Landcruiser to work will be over.

Peak oil concerns exploded during the rapid escalation of oil prices prior to the 2007 global financial crisis. These concerns have been underscored by official bodies such as the IEA warning of a possible “supply crunch” brought about by a lack of new investment following the crisis, and of rising depletion rates from existing fields.

According to the CEO of Lloyds Insurance, there are three factors combining to create deep uncertainties in how we will source energy for power, heat and mobility, and how much we will have to pay for it. These are the growing constraints on “easy access” oil, the urgency of reducing carbon dioxide emissions, and a sharp rise in energy demand from the emerging economies, particularly China.

As with climate change, the debate about peak oil is not simply confined to whether it exists or not, but whether it is worth worrying about. Some economists simply argue that as prices rise rapidly people will be forced to use a lot less fuel. While this is no doubt true, the potential disruption to the broader economy of people not being able to afford to drive to work are significant, to say the least.

World economies are built on oil. As occurred in response to the OPEC oil shock of the 1970s, skyrocketing oil prices are likely to result in severe disruption to those economies, with central banks raising interest rates to slow inflation, people out of work, and famine and civil disorder in the third world, as much agricultural production depends on oil.

The obvious policy response to the inevitable peak in oil supply is to begin to reduce our reliance on oil well before we are forced to do so. But what would that entail?

Subsidies for oil use are common around the world and need to be phased out. Wastefully low rates of fuel tax in the US should be changed. Countries like Australia, while small in terms of their contribution to demand, have a role to play. Fuel and road-pricing regimes need to be altered to encourage fuel efficiency. A congestion tax and investment in public transport would help to shift people from the least to the most fuel-efficient forms of transport. Alternative fuels like natural gas can be promoted and fringe benefits tax concessions on company cars that encourage owners to drive more to pay less should be scrapped.

Some of the alternatives to conventional oil are becoming economic at current prices, and might offer a way around peak oil. But it must be recognised that they can involve extremely high and possibly unsustainable costs in terms of greenhouse gas emissions. The extraction of oil from tar sands, for example, or its processing from coal and natural gas generates enormous amounts of greenhouse gasses. This poses a potential dilemma for policy, but the answer is actually quite simple — a price on carbon.

As luck would have it, the policy prescriptions to prepare for peak oil are almost identical to those required to reduce our greenhouse gas emissions. Let’s hope that policy makers who are disinterested in saving the planet will pay a bit more attention to saving the economy. It’s inevitable that we will run out of cheap oil, but it need not be inevitable that our economies grind to a halt.

But if we are to avoid another big and permanent increase in the price of oil, we need to invest in early adaptation. It will be costly and difficult to redesign cities, switch the vehicle fleet to new forms of fuel and invest in public transport. Ironically, it will be much cheaper and easier to make such investments before the price of oil surges, rather than after. Early investment in adaptation measures will pay high dividends in the future.

And who knows, if in 20 years someone finds an enormous new oil field in the middle of Australia, all that preparation might have served only to avoid catastrophic climate change. And wouldn’t we feel silly then.

*Dr David Ingles is a Research Fellow at The Australia Institute, a Canberra-based think tank. He is the author of Running on empty? The peak oil debate.

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9 thoughts on “The dirty topic of peak oil: get ready to reduce your reliance

  1. Alex H

    An interesting take on the relationship between peak oil policy and climate policy. But as I understand it, more greenhouse gas is produced by coal power stations and coal use isn’t predicted to peak until well after oil.

    So while policy to minimise the impact of peak oil on the economy may curtail the use of oil which will reduce greenhouse gas emissions, I suspect that the reduction won’t be significant in light of the ongoing emissions from coal.

    Of course, a general price on carbon covering all fossil fuels as you suggest above would help in both areas. The question is, would governments legislate a general carbon tax on all fossil fuels if they were only motivated by peak oil? Unlikely, they would probably just focus on policies specific to oil, such as excise.

  2. Roger Clifton

    Technically there is no problem. If we consider “hydrocarbons” instead of “oil”, a whole raft of solutions appear.

    In particular, if we separately source carbon and hydrogen, the peak vanishes and resources become effectively limitless.

    Carbon can be supplied from bitumen, tar shales, coal, biomass, limestone or even atmospheric CO2, depending on the carbon tax. Hydrogen can be supplied electrolytically from sun, wind, hydro, and nuclear.

    However, changing the culture of the oil industry is likely to be a lot harder than changing the pipework in their refineries.

  3. lindsayb

    Various credible organisations have advised the UK government to plan for oil at >$200 per barrel by 2015, and rising steadily from there. Advice also included statements about civil unrest, as transport and food become much more expensive. This is at at time when many in the western world are up to their eyeballs in debt due to the housing/bailout bubble, and governments have gone into massive debt to bail out the bad actors that caused it.
    Our collective governments’ massive spending on road infrastructure might start to look foolish and short-sighted quite soon, and their decades-long policies of designing cities around car use could lead to more social problems too. That said, bicycles are cheap and effective for mass-transit.
    However, the biggest problem with our oil dependence is that it is integral to our food production and distribution, and this at a time where the world needs to increase its food supply by 50% over the next 40 years. The Greens have started taking this seriously (only party so far), but with climate change, peak oil and population growth, we really need to have a look at how and what we are farming if we are not going to have serious problems with famine inside the next decade or two. The problems can be solved, but not by continuing to do the same things we have been doing for the past 50 years.

  4. wbddrss

    In regard to:
    “The extraction of oil from tar sands, for example, or its processing from coal and natural gas generates enormous amounts of greenhouse gasses. This poses a potential dilemma for policy, but the answer is actually quite simple — a price on carbon.”

    I do not fully appreciate the connection between price on carbon & consequences of peak oil. I would like the author to reassess the above informative discussion in the light of:

    1) Repercussions of running an ETS in shadow of Global Financial Crisis where there is still much negativity to those financial intangible assets which nobody understands except lawyers & courts only after period of implementation;
    2) It takes energy to create infrastructure, new energy sources & energy itself. This makes energy ratio critical for the future. Hydrocarbons have excellent energy ratios, all others do not.
    3) there is hypothesised a net energy cliff which if the energy ratio on average for an economy falls below there is serious ramifications for all the economy which just treads water and then there are no solutions to peak oil at all;
    4) Greens with all their vision fail to appreciate there is an absolute skill shortage across the face of the earth and new projects conjoined with appropriate risk management need skills in the general population to implement the desired solutions.

    In conclusion I fail to see how a price of carbon can mitigate by itself the above conditions which are more akin to scientific laws ( 2nd law of thermodynamics), principles & values & worldviews ( family values, structure & function in society in general). I now hint that with above systemic problems, global warming when conjoined with peak oil may be more difficult to mitigate with a price of carbon alone.

    By the way there is an alternative point of view that we are all going to be saved by horizontal drilling with simultaneous fracturing of rocks releasing hydrocarbons from oil shale etc. I am skeptical of this being a solution as well.

  5. Flower

    Wouldn’t it be funny if we spent so long arguing about what to do about climate change that our desecrated ecosystems collapsed first? No, it wouldn’t really, it would be catastrophic.

    Well there’s an ecosystem near you which is laden with industrial fallout – hydrocarbons, organochlorine pesticides, nutrients, heavy metals etc etc. There’s an ecosystem near you where biodiversity is threatened by industrial pollution ie. soils, rivers, oceans and air – salinity, mass fish mortalities, mass bird mortalities and mass mortalities of terrestrial critters (millions of them annually) – all in an island dubbed ‘down under.’

    Will it soon be every nation for itself while the greed barons continue bludging off the environment with impunity?

  6. jeebus

    If there was ever a reason to accelerate the transition to natural gas and hybrid electric cars, this is it. With our reserves of gas, abundance of sun, coal, wind, and uranium, we are an energy super power.

    Should be a relatively painless transition for Australia if our government is smart enough to act on the issue now.

  7. Roger Clifton

    @jeebus: “we are an energy super power”…

    Imagine a nuclear powered refinery at Gladstone, converting coal to light oil. Just as today Gladstone exports coal, it could be exporting transport fuel as well. If ever the export of coal is stopped, a livelihood for the people of the town and hinterland would be maintained. They may even welcome the honourable transition.

    If ever the extraction of coal in Queensland is stopped, the same hinterland could be producing biomass to feed the same refinery.

  8. Termoil

    @Roger Clifton

    The neo-classical economic assumption of infinite substitutability is a completely falwed way to approach peak oil. Firstly, The light sweet crude that we have hitherto planned our economies around is high quality and low cost in energy, engineering and effort terms. In terms of Gross World Product spent extracting oil, it is currently negligble but after peak oil, this becomes a much higher percentage and will continue to rise. Already the marginal cost to produce a new barrel of oil is $65-80 which is why the price of oil has rebounded so quickly after the GFC that is still clobbering economies around the world.

    I would expect that your plan to build a nuclear coal-to liquids facility wopuld require a much higher marginal cost of oil to be economic before anyone is going to committ the kind of capital needed if you can get it at all in this environment. The bio-mass idea is just plain ignorance of the process involved.

    At any rate alternatives need to scale up at a similar rate of oil decline plus growth demand which is a huge engineering project for which the world does not have the capital or human skills to do. We have spent the last thirty years producing lawyers and business graduates who have no idea of the basic laws of physics but ahve been mesmerised into believing the religion of endless growth economics and do not have the capacity to consider an alternaitve view.

  9. Roger Clifton

    As @Termoil implies, transport fuel would have to be one heck of a lot more expensive before we can replace traditional oil feedstocks with processes such as nuclear coal-to-liquids. That is the job of the carbon tax, so that they compete on the basis of their (fossil) carbon efficiency.

    In chemical terms, it is actually a simpler process to hydrogenate biomass than to hydrogenate coal. In terms of virtue, it would release even less fossil CO2 in the atmosphere. However the scale of transport fuels required is probably greater than the capacity of the land to fix carbon as biomass. That is, as well as food and fibre.

    What is absurd is the idea of today’s oil industry tolerating the idea of replacing oil as a source of energy with nuclear. We fear, and obey.

    Pres Eisenhower tried to warn his public about the excessive power of another industry. Pres Obama could speak similarly of the oil industry.

    Ref: http://www.ourdocuments.gov/doc.php?flash=old&doc=90