Watch out for the oil crunch

Half Gone

The difference is that few people and organisations were warning about the credit crunch as it approached, whereas with the oil crunch, a host of people - many of them in and around the oil industry - are shouting a warning.

I am one of these. Half Gone, a shout hopefully delivered with a grin and a digestible crib sheet, appeared in November 2005. There had been other warnings, by other people, dating back to 1998. I didn’t and don’t claim originality. I just wanted to have a crack at writing a readable account, aiming to cast the arcane but vital message into new parts of the pond.

In the book, I hazarded that the peak would hit somewhere in the window 2008-2012. I was far from alone in that range either, among the “peakist” community.

In November 2006, the International Energy Agency changed its tune on peak oil in a big way. This agency, having been set up by industrialised governments essentially to promote oil and other fossil fuels, had until that time been antagonistic to the peakists. For some reason - and regrettably I do not think it was a mass read-in of Half Gone - they changed their collective mind. They warned that the world was on an energy path “doomed to failure.” Oil depletion, compared to projected demand, was the main reason for this. As the FT saw it at the time, this turn-around amounted to an “apocalyptic warning.” In June 2007, the IEA spelt out the warning even more clearly. The world faced an energy crunch in five years, they said. This hit front pages all around the world.

In 2007, with the oil price soaring, I convened an Industry Taskforce on Peak Oil and Energy Security in the UK. This was my follow up to Half Gone. The world is full of middle-aged men with bees in their bonnets, all of them with their book in hand. I decided my point of view would have more impact if I sing it in loud baritone amid a choir made of businessmen.

The taskforce is chaired by Virgin, and members include Scottish and Southern Energy, Arup, Stagecoach, Foster and Partners and my own company, Solarcentury. We released our first report at the London Stock Exchange in November 2008. You can download it for free on peakoiltaskforce.net. That’s the good news.

The bad news is that it is as turgid as I tried to make Half Gone vibrant. The taskforce report concludes that peak oil poses a grave risk to the global economy. Specifically, what concerns us is the threat of a premature decline in global oil production caused by either or both of collective overestimation of reserves by the global oil industry, and inability to deliver enough flow capacity to meet demand because of underinvestment in exploration, production, and infrastructure. We forecast peak oil in 2013, on the then balance of probabilities. The second report, to be released in November this year, will examine - among other things - the impact of the recession on the brewing crisis.

My own view of the state of play is that the recession may have bought us a little time, but has deepened the crisis beyond. The central problem is that underinvestment by the oil industry today will play out as a tighter crunch in the middle of the next decade. It takes an average of six and a half years from finding an oilfield to bringing it onstream as useful capacity, and in the case of the rare finds of giant fields, often more than ten years.

Why haven’t more people in government, and the oil industry itself, seen what is coming? Why aren’t they acting proactively to soften the blow? The same questions can be asked, with hindsight, of the bonus cultists who gave us the credit crunch. Gillian Tett of the FT, a trained anthropologist, describes in her recent book “Fool’s Gold” how the banking elite achieved “idealogical domination” ahead of the financial crash. Elites do this to maintain their power, she explains. Effectively, they decide what is talked about and what is not. Hence there was a major “social silence” around the epidemic growth of derivatives.

This is exactly what I see going on among my old friends in the oil industry. And their dysfunctional culture extends right into Whitehall, which is asleep on this issue. Officials at the Department of Business will barely engage with the UK industry taskforce. They prefer to believe BP and Exxon.

One of the few financiers who saw the credit crunch coming argued that derivatives were “financial hydrogen bombs built on personal computers by 26-year-olds with MBAs.” Here is another set of similarities and differences. The oil crunch is an economic hydrogen bomb. But it is being built by men who are close to retirement. The average age in the oil industry is 49: one of the biggest problems of all. It will fall to 26-year-olds to clear up their mess. Few of these youngsters have ever found an oilfield, much less built a refinery.

I hope that Half Gone will remain a vital backgrounder on all these issues. To my great regret, reality is playing out so far pretty much as I wrote it in 2005. The big open question, though, is whether the world can use the coming energy crisis to flip itself onto the kind of renaissance trajectory I describe in the final chapter of the book. That vision, of a world fast switching from fossil fuels to renewables and efficiency, is of a society not just facing up to energy-security problems, but beginning to deal with the monster threat of global warming.

This is an extended version of an article Jeremy Leggett wrote for the Independent on August 2nd 2009.