$100 oil and British energy policy built on sand

First published as $100 oil: the terrible truth in the Guardian, 24 November 2007

As the price of crude oil sets new records almost daily, the British government remains stunningly complacent. With the $100 barrel looming, the prime minister’s website blithely proclaims “the world’s oil and gas resources are sufficient to sustain economic growth for the foreseeable future.” Officials refuse to define what is meant by “foreseeable”, but it is clear they suffer from extreme myopia or worse.

All the evidence now suggests the world is rapidly approaching “peak oil”, the point when global oil production goes into terminal decline for fundamental geological reasons. Oil output is already shrinking in 60 of the world’s 98 oil producing countries, and fourteen more are predicted to peak in the next decade. The industry consensus is that aggregate output for the whole world except OPEC will peak in 2010 or thereabouts. It is also widely agreed that the cartel’s members have grossly exaggerated the size of their reserves, meaning that by any reasonable assessment global output must also peak soon. Since oil provides 95% of all transport energy, as well as vital inputs to modern agriculture, it is likely to provoke an existential crisis.

Oil executives have traditionally avoided any talk of geological constraints – no doubt mindful of the value of their share options – but now even they admit the industry is in fundamental difficulty. A growing number believe output will never exceed 100 million barrels per day – against 86 mb/d today – including Christophe de Margerie, chief executive of Total, Shokri Ghanem, head of Libya’s National Oil Company, and James Mulva, boss of ConocoPhillips. At current rates of growth, demand will hit that ceiling within about a decade.

The government’s sanguine position ignores not only the obvious facts and the views of many senior oilmen, but also those of its European counterparts. While France believes the peak will arrive between 2013 and 2023, and Germany forecasts 2017, Britain insists it will not happen before 2030. But it is hard to see how they can be quite so sure; unlike the other two HMG has never conducted a study to determine the date.

The British position relies on the International Energy Agency, which forecasts oil production rising to 116 mb/d in 2030. But the model that produces that forecast is compromised by the fact that it relies in turn upon an estimate of the total oil available to humanity published by the United States Geological Survey that is demonstrably wildly over-optimistic.

As I report in The Last Oil Shock, for the USGS numbers to come true the world would need to discover 22 billion barrels of oil per year between 1995 and 2025. So far we have discovered just 9bn per year, only 40% of the predicted amount. Since oil discovery has been falling steadily since 1965, despite rising oil prices and advancing technology, this deficit is only likely to widen. However, even if we make the heroic assumption that annual oil discoveries stick at their current level for the next two decades, the USGS resource estimate is still 500 billion barrels too high. The deflated USGS numbers imply an oil production peak in 2017-21.

The USGS estimate has long been criticized as over-inflated by independent experts, but now even the traditionally optimistic IEA is having its doubts. Chief economist Fatih Birol recently told me that the Agency will reappraise its reliance on the USGS figures for its next long term oil production forecast, to be published this time next year. It is difficult to see how they can do this without a massive downward revision of their forecast. Britain’s official position is therefore built not only on sand, but the sand of an hourglass that is fast running out.

It is far from certain, but peak oil may even have arrived already. Production of crude oil is lower today than in February 2005, while total liquid fuel production – including all the marginal sources such as biofuels and hard-to-produce Canadian bitumen – is lower than in July 2006. Even if it’s not peak oil per se, production is clearly struggling. Meanwhile demand continues to surge, and the soaring price sends a message that can only be described as skywriting.

Tony Blair wrote in the preface to last year’s Energy Review that it was a principal duty of government to secure the energy supply. He was right. Gordon Brown must now abandon the government’s reliance on IEA forecasts, institute a truly independent assessment of global oil depletion, and launch a massive programme of mitigation. Anything less would be dereliction.

But of course he won’t. Even more than climate change, peak oil demands that governments confront voters with uncomfortable truths that will impact living standards. In Whitehall, legs will remain crossed and buttocks clenched as politicians and officials pray to God that it doesn’t happen in their term of office, or before they draw their inflation-linked pension.