First published in the Telegraph, 29 May 2008.

Even by the low standards if his government, Gordon Brown’s recent pronouncements on oil have been shockingly ignorant. Writing in a national newspaper yesterday he argued the price has soared to $135 because of barriers to production that are “technical, financial and political”. There are problems here sure enough, but the word he left out was “geological”, and the omission is crucial. It means he really doesn’t understand the profundity of the current crisis, and explains why his panicky but vapid initiatives are bound to fail.

Brown and his chancellor Alistair Darling can implore North Sea oil producers to pump harder all they like, they can even finagle the tax regime to raise the incentives, but it will make very little difference. North Sea oil production peaked in 1999 at 2.9 million barrels per day and has now fallen by more than half to around 1.4 mb/d. This happened, as in all mature oil producing regions, because of two simple facts of life.

First, oil is produced from deeply buried, highly pressurized reservoirs. This is great news to start with; the pressure forces the oil up the pipe of its own accord. But as the oil is produced the pressure is relieved, so the oil inevitably comes out more and more slowly as time goes on. Second, in any given region, oil companies usually find and exploit the biggest oil fields first. So as time goes on they are forced to scrabble around for ever smaller deposits.

It is principally this combination of geological factors, rather than economics, which caused North Sea production to peak and decline. Changing the tax regime will make very little difference to UK output, let alone the global oil balance that determines the price.

As for the rest of the world, Mr Brown is even further astray. Last week he ranted at the “scandal” that OPEC controls 40% of the world’s oil, as if it was somehow outrageous that our oil should have found its way under their sand. Here again the geology is in control.

In total OPEC’s 12 members produce around 36 million barrels per day, while the rest of the world (’non-OPEC’) produces about 50 mb/d. But many experts – including ExxonMobil’s chief executive Rex Tillerson – expect aggregate non-OPEC production to peak by around 2010, for the usual geological reasons. With non-OPEC production either flat or falling, we are in OPEC’s hands as never before. Gordon Brown, stuck in last century’s mindset, hopes the cartel can be pressured into raising output, but the signs are that they either will not or cannot.

In the past OPEC has deliberately restricted its oil production in order to maintain or raise the oil price, with varying degrees of success. Today however the cartel has almost no spare capacity; they are pumping flat out, just like everybody else. To create any surplus would mean investing billions of dollars – and the end result would presumably be a lower oil price. This may not seem a strikingly attractive bargain from OPEC’s point of view.

But neither is it in OPEC’s interests to let the oil price rip. That would eventually cause a deep global recession, demand would slump and so would their earnings. So it is fundamentally in their interests to invest and expand their production capacity – if they can. However, there is good reason to suspect that cartel members have been exaggerating their reserves figures for decades, and that even the mighty Saudi Arabia may be running into geological constraints.

Until recently Saudi officials were telling anyone who would listen that, in effect, the kingdom had a bottomless well. But just last month, oil minister Ali al-Naimi announced that all plans to expand oil production capacity beyond 2009 had been shelved, claiming there would be no demand for the additional oil. This is arguable but highly unlikely, and even the mildly skeptical will suspect the move was not entirely voluntary. Officials from the International Energy Agency have recently reiterated their doubts about Saudi reserves numbers.

Two OPEC members do have the potential to raise output substantially: Nigeria, where production is severely hampered by continuous assaults from rebel groups in the Niger Delta, and Iraq, whose giant, untapped fields are off limits because of the daily violence and the failure of the factions to agree a new law governing foreign involvement in the oil industry. But the chances of either of these producers coming good in even the medium term are vanishingly slight. Yet this is the leaky lifeboat to which Mr Brown clings.

Amid the rising panic, Arctic nations are scrambling for advantage in the oil industry’s final frontier. But the amount of undiscovered hydrocarbons in the province is estimated to be relatively limited, at 176 billion barrels – theoretically six years’ supply at current consumption. And three quarters of that is predicted to be not oil but gas, which is difficult to produce in such hostile conditions and so remote from consuming markets. So the Arctic is unlikely to produce significant amounts of oil any time soon.

All the signs are that we have at least reached the foothills of global oil peak, the moment when production will flatten and then go into terminal decline. The facts are stark: the amount discovered has been falling for 40 years; for every barrel we find each year, we now guzzle three; output is already falling in over 60 of the world’s 98 oil producing countries; and global oil production has been essentially flat, at just under 86 million barrels per day, since early 2005; serious analysts now forecast $200 per barrel. In these circumstances the Prime Minister’s declaration that “I will be proposing further work internationally achieve a better dialogue on supply possibilities and trends in demand” means precisely nothing. So what is it that Gordon doesn’t get?

Or perhaps he gets it perfectly well. Because the alternative to praying for some improbable boost to the oil supply is to get serious about cutting demand, and no politician, least of all one so rudderless as Gordon Brown, is eager to do that.

This week the Environmental Audit Committee sensibly recommended the adoption of personal carbon trading – a system of fossil energy rationing that becomes progressively tighter – as a far better approach to cutting consumption than taxation. But both Defra and the Conservatives dismissed it as “an idea whose time has not yet come”. Of course not; that would require some leadership.

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