What Stern really got wrong

By David Strahan. First published in Prospect, 16 May 2007

In one sense Stern’s conclusions were entirely predictable. He set out to answer the same brutally simple question posed by Dick Turpin: your money or your life. And now that climate change so clearly has a pistol at the head of our species, there could only be one answer – irrespective of cost. But there was also a surprise: paying off this highwayman would not be extortionate. In fact, it would be an absolute steal.

Stern famously concluded that if we do nothing the effects of climate change could shrivel the global economy by as much as 20% over the next two centuries. Avoiding that risk would cost only about 1% of world GDP to 2050. Saving the planet was not only the right choice, but also cost effective. Yet although this calculus was clearly intended to persuade economists and policymakers of the need for action in terms they could understand, the language of Gradgrind, it was economists who most excoriated the analysis.

One compared Stern to the scarifying Wizard of Oz, another accused him of producing an ecological ‘dodgy dossier’, others criticised his choice of a low discount rate, which had the apparently outrageous effect of making the cost of disasters suffered by future generations economically equivalent to those suffered by our own. The basic charge was that for political impact Stern had minimised the costs of mitigating climate change and exaggerated the threats. In other words, said the critics, things weren’t as bad as he made out.

Since climate change is already stirring positive feedback loops that could spark runaway global warming of the kind that caused the Permian mass extinction 250 million years ago – the one that wiped out 95% of species on the planet – Stern’s critics are as wrong as only economists can be. But that doesn’t make Stern right. The Review is indeed based upon a fundamentally mistaken assumption – but one which means our situation is in fact even more dangerous than his analysis allows.

Deep in the report Stern asks rhetorically whether there are sufficient fossil fuels to fulfil economic growth forecasts, or whether shortage would provide a laissez faire solution to climate change by forcing up the price and depressing demand. He concluded that “There appears to be no good reason to expect large increases in real fossil-fuel prices to be necessary to bring forth supply” (1).  In the case of oil, this conclusion was based largely on a resource assessment by the International Energy Agency (see graph below). And with that Stern swallowed and regurgitated the facile assumption that because the available resource is large, there will be no problem with supply in the foreseeable future. 

 
Source: International Energy Agency (2) Horizontal axis shows the estimated size of each resource in billions of barrels, while the upright axis shows the dollar price range within  which each is supposed to be economic. 

At first glance the graph looks very reassuring. The light blue box on the left hand side representing oil ‘already produced’ accounts for less than a fifth of what the IEA claims is the economically recoverable resource. With so much still underground, how could there possibly be a problem with the oil supply any time soon? But the critical issue is not how much oil is down there, but how quickly we can get it out – the rate of production – and here the picture is very different.

There are basically two kinds of oil. ‘Conventional oil’, produced from deeply buried, highly pressurised reservoirs, accounts for the vast bulk of the 86 million barrels of fuel we consume every day. In the graph this includes all the categories to the left of ‘arctic’ (the orange bar in the middle). Everything else is considered ‘non-conventional’, in which the significant resources are bitumen and so-called oil shales, usually found in solid, non-pressurised deposits near the surface, and which have so far produced very little. Stern’s blithe assumption is that because all these forms of oil are allegedly economic at less than today’s crude price, there can be no shortage in the foreseeable future. This is a dangerous delusion.

It now seems certain that global conventional oil production will soon go into terminal decline. It may even already have done so. Because it relies upon pressurised reservoirs, which lose their pressure as the oil is produced, the rate of conventional oil production in any given country tends to ‘peak’ and go into decline at a point when at least half the oil that will ever be produced is still underground. The big question which Stern ignored is when this point will arrive for the world as a whole. As I report in The Last Oil Shock, the evidence is not encouraging.

Conventional oil discovery has been falling for 40 years; for every barrel we discover each year, we now consume three; oil production already in terminal decline in 60 of the world’s 98 oil producing countries; everybody – including noted optimists such as the IEA and ExxonMobil – agrees that the entire world apart from OPEC will peak by 2010 or thereabouts; and there is now good documentary evidence to suggest that OPEC has been exaggerating the scale of its reserves for decades. The international oil consultancy PFC Energy has briefed Dick Cheney that on a more realistic assessment of OPEC’s reserves, the cartel’s production could peak by 2015.

Once conventional oil production starts to fall, non-conventional oil is highly unlikely to make good the yawning deficit, despite the undoubted size of the resource. The bitumen deposits of Canada’s Alberta oil sands, which currently yield about 1 million barrels per day, are produced by mining and extraction methods that require large amounts of water – between three and ten barrels for every barrel of synthetic crude oil produced. So the limiting factor is not the size of the reserves but the flow of the Athabasca river. According to Len Bolger, the chairman of the Alberta Energy Research Institute and a cheerleader for the oil sands, Alberta can produce no more than 3 million barrels of oil per day on its existing water supply. “There’s nothing in sight that will solve the water issue”, Bolger told me, “it’s a huge problem”.

Other non-conventional oil resources are likely to produce even less than the Alberta oil sands. Oil shales are not yet being exploited anywhere, despite the fact that the IEA graph suggests they are ‘economic’ at less than half the current oil price. Shale production would also consume large amounts of water, but the biggest deposits are at the head of the Colorado river, which is already so overexploited that in many years it fails to reach the sea. One forecast suggests that US oil shale would struggle to reach 3 million barrels per day by 2035 (3).  Meanwhile by some estimates conventional oil production could have fallen by 30 to 40 million barrels per day.

Any thoughts that ‘green’ alternatives such as biofuels or hydrogen could fill the gap are also misplaced. As I show in The Last Oil Shock, there simply isn’t the land to produce enough biofuel to replace crude. If you don’t believe me, just ask the Mexicans: the price of tortillas – staple diet of the poor – quadrupled earlier this year as a result of the US diverting just 20% of its maize crop into bio-ethanol. And even if there was enough land, assuming that post-peak global oil production declines at a modest 3% annually, replacing the lost supply would mean planting about 200,000km2 – equivalent to the land area of Cuba, Sri Lanka and Papua New Guinea combined – every year.  As for hydrogen, if we decided to run Britain’s road transport system on cleanly produced supplies of the fuel – produced by electrolysing water using non-CO2 emitting forms of generation – our options would be: 67 Sizewell B nuclear power stations; solar panels covering every inch of Norfolk and Derbyshire combined; or a wind farm bigger than the entire south west region of England.

So where does ‘peak oil’ leave the Stern Review? The intuitive answer is that running out of oil should at least be good for climate change, but the reverse could be true. A growing shortfall of global oil production is likely to send the crude price skywards, obliterating Stern’s grand bargain. The kind of long term impacts attributed by Stern to climate change could arrive much sooner and in a single thunderclap. With the economy reeling from blows “similar to those associated with the great wars and the economic depression of the first half of the 20th century” (4), it will be far harder to fund the expensive new energy infrastructure we need to combat climate change. And faced with the likely re-emergence of mass unemployment, the political priority may well shift from – say – maintaining a high price on carbon, to keeping the lights burning at lowest cost. True, recession would mean we would emit less CO2, but since we have to cut by at least 60% by 2050, economic contraction is hardly the optimal way to achieve the target.

Peak oil is also likely to encourage greater use of synthetic Fischer-Tropsch fuels made from coal which produce twice as much CO2 as those made from conventional crude. So it is even possible to conjure scenarios in which we suffer paralyzing fuel shortages while emitting even more CO2 than in the current business-as-usual forecasts – the worst of all possible worlds.

What makes Stern’s omission the more surprising is that two of Tony Blair’s closest advisors believe global oil production will peak by around 2015. Sir David Manning – Blair’s chief foreign policy advisor in the run-up to Iraq – seems to think it will come at “some point between 2010 and 2020” (5), while chief scientific advisor Sir David King told me emphatically in 2005, “ten years or less”. The government’s official position however is that there is nothing to worry about until after 2030. Is there something they’re not telling us?

 Notes:
(1) Stern Review; The Economics of Climate Change, part III, p.186
(2) Resources to Reserves © OECD/IEA, 2005, Figure ES.1, p.17
(3) Rand Corporation, Oil Shale Development in the United States: Prospects and Policy Issues, 2005
(4) Stern Review, executive summary.
(5) Sir David Manning, speech at Stanford University, 17 March 2006