The government, long dismissive of the threat of ‘peak oil’ is now paying attention, according to a newspaper report at the weekend.

If the Observer’s report that ministers are canvassing industry opinion about future energy supplies is true, should we interpret it as a warning sign?

What is ‘peak oil’?

Oil, a finite resource, is being used at a rate of some 86 million barrels per day.

This astounding figure is merely a point on an upward curve; the International Energy Agency predicts that global demand for oil will grow 1% each year until 2030 when it will have reached 105 million barrels per day, mostly a result of the needs of the transport sector. This growth will come not from developed countries – where demand is expected to actually fall – but from the booming economies of places like China, India and the Middle East. In fact, China is expected to overtake the US as the world’s biggest spender on oil and gas imports by 2025.

One day it’ll all run out.  But before that will come the day when oil production plateaus and then declines.

Some countries have already passed their peak. In fact, outside of the Opec cartel of oil producing countries, production is expected to peak this year.

Opec members, which are predominantly Middle Eastern, will cater for the increased demand until they too hit their peak.

When will it happen?

That’s the multi-billion dollar environmental and economic question of the century.

Former Shell chief executive Jeroen van der Veer and other head industry honchos have said several times that the era of ‘easy oil’ is over.

The size of reserves is notoriously difficult to calculate, yet Opec reckons that it has enough to last for more than a century, while non-Opec oil producers' reserves might last less than 20 years.

The UK Industry Taskforce on Peak Oil and Energy Security reckons that peak oil could come potentially by 2015 at less than 95 million barrels per day. Just 120 oil fields provide 50% of global production and no new finds of this scale have been found for a long time. If new ones are found they may prove too difficult to exploit.

Isn’t it all just a conspiracy theory?

Some argue that just because prices may rise – according to the needs of the monopoly supplier, Opec - this does not mean oil is running out. Nor do reports of dwindling reserves signify much, they say, because a well that is shut down now at a time when it is technologically too costly to make money, may prove to be profitable in the future. Current estimates of reserves reflect current technology, knowledge and prices. As MIT professor M A Adelman wrote: ‘To predict ultimate reserves, we need an accurate prediction of future science and technology. To know ultimate reserves, we must first have ultimate knowledge.’

Then of course, there is the unknown. The veracity of Opec claims about the size of their reserves has long been disputed.

What would be the consequences of peak oil?

Virtually every part of the economy is dependent on oil, directly or not. The UK Industry Taskforce on Peak Oil and Energy Security warns that without action we run the risk of a return to the oil price shocks of the 1970s and 2008. Prices would rise, would be more volatile and could lead to a crisis. This would include sharp increases in the cost of travel, food, heating and retail goods.

Another consequence would be an accelerated move to alternative sources of energy, one that is already necessitated by environmental concerns and intensified by the BP Golf of Mexico oil spill. But when conventional sources of oil are exhausted, companies will likely first spend their cash on tapping alternatives like tar sands – described by environmentalists as 'the biggest environmental crime in history'.

What are we doing about it and what are the alternatives?

The answer is not very much. Most governments are oblivious to the risks, or do as little as they can get away with, which makes the Observer report of minsters paying attention potentially so significant.

The UK industry taskforce made several recommendations in a report earlier this year, with basic proposals such as the need for government and business to put contingency plans in place for peak oil and for an acceleration of the ‘green industrial revolution’. It also wants government support to wean people off oil-based transport with support for alternatives, such as electric vehicles. More of its recommendations can be found here.

The need for alternatives to oil is most acute for transport. Alternatives might include new generations of biofuels (fuel made from living things or the waste they produce), hydrogen fuel cells and electric vehicles. The improved energy efficiency of vehicles will also help. The European Commission has proposed that by 2020 10% of road fuel should come from biofuels.

http://citywire.co.uk/