Oil price shock or climate collapse – What will force us to change?

"Resources" dialogue forum on 17 March 2009

The fossil fuel age is drawing inexorably to a close. The fourth evening debate on the subject of resources focused on the potential environmental, economic and political consequences of dwindling oil supplies. The Munich Re Foundation invited two experts to discuss the issues involved.

Although countries throughout the world achieve economic growth with the aid of fossil fuels, we should really be trying to reduce emissions in order to protect the climate. The paradox of this situation is likely to resolve itself in the near future, because oil reserves are gradually being depleted. Dr. Werner Zittel, an energy expert at Ludwig-Bölkow-Systemtechnik GmbH explained why: “Discoveries of new deposits peaked as far back as the 60s and 70s." Now, it’s not just a handful of countries like the UK and USA that are approaching their production limits. Globally, the amount of oil being extracted outstrips the new reserves being discovered.

Zittel is convinced that “peak oil is now! Maximum production has been reached and may even lie behind us.” He is concerned that, by 2030, production could have fallen by about 50%. Supplies in the global markets could fall even more as many exporting countries would have to cut back on exports to meet domestic demand. Oil prices will be a clear sign of shortages, despite the fact that the current price is well below the maximum. Noting that “prices of US$ 40–50 a barrel during the current recession are unprecedented”, Zittel concludes: “the era of cheap oil is over.”

Dr. Daniele Ganser, who lectures in history and peace studies at the University of Basle, believes whether production peaks in 5, 10 or 20 years makes no great difference. “The fact is, we find ourselves in a period of transition that we have to pass through.” Alternatives to conventional crude, such as oil sand, would not solve the dilemma in the long term either. Ganser believes Part 2 of the oil era, which dawned in 1850, will be much tougher than Part 1, because we will be living under the threat of a global oil conflict: “The economic wars have already started, albeit under another name.” He believes one reason for the Iraq War in 2003 may well have been the country’s huge oil reserves. The war in Afghanistan, potentially a major oil transit point, falls into the same category. “The war in Afghanistan is not being fought over women’s rights. It’s about a pipeline.” To avoid further conflicts looming on the horizon his advice is: “We should abandon oil before it abandons us.”

This does not coincide with the interests of the industry, which wants consumers to be dependent on oil. Ganser: “The gloves are off because so much is at stake.” A fact amply demonstrated by US oil giant ExxonMobil’s announcement of record profits (US$ 45bn) in 2008.

Zittel, a physicist, dismissed arguments that oil reserves could nevertheless exceed current expectations. “Geologists have undertaken detailed explorations and identified two bands encircling the earth in which 90% of reserves are located.” He noted that seismic explorations confirmed that the major findings had already been made.

He also rejected the idea that countries like Saudi Arabia would fill the gap by boosting production. “Saudi Arabia is purposely vague about the size of its fields and the distribution of its reserves.” He is therefore sceptical about Saudi Arabian reports of a major increase in reserves. “OPEC production quotas are based on reserves per head of population, which tends to encourage overstatement.”

Ganser also doubts that Saudi Arabia has the capacity to increase production from the current eight to 15 mbpd (million barrels per day). International Energy Agency (IEA) forecasts, which are based on returns submitted by the producer countries themselves, are not necessarily reliable. He summed up on a provocative note: “The statistics are worth about as much as a Standard & Poor’s US mortgage rating.”

If peak oil was inevitable, what might the world be like once oil became scarce?
Dr. Patrick Illinger, chairing the debate, asked the speakers if this meant, in future, we would have to buy oil at the pharmacist’s?

Zittel outlined two scenarios. In the first, the world would gradually adjust to the new realities. As the effects of expensive energy began to strike home, so industry and consumers would gradually modify their behaviour. Cars would consume less fuel, we would have better insulated buildings, globalisation would be scaled back and the pace of life in general would slow. His second scenario was more extreme. He warned of the dangers of economic collapse that would bring with it financial crisis and armed conflict.

Ganser was cautious: “I didn’t even foresee the way things would turn out in the last five years. Predicting events over the next 50 is even harder.” He believed if we could maintain production at a steady 90 mbpd maximum for several years, we would gradually be able to adapt. But, in the worst case, production levels would plummet once they had peaked, although that would not mean the end of the world: “Even then, there will be positive changes that will boost local structures.” Ganser knows from historical events that radical turning points always bring about a change of perceptions. However, we needed to find a way to resolve conflicts without resorting to violence. The French Revolution and the fall of the Iron Curtain showed this was not always possible.

To prevent political wranglings and oil wars under another guise, Ganser believes: “We in Europe should address the issues openly, making it clear that we advocate less force, sustainable developments and greater cultural tolerance between Christians, Muslims and Jews.”

But even if we gradually adapted to the new situation, one crucial factor would remain in the period after peak oil: since food production uses up large quantities of energy, we may have to prepare for the eventuality that the earth is no longer be able to feed everyone, and the number of humans will decrease. Ganser qualified this by adding: “Whether that’s how things will actually turn out is something we can’t say at the present time.”

To what extent will the climate-change debate delay the onset of peak oil? Zittel is not particularly optimistic. Since the Kyoto Protocol the problem had been recognised, but applying Kyoto in practice was still a sticking point, and even now the threat was not really being taken seriously. “On the other hand, peak oil will force us to think again, whether we want to or not. Not that this will make any difference to the resource.” We have to pull together, with greater or lesser degrees of enthusiasm.

Ganser also believes peak oil will impose inevitable constraints. Once oil production falls significantly, we will be forced to take action. The CO2 debate might be gaining momentum but that alone would not create the necessary pressure, as could be seen from current events: “Climate change has been overshadowed by the financial crisis.”

However, Ganser reminded the audience that there was one major difference between the two: “The central banks can deal with the financial crisis by printing money. Oil, on the other hand, is not something we can simply produce.” He believes hard times lie ahead for the European Union as well: “Some of the measures taken by individual member states will test the Community to its limits.” But Europeans could show the way in the field of alternatives such as renewable energies and more efficient energy. “That’s better than going down the road of deception and conflicts over resources.”

The next and final dialogue forum in the resources series will be held on 21 April 2009. It will analyse the optimal energy mix in 2030, in the aftermath of peak oil.

26 March 2009