Science & Technology > Energy >
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| Paper ID: |
433 |
Last updated: 31/01/2012 09:08:31
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Controversy: |
Where: Global |
When: 21-50yrs+ |
How Fast: Years |
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| Keywords: |
Energy - oil, Hubbert’s Peak, Alternative energy |
Summary  |
Peak oil has the potential to cause a global economic downturn. The United Kingdom will suffer from this downturn, and will also suffer directly as a moderate net oil importer. So although possibly in a better position than some other countries, the UK has a strong interest in international action to ensure a smooth technology-based transition to a post-oil future.
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Discussion |
Peak oil [see Sigma Scan issue paper 472] is the point at which oil (petroleum) production peaks before declining inexorably. When it occurs globally the price of oil will—in the absence of technological solutions—rise sharply. This will drive up the price of transportation fuel (and, thus, of all commodities and goods), severely curtailing (or even reversing) global economic growth. According to the ‘export-land model’, as the price of oil rises, the flow of income into net exporters causes them to consume more of their own product, meaning that oil exports decline at a steeper rate than oil production. [1] This positive feedback loop will drive up prices even further, exacerbating the flow of wealth from net importers to net exporters. Gas markets will exhibit a parallel phenomenon because the price of gas (as an alternative source of liquid fuel) follows the price of oil very closely. This means that the economic impact of (unmitigated) global peak oil will fall first and hardest upon net oil and gas importers. With production from its North Sea oil and gas fields in decline, the UK, which experienced peak oil in 1999, has recently become a net importer of both oil and gas. By 2020, imports will account for half of the oil (and two-thirds of the gas) consumed within the UK. [2] This increasing reliance upon imports gives the UK a strong interest in mitigating the impact of global peak oil. This is beginning to be recognised in the form of government-commissioned research into the phenomenon of peak oil [3] and its potential to impact upon the UK. Regarding impacts, the Second report of the UK Industry Taskforce on Peak Oil & Energy Security (ITPOES) [2] predicts that peak oil will:
• drive up transportation costs and, thus, the cost of travel as well as the cost of living (because food and other goods will become more expensive). This will require lifestyle changes and, for the disadvantaged, government intervention will be necessary to ensure minimum standards of welfare amidst rising costs;
• destabilise commodity markets, causing shocks to reverberate throughout the supply chains of UK-based businesses, which will raise hurdles to investment; and
• weaken the Pound Sterling, further increasing the cost of imported oil and cause inflation.
To these can be added global consequences with the potential to affect the UK, including the possibility of insecurity in countries with especially weak oil security outlooks.
Mitigating peak oil depends upon affordable new technologies to reduce demand for carbon-based liquid fuel and/or augment supply with ‘unconventional’ sources. Options on the demand-side include electrified transportation technologies (e.g. battery-electric vehicles, which recharge from the grid instead of refuelling) and hydrogen technologies (hydrogen fuel cells and hydrogen internal combustion engines) [see Sigma Scan issue paper 558]. Options on the supply-side include biomass (e.g. biofuels produced from crops [see Sigma Scan issue paper 442]), unconventional oil (from sands, shales, etc), and natural gas [see Sigma Scan issue paper 538] (including from unconventional sources e.g. coal gasification [see Sigma Scan issue paper 440]). The issue of investment in developing new oil supplies is one of the major constraints on future production.
Because the timing of the phenomenon is uncertain (it is likely to occur between now and 2030), market forces cannot safely be relied upon to drive the necessary technological progress in a timely manner [see Sigma Scan issue paper 472]. If one accepts this conclusion, there is a strong imperative for government intervention. Moreover, the scale of the necessary technological investment means that successful intervention is probably beyond the scope of the UK acting alone (especially as the economy is weak in the wake of the 2008/09 financial crisis). Global peak oil, like climate change, therefore demands international cooperation. Difficult decisions need to be made regarding which technologies to support with funding for research and development and, when the time comes, the infrastructure necessary to transition to a post-oil economy. These will be driven by a balancing of economic and environmental costs, as well as by international politics in the broadest sense. A key issue will be climate change. As ITPOES notes: “In the medium term, the need to reduce greenhouse gas emissions will limit the options available in dealing with the effects of peak oil.” [2] The worst offenders in this regard are unconventional sources of oil and gas, which emit more carbon than their conventional counterparts. However, it should be noted that the alternative—a move away from carbon-based liquid fuels—will only be as green as the electricity needed to produce hydrogen or recharge batteries.
Although the UK is a net oil importer, there are many other countries in worse situations. These include those developed countries more heavily dependent upon imports than the UK (including the United States), which imports 70 per cent of its oil), as well as oil-importing developing countries, which tend to be more reliant upon oil for GDP growth than developed countries and, therefore, more susceptible to economic downturn in the event that oil prices rise. [2] Both of these factors will tend to facilitate international cooperation to mitigate the impact of global peak oil through technological progress. This imperative, however, is yet to gain prominence in international politics. The same can be said for UK politics: a recent review of international and UK energy security commissioned by the former Prime Minister and conducted by Malcolm Wicks MP, his Special Representative on International Energy Issues, exhibits far less concern than contemporary reports such as that of ITPOES. [4] There is a risk that political leaders will not be galvanised into action until peak oil is recognisable ex post, by which time the opportunity for a smooth transition to new technologies may have passed.
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Implications |
The possible implications for the UK of unmitigated peak oil include:
• Higher electricity prices: the UK derives a large proportion of its electricity from gas, the price of which closely follows that of oil.
• Higher goods prices: because all goods (including intermediate goods) require transportation to their point-of-sale, and also because some goods are made using oil or gas as an input (e.g. nitrogen fertiliser).
• Possible severe economic downturn, forcing lifestyle changes and raising the cost of living and, hence, welfare.
• Declining global trade due to higher transport costs. This, in combination with a lower currency, will make the UK agricultural sector more competitive, at least in domestic markets.
• All else equal, the relative wealth of the UK will decline vis-a-vis oil exporters, but will likely increase vis-a-vis states more dependent upon imported oil, especially those whose economic growth is heavily dependent upon oil. As the UK’s supply of North Sea hydrocarbons is in steep decline, the relative position of the UK will worsen with time.
• International cooperation on climate change will influence, and be influenced by, efforts to achieve international cooperation on peak oil.
• Possible for conflict (internal and international) over increasingly scarce oil resources. Positive feedback is then likely, because political instability would destabilise prices even further.
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Early indicators |
Although oil prices fell as a result of the 2008 financial crisis, there is still evident a structural upwards shift in oil prices, corresponding with the emergence of China and India.
Growing acceptance of the peak oil phenomenon has given rise to numerous studies which aim to predict the timing of the peak, and the impacts which will result. Several of these studies have been commissioned by the UK government.
In the last decade, the government of Saudi Arabia has introduced reforms to diversify the national economy and thus limit dependence upon oil revenue. [5]
See also [Sigma Scan issue paper 472].
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Drivers & Inhibitors |
Drivers:
The supranational scale of the problem will drive international cooperation once leaders are galvanised into action. (Geopolitical tension over remaining oil resources may, however, inhibit cooperation.)
Oil price drives up profits of oil companies and thereby the power of the oil industry lobby.
Price of investing in alternative energy resources (change from ‘new technologies’).
Inhibitors:
Cost of investing in new technologies.
Uncertainty regarding the timing of peak oil, and the ensuing rate of production decline. This discourages private investment into new technologies, creating a need for government intervention. However (and ironically), the same uncertainty may also reduce political will to act.
Oil prices are currently suppressed by the recent global financial crisis. This has led to cancelled investment in new capacity (which may affect the timing of global peak oil ). There is a risk that it has also discouraged urgently needed investment into emerging technologies. [3]
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Parallels & Precedents |
Growing international awareness of – and cooperation to combat – anthropogenic climate change.
Although temporal in nature the oil price experienced sudden peaks and associated impacts on the world economy during the 1973 and 1979 oil crises. |
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| The contents of this paper were provided by the Outsights-Ipsos MORI Partnership. Any views expressed are independent of government and do not constitute government policy. |
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