On Wednesday, the Financial Times published excerpts from a leaked draft of the report.

The findings suggest the world will struggle to produce enough oil to make up for steep declines in existing fields, such as those in the North Sea, Russia and Alaska, and meet long-term demand. The effort will become even more acute as prices fall and investment decisions are delayed.

The IEA, the oil watchdog, forecasts that China, India and other developing countries’ demand will require investments of $360bn each year until 2030. Even with investment, the agency says the annual rate of output decline is 6.4 per cent.

Unless you have been living under a stone in recent months, you will not have failed to notice that the financial markets are in meltdown and coupled with a dramtic fall in oil prices many oil production projects are being mothballed.

The Financial Times notes that the draft EIA report was written a month ago and may be modified due to the deteriorating world financial situation and the decline in demand and oil prices in recent weeks. If the IEA’s final version of the report continues to hold that world oil production will soon be declining at 6 to 9 percent a year it should have a major impact on governmental thinking about the future of energy. The IEA has released a statement saying that the Financial Time’s article was indeed based on a dated draft that has since been revised and that the Agency would have no comments until the publication is formally released in November.

Richard Heinberg (pictured) points out that “considering regular crude oil only, this means that 6.825 million barrels a day of new production capacity must come on line each year just to keep up with the aggregate natural decline rate in existing oilfields. That’s a new Saudi Arabia every 18 months.”

Heinberg says that “If nine percent is even close to being the final figure, then it’s absolutely clear: July 2008 was the all-time peak in world oil production. Don’t expect anyone at the IEA to officially admit that fact until 2025 or so. But among those who pay attention to the evidence and the terms of the debate, further ink need not be spilled in speculation.

Peak oil is history.”

Calling Saves Miles

The survey by small business specialist telecoms provider Unicom asked car drivers from 98 companies to state what proportion of their day-time car journeys on business were absolutely necessary. “We wanted to find out whether they could have achieved the same result by making a phone call or arranging a conference call,” said Tony Eagleton of Unicom.

“28% said all of their journeys were necessary; 17% said that only 80% of their journeys were necessary; 19% said that 60% were necessary; 23% said that 40% were necessary, while just 9% said 20% were necessary and 4% said absolutely none of their car journeys for business was necessary.

Significant Savings

“Overall, therefore, it works out that a staggering 36% of business journeys by car could be replaced by a telephone call or conference call,” said Eagleton. “The responses indicate that as oil prices hit another record high there is a significant potential saving to be made by businesses.”

The question is at what price point will business adjust the way it works. Many years of low prices have lulled most of us into thinking that high prices are only temporary and do not reflect the start of a fundamental shift.

Reshaping American Lives

Although paying much lower prices, a front page report by USA Today (9th May 2008) says that Petrol costs are already reshaping daily life in the USA. The Gallup poll taken by 1,017 adults on 2-4th May says that 84% have started consolidating errands or taken other steps to cut back on daily driving. Concern is rising as 71% say that rising prices have caused financial hardship for them or their household.

Rather than a temporary fluctuation, 78% of Americans now see the price rise as a permanent change in prices, with just 19% still thinking they are temporary. In August 2003, 65% thought ‘high’ prices were temporary falling to 36% in 2005.

Pump Prices

However if Americans think prices are high, they are clearly living in another world to the rest of us. While happily consuming a third of world oil production, they rank 111 among countries in the price of petrol at the pump. An article in Le Monde (10 May 2008) sourcing ARINC puts Bosnia Herzegovina at the top of the list paying $10.86 per gallon at the end of March. The UK is 4th paying $8.38, with France paying $8.07. The paper says petrol is $3.45 per gallon, although USA Today reports prices have risen to $3.65, up from $3.034 a year ago. The cheapest places to buy petrol you probably guessed are in oil exporting countries: In Veneuela it is only $0.12 and Iran which recently introduced petrol rationing $0.40.

The issue is the price that an economy bases its price assumptions on. Any change from that level affects the whole economic system. With still so much denial of Peak Oil, it seems inevitable that price rises will create sudden economic shocks to countries around the world.

The talk was organised by the All Party Parliamentary Group on Peak Oil and Gas (APPGOPO) and took place at Portcullis House in Westminster on 16th January 2008. The evening was chaired by Liberal Democrat MP for Birmingham, Yardley John Hemming and Chair of APPGOPO.

Peak Oil Definition

Davies placed himself firmly as a Peak Oil denier on the basis of his definition of Peak Oil as
‘the risk that the world’s oil production will decline in the near future as a result of the progressive depletion of the world’s oil resources’.

Investment Key To Oil Supply

He repeatedly emphasised that there is adequate supply of oil if enough investment is made. Indeed he repeated this so often in the course of the evening that one began to conclude that this is the caveat that will be referred back to when supplies get tighter.
“There have been many predictions of Peak Oil” he said, “but for over a century production has exceeded consumption. Oil reserves today are not scarce and an imminent peak in production is not likely. It will occur at some time but not soon.” However responding to questions about the risk of a peak in production, Davies advised the UK government to monitor Peak Oil and to address the investment issue with the producing countries.

Davies reminded the audience that statistics complied by BP show the world has proven oil reserves of 1.2 trillion barrels, enough to sustain current output for 40 years. However he admitted that reserve estimates are “subjective and not objective, it reflects government estimates of what can be recovered with today’s economics and technologies. Different governments use different methodologies and have different levels of certainty.”
For example Davies said that OPEC members have not done a full appraisal of how much oil reserves they have as they have not need to while they are able to supply as much as they need. He also noted that some countries have not done horizontal drilling and when they do reserves will increase by 10%.
John Hemming MP described peak oil as a “live issue”, and that massive increases in stated OPEC reserves in the 1980s were not reliable. Likewise former Shell & BP geologist Jeremy Leggett suggested that the risk of an early peak in global oil production was much greater than BP believed. He pointed to Kuwait as not having 90 billion barrels and instead only having 40 billion or even 20 billion barrels.

Increasing Reserves

Another of Davies’s reasons for denying Peak Oil is that world oil reserves continue to rise. “For every barrel of oil that is consumed at least another barrel of new oil is added to reserves. Since 1990 world proved oil reserves have increased by 25% during which time world oil production has also increased by 25%.”
Davies confidently stated that economics matters as well as geology. “The higher the price, the more can be extracted” he said. He stated that it was possible to boost world oil production to 100 million barrels per day. “This is achievable in resource terms but it does come down to how much investment is going to take place.” However others in the industry such as the chief executive of French oil company Total, have questioned whether this is achievable in recent months.

Environmentalists Will Reduce Demand For Oil

Davies did admit that we shouldn’t be complacent pointing to “Rising population and the need for investment especially in the resource rich countries.” He repeated that “The risk is not a resource risk but at the rates of investment.”
He also pointed to the impact oil consumption has on the environment predicting that if global oil production peaks in coming decades it will be because of declining demand, not supply. “I believe there is a realistic possibility that world oil production will peak within the next generation as a result of peaking demand” he said adding that “There’s a distinct possibility that global oil consumption could peak as a result of climate policies. My suspicion is that we will run out of demand and move to a world beyond oil.” While many would see this as fanciful on current progress towards reducing demand, it perhaps reflects a concern within the oil industry.

Contracting Constraints

Asked to explain the current high prices of oil, Davies said there were two reasons for this. Firstly OPEC production has been cut in order to sustain prices and secondly concern by markets about a future Peak Oil and also lack of investment.
Confusingly Davies then said that the industry is spending every dollar that it can and that the constraint was in the contracting industry which would be there for the next decade.
“When oil was only $10 a barrel in 1990, the contracting industry shrank and now while demand has risen along with higher prices, the human resource can’t just be turned on like a tap. Indeed having repeatedly emphasised the need for investment, he questioned whether there were in fact enough opportunities to invest in the industry. With prices at around $90 a barrel, this could lead oil producing countries to conclude that they are getting enough revenue already and so not invest in infrastructure.

Affordability Issues

The strict definition of Peak Oil that Davies adhered to being oil depletion ignored the potential for economic effects that arise from restricted supply for other reasons such political turmoil. He agreed that we may have higher oil prices depending on the rate of investment. Responding to a question that with oil around $90+ a barrel, Peak Oil was already being experienced for many countries, he agreed that “there are issues on fuel poverty, affordability and the income distribution effects.”
In my book that is Peak Oil. Welcome to the new double speak world of available but unaffordable oil.

Research published by car insurer esure reveals that petrol prices would have to almost double to £1.83 to stop drivers reaching for their car keys.

Driving Whatever The Cost

The “carry on pumping” poll commissioned by esure and conducted in May 2006 by ICM on a random sample of 644 drivers, demonstrates that a massive majority of motorists in the UK (55%) would never part with their cars in favour of public transport – regardless of cost.

One in three drivers display an incredible disregard for the amount they fork out for fuel, not monitoring the cheapest petrol prices in their local area, never mind driving the extra mile to get the best budget deal.

The research also reveals that 37% of motorists will not consider replacing their car with a more fuel-efficient or environmentally friendly car in the next three years. The vast majority of motorists (79%) haven’t changed their attitude to buying petrol despite the threat of huge price rises.

Although there are a number of fuel-saving practices that drivers can easily adopt to increase the miles per gallon their car can achieve, 72% of drivers do know what to do, don’t make the effort to put these into practice or monitor their car’s fuel efficiency.

Food Miles

What this poll unwittingly reveals is how little most people are aware of how deeply oil is embedded into our way of life. Oil is the essential and main ingredient not just in transport but everything from our medicines to clothes and most importantly our food. Used in fertilizers, pesticides and to transport it to the shops – our food is awash in oil.

Food travels further these days partly because the centralised systems of supermarkets have taken over from local and regional markets. It defies common sense, but a pint of milk or a crop of potatoes can be transported many miles to be packaged at a central depot and then sent many miles back to be sold near where they were produced in the first place.

Food transport accounted for an estimated 30 billion vehicle kilometres in 2002, of which 82%
are in the UK and The Department for the Environment, Food and Rural Affairs (Defra) says that food miles rose by 15 per cent between 1992 and 2002. So an increase in transport costs will have a direct impact on the cost of food.

What Level Economic Impact?

As the price of a barrel of oil continues to rise without much apparent effect on western economies, the Financial Times speculated recently that the price per barrel would need to reach around $130 before it had significant impact.

We have built distribution systems on the basis that there will continue to be unlimited supplies of cheap oil – and that using it has no impact. None of this is true and we are soon to be faced with the consequences.

This tendency to ignore rising prices may prove to be a benefit in enabling society to adjust to the effects of Peak Oil, rather than as some predict going into a tailspin. Time will tell.

 ”The most alarming finding is the steep decline of the oil supply after peak”, warns Jörg Schindler (pictured right) from the Energy Watch Group. This result, together with the timing of the peak, is obviously in sharp contrast to the projections by the International Energy Agency (IEA). “Since crude oil is the most important energy carrier at a global scale and since all kinds of transport rely heavily on oil, the future oil availability is of paramount importance as it entails completely different actions by politics, business and individuals.”, says Schindler.

This cautious energy outlook corresponds with statements made by former US Defense Secretary and CIA Director, James Schlesinger, who said at ASPO oil summit in Cork in September 2007: “The battle is over, the oil peakists have won. Current US energy policy and the administration’s oil strategy in Iraq and Iran are deluded.”

Renewable Energy Blocked

However, until recently the International Energy Agency denied that a fundamental change of energy supply is likely to happen in the near or medium term future. Hans-Josef Fell MP, a prominent member of the German Parliament, is clear: “The message by the IEA, namely that business as usual will also be possible in future, sends a diffusing signal to the markets and blocks investments in already available renewable energy technologies.

Remaining world oil reserves are estimated to be 1,255 Gb (Giga barrel) according to the industry database HIS (2006). For the Energy Watch Group (EWG), however, there are sound reasons to modify these figures for some regions and key countries, leading to a corresponding EWG estimate of 854 Gb. This oil supply outlook does not rely primarily on reserve data which in the past have frequently turned out to be unreliable. Hence the EWG analysis is based primarily on production data which can be observed more easily and which are more reliable.

Peak Oil Is Now

“The oil boom is over and will not return. All of us must get used to a different lifestyle.”, said King Abdullah of Saudi Arabia, the largest global oil producer. For quite some time, a hot debate has been going on regarding peak oil. Institutions close to the energy industry, like CERA, are engaging in a campaign trying to debunk peak oil as a “theory”. However, the EWG report shows that peak oil is real. The world is at the beginning of a structural change of its economic system. This change will be triggered by a sharp decline of fossil fuel supplies and will influence almost all aspects of daily life. Climate change will also force mankind to change energy consumption patterns by significantly reducing the burning of fossil fuels.

Anticipated supply shortages could easily lead to disturbing scenes of mass unrest as witnessed in Burma this month. For government, industry and the wider public just muddling through is not an option anymore as this situation could spin out of control and turn into a meltdown of society.

Culture Of Denial

“My experience of debating the peak oil issue with the oil industry, and trying to alert Whitehall to it, is that there is a culture of institutionalised denial in government and the energy industry. As the evidence of an early peak in production unfolds, this becomes increasingly impossible to understand”, says Jeremy Leggett, the Solarcentury CEO and former member of the British Government’s Renewables Advisory Board.

The full report can be downloaded here: Crude Oil - The Supply Outlook