David Strahan, author of The Last Oil Shock writing for Prospect magazine.
The Stern review on the economics of climate change was published to almost universal acclaim, and six months on, only a handful of economists have found anything to criticise. In one sense, Stern’s conclusions were entirely predictable. Now that climate change so clearly has a pistol at the head of our species, there could only be one response, irrespective of cost. But there was also a surprise: paying off the highwayman of climate change would not be extortionate. In fact, it would be an absolute steal. Stern concluded that if we do nothing, the effects of climate change could shrivel the global economy by as much as 20 per cent over the next two centuries. Avoiding that risk would cost only about 1 per cent of world GDP to 2050.

Some economists charged Stern with minimising the costs of mitigating climate change and exaggerating the threats. Since climate change is already stirring positive feedback loops that could spark runaway global warming of the kind that caused the Permian mass extinction 250m years ago—the one that wiped out 95 per cent of species on the planet—these critics are as wrong as only economists can be. But that doesn’t make Stern right. His review is indeed based upon a mistaken assumption—but one which means our situation is even more dangerous than his analysis allows.

Stern asks rhetorically whether there are sufficient fossil fuels to fulfil economic growth forecasts, or whether fossil fuel 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.” 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 regurgitated the facile assumption that because the available resource is large, there will be no problem with supply in the foreseeable future.

Graph
[Source: Resources to Reserves © OECD/IEA, 2005, Figure ES.1, p.17] 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 reassuring. The light blue box on the left 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 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 86m barrels we consume every day. In the graph, this includes all the categories to the left of “Arctic.” 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, which have so far produced very little. Stern’s 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 when at least half the oil that will ever be produced is still underground. The big question Stern ignored is when this point will arrive for the world as a whole. The evidence is not encouraging.

Conventional oil discovery has been falling for 40 years; for every barrel we discover, we now consume three; oil production is already in 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 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 realistic assessment of Opec’s reserves, the cartel’s production could peak by 2015.

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 1m 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, chairman of the Alberta Energy Research Institute and a cheerleader for the oil sands, Alberta can produce no more than 3m barrels of oil per day on its existing water supply. “There’s nothing in sight that will solve the water issue,” Bolger told me.

Other non-conventional resources are likely to produce even less than Alberta. 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, and 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 3m barrels per day by 2035. Meanwhile, conventional oil production could have fallen by 30-40m barrels per day.

Any thoughts that “green” alternatives such as biofuels or hydrogen could fill the gap are also misplaced. There simply isn’t the land to produce enough biofuel to replace crude. 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 per cent 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 per cent 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 nuclear power stations; solar panels covering every inch of Norfolk and Derbyshire combined; or a wind farm bigger than the entire southwest 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, 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 per cent by 2050, economic contraction is hardly the optimal way to achieve the target.

What makes Stern’s omission the more surprising is that two of Tony Blair’s closest advisers believe global oil production will peak by around 2015. David Manning—Blair’s chief foreign policy adviser in the run-up to Iraq—seems to think it will come at “some point between 2010 and 2020,” while chief scientific adviser David King told me 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?