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THE DANGER OF GETTING OIL WRONG

by David Lewis
The Press, 25th January 2005

 

In October the government released a discussion paper on our sustainable energy future. In line with recent Peter Hodgson speeches it raises the dual challenges of global warming and peak oil production.

The earlier issue you’ve heard of, the latter probably not. If you read the discussion paper you learn that a ‘middling view’, between the extremes of 2010 and later this century, is that we will confront peak oil in approximately 2037. This ‘middling view’ is based on data from the International Energy Agency and the US Geological Survey.

Still, what is peak oil, why is it important, and is 2037 really a ‘middling view’?

Peak oil is the point when oil production peaks and begins to fall. This phenomenon was first modelled by M.King Hubbert, and often goes by the name Hubbert’s Peak. In 1956 Hubbert predicted that US oil production would peak in the early 70’s. He was rubbished at the time by many in the industry but as stated in a recent speech by Peter Hodgson “his prediction eventuated right on time”. He later predicted a peak for world oil production in the mid-1990’s. This time Hubbert was incorrect, but is he now 40 years out as our government assumes?

Our western lifestyle is characterised by the amount of energy and resources we use. Hydrocarbons are both energy dense and easily transportable, which has made them ideal for transport. Passing the oil peak will therefore have a major effect on our economy. Once the oil production peak passes demand will outstrip supply for conventional oil as production falls yet demand continues to rise. This will create a situation where demand outstrips supply, and the resultant price increases which will ripple through all aspects of our economy. Getting this call wrong is major policy mistake.

Recently in Australia on ABC radio Dr Ali Samsam Bakhtiari, a senior planning expert with the National Iranian Oil Company, predicted a future petrol price in Australia of three to four dollars a litre. His date for peak oil was 2006 to 2007, and not 2037.

Dr Ali Samsam Bakhtiari is one of a group of prominent individuals who believe in imminent peak oil. Members of the group include Colin Campbell (an oil geologist who has held management positions at major oil companies), Kenneth Deffeyes (a professor at Princeton), Matthew Simmons (owner of the world’s largest specialist energy investment bank). Recent events could be a portent that they are correct.

A quick search of the internet shows anybody willing to take the time that 2037 is far from a ‘middling view’, but in fact one of the most optimistic. Unless we find an alternative to oil quickly (and our government admits this isn’t likely) then the US Geological Survey (USGS) data needs to be correct. The sustainable energy strategy outlined in the government discussion paper is based around this scenario. The future oil price on which the government bases its economic planning is also based on this scenario.

Unfortunately the USGS is not politically neutral. In 1968 the USGS released predictions of US oil production showing continuing production growth far into the future. This report was discredited in 1974 but not after it had done serious economic damage due to errors in economic planning.

History appears to be repeating itself. Recently on Channel 4 news the retired head of exploration at the Saudi state owned oil company Aramco, Sadad Al-Husseini, had this to say about the USGS estimates. “They’re not only overestimating the Middle East, but they overestimate non-Opec, they overestimate Russia, they overestimate the whole global resource base. And I think this is a rather dangerous situation for the US government policy to be based on.”

Sadad Al-Husseini has accused early peak oil advocates of understating Saudi reserves. However, Saudi’s have treated oil reserve numbers very much like state secrets, so much so that Mathew Simmons had his staff review 200 engineering reports to develop a fuller picture. He recently painted a picture in which Saudi production could start going into a terminal decline in the near future. Therefore, a ‘middling view’ may well be somewhere between Sadad Al-Husseini and Mathew Simmons.

In late August, in a response to a question by Jeanette Fitzsimons, Dr Cullen denied knowledge of peak oil in the house. This is interesting as the challenges of peak oil and global warming were the finishing note of Peter Hodgson’s speech in Christchurch three weeks before. Dr Cullen chairs the infrastructure group of ministers that would discuss such issues. Also, in his reply he discusses the Canadian oil shale reserves. This was a curious choice as these reserves are usually given as an example by industry players (such as Peter Davis, chief economist at BP) to undermine peak oil. Furthermore, one of the more extreme early peak oil activists in this country has been sending information (emails, faxes, DVD documentaries, audio interviews, etc.) to MPs on both sides of the house and government officials for a number of years. It is surprising that no MP further pursued Dr Cullen given that every MP has been so lobbied (refer here to see what your MP received).

It needs to be stated here that it is not in the interests of many businesses, particularly those keyed into globalisation, to push peak oil. Our elected officials may consider preaching abstinence a vote loser, but for most businesses it is a profit loser.

What should our government and businesses be doing? As a minimum the prudent approach would be to do the ‘things we know we should be doing anyway’. For example the government could be altering the car tax system so car tax is lower for small cars and petrol tax is higher. This revenue neutral scheme was proposed by the Liberal Democrats by the UK and eventually copied by Labour. Other initiatives could include mandated minimum insulation levels on all buildings, which would improve public health and lower energy consumption. Similarly, Air New Zealand could opt to re-equip only with Boeing 7E7 Dreamliners, which are extremely fuel-efficient compared to rival products.

Importantly, individuals can also make informed decisions to hedge their bets. Initiatives could include decreasing the distance to work, decreasing debt, solar hot water, investing in renewable energy, and not getting rid of the fruit trees and vege garden to create ‘an outdoor living space’. In particular, eating food that is local and seasonal not only tastes better (as every television chef tells us) but also massively decreases the energy used in food distribution.

Our farming community will have major difficulties as products become more difficult to get to market, and the costs of food production rise. It may surprise you to know that it take 68 calories of energy to make one calorie of factory-farmed pork. The more intensive the farming method generally the higher the energy input. This puts a question mark against the current trends to dairy farm conversions (additional energy in irrigation and production). Conversely, the farmer who stays with sheep farming may well enjoy watching the price of synthetic fibres rise. It isn’t a time to rush out of farming, more a time to consider what we can grow and sell. Many countries will find that with oil more expensive their farming methods will not be able to economically produce surpluses to dump, or even feed themselves. Although our food production will also probably decline we’ll still have a surplus to sell.

Our living standard will also be impacted because it will be difficult to replace oil for many uses. Transport, plastics, and some medicines will be particular problems. Peak oil will take our standard of living backwards but less than most due to our agricultural capacity and renewable energy endowment. If we are careful the fundamentals should stay. It is largely the frills of our life we will lose. Remember it is our frills that give us problems such as increased childhood obesity. Not everything we lose will be a cause for regret.

One journalist commented to me that this issue is scary. Remember that a prepared New Zealand may be poorer, but an unprepared one will be poorer still. We can probably choose which decade of the 20th century we wish to effectively end up by our private and public preparedness. Personally, I’m not too scared of New Zealand ending up with a standard of living equivalent to the late 1960’s, which was an era of full employment and relative wealth. What is worrying is that we could end up somewhere worse.