Fossil fuels are not about to run out. That’s our biggest problem—and our big opportunityby Dieter Helm / March 23, 2011 / Leave a comment
Published in April 2011 issue of Prospect Magazine
Peak oil—the idea that we have passed or are about to pass the physical peak of oil production—is again in fashion. It has been lent impetus by events in the Middle East and North Africa. Predictions abound of imminent price shocks, $200 dollars-a-barrel oil, and an oil-induced Armageddon. We have been here before: it is all very reminiscent of the reactions to the Iranian revolution and the oil price shock in 1979 when oil prices hit $39 a barrel (about $130 in current money).
Belief in this coming Armageddon naturally underpins the case for going green, and in particular for placing overwhelming emphasis on renewables and energy efficiency measures. Current extremely expensive offshore wind programmes (amounting to over £100bn in Britain before 2020) become economic, advocates of this argument say, because the price of the alternative is going to be so high. Energy efficiency becomes more attractive at high oil prices, the argument goes, and hence the demand for energy will fall (at least for the domestic market) thereby offsetting the costs of renewables. Thus the strategy pays for itself.
From an environmental perspective it all looks too good to be true—and it is. Almost all that could be wrong with this argument is wrong—there is no obvious peak in oil production; what matters for electricity is gas (and coal), not oil; and there are few reasons to think that energy demand is likely to fall. Renewables will increase retail prices a lot. The one thing that remains is that offshore wind is about the most expensive means to achieving limited carbon reductions.
Let’s start with the notion of peak oil. It is true that current (conventional) oil reserves are concentrated in the Middle East. There is an Opec premium in the oil price, and right now there is clearly a Libyan premium too, and perhaps more shocks to come. But there is still a lot of conventional oil. Iraq has yet to fully enter the market. It plans to produce more extra oil by 2020 than Saudi Arabia’s entire production today. Saudi has lots of “swing production”—the capacity to produce more to compensate for shortfalls elsewhere. Africa is now a much more important part of the arithmetic. Then there is Brazil, and offshore fields in the US. Add in the enormous reserves in the Arctic as the ice melts, and Russia’s immense reserves, and a rather different picture emerges. Finally, production assumptions are based upon depletion rates typically below 50 per cent of a field’s reserves: add in a bit of technical progress and the story changes substantially.