As growth in oil production slows and global demand
continues to rise, sustained high oil prices and price spikes will have a
significant impact on the economy, in effect placing a glass ceiling on
economic recovery
The analysis presented in this report shows that this threat
is as real and as imminent as was the banking crisis in the middle of the past
decade. Without bold and imaginative action, the consequences will cast a
shadow on generations to come. Unemployment, underfunded essential services,
recession, and depressed and crippled economies provide daily reminders of what
the future will hold.
Oil prices and the recession
In the last year, the International Energy Agency (IEA), the
International Monetary Fund (IMF), and the G7 have warned that high oil prices
have likely been constraining economic recovery from the Great Recession.
Slowing the rate of decrease in oil production can only be
achieved by a potential doubling of the price of oil over the next decade. This
is likely to usher in the phenomenon of ‘economic peak oil’. In this report, we
define this as:
...the point at which the cost of incremental supply exceeds
the price economies can pay without significantly disrupting economic activity
at a given point in time.
Beyond this ‘pain barrier’, the level of oil prices will
have a dramatic effect on a nation’s people and its economy, threatening
stagnation and hardship.
Using this definition of economic peak oil, our analysis
provides a new method for determining the likely timing of peak oil, compared
to the more common method of simply looking at new capacity, subtracting
depletion, and balancing that against the most likely trajectory for growth.
We find that both approaches seem to point to 2014/2015 as a
crunch period.
A crisis of the cost
and availability of transport fuels
In this report we argue that the current economic crisis is
neither an oil crisis nor an energy crisis, but a crisis related to the cost
and availability of transport fuels – gasoline, diesel, jet kerosene, and ship
bunker fuel. These liquid fuels account for up to 80 per cent of all oil usage.
Transport fuels link all elements of the economy. If every
linkage costs more due to sustained high oil prices, all costs will increase,
the economy will slow, and inflation will rise.
The vulnerability of
oil-importing economies
Nations that are increasingly dependent on oil imports face
two threats over which they have very little control.
First is the increasing consumption of oil in the producers’
own countries. Saudi Arabia, traditionally the largest oil exporter in the
world, exported less oil in 2011 than it did in 2005 or even 1985. This is
despite large increases in production in recent years.
Second, some importing countries may be better able to
accept higher prices for oil.
In mature high-consuming economies like the USA, oil prices
greater than $90 per barrel will have a significant economic impact. However,
industrialising economies, such as China, are thought to be able to tolerate
prices in the $100–110 per barrel range.
Softening the impact
of high oil prices
Softening the impact of high oil prices can only come from
three sources: greater supplies of low-cost oil, greater efficiency in use of
oil, or a transition to a low carbon economy.
New sources of low-cost oil: No new sources of low-cost
supplies are known. For example, optimism about shale oil fails to recognise
that the additional supplies represent a higher cost. As oil is priced by the
cost of incremental supply and this is a high cost, significant falls in oil
prices can only occur if there is a major recession or depression, similar to
that seen in the second half of 2008.
Improved efficiency in oil use: Greater efficiency in use
occurs continuously, but it is relatively slow, occurring at a rate of just 2–3
per cent a year. A major drive to increase efficiency in use could be achieved
through government incentives and regulation, but demand management would be
necessary to avoid increases in efficiency leading to growth in demand – the
so-called rebound effect.
Transition to a low carbon economy: The transition to
low-carbon economies will reduce the impact of high oil prices. Yet despite the
need to and the knowledge of how to make this transition, the policies to
manage the economy in this way remain mostly absent and slow to progress.
Supporting the
transition to a low carbon economy
The only option to soften the impact of high oil prices that
is likely to meet the magnitude of the challenge is a transition to a
low-carbon economy. But this will require political leadership and policy
certainty to create a long-term, sufficient and consistent incentive structure
for renewable energy.
We recommend the government employs available and new
mechanisms for public sector finance, such as a Green Investment Bank to change
investor behaviour in favour of new, low carbon sectors.
Adaptive responses such as investment into mass public
transit systems, more efficient vehicles, people travelling less due to home
working, and cheaper, low carbon energy alternatives will also all help.
The urgent need for government contingency planning
In addition to issues of security and sustainability, the
impact of economic peak oil is another important reason to reduce an economy’s
energy intensity and dependence on oil.
Historical evidence shows that shocks lie in wait for
unprepared nations. Well prepared economies, however, should still prosper.
Because of this, we recommend urgently that:
- The government make public any assessment it has
made on scenarios for economic peak oil and its likely impact on the UK economy
and population.
- The government make public what, if any,
permanent institutional mechanism, beyond the current Civil Contingencies
Committee (COBRA), has a remit to assess the overarching implications of
economic peak oil for the UK.
- The government make public which major spending
departments have contingency plans for peak oil, and what the assumptions
behind any such plans are.
- Should any major UK economic sector lack
official contingency planning for economic peak oil, the government should
explain why, and with what confidence such plans are absent.
ABOUT THE AUTHORS
Victoria Johnson is a senior researcher and head of climate change and energy at the New Economics Foundation (NEF). Victoria is working on a number of different projects that explore the interaction between climate change and social justice both in the UK and internationally. Her particular research interests include: the social impacts of technological ‘Magic Bullets’, energy equity, social justice and carbon trading, climate change and human rights, the feasibility of green/sustainable growth and potential changes to lifestyle, politics and economics in a post-carbon world in the context of climate change policy and peak oil.
Andrew Simms founded the climate change, energy and interdependence programmes at NEF
and is author of Ecological Debt: Global Warming and the Wealth of Nations (2009). Described by New Scientist magazine as ‘a master at joined-up progressive thinking,’ he was co-author of the groundbreaking Green New Deal report and co-founded the Green New Deal group. Until the end of 2010, he was Policy Director at NEF. Andrew writes regularly for the national press and is on the boards of Greenpeace UK, the climate campaign 10:10 and The Energy and Resources Institute Europe.
Tony Greenham is Head of Finance and Business at NEF, leading the programme of research into reforming the financial sector and aligning the interests of society and business. Since 2010 he has advised the government on regional economic regeneration as a member of the Regional Growth Fund Advisory Panel. Tony is a regular media commentator on banking issues, contributing to various BBC programmes including BBC Newsnight, BBC News 24, Radio 5 Live, as well as Sky News, Channel 4 News and AlJazeera English Newshour, and writing for the Daily Mail, the Guardian and Huffington Post.
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