Oil production fears fuel grim economic warnings

As the oil price nudged above $64 a barrel this month on heightened concerns about disruption to supplies from Iran and Nigeria, a group of geologists, economists and commodity traders met in London to consider a more fundamental question: when will the world begin to run out of oil?

That moment is known as "peak oil" - the point at which production stops increasing and goes into inexorable decline. Some commentators believe that moment may be as little as two years away, some reckon we do not need to worry for another 20 years and some think the peak of production is so far in the distance that it is pointless to even try to put a timescale on it.

But one thing that is agreed on is that when peak oil does happen, its impact on the world economy - and the consumer lifestyles so many of us take for granted - will be profound.

Chris Skrebowski, editor of the Energy Institute's Petroleum Review, believes peak oil will occur in 2008, at which point the world will move into "a land without maps where we are all likely to be poorer".

For oil is essential to almost everything we do - 90 per cent of world transport is oil-dependent; all petrochemicals are produced from oil; 99 per cent of our food relies on oil in some way; and 95 per cent of lubricants are oil-based. And, in many cases, oil is not easily replaceable.

There are no realistic alternatives to oil for fuelling aircraft and ships, producing petrochemicals or powering cars, without huge investments in technology such as hydrogen.

Given that world oil consumption has doubled since 1970 from 42 million barrels a day to 84 million, that poses a stark challenge. At present rates of depletion, five million barrels a day of new production will need to be brought on stream for the next 10 years just to keep world output rising.

The peak oil debate tends to divide into two camps. On the one hand there are geologists who argue it is almost upon us, based on analysing past production and discovery rates and field exhaustion and extrapolating into the future.

On the other hand there are economists, political scientists and the oil majors who believe that oil producers - be they governments or companies - will always find a way to meet demand, whether through cleverer ways of finding and extracting oil or greater fiscal incentives to discover and produce more.

The conference in London, organised by the Dutch investment bank Insinger de Beaufort, represented both strands of opinion.

Skrebowski says that the world's big five oil majors all produced less last year than they did in 2004 while North Sea oil production is declining so rapidly that it will halve in the next seven years.

According to the University of Reading's Dr Roger Bentley, secretary of the Association for the Study of Peak Oil & Gas, the evidence is irrefutable. He points out that 64 of the world's 100 or so oil-producing countries are past the point of peak production and on the downward slope. Although there may be a "mini-glut" as output is stepped up from Russia, the Caspian and Iraq and new sources come on stream such as deepwater oil and oil sands, the trend, he says, is unmistakable.

Bentley believes that non-Opec production will reach a peak within the next 30 months and global output will start to decline between 2010 and 2015 or 2020 at the latest.

"Alongside global warming, this is one of the two extraordinary challenges facing mankind," he says. "The numbers may slip a little but the fundamental underlying direction does not change."

Dr Jeremy Leggett, an oil industry geologist turned environmental campaigner turned chief executive of a solar energy company, paints an even more apocalyptic scene. He believes that peak oil will occur some time this decade. That will not only produce "horrible economic pain" as oil prices rise to choke off demand but it will also precipitate environmental disaster as oil-consuming countries switch to coal and hasten global warming.

"The shortfall between current expectations of oil supply and actual availability will be such that neither gas, nor renewables, nor liquids from gas and coal, nor nuclear, nor any combination thereof will be able to plug the gap in time to head off economic trauma," he warns.

What is his evidence? Dr Leggett points to the lessons of history. In 1956, a world-renowned geologist, M.K. Hubbert, predicted that US oil production would peak in 1971, much to the disbelief of almost everyone, including his employer, Shell. He turned out to be wrong - peak production occurred a year earlier in 1970.

Using the same methodology, the "Hubbert curve" falls smoothly to this day, pointing to a peak some time between 2005 and 2010. Despite the ingenuity of the oil industry in extracting oil from ever more hostile environments, it is, adds Dr Leggett, a quarter of a century since the world discovered more oil in one year than it produced.

Six years ago there were 16 discoveries of giant fields containing 500 million barrels or more - in 2003 there were none.

Not all those attending the conference are sold on the idea of peak oil. Mike Lynch, an adviser to the US Government who runs his own energy and economic research consultancy, is one sceptic. He says that the study of peak oil is not a science and that those who advocate it are guilty of naivety, ignorance and plain manipulation of the data.

"There are a lot of zealots out there and a lot of claims are made which are not tested," he says. "It is true that oil is finite but since 1989 people have repeatedly predicted the peak too soon and have had to keep on increasing their estimate of reserves."

Lynch is one of the few pundits who forecasts that oil prices will begin to ease, but as even he jokes: "I have predicted nine of the last two price decreases."

- INDEPENDENT