Policy

Why we must get serious about transport policy

Oil supply going into decline
By Charlie Richardson

There are many reasons why we must reduce our reliance on the car but chief and most immediate of them is that the annual rate of extraction of conventional crude oil from the world's oilfields is reaching a peak, and is about to go into decline. At the same time, demand for petroleum continues to increase. This will soon create a crisis in the world economy, possibly the greatest crisis that the world has ever faced.

Geology
Geology is the fundamental brake on petroleum supply. Oil fields are where they are for geological reasons, and it is geology, too, which mostly governs the speed at which the oil from each field can be extracted.

The fields which gush huge quantities of oil are the biggest fields, the 'giants'. Most were found prior to the 1970s. Many of them are still going strong but some are losing pressure and are therefore delivering their oil more slowly. New giant fields have been found only very rarely since the 1970s.

At present, the world is consuming 26 billion barrels of oil each year on a rising trend, but we are discovering only six billion barrels of 'new' oil each year on a falling trend. This is despite great advances in exploration technology, and literally hundreds of billions of dollars spent over the last decade. Most of the new oil is in smaller fields from which extraction is slow and, usually, expensive. This is obviously a recipe for energy bankruptcy and therefore economic bankruptcy.

Economics

It is in its economic aspects that we can see that oil is without a rival in its core uses, and it is in economics that our addiction to oil is laid bare. Before the age of oil, which began toward the end of the nineteenth century, coal ruled supreme. Britain's huge deposits of high quality coal put it at the forefront of the industrial revolution but, when oil came on the scene, it changed everything. The United States climbed to the top of the economic ladder largely because of its vast reserves of easily extracted oil.

Oil is more economically effective than any other source of energy. The money expended, and, importantly, the energy expended, in extracting oil, gives a greater net energy gain than similar financial and energy expenditures on coal, gas or alternative fuels.

It needs to be remembered that this incredible fuel, referred to by the former Shah of Iran as "this noble substance", is virtually free. Nearly all of the cost of buying it consists of taxes, which flow as a benefit to the people of the nations imposing the various taxes, at both the production and consumption end.

The trouble is, no more of this virtually free fuel is being manufactured. It was created over hundreds of millions of years from the dead bodies of countless billions of microscopic creatures.

As well as oil's great economic effectiveness, it is without rival for certain uses, in particular transport. This is because of the ease of transporting it and delivering precise amounts of it to the vital parts of an engine.

We now live in a global economy that is only possible on its present scale with cheap transport, for which cheap oil is a necessary requisite. The 'oil cost' of all products is built into their price. It is a cost which is added at every stage of a product's development and delivery. Nothing in this world is more generally inflationary than rising fuel costs.

Many economists argue that as oil becomes scarce its the price will rise, stimulating new production. This is true of most goods, and is true, to some extent, of the oil market. But oil is a finite natural commodity and it has a geologically imposed ceiling above which production cannot rise. As well, it is cheap oil, not just oil, that has fuelled economic growth over the past hundred years. This is where the economists' theorising breaks down.

Politics

Politics adds more confusion to this picture, and is one of its more immediately dangerous elements. Political occurrences, rather than geology, are what make the news, and it is politics that can take us into war.

Two-thirds of the world's oil happens to be in one of the world's most politically and militarily volatile regions, the Middle East. The oil producing countries of that region make up the bulk of the Organisation of Petroleum Exporting Countries (OPEC).

During the 1970s, the world was shaken by rapidly increasing oil prices. They came about because OPEC imposed production cutbacks over perceived Western support for Israel following the Yom Kippur war. OPEC was able to do this because it controlled about a third of world oil production. Economic growth went into reverse, inflation hit double digits, businesses fell into bankruptcy, interest rates skyrocketed and widespread unemployment inevitably followed.

An enormous amount of capital flowed into the Middle East, which could not absorb it. This money was therefore deposited in Western banks, which 'pushed' it to Third World countries, becoming the source of much those countries' present debt. The OPEC production cutbacks, and the extremely high oil prices they caused, lasted only a few months, yet they caused all this.

The industrialised world learned a lesson from the experience. It developed fields outside the OPEC block - such as the North Sea and Alaska - in order to reduce reliance on the Middle East. This detracted from OPEC's ability to control world production, and it seemingly fell into oblivion and irrelevancy. By the mid-eighties, oil prices had crashed and the proportion of oil supplied by OPEC dropped to about 18%, causing major financial problems for the producing countries but spurring economic growth in the industrialised nations.

However, all that was a long time ago. The fields that were developed in response to the OPEC cutbacks were nowhere near as large as those of the Middle East, and production from them is about to go into decline, while world demand for oil has increased. OPEC is once again responsible for about a third of the world's production, and is again back in the driver's seat of the world economy. This is confirmed by the present high oil price, again brought about by OPEC production cutbacks.

OPEC is not now driven by politics as it was in the 1970s. Its member countries are simply trying to rebuild their treasuries, which have been severely hit by the preceding years of low oil prices. Loss of export income has caused a dangerous situation in many of their countries. They have had to cut back on many of the welfare programs (social and corporate) and cronyism that assist their governments to remain in power and keep their populations quiescent.

The danger now is that OPEC will be made the scapegoat for higher oil prices, as though it were not geology that has brought this about and is the ultimate constraint on production. By restraining production OPEC is in fact doing the world a great favour. If it were not to do so, the world would go merrily on, burning up precious oil as though there were no tomorrow.

Just as OPEC is able to control price through controlling production, the industrialised world could, if it so chose, influence price by controlling consumption. The ball is as much in the West's court as it is in that of the Middle East. We cannot bleat about Arabs holding us over an oil barrel if we do not address our profligate consumption.

Consequences - sketching a few scenarios

Mention was earlier made of the place of oil in the industrialised world. To add to this, it should be borne in mind that oil is the biggest internationally traded commodity - biggest in volume, in weight, and in monetary value. But oil is not merely a commodity. It is also a catalyst, or rather, it is the substance which, above all others, makes possible the affordability of most of the goods and services that we buy. In turn, the fact that those goods and services are affordable means that people can be employed to produce them. While there are alternatives to the use of oil in many applications, we must bear in mind the scale of our use of oil. There are many ways of providing the motive power to drive a vehicle along a road, but none of them exist in the quantities required to maintain our present activities, and none are almost free, as oil is.

Inflation is rising as a result of the oil price increases of the past year or so. So far, those rises have been moderate compared to the rises that occurred in the 1970s. If the price of oil remains over $30 per barrel for extended periods, the rise in inflation will be inexorable. This will inevitably lead to bankruptcies and redundancies. Purchasing power will be reduced, causing further bankruptcies and layoffs - a downward spiral, negative growth coupled with inflation. This occurred in the 1970s, and a new name was coined for it - stagflation.

Even more seriously, we must bear in mind that something like 20 per cent of the world's oil is consumed in order to bring food to our tables. The oil inputs in food production come about from the use of oil-based fertilisers and pesticides, from the mechanisation of agriculture and from food distribution systems.

Prior to the 'green revolution' of the 1960s, the world had come to the point where it was difficult to produce enough food for the its population. The green revolution, based mostly on oil inputs, boosted agricultural production to the point where it could feed everyone. Famines still occur, but usually related to war and poverty. The world's population is now almost double that prior to the start of the green revolution raising the question: Will we drive, or will we eat?

The oil crises of the 1970s were caused by politics, and solved by a mixture of politics and the opening of new oil fields. There are now very few major oil fields being discovered. The coming oil crisis is being caused, at its root, by geology. Politics cannot do anything about the geological constraints on oil production any more than politics could be expected to prevent continental drift.

But politics can do a great deal about oil demand and consumption. Moving individuals around our urban areas accounts for half of all petroleum consumption, and it is this use which best lends itself to reduction without major damage to the economy. The urgent development of railways and other public transport systems and a total moratorium on freeway construction is required. There needs to be strong disincentives to private car use, and excellent alternatives must be offered. Again, the question is, do we want to drive, or eat?