The International Energy Agency (IEA), the US Department of Energy, and Lloyd’s of London are all warning of an imminent oil supply crunch and price spike. Russel is concerned that all these institutions have made it very clear the world is facing an oil price shock in a few short years and this will have a very significant impact on the world economy.

Says he, “No matter how many new oil wells are drilled, New Zealand’s economy will be hit hard by the coming price shocks. It’s time to face the future rather than stick our heads in the sand in the hope that this problem will all go away”.

Colmar Brunton research commissioned by the World Wildlife Fund (WWF) has shown that 72% of New Zealanders think the Government should prepare now for future oil price rises by investing in alternative fuels and public transport.

It seems Kiwis understand that this is an opportunity to achieve economic resilience in the face of a changing energy landscape. Those countries that adapt by transitioning to a low carbon economy are the ones that will prosper.

Yet National and ACT, supposedly the parties of sound economic management, are so tied to their 20th century approach that they can’t even hear what the rest of the world is saying when it comes to oil. Adding insult to injury, Gerry Brownlee intends to gut the NZ Energy Strategy, a sad response to the changing world energy picture, lacking any kind of a plan to deal with this risk to our energy security.

At least the public see through it. So a reminder to please ensure John and Gerry get the message by making a submission on the draft Energy Strategy by 5pm this Thursday, 2 September.  See our submission guide for help.

Yesterday, National and Act voted down my Government Vehicle Procurement Bill in Parliament — a Bill which sought to introduce minimum fuel efficiency standards for the Government’s fleet of 21,000 vehicles.

My Bill was a reasonable, practical, rather modest way for our Government to show climate change leadership by driving an efficient fleet of vehicles. The Current Government Fleet and Procurement Practice Report (2006) found that, “except for the district health boards, there is significant potential to reduce vehicle size across the fleet”. The current average emissions performance is 210g/km of CO2 (9.2 l/100km).

Earlier this year, Transport Minister Steven Joyce ruled out any kind of across-the-board vehicle fuel efficiency standards, judging them to be heavy-handed and expensive. However, visiting International Energy Agency (IEA), Dr Nigel Jollands, disagrees.

On Morning Report (7.19 mins into the clip) today, Dr Jollands cited New Zealand for lagging behind the rest of the OECD with vehicle fuel efficiency. He said, “There is definitely a role for the government to mandate and regulate fuel efficiency standards of vehicles coming in.”

Why is the world going the way of energy efficiency standards? Because energy efficiency is the most affordable way to confront the challenges of economic development, climate change, and energy security at the same time. Additional up-front costs of applying the standards are more than recouped later with fuel and carbon savings over the working life of the vehicle.

Energy efficiency standards are the low-hanging fruit for longer-term cost savings and energy security. We’ve set out our plan for vehicle fuel efficiency standards in Getting There. We’d set average fuel economy standards for light vehicles coming into NZ and progressively raise them from 2013 to 2019. Importers would be free to meet the average with any mix of vehicles they choose and could trade unders and overs among themselves. Vehicles imported in 2020 would use half the fuel per 100 km compared with current imports. That would save the country 3 Mt of CO2 emissions.

Apparently the report claims a connection between the high oil price in recent years and the financial crisis, which others have been saying for a while, but it would be interesting to hear that from an institution like the IEA. So far I’ve only gotten my hands on the executive summary, which makes no mention of that though.

Other than the eye popping trillion dollars of investment needed each year to ensure oil supply keeps up with demand (last year they were saying only 360 billion…), here are a few things which jumped out at me from the summary:

Quite conservative estimates for oil prices (already too low!)
“Oil prices are assumed to fall from the 2008 level of $97 per barrel to around $60 per barrel in 2009 (roughly the level of mid-2009), but then rebound with the economic recovery to reach $100 per barrel by 2020 and $115 per barrel by 2030 (in year-2008 dollars).”

Acknowledgement of the fact that 450ppm will give us only a 50% chance of hitting the 2 degrees of warming target
“To limit to 50% the probability of a global average temperature increase in excess of 2°C, the concentration of greenhouse gases in the atmosphere would need to be stabilised at a level around 450 ppm CO2-eq”

It ends with an urgent call to action on climate change
“A critical ingredient in the success of efforts to prevent climate change will be the speed with which governments act on their commitments. Saving the planet cannot wait. For every year that passes, the window for action on emissions over a given period becomes narrower — and the costs of transforming the energy sector increase. We calculate that each year of delay before moving onto the emissions path consistent with a 2°C temperature increase would add approximately $500 billion to the global incremental investment cost of $10.5 trillion for the period 2010-2030. A delay of just a few years would probably render that goal completely out of reach. If this were the case, the additional adaptation costs would be many times this figure. Countries attending the UN Climate Change Conference must not lose sight of this. The time has come to make the hard choices needed to turn promises into action.”

SeekingAlpha have done a summary of the executive summary, for the truly rushed among us.

It’s electric. It’s cool. The Model S can make the sprint from zero to 60 mph in 5.6 seconds, crossing the quarter-mile stripe in 14 seconds flat. Give the Model S a longer track and it will top out at 120 mph. I’m old enough to know what that means.

I want one. Poor consumerist frog. Some tendencies are hard to break, even after years of abstinence.

The reality is, this is as close to a test drive as I’ll get in the next 5 years:

Electric cars are not going to magically replace their petrol brethren in time for the oil crunch that is coming in 2015 or the IEA’s prediction of peak oil in 2020, if it hasn’t happened already.

The shock to our cheap/subsidised transport dependent culture in the near future is going to be massive. But, just like cinema didn’t kill the radio and TV didn’t kill the cinema, cars we will always have with us. They will just return to being the luxury item they always really were. (That’s why we really don’t need any more roads, it’s enough to improve/maintain the ones we’ve got)

Still, I can look longingly through the showroom window as I did all those years ago, and dream of my fancy new wheels…

For the first time, in the interview I conducted with its chief economist Fatih Birol, it has given us a date. And it should scare the pants off anyone who understands the implications.

Fatih Birol, the lead author of the new energy outlook, is a small, shrewd, unflustered man with thick grey hair and Alistair Darling eyebrows. He explained to me that the agency’s new projections were based on a major study it had undertaken into decline rates in the world’s 800 largest oil fields. So what were its previous figures based on? “It was mainly an assumption, a global assumption about the world’s oil fields.

This year, we looked at it country by country, field by field and we looked at it also onshore and offshore. It was very very detailed. Last year it was an assumption, and this year it’s a finding of our study.” I told him that it seemed extraordinary to me that the IEA hadn’t done this work before, but had based its assessment on educated guesswork. “In fact nobody had done this research,” he told me. “This is the first publicly available data”.(11)

So was it not irresponsible to publish a decline rate of 3.7% in 2007, when there was no proper research supporting it? “No, our previous decline assumptions have always mentioned that these are assumptions to the best of our knowledge – and we also said that the declines [could be] higher than what we have assumed.”

Then I asked him a question for which I didn’t expect a straight answer: could he give me a precise date by which he expects conventional oil supplies to stop growing?

“In terms of non-OPEC [countries outside the big oil producers’ cartel]”, he replied, “we are expecting that in three, four years’ time the production of conventional oil will come to a plateau, and start to decline. … In terms of the global picture, assuming that OPEC will invest in a timely manner, global conventional oil can still continue, but we still expect that it will come around 2020 to a plateau as well, which is of course not good news from a global oil supply point of view.”

Around 2020. That casts the issue in quite a different light. Mr Birol’s date, if correct, gives us about 11 years to prepare. If the Hirsch report is right, we have already missed the boat.

Birol says we need a “global energy revolution” to avoid an oil crunch, including (disastrously for the environment) a massive global drive to exploit unconventional oils, such as the Canadian tar sands. But nothing on this scale has yet happened, and Hirsch suggests that even if it began today, the necessary investments and infrastructure changes could not be made in time. Fatih Birol told me “I think time is not on our side here.”

Shock. Horror. I am so surprised. This is the first publicly available research? I think not Mr Birol. But “We told you so” is always wasted breath. The more urgent issue is that like climate change, we have left it so late that it is going to cost us more than if we had acted responsibly in the first place.

So peak oil has an official date, from the official international agency that governments look to for their answers. What is New Zealand doing about it? Pretty much the same as the UK. Next to nothing. Building lots of new roads. I am not anti-road at all, but we really ought to look after the quality of the ones we have rather than building more at a time when increased demand for them will be drying up before we’ve got our money’s worth from them. Better to invest in oil independent infrastructure, of all kinds. NZ is fixated on the idea of electric cars, which is great, but the new government isn’t doing anything about it. We’ll need them. We will also need a whole heap of public transport, preferably not fossil based.

Interesting times indeed…

However, the unprecedented oil price rises of the last four years, and the spike of the last eight months have already worked their magic and spooked the markets into precipitous decline.  The spike that burst the housing/credit bubble was made of oil.

Everyone knows intuitively that there has been something fundamentally wrong in the oil market over the last few years, but few were willing to call it what it is – the first shocks of the advent of peak oil.

Whether the peak is here already or will not come untill 2012, as is the average of opinions among oil experts, is irrelevant.The Hirsch report spells out in clear financial terms that it will take a crash course of at least twenty years to respond, so it is already too late for a smooth transition. Hence the economic upheavals have begun.

What the leaked IEA report says, according to the Financial Times, is that oil production is likely to decline by 9.1% per annum, which means we need to do one hell of a lot of drilling in order to keep production constant, let alone grow it.

Without extra investment to raise production, the natural annual rate of output decline is 9.1 per cent, the International Energy Agency says in its annual report, the World Energy Outlook, a draft of which has been obtained by the Financial Times.

The findings suggest the world will struggle to produce enough oil to make up for steep declines in existing fields, such as those in the North Sea, Russia and Alaska, and meet long-term de­mand. The effort will become even more acute as prices fall and investment decisions are delayed.

The IEA, the oil watchdog, forecasts that China, India and other developing countries’ demand will require investments of $360bn each year until 2030.

The agency says even with investment, the annual rate of output decline is 6.4 per cent.

The decline will not necessarily be felt in the next few years because demand is slowing down, but with the expected slowdown in investment the eventual effect will be magnified, oil executives say.

The battle to replace mature oilfields’ output could even offset the decline in demand growth, which has given the industry – already struggling to find enough supply to meet needs, especially from China – a reprieve in the past few months.

The IEA predicted in its draft report, due to be published next month, that demand would be damped, “reflecting the impact of much higher oil prices and slightly slower economic growth”.

Rumours are flying around the internet that the draft report was leaked because the authors had come under pressure to tone it down before publication. I suspect that the authors just want the market to be aware of the realities of peak oil. While it will be many decades before oil itself is a scarce resource, our inability to grow production means that we have a future of ever escalating prices ahead of us.

If I get out my crystal ball, I would forecast oil to bounce around in the $60 -$100 range until the financial crisis settles down, as the marginal cost of a new barrel of production is currently between $70 – $90 per barrel. Once the global economy is perceived to be back onto it´s exponential growth path, prices will spike once again before dropping back to the marginal barrel range as the growth bubble is burst once again by high oil prices. Each time this happens, the marginal barrel priced will ratchet up, taking the overall average price up with it. In short, I predict a wild roller coaster ride.

Bank on one thing – volatility.

Speaking at a press conference at the World Petroleum Congress, Mr. Tanaka emphasized that market fundamentals were the main underlying factor behind high oil prices. “OPEC production is at record highs and non-OPEC producers are working at full throttle, but stocks show no unusual build. These factors demonstrate that it is mainly fundamentals pushing up the price,�? he added.

Project delays averaging 12 months, coupled with global average decline of 5.2% – up from 4% last year – are the factors behind these revisions. Over 3.5 mb/d of new production will be needed each year just to hold global production steady.

“We continue to see a significant shift in demand away from the OECD countries,�? Mr. Tanaka noted. “Developing countries will drive demand growth, their total consumption equalling that of mature economies by 2015.�? Asia, the Middle East and Latin America will account for nearly 90% of demand growth over the five-year forecast period.

In other words, in seven years, we rich countries will no longer dominate the oil market. Despite revising demand growth down significantly due to the high prices and looming global recession, the IEA is still bullish on demand, primarily from Asia. A very informative IEA presentation at the Congress makes for good reading.

Now that the international oil watchdog has finally admitted that there is a significant problem in meeting future demand, isn’t it high time we started investing in alternatives to the motorcar, our thirstiest oil consumer?

We are still well above the long term trend and surely some production should come on line to flatten the price growth at least? But will it?

Even the world’s oil energy agency doesn’t think the market will work.

“According to normal economic theory, and the history of oil, rising prices have two major effects,�? said Fatih Birol, the chief economist at the International Energy Agency in Paris. “They reduce demand and they induce oil supplies. Not this time.�?

But the International Energy Agency estimates that current investments will be insufficient to replace declining oil production. The energy agency said it would take $5.4 trillion by 2030 to raise global output. Otherwise, it warned that a crisis before 2015 involving “an abrupt run-up in prices�? could not be ruled out.

Could it be that the era of cheap oil is coming to an end? Colin Campbell, the geologist who founded ASPO, the Association for the Study of Peak Oil, has just updated his projections. He said this week:

The Depletion Model, used herein, is subject to continual revision as new information, however unreliable, and insight come in. It does not pretend to offer a definitive picture but rather an evolving approximation. Nevertheless, despite the uncertainties of detail, the overall pattern can be presented with some confidence.

He has added a great deal of deepwater oil resource and says that we are very likely sitting on the peak right now.

It’s impossible to call the peak until after it has happened. Campbell continues:

The new deepwater model has the effect of advancing the date of the overall peak of all liquids from 2010 to 2007, and is actually good news insofar as the lower and sooner the peak, the gentler the subsequent decline. The precise date is of no particular significance since it is not a high isolated peak, being no more than the maximum of a fairly gentle curve. But if correct, it might carry a certain psychological impact to recognise that the Second Half of the Oil Age has begun. Certainly this is consistent with the current world financial crisis, soaring oil and food prices, deepening recession, and consequential riots and political tensions in many countries. New military threats are being made against Iran, as the consumers become increasingly desperate for access to oil supply, much of which lies in the Middle East.

Mr Malthus must be turning in his grave.

The EIA’s newest International Petroleum Monthly shows World C+C production for January was 74,466,000 barrels per day, eclipsing the heretofore peak of May 2005 by 168,000 barrels per day. (thanks to Ron Patterson for the heads up and to Khebab for the quick graphics).

Fig 1.- World production (EIA data). Blue lines and pentagrams are indicating monthly maximum. Monthly data for CO from the EIA. Annual data for NGPL and Other Liquids from 1980 to 2001 have been upsampled to get monthly estimates.

So, the bumpy plateau of oil production since may 2005 has finally been broken, but is it really the end of the plateau or just a slightly higher bump? Needless to say the peak oil blogsites are buzzing. Pundits I have followed think that we will have one or two good spikes in production during 2008, followed by more plateau and then eventual decline. So far so good.

Whether this is the global peak oil plateau or just a pause in the oil party isn’t as important as the fact that a serious oil supply crunch is coming on, as predicted by both Shell and the IEA. The current US recession has led to predictions of oil demand destruction, but China’s burgeoning demand doesn’t look like it is going to wane at all, but keep growing. To my layman’s mind that means that the production plateau will continue and that prices will continue their slow but inexorable climb.