The report was issued today by the recently established UK industry taskforce on peak oil and energy security, a group of eight companies including transport firms Virgin, Stagecoach and FirstGroup, engineers Arup, architects Foster and Partners, and energy giant Scottish and Southern.

Entitled The Oil Crunch, the report argues that the risk of an early peak in oil production poses a bigger threat to UK society than tightening gas supplies, terrorism or the short-term impacts of climate change.

Stagecoach was the Scottish bus company that bled our kiwi city councils dry supplying public tranpsort services, until the councils started demanding ridiculous things like integrated ticketing.

The Energy Bulletin quotes the salient points from the report, which sum it all up better than I could:

We sought two opinions on oil-supply risk, one from an oil-industry expert known as a leading advocate of the early-peak scenario, and the second from Royal Dutch Shell, who we expected might advocate a more sanguine prognosis. In our first risk opinion, Peak Oil Consulting2 presents an analysis pointing to a peak in global oil production in the period 2011-2013. His core argument is that the problem is not so much about reserves, as the timely bringing on stream of new flow capacity to replace the depletion of existing capacity. The “easy oil” that makes up most of existing capacity is declining fast, and the new capacity coming on stream – often from “not-so-easy” oil – will not be replacing it fast enough from 2011 onwards.

In our second risk opinion, Shell argues that we indeed face an “easy oil” supply gap, but should think not of “peak” production, rather “plateau” production, with accompanying tensions as the demand for energy continues to surge. The global supply of oil will flatten by 2015, in Shell’s view, and if the oil industry globally is to maintain hydrocarbons supply on this plateau, very heavy investment will be required in ultradeep water, pre-salt layers, tight gas, coal-bed methane,3 in the Canadian tar sands and other areas of unconventional oil production. We find it of great concern that both our risk opinion-providers agree that the age of “easy oil” is over. If so, fast-growing alternative energy supplies become imperative, even if production flattens in 2015 as Shell suggests.

While others continue to point to the recent drop in oil prices as proof that the Greens are non compos mentis when it comes to oil, it seems that internationally, big business is waking up to what we have been saying all along. Itś not the end of oil, itś the end of cheap oil. Somehow, I think that they will soon be saying that about global average tempaerature, too.

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.

Roger Kerr says that tight monetary policy caused the 1929 depression and that easy money is causing this meltdown. He blames governments and heavy handed regulation, claiming that the market, if left to it’s own devices, would not have let this happen.

What’s wrong with his logic? The US Federal Reserve is not the government. It is privately owned by some very wealthy American families and only chartered – at arm’s length from the government – to manage the US banking system. To blame the government for the loose monetary policies behind this massive speculative bubble is ludicrous. Kerr wants us to think that governments did this. They didn’t. In New Zealand, the Reserve Bank is not privately owned, but it too is chartered at arm’s length from government.

In both cases, the government says “It’s not me” by contracting out its responsibilities for reserve bank duties, while at the same time, the big business lobby says “It’s not us, it’s the government”.  These same business interests are the ones who insist that only the private sector is capable of managing such affairs.

However you slice it, the historically high price of oil is a major factor in both individual’s and companies’ current cash flow woes. I prefer Carl Etnier‘s summary of events:

It may be, however, that the toxic dynamics of a poorly regulated and poorly managed banking industry were sufficient themselves to cause the current crisis, through the following series of steps: Banks made subprime loans with a number of years of low payments followed by a booby trap of ballooning monthly payments. Local banks sold the loans to Fannie Mae and Freddie Mac, which repackaged them into inscrutable financial instruments and sold them to other institutions. When the booby-trapped clauses were triggered, homeowners could no longer afford monthly payments. Defaults on the mortgages dragged down the value of the securities into which they were repackaged. No one understood the paper the institutions were holding well enough to confidently place a value on it, which meant it could not be used as collateral in further loans. And so credit markets froze.

Regardless of the role of energy in the current financial crisis, oil price hikes and shortages due to peaking world oil production are bound to bring about the sort of broad changes in the economy that Kunstler foresees. Right now, for example, gas pumps are largely closed in many parts of the southeast. Hurricanes Gustav and Ike shuttered both oil production and refining, leaving pipelines from the Gulf low on fuel. The shortages are forecast to continue for weeks. They’re likely both to retard the economy in the Southeast now and further push down prices on homes located far from businesses, schools, and churches.

One of the key questions the country faces is whether we will use our remaining wealth and fossil fuel to prop up the past or to transition to a different future. There’s no shortage of ways to fritter away the rest of our fortune.

For me, that is the most important question of the election. Will we use our remaining fossil fuel wealth to prop up the past or to transition to a different future? One look at our billboards shows how the Greens would want to spend our remaining fossil wealth. Roger Kerr wants to fritter it away.

Despite spiking to $130, it is currently trading at $109, which is a fairer reflection of the US Dollar’s loss of value. Will it cost us at the pumps? In a word, no. Our dollar rallied as a result of the $US slump, pretty much cancelling out the price surge.

However, our dollar is in a long slow slide back towards its long-term average, which so far has protected us from the worst of this year’s price spikes. That slide is forecasted to continue, which means we should see a slow rise or relatively stable petrol prices for the near term.

The petrol price rise will come if our dollar gets sold off in a hurry, either from bad local economic news, or because of automatic selling by traders. Our dollar’s spike overnight has put it just above its 4 week rolling average, which many traders use to trigger a sell off.

We’ll have to wait and see. The one thing we can count on is continued volatility, for both our dollar and oil prices.

This is hugely important for global petrol prices. Unfortunately, New Zealand is not likely to benefit a great deal from the price drops. We have had historically high average exchange rates throughout the last year, at the same time this oil price spike was devastating the US and Eurozone. This has protected us from the worst of the price rises. Hard to believe, isn’t it?

Now our exchange rate is dropping back towards its historical average, meaning that oil will have to drop at least as fast in relative terms to keep our pump prices from rising. So far, it has. I have been meaning to get updates of exchange rate and oil charts for some time. I’ll come back later with those charts…

Having said how good it is, it is far too early to start celebrating the end of the nasty oil ‘spike’. As the Transition Culture blog reports, and Matthew Simmons supports, we are still in denial about just how cheap oil really is, and how much higher the price is likely to go. Watch this video to see the finance gurus at CNBC’s Fast Money squirm in their seats and Simmons points out just how dire our predicament is, and why we should have been doing something about it for the last twenty years or so.

Simmons points out that whenever prices rise, the finance people call the change abnormal. Whenever they drop, they call this ‘normal’. What a joke. Any graph will show you that price rises have been ‘normal’ for a long, long time. Simmons also says that oil is more likely to go to up towards $600/bbl than go back to $50/bbl, and could do so in any time between six months and five years. This is what he says in response to the recent price drops:

So what do we make of this? I suggest it is just the calm before the storm.

I don’t really believe in silver bullet technical solutions, but if this pans out, I’m excited. Unfortunately, it takes us about 20 years in New Zealand to change out our vehicle fleet. Given that the the vast majority of our ‘new’ imports are actually Japanese has-beens that no longer meet their standards, I suspect that we’ll start seeing these beauties arrive in real numbers around 2020. We can then expect to catch up by 2030 or so, assuming that we have fully electric vehicles coming in along side them.

I know that this sounds pessimistic. But actually, it’s the first sign of a medium term solution to the current oil supply crunch that I have seen. Not only that, if the Americans get these into production fast enough, the peak oil plateau may last a year or two longer – a real bonus to help with the transition to a post fossil fueled world.

How many more times do the central government organs have to be wrong about oil before they sit down and look at alternatives? This earlier post in the series is laughable in that we would just love to have $90/bbl oil again. Wouldn’t we?

The pattern looks awfully familiar. Almost identical to what I pointed out last November. Will they ever learn? Perhaps. With oil futures in continuous contango for the first time ever, (ironically the day before the Budget), the world is waking up to the fact that oil really is a finite resource.

Joe Bennett’s hilarious jibe at the economists who live the cornucopian dream is a clear sign that the realities of peak oil are beginning to sink in. Let’s hope that our leaders pull their heads from the sand sooner rather than later.

I won’t slag Treasury off again, as I did it in my post last Wednesday. No Right Turn has done a good job of that since Budget Day.

Hirsch is famous for his initially suppressed 2005 report to the US Department of Energy entitled Peaking Of World Oil Production: Impacts, Mitigation, & Risk Management which opens with the statement:

The peaking of world oil production presents the U.S. and the world with an unprecedented risk management problem. As peaking is approached, liquid fuel prices and price volatility will increase dramatically, and, without timely mitigation, the economic, social, and political costs will be unprecedented. Viable mitigation options exist on both the supply and demand sides, but to have substantial impact, they must be initiated more than a decade in advance of peaking.

The word “unprecedented” is diplomatic code for consequences worse than the global economic destruction experienced as a result of WWII. One only needs to read the Executive Summary to realise that it is too late to mitigate some of the worse effects of the coming peak, assuming that we are at or very near to peak now. Meanwhile, Treasury fiddles. I never did follow up from my post about last Thursday’s Budget Economic Forecast Update. I’ll do that now.

In the meantime, listen to Robert Hirsch on CNBC, where his pragmatic approach is rebuffed by an economist whose only advice is to drill more!

The 11 minute interview can be found here.

My favourite quote of Ken’s is:

“The economists all think that if you show up at the cashier’s cage with enough currency, God will put more oil in ground.”

Hat Tip: Big Gav from PeakEnergy and The Oil Drum

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.

Rather than pick on Ralph Samuelson from the MED I would rather choose to praise him for having the foresight to include Campbell’s peak oil scenario in their forecast way back in 2005. It took a lot of courage back then to say that there might be a high price scenario while the futures markets were showing that oil would be:

I’m sitting at home this weekend just scratching to go into work and update the chart from my previous post. I last updated it when oil hit US$110. I’ll do it on Monday and post it. It should be fun.

Meanwhile, I’ll stick to the forecasting that I’ve done all along here at frogblog, that oil will be at a steady average of at least US$100 between July and September of this year. That’s what my trend line shows and from what I gather from all the peak oil geologists, we are due for a fresh spike in production this year as a couple of megaprojects come on stream and offset the declines from older fields enough to lower prices – temporarily. It’s a volatile market and part of the pressure on prices is from the middle – refinery capacity shortages. This year, several new refineries will be commissioned and will go into production, a further downward signal for the market. Stay tuned, it’s going to be a bumpy ride!

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.

At present, of the current uranium demand of 67 kt/yr only 42 kt/yr are supplied by new production, the rest of about 25 kt/yr is drawn from stockpiles which were accumulated before 1980. Since these stocks will be exhausted within the next 10 years, uranium production capacity must increase by at least some 50% in order to match future demand of current capacity.

At present, only 3-4 new reactors per year are completed. This trend will continue at least until 2011 as no additional reactors are under construction. However, just to maintain the present reactor capacity will require the completion of 15-20 new reactors per year. Today we can forecast with great certainty that at least by 2011 total capacity cannot increase due to the long lead times.

This assessment results in the conclusion that in the short term, until about 2015, the long lead times of new and the decommissioning of aging reactors perform the barrier for fast extension, and after about 2020 severe uranium supply shortages become likely which, again will limit the extension of nuclear energy.

As a final remark it should be noted that according to the WEO 2006 report nuclear energy is considered to be the least efficient measure in combating greenhouse warming.

It’s clear from the chart that the reasonably assured resources (RAR) available at a reasonable price are past their peak already, and only a monumental increase in capacity of the very expensive RAR will keep the existing nuclear industry running. The future of conventional nuclear just doesn’t look that rosy, and thorium and other advanced types of reactors are too far away to help with the current climate crisis. It would seem however, that uranium futures, like oil futures, would be a good bet. Here are the NUEXCO Monthly Uranium Spot Prices from TradeTech:

Nice price spike, then a big fall. The price is currently $US74/pound of U308. Uranium stocks seem to have followed a similar bull run and then a more mild correction. The NYMEX Futures show uranium remaining fairly steady near the current price.

It all seems rather dire. When you couple this with the claim in the Lean Guide to Nuclear Energy that:

The world’s endowment of uranium ore is now so depleted that the nuclear industry will never, from its own resources, be able to generate the energy it needs to clear up its own backlog of waste. The task of disposing finally of the waste could not, therefore, now be completed using only energy generated by the nuclear industry, even if the whole of the industry’s output were to be devoted to it. In order to deal with its waste, the industry will need to be a major net user of energy, almost all of it from fossil fuels.

You’ve got to wonder if investing in nuclear is in anyone’s interest. New Zealand should stay well clear of it.

Peak Oil 2010, Peak Gas 2015, Peak Coal 2025.

Boy that sounds familiar! He then went on to tell us how important it was that New Zealand continues to increase its amount of cows and coal in order to take advantage. It’s right there, on slide 5. I have often accused the state sector of keeping its head in the sand regarding peak oil and coal, but clearly an apology is in order. Don Elder knows that a crunch is coming and he is planning to make a mint from it. Never mind the environmental consequences. Never mind that if we just hang on to our coal rather than shipping it to China, perhaps our children will someday have a way to use it safely.

US wheat inventories have now reached a 60-year low and wheat prices have risen by 50 percent in the past month. Global wheat stocks are expected to fall to a 30-year low shortly. With global oil production relatively stagnant as the demand for more oil from Asia and the Middle East continues to grow, biofuels production has been plugging some of the gap.

Food and energy are converging so that to a considerable extent they can be used interchangeably as dictated by market forces. In the last six years, land for biofuels has increased from 12 to 80 million hectares worldwide as subsidies and national policies mandating their use are driving the biofuels substitution for oil. The US is offering subsidies of $.50 to $1 per gallon and the EU is attempting to reach a 10 percent biofuels target in the next three years.

Many knowledgeable observers are worried and are predicting that famines will break out in the underdeveloped world during the next 18 to 24 months, due to declining availability of grains for export and worsening climatic conditions. The recent snows in China are believed to have caused considerable crop damage and Beijing is becoming increasingly concerned about the prospects for feeding its 1.3 billion people.

All this suggests that policies mandating the use of biofuels and biofuel subsidies may have a very short half-life as the reality of inadequate food supplies overcomes cries of “energy independence.�? The elimination of mandates and subsidies would put more pressure on petroleum products and force prices still higher.

Our government is keeping it’s head in the sand about peak oil while even members of the US government have conceded that the debate is over. Global food prices are sky-rocketing, making our agricultural industries very happy, but meantime our working poor and beneficiaries are getting squeezed financially while the government turns a blind eye. As for biofuels, mandating biofuels up to 3.4 percent, as the current legislation would require, is easily achieved in New Zealand simply from our current waste stream. It remains to be seen whether the government will put teeth into the sustainability standards for biofuels that the Greens have negotiated.