Kate Mackenzie Peak oil vs supply crunch — or, both

Lloyds of London, the insurance market, is becoming rather worried indeed about the future of energy:

“A supply crunch appears likely around 2013… given recent price experience, a spike in excess of $200 per barrel is not infeasible.”

This is from Professor Paul Stevens at UK policy thinktank, Chatham House, in a paper published in conjunction with Lloyds.

Most predictions of supply-side problems choose either the ‘supply crunch’ or the ‘peak oil’ camp — often due to the sometimes arbitrary distinction between those of an economic and those of a geological bent. This paper, however, says that both are risks.

The above quote talks about a crunch resulting from investment shortfall. But that doesn’t necessarily mean it will go away, as this stark juxtaposition shows:

Of course there are all sorts of other factors — Iraq and unconventional liquids production to name a couple — but those alternatives have their own problems and uncertainties; and with conventional non-Opec oil production already beginning to decline, an imminent shortfall in Middle Eastern oil production and a quick jump to $200/barrel is not a happy thought, if one believes that oil prices are important to the world economy.

The paper makes clear that Asia’s growing appetite for oil could mean the ‘crunch’ would come before the ‘peak’, so to speak:

“Even before we reach peak oil, we could witness an oil supply crunch because of increased Asian demand. Major new investment in energy takes 10 – 15 years from the initial investment to the first production, and to date we have not seen the amount of new projects that would supply the projected increase in demand.”

The paper does warn of the effect of peaking geological supply of conventional oil too — and the often unappealing consequences of growing reliance on unconventional oil. In fact the Chatham House forecast of $200 oil is far higher than just about anyone else (although Goldman Sachs have certainly been there):

The paper cites the study last year by the UK Energy Research Council that found a peak of conventional oil production before 2030 is likely, with a significant risk of a peak before 2020.

This is not much different from the IEA, which expects global conventional oil production to peak around 2020, based on current trends.

The problem, the Lloyds/Chatham House paper points out, is that there are so many variables affecting when peak oil will be reached. Looking more than 10 years into the future, the paper says, “presents many uncertainties, including: the availability and cost of extraction technologies; the substitute technologies, pricing systems in major economies, and carbon legislation”.

And these uncertainties make it difficult to gain support for the massive investments that are required to move away from oil, the Lloyds report writes.

But it would be superficial to look only at the paper’s peak oil warnings; it is more wide-ranging than that, looking at how existing energy use will need to change dramatically in the face of several impending developments: climate change, geo-political issues, the resurgence of coal, and natural gas substitution, to name a few.

The paper argues that these factors, collectively, mean a shift away fossil fuels is required. The problem is, that it is difficult when the big, long-term investments required are hampered by both uncertainty over the future supply and demand, and a lack of clarity about important energy policies such as carbon pricing.

As Lloyds chief executive Richard Ward writes in the introduction:

“What it outlines, in stark detail, is that we have entered a period of deep uncertainty in how we will source energy for power, heat and mobility, and how much we will pay for it.”

And it’s not the energy market volatility of the past: this time, it’s different.