Archive for the ‘1000 Words’ Category

1000 Words on Peak Oil

April 23, 2010

In 1956, geologist M King Hubbert predicted that U.S. oil production would peak in the early 1970s (Deffeyes 2003). The analysis was universally rejected. In 1970 U.S. crude oil production began to fall. The industry was silenced. Peak oil is defined as the point at which production peaks and begins to decline. The term can be applied to a well, a field, a country or to global production. Around 1995 analysts began applying Hubbert’s methods to global production. Deffeyes (2003) predicted 2005 as the mathematical peak year stating that there is nothing plausible that could postpone the peak until 2009. There is a good possibility that 2005 was the peak year. Global production has not surpassed 2005 levels of 84.55 million barrels per day. (U.S. EIA).  Approximately 80 percent of the oil produced today comes from fields discovered before 1973, most of which are in decline. Total world production has increased less than 10 percent in two decades (Brown 2008). While there are various arguments around whether or not we have reached peak, the general agreement is that even if we haven’t, it’s not a matter of if, but when.

Hubbert's PeakAbove; Simplified version of Hubbert’s curve showing ultimate crude oil production based on reserves of 1250 billion barrels. Variations of the curve showing adjustments as more reserve data is collected are used to extrapolate other curves. (Deffeyes-2003)

This view of production and consumption is simplistic and it is not within the scope of this paper to examine all of the intricacies of production versus consumption along with future predictions for those variables like future consumption levels, population growth, and climate change and so on. Whenever there are unknown variables there is debate, and rightly so. Suffice to say that at some point in the future, diminishing consumption will have economic, social and environmental impact.

Oils consumption is continuing to grow. Part of the reason for this is countries like India China and other developing nations, rushing to join the oil era—pouring hundreds of billions of dollars into the construction of coal mines, oil refineries, power plants, automobile factories, and roads. (Brown 2008)

Consumption projections 2010 and beyond (IEA 2010)

There are two main scenarios that should be considered as a result of peak oil. The first is an assumption that consumption remains on the current trend. The second is based on our capacity to change and innovate. While there is demand, the price of oil will remain high. The higher price along with better technology make high costs for extraction more feasible and this will undoubtedly slow the rate of production decline for some time. The innovation and advances in technology around fossil fuel in this industrialised century have been colossal suggesting that there is no reason why such innovation can’t occur in the effort to find alternative energy sources. Technology has allowed oil companies to drill deeper and faster giving them access to wells that would have been considered unprofitable in the 70s.

World crude production showing two peaks in 2005 (U.S. EIA)

There are several peak oil facts that are hard to dispute.

  • Conventional oil (as opposed to sand oil and shale oil for example) provides most of the oil produced today, and is responsible for about 95% all oil that has been produced so far.
  • Conventional oil continues to dominate supply. It is what matters most.
  • Discovery peaked in the 1960s. We now find one barrel for every four we consume.
  • Middle East share of production is set to rise. The rest of the world peaked in 1997, and is therefore in terminal decline.
  • Production per capita limits were breached late in 2000, causing prices to soar.

(Campbell 2004)

The most obvious impact of decline will be increased price and greatest impact of higher prices is being and will be felt on the roads. The internal combustion engine has dominated personal transportation for more than eight decades. Well over half of the oil consumed every day in industrial countries is consumed as motor fuel. As oil becomes scarcer prices will rise. This is the natural mechanism of supply and demand. As Rubin (2009) points out, life as we know it depends on the price at the fuel pumps and that price depends on an uninterrupted supply of oil. There is an analogy that can be used to describe the economic impact of diminishing oil supplies. The global economy thinks in dollars rather than distance. To get a fish from the ocean to a plate takes a ridiculous amount of energy. From the fuel used for fishing boats, container ships, aircraft and delivery trucks to the energy required to freeze, process, sell it in a supermarket and cook it. For the purpose of comparison, it takes 10 calories of fossil fuel to produce 1 calorie of food in the U.S. (Pfeiffer 2004). The scenario just described is meant to highlight the reliance of the global economy on fossil fuel; it affects every aspect of our lives. Fossil fuels provide 90 percent or more of the energy in most industrial countries and 75 percent of energy worldwide. (State of the World 1999) Electricity is so taken for granted that any interruption in its supply is considered an emergency. It is fossil fuel that makes the current efficiencies of production and the global economy possible. As the price goes up the efficiency is reduced and production levels fall. These are decreases that a growing population cannot afford. The gap between the haves and have not’s is growing even now.

Oil shock tends to cause recession. As the cost of getting fish to a plate increases, the price of fish goes up and you buy less. It may seem like a quantum leap but when people buy less in general, you have recessions. Recession may become a more permanent fixture because recovery leads to new oil demand until the limits are again breached which leads to new price shocks re-imposing recession in a vicious circle. (Campbell 2004)

Today the comparative price of energy is nearly as low as it has ever been, and finding new energy sources that are more convenient, reliable, and affordable than fossil fuels is beyond the imagination of many experts.

An alternative scenario is one of change. Societies collapse if they fail to adapt.  No one is saying that we are literally going to run out of oil, at least not in the short or even medium term. The industrial age of fossil fuel has only been with us for a short period in the context of total human history.

The one hundred year period of oil production in human history known as Hubbert’s peak (Deffeyes 2003)

In 1929 the motor car was still competing with the horse drawn cart. The concept of change is not unimaginable. The billions of dollars spent on technology designed to bring efficiency to oil extraction and application if spent on alternatives innovation would have the required impact to allow us to make the transition. A world without oil is as unimaginable to us as a world without horses might have been to our great, great grandparents. The challenge is going to be using what fossil fuel is left, efficiently enough to create the next major energy source for our grandchildren, whatever that is.


Brown, L. R., & Worldwatch Institute. (1999). State of the world 1999 a worldwatch institute report on progress toward a sustainable society (Special Millennium ed.). London: Earthscan.

Brown, L. R. (2008). Plan B 3.0 : Mobilizing to save civilization (1st ed.). New York, N.Y. ; London; Washington, D.C.: W. W. Norton & Co.; Earth Policy Institute.

Campbell, C. J. (2002). Peak oil: An outlook on crude oil depletion. Retrieved 4/16/2010, 2010, from,outlook.html

Deffeyes, K. S. (2003). Hubbert’s peak : The impending world oil shortage. Princeton, N.J. ; Oxford: Princeton University Press.

Energy information administration – EIA – official energy statistics from the U.S. government. (2010). Retrieved 4/15/2010, 2010, from

International energy agency – oil market report. (2010). Retrieved 4/16/2010, 2010, from

Pfeiffer, A. (2004). Eating fossil fuels. Retrieved 4/16/2010, 2010, from

Rubin, J. (2009). Why your world is about to get a whole lot smaller : Oil and the end of globalization (1 US ed.). New York: Random House.


1000 words on Climate Change

April 19, 2010

The scientific evidence is now overwhelming: climate change presents very serious global risks, and it demands an urgent global response (Stern, 2006). Although some are still arguing over the cause the effect is no longer in doubt.

As a result, over a decade ago, most countries joined an international treaty — the United Nations Framework Convention on Climate Change (UNFCCC) — to begin to consider what could be done to reduce global warming and to cope with whatever temperature increases are inevitable. More recently, an addition to the treaty was approved: the Kyoto Protocol. Countries with commitments under Kyoto are required to meet emission targets and timeframe goals.

To say that climate change is a complex issue is a vast understatement. Uncertainty is generated by the scale and complexity of potential effects and associated costs, which can only be estimates at best. Add the complexity of the uncertainty and imperfection of the real world which includes politics and economics and practical policy approach is limited.

Stern (2006) states that when dealing with such uncertainty, policy approaches can include

  • taxing of emissions,
  • applying quantity restrictions,
  • establishing property rights which underpin bargaining or trading, or
  • a single control body.

A single control body is out of the question, particularly considering that participants could not even reach agreement on emission levels at Copenhagen. A tax requires consensus and needs to be agreed on a very broad if not global level to be effective. A full set of property rights are difficult to establish considering that many of those affected are yet to be born and therefore cannot bargain. At the very least, any climate change policy approach should ensure that GHG emitters are required to wear the cost of the damage their emissions cause, with a cost high enough to incentivise a preference for low carbon alternatives.

It would seem reasonable then to allow the mechanisms of the market to establish a cost for carbon in an emission trading scheme, or at least be the easier of the options to implement. A cap and trade system reflects the options of quantity restriction and property rights.  The mechanisms of Kyoto favor a cap and trade system establishing a carbon market. With Cap and Trade systems, the overall quantity of emission is established and then the entities within the system i.e. firms, countries etc are free to decide on how to best deliver the reductions.

Established in 2005, the European ETS is the largest and first of the Kyoto trading mechanisms. As the first it has undergone a steep learning curve. The release of the Stern Review which discusses examples from the EU ETS suggests that Trading Schemes may not be the best approach considering the failure of the EU ETS to deliver anywhere near its targets and the enormous costs involved (Stern, 2006). The European ETS did not fail because of the system applied, but rather a failure to effectively control the mechanisms of the system. Failures included over allocation, or caps that were greater than actual emissions and limited scope resulting in the system only capturing a low % of emitters, making price setting difficult. There were administrative issues like excessive free allocation with a knock on effect of windfall profits for emitters. There was general underestimation of the administrative requirements. The EU ETS lacked the complexity and sophistication required to deal with the reality of the free market. There were many criticism of the fledgling system. Stern (2006) noted that the EU went down the trading path having failed to agree on a common carbon tax. This highlights the issue of trying to establish such a tax globally, but suggests that ultimately, if consensus could be reached a tax might be more effective for the short time frame allowed for controlling emissions

The reality is that there is and will be uncertainty about the cost and benefit of action, leaving any solution open to criticism. The uncertainty will decrease over time and as that happens then costs and targets can be adjusted accordingly. In the mean time however the suggestion is that whatever method is used, it should distinguish between the long and short term, the goals should be clear and precise and short term policy should be flexible enough to mitigate the risk of costs getting out of control.

In practical terms, a long term stabilization goal needs to be agreed, again highlighting the failure of Copenhagen. The price mechanism could be a tax or a tradable quota but for the short term, a tax would undoubtedly be most effective. The disadvantage of a Tax is the challenge associated with global establishment and adjustment. Individual countries can establish a tax without consultation however the result would most likely be increased revenues for that government with little effect on emission levels elsewhere.

Assuming a Tax could be agreed, the ease with which it could be adjusted to meet the long term stabilization goal would be its greatest advantage. As understanding evolves, policy will need to evolve and the mechanisms will need to adjust accordingly and with ease.

The unpredictability of market drivers like oil price for example is easier to react to with tax. In certain circumstances however if input cost is low, the polluter may just choose to wear the tax and pass the cost on to the consumer, with little resultant change in emission. It is unlikely though that oil prices will fall a great deal any time soon with the peak in global production occurring in 2005. (EIA, 2010)

Tax revenues raise public revenues. Those revenues can be used to pass on tax incentive to the polluting industry easing the transition. Alternatively tax revenue can be funneled to innovation.

In a quota based system the revenue can only collected if the quotas are initially sold by governments. If the quotas are free then the benefit goes to the polluter in the form of profit. This is one of the criticisms of The EU ETS where quotas were freely given without any impact on emissions. It’s a big if though.

Equity relies heavily on the ease with which finance can flow between developed and undeveloped countries. A tax system would require the implementation of additional vehicles to allow for this transfer.

The sophistication required for complimentary policies and measures most likely lends itself to government policy making mechanisms, but government policy making can be costly and inflexible. Both tax and tradable quota systems are capable of financing carbon reduction. Only the quota system will do it automatically and via the most cost effective path, and only then if managed properly. The failings of the EU ETS have highlighted the difficulties of getting this right however and as a result the pain and compromise of arriving at a equitable and effective tax rate is now being examined as a preferred path.


Energy information administration – EIA – official energy statistics from the U.S. government. (2010). Retrieved 4/15/2010, 2010, from

Stern, N. H. (2006). The economics of climate change: The stern review Cambridge, UK ; Cambridge University Press, 2007.

United Nations FCCC. (2010). United nations framework convention on climate change. Retrieved 4/14/2010, 2010, from

United Nations, Food and Agriculture Organisation. (2010). Climate change. Retrieved 4/5/2010, 2010, from

World resources institute | global warming, climate change, ecosystems, sustainable markets, good governance & the environment. (2010). Retrieved 4/18/2010, 2010, from