Oil prices hit high but report warns of supply crunch
• US light crude oil futures pushes above $79 a barrel
• Report blames government for ignoring supply problem
guardian.co.uk, Monday 19 October 2009
Ashley Seager guardian.co.uk, Monday 19 October 2009 23.00 BST Article history
Oil prices have pushed above $79 a barrel, but a new report claims the world is facing a supply crisis. Photograph: Hasan Jamali/AP
World oil prices hit their highest point for a year yesterday, as a major new report urged governments around the world to take drastic action to head off an approaching oil supply crunch.
US light crude futures pushed above $79 a barrel, supported by the view that a recovering world economy would raise demand for crude. Oil prices have more than doubled from the low point they hit in the spring, but are still around half the all-time high of nearly $150 a barrel they reached in early summer last year.
Analysts have been surprised at the recent resilience of oil prices given the impact on energy demand of the global recession. In spite of this year's volatility in the oil price, the underlying trend for a decade has been for it to rise steadily.
A report from the non-governmental organisation Global Witness – famous for its exposé of so-called "blood diamonds" – pointed to an impending supply shock that could be so severe that many of the world's poor countries would simply be shut off from the world of energy by sky-high prices.
Two years in the preparation, Global Witness's report, Heads in the Sand, accused governments of ignoring the fact that the world could soon start to run short of oil. This would lead to huge consequences in terms of price shocks and much higher levels of violence around the world than last year's food riots.
"There is a train crash about to happen from an energy point of view. But politicians everywhere seem to have entirely missed the scale of the problem," said the report's author, Simon Taylor.
"We are all addicted to oil but if you look at the mathematics of the problem, they simply don't add up in terms of future supply and demand."
The report went through the latest figures from the oil industry and the Paris-based International Energy Agency, which last year drastically reduced its estimate of the available oil.
The IEA figures showed there could be a gap of 7m barrels a day between supply and demand by 2015. That represents about 8% of the expected world demand by then of 91m barrels a day.
The IEA expects production from existing oilfields to fall by 50% between now and 2020 and warned the world needs to find an additional 64m barrels a day of capacity by 2030 – equivalent to six times current Saudi Arabian production.
But Global Witness took issue with the IEA's recommendation that the oil industry spend $450bn a year chasing these supplies, many of which may well not be there. Because of the demands of climate change, the report argued, the money would be better invested in moving rapidly to a post-oil world of renewable energy and conservation.
Taylor said even the new IEA projections of how much new oil the world would discover were likely to be over-optimistic. He said the so-called "big" oil discoveries of the last few years added up to nothing like the "discovery rate" needed to replace the world's dwindling supplies from existing fields. They have totalled around 16bn barrels, or only around 1.7m barrels a day, once up and running.
The report said that between 2005 and 2008, global oil production ceased to grow in spite of widespread investment and rising prices, which should normally have brought forth a big rise in supply. It notes that the biggest year for new discoveries was 1965, since when they have been falling. Global oil production overtook new discoveries in 1984 and has outpaced them ever since.
It also dismissed as myth a widely held expectation that tar sands in Canada could fill the supply gap. Tar sands are unlikely ever to yield more than 3-4m barrels a day, equivalent to the pace at which existing fields are declining every year.
Taylor said the four key issues about oil – declining output, declining discoveries, increasing demand and insufficient projects in the pipeline – have been apparent for many years.
"But governments and multilateral agencies have failed to recognise the imminence and scale of the global oil supply crunch, and most of them remain completely unprepared for its consequences," he said.
"There has been a decade of dithering and it is now too late to avoid the consequences unless the authorities move like there is no tomorrow."
Dr Jeremy Leggett, author of books on peak oil and convenor of the UK Industry Taskforce on Peak Oil and Energy Security, said: "A steep premature descent in global oil production would be worse than the credit crunch in terms of economic impact. Unlike the credit crunch, however, the peak oil risk assessment involves big companies sounding the alarm alongside organisations like Global Witness."