It is almost always a mistake to assume you know where energy bills are going. This is especially true for secretaries of state, and energy policy should never be based upon assuming you know what the future will bring. Unfortunately, it is the new conventional wisdom and an assumption prevalent across much of Europe. ... Read full article
There is always a certain wry amusement to be gained from watching an economist trying to explain why oil is not finite, and the rate of supply will not peak. Professor Dieter Helm at first glance is just another, and yet he may actually be stepping slowly backwards into the peakist lobby, although protesting loudly all the way.
As Helm notes, “Energy policy should not be based on assuming we know what the future will bring”. It’s the first of several red herrings. Nobody rational does assume they can know the future, we can only assess the evidence for various probabilities. Policy has to be based upon what presently appears to be most likely to occur, not upon what we would like to occur in defiance of the facts as presently known. At present, a peak of oil supply appears far more likely than not, driven by reduced demand which in turn will be driven by rising prices. The reasons have been presented, for example by UKERC in 2009, and at the Energy Institute’s London meeting on Oil Supply and Energy Security last December. Helm attended that day-long meeting for just long enough to present his own paper and leave, without listening to anything else.
Oil reserve volumes are not the problem. Officially, proved oil reserves in the ground today are equivalent to over 40 years of supply at current demand rates. The problem is that the rate of production from most oil fields is in decline, for reasons of basic physics. The total oil output from today’s operating fields is falling by about 4% every year. It isn’t the volume in the ground that matters but the rate at which it can be produced. Production rates could be raised by increased investment in exploration and production, but then the oil would cost more, demand would fall, and the peak would be behind us.
Helm also states, “We are led to believe that the world's fossil fuel resources are finite and known.” Actually, this being a finite world, fossil fuel resources are finite, as I’m sure he secretly realises. I am not aware of anyone who claims to know the exact quantity of conventional oil on the planet, so that’s another red herring. But geologists do have a good idea about what quantities are most likely, and what quantities are not (and unconventional oil costs more, so it doesn’t fix the problem). More importantly, not knowing the precise quantities of fossil fuel in existence cannot be an excuse to avoid making energy policy decisions, based upon the most probable numbers, any more than our ignorance of the exact state and future trajectory of the nation’s health or finances should prevent government from making NHS or Treasury policy. Our uncertainty of the exact volumes of fossil fuels is blatantly a false argument against an energy policy of which Helm doesn’t approve.
Helm backs slowly into the peak lobby when he notes that the cost of producing oil is rising. It’s the last, expensive, marginal barrel that sets the global price for all oil, and which has now set the stage for shale-sourced oil and gas. He might think about this more. These fuels are not as easy and cheap to extract as conventional oil. Perhaps one day they will be, but only an economist would be prepared to bet the farm on that. On present evidence, shale sources of oil and gas may improve the security of supply but are most unlikely to lower the price. Does Professor Helm think the Minister can logically make any other assumption in setting policy?
Helm then briefly condemns renewable and nuclear energy on the grounds of price, and offers up gas as the logical, cheaper, low-carbon alternative for the next two decades. Clearly he thinks he knows where the gas price is going, but of course that is the precise criticism he levelled at Chris Huhne in his opening paragraph. Nobody knows the future for sure, but no Minister should bet on the lower probabilities. If Helm thinks it’s too expensive to invest in renewable energy, he might want to estimate the future cost of not investing. He’ll find that was the real strength of the Stern review.
1. “Global Oil Depletion: An assessment of the evidence for a near-term peak in global oil production”, UK Energy Research Centre, September 2009.
Dr. Richard Miller is an Independent Consultant, and former geochemist for the BP Exploration Department