The Possible Consequences of Peak Oil


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We have seen in the "Fossil Fuels" section how the evidence for a peak or plateau in world oil production during the 2000 - 2010 decade is compelling. Given the importance of oil, it follows that the consequences of Peak Oil must be analysed to the extent feasible.

A word of strong warning is needed here. This discussion is based on two assumptions:

  1. A plateau in oil production will occur during the 2000 - 2010 decade
  2. There are few, if any, substitutes for oil in its many and varied uses

The second assumption will be discussed in more details in this section. Let's remind ourselves of the importance of oil by examining its share of as a primary energy source and by examining its main uses.

 

The Primary Sources of Energy for the World

Primary Energy Source

% of Worlds Energy

Oil

34

Natural gas

21

Coal

23

Nuclear

7

Water Flow

2

Bio mass

12

Wind and Solar

<1

Source: IEA 2004 World Energy Outlook

 

The Main Uses for Oil

 

Transportation

Planes, Trains, Motor Vehicles, Vessels

Chemical Feedstock

Natural Gas Liquids made into various chemicals

Other

Boiler Fuel, Asphalt, Power generation

Oil

70%

20%

10%

Source: Simmons and Company International

 

From the above tables we see that 34% of world energy needs are provided by oil and 70% of the oil is used for transportation. Furthermore 95% of all transportation requires oil. The near complete dependency of transportation systems on oil is evident. To move things around requires oil. This state of affairs came about because oil is a concentrated source of energy, liquid at room temperature that can conveniently be stored and pumped into and out of reservoirs.

The advantages of oil for transport mean that no sources of energy come anywhere close to it, and so there are few if any substitutes for oil in transportation. Unless a truly novel form of energy is discovered and there are no signs of that happening, the clear-cut advantages of oil as transport fuel will remain unmatched.

It is important to clearly point out these two important facts:

  1. To move things around requires oil
  2. To date, there are limited substitutes for oil in the transportation sector

There are trains running on coal or on electricity generated from natural gas, hydro electricity, or nuclear power. There are cars running on natural gas. Coal can be used to manufacture synthetic oil. However they are very limited as substitutes for oil because to change the transport infrastructure to use gas or coal for instance would take years due to its sheer size and also because the lifetimes of ships, aircraft, lorries, trains and cars are measured in decades. Furthermore, air transport cannot use anything else but oil. The manufacture of synthetic oil from coal will be dealt with in the section on coal but it suffices to say that very little liquid fuel is as present manufactured this way.

The decade 2000 - 2010 is set to see a plateau in the production of oil. The dependence of transportation on oil means that once the plateau reached, this sector will be hit hardest and soonest. The imminence of the production plateau and the lack of alternatives mean that there is very little room to manoeuvre. Transportation will have to contract even if it becomes more efficient in its use of oil. Where possible, there will probably be an increase in rail transport given it is an energy efficient mode of locomotion that does not require oil to run.

Transport contraction and at greater cost will have numerous impacts on any economy. Fewer goods will be transported resulting in fewer goods to buy. The economy will have to contract accordingly even though it might be mainly a service-orientated economy for even in such economies goods are brought in for sale from somewhere else. Indeed, service-orientated economies can exist only because manufacturing has been displaced some place else. Goods are then brought in from afar. This is the essence of globalisation: the delocalisation of cheap manufacturing to poorer countries like China, India and also Mauritius whilst high value added services or advanced manufacturing are retained in rich countries.

In effect, initially the process of globalisation will slow down as transport costs increase rapidly and then as transport becomes more difficult and less available, globalisation will grind to a halt. Any prolonged period of costly and much less frequent transport will force countries to abandon globalisation as an engine for economic growth. A period of relocalisation of production of industrial goods will begin.

 

Food Production and Industrial Agriculture

Food production is currently delocalised to a large extent. More and more countries are becoming net food importers and relying on fewer and larger food producing countries or regions like the US, the EU, Australia and Argentina for staple foods such as corn and wheat. Food production has evolved since the Second World War to become very dependent on the consumption of large quantities of natural gas for the manufacture of fertilisers and pesticides and on oil to move farm machinery and to dispatch food to markets. Any contractions in oil supplies will affect greatly the growing, processing and distribution of food to markets. Food shortages appear both inevitable and possibly intractable as time goes by.

Inevitably, each country or region will have to grow a greater share of its food locally to avoid food shortages. However the transition from a largely globalised food manufacturing industry to a largely decentralised and localised food manufacturing industry will not be easy nor smooth. Fewer people than before have the necessary skills to grow food by themselves. Urbanisation, land degradation and soil erosion have removed from agricultural use large tracts of land in both rich and poor countries alike. There is less land to feed greater numbers of people and water is becoming a major constraint in many countries. Peak oil will aggravate world food security already under stress.

Industrial Fisheries

Fisheries, worldwide, are being over-exploited, leading at times to collapse. As oil becomes more expensive and less available, it appears that there should be less fishing activity and thus fisheries might recover a bit. However, once scarcity becomes prevalent, political authorities will allocate fuel preferentially to a number of critical sectors like emergency services, police forces and so on. It is possible that, at least initially, the fishing industry might be allocated enough oil to continue its activities given the importance of this sector. Hence, the pressure on fisheries might continue unabated. Nevertheless, on the medium term, even fishing activities will have to decline. Furthermore, coastal fisheries that feed coastal communities mainly will have greater difficulties in sustaining their fishing activity, it will impact on their economic well being and even their health as an excellent source of protein (fish) may become deficient.

The Airline and Tourism Industry

The total reliance of the airline and tourism industry on oil means this industry will probably be the first to be affected. Already, high oil prices are causing fuel surcharges on air tickets and in the US a number of airlines are close to bankruptcy. Over time, international air travel and tourism will be restricted to the rich and powerful. Mass tourism will decline into extinction. The economic consequences of this decline will be severe for many countries.

Geopolitics and World Peace

High prices and subsequent scarcity of oil cannot be a trivial event from a geopolitical perspective. Throughout the 20th century, security of oil supplies had always been a prime factor in the foreign policies of powerful nations. Indeed, on the eve of the First World War (1914-1918), Imperial Germany tried unsuccessfully to secure its access to Middle Eastern oil by making an alliance with the declining Ottoman Empire and build the Berlin to Baghdad railway line. On the other hand the British, always craftier than the rest, managed to transform the Middle East into its sole playground and ensured that its mighty Royal Navy was in a position to control the sea lanes to safeguard a ready supply of oil from Persia.

Indeed, only a few years before, the Royal Navy, spurred on by Winston Churchill, decided to switch its fleet to oil. The tactical advantages of this transition to oil were far too great to have any second thoughts about the matter. Oil based ships were faster, more powerful and above all could have a greater range due to the greater energy concentration of oil compared to coal. Imperial Germany and Austria had access only to limited Romanian oil. It has been said that the abundant oil supply enjoyed by the Allies during the First World War was a major contributing factor in their victory over Imperial Germany.

Similarly, during the Second World War, the Axis forces were continually hampered by the lack of oil. Although Japan invaded Indonesia for its oil, it had immense difficulties in shipping enough oil to its industry and over-stretched forces due to US submarines rampaging throughout the Pacific. Germany fared no better as it had access only to Romanian oil. It failed in its endeavour to invade the Caucasus to secure its oil resources when the Soviet Red Army stopped the Germans at Stanlingrad and defeated them in Crimea. It is interesting to note that Germany produced half of its oil by coal liquefaction. Although it had ample coal, a competent workforce, a large industrial base, and was motivated enough by the war effort, it failed to supply enough oil to its war machine. Therein lies a lesson for us, even though it is technically possible to produce synthetic oil from abundant coal supplies, it does not follow that we could substitute a large fraction of what is consumed daily from conventional oil with oil from coal liquefaction. Germany failed to do it. This is fact. On the other hand, the Allies never ran short of oil as the US, which was the largest producer then, and Venezuela did supply all the oil needed for the Allied war machine.

The Cold War was also about securing Middle Eastern oil badly needed to rebuild Europe and Japan after the war and to confront the Soviets simultaneously. It would have been impossible for the West to confront the USSR without Middle Eastern oil because the US had become a net importer of oil by the fifties. The Allies needed more oil from elsewhere and that could only be from the Middle East. The Soviet Union on the other hand was not only self sufficient in oil, but it could also supply its own allies: East Europe, China (oil production began in China only in late fifties with the help of the Soviet Union) and Cuba later on. It is fascinating to note that oil production in the Soviet Union peaked in 1987, a few short years before its collapse in 1991. It is possible that the two events are not unrelated though the exact chain of causality might be difficult to establish.

The invasion of Kuwait by Iraq in 1990 and the invasion of Iraq by the US in 2003 have been touted as unrelated to oil issues by both the US and the UK Governments and by large sections of the Western media. Even well informed and highly intelligent people assert that oil had nothing to do with this invasion. This stand borders on the infantile and the ridiculous for two major reasons.

  1. Oil is indispensable for any modern war machine, hence it is a strategic material and as such it conveys considerable wealth and power to its owner even in the absence of peak oil issues.
  2. Iraq is situated in the heart of the Middle East, close to major oil producers like Saudi Arabia and Iran. The oil reserves of these three countries, though probably inflated to some significant degree, are the largest in the world. Any super power having a large military presence there has the power to deny any country dependent on Middle Eastern oil its share of supplies. Few countries would relinquish such enormous political advantage.

The above mean that oil issues probably played a considerable role in the US decision to invade Iraq in 2003. The strategic and economic importance of oil also mean that peak oil issues will greatly accelerate the race to control oil supplies and reserves. Increases in oil prices add fuel to fire and scarcity in supplies can potentially trigger military confrontation between major powers. This potential for major conflict means that it becomes next to impossible to sensibly and intelligently forecast how major powers will react. The world will have entered uncharted territory.

Therein lies the greater danger associated with peak oil: How will the major nuclear-armed powers react when high oil prices followed by interruption in supply begin to create intractable and potentially catastrophic economic, social and political problems. A major discontinuity in human affairs may be reached.

 

Date on the web: 1st August 2005