Oil prices touch a record $70 per barrel, petrol prices hit £1 a litre and British Gas announces another crunching 14 percent price increase. Gordon Brown berates the oil producers’ organisation Opec, and John Prescott lectures the Americans on climate change.
Research shows the scale of devastation wrought by recent hurricanes can indeed be traced to global warming. Yet carbon dioxide emissions actually rose during the first half of 2005 in Britain.
And having skipped an increase in fuel duty yet again, the Treasury was able to boast that the real tax had fallen 14 percent since the fuel lobby launched its campaign in 2000.
Such hypocrisy exposes the failings of New Labour’s energy policy and the huge economic risks that lie ahead, because of the unwillingness to reduce our dependency on fossil fuels.
The world is running out of easily accessible reserves of oil. Production in the US peaked in 1970 and has been declining steadily since.
Critically, the rate of discovery in new oil fields worldwide has been on a downwards trend since possibly 1964. Whatever the next few years brings, any fresh discoveries will come too late to prevent an energy crisis.
The precise timing of the peak in output is open to debate. Some geologists argue that 2005 may prove to be the top of the cycle.
The behaviour of oil markets certainly lends credibility to this view. There have been no “temporary” disruptions to supply as in previous crises, such as the Arab embargo of 1973, the Iran revolution of 1979 or the 1990-1 Gulf War.
But crude prices had nearly doubled before Hurricane Katrina. It seems we may be seeing the gradual plateauing of worldwide supplies that presages the inevitable decline.
Indeed, there is growing concern that Saudi Arabia will no longer be able to fulfil its historic role, acting as the swing producer, stepping into the breach when prices rise sharply. Opec may not be in a position to offset the well-documented decline in non-Opec countries, despite Mr Brown’s pleas.
Most of the cheap Saudi oil has been lifted, and in an attempt to keep production levels high, increasing quantities of treated seawater have been injected into the oil reservoirs.
The cost of extracting the oil is now rising. Some analysts believe that 30 percent of the wellflow from the Saudi Ghawar field is now water. The rising “water cut” will make it increasingly difficult to pump the oil.
Ghawar is the Saudi’s biggest field, producing nearly half of the country’s oil. Indeed, the bulk of Saudi oil comes from just five fields, where production peaked 20 to 30 years ago. The state controlled Saudi Aramco has been unable to find any new fields to remotely compare with these super-giants.
The “geological shortage” is being exacerbated by insatiable demand. Contrary to Gordon Brown’s assertions over the weekend, Chinese demand has been weaker than expected this year.
But here in the West, there was certainly little evidence prior to Katrina that rising oil prices had dampened demand for gas-guzzling SUVs and light trucks. US car sales were the second highest on record in July.
For countries that have become addicted to heavy consumer borrowing and runaway house prices to sustain economic growth, a further rise in oil prices could spell real trouble. Aided and abetted by New Labour, the Bush administration has bound its foreign policy up in the pursuit of energy security to underpin its economy. That strategy is now in tatters.
In short, the political pressure for a sustainable energy policy is mounting. The market is imposing its own solution to a scarce resource, pushing prices higher. Given the risks to climate change, it might be tempting to sit back and applaud.
If governments are not prepared to act and prevent the planet from overheating, perhaps nature in its own way is telling us the game is up — the oil is running out, and a further rise in prices might at least give the West a better chance of hitting emission targets.
But such an approach means the impact of higher energy costs will inevitably fall disproportionately on the least well-off. Curbing energy demand cannot be left to the “invisible hand” for one other critical reason.
The free market has ridden roughshod over the costs for us all of a hydrocarbon economy ever since coal became the dominant source of fuel.
The free market is not interested in new technologies if there is no obvious payback. It is the duty of governments to intervene, to accelerate the development of cleaner, safer alternatives. In the meantime, energy demand may have to be curbed, if needs be, by rationing and not simply through price hikes.
That will ensure the burden of adjustment is shared evenly.