>How to Avoid Oil Wars, Terrorism, and Economic Collapse
>by Richard Heinberg
Museletter No 160 (August 2005)
By now most well-informed people are aware that global oil production may soon reach its all-time peak, and that the consequences will likely be severe.
Already many important oil-producing nations (such as the United States, Indonesia, and Iran) and some whole regions (such as the North Sea) are past their production maximums. With nearly every passing year another country reaches a production plateau or begins its terminal decline.
Meanwhile global rates of oil discovery have been falling since the early 1960s, as has been confirmed by ExxonMobil. All of the 100 or so supergiant fields that are collectively responsible for about half of current world production were discovered in the 1940s, 1950s, 1960s, and 1970s. No fields of comparable size have been found since then; instead, exploration during recent years has turned up only much smaller fields that deplete relatively quickly. The result is that today only one new barrel of oil is being discovered for every four that are extracted and used.
World leaders are hampered in their ability to assess the situation by a lack of consistent data. Proven petroleum reserve figures look reassuring: the world has roughly a trillion barrels yet to produce, perhaps more; indeed, official reserves figures have never been higher. However, circumstantial evidence suggests that some of the largest producing nations have inflated their reserves figures for political reasons. Meanwhile oil companies routinely (and legitimately) report reserve growth for fields discovered decades ago. In addition, reserves figures are often muddied by the inclusion of non-conventional petroleum resources, such oil sands – which do need to be taken into account, but in a separate category, as their rates of extraction are limited by factors different from those that constrain the production of conventional crude. As a consequence of all of these practices, oil reserves data tend to give an impression of expansion and plenty, while discovery and depletion data do the opposite.
This apparent conflict in the data invites dispute among experts as to when the global oil peak is likely to occur. Some analysts say that the world is virtually at its peak of production now; others contend that the event can be delayed for two decades or more through enhanced investment in exploration, the adoption of new extraction technologies, and the substitution of non-conventional petroleum sources (oil sands, natural gas condensates, and heavy oil) for conventional crude.
However, there is little or no disagreement that a series of production peaks is now within sight – first, for conventional non-OPEC oil; then for conventional oil globally; and finally for all global conventional and non-conventional petroleum sources combined.
Moreover, even though there may be dispute as to the timing of these events, it is becoming widely acknowledged that the world peak in all combined petroleum sources will have significant global economic consequences. Mitigation efforts will require many years of work and trillions of dollars in investment. Even if optimistic forecasts of the timing of the global production peak turn out to be accurate, the world is facing an historic change that is unprecedented in scope and depth of impact.
Due to systemic dependence on oil for transportation, agriculture, and the production of plastics and chemicals, every sector of every society will be affected. Efforts will be needed to create alternative sources of energy, to reduce demand for oil through heightened energy efficiency, and to redesign entire systems (including cities) to operate with less petroleum.
These efforts will be challenging enough in the context of a stable economic environment. However, if prices for oil become extremely volatile, mitigation programs could be undermined. While high but stable prices would encourage conservation and investment in alternatives, prices that repeatedly skyrocket and then plummet could devastate entire economies and discourage long-term investment. Actual shortages of oil – of which price shocks would be only a symptom – would be even more devastating. The worst impacts would be suffered by those nations, and those aspects of national economies, that could not obtain oil at any price affordable to them. Supply interruptions would likely occur with greater frequency and for increasing lengths of time as global oil production gradually waned.
Efforts to plan a long-term energy transition would be frustrated, in both importing and exporting countries. Meanwhile the perception among importers that exporting nations were profiteering would foment animosities and an escalating likelihood of international conflict.
In short, the global peak in oil production is likely to lead to economic chaos and extreme geopolitical tensions, raising the spectres of war, revolution, terrorism, and even famine, unless nations adopt some method of cooperatively reducing their reliance on oil.
A Plan for Global Powerdown
The Oil Depletion Protocol provides a way forward (the text appears at the end of this article). It was drafted by the Association for the Study of Peak Oil; however, the source of the document is of little importance – only its substance is of interest. While it is merely a suggested outline and will require fleshing out and detailed negotiation, the Protocol is inherently simple. As will be clear from the Discussion below, it would be unnecessary for all nations to ratify the Protocol in order for it to have a beneficial effect; if even one nation adopts it, that nation will be benefited. However, if a substantial number of nations sign on this will create a platform for international economic stability and cooperation.
The Protocol will be presented at several important international conferences attended by world leaders in late 2005. Efforts will also be made to publicize and communicate it to the general public. It is hoped that a few courageous politicians in each country will understand its importance and bring it before their governing bodies for consideration and adoption.
How Would It Work?
The idea of the Protocol is inherently straightforward: oil importing nations would agree to reduce their imports by an agreed-upon yearly percentage (the World Oil Depletion Rate), while exporting countries would agree to reduce their rate of exports by their national Depletion Rate.
The concept of the Depletion Rate is perhaps the most challenging technical aspect of the Protocol, yet even it is easy to grasp given a little thought. Clearly, each country has a finite endowment of oil from nature; thus, when the first barrel has been extracted, there is accordingly one less left for the future. What is left for the future consists of two elements: first, how much remains in known oilfields, termed Remaining Reserves; and second, how much remains to be found in the future (termed Yet-to-Find). How much is Yet-to-Find may be reasonably estimated by extrapolating the discovery trend of the past. The Depletion Rate equals the total yet-to-produce divided by the yearly amount currently being extracted.
Let us explore a few examples:
Norway is a country that reports exceptionally accurate reserve estimates. The total produced to-date is 18.5 billion barrels (Gb), and 11.3 Gb remain in known fields, with about 2 left to find, giving a rounded total of 32 Gb. It follows that 13.5 Gb are left to produce. In 2004, 1.07 Gb were extracted, giving a Depletion Rate of 7.4 percent (1.07/13.5). This is a comparatively high rate, typical of an offshore environment.
In the case of the US (considering only the lower 48 states and excluding deepwater), the corresponding numbers are: produced to-date, 173 Gb; Remaining Reserves, 24 Gb; Yet-to-Find, 2 Gb – meaning that there are 27 Gb left. Annual production in 2004 was 1.3 Gb, giving a Depletion Rate of 4.6 percent (1.3/27).
For the world as a whole, 944 Gb have been produced; 772 remain in known fields; and an estimated 134 Gb is Yet-to-Find, meaning that 906 Gb are left. Production of conventional oil in 2004 was 24 Gb, so the Depletion Rate is 2.59 percent (24/906).
These estimates exclude non-conventional oil – oil shales, bitumen (oil sands), extra-heavy oil, heavy oil, deepwater oil, polar oil, and liquids from gasfield plants. Most oil produced to date has been of the conventional variety, which will dominate all supply far into the future, so it makes sense to concentrate on this category.
It must be stressed that current Reserves estimates in the public domain are grossly unreliable, and one of the purposes of the Protocol is to secure better information. The assessed Depletion Rate for each country, and eventually for the World as whole, is subject to revision when better information becomes available, but the resulting correction of the Depletion Rate will not be large, probably causing it to vary by less than one percent.
The Depletion Protocol would require importers to reduce their imports by the World Depletion Rate (that is, 2.5 percent) each year in order to put demand into balance with world supply. As stated earlier, exporters would reduce their production according to their national Depletion Rate. Thus Norway would reduce its production by 7.4 percent each year (that country’s production is already declining at an even higher rate).
The imposition on the producing countries represents no great burden, since few can now increase their rate of production in any case, and many are experiencing declining production for purely geological reasons, as is the case with Norway and the US. Agreeing to produce less oil would not inhibit exploration because new finds would lower the national Depletion Rate, and thus permit a higher rate of export than would otherwise be the case. The main thrust of the Protocol would be to require importers to cut imports, but the inclusion of producers in the provisions would stimulate greater cooperation between the two factions. Any indigenous production in a country that was a net importer would not be likely to provide that country with an unfair advantage, as production within most importing countries is already declining at a rate higher than the World Depletion Rate.
How importers dealt internally with the import restriction would be up to them (though strategies both to obtain supplies of alternative fuels and to reduce demand for oil would doubtless be required). Some might wish to introduce an energy allowance as a form of tradable ration (as will be discussed in more detail below).
Discussion of the Protocol
Questions and Possible Objections
The Protocol may at first look like merely a good idea with no real chance of implementation. However, closer inspection suggests that its implementation will benefit nearly all important global stakeholders and that objections likely to be raised to it are easily countered.
What if forecasts of a near-term peak in global oil production are wrong? Won’t there be a cost to preparing for the oil peak too early? In practical terms, won’t this mean voluntarily choking off economic growth?
Because so much is at stake, it is important that these vital questions be addressed not just by partisan participants in the debate over the timing of the oil-production peak (the so-called “oil optimists” and the “oil pessimists”); some independent assessment is required of the costs of preparing too soon versus the costs of preparing too late.
Fortunately, such an assessment has already been undertaken – “Peaking of World Oil Production: Impacts, Mitigation, & Risk Management”, a Report prepared by Science Applications International Corporation (SAIC) for the US Department of Energy, released in February 2005, and authored principally by Robert L Hirsch (hereinafter referred to as “the SAIC Report”).
The SAIC Report concludes that substantial mitigation of the economic, social, and political impacts of Peak Oil can come only from efforts both to increase energy supplies from alternative sources and to reduce demand for oil. With regard to the claim that efficiency measures will be enough to forestall dire impacts, Hirsch and coauthors note that, “While greater end-use efficiency is essential, increased efficiency alone will be neither sufficient nor timely enough to solve the problem. Production of large amounts of substitute liquid fuels will be required.” Further, “Mitigation will require a minimum of a decade of intense, expensive effort, because the scale of liquid fuels mitigation is inherently extremely large”. Hirsch and coauthors also point out that “The problems associated with world oil production peaking will not be temporary, and past ‘energy crisis’ experience will provide relatively little guidance”.
The SAIC Report agrees that mitigation efforts undertaken too soon would exact a cost on society. However, it concludes that, “If peaking is imminent, failure to initiate timely mitigation could be extremely damaging. Prudent risk management requires the planning and implementation of mitigation well before peaking. Early mitigation will almost certainly be less expensive than delayed mitigation.”
What if the pessimists are right and the world is at its peak of oil production now? In that case, is it too late to implement the Depletion Protocol?
If the world reaches the peak of production within the next two years there will be too little time to undertake major mitigation efforts prior to the event, and therefore there are likely to be severe economic, social, and political impacts, as outlined in the SAIC Report.
However, in that case the need for the Protocol should quickly and widely become apparent. While all nations will suffer from higher prices and shortages, only a cooperative system of national and international quotas will avert the even more extreme economic and geopolitical crises that would otherwise ensue.
Why can’t the market take care of the problem? Won’t high prices stimulate more exploration and the development of alternatives? Wouldn’t interference with market mechanisms be harmful?
The SAIC Report’s authors dismiss the claim that the market will solve any shortage problems arising from global oil production peak, with higher oil prices stimulating investments in alternative energy sources, more efficient cars, and so on. Price signals warn only of immediate scarcity. However, the mitigation efforts needed in order to prepare for the global oil production peak and thus to head off shortages and price spikes must be undertaken many years in advance of the event. Hirsch and coauthors maintain that, “Intervention by governments will be required, because the economic and social implications of oil peaking would otherwise be chaotic. The experiences of the 1970s and 1980s offer important guides as to government actions that are desirable and those that are undesirable, but the process will not be easy.”
Historically, oil production has often been managed by governments or by cartels. In petroleum’s early days, free-market boom-and-bust cycles bankrupted many players (including the “father” of the oil industry, Edwin Drake). Soon John D Rockefeller brought a certain order to the situation through the creation of the Standard Oil Trust (in doing so he squeezed out many competitors and personally profited to an extraordinary degree). This regime came to an end in 1911, when the US Government broke up Standard Oil after prosecution for violation of anti-trust laws. Starting in the 1930s, with the US in position to control global oil prices, the Texas Railroad Commission capped production levels in order to stabilize the market. After US oil production peaked in 1971 and that nation lost its ability to control global prices, petroleum’s center of gravity shifted to the Middle East, and OPEC began mandating production quotas for its members in order to keep prices within a desirable band.
While the management of oil prices globally thus has precedents, the situation in the future will be fundamentally different than heretofore, in that previously the problem was too much oil and collapsing prices that offered little incentive for exploration. The situation the world will soon face is that of insufficient supply leading to extreme price shocks, price volatility, and acute shortages. Thus a new kind of management scheme will be required.
How will adoption of the Protocol affect importers and exporters differently?
Importers: No one doubts that industrial nations will find it difficult to sustain economic growth while using less oil on a yearly basis. Thus the voluntary adoption of the Protocol by importers would seem disadvantageous – a “tough sell”.
However, it must be recognized that a decline in the availability of oil is inevitable in any case; only the timing of the onset of decline is uncertain. Without a structured agreement in place to limit imports, nations will be inclined to put off preparations for the energy transition until prices soar, at which time such a transition will become far more difficult because of the ensuing chaotic economic conditions. With the Protocol in place, importers will be able to count on stable prices and can then more easily undertake the difficult but necessary process of planning for a future with less oil.
Poor importing countries may object that by using less petroleum they will have to forego conventional economic development. However, further development that is based on the use of petroleum will merely create structural dependency on a depleting resource. Without the Protocol, these nations will be financially bled by high and volatile prices. With the Protocol in place and with prices stabilized, these nations will be able to afford to import the oil they absolutely need; meanwhile they will have every incentive to develop their economies in a way that is not petroleum-dependent.
Exporters: Economies that are based primarily on income from the extraction and export of natural resources often tend to give rise to governments that are more responsive to the interests of powerful foreign resource buyers than they are to the needs of their own citizens. Thus it is in the interest of resource-exporting countries to develop indigenous industries in order to diversify their economies.
Countries that depend primarily on income from oil exports will need to wean themselves from this dependence eventually in any case, as their oilfields are depleted; the Protocol provides them a means of making the transition in a way that will allow for long-term planning.
Without the Protocol, smaller exporting nations will likely be at the mercy of militarily powerful importers. The Protocol will provide a means of minimizing external political interference in these nations’ affairs. As a result, much international tension and conflict, including the threat of terrorism, can be minimized – which will be a help also to the wealthy importers.
How will the oil companies be affected?
Without the Protocol, the oil companies may enjoy record revenues – for a time. But they will be demonized for profiting from the misery of the rest of society; meanwhile, they will be hampered in their operations by the destabilization of national economies resulting from wildly gyrating oil prices. As noted earlier, the Standard Oil Trust, the Texas Railroad Commission, and OPEC all provided production-rationing mechanisms that brought order out of what would otherwise have been chaotic situations. The oil companies (sometimes reluctantly) accepted these mechanisms, recognizing that a stable economic environment was more important to them in the long run than the opportunity to make momentary windfall profits.
With the Protocol, the oil companies will remain profitable, they will have the incentive to undertake further exploration, and they will be able to plan for decades ahead. They will also be motivated to become more generalized energy companies (rather than remaining merely oil companies) and thus to invest in the development of alternative energy sources.
There is already evidence that the oil companies are concerned about a public backlash as gasoline prices soar: ChevronTexaco has initiated an expensive public-relations campaign titled “Will You Join Us?”, featuring a web site (www.willyoujoinus.com) and expensive newspaper ads informing readers that “the era of easy oil is over” and asking for public discussion on the issue. The Oil Depletion Protocol will provide more long-term security for the petroleum industry than any PR campaign ever could, and at no cost.
Won’t both importers and exporters be tempted to cheat? How would the Protocol be enforced?
The Protocol will require a system for monitoring production, exports, and imports – which cannot be hidden to a large degree in any case. Enforcement will require the establishment of a Secretariat for adjudication of disputes and claims, and a system of economic penalties to be negotiated by the agreeing nations.
How can nations adjust internally to having less oil?
Withdrawal from oil dependency will be an immense challenge that will require cooperation and compromise on everyone’s part. Efforts will be needed both to create supplies of alternative fuels and to reduce the demand for oil.
The latter task will be much easier if systems are designed to make it in individuals’ interest not only to reduce their own oil dependency but also to persuade others to reduce theirs. One such system for creating collective motivation and cooperation consists of Domestic Tradable Quotas, or DTQs.
DTQs can be used to ration all hydrocarbon energy sources (in order to reduce greenhouse gas emissions) or specific fuels such as oil. For the sake of discussion, let us assume the use of DTQs for petroleum only, as a way of implementing the Depletion Protocol within nations.
First, a national Petroleum Budget would be drawn up, based on the nation’s indigenous production and oil imports as mandated by the Oil Depletion Protocol. A segment of the Petroleum Budget would then be issued as an unconditional entitlement to all adults and divided equally among them; the remainder would be auctioned to industry, commercial users, and government. The units could then be bought and sold, so that users unable to cope with their ration could increase it, while others who kept their fuel consumption low could sell and trade their Petro-units on the national market. All transactions would be carried out electronically, using technologies and systems already in place for direct debit systems and credit cards.
When consumers (citizens, businesses, or the government) made purchases of fuel, they would surrender their quota to the energy retailer, accessing their quota account by (for instance) using their Petro-card or direct debit. The retailer would then surrender the carbon units when buying energy from the wholesaler. Finally, the primary energy provider would surrender units back to the National Register when the company pumped or imported the oil. This closes the loop.
All purchases of petroleum would be made with Petro-units, whether the oil were used as fuel or as feedstock for plastics or chemicals. So long as the petroleum remained fuel, Petro-units would have to be passed back up the line, starting with the end user. However, if the petroleum were incorporated as feedstock into the manufacturing of a product (such as plastics), the manufacturer would simply add the cost of the Petro-units into the cost of the product. Thus, in the case of feedstocks, the manufacturer of goods would be the presumed end user.
Purchasers not having any Petro-units to offer at point of sale – foreign visitors, people who had forgotten their card or cashed-in all their quota as soon as they received it – would buy a quota at point of purchase, then immediately surrender it in exchange for fuel, but would pay a cost penalty for this (that is, the bid-and-offer spread quoted by the market).
DTQs place everyone in the same boat: households, industry, and government would have to work together, facing the same Petroleum Budget, and trading on the same market for Petro-units. Everyone would have a stake in the system. All would have the sense that their own efforts at conservation were not being wasted by the energy profligacy of others, and that the system was fair.
Moreover, DTQs are guaranteed to be effective, because the only fuel that could be purchased would be fuel within the Budget. The Budget would set a long time-horizon so that people would have the motivation and information they needed to take action in the present to achieve drastic reductions in oil use over a twenty-year timeframe.
What if only a few nations sign on? Won’t the Protocol be ineffectual if a few large exporters or importers refuse to do so?
At first it might seem that those nations not adopting the Protocol would achieve an advantage. However, any temporary benefit would be purchased at the expense of later economic calamity. As discussed in the SAIC Report, nations that embark on the energy transition sooner will be much better off than those procrastinating.
What about natural gas and coal – should there be similar protocols for these? Might countries simply burn more coal to make up for having less oil?
The Oil Depletion Protocol will not preclude other agreements aimed at reducing fossil fuel usage in order to avoid impacts to the global climate, but it will be more ambitious in its reduction trajectory than the Kyoto Protocol or the Asia Pacific Partnership on Clean Development and Climate. If nations’ experience with the Oil Depletion Protocol is positive, this will provide motivation for the forging of similar agreements covering these other fossil fuels.
How can the process of adopting the Oil Depletion Protocol begin?
A program to win implementation of the Protocol must focus on educating both the general public and top-level decision-makers.
Adoption of the Protocol will require that a few policy makers champion it and bring it before their national parliament or congress. If even one country adopts the Protocol, this will help to open a global discussion.
At the same time, it is important that citizens understand the issues and what is at stake, as pressure on elected officials from below will help focus the latter’s attention on the matter.
In the near future, a program will be underway to obtain endorsements of the Protocol from prominent organizations and individuals. This article is part of a preliminary effort to inform the public of both the Peak Oil issue and the Oil Depletion Protocol. Please help by copying this article and sending it to family, friends, colleagues, the media, and elected officials. This may be our last, best opportunity to avert resource wars, terrorism, and economic collapse as we enter the second half of the Age of Oil.
THE OIL DEPLETION PROTOCOL
WHEREAS the passage of history has recorded an increasing pace of change, such that the demand for energy has grown rapidly in parallel with the world population over the past two hundred years since the Industrial Revolution;
WHEREAS the energy supply required by the population has come mainly from coal and petroleum, having been formed but rarely in the geological past, such resources being inevitably subject to depletion;
WHEREAS oil provides ninety percent of transport fuel, essential to trade, and plays a critical role in agriculture, needed to feed the expanding population;
WHEREAS oil is unevenly distributed on the Planet for well-understood geological reasons, with much being concentrated in five countries, bordering the Persian Gulf;
WHEREAS all the major productive provinces of the World have been identified with the help of advanced technology and growing geological knowledge, it being now evident that discovery reached a peak in the 1960s, despite technological progress, and a diligent search;
WHEREAS the past peak of discovery inevitably leads to a corresponding peak in production during the first decade of the 21st Century, assuming no radical decline in demand;
WHEREAS the onset of the decline of this critical resource affects all aspects of modern life, such having grave political and geopolitical implications;
WHEREAS it is expedient to plan an orderly transition to the new World environment of reduced energy supply, making early provisions to avoid the waste of energy, stimulate the entry of substitute energies, and extend the life of the remaining oil;
WHEREAS it is desirable to meet the challenges so arising in a co-operative and equitable manner, such to address related climate change concerns, economic and financial stability and the threats of conflicts for access to critical resources.
NOW IT IS PROPOSED THAT
1. A convention of nations shall be called to consider the issue with a view to agreeing an Accord with the following objectives:
a. to avoid profiteering from shortage, such that oil prices may remain in reasonable relationship with production cost;
b. to allow poor countries to afford their imports;
c. to avoid destabilising financial flows arising from excessive oil prices;
d. to encourage consumers to avoid waste;
e. to stimulate the development of alternative energies.
2. Such an Accord shall have the following outline provisions:
a. No country shall produce oil at above its current Depletion Rate, such being defined as annual production as a percentage of the estimated amount left to produce;
b. Each importing country shall reduce its imports to match the current World Depletion Rate, deducting any indigenous production.
3. Detailed provisions shall cover the definition of the several categories of oil, exemptions and qualifications, and the scientific procedures for the estimation of Depletion Rate.
4. The signatory countries shall cooperate in providing information on their reserves, allowing full technical audit, such that the Depletion Rate may be accurately determined.
5. The signatory countries shall have the right to appeal their assessed Depletion Rate in the event of changed circumstances.
(Note: the Oil Depletion Protocol has elsewhere been published as “The Rimini Protocol” and “The Uppsala Protocol”. All of these documents are essentially identical.)
Sources of further information
On Domestic Tradable Quotas (DTQs):
On the SAIC Report:
Richard Heinberg is the author of Powerdown – Options and Actions for a Post-Carbon World (New Society Publishers 2004). He is a journalist, educator, editor, and lecturer, and a Core Faculty member of New College of California, where he teaches courses on “Energy and Society” and “Culture, Ecology and Sustainable Community”.
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