The age of cheap oil is over

There is no time for denial. Governments and communities need to start adapting now.

We are now inhabiting a 'post-peak' world. That is the implication of the International Energy Agency's (IEA) new report, World Energy Outlook 2001, which in its 25-year 'New Policies Scenario' projects that it is most probable that conventional crude oil production "never regains its all-time peak of 70 million barrels per day reached in 2006." In this scenario, crude oil production is most likely to stay on a plateau of around 68-69 million barrels per day.

The IEA blames a number of factors for this - a combination of supply constraints due to below-ground geological resource limits, and above-ground factors such as political obstacles to fully exploiting existing reserves (such as in Iraq), as well as international commitments to reducing fossil fuel emissions to meet climate targets.

So is this the end of industrial civilization as we know it? Not quite. Or perhaps, not yet. Despite the peak of conventional oil production, the IEA concludes that total growth in liquid fuels from other unconventional sources - such as tar sands, oil shale and natural gas liquids - will continue to make-up for the short-fall in crude until around 2035. But while this means there will be no imminent fuel shortages as such, it also means, in the words of IEA chief economist Fatih Birol, "The age of cheap oil is over."

The problem is that unconventional sources of oil and gas are far more expensive to get out of the ground and process into usable petroleum, and environmentally problematic. This means that over the next decade, oil prices are likely to become more expensive. Driven largely by industrial growth in places like China and India demand is projected to grow by 36 per cent up to 2035 - at which point, the price of oil will rise beyond $200 a barrel. On the way, by around 2015, we could see price hikes above $100 a barrel.

Even if the 'post-peak' world by no means implies the End of the World, it will nevertheless be an extremely volatile one if business-as-usual continues. The convergence of food and financial crises we saw in 2008 was one of the first signs of a strained system. Oil price volatility due to peak oil was a major factor that induced the 2008 banking crash. The collapse of the mortgage house of cards was triggered by 'post-peak' oil price shocks, which escalated costs of living and led to a cascade of debt-defaults. A study by US economist James Hamilton for the US Congress Joint Economic Committee confirmed there would have been no recession without the oil price shocks.

The oil shocks also impacted on food prices. The global industrial food system is heavily dependent on fossil fuels, consuming ten calories of fossil fuel energy for every one calorie of food energy produced. As noted by Australian agricultural expert Julian Cribb in his book The Coming Famine (2010), the six-fold rise in food prices between 2003 and mid-2008 was triggered by escalating oil prices (among other factors), and impacting severely on "farmers' fuel, fertilizer, pesticide, and transportation costs." While "financial pain was high" in developed countries, in the less developed world - from where the developed countries import much of their food - "farmers simply could not afford to buy fertilizer, and crop yields began to slip."

All this was exacerbated by a debt-dependent economic system that systematized the very kinds of dodgy derivatives trading which generated subprime mortgage blowback - with speculators throwing money into futures markets for oil and staple food commodities, rocketing prices even higher. The recession that such price hikes partially inflicted, leading consumption and production to drastically contract, allowed prices to drop. But as economies tentatively recover, as populations grow, as demand rises, the danger that we once again hit the ceiling of the world's oil capacity limits will remain.

So if the IEA is anywhere near right, we are in for a rather rough ride. The volatility of the 'post-peak' world will be difficult to predict. It is a world not of easy abundance, but of declining - and increasingly expensive - carbon-based resources. If we are to develop sufficient resilience to the various price shocks and converging crises of the 'post-peak' world, we will need to recognize that they are symptomatic of an inevitable civilizational transition toward an emerging post-carbon age. There is no time for denial. Governments and communities need to start adapting now.

Dr. Nafeez Mosaddeq Ahmed is Executive Director of the Institute for Policy Research & Development. His latest book is A User's Guide to the Crisis of Civilization: And How to Save It (Pluto, 2010). He blogs at The Cutting Edge.

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Autumn Statement 2015: George Osborne abandons his target

How will George Osborne close the deficit after his U-Turns? Answer: he won't, of course. 

“Good governments U-Turn, and U-Turn frequently.” That’s Andrew Adonis’ maxim, and George Osborne borrowed heavily from him today, delivering two big U-Turns, on tax credits and on police funding. There will be no cuts to tax credits or to the police.

The Office for Budget Responsibility estimates that, in total, the government gave away £6.2 billion next year, more than half of which is the reverse to tax credits.

Osborne claims that he will still deliver his planned £12bn reduction in welfare. But, as I’ve written before, without cutting tax credits, it’s difficult to see how you can get £12bn out of the welfare bill. Here’s the OBR’s chart of welfare spending:

The government has already promised to protect child benefit and pension spending – in fact, it actually increased pensioner spending today. So all that’s left is tax credits. If the government is not going to cut them, where’s the £12bn come from?

A bit of clever accounting today got Osborne out of his hole. The Universal Credit, once it comes in in full, will replace tax credits anyway, allowing him to describe his U-Turn as a delay, not a full retreat. But the reality – as the Treasury has admitted privately for some time – is that the Universal Credit will never be wholly implemented. The pilot schemes – one of which, in Hammersmith, I have visited myself – are little more than Potemkin set-ups. Iain Duncan Smith’s Universal Credit will never be rolled out in full. The savings from switching from tax credits to Universal Credit will never materialise.

The £12bn is smaller, too, than it was this time last week. Instead of cutting £12bn from the welfare budget by 2017-8, the government will instead cut £12bn by the end of the parliament – a much smaller task.

That’s not to say that the cuts to departmental spending and welfare will be painless – far from it. Employment Support Allowance – what used to be called incapacity benefit and severe disablement benefit – will be cut down to the level of Jobseekers’ Allowance, while the government will erect further hurdles to claimants. Cuts to departmental spending will mean a further reduction in the numbers of public sector workers.  But it will be some way short of the reductions in welfare spending required to hit Osborne’s deficit reduction timetable.

So, where’s the money coming from? The answer is nowhere. What we'll instead get is five more years of the same: increasing household debt, austerity largely concentrated on the poorest, and yet more borrowing. As the last five years proved, the Conservatives don’t need to close the deficit to be re-elected. In fact, it may be that having the need to “finish the job” as a stick to beat Labour with actually helped the Tories in May. They have neither an economic imperative nor a political one to close the deficit. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.