Abundant supplies of cheap liquid fuels form the foundation of modern industrial
economies and at present the vast majority of these fuels are obtained from ‘conventional’
oil. But a growing number of commentators are forecasting a near-term peak and
subsequent terminal decline in the production of conventional oil as a result of the physical
depletion of the resource. Many believe that this could lead to substantial economic
dislocation, with alternative sources being unable to ‘fill the gap’ on the timescale
required. In contrast, other commentators argue that liquid fuels production will be
sufficient to meet global demand well into the 21st century, as rising oil prices stimulate
exploration and discovery, the enhanced recovery of conventional oil and the development
of ‘non-conventional’ resources such as oil sands. The first group claims that physical
depletion will have a dominant influence on future oil supply, while the latter emphasise
how depletion can be mitigated by investment and new technology. A concern for both is
whether the relevant organisations will have the incentive and ability to invest.
Despite much popular attention, the growing debate on ‘peak oil’ has had relatively little
influence on energy and climate policy. Most governments exhibit little concern about oil
depletion, several oil companies have been publicly dismissive and the majority of energy
analysts remain sceptical. But beginning in 2003, a combination of strong demand growth,
rising prices, declining production in key regions and ominous warnings from market
analysts has increased concerns about oil security. While the global economic recession
has brought oil prices down from their record high of July 2008, the International Energy
Agency (IEA) is warning of a near-term ‘supply crunch’ owing to the cancellation and delay
of many upstream investment projects. There is a growing consensus that the age of
cheap oil is coming to an end.
Without sufficient investment in demand reduction and substitute sources of energy, a
decline in the production of conventional oil could have a major impact on the global
economy. In addition, the transition away from conventional oil will have important
economic, environmental and security implications which need to be anticipated if the
appropriate investments are to be made. While the timing of a future peak (or plateau) in
conventional oil production has been a focus of debate, what appears equally important is
the rate at which production may be expected to decline following the peak and hence the
rate at which demand reduction and alternative sources of supply may be required. In
addition, there are uncertainties over the extent to which the market may be relied upon
to signal oil depletion in a sufficiently timely fashion
Report Material

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