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By Patrick Reynolds, on March 9th, 2012 There has been a noticeable change in the reporting of global oil supply issues recently, although not locally. First I was quite surprised to see this article in the UK’s Daily Telegraph. Surprised because hitherto the Telegraph has largely run skeptical views on Peak Oil:
Plateau oil meets 125m Chinese cars
The clever, or coy, replacement of ‘peak’ with ‘plateau’ refers to the fact that global oil supply has been bouncing around on a bumpy plateau since 2005 despite the ever rising price signal from the market. Economics 101 says that this shouldn’t happen; increase in price should lead to an increase in supply. And as the years of no meaningful addition to supply keep accumulating it seems we really have met a geological limit to oil production. As the article points out:
‘The West has the disquieting experience of watching crude soar even as we languish in stagnation.’
And the reason for this is that ‘The West’ or the OECD, for the first time, is not the source of the demand that is driving the increase in price. Hence the reference to 125m Chinese cars, as this is the number of additional cars the article claims are due to hit Chinese roads over the next five years. This is a bit of an oversimplification as it isn’t just in China by any means where demand is growing but all over the developing world this is the case, including the countries that are net exporters of oil like in the Middle East. So much so they increasingly have a smaller quantity to export even where they are maintaining production.
Here’s a consumption graph, sure China and India are steadily growing, but look at that ‘non-OECD’ demand [including Chindia]. Soon to overtake the OECD as the biggest draw on world oil supply. This really is the beginning of a new era.
 souce: Samuel Foucher/Logi Energy LLC Note that there has been a decline in Europe and US, which largely reflects contracting economies. Also something of shame that Japan is not separated out here as post Fukushima they are the only sizable OCED nation to be increasing imports, but not because of a booming economy, quite the reverse, in order to replace the knocked out nuclear energy source.
So you can see why the title of the article with chart is called:
Oil demand shift: Asia takes over
 Vietnam; efficient use of transport! A great image illustrating a very sharp summary of the current situation:
The realization that oil prices aren’t about them anymore has been slow to dawn on Americans after a century of being the world’s swing consumers. But the fact is that the world’s developing economies have been outbidding the developed OECD countries for oil since 2005. Some time this year, non-OECD oil demand will overtake OECD demand, and they will stay in the driver’s seat for the remainder of oil’s reign as the lifeblood of the global economy.
And:
Further, this new demand trend is already structurally baked-in. There is really nothing that America can do about it other than to consume less.
The sheer numbers of the global population using oil more efficiently will doom us to being the buyer of last resort under virtually any U.S. fuel economy standard. The roughly one billion people in the U.S. and Europe combined are now competing for oil with four billion people in Asia and over one billion more in Latin America, the Former Soviet Union and the Middle East. It’s like a tug-of-war with five people on one end of the rope and one on the other.
The article concludes with this sobering observation:
The conclusion should be obvious and indisputable: We’ll just hand over the keys. As I said last October, OECD economies should expect growthless stagnation at best. Oil has become a zero-sum market where the developing world’s gain will be the OECD’s loss. It’s time we woke up to the new reality of oil demand and acted accordingly. Not by imagining that we’ll be running more than 240 million slightly more efficient vehicles in the future, but by transitioning to rail and retiring them altogether.
The important point is that peak or plateau oil is not about oil suddenly running out but rather the competition for it heating up yet the supply not growing, and at some point beginning to decline. For The US this comes with the uncomfortable and no doubt to many unacceptable idea that they no longer call the shots in this vital market. At least in NZ we have never suffered from this burden but we are nonetheless just as vulnerable to being all but priced out of the oil market as this decade unfolds.
For now the appreciating NZ dollar has allowed us to stay slumbering on this issue as the international oil trade deals in USD, so the rising crude price has not meant reciprocal rises at the pump here. However this makes us doubly vulnerable as all it will take for $3/litre is for the NZD to settle down closer to its historical average with the USD. But then factor in any continuation of rising crude prices too and things could get very alarming very quickly. And all of this without anything special happening like Iran being attacked by the Israelis or any other above ground event [also, of course, possible].
The reason this isn’t understood as much as you might expect is that this is a very big departure from everyones’ experience, so despite seven years of stagnant production it just doesn’t fit with a lifetime of available oil and of the oil market’s responsiveness to the requirements of the West. Really big changes are not only not anticipated they are often not even accepted once they’ve happened. Welcome to the new century.
Further links:
http://gregor.us/ [short and sharp]
http://www.theoildrum.com/node/8998 [shows role of high oil costs in Euros in current economy, good stuff in the comments here too esp. about US v. Euro train use]
 Supply chart, non-opec including the world's biggest producer: Russia
By Matt L, on February 3rd, 2012 The government has released the briefings ministers received from their ministries and of course this blog is fairly interested in what the transport ministry has to say. The briefing has been split into two sections, one giving an overview of the portfolio and the other the policy challenges and upcoming decisions.
The first briefing gives a fairly high level description of what the portfolio is about, what the ministry does and what powers the minister has. It also goes through the various law and rule changes that have happened recently and the levels of funding that the ministry/portfolio is involved in. Overall there isn’t really anything new in here but that is what I would expect to see.
The second briefing on the policy challenges and upcoming decisions is much more interesting as it gives a good indication on the ministries thoughts which are what are likely to heavily influence the minister. The first section that really caught my eye was the section on oil prices on page 17. It seems that there is a bit of confusion in the message they want to deliver, first up there is a sort of high level comment about oil prices saying:
Almost all road transport is fuelled by petroleum products. This fuel source will persist over the next 20 years, but electric and plug-in hybrid vehicles will gradually become more widely used, as the real price of oil continues to increase. However, petrol and diesel will probably still fuel around 85-90 percent of vehicles in 2030.
In the short-term, people resist changing transport usage as costs increase. However,over longer time periods, oil price increases are more likely to induce changes in travel, lifestyle, and locational decisions.
but later on the same page they say
New Zealanders have a range of preferences for how they arrange work, shopping, socialising, and participation in education. These lifestyle preferences usually require travel. In the short term, individuals are reluctant to make lifestyle changes when the cost of transport increases. However, sustained oil price increases are more likely to induce change in travel patterns over longer periods:
• In the medium term (say 2–5 years), people can purchase more fuel efficient vehicles and make greater use of public transport, cycling and walking, where those choices are feasible.
• In the longer term (5–20 years), people will be more willing to make substantive and permanent changes to lifestyles in order to reduce their transport demand. For example changing patterns of social interaction, and living closer to places of employment and education.
So in 20 years time with high oil prices most vehicles will still be powered by oil based fuels but at the same time now where near as many will be driving them as most people would have made large changes to their lives to reduce their demand for transport or at least oil fuelled transport (but more on that soon).
The next thing that caught my eye was in the section on Land Transport starting at page 20. In the very first comment they say:
It will be increasingly important to manage the existing land transport network to its full potential.
There are wider economic impacts that cannot easily be estimated and considered in the traditional benefit cost ratio (BCR) evaluation framework. The current BCR assessment is based on a relatively high discount rate (8 percent real) and a 30-year horizon. This rate tends to discount away the benefits of long-life projects, such as motorways.
In the cities, cars remain the dominant means of people transport. Urban transport networks will need to become more effective through better use of infrastructure, urban planning, demand management tools and public transport increasing its role.
They acknowledge that we need to move away from the traditional BCR framework but this is exactly the thing they slammed the CRL business case for, it has also noted here in the past about just how much impact having a high discount rate and relatively short assessment time frame has on the outcomes of projects.
Continuing to work my way through the document I really had to have a chuckle at these two comments:
55. New investment in State highways is evaluated by the NZ Transport Agency (NZTA) using three criteria.
(a) Strategic fit which considers national strategic objectives as specified in the Government Policy Statement on Land Transport (GPS)
(b) Effectiveness which considers how well proposed activity would achieve the GPS impacts identified in strategic fit
(c) Efficiency which measures the BCRs
57. The major highway projects tend to score well on strategic fit. The BCRs for major improvements to the network have declined in recent years.
Basically that means the government tells the NZTA what projects it want and if the NZTA goes to do them then they can tick off two of the three assessment boxes which means that economic considerations get largely pushed out of the way and that is evidenced in the last part of comment 57. In just 5 years we have gone from have over half of all approved projects having high BCR’s to over half of them having low BCR’s. That’s an astounding change in such a short time considering there are a large number of projects out there that haven’t even been approved yet, things like Puhoi to Wellsford or the group of projects in Wellington.
The last thing I will cover in this post is showing just how much our transport expenditure has changed over time, as you can see spending has really ramped up in the last few years and in the space of about 5 years we have more than doubled how much we spend as a percentage of GDP. Of note the transport and storage sector accounts for around 5.2% of all of our GDP
There is quite a bit more to cover, especially the parts that relate to Auckland but I will leave that for the next post
By Patrick Reynolds, on January 26th, 2012 As there’s been a lot of discussion about population density here I figure this post from good ol’ Cap’nTransit is on the money. Yes this is my view too, you think more density is needed? Well build the transit and the density will follow [all else being equal], foolish to try to wait for some ideal density then meet that demand with infrastructure. Transit supply is causative. Or as the Cap’n says: ‘The population density to support my ass’
Here are two interesting posts on Twitter and Transit. One beautiful the other more for the quants. Both instructive.
The second is via Atlantic Cities where there is also this argument for High Speed Rail in the Union’s most populous State, California. Newt of the GOP has been banging on about the US heading back to the moon in some kind of pissing contest with China, but frankly if they can’t even get a train to run from SF to LA and any decent speed I think he’ed better dodge that race. *Note for Geoff: These arguments here for HSR are intended as a metaphor for local arguments for urban transit, not as a literal argument for HSR in NZ. Same things apply, land use transformations, economic return not a financial one etc, but at a vastly different scale.
More from the States on gas prices [as they call them] and what to do, and for once this doesn’t involve bombing somewhere else or other wise frackin’ it all up.
Closer to home; no round up from me will be complete without at least a passing note on resource supply issues. As we head to the exciting singularity of peak damn near everything it’s good to see some people have their heads up. Here’s an introductory note from across the ditch, what I especially like about this is that it states a view that I also have, namely that it could just be that a world with less freely available oil may well be a lot better in a number of ways; once we’ve made the adjustment. Like London after the peasoup smog and mountains of horse-shit. I’m also guessing less isolation, more localiasation, more human interaction, less alienation. Perhaps more meaningful lives. Perhaps.
There’s also this guy, Denis Tegg, I know nothing about him but he has been manfully plugging away on this issue in NZ for a while and here he is bringing an important shelved report to the surface. I say manfully because there is a really creepy silence on this issue and Climate Change in the mainstream media and in government in NZ. It’s like if we don’t mention these problems they’ll just go away.
Look away Actoids! Here’s a well reasoned piece on the attractions and limitations of neoliberalism. It’s short too. Relevant how? Transit like our cities need long term planning, by elected bodies. The market is a great tool, but a lousy master, and an even worse god. As I think we’ve just seen.
Those interested in the strange ways that change can happen will like this. Why the US Marine Corp may well lead the US into a solar future.
Back to transit, and more personally; I have new wheels, yay! and loving it, but won’t be going to these extremes to protect them. No.
By Patrick Reynolds, on January 10th, 2012
This is a new kind of post for readers interested in a quick roundup of transit related news and analysis from around the world. The plan is to aggregate a bunch of links that relate either directly or tangentially to Auckland transit issues. This will include examples of similar transport debates and solutions from elsewhere, but also related issues such as urbanism, energy supply, and economic challenges. Clearly Auckland is facing situations common to other cities in the world, and there is a rich and growing resource online that we can learn a great deal from. It is also intended as an opportunity for readers to comment on any issue raised in the links and especially to share their own resources.
In fact it never ceases to amaze me how similar the debates seem all over the world to our own. And just as we followed other western nations in investing heavily in automobilie and suburban infrastructure over the last 60 or so years this was largely because we faced similar problems and opportunities as those places. But times change and it seems pretty clear that we are now facing new pressures that are best approached by a different mix of answers, but these are still similar to those faced elsewhere. Here, for example, is an incredibly condensed summary of the big picture by Portland based economist and oil analyst Gregor MacDonald at Gregor.us
For a view of how the most dynamic and important developing nation is responding to urban growth, congestion, and quality of place issues here is a summary of China’s commitment to urban rail transit. Important to note that many of the cities mentioned are around the 1 million people mark, like Auckland. And that the writer is emphasizing that the metro solution allows suburbs to retain their identities and economic viability by offering connectivity without destruction. An important reminder that expansion of AK’s RTN network is not all about the CBD, but also about making this suburban city connect and thrive.
For an example of why open space isn’t always the best answer in cities especially to severance issues have a look at this view of Boston’s ‘Big Dig’ via Old Urbanist. Yes the future of the city is greener but better joined up built forms are also often the answer to broken cities.
Long but good. How we can learn from LA, and just stop building expensive and place defiling parking infrastructure. And great data that shows less really is more when it comes to parking, for the sake of our city’s economic health and viability, no matter how counter-intuitive that feels to auto-man.
Two-waying, or how to unlock the economic performance of traffic sewers.
This is just cool, urban explorers.
Learning from the master, or perhaps mistress. Why Jane Jacobs is still relevant.
Why we will never catch up with Australia, or wherever, by paying each other less. Look for NZ on this chart.
One for the urban cyclists out there. Cool rack.
No roundup would be complete without a link to The Oil Drum, too much to choose from, but this short interview shows the mainstreaming of the Peak Oil observation. Feels like old news to me but this debate and its arguably even more worrying sister Climate Change is curiously absent in NZ. This site is great too, Californian physicist Tom Murphy Does The Math so that we don’t have to.
 Quality of place versus speed of vehicle movement: The same part of LA 1894 and 2011. From Atlantic Cities. A site always worth keeping an eye on. Note the train in the upper left of the first image, I wonder what happened to that line, or is it still there? Happy reading.
By admin, on November 15th, 2011 One of the most interesting things to note when it comes to transport trends over the past few years is the complete lack in growth of state highway traffic volumes since around 2005, with a little bumping around we actually find ourselves with the same level of traffic on our state highways in 2010 as we had in 2005: It’s perhaps a bit early to comprehensively know whether this is a short-term “bucking” of the long-term trend of inexorable growth – or something more permanent. Of course we have had a pretty major economic ‘situation’ over the past few years which is likely to have contributed to the flat-lining of traffic growth, but I tend to think that there’s something more long term at work here.
If you look at similar numbers in the USA, you can also see a pretty big anomaly to the long-term traffic growth rates over the past few years: There’s an obvious connection between the graph above and the one below, which shows a decline in the USA’s consumption of petroleum over the past few years: Along with the economic difficulties of the past few years I can’t help but think a core reason for these changes relates to the rising cost of fuel, which itself is fundamentally being caused by the increasing difficulty of finding more oil to pump. This is pretty obvious when you look at global oil supply levels over the past eight years: Perhaps the over-arching point to take from all these graphs is to ask the question about whether we really think it’s likely that we’ll return to the days of the 1990s and early 2000s when traffic grew consistently each year by a few percentage points – putting increasing pressure on the transport system and making the argument for building more and more roads. Or, alternatively, is the current situation part of a longer term trend, something we’re also seeing in overseas countries like the USA, caused by the inability to increase oil supply (and therefore increasing prices)? If the answer is the latter, then perhaps we need to truly fundamentally rethink our approach to transport, because if the number of cars on the road system isn’t increasing, then it’s pretty hard to argue that we need to increase the capacity of the road network.
By admin, on July 16th, 2011 I came across an interesting journal article the other day – entitled Are We Reaching Peak Travel? Trends in Passenger Transport in Eight Industrialized Countries by Adam Millard-Ball and Lee Schipper. It is an interesting examination of an issue that I’ve been looking at in my analysis of recent traffic trends on roads in New Zealand – the idea that perhaps we’re shifting away from the decades long process of people travelling more and more each year. Here’s the abstract:
 The general trend for the 20th century was that as time went on, and particularly, as the population got richer, they travelled more and more. The most basic reason behind this was that as incomes grew, people were able to afford more cars and airline tickets, and therefore travelled further and further. The graph below highlights this relationship for a number of industrialised countries:
 Most of the graphs above do show a bit of a tailing off’ at the higher levels, showing that perhaps there’s a level of GDP per capita beyond which we don’t actually see the increases in travel activity that are visible with earlier increases. The article considers recent fuel price increases as a potential cause of this trend – although according to its calculations not the whole reason:
 The same trends appear true for car ownership, although once again it seems we’re in the fairly early phase of any ‘slowing down’ so it’s difficult to know whether the trends are permanent:
 So what does this all mean? Well there are two big “elephants in the room” out there when it comes to transport policy: peak oil and climate change. What the data outlined above is potentially indicating is that the rising price of oil, plus other factors which suggest market saturation of vehicles, may mean that travel levels are lower than previously expected – helping us both minimise the impact of transport-based CO2 emissions on climate change and also slowly reducing our reliance on oil: which is likely to be a very good thing if oil becomes extremely expensive in the future.
In a sense, perhaps the market mechanisms are starting to work a bit: the higher price of oil weaning us off travelling further and further each year and buying more and more cars. This is why I think our best argument for investing in public transport at the moment is not the potential for oil to cost more in the future or for us to need to reduce CO2 emissions: but rather that we need to respond to choices people are already making, to use their cars less and ride the bus or train more.
It’s all about this:
 Spending the vast majority of our transport budget on a part of the system with declining use, and constantly cutting funding for a part of the transport system with vastly increasing use is ignoring all the signals that form part of a longer term, fundamental shift in our transport system. It is just plain stupid.
By admin, on June 24th, 2011 In a comment on yesterday’s post about changing attitudes towards transport among young people, Stu Donovan pointed towards a very interesting piece of research undertaken by the Victoria Transport Policy Institute on changing transport trends in a number of different countries around the world. The argument of the paper is quite simple – and very much linked with what I’ve been pointing out has been happening in New Zealand recently – that the decades long trend of more and more automobile use seems to be tapering off and even declining in a number of developed world countries.
Here’s the paper’s abstract:
 I’m not going to run through every detail of the paper, because it’s pretty lengthy, but rather pick out a number of the graphs and tables that I think are interesting.
Vehicle ownership rates seem to have hit a peak in the USA over the past decade, although the very high levels of car ownership seem to indicate that’s probably the result of market saturation: Perhaps a bit more interesting than car ownership rates is the fact that distance travelled per person has also tapered off over the last seven years compared to the rapid growth in earlier decades: It’s worth remembering that these numbers are per capita, so between 2000 and 2007 we would have still seen increases in total VMT, due to population growth. One does wonder why the last 10 years has varied so much from what happened in the 1990s though – perhaps the USA experienced more economic growth in the 1990s? Perhaps the very low oil prices of the 1990s, and the higher oil prices in recent years, have had an impact? Perhaps there are changing land-use patterns with a ‘re-centralisation’ of many cities.
The next graph doesn’t necessarily answer the questions above, but does show something quite interesting: that most of the slowdown in per capita VMT between 2000 and 2007 probably occurred in the last two years of that period, and that this trend has continued (and intensified) since 2007: There are some obvious similarities between the graph above, and what’s happened in New Zealand over the past few years – shown in the graph below: While one reason for the slowdown over the past few years might well be the economic situation, it’s interesting to see that in both NZ and the USA the large recession which occurred in the late 1980s and early 1990s doesn’t seem to have had the same impact on transport trends as what we’ve seen in the past few years.
The paper quotes Lester Brown, who suggests a potential social reason behind some of these changes:
There were probably quite a lot of teenagers in the late 1970s, due the baby boom of the post-World War II years, but even on a per capita basis the proportion of teenage drivers with licenses has declined in the USA in more recent times: Looking at the last 10 years, for most of these years the increase in public transport has been larger than that for vehicle use. The gap was particularly massive in 2008, when oil prices spiked: Of course there’s still some uncertainty over the question of whether what’s happened in the past few years is the exception to the long-running trend of increasing automobile use, or whether we really are at the cusp of a fundamental shift in transport trends. The more general ‘cultural shift’ of young people away from cars and towards other technologies is perhaps the most difficult thing to measure, but potentially very significant. I tend to think that rising oil prices have also had a fundamental impact on transport trends in the past few years, and it seems likely this will continue into the future too.
By admin, on May 25th, 2011 There was a fascinating interview on Radio NZ this morning of the International Energy Agency’s Chief Economist Fatih Birol, about increasing oil scarcity. You can listen to the interview here.
Mr Birol talks a lot about things I’ve mentioned many times on this blog before: that there are two underlying key factors behind higher oil prices – continually increasing demand (particularly in developing nations) as well as the geological constraints of peaked oil supply in many countries. On top of those two underlying issues are short-term issues such as Middle East political instability, which was probably the main factor that boosted prices from around $1.90 a litre to above $2.20 over the past few months. Prices have dropped back a bit recently.
In terms of geological factors, the supply of oil does seem to have been constrained in the past few years – as shown in the graph below: What’s particularly interesting to note right at the start of the interview is how the IEA has changed its tune over the past few years when it comes to peak oil. Not too long ago they were calling peak oil theorists “doomsayers”, and even in 2005 the IEA was arguing that peak oil either wouldn’t happen or was so far in the future that it wasn’t worth worrying about. Yet here we have their Chief Economist saying that crude oil production now peaked in 2006.
One thing that I often find myself thinking is how surprising it is that oil prices are as high as they are at the moment, given that the global economy is very fragile (remembering that reduced economic activity lowers oil demand). One wonders what will happen to oil prices once the economic truly recovers.
By admin, on May 3rd, 2011 As I got off the bus this evening I noticed that BP had raised their price for 91 octane petrol to 221.9 c a litre. From memory this is the highest price, in nominal terms, we’ve ever seen for petrol in New Zealand. While the most recent price spike seems to be more the result of political instability in the Middle East – and one might assume a price reduction if/when the instability falls away – it does seem as though higher prices than we’ve been used to in the past are here to stay.
On this note, there was a very interesting article by Bernard Hickey in the NZ Herald a couple of days ago – asking how prepared we are for much higher petrol prices in the future. While I don’t share Mr Hickey’s opinions on all matters, he’s a very thoughtful commentator.
The economic and political pain around the rise this year in petrol prices to around $2.20 a litre is intense, but many can’t imagine the prospect of it going much higher or haven’t thought too much about what a permanently higher petrol price means for them and the wider economy.
The assumption is the rise is temporary in the same way that high oil prices in 1975, 1979 and 2008 were temporary.
But what if this time is different and the price of oil and petrol is about to shift permanently higher?
Interestingly, I would put the 2008 price spike as the “odd one out”, compared to the price spikes in 1975, 1979 and now in 2011. The price shocks in the 1970s were caused by supply disruptions, while the current price rise is probably also caused – to some extent – by disruption to supplies in Libya and general unease about the possibility of further supply disruptions in the Middle East. The 2008 spike, on the other hand, seemed to be caused by rising demand and the inability for supplies to meet that demand – even though there were relatively few supply constraints.
However, in general it seems that today a relatively small disruption to oil supplies can result in a pretty big increase in oil prices. That’s something somewhat new – as it would seem there simply isn’t the supply capacity anywhere else to ‘pick up the slack’. Hickey continues, looking at the cause of this more recent phenomenon:
It’s worth looking at the trends in oil production, oil demand and in currencies to get a sense of where prices might head.
Some analysts believe the near record high oil prices are simply a result of financial market speculation and by a rush by many investors to hold ‘hard’ inflation proof assets rather than the US dollar, which is being printed at an alarming rate and at alarming interest rate of 0 per cent by the US Federal Reserve.
But in recent months the debate around peak oil has migrated from the greener fringes into the centre of economic and financial debate.
This week renowned hedge fund manager Jeremy Grantham issued a detailed paper predicting the world was at one of its “giant inflection points in human history” with an epic shift higher likely in commodity prices, led by oil as rising demand from China and India hit peak oil supply.
He is not the only one. HSBC, one of the world’s biggest banks, predicted oil would run out in 50 years, even if demand was flat at current levels.
I pointed out a week or so ago that the International Monetary Fund appears increasingly concerned about the larger-scale economic impacts of growing oil scarcity and its inevitable outcome: higher petrol prices.
As well as it seeming increasingly difficult for the oil producing nations to increase the amount of oil they pump (often necessary to offset oil fields like the North Sea that are well past their peak production), one of the major reasons for the long-term price increases seems to be the increasing demand for oil in developing nations like China and India. Hickey’s article picks up on this matter:
The trouble for the world and petrol consumers everywhere is that oil demand is not flat. It’s growing, largely because of China’s explosive and intensive demand for oil. India is not far behind.
Both nations are rapidly motorising their economies and are entering a phase of industrialisation where energy and oil usage becomes most intense.
As well as expanding their fleets of cars and trucks, they are building new motorways, buildings and other infrastructure that uses a lot of steel and concrete.
Both require large amounts of energy. Some of it will come from coal, but the end result is strong demand for oil.
For example, China is now the world’s largest car market. It is expected to add another 220 million cars to its fleet by 2020.
That would add 8 million barrels a day of demand at a time when the International Monetary Fund forecasts oil supply rising just 1 million barrels a day.
If one looks at the amount of oil pumped out of the ground over the past few years, we simply haven’t seen much of an increase.
Therefore it’s difficult to see how the increased demand from developing nations, plus our seeming inability to pump more oil out of the ground, will result in anything other than a significant increase in prices. This is picked up in Hickey’s article:
Some economists are forecasting an oil price well over US$200 a barrel within 5 years.
Even the US Energy Information Agency has forecast a rise to US$200 a barrel within 20 years.
Even if the New Zealand dollar was to rise to parity with the US dollar, a rise in the oil price to US$200 a barrel would push the petrol price towards $4 a litre, particularly once the deferred tax increases are included in 2012 and 2013.
A week or so ago I filled up my car with petrol, bought a couple of bottles of milk and a loaf of bread – the total came to over $100. The thought of doing the same thing in a few years time and having the total coming to around $200 is pretty scary.
How prepared are we for the impacts such a price spike might have? Did the issue even cross the mind of those preparing the 2012 Government Policy Statement for transport? I think not.
By admin, on April 24th, 2011 It’s a bit difficult to talk about “peak oil” without being written off as some sort of conspiracy theorist. I guess perhaps it’s because the supply of relatively cheap oil is so deeply embedded into the operation of our modern economy and society that people struggle to consider what life might be like with oil doubling or tripling in price within a relatively short time period. But with petrol prices nearing $2.20, it’s probably worthwhile having a bit of a think about the economic impacts of rising oil scarcity. Interestingly, the International Monetary Fund has dedicated a whole chapter of its 2011 World Economic Outlook to the subject of oil scarcity – so it’s obviously something exercising their minds too. It is well worth a read (PDF version here).
A summary of the chapter is included below:
The persistent increase in oil prices over the past decade suggests that global oil markets have entered a period of increased scarcity. Given the expected rapid growth in oil demand in emerging market economies and a downshift in the trend growth of oil supply, a return to abundance is unlikely in the near term. This chapter suggests that gradual and moderate increases in oil scarcity may not present a major constraint on global growth in the medium to long term, although the wealth transfer from oil importers to exporters would increase capital flows and widen current account imbalances. Adverse effects could be much larger, depending on the extent and evolution of oil scarcity and the ability of the world economy to cope with increased scarcity. Sudden surges in oil prices could trigger large global output losses, redistribution, and sectoral shifts. There are two broad areas for policy action. First, given the potential for unexpected increases in the scarcity of oil and other resources, policymakers should review whether the current policy frameworks facilitate adjustment to unexpected changes in oil scarcity. Second, consideration should be given to policies aimed at lowering the risk of oil scarcity.
The concept of peak oil relates to a point where approximately half the world’s oil has been pumped out, and it becomes increasingly difficult to to up the amount of oil coming out of the ground. Generally, each oil well follows a natural ‘bell shaped’ production curve due to the geological composition of oil and the need to pump water (or gas) into the well after a certain point to keep the pressure up. Aggregate up all the oil wells of the world and the result is a general bell curve for oil production. The question is where we fit on that curve now, and how far away is the top of the curve – the point at which we can no longer increase the level of production, no matter how hard we try.
If you look at oil supply levels over the past few years, it’s interesting to see the dramatic increase in demand up until around 2005, and then a major levelling off in the five years since then. Obviously the global economy has had some rocky times over the past few years – but the argument that it seems at the very least difficult for oil production to exceed 75 million barrels a day appears plausible.
So peak oil relates to supply issues – that after a certain point the natural geological characteristics of oil mean that we reach a ‘supply ceiling’. However, demand is also very important – as if our demand for oil keeps on increasing then that just makes the job of producing enough oil to meet supply particularly difficult. It’s quite helpful to then look at changing demand levels in various major areas of oil consumption around the world over the past few years: Changes over the last couple of years are particularly interesting – with per capita oil usage in the USA and the rest of the OECD reducing quite a lot, whereas per capita usage in China continues to boom, regardless of rising prices. Despite this, per capita usage in China is still a tenth of the US, giving us a clue that China has a lot of potential growth remaining. Growth that will probably have to come at the cost of other countries if we take the 75 million barrel ‘limit’ as being credible (which I generally do).
So, now that we’ve established that it seems there’s a pretty obvious oil supply crunch coming (or perhaps that it has already arrived), let’s go back to the IMF report and have a look at what the potential economic effects of increasing oil scarcity might be. The main findings of the report are summarised below:
The increases in the trend component of oil prices suggest that the global oil market has entered a period of increased scarcity. The analysis of demand and supply prospects for crude oil suggests that the increased scarcity arises from continued tension between rapid growth in oil demand in emerging market economies and the downshift in oil supply trend growth. If the tension intensifies, whether from stronger demand, traditional supply disruptions, or setbacks to capacity growth, market clearing could force price spikes, as in 2007-08.
As for the effects on the global economy, the simulation analysis suggests that the impact of increased oil scarcity on global growth could be relatively minor if it involves primarily a gradual downshift in oil supply growth rather than an absolute decline. In particular, a sizable downshift in oil supply trend growth of 1 percentage point appears to slow annual global growth by less than ¼ percent in the medium and longer term. On the other hand, a persistent decline in oil supply levels could have sizable negative effects on output even if there is greater substitutability between oil and other primary energy sources. At the same time, in the medium term, the oil-induced wealth transfer from oil importers to exporters can increase capital flows, reduce the real interest rate, and widen current account imbalances.
The analysis in this chapter suggests that oil scarcity will not inevitably be a strong constraint on the global economy. However, the risks it poses should not be underestimated either. Much will ultimately depend on the extent and evolution of oil scarcity, which remain uncertain. There is a potential for abrupt shifts, which would have much larger effects than more gradual shifts.
The chapter concludes that policymakers should strengthen measures to reduce the risks from oil scarcity as a precautionary step and to facilitate adjustment if such shifts are larger than expected or materialize in an abrupt manner. Policies need to be complemented with efforts to strengthen social safety nets, because higher oil prices could lead to shifts in income distribution and to increased poverty.
In short, it would appear as though the effects of increasing oil scarcity on the global economy could be either very significant or somewhat manageable, it all depends on whether oil supply decreases gradually or dramatically, and how prepared we are for the changes that increasing oil scarcity is likely to bring.
The IMF modelling on the economic impact of decreasing oil supply results in a large number of graphs – which all together are a little too complex for me to fully understand. However, the general trend seems to be that reduced oil supply has a clear negative effect on the global economy: A number of variation on the base scenario are also analysed, including what might happen if the reduction in oil supply was faster than expected (the GDP reductions are far greater) or if there’s an increasing use of oil substitutes (which mitigates some of the effects) and so on.
The IMF interprets the results as showing that oil scarcity may or may not have a relatively benign effect on the global economy – depending on the speed at which it happens and the extent to which we are prepared for it.
The analysis shows that the constraints on global growth in the medium to longer term from gradual and moderate increases in oil scarcity—those involving lower trend growth rather than sustained declines—could be relatively minor. In particular, a sizable downshift in oil supply trend growth of 1 percentage point appears to slow annual global growth by less than ¼ percent.
Such benign effects on output, however, should not be taken for granted. Important downside risks to oil investment and capacity growth, both above and below the ground, imply that oil scarcity could be more severe. Moreover, unexpected increases in oil scarcity and resource scarcity more broadly might not materialize as small, gradual changes but as larger, discrete changes. In practice, it will be difficult to draw a sharp distinction between unexpected changes in oil scarcity and more traditional temporary oil supply shocks, especially in the short term when many of the effects on the global economy will be similar. In addition, it is uncertain whether the world economy can really adjust as smoothly as the model envisages. Finally, there are risks related to the scope for the substitution away from oil, on both the upside and the downside. The adverse effects could be larger, especially if the availability of oil affects economy-wide productivity, for example by making some current production technologies redundant.
Therefore, the state of oil scarcity needs to be monitored carefully; the global economy is still in the early stages of the new era of maturity in major oil-producing economies.
I have underlined a section that I think is of particular interest – the difficulty in distinguishing between oil supply shocks that are the result of non-scarcity reasons (such as the most recent spike in prices that occurred due to conflicts in Libya) and those that do relate to scarcity (I would argue the July 2008 price spike was predominantly scarcity related). This isn’t surprising, as what we have now is a much reduced “buffer zone” between supply and demand levels. If something in the oil supply system gets disrupted then nobody else can simply ‘make up the difference’, because chances are they’re already pumping at around full capacity.
The IMF paper has this to say about policy recommendations to reduce the effects of the worse-case scenario:
Regarding policies aimed at lowering the worst-case risks of oil scarcity, a widely debated issue is whether to preemptively reduce oil consumption— through taxes or support for the development and deployment of new, oil-saving technologies—and to foster alternative sources of energy. Proponents argue that such interventions, if well engineered, would smoothly reduce oil demand, rebalancing tensions between demand and supply, and thus would reduce the risk of worst-case scarcity itself.
There are, however, several issues that need to be addressed before policy interventions to reduce oil consumption are implemented. Such interventions come at a cost, and their net benefits need to be evaluated. For example, lowering oil consumption through higher taxes could reduce growth and welfare during the period before serious scarcity has emerged. The calculations to establish costs and benefits are complex. This is mainly because the net benefits ultimately depend on the probability of significantly higher scarcity and the present discounted value of expected costs that the higher scarcity would impose, which are hard to quantify.
I wonder what the IMF would think of our government’s current transport priorities, with this issue in mind. Raising fuel taxes to build more motorways seems to contradict most of what the paper seems to be suggesting.
The paper is generally an interesting read – and it’s good to see ‘mainstream economics’ organisations starting to recognise the impact of oil scarcity and rising fuel prices on the economy.
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