The Age of Cheap Oil Has Ended

By Glenn Ashton · 20 Mar 2012

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Picture: madaboutasia/Flickr
Picture: madaboutasia/Flickr

While motorists feel the pain of the recent ascent of the oil price to near record levels, the underlying reality of rising oil prices has profound implications right across society.

Barring an unprecedented oil discovery, the world will never again see the return of cheap oil. Oil prices will certainly never return to the levels of the 1990s, or even the first half of the first decade of this century.

The rise in oil prices is the harbinger of a major restructuring of modern civilisation. Our inexorable addiction to oil, not only for fuel but for almost every single item we use, from food to fertilisers, to pesticides, pharmaceuticals, packaging and high technology, has reduced us all to oil junkies.

While oil unlocks incredible value in our modern lives, oil itself has been and remains deeply undervalued. Perhaps its current revaluation toward what are in fact realistic levels, will assist to shift our society towards more sustainable, considered lifestyles.

The primary reason that oil prices are set to remain high is because we have, by general consensus, reached the peak of oil production, so called “Peak Oil.”

This should not come as a surprise.

In the mid-1950s United States geologist M.K. Hubbert predicted that US continental oil production would peak in the early 1970s, which it subsequently did. He similarly proposed that global oil production would peak sometime between 2000 and 2020.

Despite early denial of this reality by some extremely influential players in the oil industry, the authoritative International Energy Agency (IEA) declared that the “end of cheap oil” was upon us in their 2008 World Energy Outlook report. In 2010 they reinforced this by stating that peak oil production potential was reached in 2006. These realities have been echoed by a broad range of analysts across all sides of the spectrum.

We do know that world oil discovery peaked in the mid-1960’s and we now use around six times more oil per year than we discover. While some major oil producers may have limited means to manipulate the market, at best this will simply flatten the peak for a few years. The fact is that even oil giants like Saudi Arabia have over-stated their true oil reserves for many years for fear of spooking the market.

Not only are oil supplies in rapidly decline but they are increasingly expensive and challenging to extract, as we saw in the Gulf of Mexico last year. For a civilisation reliant on oil as a source of cheap energy, the implications are epic.

One of the first impacts of increasing oil scarcity has begun to manifest – food prices are rising. Industrial food production is inextricably linked to the price of oil because it is so energy intensive. It is not only about how food is planted and harvested but also in how vast amounts of food are shifted across vast distances, often inter-continentally. Simply put, food has become just another industrial commodity, inextricably linked to other commodity cycles.

This is neatly illustrated in what happens to the US maize (corn) crop, the world’s single biggest food commodity crop. Around forty percent of the total harvest is converted directly into ethanol and used as automobile fuel. The fact that this is a hopelessly inefficient process is hidden behind massive subsidies. A similar amount goes into animal feed. Some is used to produce food ingredients like high fructose corn syrup, corn starch and oil. An ever-decreasing percentage is consumed directly as food, mainly through subsidised US Aid food donations to developing nations, often distorting local markets.

The point is that cheap oil has been instrumental in maintaining artificially low food prices. However, since the mid-2000’s food prices have moved in lockstep with the price of oil, both through the direct linkages of crop derived agro-fuels, and indirectly through speculative financial instruments. The fact remains that all industrially produced commodity crops are totally dependent on cheap oil. Fertilisers, pesticides, herbicides as well as farm energy and transport, are each directly linked to oil prices.

The end of cheap oil signals the end of artificially cheap food, and just about everything else. Clothing, housing, transport, and in turn the goods and services industries that support the global economy are inextricably linked to and reliant on cheap oil.

Despite adequate warning we have failed to develop anything that vaguely resembles a plan B, an alternative to using oil. This represents a staggering failure of international governance. While oil supply declines, demand is rapidly increasing, particularly amongst emerging economies like China, where increasingly mobile populations enter the global consumer economy.

What lies behind this major policy failure? After all, the realities of peak oil have been raised for at least a decade. However, similar and sometimes the identical groups involved in opposing the very notion of anthropogenic (human caused) climate change are instrumental in decrying the very notion of peak oil.

Despite such vehement denials, companies like Deutsche Bank, Exxon (the worlds largest oil company) and the governments of Australia and the United Kingdom have all stated, in one way or another, that peak oil presents a real and present challenge to the way the world works. Even the US Military Joint Forces Command has issued warnings. The reality is that peak oil is upon is.

Despite the reality and policy failures to date, peak oil need not be a harbinger of doom and gloom. Previous energy crunches, such as that in the 1970’s saw rapid adaptation through the adoption of novel technologies. Social behaviour shifted rapidly with car-pooling and the movement toward virtual commuting.

While we do face real risks of civil unrest because of food shortages – nowhere epitomised better than the recent Egyptian Revolution – if reports by leading agricultural policy groups such as the International Assessment of Agricultural Knowledge, Science and Technology for Development (IAASTD) and the UN Rapporteur on the Right to Food are noted, we will be able to shift our food production toward more egalitarian and sustainable methods.

The arrival of peak oil and its consequences must be taken for what it is: A massive opportunity to shift ourselves – our economy and our society - away from the dangerous and unsustainable practices that cheap energy has encouraged. There are other, better ways to do things. Our real challenges lie in seizing these opportunities before, not after, the oil triggered crises hit.

You have been warned.

Ashton is a writer and researcher working in civil society. Some of his work can be viewed at Ekogaia - Writing for a Better World. Follow him on Twitter @ekogaia.

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