Recent columns have examined the reasons why world oil production will soon decline, when that may occur and what effect it will have on our economy and to our lives personally. Previously we explored the dark side of the oil decline (worst case) and it was a doom and gloom article.
Is it possible to have a soft landing when the production of oil is less than the world’s demand and when most people don’t realize the havoc that a small shortage of production will have on their lives? In recent years surplus production capacity has decreased from many million barrels a day to approximately 1 Million barrels. This means that the margin of error for hurricanes, political unrest in Nigeria, Iran, Iraq or terrorism events is just over 1%.
It is that narrow margin along with fears caused by Hurricane Katrina among others incidents that caused the price to rise to almost double. Based on experience in the 1973 oil embargo, it is believed that a 5% shortage will raise prices to at least four times above the existing $75 a barrel. It is unlikely that the initial shortage would be greater than this.
In order to limit the damage caused by high prices, it is essential that when a crisis situation becomes evident (oil at higher than $140 / barrel) all governments of the world will cooperate and quickly:
- Introduce rationing of their national oil usage by more than the shortage.
- Clearly inform their citizens of the necessity and reasons for conservation.
- Introduce long term measures to promote fuel switching, conservation and fuel production by other means.
These actions may ensure that prices, although higher than normal, will not destroy the economy. Some inflation and recession may occur with job losses in certain sectors. However, this scenario depends entirely on the world recognizing the danger and acting in a cooperative manner. What we are more likely to see is wars over resources, repudiation of contracts, nationalization of oil fields and disorder all over.
Once the production decline starts, it will continue and the gap will become larger in the second and subsequent years. After ten years of decline, world oil production may have dropped to 75% of peak levels. Along with recession comes a reduced demand for oil which will lessen the decline situation. We wish to believe that a soft landing is possible but the reality is that preparation for this eventuality should start at least ten years before the event in order to improve our likelihood of survival.
To illustrate, think about the average family mileage of 20,000 km per year. At seven litres per 100 km, this is 1400 litres or roughly 30 dollars per week at present day prices. Now, if the average life of a car is roughly 12 years, about 8% of vehicles are scrapped every year and a new vehicle is purchased. This means that if vehicle efficiency of 3.5 litres per 100 km were the law and it is technically possible to achieve this, then we wouldn’t see the full benefits for 12 years.
If transportation of goods over several hundred kilometers were mandated by rail, then we could save substantial fuel. But we have torn up half of the tracks. How many years to restore the rail system in Canada? What about the use of the rail lines in the Kennebecasis and Saint John River valley for commuter traffic to Saint John? Can it be done? Are we still spending hundreds of millions on four lane highways to be completed just when gas becomes too expensive for traffic? We are building excellent roads that few will use. Should we not turn all of our capital resources to energy conservation and renewable energy development?
How many years to achieve the maximum number of wind power plants in the Maritimes? These installations can be completed in less than a year after proper site selection. What about the development of small hydro sites at appropriate sites? Seven years or more? How many years to install a second nuclear plant at Lepreau to displace oil usage in New Brunswick and Nova Scotia? Seven years, perhaps.
How many years until high speed Internet is available in small communities so that some workers can work and shop at home?
Canada is one of the most fortunate of countries from a resource point of view. What about a west to east oil pipeline for Canadian economic security? It is time to review our options. (More in a later column)
The soft landing is possible. Is it probable? No. Without significant planning and focused expenditures, an easy transition to a post oil society in not in the cards. We live in a country where the climate is unforgiving, where we no longer grow enough food to feed ourselves and our economy is dependent on cheap oil to function. Well my friends, the cheap oil is gone and soon it will be much more expensive.
Some people have great faith in the energy companies to find new oil fields, that a magic new technology will solve the lack of fuel, or that something! will happen. Unfortunately, it takes several years to bring a new oil field into production or to retool and reengineer car factories. The super giant oil field hasn’t been discovered and no coal-to-oil gasification plants are being built in Canada that I am aware of. We aren’t talking about doing things that are uneconomic, just doing good things now to get ready for a future that isn’t too bright. It is call prudent risk management.
What are our governments doing? Sounds like business as usual. Are they in denial? Are they afraid to be the bearer of bad news? Well that is a subject for another day.