Oil supply crunch would leave us all in deep water


The Deepwater Horizon disaster casts doubt on the future of deepwater drilling and may hasten the arrival of peak oil, writes FRANK McDONALD

THE LUTINE Bell, salvaged from the wreck of a British frigate that sank off the Netherlands in 1799, is preserved in an elaborate Corinthian rostrum standing rather incongruously in the high-tech atrium of Lloyd’s of London. By tradition, it was rung once when a ship was lost at sea, so that all the company’s insurance brokers and underwriters heard this bad news at the same time.

The bell is tolling again now, this time for the imminent end of cheap and plentiful oil. Last week, Lloyd’s – in collaboration with think tank Chatham House – issued a White Paper, Sustainable Energy Security: Strategic Risks and Opportunities for Business, which explicitly warned that we are heading towards a global oil supply crunch and price spike – in other words, “peak oil”.

As the Deepwater Horizon disaster continued to unfold in the Gulf of Mexico, Lloyd’s analysts said: “International oil prices are likely to rise in the short- to mid-term due to the costs of producing additional barrels from difficult environments, such as deep offshore fields and tar sands . . . This would create a price spike prompting drastic national measures to cut oil dependency.”

The sheer helplessness of BP – and of the US government – to staunch the flow of oil has shocked Americans and the wider world. BP has admitted that it “did not have the tools” to contain such a deepwater oil leak. As a result, a slick that’s now larger than the land area of Florida is spreading to the shorelines, wreaking havoc on fisheries and wildlife.

BP has taken a hammering. Its shares plummeted in value, it had to set up a victims’ compensation fund of $20 billion (more than €16 billion) and none of its shareholders will receive a penny in dividends this year. This is all bad news for pensioners, as so many pension funds have money tied up in BP – having viewed Britain’s premier oil company as a sound investment over the years.

Of course, it’s not entirely BP’s fault, even though it has taken the blame. The Deepwater Horizon rig was built by Hyundai in South Korea, supplied by Transocean, the world’s largest offshore drilling contractor, and carries the Marshall Islands’ flag.

Halliburton, once headed by former US vice-president Dick Cheney, was responsible for “cementing” the rig in place and could be the real culprit, some lawyers believe. But BP’s failure to assess the risk of drilling in deep waters “now raises questions about its approach to other risks”, according to Jeremy Leggett, executive chairman of Solarcentury. “Top of the list must be the threat that global oil production will fall sooner than generally forecast, ambushing oil-dependent economies with a rapidly opening gap between supply and demand.”

Leggett knows his stuff. He is a geologist by training whose research on Earth history at the Royal School of Mines in London was funded by oil companies, including BP, and “he spent the 1980s in the service of Big Oil”, as Wikipedia puts it. Then he jumped ship and, still wearing a suit and tie, became an effective campaigner on climate change for Greenpeace International before founding Solarcentury.

Writing in the Financial Times on June 8th, he challenged BP’s latest Annual Statistical Review of World Energy – particularly its contention that there are about 40 years of proven oil reserves; that advances in technology will enable much more to be found and produced; that rising oil prices can finance the necessary exploration and infrastructure; and that global oil supply can go on rising for decades.

“The disaster in the Gulf of Mexico casts doubt on the viability of the deepwater production on which industry forecasts depend,” Leggett said, arguing that “premature peak oil would be quite as bad as the credit crunch”. Indeed, Britain’s industry taskforce on peak oil and energy security has warned the government there to “act now . . . don’t let the oil crunch catch us out in the way the credit crunch did”.

Now Lloyd’s has joined this chorus. It notes that much of the world’s energy reserves lie

in areas that “will be increasingly subject to severe weather events caused by climate change. On top of this, extraction is increasingly taking place in more severe environments such as the Arctic and ultra-deep water . . . For energy users, it means greater likelihood of loss of power for industry and fuel supply disruptions.”

The combination of market dynamics and environmental factors means that business can no longer rely on low-cost fossil fuels, according to the Lloyd’s/Chatham House White Paper. “Companies which are able to plan for and take advantage of this new energy reality will increase both their resilience and competitiveness. Failure to do so could lead to expensive and potentially catastrophic consequences.

“The last few years have witnessed unprecedented investment in renewable energy and many countries are planning or piloting ‘smart grids’. This revolution presents huge opportunities for new partnerships between energy suppliers, manufacturers and users . . . Those who succeed in implementing the most efficient, low-carbon, cost-effective energy systems are likely to influence others and export their skills and technology.”

As for peak oil, Jeff Rubin, former chief economist of CIBC World Markets, has likened the Deepwater Horizon disaster to the 1979 nuclear accident at Three Mile Island, Pennsylvania, which led to not a single new nuclear power plant being built for 30 years. Now, with a US moratorium on further offshore drilling, he said “not only has world oil production already peaked, but it will also very soon start to shrink”.

What are we going to do about that?