A FIERCE DEBATE has been raging, mainly on the internet, and for once it isn’t about Princess Diana, September 11 or UFOs. The debate is about oil, and whether the world is about to run out of it.
Peak-oil theory postulates that the globe is at or close to its production peak and that it will be downhill from here. Peak oil’s great guru is the late M King Hubbert (like John Wayne, his first name was Marion; like Wayne he chose not to emphasise it). He was the American geophysicist who predicted in 1956 that American oil production would peak about 1970 (it did) and that a global peak would be reached a quarter of a century or so later.
Some saw the spike in oil prices to nearly $80 a barrel as evidence of the peak, roaring demand running up against limited supplies. Books postulating the end of oil have been flying off the airport bookstalls.
I mention this not just because the Organisation of Petroleum Exporting Countries (Opec) is trying to cut production to stop oil prices falling too much, showing that all those who thought we would never again see surplus supplies were barking up the wrong tree.
More importantly, the question of whether oil is running out is central to climate change. If fossil fuels are the main cause of rising greenhouse-gas emissions, and one of them is on its way out, perhaps we should not be so worried.
That was one reason why last week’s Treasury-commissioned report on the economics of climate change, from Sir Nicholas Stern and his team, was interesting. It is a tome, just under 600 pages.
Far from running out of oil, it said, we are still awash with it. Taking all fossil fuels together — oil, gas and coal — the world has so far used 2,700 billion barrels of oil equivalent. The amount of oil, gas and coal left in the ground is at least 40,000 billion barrels, with at least seven billion barrels of that economically recoverable. On unchanged polices, demand for energy will be some 4,700 billion barrels over the next half-century. Oil demand will be 1,800 billion barrels, and that amount, according to the report, is economically recoverable as long as oil remains above $30 a barrel.
“There is enough fossil fuel in the ground to meet world consumption demand at reasonable cost until at least 2050,” the report said.
Can this be true? While I don’t think we are at an oil peak now, there is something close to an industry consensus that we could reach that point in 20 years. The International Energy Agency has warned that huge investments will be needed in exploration, production and refining capacity to meet demand after 2010.
So, while the Stern review was right to conclude that supply shortages will not get in the way in the next few years, it is a bold view that says such shortages will not bite, possibly very hard, between now and 2050.
I mention the oil point because it illustrates what I think is the problem with the Stern report.
The analysis is clear, rigorous and comprehensive. No stone, it seems, has been left unturned. There are caveats and alternative scenarios.
Its central message, however, is alarmist and relies on three propositions. One is that dangerous global warming is in prospect — the report leans the reader towards five degrees centigrade by the end of the century — “far outside the experience of human civilisation”.
The second proposition is that the economic effects of this could be catastrophic, never mind the human consequences. I say “could be” advisably. The review found the much-quoted figure of a 20% hit to the global economy (similar to the great depression of the 1930s), hard to generate. Its baseline scenario was for global gross domestic product (GDP) per head to be reduced by only 2.2% in two centuries’ time, in 2200. Even adding in risks of serious catastrophe gives a per capita GDP effect of only 0.9% in 2100, rising to 5.3% a hundred years later.
The third proposition is that “only” 1% of global GDP needs to be spent, each year, to put the world on a low-carbon path; stabilising greenhouse-gas concentrations and spending money to enable people, particularly in poor countries, to adapt to unavoidable warming.
There are two things to say about this. One is that 1% of global GDP is a lot of money — about $600 billion (£315 billion). Bjørn Lomborg, director of the Copenhagen Consensus Centre, says that for a fraction of 1% of world GDP, many of the most pressing global problems could be solved, giving everybody clean drinking water, sanitation, basic healthcare and education. The other problem, according to experts, is that 1% a year may be a conservatively low estimate.
Looked at more closely, the report’s headline message — spend 1% now to avoid 20% damage later — does not stack up. I don’t want to debate the science again, but the numbers given prominence are at the high end of what even scientific believers expect.
At this point, environmentalists will cite the precautionary principle. Better to be safe than sorry. Act now just in case there is a catastrophe later — the millennium-bug principle.
Except that, as the report makes clear, the precautionary principle is highly sensitive to assumptions used, about the risks and the relationship between current spending and future benefits (the discount rate). If the cost now is low but the risks of future severe economic damage are high, that argues for action. If not, action may be unjustified, certainly on economic grounds. Spending 1% of global GDP every year from now, to avoid the loss of 2% or even 5% of global GDP in 2200 does not seem a great bargain.
Lord Lawson, in a lecture last week for the Centre for Policy Studies and the 1900 Club, said Stern was “scaremongering” and compared his report to the government’s dodgy dossier before the Iraq war. If global warming is happening, and he accepts a “modest” amount is, we should adapt to it and provide poor countries with the means to do so.
That is a little bit harsh. Stern was never going to produce a report that took a different view on the science to Sir David King, the government’s chief scientific adviser. Within the constraints, he has done his best.
I also believe there is more we should be doing than just adapting to climate change. Weaning ourselves gradually off fossil fuels makes sense, not just for climate reasons but because of security of supply and the eventual oil peak.
Achieving this, however, is easier said than done. A global emissions trading scheme could correct what Stern sees as the “market failure” of global warming, but it would require countries out- side the Kyoto process — America, India, China — to sign up.
Local action has a role but is never easy. The Institute for Fiscal Studies, in another report, confirmed that green taxes have dropped in relative terms in recent years, and that UK greenhouse-gas emissions have risen.
That would seem to set the scene for a package of green taxes, to be signalled in Gordon Brown’s pre-budget report at the end of the month. But the two serious money-raising green taxes would be increasing Vat on domestic fuel bills and returning to a policy of over-indexing petrol duties, increasing them more than inflation. However green we say we are, both are politically unpalatable. They won’t happen.
PS: Nothing is certain, not even next Thursday’s Bank rate rise to 5%, but it will take something extraordinary to stop it. Given that the only way to make money in this kind of market is to bet against the rise, City economists have racked their brains for reasons why the monetary policy committee (MPC) won’t act. They haven’t succeeded.
The “shadow” MPC, which meets under the auspices of the Institute of Economic Affairs, provides three options. Two members vote for no change, two for a half-point hike, and five for the expected quarter-point increase. Its members are worried about strong growth, inflationary pressures and the rise in the “broad” money supply, M4. In this case, the majority view on rates looks to be the right one.
