[A-List] How to Avoid Oil Wars, Terrorism, and Economic Collapse

[Bill Totten <shimogamo@xxxxxxxxxxxxx>]

 by Richard Heinberg

Museletter No 160 (August 2005)


By now most well-informed people are aware that global oil production may soon
reach its all-time peak, and that the consequences will likely be severe.

Already many important oil-producing nations (such as the United States,
Indonesia, and Iran) and some whole regions (such as the North Sea) are past
their production maximums. With nearly every passing year another country
reaches a production plateau or begins its terminal decline.

Meanwhile global rates of oil discovery have been falling since the early 1960s,
as has been confirmed by ExxonMobil. All of the 100 or so supergiant fields that
are collectively responsible for about half of current world production were
discovered in the 1940s, 1950s, 1960s, and 1970s. No fields of comparable size
have been found since then; instead, exploration during recent years has turned
up only much smaller fields that deplete relatively quickly. The result is that
today only one new barrel of oil is being discovered for every four that are
extracted and used.

World leaders are hampered in their ability to assess the situation by a lack of
consistent data. Proven petroleum reserve figures look reassuring: the world has
roughly a trillion barrels yet to produce, perhaps more; indeed, official
reserves figures have never been higher. However, circumstantial evidence
suggests that some of the largest producing nations have inflated their reserves
figures for political reasons. Meanwhile oil companies routinely (and
legitimately) report reserve growth for fields discovered decades ago. In
addition, reserves figures are often muddied by the inclusion of
non-conventional petroleum resources, such oil sands - which do need to be taken
into account, but in a separate category, as their rates of extraction are
limited by factors different from those that constrain the production of
conventional crude. As a consequence of all of these practices, oil reserves
data tend to give an impression of expansion and plenty, while discovery and
depletion data do the opposite.

This apparent conflict in the data invites dispute among experts as to when the
global oil peak is likely to occur. Some analysts say that the world is
virtually at its peak of production now; others contend that the event can be
delayed for two decades or more through enhanced investment in exploration, the
adoption of new extraction technologies, and the substitution of
non-conventional petroleum sources (oil sands, natural gas condensates, and
heavy oil) for conventional crude.

However, there is little or no disagreement that a series of production peaks is
now within sight - first, for conventional non-OPEC oil; then for conventional
oil globally; and finally for all global conventional and non-conventional
petroleum sources combined.

Moreover, even though there may be dispute as to the timing of these events, it
is becoming widely acknowledged that the world peak in all combined petroleum
sources will have significant global economic consequences. Mitigation efforts
will require many years of work and trillions of dollars in investment. Even if
optimistic forecasts of the timing of the global production peak turn out to be
accurate, the world is facing an historic change that is unprecedented in scope
and depth of impact.

Due to systemic dependence on oil for transportation, agriculture, and the
production of plastics and chemicals, every sector of every society will be
affected. Efforts will be needed to create alternative sources of energy, to
reduce demand for oil through heightened energy efficiency, and to redesign
entire systems (including cities) to operate with less petroleum.

These efforts will be challenging enough in the context of a stable economic
environment. However, if prices for oil become extremely volatile, mitigation
programs could be undermined. While high but stable prices would encourage
conservation and investment in alternatives, prices that repeatedly skyrocket
and then plummet could devastate entire economies and discourage long-term
investment. Actual shortages of oil - of which price shocks would be only a
symptom - would be even more devastating. The worst impacts would be suffered by
those nations, and those aspects of national economies, that could not obtain
oil at any price affordable to them. Supply interruptions would likely occur
with greater frequency and for increasing lengths of time as global oil
production gradually waned.

Efforts to plan a long-term energy transition would be frustrated, in both
importing and exporting countries. Meanwhile the perception among importers that
exporting nations were profiteering would foment animosities and an escalating
likelihood of international conflict.

In short, the global peak in oil production is likely to lead to economic chaos
and extreme geopolitical tensions, raising the spectres of war, revolution,
terrorism, and even famine, unless nations adopt some method of cooperatively
reducing their reliance on oil.


A Plan for Global Powerdown

The Oil Depletion Protocol provides a way forward (the text appears at the end
of this article). It was drafted by the Association for the Study of Peak Oil;
however, the source of the document is of little importance - only its substance
is of interest. While it is merely a suggested outline and will require fleshing
out and detailed negotiation, the Protocol is inherently simple. As will be
clear from the Discussion below, it would be unnecessary for all nations to
ratify the Protocol in order for it to have a beneficial effect; if even one
nation adopts it, that nation will be benefited. However, if a substantial
number of nations sign on this will create a platform for international economic
stability and cooperation.

The Protocol will be presented at several important international conferences
attended by world leaders in late 2005. Efforts will also be made to publicize
and communicate it to the general public. It is hoped that a few courageous
politicians in each country will understand its importance and bring it before
their governing bodies for consideration and adoption.


How Would It Work?

The idea of the Protocol is inherently straightforward: oil importing nations
would agree to reduce their imports by an agreed-upon yearly percentage (the
World Oil Depletion Rate), while exporting countries would agree to reduce their
rate of exports by their national Depletion Rate.

The concept of the Depletion Rate is perhaps the most challenging technical
aspect of the Protocol, yet even it is easy to grasp given a little thought.
Clearly, each country has a finite endowment of oil from nature; thus, when the
first barrel has been extracted, there is accordingly one less left for the
future. What is left for the future consists of two elements: first, how much
remains in known oilfields, termed Remaining Reserves; and second, how much
remains to be found in the future (termed Yet-to-Find). How much is Yet-to-Find
may be reasonably estimated by extrapolating the discovery trend of the past.
The Depletion Rate equals the total yet-to-produce divided by the yearly amount
currently being extracted.


Let us explore a few examples:

Norway is a country that reports exceptionally accurate reserve estimates. The
total produced to-date is 18.5 billion barrels (Gb), and 11.3 Gb remain in known
fields, with about 2 left to find, giving a rounded total of 32 Gb. It follows
that 13.5 Gb are left to produce. In 2004, 1.07 Gb were extracted, giving a
Depletion Rate of 7.4 percent (1.07/13.5). This is a comparatively high rate,
typical of an offshore environment.

In the case of the US (considering only the lower 48 states and excluding
deepwater), the corresponding numbers are: produced to-date, 173 Gb; Remaining
Reserves, 24 Gb; Yet-to-Find, 2 Gb - meaning that there are 27 Gb left. Annual
production in 2004 was 1.3 Gb, giving a Depletion Rate of 4.6 percent (1.3/27).

For the world as a whole, 944 Gb have been produced; 772 remain in known fields;
and an estimated 134 Gb is Yet-to-Find, meaning that 906 Gb are left. Production
of conventional oil in 2004 was 24 Gb, so the Depletion Rate is 2.59 percent
(24/906).

These estimates exclude non-conventional oil - oil shales, bitumen (oil sands),
extra-heavy oil, heavy oil, deepwater oil, polar oil, and liquids from gasfield
plants. Most oil produced to date has been of the conventional variety, which
will dominate all supply far into the future, so it makes sense to concentrate
on this category.

It must be stressed that current Reserves estimates in the public domain are
grossly unreliable, and one of the purposes of the Protocol is to secure better
information. The assessed Depletion Rate for each country, and eventually for
the World as whole, is subject to revision when better information becomes
available, but the resulting correction of the Depletion Rate will not be large,
probably causing it to vary by less than one percent.

The Depletion Protocol would require importers to reduce their imports by the
World Depletion Rate (that is, 2.5 percent) each year in order to put demand
into balance with world supply. As stated earlier, exporters would reduce their
production according to their national Depletion Rate. Thus Norway would reduce
its production by 7.4 percent each year (that country's production is already
declining at an even higher rate).

The imposition on the producing countries represents no great burden, since few
can now increase their rate of production in any case, and many are experiencing
declining production for purely geological reasons, as is the case with Norway
and the US. Agreeing to produce less oil would not inhibit exploration because
new finds would lower the national Depletion Rate, and thus permit a higher rate
of export than would otherwise be the case. The main thrust of the Protocol
would be to require importers to cut imports, but the inclusion of producers in
the provisions would stimulate greater cooperation between the two factions. Any
indigenous production in a country that was a net importer would not be likely
to provide that country with an unfair advantage, as production within most
importing countries is already declining at a rate higher than the World
Depletion Rate.

How importers dealt internally with the import restriction would be up to them
(though strategies both to obtain supplies of alternative fuels and to reduce
demand for oil would doubtless be required). Some might wish to introduce an
energy allowance as a form of tradable ration (as will be discussed in more
detail below).


Discussion of the Protocol

Questions and Possible Objections

The Protocol may at first look like merely a good idea with no real chance of
implementation. However, closer inspection suggests that its implementation will
benefit nearly all important global stakeholders and that objections likely to
be raised to it are easily countered.


What if forecasts of a near-term peak in global oil production are wrong?  Won't
there be a cost to preparing for the oil peak too early?  In practical terms,
won't this mean voluntarily choking off economic growth?

Because so much is at stake, it is important that these vital questions be
addressed not just by partisan participants in the debate over the timing of the
oil-production peak (the so-called "oil optimists" and the "oil pessimists");
some independent assessment is required of the costs of preparing too soon
versus the costs of preparing too late.

Fortunately, such an assessment has already been undertaken - "Peaking of World
Oil Production: Impacts, Mitigation, & Risk Management", a Report prepared by
Science Applications International Corporation (SAIC) for the US Department of
Energy, released in February 2005, and authored principally by Robert L Hirsch
(hereinafter referred to as "the SAIC Report").

The SAIC Report concludes that substantial mitigation of the economic, social,
and political impacts of Peak Oil can come only from efforts both to increase
energy supplies from alternative sources and to reduce demand for oil. With
regard to the claim that efficiency measures will be enough to forestall dire
impacts, Hirsch and coauthors note that, "While greater end-use efficiency is
essential, increased efficiency alone will be neither sufficient nor timely
enough to solve the problem. Production of large amounts of substitute liquid
fuels will be required." Further, "Mitigation will require a minimum of a decade
of intense, expensive effort, because the scale of liquid fuels mitigation is
inherently extremely large". Hirsch and coauthors also point out that "The
problems associated with world oil production peaking will not be temporary, and
past 'energy crisis' experience will provide relatively little guidance".

The SAIC Report agrees that mitigation efforts undertaken too soon would exact a
cost on society. However, it concludes that, "If peaking is imminent, failure to
initiate timely mitigation could be extremely damaging. Prudent risk management
requires the planning and implementation of mitigation well before peaking.
Early mitigation will almost certainly be less expensive than delayed mitigation."


What if the pessimists are right and the world is at its peak of oil production
now?  In that case, is it too late to implement the Depletion Protocol?

If the world reaches the peak of production within the next two years there will
be too little time to undertake major mitigation efforts prior to the event, and
therefore there are likely to be severe economic, social, and political impacts,
as outlined in the SAIC Report.

However, in that case the need for the Protocol should quickly and widely become
apparent. While all nations will suffer from higher prices and shortages, only a
cooperative system of national and international quotas will avert the even more
extreme economic and geopolitical crises that would otherwise ensue.


Why can't the market take care of the problem?  Won't high prices stimulate more
exploration and the development of alternatives?  Wouldn't interference with
market mechanisms be harmful?

The SAIC Report's authors dismiss the claim that the market will solve any
shortage problems arising from global oil production peak, with higher oil
prices stimulating investments in alternative energy sources, more efficient
cars, and so on. Price signals warn only of immediate scarcity. However, the
mitigation efforts needed in order to prepare for the global oil production peak
and thus to head off shortages and price spikes must be undertaken many years in
advance of the event. Hirsch and coauthors maintain that, "Intervention by
governments will be required, because the economic and social implications of
oil peaking would otherwise be chaotic. The experiences of the 1970s and 1980s
offer important guides as to government actions that are desirable and those
that are undesirable, but the process will not be easy."

Historically, oil production has often been managed by governments or by cartels.
In petroleum's early days, free-market boom-and-bust cycles bankrupted many
players (including the "father" of the oil industry, Edwin Drake). Soon John D
Rockefeller brought a certain order to the situation through the creation of the
Standard Oil Trust (in doing so he squeezed out many competitors and personally
profited to an extraordinary degree). This regime came to an end in 1911, when
the US Government broke up Standard Oil after prosecution for violation of
anti-trust laws. Starting in the 1930s, with the US in position to control
global oil prices, the Texas Railroad Commission capped production levels in
order to stabilize the market. After US oil production peaked in 1971 and that
nation lost its ability to control global prices, petroleum's center of gravity
shifted to the Middle East, and OPEC began mandating production quotas for its
members in order to keep prices within a desirable band.

While the management of oil prices globally thus has precedents, the situation
in the future will be fundamentally different than heretofore, in that
previously the problem was too much oil and collapsing prices that offered
little incentive for exploration. The situation the world will soon face is that
of insufficient supply leading to extreme price shocks, price volatility, and
acute shortages. Thus a new kind of management scheme will be required.


How will adoption of the Protocol affect importers and exporters differently?

Importers: No one doubts that industrial nations will find it difficult to
sustain economic growth while using less oil on a yearly basis. Thus the
voluntary adoption of the Protocol by importers would seem disadvantageous - a
"tough sell".

However, it must be recognized that a decline in the availability of oil is
inevitable in any case; only the timing of the onset of decline is uncertain.
Without a structured agreement in place to limit imports, nations will be
inclined to put off preparations for the energy transition until prices soar, at
which time such a transition will become far more difficult because of the
ensuing chaotic economic conditions. With the Protocol in place, importers will
be able to count on stable prices and can then more easily undertake the
difficult but necessary process of planning for a future with less oil.

Poor importing countries may object that by using less petroleum they will have
to forego conventional economic development. However, further development that
is based on the use of petroleum will merely create structural dependency on a
depleting resource. Without the Protocol, these nations will be financially bled
by high and volatile prices. With the Protocol in place and with prices
stabilized, these nations will be able to afford to import the oil they
absolutely need; meanwhile they will have every incentive to develop their
economies in a way that is not petroleum-dependent.

Exporters: Economies that are based primarily on income from the extraction and
export of natural resources often tend to give rise to governments that are more
responsive to the interests of powerful foreign resource buyers than they are to
the needs of their own citizens. Thus it is in the interest of
resource-exporting countries to develop indigenous industries in order to
diversify their economies.

Countries that depend primarily on income from oil exports will need to wean
themselves from this dependence eventually in any case, as their oilfields are
depleted; the Protocol provides them a means of making the transition in a way
that will allow for long-term planning.

Without the Protocol, smaller exporting nations will likely be at the mercy of
militarily powerful importers. The Protocol will provide a means of minimizing
external political interference in these nations' affairs. As a result, much
international tension and conflict, including the threat of terrorism, can be
minimized - which will be a help also to the wealthy importers.


How will the oil companies be affected?

Without the Protocol, the oil companies may enjoy record revenues - for a time.
But they will be demonized for profiting from the misery of the rest of society;
meanwhile, they will be hampered in their operations by the destabilization of
national economies resulting from wildly gyrating oil prices. As noted earlier,
the Standard Oil Trust, the Texas Railroad Commission, and OPEC all provided
production-rationing mechanisms that brought order out of what would otherwise
have been chaotic situations. The oil companies (sometimes reluctantly) accepted
these mechanisms, recognizing that a stable economic environment was more
important to them in the long run than the opportunity to make momentary
windfall profits.

With the Protocol, the oil companies will remain profitable, they will have the
incentive to undertake further exploration, and they will be able to plan for
decades ahead. They will also be motivated to become more generalized energy
companies (rather than remaining merely oil companies) and thus to invest in the
development of alternative energy sources.

There is already evidence that the oil companies are concerned about a public
backlash as gasoline prices soar: ChevronTexaco has initiated an expensive
public-relations campaign titled "Will You Join Us?", featuring a web site
(www.willyoujoinus.com) and expensive newspaper ads informing readers that "the
era of easy oil is over" and asking for public discussion on the issue. The Oil
Depletion Protocol will provide more long-term security for the petroleum
industry than any PR campaign ever could, and at no cost.


Won't both importers and exporters be tempted to cheat?  How would the Protocol
be enforced?

The Protocol will require a system for monitoring production, exports, and
imports - which cannot be hidden to a large degree in any case. Enforcement will
require the establishment of a Secretariat for adjudication of disputes and
claims, and a system of economic penalties to be negotiated by the agreeing
nations.


How can nations adjust internally to having less oil?

Withdrawal from oil dependency will be an immense challenge that will require
cooperation and compromise on everyone's part. Efforts will be needed both to
create supplies of alternative fuels and to reduce the demand for oil.

The latter task will be much easier if systems are designed to make it in
individuals' interest not only to reduce their own oil dependency but also to
persuade others to reduce theirs. One such system for creating collective
motivation and cooperation consists of Domestic Tradable Quotas, or DTQs.

DTQs can be used to ration all hydrocarbon energy sources (in order to reduce
greenhouse gas emissions) or specific fuels such as oil. For the sake of
discussion, let us assume the use of DTQs for petroleum only, as a way of
implementing the Depletion Protocol within nations.

First, a national Petroleum Budget would be drawn up, based on the nation's
indigenous production and oil imports as mandated by the Oil Depletion Protocol.
A segment of the Petroleum Budget would then be issued as an unconditional
entitlement to all adults and divided equally among them; the remainder would be
auctioned to industry, commercial users, and government. The units could then be
bought and sold, so that users unable to cope with their ration could increase
it, while others who kept their fuel consumption low could sell and trade their
Petro-units on the national market. All transactions would be carried out
electronically, using technologies and systems already in place for direct debit
systems and credit cards.

When consumers (citizens, businesses, or the government) made purchases of fuel,
they would surrender their quota to the energy retailer, accessing their quota
account by (for instance) using their Petro-card or direct debit. The retailer
would then surrender the carbon units when buying energy from the wholesaler.
Finally, the primary energy provider would surrender units back to the National
Register when the company pumped or imported the oil. This closes the loop.

All purchases of petroleum would be made with Petro-units, whether the oil were
used as fuel or as feedstock for plastics or chemicals. So long as the petroleum
remained fuel, Petro-units would have to be passed back up the line, starting
with the end user. However, if the petroleum were incorporated as feedstock into
the manufacturing of a product (such as plastics), the manufacturer would simply
add the cost of the Petro-units into the cost of the product. Thus, in the case
of feedstocks, the manufacturer of goods would be the presumed end user.

Purchasers not having any Petro-units to offer at point of sale - foreign
visitors, people who had forgotten their card or cashed-in all their quota as
soon as they received it - would buy a quota at point of purchase, then
immediately surrender it in exchange for fuel, but would pay a cost penalty for
this (that is, the bid-and-offer spread quoted by the market).

DTQs place everyone in the same boat: households, industry, and government would
have to work together, facing the same Petroleum Budget, and trading on the same
market for Petro-units. Everyone would have a stake in the system. All would
have the sense that their own efforts at conservation were not being wasted by
the energy profligacy of others, and that the system was fair.

Moreover, DTQs are guaranteed to be effective, because the only fuel that could
be purchased would be fuel within the Budget. The Budget would set a long
time-horizon so that people would have the motivation and information they
needed to take action in the present to achieve drastic reductions in oil use
over a twenty-year timeframe.


What if only a few nations sign on?  Won't the Protocol be ineffectual if a few
large exporters or importers refuse to do so?

At first it might seem that those nations not adopting the Protocol would
achieve an advantage. However, any temporary benefit would be purchased at the
expense of later economic calamity. As discussed in the SAIC Report, nations
that embark on the energy transition sooner will be much better off than those
procrastinating.


What about natural gas and coal - should there be similar protocols for these?
Might countries simply burn more coal to make up for having less oil?

The Oil Depletion Protocol will not preclude other agreements aimed at reducing
fossil fuel usage in order to avoid impacts to the global climate, but it will
be more ambitious in its reduction trajectory than the Kyoto Protocol or the
Asia Pacific Partnership on Clean Development and Climate. If nations'
experience with the Oil Depletion Protocol is positive, this will provide
motivation for the forging of similar agreements covering these other fossil
fuels.


How can the process of adopting the Oil Depletion Protocol begin?

A program to win implementation of the Protocol must focus on educating both the
general public and top-level decision-makers.

Adoption of the Protocol will require that a few policy makers champion it and
bring it before their national parliament or congress. If even one country
adopts the Protocol, this will help to open a global discussion.

At the same time, it is important that citizens understand the issues and what
is at stake, as pressure on elected officials from below will help focus the
latter's attention on the matter.

In the near future, a program will be underway to obtain endorsements of the
Protocol from prominent organizations and individuals. This article is part of a
preliminary effort to inform the public of both the Peak Oil issue and the Oil
Depletion Protocol. Please help by copying this article and sending it to family,
friends, colleagues, the media, and elected officials. This may be our last,
best opportunity to avert resource wars, terrorism, and economic collapse as we
enter the second half of the Age of Oil.


THE OIL DEPLETION PROTOCOL

WHEREAS the passage of history has recorded an increasing pace of change, such
that the demand for energy has grown rapidly in parallel with the world
population over the past two hundred years since the Industrial Revolution;

WHEREAS the energy supply required by the population has come mainly from coal
and petroleum, having been formed but rarely in the geological past, such
resources being inevitably subject to depletion;

WHEREAS oil provides ninety percent of transport fuel, essential to trade, and
plays a critical role in agriculture, needed to feed the expanding population;

WHEREAS oil is unevenly distributed on the Planet for well-understood geological
reasons, with much being concentrated in five countries, bordering the Persian
Gulf;

WHEREAS all the major productive provinces of the World have been identified
with the help of advanced technology and growing geological knowledge, it being
now evident that discovery reached a peak in the 1960s, despite technological
progress, and a diligent search;

WHEREAS the past peak of discovery inevitably leads to a corresponding peak in
production during the first decade of the 21st Century, assuming no radical
decline in demand;

WHEREAS the onset of the decline of this critical resource affects all aspects
of modern life, such having grave political and geopolitical implications;

WHEREAS it is expedient to plan an orderly transition to the new World
environment of reduced energy supply, making early provisions to avoid the waste
of energy, stimulate the entry of substitute energies, and extend the life of
the remaining oil;

WHEREAS it is desirable to meet the challenges so arising in a co-operative and
equitable manner, such to address related climate change concerns, economic and
financial stability and the threats of conflicts for access to critical
resources.


NOW IT IS PROPOSED THAT

1. A convention of nations shall be called to consider the issue with a view to
agreeing an Accord with the following objectives:

a. to avoid profiteering from shortage, such that oil prices may remain in
reasonable relationship with production cost;

b. to allow poor countries to afford their imports;

c. to avoid destabilising financial flows arising from excessive oil prices;

d. to encourage consumers to avoid waste;

e. to stimulate the development of alternative energies.


2. Such an Accord shall have the following outline provisions:

a. No country shall produce oil at above its current Depletion Rate, such being
defined as annual production as a percentage of the estimated amount left to
produce;

b. Each importing country shall reduce its imports to match the current World
Depletion Rate, deducting any indigenous production.


3. Detailed provisions shall cover the definition of the several categories of
oil, exemptions and qualifications, and the scientific procedures for the
estimation of Depletion Rate.

4. The signatory countries shall cooperate in providing information on their
reserves, allowing full technical audit, such that the Depletion Rate may be
accurately determined.

5. The signatory countries shall have the right to appeal their assessed
Depletion Rate in the event of changed circumstances.


(Note: the Oil Depletion Protocol has elsewhere been published as "The Rimini
Protocol" and "The Uppsala Protocol". All of these documents are essentially
identical.)


Sources of further information

On Oil Depletion:
www.globalpublicmedia.com
www.energybulletin.net
www.peakoil.net
www.odac-info.org

On Domestic Tradable Quotas (DTQs):
www.dtqs.org

On the SAIC Report:
www.cge.uevora.pt/aspo2005/ abscom/Abstract_Lisbon_Hirsch.pdf
www.hilltoplancers.org/stories/hirsch0502.pdf

Richard Heinberg is the author of Powerdown - Options and Actions for a
Post-Carbon World (New Society Publishers 2004). He is a journalist, educator,
editor, and lecturer, and a Core Faculty member of New College of California,
where he teaches courses on "Energy and Society" and "Culture, Ecology and
Sustainable Community".

If you wish to republish any of these essays or post them on a web site, please
contact rheinberg@xxxxxxxxxxxxxx for permission.

http://www.museletter.com/archive/160.html

Bill Totten     http://billtotten.blogspot.com/