Energy experts: high oil prices bigger threat than climate change

Rising oil prices are a bigger threat to the world economy than climate change in the next 10 years - that was the surprising verdict of company executives from carbon trading, fuel cell, oil exploration and renewables firms who attended the Reuters Smaller Companies Forum. But climate change is likely to have a greater effect on the global economy over a 50-year timespan, according to those executives from old and new energy companies.

The experts did not comment specifically on the situation in the poorest countries, but there high oil prices are already a real disaster: according to the UN, some of the least developed countries (LDCs) are now forced to spend six times as much on oil than on health care. This obviously has major effects on the lives of millions of poor people.

According to the African Development Bank, for the wealthiest countries (non-oil producing OECD), oil imports make up less than 2% of GDP, whereas for African oil importing nations this was more than 10% of GDP in 2006. In poor oil importing countries, oil price rises of the current magnitude imply a significant reduction of economic growth rates, an erosion of trade balances, the destruction of progress in debt relief, a hike in inflation rates, higher unemployment and deeper poverty for the weakest (earlier post). Of the 47 poorest countries, 38 are net importers of oil, and 25 are fully dependent on imports (more here).

Biofuels are the only immediate alternative to liquid petroleum fuels and products which are so crucial to nearly all processes of an economy (from food production to trade, from mobility to the production of pharmaceuticals). No wonder developing countries want to invest in them: they offer the only strategy to stave off a societal catastrophe. The FAO's chief recently warned increased commodity and energy prices could cause political upheaval in developing countries. India's finance minister echoed the concerns calling high oil prices 'outrageous' and warning that they could significantly damage economic growth.

Over the longer term, a transition away from oil towards electricity would be a major step forward because it would allow for the efficient use of a broad spectrum of renewables, including radically carbon-negative bio-electricity. But it will take decades before electric vehicles and trucks penetrate the market in any significant way. For some transport sectors like aviation and shipping, there is virtually no alternative to liquid fuels.

Oil prices have quadrupled since 2002, and there seems to be no stopping the upward trend. The Reuters Smaller Companies Forum comes at the time when a new study [*.pdf] by Dr Robert L. Hirsh, senior Energy Program Advisor at the Science Applications International Corporation (SAIC) demonstrates the economy-destroying effects of peak oil. His conclusion is that economic growth will decline at a similar rate as oil output, that is, by 2 to 5 percent per year. There is a strict correlation between economic growth and oil supply (graph, click to enlarge). It is unclear whether we have actually reached the peak, but more and more analysts are beginning to suspect that this could be the case.

Recently, the world's leading scientific energy experts from 15 of the world's Academies of Science warned in a major report that the energy crisis is one of the major challenges facing humanity this century. They called for immediate action, especially in the developing world and amongst the poorest (that is, rural and remote populations) (previous post).

The finance director of carbon cutting project developer EcoSecurities told the Forum:

In a short-term scenario it is hard to say climate change is going to be a differentiating factor. If oil prices quadruple it is probably more of a challenge to the economy than climate change. - Jack MacDonald

But he added high oil prices would force businesses to tackle climate change earlier, as it is a greater problem in the longer term. Carbon-negative biofuels and bioenergy (schematic, click to enlarge) offer the advantage of reducing greenhouse gases in a far bigger and more affordable way than all other alternatives, which are carbon-neutral at best (more on negative emissions energy here and recent projects in 'bio-energy with carbon storage', here and here). So in theory, they can prevent two catastrophes: the peak oil disaster and the climate crisis:
energy :: sustainability :: biomass :: bioenergy :: biofuels :: oil :: petroleum :: climate change :: peak oil ::

Peter Bance, chief executive of fuel cell domestic boiler maker Ceres Power, whose fuel cell systems run on biofuels, said the world can cope with both pressures in the short term, but there were signs that natural catastrophes were already forcing a radical rethink.

Hurricane Katrina woke people in the U.S. up in a very big way, even though it was not necessarily 100 percent linked to climate change. Droughts and flooding are a much bigger long-term driver (of people's behaviour) than the oil price.

Dr Peter Finnegan, finance director of solar wafer maker PV Crystalox Solar Plc, said oil was a far more obvious threat to the economy than climate change over the next 10 years.

High oil prices have a direct cost implication in terms of industrial output.

However Eugene Whyms, Finance Director of oil and gas explorer EnCore Oil, said he did not think either issue was of much concern:

The threat from climate change -- I'm not sure what that is, apart from panic and extra taxes in case we all go under water," Whyms said, adding that the climate has always changed. And the oil price has doubled in the past few years, without any major consequences.

Note, Whyms, like many in the oil industry are not really concerned about the destructive effects of even marginal increases in oil prices for the developing world. In LDCs, oil imports constitute a major strain on the treasuries of governments and on the energy intensive economy.

The fight to tap oil fields in Alaska, the Arctic and Antarctic will be the key battleground between climate change campaigners and old, fossil-fuel based, energy firms, Whyms added. "The battle will probably come to a head on something emotive, like spoiling Antarctica," he said.

Asked whether those areas should be drilled, he said:

It would be very expensive and I don't think there is a big imbalance between oil supply and demand. I think the price has partly been pushed up by a lot of traders and speculators.

But the energy experts who warn for peak oil are far more concerned and think the petroleum industry is trying to blame high prices on speculation instead of on the real reason: a peaking of production. An oil company can never publicly admit it has hit its peak, because that would mean its immediate collapse.


References:
Reuters: Oil bigger threat than climate change in 10 years - October 26, 2007.

Robert L. Hirsch, "World Oil Shortage Scenarios for Mitigation Planning" [*.pdf], Presentation to ASPO-USA - October 17-20, 2007.

Biopact: Leading scientists: energy crisis poses major 21st century threat, action needed now - October 23, 2007

Biopact: High oil prices disastrous for developing countries - September 12, 2007

Biopact: India: 'outrageous' oil price damages economy, as $80pb could be new floor price - September 27, 2007

Biopact: A quick look at 'fourth generation' biofuels - October 08, 2007

Biopact: Carbon-negative bioenergy is here: GreatPoint Energy to build biomass gasification pilot plant with carbon capture and storage - October 25, 2007

Biopact: Carbon-negative bioenergy recognized as Norwegian CO2 actors join forces to develop carbon capture technologies - October 24, 2007