Business leaders predict 'global oil supply crunch and price spike'

The Chief Executive Officer of insurance giant Lloyds is warning that the world is facing a “period of deep uncertainty” over the decline of fossil fuels - and may soon be coping with $200-a-barrel oil.

It may be hard to believe now, writes Dr Richard Ward in his introduction to a “stark” report just published by Lloyds and an influential UK think tank, but that’s because “the bad times have not yet hit”. He warns business managers to be ready for “dramatic changes” as oil, gas and coal supplies will soon be “less reliable and more expensive”. The world “has entered a period of deep uncertainty in how we will source energy for power, heat and mobility, and how much we will pay for it,” he states.

And that’s just CEO Ward’s introduction. The rest of the report does not disappoint.

Titled Sustainable Energy Security: Strategic Risks and Opportunities for Business (PDF 1.38MB), it urges business leaders to adopt a “transition to a low carbon economy”. Those that do will thrive; the report talks of opportunities for forward-thinking managers that “prepare for and take advantage of the new energy reality”. However, “failure to do so could be catastrophic”.

Lloyds, which provides business services in more than 200 countries and territories (reporting profits of £3.9 billion in 2009) produced this report with Chatham House, a London, England “world-leading source of independent analysis, informed debate and influential ideas”. Formerly know as the Royal Institute of International Affairs, Chatham House is independent, but works closely with the British Parliament. For instance, the organisation facilitated the March 2010 meeting between British energy ministers and peak oil proponents.

It’s a report for business leaders, so emotive writing is perhaps not to be expected; instead, we get the occasional “new energy paradigm”. The term peak oil is largely avoided in favour of global oil supply crunch - which is emerging as a kind of Brit euphemism of choice for those wanting to attract the business community.

Sustainable Energy Security does not get hung up on predicting a date for this decline in oil production, but states that it is an urgent issue. It quotes from a 2009 study from the UK Energy Research Centre suggesting “that a peak in conventional oil production before 2030 appears likely, and there is a significant risk of a peak before 2020,” and also that “some suggest that this ‘peak’ has already occurred, while others maintain it is either impossible to predict or shows no sign of appearing”.

Having said that, it doesn’t pull any punches. For instance:

MARKET DYNAMICS AND ENVIRONMENTAL FACTORS MEAN BUSINESS CAN NO LONGER RELY ON LOW COST TRADITIONAL ENERGY SOURCES
Modern society has been built on the back of access to relatively cheap, combustible, carbon-based energy sources. Three factors render that model outdated: surging energy consumption in emerging economies, multiple constraints on conventional fuel production and international recognition that continuing to release carbon dioxide into the atmosphere will cause climate chaos.

WE ARE HEADING TOWARDS A GLOBAL OIL SUPPLY CRUNCH AND PRICE SPIKE
Energy markets will continue to be volatile as traditional mechanisms for balancing supply and price lose their power. 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. An oil supply crunch in the medium term is likely to be due to a combination of insufficient investment in upstream oil and efficiency over the last two decades and rebounding demand following the global recession. This would create a price spike prompting drastic national measures to cut oil dependency.

The report looks at declining “extractive energy sources” - hydrocarbons and nuclear - along with climate change, and the likelihood of government carbon regulation. It repeats that fossil fuel energy is going to get more expensive, due to both diminishing supply and carbon taxation, so that “the most cost-effective mitigation strategy is to reduce fossil fuel energy consumption”. It argues for efficiency and for renewable energy, and against just-in-time manufacturing models.

While written in a positive, pro-business frame of mind, Sustainable Energy Security makes it clear that we are fast approaching a transition away from “extractive” energy sources that currently make up “90 per cent of the world’s traded energy” and into uncharged territory:

These changes will naturally impact jobs, profits, national economies and the environment, just as the dramatic increase in coal use during the industrial revolution and the onset of the “oil age” did in the first part of the 20th century. This means that there will be push and pull factors from stakeholders. This will form the political context for many business transactions and operations over the next 30 years.