Select Committee on Environmental Audit Minutes of Evidence

Examination of Witnesses (Questions 443 - 459)



  Q443  Chairman: Thank you for coming back. We were engaged in a discussion which was not quite concluded yesterday but obviously we have been dealing with this subject again this afternoon. Do you want to say what peak oil means in your view and when you think the world is going to get there?

  Mr Skrebowski: Peak oil is essentially a simple concept. It is simply the point at which rate at which oil is declining, which all the fields do after a period, exceeds the rate at which new production is expanding. Therefore, what we are looking at is the flow. There is great confusion between the stock, which is the amount of reserves in the world, which only become of interest when they are converted into a flow because what society requires, what business requires, what you and I require is a flow of oil, whichever product it is. What I have a look at is the flow of new projects and I take these down to quite a small size. In fact, I was talking to someone by e-mail this morning and he was confirming that I have now got as much new capacity as CERA, which gave that very optimistic report in the States earlier last year, has got. Where we differ is simply that I recognise a much greater degree of slippage which is the experience at the moment with oil field inflation and lack of equipment and lack of people. That is tending to get worse. I also recognise the rate at which capacity is eroding, which is not quite the same as depletion, but I do not want to get into a long, convoluted discussion on that. Essentially the capacity to produce in somewhere like the UK is going down so the capacity that is lost from there is being sold to someone and those people have to go off and buy it from someone else. In effect, as more countries start depleting you have displaced buyers who are going to those who are left that are still expanding their production and they are progressively getting more and more loaded, and clearly there will come a point at which they cannot support the demands that are likely to be made of them because they will also be depleting their resources ever faster. This in some senses is already visible. If you look at the OPEC production statistics over the last 18 months, OPEC output has barely increased. It is wobbling around. One or two countries are going up, one or two are going down, the rest are just struggling. They have got more money than ever before. They have all of the best contractors, by and large, although some of it is closed. Saudi Arabia has never had so many rigs operating, it has never had so many workovers going on, it has never had so much money being spent, and yet it is struggling to hold production. That is the contemporary reality. When you add all these together and do the calculation, my answer comes out that somewhere in 2010-11 the numbers cease to add up and you start getting less oil at the end of the year than you had at the beginning on a global scale. That is when peak oil occurs. In my view, it is really quite imminent. The oil companies themselves are struggling. From 2000 they have all been grandly announcing to their shareholders that they will produce 5% more each year. They have consistently failed and by 2005 there was very little growth at all. I have got a tabulation that shows the 21 largest commercial companies (accounting for a quarter of the world's oil production) produced ½% more last year. There was a hurricane impact but then people are telling us—and there is a report this morning—that this level of hurricanes is likely to continue, that there has been a change, and maybe it is global warming that has produced that change, maybe it is not, but the expectation is that that sort of phenomenon is going to continue,

  Q444  Colin Challen: You have heard the evidence this afternoon from our previous witnesses that they consider a 40 years away peak oil situation as being pessimistic and their range is 40 to 100 years. Yours is clearly in that case almost pornographic in its pessimism—2010. There must be quite a range of other commentators. Is there any real science to this? Are there people who say there could be oil beyond 100 years, for example? What is the range?

  Mr Skrebowski: It broadly falls into three groupings. There are people who are actively involved in this sort of research like myself who, because they are retired or because they are in a position like mine or because they are doing it part time, have the disadvantage that they do not necessarily get hold of best data. They have the advantage that they have no institutional commitment to a particular outcome. You can do the analysis in various ways. You can do it in a fairly theoretical way on this midpoint of the reserves, which gives you the problem of defining reserves. You can do it the way I do it, which is on a flows basis. Then there are intermediate variants between them. Those groups vary between the ultra-pessimist Professor Deffeyes, who is the linear heir to Hubbard, at Princeton, who had it as last year, through to two or three of us doing it up to the 2010 period, and a couple more doing it to 2012. Then you get a group of consultancies who agree with this sort of analysis but are not prepared to be quite so pessimistic who tend to group around 2015. Then you have the international agencies which still seem to have a sometimes stated and sometimes unstated commitment to business as usual, so you get the EIA and the IEA which are around the 2020 to 2030 mark. Beyond that you get into the professors who do not believe any of this and have rather grand theories on the back of envelopes. I think the realistic range is about 2008-10 through to about 2030. To get to the 2030 you have not only got to assume that the discovery rate picks up enormously but you have also got to assume that the geo-political environment is completely benign and that you will get access to the countries, the countries that are producing will not put constraints on the amount they produce, and that everything works like a Swiss clock. This seems to me a pretty heroic assumption, particularly in the light of the resource nationalism we have been seeing out of Russia and out of South America and also we have seen a straight opportunity to take a tax grab in places like Angola and places like Kazakhstan. There is a next stage which I think has to be seriously considered which is where a nation state says, "Hang on, we are depleting our resource awfully fast. Would it be more appropriate to keep that resource for ourselves, for our own people?" There have been hints of this. The Russians flew a kite a couple of years ago where one of the ministers talked about capping off production and just keeping it at a particular level. I think that is another idea that is waiting in the wings. We could quite easily see that countries which might have the capability to produce more electing to cap it off at a particular level and make it last longer. There is the other, in my view, somewhat unacceptable idea of this miraculous 2030 where every nation on earth produces happily until it goes into decline, so all these nations on earth are going to destitute themselves in order to keep the Western world running nicely, and the international oil companies have a smooth changeover to hydrogen which, equally miraculously, is going to turn up in 2030. I am sorry, I cannot believe it.

  Q445  Colin Challen: The Shell fiasco revealed the pressures on oil companies to boost their reserves and that is presumably to boost their valuations and so on. Following that, have oil companies been more transparent and more accountable in the way that they calculate the figures?

  Mr Skrebowski: They have conformed more tightly with the rules. The primary problem is that the Securities and Exchange Commission in the States requires oil companies to quote their reserves according to their rules, which is fair enough, in order to have a quotation on the US market, and as virtually all oil companies wish to be quoted on the US market, they fall in with the SEC definition. There is a whole series of technical reasons to say where the SEC definition is not entirely satisfactory. It is notionally a proven, which is one part of the distribution curve factor. It has no probability ascribed to it and, utterly perversely, two years ago they modified the rules to allow a certain technology to be used for fields in the Gulf of Mexico but nowhere else on earth. This led to the result that companies who had fields in the Gulf of Mexico could, in effect, book more reserves than ones who had similar sized fields but not in the Gulf of Mexico. Thus it is a rather strange animal. The more generally used and more useful number is the proved and probable, which is the statistical one which says this number is the best one in the sense that it is as likely to be too big as too small. The advantage of that is that you can mathematically add the 50s together and get a meaningful result. At the moment it is a bit of an apples and pears situation. Some give both quotations; some have another variant, and there is still a great reluctance to let too many people into the craft mysteries.

  Q446  Colin Challen: What do you think will be the main effects of reaching peak oil production in a full global sense, but particularly on transport where we are so dependent on oil?

  Mr Skrebowski: Given that, by and large, people do not drive around the countryside for the fun of it and that the bulk of the consumption has an economic purpose, that cannot really do anything but spike the prices and translate into some form of inflation.

  Q447  Mr Stuart: I wonder if you could comment on the Government's position which is they have based their projections on the IEA's World Energy Outlook Publications and they say there are sufficient oil reserves for 30 years and possibly, with some technological and other means, stretching that out to 60 years. We know your opinion of those particular conclusions but could you comment on how they got there?

  Mr Skrebowski: I think because all the major Western nations are members of the IEA and contribute data to it and interact with it, it is philosophically fairly difficult to say that perhaps we should be looking at some other scenarios, but I think there are some very good reasons on this occasion because we have at least a possibility of a quite heroic discontinuity here, in that in addition to examining the benign scenario that life goes on much as before, that other scenarios are at least examined a bit further than just not being taken into account. There is a dreadful analogy, but I think I will make it, which is that throughout the 1930s Mr Hitler did not keep his intentions secret. It was perfectly well-known what his aspirations were. There was lots of information about the rearmament of Germany. There were people writing books about it and people lobbying for it, but the idea of another major war at so short an interval from the previous one was so horrendous that people would rather not contemplate. We went all the way through the 1930s and the British Embassy in Berlin was sending constant messages to London which were piled up and ignored. If we had even taken notice of it a couple of years earlier the outcome would have been significantly different. If there had been a greater preparedness to say that, "Yes, we certainly hope there will not be a war but it cannot be ruled out," then the outcome would have been more benign, and similarly here. Oddly enough, I passionately believe it, and all the analysis I have done suggests that what I am saying is right, but of course I have to consider the possibility that I might be wrong but, equally, I do not think it is reasonable any longer looking round the world and looking at what is happening in the oil field just to blindly assume that you can go on much as before, and that is what we are doing.

  Q448  Colin Challen: So we know what the Government's official view is. Committees like this rely on expert evidence from people like yourself and also from people within government. Are you finding that there are any individuals within government who are beginning to take your ideas more seriously?

  Mr Skrebowski: I think there always have been. It is a paradox, is it not, that halfway down most organisations there are people who are prepared to think further out of the acceptable box than you get higher up. As you get closer to the top, it is not always clear whether you are providing analysis or reassurance, and I think certainly in the energy field that is very much what we are seeing. That is a subjective, personal opinion and must be treated in that light. What else is there to say?

  Q449  Colin Challen: You will recognise that our difficulty while looking at this is that we have just had evidence from the industry which is quite clear about the fact that there is at least 40 years' worth and more like 100 available, and that contrary to your argument in fact production is going to be able to brought on-stream, and again they are telling us that. The Government's official view is that, the IEA's view is that. Why should we believe you and not all these authorities?

  Mr Skrebowski: I think my answer to that would be to check what I am saying, ask other people whether what I am saying makes sense, and if you find (which I am sure you will) that they start to squirm a bit, then recognise that there is this very real possibility that this is happening. If we look at some of the other governments, the EIA, the American one, puts out happy nonsense numbers and actually at the beginning of their reports they have in very, very tiny letters the statement "this is what is required for business as usual", which no-one ever reads and moves swiftly on. They in fact commissioned indirectly the Hirsh Report. The Hirsh Report last year was a report which basically wanted to examine the impact of peak oil and what you could do to mitigate its effects. To do a one-line summary of it, the answer was if you had 20 years you would get through; if you had 10 years, it would be pretty rough; if it was any quicker than that, forget it. There is now a follow-on to that report, the executive summary of which is just about to be issued, which is looking at the primary mitigation proposals which are, broadly, conservation, coal to liquids, shale oil (which frankly is romance), and I forget what the fourth one is. I can dig that out for you, if you wish, and send it to someone. We had a very strange story in the New York Times on Sunday claiming that Mr Bush knew all about peak oil, that he had been briefed by Mr Simmons and Mr Cheney and that was the real reason for his rather strange remarks in the State of the Union Address. So there are all sorts of conflicting counter-currents going on and there certainly does seem to be some evidence that there are at least some people taking it seriously and having a look, while at one and the same time there is a very strong "don't frighten the horses" attitude.

  Q450  Colin Challen: Thank you for that. That is a very full answer and an interesting one. The Government currently uses three different projections of future oil prices in 2020. $50 is the high one, they have a central price of $35, and a low price of $20, all at 2004 prices. Would you comment on what you think of those estimates? Are you able to shed any light on how you think the DTI might possibly have come up with them?

  Mr Skrebowski: I do not think I can shed any light on how they might have come up with them other than they probably went back to the IEA projections and there was an interaction that way. If—as I am—you are projecting a huge discontinuity and a shortfall in oil supplies then logically oil prices have got to go very high because what you are trying to do or what the market is trying to do is drive them into the highest return uses, and then you are going to try and fill up the remaining bit with other sources of energy in some shape or form. So if you accept the discontinuity, and remember if you are going out to 2025 you are 15 years after when I think it will occur and you are 10 years after when many people think it will occur, I would anticipate very high prices because, apart from anything else, you have got to have an incentive to draw forth either a conservation measure or alternative energy source in order to try and fill a gap which is in danger of opening up each year.

  Q451  Mr Caton: We have touched on transparency earlier. The Government says it has been working with the IEA and various governments to promote greater transparency in oil markets and to improve the investment climate in oil-producing countries. What do you understand them meaning by this and why is transparency of oil data so important?

  Mr Skrebowski: The oil industry, as I hinted, rather likes to keep its secrets and rather likes to keep its mysteries. This has been an historic pattern, which is not surprising. It is no different from any other industry in that sense. Producing countries very often declare their reserves to be state secrets and their actual production figures to be state secrets and all the rest of it. They do not want people calculating out things like declining curves. Just out of interest, if you have data on a field and you know something about its characteristics, it is relatively simple to know where it is going which is why production data tends to become state secrets, otherwise you can tell what is going to happen to them. If you go back, some of this is actually still in the public domain so we can catch up with some of it. Matt Simmons, who is fairly apocalyptic and is a New York banker and close to the Bush administration and close to Bush personally, has been going round the world talking about peak oil and the likely impact of that. One of the things that came out of that was that we really needed much, much better data from both the oil companies and the producing countries because then we could start doing what in effect we want to do which is plug the right numbers in and see exactly where things are going because then we can see how big a problem we have got. So far where has this got to? OPEC has certainly started publishing its future investment plans in much greater detail than we have ever seen. We know that is in response to the pressure. The companies after the Shell debacle have definitely been more scrupulous in their presentation of reserves and definitions and one thing and another, so that has tightened up. We have some countries that are exemplars, and I am proud to say the UK is one, where you have very detailed production data and an excellent web site where you can look it all up. The Norwegians are the other ones, they have very comprehensive details. The Danes are not so bad (but they are not quite as good as the Norwegians) and some of the states in Canada are not too bad. So the Anglo-Saxon world, loosely defined, is not too bad on data release and allowing you to calculate whatever. Most of the rest of the world is still not very good, but possibly getting a bit better.

  Q452  Dr Turner: How seriously do you think the Government is acting in anticipating and addressing the problems that would undoubtedly be caused by the problem of reaching peak oil?

  Mr Skrebowski: The short answer is I honestly do not know. I have not heard even unofficially anything that would suggest that they are doing very much. It was quite interesting that a friend of mine who is writing a book on the subject challenged Malcolm Wicks openly about peak oil and got some denial. He also challenged Sir David King at a luncheon who said, "Oh yes," and essentially confirmed it but put it about 10 years out, so that is five years beyond, so it sounds as though he is talking about 2015. The short answer is I think there is some awareness of it but a great reluctance to talk about it or take any obvious, overt steps to do anything about it.

  Q453  Dr Turner: If the Government were to do anything about it, it would clearly face some quite significant challenges. Can I ask you what you personally would do? If you were the Secretary of State for Transport, what would you do in terms of government transport policy to start replacing oil in transport in the United Kingdom?

  Mr Skrebowski: I think my answer to that would be that the first thing one would try and do in a fairly controlled manner is indicate that, for all manner of reasons, future oil supplies are going to be tight and we are going to be at the behest of regimes that we might not have much in common with. Once the population in a general sense has even a limited perception that many of the things that it is doing are both silly and extravagant, then there is a reasonable possibility they will react. At the moment we have this slightly perverse thing where we have all sorts of noble initiatives on saving or conservation or insulation, but the problem is that no-one out there sees any immediate position to do anything about it. They have got to have a reason to do something. Once they have a reason to do something, humanity is really quite clever and ingenious and will start doing things. I can see that for financial reasons, for the stock markets, for political reasons of not creating panic, people might be very reluctant to attempt this because they are worried that it might run out of control, but I think if they do not do anything about it the public is necessarily going to catch up, the reality is going to catch up, and then the government is going to be heftily blamed. Just ducking slightly sideways Chevron, the oil company, has got this strange web site called "Will you join us?" which is basically admitting to peak oil and talking about all the good things you need to do to mitigate it. What, in effect, Chevron is really saying is: "Don't blame us. We told you. It was all there. You only had to look", and governments almost by definition always do get blamed. That is what the population does. It may be grossly unfair but that is the reality, so I think the Government is taking a great risk by not even starting to bleed out the idea because there is no real downside. If you bleed out the idea that fuel is valuable and is likely to remain expensive, then you encourage conservation, and if you encourage conservation then you mitigate carbon emissions. Then you have a whole series of not necessarily dramatic but small wins from a controlled admission that there is a problem. Then if the problem deteriorates, as I anticipate it will, the population is not howling and screaming; it is something it is starting to understand has got worse.

  Q454  Dr Turner: The Government is sort of dipping its toe into the water into this field fairly gingerly in terms of biofuels obligations, et cetera. Do you think it could do more and do more effectively and do you think it has got the right fiscal instruments to encourage action?

  Mr Skrebowski: Again entirely a personal opinion, I think it could be a little bolder. The Germans have just made the biofuels obligation there mandatory. There is no real reason why we should not make it mandatory in this country. The Americans quite successfully a few years ago improved air quality by offering scrapping premiums for elderly vehicles. If you want to start changing the perception about SUVs you could offer scrapping premiums for SUVs. No-one is going to take it up because they are new vehicles but it just starts to change the perception of that sort of action. I think there are quite a lot of little things that could be done and probably should be done.

  Q455  Dr Turner: What do you think are the practically attainable limits, if those things were done, in terms of the amount of fossil fuel we could replace?

  Mr Skrebowski: What you are really asking is, what is the immediate fat in the system. I would think somewhere between 15 or 20%, if pushed. Obviously the first 5% would be quite easy even if things got a bit higher still. That is simply a good guess.

  Dr Turner: Fair enough.

  Q456  Colin Challen: We heard from our previous witnesses that they thought the reason why oil was currently around $70 a barrel was because of speculation. If you agree with that assessment, is that speculation based on the approaching peak oil problem or is it based on Chinese demand or uncertainty in the Middle East or all three?

  Mr Skrebowski: The first point is speculation is not necessarily unreasonable. In other words, if you pay over the odds because you think there is a lot of insecurity at the moment, that is not an irrational act. It may come to seem an irrational act if it subsequently proves it was not really a problem, but it is not necessarily an irrational act at the time. Then there are hedge funds and speculators and that popular part, people who want to say why prices have suddenly got so high. I think you need to be a bit cautious. After all, they have staked real money and if they get it wrong, they will lose real money in quite large volumes. I will not cry one way or the other about that, but it is a real bet. It is quite interesting that there is a divergence between the oil company view going forward and the financial community view going forward. The financial community, generally, is much more open to the idea that there could be serious difficulties in this area, serious constraints, because they have seen the failure of the oil companies to deliver volume and the way oil companies, to keep their share prices up, are having to buy enormous quantities of shares, so the financial community is literally at odds with the oil community. The oil community sees forward prices dropping down, the financial community, in effect, is betting they will go on at high levels. Place your own bets who historically has done better, the bankers or the oil companies; they have both done pretty well.

  Q457  Colin Challen: I notice that the new Chief Executive of Exxon predicts that prices will drift down again but probably not as far as to $25 a barrel, which is what the Government's Aviation White Paper of airport expansion is based on.

  Mr Skrebowski: Can I interject at that point. If the price fell to $25 a barrel, it would be a catastrophe. The reason it would be a catastrophe is that is the sort of production cost you are now getting in the Canadian tyre sales. If it dropped anywhere near $25, all sorts of projects would start getting cancelled. Some of the marginal projects, the extensions that these lands are depending on to give them their bananas in a hurry, are totally predicated on high prices continuing; $25 would be a catastrophe.

  Q458  Colin Challen: In that case, somebody needs to write to the Secretary of State for Transport asking that the Aviation White Paper be redrafted because that is based on $25 a barrel for aviation fuel, and that price level is predicted to continue until 2020. What do you make of that kind of government assessment which just seems so awry?

  Mr Skrebowski: Can I tell you a story. Many years ago, I worked as a long-term planner for BP and every year the demand went up by 7%. I went to my boss and said, "I really cannot believe that demand is going to go on up at 7% a year." He said, "Well, you may be right, but it has gone up at 7% for the last eight years. I cannot do anything other than include that assumption in next year's plan because, to change it, I would have to have an unbelievably good reason", so we got out the ruler and drew the line on. That I think is what is happening, that people are just sitting there with a ruler and extrapolating a formula, because they cannot think or are not prepared to believe there is a reason good enough to take them away from this straight line they have been living with. It is a sort of oil industry idée fixe, that the long-term price of oil is that and for the best part of 100 years that was correct.

  Q459  Colin Challen: Are we blinded by the history of our growth? I am thinking particularly of aviation where recently the huge growth has been spurred on by cheap airlines. Are we going to have to start looking at a situation where we will be rationed by price in the not too distant future in commercial aviation?

  Mr Skrebowski: Naturally enough, I do not know. What I do know is that making an aeroplane that flies 500 or 600 miles an hour consumes enormous volumes of fuel. If you make an aeroplane that flies at 200 miles an hour, because it goes up by the square, it will use a small fraction, so one possibility is that you will get a segmentation of air travel where there will be a high-priced, fast air travel and a lower-priced, slower air travel. That, at least, would start the mitigated constraint. I was surprised to hear that there is only sasol jet kerosene. The Russians have been extending jet kerosene with ethanol; you can do this. Ethanol has a lower calorific value so you have a penalty in terms of carrying the sasol, but you can extend jet fuel with ethanol. There is a lot of experience out of Russia; I am sure if you ask them nicely, they will probably tell you. I think you can say that the present growth in air travel is unlikely to continue on its current trajectory, but that does not necessarily mean it will fall off completely catastrophically because of the high rise. I think it will work hard to get around it and sort of package itself in various ways.

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