Sunday, November 05, 2006
Climate warning is a bit too stern
Posted by David Smith at 11:00 AM
Category: David Smith's other articles

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A fierce debate has been raging, mainly on the internet, and for once it isn’t about Princess Diana, 9/11 or UFOs. That debate is about oil, and whether the world is about to run out.

The peak oil theory postulates that the globe is at or close to its production peak and that it will be downhill all the way 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 US 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 recent spike in oil prices to nearly $80 a barrel as evidence that the peak had been reached, roaring demand running up against limited supplies. Books postulating the the end of the oil era have been flying off the airport bookstalls.

I mention this now not just because the Organisation of Petroleum Exporting Countries (Opec) is desperately 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 the debate over climate change. If burning fossil fuels is the main cause of rising greenhouse gas emissions, and one of those fuels 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 quite a tome, though it runs to something under 600 pages, not the 700 everybody has been quoting.

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. This is the conventional way of measuring energy use, a barrel being 35 gallons.

The amount of oil, gas and coal left in the ground is at least 40,000 billion barrels, the report said, with at least seven billion barrels of that being economically recoverable. Given that on unchanged polices demand for energy will be some 4,700 billion barrels over the next half-century, the fossil fuels are there, should we want to use them. That is also true for oil, with 1,800 billion barrels needed under unchanged policies, and that amount, according to the report, being economically recoverable over that period as long as oil prices remain 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 says.

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 or so. 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 (barring an insurgency in Saudi Arabia) 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. Every time you start to think there is something it has missed out, it is there in another section. No stone, it seems, has been unturned. There are plenty of caveats and alternative scenarios.

Its central message, however, is alarmist and relies on three propositions. One is that dangerous global warming is prospect - the report leans the reader towards 5 degrees C 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 team found the much-quoted figure of a 20% hit to the global economy (a climate effect similar to the great depression of the 1930s), rather hard to generate. Its baseline scenario was for global gross domestic product per head to be reduced by just 2.2% in two centuries time, in 2200.

Even adding in risks of serious catastrophe to the baseline, gives a per capita GDP effect of only 0.9% in 2100, rising to 5.3% a hundred years later.

The third proposition was that “only” 1% of global GDP needs to be spent, each year, to put the world on a low-carbon path; stablising greenhouse gas concentrations at a somewhat higher level than now and spending money to enable people, particularly in poor countries, to adapt to the global warming that is now unavoidable.

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). The other is that it is significantly lower than other estimates. The cost, in other words, could be a great deal higher. Bjorn Lomborg, director of the Copenhagen Consensus Centre, says that for a fraction of that everybody in the world could be given clean drinking water, sanitation, basis healthcare and education.

Looked at a little more closely, the report’s headline message; spent 1% now to avoid 20% damage later does not stack up. I don’t want to get into the debate over the science again but many of the numbers that have been given prominence are at the high end of what even scientific believers expect.

At this point, most enviromentalists will cite the precautionary principle. Better to be safe than sorry. Act now just in case there is going to be a catastophe later. If not, no harm done.

Except that, as the report makes clear, the precautionary principle is highly sensitive to the assumptions used, about the risks and about the relationship between current spending and benefits in the future (the discount rate). If the cost now is low but the risks of future severe economic damage area 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 deal.

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 unduly hard on Stern. He was never going to produce a report which took a different view on the science to Sir David King, the government’s chief scientific adviser. Within the constraints in which he was operating, he has done his best. I also believe that there is more we should be doing more than adapting to climate change. Weaning ourselves very gradually off fossil fuels makes sense, not just for climate reasons but also because of security of supply and the eventual oil peak.

Achieving this, however, is easier said than done. A global, and properly-functioning, emissions trading scheme could correct what Stern sees as the “market failure” of global warming, but is easier said than done. Achieving it would require countries outside the Kyoto process - America, India, China and so on, to sign up.

Local action has a role but is never easy. The Institute for Fiscal Studies, in a report published after Stern, 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 the policy of over-indexing petrol duties; increasing them by more than inflation. However green we say we are, both options are politically unpalatable. They won’t happen.

PS Nothing is certain, not even next Thursday’s Bank rate rise to 5%, though 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 occurring, City economists have been racking 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, above all, the rise in the “broad” money supply, M4. In this case, the majority view on rates looks to be the right one.

From The Sunday Times, November 5 2006

Comments

"the question of whether oil is running out is central to the debate over climate change"

That's a half-truth at best. The largest contributors to greenhouse gas emissions are coal and gas-fired power stations.

I think the idea that OPEC is attempting to cut production to keep prices artificially high is dubious - the same would have to be happening for natural gas and coal recently which have both seen surges in demand and prices. Conspiracies aside, sometimes the most obvious answer (demand-led price increase) is the correct one.

Finally the idea that we should gaily use as much oil as we want because it'll run out anyway is odd. Could it be that it's precisely because people are taking your advice that demand for oil is so high and prices are so high?

Peak oil is not a conspiracy - it's an economic fact of the supply and demand life cycle.

Posted by: G Campbell at November 5, 2006 01:36 PM

If oil deflates, I suggest somebody chuck a couple of Viagra down the oil well. That should get it peaking nicely.

Posted by: Werewolves at November 5, 2006 02:33 PM

Viagra aside - a bit of a misunderstanding here. The peak oil lobby says we've reached that point now (though some said that in the mid-1990s), while the Stern review says there won't be a peak over the next 50 years. I say there probably will be, but not for about 20 years - but even before that there will be periods when supply shortages bite. And, as I say, it makes sense to wean ourselves gradually off fossil fuels.

A misunderstanding too on the Opec point. It is cutting output to keep prices up after one of the sharpest falls on record from the highs of the summer. Its aim seems to be to keep prices in a $50-60 a barrel range. Coal and gas prices have also fallen in recent months, dramatically so in the case of gas.

Posted by: David Smith at November 5, 2006 03:10 PM

I'm disappointed - I enjoy a debate but you're countering facts with more opinion.

"If burning fossil fuels is the main cause of rising greenhouse gas emissions, and one of those fuels is on its way out, perhaps we should not be so worried."

What you're saying (or what you've said) here is that because one of the factors of the problem may lessen in significance, we can safely ignore the problem.

This is an old fashioned Ignoratio elenchi conclusion. And you're persisting with your OPEC conspiracy idea - that's your opinion, not a fact. You're famous for your $40 a barrel prediction, but only because it was and continues to be spectacularly wrong.

Jeremy Clarkson may get away with such an argument but he also remarkably predicted the demise of the new fangled "Internet" - in 1995.

I can only urge you not to share too much in common with him, as I'm quite sure you wouldn't want his track record on future predictions.

Anyway, we've got a rate decision next week which I'm sure you'll approach with more rigour.

Posted by: G Campbell at November 5, 2006 11:20 PM

I also enjoy a debate but it is difficult when the person on the other side is unaware of the basics, or deliberately misunderstands them. We used to have a strange character on the site who popped up under a variety of names, and who used a very similar approach. I do hope he's not back under another guise. So let's have a few facts:

Fact 1: OPEC is cutting output to keep up oil prices. That is what the president of OPEC and every oil minister has been saying over the past few weeks.

Fact 2: If the oil ran out there would be less of a problem over carbon emissions - as an example 11% of world energy consumption is on US highways.

Fact 3: My prediction of a $40 a barrel oil price has not been proved spectacularly wrong. I didn't say we would return to $40 a barrel immediately. I did say we would get back there in the medium-term as has been the case for every oil price spike through history.

Fact 4: The Bank of England's interest rate decision is this week.

Posted by: David Smith at November 6, 2006 09:01 AM

Fact 5: Annual Greenhouse Gas Emissions by Sector (2000)

Power stations 21.3%
Industrial Processes 16.8%
Transportation fuels: 14.0%
Agricultural byproducts: 12.5%
Fossil fuel retrieval, processing and distribution 11.3%
Residential, commercial, other sources 10.3%
Land use and biomass burning 10.0%
Waste disposal and treatment 3.4%

Fact 6: From the OPEC website:

"If demand grows, or some oil producers are producing less oil, OPEC can increase its oil production in order to prevent a sudden rise in prices. OPEC might also reduce its oil production in response to market conditions."

No conspiracy there. Although yes, of course, maybe that's a conspiracy too.

Fact 7: Monday is the start of the working week, but (lets face it) that's petty anyway, right?

Fact 8: There must be a pattern - maybe I'm a collaborator with this mysterious figure from your past. Perhaps he's from OPEC?

I don't want to make an enemy of you David. I enjoy this site but more rigour is needed in some areas. I fear that you tend to disagree with your readers only to be later proven incorrect. A good economist listens - two ears and one mouth, used in that proportion.

Posted by: G Campbell at November 6, 2006 09:50 AM

You talk about rigour and then come back with responses that lack both rigour and common sense. I'm assuming you're just unaware of what's been happening in the oil market recently but I'm surprised you're prepared to sound off from such a position of ignorance. But here we go:

This is from the FT, October 20:

"The Organisation of the Petroleum Exporting Countries on Thursday night agreed to cut production by 1.2m barrels a day, showing its determination to defend $60 as its new minimum international price. Opec oil ministers, who had for the last two weeks been divided over how to implement the cut, on Thursday agreed that each of Opec’s 10 active members would participate on a pro rata basis, said Edmund Daukoru, Nigeria’s oil minister and Opec’s current president.

Oil prices in the last three months have fallen 25 per cent to below $60 a barrel. Mr Daukoru said: “We have never seen a drop [in the price of oil] like this in many years.”

As for source of carbon emissions, you appear to think that the only use of oil is in transport. As the piece says, nearly 40% of expected fossil fuel use over the next 50 years will be in the form of oil. If the oil was not available there would be some switching from other fossil fuels but there would also be fewer carbon emissions than in the base case, as I said. It is a very simple point.


Posted by: David Smith at November 6, 2006 12:14 PM