Friday, June 15, 2007

A World Without Oil (and Gas and Coal)

Yesterday the Independent published a front-page article about the coming oil crisis. At last the media, or this part of it at least, have recognised that there’s an energy crisis ahead. The article was triggered by the publication of the latest edition of BP’s Statistical Review of World Energy. A number of industry experts have taken issue with the rosy view they claim the report is taking. Some of them believe that oil supplies will begin to run out in four years. Some believe that cheap oil has run out already.

Paradoxically, taxation is one of the factors that have cushioned the British public against the evidence of an increasing oil price. Petrol is taxed at a fixed sum per gallon; unlike VAT which is calculated as a percentage of the selling price. Because UK petrol duty is relatively high, the cost of the oil at the pump is only a small portion of the price paid. If the cost goes up, the petrol duty per litre does not. Thus in the UK the price of petrol has risen from 85p to 97p over the last few months; an increase of some 14%. Over the same period US prices have risen from $2 to $3 – a 50% increase caused by the same underlying rise in oil prices. Another factor is the dollar rate: as oil prices have gone up the dollar has declined, offsetting the increases for us in Europe. This cannot continue, however. The signs are that the oil producers are less willing to accept payment in dollars as the American economy weakens. This will push prices up for the rest of us.

Going back to the BP review; there are some startling figures. The report calculates R/P - the reserves to production ratio. So if a country has 100 barrels and uses 10 barrels per year the R/P is 10: they have enough reserves for another 10 years.

Take a look at the UK figures:
Coal R/P = 12 years
Oil R/P = 6.5 years
Gas R/P = 6 years

Of course we will not be able to maintain our production rates as these resources get harder to find and more difficult to extract, so they will last longer than implied. They are still running out, though, and the UK is increasingly dependent on foreign supplies.