Growing energy demand and peaking fossil fuel production may lead to worldwide economic depression and disastrous climate warming as oil and fossil fuel production peaks and energy demand continues to increase, cautions Feasta, the Foundation for Economics of Sustainability.
Seeing parallels between economic developments today and the disastrous effects of petrodollar recycling seen in the 1970s – stagflation, a massive debt crisis and a 20-year-long slump in oil prices – the trillion or so dollars a year over and above anticipated revenues being funneled to oil exporters and the governments of oil exporting nations taking place today not only is the largest and fastest transfer of wealth yet seen in economic history, it is driving dislocations in savings, investment, economic growth and capital allocation that threaten the prevailing global economic system, Feasta argues.
Turning the economic concept of scarcity rent on its head in its May 2008 paper, “Cap and Share: A fair way to reduce greenhouse gas emissions,” Feasta proposes addressing both issues through the establishment of a politically practical, market-based Cap-and-Share system that would cap and then rapidly reduce greenhouse gas emissions by giving every adult in countries that adopted it the means of generating income from rising oil and fossil fuel prices.
As stated in the executive summary, “The paper argues that C&S needs to be adopted urgently not just for climate reasons but because the scarcity rent being captured by fossil fuel producers is concentrating global wealth in a way that threatens to collapse the world economy. The payment of scarcity rent is already causing severe hardship for millions of poorer people around the world.”
Key to the System
Cap-and-share systems can be established by countries individually or internationally, according to Feasta. If international, a “Global Atmosphere Trust” would limit via caps greenhouse gas emissions at their present level. Using best scientfic advice the caps would be tightened each year, bringing carbon dioxide and greenhouse gas emissions down to a level deemed to be consistent with climate stabilization, according to Feasta’s paper.
“Every year, national climate protection trusts would share out whatever emissions tonnage had been allocated to them on the basis of their country’s population. They would give an equal amount of pollution authorisation permits to every adult resident in their country,” the authors wrote.
The world’s major oil and fossil fuel producers would need to buy enough of the permits to cover their production each year. Banks, overseen by regulatory authorities, would act as financial intermediaries, purchasing the credits from individuals and selling them on to fossil fuel energy producers.
The key to the system is ensuring that the supply of “fossil fuel pollution authorization permits” issued by national agencies to every adult in a country would be less than the oil and/or fossil fuel produced. The permits would serve to convey “the right to our individual share of that year’s global emissions and making us responsible for it.”
Ensuring that the supply of fossil fuel pollution authorization permits was less than actual production levels would result in their value increasing as the resources become scarcer. Every individual that sold his or her credit would capture a small part of the scarcity rents now being captured completely by oil producers. People that chose not to sell them would reduce supply and exert upward pressure on prices, making emissions more costly.
Peak Oil and More Equitable Distribution of Scarcity Rent
Putting such a trust(s) into operation is the main challenge, the authors point out. Recognizing that global oil production has been in a slow decline – a la Peak Oil Theory – would be a big step in that direction. From the horde of data, statistics, charts and graphs now available, Feasta selects some choice examples to support their argument.
Along the lines mapped out in Shell’s Scramble and Blueprint Scenarios, but cutting through to the economic gist of the matter, the Feasta paper’s authors write, “…if no action is taken, the producers will make greater profits than they are already doing from the ‘scarcity rent’.
“The total amount of scarcity rent they have received since oil prices began their climb has been substantial. Most currently-active oilfields were developed on the assumption that the price of oil would be about $20 a barrel. If one increases that figure to $30 to allow for inflation, more than half of the $1,975 billion paid for oil last year was actually scarcity rent. The amount involved, around $1,000 billion, was roughly 2% of gross world product. To put this into context, overseas aid was about $100 billion in 2007, about a tenth of the rent the fossil fuel producers received.
“The oil peak therefore makes it urgent to set up a trust to cap the world’s fossil fuel use and then reduce consumption more rapidly than the rate at which oil production falls. This would achieve two turning points. One is that, rather than increasing, the world’s greenhouse emissions would actually start coming down. The other is that the poor would be compensated for the price rises taking place.”
Fossil Fuel Facts & Figures, as Best We Know Them
Conventional production of oil worldwide may have reached its peak in May, 2005, claim some Peak Oil Theory proponents. In one prominent scenario put forth by Rembrandt Koppelaar, editor of The Oil Drum’s Oilwatch Monthly and based on a study of production rates at the world’s 60 largest oilfields, production rises and then peaks around 2015 as a result of employing more efficient extraction technology and developing harder to get at oil resources, then decline between 2% and 8% per year.
The 2% figure was one put forth by 75 international oil industry figures during an invitation-only conference at Hedberg near Colorado Springs in 2006. The 8% figure comes from the doctoral thesis of Frederick Robelius of Utrecht University in which he investigated recent production rates and estimated reserve declines of 507 of the world’s largest oilfields supplying more than 60% of worldwide oil demand in 2005.
What about other fossil fuels you ask, namely natural gas and coal? The Feasta paper also presents best guesstimates from widely acknowledged experts, their gist being that natural gas supplies may peak as early as 2025. Supply and distribution problems are likely to cause problems sooner, however, as no global market exists due to the high costs of transport. Europe and North America, in particular, are likely to suffer shortages before oil shortages begin, industry expert Jean Laherrere stated at a 2006 industry conference, the Feasta paper’s authors note.
When it comes to coal, Feasta references an April 2007 study, “Coal: Resources and Future Production,” by Werner Zittel and Jorg Schindler, which claimed world coal reserves had been over-estimated and that global coal production was likely to peak around 2025 at 30% above the present level and would begin declining in 2060. As with oil and gas, the net amount of energy the coal would provide would decline even faster than actual output due to the higher cost of mining it, the Feasta paper’s authors contend.
World Energy Outlook
Acknowledging that we will never be able to be fix absolutely the rate fossil fuel resources are being depleted, Feasta argues that two things are clear:
1. Given the excessively high levels of carbon dioxide already in the atmosphere, the evenutal decline will come to late to prevent disastrous climate change; and
2. The supply of oil will not be able to keep up with demand from 2009 or 2010 onwards if the world economy stays buoyant.
Feasta quotes Nobuo Tanaka, executive director of the International Energy Agency (IEA), who told a conference in London in October 2007, “Despite five years of high oil prices, market tightness will actually increase from 2009. New capacity additions will not keep up with declines at current fields and the projected increase in demand.”
In its World Energy Outlook 2007, the IEA stated that it expects “An abrupt escalation of oil prices after 2015 as a result of a global supply crisis.”
It continues “…it is very uncertain whether new oil production in the period to 2015 will be enough to compensate for the natural falloff in output from existing oil fields and keep pace with the projected increase in demand.” In light of this, “establishing a trust to share the scarcity rent is extremely urgent,” Feasta argues.