Decoding a message about the market for oil

European EnvironmentEur. Env. 9, 125–134 (1999)

DECODING A MESSAGE ABOUTTHE MARKET FOR OIL

David Fleming

The Lean Economy Initiative, London, UK

Information from the International EnergyAgency (IEA) casts a totally new light onprospects for the world supply of crude oil.According to data published in the latestissue of World Energy Outlook, productionof conventional crude oil by the‘rest-of-the-world’ producers is already at aplateau, and will start its long declinetowards exhaustion as soon as 2001. Thiswill give effective control of crude oilsupplies to the five major Middle EastOPEC producers, whose market share – atpresent just short of 30% – is set to risetowards 50% in the next decade. The lasttime this group had a market share of 30%or more was in the 1970s. This articlesummarizes the situation, reviewsconsequences and proposes a way forward.Copyright ? 1999 John Wiley & Sons, Ltdand ERP Environment.

F or the last 25 years, there has been a tacitconsensus that the possibility of resourcedepletion has almost no place on the

environment agenda. This avoidance of the sub-ject is a consequence of the massive criticismwhich all but destroyed the credibility of the Clubof Rome’s study, The Limits to Growth (Meadowset al., 1972). The study was criticized on the

Correspondence to: Dr. David Fleming, The Lean EconomyInitiative, 104 South Hill Park, Hampstead, London, NW3 2SN,UK.

CCC 0961-0405/99/040125–10 $17.50Copyright ? 1999 John Wiley & Sons, Ltd and ERP Environment.

grounds of poor modelling, poor economics andan underestimate of the extent to which the newgeneration of technology would reduce the rateof growth in material demand (Cole et al, 1973;Nordhaus, 1973; Beckerman, 1974; Solow, 1974;Olson and Landsberg, 1975). Since then, it hasbeen revisited and persuasively defended on thegrounds that its message about the impossibilityof sustained growth was correct, and that itgave its warning at a time when a planned andmeasured response would have been a farmore realistic proposition than they are today(Douthwaite, 1992; Meadows et al, 1992), but theweight of received opinion has been essentiallyfatal to it. With some exceptions, environmentstudies have since concentrated on pollution andeco-efficient technologies, economics and distri-bution, and they have fudged the growth problemunder the seductive formula of ‘sustainable devel-opment’. The ‘resource issue’ is now regarded,almost with embarrassment, as a difficult patch inthe adolescence of the environmental movement.

Now the issue of resource depletion is about tocome back on the agenda abruptly and unexpect-edly. The resource in question is oil, and itsappearance as a critical problem finds the worldunprepared.

The new information comes from the Inter-national Energy Agency (IEA), the most authori-tative body in the field of energy. The IEA wasset up by the OECD in 1974; it has an office inParis and its job is to publish statistics on energyand to advise governments of significant devel-opments in the market. The 1998 edition of itsWorld Energy Outlook (International EnergyAgency, 1998) contains a chapter on oil supplies

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which is quite anodyne. It includes a graph and atable (Figure 7.7 and Table 7.12, reproducedbelow as Figure 1 and Table 1) that forecast thesupply of oil during the first two decades of thenext century, under a middle-of-the-road assump-tion about the total resource.

Evidently, there are some big expansions in oilproduction on the way. An investment of ‘manymulti-billion’ dollars in ‘unidentified unconven-tional oil’ will, by 2020, be producing as much oilas do the five Middle East OPEC producerstoday; Middle East oil production itself will morethan double, as will production of oil from naturalgas – known as natural gas liquids (NGLs). Intotal, allowing for sources that are in decline,production in 2020 will be about 65% more thanit is now, and a reasonable summary of allthis – climate change considerations aside – mightbe ‘all’s well’.

However close inspection suggests that thesefigures are not all that they seem to be. The firstthing that looks suspicious is this ‘unidentifiedunconventional oil’. ‘Unconventional’ oil is oil

Copyright ? 1999 John Wiley & Sons, Ltd and ERP Environment.

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from shales and from oil and tar sands; it is alsosynthesized from coal and gas and it is producedfrom vegetation (biomass). By far the largest ofthese sources are the oil and tar sands, which,despite their massive scale, are far from easy toexploit: for instance, you typically have to dig acrater to a depth of 50 m or more; you then lift outmillions of tons of sand and transport it to a plantto extract the oil by a heavy industrial processwhich involves the application of heat and highpressure; you then have to find somewhere todump the waste. It can be done, but even to do iton a small scale produces a shattered, black, oilylandscape, which gives a whole new meaning to‘environmental destruction’, and, in the process,you use up much of the energy you obtain fromthe oil itself. On a large scale, the huge tracts ofland that are required, the extent of the destruc-tion, the cost and the relatively poor ratio ofenergy produced to energy invested mean that itis not a practical proposition at all. Other ‘uncon-ventional’ sources have similar problems, particu-larly if attempted on the scale that is required.

Figure 1. Oil supply profiles 1996–2030. Ultimate conventional oil reserves of 2300 billion barrels. (Source: InternationalEnergy Agency World Energy Outlook 1998.)

Eur. Env. 9, 125–134 (1999)

DECODING A MESSAGE ABOUT THE MARKET FOR OIL

Now for that word ‘unidentified’. What itmeans is that no one has yet been able to saywhat those unconventional sources might actuallybe. As the Outlook puts it, they are ‘currentlyunknown or uncertain’. In fact, the Outlookdisarmingly describes them as the ‘balancingitem’ – the shortfall expected in the supply of oilin 2020, which has to be written into the table tomake the supply figures add up to the forecastdemand, assuming a business-as-usual annualincrease in demand of 1.8%. As the revised totalfigure for 2020 shows (bottom of table), the 19.1million barrels a day (Mbd) derived from uncon-ventional sources is included only as a thought-experiment: it is what would be required if


the annual 1.8% growth were realistic, which itpatently is not.

There is a second odd thing about thefigures presented in the table and the graph.This is the starring role the IEA has in mind forthe oil producers in the Middle East. World oilproducers can be divided into two groups. Theyare, first, the five Middle East oil producers whoare also members of OPEC – that is, Iran, Iraq,Kuwait, Saudi Arabia and the United ArabEmirates – and, secondly, the ‘rest of the world’(which includes the United Kingdom). Untilnow, the rest of the world has been the moreimportant of the two groups, but this is aboutto change.

Table 1. Oil supply 1996–2020 (million barrels per day). Ultimate recoverable reserves of 2300billion barrels. (Source: International Energy Agency World Energy Outlook 1998).

1996 2010 20201996–2020annual growth rate

Total oil demand 72.0 94.8 111.5 1.8%

Oil supplies by sourceNatural gas liquids

Middle East OPEC 1.3 2.8 3.7 4.5%World excluding Middle East OPEC 5.3 8.5 11.5 3.3%

Total NGLs 6.6 11.3 15.2 3.5%

Identified unconventional oilMiddle East OPEC 0.1 0.1 0.1 1.6%World excluding Middle East OPEC 1.2 2.4 2.4 3.0%

Total identified unconventional oil 1.2 2.4 2.4 3.0%

Processing gains 1.5 2.1 2.5 2.0%

Conventional crude oilMiddle East OPEC 17.2 40.9 45.2 4.1%

World excluding Middle East OPEC 45.5 38.0 27.0 "2.2%

Total crude oil 62.7 79.0 72.2 0.6%

World oil supply excluding 72.0 94.8 92.3 1.0%unidentified unconventional oilBalancing item: unidentified unconventional oil 0.0 0.0 19.1

Total oil supply (excl. processing gains)Middle East OPEC 18.5 43.8 49.0 4.1%World excluding Middle East OPEC 52.0 48.9 40.8 "1.0%

World 70.5 92.7 89.9 1.0%

Identified unconventional oil refers to relatively well defined projects.Unidentified unconventional oil is from currently unknown or uncertain projects.NGLs includes some condensates.

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The graph shows that the rest-of-the-world’soil production is now on a plateau of around 47Mbd, and it will remain there until 2001, when itwill start its long decline, passing the 27 Mbdmark in 2020, and thence towards exhaustion.The Middle East OPEC group, on the other hand,has a few more shots in its locker. Its output, atpresent around 20 Mbd, is due to double by 2010;but then it, too, will reach its peak in 2014 (at 49Mbd), beginning the long decline towardsexhaustion. The half-way mark (and peak produc-tion) for the combined total crude oil resource forthe world as a whole will be passed between 2009and 2012.

At first sight, this does not necessarily repre-sent a problem. More than half the total resourceis still in the ground. Oil is a finite resource, and ifsupplies gradually begin to fall off in 15 years’time, with the Middle East sustaining the flowthroughout the period, that fits in with the newtechnologies that are coming to take its place, andwith the need to reduce our dependence on fossilfuels in order to protect the climate. And yet,there is something wrong here.

We know, because the Outlook tells us so, thatin the future there will be a massive role for the‘Big Five’ Middle East producers. This group isabout to break through to a market share of morethan 30%, putting it back into the dominantposition it used to such remarkable effect in the1970s. By 2009, according to the IEA, this sharewill reach 50%. The Middle East, with merelyfive members, is about to become a giant. Andyet, according to the Outlook’s forecasts, it willmake no use of its power. It will keep oilprices low; it will do everything it can to avoidinconveniencing anyone in any way.

Strange behaviour in a heavyweight, perhaps,especially for the five heavyweight oil producersin the Middle East. Not all of them are famous forthe warm affection with which they regard theWest. They feel they have been almost givingaway their one priceless asset for the last 50 years.They are within a few years of the half-way markin the depletion of their oil. They are about to findthemselves with a prize in their hands that theyhave craved for a long time. And the prize iscontrol over the price of oil.

As soon as this Middle East OPEC groupbegins to use the power that is now beingrestored to it, oil prices will start to rise and, after


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some initial hesitation, they can be expected tomove fast. There is a ‘positive feedback’ in the oilmarket. The oil-producing countries depend ontheir oil revenues; when prices fall they aretempted to increase sales to maintain their rev-enues, and this makes prices fall still further. Theproblem is that the converse is also true: whenprices rise, producers can maintain their revenuewith reduced production; lower production leadson to yet higher prices. This makes the oil that isstill in the ground more valuable – an appreciat-ing asset, which should be conserved. This tendsto raise prices still further. The driver of this is notthe bomb or the gun, but the ‘slow’ lever at thetop of the oil wells. There are some compensatingmechanisms: for instance, the higher oil prices rise,the more high-cost sources will be revisited oropened up. But these are minor reserves incomparison with the massive new provinces thatstabilized the oil market in the 1980s and 1990s.After a few ambiguous years – we might belooking at five years in which oil prices are highbut not extremely high – oil prices will be deter-mined by a combination of tactical and physicallimits to supply.

Here is an ‘oil price shock’ of a new kind. In the1973 price shock, oil prices rose more than sixfoldfrom their starting-point of around $2 a barrel;after settling back some way they surged aheadagain in 1979 to three times the peak they hadreached in 1973, reaching nearly $50 a barrel. Inboth cases, prices fell back again – not all the way,but far enough to restore business as usual. Therewere too many producers around to allow highprices to be sustained; the new provinces ofAlaska and the North Sea were clearly identifiedor were opening up. But now there are no newprovinces to be discovered; the IEA acknowl-edges this, so it can be taken as settled. Therest-of-the-world producers are past their prime,and we are dealing with the heavyweight end ofan industry that has two shattering price mark-ups, briefly achieving a 17-fold increase, on itsrecord.

Where the heavyweights lead, the others willfollow. The rest-of-the-world producers, too, willsee their chance; they will be glad to get a decentprice for their oil and to ease off the rate at whichit is being depleted. As for the natural gas liquidsthat, according to the table, are scheduled to playsuch an important part in ten years’ time, their

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price will follow exactly in step with crude oilprices. We can now put all these clues togetherand discern the bold outlines of the case: an oilprice shock will lift off in the first decade of thecoming century. This time, there will be no returnticket.

All that has been done here is to read a tableand a graph in the Outlook; some deduction hasbeen applied, along with experience of whatpeople do when they are in possession of powerwithout accountability. The sequence of cause andeffect follows: a market close to its peak; the BigFive with a dominant share; higher prices; reducedproduction; even higher prices; a rapid transfor-mation of the oil market. The logic leaves thereassuring data in the Outlook in ruins. There is areal possibility that it leaves the basic assumptionsof economic growth, employment policy andsustainable development also in ruins. The oilproducers will not want to destroy their custom-ers’ economies; on the other hand, if prices rise farenough, the producers will be able to sustain theirrevenues even if the quantity they sell declinesdrastically.

AN EXERCISE IN COMMUNICATION

Now, what is to be made of an argument basedon official statistics, but which claims to show thatsome of the critical numbers are sufficientlywrong to turn the message of the whole table onits head? To answer this, we need to understandthe situation faced by the International EnergyAgency. As the most influential policy body inthe oil business, and an intergovernmentalagency, it is in a delicate position, and thisdelicacy is particularly evident in the presentsituation because of the explosive mixture of oiland politics. There is, from the purely technicalpoint of view, nothing to stop the Middle EastOPEC producers making a massive investment intheir oil production, and leasing out a vast pro-portion of their oilfields to the big integrated oilcompanies such as Exxon and BP. If they wantedto, they could use up their oil resource quickly inorder to keep prices down and to cause the leastpossible difficulty to the oil-dependent economies.That it to say, from the technical point of view,the problem could be postponed for some 15years. The certainty that this will not happen is


not a fact of geology or technology, but ofpolitics and human nature. If the IEA said, ‘Noway are the Middle East OPEC producers goingto increase their supply on the scale that isneeded’, this could be construed almost as anencouragement to them to be difficult. The IEA’sjob is to report the numbers, not to show pro-ducers how to use the numbers with devastatingconsequences.

The IEA is therefore constrained in what it cansay, so it has presented the data in a way thatshows what would have to happen to sustain busi-ness as usual, knowing full well that someonewould, sooner or later, pick up the anomalies andstart thinking.

The IEA is also in a difficulty because of thedramatic implications of its message. If it were toissue a press release to the effect that ‘We arelooking at a major, permanent oil deficit, forwhich we can offer no solutions’, then it is highlylikely that it would be met with denial, scepticismand reassurance. The response can well beimagined: ‘The IEA has, with reckless disregardfor its responsibilities to help to maintain stabilityin the oil market, caused alarm and instability notonly in the oil market but in stock markets aroundthe world’; ‘The IEA has got too close to itssubject and is in need of radical reform andre-education’; ‘The IEA has suddenly streakedahead and made Greenpeace sound like the USFederal Reserve’. It is for these understandablereasons that the IEA has presented its messagein the form of code. It has provided statisticsthat signal the gaps and inconsistencies clearly,and that invite readers to draw their own con-clusions. In effect, it is fulfilling its mandate to theletter.

We therefore have vital original informationabout the prospects for oil, and from the mostauthoritative possible source. Moreover, this isinformation that the OECD countries that are itsmembers are treaty bound to take seriously. TheIEA was established under a treaty – the ‘Agree-ment on an International Energy Programme’ –which obliges it to provide detailed informationabout developments in the energy market, andthe signatories are required to take appropriateaction by, for instance, restraining energy demandin their economies. The UK, along with the othersignatories, is therefore under an obligation toread the report – and, if necessary, to read

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between the lines of the report. And then to takeaction.

IMPLICATIONS

The implications of a one-way oil price shockearly in the next decade are profound. Here arefour of them. First of all, there is the real possi-bility of a destabilized economy and actualhardship. More generally, the assumptions ofeconomic stability and sustained growth well intothe century will now have to be re-evaluated. Oilis the primary energy source for the global marketeconomy, and a significant rise in price will raiseindustrial costs, reduce real incomes and blowbusiness-as-usual growth expectations out of thewater. There are some industries that will beimmediately affected, such as air transport andrelated sectors, including tourism, which, taken asa whole, is the world’s biggest employer. Roadtransport in all its forms is also in the front line ofrisk, and the critical contribution of the transportsector in GDP means that the economic conse-quences of any damage taken by this sector couldbe profound. The direct economic impact, then, islikely to be felt in a sharp rise in unemployment –backed by inflation, as oil prices feed through tothe price of all other goods and services.

Secondly, there are implications for the costsand availability of food. The whole food chain istotally oil-dependent at every stage: fertilizers,chemicals, equipment, transport and processing. Arise in the price of oil will knock on immediatelyto a rise in the price of food of about the sameorder of magnitude. In practice, this means thatthe pressure is on to develop a strategic responsewith respect to food supplies. Organic agriculture,which is much less dependent on oil than itsconventional counterparts, clearly has the advan-tage, and organic systems should be developed asfast as possible. Transport costs and economicinstability overseas mean that there is a strongcase for minimizing dependence on imported foodand protein. Very high fuel prices – and possiblyactual fuel scarcity – could shift the advantagetowards local production and distribution.

Thirdly, the coming oil shock transforms theclimate agenda. The Kyoto process has been builton the assumption that oil supplies will not be theconstraint that will limit carbon emissions in the


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future, and that if they are to be reduced, this willhave to be through deliberate limitations ondemand. In this new situation, however, theproblem is transformed: reductions in affordableoil may turn out to be faster than the mostambitious targets that have been conceived in thecontext of climate change; indeed, there may wellbe a need to shift towards some international anddomestic system of rationing to share out actuallimits to supply, instead of sharing out imposedlimits to demand. It could be that some of theinternational and domestic quota systems thathave been devised in the Kyoto context will turnout to be appropriate instruments for the newsituation, but the rate at which the availability ofaffordable oil will decline worldwide is evidentlygoing to be far greater in practice than theleisurely reductions that are in prospect in theclimate change negotiations. The actual rate ofreduction will be much closer to the rate neededto stabilize the climate.

Fourthly, there are implications for alternativesupplies of energy, and a blistering debate can beexpected. There will be strong pressure, world-wide, to build nuclear plants at speed, but thehazards of this would be significant. Nuclearplants normally take well over ten years to buildand to come on stream, so it could take a good 30years before, even in theory, they have begun toreplace oil to a substantial degree – and that istoo late. A rapid expansion of nuclear generationwould affect safety standards, especially since itwill take place at a time when economic instabili-ties have increased the likelihood of insurgency ofvarious kinds. These two effects, taken together,would increase the risk of accident. There is alsoa problem of costs. Economies, developed anddeveloping alike, will need to build a new energyregime fast. Dollar for dollar, the most efficientway to do this is by developing the conservationtechnologies (Keepin and Kats, 1988). Nuclearcould be a distraction from this, a dog in themanger preventing the development of the onetechnology with a real chance of implementingthe transition to the post-oil economy.

Coal shares with nuclear power the disadvan-tages of long lead times needed to bring coal-based energy on stream, and of very significantcommissioning costs. It also, of course, makes acontribution to global warming. However, the

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costs, the timeframe, the problems of waste dis-posal and of catastrophic accident are less in thecase of coal than for nuclear, and coal productionwill no doubt expand to fill part of the energygap.

The thrust of the effort to develop new sourcesof energy will need to be devoted to the renew-ables and conservation technologies. One of thegreat missed opportunities of the 1980s and1990s has been the slow development of thesetechnologies. There have been importantadvances: solar cells are much more efficient anddurable than they were 20 years ago; wind, tide,wave and biomass, the storage and release ofenergy with fuel cells and the conservation tech-nologies are all improved relative to their coun-terparts of the early 1980s. And yet, relative tothe need, to the potential, and to the massive jobof development that lies ahead, progress has beenfar from adequate.

Why? A recent study by the LTI ResearchGroup in Mannheim (LTI, 1998) has identifiedsome of the bottlenecks, such as: the high costs ofrenewables relative to current energy prices, theintermittent nature of wind and solar energy,the lack of long term stability in R&D budgets,the complex and time-consuming proceduresrequired to obtain research grants, the lack ofrelevant training, overcapacity in the energy sup-ply industry and lack of local involvement. Theseare all institutional and social problems ratherthan problems inherent to the technology – butthere are some of those too, notably the inter-mittent nature of solar and wind energy, and theinherent complexities of plugging diverse renew-able sources into a grid that was designed for asmall number of very large-scale centralizedpower producers.

It is the first of those bottlenecks that isdecisive: the current low cost of oil-based energyrelative to the renewables. That disadvantage isabout to be removed. Renewables will soon lookvery cheap indeed. At that point, they will receivea ‘market signal’ that they are an opportunity ofmajor proportions, which justifies a decisiveinvestment programme. The tragedy is that thesignal for action has been so long delayed. TheLTI Research Group urge 50 years of decisiveinvestment in renewables – and that is on theassumption that stable energy supplies and stableeconomic conditions will persist throughout the


period of transformation. In practice, the transfor-mation will have to be compressed into a decadeor less, during which those stable conditionscannot be assumed. Fortunately, extremely rapidresults can be achieved when the governmentgives a determined lead: the development oftechnologies relevant to the period 1938–45 is anillustration of this. There is the need and oppor-tunity to achieve the same kind of result now, inconditions which, in many ways, are as serious,with much deeper and longer term implications.

RESPONSES

In terms of analysis, the issue that confronts usnow is not particularly difficult. It will be extra-ordinarily difficult to implement, but it is easy tounderstand. The first step must be to recognizehow little time there is to take effective action,and how easily it could be frittered away indebate. There are two alternative ways of usingthe five years or so that we may have before oilprices begin to bite seriously into the structure ofthe market economy. The first option is to settlehappily into a debate about whether oil prices areabout to rise or not. The second is to take actionnow. Delay, sustained by denial-offensives, is thenormal response to a major threat; it follows thefamiliar two-stage progression from reassuranceto panic: the panic is inevitable because thereassurance has used up the whole of the time inwhich the problem could have been preventedfrom reaching its climax. The denial routine hasalready been extremely effective in ensuring thatwarnings of the emerging problem are ignored,despite explicit warnings (e.g. Amirahmadi, 1996;Campbell, 1997; Bentley, 1998). It is essential, onthis occasion, to break with that tradition. Actionmust start now.

The critical first step is to specify a responseprogramme in some detail. This paper will notattempt any such thing, but it will point to sixitems on the agenda which are typical of the kindof action that will be needed.

Evaluation and immediate response

Prospects for the market for oil need to beappraised urgently. The data published by the IEAcan be taken as authoritative and, as this paper has

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shown, its implications – even if they are incode – are very clear, but there is no doubt thatwe need a more rigorous analysis than simply theinterpretation of the IEA’s figures as set out in thispaper. At the same time, there is an immediateagenda of short-term measures. This shouldinclude frank, open-book communication with thepublic, the use of conservation methods that arealready available, and action to secure supplyarrangements; they could perhaps include re-phasing the depletion rate of North Sea supplies,and launching a diplomatic offensive with respectto those world oil suppliers with whom the Westhas succeeded in maintaining a constructive dia-logue. This programme will buy a little time – butthat is all it will do.

Logistics

There will need to be a rapid appraisal of currentpatterns of land use and supply logistics. Thedependence on oil for food production will needto be reduced, as will the distances over whichfood is transported, and the distances whichconsumers must travel to obtain food. Importsubstitution in food, organic agriculture, morelocalized shopping and reduced dependence onpackaging will be among the critical issues forplanning. Food production systems cannot, ofcourse, be changed quickly. It is regrettable that,despite incessant warnings over the last severaldecades, there has been no attempt to prevent theenergy intensification of every aspect of foodprovision. Greater foresight and willingness tolisten to those warnings would have meant a foodsupply chain much better adapted to the comingconditions. Energy-efficient agriculture would bemore robust and less frankly old-fashioned thanthe current energy-profligate agricultural prac-tices: they were specifically adapted to the specialconditions of cheap energy which, even at thetime, were recognized by many people to beshort lived.

Generation and conservation

The renewables and conservation technologiesneed to be brought rapidly through three stages.(i) Research to improve the technology at afundamental level. (ii) Development to specifystandards, including such fundamental issues as


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rethinking the role of the grid and the relativeadvantages of AC versus the more efficient DCalternative for some purposes. (iii) Application:there are some long lead-times here, includingtraining, building production equipment, retrofit-ting in buildings, bringing forward the newenergy-efficient technologies such as the newgeneration of cars and phasing in localized sys-tems for renewables. Industrial output is, ofcourse, almost entirely undefended against theeffects of an oil price shock, and responses to this,in terms of energy technologies, shorter supplylines, a radical re-thinking of product design and ashift of emphasis towards energy technologiesand solutions for the domestic sector, will set anew and intensely urgent agenda for businessstrategy.

Allocation and the individual response

The transition into a low-carbon economy willrequire informed and positive partnership withconsumers. It is likely that it will require arationing system, and options for the use ofinformation technology in a fuel rationing systemare already being explored (Fleming, 1997, 1998).Above all, it will require radical reskilling andchanges in behaviour as households come toterms with far higher food, transport and energycosts. It will be imperative to bring individualspositively into the programme, working onchanges in expectations and living patterns.

Economics

The most difficult element in the programme willbe the stabilization of the economy at a timewhen a strong surge in unemployment is to beexpected. The programme itself will provide someassistance here, in that the task of shifting theeconomy rapidly into the new regime will itselfbe a significant job creator. The net effect of thisjob creation, compared with the job-destroyingconsequences of higher energy prices and a dras-tically weakened pattern of world trade, will needto be evaluated; at present the expectation has tobe that the net effect will be to destroy jobs on alarge scale. This is not the place to consider theconsequences, but a rigorous analysis of them anda policy response will need to take a high priority.Not far behind this, there will need to be an

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estimate of the impact on government finances,taking into account the loss of government rev-enue from the reduced scale of output andemployment, and the greater demands on govern-ment funds for unemployment benefits and for thewhole programme of building the energy-efficienteconomy.

Communication

This will be the communication programme thattransforms the relationship between governmentand public. If the public does not cooperate, theattempt to shift away from carbon dependencewill fail. On the other hand, it will only be becauseof the leadership, coordination and funding pro-vided by the government that serious options fora solution will be open to the public at all. Therecould be a mandate here for rethinking the scaleof the government: the detailed action requiredmay make a regional, or small-nation, governmentbetter adapted to the task than a centralized large-nation administration. In any event, this will openup a new era in the relationship between govern-ment and people, which will finally bury thelong-standing debate between laissez faire andintervention. For the first time since the appear-ance of the Invisible Hand in the early days of themarket economy, peace-time government will finditself with a very serious job to do.

CONCLUSION

This is an occasion on which we need to allowdisbelief to take its time – but not too much time.The prospect of the one-way oil price shockoutlined in this paper appears at first to bemassively unlikely. At the time of writing there isno real sign of it to anyone other than those whohave dug deep into the statistics. Oil prices arestill low, and until very recently they have beenso low as to cause the major oil producers a lot ofproblems with their domestic economies. Butunexpectedness is a characteristic feature of thephase-transitions that change future prospects outof recognition.

The imminent energy problem finally achievesthe elusive integration of economics and environ-mental policy. It broadens the environmentagenda to include every aspect of the economy


and of our way of life; it places energy at thecentre of economics. The technology that hasbeen developed during the wasted years between1972 and the present is largely irrelevant but notentirely so: the renewables and conservation sys-tems are now ready for the serious investmentthat will be required to apply them. There is muchunderstanding of how lifestyles, logistics andstaple industries such as food will need to change.Even the prospect of a reduction in fossil fueldependence itself is already on the agenda, thanksto the Kyoto process. The critical constraint thatnow confronts us will represent a dramatic inten-sification of that agenda, but the work that hasbeen done to date on climate change means thatsome at least of the fundamentals, in terms ofknowledge of how to proceed, are in place.

The IEA has done us a service. It places theresponsibility squarely in our court – not just toact, but to interpret the evidence for ourselves. Ifwe can do that, and do it quickly, then there is apossibility that the economy can be shifted awayfrom carbon dependence in the time that isavailable. And who is ‘we’? Everybody, of course.Every household will need to be directly engagedin the transformation. That idea has been part ofthe rhetoric for a long time, but this is themoment when, whether we are prepared for it ornot, the reality catches up.

ACKNOWLEDGEMENTS

I would like to thank the International EnergyAgency for its overall endorsement of this paper,and for its permission to make this acknowledge-ment. Table 1 and Figure 1 were first published inthe Agency’s report, World Energy Outlook, 1998edition, and are published with its permission. Iwould also like to thank the following for assist-ance with the paper in a variety of ways: DavidAstor, Roger Bentley, Colin Campbell, FaithEvans, David Goodhart, George Whitfield,Lawrence Woodward and an anonymous referee.

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Decoding a message about the market for oil