The Energy of Nations

Risk Blindness and the Road to Renaissance

Jeremy Leggett

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781134578788
• Edition: 1
• Topic: Technology & Engineering
• Subtopic: Power Resources
• Index: Technology & Engineering

Systemic global risks of oil supply, climate shock and financial collapse threaten tomorrow's economies and mean businesses and policy makers face huge challenges in fuelling tomorrow's world.

Jeremy Leggett gives a personal testimony of the dangers often ignored and incompletely understood - a journey through the human mind, the institutionalization of denial, and the reasons civilizations fail. It is also an account of tantalizing hope, because mobilizing renewables and redeploying energy funding can soften the crash of modern capitalism and set us on a road to renaissance.

Part I

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A history

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Chapter 1

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Lies, scaremongering and affordable oil

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Imagine you are the CEO of Shell, and you receive an e-mail from your Head of Exploration complaining that he is sick and tired of lying about the company's oil reserves. Would you fear your days as CEO were numbered? Would the prospect of a prison cell intrude on your comfortable life?

In November 2003, the then CEO of Shell, Phil Watts, did receive such an e-mail from Shell's then exploration chief, Walter van de Vijver. ‘I am becoming sick and tired of lying about the extent of our reserves issues and the downward revisions that need to be done because of far too aggressive/optimistic bookings’, it read.¹

In April 2004, that e-mail went public. Watts had admitted in January that Shell's reserves were overstated by 20%. In the months to come, he would have to revise them down a further three times. He was fired. But that was the least of his troubles. The US Justice Department was now conducting a criminal investigation and the British Financial Services Authority was after him too.²

2004 was a bad year to be caught telling lies about oil reserves. The oil price had wandered along at around $20 for the best part of two decades, but it was now starting to climb, and fast. It hit $40 for the first time in May. Pain quickly spread around the world. American consumers found themselves paying an extra $44 billion at the pump during the first half of the year. They and their thinning wallets began staying out of the shopping malls, and so the misery spread to retailers. As one retail executive saw it: ‘We are hurt by high oil prices because people are giving their extra dollars to Exxon.’³

Shell had created jitters in the market with its lies, but there were other reasons for the then record prices. The war in Iraq was entering its second year. It was not going well. With insurgents attacking oil pipelines on a seemingly daily basis, maintaining exports was proving impossible. The Abu Ghraib torture scandal broke in May, fanning the flames further. In June, terrorists attacked oil infrastructure within Saudi Arabia, the world's number one producer, the nation with the largest reserves by far, spreading the jitters to the main Saudi oil-export terminal at Ras Tanura. Said one analyst: ‘If you can blow up the Pentagon in broad daylight, then it cannot be impossible to fly a plane into Ras Tanura – and then you are talking $100 [per barrel of] oil.’⁴

Looking back from the vantage point of 2013, with an average oil price in 2012 of $111, we can only wonder what the price would be driven to if Ras Tanura blew up today.

The year 2004 proved to be the beginning of a long wobbly climb in the oil price that, in the decade ahead, would change the world. There is a lot you can't do with $100 oil that you can do with $20 oil: like buy a suburban house on a low salary, for example. Equally, there is a lot you can do with $100 oil that you can't do with $20 oil: like grow renewable energy markets, for example.

What is supposed to happen in situations of tight global oil supply like this is that OPEC, the Organisation of the Petroleum Exporting Countries, opens up its spare capacity – its ability to pump more oil, held in reserve – floods the market and cools the oil price. In August 2004, OPEC announced that it no longer had any spare capacity left to tap. The price duly moved up to a new record near $45.

At that point headline writers began flagging a threat to the world economy.⁵

It seems incredible looking back. But such is the importance of affordable oil in our oil-overdependent global economy. A little panic about unaffordability goes a long way.

The markets themselves weren't helping. Hedge funds had begun betting on a high oil price. When this happens, the potential for self-fulfilling prophecy comes into play.

Investors grilled B P, fearing it might have been playing the same game as Shell. BP's CEO Lord John Browne gave a series of speeches aimed at reassuring the financial world that BP was not Shell, and that both his company and the wider oil industry could be relied on to deliver growing supply from real reserves.

‘There isn't really a supply crunch at the moment’, he asserted. ‘We have the perception of the risk of a supply interruption, but that's all we've got.’⁶ Indeed, he said, there is 40 years of supply.

This is a statement that BP have repeated many times since. They derive the figure by dividing the total global reserves reported by oil companies, more than 1,000 billion barrels, by the global demand. The mantra sows comfort while neatly sidestepping the underlying concern.

All through 2004, those concerned about the rate of oil depletion sought to warn about the risk of peak oil. Our oil-dependent global economy is at risk of a crash, should it discover that oil supply cannot rise in line with demand. The persistently high oil price gave us a context, and hence the chance for a degree of unfamiliar exposure.

Oil reserves under the ground are not the same as oil flows from production pipes at the surface, we explained. Oil resources, deposits of oil extractable in theory, are not the same as oil reserves, deposits of oil mapped out and extractable economically. Peak oil is the point at which the depletion of existing oil reserves around the world can no longer be replaced by additions of new flow capacity. Oil production reaches the highest level it ever will, and drops. It can drop for what we can think of as below-ground reasons or for above-ground reasons, or both. Below-ground reasons involve the geology of depletion: how much oil there really is down there, and how fast we suck it out. Above-ground reasons involve geopolitics, the behaviour of nations and their citizens, which can so easily mess up oil production. Most of us think that both below- and above-ground factors will define the peak, but the peak will be the peak: the most oil that can ever be produced in any one day. Perhaps production will wobble along on a plateau for a while before dropping, but it will never exceed that peak level. If we think of all the theoretically extractable oil under the ground as a tank, what we have to worry about is not so much the size of that tank, but the size of the taps: the actual global oil production capacity.

The oil industry usually doesn't question the fact that some day there will be a peak in production: how can it, when oil deposits are finite? It simply says the peak will happen much later. In its over-exuberant rhetoric, the industry constantly focuses attention on its estimates of the size of the tank: both the 40 years of supply in the reserves, and the vastly higher figure in the resources, those deposits that they have yet to prove they can extract economically. Those who fear an early oil-production peak worry about the flow rates the industry can deliver from the actual taps in place today. If the taps start running slower, and the industry can't meet global oil demand, we have a crisis on our hands. We live in a system where markets are prone to panic. We live in a society where food supply needs lots of affordable oil all the way from the field to the plate.

There is also, as it happens, reason to be worried about the size of the tank. OPEC governments, including Saudi Arabia, have been less than transparent about the size of their national reserves since deciding to fix quotas based on the size of those reserves in the 1980s. Some experts, including within OPEC itself, profess that at least 300 billion barrels out of the 1.2 trillion barrels of supposed global proved reserves may have been overstated.

Sceptical oilmen refer to these barrels as ‘political oil’. Others use less polite language to describe the situation.

Why don't people check, one might ask?

And there is the dilemma. A dozen good geologists could check, and set this nasty suspicion to rest – or not as the case may be – in a matter of months. But the OPEC governments do not allow them into their oilfields to do so. That was the case in 2004. It remains so today.

In September 2004, the CEO of Total, Thierry Desmarest, called on the Saudis to let the oil majors in to help them boost output, so as to reduce the oil price. His offer went unheeded.

A revealing letter written by the First Secretary for Energy and Environment in the British Embassy in Washington found its way to me and others worried about peak oil at this time. The diplomat in question had attended a presentation on oil supply by the respected consultancy PFC. ‘The presentation drew some gasps from the assembled energy cogniscenti’, he reported back to London. ‘They predict a peaking of global supply in the face of high demand by as early as 2015. This will lead to a more regionalized oil market, a key role for West African producers, and continued high and volatile prices.’

Let me emphasise this year, at this early point in my account of events: 2015. We will find that it recurs in the story to come.

In October 2004, G7 finance ministers met in Washington for the annual meeting of the World Bank and the International Monetary Fund (IMF). They seemed as worried about oil supply as the diplomat. The closing statement by ministers and central bank governors read: ‘Oil prices remain high and are a risk. So first, we call on oil producers to provide adequate supplies to ensure that prices remain moderate.’

As a veteran financial correspondent described it, ‘my sense of [the] meetings is that there is an atmosphere of suppressed panic about the oil price, and about the danger of a serious crisis.’⁷

By the end of the month the oil price had crossed $55.

OPEC now called on the US to open its 670-million-barrel Strategic Petroleum Reserve to help suppress the prices. This reserve, stored in caverns in Louisiana salt mines, is meant to be on hold for major emergencies, not the cooling of price rises.

How was that for a signal that all may not be well in the Middle East, we early peak worriers asked. If Saudi Arabia doesn't have the spare capacity to cool a price rise, how can we be sure of its reported reserves?

BP CEO Lord Browne upped his rhetoric to try to calm the jitters. ‘It is not helpful for the world to believe that it is running out of oil’, he said. ‘We are evidently not.’⁸

The early peakers read this in exasperation. This risk debate is not about the oil ‘running out’. It will never run out. Oil reserves under the ground, we tried to say, once again, are not the same as oil flows from production pipes at the surface.

Somehow, we didn't seem to be able to get our messages heard as readily as BP did theirs. Even in a world where Shell had been caught lying about its reserves.

St James Park, London, October 2004

Tony Blair's man is in relaxed mood as we walk by the lake in the park, a short walk from his office in Number Ten on a lovely autumn morning. He has a smile on his face. I am more used to frowns from people such as he.

The visit worked really well, Jeremy, he says. We are all pleased.

And no doubt you are particularly pleased with yourself, I think but don't say, given that the whole thing was your idea.

The idea was this. The Prime Minister intends to top the agenda with climate change when he chairs next year's G8 Summit, in Scotland. On the day he announced this, he wanted an appropriately green and youthful photo-opportunity. His man suggested my company, just ten minutes away.

Blair is trying to persuade America to join Europe in efforts to cut greenhouse-gas emissions. He has sanctioned his Chief Scientific Adviser, Sir David King, to fire a test missile aimed at US opposition to cuts. Climate change is the most serious problem we are facing today, King has said: more serious even than the threat of terrorism.

That would make it more important than the war in Iraq then, I thought when I heard this. Because that is what the war on terror is about, supposedly.

On his visit to Solarcentury, Blair led a round-table discussion with a handful of the younger staff, television cameras and radio microphones trained on them for the first time in their lives.

What shall we ask him? they demanded of me as the Anti-Terrorist Branch's sniffer dogs descended on the office ahead of the visit, scrabbling around under their desks with vibrating noses.

Anything you like, I said.

Then, succumbing to a corporate afterthought: OK, it's up to you, but actually, perhaps, er, today wouldn't be a great day to mention the war.

These days, in my chosen path, I am discovering what many an entrepreneur does. It is difficult indeed to wear your principles on your sleeve.

After two hours in the office, I walked out onto the street with Blair, both of us expecting to see his motorcade there. But Lower Marsh is a busy market street. The cars were parked a hundred yards up the road. No security men were waiting. None had come out of the office with us. To my amazement, I walked alone along a crowded market with the Prime Minister as he nodded at flabbergasted people, his trademark beam full on.

Blair's man and I have lunch, talking climate politics and the pr...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• About the author
• Note about the author's credentials and motivations
• Prologue
• Acknowledgements
• Note on sources, style and the life of the project beyond the book
• Part I A history
• Part II A future
• Notes
• Index