New world energy order on the way

Mega-trends in the path of human society open up opportunities for investors and present threats, not only to your wealth. History is littered with examples of societies or indeed civilizations which flourished and then perished or withered away.

Some, like the Egyptians, may have fallen victim to climate change, combined with competition from neighbouring groups over many centuries. Others may have fallen victim to some creeping disease or ill health, while some, such as the society on Easter Island, appear to have exhausted the natural resources which sustained their strong character. These previous failures, whether in the Amazon, the Andes or Asia, provide clues to the ongoing challenges facing modern man.

Globally, growth in virtually every aspect of human economic activity during the past 200 years has been closely linked to the availability of cheap energy, firstly in the form of steam from coal but more latterly in the form of crude oil. Cheap, petroleum-based transport enabled the development of our globalised economy, where raw materials are transported vast distances to areas which have a natural advantage for processing and fabrication, only for the finished products to be transported around the world to widely dispersed markets.

Mechanisation of food production, which began with the steam age, replaced manual or horse-driven labour, resulting in huge increases in productivity. One man, with a tractor and a combine-harvester, could now feed thousands of people as he tilled several hundred hectares to produce a crop, whereas by himself or with horse- or oxen-drawn equipment, he may have been able to tend to just 1ha each year. In addition, petrochemical based fertilisers and pesticides have boosted crop yields around the world.

Modern man has recolonised the planet during the past 600 years, starting in South and North America and moving into Africa and then Australasia. Aboriginal peoples, who may have moved out of Africa about 60,000 years ago, were the first colonisers, but it was modern European man who expanded the human domain to enable a secondary population expansion to match a new supply of nutrition from intensively farmed areas.

During the past 150 years, a general increase in food availability combined with disease control, which reduced our natural predators, has enhanced human survival rates. Human population has done what any other species of plant or animal would have done under the same circumstances, experiencing a tripling over the past 120 years. Just as populations of rabbits, prickly pear and cane toads grew to plague proportions in Australia after they were introduced to an environment of plentiful nutrition devoid of natural predators, so the human population of the planet has expanded under similar conditions.

It is clear to more and more observers that this heavy and rapidly expanding human population burden is now making a massive impact on the availability of food and non-renewable resources of all kinds on the planet. Economists estimate that, if all humans lived with a modest Australian lifestyle, we would need three planets like earth to supply all the food, copper, coal, iron, oil etc required to maintain that lifestyle.

Just as the global annual gold production peaked in 2001 at 84 million ounces and has since declined to around 78 million ounces a year, so oil and condensate (light oil) production is now nearing a peak annual production level of around 32 to 33 billion barrels. Briefcase calculates that, by 2013 at the latest, oil production will be experiencing an increasingly steep rate of annual decline.

This occurrence will result in huge changes to the way we live and do business around the world. That means no more cheap air travel, even though a new but inevitably more expensive form of fuel could replace jet fuel. There will be more expensive city commuting and more expensive food, which relies on mechanical planting, harvesting, processing and transport. Briefcase suspects that new sources of energy and transport technologies are unlikely to be deployed within the coming five to 10 years. Peak oil production is likely to result in massive price rises for food and other goods, along with a disruption to the flow of global commerce, combined with severe shortages of food.

The graph above illustrates how annual oil discovery rates have fallen since the 1960s and also shows that annual production of oil has increasingly outpaced new oil discoveries each year since the early 1980s. During the past 27 years, global oil production has begun to suck the tank dry. Today, it is estimated that annual new oil discoveries amount to about 5 billion barrels, while oil and condensate production is running at close to 32 billion barrels per annum.

Sure, as the price rises, demand for oil will moderate and ways will be found to extract more of the stuff, but peak oil production is not about matching supply to demand via the pricing mechanism. Peak oil is about daily flows and a physical or geological restriction to the production of oil at any oil price.

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Geologists estimate that about 2 trillion barrels of easily recoverable oil was initially emplaced. Experience in well-trodden oil provinces around the world tells us that the largest oilfields are usually found first, so today the discovery of even 100 million barrels is seen as a large field, when previously a field of a billion barrels may have earned that tag.

Recently, companies operating in deep waters offshore Brazil indicated that they may have found an 8 billion barrel field. Further drilling appraisal will be required, but even if this proves to be correct, that field would only provide for three months of current, global oil demand. Briefcase estimates that, based on previous industry examples, the field in Brazil’s Santos Basin, if proven, would not come into production until at least 2013, and even then would take several years to ramp up to, say, 1 million barrels per day.

Even if the geologists are wrong by a factor of 50 per cent, and an additional trillion barrels of recoverable oil is available, this would only delay peak oil production by 10 to 12 years at the current rate of demand growth.

Historically, oil production has risen from just 2.77 million barrels per day in 1921, when most of the oil was produced and consumed in the US.  Production reached 30 million barrels per day by 1967 and oil and condensate production hit 75 million barrels per day in 2000. Recent estimates of oil production into the future indicate a rapid decline to around 60 million barrels per day by 2020. It is amazing to see that, in 1952, global oil production was running at only 10 million barrels per day. Adding production of condensate and oil from tar sands and other sources, such as bio-diesel, this production rises to about 86 million barrels per day.

But not only has the world population tripled since 1952, but a larger proportion of those people are taking part in the global economy, rather than subsisting in a semi-sustainable way, creating larger demands on finite resources on a per capital basis.

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Briefcase believes a number of responses are required. Business needs to check its energy vulnerability. Governments need to ensure that telecommuting is viable by establishing a world’s best communication network, while working to extend the life of existing fossil fuels and establishing renewable sources of power to run public transport and prime the hydrogen- or electric-powered vehicles of the future.

Cities will need to decentralise and land use will need to be carefully planned to ensure food is grown close to its market. Lastly, Australia needs to come to a consensus on what is a sustainable population which maximises gross national happiness for its citizens.

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• Peter Strachan is the author of subscription-based analyst brief StockAnalysis, further information can be found at Stockanalysis.com.au