Oil crisis will sap global recovery: expert

The world is heading for a catastrophic energy crunch that could cripple a global economic recovery because most of the major oil fields have passed their peak production, a leading energy economist has warned.

Higher oil prices brought on by a rapid increase in demand and a stagnation, or even decline, in supply could blow any recovery off course, said Dr Fatih Birol, chief economist at the International Energy Agency (IEA) in Paris which is tasked with assessing future energy supplies by OECD countries.

Birol said the public and many governments appeared to be oblivious to the fact that the oil on which modern civilisation depends is running out far faster than previously predicted and global production is likely to peak in about 10 years - a decade earlier than most governments estimated.

But the first detailed assessment of more than 800 oil fields, covering three-quarters of global reserves, has found that most of the biggest fields have already peaked and the rate of decline in oil production is now running at nearly twice the pace calculated two years ago.

On top of this, there is chronic under-investment by oil-producing countries, a feature that is set to result in an "oil crunch" in the next five years which will jeopardise any hope of recovery from the recession, he said.

In a stark warning to Western powers, Birol said the market power of the few oil-producing countries that hold substantial reserves - mostly in the Middle East - would increase rapidly as the oil crisis began to grip after 2010.

"One day we will run out of oil, it is not today or tomorrow, but one day we will run out of oil and we have to leave oil before oil leaves us," he said.

"The earlier we start, the better, because all of our economic and social system is based on oil, so to change from that will take a lot of time and a lot of money and we should take this issue very seriously."

There is now a real risk of a crunch in the oil supply after next year when demand picks up because not enough is being done to build up new supplies to compensate for the rapid decline in existing fields.

The IEA estimates the decline in oil production is now running at 6.7 per cent a year compared with the 3.7 per cent decline it estimated in 2007.

"If we see a tightness of the markets, people in the street will see it in terms of higher prices, much higher than we see now. It will have an impact on the economy, definitely, especially if we see this tightness in the markets in the next few years.

"It will be especially important because the global economy will still be very fragile, very vulnerable. Many people think there will be a recovery in a few years' time but it will be a slow recovery and a fragile recovery and we will have the risk that the recovery will be strangled with higher oil prices."

Oil production has already peaked in non-Opec countries and the era of cheap oil has ended, the IEA warned.

In most fields, oil production has peaked, which means other sources of supply have to be found to meet existing demand.

Even if demand remained steady, the world would have to find the equivalent of four Saudi Arabias to maintain production, Birol said. Six Saudi Arabias would be needed to keep up with the expected increase in demand between now and 2030.

Environmentalists fear that as supplies of oil run out, governments will be forced to exploit dirtier alternatives, such as the massive reserves of tar sands in Alberta, Canada.

That would be immensely damaging to the environment because of the amount of energy needed to recover a barrel of tar-sand oil compared with the energy needed to collect crude oil.

"Shell and others want to turn to tar and extract oil from coal. But these are carbon-intensive processes and will deepen the climate problem," said Jeremy Leggett, a former oil-industry consultant now with Solar Century.

"What we need to do is accelerate the mobilisation of renewables, energy efficiency and alternative transport.

"We have to do this for global warming reasons anyway, but the imminent energy crisis redoubles the imperative."

- INDEPENDENT