Ever heard of spare capacity theory? It’s defined by Gregor Macdonald as:

the assumption among western bankers, policy makers, economists, and stock markets that OPEC producers can lift oil production at will, and, export all of that spare production to world consumers.

(See also this recent post on Global Dashboard, and this one from back in 2008.) There’s a lot of spare capacity theory doing the rounds at the moment, given what’s happening in North Africa and the Middle East. Libya normally produces 1.6 million barrels of oil a day (a little under 2% of global production). It’s estimated that about 350,000 barrels, or 22%, of that is now offline, and depending on how things pan out, it could stay offline for some time.

Now imagine what happens if it all kicks off in Algeria (a larger exporter than Libya of oil plus oil products). Or, for that matter, in Iraq, Iran, or Saudi Arabia – all of which are much more significant again. That’s what has traders and futures markets spooked, and everyone looking to Saudi Arabia: as a source quoted in the FT this morning puts it,

“It is fear of the unknown. The risks are all to the upside. Saudi Arabia needs to respond.”

Saudi Arabia, for its part, insists that it can and will increase production if needed:

“Right now, there are active talks in order to implement what is needed,” the Saudi official said. He stressed that the kingdom retains spare capacity of some 4m barrels a day – more than double Libya’s entire output, which totalled 1.58m b/d in January, according to the International Energy Agency.

Saudi Arabia has not yet decided whether to increase production. If it proved necessary to produce more, “then that will happen, there’s no problem at all”, the official said.

But what if that’s not true? Gregor Macdonald argues that the extent to which markets have climbed over the past week “suggests the market is justifiably concerned about events in Libya, and the risk of more unrest to come in oil producing regions”. His conclusion:

Given the potential magnitude of this situation, I actually think its good that we can still rely on price as a means to ration supply.

True though that may be, a new oil price spike is exactly what we didn’t need on global food prices at this point. Back at the start of the year, the fact that we weren’t in the middle of an oil spike was one of the factors I drew comfort from on the food outlook. Not now…

Back in 2008, just as the oil price started to plummet after hitting its all-time high of $147 a barrel, I did a post pondering whether the drop was “the start of a long decline, or just a brief pause to draw breath before a resumption of the relentless upward march of recent years”. I argued that oil prices would stay low as long as the credit crunch lasted, but that

once we’re through the crunch, we may be back to a game of cat and mouse between oil supply and economic growth. Demand falls, oil price falls; demand picks up, oil price goes back up too – but never for long enough to give investors a clear signal to pump cash into new oil supply infrastructure

Over at the Energy Bulletin, Dave Cohen’s just published a post thinking about the same question – and wondering when the next oil spike is due. His take is that the next crunch will likely be in 2013, give or take a year, as his graph below illustrates:

As Dave notes, this graph is not a forecast on oil prices, but rather a schematic illustrating that a) demand surges cause oil price shocks [i.e. the peaks on his graph]; b) oil price shocks cause recesssions and force reductions in demand [the troughs]; and c) the average price of oil goes up over time [the straight line]. Informally, he notes, “we can say there’s been an oil price shock when the real (inflation-adjusted) price goes over $100 per barrel and stays there for at least 2 months”.

His whole post is worth reading (n.b. especially his emphasis on the key variable in all this, namely prospects for Chinese growth) – and leaves the reader wondering: how do we break out of the cycle?

As I argued back in 08, one answer could be massive new investment in oil production – remember the IEA’s consistent warnings throughout the downturn about how under-investment in new oil production is setting the stage for a new supply crunch. But there are two problems with that option. One: we’re into diminishing returns territory. With the age of easy oil over, production increases from now depend on unpalatable options like tar sands, oil shales and, ahem, a lot more deepwater drilling (which is projected to account for 40% of global oil demand by 2020). Two: this approach does nothing to solve climate change.

So, I concluded 2 years ago, “it looks like the only way through is for policymakers to agree a global climate policy framework that’s both global in scope and sufficiently long term to provide investors with an unequivocal signal of where to put their cash: this is the only way of squaring energy security with climate change”.

I still think that’s right – but obviously, prospects for that have dimmed considerably since Copenhagen. So where does that leave us? That leaves us, alas, stuck in the yo-yo world depicted in Dave’s graph (which looks a lot like the Multilateral Zombie climate policy scenario that David and I described in our 2009 report for the UK government on global climate architecture – see page 7 onwards).

Oh – and it also leaves us on track for 3 degrees plus of global warming.

What do countries do when they run out of oil?  That’s the question posed by Oxford University’s Joerg Friedrich in a fortcoming journal piece in Energy Policy (already available here). Friedrich give three examples of strategies taken by countries facing this very issue in the past, which go like this.

First, you can opt for predatory militarism, where Japan before and during World War Two provides his case study. According to Friedrich, “the spectre of future resource shortages had played an important part in shaping Japan’s imperialist strategy ever since the end of World War One … when an American oil embargo became imminent, in 1941, Japan pre-emptively attacked the US and radicalized its war of conquest in order to gain access to the oil supplies of the East Indies”.

A second strategy, he reckons, is totalitarian retrenchment, which is what North Korea did after the Cold War. “When subsidized deliveries of oil and other vital resources from the Soviet Union were disrupted, the ‘Hermit Kingdom’ reacted in a shockingly reckless way. Elite privileges were preserved in the face of hundreds of thousands of North Koreans dying from hunger.”

Third, he offers what he calls socio-economic adaptation – which, he argues, is what Cuba successfully achieved when faced with the same challenges as North Korea.  While the end of subsidized deliveries from the USSR presented a massive challenge here too, “there was no mass starvation comparable to North Korea. Instead, Cubans relied on social networks and non-industrial modes of production to cope with energy scarcity and the concomitant shortage of food. They were actively encouraged to do so by the regime in Havana”.

It’s an engaging analysis, and worth reading the whole thing – and I absolutely share Friedrich’s concern about the risk of hugely damaging zero sum games as resources get scarce.

But as with many other peak oil analyses, I hesitate about the implied assumption that the answer to peak oil is necessarily local. I’d love to hear Friedrich’s take on what might an internationalist approach to managing increasing resource scarcity might look like. Cuba’s hardly the best case study for examining that, of course, given that it also faces the small matter of a US trade embargo.  But it’s still a big – and largely unexamined – question.

As regular readers will know, I’ve been banging on for a long time about the need for a comprehensive database that tells us exactly how exposed international trade is to peak oil – or, for that matter, to the maritime sector being brought into the international climate regime and made subject to really severe emission controls.

After all, the bunker fuels used to power container ships and bulk carriers are much less easily substitutable than other kinds of fossil fuels. You can replace coal-fired power stations with renewables or nuclear; you can replace petrol-fuelled cars with ones that run on electricity or hydrogen.  But ships? That’s another story. As a UK government study published just before Copenhagen found, for instance, “it will be extremely challenging, and expensive, to reduce emissions of carbon dioxide from shipping and aviation … there are a number of options available in each sector, but currently most of these are not economically viable”.

But if we don’t have readily available substitutes for marine bunker fuels, then what happens to maritime trade – to globalisation itself, in other words – if oil costs start really soaring again, or governments start to get serious about carbon pricing?

In particular, as I asked in The Feeding of the Nine Billion, what happens to the import bills of countries that depend on food imports from overseas (like most of the fragile states in West Africa, for example)? And what does it mean for China – whose advantages on wage costs could easily end up offset by increased transport costs, as actually happened when oil costs went into triple digits?

Although a number of analysts have been asking that question ever since the oil price spiked in 2008 (most notably Jeff Rubin – see the link above and also this), what we’ve all lacked is a really serious database that works out the costs of maritime trade, and how exposed these are to energy prices. Until now.

For it turns out that the OECD have been compiling a large new Maritime Transport Costs database. Although they didn’t make a lot of noise about it, they also posted a working paper (pdf) on their website a few months back – which confirms the significance of the issue (emphasis added):

Maritime transport costs represent a high proportion of the imported value of agricultural products — 10% on average, which is a similar level of magnitude as agricultural tariffs. This study shows that a doubling in the cost of shipping is associated with a 42% drop in trade on average in agricultural goods overall. The tendency to source imports from countries with low transport costs is therefore strong. Trade in some products is particularly affected by changes in maritime transport costs, in particular cereals and oilseeds, which are shipped in bulk.

Most valuably of all, the database goes into massive levels of detail on fuel costs in particular – making it a truly indispensable part of the toolkit for working out what happens to globalisation in a world of emission controls and peak oil. So, where can you access the database?

Answer: you can’t. For news reaches me that its publication is being blocked, by one OECD member state alone – namely, the United States. For, it is said, reasons of national security. How do you like them apples? (Locally grown, I suppose.)

It’s tough keeping up sometimes. I thought that the peak oil conspiracy theory ran like this:

The world is much closer to running out of oil than official estimates admit, according to a whistleblower at the International Energy Agency who claims it has been deliberately underplaying a looming shortage for fear of triggering panic buying. The senior official claims the US has played an influential role in encouraging the watchdog to underplay the rate of decline from existing oil fields while overplaying the chances of finding new reserves.

But that, my friends, is so last week. Apparently, the cool kids now believe that:

Peak oil is a fraud concocted by the oil industries to increase prices amid concerns about future supplies. The oil industry is aware of vast reserves of untapped oil, but does not utilise them in order to maintain the illusion of scarcity, they claim.

The safest thing is probably to believe that both conspiracy theories are true.

The Independent had an interview with International Energy Agency chief economist Fatih Birol a week ago, in which Birol was unequivocal about peak oil. He said:

The UK Government, along with many other governments, has believed that peak oil will not occur until well into the 21st Century, at least not until after 2030. The International Energy Agency believes peak oil will come perhaps by 2020. But it also believes that we are heading for an even earlier “oil crunch” because demand after 2010 is likely to exceed dwindling supplies.

More on the prospect of a near term oil price crunch here, here and here. In other news, Will Whitehorn and Jeremy Leggett had an op-ed on peak oil in the FT yesterday, querying why the UK government’s recent Wicks review of energy security made next to mention of peak oil.  This passage was a beautifully crafted broadside:

The Wicks review mentions peak oil only once. The relevant passage concludes: “Few authors advocating an imminent peak take account of factors such as the role of prices in stimulating exploration, investment, technological development and changes in consumer behaviour.”

If we imagine a review of financial security in 2006, the equivalent of the cursory dismissal of peak oil in the Wicks review might have read as follows: “Few authors advocating the toxicity of derivatives take into account factors such as the investment banking industry’s sophisticated treatment of risk, and the extent of the due diligence involved in awarding triple-A investment grading.”

The FT has a big splash this morning on how concerns about future climate policy and the global downturn are both driving a move away from global supply chains and towards more regional ones.

Companies are increasingly looking closer to home for their components, meaning that for their US or European operations they are more likely to use Mexico and eastern Europe than China, as previously. “A future where energy is more expensive and less plentifully available will lead to more regional supply chains,” Gerard Kleisterlee, chief executive of Philips, one of Europe’s biggest companies, told the Financial Times.

Mr Kleisterlee said businesses needed to find ways to build an economy on a sustainable basis ahead of the Copenhagen summit on climate change later this year, with “a review of global logistics and transport” one of the important steps. He said that until now cheap transport costs had meant “Mexico wasn’t competitive with China for supplying the US”. But he now forecasts that companies such as Philips will use countries such as Ukraine for supplying Europe rather than Asia.

Nor are climate regulation and the downturn the only drivers towards a more regional world – there’s also the prospect of a return to very expensive oil in the near future. If you’re wondering what that means for global supply chains, look no further than what started to happen during 2007:

…competitiveness in steel had already shifted away from Chinese exports and back to North American producers. Soaring transport costs – first on importing iron ore to China from Australia or from halfway around the world in Brazil, and then on exporting finished steel overseas to North America – added as much as an additional $90 onto the cost of what was then $600 per ton of hot rolled steel. That more than offset the Chinese wage advantage on what, thanks to technological change, had become as little as an hour and a half of labor time for that ton of steel.

For the first time in over a decade, made-in-America steel had become cheaper than Chinese imports in the US marketplace. Long before the recession blew up the US steel market, Chinese exports to the US fell 20% between July 2007 and March 2008 – and US steel production was up 10% over the same period. All of a sudden American steel producers were winning back their home market. Who would have thought that tripil digit oil prices could breathe new life into America’s rust belt?

That’s Jeff Rubin, in his very highly recommended new book on what peak oil will mean for globalisation (regular readers will remember his CIBC World Markets research paper on Could Soaring Transport Costs Reverse Globalisation a little over a year ago) – go buy it.

If I were the Chinese government, I’d be worried. First you see your export sector getting hammered by triple digit oil prices.  Then even when they crash to less than half of their pre-spike levels (though n.b. still way above their pre-2000 average of 10 or 20 dollars a barrel, even in the biggest recession since 1929), you find that the downturn’s still driving a shift towards regionalisation in trade.

Time to start investing heavily in a more endogenous growth model, perhaps…