When’s the next oil price spike?

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.

Emissions have peaked! (Shame NGOs don’t call for them to do so til 2017…)

If you missed it earlier in the week, the FT’s Fiona Harvey has been given a preview of the next World Energy Outlook, which the International Energy Agency will publish in November.  Findings:

The recession has resulted in an unparalleled fall in greenhouse gas emissions, providing a “unique opportunity” to move the world away from highcarbon growth, an International Energy Agency study has found.

In the first big study of the impact of the recession on climate change, the IEA found that CO 2 emissions from burning fossil fuels had undergone “a significant decline” this year – further than in any year in the past 40. The fall will exceed the drop in the 1981 recession that followed the oil crisis. Falling industrial output is largely responsible for the plunge in CO 2 , but other factors have played a role, including the shelving of plans for new coal-fired power stations owing to falling demand and lack of financing.

For the first time, government policies to cut emissions have also had a significant impact. The IEA estimates that about a quarter of the reduction is the result of regulation, an “unprecedented” proportion. Three initiatives had a particular effect: Europe’s target to cut emissions by 20 per cent by 2020; US car emission standards; and China’s energy efficiency policies.

All of which brings us back to David’s prescient suggestion back in March this year that civil society “should declare 2009 the year of peak emissions and challenge the world’s governments to develop a concrete plan to ensure they are never allowed to rise again”. 

Given IEA’s data, it’s clear that’s exactly what NGOs should have done. In fact, though, the TckTckTck campaign’s policy position – their only policy position, in fact – is that emissions should peak in… 2017.

Er, thanks guys. Great agenda setting there. Don’t call us – we’ll call you.