As a recent immigrant, I still marvel at the energy usage in all aspects of Canadian life. As a country, we are in 27th position of a list of the 29 OECD nations for energy use per capita, with a rate of twice the OECD average and five times the global average. Over the last eight years we have seen gas prices at the pump continue to creep upwards from 80 to 120 cents/L, with peaks of 140 cents/L in 2008. Ironically this is still lower than gas prices were in the UK when I left in 2004 and I am well used to the life-choices that people make when faced with high energy prices. I often wonder what effects this steady increase has on the North American psyche; at what point do people begin to downsize their cars and houses, and change their lifestyles? However, at the same time, we are all aware of the enormous reserves of hydrocarbons in North America; the International Energy Agency recently stated that the U.S. would surpass Saudi Arabia in oil production by 2017. So what’s the problem?
In 1956, Hubbert developed a model of oil production that has been successfully used to predict the peak and decline of production from oil wells to whole countries. Peak oil theory suggests that we are at the cusp of global peak oil extraction and the rate of production is now expected to go into terminal decline. Although pronouncements of the death of the oil industry are, to paraphrase Mark Twain ‘exaggerated’, what is not controversial is that much of the remaining estimated trillion barrels of oil on Earth will come from unconventional sources, such as oil sands, shale gas and deep-water offshore fields. The challenges of extracting and processing these hydrocarbons, requires high oil prices for the economic viability of the reserves. So it is not likely that we will run out of oil, but the era of cheap oil is over. Negative global economic outcomes are predicted to occur with this post-peak oil production decline, due to the dependence of industrial transport, agricultural and systems on the low cost and high availability of oil. Although major investments in alternative energy sources can be anticipated, they will not be able to replace oil and a viable transition fuels are decades away. Hence major changes in the economies and industries of heavily oil-consuming nations will eventually occur.
Despite the current global recession suppressing oil prices, increases from the current $117 per barrel of Brent crude to the historical maxima of $147 per barrel are quite feasible over the next few years. This has been estimated to cause a 1% reduction in global GDP (approximately $500 billion), which will be magnified for developing countries, with some of the poorest oil-importing countries estimated to lose up to 4% of their GDP. Reductions in investment and tax income often take place with significant oil price volatility and contagion occurs in the financial markets. The lower economic output from the OECD countries will potentially lead to less bilateral foreign aid, philanthropy and lower immigration rates, which may affect diaspora contributions to their home countries.
Oil prices will have significant influences on employment, food and transport prices, which will increase food insecurity and poverty levels in developing countries. Whilst global trade will decline, higher transport prices will likely encourage more local and regional trade. Certain groups in society have a higher degree of vulnerability, such as the poor, the landless, informal workers and female-headed households. The poor spend a higher proportion of their money on oil products and in urban areas have limited access to agriculture and are vulnerable to changes in the food and urban transport prices. The cost of community development initiated from the OECD countries will also increase and more projects may be generated and lead by local NGOs.
A number of policy solutions have been proposed for developing countries to cope with these oil price increases, including strategic petroleum reserve stockpiling, trade agreements with net oil-exporting developing countries, infrastructural change to renewable sources of energy and reducing and optimizing energy usage. The creation of innovative solutions for oil price stability is also recommended. However, the use of bio-ethanol is a salutary lesson, since it has had the unintended result of causing higher food prices for the developing world. Oil price increases will certainly affect us all and the globe may even be entering a period of de-globalization. The developing world is particularly vulnerable to these changes and the international development sector will be dealing with the consequences sooner, rather than later.
Do you agree? What issues can you foresee for development if this occurs?