Over a barrel

The International Energy Agency (IEA) produced an interesting statement on Friday on the global oil situation. It reported that China's oil demand had jumped by an "astonishing" 28% over the year ending in January 2010, and predicted that global oil demand this year would be 86.6 million barrels per day (mbpd). On the same day, oil briefly touched $83 per barrel, a price that has not been seen since the panic of summer 2008.

However, the IEA reassures us that these high prices are due to "heightening of geopolitical tensions affecting some producing countries", which presumably will go away when world peace breaks out as it surely must do quite soon; and that there are "ample physical oil supplies" -- as opposed, I can only assume, to the supplies of the mental oil that you need to apply to understand the IEA's slippery logic, or the spiritual oil we will all be in sore need of when the true implications of peak oil really sink in.

Let's look at the facts. According to this spreadsheet from the US Energy Information Administration, who seem to be the best source of the relevant numbers, oil production passed 85 mbpd for the first time in spring 2005, and since then has plateaued, only exceeding 86 mbpd in one month, July 2008, when it briefly touched 86.6, the level the IEA is predicting as the average for 2010. During that month, the price spiked to an all-time high of $147 per barrel.

No-one is denying that there is still plenty of oil in the ground, although the most realistic estimates are that it is now, to use the title of an excellent book by Jeremy Leggett, "half gone". The more immediate questions are, how much of the stuff can we get at, at what cost, and how fast can we pump it? The evidence from the last five years' production and price data is that even with huge price incentives, production levels above 86 mpbd cannot be sustained.

Thus if the IEA's prediction is correct, oil demand this year will be above what can be produced. Not by much, but the history of oil crises over recent decades shows that the oil price is highly inelastic: even a small shortfall in supply leads to a very large increase in price.

And at some point -- a small number of years, or maybe only months -- we will find ourselves on the down side of the oil peak, where even sustaining current production levels will prove impossible, while demand, presumably, will continue to surge, from developing countries headed by China if not from OECD ones. All this implies very high energy prices, which will put the brakes on the kind of economic recovery that the politicians assume is just round the corner.

It has seemed to me for some time that the usual kinds of investments, of the sort that are traditionally used to fund pensions, for example, are just not a sensible place to put money any more, because they are based on an assumption of continuing economic growth that is impossible without cheap energy. Such investments are therefore much more likely to lose you your shirt than provide you with a comfortable retirement. It makes far more sense to pay off your debts, and then put any spare cash into energy saving measures like home insulation and, depending on where you live, renewable energy generation in its various forms: solar water heating, wind turbines, or whatever. Other ways of reducing your dependence on fossil fuels are also well worth considering: changing your lifestyle so you don't need a car; growing your own food; learning skills that will still be in demand when our current globalized economy is no longer affordable, and which you can practise well into old age.