• 06 Sep 2004
  • What Do You Think?

How Do We Prepare for a World Without Cheap Oil?

How should the world (and firms, and countries) best adjust to an age of more expensive energy? Among the possible alternatives for tackling the problem, three seem to stand out.
by James Heskett

Summing Up

Is the end of cheap oil a challenge to the world? Yes. Will it affect our standard of living adversely? Not likely. At least that is the verdict of most of the large number of respondents to this month's column who rely on assumed human ingenuity combined with market forces and government incentives to bolster their arguments. This view was characterized by Mark Townsend Cox, who commented, "I can count almost twenty methods of creating electricity without burning something, every one of which is essentially an infinite resource that does not pollute or deprive future generations of oil." David Hirsch seconds this notion, saying, "There is nothing our technology (including revisiting our ‘revulsion toward nuclear power') cannot achieve."

There is a great deal of support as well for the notion that we are still the masters of our fate by means of energy consumption. As John Friedery put it, "I believe that markets will regulate consumption ...." Suman Das opines that "The world is a very resilient place." "Relatively minor lifestyle changes can lead to huge reductions in energy usage," in the opinion of David Richie. Specifically, Martin Edic points out that "Much of global air business travel, for example, is unnecessary ... (with) broadband connections combined with free VoIP software."

Necessary behaviors can be fostered by incentives as well as education and the transfer of knowledge, according to our respondents. Joseph Butler suggests that "It is the responsibility of corporations and governments alike to share knowledge and to work to educate developing nations ... about consumption, pollution, and efficiency." Mark Cox adds, "I think that the best method to remediate our world is education about the possibilities. I have rarely found anyone who is not ... fascinated by the possibilities ...."

Governments and global organizations may also provide avenues for large-scale remediation. Several expressed interest in Kyoto-type accords to facilitate incentives for international conservation and pool funds for the development of alternative energies.

Others largely see opportunity in what is happening. Remco de Ket's question reflects this view: "Perhaps running out of oil isn't such a bad thing after all?" Marc Schoenen says, "The spike in oil prices, if nothing else, has fostered a sense of entrepreneurship and opportunity in the renewable energy sectors." And Chip Levy suggests that "This is a great time to leap into a growth industry ...We developed the petroleum industry ...we can develop the clean-fuel market just as well."

A problem may result, however, from differences in the timing of the end of cheap oil and the responses it provokes, whether market driven or not. If these differences lead to a period of very high prices, the pain could be substantial, according to some of you. Jeremy Stieglitz cites one possibility when he says that "An end to cheap oil would very well mean an end to cheap food worldwide. And with 6.5 billion people to feed, I am reminded of a somewhat frightening quote that I'll likely garble: "Throughout history, when humans are left between starvation and raiding, they raid." What do you think?

Original Article

A newly-published book by Paul Roberts, The End of Oil, and a variety of observers remind us again that we either have seen or will soon see a peaking out of the production of the world's oil. Worse yet, we are encountering or will soon encounter a decline in the production of so-called "cheap oil," the most easily accessible of the world's carbon energy resources. These events are concurrent with new demands for oil, especially by the rapidly-expanding economies of Asia. All of this helps account for the new reality that instead of encountering recently a mere price "spike" in oil, we may be entering an era in which we have to adjust our thinking to prices that fluctuate around, say, $40 per barrel, a level long thought to be unsustainable even by OPEC, the oil-supplying cartel.

Of course, warnings about the world's heavy reliance on a resource controlled by a few relatively unstable nations have been sounded for years. In the U.S., they became especially acute at the time of the first oil crises in the 1970s. One response was a study, Energy Future, published in 1979 by the Energy Project at the Harvard Business School, headed by Robert Stobaugh and Daniel Yergin. Starting from a premise stated in the title of the first chapter, "The End of Easy Oil," the project team went on to recognize the importance of a balanced approach relying heavily on the marketplace. But it suggested that this could be complemented by two major efforts to deal with the dilemma, at least in the U.S.—incentives to foster conservation and the development of alternative energy sources, particularly solar energy.

Roberts observes that it isn't in anyone's immediate interest to conserve cheap oil. It helps bestow competitive advantage on firms and countries and a convenient, inexpensive, and relatively clean source of carbon energy on the world's consumers. As a result, there is a race to consume it as fast as possible, a race interrupted only by such things as increasingly ineffective attempts to control supply by OPEC, sporadic disruptive efforts by individual governments and their leaders, and wars.

If predictions of the end of cheap oil are not accurate to the barrel or a certain date, they must be directionally right. This assumption raises questions about how the world will best adjust to an age of more expensive energy and how long it will have to do so. Of the possible alternatives for approaching the challenge, three seem to stand out. One relies on market forces to provide the incentives for changes in behaviors. Another would supplement that with government-created incentives of the kind suggested by Stobaugh and Yergin, today possibly including support for the further development of the hydrogen fuel cell or other technologies. Yet a third might include some attempt on the part of the world's major energy-using countries to create incentives for the efficient use of energy on a multi-national basis, an approach similar to the Kyoto Accord intended to reduce the world's pollution—pollution resulting largely from the use of carbon fuels.

Given the trends in demand and supply, no action constitutes action. But is that the best alternative? Is this a matter in which the U.S., as the world's most prolific user of energy, should take the lead? Or does it make any sense for any one nation to risk placing itself at a competitive disadvantage by doing so? What do you think?