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Dieter Helm: Chris Huhne And The Peak Oil Brigade Are Wrong

One can’t assume energy prices are going ever upwards. The real problem is there may be too much fossil fuel, not too little

It is almost always a mistake to assume you know where energy bills are going. This is especially true for secretaries of state, and energy policy should never be based upon assuming you know what the future will bring. Unfortunately, it is the new conventional wisdom and an assumption prevalent across much of Europe.

Yet Chris Huhne, the British secretary of state for energy and climate change, is pretty sure that oil and gas prices are going ever upwards, that they will be volatile and that a core function of energy policy is to protect British industry and consumers from the consequences. It is a convenient assumption for renewables and nuclear: if the price of fossil fuel is going to get more expensive, then renewables and nuclear will be relatively cheap. Add in energy efficiency, and then it can be predicted that energy bills will fall if these technologies are supported.

The last time policymakers were this sure was the last time oil prices peaked – back in 1979. Oil peaked at $39 a barrel (around $150 in today’s prices). It was assumed then that oil prices would go ever up, and the incoming Conservative government launched a plan to build one nuclear reactor per annum for 10 years. Instead, prices collapsed in the mid 1980s, and didn’t return to the 1979 prices for more than a quarter of a century (even with two Gulf wars).

As then, we are led to believe that the world’s fossil fuel resources are finite and known, and that the peak of production has either been already met or will come soon. Gas, it is assumed, will follow oil. Put simply, we are going to run out of fossil fuels, and they will therefore get (much) more expensive. For the peak oil advocates, the convenient truth is that de-carbonisation via renewables and nuclear is not only good for the climate, but sound economics too. Almost all of this is nonsense – and some of it is dangerous nonsense. There is enough oil and gas (and coal too) to fry the planet several times over. The problem is there may be too much fossil fuel, not too little, and that fossil fuel prices might be too low, not too high.

The Earth’s crust is riddled with fossil fuels. The issue is not whether there is a shortage of the stuff, but the costs of getting it out. Until recently, the sheer abundance of low-cost conventional oil in places like the Middle East has limited the incentives to find more, and in particular to go after unconventional sources. But technical change has been driven by necessity – and the revolution in shale gas (and now shale oil, too) has already been transformational in the US, one of the world’s biggest energy markets.

New technological developments take time to penetrate markets, and customers may not feel the benefits for quite a while. But it would be a mistake to assume they won’t eventually. Even worse, it would be wrong to design energy policy to protect them from price volatility so that if gas prices fall, they will be prohibited from gaining the benefits.

It is also wrong to assume the renewables and nuclear will pay for themselves – and that therefore they are going to be cheap alternatives (though we would then at least be able to get rid of any subsidies). This was ultimately the real weakness of the Stern review, and why politicians fell over themselves to quote its 1% GDP per annum costs for tackling climate change. Customers were led to believe it would not hurt them, and hence were happy to support green policies. But now they are finding out that it isn’t true, and the backlash has started. The very real risk is that having been misled by politicians, they start to doubt the veracity of climate change.

Is there another way forward, which enables possibly cheaper gas to feed through to customers without undermining attempts to reduce emissions? The answer is – at least for the next couple of decades – yes. At the global level, the reason emissions keep going up – and why Kyoto has made so little difference – is that coal is the rising fuel; its share has risen from around 25% to nearly 30% during the Kyoto period, and it is a percentage of a growing total. Switching from coal to gas is cheap – and it cuts emissions by roughly half. It doesn’t solve the climate change problem in the long run, but it gets emissions down much faster and much cheaper than all those offshore windfarms in the short to medium term.

The Guardian, 18 October 2011