Challenge of Hubbert’s Peak

Since the Left front opposes any increase in oil prices in line with global prices, public sector oil companies lost almost Rs 6,000 crore in the first six weeks of this fiscal year. The Left is unwilling to face the harsh fact that the days of cheap oil are probably over and the world needs to adjust accordingly.

Alarmists have made false predictions of the world running out of oil so often that they sound like the boy who cried wolf. Yet in the story, the wolf does arrive one day. And the world has a finite amount of oil. A new book by Kenneth Deffeyes, Professor of Geosciences at Princeton University (Beyond Oil: the View from Hubbert’s Peak) predicts that world oil production will peak between 2004 and 2008, probably this year.

Hubbert’s Peak is a concept attributable to M King Hubbert, a geologist at Shell. He showed that oil production in any area tends to follow a bell-shaped curve, rising fast as the easiest oil is exploited, then peaking, then declining as the easy oil runs out and the difficult deposits are exploited. Surveying US geology, he calculated in 1956 that US oil production would peak in 1970. He turned out to be right.

Deffeyes has now attempted a similar exercise for world oil production. He concludes that global oil production will peak soon, perhaps by November this year. Major new finds will not compensate for the decline of older fields.

What are the implications for us? The BRIC (Brazil Russia India China) report of Goldman Sachs predicts that between 2000 and 2050, China’s GDP will rise over 40 times, and India’s almost 60 times. Sounds good, but can they increase oil consumption by 40-60 times? No way. That would mean increasing oil use from roughly 8 million barrels/day to 400 million barrels/day, which would be five times today’s global output of 83 million barrels/day. And today’s level, argues Deffeyes, is a peak that will not be exceeded.

Probably the BRIC report is too optimistic, and Deffeyes is too pessimistic. But let me stick my neck out and say that Hubbert’s Peak is a reality. It may come a few years later than Deffeyes predicts, and may be at a much higher level (maybe 50 per cent higher). But it will come. So, a switch to other sources (gas, nuclear, renewables) is inevitable.

If the oil price remains above $35/barrel, vast quantities of heavy oil in Venezuela, tar sands in Canada, and shale oil in many countries will become economic. Nuclear energy, solar energy, solar/wind energy and the conversion of coal and gas to liquids will all be economic. However, many of these alternatives are very capital intensive, and corporations worry that if they invest huge sums and oil prices suddenly drop, their investment will go bust.

One way India can meet the challenge of Hubbert’s Peak is through ethanol from sugar cane. Brazil’s transport already runs on ethanol and ethanol/petrol blends. This looked uneconomic when the price of oil crashed in the late 1990s. It is highly economic today.

Countries with hot moist climates have a comparative advantage in cane production, and India is one of them. The Gangetic valley is ideal. It is wrong to use scarce water in Maharashtra for cane — the crop should be grown mainly in UP and Bihar. Farmers love the crop, for it is profitable and needs little maintenance. When cane is cut, it grows right back (though the sugar yield falls) and farmers can take four cuttings before having to replant. It is flood resistant, and so could be planted in the flood-prone areas of eastern UP, and northern Bihar. These are some of the poorest regions of India, and sugar cane could greatly raise living standards there.

However, a new ethanol policy must be de-linked from sugar policy, which remains a mess. States arbitrarily decide what price sugar mills must pay for cane, and these are not related to any economic criterion, and may not be internationally competitive. Indian sugar mills make ethanol as a by-product from molasses, and that can never generate the huge volumes required.

We need an industry generating ethanol straight from cane, bypassing sugar (as Brazil does) and so warranting a different tax structure. This should be viewed as an energy industry, not a sugar industry, and so state advised prices for sugar cane should not apply. Nor should state-level curbs on storage and movement. Oil companies should enter into long-term supply contracts with ethanol factories, and negotiate a price band that suits both.

Only this sort of approach can generate ethanol production in tens of millions of tones per year. Much experimentation and policy adaptation may be required, but it is time to make a start. Hubbert’s Peak is not too far off.

What do you think?