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1. Won’t new oil fields be discovered and make up for the shortfall?
2. Who would suffer the greatest impacts?
3. How will the Oil Depletion Protocol help?
4. How is the Depletion Rate calculated for each country?
5. What if forecasts of a near-term peak in global oil production are wrong? Won't there be a cost to preparing for the oil peak too early? In practical terms, won't this mean voluntarily choking off economic growth?
6. What if the pessimists are right and the world is at its peak of oil production now? In that case, is it too late to implement the Oil Depletion Protocol?
7. Why can't the market take care of the problem? Won't high prices stimulate more exploration and the development of alternatives? Wouldn't interference with market mechanisms be harmful?
8. How will adoption of the Protocol affect importers and exporters differently?
9. How will the oil companies be affected?
10. Won't both importers and exporters be tempted to cheat? How would the Protocol be enforced?
11. How can nations adjust internally to having less oil?
12. What about natural gas and coal – should there be similar protocols for these? Might countries simply burn more coal to make up for having less oil?
13. What if only a few nations sign on? Won't the Protocol be ineffectual if a few large exporters or importers refuse to do so?
1. Won’t new oil fields be discovered and make up for the shortfall?
Global rates of oil discovery have been falling since the early 1960s, as has been confirmed by ExxonMobil. All of the 100 or so supergiant fields that are collectively responsible for about half of current world production were discovered in the 1940s, '50s, '60s, and '70s. No fields of comparable size have been found since then; instead, exploration during recent years has turned up only much smaller fields that deplete relatively quickly. The result is that today only one new barrel of oil is being discovered for every five or six that are extracted and used.
2. Who would suffer the greatest impacts?
The worst impacts would be suffered by those nations, and those aspects of national economies, that could not obtain oil at any price affordable to them.
3. How will the Oil Depletion Protocol help?
4. How is the Depletion Rate calculated for each country?
Each country has a finite endowment of oil from nature; thus, when the first barrel has been extracted, there is accordingly one less left for the future. What is left for the future consists of two elements: first, how much remains in known oilfields, termed Remaining Reserves; and second, how much remains to be found in the future (termed Yet-to-Find). How much is Yet-to-Find may be reasonably estimated by extrapolating the discovery trend of the past. The depletion rate equals the yearly amount currently being extracted divided by the total yet-to-produce.
5. What if forecasts of a near-term peak in global oil production are wrong? Won't there be a cost to preparing for the oil peak too early? In practical terms, won't this mean voluntarily choking off economic growth?
Because so much is at stake, it is important that these vital questions be addressed not just by partisan participants in the debate over the timing of the oil-production peak. Some independent assessment is required of the costs of preparing too soon versus the costs of preparing too late.
Fortunately, such an assessment has already been undertaken – Peaking of World Oil Production: Impacts, Mitigation, & Risk Management, a report prepared by Science Applications International Corporation (SAIC) for the US Department of Energy, released in February 2005, and authored principally by Robert L. Hirsch (hereinafter referred to as the "SAIC Report").
The SAIC Report concludes that substantial mitigation of the economic, social, and political impacts of Peak Oil can come only from efforts both to increase energy supplies from alternative sources and to reduce demand for oil. With regard to the claim that efficiency measures will be enough to forestall dire impacts, Hirsch et al. note that:
While greater end-use efficiency is essential, increased efficiency alone will be neither sufficient nor timely enough to solve the problem. Production of large amounts of substitute liquid fuels will be required.
Mitigation will require a minimum of a decade of intense, expensive effort, because the scale of liquid fuels mitigation is inherently extremely large…The problems associated with world oil production peaking will not be temporary, and past 'energy crisis' experience will provide relatively little guidance.
The SAIC Report agrees that mitigation efforts undertaken too soon would exact a cost on society. However, it concludes that:
If peaking is imminent, failure to initiate timely mitigation could be extremely damaging. Prudent risk management requires the planning and implementation of mitigation well before peaking. Early mitigation will almost certainly be less expensive than delayed mitigation.
6. What if the pessimists are right and the world is at its peak of oil production now? In that case, is it too late to implement the Oil Depletion Protocol?
If the world reaches the peak of production within the next two years there will be too little time to undertake major mitigation efforts prior to the event, and therefore there will likely be severe economic, social, and political impacts, as outlined in the SAIC Report. While all nations will suffer from higher prices and shortages, only a cooperative system of national and international quotas will avert the even more extreme economic and geopolitical crises that would otherwise ensue.
7. Why can't the market take care of the problem? Won't high prices stimulate more exploration and the development of alternatives? Wouldn't interference with market mechanisms be harmful?
The SAIC Report's authors dismiss the claim that the market will solve any shortage problems arising from global oil production peak, with higher oil prices stimulating investments in alternative energy sources, more efficient cars, and so on. Price signals warn only of immediate scarcity. However, the mitigation efforts needed in order to prepare for the global oil production peak and thus to head off shortages and price spikes must be undertaken many years in advance of the event. Hirsch et al. maintain that:
Intervention by governments will be required, because the economic and social implications of oil peaking would otherwise be chaotic. The experiences of the 1970s and 1980s offer important guides as to government actions that are desirable and those that are undesirable, but the process will not be easy.
Historically, oil production has often been managed by governments or by cartels. In petroleum's early days, free-market boom-and-bust cycles bankrupted many players. Soon John D. Rockefeller brought a certain order to the situation through the creation of the Standard Oil Trust (in doing so he squeezed out many competitors and personally profited to an extraordinary degree).
This regime came to an end in 1911, when the US Government broke up Standard Oil after prosecution for violation of anti-trust laws. Starting in the 1930s, with the US in position to control global oil prices, the Texas Railroad Commission capped production levels in order to stabilize the market. After US oil production peaked in 1971 and that nation lost its ability to control global prices, petroleum's center of gravity shifted to the Middle East, and OPEC began mandating production quotas for its members in order to keep prices within a desirable band.
While the management of oil prices globally thus has precedents, the situation in the future will be fundamentally different in that previously the problem was too much oil and collapsing prices that offered little incentive for exploration. The situation the world will soon face is that of insufficient supply leading to extreme price shocks, price volatility, and acute shortages. Thus a new kind of management scheme will be required.
8. How will adoption of the Protocol affect importers and exporters differently?
Importers: No one doubts that industrial nations will find it difficult to sustain economic growth while using less oil on a yearly basis. Thus the voluntary adoption of the Protocol by importers would seem disadvantageous.
However a decline in the availability of oil is inevitable in any case; only the timing of the onset of decline is uncertain. Without a structured agreement in place to limit imports, nations will be inclined to put off preparations for the energy transition until prices soar, at which time such a transition will become far more difficult because of the ensuing chaotic economic conditions. With the Protocol in place, importers will be able to count on stable prices and can then more easily undertake the difficult but necessary process of planning for a future with less oil.
Poor importing countries may object that by using less petroleum they will have to forego conventional economic development. However, further development that is based on the use of petroleum will merely create structural dependency on a depleting resource. Without the Protocol, these nations will be financially bled by high and volatile prices. With the Protocol in place and with prices stabilized, these nations will be able to afford to import the oil they absolutely need; meanwhile they will have every incentive to develop their economies in a way that is not petroleum-dependent.
Exporters: Countries that depend primarily on income from oil exports will need to wean themselves from this dependence eventually in any case, as their oilfields are depleted. The Protocol provides them a means of making the transition in a way that will allow for long-term planning. It is in the best interest of exporting countries to diversify their economies by developing indigenous industries.
Without the Protocol, smaller exporting nations will likely be at the mercy of militarily powerful importers. The Protocol will provide a means of minimizing external political interference in these nations' affairs. As a result, much international tension and conflict, including the threat of terrorism, can be minimized – which will be a help also to the wealthy importers.
9. How will the oil companies be affected?
Without the Protocol, the oil companies may enjoy record revenues – for a time. But they will be demonized for profiting from the misery of the rest of society. Meanwhile, they will be hampered in their operations by the destabilization of national economies resulting from wildly gyrating oil prices.
As noted earlier, the Standard Oil Trust, the Texas Railroad Commission, and OPEC all provided production-rationing mechanisms that brought order out of what would otherwise have been chaotic situations. The oil companies (sometimes reluctantly) accepted these mechanisms, recognizing that a stable economic environment was more important to them in the long run than the opportunity to make momentary windfall profits.
With the Protocol, the oil companies will remain profitable, they will have the incentive to undertake further exploration, and they will be able to plan for decades ahead. They will also be motivated to become more generalized energy companies (rather than remaining merely oil companies) and thus to invest in the development of alternative energy sources.
There is already evidence that the oil companies are concerned about a public backlash as gasoline prices soar: ChevronTexaco has initiated an expensive public-relations campaign titled "Will You Join Us?", featuring a web site (www.willyoujoinus.com) and expensive newspaper ads informing readers that "the era of easy oil is over" and asking for public discussion on the issue. The Oil Depletion Protocol will provide more long-term security for the petroleum industry than any PR campaign ever could, and at no cost.
10. Won't both importers and exporters be tempted to cheat? How would the Protocol be enforced?
The Protocol will require a system for monitoring production, exports, and imports – which cannot be hidden to a large degree in any case. Enforcement will require the establishment of a Secretariat for adjudication of disputes and claims, and a system of economic penalties to be negotiated by the agreeing nations.
11. How can nations adjust internally to having less oil?
Efforts will be needed both to create supplies of alternative fuels and to reduce the demand for oil. The latter task will be much easier if systems are designed to make it in individuals' interest not only to reduce their own oil dependency but also to persuade others to reduce theirs. One such system for creating collective motivation and cooperation consists of Tradable Energy Quotas, or TEQs. TEQs can be used to ration any type of energy, including electricity and natural gas as well as oil. As the Oil Depletion Protocol deals specifically with petroleum as an energy source, TEQS will be referred to as Petroleum quotas, or Petro-units.
In this system, a national Petroleum Budget would be drawn up, based on the nation's indigenous production and oil imports as mandated by the Oil Depletion Protocol. A segment of the Petroleum Budget would then be issued as an unconditional entitlement to all adults and divided equally among them into Petro-units; the remainder would be auctioned to industry, commercial users, and government. The Petro-units could then be bought and sold, so that users unable to cope with their ration could increase it, while others who kept their fuel consumption low could sell and trade their Petro-units on the national market. All transactions would be carried out electronically, using technologies and systems already in place for direct debit systems and credit cards.
When consumers (citizens, businesses, or the government) made purchases of fuel, they would surrender their petroleum quota to the energy retailer, accessing their quota account by using their direct debit card or, for instance, their Petro-card (withdrawals made from the individual’s allotted Petro-units). The retailer would then surrender the Petro-units when buying energy from the wholesaler. Finally, the primary energy provider would surrender units back to the National Register when the company pumped or imported the oil. This closes the loop.
Petroleum quotas place everyone in the same boat: households, industry, and government would have to work together, facing the same Petroleum Budget, and trading on the same market for Petro-units. Moreover, petroleum quotas are guaranteed to be effective, because the only fuel that could be purchased would be fuel within the Budget. The Budget would set a long time-horizon so that people would have the motivation and information they needed to take action in the present to achieve drastic reductions in oil use over a 20-year timeframe. For more information on TEQs, visit www.teqs.net. The Wall Street Journal published a comprehensive article in June 2006 on Tradable Gas Rights (same idea as TEQs). To read the article, click here.
12. What about natural gas and coal – should there be similar protocols for these? Might countries simply burn more coal to make up for having less oil?
The Oil Depletion Protocol will not preclude other agreements aimed at reducing fossil fuel usage in order to avoid impacts to the global climate, but it will be more ambitious in its reduction trajectory than the Kyoto Protocol or the Asia Pacific Partnership on Clean Development and Climate. If nations' experience with the Oil Depletion Protocol is positive, this will provide motivation for the forging of similar agreements covering other fossil fuels.
13. What if only a few nations sign on? Won't the Protocol be ineffectual if a few large exporters or importers refuse to do so?
At first it might seem that those nations not adopting the Protocol would achieve an advantage. However, any temporary benefit would be purchased at the expense of later economic calamity. As discussed in the SAIC Report, nations that embark on the energy transition sooner will be much better off than those that procrastinate.
