The pressure mounts

North Sea oil production has 'peaked' and is now declining. The same will happen soon to global supplies. John Vidal and Ian Sample examine the potential consequences of a worldwide shortage of fossil fuels

Six years ago, the British sector of the North Sea was producing more than two million barrels of oil a day. Every barrel sold for just $12 (£7), and the government thought this output could be more or less maintained until at least 2010. The change since then has been dramatic.

The price of a barrel of North Sea crude is now over $60 (£34), and it is thought unlikely to fall; UK production in all offshore fields is 30% down on 1999 and dropping daily; and governments, major oil companies and energy analysts accept that, barring a few spikes, North Sea output will probably fall every year from now until the resource becomes physically too difficult to extract - perhaps in 20 years' time.

In resource terminology, North Sea oil has "peaked", says Chris Skrebowski, who worked in the industry for almost 20 years and who now edits Petroleum Review. At a meeting on oil depletion last week in London, he said that its decline was neither uncommon nor unexpected.

According to Skrebowski's calculations, more than 50 countries - including 10 large producers, such as Britain, Mexico, China, the US, Norway, Indonesia and Oman - are now seeing their oil production levels decline. The little good news, he said, comes from the Sudan, equatorial Africa, Kazakhstan and Azerbaijan, where production is greatly increasing.

Close to capacity

But, says Skrebowski, the world is being hit by a double whammy. Major oil companies and governments have been throwing money at exploration for years but despite far better geological knowledge, are not finding any large new fields and are unable to replenish their reserves. And although the International Energy Authority (IEA) says there is enough conventional oil to sustain 1.8% per annum growth in the world economy for 25 years, demand from countries such as China and India is exploding at more than 10% a year and straining existing refinery capacity. At a rough estimate, 90% of all the world's known reserves are now being exploited.

The combination of demand growth and supply declines, say Skrebowski and other industry analysts, suggests that the world is roughly where North Sea oil was in 1999 - close to its production peak. He compares the situation to someone trying to fill a leaking bucket. However much water is poured in, more runs out of the bottom. In the end, he says, it has to run out.

"Quite simply, we are consuming oil far faster than we can find it," Skrebowski says. "For the next three years, I believe we will scrape by. After that, it gets progressively more difficult." The exact timing of a global peak, and the speed at which supplies then decline, is fiercely debated. Some analysts give it 10 years or more, others suggest that we may have reached that point already. Skrebowski, who sees oil companies struggling to hold production levels now, and knows how hard it is for the oil industry to move, estimates 2008.

The truth is that it is impossible to know until after the event because several years of output need to be compared. But the date may be immaterial. Oil peak is bound to come, after which the only thing that countries can do is to reduce demand. Unless this is handled well, it is bound to put the brake on economic growth and lead to chaos and potentially large-scale depression. So far, there is little evidence that governments are preparing for the level of oil shocks being contemplated.

"Governments are in denial about the scale of what is needed to be done," Skrebowski says. "We are moving in to a new world without maps. We are all likely to be poorer".

Michael Meacher, the former environment minister, warns that the scale of the change required in the world economy is "nothing short of apocalyptical. Our whole civilisation is overwhelmingly dependent on oil.

"Oil will start to run out, but not abruptly. The price, however, will rise rapidly. It is bound to go over $100 (£57) [a barrel], rising much further. The majority of countries do not have oil and will be forced into a tailspin of decline. It is likely that there will be violent disruptions, and mass refugee movements on a scale we have never seen."

Meacher calls for an immediate, if temporary, "bridge" economy that shifts demand from oil to gas, imposes taxes on heavy users, rebates on cars that use little, and carbon budgets for each sector.

"But gas is a risk, too," he says. "It is also declining. The UK is now a net importer of gas and is likely to import 80% of its needs by 2020, mainly from unstable countries."

Beyond that, Meacher would recommend a massive global energy conservation drive and putting more international pressure on the US to use less. "The volume of energy wasted [in the world] is almost unbelievable," he says. "US power stations discard more waste energy than is needed by the whole Japanese economy. Only 15% of energy in a car actually gets to the wheels. A 3% increase in US car efficiency would mean that no oil had to be imported from the Gulf."

While rich countries could buy time as supplies declined, that would not be an option for long, says Richard Douthwaite, a former UK government economist now working on the a study of oil depletion for the Irish government. "Business as usual will just not be possible," he says. "What do you do when a vital commodity becomes scarce? The rich cannot be allowed to take it all. The only option may be for a world rationing system for oil."

Handled correctly, he says, the lower output of oil may be environmentally and socially good. "It gives us a chance to change a lot of things that are clearly going wrong now. The climate crisis and the energy crisis are coming together."

To survive on the other side of a global oil peak, Douthwaite says, economies will have to be drastically restructured. "The real danger is that banks will jack up interest rates to stop inflation. The cost of business will inevitably rise. All prices in the economy will have to change because everything is dependent on oil. Every price in the world will have to change to reflect the carbon content of goods, and the new cost of energy."

Andrew Simms, policy director of the New Economics Foundation, says that the price hikes after an oil peak would be catastrophic for poor countries. The 1974 oil crisis laid the foundation for the Latin American debt crisis, when demand contracted, export prices collapsed, and interest rates went through the roof.

Food crisis

Any oil shortage would, says Tim Lang, professor of food policy at City University, effectively cause the collapse of the whole British supermarket system. The slick operation, which depends on air freight, tens of thousands of lorries, giant distribution points, intensive farming and out of season production, around the world, depends from start to finish on oil. Were prices to rise dramatically, the system would, he says, show its fragility.

What is badly needed to avert a future collapse, he says, is a plan B. "Food today travels further to our shores and further on our roads to reach supermarkets further from our homes than ever before. The result is a finely-honed system that is woefully vulnerable to oil prices.

"The entire system is incredibly fragile. Four companies sell 70% of all the food in Britain and 1,500 shops provide food for half of the country. If you remove oil, frankly, everyone is kebabbed."

But like others, he sees the potential for a much healthier food supply system emerging from a food crisis brought on by oil shortages. One plan B that might emerge in Britain, he believes, is a return to localism that could change the landscape of the country. Whether forced by rising costs or pre-empted by the prospect of them, the centralised food distribution system run by a handful of companies could give way to the microdistribution of produce grown locally and sold locally, driving a resurgence in community shops at the expense of supermarkets.

Cities, he says, would have to adapt. Many, as with London, feed themselves by bringing in produce from around the world instead of living off the surrounding land. "The land around London that once fed the city now goes to stockbrokers' ponies. It's bonkers," says Lang. "The current system is simply unsustainable."