We may be in the grip of the worst economic upheaval for half a century, but the UK is still at heart a forward-looking, modern economy, isn’t it? Smogs and satanic mills are things of the past and we have a model that is resource-light and service driven, don’t we?
Perhaps not. In the UK for the first quarter of this year, £1 in every £4 paid in dividends to shareholders came from a single industry: oil and gas. And, from that sector, just two companies – BP and Shell – accounted for the vast majority.
If the banking crisis taught us one thing, it is that putting too many of your economic eggs in one sector’s basket is a very bad idea. In banking it was a bad idea because they practised Narnia-nomics (which is probably a slur on Narnia). With the oil and gas sector it is a bad idea for two reasons, which may seem contradictory: the products are both very damaging and have no long-term future. Unfortunately, however, there’s still enough oil and gas left to cause more damage than the planet can handle (and an awful lot of coal, which people may turn to as the other fossil fuels become more expensive and harder to get).
Where the damage is concerned emissions continue to drive the loss of a climate system conducive to stable, flourishing societies. A combination of steadily rising greenhouse gas concentrations and temperatures suggest that in around 78 months we will enter a new, more dangerous category of risk for creeping climatic instability, reason enough perhaps, to disinvest in fossil fuels.
The second reason is that an economy so hard-wired to the oil and gas sector is hitching its future to a long-term loser. We are already decades past the point of peak global oil discoveries, and on the cusp of the peak of oil production.
A new assessment of 14 forecasts of global oil supply underlines how the short-lived empire of oil is already well into its dotage, with the end in sight during our own lifetimes.
Some speculate that the moment at which production levels-off and begins its inexorable decline is already with us. If so, it may be only the recession, which temporarily reduces demand, that is hiding it. Several more forecasts suggest it will happen over the course of this decade – mere seconds away in the calibration of economic planning. Crucially, the study concluded that no credible forecast could put the date more than 20 years away.
Expect to see repeats of BP’s disaster at its Deepwater Horizon rig as companies seek to extend their lives of by exploiting ever-more marginal and hard-to-get reserves. Accidents happen when limits get pushed and an industry becomes increasingly desperate.
While companies like Shell, BP and Exxon may dominate the current economic landscape like leviathans, it is a feature of the end of empires that they seem permanent (especially from within) until, suddenly, they are gone.
All the more important, then, to plan for the inevitable. This is starting to happen. As the peak, plateau and decline of oil production approaches, its price will rise dramatically. Companies that are heavily exposed or, in other words, dependent on the old oil economy, will be at risk. Thinking back to the oil price spike of 2008, the ratings agency Fitch recently reassessed a range of industrial sectors for how vulnerable they will be when oil again knocks on the door of $150 per barrel. Airlines, trucking, chemicals and various consumer goods sectors look to be in big trouble. But railways and renewable energy cash-in.
It’s not just the coasts of the Gulf of Mexico that have fallen victim to our economic dependence on oil, its the climate that we depend on, for example, to grow our food, and will soon also be huge chunks of the economy.
The quicker we arrange a separation between society, the economy and the oil and gas sector, the better. This era-defining problem falls on the watch of the new coalition government. They could start by substantially capitalising the proposed new green investment bank and turning the taxpayer-owned Royal Bank of Scotland – that once proudly called itself the “oil and gas bank” and is still up to its neck in fossil-fuel financing – into a Royal Bank of Sustainability. More or less we have just the lifetime of this parliament to get money out of oil and into renewables and low-energy infrastructure.
After the bank bailout, we were left with the question, “where did the money go?”. At least if we put our resources into the great transition away from fossil fuels there would be tangible results. We would be looking at a great wave of new employment opportunities, more energy security, a less vulnerable economy and the chance for a better future.
78 months and counting …