Kumhof and Keen’s work is of interest because of their attempts to model how the economy works, and by so doing, attempting to forecast how the economy might unfold in the future under different sets of scenarios. What’s particularly interesting about the models they’ve built is that they’re based on fundamentally different theories of how the economy is believed to work. Kumhof’s model is based on the economic theory thought to everyone today as ‘economics’ based on the assumption of equilibrium between supply and demand, called general equilibrium theory, and also known as neoclassical economics. In stark contrast, Keen’s starting point is that the economy is rarely if ever in equilibrium, a dis-equilibrium theory.

Kumhof was centrally involved in a piece of research published in the IMF’s World Economic Outlook last April on the impact of peak oil on the global economy: Oil Scarcity, Growth, and Global Imbalances. Included below is a graphic showing the oil supply scenarios considered and another showing the model’s forecast global GDP based on the shock associated with each scenario:

Kumhof gave a very compelling presentation in Dublin last October when he came to present on this work.

Eqaully, Keen, when he presented at the IIEA last November, gave a compelling presentation on how the Global Financial Crisis, or GFC as the Australians like to call it, was no black swan event and was forewarned by a small group of economists outside the mainstream (see Bezemer for an overview of who saw it and why). Keen actually built the foundation for his economic modelling approach back in 1995, and forewarned back then that we were on an unsustainable track. Curiously, around the same time ASPO’s founder, Dr Colin Campbell started his work to warn the world of peak oil. He has since coupled his purely monetary model with a physical stocks-and-flows model to look at carbon emissions and energy consumption in the Asia Pacific region as part of a study for UNEP on resource efficiency (REEO). The scenarios considered and the results emerging are fascinating.

The Irish Context

ASPO Ireland has invited Australian economics professor, Dr. Steve Keen, to Dublin to give a series of lectures as part of his global tour to support the recent publication of a revised edition of his book ‘Debunking Economics‘.

His visit is already generating debate over on the IrishEconomy website.

During his trip he will be presenting at several events:

TASC Economists (4:30pm Tuesday 15th)

ASPO Ireland/Feasta (7pm Tuesday 15th)

IIEA Economics group (open event) (11am Wednesday 16th)

A brief economic explanation of Peak Oil by Chris Skrebowski

Graph 3 Shows the development of oil prices and illustrates the $10/year trend (red line)

The conclusion appears to be that:

Unless and until adaptive responses are large and fast enough to constrain the upward trend of oil prices, the primary adaptive response will be periodic economic crashes of a magnitude that depresses oil consumption and oil prices. These have the effect of shifting consumption from incumbent consumers—the advanced economies—to the new consumers in the developing economies.

This is exactly what happened in the last recession when between the start of the recession in January 2007 and its effective end in 1Q 2011 demand rose by 4.3 million b/d in the non-OECD area and fell by 4 million b/d in the OECD area.

Weak World GDP Growth & “Peak Oil” by Bob Hirsch

As we previously forecast, the decline in world oil production is likely to occur in the next 1-4 years…

Beginning in 2004, world oil production (total liquids) has been on a fluctuating plateau, as shown below.

Hirsch’s warning that we’ve got at best 4 years before terminal decline is particularly disconcerting. It leaves us with barely time to brace for impact, let alone attempt to get out of the way. The Initial Thoughts article published yesterday took a high level look at Ireland’s oil consumption and looked at an illustrative scenario to halve consumption by 2020, effectively rolling us back to where we were in 1990. It was not possible without a drastic (2/3) reduction in private car use. The chart below extends the data back to 1970.

We can clearly see the impact of the second oil crisis on our consumption, although it doesn’t appear to have had much impact on GDP (worth further investigation to understand why). The steepest future demand scenarios reflect the reverse side of the steep rise in the 90′s. Between 1990 and 2000 we doubled our oil consumption and GDP. The charts below show a strong correlation, the direction of causality being the subject of much debate, with Ayres-Warr arguing that there is a positive feedback between the two, but energy being the critical enabler:

If this relationship holds on the way down, as it did on the way up, we should expect the economy to shrink back according to oil availability. Whether and to what extent this relationship works in reverse should be the focus of much considered attention. One important factor will be the cause of the reduction. If it’s because of high price imposed by market factors, then that could have a very different impact than if we implement policies ourselves to force us down the curve.

SEAI’s 2009 Transport Statistics report is a great resource, some highlights worth mentioning in this context include the chart below showing a strong link between personal consumption and private car travel.

What’s interesting about the average distance data is how it demonstrates that our cars spend most of their time stationary. At an average speed of 30 kmph, it takes just over 500 hours to hit the average distance travelled by an Irish petrol car. Assuming normal driving hours are between 7am and 9pm (14 hours/day x 365 days = ~5,000 hours), the car spends 90% of its time going nowhere.

The vast majority of private cars are less than 10 years old, the average life of a car in Ireland is almost 7 years. Even if we get back to the heady days of 100k new cars each year, and assuming petrol cars were outlawed, forcing everyone to buy electric, it would take 10 years to replace half the nearly 2 million private cars in Ireland (in the scenario being considered here, the remaining half needing oil will be recycled for parts).

The chart below, extracted from a report by the CSO, presents a vivid image of those most vulnerable from a transport perspective to oil price volatility or availability.

Finally, for the jet-set among us, it’s worthwhile to understand where most of our airline travel is destined. The link with the UK and EU clearly evident. I don’t know if the data is available, but it would be useful to see a breakdown of this data into purpose of travel, business versus tourism. The government’s strategy of reinvigorating the economy through tourism may be misplaced.

If there is a non-negligible risk of future oil scarcity in the near term, then it would be negligent not to manage the associated risks.

Dr Kumhof presented a wealth of very useful information, and more importantly, an approach to understanding our economy’s dependence on energy and oil in particular, that needs to be repeated for Ireland. Below are some initial thoughts using headline data from the IMF and SEAI.

The chart above shows total oil consumption in Ireland on energy related activities (95% of all oil used) [source]. Clearly, the lions share goes into Transport, although Residential use is also substantial.

A closer look at the Transport sector demonstrates that private cars are the single largest consumers. Consumption by rail and public passenger services is paltry. ‘Unspecified’ and ‘Fuel Tourism’  are remarkably significant and will be looked into further in future research.

Let us next take a look at historic consumption and future projections, which were prepared by SEAI [source]:

Included in the chart of oil consumption is GDP data from the IMF’s WEO database [source]. The scenarios shown include SEAI’s Baseline scenario, which used the 2009 growth forecasts from the IMF (since reduced in 2010). It also includes the impact of two action plans (AP) focused on energy efficiency (NEEAP) and renewable energy (NREAP). The IMF’s April WEO considers the scenario of a 2% decline in oil availability, which is also included here from a demand perspective. To halve our oil demand by 2020 required an annual 6% reduction. Given the strong historic correlation between oil consumption and GDP, one worries about our ability to produce the growth anticipated by the IMF while reducing oil demand, at least without a very clear plan for achieving it.

The argument for pushing the Nation down the curve ahead of a shortage is to build some resilience into our economy and reduce the risk of our current high degree of exposure. There is obviously a cost associated with such an insurance policy, just as there is a cost if we’re caught unprepared. It’s a political call as to what’s an appropriate balance of cost, benefit, and risk. The present concern is the general ignorance surrounding the nature and potential cost of the risk we’re taking by doing little or nothing to prepare.

To see what an aggressive reduction in oil consumption for Ireland might look like, I set some headline targets for 2020 to see what it would take to achieve based on current patterns of usage. I started by assuming Industrial and Agricultural usage would remain flat, although I averaged agriculture over the last 10 years on the assumption that there would be an increase in activity, while industrial use could be expected to become more efficient, allowing greater output with the same input, sensible but arbitrary assumptions. I then assumed a doubling in demand for rail and public transport. I assumed road freight transport would double in efficiency. I assumed residential and commercial/public services would make large gains by reducing to 45% of current usage. I assumed aviation demand would halve, again arbitrarily. I then made the very dramatic assumption of a 2/3 cut in demand from private cars. It’s not possible without a collapse in the economy, but I wanted to look at what it would take to halve current consumption in transport overall.

Here’s what the scenario looks like:

Based on what we know from Hirsch, Ayres/Warr, and the IMF, such a dramatic reduction in demand over a relatively short period would only be observed in a situation where the economy effectively collapsed. However, if we don’t make a plan now to figure out how to reduce our dependence while we’re trying to resurrect the economy, we’re going to end up in a very vulnerable place. This is an opportunity, we can’t afford to miss it.

Assessing the Risks

Energy Security and the Global Economy

Dr. Roger Bentley [slides]

Prof. Robert Ayres [slides]

Dr. Michael Kumhof [slides]

Following up on our June seminar Energy Security and Competitiveness in a Rapidly Changing World, our next seminar expands on the recent warning from the IMF, published in their April 2011 World Economic Outlook, on the risks of oil scarcity to the global economy.

Access to affordable, reliable, and sustainable energy is a matter of national security, particularly so for a state such as Ireland, heavily dependent on increasingly expensive imported fossil fuels. Since the last seminar we have seen the unprecedented release by the International Energy Agency of their strategic oil reserve in an attempt to ease pressure on rising prices, further oil price volatility, and continuing economic stagnation in Europe and the US.

Dr. Michael Kumhof, a Deputy Chief at the International Monetary Fund will present his latest research on energy augmented macroeconomic models which formed the basis of Chapter 3 of the IMF’s April World Economic Outlook, entitled ‘Oil Scarcity, Growth, and Global Imbalances’. This work is a noteworthy departure from classical economic growth modeling methodologies. He will be joined by Dr. Robert Ayres (INSEAD) and Dr. Roger Bentley (UK ERC), whose respective work on the role of energy in economic growth and oil production forecasts, were referenced in the IMF study.

This seminar will highlight how

• traditional models of economic growth exclude energy as a factor of production
• present a new model incorporating energy as a factor of production (Ayres)
• present an overview of a comprehensive study of future oil production forecasts and their attendant risks (Bentley)
• an updated IMF model for economic growth incorporating oil and considering different future availability scenarios (Kumhof)

	Dr. Michael Kumhof Deputy Chief, Modeling Unit, Research Department, International Monetary Fund	Dr. Kumhof prepared the economic model and ran the oil supply scenarios published in Chapter 3 of the IMF’s April 2011 World Economic Outlook.He will present his latest work on the impact of different future oil availability scenarios on economic growth.
	Dr. Robert U. AyresProfessor Emeritus, INSEAD	Prof. Ayres is a co-author of The Economic Growth Engine: How Energy and Work Drive Material Prosperity and Crossing the Energy Divide: Moving from Fossil Fuel Dependence to a Clean-Energy Future. He has published ground-breaking research into the role of energy in determining economic growth, raising fundamental questions about our conventional models for economic prosperity.
	Dr. Roger BentleyUniversity of Reading	Dr. Bentley is a leading expert in energy and oil production forecasts. He co-authored Global Oil Depletion (2009), a report commissioned by the UK Energy Research Council. He has studied the often controversial debate on oil production forecasts since the oil crises of the 1970’s and attended the IEA’s meeting in 1997 on oil reserves which formed the warning in their 1998 World Energy Outlook, a warning repeated in their 2008 WEO.

ASPO Ireland has teamed up with SEAI, who will host the event.

To see what is in front of one’s nose requires a constant struggle – Orwell

ASPO Ireland was invited to return this year (last year) to Cultivate‘s Rethink Tank at Global Green, a part of the Electric Picnic festival, to participate in a panel discussion on How green is Ireland? The panel was chaired by Davie Philip of Cultivate, and participants, along with yours truly, were Gavin Harte, Taja Naidoo, and Eamon Ryan.

Gavin kicked off proceedings with a ‘lively’ talk, so lively in fact he had the audience squating up and down for 5 minutes to let them ‘feel’ what 40W of power was like (think of a light bulb). He then told them that to power Ireland requires about 20GW  - imagine the entire population of Europe squating – ALL THE TIME – to power just the Irish economy. I put the graph below together to give you a sense of the scale of our dependence on mostly imported fossil fuels. We shouldn’t expect to be able to replace all of that with wind (that blip at the bottom of the graph), wave, biomass, etc. in any meaningful timeframe, so our challenge is as great to reduce demand to a level that supply can meet. If we have ambitions to continue to enjoy something approaching the relatively high standard of living we currently enjoy, then that will require a complete re-engineering of Irish society to operate on a much lower energy demand basis.

To this end, Eamon Ryan, former energy minister and now leader of the Green Party, warned that the way to engage the general public in this transformation was not to scare them with dire warnings about Peak Oil and Climate Change and called for a massive investment in the Smart Grid. I suspect trying to resurrect your political career on the back of a spent political force in Ireland is a daunting task. And no politician has ever been elected for promising bad news. The economic risk posed by peak oil is not being managed by anyone at a government level, and the NAMA project, a 50 billion euro bet on going back to a paradigm that peak oil makes impossible, is what we’ve got instead of a Smart Grid. Admittedly, his analysis is correct, but it’s a lot easier to shout from the sidelines than get it done at the cabinet table.

And so to another fool wasting his sweetness on the desert air… and the general trust of my comments on the day, namely paradigms are funny things. I opened by describing the challenge Copernicus faced trying to convince us that maybe we were the ones going around the sun, rather than the other way around. Copernicus only saw a pre-publication draft of his work on his death-bed, waiting 20 years to release to the world the results of his study of the motion of the planets. His acolyte, Galileo, was threatened with excommunication for teaching his students Copernicus’ work. It’s often hard to appreciate how much of what we believe to know is simply socialised knowledge, what everyone believes without question, a paradigm. And to question it is to question the legitimacy of a whole network of beliefs that build up around it. The happy belief that we are at the centre of our universe ties in quite conveniently with our creation myth as recorded in the Book of Genesis. To challenge that story means taking on the whole of society in a pervasive belief network that is stable for all the reasons that society is generally stable.

So too Darwin, who sat on his theory of evolution for 20 years before being forced to publish it to beat a competitor to the printing press. He was acutely aware that he was taking on the Church and everyone who believed in it when he suggested man had descended from the apes rather than, per the Book of Genesis (again), had life breathed into him by God on the 6th day.

Similarly, it is now a generation since Dr. Colin Campbell, founder of ASPO, published his first study of oil depletion, The Golden Century of Oil. In that generation, in which he forewarned that global oil production could peak as soon as the year 2000, consistent with M. King Hubbert, leaving industrialised society with, at worst, just a decade to take appropriate steps to prepare, all his warnings were wilfully ignored. Much worse, he was denounced as a heretic by his colleagues in the oil industry and the economics profession, who pointed out that higher prices will induce us to find new and alternative sources of energy.

Now, 20 years later, we have casual announcements by the International Energy Agency (IEA), that conventional oil peaked in 2006 and that governments would have been well to have started preparing ten years ago. The challenge that Dr. Campbell faced in proposing his peak oil theory is the threat it posed to the unquestioned faith in the paradigm of economic growth. There is no energy source that we’re currently aware of that can replace the one third of the global economy’s energy supply that comes from liquid petroleum: not wind, not nuclear (fission). 84 million barrels per day (mbpd) equates to 5,600  GWs of wind power or 17,000 GWs of turbines (we installed 40GW last year globally to bring the total to 200GW). Very soon (“there is a significant risk of a peak before 2020″, UK ERC), global oil supply is going to start declining, ASPO’s best estimate is 3% per annum, equivalent to 2.5 mbpd (500 GW of turbines). The green establishment rhetoric is calling for an orderly transition to non-fossil fuels. Given the numbers above, the transition is unlikely to be anything but orderly. And the biggest transition to be made is in our belief systems, in our very paradigm of living.

So to the panel’s question – How green is Ireland? For many tourists who visit our shores each year, very! Yet our new Fine Gael/Labour government are probably sympathetically described as ‘struggling’ with the green political agenda, less clear is whether they’re struggling to dismantle it completely. Not only that, there is an agenda being pushed by certain quarters to eschew the virtues of wind energy and continue the dash for gas, or as we heard recently from the IOOA, the opportunity to develop the massive but untapped oil/gas potential off the West coast of Ireland. The desperate claims of a society in need of its energy fix. Just like digging up the tar sands and defining the borders under the arctic ice so that we can exploit the expected natural resources underneath once the ice melts. The behaviour of a rational and well informed society acting with a social conscience or the nihilism of a heroin addict in need of their next fix?

In an era when the green agenda is largely disenfranchised, it’s easy and convenient to attack the straw men that are our new Minister’s for Energy and Environment. However, to do so is to forget that they were elected by the majority to sweep away those previously filling our Dail and get our economy ‘back to growth’. The legal contract between mortgage holders and their bank managers is that they will repay their loan, the social contract between parents and their children is that they will enjoy, at the very least, the same standard of living as their parents. And so the general public’s demand for a return to economic prosperity (and therefore growth from our current dire predicament) is premised on a return to something that no longer exists in our future, cheap energy. To understand why that is so, is to understand the peak oil argument. Encouragingly, the upcoming ASPO/SEAI event (Oct 10th) with the IMF on their recent study of the impact of oil scarcity on the global economy offers fresh insight from a very credible source into this enormous challenge, and more importantly, a challenge that fundamentally undermines our socially constructed understanding of the world we live in and our expectations for the future, much as Copernicus and Darwin did in their time.

We should learn from them and better appreciate how societies can be blind to the reality staring them in the face. We should also be mindful that, while Copernicus and Darwin’s theories undermined the faith of entire societies, whether one believes that the sun goes around us or vice versa would have little material impact on the day-to-day life of the average medieval citizen. To suggest that the remarkable standard of living that the fortunate among this planet’s 7 billion and growing homosapiens enjoy, only made possible by our exploitation of Nature’s stored reserve of ancient sunlight, a reserve we’re extinguishing in but the blink of an eye, is threatened by a decline in that energy supply, is to shake the very roots of our secular beliefs in as profound a way as Darwin threatened our religious beliefs in a different time.

Modern society is as fraught with conflicts of secular dogma as was medieval society with religious dogma. To acquire a new world view, a change of paradigm, is comparable to a religious experience. (Cotgrove, 1982)

In which case, don’t be surprised if mainstream society doesn’t want to hear your story about Peak Oil or Climate Change. Do what you can to build a safety net. Do what you can to keep yourself sane while you exist in a paradigm that most of the people around you simply cannot see or comprehend. Much like the rebels in The Matrix awakening people from their machine induced dream, try to find open minds and help release them, but understand that others will see you as a threat to the legal and social contract they have with their bank manager and children, and their hopes and expectations for the future.

How Green is Ireland? Very. Now get on with the job at hand.

On June 13th 2011, the Sustainable Energy Authority of Ireland (SEAI) is hosting a seminar on “Energy Security and Competitiveness in a Rapidly Changing World” to be opened by the Minister for Communications, Energy and Natural Resources, Mr. Pat Rabbitte T.D.

Energy security is becoming a more pressing issue globally, with its potential economic and social implications being raised recently by bodies such as the International Monetary Fund and the International Energy Agency. There is growing concern about the risks of disruption related to oil in particular, with prices high and demand likely to considerably outstrip supply growth in the coming years. Ireland’s large renewable energy resource, coupled with a greater immediate emphasis on efficient use of all energy, represents a path out of our dependence that also offers opportunities for enterprise and export growth. Energy security is now an important national strategic issue for Ireland.

Attendees will hear from leading energy professionals on the changing international context, the impact of energy security on our competitiveness and our opportunities for change and mitigation.

The speakers are:

· Mr Pat Rabbitte T.D., Minister for Communications, Energy and Natural Resources,

· Richard O’Rourke, Association for the Study of Peak Oil and Gas (ASPO)

· Katrina Polaski, Head, Low Carbon Technologies, SEAI

· Fergus Cahill, Irish Offshore Operator’s Association

· Peter Clinch, Jean Monnet Professor (Economic Integration/Environmental Policy) at University College Dublin (UCD)

Watching Barack Obama walk off Airforce One this morning in Dublin airport into a very blustery day, it inspired me to take a look at the Eirgrid website to see what kind of power our wind turbine fleet is generating.

I then thought I’d take a look at what our overall energy consumption looks like.

We’ve a long way to go to fill the gap currently occupied by fossil fuels, oil in particular.

The potential for good news is in the generation report published by Eirgrid, summarised in the chart below. It shows that if all the renewable generation (RES-E) resources are built out then, we go a long way towards bridging the gap.

However, while the nameplate generation gets us past the 20GW mark, when it’s adjusted for average power output (capacity factor), it drops below 10GW, and below fossil capacity. Theoretically, an all-electric car fleet would halve our oil consumption, reducing demand by about 5GW.

Bottom-line: it’s do-able, but it will be a squeeze.

[NOTE: power figures are calculated by converting the annul figure in ktoe from the SEAI's report 'Energy Forecasts for Ireland to 2020' into an annual average in MW]

The latest International Monetary Fund (IMF) World Economic Outlook (WEO) published last month (April 2011) makes for very interesting reading, Chapter 3 specifically: “Oil Scarcity, Growth, and Global Imbalances”.

Considering the findings of the report, it’s remarkable the relatively little press the report has received, and I can find none in the Irish media. All the more remarkable considering their role in our bail-out.

Chapter 3 considers four future oil production scenarios, one of which being a ‘Peak Oil’ scenario (Scenario 2):

• Benchmark scenario
• world oil production increases by only 0.8% versus business as usual (BAU) 1.8%
• Scenario 1: Greater substitution away from oil
• assumes a more optimistic long-term elasticity of 0.3, almost five times as high as that used in the benchmark scenario
• Scenario 2: greater declines in oil production
• -2% per annum (-3.8% vs. BAU)
• 4% real increase in extraction costs per year (vs 2% in benchmark scenario)
• Scenario 3: greater economic role for oil
• the contribution of oil to output (either directly or as an enabler of technology) amounts to 25 percent in the tradables sector and 20 percent in the nontradables sector (rather than 5 percent and 2 percent).

Oil production assumptions in the IMF model

The chart above demonstrates the oil production scenarios used in the model.

For this study, the researchers took the IMF’s ‘standard’ economic model, GIMF (Global Integrated Monetary and Fiscal Model), which is a multiregion dynamic general equilibrium model, and made some rather ground-breaking modifications – at least if you’re a neoclassical economist.

The main difference between this application and the standard version of the GIMF is that oil is a third factor in an economy’s production, in addition to capital and labor, and a second factor in final consumption, in addition to goods and services. The price and availability of oil therefore influence production as well as consumption possibilities.

This is a very substantial break from the conventional Solow-Swan model (for which Solow won the Nobel Prize in 1987). This thinking reflects that described by Ayres & Warr (referenced in this IMF report) in their recently published book ‘The Economic Growth Engine‘ (2009). They develop a metabolic model of economic activity based on exergy and efficiency as the primary determinants of economic growth in industrial society. This allows them to drop the critical assumption of ‘technological progress’, while still explaining GDP growth. Ayres & Warr critically deconstruct neoclassical economics and highlight, yet again, its shortcomings as a model to explain and forecast economic performance. As such they represent yet another paradigm shift away from the old school. That the IMF would see fit to adopt it for this report demonstrates how the paradigm of the old school is starting to be replaced because of the failures of the old.

The authors then model oil demand using a function based on consumption elasticities. Long- and short-term elasticities are determined  using a regression model of per capita oil consumption and real per capita GDP. The results bear out the belief in the special nature of oil:

• very low short-term price elasticity, about –0.02. This implies that a 10% increase in oil prices leads to a reduction in oil demand of only 0.2%
• long-term price elasticity is 4 times larger, implying a 10% permanent increase in oil prices reduces oil demand by about 0.7% after 20 years.
• short-term income elasticity is about 0.68, implying that a 1% increase in income is associated with an increase in oil demand of 0.68%

The authors’ paradigm shift is only partial, they’re still principally using a general equilibrium model. Yet, even in this regard, they explicitly acknowledge the limitations of their model:

In each of the GIMF scenarios, the transition to a new equilibrium is, by assumption, a smooth process:
- consumers in oil-exporting economies easily absorb large surpluses in goods exports from oil importers,
- financial markets efficiently absorb and intermediate a flood of savings from oil exporters,
- businesses respond flexibly to higher oil prices by reallocating resources, and
- workers readily accept lower real wages.
Some of these assumptions, however, may be too optimistic.

Indeed.

The results of the simulation are summarised below:

The report observes, that based on its simulations, the benchmark scenario is relatively benign. Scenario 1, an admittedly optimistic scenario, given the assumption made, of a gradual move to a reduced dependence on oil, is moderately better. From there on the scenario results become rather unsettling. Scenario 2 (the ASPO scenario), results in an immediate tripling of oil prices, going to 800% increase at the end of the simulation period, 20 years hence. Of more interest to our politicians (and paymasters) is the impact on economic growth and Europe’s current account. The results from scenario 3 (pseudo Ayres-Warr) are to double the negative impact of the benchmark scenario, putting it between the worst case scenario (ASPO) and the benckmark scenario in terms of impact on GDP.

However, the study fails to consider the very obvious possibility of a combination of Scenarios 2 and 3, i.e. both ASPO and Ayres-Warr being correct. If the Ayres-Warr scenario doubled the impact of the benchmark scenario, then we might reasonably assume that it will do the same to the ASPO scenario, making the worst-case twice as bad.

The report summarises the scenarios, pointing out:

But if the reductions in oil output were in line with the more pessimistic studies of peak oil proponents or if the contribution of oil to output proved much larger than its cost share, the eff ects could be dramatic, suggesting a need for urgent policy action.

From the references, the authors studied the Hirsch Report (2005) and the work of the UK ERC’s Global Oil Depletion Report (2009). Undoubtedly the most significant finding from the ERC report is:

A peak in conventional oil production before 2030 appears likely and there is a significant risk of a peak before 2020. Given the lead times required to both develop substitute fuels and improve energy efficiency, this risk needs to be given serious consideration

What does the IMF consider are the policy implications?

Fundamentally, there are two broad areas for action:
First, given the potential for unexpected increases in the scarcity of oil and other resources, policymakers should review whether current policy frameworks facilitate adjustment to unexpected changes in oil scarcity.
Second, consideration should be given to policies aimed at lowering the risk of oil scarcity, including through the development of sustainable alternative sources of energy.

Given the impact of the banking crisis on Ireland’s economy, probably the most salutary warning in the report, in light of what’s gone above, is regarding the threat Peak Oil poses to our already fragile banking system:

The adverse effects of large-scale bankruptcies in such industries [car manufacturing, airlines, trucking, long-distance trade, and tourism] could spread to the rest of the economy, either through corporate balance sheets (intercompany credit, interdependence of industries such as construction and tourism) or through bank balance sheets (lack of credit after loan losses)

The challenge we face, from a policy perspective, is getting the mix of short-term and long term policies right such that we can get through the near-term disruptive risks on the long road to decarbonising our society.

The area of appropriate policy responses will be explored in a future post.

Contents:

Tensions from the Two-Speed Recovery: Unemployment, Commodities, and Capital Flows

Chapter 3. Oil Scarcity, Growth, and Global Imbalances
1.What Are the Main Findings?
2.Has Oil Become a Scarce Resource?What is oil scarcity?

• How do we measure scarcity?
• What lies behind the apparent increase in oil scarcity?
• What are the prospects for overall energy consumption?
• What are the prospects for oil demand?
• What are the prospects for oil supply?
• What are the implications for oil scarcity?

3.Oil Scarcity and the Global Economy

• What is the model and how is it calibrated?
• How will lower oil supply trends affect the global economy?
• Alternative scenarios?
• Scenario 1: greater substitution away from oil
• Scenario 2: greater declines in oil production
• Scenario 3: greater economic role for oil
• Summary of the simulations
• Additional considerations

4.Implications for the Outlook and Policies

Appendix 3.1. Low-Frequency Filtering for Extracting Business Cycle Trends
Appendix 3.2. The Energy and Oil Empirical Models
References