Workshop Briefing Document

Overview

This material has been prepared by Feasta, the Dublin-based Foundation for the Economics of Sustainability, in order to carry out a research contract we have been awarded by the (Irish) Environmental Protection Agency. The contract is to explore the effects that oil and gas depletion, and the very much higher energy prices that might follow from that, could have on where and how people will want to live and also on where and how goods are likely to be produced, and in what quantities.

Rather than making a single prediction, which would inevitably be wrong, we are developing four plausible scenarios which demonstrate a range of possible futures. Our key criteria are when oil and other fossil fuels supplies peak and how we prepare/respond to this.

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Peak Oil

Apart from occasional blips such as the oil crisis in late 1970s, world oil production has grown steadily since the 1930s. However, at some point, the depletion of reserves will make it impossible for this output growth to be maintained and the supply will level off and then begin to fall. This point at which the supply levels off is "Peak Oil".

There is a growing consensus that the world’s production of ‘conventional’ oil – that is, oil from conventional, relatively cheap-to-extract oil fields – is already at, or near, its peak and that its output will begin a steady decline within as little as five years. A group of experts, the Association for the Study of Peak Oil and Gas (ASPO) (http://www.peakoil.net), thinks that by 2030, annual output will have dropped to around a half of the current level.

If ASPO is right, it will only be possible to carry on increasing oil production by turning to unconventional sources such as the tar sands in Canada and Venezuela, or fields under polar ice caps and in very deep water offshore. As oil from these sources is very much more expensive to produce, prices are going to have to rise to not just to pay the additional costs of production but also to attract and reward the huge amount of capital that will be required. The International Energy Agency (IEA) estimates that $3,000 billion will need to be invested by the oil industry between 2003 and 2030 to keep up with world oil demand if the latter increases by 1.6% a year.

ASPO, however, thinks that it will prove impossible to develop the unconventional sources to keep up with demand. This is because it doubts whether there is enough oil under the very deep oceans to keep up with the IEA projections and, also, whether the amount of energy produced by extracting oil from the tar sands once the energy used to extract it has been deducted will be sufficiently high to make the process viable. At the moment, it claims, extraction is profitable because cheap supplies of natural gas are available to warm and liquefy the heavy tar and to provide hydrogen to turn the tar into a lighter oil. When this gas has been used up, it says, the economics of the process won’t be attractive because, no matter how high oil prices rise, all other prices will go up too.

When the oil peak is reached – and no-one disputes that it will happen one day – it will have profound effects on the world economy unless enough alternative sources of energy have been developed by then. This is because global economic growth has been made possible largely by humanity’s use of more and more energy. If the rate at which we use energy can no longer increase, the rate of growth will become glacially slow. And if energy use has to be cut, our incomes will almost certainly be cut as well.

Find out more...

• What are people saying online about Peak Oil - http://www.technorati.com/tag/peak+oil
• Wikipedia entry on peak oil - http://en.wikipedia.org/wiki/Peak_oil
• Oil Depletion in a Nutshell - http://sustainability.vividlogic.ie/index.php/sustainability/more/oil_depletion_in_a_nutshell
• The Beginners Guide to Oil Depletion - http://wolf.readinglitho.co.uk/index.html
• Association for the Study of Peak Oil - http://www.peakoil.net
• Post Carbon Institute - Learning to live in a low energy world - http://www.postcarbon.org

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Brief Introduction to Scenario Planning

Scenario Planning is a method for exploring the future that creates several plausible but challenging alternative futures rather than a single prediction. Why do this?

• A prediction is never right - the unexpected always happens and the assumptions, conscious and unconscious that apply today may not apply tomorrow.
• You either agree or disagree with a single prediction so it is difficult to gain consensus. Because scenario planning is not trying to predict the future, but only find plausible futures, consensus becomes possible.
• Good scenarios challenge our thinking and stimulate discussion, helping organisations to create a common language to talk about the future.

The scenarios to develop are chosen because they represent the extremes of uncertainty. It is traditional to choose two areas of uncertainty related to the area of study, giving four scenarios. In our case, considering the impact on Ireland or energy supply and price in the future, we thought the following areas relatively certain:

• Demand for energy is increasing
• Ireland has limited local supplies of fossil fuels and must import an increasing proportion (90% in 2004)
• Fossil fuel supplies are finite

And the following, the key areas of uncertainty:

• Time at which fossil fuel supplies will not be able to meet demand (Peak Oil)
• Whether we will be proactive or reactive in dealing with Peak Oil

Giving us four scenarios:

• Peak Oil distant, Reactive response - Business As Usual
• Peak Oil distant, Proactive response - Enlightened Transition
• Peak Oil soon, Reactive response - Localisation
• Peak Oil soon, Proactive response - Fair Shares

If we develop these scenarios well, they will be:

• Plausible
• Uncomfortable
• Very different from each other
• Very different from today
• Vivid pictures of what the future might be like

Having developed four scenario worlds, normal planning takes place, but can be challenged by looking at the impact of the scenarios on those plans.

Find out more...

• What people are discussing online - http://www.technorati.com/tag/scenario%20planning
• Wikipedia entry for Scenario Planning - http://en.wikipedia.org/wiki/Scenario_planning
• Plotting Your scenarios - an introduction to scenario planning - http://www.gbn.com/ArticleDisplayServlet.srv?aid=34550 (PDF)
• Scenario Planning Research and References - links to scenarios developed elsewhere for different sectors.

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Assumptions

We have ruled out certain events happening within the 50-year time horizon of the four scenarios, not because we think that some very real threats to our current way of life can be ignored, but purely to simplify matters. We have assumed, for example, that

• Climate change has no impact beyond an increasing frequency of floods and storms. If a major climate change occurs, such as the Gulf Stream ceasing to run, all bets are off.

• Disease or some other catastrophe does not wipe out a significant proportion of humanity.

• Powerful countries do not wage war over oil, water or other supplies leading to a worldwide destabilisation.

Our other major assumptions are:

• Ireland continues to work within the framework of the EU
• Net foreign direct investment in Ireland ceases after 2012. There would still be in inflow of capital but it would be matched by an outflow from Irish residents investing abroad. The effect of this assumption is to require that Ireland’s imports and exports balance each other and that a capital inflow does not make it possible to import more energy than would otherwise be the case.
• The world begins to take climate change more seriously and its actions to control emissions cause fossil energy prices to increase by 3% a year above trend in the post-Kyoto protocol period following 2012. Note that all energy prices are expressed in relation to wages. In other words, to eliminate inflation from the discussion, we assume that wages stay constant and that the price of energy and other goods and services move up and down in relation to them.
• Energy is required for all forms of production. If energy prices rise, we therefore assume that the price of every product rises by the extra cost of the energy used to make it. Of course, technological changes have the potential to reduce energy use and we will be asking panels of people drawn from all sections of Irish life to tell us what such changes might be. We will then use a computer model to calculate what effect the expected technological changes might have on the relative prices of each sector.

Finally, we have assumed the most positive outcomes for each scenario. Each set of circumstances could lead to far worse results.

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	Reactive Response	Proactive Response
Oil Peaks by 2030	Business as Usual Ireland continues to use current assumptions until close to peak, leaving key decisions to the market	Enlightened Transition Ireland actively prepares for transition by encouraging efficiency and uses market mechanisms to speed shift to renewable energy.
Oil Peaks by 2007	Localisation Market determines allocation of remaining oil and gas. World economy plunged into depression by high prices.	Fair Shares Energy rationed to share it fairly. World economy does well but consumption in rich countries falls.

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This project started from the idea that over the next 50 years the price of energy will rise very significantly in relation to the price of labour as a result of both oil and gas depletion and restrictions on the release of greenhouse gases in order to slow climate change. In the 1920s, the price of a litre of petrol was ten times its price in 1995 in terms of the length of time the average worker had to work to buy it. (See Folke Gunther’s article in Feasta Review No. 1 http://www.feasta.org/documents/feastareview/guenther.htm) It is not inconceivable that energy prices will return to that level.

There are, of course, an infinite number of ways in which Ireland’s energy future might work out but we have tried to set the boundaries within which that future has to lie by developing the four scenarios explained elsewhere on this site. We will be asking people drawn from the major sectors of Irish life consumers, energy suppliers, manufacturers, the construction industry, transport companies, farmers, etc how they would wish to change the way they operated if each of the scenarios came about. For example, it might take someone six months at present to earn enough to buy a new car. Would he or she still want to have one in future if a scenario indicated that it might take them five years to get enough money together because of the huge jump in the cost of the energy used to make the vehicle? And how would that decision affect where they wanted to live in relation to shops, work and schools? Would they heat their houses to the same temperature and, if not, would that affect the weight of the clothes they chose to wear?

The changes in consumer demand would have massive knock-on effects on what was manufactured, as well as how (production techniques might become smaller-scale and more labour-intensive) and where (transport costs would rise sharply). Goods would be made to last, and to be easy to repair. Nothing embodying a significant amount of energy would ever be dumped or incinerated it would all be recycled instead. (After all, we don’t dump gold now, do we?). Agricultural techniques would change. Many more horses might be used and no-till systems would become more popular. The higher cost of fertilizers might mean that the price differential between organic and inorganic food disappeared. There might be very little new construction, and what there was would be done with low embodied-energy materials such as local stone and wood. Most building activity might be improvements and conversion work.

The results of our discussions will be run through Feasta’s ECCO model of energy flows (rather than money flows) in the Irish economy to see if they can be made to be consistent with the amount of energy Ireland might be able to afford. If not, a different set of adjustments would be required and we will go back to each sector to see what they might be. In effect, the model enables one to assess what it might be possible to accomplish in Ireland if the factor limiting the level of activity here is the supply of energy rather than the availability of cash.

The main aim of the project is to get policymakers from the various sectors thinking about how their industries are going to have to change in response to energy shortages and the climate crisis. Perhaps the price of energy won’t return to 1920s levels but, even if it doesn’t, every sector in Ireland is still going to have to make the same types of change although to a lesser extent.

Feasta’s partners in the project are Larry Staudt and Ray Byrne from the Centre for Renewable Energy at Dundalk Institute of Technology, and David Crane of Sunwheel Technologies in England. Dave and Larry worked together two years ago to develop the ECCO model Comhar and Sustainable Northern Ireland are also working with us. Phoebe Bright from Vivid Logic is developing the scenarios and making this information available online.

The project will end with a conference in Dublin on Wednesday, October 12th at which the results will be presented and discussed. The conference will be open to the public and is part of the Autumn 2005 Convergence festival. After the conference we will be producing a written report.

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Overview of Business as Usual

This scenario is based on the oil and gas output projections prepared by Dr. Fatih Birol and his colleagues at the International Energy Agency (IEA). In World Energy Outlook 2004, they write:

“Global oil production will not peak over the projection period [i.e., before 2030] so long as necessary investments in supply infrastructure are made. New capacity will be needed to offset production declines and to meet demand growth. About $3 trillion will need to be invested in the oil sector from 2003 to 2030. Financing that effort will be a major challenge.”

However, if the investments are made, they think that oil output will be able to match demand, which they expect to grow from 77 million barrels a day (mb/d) in 2002 to 121mb/d in 2030. This is an annual growth rate of 1.6%, rather less than demand is growing at the moment.

For gas, the IEA team says that “resources can easily meet the projected increase in global demand” provided that $2.7 trillion, or about $100 billion a year, is invested in gas supply infrastructure between now and 2030. This level of investment would allow world gas consumption to rise at 2.3% a year to just less than double its present level.

Following the oil price shocks of 2005/2006 a significant find of oil and gas in the Siberian Arctic restores confidence in the market and oil prices return to $60, thereby growing each year by on average 3%.

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Overview of Enlightened Transition

In this scenario, the combined oil and gas peak is reached in twenty five years, just as it was in the Business as Usual one. However, in this case, the government gives leadership from 2005 onwards, enabling the business sector and the general public to avoid making stranded investments (that is, investments that are totally inappropriate to a high energy cost world) and, instead, to use energy which is much cheaper now than it will ever be again to develop Irish energy sources and to reduce the amount of energy required to maintain and run the Irish economy.

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Overview of Enforced Localisation

The world is unprepared for the oil peak when it occurs in 2007. The European central bank panics and increases interest rates in order to try and control inflation. Instead of allowing the increases in energy prices to work their way through the markets, business is stifled by increasing costs on all sides.

The lack of demand for energy causes a drop in price and supply is once again able to meet demand, but as the economy picks up, the need for fossil fuel generated energy also increases and since there has been no investment in alternatives, this quickly leads to supply shortages and the cycle repeats itself.

By 2015, oil prices are low, but unemployment high and business people are reluctant to invest having been stung by the instability of the previous years. Those businesses that survive are focused on delivering locally sourced products to local markets.

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ECCO Model

Commentary

This graph shows the indexed manufacturing output of the Irish economy, as a guide to the overall state of the economy's health. Similar indicators for other sectors, such as consumption and services, would tell a similar story.

All three alternative scenarios entail a significant decrease in economic growth compared to the BAU profile's initial buoyancy. The economy gets a real battering under the localisation scenario, from which it can't recover. Likewise the Fair Shares scenario eventually lead to economic decline as manufacturing turns small scale and local, although it weathers the storm far better, and for longer.

The enlightened transition scenario manages to achieve a steady state, just about as it much less dependent on fossil fuel imports but declines somewhat. Also in the Enlightened Transition scenario, Ireland may have installed all its available renewable energy capacity by 2040 with any excess energy requirements coming from dwindling expensive imported fossil fuels hence the moderate decline in manufacturing output after 2040.

Clearly manufacturing output in the Business as Usual scenario takes a nose dive soon after the 2030 oil peak when the cost of imported fossil fuels (as can be seen on the "Fuel Import Costs Graph) rise sharply.

These are preliminary runs of the model, in which we've fed some information into the model. The scenarios are not comprehensive by any means - all still entail some fossil fuel dependencies by 2050. What is needed now is input on further activities to help wean the economy off the increasingly expensive fossil fuels altogether.

What would you suggest?

Commentary

This graph shows a major input into our scenarios: the future trend in price of oil and gas. In all scenarios, there is a steep rise over the coming decades. In the Fairs Shares scenario the rise is steeper up to ~ 2030 as peak production occurs in the next two years but then begins to levels off as the economy has adapted to more localised energy sources and is less energy intense resulting in the demand for imported fuel getting lower. In the case of Localisation this result very erratic, following the stop-start nature of the global economy. The Business As Usual and Enlightened Transition cases follow a similar trend to eachother as the rise gets very steep after a 2030 oil peak.

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Workshop Agenda

• Discussion and questions re briefing document (20 mins)
• Feedback on briefing document - too long, too short? (5 mins)

• Breakout into two groups. Each group looks what the future of cork city might be under one scenario for 20 minutes.
• Return to one group and present scenario (10 mins)
• Repeat of other two scenarios

• Review - What went well? How could it be better?
• What next?

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