Every day, businesses, government agencies and households around the world plan and make decisions based on the assumption that oil and natural gas will remain plentiful and affordable. In the past few years, powerful evidence has emerged that casts doubt on that assumption and suggests that both oil and natural gas production are likely to begin to decline significantly. This phenomenon is known as “peak oil.”[1] Given the fundamental role of oil and natural gas in all levels of social, economic, and geopolitical activities, the consequences of such a change are enormous. Portland City Council created the Peak Oil Task Force by resolution to investigate the implications for Portland of a future in which oil and natural gas production is declining, prices are rising, and supply is subject to periodic volatility. The resolution charged the Task Force with addressing these issues and presenting findings and recommendations to the City Council.
The starting point for the Task Force is well summarized in the introduction to the February 2005 United States Department of Energy (U.S. D.O.E.) report, Peaking of World Oil Production: Impacts, Mitigation, & Risk Management:
The Earth’s endowment of oil is finite and demand for oil continues to increase with time. Accordingly, geologists know that at some future date, conventional oil supply will no longer be capable of satisfying world demand. At that point world conventional oil production will have peaked and begin to decline.[2]
While there is a wide range of opinions on when the peak will occur, many experts predict global oil production will peak within five years, and few anticipate a peak later than 2020. For purposes of the Task Force these debates about when the peak will occur are largely irrelevant. Fossil fuel consumption patterns cannot be substantially altered without changing the transportation and building infrastructure. Since these change slowly, action is required now even if peak production is 10 or more years away. Again, the U.S. D.O.E. report is instructive:
Mitigation will require an intense effort over decades. This inescapable conclusion is based on the time required to replace vast numbers of liquid fuel consuming vehicles and the time required to build a substantial number of substitute fuel production facilities. . . . There will be no quick fixes. Even crash programs will require more than a decade to yield substantial relief.
Development of alternative liquid fuels will help, but no credible authority believes that a significant portion of petroleum transportation fuels can be replaced by alternatives in the short term or that they can make up the whole gap, even in the long term.
To avoid unnecessary confusion and debate in the reading of this report, a crucial point of understanding is that peak oil does not imply that the world is physically running out of oil or natural gas in the immediate future. Generally, the peak of production is expected to occur at the point at which about half the resource has been used, meaning that half still remains. The crucial concern is that, while production is approaching its peak, demand for oil is rising rapidly. The inevitable collision between escalating demand and a plateau and decline in production will bring sweeping economic consequences.
The oil and natural gas we have already used were relatively cheap to obtain. Many of the existing oil fields are known to be in decline, and the remaining supplies are deeper, under water, in more extreme climatic locations and/or in politically unstable regions. All these conditions place upward pressure on production costs. Following from this, even current production levels cannot be maintained without massive, risky investments in new production that will directly increase costs. Even in a static situation, therefore, either production will fall or costs—and then prices—will rise. Unfortunately, the situation is not static. Greatly exacerbating the increasing cost of production is rapidly increasing global demand resulting from accelerating industrialization, particularly in China and India, both of which have extremely large populations. Current production capacity exceeds demand by only a few percent, and that margin is steadily shrinking. As in any market where production costs are rising, demand is rising, and supply and demand are closely matched, basic economic theory holds that:
1) Long-term prices will rise;
2) Short-term prices will be more volatile, with spikes and drops occurring at an increasing rate; and
3) Supplies will become less reliable because even small disturbances at any point in the production or delivery chains will lead to immediate shortages for consumers.
The scenario that the Task Force addressed assumed all of these outcomes would occur. The Task Force focused its efforts, however, on the impacts of gradually increasing long-term prices because the longer timeframe allows for the development and implementation of meaningful long-term policy recommendations. While the Task Force fully believes oil and natural gas supplies will likely be punctuated by sudden disruptions and price hikes that will trigger periodic emergencies, it also recognizes that it has less to add in this arena, as the consequences will be similar to other types of emergencies which are already addressed by agencies such as the Portland Office of Emergency Management.
The Task Force acknowledges the possibility of a scenario in which the impacts are so severe that society will deteriorate severely, leading to rampant unemployment, hunger, crime and violence. While such a collapse is not out of the realm of possibility, the Task Force felt it would not be constructive to focus on it because, by its very definition, such a situation implies that government is able to respond in an extremely limited way. The transition the Task Force chose to focus on is meant to mitigate the likelihood of such a collapse and to provide some ability to respond to a collapse, should one occur.
During six months of careful study, consultation and dialogue, the Task Force investigated the types of impacts that Portland may experience as a result of changes in the global supply and demand for oil and natural gas. This document briefly reviews the process the Task Force followed in developing this report, explores in detail the impacts peak oil is anticipated to lead to, and makes recommendations to City Council for responding to those impacts. This report is intended to assess Portland’s vulnerabilities in the face of wide-ranging changes in global energy markets and to provide an initial set of recommendations for addressing that challenge thoughtfully and prudently.