Political Economy of Energy Security: Oil Peak and Mitigation and Risk Management Strategy

By Francis Hualupmomi
Oil peak is imminent and has severe political and economic implications in global and national economies. Given this energy security dilemma how can PNG respond to it as far as national security is concerned?
What is Oil Peak?
In economic terminology, Oil Peak is an economic situation in which the global maximum production of oil has reached a point and then slowly declines until it reaches depletion in producing countries. It is quite different from oil depletion. Oil depletion occurs when there is a decline in oil reserves and supply as opposed to peak oil which refers to a maximum point of production.
Oil is a scarce non-renewable resource which if consumed overtime exponentially will reach a maximum point of peak where it will decline either slowly or rapidly depending on the production and consumption rate influenced by the forces of demand and supply. The impact of oil peak has severe implications in the global economy.
Macro Scenario
At macro level, global demand of energy grows by 40 percent between 2007 and 2030, with fossil fuels accounting for more than three quarter of the increase.
Non-OECD countries account for 93 percent of the increase in world primary energy demand and all of the growth in oil demand, which rises from 85 mb/d in 2008 to 105 mb/d in 2030. Demand of oil is surging exponentially in the Newly Industrialized Countries (NICs) or developing countries in particular Asia with China and emerging India. OPEC is and will continue to be the major supplier of conventional and unconventional oil as non-OPEC peaks (OECD/IEA – 2009).
Modernization, industrialization and rapid population will trigger heavy dependence on energy, especially oil. China and India both have seen increase rates of energy consumption respectively to drive their modernization agenda. For instance, China has seen an 8 percent annual growth rate of energy consumption since 2008. Consumption of oil revolves around three main sectors of the economy: transport; agriculture; and industrial system. The most highly energy consumption sector is transportation with heavy consumption of commuters (personal-used vehicles) which consumes a lot of combustion fuels of about 55 percent globally.

Micro Scenario
At micro level, PNG will soon be considered as one of the major oil and gas suppliers come its full economization in 2014 should there is no social disruptions. The life span of the LNG project is projected at approximately more than 30 years sufficient to supply the global economy.
Although some petroleum pessimists predict oil depletion by 2030, PNG will still continue to meet a global demand due to the fact that it was not producing energy at the time of energy forecasting. We may expect a different scenario should and when LNG is in full operation.
In PNG, the transportation sector followed by population and agriculture are the main consumption of energy resource. The transportation sector consumes more than half of the aggregate energy consumption. With increasing population growing at about 2.5 percent annually, the demand of energy consumption will also surge imposing an acute pressure on production of oil.
Although the agriculture sector is a semi-industrial typology which consumes less energy as opposed to other sectors, the modernization drive in PNG will diversify the economy in future to modern agriculture technologies with heavy reliance on energy use. For instance, the conversion of ammonia into fertilizers through the Haber process consumes a lot of oil.
Possible Political and Economic Implications
Oil peak and depletion have severe implications in the global and national economy. First, a surge in oil price could lead to price shock and economic recession. As the oil production reaches its peak it is expected to trigger price increase. The high oil price will construct economic recession which has domino-effects in the global and national economy.
Second, the recession will cause a stiff increase in food prices leading to famine and population decline. As food prices increase, people with less income may face poverty leading to population decline. It is estimated that the world population (including PNG) will decrease by about 2 billion circa in 2050 as a resultant. For instance, people would die of malnutrition. In PNG, this situation may have severe effects in urban centers with ample settlements than in rural areas. Rural areas will face an average effect due to availability of agricultural food crops to sustain itself.
Third, we expect political instability as a result of economic instability caused by peak oil crisis. The government will be under extreme pressure from the public to restore the status quo through policy realignment. This situation may possibly lead to the final effect; social chaos and instability. It is most likely that if the government fails to manage the oil peak crisis, the populace can revolt against the state fueling social violence and disorder.
Mitigation and Risk Management Strategy
Against this backdrop of political and economic implication pose by oil peak in the future it is necessary that the government take a pre-emptive approach by developing a comprehensive Energy Mitigation and Risk Management Strategy.
It is projected that global conventional oil production may expect a decline by 2030 as predicted. The policy package should consider 63 mb/d of gross capacity to be installed between 2011 and 2030. It is viable that a 20 year advancement strategic plan is a safe precautionary security measure a country could take. Oil supply security and response measures can be approached in a two-way strategic approach:
1. The short term oil supply disruptions responses measures include: emergency oil stock draw, demand restrain, fuel switching, standby production and information sharing; and
2. Long term measures (energy policy): diversification of oil imports sources, efficiency of oil use, enhancing fuel flexibility, investment in alternative sources and technologies, removal of market impediments, and dialogue between producers and consumers.
When price increases the government can deploy demand restraint by cutting down on import/consumption through price effect, persuasion and mandatory measures, e.g. voluntary energy use reduction, temporary ban on some energy use equipments such as vehicles, market-oriented approach through auctioning of coupon. This exercise, however, may be very costly which can lead to misallocation of resources.
Fuel switching or a shift from fossil fuel to alternative fuels such as bio-fuel or nuclear energy or unconventional fuel is also important. Alternative energy could be derived from hydro, food crops, wind, ocean, etc to substitute price increase.
The standby oil production and spare capacity also helps during emergency with spare capacity to increase production. It helps as a supplement oil supply and stabilizes market. The standby production should be not less than 2.5 percent.
The emergency oil stocks have advantage by being openly available, more visible and transparent, can affect market perceptions effectively, deterrent to politically and economically motivated disruptions and avoid misallocation of resources through demand restraint.
Information sharing removes uncertainty and minimizes rogue or cheating actors. Key players in energy market can distort oil market price through cheating, hence, sharing of information among political and economic actors reduces security dilemma.
Conclusion
Oil peak is imminent given the unprecedented unsustainable production and consumption of oil globally. Given this pessimistic scenario, it is strategically imperative that the government develop a comprehensive Energy Mitigation and Risk Management Strategy to avoid possible future economic shocks and social chaos.