IEA official: Peak Oil is closer than we think

One of the leading figures at the International Energy Association (IEA) has this week issued a stark warning that global oil supplies could peak far earlier than expected, resulting in soaring energy prices that could blow any economic recovery off course.

In a break from the IEA's typically optimistic projections, Dr Fatih Birol, chief economist at the agency, told The Independent newspaper that global oil production was now likely to peak within 10 years and that governments were woefully under-prepared for such an eventuality.

According to an assessment of more than 800 oil fields undertaken by the IEA, the average rate of decline in oil production is now running at 6.7 per cent a year, significantly worse than the official estimate of 3.7 per cent released in 2007.

Dr Birol told The Independent that the world should be acting now to prepare for oil supplies peaking, a scenario that is likely to lead to a rapid increase in oil prices.

"One day we will run out of oil. It will not be today or tomorrow, but one day we will run out of oil and we have to leave oil before oil leaves us, and we have to prepare ourselves for that day," he said. "The earlier we start, the better, because all our economic and social system is based on oil, so to change from that will take a lot of time and a lot of money and we should take this issue very seriously."

He added that the failure of many countries to invest in increased production and the growing concentration of supplies in the Middle East could result in soaring oil prices over the next few years, potentially undermining any global economic recovery.

"If we see a tightness of the markets, people in the street will see it in terms of higher prices, much higher than we see now," he said. "It will be especially important because the global economy will still be very fragile, very vulnerable."

He also said that governments had largely failed to take the warnings on board, arguing that while they increasingly accepted that oil prices would rise, they failed to appreciate that supplies could begin to fall.

In an attempt to compensate for falling production, oil companies have increased investment in alternative sources of fuel such as tar sands in North America. However, oil extracted from tar sands is significantly more expensive than conventional oil, and the projects have been routinely criticised by environmental groups which argue that they are far more carbon intensive than traditional fuels.

Moreover, a recent report from Greenpeace predicted that oil firms and energy investors will find it harder to justify long-term investments in tar sands projects as the impact of global renewable energy and low-carbon initiatives leads to falling demand for fossil fuels.

"The idea that falling demand for oil in the EU and US will be offset by increased demand in China is increasingly open to question," said a spokesman for the green group. "For example, you now see China giving its people incentives to buy smaller cars in a manner that is even more aggressive than the fuel standards in the US and Europe. Meanwhile, Obama's recently introduced fuel-efficiency standards are expected to cut demand by a million barrels a day. "

He added that investors in oil sands developments risked getting locked into projects that require high global demand for oil to remain profitable, at a time when demand could begin to fall as a result of low-carbon policies.