Financial Times

The report circulated to governments (…) suggests dramatic measures, such as reducing motorway speed limits by 25 per cent, shortening the working week, imposing driving bans on certain days, providing free public transport and promoting car pooling schemes.

And who’s saying this? Lefties? Envirofreaks? Eurowhiners?

Nope, it’s…

The International Energy Agency, the energy watchdog for industrialised countries created after the oil crisis of the 1970s.

IEA to call for an emergency oil plan

Oil importing countries should implement emergency oil saving policies if supplies fall by as little as 1m-2m barrels a day, the International Energy Agency will warn next month.

The figure is much lower than the official trigger of 7 per cent of global oil supply equivalent to 6m b/d agreed in the treaty that founded the energy watchdog for industrialised countries after the oil crisis of the 1970s. A fall in supply of just 1m-2m b/d would be equivalent to the disruptions during the 2003 Iraq war or the 2002 oil industry strike in Venezuela.

A warning to set up “demand restraint policies” in the transport sector, such as driving bans or shorter working weeks, is contained in a study to be published next month during the annual IEA meeting of energy ministers.

It comes as oil is trading at more than $55 a barrel and highlights the agency’s concern about the possibility of a supply shock, the economic impact of high oil prices, and the need to focus on conserving energy rather than simply encouraging higher production.

The report marks a departure in IEA policy, as it says demand restraint measures, until now confined to times of crisis, “may be attractive during extended periods of high oil prices to relieve demand pressure”.

THEY ARE OFFICIALLY PANICKING.

What this means is the following:

  • a temporary drop of only 1-2% in oil production at any time, for any cause can have dramtic consequences for the oil market, because it is so stretched.
  • supply side policies (à la drilling in Alaska) are not sufficient. Production is still increasing, but this is barely enough to cope with rapidly increasing demand, and there now is no spare capacity.
  • above 50$/bbl prices have not reduced demand; they have not even slowed growth of the demand.
  • the official cheerleader of the oil markets, the EIA, which has always been saying that production capacities were sufficient, is finally admitting the obvious: they are not, and arguing for pretty radical steps.

Price increases are not enough to balance the market when demand is so unelastic – unless they are truly of earth shattering proportions (see this previous diary which suggested that prices needed to be multiplied by 10 or 15 to have an effect on demand of another unelastic commodity), so administrative measures are going to be required.

Rationing. Get ready for it. Really soon.

And no, I am not being needlessly dramatic. Everybody has been surprised by the surge in oil demand in the past 2 years, and there simply isn’t the requisite production capacity. As I have written previously, but it bears repeating, the oil majors are not investing because they have no access to the reserves in the most attractive places (Saudi Arabia, Iran, Mexico), and the national oil companies are not investing because their governments are busily spending the windfall. Production capacity simply cannot cope.

This is not directly peak oil, but it is a kind of “political peak oil”, which is the first sign of the actual physical peak oil.