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PaulS's picture

Lloyd's warns of dire 'peak oil' consequences

One of the City's most respected institutions has warned of "catastrophic consequences" for businesses that fail to prepare for a world of increasing oil scarcity and a lower carbon economy.

The Lloyd's insurance market and the highly regarded Institute of Strategic Studies (ISS, known as Chatham House) says Britain needs to be ready for "peak oil" and disrupted energy supplies at a time of soaring fuel demand in China and India, constraints on production caused by the BP oil spill and political moves to cut CO2 to halt global warming.

"Companies which are able to take advantage of this new energy reality will increase both their resilience and competitiveness. Failure to do so could lead to expensive and potentially catastrophic consequences," says the Lloyd's and ISS report "Sustainable energy security: strategic risks and opportunities for business". (google it to download)

executive summary

1. BUSINESSES WHICH PREPARE FOR AND TAKE ADVANTAGE OF
THE NEW ENERGY REALITY WILL PROSPER – FAILURE TO DO SO
COULD BE CATASTROPHIC
Energy security and climate change concerns are unleashing a wave of policy initiatives and investments around the
world that will fundamentally alter the way that we manage and use energy. Companies which are able to plan for and
take advantage of this new energy reality will increase both their resilience and competitiveness. Failure to do so could
lead to expensive and potentially catastrophic consequences.

2. MARKET DYNAMICS AND ENVIRONMENTAL FACTORS MEAN
BUSINESS CAN NO LONGER RELY ON LOW COST TRADITIONAL
ENERGY SOURCES
Modern society has been built on the back of access to relatively cheap, combustible, carbon-based energy sources.
Three factors render that model outdated: surging energy consumption in emerging economies, multiple constraints on
conventional fuel production and international recognition that continuing to release carbon dioxide into the atmosphere
will cause climate chaos.

3. CHINA AND GROWING ASIAN ECONOMIES WILL PLAY AN
INCREASINGLY IMPORTANT ROLE IN GLOBAL ENERGY SECURITY
China and emerging Asian economies have already demonstrated their weight in the energy markets. Their importance in
global energy security will grow. First, their economic development is the engine of demand growth for energy. Second,
their production of coal and strategic supplies of oil and gas will be increasingly powerful factors affecting the international
market. Third, their energy security policies are driving investment in clean energy technologies on an unprecedented scale.
China in particular is also a source country for some of the critical components in these technologies. Fourth, as ‘factories
of the world’, the energy situation in Asian countries will impact on supply chains around the world.

4. WE ARE HEADING TOWARDS A GLOBAL OIL SUPPLY CRUNCH
AND PRICE SPIKE
Energy markets will continue to be volatile as traditional mechanisms for balancing supply and price lose their power.
International oil prices are likely to rise in the short to mid-term due to the costs of producing additional barrels from difficult
environments, such as deep offshore fields and tar sands. An oil supply crunch in the medium term is likely to be due to a
combination of insufficient investment in upstream oil and efficiency over the last two decades and rebounding demand
following the global recession. This would create a price spike prompting drastic national measures to cut oil dependency.

5. ENERGY INFRASTRUCTURE WILL BECOME INCREASINGLY
VULNERABLE AS A RESULT OF CLIMATE CHANGE AND
OPERATIONS IN HARSHER ENVIRONMENTS
Much of the world’s energy infrastructure lies in areas that will be increasingly subject to severe weather events caused by
climate change. On top of this, extraction is increasingly taking place in more severe environments such as the Arctic and
ultra-deep water. For energy investors this means long-term planning based on a changing – rather than a stable climate.
For energy users, it means greater likelihood of loss of power for industry and fuel supply disruptions.
Lloyd’s 360° Risk Insight Sustainable energy security: strategic risks and opportunities for business

6. LACK OF GLOBAL REGULATION ON CLIMATE CHANGE IS CREATING
AN ENVIRONMENT OF UNCERTAINTY FOR BUSINESS, WHICH IS
DAMAGING INVESTMENT PLANS
Without an international agreement on the way forward on climate change mitigation, energy transitions will take place
at different rates in different regions. Those who succeed in implementing the most efficient, low-carbon, cost-effective
energy systems are likely to influence others and export their skills and technology. However, the lack of binding policy
commitments inhibits investor confidence. Governments will play a crucial role in setting policy and incentives that will
create the right investment conditions, and businesses can encourage and work with governments to do this.

7. TO MANAGE INCREASING ENERGY COSTS AND CARBON
EXPOSURE BUSINESSES MUST REDUCE FOSSIL FUEL
CONSUMPTION
The introduction of carbon pricing and cap and trade schemes will make the unit costs of energy more expensive. The
most cost-effective mitigation strategy is to reduce fossil fuel energy consumption. The carbon portfolio and exposure of
companies and governments will also come under increasing scrutiny. Higher emissions standards are anticipated across
many sectors with the potential for widespread carbon labelling. In many cases, an early capacity to calculate and reduce
embedded carbon and life-cycle emissions in operations and products will increase competitiveness.

8. BUSINESS MUST ADDRESS ENERGY-RELATED RISKS TO
SUPPLY CHAINS AND THE INCREASING VULNERABILITY
OF ‘JUST-IN-TIME’ MODELS
Businesses must address the impact of energy and carbon constraints holistically, and throughout their supply chains. Tight
profit margins on food products, for example, will make some current sources unprofitable as the price of fuel rises and
local suppliers become more competitive. Retail industries will need to either re-evaluate the ‘just-in-time’ business model
which assumes a ready supply of energy throughout the supply chain or increase the resilience of their logistics against
supply disruptions and higher prices. Failure to do so will increase a business’s vulnerability to reputational damage and
potential profit losses resulting from the inability to deliver products and services in the event of an energy crisis.

9. INVESTMENT IN RENEWABLE ENERGY AND ‘INTELLIGENT’
INFRASTRUCTURE IS BOOMING. THIS REVOLUTION PRESENTS
HUGE OPPORTUNITIES FOR NEW business PARTNERSHIPS
The last few years have witnessed unprecedented investment in renewable energy and many countries are planning
or piloting ‘smart grids’. This revolution presents huge opportunities for new partnerships between energy suppliers,
manufacturers and users. New risks will also have to be managed. These include the scarcity of several essential
components of clean energy technologies, incompatible infrastructures and the vulnerability of a system that is
increasingly dependent on IT.