Jeremy Leggett: Another crunch is coming – but will the world act?


There is one major similarity between the energy crisis and the financial crisis and one main difference. These two things tell us a lot about the role of cultures in how our modern version of capitalism plays out.

The similarity is that we are dealing with two massive global industries who have their asset assessment systemically, and roundly, wrong. The difference is that few people and organisations warned about the credit crunch as it approached, where as with the oil crunch, a host of people – many in and around the oil industry – are shouting a warning, and so to are a few good organisations concerned companies span British industry.

As for the international energy agency, it is as the World Bank was warning about the credit crunch a few years before it hit. In 2007, I convened an industry task-force on peak oil and energy security in the UK. It is chaired by Virgin, and members include Scottish and Southern energy, Arup, Foster + Partners, Stagecoach and my own company, Solarcentury. We released our first report at the London Stock Exchange last November, and our second will be released in November this year.

The first report concluded that peak oil is a grave risk for the global economy. Specifically, what concerns us is the threat in the premature peak in global oil production caused by either or both of a collective overestimation of reserves by the global oil industry, and an inability to deliver enough flow capacity because of underinvestment. The second report will examine, among other things, the impact of the recession on the global prices.

My own view of the state of play is that the recession might have bought us a little time, but has deepened the crisis beyond. The central problem is that the underinvestment in the oil industry today will play out as a tighter crunch in the middle of the next decade. It takes an average of six and a half years from finding an oil field to bringing it onstream and, in the rare case of giant fields, often more than 10 years. Why haven't more people in government, and the oil industry itself, seen this particular crisis coming? Why aren't they acting proactively to soften the blow?

The same question can be asked, with hindsight, of the bonus cultists who gave us the credit crunch, and their institutional fans. Gillian Tett of the Financial Times, a trained anthropologist, describes in her recent book the effort made by the banking elite at "ideological domination" ahead of the financial crash. Elites do this to maintain power, she explains. They decide what is talked about and what is not. There was a major "social silence" around the epidemic growth of derivatives.

This is exactly what I see going on among my old friends in the oil industry when it comes to weighing their assets. And their dysfunctional culture extends right into Whitehall, which is asleep on this issue. Civil servants will barely engage with the UK industry task-force.

One of the few financiers who saw the credit crunch coming said derivatives were financial hydrogen bombs built by 26-year-olds with MBAs. Here is another set of similarities and differences. The oil crunch is an economic hydrogen bomb. But it is being built by men close to retirement. The average age in the oil industry is 49, one of the biggest problems. It will fall to 26-year-olds to clear up their mess. Few of them have ever found an oilfield, much less built a refinery.

Jeremy Leggett, a green energy entrepreneur and writer [], worked for more than a decade as an oil industry geology consultant