"Where there is oil, there will be blood" wrote Upton Sinclair in his novel Oil; but increasingly forecasters in the energy industry are pointing to the gathering storm clouds as oil dries up and raises a host of questions for energy security. The International Energy Agency predicts an oil supply crisis by 2013; Shell has seen fit to revise that figure upwards, but only to 2015. This year Chevron is expected to announce the largest losses in a decade when it publishes its annual profits in May. Meanwhile OPEC countries are seen to be withholding supply beyond cuts determined by the group in September of last year in an effort to boost the oil’s flagging price. And the price itself, having somersaulted from $147 in June last year to the bottom of the proverbial barrel in late 2008, has seen a typically volatile commodity surpass itself in its movements. Enter "peak oil".

Peak oil is, quite simply, the point at which oil reserves being used up are no longer matched by new reserves being introduced to the market. Such a point has been termed a "grey swan" event by analysts because of the lack of credence traditionally afforded it by policymakers despite its theoretical inevitability in time. How serious are we to take such warnings now? The IEA, for one, has sat up. It had been reluctant to acknowledge peak oil but in its 2006 World Energy Outlook mentioned the possibility for the first time. Broadly sketched, the outlook concluded that non-OPEC oil production would peak within a few years, and that the world’s ability to meet supply challenges would depend on Saudi Arabia, Iraq and Iran. The short-term geopolitical issues in such countries – and the price volatility they engender – may well be what make the headlines on a month-by-month basis in Britain. But an all-too predictable threat is the underlying challenge posed by a peak and subsequent decline in global oil production.

Global oil supply faces three central structural challenges that combined are beginning to render its future uncertain: the first, and most important, is that the age of so-called "easy oil" is over. Such fuel, described by the CEO of Shell as that which is "relatively cheap to produce and very easy to get to the market", has been swallowed up by staggering increases in demand since the 90s as suppliers have scrambled to feed a market whose prices have increased by over 1000 percent in the last decade. But since 2005, despite a continuous demand surge, global supply has been essentially flat as oilfields have failed to boost reserves. The five "Megamajor" private international oil companies are all experiencing declining oil production, and figures have fallen steadily in the last six quarters. Simultaneously, extensive inflation in oilfield costs has also worked to swallow up new investments. An IMF report published in early 2008 suggested that two-thirds of all incremental investment in the 7 years before 2006 was lost to inflation. In other words, it is becoming increasingly hard and increasingly expensive for most oil producers to maintain production levels.

Second, the price of bringing known oil reserves to the market has rocketed. The most popular price index for exploration and development, the CERA oilfield costs index, has more than doubled since 2005. It has also recently published a paper that analyses how oil development is increasingly threatened by low prices: the group estimates that almost half of the potential 14.5 million barrels in reserve growth for the next five years is "at risk" as potential investors are frightened by the effect of the recession on demand for oil.

The "Megamajors" have been some of the first to flag this trend up. Christopher de Margerie, CEO of Total, has speculated that new Canadian tar sand investment – held as the darling of exploitable oil reserves by the Western world and private oil companies – will have to sell at $80 a barrel to be financially viable for exploration. This may not sound like such a tall order with barrels going for nigh on $150, but in a recent report the IEA has predicted that prices – already much lower than needed at $50 a barrel – will fall over the next year, and any industry recovery will have to be "deferred" until 2010.

Ongoing work at the Kashagan oil fields

The final structural problem is the nature of successful oil exploration. Kashagan, the largest oilfield discovery in the last 30 years, is expected to start in 2014 and to be a pivotal reserve for future central Asian demand. But this apparent boon to the industry is merely a silver lining, and a tarnished one at that: the oilfield, discovered in 2000, will have taken a full 14 years to move into production despite entering development almost immediately. (And this on the basis that there are no further delays, though the latest was announced only 4 months ago and the original starting date for production was 2005.)

Whilst Kashagan is something of an exception, most oilfields take six to eight years to move from discovery to production. Clearly, the large amount of time needed to bring known oilfields to the market does not bode well for future growth. And some pessimists have drawn their own conclusions straight from this simple fact underlying supply: the Petroleum Review’s “Megaprojects Database”, that tabulated all 258 oil projects due onstream between 2008 and 2016, has projected that even if all planned supply projects proceed according to schedule there will be no net increases in the global supply.

As the World Energy Outlook was only too careful to point out, these developments are likely to see an increasing reliance on Middle Eastern countries in meeting supply. And as if two oil-fueled wars in the region in the last 20 years – and limitless more local conflicts – weren’t enough, major questions remain unanswered. In particular, the large and unproven upward revisions of OPEC reserves in the 1980s remains unsubstantiated, and experts within OPEC have voiced their doubts over up to 300 billion barrels of supposedly proven reserves.

OPEC members are also notoriously petulant when it comes to providing figures regarding their production as a margin of total supply: Saudi Arabia, according to official statistics, has discovered exactly as much oil as it has produced for sale in the last two decades. The first quarterly review for 2009 charts no significant increases in production whilst mentioning "short delays", and no word was given regarding the recent credit crisis or how that might affect investment in such expansion.

In the face of such a future Brown’s stance on the prospect of peak oil is astonishingly blasé. The Number 10 website has cheerfully shrugged off two petitions in the last two years asking the Prime Minister to address the risk of declining production; instead one is met with the statement that "proven reserves are already larger than the cumulative production needed to meet rising demand until at least 2030." With remarkable confidence the government purports to swat problems of supply and demand in one fell swoop. The 2007 Energy White Paper, in support of this stance, flies in the face of the IEA, a number of independent surveys and the assessments of all major international oil companies. It also displays a truly unnerving lack of will to face up to the political consequences of a decrease in production.

Brown’s focus appears depressingly superficial and short-term in reaching his conclusion. His "economic vision", as announced in November 2008, might well have had energy experts scratching their heads for its scant mention of serious energy policy. They had to wait until the London Energy Meeting of December 2008, when he stated that "our most pressing challenge now and for the future is oil price volatility." Such a policy appears little more than a prescriptive and reactive approach to the problem, as oil prices are by nature volatile because of the market they address: widespread subsidies are part of the fabric of energy consumption in many oil producing countries so that the same barrel of gasoline can sell for ten times the price in the US than it could in areas of the Middle East.

Whilst oil demand has fallen over the last 4 years in OECD countries, the Middle East, China, India and the Far East have seen oil demand balloon by 5-7% a year due to rapid growth and substantial government subsidies. Brown’s small-minded "vision" does well to focus the public eye on environmental energy targets, like the EU 20-20-20 proposals, but not at the cost of facing up to reality; the G20 summit, for all its fanfare, was notably silent on oil.

A recent Industry Taskforce spearheaded by some of the most significant domestic energy producers – including Shell, Scottish and Southern Energy and Virgin Group – has gone so far as to stress that peak oil should replace the threat of climate change as the primary concern of governments for its short-term impact. The Taskforce offers a stark choice between a controlled though steady “descent”, or a “collapse” of oil supply beginning in the next five years, and concludes that "the speed with which the UK would need to mobilise for a 'descent' peak oil scenario, much less a 'collapse' scenario, exceeds anything that had yet been considered in the climate-change policy-response arena." In any case, it’s high time that Brown addressed targets for renewable energy or the development of cleaner technologies like nuclear power or Carbon Capture and Storage in their proper context: that of a global oil supply whose future appears increasingly uncertain and for which a peak oil crisis may be just around the corner.