Geoffrey Lean: Oil. The fast-vanishing drug the world can't yet live without

Say what you like about Dick Cheney, but you can't accuse him of not giving us fair warning. A year, almost to the day, before he was dubiously elected Vice-President of the United States - while still chairman of the energy giant Halliburton - he gave a riveting insight into the thinking that has since guided the administration's oil policy.

In a speech to the Institute of Petroleum in November 1999 he shed light on our front-page revelation - that in the wake of the occupation of Iraq, Western companies are to be let loose on its vast, and previously state-owned, oil reserves. Perhaps even more importantly he flagged up an impending crisis that the world urgently needs to grasp - that supplies of oil may be about to shrink alarmingly.

The "basic, fundamental building block of the world economy" was, he warned, in danger of becoming extremely scarce.

Estimates suggested that production from existing reserves would soon decline sharply, by 3 per cent a year, even as world demand for oil grew by 2 per cent. That meant that the world would soon need to be producing "an additional 50 million barrels a day", more than half as much again as the 82 million now being wrested from the ground.

"So where is this oil going to come from?" he asked. His answer: the Middle East was "where the prize ultimately lies". The problem was that "governments and national oil companies" controlled almost all of the "assets", and "even though companies are anxious for greater access there, progress continues to be slow".

Lest there be any doubt about what was at stake, the man who was to become one of the most powerful proponents of the invasion of Iraq went on: "Oil is unique because it is so strategic in nature. We are not talking about soapflakes or leisurewear ... The Gulf War was a reflection of that reality."

Well, seven years on, Mr Cheney's solution to the impending oil crisis is well on its way to being implemented. In the aftermath of another war, Iraq's Council of Ministers is today expected to throw open the doors to the country's oil reserves - the third-largest in the world - to private companies, the first time a major Middle Eastern producer has ever done so.

Whether this will work for the oil giants depends on an end to the insurgency being achieved, while a compliant government is maintained, which looks more unlikely as each week goes by. But whatever the practicality - and morality - of his solution, the Vice-President's diagnosis is sound enough. Indeed it probably understates the crisis facing the world.

For a start, as Mr Cheney put it, "oil is unlike any other commodity". The world is deeply hooked on it, and any reduction in its massive daily fix will cause devastating, and possibly catastrophic, withdrawal symptoms.

It is not just that it makes up 40 per cent of all the energy that is traded worldwide, and no less than 90 per cent of all the fuel used in transport. Every aspect of our lives and our economies has been designed around the assumption that it would continue to be plentiful and cheap.

Our cities have been allowed to sprawl - particularly in the US, where, until recently, petrol cost less than bottled water. And almost everything we consume in developed countries depends on it. About 10 calories of fossil fuels - principally oil - are burned to produce every calorie of food consumed in the US. A staggering 630g of them are burned to produce a single gram of microchips. And making a car consumes the equivalent of 840 gallons of petrol, enough to drive it for the first two years of its life.

Even some alternative energy sources advanced as oil's replacements in fact crucially depend on it. Nuclear power is fuelled by uranium, mined and transported by oil-powered machinery and vehicles. Biofuels depend on crops grown by oil-powered intensive agriculture.

Worse, the world's entire financial system is based on the assumption that the decades of growth fuelled by cheap oil will continue. A permanent shortage, by some predictions, would lead to another Great Depression lasting for generations, sparking conflicts as nations fought over shrinking supplies.

Yet, as Mr Cheney indicated, such a shortage is becoming a real and present danger. More and more experts are convinced that the world is rapidly approaching a uniquely dangerous threshold when, for the first time, humanity will suffer a cut in supplies of its main source of energy before an alternative is available.

After all - as the current issue of the scientific journal 'Nature' points out - there were still plenty of forests standing when the world switched from wood to coal as its principal fuel, and there were hundreds of years of supplies of coal still in the ground when oil took over. Yet there is no other source of energy versatile enough or ready to be exploited fast enough and on a large enough scale to take up the slack if oil supplies suddenly begin to decline.

The tipping point at which this decline begins goes under the increasingly popular tag of "peak oil". It marks the moment at which what have - for the past 150 years - been ever-expanding, and therefore generally cheap, supplies of the stuff turn into steadily declining, ever more costly ones.

The prediction is based on the observation - first made by an American geophysicist called M King Hubbert 50 years ago - that oil production rises sharply to a peak, and then slumps equally rapidly. Hubbert thought, on this basis, that production in the US's 48 states (excluding Alaska and Hawaii) would peak in this way in the early 1970s.

Official statement after reassuring official statement rubbished his apparent pessimism - even suggesting that the peak would not come until the 22nd century. But, sure enough, it arrived in 1970.

Much the same thing has been happening in the North Sea. New, but unpublicised, official figures buried in the latest issue of Energy Trends - a dry Department of Trade and Industry (DTI) report published on Thursday - show that UK production has been falling sharply for the seventh successive year.

On 18 June 1975, when the first British North Sea oil arrived by tanker at the Isle of Grain refinery in Kent, a rising British politician called Tony Benn - recently appointed Energy Secretary - raised a bottle of it above his head, grandiosely declaring: "I hold the future of Britain in my hand."

He was right, in a sense. Production soared until, in 1980, the country became self-sufficient in oil, and became an overall exporter. The revenues rescued Britain from the balance of payments crises - exacerbated by rising oil import bills - that dogged successive governments in the 1970s.

After a short-lived slump in the late 1980s and early 1990s, caused by low oil prices and the Piper Alpha oil rig disaster, production built up to a peak of more than 2.9 million barrels a day in 1999, the very year in which Mr Cheney delivered his speech. Since then it has slumped by almost half.

Crucially, it has now fallen so low that Britain, for the first time in a quarter of a century, has become an overall importer of oil.

Ministers and the industry seek to deny this. The latest Economic Report by the UK Offshore Operators Association, which represents the oil and gas companies in the North Sea, insists: "The UK has been self-sufficient in oil for the last 25 years and is expected to remain so for the next four or five years". The DTI says much the same.

But the department's own figures reveal the truth. Since August 2005, the UK has been an oil-importing nation. Estimates by the official International Energy Agency (IEA) suggest that the country produced just 1.65 million barrels a day last year, compared to consumption of about 1.7 million.

Ministers and the industry are hoping that a new field, due to come onstream in the next couple of weeks, will put the country briefly back into the black. The Buzzard field in the outer Moray Firth is the biggest to have been discovered in British waters for more than a decade.

But David Fyfe, the IEA's principal oil supply analyst, says he expects production to be raised to only 1.68 million barrels a day this year - still not enough to meet consumption - before the decline resumes in 2008.

Britain is not alone in its troubles, either in the North Sea or the world as a whole. Norway and Denmark have also passed peak production. And last year, half of the world's 44 main oil-producing nations produced less oil than they did the year before. The chain of peaks is beginning to take on Himalayan proportions.

"In all," says Chris Skrebowski, editor of the Energy Institute's 'Petroleum Review', "40 per cent of the world's oil is coming from areas where production is in clear and substantial decline." When the figure reaches 50 per cent, he adds, the world as a whole will have reached the "peak oil" tipping point.

The world's first oil well was dug on the Greek Island of Zante around 400 BC, but it was not until 1859 that the Pennsylvania Rock Oil company struck the black gold 69 feet below ground, setting the scene for the oil age.

Little more than 7,000 barrels of it were produced in the whole of 1860, the first full year of pumping. Since then, it is generally agreed, the world has burned nearly 1.1 trillion barrels. But nobody knows how much is left and can be economically recovered.

So while everyone agrees that some day oil production will peak - since there is a finite amount of it on the planet - there is wide debate over when this will be. At one extreme, some experts believe that time has already arrived. Professor Kenneth Deffeyes of Princeton University - who worked with M King Hubbert - plumped for the astonishingly precise date of 16 December 2005. At the other extreme, analysts at Cambridge Energy Research Associates in Massachusetts think the peak will not come until the 2030s.

But a growing number of experts are coming to believe that it will be upon us disturbingly soon, at around 2010 or 2011. Mr Skrebowski, once sceptical of the more pessimistic estimates, is among them. "All the work I have done suggests that you just can't get it beyond then," he says.

Optimists put their faith in new discoveries and improved technology. But the world has now been burning much more oil than it has found for a quarter of a century, and despite vast investment in prospecting, the discovery of new fields is at a record low.

Mr Skrebowski points out that new discoveries will still be made even after world production is past its peak, but that "the deadweight of the general decline will overwhelm them".

Similarly, as oil prices rise it will be economic to get more out of existing wells, but again this is not expected to be enough to reverse the sharp decline. And though there are vast reserves in Canadian tar sands and US oil shales, these are costly and difficult to exploit - and unlikely to come onstream quickly enough.

Whenever it is, the world is not likely to get much warning from the market. Prices did not rise sharply in the US just before oil production peaked there, mainly because the costs of production remained about the same.

But nasty surprises can be expected before the world is far along the downward slope. Oil prices almost quadrupled during the 1970s oil shocks, even though production fell only by around 5 per cent. And after peak oil the decline would be permanent and intensifying, not short-term and reversible as it was then.

And it may be that Mr Cheney's prediction of a 3 per cent annual decline, immensely disruptive as it would be, is indeed, as he said, "conservative". The head of one giant oil services firm has suggested that production might fall by 8 per cent a year, which would mean that supplies fell by half in just nine years. That, after all, is about what is happening in the British North Sea.

Such a slump could hardly be less than catastrophic to the world economy. All we can do is to pray that the peak will be later, and the downward slope less severe - and embark on a crash programme to save energy and develop renewable sources as fast as possible, something we already urgently need to do to try to control global warming.

Dick Cheney has decried both energy efficiency and renewable sources in the past. It seems he has another plan. And indeed some experts believe that, if peace were miraculously to break out in Iraq and oil production can be miraculously increased, the peak-oil tipping point could be pushed back four or five years. But it would then come just as unrelentingly.

But the Vice-President can be sure of one consolation. In his speech seven years ago he complained that oil was "the only large industry whose leverage has not been all that effective in the political arena". If ever that were so, six years of two oilmen running the world's most powerful nation has certainly sorted that out. But whether the world - or Iraq - has benefited, is entirely another matter.