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Why 95% of Traders Fail

Event Horizon For Low Carbon Energy, The End Of Fossil Fuels ?

Politics / Energy Resources Jan 16, 2012 - 11:12 AM GMT

By: Andrew_McKillop

Politics

Best Financial Markets Analysis ArticleOfficial plans for Low Carbon energy transition in several countries, and for as long as the European Union's climate-energy package holds together, for all the EU's 27 member states, target a complete and total replacement of fossil energy within as little as 45 years. US president Obama in January 2011 called for a “Sputnik moment” to wean the US completely off fossil fuels. Since then however, carbon cap-and-trade legislation has failed in the US and increasing company failures in solar cell and wind turbine production industries have eroded the credibility of this "Sputnik moment". Today, White House briefing papers attribute much of the rebound in manufacturing which could help Obama back into power, to the boom in cheap shale gas supply made possible by "fracking" technology.


The theory of the Postcarbon Future however rests in the policies of many countries. By about 2060-2065, these countries would use no fossil fuels at all, even if this fossil fuel replacement goal is usually couched in terms of national targets for reducing greenhouse gas emissions from fossil fuel burning to nearly zero (by around 90% - 95%) by that date.

On the energy demand side we have no problems thinking global energy consumption in 50 years could easily triple from present rates, and in the emerging economies it could more than pentuple, by growing at about 4% to 6% a year. Compound annual growth does things like that, and apart from the shale and stranded gas boom these forecasts are bad for the credibility of reasonable-priced oil or low-priced coal. Most if not all official scenarios for Energy Transition exclude a Zero Option, where energy consumption declines at a certain annual average rate through 50 years, but for the "advanced industrial" countries some scenarios include low annual average compound growth rates, around 1.5% or 2%. In Europe's gathering recession of today, plenty of countries are now into their third year of declining national oil demand, with gas demand flat and electricity demand also near zero.

If we went back 50 years however, and looked at global energy consumption through 1960-2010, the higher demand growth rates of about 4% to 6% per year would be typical.

The total amount of energy consumed could therefore easily rise from today's approximate global total of around 240 million barrels oil equivalent per day (boe/day), to 700 - 900 million boe/day, but greeenhouse gas emissions would be near-zero. If there was technologically perfect and economically feasible carbon capture and sequestration at the time, fossil fuels could surely go on being used, but if not they would have to completely disappear.

Several countries, especially Germany come close to officially targeting a reduction of fossil fuel consumption, by about 2065, to nearly zero. Only for the next 8 years to 2020, Germany's official energy transiton plan (the REAP) targets a 40% reduction of CO2 emissions relative to 2005.

How logical and feasible is this ?

POSTCARBON DREAMS - AND NIGHTMARES
Anybody is free to imagine they could do without fossil fuels. Everybody can look at human history and see the human race used almost no fossil energy at all, before about 1750, but at present we totally depend on oil, coal, gas and uranium. World food production, population, lifestyles and life expectancy figures for 1750 can and should be compared with today's figures.

Current fossil energy use is about 90 million barrels a day of oil, near the same for coal in oil equivalent energy terms, and around 60 Mbd oil equivalent of gas energy: this supplies over 90% of all energy presently used, worldwide.

Many activities we take for granted - starting with food production - are at present totally dependent on fossil fuels. Urban industrial civilization "as we know it" would simply not be possible without fossil energy, so we need to understand that a "total decarbonized" society, or postcarbon society and economy would also have to go through total revolution. 

To be sure, this subject is kept off limits in official scenarios for nearly-zero-carbon energy supply and utilisation systems of 50 year ahead. While hoping for or expecting breakthroughs in biofuels to substitute and replace oil, the main thrust is near-total electrification of the energy economy with the electricity produced by renewable energy. This technology revolution is easy to scope: the scientific notion of near-total electrification of the economy and society was a major theme in the 1950s at the start of the aborted "nuclear age", but this was a failed quest. The idea of totally electrifying the economy, and then supplying all the electricity from renewable sources is technologically and economically unrealistic, to say the least, although it is defended by some - for example by Hydrogen Economy promoters, but the failure to have any discussion on this subject hides another primal fault in the communication and presentation of Low Carbon energy transition plans: lack or realism.

As with the prime movers for the nuclear age and the hydrogen economy, depletion of fossil fuels has a look-in to Low Carbon scenarios. Taking any energy growth-continued scenario, even to 2035, as the IEA World Energy Outlook series does, draws on powerful depletion-related energy supply and cost forecasts, starting with and featuring oil, the shortest-fuze global fossil energy resource.

In fact "economic depletion" rather than geological, also concerns coal and uranium, if not gas due to shale gas and coalseam gas reserves. The so-called 'static lifetimes' of economically recoverable coal and uranium resources, measured in decades not centuries are based on projecting current energy demand forward, without growth, but oil resources show the shortest-life expectancy. Because the Zero Option of no energy demand growth (or declining demand) is only allowed for the IEA under "special scenarios", its main forecast says that by 2035 world oil demand will increase, but very moderately by about 10 Mbd from today's demand rates - but that also by 2035 it is possible global oil demand could fall by about 4 Mbd from today's 90 Mbd under the IEA's low CO2 scenario, called the "450 parts per million scenario". This forecast imagines that Chinese and Indian oil demand, "for the good of the planet" would somehow be capped at around 3 barrels per person per year in China and around 1.8 bbl per person per year in India, compared with over 14 barrels per person consumed in the OECD countries in 2010.

Oil prices in current dollars, according to the IEA, would only rise to about $125 a barrel in today's dollars, but IEA price forecasts often change, and include higher priced scenarios.  Allowing for world population growth and sure and certain oil demand growth in China and India, OECD per capita oil consumption would be likely cut by 25% or more from current levels, by this single scenario.

Plenty of studies and reports suggest depletion of lower cost conventional oil resources will in fact make it hard for world oil production to be sustained at over 90 Mbd beyond about 2017, let alone 2035. Depletion rates could climb to 6%-a-year by 2017 without heroic leaps in oil exploration and development spending (the IEA calls for a 330% increase). This investment-constrained 'economic depletion' outlook also applies to coal and uranium, where geological depletion is less important than the costs of maintaining or expanding supplies - but this is totally different from a supposed voluntary social and economic mega-shift away from all fossil energy utilisation within 50 years.

COSTS AND TIMEFRAMES
IEA and other scenarios and forecasts for future oil supply range as low as 30 Mbd by 2035 to over 120 Mbd by 2035, showing a wild variety of different analyses and policies, if nothing else. Among these policies we have the full-blown energy transition away from fossil fuels set as official policy in Europe in the Dec 2008 climate-energy package, with its most extreme version operating in Germany as the REAP, whhich since May 2011 includes a total nuclear exit strategy. Demand destruction for fossil energy has to be imagined as feasible, year in and year out, to 2065 or later. This is a policy issue, therefore a political and social issue as much as a technology, industry and finance issue.

One event horizon risk is easy to describe: each percentage extra of fossil energy replaced by green energy will typically cost more than the previous percent as the fossil energy exclusion curve is scaled, reaching limits where each extra percent costs too much or takes too long to achieve under normal economic conditions. This argument is known and countered by several intellectual stratagems.

We are invited to hope or imagine that low down the curve, green energy will come cheaper and easier, "low hanging fruit" style, but this is already disproven by experience through 2006-2010. What we can call the First Green Energy Boomtime, followed by bust time and accentuated by the current global economic downturn, despite ultra low interest rates and total policy support from hands-off governments delivered miserable results in replacing fossil energy.

Investor retreat from green energy is currently snowballing. The bottom line is simple: green energy investing is a loser without massive subsidies from governments - but governments in the OECD group, especially USA and Europe, are now wracked with debt and deficit.

The defenders of total energy transition can argue that failure of green energy to "ramp up" is due to energy prices remaining artificially low, now aggravated by a likely 20 - 30 year boom in low cost shale and coalseam gas and, priced up to oil, green energy can be or is a rational longer-term investment, even under normal economic conditions and timeframes. In other words as long as oil stays above $100 a barrel, some green energy is OK, but this only sets another potential event horizon: when fossil energy supplies become really depletion-constrained, and spiral up in price without any need for new energy taxes to boost their price growth, the fossil energy costs of total energy transition will be so high, and the timeframe so short that transition is again not possible: engaging the energy transition process in the present can be called "sink or swim".

Put in resource terms, the fossil resources needed to build The Transition Bridge were consumed and frittered away before the bridge was completed. We therefore come back to the basic and implied, but never stated Total Revolution goals of advocates who say the world must completely stop burning all fossil fuels within 45 year.

Writing in MIT Energy Initiative, 29 November 2011, former foreign minister and vice chancellor, Joschka Fischer said:  ".... the political environment in Germany means it has passed a “point of no return” – nuclear energy will be completely phased out in 2022", adding: "Today, the country faces uncertainty regarding how exactly it will meet its energy needs while facing self-imposed nuclear and emissions constraints. But by creating a 'sink or swim' situation, Germany will be forced to innovate and lead".

Forgetting to add that all 17 of Germany's reactors, like the 58 in nearby France will obligatorily have to be dismantled and placed in "Safestore" within 25 years, Fischer avoided giving any estimates of what this single end-of-fossil Energy Mega Project of the 21st century will cost. One thing we know is: not cheap but surely dangerous. One more Fukushima-type nuclear disaster in a western advanced industrial country is probably all that is needed to revolutionize public opinion. The anti-nuclear revolution is already a well known political fact of life, in Germany, which blurs the fact that fifty-year-old nuclear reactors may be interesting artefacts for Industrial Archeology, but are not economic assets.

FORWARD TO THE REVOLUTION, BROTHER
At least one other event horizon for energy transition exists: investor and government energy financing and taxing decisions are unsure, and regulatory changes in energy are complex and incoherent when they are not on hold. While some estimates and forecasts for global corporate spending in oil exploration and production spending exceed $575 billion for 2012, many estimates are far below this level - and economic downturn through 2012 can radically trim these early estimates, on the downside.

What we know is that gas is attracting fast-rising investment intentions, despite the near certainty this will drive a glut of both LNG and pipeline capacity, while oil sector spending stays high if not above the most-recent record spending level near $375 billion in 2007. In 2012 this spending is unlikely to deliver more than 2007's approximate 1.5 Mbd net additional global supply after depletion losses. As we also know, even if China and India only reached one-half of the 2010 value for oil consumption per person in the "postindustrial" countries, this would raise world oil demand by around 35 Mbd, unless OECD oil demand contracted by the same amount (about a 75% cut for the OECD). Neither are possible without a radical transformation of the economy - and society.

This yet again brings us back to fundamentals of governmental and public thinking in the consumer societies: if we want Low Carbon, the economy and society has to change. If we want fossil energy business as usual it will get more expensive unless we radically increase the role and use of gas in the economy, and stretch the coal and oil ages, with a gas age.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2012 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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