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CO2 In The Cuckoo's Nest

Commodities / Climate Change Nov 29, 2009 - 09:39 PM GMT

By: Andrew_McKillop

Commodities

Best Financial Markets Analysis ArticleITS A GAS
Climategate has come and gone, like Dubai World, with only ripples in the agonizing V-shaped, W-shaped or X-shaped recession and recovery sequence. Recession and recovery of hopes and fears that COP15 will be a success or failure have also rippled.


For the global economy there is a new, X-shape recovery outlook. Global Warming finance, like Keynesian recovery finance might cross out the risks of double dip, with a big new raft of funny money channelled to the right hands. Like the cash needed to cancel out "troubled assets" and bankrupt banks, it can be printed, borrowed and guaranteed in extreme high amounts but in full media view with full media support. Public opinion, as for the Keynesian recovery trillions, will matter little "because this is a complex and urgent affair". The media can be counted on to give all sides of the story, plus additional sides they invented to amuse the crowd.

Global Warming itself is one of these complex topology facets. Granted that global average surface temperatures have been falling for about 10 years, but Al Gore and Rajendra Pachauri, and a lot of other people, including most OECD leaders will vigorously tell you this is only a statistical quirk. Manhattan could or might suffer more damage from rising sea levels than it did from air pirates in 2001, within a 100 years or so. Within 200 years the globe could be nearly uninhabitable. Everything bad is possible, if we dont spend now.

GAS AND OIL
We can add coal, uranium, windpower, solar energy, methane biogas and other things to what is really an Energy & Finance summit that never, ever states the basic driver: high oil prices and oil reserve depletion right now. Despite the coming, massive bulge of cheap natural gas supplies, depletion will also be biting into world gas output and supplies by 2015-2020. Gas prices could or might recover rather fast, probably through producer pressure.

Coal has no reserve problems but transport infrastructure shortage and a bad press; uranium supplies face serious limits and nuclear power like coal has a bad press. None of this applies to windpower and solar energy. Green Recovery featuring wind and solar energy could or might generate enough jobs to take some of the heat out of car making cutbacks in the OECD countries. Some of the renewables are economical with oil at less than $75 a barrel. Potential expansion for some, like windpower, could rival US budget deficit growth but real world data cools the warming.

Using data for December 2008, record-growing windpower in China delivered about 0.4% of China's electricity, and 78% came from coal. China's car market is now in permanent overdrive at close to 1 million-a-month sales through 2009. To be sure, 99.9% of these cars run on oil, LPG or compressed natural gas. India's car sector is way behind China's, but growing just as fast. Headline data on US oil demand shows how hard it fell in late 2008-early 2009, but with the green shoots of recovery the brown oil slide has bottomed. When or if US oil demand starts growing again, and keeps growing oil prices can cruise through successive 'pain ceilings' like $85 and $95 a barrel with little sweat. Anyplace else, inside the OECD or outside, faster economic growth will drive increased oil demand. As we saw in 2007-2008, oil prices well above $100 a barrel are needed to seriously cap economic growth and shrink oil demand.

Capping CO2 is the nice way out. Energy saving is a 'low hanging fruit', to some, and could or might trim oil demand growth despite the economy growing. Obama's 17% CO2 cut by 2020 along with Europe's 20% cut, and China's flexible target cut in CO2 linked to economic growth, possibly reducing growth of Chinese emissions by one-half for each 1% rise in GDP, all send a message that energy crisis is being fought. All of them give a read out of slowed oil demand growth and less additional oil needed for each 1% rise in GDP.

THE BOTTOM LINE - WHO PAYS ?
Nobody knows. Carbon taxes are so tiny, so unpopular, so complex to apply here, waive there, record and monitor that carbon taxation has a bad press to rival coal or nuclear power. CO2 emissions trading might offer prospects of generating slabs of green energy finance, especially if the Clean Development Mechanism for 'low carbon' energy and development in low income developing countries was multiplied 5 or 10 times from current levels. The IMF might come along with an SDR-CO2 Bancor, a sort-of new world money, emitted from the same thin, CO2-lean air from which SDR emissions are being robustly cranked up, in view of a (nother) dollar crisis. This new climate friendly Bancor would grease the emissions trading game tables, inspire confidence, take the heat off the dollar - and speed green energy growth.

A much cited, little read report to the 2009 Davos Forum estimated 'clean energy and climate finance' spending needs and turnover as attaining an average $ 515 billion a year through 2010-2020. This only slightly outpaced Lord Stern's present upward revisions of his early, 2006, estimates that the world will have to spend about $ 200 to $ 220 billion a year on a mix of green energy, carbon capture, agriculture and land use change, and other favorites of Global Warming fighters. As his own little read, or hard-to-read marathon report said, on occasions, world GDP will attain at least $ 250 000 billion a year, 2006 dollar value, by the time Manhattan will have been saved from a watery fate. Climate change abatement spending totalling lets say $ 50 000 billion over the decades was a nice investment, we will find out.

If we cut from these not-so-serious financing ideas for alternate energy sources that do not yet exist, and move to real world oil and gas we have another shock coming. The IEA regularly publishes estimates for world oil & gas sector spending needs. These are slated to hit $ 1000 billion a year by 2016, close to 3 times current recession-impacted levels. Electric power spending will also have to grow like never before, in part due to massive challenges for integrating variable, but fast increasing quantities of wind source electricity, along with other green electricity sources.

The first bottom line is that under any scenario energy prices will rise. The second bottom line is that high oil prices and low gas prices will find endless ways to combine and interfere in energy markets. These will be also hit by green energy feed-in tariffs, tax breaks, grants and non-market factors, as energy demand shifts and squirms with the global economy's struggle against left-over debt and FX instability from the 2008-2009 recession.

Who pays and how, are going to be long-term pressures able to hit fever pitch on a recurring basis.

By Andrew McKillop

gsoassociates.com

Project Director, GSO Consulting Associates

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

© 2009 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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