TN Labs Energy Talk

Will Oil Hit $300 A Barrel in 2010 Due To Mid-East Tensions?

http://www.gurufocus.com by Jacob Wolinsky

While I am very reluctant to provide short term forecasts on area such as commodity prices or stock prices, I have a strong opinion about future oil prices. I am confident in my prediction because huge oil disruptions might occur due to tensions in the Middle East this coming year. I strongly believe that the media, politicians and investors do not realize the severity of situation. I think the coming year can see geo-political events that may cause the price of oil to skyrocket from current levels. While I think oil prices are currently over-priced, tensions in the Middle East could increase that will cause oil spikes this coming year. These Middle Eastern tensions are related to the current actions of the Iranian government.

There have been growing tensions between Iran and many other countries in the region. Although the media has been covering them, I do not think the media realizes the severity of these recent events.

Yemen/ Saudi Arabia

The media completely ignored the severity of the situation of Yemen until it was revealed that the recent terror attempt on a US bound airline was planned by Al Qaida in Yemen. However, I have been following the situation in Yemen for nearly a year, and I am astonished by how little attention it gets in the media.

For several years the government of Yemen a Sunni country has been fighting a civil war with Shia rebels who are trying to challenge the Government and introduce a shia country with an Islamic radical agenda. The rebels are heavily backed with moral and military support from the Iranian Government. The Government of Yemen is very weak and poor, and therefore is unable to exercise full control over the country. The situation is so bad that the last Jews in Yemen who have been there for over 3,000 years have been forced to leave in the past few months due to violence from the Shia rebels. The situation is deteriorating so rapidly that the Saudi (Sunni) Government has sent its military into Yemen to help the Yemeni Government. There have been reports that many Arab Sunni countries including Jordan, Morocco and Egypt have sent commando units to Yemen to help the government. The US is also helping Yemen financially and militarily to fight the rebels. The ultimate goal of Iran is to impose a shia Government that will be obedient to it. While Yemen does not have much oil a collapse of the government could have a large impact on oil prices. Iran’s main goal in defeating Yemen would be to overthrow the Saudi Government which is the largest producer of oil in the war. Even though Saudi Arabia has a majority Sunni population, if the Government collapsed Sunni Al Qaida extremists could take over who will align with the Shia government in Iran.

Assuming Iran overthrew the Yemeni Government, and not the Government of Saudi Arabia, it would be able to halt traffic traveling through the Suez Canal, which is a major shipping route. All Yemen would have to do is block off a small area off its coast and it would cripple all shipping going through the Suez Canal.

Egypt

Egypt is another country that feels severely threatened by Iran. Egypt uncovered a cell of several dozen Hezbollah operatives in the country several months ago planning terrorist attacks on Egyptian targets. Hezbollah is a shia organization that is heavily backed by Iran. Egypt and Iran have had been enemies for many years. Iran has a street named in honor of the assassin who murdered former Egyptian president Anwar Sadat.

However, recently tensions have been escalating further. Egypt has accused Iran of planting terrorist cells in Egypt to create chaos and try to topple the Government. Although Egypt is a Sunni country there is fear that Iran could align with the Sunni Muslim brotherhood that would be willing to team up with Iran despite their different sects in Islam. Like Yemen, Egypt is not a major oil producer however it is in very strategic location. If the Suez cannel which Egypt controls would be closed to traffic it would cripple international shipping and could lead to higher oil prices.

Below is a map of the Middle East. As clearly shown in the map the coast of Yemen and the Suez Canal can easily be blocked off if the Iran is able to overthrow either Government

An Iranian/Iraqi War

Another area of conflict that has not received much attention by the media is the recent tension between Iran and Iraq. Few people grasp the severity of the escalating situation. Several weeks ago Iran seized a small oil well in Iraq which Iran claims is part of its territories. Several days’ later Iranian troops withdrew without giving an official explanation. However, due to the weak international response Iranian troops returned to the area several days ago and now show no signs of backing off. While the oil well itself is small and insignificant, the chance of an Iraqi and Iranian war is frightening. Iraq and Iran fought a long and bloody war in the 1980s which resulted in over a million deaths. According to the Iraqi government, Iraq has largest proven oil reserves in the world. As shown below most of Iraqis massive oil fields (especially in the southern part of the country) are located very close to the border with Iran . If there is an invasion by Iran this could lead to huge disruptions in the Iraq’s oil production.

Potential Israeli Strike on Iranian Nuclear Facilities

This story that has gotten the most attention with regards to Iran. Pundits in the media are debating back and forth every day whether Israel will strike Iran. While, I am not privy to any intelligence information, my opinion is that Israel will strike Iran’s nuclear facilities this year. I make this statement as someone who has spent many years in Israel, has close family in the country and I know people who are in the military. There is a bi-partisan consensus across the Israeli public that Iran cannot be allowed to obtain Nuclear weapons. There is no way Israel can allow a country which has threatened to wipe it off the map to obtain nuclear capabilities. In addition Iran has been sending massive shipments of weapons to terrorist organizations that are threatening Israel. Iran is a major supporter of Hamas in Israel’s south and Hezbollah in Israel’s north. If Iran went nuclear this would provide these terrorist groups a nuclear umbrella. The deadline to strike Iran is running out, and soon Iran will reach the point of no return when it will be too late to stop their nuclear weapons program. There is growing speculation that even if the US will not help Israel, Europe will join in an Israeli strike which would set back Iran’s nuclear by several years.

Iran has threatened to close off the straits of Hormuz if attacked by Israel. The strip is only a few miles wide and is strategically located. As the map below shows cutting off the straits would prevent oil from flowing out of Southern Iraq, parts of Saudi Arabia, Kuwait and many oil rich Gulf States countries. 40% of all seaborne oil shipments travel through the straits. The US could not allow Iran to close the straits and this could create a full scale war with Iran. This in turn would further cause oil prices to skyrocket.

During the Arab oil embargo from 1973-1974 oil prices quadrupled in a very short period. While I am not an oil bull who believes in peak oil, I do believe that any of the four situations I mentioned in this article could cause a massive rise in oil prices. If all four occurred it could make the oil embargo in the 1970s look like child’s play. This situation is not farfetched. Like I mentioned, I strongly believe that there will be an Israeli (or join Israeli /European) strike on Iran in 2010. This could lead to Iran retaliating by closing the straits of Hormuz, invading Iraq, and further trying to overthrow the Governments of Egypt, Yemen and Saudi Arabia. If this were to occur it would be realistic for oil to more than quadruple from $80 a barrel to well over $300 a barrel.

Clearly the situation is extremely volatile in the Middle East. Iran is becoming an increasing important and destabilizing player in the region. I think that any one of the four scenarios above would cause oil prices to increase to such high levels that it could cripple the fragile US economic recovery. If oil prices rose over $300 it would completely cripple the world economy. At this point, the best hope would be for a peaceful and democratic revolution which overthrows the mullahs of Iran. If this were to happen I think we could see a dramatic decrease in oil prices. I hope the people of Iran get the democracy they deserve and my $300 prediction never comes true.

http://www.gurufocus.com/news.php?id=80542

January 3rd, 2010 | Posted in Economy, oil | Comments Off

Shale Gas and Climate Change

http://energyoutlook.blogspot.com

In Wednesday’s posting on the likely consequences of the latest version of greenhouse gas (GHG) cap & trade legislation, I hinted at an important option for electricity suppliers to reduce their emissions promptly. Today I’d like to elaborate on it. Although the power sector accounts for the largest share of US GHGs, its existing generating fleet already has the potential to reduce those emissions substantially by relying less on coal-burning plants and more on those that burn natural gas. That could be done with little or no new investment, at least on the part of generating companies. This isn’t exactly a new idea, but what makes it feasible now–when it wouldn’t have been not so long ago–is the development of enormous new US natural gas resources found in shale deposits such as the Barnett, Haynesville and Marcellus shales. Twice in just the last week I have seen shale gas referred to as a “game changer”, without the least hint of exaggeration.

Capitalizing on shale gas to take a big bite out of US GHG emissions would depend on two key facts: First, gas-fired power plants emit on average 37% less CO2 than coal-fired plants. At the same time, although the US generated more than twice as much electricity from coal as from gas last year, we actually have more gas-fired generating capacity than coal-fired. The former is merely utilized less–an average of 25% of the time, compared to 73% for coal–for reasons that made perfect sense in a world in which CO2 emissions didn’t matter. If we doubled our utilization of existing gas-fired power plants and burned correspondingly less coal, the country would emit roughly 330 million fewer tons of CO2 per year, representing about 13% of the emissions from the power sector, or a reduction of a bit more than 5% of all US net emissions. And that’s probably a conservative estimate, since the best combined-cycle gas turbine power plants emit less than half the CO2 per kWh of the oldest, least efficient coal-fired plants.

There are two principal reasons we aren’t doing this already. The simplest is that coal has generally been much cheaper than gas on a fuel cost per kWh basis. However, the recent drop in gas prices has already put significant pressure on coal prices. At $4 per million BTUs, even at an unspectacular turbine heat rate of 8,500 BTU/kWh, the marginal fuel cost of gas-fired power is only 3.4 cents/kWh. But $4 gas may not be sustainable, since shale deposits are not exactly low-cost sources. The current long-dated gas futures price of roughly $7/MMBTU reflects that. In order for gas to displace large quantities of coal, it would probably take both stable gas prices higher than today’s plus the kind of CO2 pricing envisioned under cap & trade–provided the utility sector isn’t entirely insulated from this by excessive free emissions permit allocations.

Another reason for the current fuel mix is that most coal-fired power plants were built to run in baseload mode at high utilization rates, while many gas turbines were built to run intermittently to cover mid-peak and peak power demand. They probably couldn’t all run at an 80-90% utilization rate, though we wouldn’t need them to. They’re also not evenly distributed around the country. California has lots of gas turbines, because that’s pretty much all you could build there since the 1970s. That’s not true everywhere. However, probably the biggest limitation has been concerns about the long-term availability of gas. Power generation already consumes 29% of the US gas supply, which in 2008 was about 87% domestic and 13% net imports, mostly from Canada. Until recently, any incremental demand would have been expected to be met mainly from imported LNG, at a higher price than domestic gas, or by destruction of existing demand in other sectors, such as chemicals. Abundant shale gas has altered that outlook, while putting downward pressure on LNG prices, as well.

In some respects, this is all somewhat “back to the future”; a decade ago it was widely assumed that natural gas would play a pivotal role in reducing our emissions. That notion went partly out of fashion, as gas prices climbed and environmentalists focused more on the lower emissions from wind and solar power, which despite their rapid growth still generated only 1/16th as much power as gas last year. The potential of shale and other “unconventional” resources makes gas once again a viable medium-term strategy for mitigating climate change, with a few caveats. I recall seeing similarly exuberant forecasts of gas supplies in the late 1990s, just before conventional onshore production nosedived and prices spiked. Shale gas looks more sustainable, but it depends on lots of well-capitalized companies drilling like crazy and earning enough from that to keep on drilling. If the economics don’t hold up, most of that gas will stay underground. It also depends on drilling techniques that have suddenly become controversial, as noted on API’s new blog. Preserving this option for reducing GHG emissions will require Congress and regulators to stay focused on the big picture.

http://energyoutlook.blogspot.com/2009/06/shale-gas-and-climate-change.html

December 31st, 2009 | Posted in natural gas | Comments Off

To Bury CO2 or Recycle It

http://energyoutlook.blogspot.com

While not the most powerful of the greenhouse gases produced by humanity, CO2 is certainly the most prevalent, if you don’t count water vapor. To a very large extent, addressing climate change depends on three main strategies for dealing with the excess CO2 our activities emit: avoiding its creation by switching to other energy sources, such as renewables or nuclear power; capturing and storing it in trees, other vegetation or underground; and recycling it into useful fuels and products. Most of the work to date on the third option has focused on biofuels, which employ photosynthesis to convert CO2 into vegetable oils or fermentable sugars. However, another strategy now attracting interest involves non-photosynthetic pathways for turning CO2 back into hydrocarbons. If practical, this approach has much to recommend it, though the laws of Thermodynamics suggest it will always require more energy than the resulting fuels can deliver when used. A recent conversation with the CEO and CTO of Carbon Sciences, Inc., a start-up pursuing CO2-to-fuel technology, shed some interesting light on the subject.

The magnitude of global emissions of CO2 makes managing them a daunting prospect. Carbon Capture and Sequestration (CCS), which creates an artificial carbon cycle, has garnered much political and financial support in the last year, though it is still in the development stage and faces significant hurdles. CO2-to-fuel conversion offers another interesting option, because it could either work in parallel to CCS to enhance the reduction of emissions from fossil-fuel power plants and other stationary sources, or in competition with sequestration as an outlet for the captured CO2 from such facilities. If the resulting synthetic fuel displaced a like quantity of petroleum, natural gas or coal, the effect on the atmosphere would be largely equivalent to CCS and likely better than conventional biofuels, which appear to result in substantial non-combustion releases of CO2 and other GHGs. Fuels produced from recycled CO2 could finesse many of the NUMBY concerns about CCS while beating corn ethanol and some biodiesel on overall “green-ness” and compatibility with existing fuel infrastructure and transportation fleets. So why aren’t we already doing this?

The answer is simple. When we burn the carbon compounds found in fossil fuels, they produce CO2 and a specific quantity of energy that is unique for each molecule. Turning CO2 back into the original fuel compound requires the input of that same amount of energy–that’s from the First Law of Thermodynamics–and in practice a bit more, thanks to the Second Law. Chemists have known for a long time that CO2 could be converted into fuel and chemicals, but outside the laboratory this wasn’t regarded as useful, because it inherently consumed more energy than it could return. Biofuels get caught up in this same conundrum, though in their case much of the energy required is supplied by the sun, rather than from other fuels and energy inputs we must produce. So I was quite intrigued when I received an email inviting a conversation with the CEO of Carbon Sciences, the start-up I mentioned earlier, which claims to have solved this problem using “biocatalysts”, nanotechnology, and a unique multi-step process.

The company’s website includes animation showing how this would work, though from my perspective it omits the key factor: where does the energy come from to drive the process? Catalysts and enzymes can reduce the threshold for the reaction to take place and improve its speed–the reaction kinetics, in engineering terms–so that what would otherwise take nature years or millennia to produce can be accomplished in a commercially-practical interval. However, catalysts can’t alter the basic energy requirement of the reaction. What is the source of that energy?

My discussion with Carbon Sciences’ CEO Byron Elton and Chief Technology Officer Naveed Aslam, Ph.D. assuaged my immediate concern that this was yet another perpetual motion machine dressed up with technical jargon and fancy graphics. They struck me as pragmatic and realistic about the challenges they face, though with the customary optimism required for entrepreneurial risk-taking. Dr. Aslam clarified that their process for converting CO2 to methanol for later conversion into hydrocarbons or petrochemicals involves a hydrogen-and-energy carrier molecule that must be regenerated from a “sacrificial substrate.” That substrate effectively provides the energy required for uplifting the CO2, which is at a very low energy state, and acts as the fuel source for the whole sequence. The value of the entire CO2-to-fuel process in energy, economic and emissions terms thus hinges on the characteristics, cost and supply potential of this energy-donating material.

The process developed by Carbon Sciences can apparently use a variety of substances for this purpose, which is fortunate. Initial laboratory tests apparently involved glucose, a commercially-available sugar, but the company is now using another, undisclosed feedstock because of their concerns that glucose supplies couldn’t keep up with a large-scale CO2-to-fuel industry without affecting food prices. Dr. Aslam indicated that in the long run they would likely use a mineral-based compound that was widely available. Without knowing the specific chemical involved, it’s impossible to assess the overall energy balance, lifecycle emissions, or usefulness of the process, but I at least came away with a sense that Mr. Elton and Dr. Aslam understand the constraints involved very well.

And while the global supply of CO2 certainly looks large enough, it has to be provided in the right form: highly concentrated and free of contaminants that could degrade their catalyst or retard the reaction rate. That is a very different requirement from biofuels that extract their CO2 from the air, and it would put CO2-to-fuel in direct competition with carbon sequestration and enhanced oil recovery, which also effectively produces incremental fuel from CO2. It’s not obvious to me which technology will advance the fastest, offer the largest overall CO2 reduction, or the most attractive economics. Markets are usually the best way to sort that out, if given the right signals.

Nor are Carbon Sciences the only ones working on this problem. A team at Sandia Laboratory has been developing a “Sunshine to Petrol” system using CO2 and concentrated sunlight, while the new Advanced Research Projects Agency-Energy (ARPA-e) is looking into a variety of novel ways to convert CO2 into fuel without photosynthesis.

It’s important to note that Carbon Sciences’ conversion technology is still at an early phase of development–lab-scale, rather than demonstration-scale. “Milliliters per day” won’t solve our energy or emissions problems, but if this can be scaled up to many thousands of barrels per day with a cheap and readily-available source of chemical energy and a suitable supply of CO2, it has the potential to deliver fuels that are 100% compatible with our current infrastructure and vehicle fleets. That’s a big advantage, and it would certainly explain the interest that Carbon Sciences has apparently been getting from large energy firms. I was told that Carbon Sciences hopes to develop a commercially-attractive package by the third quarter of 2010 and are exploring a “strategic partnership” to take the process–and the company–to the next phase. They have also applied for DOE technology funding under the category of “Innovative Concepts for Beneficial Uses of CO2″. I will be watching their progress with great interest.

http://energyoutlook.blogspot.com/2009/12/to-bury-co2-or-recycle-it.html

December 31st, 2009 | Posted in Carbon Emmssions, Energy, Technology | Comments Off

Talking Energy: carbon capture and storage

http://www.telegraph.co.uk

Andrew Charlesworth

The UK is facing transformation of its energy generating system. The closure of end-of-life nuclear and coal power stations is coinciding with ambitious commitments to reduce carbon emissions and the demise of North Sea gas.

Whatever we replace our current generating capacity with has to provide affordable, reliable and lowcarbon power – an energy trilemma.

This fifth article in a series of 10 looks at where carbon capture and storage fits into the trilemma debate. Coal used to be the mainstay of UK electricity generation. But falling gas prices over the last three decades have seen us play it down.

Now, aware of the need to balance our options, we are reconsidering our use of coal. “Given the importance of supply diversity to our security, it would be foolish to abandon coal,” wrote ex-energy minister and MP for Croydon North Malcolm Wicks in his report Energy Security: A national challenge in a changing world. “UK coal production could be retained at current levels of around 20 million tons per year through to at least 2025.”

Unfortunately, coal emits more than double the CO2 as gas per kilowatt of energy produced when burned. Step forward carbon capture and storage (CCS) – sometimes called “clean coal” – which promises to remove a large proportion of emissions from burning coal.

“Promise” is the choice word. Current research by the Carbon Sequestration Leadership Forum suggests there are 273 CCS projects under way worldwide, 64 of which are of commercial scale. Of those, seven are operational end-to-end, but none as yet generate electricity.

“Carbon capture has been used in petrochemical and chemical processes for many years,” says Andy Read, clean coal business development manager at E.ON. “We are confident we can build CCS at a commercial scale. We know the technology needs to improve and are confident it will.”

In October, energy secretary Ed Miliband reaffirmed the Government’s commitment, stating that no new coal station can be permitted without at least a quarter of it having CCS capability.

The government is currently running a £1bn competition to fund a CCS plant. There are currently two entrants in the competition; E.ON and Scottish Power.

Of course, this money has to come from somewhere, and the new Energy Bill has clauses in it for a levy on energy bills to fund up to four CCS projects, in line with the Government’s Low Carbon Transition Plan and the recommendations of the Climate Change Committee.

The four CCS plants would play a role in achieving the goal of a 50 per cent cut in emissions from the power sector by 2020, the Committee’s report said. It is also thought that the European Commission will fund a 900-megawatt plant with CCS fitted at Hatfield in Yorkshire.

Fully operational CCS as it is envisaged by the power companies is still several years away and developing it to a reliable technology will be expensive.

So, we can’t rely on CCS alone to fulfil all three criteria of the trilemma – reliability, affordability and low-carbon. Nevertheless it is another part of the mixed portfolio of sources that the UK needs in order to meet its future energy requirements.

Carbon Capture and Storage (CCS): why it matters

CCS (carbon capture and storage) covers a range of techniques for removing most of the CO2 emissions from coal-fired power stations.

The two main techniques, pre- and postcombustion have their pros and cons, their cheerleaders and critics.

Neither is suitable for retrofitting to the UK’s old coal-fired power stations, so whichever is used we would need to build new plants. Both require captured CO2 to be stored as liquid in underground chambers, such as depleted gas fields, so they require pipelines from power station to storage site.

The techniques involved are all in current use: post-combustion CO2 is used in fizzy drinks; pre-combustion gasification is used in the production of ammonia; and CO2 is injected into gas and oil fields to drive out the last reserves.

But no one has yet combined these in an end-to-end process at the scale required for clusters of power stations. Oxyfuel technology, an alternative carbon capture technique, is under trial in Germany.

CCS is vital to the struggle against global climate change, because the emerging economies of India and China are almost wholly dependent on coal for electricity generation.

Speaking at the Carbon Sequestration Leadership Forum in London in October, US energy secretary Steven Chu predicted it was highly unlikely that the US, China and India would stop burning coal.

The International Energy Agency estimates 100 CCS plants will be needed by 2020, up to 850 plants by 2030 and 3,400 plants by 2050.

CCS technology developed in the west will probably be deployed in countries like China and India as part of a deal to help them industrialise without skyrocketing emissions.

Indeed, work began on China’s first clean coal plant, in the northern city of Tianjin, in June. The $1bn project is funded by a group of investors, one of which is US coal giant Peabody Energy.

http://www.telegraph.co.uk/sponsored/lifestyle/talkingenergy/6672153/Talking-Energy-carbon-capture-and-storage.html

December 31st, 2009 | Posted in Carbon Emmssions, Technology | Comments Off

The Peak Oil Crisis: Accusations

http://www.fcnp.com Tom Whipple

Not many years from now, there will be a huge uproar over who missed the coming of peak oil. There will be Congressional hearings and much finger pointing and protestations that the peaking of world oil production was impossible to predict.

It will all sound much like current discussions of whether our great recession was foreseeable. The uproar will come amidst very high gasoline prices and still greater economic difficulties and, hopefully, widespread understanding that the final energy crisis has begun.

Last week we had an early insight into the recriminations when the UK’s Guardian newspaper (formerly the Manchester Guardian) published an exposé on how the world’s official keeper-of-the-books on energy matters, the International Energy Agency (IEA), has been manipulating its forecasts. Two senior IEA officials, one active and one retired, were the sources of the story which was corroborated by others who have had close contact with the inner workings of the IEA in recent years.

The most damning part of the exposé was the allegation the manipulation of the oil production forecasts was done at the behest of the United States government which feared the consequences, should it become generally known and believed that oil soon would no longer be available in unlimited quantities. Oil products would become too expensive for many uses and the world would change forever. The IEA, of course, immediately denied that they were cooking the books to keep the Americans happy. They pointed out that for at least the last two years they have been warning of a near term supply crunch and that hundreds of outside experts reviewed their projections.

The evidence however that their projections were out of line with reality is very strong - whether American pressure was involved or not. Five years ago the IEA was projecting that world oil production would increase by another 35 million barrels per day (since reduced to 20) at a time when existing oil fields were depleting faster and faster. Every serious, unbiased, outside analyst that looked at the numbers said their projections were absurd as they required discovering and producing from new oil fields at a rate faster than had ever been achieved in the history of the oil age.

This, of course, would all be an interesting academic debate except that the fate of industrial civilization over the next century is at stake. Every one looking at the oil depletion problem has concluded it will cost trillions of dollars and take decades to effect a transition from oil to some other form of energy to keep civilization running in a recognizable form. Even then the chances of “success” are not that good. The longer we put off serious planning and implementing this transition to a post fossil fuel world, the worst the situation will get. However, to this day, almost no senior politician anywhere in the world has been willing to step forth and lay out the case that we almost certainly have one of the most serious problems of the 21^st century just over the horizon.

We can probably give a pass on responsibility for ignoring peak oil to the Clinton administration. When the administration left office in January 2001 the proximity of peak oil was understood by only a handful of people, and peak production was still five years off. The Bush administration, however, is another matter. By Bush’s second term, the debate over peak oil was going hot and heavy, much research had already been published, and dedicated governmental energy research organizations such as the US’s EIA and OECD’s IEA certainly were aware of the likelihood that large increases in oil production could not continue much longer. Some are already holding the Director of the U.S.’s Energy Information Administration during the Bush Administration responsible for ignoring peak oil and for pressuring the International Energy Agency. For now however we can leave this up to the Congressional investigators.

While In its first ten months the Obama administration has made valiant efforts to stem carbon emissions, so far as is known, it has never mentioned the far more imminent problem of peak oil. Third parties report that Obama’s Energy Secretary Chu understands peak oil and its ramifications, but so far has remained silent as have the President and other senior officials.

The problem of course as we now have witnessed through two US administrations, and numerous foreign ones, is how does a government start to explain the phenomenon, peak oil, and more importantly the extreme sacrifices required to mitigate its occurrence to its citizens. Suppose the President gave a prime-time speech describing the evidence for the proximity of peak oil and laying out proposals to the Congress as to what needs to be done. It does not take a rocket scientist to deduce that there would be a huge political flare-up and likely a collapse of the equity markets. The President’s political opposition, which has yet to figure out just why polar ice caps are melting, would go completely berserk at the hint of restrictions either through taxes or other means on energy consumption.

There would be calls for impeachment and the likelihood that any legislation could be passed that might be helpful in preparing for or mitigating the consequences of global oil depletion for the time being are zilch. The reason of course is that the evidence for peak oil must first become so overwhelming that even the simplest amongst can understand that there is no cheap and easy way out of the problem

All this means that it is unlikely that our leaders will be taking the initiative to head off and attempt to mitigate the consequences of peak oil prior to its arrival. The political consequences of raising the issue in a polarized political world would almost certainly be seen as too uncertain and too severe.

http://www.fcnp.com/commentary/national/5301-the-peak-oil-crisis-accusations.html

November 18th, 2009 | Posted in Alternative Energy, Economy, Energy, peak oil | Comments Off

Scientific American’s Path to Sustainability: Let’s Think about the Details

http://www.theoildrum.com

Scientific American presents “A Path to Sustainable Energy by 2030″ in its November issue. In many ways, it sounds good. But let’s think about the details: What would the end result look like? Would it really be sustainable? What would the costs really be? Is there any way we could afford to do what is proposed?

The authors of the article, Mark Jacobson and Mark Delucchi, propose substituting wind, water, and solar (WWS) energy for all other forms of energy by 2030, not for just the US, but for the world. The types of energy sources that would be eliminated include the following:

• Petroelum (including gasoline, diesel, propane, heating oil, etc.)
• Natural gas
• Coal
• Liquid biofuels, such as ethanol
• Wood and other biomass
• Nuclear

All that would remain would be wind, wave power, tidal energy, hydroelectric, geothermal, and solar. Because of the ambitious timeframe, the only techniques that can be used are ones that work at large scale today, or are very close to working.

What would we end up with?

Essentially, we would need to change all of the world’s infrastructure to use either electricity or solar or water power directly–by 2030. What might this mean?

• Airplanes. The authors propose that airplanes be powered by hydrogen powered fuel cells (with the hydrogen be made by hydrolysis using WWS energy sources). I understand that hydrogen is three times as bulky as gasoline, and escapes fairly quickly from its holding tanks, making it difficult to store for very long. It seems like airplanes and helicopters would need to look more like blimps, to hold the necessary fuel.

Ships. The authors don’t tell us how ships would be powered. Clearly sailing ships would meet the criteria, but would be quite slow. Because of their slow time for passage, we would need a lot more sailing ships than the types of ships we use now, because so many would be in transit at a given time. Barges could float down rivers, and if the current isn’t too strong, could perhaps be towed back in some way (boat with fuel cell?). Ships powered by hydrogen fuel cells might also work, but they would have the same issues as for airplanes. Because of their long trips, leakage would be more of an issue than on airplanes.

• Automobiles and Trucks. According to the authors, these would be powered by batteries or hydrogen powered fuel cells. There are several issues–the technology is only barely there for automobiles and trucks–for example, I don’t know of anyone working on battery-powered technology for long distance trucking. Fuel cell technology is very expensive. David Strahan in The Last Oil Shock says that the current cost is about $1 million dollars per car. He quotes the chief engineer at Honda as saying it would take 10 years to get the cost down to $100,000 a car.

Minerals shortages are also likely to be a problem for converting autos and trucks to batteries or to hydrogen fuel cells. The Scientific American article mentions following materials as being in short supply: rare-earth metals for electric motors, lithium for lithium-ion batteries and platinum for fuel cells. The article mentions recycling as a partial solution. Analyses published at The Oil Drum, such as this one, indicate that we would likely run out of rare materials fairly quickly, even with recycling.

• Farm equipment; bulldozers; cement mixers; and other heavy equipment. Would need to be converted to electric. It is not clear that the technology (or rare materials needed for the technology) exist to do so.

• Heating of buildings; heating for cooking and baking; hot water heating; commercial heating; heating of grains to remove excess moisture. Would need to be converted to electric, or in some cases solar. This would be true, even where heating is now done over wood or charcoal fires, such as in Africa or China.

• Mining and manufacturing. Would need to be converted to all electric. Presumably oil and natural gas extraction would continue, but at possibly lower rates, because of their uses for non-energy uses, such as textiles, asphalt, plastics and lubrication. Drilling for oil and gas would be converted to electric as well.

What steps would be needed to build all of these things?

It seems like we would first need to figure out what the end point would look like, and then work backwards.

We are told that the authors of the Scientific American article think we would need the following:

• 3.8 million large wind turbines

• 90,000 solar electricity generating plants

• “Numerous geothermal, tidal, and rooftop photovoltaic installations”

Besides these, we would need to build all of the new airplanes, ships, cars, trucks, heavy equipment, and new appliances that would be needed under the new regime. Individual homeowners would need to get their homes rewired for the larger amount of electricity they would use–especially if they are converting to electric home heating.

One thing we need to plan for is a greatly expanded and improved electrical grid. The Scientific American article indicates that the variability in generation would be mostly smoothed out by combining electrical transmission of many different types–wind, hydroelectric, solar, geothermal, and wave–over a wide geographical area. To do this will require considerable long distance transmission, often between different countries–including some that may not be friendly with each other. The grid will also need to be upgraded to be “smart,” so automobiles can draw electric power at the times of day when it is not needed elsewhere.

Once we have figured out what the new system will look like, we will need to figure out what kind of factories are needed to build all of the devices for the new system, and what raw materials the factories will need. Some of the raw materials can perhaps be obtained by recycling, and some factories can perhaps be obtained by converting other factories, but this won’t always be the case. It is likely that new factories will need to be built, and new mines opened, especially for the rare minerals.

By the time we start seeing many finished good produced, it is likely that we will be at least half way through the 20 year period. In part, this is because we are still working out technology details (for example, how to efficiently build a hydrogen fuel cell powered airplane). Also, once we get those details worked out, we need to build mines for raw materials and build the factories to make the new devices. It is only when we get those steps taken care of that we can build what we really want–the airplanes, the new ships, the wind turbines, the solar PV, and all of the rest.

When sizing the factories, we will need to size them not for “normal” production levels, but for converting the economy quickly to use the new power sources. For example, under normal circumstances, if earth-moving equipment is expected to last for 40 years, we would expect to need factories to make 1/40 of the world’s needed earth-moving equipment in a given year. But if we need to ramp up to replacement in 10 years, we will need 4 times as many factories. (What do we do with the excess factories at the end?)

How much would this all cost?

The authors tell us that they expect the cost of the new WWS energy generation equipment would be $100 trillion over 20 years. But that doesn’t include the cost of all the new infrastructure to go with it–the new airplanes and ships and cars and trucks, or the electrical transmission lines. In total, the cost will be far higher than $100 trillion–lets guess $200 trillion–to be paid for over the next 20 years.

The Scientific American article gives the impression that the costs will be low, because it looks only at the cost the new electricity generation, and assumes that cost of generation will go down with volume and with additional research. It also implicitly assumes that debt financing over a long period, such as 40 years, will be used, so we don’t have to pay for the cost of the new system before we start using it. But how realistic is that?

The cars, trucks, boats, airplanes, coal fired power plants, etc. we are currently using won’t have much trade-in value once power is generated by WWS, and the new equipment will likely be fairly expensive. So we will be faced with buying new high priced equipment, with little trade-in value from what we used previously. In many cases, businesses would not normally be replacing equipment this soon. The debt that was taken on to pay for all of our current equipment won’t magically go away either–it will still need to be paid.

So how will we pay for all of the new equipment? The governments of the world are pretty much maxed out for borrowing. Companies are not going to be able to take on a project of this magnitude either, especially since they already have debt to service. It seems to me that the only way a program such as the program of WWS fuels replacing other fuels can be financed is through increased taxes that would cover each year’s expenditures, as they are made.

So let’s think about how much this would cost. $200 trillion over 20 years amounts to $10 trillion a year, spread over world economies. The US share of this would be something around 21%, based on the ratio of US GDP to world GDP. So let’s say that the US would need to fund $2.1 trillion a year. Let’s compare this to current taxes. In 2008, US Federal, State, and Local taxes combined amounted to $4.1 trillion according to the US Bureau of Economic Analysis. In order to collect $2.1 trillion more, a tax increase equal to slightly more than 50% of all taxes currently paid would be required. If the additional tax were collected as a percentage of “personal income” (which includes wages, social security income, rents, dividends, etc.), it would amount to 17% of personal income. It seems unlikely that a tax of this magnitude, or even half of this magnitude, would be agreed to by tax payers.

If such a tax were passed, after a few years there would be benefits that would start offsetting its cost, and might lead to a lower tax, and after 2030, perhaps lower costs overall, because it is no longer necessary to purchase fossil fuels. The benefits that would start offsetting costs would be sales of electricity and other energy, and sales or leasing of vehicles and other goods produced. Many of the sales of goods would be going to replace automobiles that had worn out, factories beyond their useful life, and ships that no longer had value to the owners.

But there is a remaining issue. There will be a lot of assets which would still have considerable value in 2030, if it weren’t for the new law. For example, a new car with an internal combustion engine that was manufactured in 2028 will still have considerable value, and a gas fired stove a homeowner owns will still have value, even though he needs to replace it with an electric one. A coal fired power plant built in 1980 is likely to still have value, apart from this law, and so will all of the tankers used for international transport of oil, and all of the natural gas pipelines. Should the owners of these assets be compensated for value of their otherwise-useful assets? There is nothing built into the tax to do so.

It would seem to me that these owners should be compensated, even if it takes a higher tax to do so. In part, this compensation could come in the form of “trade in” value, if a new automobile or electric stove or other item is purchased. But suppose the assets that lose value belong to businesses, and aren’t easily traded in for corresponding asset–such as a coal fired power plant, or natural gas pipelines. I would argue that compensation for the remaining value of these is really needed as well.

The assets that will lose value because of the new law are typically owned by a company. The stocks and bonds of these companies will generally have a wide variety of owners–very often pension plans, insurance companies, endowment funds, and individuals saving for their retirements. If the otherwise-useful assets of these companies are taken without compensation, the companies are likely to default on their bonds, and the stocks of these companies will lose value. This will mean that some pension funds will not be able to pay their promised payments, and some life insurance policies will not pay as promised. If there is no compensation to these companies by a tax or some sort, the loss will flow through the system and hit others–with retirees likely hit the hardest. So there will be a loss to the system, one way or another.

How sustainable would this system be?

There are a number of weak areas in this system:

• There are not likely to be enough rare minerals (and even not-so-rare minerals), to make all of the desired high-tech end products. Recycling will help, but it is likely that the system will run into a bottleneck in not very many years.

• The system will use a huge number of electrical transmission lines. These transmission lines are subject to all kinds of disturbances–hurricane or other windstorm destruction, forest fires, land or snow slide, malicious destruction by those not happy for some reason (perhaps those unhappy by wealth disparities). Fixing lines that need repair will be challenging. We currently use helicopters and specialized equipment. These would need to be adequately adapted to a system without fossil fuels.

• If electricity is out in an area, pretty much all activity in an area will stop (except that powered by local PV), and there will be no back-up generators. Residents will not be able to recharge vehicles, so they will quickly become useless. Even vehicles coming into an area may get stranded for lack of recharge capability. Food deliveries and water may be a problem. The current system at least offers some options–back-up generators, and cars and trucks powered by petroleum that one can drive away.

• Operating the system will require a huge amount of international co-operation, because the transmission system will cross country lines. If one country becomes unable to pay its share, or fails to make repairs, it could be a problem.

• All of the high tech manufacturing will require considerable international co-operation and trade. This could be interrupted by debt defaults by major players, or by countries hoarding raw materials, or by difficulty in producing enough ships and airplanes to handle international trade.

• The system clearly can’t continue forever. It could be stopped by a lack of rare minerals, or international disputes, or lack of adequate international trade. The system doesn’t provide any natural transition to a truly sustainable future. For example, food production is likely to still be done using industrial agriculture, with the food that is produced shipped to consumers a long distance away. It will be difficult to transition to a system which is truly sustainable at the point the system stops working.

What would a reasonable timeframe for transition be?

It seems to me that a reasonable timeframe for a transition such as that discussed in the Scientific American article would be 50 years, rather than 20 years suggested in the Scientific American article. With such a timeframe, there will be a little more time to fine tune technology, so as to find cost-efficient solutions that scale well. We also have more time to use the factories that are built, so that we don’t have to overbuild, just to meet a deadline. Costs are likely to much easier to handle, since there will not be as much of an overlap issue. In addition, there will be much less problem of having to dispose of other-wise useful assets.

The problem is that we really don’t have 50 years to make a transition. We already are on the downslope. We should have started back in the 1960s with a project like this.

It seems to me that all we can do is a very much reduced version of an approach such as the one described in the Scientific American article. Given the timing, we may not even want to do an approach such as described in the article. The approach described assumes a high level of international trade continuing long-term. This is a fairly optimistic assumption, given the difficulty of air and ship transportation without fossil fuels.

Instead of the high tech approach advocated by Scientific American, we may want to find solutions that can be done locally, with local materials. For example, we may want to encourage local agriculture. For industry, we may want to look at solutions that have worked in the past, such as wind powered factories, as discussed in this recent post. These were built with local materials, and were used to power factories directly, without conversion to electricity. With such solutions, a transition to a truly sustainable future will be much more of a possibility.http://www.theoildrum.com/node/5939#more

November 17th, 2009 | Posted in Alternative Energy, Carbon Emmssions, Economy, Energy, Environment | Comments Off

Peak Oil Should Still Worry You: The Hot Air in New Natural Gas Estimates

http://www.examiner.com Seamus Ford

The Cavalry is not coming to the rescue us from our wasteful lifestyles

According to an article this week in the UK’s Guardian Newspaper a whistleblower at the International Energy Agency said that the US pressured the agency to be complicit in underplaying the increasing decline of global oil reserves.

In light of this, recently revised estimates of Natural Gas reserves in North America should be taken with a grain of salt even thought they have some people calling the United States the Saudi Arabia of natural Gas. These excited comparisons are based on new techniques that allow natural gas to be extracted directly from Shale formations. Geologists have always known that natural gas exists in shale formations. (You can crack a chunk of shale and hold a match up to it and momentarily get a flame.)

The reason for the recent optimism is that newly developed technique called hydro-fracturing where horizontal drilling is combined with pressurized water to fracture the surrounding rock thus creating millions of cracks that allow the natural gas to seep into perforated pipe at the bottom of the well. There several things to consider when hearing such optimistic projections.

From an environmental standpoint, what is over looked are the thousands of already documented cases of ground water contamination. In the same way that the fracturing of the rock allows the gas to seep into the well it also can allow it to seep into the aquifer. For example, there are instances of towns in Texas where people have been able to hold a match to their tap water and ignite the natural gas that is in the water. People may need natural gas, but they need water more and this technique is dangerous to an already jeopardized water supply.

If somehow undertaken on the scale proposed in these optimistic projections it would almost certainly lead to a public backlash similar to that experienced by nuclear power after Three Mile Island.
The other aspect is the unproven energy economics of taping this resource. Setting certain environmental damage aside there is no certainty that this technique can be done on a wide enough scale to be able to replace oil in our transportation needs. Oils shale has shown to have a very quick depletion rate with many wells loosing 70% of their flow rate within one year. If natural gas is even to have a chance to replace oil in the It would require drilling on an almost unimaginable scale. Keep in mind that drilling a well (through perhaps mile or more of rock) can take up to two years. Quite simply the time required to drill a well, combined with the very high rate of decline in a shale gas well cannot be counted on to come to market fast enough to provide a reliable solution. To get an idea of the kind of drilling that would be required see this Quote from the R-Squared Energy Blog:

“The U.S. currently consumes 390 million gallons of gasoline per day. (Source: EIA). A gallon of gasoline contains about 115,000 BTUs. (Source: EPA). The energy content of this much gasoline is equivalent to 45 trillion BTUs per day. The energy content of natural gas is about 1,000 BTUs per standard cubic foot (scf). Therefore, to replace all gasoline consumption would require 45 billion scf per day, or 16.4 trillion scf per year. Current U.S. natural gas consumption is 23 trillion scf per year (Source: EIA). Therefore, replacing all gasoline consumption with natural gas would require a total usage of 39.4 trillion scf per year, an increase in natural gas consumption of 71% over present usage.”

Additionally, expanding our use of natural gas to remake our transportation fleet will drive the cost of natural gas up for our already existing uses. Additionally, according to www.greencar.com estimates on the cost of converting a vehicle to natural gas range from 12 to 22 thousand dollars. This makes a natural gas vehicle exceptionally expensive during a time when it is harder for more and more consumers to afford.

Other things to consider are:
Historically speaking, estimates of any energy reserve are almost always conflated. How long can Shale gas be expected to last? Extracting gas from these new locations will require the creation of new pipelines which will add to the cost of the gas and add to the time it will take to come to the market. Do we/will we have the resources to create a whole new infrastructure?

All this is to say that while natural gas will certainly be part of the future energy solution, it will not be a panacea that saves us from having to make significant changes to the way we live.

http://www.examiner.com/x-28586-Chicago-Environmental-News-Examiner~y2009m11d11-Peak-Oil-Should-Still-Worry-You-The-Hot-Air-in-New-Natural-Gas-Estimates

November 17th, 2009 | Posted in Oil and natural gas, natural gas, peak oil | Comments Off

What Oil Price can America Really Afford?

http://www.thecuttingedgenews.com Steven Kopits

Saudi Oil Minister, al-Naimi, has warned that under-investment in oil capacity may lead to a return to $150/barrel oil, “or even worse.” The Paris-based IEA has also warned of price shocks due to resurgent demand and restricted investment. Will a high price environment truly emerge, or are price spikes followed by brutal recessions more likely, as experienced in the last year? And what is more important, the absolute price of oil or the rapidity of the price increases? A tour through the historical record may provide some insight.

The burden of oil consumption

In the last 37 years, the US has suffered six recessions. From the beginning, oil played a central role. As the period opened in 1972, Saudi Arabia was selling oil for about US$2.50/bbl – or about $13.50 in today’s prices. Oil had seen a decade of unprecedented growth. The US and Western Europe were finishing the process of motorization of their societies, and demand had soared from just over 20 MMbbl/d in 1960, to more than 50 MMbbl/d by 1972. At the same time, US oil production had peaked in 1970 and had begun to decline. The time was ripe for a shift of power to the up-and-coming OPEC producers, and it was not long in coming.

The fourth Arab-Israeli war broke out in October 1973, and the Arab Oil Embargo was imposed that same month. Within a month, the price of oil had doubled, and the US had plummeted into recession. Oil would double yet again within another two months, and by mid 1974 was trading at $15/bbl, about $55 in today’s prices, pushing the US deeper into the downturn. The US did eventually emerge from the recession, but the price of oil did not decline and remained in the $13-15 range until 1979. In the interim, the economy struggled with stagflation, a combination of high inflation and low growth, and the oil price was a primary cause.

The US economy has tended to grow well when oil consumption expenditures were less than 2 percent of GDP. In the early 1970s, for example, oil ranged from 1 percent to 2 percent of GDP. By contrast, from 1973 through 1978, oil consumption’s share of the economy peaked as high as 6.3 percent, never fell below 4 percent, and averaged 5.3 percent of GDP. In other words, oil expenditures represented a drag of about 3 percent of the economy throughout the period.

Many Americans remember the era as a depressing time, not only of economic difficulty, but also of political uncertainty as the country grappled with its military loss in Vietnam and the rise of communist regimes across the globe. The tide of history looked to be running against the United States. And it would get worse.

In January 1979, the Iranian Revolution broke out, and oil markets were savaged for the second time in a decade. Within a year, oil prices had doubled yet again to $30 ($90 in 2008 dollars), and the US was once again in recession. Oil consumption leapt from 5 percent of GDP to 8 percent and on to 9 percent (peaking at over $100/bbl in today’s dollars), in what would mark a recession that, for all purposes, would last the three years from 1980 to 1983.

The Federal Reserve Bank in the 1970s, under its Chairman Arthur Burns, had sought to counteract higher oil prices with an accommodative monetary policy in the hopes of maintaining “full employment.” This would prove unsuccessful, and inflation soared to 12 percent under his term, creating the malaise of stagflation. In 1979, Burns was succeeded by Paul Volcker, who brought monetary discipline to restore the foundations of the economy. Volcker raised interest rates and began to grind inflation out of the economy.

Without the cushion of inflation, the full effects of oil prices hit the consumer, and oil consumption was slowly crushed out of the economy. From 1978 to 1983, US oil consumption declined from 18.9 MMbbl/d to 15.2 MMbbl/d, a decline of 20 percent. Demand would not recover for nearly two decades. Indeed, the effects of OPEC’s pricing policy were felt globally. World demand peaked in 1979 and did not return to this level for a decade. For its part, Europe would never see its 1979 peak again.

However, the policies of Volcker and other central bankers would have their effect, and by 1983, oil consumption as a share of the economy had fallen dramatically. By 1986, it would fall sufficiently to break the will of OPEC, and Saudi Arabia would abandon its role as swing producer, never to return. The price of oil fell, and US oil consumption fell back to 2 percent of GDP. The “Great Moderation” had begun. Equities began their long bull run, inflation would remain tame, and the developed economies would begin a long period of prosperity.

But not without a few bumps in the road. In 1990, Iraqi strongman Saddam Hussein invaded Kuwait, prompting a military response from the US and a brief recession. Oil prices spiked only for a few months, but even this was enough to down the US economy, and the US suffered a shallow downturn which would bring Bill Clinton to the White House (“It’s the economy, stupid.”).

The US would also suffer one more recession before the current one, the bursting of the technology bubble in 2001. This recession is generally not linked to the price of oil, but even here, as we will see, oil may have played a role.

In every case when oil consumption breeched 4 percent of GDP, the US has suffered a recession, and indeed, the current US recession began within two months of oil hitting the 4 percent threshold, that is, when oil reached $80/bbl.

Oil price volatility

Are oil price levels the critical factor, or do rapid prices increases – price volatility – also matter? As it turns out, recessions also correlate well with sustained oil price increases. Whenever oil prices have increased by more than 50 percent year-on-year (trailing 12 month average divided by the previous 12 month average), a recession has followed shortly.

Curiously, oil prices doubled in the year preceding the technology-led recession of 2001, a recession not ordinarily associated with an oil prices shock, and a recession in which oil consumption did not reach 4 percent of GDP, suggesting oil may have be implicated here as well.

On the other hand, the 1991 recession associated with the first Gulf War did not result in a sustained price increase. But prices did, in fact, double for a period of about four months – not enough to cause a 50 percent annual increase, but enough to cause a recession. While the case for volatility remains somewhat circumstantial, in general, a sustained rise in the oil price of 50 percent or more has always been associated with recession, and this applies to the current recession as well.

The ‘shed rate’

When OPEC raised oil prices in 1973/74, and again in 1979, the cartel was operating under the belief that oil was a valuable commodity that deserved a higher price. And indeed, early prices increases did take hold. However, OPEC assumed that consuming nations would not react to higher prices at any level. This proved untrue.

After the first oil shock, the US economy shed oil consumption over a three year period starting in 1975, reducing oil’s share from 6 to 4 percent of GDP. After the 1979 oil crisis, the economy shed 5 percent of oil consumption in GDP over a six year period. High oil prices will draw a response, and in the case of the US, oil consumption as a share of GDP will tend to be compressed to below 4 percent of GDP, and perhaps lower, exhibiting mean reversion characteristics.

The maximum rate of adjustment for the economy appears to be about 0.8 percent of GDP per year. That is, the economy cannot shed oil consumption instantaneously; society needs time to adjust. When the economy is adjusting at full speed, it tends to struggle. Adjustment tends to be characterized by recession, inflation, or generally low GDP growth. For example, the period of adjustment from 1974 to 1979 was characterized by stagflation.

Three rules for policy

History then provides us three rules by which to avoid recession caused by oil prices, notably:

Crude oil expenditures should not exceed 4 percent of GDP.
Oil prices should not increase by more than 50 percent year-on-year.
Oil price increases should not be so great that a potential demand adjustment should have to reach 0.8 percent of GDP on an annual basis, as shedding demand at this rate has generally been associated with recession.

The policy context
These rules can be applied to three alternative approaches to oil and climate policy, notably to:

Prioritize climate policy with economic impacts secondary;
Prioritize climate policy while taking a cautious approach to the economy; or
Prioritize economic well-being, with climate policy secondary.

A climate focus

If indeed climate change represents “mankind’s greatest challenge,” then economic dislocation associated with CO2 reduction may be considered a necessary cost of achieving the goal. Indeed some articles have commented on the beneficial effects of the recession in prompting Europe’s declining carbon emissions in the last year. The US is no less commendable. Oil demand in the US has dropped 10 percent from its peak in November 2007. From a purely climate-centric perspective, this may be considered a success. Nevertheless, while de-constructing the economy will achieve climate goals, as a practical matter, few would endorse such a policy.

A balanced focus

If we allow that the economy matters, a more balanced approach would seek set climate policy to reduce US oil consumption at rates below those which would normally be thought to induce recession. This would involve a tax at an effective rate lower than the maximum “shed rate” of 0.8 percent of GDP which has consistently been associated with recession. For safety, one might wish to target a rate of perhaps half the maximum, perhaps 0.4 percent of GDP per annum, which would equal about $8/bbl per year, or equate to approximately 20 cents/gal at the pump (based on crude barrels). At this price, the economy would have ongoing pressure to adjust to higher oil prices, but the rate of change would be set to avoid unmanageable and excessively rapid price increases.

An annual increase of $8/bbl represents less than a 50 percent price increase from current levels and therefore should not create a level of volatility which would cause a downturn. However, this approach would not take into consideration levels of spending, that is, under such a program, oil consumption as a percentage of GDP could exceed the 4 percent threshold which has generally been associated with recession. As such, this policy would prioritize climate change over the economy, but would seek to apply sustained pressure without pushing the economy into the abyss of recession and would allow fine tuning of policy moving forward.

An economy focus

A third approach would take as its primary focus the economic health of the economy. Energy price volatility is the key consideration in this approach. In the last year, oil prices have varied not by 20 cent/gal, but by 10 times that amount, $2/gal, since last July. Since December, gasoline prices have increased by four times the rate which might represent a prudent carbon tax.

In short, the impact of inherent price volatility is likely to dwarf the magnitude of any carbon tax that a prudent policy maker might apply. For example, the recent collapse in oil consumption and dramatic reduction in US carbon emissions is unrelated to any carbon tax. Instead, it reflects oil price volatility and its impact on the US economy. Therefore, the greater issue – and the more profound driver of oil consumption – is oil price volatility, and this matters perhaps an order of magnitude more than a prudent carbon tax in whatever form.

A policy prioritizing the economy would be geared to minimizing volatility in oil prices and achieving steady oil price growth instead of the boom-bust cycle of the last two years. As a function of its primary objective, such a policy would explicitly consider the impact of any carbon tax in the context of both price volatility and overall cost burden.

For example, historical statistics indicate that a 50 cent/gal tax on $1.60/gal pump price would be relatively benign. Such a tax at $4.00/gal would be expected to prompt a six-month recession. Therefore, a suitable carbon policy would reflect a “flex tax” approach in which the tax would decrease as oil prices increase.

Moreover, such a policy would seek to sustain oil consumption during periods of high prices and promote oil production during periods of low prices in order to preclude recession. Climate policy would be explicitly subordinate to sustained economic stability, if not growth. This policy would not be anti-climate per se; however, it would seek to channel the transition from dependence on oil through a relatively controlled and gradual process, rather than through a series of spike-and-crash recessions, and the explicit emphasis would be on sustainable economic activity rather than on the climate.

Managing what matters

In the end, the administration has to decide whether climate change is the most important matter at hand, in which case any energy-induced recession is worth the price; or whether the health of the economy is of paramount importance, and any climate policy must be subordinate to that.

If the health of the economy matters, then the administration should take note that oil, at the time of writing, stands around $70 and that the recession threshold, by the books, is $80. Oil prices do not have to rally very much to reach unsustainable levels for the US economy.

In the longer term, the administration would do well to heed the forecasts and concerns of wide range of a mainstream analysts. Take for example, an oil forecast from an April report from the Commodities Research group at Macquarie, a leading natural resources investment bank:

“When looking out into 2011-12 and beyond, we see global spare capacity reduced to zero by 2013. Prices will again need to rise to accelerate upstream spending. We do not think, however, that production can be ratcheted higher fast enough. Oil prices could then rally to reflect scarcity, just like they did in 2Q of last year.”

Should oil return to $150/bbl, as Saudi Oil Minister, al-Naimi, has warned or as Macquarie implies above, the statistics are not ambiguous. When that happens, expect a recession, and a severe one at that.

http://www.thecuttingedgenews.com/index.php?article=11440

November 17th, 2009 | Posted in Economy, oil, peak oil | Comments Off

Energy body rejects whistleblower allegations of oil cover up

http://edition.cnn.com By Hilary Whiteman, CNN London, England (CNN) — The International Energy Agency has rejected reported allegations from a whistleblower that world oil reserves have been exaggerated to avoid panic buying in the oil market.

A senior source within the IEA is reported to have told The Guardian newspaper that many within the agency believe the body’s prediction for oil supplies “is much higher than can be justified.”

In its annual outlook released on Tuesday, the IEA repeated its prediction that oil supplies would rise to 105 million barrels by 2030 under current government policy.

“We’re the ones that are out there warning that the oil and gas is running out in the most authoritative manner. But we don’t see it happening as quickly as some of the peak oil theorists,” Richard Jones, deputy executive director of the IEA, told CNN.

“Generally, we’re viewed as more pessimistic than we should be by the (oil) industry,” he added.

The whistleblower, who reportedly refused to be identified for fear of reprisals, told the newspaper that: “Many inside the organization believe that maintaining oil supplies at even 90 million to 95 million barrels a day would be impossible, but there are fears that panic could spread on the financial markets if the figures were brought down further.”

nother second senior source also reportedly told the newspaper that within the energy body, it was “imperative not to anger the Americans” who were said to play an influential role in encouraging the body to underplay potential supply shortfalls.

“I don’t see why that would be in the U.S. interest. I don’t see the logical chain of that allegation,” Jones told CNN.

The IEA source is also reported to have said: “We have already entered the ‘peak oil’ zone. I think that the situation is really bad.”

Peak oil theorists argue that the world is rapidly running out of oil. A report released by The UK Industry Taskforce on Peak Oil and Energy Security warned in 2008 that a “peak in cheap, easily available oil production” was likely by 2013.

Jeremy Leggett, CEO of Solar Century and a member of the taskforce, told CNN that the allegations from within the IEA were particularly worrying, but not surprising.

“I increasingly think there are parallels between [the oil industry] and what we now know of the banking culture,” Leggett told CNN. “It’s the systematic, cultural burial of risk. Investment bankers did it with complex derivatives. And I very firmly believe that the oil and gas industry culturally does the same thing with the depletion of reserves.”

“The bankers hit the buffers — they buried the risk until it exploded in their faces. It’s going to be the same with the oil industry,” he added.

The IEA’s 2009 World Energy Outlook is explicit in its warnings about the impact of a “business as usual” approach to energy over the next 20 years.

“The scale and the breath of the energy challenge is enormous — far greater than many people realize. But it can and must be met,” the report said.

It presents the results of two scenarios: The “Reference Scenario” assumes government policy remains the same, while the “450 Scenario” projects what may happen if governments take action on climate change.

The 450 refers to the long-term concentration of 450 parts per million of CO2-equivalent needed to limit to 50 percent the probability of a global average temperature rise of two degrees Celsius.

Under the “Reference Scenario” — where global temperatures could rise by up to six degrees Celsius — demand for fuel is predicted to rise 40 percent on 2007 levels between now and 2030.

Non-OECD countries led by China and India are behind more than 90 percent of predicted rise, along with the Middle East.

Despite the push towards renewable energy, the IEA predicts three quarters of the increased demand would be for fossil fuels.

Demand for oil is expected to rise from 85 million barrels per day to 105 million barrels per day by 2030. While demand for coal would jump by 53 percent and natural gas by 42 percent from 2007 to 2030.

The report assumes that gas, coal and oil prices would rise along with demand.

Crude oil would be expected to cost as much as $115 per barrel by 2030. This year, the IEA estimates oil prices will average around $60 a barrel. Crude is currently trading around $80 a barrel after a spike earlier this week.

The IEA says the worst case scenarios can be avoided if world leaders agree a global climate change treaty at next month’s U.N. climate conference in Copenhagen (COP15).

Limiting the temperature rise to two degrees Celsius, the report says, would require a “low-carbon energy revolution.”

It acknowledges the challenge is “formidable,” but says the reductions in energy-related CO2 emissions can be achieved through emissions caps, a move to low or zero carbon energy sources and new technologies including carbon capture and storage.

The IEA concludes that trillions of dollars in additional investment is needed to avoid the worst case scenario of climate change.

“In the climate friendly scenario, we see the demand for investment at around $10.5 trillion higher, but that’s spread well over 20 years so it’s a manageable amount,” Jones said.

World leaders are scheduled to meet in Copenhagen from December 7 to agree a new global climate treaty to replace the Kyoto Protocol which is due to expire at the end of 2012.

http://edition.cnn.com/2009/BUSINESS/11/10/france.iea.oil.supplies/

November 10th, 2009 | Posted in Economy, Energy, Oil and natural gas, peak oil | Comments Off

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