Peak Oil and Demand - Again

I have been thinking again about my recent post on high oil prices and the possibility of our having reached “peak oil” (ie. maximum supply levels). In the last post, I noted that there was some evidence that Saudi Arabia and other swing producers were unwilling – or unable – to increase their production so as to take global supplies of oil above around 85 million barrels per day. (Bear in mind, that's still around 35mn tonnes of CO₂ pushed out into the atmosphere every day, too.) Looking at a graph of global production, I now see that we have not yet reached a plateau, although there is still no guarantee that production can exceed this level unless countries such as Russia, Nigeria or Iraq get their act together.


Oil production (and roughly consumption) has been rising steadily at an average of around 1 million barrels per day since the early 1980s, from a level of just under 60mn bbl/day to current levels. Over the past few years the net growth in demand has been a little higher – perhaps 1.5mn bbl/day on average over the past 5 years. Almost all of this extra demand has been in industrialising or developing countries, with China responsible for almost a third of the total.

Now conventional wisdom might say that these poorer countries are likely to be the first to cut back in response to higher prices. However, much of their demand is driven by our insatiable demand for cheap consumer goods in the West, and while China (and other industrialising countries) can continue to pare costs through greater efficiency (not necessarily of oil, but in the overall manufacturing process) then they can swallow the costs. And with a strong renminbi against a weak dollar, coupled with relatively high domestic inflation, even Chinese consumers – with their rapidly escalating personal income – can cope with higher oil prices.

Outside China, many of the same factors apply; and some of the largest increases in demand for oil (and electricity) are coming from the Gulf, where they are cushioned against high prices by high oil prices! Even so, some Gulf Cooperation Council countries are looking seriously at stopping using oil or gas to generate electricity, preferring to sell it on the global market at high prices; instead they are looking at moving to cheaper imported coal or even building nuclear power plants.

This suggests that if we do indeed have a capped oil supply it is more than likely to be Western countries that reduce consumption, not the fast developing economies (who use much less oil per capita in any case). The Western countries are instead likely to invest more in capital initiatives to reduce oil consumption – energy efficiency and investment in alternative supplies. That’s not to say that industrialising countries are uninterested in these technologies – they too can see the need for energy efficiency as part of an efficient manufacturing process (and to a lesser extent in the domestic sectors, although transport efficiency often leaves much to be desired in the shift towards private cars), and are interested in renewables, especially if it comes with support through Kyoto credits.

So will high oil prices give a fillip to energy efficiency in the West? Many commentators seem to think so, especially when backed with strong policies against climate change, including emissions trading systems that include a cap and trade element. I personally am not so sure; high energy prices will certainly improve payback periods or NPV calculations, which may lead to more rational investment decisions in efficiency in the next few years. But most consumers – in the UK at least – seem to be more concerned about grumbling a little, possibly kicking out the politicians in power (whose fault it probably isn’t, except insofar as they should have been encouraging greater energy efficiency over many years), and driving a little less far until such time as they have got used to the new higher prices. This may pressurise Governments into reducing fuel taxes (French and British truck drivers can really frighten a Government) and let demand slip back up. Unless of course the creep back upwards of demand cannot be met by extra supplies, as a result of really having reached peak oil...

Peak Prices, Peak Oil – and Peak CO2 emissions?

I have resisted the temptation to comment over recent energy prices, especially that of oil. There’s a real danger of gloating over the high prices that may make renewable energy look a whole lot more attractive (in economic terms at least), even though it may simultaneously be driving as many as 2 million UK households back into fuel poverty. When oil prices first $100/barrel, my reaction was that it would be short-lived, especially as it seems that the first trades were done by a small player keener to be the record breaker than to set a sustainable price.

But now we have had oil prices of over $100 for several weeks, and Goldman Sachs are predicting $200 by the end of the year. Again my instinct is to say that if they are talking oil prices up, there is only one way that it can go (and that’s down). And yet the men in braces are willing to commit to $140 oil on futures (and as I write West Texas is around $135/barrel)¹. But we have got a real surge in oil prices: almost back to 1973 levels when inflation adjusted, and certainly well above the trend of the last decade. So what might this do for sustainable energy?

Firstly, it must provide added impetus to energy efficiency. The cheapest barrel of oil is always the one not used, and even though efficiency may have significant upfront costs, there is something very compelling about not having to buy oil when you are saving over $100 a barrel. (And we must remember that it’s not just oil: global gas prices tend to follow oil, as does tradable electricity in open markets such as the UK. Hence my concerns about fuel poverty.)

Secondly, it may also add to pure energy conservation – the avoidance of waste. US gasoline consumption fell by 0.4% in February 2008², the first recorded fall for several years, as hard-pressed consumers avoided unnecessary trips to the local supermarket, planning their shopping trips more carefully. Now a single month’s data may be unreliable, but the strong price signal being given when gasoline is $3.50-$4.00 a (US) gallon can’t be totally ignored, especially by those feeling the double whammy of an incipient recession. Even in New Jersey (where – somewhat perversely – US gas prices are lowest, despite a state-wide ban on self-service), the $2.99 gallon is fast becoming a fading memory. Of course, Western European consumption has been falling for years, partly due to a switch to more efficient diesel cars (not the Energy Don’s favourite, it must be said, as he doesn’t like particulates and the carbon emissions are hardly lower), but also – in countries such as the UK – due to lower average mileages. (This latter effect is reported by DfT, but not wholly understood, but may be linked to “anti-car” policies such as parking restrictions and the London congestion charge, or to broader economic issues such have been seen in the USA. Alternatively, it may be related to higher fuel prices, as the AA say³.) What's more, this does not just extend to road travel; American Airlines are reported to be cutting a significant proportion of their flights due to lower passenger numbers and higher fuel prices.

Thirdly, it will support the development of low-carbon renewables, most of which have high initial costs built low or zero running (fuel) costs. We are seeing this at a macro level in the planned floatation by EDP (Electricity of Portugal) of part of its renewable energy subsidiary (EDP Renováveis) – taking advantage of both high electricity prices and the need to raise additional capital to raise further investment. EDP is a specialist in wind power and at the current level of €65/MWh many turbines are profitable without any support mechanisms. But other renewables are also looking more attractive: my friend Steve claims that he can sell me PV with a payback of 7 years, and even allowing for his usual mathematical tricks, I suspect that his imported Chinese units may have a true payback of 15 years.

So how does this relate to peak oil? It seems that global production is stuck in a rut of around 85 million barrels a day (a back of the envelope calculation still suggests that this is equivalent to the realise of a further 35 million tonnes of CO₂ a day) and that non-OPEC countries cannot raise production and OPEC countries won’t (or maybe cannot either, although they are understandably a bit coy on this point). This may act a cap on production at any price, and hence as a peak CO₂ emission. (OK, I have forgotten coal, and there’s an awful lot of heavy oil in Canadian oil sands.) But if this is a peak figure it may help climate modellers establish the worst-case CO₂ concentration on a business as usual scenario. That’s the good news; the bas it that with global concentrations still rising by 1.7 to 2 ppm per annum, there is s dangerously high level of new emissions, with the risk of really catastrophic global warming by mid-century.

In the meantime, we should be slightly thankful for the high prices, as they should act as a spur to more sustainable energy systems. And that applies not just in Europe and America but in the rapidly developing countries; if China’s central planners foresee high oil prices, they may wish to encourage Chinese industry to be more energy efficient, and Chinese cities to allow for better public transport as well as more cars and highways.

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¹ BBC website (22/5/08) says "US light, sweet crude for July delivery reached $135.04, taking its gain for the year so far above 40%." See http://news.bbc.co.uk/1/hi/business/7414093.stm

² Financial Times, 20 May 2008

² Edmund King of the AA, speaking on Radio 4's Today, 22 May 2008

Has increasing GDP improved the USA's Quality of Life?

I’ll start by apologising for the gap in this blog – I am still unsure whether it’s worth the time and effort given the conflicting demands on my time, so would welcome feedback from any readers, positive and negative. (So far, it’s been exactly 50:50, but from a small response rate.) A second reason for my absence from the blog has been a physical absence – I have been in the USA. So what did I bring back apart from the obligatory Obama’08 T-shirt (and a nasty cold from the plane)?

I have been reflecting on the environmental impacts and benefits of differing living styles. It is increasingly striking me that in wealthier countries GDP has become de-coupled from quality of life. Fifty years ago, had I returned to Europe from the States I would almost certainly have been enthusiastic about their greater material wealth: most families having cars, refrigerators (and even a few with home freezers!), and being able to eat out inexpensively at roadside restaurants. Sure, I might have been slightly bemused by Americans’ love affair with the atomic age, but it would be clear that this was the direction everyone was moving. Cheap and plentiful oil was fuelling the nation to a standard of living unheard of elsewhere. Bill Bryson captures this sense of optimism in his autobiographical “The Thunderbolt Kid” which makes excellent airplane reading[i].

Roll forward 50 years and the experience has perhaps gone just a little sour. Americans are still more upbeat than most Europeans; although I’m not sure it’s optimism – there does seem to be a need to be constantly reminding themselves that America is the world’s greatest nation. And of course, in resource use, it is the world’s greatest nation; in other ways I’m not so sure.

Let’s look at just a few of the ways in which the US GDP exceeds that of Europe:

• More and larger private cars. This is an immediately obvious difference, with a direct impact on the average per capita energy consumption and emissions of CO₂. In part this reflects the greater land area of the country, and so congestion tends to be not as bad as in Europe despite the higher car numbers in most of the USA. But this is at the expense of a huge land take from the freeway system (and allied roads) with noise blighting many homes, and the near abandonment of some areas on routes since bypassed by newer highways. Of course, if you want to see real congestion, you need to travel to the rapidly developing economies of Asia or Latin America.

• But are larger cars better? Certainly they add to GDP (all that extra steel and chrome, not to mention oil being guzzled). But to take an extreme example, compare a Hummer to my Honda (of a model not sold in the USA). The capital cost and pretty well everything else about the Hummer will be around 3 times my Honda, as will its contribution to GDP. But does the driver get three times the facility? I suspect not. (I have never driven one; I did hire a Pontiac this year and found that in some respects it was far inferior to my normal car – I had this vague sense of driving a silver blancmange with that had its own desire to stop at all of America’s many gas stations to be refuelled.)

• More and larger meals – especially at restaurants. It is said that you can never go hungry in America, with every type of “dining experience” available almost anywhere. Certainly food is cheap; but it’s not always of high quality (and rarely meets expectations raised by the descriptions on the restaurant menu, except perhaps for US beef.) That’s partly because, compared to European food, it’s still full of additives – guar gum thickening everything and waxed fruit are two of my personal dislikes. Visit a large supermarket and try and find natural yogurt with no flavours, thickeners or preservatives – I couldn’t find it. (Actually US supermarkets are an enigma – they are always well-stocked with copious quantities of everything – but no customers. When do Americans shop – after midnight; most stores are open 24 hours after all)? Or is that one reason for additives: food has to have a long shelf life as Americans eat out more or buy snacks from the gas station to survive. But the downside of this quantity over quality can be seen everywhere – obesity. The USA has a time bomb strapped the waists of its citizens – no longer does the US diet create the world’s healthiest and longest lived population. Again, I question whether more food adds to the experience[ii] – or just to GDP?

• More money spent on healthcare. America should have the best healthcare in the world - and probably does, if you can afford it. In contrast European state-funded systems may not reach the heights of the US system, but are at least reasonably universal.

• More lawyers, policemen (and felons)... Probably enough said – crime is one of the silent contributors to GDP through the need to replace assets funded via the insurance system. And although I may have had a cousin who worked for the NYPD, I remain amazed at the numbers of US police (and forces – even Washington Zoo seems to have its own police force!)

• And finally more guns and a bigger military presence – definitely enough said on this one.

In case you think this is a typical liberal European’s anti-American diatribe, I should add that I love America (in small to medium doses) and have many fine American friends, with some of whom I agree to disagree on energy policy and global warming. But I do feel that America has lost its balance, and that the higher GDP no longer relates to a higher quality of life.

Economists sometimes refer to this as the Easterlin paradox: as countries GDPs grow, on average their population fails to become happier, although richer people tend to be happier than poorer people in the same country. And there is an important lesson for those of us who suspect that our current level of consumption is unsustainable: we may be able to shrink consumption (especially energy) and GDP in a way that does not make people feel less well off. This may be one of the challenges that we face in the next 20 years – how to manage citizens’ expectations in a process of contraction and convergence.

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[i] Bill Bryson may be a bad choice as he recognises that the USA is no longer the “promised land” and lives permanently in the UK, chairing the Campaign to Protect Rural England

[ii] I ate in a great little restaurant, The Village, on Chincoteague Island, Virginia. The flounder with crab imperial is truly recommendable – but if you’re a European ask for one serving with two plates: psychologically unable to leave good food on the plate, I found it very hard work to finish the meal. At least there was a 15 minute walk back to our hotel – but being in the USA there was no sidewalk (pavement) and no street lights either.

Cold Shoulder for Patio Heaters

There's been another small victory in the battle against energy waste, as British leisure retailers are falling over themselves in a rush to stop selling patio heaters. These heaters are designed to help people stay warm in their gardens on chilly summer evenings and generally work off a 13kg LPG cylinder in the base, which also helps to provide stability. Switched on to maximum output and left to run until a full cylinder runs out, they are reckoned to burn for around 13 hours - enough for even the longest party! FoE and the Energy Saving Trust have calculated that this would release some 34.8kg of CO₂, the main gas contributing to climate change. That's the same as the emissions from 15 litres of petrol - or enough to drive 120 miles in a typical family car.

What's more, most of this energy (and CO₂) is wasted. The typical heater burns across a circular grill at a high level; although some radiant heat is generated, most of the heat simply rises up above the device, or is convected around the "cap".

Enter the DIY retailers. So far, they have sold an estimated 1.2 million of these highly inefficient and quite ineffective units. But suddenly they have come over "all green" and are trumpeting their concern for the environment by stopping sales. Wyevale took the lead last May, saving its customers from a complete summer of patio heating. B&Q followed last week, with Homebase jumping on the bandwagon this week. This is to be welcomed, but B&Q admit they have 20,000 of the things still waiting to be sold - and they are not going to be scrapped.

The cynic in me wonders if there's another reason. Patio heaters are ineffective: they may impress the neighbours, but they don't keep you warm. The Government's Market Transformation Programme have compared cumulative sales of heaters (1.2mn) with annual sales of "alfresco" gas canisters - and deduced that the average unit is used between 10 and 21 hours a year: many heaters, they suspect, are rarely or never used, staying locked inside the garden shed. And if B&Q have such a large stock now, I suspect that sales may not be what they used to be, as the public have cooled on the idea of patio heating. Axe a slow-selling line and claim greenie points - it's almost to good to be true!

Hiding behind the consumer patio heater is a much more pernicious heater - the pub patio heater. These are used, especially since the smoking ban, and - unlike domestic heaters - are use year-round, not just on balmy evenings. Although some are the same as domestic LPG units, most are electric to befit from lower running costs. Electric units are also more controllable: they can be centrally switched on or off by the pub staff with a second point-of-use push button for use by customers, which will give a 10 minute burst of heat. Unlike gas heaters, they are primarily radiant, and use a rear reflector to direct the heat in a narrowly focused pool. But they're not all good; a typical 1.5kW heater in use for 237¹ days a year and 2 hours on a day (assuming good controls) will still result in almost 400kg of CO₂ annually. And most pubs will have several such heaters, to cater for several different groups of smokers. When you realise that around half Britain 51,000 pubs (not the mention its 48,000 restaurants) may have installed these heaters to beat the smoking ban, that's a lot of CO₂! Estimates vary, but they could lead to anywhere between 100,000 and 200,000 tonnes of CO₂ - perhaps equivalent to the emissions from 50,000 cars.

¹ These figures come from the MTP (www.mtprog.com)

We can make 15% renewables by 2020

The BBC has reported¹ that the EU will expect Britain to meet 15% of its energy supplies from renewable sources by 2020. The European Commission is expected to announce its country by country targets next week, with the aim of reaching an average contribution to energy supplies of 20% from renewable sources and at the same time cutting overall carbon emissions by 20%. The targets take into account the existing level of renewables and the level of economic development of the member state; Britain currently only has 2% of energy from renewables (although 5% of electricity is renewable, the proportion of transport and heating fuels is much lower).

This is a challenging but achievable target. To meet the target, we will need to do three things:

1. Continue to focus on energy efficiency, in part to limit total demand. As renewably sourced energy is likely to be more expensive, reducing demand will also help limit total energy bills. This is especially important for lower-income consumers, and - at the same time that electricity generation companies are moving into renewables - electricity, gas and heating oil distribution firms should be incentivised to expand insulation and other conservation schemes.
   
2. Identify key renewable energy sectors to provide large scale electricity generation. Historically the UK Government has mainly relied on the market, with only limited intervention through support mechanisms such as the non fossil fuel order (NFFO). Although this has tended to produce least cost renewables, it has also resulted in rather a patchwork of technologies, with none achieving critical mass. In turn, this has allowed European competitors in countries such as Germany, Austria, Spain or Denmark build up strong positions in key renewable energy fields. A little more intervention may allow the UK to be a leader, rather than a follower, in offshore technologies² (wind, wave and tidal stream). However, it should be cautious before attempting to impose mega-projects such as the Severn barrage in a desperate attempt to leap towards the 20% target.
3. Large scale electricity generation should be matched by support for smaller scale heat generation especially in the domestic and SME sectors. This should focus on proven technologies such as solar water heating, ground source heat pumps and modern biomass systems.

So what what should the Government not do? Essentially, it should not talk up technologies with unproven benefit, or those that have only marginal carbon benefits (even if they contribute towards the renewable energy percentage targets). In practice, this would seem to be a warning away from many of the liquid biofuels, as well as from micro-scale wind, for which the early implementation results look unpromising. The UK Government should continue to support research into these areas, but unlike George Bush, should not rely on future technologies to solve today's problems.

But we can meet the targets, and we can do so in a way that is environmentally friendly and not financially crippling if we treat them intelligently and with resolve.


¹ See BBC News Report, 18/1/08

² This may be changing; John Hutton (Minister for Business, Enterprise & Regulatory Reform) is quoted in the house magazine of the British Wind Energy Association (realPower) as having said "by 2020 enough electricity could be generated off our shores to power the equivalent of all of the UK's homes".

Has the USA started getting the message on CO2 emissions?

Fresh from their willingness to at least "talk about talks" on climate change in Bali, the US Congress has also, for the first time since 1975, moved to significantly beef up the requirements on for more energy efficient vehicles. It aims to reduce America’s dependency on imported oil by raising corporate average fuel economy standards (CAFE) for new cars and trucks to 35 miles per US gallon on average. The 40% increase over the current CAFE standard is intended to cut oil demand by 1.1 million barrels a day by 2020. (The current standards mandate 27.5mpg for cars and 20.7mpg for light trucks. These are equivalent to approximately 33 and 25mpg using the Imperial gallon in the UK, or for cars 8.56l/100km, or 197gCO₂/km. The new CAFE standard is equivalent to 42mpg (UK) or 6.73l/100km or 155gCO₂/km.)

The proposals were part of a wider Energy Bill passed by the senate at the end of last week (13 December). The Energy Bill did however lose two other key environmental elements, one of which would have required utilities to get 15% of their electricity from renewable sources, and the other which would have eliminated huge tax breaks for oil companies. These were removed in response to a likely veto from President Bush.

The Energy Bill also contains a requirement to increase by nearly fivefold US production of renewable motor fuels like ethanol to 83 billion litres by 2022, although this may, as the EnergyDon has noted before, cause more problems than solutions, leading to rising food prices and a potential shortage of corn and soya beans for food uses. (There is also worrying evidence that the US Midwest may run out of irrigation water from underground aquifers, but that's another story...)

Electricity companies in Southern States lobbied strongly against the 15% renewable electricity provision, arguing there are few renewable energy sources like wind in their part of the USA, in contrast to plentiful (and polluting) supplies of cheap coal. No wind along the Gulf Coast – now does that sound right?

While the cut-down energy bill might not be as environmentally benign as its sponsors had hoped, it still represents progress. It is to be hoped that a greener White House in 2008 will allow the change of reintroducing some of the elements lost this year.

Meanwhile the European Commission has confirmed its plans to table draft legislation on this week to reduce CO₂ emissions from new cars, even though the final details of the plan appear to be uncertain. In particular, the Commission may allow car manufacturers to form emissions groups for the purpose of calculating average fleet emissions. This would be similar to a basic form of emissions trading, where producers of larger vehicles could pay the makers of smaller cars to offset their higher emissions.

The European Commission is also expected to try and differentiate between different car classes in meeting the anticipated overall target of 130gCO₂/km by 2012. The calculation will probably be based on three variables, including the weight of the car, in an apparent concession to German manufacturers which manufacture significantly large (and so heavier) cars than the EU average.

So does the new action in the USA mean that it is catching up the European Union, and is this something that we should be pleased about? To answer the second question first, any progress in improving the lamentably bad US fuel economy standards has to be welcomed. However, if they reach 35 miles per US gallon by 2020, they will still be no further forward than we are now, and the EU's proposed standards, while watered down from earlier proposals of 120gCO₂/km, will still be 16% better and 8 years earlier.

But there is another more serious problem. Historically the USA has defended its large, inefficient vehicles by pointing out that their country is large, with a severe climate and long distances. To some extent this has been a self-fulfilling prophecy. US cities suffer from a vast urban sprawl, linked by traffic-clogged freeways, with in most cases few public transport alternatives. If you are sitting in a jam on the Santa Monica freeway in 90° heat, for example, you expect a bit of space in which to stretch and a nicely air-conditioned vehicle. To overcome America's dependency on oil will require more than smaller or more fuel-efficient cars; it will also need a re-think about how America does business and builds itself.

Australia, China and Climate Change

The Australian Prime Minister, Kevin Rudd, made ratifying the Kyoto protocol on climate change his first official act after his inauguration last week. Mr Rudd is reported as saying "Australia’s official declaration today that we will become a member of the Kyoto protocol is a significant step forward in our country’s efforts to fight climate change domestically – and with the international community". Mr Rudd will also be one of only six heads of government expected to attend the Bali conference on Climate Change. Some commentators have noted that his signature was largely symbolic, as Australia is one of the few developed countries likely to meet its Kyoto targets due to its shift away from coal. Nonetheless, the environment was one of the two main areas of difference between the incoming Labor Party and the conservative coalition under former PM John Howard and assumed its importance in part due to Mr Howard's perceived intransigence in not signing up to Kyoto, as well as due to the prolonged droughts in much of Australia.


Clearly this ratification is to be welcomed, even though it is 10 years (yesterday!) since the Kyoto protocol was first agreed. The US is now the only major country not to have ratified the treaty, which requires developed countries to cut their CO2 emissions but imposes no targets for developing countries.


We do not have the luxury of another ten years in which to prevaricate, and squabble among ourselves about which countries should do what. And yet, we see this happening in Bali at the moment, with China and the USA involved in some sort of game of chicken, trying to be the last to cross the road towards making meaningful emissions reductions.


While this brinkmanship is going on, emissions are continuing to rise globally, with China - in particular - continuing to build new power stations. The Financial Times estimates that this year around 90GW of new coal fired capacity will be opened in China (although perhaps 15% of this will replace older smaller and often illegal stations. This comes on the back of 102GW opened in China last year - an all-time record.


It would be wrong of us in the West though, to focus too much on China. Certainly, much of the dirty electricity generated is then used in inefficient manufacturing, compounding the problem. The Chinese admit that this additional coal-fired capacity would not be entirely needed if their burgeoning manufacturing industry was more energy efficient. But part of the reason that it is inefficient is due to an escalating demand for inexpensive products by the very countries in the West, such as the UK, that are complaining about its rising emissions. As we go to the shops this Christmas and load our baskets with cheap Chinese goods, we should remember that there is a high carbon cost as well as the low financial cost that we see.


To bring this full circle, China and Australia are both Pacific nations, joined loosely through APEC (the Asia-Pacific Economic Cooperation). The world is shifting away from Europe and the Americas in the 21st century; let's hope that the new realism about climate change in Australia can spread around the Pacific Rim.