Wednesday, 28 May 2008
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...
Thursday, 22 May 2008
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.
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
Wednesday, 30 April 2008
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.
[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.
Friday, 1 February 2008
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)
Friday, 18 January 2008
This is a challenging but achievable target. To meet the target, we will need to do three things:
- 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.
- 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.
- 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.
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".