Wednesday, 28 May 2008

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...

Thursday, 22 May 2008

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 Renov├íveis) – 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

2 Financial Times, 20 May 2008

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