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GREEN ENERGY AND CHEAP OIL INTRODUCTION Cheap oil is still believed to be a passport to economic growth, as witnessed by Ben Bernanke's identification of $ 100 a barrel, at the late August Jackson Hole meeting, as the red line in the sand, beyond which he would have to think about raising interest rates. In the current context this would spell hara kiri for 'green shoots' recovery of the US and OECD economies. By the process I call 'Petro Keynesian Growth', through 2004-2007 rising oil prices in fact bolstered and accelerated growth, but oil prices overshot in 2008. This is a rearview mirror paradigm and context. Cheap oil, if that means around $ 30 or $ 40 a barrel is very unlikely to return unless deep economic recession was permanent. Cheap oil is also unrealistic given the massive forecast increase in world oil and gas industry spending in the coming 2010-2020 decade. Cheap oil and transition to green energy also do not rhythm together, since cheap oil would only raise the subsidies and state-backed loans, and state intervention needed to accelerate energy transition away from fossil fuels, to protect the climate and environment. Under almost any scenario, energy prices will rise in a context of radical dislocation, change and restructuring of energy systems, energy markets and energy economics. Facing these emerging realities will be needed in the short-term, for energy transition to have realistic chances of success. BIG SPENDING FOR GREEN ENERGY Spending plans, and estimates for investment needs to achieve an accelerated transition from fossil fuels, to alternate and renewable sources, are rapidly rising in the G20 countries. Present estimates, for example as published at the 2009 Davos Forum, extend up to more than $ 5 000 billion being needed in the 2010-2020 decade. This will be the key decade for starting a major shift away from fossil energy on a worldwide basis. These new spending plans come on top of fast rising needs for oil and gas sector investment, to fight depletion effects and satisfy still rising demand without price explosion. IEA forecasts of world oil and gas industry spending outside the OPEC national oil companies is this capex spending will rise to $ 1 000 a year by 2016. Big spending on green energy also comes at a time of record public debt growth in the OECD countries and several non-OECD G20 countries. Amounts and estimates vary, but the total probably extends beyond $ 15 000 billion in 2008-2010, to fight recession and save the bank, finance and insurance sector from meltdown. On the revenue side, carbon taxes and other state returns from legislative and fiscal intervention in the energy sector can only be relatively low. These new energy taxes also need a base of low energy export market and import prices, to enable the new taxes to be levied without damaging consumer confidence, raising inflation, or depressing economic growth, itself vitally needed to fight rising unemployment and rising public debt. Conversely, high fossil energy prices will deliver economic feasibility to green energy sources and systems. Risks for Cleantech energy transition will therefore remain high, whatever the outcome. G20 MEETINGS AND ENERGY TRANSITION The G20 Pittsburgh meeting continued the political momentum of recent G20 summits towards an epochal goal: economic life after fossil fuels are stripped out of the economy, through green energy spending plans that rise almost daily, as the timelines set for this massive energy transition shrink. Selling the message of this forced march to a new energy future, to public opinion, is mainly through climate change fear. Global leaders, when talking climate change, proclaim that global warming could cook the planet and create a Biblical-style flood "perhaps by the year 2075" if fossil energy sources are not quickly banished. Usually without saying it outright, the accompanying message from global leaders is they want to start with oil. Oil supplies are the least secure, most expensive and most affected by depletion loss of output capacity, despite large declared oil finds in 2009. The outlook for world oil however remains troubled. The coming decade may see quite large net capacity falls through 2015-2020, despite record oil and gas industry spending focused on increasingly deep, difficult and smaller sized fields. Oil depletion de facto accelerates the timetable for energy transition to the non-fossil 'green energy' sources and systems. However, rising oil and gas industry capex also creates major difficulties for decision, to heavily invest in either fossil or in renewable energy, or both. At the coming Copenhagen climate summit in December, even shorter timeframes are possible or likely to be proclaimed, and perhaps specifically for oil. European Union leaders, meeting in December 2008 set a timeline of 2020 for at least 20% of all European energy coming from renewables, and this target could or may be raised to 30%. COMPETING INVESTMENT NEEDS More than $ 7 500 bn may need to be invested in the coming decade, simply to cover oil depletion loss of world oil export capacity. This loss of "conventional oil" capacity may attain 20 Mbd (million barrels/day), and not be compensated by increased "tertiary oil" and gas liquids production, resulting in a large loss of net export supply to importer countries. We can note that the apparently immense oil and gas industry capex need of about $ 7.5 trillion in 2010-2020 is not extreme. Relative to current and recent performance by the world oil and gas industry, where net gains of liquid hydrocarbons output are small on an annual basis, this is not extreme high. However, adding $ 5 to $ 7.5 trillion of green energy investment spending, to ongoing and rising oil and gas industry capital expenditure needs, sets obvious policy decision, and financing challenges for the near term. In a scenario where both strategies are attempted (green energy plus continued high level oil and gas output) total energy sector spending needs (outside coal and uranium) through 2010-2020 could rise to extreme highs, possibly $ 12 to $ 14 trillion. Is this possible ? Back in the real world, the real economy still needs oil - a lot of oil. Oil and gas industry investment is rising steeply in cost, reflecting the industry's high cost inflation trends, technology challenges, environmental constraints and declining reserves. The IEA forecast noted above, of $ 1 trillion a year by 2016, can itself be called fantasist, through comparing it to potential OPEC revenues on a high-priced barrel basis. At a year average price of $ 100 a barrel, on OPEC maximum export supply of 28 Mbd, total annual revenues to OPEC would run at $ 1 050 bn. During the 2008-2009 recession, called the most serious since 1945 by the IMF, world oil demand only fell by about 3.5% on a year earlier, at the height of the crisis. Since then, global oil demand has recovered to levels close to those of late 2008, at around 86 Mbd. Highly conventional oil-based industrial and economic growth, specially in China and India, sets an outlook of still rising world demand, regularly analyzed and described in IEA reports. Recent signs of recovery in several OECD countries, for example Japan, have translated to a quick bottoming-out of national oil demand contraction, and resumption of oil demand growth. Substituting even one-half of current world oil supply (equivalent to 43 Mbd), with renewables and energy saving over 30 years, by 2035 or 2040, will itself be an epochal challenge. Oil depletion will probably not allow this timeframe, making the either-or choice, of either massively spending on fossil energy, or massively spending on green energy and energy saving, a key near-term decision for all countries and leaderships. When we add current coal and natural gas inputs to the global energy economy, total fossil energy supply to the world economy runs at around 145 Mbd oil equivalent, making the challenge for a full scale, and very hypothetical total energy transition yet longer-term and yet more massive. For food, buildings, transport of any kind, mining and metals production, plastics, paints and phytochemicals, in fact almost anywhere in the economy, oil, gas and coal are still needed. The world oil market system ensures any accident, any event, whether geopolitical or political, industrial, seismic, or other factor able to limit supplies will translate to fast rising oil prices. Energy prices led by oil, as shown in 2007-2008, can rise to extreme highs, and collapse very fast. Making extreme high investment funding decisions, and raising the capital in these conditions, is not easy. REPLACING OIL The G20 conference in Pitttsburgh was announced as seeking to: "replace the G8 with the G20 as the primary forum for international economic diplomacy, endorse a World Bank-led food security initiative for the world's poorest countries - and commit to phasing out fossil fuel subsidies". As we know, after phasing out the subsidies and setting new carbon taxes, G20 leaderships want to speedily phase out the fossil fuels themselves. This is simple in speeches and on paper, more difficult in the real world. This implied global energy transition objective, can only be hypothetical for all three main fossil fuels (ignoring fossil uranium's contribution) before well after 2050, perhaps 2075. What we can note is the urban industrial revolution started with coal, and is likely to end with coal, simply because it is cheapest. More rational global targets can be suggested. Replacing and substituting a total of around 25 Mbd of oil and gas energy by 2025 may be more feasible, and in the case of oil this transition will likely be forced by depletion. My study on the subject, summarized in a paper published by Australia's FINSIA (June 2009) suggested 25 Mbd oil equivalent, of oil and gas energy, could be replaced by green energy and economized by energy saving, through capex spending of around $ 11 trillion. Estimates for current global investment and spending in alternate and renewable energy are variable depending on definitions used for non-fossil energy, and net financing of green energy systems and infrastructures, rather than derived and related financial operations. The likely world total runs at no more than about $ 60 to $ 70 billion a year. As noted above, the Davos Forum of 2009 published a report estimating that, from 2010, average yearly spending on renewable and alternate energy could or should attain $ 515 bn. Under almost any scenario, therefore, amounts invested for energy transition will have to show a stepwise jump, in the next 1 to 2 years. Capex then need to be maintained at a high level, to achieve present public goals for energy transition, nearly always set in terms of CO2 emission reduction, rather than fossil energy substitution. When oil substitution is joined by clean coal and carbon sequestration spending needs, and natural gas substitution by the 2015-2020 period, spending needs can only, and will again rise. For world electricity we can note that despite a growing proportion of low cost wind electricity, around 50% of current world electric power production is coal-fired. Short-term supply growth of natural gas, specially LNG supplies, will almost surely result in fast growth of gas-fuelled power plant capacity. The needed alternate energy investment is very unlikely to be spontaneously generated by the private sector. This in turn means that big government, using borrowed funds, will have to take a large part of the burden. Linked with the aftermath of emergency spending by G20 governments to fight recession, which continues, the potential for national and corporate debt growth through 2010-2020 may be extremely high - unless there is strong and sustained economic growth. KEEPING OIL AND ENERGY PRICES UNDER CONTROL Non-subsidized growth of green energy as a percentage of total energy will be very unlikely to achieve the replacement targets sketched out by recent G20 meetings, which will be further defined at the December Climate summit in Copenhagen. Capping the growth of energy prices in the economy will be urgently necessary under any scenario. Fast rising energy prices would cause knock-on food price inflation, heavily depress economic growth, and heavily reduce potential carbon tax revenues, to low levels. The 2008 experience of extreme high oil prices is recent enough to show what happens when 'Petro Keynesian Growth' peaks out. Carbon taxes, to part-finance green energy transition, will generate most revenue when they can be levied on the base of low and stable energy prices in the economy, or can be substituted through state grants, loans and subsidies - obviously needing strong economic growth and reduced national debt burdens. RISKS TO GREEN ENERGY TRANSITION From the above, we can summarize major risks as featuring a few major issues and themes:
SUSTAINING THE GREEN ENERGY BOOM As a follow on to fighting recession, the fight against climate change, and for green energy, will be expensive. Due to the compressed timeframe and extreme high spending needs, big government spending will be obliged to take the lead, with all the risks of bad management and poor asset allocation this implies. Carbon taxes are critical to the process, but will essentially and only generate collateral for new and big ticket borrowing by G20 governments, to prime the pump, and sustain soft energy spending. At the December climate summit in Copenhagen, behind the scenes haggling on a likely international carbon tax will move to high gear, but oil and energy prices set the ceiling on how much governments will be able to add, in new energy taxes. Current maximum rates for carbon taxes in EU27 countries are around $ 150 a ton CO2. Government revenues from carbon taxes will help to set how much they can borrow to help 'green energy', before there is political and economic blowback. Resistance to carbon taxes is already brewing, as consumers and enterprises start losing their newfound desire to protect the climate by developing green energy - and also paying for it. Squaring this circle is easier with cheap oil, but cheap oil is contradicted not so much by geopolitical pressures (currently the Iran nuclear issue) but by extreme high oil and gas industry capex needs. Oil prices need to be kept low to generate the highest possible carbon tax take, itself enabling the highest possible new borrowing. Oil prices need to be allowed to rise to high levels to make green energy investing feasible. Cheap oil is the traditional prop for economic growth, the idea going back nearly four decades to the first oil shocks of the 1970s. Today, due to economic recession and fantastic government borrowing to bail out the bank and finance sector, economic growth is not just desirable, but obligatory. Further limiting economic growth potentials through depression commodity prices (including oil), assuming it was possible to do this, would be a negative strategy. Without strong economic growth, government debt will snowball, currency devaluations and national debt default, and austerity programs will be likely or obligatory. This threat is no longer circumscribed to the former Third World, but can strike several OECD countries, including members of G8. The problems for decision making, policy, financing and energy program management are truly massive and, maybe worse, are hardly discussed at present.
contact information Andrew McKillop | Author & Consultant | Email |
