ONLY TAXES CAN FORCE THE PEAK:

Look to gas for the future: Fossil fuels are not about to run out. That’s our biggest problem—and our big opportunity (Dieter Helm, 23rd March 2011, Prospect)

Let’s start with the notion of peak oil. It is true that current (conventional) oil reserves are concentrated in the Middle East. There is an Opec premium in the oil price, and right now there is clearly a Libyan premium too, and perhaps more shocks to come. But there is still a lot of conventional oil. Iraq has yet to fully enter the market. It plans to produce more extra oil by 2020 than Saudi Arabia’s entire production today. Saudi has lots of “swing production”—the capacity to produce more to compensate for shortfalls elsewhere. Africa is now a much more important part of the arithmetic. Then there is Brazil, and offshore fields in the US. Add in the enormous reserves in the Arctic as the ice melts, and Russia’s immense reserves, and a rather different picture emerges. Finally, production assumptions are based upon depletion rates typically below 50 per cent of a field’s reserves: add in a bit of technical progress and the story changes substantially.

Even were the worst fears of peak oil advocates to emerge, the consequences for electricity (and renewables) are far from obvious. The fossil fuel of choice for electricity generation is gas, not oil, and gas is super-abundant. The coming of shale gas has doubled the world’s gas reserves in a couple of years, the US has become an exporter and its shale gas production costs are such that it is competing on cost with natural gas. Shale gas has its problems, but the fact is that the reserves are very large and widely distributed—in the US, China, Europe, Russia, the Middle East and elsewhere. In Australia even coal-bed methane is being liquefied and exported to China.

This transformation is no accident: much more research and development (R&D) has been applied to fossil fuels than renewables. In the shale gas case, it is the combination of IT advances in seismic surveying, horizontal drilling and techniques for fracturing the shale rock to release the gas. The result is that, for policy purposes, we can assume that the supply of gas is almost infinite, and there are large-scale deposits of shale oil, coal and tar sands. The earth’s crust is riddled with carbon fuels. Contrary to the peak oilers, there is no physical shortage of fossil fuels—and that’s the real problem.

More conventional oil and shale gas (and shale oil too) will meet the medium-term demand. More immediately, the constraint is not a physical peak, but rather a political one. Recent developments in the Arab world are argued to threaten supplies and induce spikes in prices. They may well do so. But there is a world of difference between volatility and the trend level of prices. Emerging democracies will need the oil revenues just as much as the dictators they are replacing—and the rapidly growing and young populations need to get education and public services paid for. Few Arab countries will be keen to leave the stuff in the ground.

So the oil Armageddon is unlikely to be emerging, despite short-term volatility. But the coming of shale gas represents much more. As I have said, gas is the fuel of choice for electricity generation, and electricity is the power of choice for final use. Electricity is gradually taking over. To date it’s been supported by coal, and the growing share of coal in world primary fuel sources is the main explanation for the growth of carbon emissions—on which (as a result) Kyoto has made almost no impact.

The hegemony of electricity is arguably still in its infancy. Smart grids and smart meters are a technical revolution waiting to happen. Electric cars transform the storage of electricity (it’s in the batteries) and increase electricity demand—and lower demand for oil (because transport has been the main source of growth in demand for oil). Once electric cars get a grip, oil is of much less relevance—gas, in effect, displaces oil via electricity. Peak oilers assume not only that oil is in fixed supply, but that it is not interchangeable with other fossil fuels. They are just wrong. In due course we might even end up leaving a lot of the oil in the ground.

The implications for climate change policy are profound. On the one hand, cheap and abundant fossil fuels make renewables expensive and deter investments in energy efficiency. Demand grows. On the other hand, coal is twice as bad from a carbon perspective as gas. If gas displaces coal (especially in China, India and the US) really big inroads could be made quickly into carbon emissions. Add in some significant nuclear investments, and there is the making of an intermediary (and very cheap) transition to a lower carbon world.

Further out, technical change takes over. There has probably never been a time when there is more R&D in energy technologies. The range of ideas and concepts is enormous. There is no shortage of energy supply: the sun comes up every day. The task is to harness the opportunities. It is not to reduce the demand for energy which has the power to transform the lives of billions.

Government isn't much good at picking winners, but it excels at picking losers. Just make gasoline a loser and the rest follows.

Posted by oj at April 8, 2011 6:12 AM
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