May 2011

Here comes the future

If you know me at all, you can probably imagine that I keep a watchful eye on energy related news stories. And what with google alerts and RSS feeds, that’s not all that difficult to do. Over the past few weeks, however, a difficulty has arisen. Put simply, there’s just not enough hours in the day to keep up with the recent flurry of activity in the sector. In fact, there are considerably more “peak oil”, “renewable energy”, “tar sands” and “gas pipeline” stories right now than at any time I can remember. More even than when oil prices were rising towards $150 per barrel a couple of years back. So what’s the reason for all this activity?

Well, it seems as though the reality of peak oil is finally beginning to sink in. Not that it’s made it onto the front page of The Sun yet… but while the popular media is obsessing about the Royal Wedding, furrowed brows are appearing elsewhere as what was once a fringe theory preached by a handful of lunatics has finally been accepted by those who once derided it.

Ugly as the words may sound and however petty they may make me seem, I’m going to say this once and then move on… I told you so!

Ahhh… it feels good to get that off my chest, even if it implies some terrible things.

Welcome aboard: IEA

IEA logoThe International Energy Agency has been hmm’ing and hah’ing about their forecasts over the past couple of years. Roughly three years ago, even as oil prices rose to unprecedented levels, the IEA was predicting a steady rise in oil production until at least 2030. Careful analysis of their production forecasts seemed to suggest, according to ASPO (the Association for the Study of Peak Oil and gas) that the IEA was essentially relabelling oil demand projections between now and 2030. Think about that… the international agency that advises the majority of major governments on energy policy was simply asking “how much oil do we want?” and then telling everyone that’s how much oil would be produced. There was apparently no attempt to match their production forecasts to the real-world capabilities of the oil industry. Their projections were based purely on economic data rather than geological or engineering data. And unsurprisingly these projections turned out to be even more optimistic than those coming out of BP, which if you’ll recall are little more than political artefacts designed by OPEC nations to maximise oil revenue.

Recently this has begun to change. And now the IEA is back-pedalling furiously and seems to be sounding alarm bells – albeit rather quiet and diplomatic alarm bells. Dr. Fatih Birol is the Chief Economist at the International Energy Agency. In a recent interview, Birol stated that he believes global crude oil production peaked in 2006. Yes, you heard that right. We passed peak about 5 years ago according to the the IEA.

An Australian TV company made a short film (it’s a shade over 12 minutes) about peak oil which includes that interview. I recommend you take the few minutes to watch it; it’s sobering stuff. I’m particularly gob-smacked by his final remark, right at the end of the film, when asked how urgent the problem is. He responds by suggesting that “time is running out […] I think it would have been better if governments had started to work on this at least ten years ago”. This from a man who was insisting, up until three years ago, that there was no problem!

Don’t get me wrong, I’m happy that the man and his agency have seen the light, but frankly I think a Mea Culpa might be in order given that plenty of people were arguing this very point ten years ago and the IEA was lambasting them as fools while cautioning governments to ignore them.

And welcome aboard: IMF

IMF logoYes indeed. It’s not just the IEA who has suddenly realised “whoops!” During the past seven years or so we’ve had an acknowledgement of a serious problem from the US Department of Energy (see the graph on this page for their latest projections), the US Defence Department and at least two specific branches of the US military. The Irish and Swedish governments both received comprehensive reports detailing the problem (the Swedes acted on it, the Irish built a motorway system and had a property bubble) and about a dozen other non-fringe organisations have sounded caution. A few days ago these organisations were joined by one of the heavy hitters… the International Monetary Fund.

In the April 2011 World Economic Outlook report, the IMF have starkly stated that they expect global oil shortages “within a year”. This tallies with the predictions of the US Defence Department who claimed that we would see “significant supply constraints” by the middle of 2012. The IMF report tries not to sound too downbeat and claims that so long as the oil supply falls gradually it won’t be too big a problem. I have two points to make regarding this claim… first, it won’t drop gradually. Once the reality of the situation kicks in there will be a variety of dramatic responses (producer nations hoarding, rich importing nations trying to buy up available supply on long-term contracts, invasions and wars) which will prevent a gradual reduction in supply. I would suggest that this has already begun in some quarters and we’ve not seen the half of it. Second… even if it did drop gradually, it would still be a big problem.

So although – like over at the IEA – some of this is starting to sink in at the IMF, they still can’t see beyond their free market ideology. And I’m afraid it simply does not work in the arena of essential non-renewable resources. Future generations will view the free market in natural resources as possibly the single most stupid thing ever to have emerged from the human mind. I know some intelligent, decent people who read this blog and subscribe to the notion that a free market in non-renewable natural resources is a good idea. It’s perfectly possible for smart people to have some stupid ideas. And selling natural resources into the open market for profit is a stupid idea.

Anyway you can read more about the IMF’s eleventh hour conversion over at crudeoilpeak.com (IMF warns of oil scarcity and a 60% oil price increase within a year). And here’s a link to the original (and lengthy) World Economic Outlook report (PDF, see Chapter 3).

And joining us tonight: GMO Capital

GMO Capital logoIf you thought the IEA and IMF were surprise guests at the peak oil awareness gig, an even bigger surprise – in its own way – is GMO Capital. These guys are a global investment management firm controlling over a hundred billion dollars in assets. While the IEA and IMF are international agencies that advise governments and proselytize about the wonders of the free market, GMO Capital pretty much are the market. Or a bit of it anyway. In a sense. Oh, you know what I mean.

Anyway, one of the most remarkable essays I’ve read over the past while comes from Jeremy Grantham, the Chief Investment Officer of GMO Capital. Not because of what is says per se, but because of who is saying it. You can read the article at the GMO website (PDF). In essence the article claims that the past 100 years of market-led growth and prosperity is about to come to a crashing end. It’s remarkable stuff considering who wrote it and the audience it’s aimed at (GMO Capital’s investors). Well worth your time to read, or even just skim.

And so it goes

Elsewhere in the news we read about wind farms being paid to shut down because the national grid cannot absorb the power they are producing. The first thing to be said about this is that these payments represent a clear failure in grid management and this needs to be addressed. The second thing that needs to be said is that the BBC should be ashamed of itself for allowing almost half the article to be dominated by the REF. The REF (Renewable Energy Foundation) is a lobbying organisation founded by… wait for it… Noel Edmonds, and has been described as “an anti-wind lobbying organisation”. It’s been suggested that “they actually exist to undermine Renewable Energy – in that respect their name is a deceit”.

In reality we have two choices… we can either embrace a mix of renewable energy solutions (wind, wave, tidal, solar, etc.) or we can resign ourselves to a life without electricity. Whatever George Monbiot and others might claim, nuclear power is simply not the solution to our energy problems. The reasons for this are outside the scope of this blog post, but essentially it is not a sustainable solution, and replacing one unsustainable energy system with another unsustainable energy system is sheer madness. Especially given the massive energy expenditure it would take to do so. We have one more roll of the dice with regards to building a new electricity supply system (the problems of transport and the other uses of petrochemicals still seem insoluble to me, but we can at least keep the lights on and the refrigerators running) and wasting our remaining fossil fuels building a network of nuclear power stations destined to fail is a recipe for disaster.

Instead we need to rethink our consumption patterns. We need to build far more storage into the grid to cope with excess production. We need to massively increase the geographical spread of our renewable energy infrastructure to reduce the “calm day” effect. And we need to ignore the petty grievances of TV presenters with a personal axe to grind. I accept that, aesthetically speaking, wind farms aren’t to everyone’s taste (I think they look great, but that’s just me). But if we want to keep the lights on in a world faced with Climate Change and fossil fuel depletion we need to get past that.

The last thing I want to say here is that I expect to be hearing a lot more about “shale gas” over the coming months. Already China is looking towards it (PDF) as a solution to a decline in global oil supplies (once again, the notion that replacing one unsustainable resource with another, albeit a slightly more abundant one, is being described as “a solution” dismays me). Few things, however, give me the screaming heebie-jeebies as much as the thought of a massive expansion in shale gas production. It may well be the only fossil fuel that’s ecologically worse than tar sands from an extraction and production standpoint. Both tar sands and shale gas production have the potential to massively accelerate fresh water depletion, as well as lay waste to vast areas of the planet.

Fact is, in the face of peak oil we need to start looking at reducing our energy consumption. Every other option leads to disaster.

Posted in: Opinion