Is time running out?

In this article, Dr Samuel Fenwick takes a look at the long-term issues facing the energy sector and looks at how we might escape the seemingly inevitable.

One of the most worrying issues that I’ve been introduced to since I started this position at IFandP is that of peak oil and resource depletion. Much of the discussion seems to revolve around the precise date at which we might hit peak oil. However, as many have pointed out what matters more is the point at which the total net energy we obtain from fossil fuels starts to decline. The situation is compounded by the issue of climate change, which will also act to accelerate the amount of free energy available to society, given the increased need to mitigate its effects and sequester carbon. This rings particularly true once you consider the complete storage of global CO₂ emissions from fossil fuels would require an infrastructure of comparable size to that of the current oil and gas industry.

Such concerns lead to the thought that there may well be a time when the amount of net energy (often referred to as Energy Return on Energy Invested or EROEI) needed to convert the world over to a sustainable energy system is no longer available or can only be freed up at the expense of politically unacceptable levels of hardship among the population.

A good analogy would be a family where the main breadwinner is diagnosed with a curable, but expensive-to-treat form of cancer at a time when a new baby is on the way. To make matters worse, he is less than convinced by the need for treatment, wages are going down and living costs are going up and more and more of the the time, he feels too sick to work. Left long enough, eventually there will become a point where the family cannot afford to pay for the treatment with dire implications for both the worker and his dependents.

The situation is complicated further that while the energy return on energy invested of oil and gas production is in decline, that of renewables can be expected to increase due to economies of scale, R&D and “learning by doing.”

A moving target?

Part of the problem comes from the fact that we don’t know where we stand. While some of the uncertainties regarding the timing of both these events are impossible to resolve (such as the impact of future technology), the situation is not helped by the lack of clarity and transparency surrounding the world’s endowment of oil, particularly in the case of OPEC reserves, which are widely thought to be inflated for reasons of prestige and historically as a means of obtaining higher production quotas for individual countries.

However, it is possible to make some educated guesses. Improvements in the renewable energy sector will eventually subject to the law of diminishing returns and will also suffer cost inflation as fuel prices and those of energy-intensive raw materials such as steel and concrete rise. There is also the problem that a widespread and concerted push for renewables at the global scale, would lead to significant price inflation due to higher demand for raw materials (particularly steel and concrete, the major components of both nuclear power plants and wind turbines) and also logistical bottlenecks. The law of diminishing returns is particularly acute with the nuclear industry in its current state. Without the successful development of a closed nuclear fuel cycle, nuclear power alone cannot be the option as the massive increase in uranium demand would mean that increasing amounts of energy would have to be spent extracting uranium, as ore quality would drop rapidly, hitting the EROEI hard, a issue extensively explored by Joshua M Pearce of the Clarion University back in 2008 (see his paper here).

Clearly, then a considered and gradual transition is likely to be less costly, but this does not avoid the problem that we might be eating into the world’s endowment of fossil fuels at a rate that could ultimately prevent the smooth transition to a sustainable way of producing and using energy. The fact that the entire global system relies on plentiful and cheap energy for food production and almost every other form of economic activity, coupled with the fact that global GDP growth requires exponential growth in energy consumption means that we have a moral and pressing need to resolve this situation, both for our own benefit, but also that for future generations.

Given that the International Energy Agency has already stated that conventional oil production probably peaked in 2006, inferring greater reliance on more difficult to exploit resources such as ultra-deepwater deposits and the Canadian oil sands, it is extremely likely that we are already past this peak in net energy and as a result, we are indeed running out of time.

So what are the barriers that might possibly prevent us from acting?

Stumbling block no.1: politics

Perhaps one of the most difficult issues to address is the interaction between the psychology of power and problems that require long-term solutions. While many would like to think that the appointed representatives in a democracy have the concerns of their voters at heart, the drive to stay in power can act as a powerful disincentive to address certain issues, particularly when action comes at an immediate cost in popularity and the consequences for inaction will likely fall on the heads of a future administration. Good recent examples of this include the failure of South Africa’s government to support an adequate power plant build programme despite strong growth in power demand and the UK’s new nuclear build programme. The go-ahead for the latter scheme theoretically took place in 2006, but even today, there are doubts as to whether the UK power market will adequately incentivise utilities to take the significant risks involved onto their balance sheets.

Furthermore, in a democracy, a mandate for radical changes, particularly those that will in the short-term adversely impact the living standards of voters, requires the electorate to be already suffering from the condition that the government’s “cure” is intended to alleviate. With regard to the energy sector, there is a lengthy lag between the adoption of a new policy and its implementation, due to the scale of the infrastructure and work required. If a crisis occurs in the energy sector, then it follows that a country will find it much more expensive to resolve, than if it had taken earlier measures to prevent it from happening in the first place. In other words, prevention is better than the cure.

An obvious solution would be to develop a cross-party consensus, but this is filled with difficulties, particularly given the thorny issue of the “prisoner’s dilemma,” and in the case of the USA, its extremely polarised political system. The situation isn’t helped by the lobbying efforts of  many groups that see a shift to a more sustainable energy system as a clear threat to their wealth and prestige. Furthermore, governments’ capacity to directly champion the investment required is being undermined by the increasing difficulty in extracting tax revenue from both the wealthy elite and multinational corporations, with many nations locked in a spiral towards the bottom in terms of corporation tax rates.

Signing renewable energy targets into law in principle is a good step forward, but how does one hold politicians accountable, given the diffuse responsibility created by many hands being at the wheel? This is more of an issue in today’s world where governments are typically more market-makers than in direct control of their economies. Aiding and abetting this is the growing maturity and sophistication of election science, in which politicians are actively encouraged to be “all-things to all people.”

Other systems of government are not immune from such issues. China’s central government has significantly more freedom of movement than that of the US, but it has to been seen to deliver massive and continual economic benefits for its population in order maintain its grip on power. In the case of other authoritarian regimes, particularly those in the Middle East, fuel subsidies are a major impediment to energy efficiency, but are often seen as a necessary means of appeasing the population.

Stumbling point no. 2: psychology

Like climate change, peak oil and resource depletion in general runs into the human tendency to discount the future. While this worked admirably back when our problems occurred on a daily or at most seasonal basis, it is ill-suited to managing events that happen over the course of decades.

Personally, the most glaring example of this problem is BP’s Statistical Energy Review. The current version reports that “reserves remain sufficient to meet demand growth,” and that “over the past decade the reserve-to-production ratio for oil increased from 41 to 46 years; it has remained above 60 years and currently stands at 63 years for natural gas.” While its tone is meant to be reassuring, consider these figures more carefully. Scientific estimates suggest that we have been on this planet in our current form for around 250,000 years. Our recorded history is in the order of 5000 years. The oil industry has only been in existence since 1850, marked by the discovery that it is possible to distill kerosene from petroleum and oil discoveries peaked in 1965. In this context, 46 years is but the blink of an eye.

Another potent issue is the ingrained belief that economic growth will continue. This is likely to be particularly acute in those of advancing years who have witnessed a colossal improvement in living standards and technology and understandably are predisposed to expect this trend to continue.

There is some hope in the fact that society has shown time and time again, that given sufficient incentive, it can quickly adapt and institute large-scale changes in a surprising small period of time. A good historical example is the rapid retooling of the US manufacturing industry in WWII from consumer goods to tanks, planes and munitions. However, in such cases, the need for immediate action is clear, urgent and obvious to the population as a whole. It is difficult to see how the issue of resource depletion could evoke a similar response, given that by its very nature, the scenario is closer to a frog in a saucepan under a low heat. Lulled by the slow increase in temperature, the hapless amphibian cooks without the sudden jump in heat needed to elicit a pain response*.

Stumbling block no 3: Economics

A knock on effect of declining EROEI is the problem it creates for global GDP growth. Rising fuel prices work to drag down disposable income and have been a harbinger of US recessions. This makes the case for investment harder, particularly given the issue of increased volatility. It also may be partially behind the massive run-up in sovereign debt and will create further problems in terms of pension provision for those currently in employment.

If times do indeed get harder in the developed world, then it becomes more important to use resources effectively. Just as in times of recession, fraud becomes harder to disguise, so will society as a whole will have to learn to shed the “productively unproductive”. We currently live in a world with a massive disparity between the reward for many occupations and their social value, as witnessed by the fact that someone who buys low and sells high on the financial markets can earn far more than our top scientists. Similarly, the current inequality between the richest and poorest sections of society could be viewed as a barrier to job creation, given the limited needs of a single individual.

Changes will have to be made to keep the global economy from seizing up. Debt forgiveness on a large scale and experimenting with local currencies with negative interest could be a way forward, but are likely to be met with fierce resistance from the status quo. Should the need for action become more apparent, then democracies will be faced with growing demand for a less consultative and more authoritarian state.

The belief among economists that sources of energy are readily substitutable and that the replacement of one for another is driven entirely by market-forces, will also need to be addressed. While the rising price of whale oil did indeed result in the switch towards mineral oil for lighting before supplies of the former were exhausted, the transition was only possible because the technology needed to unlock oil resources was within our reach at that time. Despite the understanding accumulated over the past century, current substitutes for sweet light crude such as tar sands and ultra-heavy Venezuelan crude could hardly be described as ideal.

Many of the potential solutions to the trilemma of resource depletion, climate change and the need for continued economic growth are somewhat anathema to current thinking. For example, a regulated oil price, as proposed by French President Nicolas Sarkozy would go a long way to incentivise long-term investment, but runs counter to the current preference for efficient market-based solutions. Similarly, localised supply chains are likely to provide the greatest security against potential disruption, but are an ill-fit in this age of just-in-time production and low freight rates.

A zero-sum game?

A potential source of concern is how individual countries will react to the situation. Would oil-exporting nations, confronted with diminishing supplies, begin to reduce export volumes to maintain future living standards? How can developed countries obtain the investment needed to transform their economies in the context of wealth transfer to developing nations? Although war originally began as theft on a large scale, it is unclear whether even the US could come out ahead in resource terms in the event of hostilities. The incredible cost of the war in Iraq and the ongoing conflict to Afghanistan is a testament to the heavy price paid in blood and taxes for military adventures. What will happen once Chinese coal production peaks? If wars do end up being fought over resources, there is a danger that would be conquerors will have a powerful incentive to lay waste to captive populations to free up more resources for their own citizens.

Cause for hope?

To be fair, the growing awareness of peak oil and related issues is encouraging as is the fast rate of both technological development and deployment in the renewable energy sector. However, the amount of political horse-trading at Copenhagen and Cancun and the lack of clear direction in terms of energy policy in the US and the UK, makes it hard to believe that those in power have a credible long-term plan for action on the scale required by the task ahead of us.

On the other hand, never has the capacity for human ingenuity been so great as it is now. The sheer scale of the global population today and the rise of information technology and education for the masses means that our capacity for thought and innovation is unmatched compared to any other time in history. Our current extravagant use of the earth’s resources is part of the problem, but it is also part of the solution, given the significant savings that could be made and the amount of energy that could be redirected at putting the world on a more sustainable footing. In addition, as fuel prices rise, some of the barriers to investment may dissipate. Once the cost of shipping goods back and forth across the globe reaches a certain point, globalisation is likely to start running backwards, improving the balance of trade for mature economies and providing greater opportunities for employment. Also it might not be long before the cost of solar power drops to grid parity, with the IEA predicting that this will happen by 2020. A wild card will be unconventional gas production, given both its considerable environmental impact and massive potential.

To conclude, the current unsustainable nature of our energy system creates substantial long-term risks, particularly in the light of the significant amount of time it will take to mobilise public opinion, develop alternative sources of energy and deploy them on a large scale.

What are your thoughts? Do these problems have solutions, or are we destined to crash and burn?

Industrial Fuel and Power