Look to gas for the future

Fossil fuels are not about to run out. That’s our biggest problem—and our big opportunity
March 23, 2011

Peak oil—the idea that we have passed or are about to pass the physical peak of oil production—is again in fashion. It has been lent impetus by events in the Middle East and North Africa. Predictions abound of imminent price shocks, $200 dollars-a-barrel oil, and an oil-induced Armageddon. We have been here before: it is all very reminiscent of the reactions to the Iranian revolution and the oil price shock in 1979 when oil prices hit $39 a barrel (about $130 in current money). Belief in this coming Armageddon naturally underpins the case for going green, and in particular for placing overwhelming emphasis on renewables and energy efficiency measures. Current extremely expensive offshore wind programmes (amounting to over £100bn in Britain before 2020) become economic, advocates of this argument say, because the price of the alternative is going to be so high. Energy efficiency becomes more attractive at high oil prices, the argument goes, and hence the demand for energy will fall (at least for the domestic market) thereby offsetting the costs of renewables. Thus the strategy pays for itself. From an environmental perspective it all looks too good to be true—and it is. Almost all that could be wrong with this argument is wrong—there is no obvious peak in oil production; what matters for electricity is gas (and coal), not oil; and there are few reasons to think that energy demand is likely to fall. Renewables will increase retail prices a lot. The one thing that remains is that offshore wind is about the most expensive means to achieving limited carbon reductions. 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. Energy efficiency (an obvious good thing) is not the same as energy demand reduction (not necessarily a good thing). No amount of fitting of draft-excluders, double glazing or wall insulation will have much impact on global warming—what matters is initially lower carbon ways of getting the energy (that is, gas) and then low carbon ways (through R&D and new technology). In the short run, the impact of low carbon technology “winners” governments have (foolishly) picked is going to be tough. All those offshore windmills are going to remain very expensive and politicians who have rushed to say otherwise (in part, on the basis of peak oil) have not helped. Telling people something is going to be economic when it is unlikely to be is hardly the way to get carbon credibility. Better to face down the lobbyists and to tell the truth: offshore wind is very expensive and likely to remain so. Politicians can of course carry on with this deception for as long as not much offshore wind is built. But as the rush in the next nine years towards perhaps as much as 30 gigawatts gets underway to meet the EU 2020 target, the impact on the bills will start to show. Here there are two conditions which need to be met: that customers can actually pay; and that they are willing to vote for politicians who will force them to pay. By around 2016, both of these conditions will be put to the test. Fortunately there is a better way forward. The first step is to recognise that peak oil alarmism is nonsense. Oil is not likely to run out any time soon, and in any event it is fungible—replaceable—with gas. The second step is to recognise the impact of the shale gas revolution—and the implications for the wider production of carbon based fuels. The problem is there is too much fossil fuel, not too little—and if we burn it all we will fry. This is the real threat. The third step is to be realistic with the politics. Truth telling comes hard, but it is a much better way of addressing the politics of climate change than claiming that the transition to a low carbon economy can be relatively painless. This was the mistake in the political interpretation of the 2006 Stern Review—with its claim that the transition to a low carbon economy could be achieved for the very low cost of 1 per cent of GDP per year, based largely on renewables and energy efficiency (and no policy costs at all). The 1 per cent was quoted across the European and world political spectrum with little appreciation of the assumptions on which it was based. A sensible transition would start by getting rid of the coal. Gas is cheap and gas-fired power stations are quick to build. Unless we switch from coal to gas globally, coal will carry on growing—and polluting. It is very simple: either we burn the coal and get serious global warming—or we switch away. Only gas can do this quickly—and in this case at virtually no net economic cost. With this breathing space, the efforts should go into R&D, and in deploying the technologies that are near to reaching the market—things like smart grids, smart meters and system IT, and electric cars. In this transition period there is of course room for some windmills and solar, but at the margin. It is better to spend the extra pound on R&D than offshore wind.

Also in Prospect’s energy special: Simon Henderson: The main security risk for Europe lies in Moscow Malcolm Grimston: Nuclear may make sense, despite concerns Roger Harrabin: Battery power is the way ahead for transport Miles Brignall: Get your solar panels while the subsidies last