October 31, 2008

Jim Hansen's Tipping Point

The foregoing chart from the International Panel on Climate Change, which shared the Nobel Prize with Al Gore in 2007, shows the dimensions of the warming problem under three different scenarios: mild, hot, and extra spicy.

This chart is from the IPCC's 2007 presentation to policy-makers of the science behind global warming, which urged upon them the gravity of the situation.

The specter of global warming, and the disastrous climatic effects that might ensue from it, has waxed and waned in public consciousness over the past two decades. It was only in 1988 that an obscure NASA scientist named Jim Hansen brought the prospect of global warming to widespread attention, in testimony before Congress. The message was not popular then--"The American way of life is not up for negotiation," declared the first President Bush. As a way of declaring its indifference, Congress rejected carbon taxes in 1993. But anxiety has heightened dramatically in recent years as the scientific evidence has accumulated.

In a recent paper, Hansen's conclusion, with other colleagues, "is that, if humanity wishes to preserve a planet similar to the one on which civilization developed and to which life on Earth is adapted, CO2 must be reduced from its present 385 ppm (parts per million) to, at most, 350 ppm."

350.org has made this a rallying cry.

It is an extremely tall order, as Hansen acknowledges: just to keep Co2 at 425 ppm, assuming plentiful oil and gas, coal use must be phased out by 2030 unless a means is found of "capturing and sequestering" the CO2 emissions it produces. Unconventional sources of fossil fuels like tar sands or shale oil could also not be developed on any appreciable scale if the target were to be met. Hansen also calls for an immediate moratorium on coal-fired power plants and constraints on oil extraction on "public lands, off-shore regions under government control, environmentally pristine regions and extreme environments."

Time is running out, writes Bill McKibben. A change of course is urgent. That "means no more new coal-fired power plants anywhere, and plans to quickly close the ones already in operation. (Coal-fired power plants operating the way they're supposed to are, in global warming terms, as dangerous as nuclear plants melting down.) It means making car factories turn out efficient hybrids next year, just the way we made them turn out tanks in six months at the start of World War II. It means making trains an absolute priority and planes a taboo. . . . it means the rich countries of the world sharing resources and technology freely with the poorest ones, so that they can develop dignified lives without burning their cheap coal."

Lots of questions may be raised about this perspective. Is it remotely feasible? What is the cost? Assuming it is the right objective, what prospects are there for a domestic reconsideration of our profligate ways or for international collaboration that goes well beyond the Kyoto Protocol?

No realistic accounting can ignore the profound obstacles that stand athwart attempts to lower the level of CO2 in the atmosphere. The gap in perspective between the developed world, and especially the United States, which seeks to preserve its "energy-intensive lifestyle," and the developing world, which refuses to be condemned to 1/10th the per capita consumption of the rich countries, constitutes a huge obstacle to any consensus agreement.

If the Cassandras are right, we have an enormous challenge and a profound moral responsibility to adjust our course so as not to visit upon future generations the ill consequences foreseen. But given the way of the world, the likelihood of this adjustment is remote. "A long-term overshoot of the 350 ppm target level, with potentially disastrous consequences," Hansen notes, is "a near certainty if the world stays on its business-as-usual course."

What would knock the world off its rocker? Is the idea of future devastating consequences, in a sort of great hereafter, sufficient to change its "business-as-usual course"? Will Asia consent? Will China and Russia and Brazil and India consent? Can America offer an attractive bargain to them? What would that be?

Asia Likes Energy, Especially Coal

This chart from BP's Statistical Review of World Energy shows coal production and consumption in 1997 and 2007. Whereas both production and consumption stayed relatively flat in most regions, Asia was a huge exception.

Coal consumption grew in 2007 by 4.5%, according to BP, well above the 10-year average. "Coal was the world's fastest-growing fuel for the fifth consecutive year. Growth was above average in all regions except the Middle East. Chinese consumption growth accounted for more than two-thirds of global growth." Coal is especially important in Asia, as the chart below shows. It makes up 70% of China's energy use.

The reserves situation also shows the pronounced domination of coal, which has a reserves to production ratio of 130 years, far larger than oil or natural gas. BP says that coal has emerged as "the world's fastest growing fuel in part because reserves are located in key consuming countries."

Several years ago, Marc Faber looked to previous experiences of rapid industrialization to forecast the growth in Chinese and Indian oil demand. In the United States, per capital consumption of oil rose from one barrel per year in 1900 to 28 barrels a year in 1970; in Japan the rise from 1950 to 1970 was from one barrel to 17. In China, by contrast, "oil demand per capita [in 2004] is still only 1.7 barrels per year, and for India it has only reached 0.7 barrels. By comparison Mexico consumes annually about 7 barrels of oil per capita and the entire Latin American continent around 4.5 barrels."

According to Simmons' latest figures (October 21, 2008), India now uses 3.2 million barrels per day and 1.1. barrels per person a year. China uses 8 million barrels per day (up from 3.5 million in 1997), but still only 2.3 barrels per person a year. Demand in the United States, by contrast, totals 24 barrels per person a year.

The main point: If the developing world develops per capita energy consumption anywhere near the levels of previously industrializing societies, the effort to arrest the rise in global temperatures seems doomed. The following chart from National Geographic suggests as much.

Update: here are the July 2010 projections of the Energy Information Administration for world use of coal:

Asia Likes Petrol, Too

In the International Energy Agency's 2007 estimate of oil demand to 2030, China, India, and other developing countries make the largest contribution. The following charts suggest why.

In 2007, the IEA projected that China's car sales would overtake the United States in 2015. In fact, they did so in 2010, as the following chart shows:

Jan. 25, 2011: From the Early Warning blog, here is a graph of China's explosive growth in oil consumption, plotted alongside U.S. oil consumption:

China Overtakes US in Total Energy Consumption

From the Wall Street Journal, July 18, 2010:
China has passed the U.S. to become the world's biggest energy consumer, according to new data from the International Energy Agency, a milestone that reflects both China's decades-long burst of economic growth and its rapidly expanding clout as an industrial giant.

China's ascent marks "a new age in the history of energy," IEA chief economist Fatih Birol said in an interview. The country's surging appetite has transformed global energy markets and propped up prices of oil and coal in recent years, and its continued growth stands to have long-term implications for U.S. energy security.

The Paris-based IEA, energy adviser to most of the world's biggest economies, said China consumed 2.252 billion tons of oil equivalent last year, about 4% more than the U.S., which burned through 2.170 billion tons of oil equivalent. The oil-equivalent metric represents all forms of energy consumed, including crude oil, nuclear power, coal, natural gas and renewable sources such as hydropower. . . .

China overtook it at breakneck pace. China's total energy consumption was just half that of the U.S. 10 years ago, but in many of the years since, China saw annual double-digit growth rates. It had been expected to pass the U.S. about five years from now, but took the top position earlier because the global recession hit the U.S. more severely, slowing American industrial activity and energy use.

Beijing has refused to agree to cap its overall growth in its consumption of fossil fuels, or reduce its emissions of carbon dioxide and other greenhouse gases. That frustrated President Barack Obama's efforts to forge an international climate agreement at a United Nations summit in Copenhagen last December.

China instead set a target to reduce emissions intensity—the amount of carbon dioxide emitted per unit of gross domestic product—by 40% to 45% from 2005 levels by 2020. That meant China was agreeing to make its economy more energy efficient—boosting its competitiveness—but not to consume less energy overall. . . .

China's growth has transformed global energy markets and sustained higher prices for everything from oil to uranium and other natural resources that the country has been consuming. Once, China was a major exporter of both oil and coal. Its increasing reliance on imports has sustained higher energy prices worldwide and underpinned a natural-resource boom in Africa, the Middle East and Australia. ..

China's rapidly expanding need for energy promises to have major geopolitical implications as it hunts for ways to satisfy its needs. Already, China's rising imports have changed global geopolitics. Chinese oil and coal companies have been looking overseas in their quest to secure energy supplies, pitching the Chinese flag in places like Sudan, which Western companies had largely abandoned under international pressure.

The most ambitious effort to secure overseas energy supplies was the failed 2005 attempt Cnooc Ltd. to take over California-based Unocal in an $18 billion bid, which was trumped by politics and rival Chevron. Despite a short pullback in the aftermath of that failed deal, Chinese companies have expanded overseas, buying assets in Central Asia, Africa, South America, Canada and even small stakes in the Gulf of Mexico. While their overall overseas footprint is still small compared with that of big international oil companies, these companies are expanding with access to cheap credit through China's state-owned banks. . . .

The U.S. is also by far the biggest per-capita energy consumer, with the average American burning five times as much energy annually as the average Chinese citizen, said Mr. Birol.

The U.S. also remains the biggest oil consumer by a wide margin, going through roughly 19 million barrels a day on average. China, at about 9.2 million barrels a day, runs a distant second. But many oil analysts believe U.S. crude demand has peaked or is unlikely to grow very much in coming years, because of improved energy efficiency and more stringent vehicle fuel-efficiency regulations.

China's rise is also helping shift the focus for oil producers in the Organization of Petroleum Exporting Countries. Key OPEC states like Saudi Arabia long looked to U.S. oil consumption for guidance in adding new pumping capacity. But in recent years, OPEC states including Saudi Arabia and the United Arab Emirates have built or started building refineries and storage facilities in Asia. Saudi Arabia, the world's biggest crude exporter, now ships more to China than to the U.S.

Prior to the global economic crisis, China had been expected to become the biggest energy consumer in about five years. Economic malaise and energy-efficiency programs in the U.S. brought forward the date, Mr. Birol said.

The decreased "energy intensity" of the U.S. economy is a key reason energy investors, such as General Electric, have increasingly looked to China as a driver of growth. Mr. Birol said China requires total energy investments of some $4 trillion over the next 20 years to keep feeding its economy and avoid power blackouts and fuel shortages.

Mr. Birol, formerly an economist at OPEC, said China is expected to build some 1,000 gigawatts of new power-generation capacity over the next 15 years. That is about equal to the current total electricity-generation capacity in the U.S.—a level achieved over several decades of construction.

China's energy intensity actually fell during the first phase of its economic growth in the 1980s and 1990s, which was driven by light manufacturing. But in the early 1990s, China became a net oil importer for the first time as its demand finally outpaced domestic supplies. China's energy demand surged again after China joined the World Trade Organization in 2001.

Before China joined the WTO, most international prognosticators, including the IEA, predicted energy demand would increase at an annual rate of 3% to 4% from 2000 to 2010. Demand wound up growing four times faster than they predicted.

There is a chance the growth in China's energy appetite could slow, as the pace of industrial expansion slows and energy-efficiency policies backed by the government—such as tougher fuel-efficiency standards for cars—take hold.

In a few years, there won't be much infrastructure left to build. Urbanization will continue, but at a slower pace. And the heavy factory jobs that consume huge amounts of energy may start to shift away to other countries partly as China's workers demand better conditions and higher salaries.

But the same force that could be moving factory jobs away—rising incomes—could also underpin even greater energy needs as richer Chinese start consuming more. The question is whether China will adopt a low-energy pathway pioneered by places like Japan and Europe or follow a high-energy life-style of big houses and big cars pioneered by the U.S.

Oil in the Middle East

This graph shows that over 60% of the world's oil reserves lie in the Middle East, embracing Saudi Arabia, Iraq, Iran, Kuwait, together with a handful of other states. So it was in 1987, so again in 2007, so it is likely to be in the future.

This great geopolitical fact has been a vital feature of the energy predicament for more than half a century. Oil was a key foundation of world economic recovery after 1945, as Western Europe especially imported huge quantities to fuel its recovery from World War II.

So another essential aspect of the energy problem is the concentration of the most irreplaceable form of energy in the world's most volatile region. Over the years, a geopolitical competition has ensued whose stake was either control over this great resource, or denial of control to others, but in either case fixed on the transcendent significance of this resource, more valuable than gold.

The United States has been deeply interested in the region since the 1940s. Its armed forces are now overwhelmingly deployed either directly or indirectly in support of two wars in Iraq and Afghanistan.

US policy in the Middle East is not solely reducible to oil by any means, but the fact is undeniable that the existence of the great oil reservoirs in the region has always been a vital conditioning factor in US policy.

The map from British Petroleum shows "proved reserves." In fact, however, the "proved reserves" aren't proven; a cloak of mystery surrounds the true state, for instance, of the Saudi oil fields. But in all probability the figure does not lie too much. Most of the easily accessible, cheap to produce oil lies in the Middle East.

In thinking about the energy problem from a geopolitical perspective, we confront a much different world from that seen by the scientists. Their perspective is, as it were, from “on high”; this is “down low.” It is thick with avarice and selfish ambition, clever (and not-so-clever) Machiavellian calculations. It has lots of different dimensions, later to be explored. But the chart speaks volumes. The concentration of oil reserves in the Persian Gulf is a fact of commanding importance in thinking about the energy predicament. The role it plays in the global energy system has decisive implications for the viability of other forms of energy.

Oil Reserves and Consumption: The Mismatch

This nice graphic first appeared in Energy Bulletin, via William Tamblyn. In the graph, the size of each country reflects the relative size of its oil reserves. It is based on the same data (though from 2004) as the preceding chart from BP, though is more useful in giving the country-by-country breakdown. The colors in the above chart reflect different levels of oil consumption per country (not, as is sometimes done, per capita oil consumption). Click the graph for enlargement and to see the consumption per country key on the lower left.

Tamblyn's map above is a clever way of rendering the production-consumption disparity, though a simple pie chart comparison showing the consumers, as in the pie chart to the right, is also revealing. This "Production and Consumption" graph is from the folks at oilposter.org (whose renowned poster projecting peak oil is available free to educators and at modest cost to individuals).


The Growth of Dependence: US Oil Imports from 1950

This graph from the Energy Information Administration shows US production declining from a peak of 10 million barrels per day in the early 1970s to only 6 mbd by 2007. Consumption fell steeply in the 1970s as the economy fell into recession from the two oil shocks, but rose again when oil prices collapsed in 1985. Net imports are now some 12 mbd.
Questions: is it likely that net imports will fall further under the impact of domestic recession? Can the United States make up the gap between production and consumption by more production? What are the costs of this dependency?

Oil Fields in Middle East

The above map is a closeup of the Persian Gulf from a 2007 CIA rendering of Middle Eastern Oil Fields, giving us a yet finer grain than the two previous entries. Below is a cropped view of the larger CIA map.

Costs of Oil Imports

In 2007, the United States spent $246 billion on oil imports and another $82 billion on imported refined petroleum products, making for a grand total $328 billion.

The cost rose more in the first seven months of 2008, with the total cost of oil and refined imports products at $283.6 billion. The bill was paid for by the "recycling" of dollars into US Treasury debt by the oil exporters.

If you were to ask most Americans, the big problem with high oil prices is high gas prices. They care about that. Presidential approval ratings have been shown to rise and fall inversely with the price of gasoline.

But there are two other very important aspects of this import bill.

One is its significance to the the US role in the world financial system. The US current account deficit stayed stubbornly high in the first two quarters of 2008 because of the rising cost of oil; the movement of investment funds into the commodity markets, which changed their character, contributed to the sharp spike in oil in 2008; movement into hard assets, of which oil was a beneficiary, was in part a response to market distrust of paper assets, so the price of oil was in part a function of doubts over the value of paper currency. Oil influences, and is itself influenced by, the financial system.

The financial deficit is also a geopolitical deficit. The obverse fact of high oil import bills is that nations with which the United States has embittered relations were often the biggest immediate gainers from a rising oil price: Iran, Venezuela, and Russia were especially important in this regard. Both presidential candidates exclaimed in 2008 against "sending $700 billion a year to tyrants and dictators for their oil," as Obama put it in words closely echoing McCain's.

Both McCain and Obama mistated the facts. Had the price of oil held in the three figures, the total bill could well have amounted to $700 billion, but it subsequently fell. Most US remittances, moreover, do not go to "dictators and tyrants," but rather to such decent folks as Canadians.

Still, it is a very big yearly bill. And ultimately the world price of oil, to which America contributes by its massive consumption, does mean that US oil imports replenish the coffers of states not exactly friendly, as this chart from Matt Simmons shows.

Another chart from Simmons estimates the impact of successively higher oil prices on the 13 poorest oil producers. He sees that as a powerful impetus to development, but it is also indicative of the power shift to petro states such as Russia, Saudi Arabia, and Venezeula that a high oil price brings.

Oil consumption has financial consequences. It has geopolitical consequences. Those should count as costs of our acknowledged "addiction."

The Specter of Peak Oil

There is no consensus among the experts over what the future holds in the way of oil production. As this 2007 chart from Energy Watch Group shows, the advocates of "peak oil" believe that production will fall inexorably over the next several decades to less than half of present output, from some 85 mbd to 40mbd. The official outlook, as represented for instance by the World Energy Outlook of the International Energy Agency, saw production rising from 85mbd to 116 mbd by 2030 in its 2006 report. The IEA subsequently reduced its projections to 106 mbd by 2030 in its 2008 World Energy Outlook, a considerable volte-face for the IEA but still worlds apart from the projections of the Energy Watch Group.

Who is right?

A lot rides on the answer to that question. It's a complicated debate with a long history, pitting at the most general level "neo-Malthusians" with a harsh view of inexorable natural limitations against "cornucopians" who think that humanity, with the aid of the market system, will prove sufficiently inventive to overcome these limitations.

The advocates of Peak Oil make a very strong case. We will review the evidence they put forth later on. Like other key questions, some of it involves questions that neither you nor I have the technical capacity to resolve. Don't feel bad: the experts themselves do not have access to key data and have difficulty arriving at an informed judgment themselves.

So we can't resolve it to 100% satisfaction. But we've got to have a view of it. It is one of the keys to the puzzle, a basic factor in understanding the energy predicament.

Peak Oil and Climate Change: Alternate Universes

Richard Heinberg has a terrific deconstruction of the sometimes clashing, sometimes complementary, perspectives of peak oil and climate change activists:

"Most advocates for the Peak Oil concept—sometimes known as “depletionists”—are energy experts, economists, journalists, urban planners, or workers retired from the oil industry (usually geologists or petroleum engineers). Among climate analysts and activists there are more environmentalists, fewer energy experts, and far fewer retired oil industry employees. It is my experience that, when placed in the same room together, the two groups often talk past one another."'

Heinberg notes that considerable internal diversity exists within each grouping:
Some individuals and groups working on issues related to oil and natural gas depletion are well informed about climate science, while some are not. Some climate protection groups are sensitive to fuel-supply vulnerability issues; others are not. Some Peak Oil activists are what have come to be known in the blog world as “doomers”—that is, they believe that there is no hope at this point for the preservation of modern civilization in any recognizable form; others are “techno-fixers,” who think that the world will adjust—painfully perhaps, but in the end successfully—to oil depletion through conservation and the development of alternative energy sources. Similarly there are “moderate” climate-change scientists and activists who see the problem as serious but solvable, while there are some who believe that the world has already passed a “tipping point” beyond which catastrophic impacts are inevitable. It is probably fair to say that the substantial majority of both groups find themselves somewhere midway between extreme positions staked out by some of their spokespeople."

...Some Peak Oil analysts seem to be of the opinion that oil depletion constitutes a solution to the dilemma of global greenhouse gas emissions, or that Climate Change is actually not a problem at all. This appears to be the view primarily of some former oil industry geologists, but is probably not that of the majority of depletion analysts. The view is rarely stated openly (I was unable to find a glaring instance in print, though I have heard it expressed in conversation).
Climate change activists, by contrast, "argue that, even if global oil production peaks soon, this will provide no solution whatever to Climate Change because society will replace oil with coal and other low-grade fossil fuels—which will simply worsen greenhouse gas emissions. Moreover, since the remedies for carbon emissions that climate activists propose will inevitably lead to increased energy efficiency and a reduction in oil consumption, they often feel such efforts constitute an adequate answer to the Peak Oil problem."
For many Climate Change activists, theirs is primarily a moral issue having to do with the fate of future generations and other species. Their message implies an appeal to self-preservation, but since they cannot prove that the most horrific climate consequences being predicted (the drowning of coastal cities by rising seas, rapidly expanding deserts, collapsing agricultural production) will occur within the next decade or two, the motive of self-preservation is often downplayed. This emphasis on the moral dimension of climate activism is clear in Al Gore’s documentary film, An Inconvenient Truth."

Perhaps because Climate Change activists see that a dramatic reduction in emissions must be undertaken voluntarily and proactively, and that the depletion of fossil fuels will not occur quickly enough to deter catastrophic emissions levels, they tend to accept generous estimates of remaining fossil fuels as a way of dramatizing the need for action. They see the argument that depletion will take care of the carbon emissions problem as a threat, because it could lead to apathy. They argue that there are enough fossil fuels left on the planet to trigger a climatic doomsday; and, to underscore the argument, Climate Change often quote robust estimates of remaining oil reserves and amounts awaiting discovery issued by agencies such as the United States Energy Information Administration (EIA), and by companies like ExxonMobil and Cambridge Energy Research Associates (CERA)—most of whose forecasts seem unrealistically optimistic compared to the majority of expert forecasts.
After discussing the contending perspectives of the two camps over natural gas, coal, and unconventionals like tar sands, which I excerpt later, Heinberg comes to the main pitch:
the two problems of Climate Change and Peak Oil together are worse than either by itself. Strategies that might help to keep lights burning and trucks moving while reducing emissions are questionable from a depletionist point of view, while most strategies to keep the economy energized as oil and gas disappear simply increase greenhouse gas emissions.

With regard to both problems there are only two kinds of solutions: substitution solutions (finding replacement energy sources) and conservation solutions (using energy more efficiently or just doing without). . . .

Several questions become critical: How much of a change in energy supply will be imposed by the peaking of production of oil and natural gas? How much will be required in order to minimize Climate Change? And how much of that supply shortfall can be made up for with substitution and how much with efficiency, before we have to resort to curtailment?
Though noting various tensions among the two camps, Heinberg finds a basis for cooperation among them: "Taken together, Climate Change and Peak Oil make a nearly air-tight argument. We should reduce our dependency on fossil fuels for the sake of future generations and the rest of the biosphere; but even if we choose not to do so because of the costs involved, the most important of those fossil fuels will soon become more scarce and expensive anyway, so complacency is simply not an option."

At the same time, Heinberg does find fault with both camps:
Climate activists could start using depletion arguments and data in tandem with their ongoing discussions of ice cores and melting glaciers, but to do so they would need to stop taking unrealistically robust resource estimates at face value.

For their part, depletionists—if they are to take advantage of increased collaboration with emissions activists—must better familiarize themselves with climate science, so that their Peak Oil mitigation proposals are ones that lead to a reduction rather than an increase of carbon emissions into the atmosphere.
The bottom line, Heinberg believes, is that "energy efficiency and curtailment will almost certainly have to be the world’s dominant responses to both issues."

October 30, 2008

Nuclear Options

Civilian nuclear power, offering the prospect of relatively cheap electricity, arose in the 1950s as a cure-all for the energy predicament. Eisenhower was an enthusiast; he called it "Atoms for Peace." The idea was to spread nuclear knowledge around the world and convert it to abundant energy. He thought desalinization plants powered by nuclear energy could solve the Middle East's notorious water problem. How quaint, the modern reader says, for nuclear power sharply diminished in appeal once concerns over safety and nuclear proliferation took center stage in the 1960s.

The dangers of global warming, the existence of high oil prices, and the specter of peak oil have all conspired to give nuclear power a "new look." The absence of CO2 emissions is a huge plus (though the construction of nuclear plants are themselves energy intensive). Abundant electricity could encourage a shift to a transportation system keyed to electricity, diminishing the need for oil. Is nuclear power the key to dealing with both global warming and peak oil?

There are serious downsides: the waste problem has not been resolved; cost pressures in the industry rose enormously in recent years, plus various other environmental dangers including carbon intensive construction and cleanup costs. On the other hand, the French seem to be living smartly with nuclear power. The Swiss and the Swedes are in the game. Are they all idiots? It is doubtful one should proceed on that premise.

I'm not ready to make a case for nuclear power, but we are obliged to listen to the cases that are being made. The potential contribution to mitigating the emissions problem has made some prominent environmentalists reconsider their previous opposition and come out strongly for the nuclear option. One example is James Lovelock, inventor of the "Gaia hypothesis," who argues that we "cannot turn off our energy-intensive, fossil-fuel-powered civilization without crashing." Lovelock believes that wind and solar do not offer a short range solution and recommends a crash program to build nuclear reactors.

Others, like Lester Brown, dismiss the nuclear solution. Brown notes that "Amory B. Lovins and Imran Sheikh put the cost of electricity from a new nuclear power plant at 14¢ per kilowatt hour and that from a wind farm at 7¢ per kilowatt hour. This comparison includes the costs of fuel, capital, operations and maintenance, and transmission and distribution. It does not include the additional costs for nuclear of disposing of waste, insuring plants against an accident, and decommissioning the plants when they wear out. Given this huge gap, the so-called nuclear revival can succeed only by unloading these costs onto taxpayers. If all the costs of generating nuclear electricity are included in the price to consumers, nuclear power is dead in the water."

Nuclear Nightmares

This figure is from Homer-Dixon's The Upside of Down. It shows the relatively small quantity--less than a ten-thousandth of the world's highly enriched uranium (HEU)--to build a crude atomic bomb.

If you can make nuclear power in abundance, you can make bombs. That is a further scary element in the energy predicament, another cudgel to crack your skull wide open.

The Nuclear Non-Proliferation Pact of 1968 (NPT) sought to resolve this question by a couple of trade-offs. Non-nuclear states were to gain access to civilian nuclear technology if they placed themselves under safeguards. The existing nuclear powers were to dedicate themselves to disarmament. Important states known to have acquired nuclear weapons--India, Pakistan, and Israel--stayed outside the treaty, but the five veto-holding powers of the UN Security Council were all signators.

Here we have an abundance of questions: Is the NPT deeply flawed or does the existing nuclear proliferation regime offer good safeguards against further nuclear proliferation? How serious is the danger posed by the spread of civilian nuclear technology? How vulnerable is it to terrorist seizure and the making of bombs? Would increasing emphasis on nuclear energy in the world make hopeless the attempt to stop nuclear proliferation? Were such proliferation to occur, how dangerous would it really be? Could we live with it, or must it be stopped at all costs? Is deterrence a workable solution to the danger of nuclear proliferation, such as it is, or are the factors that made it successful during the Cold War non-existent or weak? Which among the crisis situations over nuclear proliferation--Iran, North Korea, Pakistan--is most serious? Are peaceable solutions on the table, or must we be prepared to resort to war?

You could put the big question another way: is the danger from nuclear proliferation sufficiently serious as to pose in effect a veto against civilian nuclear power as a big contributor to addressing the energy problem?

This is like the question surrounding global warming. Is the specter raised by the scientists sufficiently serious as to debar coal from making a serious contribution to energy needs?

If you say "Yes" to both questions--we can't afford either coal or nuclear energy because of the eventual grim consequences--then the energy predicament becomes yet more acute.

Then we'd be "running out" of oil, and "running away" from potential substitutes.

That is not a likely future outcome. Under those stipulated circumstances, something would undoubtedly give way under the stress.

Long-Term Capital Needs, Broken Markets

One of the most marked features of the energy business is how long it takes to develop large scale projects. A decade, give or take a few years, is required virtually across the board.

Yet the world capital markets are in a state of serious disorder. The 2008 financial crisis took a huge toll on resource companies. We will survey the carnage in a later chapter, but it was pretty spectacular.

It's not much of an exaggeration to summarize the situation as follows: Energy needs long term capital. The capital markets are broken.

One aspect of this problem follows from the price of oil. The chart above shows West Texas Intermediate Crude, one of the key benchmarks. As you see that chart rise to $145 a barrel in July 2008, then plummet back to earth, consider the following questions:

At what price level do other forms of energy become viable? In the short term, other forms of energy (natural gas, wind, solar, nuclear, coal) do not compete with oil, whose use is concentrated in transportation, but in the longer term and at the right price most of these could definitely muster some competition.

Energy development requires access to the equity and debt markets; if companies have too much leverage they can go bankrupt if prices fall suddenly. Expectations of profit and debt repayment are inherently uncertain. Many companies might be profitable if oil averages around $75 a barrel, extremely profitable if it averages a $125, and bankrupt if it averages $50.

The gyrations of the oil price in 2008 show how difficult it is in the energy sector to do that which is most required of thee. In this domain, that is neither to do justice nor to love mercy, but to walk humbly in estimating the future price of oil. On that your whole enterprise depends. And it is vastly uncertain. That is one signal that we emphatically get from the markets.

Letting the Market Decide

The one thread that runs through all these discussions is that "true costs" are not well represented, or captured at all, by market prices.

Let us review the various examples of this.

The cost of carbon emissions, and the consequence threat of global warming, is not reflected in the price of carbon fuels. It is just shifted off to a great hereafter.

The danger of nuclear proliferation is a potential cost for building nuclear reactors that is not factored into the price, but it might prove to be the most significant cost of all.

Adverse consequences for the balance of payments, excessive dependence when oil prices are low, a huge transfer of wealth to petrostates when prices are high, the vulnerability of the economy to sudden disruption via an "oil shock"--all these are relevant in assessing the long term costs of oil dependency that are not registered in the nominal price.

The costs of maintaining expensive armed forces to guard over, patrol, or otherwise dominate oil-bearing regions are also very real, but are not reflected in the market price. They are a cost of extraction paid for by public authority (and, so long as they achieve their ostensible object, also a hidden subsidy to consumers of oil everywhere).

No modern economy can function without markets, and no approach to energy can be successful that does not give "market forces" a wide berth. But there are basic environmental, strategic, economic, and political costs that hover round the energy market, not registered in the price, which any rational public policy should attempt to register.

In principle, the conclusion is unavoidable that government action is needed to provide rational pricing for those "externalities"--rational in the sense of reflecting our estimation of costs not captured by the market. Has government done this well when it has tried? Sometimes yes, sometimes no. Is the assessent of costs surrounded by considerable uncertainty? Of course. But somehow we need to figure out a way to get our best estimate of real price registered in the market price.

An evocative portrait of the long term costs of gasoline consumption is given by the Canadian scholar Thomas Homer-Dixon: "Every time we push down on the accelerator pedal, we emit a blast of carbon dioxide that contributes to global warming. Our children and grandchildren will pay for this warming--in the form of higher food prices from drought, heat waves and floods, greater health expenses from diseases that thrive in warmth, more property damage from storms and rising seas. Those huge future costs aren't reflected in today's gasoline price. In effect, our children and grandchildren are subsidizing our current mania for driving."

The idea Homer Dixon expresses here has long been registered in environmental economics and is the foundation of the field. You don't have to accept as inevitable the consequences Homer-Dixon foresees in order to accept the main point. In principle, there are obvious and not-so-obvious environmental costs associated with energy use, whether we attach greater importance to the short term or the long term. His general analysis, moreover, applies also to costs associated with military spending (counting part of that as a cost of extraction from the Persian Gulf) and to the other examples we have mentioned. In all these areas, government action is needed to provide rational pricing for those "externalities."

In the environmental field, as Homer-Dixon notes, economists have two bright ideas for going about this: "We can apply green fees or taxes to reflect a product's environmental harm, or we can create a market for nature's environmental services that we now treat as free."

More on the advantages and disadvantages of these approaches later.

Taxing Carbon

About the firmest star in my political constellation is the belief that the United States should have long been taxing carbon consumption generally, and gasoline specifically. Twenty years ago, there was already a case for it in terms of addressing the budget deficit, limiting dependence on the Persian Gulf, and mitigating the emerging problem of global warming.

This was hardly an original view. It was widely propounded at the time. But most of the American people and, as it turned out, most politicians would have none of it. The Clinton/Gore administration wisely proposed such carbon taxes in 1993 but got savaged by the Republicans, led by Newt Gingrich. Then the Democrats got crushed in the 1994 mid-term elections. So that was about the end of it.

Painful though it may be, such taxes are simply an essential element of a rational and coherent energy policy. They are the way in which we register the economic, environmental, and political costs that are not registered in the market price; they are the way in which a coherent umbrella of national policy is created under which we allow market forces to function.

People who face higher energy costs will conserve more, and especially so if they know these higher costs are in store for the long run. As Daniel Yergin and Daniel Stobaugh pointed out some thirty years ago, the easiest way to get additional sources of energy is via conservation.

The same is true on the production side. With the assurance that oil producers could not, at some propitious moment, drive down the price so as to make solar, or wind, or natural gas, uneconomic, thus driving competitors from the field, we would have a solid basis for creating the market fundamentals that would support these enterprises over the long run, that would justify investors in placing long term capital in them, and that would thereby encourage entrepreneurial solutions within the framework of national and international security.

We need those solutions very badly, but we are unlikely to get them, or to get them on the scale necessary, without the overarching framework of a national policy that penalizes, through taxes, carbon consumption, and that rewards, through subsidies or other forms of support, the production of energy less costly to other vital public purposes.

Another way of expressing the main point: the real cost of oil and coal is much higher than the nominal cost. By contrast, the real cost of wind, solar, and natural gas is much less than the nominal cost. By paying up for those alternatives, we get a whole range of additional benefits: less warming from carbon emissions, less dependence on hostile oil, less risk of catastrophic disruption.

How to design such a system is tricky. If you are looking at reducing carbon emissions, a carbon tax is the way to go. If you want to limit dependence on foreign oil, a tariff would be advisable. But oil tariffs would violate other agreements under the WTO--at least I'm pretty sure they would--and you could achieve the same benefit of reducing foreign oil dependence via a carbon tax.

In principle, there is no reason why such a system of taxation could not be "revenue neutral." Increased taxes on carbon consumption could be paired with the reduction or elimination of Social Security taxes, as Al Gore has proposed. (Unemployment insurance, as Gore reminds us, was an innovation of Bismarck's.)

Ultimately, some international agreement is needed. We will want to investigate that further later on, but the need for it is pretty obvious.

The United States and China need to step up with tough but responsible measures. On no issue is their collaboration more necessary than on a new energy regime.

Energy Return on Investment

The Energy Returned on Energy Invested (EROEI, affectionately) is a sort of master indicator of dependency, but it registers natural limits. It takes a lot more energy to produce tar sands than conventional oil. Corn ethanol, touted as a solution to the emissions problem, actually expends more energy than it produces.

For a different way of expressing the investment-return ratio, take a look at this somewhat fuzzy chart from oilreport.org, which is measuring an "Energy Profit Ratio." In the 1920s, oil yielded 100 times the energy it took to obtain and process it. According to the chart, ethanol, nuclear, wind, and tar sands do poorly today on what seems to be simply a measure of the EROEI. This is a pretty good chart, if you ask me, even if I can't read half of it.

One note of caution: the "energy/profit" ratios are changing for oil, and are biased if they give much weight to Persian Gulf oil. "New oil"--that is, oil far off shore, in the deep seabed or in various other formidable environments--requires far higher levels of energy to extract.

OPEC Crude Production 2008

October 29, 2008

Paper Topics

1. It is apparent that any attempt to limit carbon emissions requires bringing the developing world into some kind of bargain. What are the strengths and weaknesses of the various approaches that have been offered by specialists? Take as your starting point the debate over Kyoto, and assess developments since then, especially focusing on schemes to "cap and trade."

2. Natural gas is frequently touted as a “bridging mechanism” to an unknown energy regime in the future. Its great advantage is that it is much cleaner than either oil or coal. But we may be running out of it, as the proponents of “Peak Gas” argue. Take as your starting point the "Pickens Plan," which features encouragement for both natural gas and wind, and go to town. Why dudn't he like solar? What effect would various plans have on coal emissions and oil dependence?

3. Nuclear power is also a potential godsend from an emissions perspective. But it has other adverse environmental consequences and, if widely adopted in the developing world, may foster nuclear proliferation. For this paper, I would like you to take as a premise McKibben’s observation that "Coal-fired power plants operating the way they're supposed to are, in global warming terms, as dangerous as nuclear plants melting down." Are they also as dangerous, say, as cities blowing up?
So you need to consider the various environmental and safety issues raised by nuclear power, as also the whole question of nuclear proliferation. Focus on the big picture--the global nuclear industry--not just the US issues.

4. Are the Peak Oil advocates right? Weigh the evidence they put forth and examine the critique by many industry specialists and insiders that the whole thing is "garbage." If the Peakists are right, what are we now doing that seems especially idiotic? If they are wrong, what sort of penalties would we pay by following their advice? Also consider, if you can, the relationship the Peak Oil camp bears to the Climate Change camp.

5. Is coal capture and sequestration some kind of hare-brained, delusional scheme, a farce to comfort uneasy consciences, or does it have merit? If the answer is uncertain, what would be the cost of finding out?

6. What is the way the US government deals with the energy predicament. Describe the major ways in which government regulations, taxes, and laws subsidize or punish various energy actors (industries, consumers). Identify the major lobbies and interest groups that are influential. How does the political map in Washington compare with the "intellectual" map that makes up the energy predicament? You could go in a variety of ways in terms of assessing the implications of your findings, but there is a lot to do in simply describing the terrain.

7. Compare US government policy toward Iranian and Indian nuclear ambitions. Assess state of existing nuclear programs by both states, in both civilian and military dimensions. Review evolution of US policy and attitude of international community toward it. Are we doing something that we should not; if so, what would be the alternative? What will policy of the Obama administration be?

8. What role has access to oil played in US policy toward the Middle East and Persian Gulf? Assess its significance especially since 9/11/01 and the two wars in Afghanistan and Iraq. Granted that the US would not have displayed such intense interest in the region if it were bereft of oil, are considerations deriving from that interest decisive in explaining policy? Or are other factors, such as the influence of the Israel lobby, more important? Your challenge is to describe what makes the US government tick--as it is likely to do under an Obama administration, and as it did in the past eight years under the not-so-dear-but-soon-to-be-departed administration of He Who Shall Not Be Named. (11/4/08)

Tar Sands and Shale Oil: Subprime Carbon Assets

"Subprime carbon assets" was Al Gore's choice expression in An Inconvenient Truth regarding Tar sands. But about them one thing is clear: there is lots and lots of energy in them thar Tar sands, subprime though they may be.

Tar sands in Canada and Venezeula are not equivalent to oil, as Chris Vernon explains: "A barrel of tar-sand oil reserves isn’t the same as a barrel of conventional oil reserves since it can’t support the same level of flow rates. We currently have around 1000 billion barrels of conventional oil reserves and these support a flow rate of around 31 billion barrels per year (84-85mbpd). If these 3500Gb were equivalent we could expect today’s tar sands and oil shale to support flow rates as high as 109 billion barrels per year (300mbpd). It is clearly impossible to draw 300mbpd from these reserves so they aren’t equivalent to conventional reserves from a peak oil point of view."

A debunker of Peak Oil notes that "In a way, tar sands are the best oil source. You can't pump them very fast, so they have two virtues: they will slow down our consumption, and they will last a very long time."

The biggest defect of tar sands and other unconventional sources is that they require for their exploitation the use of a tremendous amount of energy. Their energy return on investment is miserably low by comparison with oil itself. On every score, their environmental impact is grim.

If you take seriously the case for global warming and all that follows, the Tar sands option is the kiss of death; by comparison coal looks terrific. Both, however, would do less harm if a reliable way were found to capture and sequester carbon emissions--another question surrounded by considerable uncertainty.

The existence of these vast oilsand reserves is an important fact. It constitutes a potential corrective to the Peak Oil view and introduces another complication in calculating reserves. Reserve calculations based on these "unconventional" sources lead experts such as Peter Odell to conclude that carbon fuels will dominate the 21st century.

One possibility has to be allowed for: Developing the tar sands in Canada and Venezuela, to sustain our dependence on energy, will seem to many a tempting route, the prospect of climate change be damned.

It's just like the smoker thinking about quitting who is always weighing present need against an uncertain great hereafter, except that "humanity" has no center of decision. Even if half want to quit smoking, what will drag the other half along?

Al Gore's Super Solar Grid

This map from Nature magazine describes a proposal for concentrating solar power (CSP) plants in a gigantic super-grid.

From Nature, November 27, 2007, "Europe Looks to Draw Power from Africa
The power needs of Europe, the Middle Eastand North Africa could be met by an ambitious idea to network renewable energies across the region. The cornerstone of the plan, developed by a group of scientists, economists and businessmen, involves peppering the Sahara Desert with solar thermal power plants, then transmitting the electricity through massive grids.
Prince Hassan bin Talal of Jordan was scheduled to present this green-energy idea, dubbed DESERTEC, to members of the European Parliament in Brussels on 28 November.
The vision is ambitious: it would require roughly 1,000 100-megawatt power plants, using mirrors to concentrate energy from the Sun's rays, throughout the Middle East and North Africa to meet the region's projected energy needs. A high-efficiency electricity grid, yet to be built, would then ferry the power around and across the Mediterranean Sea and northern Europe.

October 28, 2008


"We must stand at last at the bar of posterity, and answer there for ourselves and our country. If we look for party influence to sustain us now, it will fail us there. The little bickerings in which we now bustle and show off our importance, will have then ceased and been forgotten, or little understood . . . Our country will be brought by the historian—custodia fidelis rerum—to that standard of universal morality which will guide the judgment and fix the sentence of posterity. . . . The character of [our conduct] will then be known as it is. The full and clear light of truth will break in upon it, and it will stand out in history in bold relief. . . . The human heart will be consulted--the moral sense of all mankind will speak out fearlessly, and you will stand condemned by the law of God as well as the sentence of your fellow-men. You may not live to hear it, but there will be no refuge for you in the grave. You will yet live in history, and if your children do not disown their fathers, they must bear the humiliating reproaches of their name."

Henry Storrs, Representative from New York, Speech on Indian Removal, May 15, 1830

October 21, 2008

Commodity Derivatives in US Banking System

"The following tells us directly that in addition to the influence of real world demand in the China's and India's of the world, financial sector demand for commodity exposure, driven by the need to arbitrage the yield spread between cost on and use of excess liquidity funding, has simply mushroomed. And in the world of commodities, "financial" or investment demand for the asset class as a whole has a direct and meaningful impact on real world prices and economics. But during the current go around, the direct and meaningful impact on real world global input prices is very much unlike the tangential excess liquidity positive effects of rising stock and residential housing prices in years back. After all, do stock or housing prices really influence actual input cost decisions of manufacturers and producers of goods globally? We think not. Commodities prices? A different story entirely, now aren't they?" Contrary Investor, April 27, 2006

Asia Pacific Oil Consumption

Saturday, August 25, 2007The Inflated Asset Economy