Lloyd’s insurance market, in its 360 Risk Insight programme, and Chatham House, an independent English think tank, have published an analysis of present and near future conditions in the energy field that raise serious questions about the continuing reliance on oil and other fossil fuels. Sustainable Energy Security: Strategic risk and opportunities for business: A White Paper, June 2010. As the report points out, the on-going Gulf of Mexico oil spill is just the leading edge of more disasters to come if we continue to rely on extracting hard-to-get oil.
In the past, most concerns about energy focused on reliable supplies and relations with oil exporters. In the future, energy efficiency, on the demand side, will dominate concerns for energy security and renewable energy will dominate on the supply side. Renewable energy is increasingly within the mainstream and is supplying the majority of new electricity in some regions. For example, on one day in November 2009 the wind farms of Spain met 53% of the country’s demand.
The report analyzes three conditions that make the present moment very risky for businesses, and dangerous for Big Oil.
First, the world-wide recession has lowered demand for oil in developed countries, because of lower population growth, de-industrialisation, greater efficiency, higher fuel prices and environmental concerns. But demand for oil continues to grow world-wide, especially in China and developing countries. China’s oil production is estimated to peak in 2013 yet its demand for oil could more than double by 2030, putting pressure on global oil markets. Even though China possesses enormous coal reserves — the world’s third largest — it is still a major buyer in the global energy market, investing in Australian coal and Turkmenistan gas.
Coupled with the continuing growth in China and other developing countries, demand in developed countries will grow once again when the recession eases. Forecasts suggest that overall there will be a 40% increase in energy demand by 2030, requiring about $26 trillion of investment.
Second, easy-to-get oil supplies are running out and will sooner rather than later peak. In August 2009, the UK Energy Research Centre found that conventional oil production would likely peak before 2030, and there is a significant risk of a peak before 2020. The oil that is easy-to-get is concentrated in politically troubled lands that occasionally, and unpredictably, experience interruptions in supply lines. As a result, oil companies are turning to hard-to-get oil sources, including deep-sea and Arctic drilling, that present substantial dangers for the environment. If we did not know this before, the on-going Gulf of Mexico oil disaster was a wake-up call. Hydraulic fracturing for gas is comparable, and also presents substantial environmental risks. See the entry on “Hydraulic Fracturing” in iePEDIA section of this magazine. As Lloyd’s/Chatham report, with increasing demand and decreasing supplies, there will be an oil crunch and price spikes, with oil costing as much as $200 barrel possibly by 2013.
Both the crunch and spikes create problems for business planning as well as for individuals. And when the spikes hit, and persist, national policies will restrain oil consumption. Some governments are beginning to explore setting ceilings on the amount of carbon dioxide emitted for every unit of electricity produced (CO2/kWh). Such carbon intensity standards would work against extraction of hard-to-get oils.
Even greater reliance on nuclear power presents risks of diminishing supply of uranium. And in 2003 and 2006 nuclear power plants in the EU were forced to power down because of lack of water from heat waves. Such events have begun to draw focus to the interdependence between energy, which is essential for extracting drinkable water, and water, which is necessary for many sources of energy production. Much more focus will come with global warming trends.
Finally, despite some resistance, there is a strengthening consensus that oil and other fossil fuels are creating real dangers with greenhouse gas emissions and the resulting global climate change consequences. Local, national and international regulations over the emissions are here, they are not going away, and they will get more comprehensive and burdensome, despite the recent lack of meaningful action in Copenhagen and the US Congress.
The report notes that the consensus among the world’s scientific community is that global temperatures must be kept from rising by 2°C over pre-industrial levels and to reach that goal we need at least a 50% global reduction in greenhouse gas emissions by 2050. To achieve that goal will mean average global emission reductions to half of the present Chinese level, a fifth of the level in Europe, and a tenth of the level in the US. Those are considerable challenges and only a concentrated investment in and development of renewable energy sources will make it possible. Global investment in clean energy sources went from $18bn in 2004 to $112bn in 2009, and by 2008 almost a quarter of new electricity generation in Europe was from renewable sources. But much more is needed.
Lloyd’s argues that those companies that fail to adjust and continue to rely on oil and other fossil fuels will pay a hefty price. The report drives home the message that “Businesses that can adapt their activities to benefit from emerging energy trends and manage the risks will gain an advantage over their competitors.”
While these three forces create uncertainties, and opportunities, for businesses, at the same time they create a dangerous moment for Big Oil.
With oil running out, the extraordinary and risky efforts to capture it — in the valuable fishery that is the Gulf of Mexico, the tar sands of Canada or the pristine Arctic — are merely delaying the inevitable, with enormous costs to our shared, public natural resources. If this idea takes hold, the corollary is simple: we’re better off investing private and public money, including buying stock, in other forms of energy — wind, sun, water, biofuels. And we can best preserve and protect our natural resources by eliminating or severely restricting ever-increasing, risky, hard-to-get oil drilling
That’s a dangerous thought, for Big Oil.
The report is available online at www.chathamhouse.org.uk or www.lloyds.com/News-and-Insight/360-Risk-Insight/Research-and-Reports/Energy-Security/Energy-Security