Look to gas for the future

23rd March 2011  —  Issue 181 Free entry
Fossil fuels are not about to run out. That’s our biggest problem—and our big opportunity


Peakoil—the idea that we have passed or are about to pass the physical peakof oil production—is again in fashion. It has been lent impetus byevents in the Middle East and North Africa. Predictions abound ofimminent price shocks, $200 dollars-a-barrel oil, and an oil-inducedArmageddon. We have been here before: it is all very reminiscent of thereactions to the Iranian revolution and the oil price shock in 1979 whenoil prices hit $39 a barrel (about $130 in current money).

Belief in this coming Armageddon naturally underpins the case forgoing green, and in particular for placing overwhelming emphasis onrenewables and energy efficiency measures. Current extremely expensiveoffshore wind programmes (amounting to over £100bn in Britain before2020) become economic, advocates of this argument say, because the priceof the alternative is going to be so high. Energy efficiency becomesmore attractive at high oil prices, the argument goes, and hence thedemand for energy will fall (at least for the domestic market) therebyoffsetting the costs of renewables. Thus the strategy pays for itself.

From an environmental perspective it all looks too good to betrue—and it is. Almost all that could be wrong with this argument iswrong—there is no obvious peak in oil production; what matters forelectricity is gas (and coal), not oil; and there are few reasons tothink that energy demand is likely to fall. Renewables will increaseretail prices a lot. The one thing that remains is that offshore wind isabout 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. Thereis an Opec premium in the oil price, and right now there is clearly aLibyan premium too, and perhaps more shocks to come. But there is still alot of conventional oil. Iraq has yet to fully enter the market. Itplans to produce more extra oil by 2020 than Saudi Arabia’s entireproduction today. Saudi has lots of “swing production”—the capacity toproduce more to compensate for shortfalls elsewhere. Africa is now amuch more important part of the arithmetic. Then there is Brazil, andoffshore fields in the US. Add in the enormous reserves in the Arctic asthe ice melts, and Russia’s immense reserves, and a rather differentpicture emerges. Finally, production assumptions are based upondepletion rates typically below 50 per cent of a field’s reserves: addin a bit of technical progress and the story changes substantially.

Even were the worst fears of peak oil advocates to emerge, theconsequences for electricity (and renewables) are far from obvious. Thefossil fuel of choice for electricity generation is gas, not oil, andgas is super-abundant. The coming of shale gas has doubled the world’sgas reserves in a couple of years, the US has become an exporter and itsshale gas production costs are such that it is competing on cost withnatural gas. Shale gas has its problems, but the fact is that thereserves are very large and widely distributed—in the US, China, Europe,Russia, the Middle East and elsewhere. In Australia even coal-bedmethane is being liquefied and exported to China.

This transformation is no accident: much more research anddevelopment (R&D) has been applied to fossil fuels than renewables.In the shale gas case, it is the combination of IT advances in seismicsurveying, horizontal drilling and techniques for fracturing the shalerock to release the gas. The result is that, for policy purposes, we canassume that the supply of gas is almost infinite, and there arelarge-scale deposits of shale oil, coal and tar sands. The earth’s crustis riddled with carbon fuels. Contrary to the peak oilers, there is nophysical shortage of fossil fuels—and that’s the real problem.

More conventional oil and shale gas (and shale oil too) will meet themedium-term demand. More immediately, the constraint is not a physicalpeak, but rather a political one. Recent developments in the Arab worldare argued to threaten supplies and induce spikes in prices. They maywell do so. But there is a world of difference between volatility andthe trend level of prices. Emerging democracies will need the oilrevenues just as much as the dictators they are replacing—and therapidly growing and young populations need to get education and publicservices paid for. Few Arab countries will be keen to leave the stuff inthe ground.

So the oil Armageddon is unlikely to be emerging, despite short-termvolatility. But the coming of shale gas represents much more. As I havesaid, gas is the fuel of choice for electricity generation, andelectricity is the power of choice for final use. Electricity isgradually taking over. To date it’s been supported by coal, and thegrowing share of coal in world primary fuel sources is the mainexplanation 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. Smartgrids and smart meters are a technical revolution waiting to happen.Electric cars transform the storage of electricity (it’s in thebatteries) and increase electricity demand—and lower demand for oil(because transport has been the main source of growth in demand foroil). Once electric cars get a grip, oil is of much less relevance—gas,in effect, displaces oil via electricity. Peak oilers assume not onlythat oil is in fixed supply, but that it is not interchangeable withother fossil fuels. They are just wrong. In due course we might even endup leaving a lot of the oil in the ground.

The implications for climate change policy are profound. On the onehand, cheap and abundant fossil fuels make renewables expensive anddeter investments in energy efficiency. Demand grows. On the other hand,coal is twice as bad from a carbon perspective as gas. If gas displacescoal (especially in China, India and the US) really big inroads couldbe made quickly into carbon emissions. Add in some significant nuclearinvestments, 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 neverbeen a time when there is more R&D in energy technologies. The rangeof ideas and concepts is enormous. There is no shortage of energysupply: the sun comes up every day. The task is to harness theopportunities. It is not to reduce the demand for energy which has thepower to transform the lives of billions. Energy efficiency (an obviousgood thing) is not the same as energy demand reduction (not necessarily agood thing). No amount of fitting of draft-excluders, double glazing orwall insulation will have much impact on global warming—what matters isinitially lower carbon ways of getting the energy (that is, gas) andthen 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 thoseoffshore windmills are going to remain very expensive and politicianswho have rushed to say otherwise (in part, on the basis of peak oil)have not helped. Telling people something is going to be economic whenit is unlikely to be is hardly the way to get carbon credibility. Betterto face down the lobbyists and to tell the truth: offshore wind is veryexpensive and likely to remain so.

Politicians can of course carry on with this deception for as long asnot much offshore wind is built. But as the rush in the next nine yearstowards perhaps as much as 30 gigawatts gets underway to meet the EU2020 target, the impact on the bills will start to show. Here there aretwo conditions which need to be met: that customers can actually pay;and that they are willing to vote for politicians who will force them topay. By around 2016, both of these conditions will be put to the test.

Fortunately there is a better way forward. The first step is torecognise that peak oil alarmism is nonsense. Oil is not likely to runout any time soon, and in any event it is fungible—replaceable—with gas.The second step is to recognise the impact of the shale gasrevolution—and the implications for the wider production of carbon basedfuels. The problem is there is too much fossil fuel, not too little—andif we burn it all we will fry. This is the real threat. The third stepis to be realistic with the politics. Truth telling comes hard, but itis a much better way of addressing the politics of climate change thanclaiming that the transition to a low carbon economy can be relativelypainless. This was the mistake in the political interpretation of the2006 Stern Review—with its claim that the transition to a low carboneconomy could be achieved for the very low cost of 1 per cent of GDP peryear, based largely on renewables and energy efficiency (and no policycosts at all). The 1 per cent was quoted across the European and worldpolitical spectrum with little appreciation of the assumptions on whichit was based.

A sensible transition would start by getting rid of the coal. Gas ischeap and gas-fired power stations are quick to build. Unless we switchfrom coal to gas globally, coal will carry on growing—and polluting. Itis very simple: either we burn the coal and get serious globalwarming—or we switch away. Only gas can do this quickly—and in this caseat virtually no net economic cost. With this breathing space, theefforts should go into R&D, and in deploying the technologies thatare near to reaching the market—things like smart grids, smart metersand system IT, and electric cars. In this transition period there is ofcourse room for some windmills and solar, but at the margin. It isbetter to spend the extra pound on R&D than offshore wind.

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