In recent months, many have touted that the United States is on the road to energy independence. Citibank pointed in the early part of the year that the emergence of shale oil and shale gas and increased vehicle efficiency may make USA the new Middle East of Oil, whilst Philip Verleger, a famed American economist argued that the US will be energy independent in that it will export more oil than it imports by 2023. In March 2012, the United States exports of petroleum products exceeded imports for the first time since six decades.
Whilst the Americans satiate their energy appetite with advanced lateral and horizontal drilling for tight oil and gas, the Europeans are pursuing their own energy agenda via a different route.
Divergent paths to energy independence
The use of gas instead of coal in power generation has reduced American carbon emission by 450 mt over the past 5 years. At the same time, lower energy costs have resulted in a renaissance of industry in the States, with thousands of jobs created and the relocation of petrochemical and fertiliser industries back to the States.
In Europe, countries are adopting a renewables approach towards energy independence instead. Germany’s adoption of Energiewende – an energy turnaround or transformation – faces hurdles to meet all its targets. The Irish targets renewables to be 20% of all energy sources by 2020. These targets are made more arduous by European countries phasing out nuclear power, whilst shale gas lumbers with environmental and geological obstacles in the continent.
Divergent paths meet on transportation
Even as renewables growth accelerates over the next 5 years and natural gas increase its share as an energy source, energy independence in both continents hinges on the key transportation sector. The transportation sector unlike the power sector is made up of disparate millions of vehicles which face inertia to fuel type change relative to more concentrated power stations.
Both continents’ success hinges on reducing the use of gasoline (for America) and diesel (for Europe) in vehicles. The Europeans will largely depend on electric vehicles to wean off oil. However a recent IEA report highlighted the muted impact of electric vehicles – only 5 million of vehicles sold in 2020 or 5% of total vehicles production. It may take another 30 years for electric vehicles to make a material impact, during which re-charging stations and the mileage range of electric vehicles are improved.
The greater abundance of natural gas for the Americans may see it adopt natural gas (CNG / LNG) vehicles as an interim solution for energy independence. However, similar issues arise for this type of vehicles – re-fuelling stations and the mileage range. In the case of natural gas though, prices are not likely to remain at present depressed levels. Advancing renewables technologies on the other hand are likely to see a decrease in unit costs of production over time.
Recently, controversies on climate change have surfaced. This includes the much respected IPCC group that won a Nobel Prize for its work on perils of climate change. In particular, the IPCC was criticised for using unsubstantiated technical articles (in the National Geographic) in establishing global warming over the ages. Its much hyped claim that the Himalayan glaciers will disappear by 2035 was also retracted due to previously inconclusive evidence. A scandal arises over East Anglia University a leading climate research facility in UK, for having emails deleted to cover up actual earth cooling data. The wave of media attention on global warming and backlashing over climate critics have cast the latter in bad light. It appears that the global warming have been over-sensationalised.
First for the facts. It is true that carbon dioxide concentration has risen considerably over the past century from 250 ppm to 390ppm presently. This has been caused by man-made activities with the industrial and transport revolution over the past century, and an extensive use of fossil fuels.
Now for the science. However, climate science has not evolved to an extent to relate an increased carbon dioxide concentration in the atmosphere to global warming. The earth is a complex system, and factors like thermohaline circulation, methane beds or plate tectonics are not fully understood for its impact on the global warming. Further, the earth being millions of years old have undergone cycles of warming and cooling in its long history. The data that have been collected over the past few decades just constitutes a statistical blip in the bigger history of things.
A recent interesting article by Paul Krugman claims not countering global warming leaves future generations the dire risk of not having an environment fit for living. The author is of the opinion combating global warming is an economic one. Whether carbon dioxide emissions ultimately leads to global warming or not is best left to the scientists.
However, the world needs an economic push. In the 1980s, it was the electronics revolution. In the 1990s, it was the Internet revolution, and the 2000s saw a telecommunication revolution with the advent of iPod and wireless technology. Moving ahead for the next 2 decades, it is the green economy. The green economy will provide hybrid vehicles, hydrogen fuel cells, energy efficient buildings, renewable energies and unconventional sources of energy like shale gas, oil-sands from which jobs will be made available. Further, this development of alternative sources of energy and energy efficiency will help to improve energy security. This is in spite the IEA has projected that in the 2030s, the main source of primary energy will still be fossil fuels.
The automobile industry for example needs a push. Gone are the days of the gas-guzzling SUVs. Instead, Congress has mandated to improve the miles per gallon to 35 mpg by 2020, a level that is still behind the Japanese vehicles. Such a push towards the green economy provides a conduit for human ingenuity and technological innovation.
Among the major factors that affect energy use are depleting resources, technological innovation, weather and geopolitical risk. Unlike technology and energy reserves which are long term factors, geopolitical risk adds to the immediate volatility of energy prices. Weather as a factor of nature cannot be controlled. On the other hand, geopolitical risks can impact both market supply and demand on a short and long term basis and directly impact energy security.
How it started:
Energy security is normally perceived as geopolitical risks that disrupt supply including attacks on oil and gas infrastructure like oil and gas wells, pipelines, shipping routes and refineries. A defining moment in energy security stems from the oil embargo in 1973, when Arab countries retaliated against the USA which had supported Israel in the Yom Kippur War. The embargo lasted till Mar 1974, after which the USA enacted the strategic petroleum reserve. The SPR stores crude and products reserves which are to be used only in times of emergency. To this date, the SPR stores more than 700 million bbls of oil or about 34 days of use. See link.
Since then, various geopolitical events have occurred that disrupted energy supplies. Some major events include the Iranian revolution in 1979, Iraq-Kuwait war in 1991 and Sep 11. Energy security is a particular concern as the major oil producing countries are in the Middle East, a politically unstable place.
Today, the Iranian nuclear standoff has potentially the greatest disruption on oil supplies. Iran borders the Straits of Hormuz, a narrow strait between it and the UAE. Between 15 to 16.5 million barrels of oil pass through the Straits daily, which is about 20% of the world’s consumption. Other choking points that are major channels for the transportation of crude oil are the Suez channel, the Straits of Malacca and others. See the world choke points.
Supply disruptions come not only from sovereign wars but also terrorism and militant attacks. During the period 2006-2008, militant attacks in Nigerian oil producing delta kept offline the production of almost 1.3 million barrels of oil. This happens at a time when the world surplus crude capacity was thin at about 1.5 million barrels.
Gas affected too:
Aside from crude oil, natural gas is also affected by geopolitical concerns. In 2007 and 2008, Russia twice cut off the gas supplies to Ukraine on price disputes. Ukraine is a transit point for the gas pipelines to the major consuming nations of Western Europe. Western Europe suffered from shortages for almost a week, during which alternative fuel oil was used in power stations.
However, geopolitical risks have less of an impact on natural gas than crude oil. A major reason is that the major producers of natural gas are Qatar, Russia, Algeria and Indonesia, and the natural gas trade is not as globalised as crude oil due to higher transportation costs. The countries mentioned also have relatively lower geopolitical risks.
Geopolitical risks can also affect demand, and a consequent decrease in prices. This was evident in the September 11 incident. The initial reaction was a spike in oil prices as it was suspected that the act was linked to the main Saudi oil supplier. When that turned out to be untrue, demand fell in the later months on lower economic activity and reduced air travel. Air travel worldwide used an estimated 4-5 million barrels a day.
Offsetting Security Measures:
The SPR reserves by the USA was a response to enhance energy security. Since then, the OECD countries in Europe, Japan and South Korea have started their own reserves. In 2003, China also launched its own storage reserve programme with an initial capacity of 210 million barrels, with eventual capacity reaching up to 90 days of forward demand or 270 million barrels. These purchases put a floor on crude oil prices in early 2009, as China and others buy up crude oil to fill up the storage tanks when prices fall too low.
New transportation routes:
New pipelines for oil and gas have also been planned and constructed to diversify and complement energy transportation routes. These pipelines have surfaced especially in Central Asia across the Caspian and the Black Sea, bring natural gas and crude oil from Kazakstan and Azerbaijan to the Turkish ports, and bypassing the transit pipelines normally used for Russian gas and oilfields. China too has constructed pipelines to divert crude and gas from the Western Siberian fields to its main consuming coastal regions.
Alternative sources of fuel:
Alternative sources of fuel are another solution for energy security. These can include the oil sands, coal, renewable energies like solar, wind and tidal, nuclear fuel and bio-fuels. These alternative fuels all have their own limitations. For example, the oil shale deposits in the USA and Canadian Rockies potentially hold about 1.5-2,5 trillion barrels, even larger than 250 billions of oil in Saudi Arabia. However the cost of extraction is enormous – about $70 to $100 per barrel, and oil prices have to be sustained above this level for economic feasibility.
The global trends of renewable energies use are expected to increase from 6% in 2006 to 10% in 2030 of primary energy use (World Energy Outlook 2008). This is the result of improved technological efficiency, accommodative energy policies and assumed higher fuel prices. Whilst the share of renewable energies will grow, total energy use is also expected to increase and fossil fuels are expected to still account for 80% of the world’s energy use. An additional 20 barrels of crude oil is expected from the present daily ~85 million barrels presently. Most of the increase in crude oil production is expected from Middle East and Africa. As a result, the continued reliance on imported crude oil is expected to continue.
Coal and Climate change:
Another source of energy, coal is found in abundance in China and USA, and other major consuming countries. In fact, coal accounts for about 25% of the present energy mix. However, coal is a major contributor to greenhouse gases. It is estimated that the emissions from all the coal powered plants in USA together account for about 40% of the total gas emissions in the country. This can be solved by implementing carbon sequestration technologies in plants. Such implementations are more economical in new plants (and there are not many new constructions) but cost more to retrofits in existing plants. It is estimated that subsidies either in the form of a carbon tax of $40-60/ tonne or direct subsidies are needed to sustain its use. With technological improvements though, the prices may decrease over the years.
Energy Security – at a price
Thus said, energy security comes at a price. The world is not expected to wean of its dependence of oil or imported oil for that matter over the next two decades. This is in spite of increased use of alternative sources of energies. Economics can be the solution but this means the average consumer paying more for energy in an era when the competition and demand for energy resources are already increasing.