In the first article in this four-part series, I asked what lessons can be drawn from history about how the world moves from one type of energy era to another. In this piece, I look at the current situation and use the historical lessons to draw conclusions on what will happen next.
The Current Global Energy Situation
Table 1 provides information on energy production from 1971 through 2009. To make comparisons between different energy sources possible, the data are expressed in millions of tons oil equivalents (MTOEs).
Table 1. – Global Energy Production 1971, 2009 (MTOEs)
Source: International Energy Agency
1. Oil and Natural Gas
Oil remains the largest energy source, but its share has fallen. Natural gas holds its position as the third leading energy source with a growing energy share. In as much as most natural gas is produced by oil companies, it is worth looking at them together. Oil and gas provided 53% of global energy in 2009, down from 61% in 1971.
The world’s 20 largest oil companies are listed in Table 2, along with their proven oil and gas reserves expressed in MTOEs.
If you total the proven oil and gas reserves of the top 50 companies, you get 1.7 million MTOEs. That is more than enough to last for 130 years at projected production rates. And every year, more oil and gas is found. The bottom line? We are not running out of oil or gas. However, 72% of all reserves are located in the Middle East/North Africa region. If you add Nigeria and Venezuelan reserves, 83% of reserves are located in politically unstable regions. Not good – a cause for concern.
About 15 years back, I was working in Amman Jordan. Up to that point, I had only seen the Saharan Desert from the air, so I got a taxi to drive me into the desert (only 10 miles from Amman). There, I saw a stream of tanker trucks as far as I could see in both directions taking oil to Aqaba, a Jordan Seaport on the Red Sea. This was being done because Iran was threatening to close the Persian Gulf to shipping. I realized this long thread of trucks was the world’s life line….
.Like oil and gas, the world is not running out of coal. China and the US are particularly well-endowed, with each having more than 100 years of proven reserves. And despite the concerns over coal mining hazards (approximately 5,000 deaths yearly) and pollution, coal’s share of energy production is growing - from 25% in 1971 to 29% in 2009. Every day, 343,044 railroad cars loaded with coal leave the mines – a reminder of the enormity of the supply system required to deliver coal. It is also a more general reminder of just how expensive the infrastructure for the extensive use of any energy source is.
Despite the recent tragedy in Japan (probably not a good idea to locate nuclear plants in earthquake-prone areas), it is relatively safe form of energy and does not contribute to greenhouse gasses. The US is the largest nuclear fuel producer in the world. France generates about half as much energy as the US via nuclear with Japan third.
In hopes of developing renewable fuels, US governments have introduced a variety of incentives. These include state requirements to use renewables in both transport and the generation of electricity. As a consequence, utility companies must pay 50% or more for electricity for renewable sources than they have to pay for electricity from non-renewable fuels. And because most renewables provide intermittent electricity, the utilities must have backups as well. In addition, the Energy Departments has a loan guarantee program that effectively cuts borrowing costs in half. Loan guarantees to date have gone to: renewables - $78.5 billion, nuclear - $20.5 billion, and clean coal - $8 billion. The US Treasury has a program that effectively provides a 30% grant for renewable energy construction.
As Lipton and Krauss have reported, these incentives have attracted a number of the big financial houses to participate. They can get in and out without having to worry about whether the programs will ultimately succeed or fail. Of course, these generous programs have resulted in some excesses. I offer two examples.
Despite recent enthusiasm over using ethanol to power motor vehicles the US ethanol effort has fortunately lost some steam - I quote from a recent piece in the Economist:
“Ethanol currently accounts for just 8% of America’s fuel for vehicles, but it consumes almost 40% of America’s enormous maize crop….American ethanol produces only 1.5 units of energy output per unit of input, but its inefficiency is underwritten by government subsidies and high tariff walls…..one of the simplest steps to help ensure that the world has enough to eat in 2050 would be to scrap every biofuel target. If all the American maize that goes into ethanol were instead used as food, global edible maize supplies would increase by 14%.”
As a result of rising food prices and global protests, the ethanol initiative is being re-thought.
Chinese, European and US incentives for more solar energy have resulted in wild swings in prices and economic prospects. Bloomberg reports:
Polysilicon has plunged 93 percent to $33 a kilogram from $475 three years ago as the top five producers more than doubled output….Price declines for products at every step in the solar supply chain triggered a 60 percent drop in the Bloomberg Global Leaders Solar Index since February tracking 37 shares. It’s led to speculation that more poly producers and panel makers may either combine or go bust in the coming months. Q-Cells SE (QCE), once the world’s biggest cell maker, has said it’s open to takeovers. …Two-thirds of the existing 66 polysilicon producers could fall victim to the shakeout that has just started,” the Macquarie analysts wrote in a note on Nov. 8. “The total number of Chinese polysilicon producers could fall to as little as four over the next three years, down from 35 known to us today.
I quote from Dana Blankenhorn on new solar technologies:
“The next generation of systems will be made quite differently from today's, and will be twice as efficient as what you can buy now. Some data points:
- Luminescent solar concentrators can be up to 2.5 times more effective than they are now, trapping more light for solar cells to convert into electricity and raising yields.
- Like silicon chips, solar cells can have three dimensions. This traps light in a structure that turns more photons into electrons. A penny stock outfit called Solar 3D (OTC:SLTD) says it can have a working prototype early next year and will then seek a manufacturing partner.
- The Department of Energy has perfected an optical cavity furnace that can produce 1,200 highly-efficient cells per hour. The DoE already has technology-sharing agreement with major U.S. solar producers.
- A company called BioSolar (OTCQB:BSRC) has gotten Underwriters Laboratory (NYSE:UL) approval on its BioBacksheet, a low-cost, high efficiency replacement for current solar cell backsheets made from biological materials, rather than rare earths.
- Sharp (SHCAF.PK) says its new three-layer solar cell has an efficiency of 35.9%, double what current cells offer.”
Of course, the Chinese are dumping old solar panels. They know they won’t stand a chance against the new technologies coming on line shortly.
Where Are We Going?
In order to answer this question, I list the lessons from the history of energy transitions from my first article in this series:
- During past energy transitions, much money was made and lost as various actors tried to guess which new technologies would succeed.
- Money-making energy choices are not always the right ones. Deep pockets, government subsidies and aggressive marketing can turn a bad choice into a winner.
- Transitions take a long time. This happens in part because the infrastructure needed for new energy technologies is expensive. And as long as the old energy providers can make money selling their product, they will.
It is not at all clear where things will end up. Table 3 gives the US Energy Department’s estimates on the costs of various energy sources, where “levelized cost” is defined as “the present value of the total cost of building and operating a generating plant over an assumed financial life and duty cycle, converted to equal annual payments and expressed in terms of real dollars to remove the impact of inflation.”
Table 3. – Electricity Generation Cost Range for 2016 New Plants
Source: US Energy Information Administration
Who knows? Recognize that unlike earlier transitions, tremendous sums of money are being invested in different options and the technologies are improving rapidly. In such circumstances, one wonders why the government programs put such an emphasis on construction of soon-to be-outdated systems rather than research on new technologies. Maybe because much of the funding for renewables came from stimulus packages, and construction will add more jobs than research. But as a result, the world soon will be littered with out-of-date solar panels and windmills.
I quote from an informed British blog commenter:
…the subsidies are lunatic. The grid is obligated to provide them with power in the winter when at the latitude of the UK they get almost none (1-6% of rated power around the solstice) and conversely to take power from them at the rate of around £0.60 kWh in the summer when demand is low and it is almost useless. This is after a massive taxpayer contribution to installing the solar and tax breaks. They might as well simply take taxpayer money and not bother with the trivial amounts of power they generate. This nonsense will last as long as the Government still thinks it is so wealthy that it can toss away our money on technical lunacy and not a second longer.
One concluding thought: the oil companies have deep pockets. They also have lots of oil and natural gas to sell. They will not be folding up their tents and going away anytime soon. I will have more to say on this in the next piece in this series on financing and investing in energy transitions.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.