Predicting and investing in the energy future

When Congress passes laws, and politicians put the full resolution of a problem into the “out years”, i.e. those in the future, there is a tendency to see this as a way of providing an “answer” while giving time for the answer to be developed to the scale needed. It also allows the subject to be considered covered, so that other problems can rise to the top of the list. There is an inherent assumption that industry will meet the obligations that are defined in the legislation, and that the needed tools will be invented in time to be useful. So it may well be with the supplies of future renewable energy, those that will be needed to power the country forward at defined points in the future. Any problems associated with the various technologies, whether cellulosic ethanol, solar or wind are assumed to have been resolved by the time that the supply will be required.

There are several dangerous assumptions that are made in developing such policies, and assuming that they will provide for the national need (whether American, European or wherever) when called upon. Considering just a couple, the first of these is that we have the time to evolve the technologies at the scale required, the second is that the funds and knowledge will be available to resolve any existing technical problems in generating viable supplies at the required level. By stating or implying that these things will happen, the public concern is meant to be relieved, and the problem resolved. To meet the growing global need there is an increasing assumption that the answers will come from renewable sources. This is the sector expected to have the fastest growth in supply (the EIA is anticipating an 11% contribution by 2030, with 5.9 mbd of ethanol and biodiesel by that time). (The EIA anticipate that, through 2030 only Libya and Ecuador of the OPEC nations will see a fall in oil production, most will increase with Saudi Arabia producing 12 mbd). So let’s look at these assumptions to see why we might be in trouble.

The first is the time that will be needed to resolve the problem. And to resolve this problem (and the others) someone has to be working on it. Yet, with the decline in the economy, the amount of investment in energy producing plant both conventional (as in oilwells) and in renewable systems is dropping. The IEA has expressed concern over the levels in investment in the oil industry, with projects being postponed or cancelled.

Fatih Birol, The IEA's advisor to 28 industrialized countries, said in an interview he expected oil and gas upstream investment to fall 21%, or about US$100-billion ($113.8-billion), in 2009 from 2008 due to the global recession.

At the same time investment in renewable energy is dropping more rapidly, while existing companies are going bankrupt in the face of the current economy.

Spending on renewable energy, such as wind power, is falling even more rapidly than on oil and gas. The IEA expects renewables investment to slide 38% this year compared to last, Mr. Birol said.

Now that story ends with the usual caveat

Not all agree with the IEA. The agency warned in 2007 of a supply crunch around 2012, a view that some analysts said was actually contributing to higher prices by putting a "fear premium" in the market.

But the reporter fails to grasp a point I have made before, that while it is easy to delay projects, it is much more difficult to accelerate them. The millions of barrels of oil that will no longer be available when needed within the next five years, mean that the need for an alternative supply, the role the renewables are meant to fill, will come earlier than anticipated, and at a level higher than now projected. It is a concern that is also now being voiced by some of the Ministers of the G-8.

Italy, which currently holds the G8 presidency, expressed concern about the possibility of another soaring period of oil prices when the world economy comes out of the crisis.
"When the crisis is over, the risk of insufficient energy supply exists, and as a result high and unstable prices," Italy's economic development ministry said ahead of the meeting.

Now part of the second problem is tied up with the first as cited above with the second quote from Fatih Birol, but a more significant part relates to the nature of the problems in establishing the new renewable plants, and, particularly for the replacement fuels, in making their operation profitable in the short term. Companies that invested in corn ethanol production have seen prices fall and several have become bankrupt, with Pacific Ethanol being the latest. And investors in cellulosic ethanol have also lost some confidence( despite the President’s confidence in the (as yet unproven) technology.

"My administration is committed to moving as quickly as possible to commercialize an array of emerging cellulosic technologies so that tomorrow's biofuels will be produced from sustainable biomass feedstocks and waste materials rather than corn,"

Shrinking an industry when it needs to be growing is not something that has an immediate impact, given the recession, but it makes it that much more problematic to be able to meet future targets. I accept that 2030 is a relatively distant time (the 20-years that will be needed according to the Hirsch report) but unfortunately by picking that interval there is an inherent implication that problems won’t arise before then. And that is where I expect that the greatest error in these assumptions is being made.

There is no longer enough investment in the resources that will be required to provide an adequate supply for the next five years, let alone 20, and while the results of that lack may well bring future funding it will be too late to avert significant negative impact. By focusing only on that long term, we may be missing the intervening hard times. I thus expect that the EIA prediction that oil will not get back to $110 per barrel until 2015, and to $130 by 2030 to be not only unrealistic, but dangerously complacent.
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