The Current Oil Shock
http://archives.econ.utah.edu/archives/a-list/2008w28/msg00104.htm
No Relief in Sight
by Dilip Hiro
www.tomdispatch.com (July 15 2008)
When will it end, this crushing rise in the price of gasoline, now
averaging $4.10 a gallon at the pump? The question is uppermost in the
minds of American motorists as they plan vacations or simply review
their daily journeys. The short answer is simple as well: "Not soon".
As yet there is no sign of a reversal in oil's upward price thrust,
which has more than doubled in a year, cresting recently above $146 a
barrel. The current oil shock, the fourth of its kind in the past
three-and-a-half decades, and the deadliest so far, shows every sign
of
continuing for a long, long stretch.
The previous oil shocks - in 1973-74, 1980, and 1990-91 - stemmed from
specific interruptions of energy supplies from the Middle East due,
respectively, to an Arab-Israeli war, the Iranian revolution, and
Iraq's
invasion of Kuwait. Once peace was restored, a post-revolutionary
order
established, or the invader expelled, vital Middle Eastern energy
supplies returned to normal. The fourth oil shock, however, belongs in
a
different category altogether.
Nothing Like It Before
Unlike in the past, the present price spurt has been caused mainly by
global demand for energy outstripping available supply. Alarmingly,
there is no short-term prospect that supply will match demand. For a
commodity like petroleum that underwrites and permeates every aspect
of
modern life - from fuel to fertilizers, paints to plastics, resins to
rubber - "balance" requires a five percent safety factor on the supply
side.
At present, however, spare capacity in the oil industry is less than
two
percent, down from more than six percent in 2002. As a result, the
price
of oil responds instantly to negative news of any sort: a threat
against
Iran by an Israeli cabinet minister, a fire on a Norwegian offshore
drilling rig, or an attack on an oil facility by armed rebels in
Nigeria.
Behind the present price surge, other factors are also at work. Take
the
sub-prime mortgage crisis in the US. It flared almost a year ago,
drastically lowering the market value of the stocks of banks and
allied
companies. The concomitant downturn in other equities led investment
fund managers and speculators to direct their cash into more
productive
markets, especially commodities such as gold and oil, driving up their
prices. The continued weakening of the US dollar - the denomination
used
in oil trading - has also encouraged investment in commodities as a
hedge against this depreciating currency.
The earlier oil shocks led non-OPEC (Organization of the Petroleum
Exporting Countries) nations to accelerate oil exploration and
extraction to increase supplies. Their collective reserves, however,
represent but a third of OPEC's 75% of the global total. By the turn
of
the century, these countries had pumped so much crude oil that their
collective output went into an irreversible decline.
A mere glance at the oil production table of the authoritative BP
Statistical Review of World Energy - published annually - shows
declines
in such non-OPEC countries as Britain, Brunei, Denmark, Mexico,
Norway,
Oman, Trinidad, and Yemen {1}. Over the past decade, oil output in the
US has declined from 8.27 million barrels per day (bpd) to 6.88 million
bpd.
The exploitation of the much-vaunted tar sands of Canada - expected to
cover the global shortfall - only helped to raise that country's
output
from 3.04 million bpd in 2005 to 3.31 million bpd in 2007, a mere ten
percent in two years.
In the 1990s, overflowing supplies and cheap oil had led to an overall
decline in oil exploration as well as under-investment in refineries.
These two factors constitute a major hurdle to hiking the supply of
petroleum products in the near future.
In addition, new hydrocarbon fields are increasingly found in
deep-water
regions that are arduous to exploit. The paucity of the specialized
equipment needed to extract oil from such new reserves has created a
bottleneck in future offshore production. The world's current fleet of
specialized drill ships is booked until 2013. The price of building
such
a vessel has taken a five-fold jump to $500 million in the last year.
The cost of crucial materials - such as steel for rigs and pipelines -
has risen sharply. So, too, have salaries for skilled manpower in the
industry. Little wonder then that while, in 2002, it cost $150,000 a
day
to hire a deep-water rig, it now costs four times as much.
Static Supply, Rising Demand
While the oil supply remains essentially static, worldwide demand
shows
no signs of tapering off. The only way to cool the energy market at
the
moment would be to reduce consumption. Luckily - from the
environmentalist's viewpoint - soaring gasoline and diesel prices have
begun lowering consumption in North America and Western Europe.
Gasoline
consumption in the United States dropped three percent in the first
quarter of 2008, when compared to the previous year.
When it comes to energy conservation, there is a far greater
opportunity
for saving in the affluent societies of the West than anywhere else in
the world. An average American uses twice as much oil as a Briton, a
Briton twice as much as a Russian, and a Russian eight times as much
as
an Indian. It was therefore perverse of US energy secretary Sam Bodman
to focus on the way the Chinese and Indian governments subsidize oil
products to provide relief to their citizens - and to urge their
energy
ministers to cut those subsidies to "reduce demand".
It is true that China and India, which together account for two-fifths
of the human race, are now major contributors to the growth in global
oil demand. But it's an indisputable fact that only by increasing per
capita energy consumption from current abysmally low levels can the
Chinese and Indian governments hope to lift hundreds of millions of
people out of grinding poverty.
In a country like India, for instance, half of all households lack
electricity, so hurricane lanterns, fueled by kerosene, are a basic
necessity. Subsidized kerosene, also used for cooking stoves, helps
hundreds of millions of poor Indians. To cut or eliminate the subsidy
on
kerosene would only intensify poverty.
In truth, when it comes to energy conservation, the main focus at the
moment should be on the thirty-member Organization for Economic
Co-operation and Development (OECD), a group of the globe's richest
nations which cumulatively consumes nearly three out of every five
barrels of oil used anywhere.
Among OECD members, Japan provides a model to be emulated.
Japan's Exemplary Performance
When it comes to energy conservation, Japan provides a glaring
counterpoint to the United States. Consider what's happened in both
countries since the first oil shock of the mid-1970s when prices
quadrupled.
That price hike initially led to a drive for fuel efficiency in the
US,
Western Europe, and Japan. It also gave a boost to the idea of
developing renewable sources of energy. Ever since, Japan has followed
a
consistent, long-range policy of reduction in petroleum usage, while
the
US first wavered and then fell back dramatically.
Under the presidencies of Gerald Ford and Jimmy Carter, the US
modestly
improved the fuel efficiency of its vehicles, as stipulated by a
federal
law. President Carter also announced a $100 million federal research
and
development program focused on solar power and symbolically had a
solar
water heater installed on the White House roof.
During the subsequent presidency of Ronald Reagan, when oil prices
fell
sharply, energy efficiency and conservation policies went with them,
as
did the idea of developing renewable sources of energy. This was
dramatized when Reagan ordered the removal of that solar panel from
the
White House.
In the private sector, utilities promptly slashed by half their
investments in energy efficiency. President George H W Bush, an oil
man,
followed Reagan's lead. And his son, George W (along Vice President
Dick
Cheney, former chief executive of energy services giant Halliburton)
has
done absolutely nothing to wean Americans away from their much talked
about "addiction to oil".
Even now, instead of urging Americans to cut oil usage (and putting a
little legislative heft behind those urgings), politicians of both
parties are blaming soaring gas and diesel prices on "speculators",
conveniently ignoring how thin a line divides "speculators" from
"investors".
In Japan, on the other hand, the government and private companies have
stayed on course since the First Oil Shock. Despite the doubling of
Japan's gross domestic product during the 1970s and 1980s, its annual
overall levels of energy consumption have remained unchanged. Today,
Japan uses only half as much energy for every dollar's worth of
economic
activity as the European Union or the United States. In addition,
national and local authorities have continually enforced strict
energy-conservation standards for new buildings.
It is, again, Japan that has made significant progress when it comes
to
renewable sources of energy. By 2006, for instance, it was responsible
for producing almost half of total global solar power, well ahead of
the
US, even though it was an American, Russell Ohl, who invented the
silicon solar cell, the building block of solar photovoltaic panels,
which convert sunshine into electricity.
What to Do: Medium-Term Solutions
Worldwide, over half of all oil is used for transport. Though we
instantly associate a car or truck with an internal combustion engine
(ICE), it was not always so. At the turn of the twentieth century,
cars
were also powered by steam engines or batteries.
Now, our salvation lies in finding a way back to the pre-ICE era. It
is
incumbent upon the automobile companies in rich nations to accelerate
the process of divorcing vehicles from the internal combustion engine.
Cars of the future can be powered by batteries, hydrogen cells, or
solar
panels - or a combination of the above.
Typically, Japanese companies are in the forefront of research and
development on this. It was Toyota which first introduced a "concept"
hybrid car in 1995, combining batteries with the internal combustion
engine, and began mass producing them some years later.
This June, Honda set up an assembly line for producing a
hydrogen-powered car, the FCX Clarity. This model already can travel
280
miles on a tank of liquid hydrogen. But it will go into mass
production
only after there is an infrastructure of liquefied hydrogen stations
in
place in Japan and in California, which will take time. So far there
are
only thirteen hydrogen stations, funded by the government, in the
Tokyo
area. Meanwhile, aware of the enormous cost of its product, it is
initially planning to lease the FXC Clarity to drivers for $600 a
month.
Another Japanese corporation, Mazda, has come up with a hybrid car
using
hydrogen cells as well as an internal combustion engine.
As the mass production of non-ICE cars takes off in rich nations, the
cost will fall, and such models will find markets in the fast
expanding
(yet comparatively poor) economies of China and India.
Medium-Term: The Nuclear Option
Besides powering transport, oil is a major source of fuel for
electricity-generating plants. With even Royal Dutch Shell CEO Jeroen
van der Veer conceding publicly that we are nearing peak oil
production
(after which oil reserves will decline irretrievably), attention is
increasingly turning, in the West, to coal and nuclear power as
medium-term solutions.
The very mention of nuclear plants revives nightmarish memories of the
partial meltdown of a US reactor at Three Mile Island in Pennsylvania
in
1979, and the catastrophic burning of the Chernobyl nuclear plant in
Ukraine in 1986. On the other hand, nuclear stations now provide 79%
of
France's electricity and have, so far, been accident-proof. That
country's leading nuclear company, Areva, expects to sell 100 power
stations, fueled by third-generation Evolutionary Pressure Water
Reactors (EPWR), worldwide by 2030.
Areva also heads a consortium that is building the first nuclear power
station in Europe in more than a decade - in Finland. On nuclear waste
management and safety, the Finnish nuclear authority Posiva seems to
have found a workable solution. After twelve years of public debate,
it
has allowed the construction of a $3.5 billion nuclear plant equipped
with an EPWR reactor, on an offshore island.
The new plant is designed to last sixty years, twice the average life
of
a nuclear power plant today. If its control rods should fail,
triggering
a core meltdown, a special basin of concrete will be there to hold the
debris, thus theoretically preventing the release of radioactive
material. The nuclear waste will then be set in cast iron, encased in
copper, and dropped down a borehole, half a kilometer deep, which
would,
in turn, be saturated with bentonite, a kind of clay. According to
Posiva's metallurgists, under such conditions the copper barrier
should
last a million years.
Once this station is commissioned, nuclear-fueled electricity will
rise
from 27% to 37% of the total on the Finnish national grid.
So acute is the demand for electricity in India that three nuclear
power
stations are to be commissioned this year. Once on line, however,
these
plants will make but a marginal difference in meeting Indian energy
needs. Only coal, which abounds in India, can help meet exploding
demand, as is true in coal-rich China. There, an electric plant fueled
by (dirty, conventional) coal is being commissioned every week.
Medium-Term: Cleaner Coal
In the hydrocarbon family, coal is the least efficient energy source,
providing only half as much energy as oil, while producing twice as
much
carbon dioxide (CO2). But coal has the longest history of supplying
energy to modern societies, and as the twenty-first century began, it
was still one of the leading fuels for power plants worldwide.
Today, coal provides 28% of electric power globally, only marginally
less than in the 1970s. Countrywide, percentages vary widely - from
twenty percent in the United States to four times as much in China.
Because coal isn't going away any time soon, the challenge is
obviously
to burn coal more efficiently and, at the same time, capture its
carbon
dioxide emissions before they reach the atmosphere. One possible
solution to coal's polluting problems lies in producing de-carbonized
coal - that is, in converting coal into petroleum products, thereby
also
reducing demand for crude oil. A hybrid technology involving
de-carbonizing natural gas or coal already exists. In a coal-fired
integrated gasification combined cycle (IGCC) facility, coal is broken
up, extracting the hydrogen and leaving behind the carbon. Next the
hydrogen is burned, emitting heat that drives the
electricity-generating
turbines, while carbon, in the form of liquefied carbon dioxide, is
stored underground or under the seabed.
But, at the moment, an IGCC station needs one-fifth more coal as fuel
than a conventional plant just to produce the energy needed to power
the
carbon-capturing mechanism. The price of the electric power thus
generated would be a third to a half higher than that from dirty coal.
On the other hand, according to the United Nations' Intergovernmental
Panel on Climate Change (IPCC), the carbon dioxide capture and storage
(CCS) system could someday provide up to 55% of the emissions
reduction
needed to avoid the worst effects of global warming. Last month, the
G8
energy ministers, meeting in Japan, called for the launch of twenty
large-scale CCS projects globally by 2010. Soon after, the British
government invited four leading European companies to submit tenders
for
such a project in the United Kingdom.
At the recent oil summit in Jeddah, British Prime Minister Gordon
Brown
announced that his country would work with Saudi Arabia on perfecting
the technology for carbon capture. The United States and Australia are
already committed to advance this technology with public funds. As it
gets cheaper with frequent application, it will become affordable by
countries like India and China.
With oil supplies peaking in the coming years and uranium following a
similar path as the present century unfolds, the weight of humanity's
needs will increasingly fall on coal. It is coal, for better or worse,
that will provide the energy to sustain higher living standards for a
growing segment of humanity, even as the search for, and development
of,
renewable energies proceeds at a faster pace. Last week, recognizing
this reality, the G8 summit renewed its commitment to advance carbon
capture and storage systems with all due speed.
This, in a nutshell, is the global energy future in the medium term.
It
is the reality we face.
Link {1}
http://www.bp.com/productlanding.do?categoryId=6929&contentId=7044622
_____
Dilip Hiro is the author of numerous books on the Middle East. His
most
recent book, Blood of the Earth: The Battle for the World's Vanishing
Oil Resources (Nation Books, 2006) is a vivid history of how oil has
revolutionized civilian life, war, and world politics over the last
century, as well as of alternatives to oil, including renewable energy
sources.
Copyright 2008 Dilip Hiro
http://www.tomdispatch.com/post/174955/dilip_hiro_the_energy_reality_we_faceThe
http://www.billtotten.blogspot.com
http://www.ashisuto.co.jp
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