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Peak Climate And New Energy

Politics / Climate Change Dec 22, 2009 - 06:38 AM GMT

By: Andrew_McKillop

Politics Best Financial Markets Analysis ArticleExit Global Warming

"Hockey sticks in the air!" well summarises the Copenhagen Climate summit debacle, as some world leaders, especially Obama and the 'European climate triumvirate' of Brown, Sarkozy and Merkel wrestled a face-saving, non-binding and vague agreement from the wreckage. This hard-won gesture, as of Saturday December 19, brings Brazil, China, India, South Africa and about 20 other states into a nice statement of principle affirming their collective wish that world average temperatures should not rise by more than 2°C in a flexibly defined long-term period, stretching to about 2040.


For a marathon conference bringing together 193 nations and briefly some 110 to 130 heads of state, which was sold to the media and public opinion by environmentalists and the European triumvirate as "the last chance to save the planet", the net result is a cold taste of realpolitik, the real economy and the real world.

Calling such a conference in the depths of winter, in a Scandinavian capital and saturating media with scare stories of "runaway global warming" was an interesting reminder of the unlimited self-esteem and bulldozer will to force through pet policies, that inhabits the minds of politicians and their allies in government-friendly media. But attempts by Europe's hardcore political defenders of "imminent climate catastrophe" to extend their hot air message to a worldwide cut in CO2 emissions and a crusade for alternate energy came to nought in the Copenhagen chill.

Both in Europe and the USA, the real drivers of a forced pace for switching to alternate energy are clear: mass unemployment makes the search for all job creating solutions a real concern for political leaders wanting to stay in power. Getting China, India and Brazil to help pay for new export markets in the low income developing countries, for the fast growing but overlevered, high labour cost renewable energy corporations and companies with recession hit domestic markets, was a very nice strategy on paper. Fending off the near-term impacts of Peak Oil by slowing energy demand growth, while profiting from the coming global bulge in cheap gas supplies, was another appealing strand to a strategy of forcing the pace on global energy transition to "prevent climate catastrophe".
The obsessional role given to the evil molecule CO2 added a nod of scientific weight and credibility, for those who reject the simple facts of global warming since year 2000 and the siren songs of Climate Sceptics. Along with the struggle against CO2, were added a complex mix-and-mingle of different economic, energy and environmental objectives, with different mature dates through the next 30 to 80 years and beyond.

Alternate and Renewable Energy Spending

Knowing this fuzzy horizon for "catastrophe" is wildly far beyond the interest and concern horizon of politicians, or most anybody else, we have to ask why so many leading OECD political and business leaders, media opinion formers and manipulators, and celebrity people crowded into the breach. We must ask why they so heavily pushed for unrealistic and even fantastic goals at this climate summit, the goals that were widely communicated and energetically defended in the run-up to the conference.
Cutting CO2 emissions does not only mean cutting fossil energy dependence and consumption: at least 60% of what can be called, with different levels of precision "anthropogenic and human related" CO2 and greenhouse gas emissions are not directly due to burning oil, coal and natural gas. However, for public opinion and business deciders, the meat of CO2 mitigation policies and strategies lies in forcing the pace of development in the loosely defined sphere of "non hydro renewable" energy.

Even here, some of these new energy sources and systems, such as landfill methane recovery also relate to reducing urban waste disposal problems and recovering metals and other materials from waste. Others are linked to economizing on water use and waste, and shade into a large and fuzzy edged field of economic, land use and resource management with or without an energy handle.

Staying with an energy-focused definition of "non hydro renewables", however, we find that analysis and forecasts of their growth in total energy mixes of different nations, groups of nations and global energy, to 2030 or 2040, could extend to anywhere from 5% to 20% of total commercial energy utilisation. The IEA, using a highly conventional forecast of continually growing total energy needs, projects that non hydro renewables could supply about 3% to 7.5% of world total energy by around 2035. Despite this seeming small, spending and investment needs to achieve this goal would probably add up to US $ 11 to 15 trillion in 2009 dollar value, if investment started in 2010 and attained an average annual rate close to US $ 700 billion, for 20 to 25 years. This adds an immediate near term question: Who is going to pay ?

Due to "fighting climate change" being a complex, multi-sector and ramifying quest, any number of other spending needs can be projected, with different assumptions as to their energy impact, for the business of cutting CO2 emissions. Obama's target of "80% reduction of US emissions by 2050" is an example: it is impossible to know exactly what rate and cumulative amount of fossil energy substitution by non fossil sources and by energy saving would be needed to achieve this goal. One simple example concerns CCS or clean coal and carbon sequestration. When or if there was a breakthrough in CCS, the annual coal burn of the USA and other coal dependent countries like China, India, Russia, Australia, Poland and Germany could be considered 'clean'. In this case, coal energy would not be subject to attempts at reducing its role in the economy, and substituting coal based electricity with renewables based electric power.

We can also add the 'pure politics' of climate change policies, now that the Copenhagen summit has turned out to be a farce. If we saw Obama as a new Jimmy Carter installing solar collectors on the White House roof and having his wife grow organic vegetables on the lawn, he might be replaced by a new Ronald Reagan who simply tears down the solar collectors and proclaims his faith in burgers from McDonalds, without cooking oil recycling as biodiesel fuel. With the failure of COP15, and the likely "moderated goals" for the coming Mexican summit, the forward credibility and to use a key word - the sustainability - of implied and projected energy transition goals are low or very low.

Fighting climate change and cutting CO2 emissions is however now a small but important, and growing financial trading activity, the World Bank estimating that emissions and CDM offsets trading generated about US $ 126 billion of activity in 2008-2009. Proving the extreme importance of exaggerating everything to do with climate change, extending to data on real world temperatures, sources close to the UK's Lord Stern, whose own estimates of spending needed to fight climate change have a one-way propensity to grow, trading in CO2 credits and CDM offsets could have an annual value, by next year, 2010 "of close to US $ 1.2 trillion". The Davos Forum of 2009 received a report of experts concluding that both in climate change finance, and in the renewable energy and energy saving domains, turnover and spending could, or should reach a year average of US $ 515 billion through 2010-2020.

At present little evidence shows a ramping up in activity, spending and investment in non fossil energy able to achieve the rates forecast, or recommended by the above-cited, and other plans and proposals from sources such as the UN IPCC, other UN agencies like UNEP and  UN DESA, national government agencies, and a myriad of NGOs and associations, interest groups, and corporate or commercial entities. Probable spending on the relatively narrow-defined "non hydro renewable energy" sector, worldwide, is no more than about US $ 60 to 70 billion per year as of 2009, and dominated by wind energy.

This returns us to one of the major causes of dispute and disagreement at COP15 - the large or grandiloquent alternate and renewable energy spending plans for lower income developing countries, pushed by the OECD countries, and aimed at quickly attaining about US $ 100 billion a year in value. As plenty of African and low income Asian delegates to the conference remarked, some in public, this was a new twist to the old theme of 'imperial rivalry for Africa', and anyplace else than has remaining bioresources, land, water, minerals or hydroelectric power resources, now joined by solar and wind. For at least 25 years, many aid programs and NGO activity in Africa has focused attempts at reducing the continent's growth rate of oil consumption despite the tiny domestic oil consumption of African countries - to take pressure off world export supplies and maximise African oil exports.

Oil and Fossil Energy

Energy trader perception of the Copenhagen summit is easy to forecast: oil substitution is now delayed, possibly sine die, so oil prices will be bid up along with natural gas and uranium prices, these two fossil energy sources being the most able to combine mainstream industrial use, relative abundance, and apparent "low carbon" performance. Coal prices might also gain, but less surely and with fewer high ground pro domo one-line statements by star traders. The long-predicted "gas bulge" is now arriving, and could last 5 years depending how fast natural gas burning is ramped up. Along with windfarms, natural gas will be the default choice for new electric power capacity in nearly all countries and world regions, probably including developing and emerging Asia, and perhaps several African countries.

Taking China and India however, their completely conventional automobile industries are growing at rates up to, or above 20% annual; this year ends with China attaining output and sales of 1 million cars a month, and India's output approaching 250 000 a month. These cars are approximately 98% to 99% oil, compressed natural gas and LPG fuelled, depending on country. Along with other key industrial and consumer society growth, from plastics, chemicals and pesticides to cement, and in air, marine and rail transport, and urban development, the growth of their oil demand will remain high and close linked to their economic growth rates for several years ahead, whatever the pace of their renewable energy (RE) industrial growth and action to limit the growth of CO2 emissions. Several other nonOECD large population states are following a similar economic development track - exactly like, for example, the postwar economic miracles of Germany and

Japan. In the case of these two success stories, their oil demand growth often averaged 7% a year for multi-year periods.
To be sure, the impact of higher oil prices, better technology, and growing supplies of much less costly natural gas and cheap coal have shaved oil demand growth rate averages in many emerging economies relative to Japan or Germany through 1950-1975, but pressure on world oil export supply  can only increase. As many times repeated at the Copenhagen summit, per capita oil and gas demand of China and India, and therefore energy related CO2 emissions per capita, are far behind and far smaller than average rates in the OECD group.

As IEA forecasts, and analysis by many oil sector observers make it increasingly clear, world oil export supply will face constant pressure from the near-term future, and will continue right through to 2030. This assumes no recession, and also assumes the OECD group does not attain quite impressive, and regular annual cuts in its oil consumption. This outlook is shared by other agencies and institutes, with the only 'wild cards' in oil forecasting concerning the role of tarsand oil output increase, gas liquids production and possible gas-based or coal-based synfuels production. What we have experienced in 2008-2009, reflected by oil prices, is only a respite due to intense recession in the OECD countries, which is already tending to fade in its oil demand cutting impacts.

Economic Threats

This is a context where one sure winner for near term price growth, and threat to business as usual economic recovery, will be real resources. That is oil, natural gas, gold, platinum, base metals, some other metals and minerals, and many of the agrocommodities enjoy structurally high demand in many countries (the OECD group). This is joined by rising real resource demand in the Emerging Economies. Measuring the recovery of the global economy, and its OECD and Emerging Economy main components (accounting for over 85% of world GDP), rising growth of resource consumption is a sure sign of economic recovery. Supply of major natural resources is however now increasingly often faced with multiple, convergent and self-reinforcing constraints on possible expansion. This can be shown by many examples, right across the natural resources spectrum, ranging from metals and minerals, to water, agricultural crops, and natural bioresources such as ocean fish stocks.

This easily forecast resource pinch due to 'Asian decoupling' and continued extreme high energy and resource demand of the OECD's 'postindustrial' societies is already recognized by both China and India, which will certainly continue their own, already large Renewable Energy and Cleantech development programs, but with little spillover to the lower income developing countries in the near term. Along with rising but confused signs of economic recovery in the US if not in Europe or Japan, and continued strong economic growth in China, India and other major Emerging Economies, the bottom line for world oil demand is crystal clear. Demand is very likely to pick up through Q1 2010 exercising a constant pressure on prices. Traders will anticipate this in a trading context marked by a return to selling pressure on the dollar (presently upstaged by a falling Euro),signalling higher oil prices from the short term.

Unlike the recent past, natural gas futures will also tend to rise in synch with oil, rather than falling anytime Brent and WTI rise, and rising anytime Brent and WTI fall. Gas is the clear winner from attempts at finding cheaper, lower carbon substitutes to oil, but its price has languished this year. With restored oil price growth, natural gas will this time also gain.

From 'Climate Catastrophe' to Sustainable Development

The near-term outlook for renewed commodity price appreciation, posing a menace for continued prolongation of present low inflation sequels from recession, is taking place at a time of surreal change in economic policies and policy making. The most extreme recent example of this are the strident calls for a massive, massively rapid shift away from fossil fuels to renewable energy sources "or face climate catastrophe". Failure of the Copenhagen farce, however, will surely reawaken media and public opinion to the real, and very complex trends of both natural and anthropogenic climate change, along with anthropogenic ecosystem disruption, degradation, and destruction. In the same list, ongoing and rising pressure on natural resource supply capacities for growing human population numbers and fast growing urban populations, will constantly raise the inflation bomb threat from commodity price takeoff.

Extreme flights of fancy of the world's deciders, hinged on global warming, are now likely to be put on the back burner. One likely loser will be attempts to save the US dollar through proposals to replace it as the world reserve money with a "CO2 Bancor". This new plaything for FX traders and central bankers could be cobbled together from a shifting pile of carbon finance instruments, CO2 offset bonds for 'soft energy' loans to developing countries, carbon tax revenues and their derivatives, and other creative paper promises of future value built on the shaky struggle to fight climate catastrophe. The possible end of climate change hysteria as a tool for thrilling the crowds will signal a return to normal business, in a context where both Equities and Commodities are now completely interdependent and interchangeable trading chips - for traders and financial market operators. In the near-term future, rational scenarios for global economic recovery and oil price takeoff spell a very shaky ride ahead for Equities.

Long-term trends to more sustainable resource development - meaning long term production strategies with lower growth to lower peaks - will be accelerated in a context of higher energy prices, but compromised by the growing prospect of the global economy plunging back into recession, this time inflationary. In the energy and natural resource space this shift will be major, as the world shifts to lower intensity, harder to use and higher capital cost renewable energy, which can only increase slowly, after big capital expenditure. The net result is simple to forecast: as for gold output which has shown little or no responses to a tripling of the dollar price since 2002, world energy supply is set in a relatively slow growth, or for oil no growth outlook. We can summarise this as net energy and natural resource output falling as prices rise and because prices rise in a transition period that could extend for decades ahead.

By Andrew McKillop

gsoassociates.com

Project Director, GSO Consulting Associates

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

© 2009 Copyright Andrew McKillop - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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