Energy Security

[Dayuhan]

Ulenspiegel and I discussed the issue of coal vs NG before. To some extent the European LNG terminals are already there as simple container ports which handle coal.

Container ports don't handle coal, they handle containers. Coal would move through a bulk cargo terminal, which uses very different equipment. Coal ports are typically specialized and associated with specific power plants.

The days when a port was a port are long gone... the basic need to bring ship into proximity with shore remains, but the infrastructure for handling different cargo is very different. A good example is the US and its gas terminals. The US has a number of regasifacation terminals, which are designed to receive LNG, convert it back to gas, and feed it into a distribution grid. As the US no longer imports gas, these facilities are largely useless. The US cannot export gas at this time because despite a surplus of gas, none of the terminals are equipped with the infrastructure needed to liquify gas and load it onto ships. They can take it off, but they can't put it on. The industrial plant required for liquification is completely different from that used for regasification.

Gas import or export facilities are single-purpose dedicated installations that require large investments of time and money to build. They cannot be flipped from one purpose to another, something which is occasionally overlooked in discussions.

[Firn]

Container ports don't handle coal, they handle containers. Coal would move through a bulk cargo terminal, which uses very different equipment. Coal ports are typically specialized and associated with specific power plants.

....

Gas import or export facilities are single-purpose dedicated installations that require large investments of time and money to build. They cannot be flipped from one purpose to another, something which is occasionally overlooked in discussions.

Thanks for catching that error, what was I thinking? As I stated before coal imports can substitute natural gas imports and indeed they do to some degree. Obviously in the short-term is limited by the existing infrastructure along along chain, but it is very important to state the obvious, as I often do. Things get more elastic with time of course...



Demand:





Supply:








Of course part of those coal imports are, especially in the eastern European countries, from the same sources as the NG and oil....

[Rick M]

Today Ron Patterson posted some highlights from the latest energy outlook which is conducted annually by a team of Russian analysts.

In one scenario they forecast a peak in coal production prior to 2040. In all scenarios they see abundant oil supply. Many of these projections seem quite unrealistic (Canada at over 7 mbpd in 20 years time?).

Ron has warned for some time that Russian oil production is peaking. He feels that this new outlook confirms that view, which is the real story here:
http://peakoilbarrel.com/russias-take/#more-4111

[Dayuhan]

Ron has warned for some time that Russian oil production is peaking.

What does he mean by "peaking"? It is certainly true that without substantial investment Russian production is likely to start dropping soon, but there's no reason to see that as a "peak" imposed by geologic constraints ("running out of oil"). It's a constraint imposed by policy, and reversible by policy.

[Rick M]

I'm reluctant to speak for Ron, but I have followed his research for many years and am confident that I am accurately representing his views.

Both Ron and I see little reason to quibble over the cause of a peak in production. The cause could be geological, geopolitical, lack of investment, price uncertainties, etc or any combination thereof.

Both of us see little value in attempting to predict the timing of the global peak. Also, we both see this peak as being fairly imminent and having a severe impact, mostly because we are so unprepared for it.

When Russian experts confirm what was previously hinted at (ie. that Russian oil production is close to reaching its maximum), this is important info because Russia is a leading oil exporter.

Neither of us views the projections for Russian oil as being constrained by policy nor reversible by policy.

[Dayuhan]

Both of us see little value in attempting to predict the timing of the global peak. Also, we both see this peak as being fairly imminent and having a severe impact, mostly because we are so unprepared for it.

When Russian experts confirm what was previously hinted at (ie. that Russian oil production is close to reaching its maximum), this is important info because Russia is a leading oil exporter.

I dislike the term "peak" because it's associated with all manner of emotional baggage. The impact of a decline in Russian production will depend on the extent and duration of the decline. "Maximum" is also a loaded word: does it mean "the maximum possible production from Russia" or "the maximum that Russia can produce with currently existing infrastructure"?

[Rick M]

I agree that the term, "Peak Oil" has acquired various associations and so has the word "peak" which has become fashionable to apply to all sort of things (peak democracy, peak coffee, etc).
The PO concept is also widely misunderstood, usually by people who equate it with "running out" when it fact it refers to maximum production, not minimum.

In my opinion the most comprehensive, credible analyses of PO are those of UKERC (over 200 pgs) and Bundeswehr (100 pgs), both of which are thoroughly sourced.

Here is Ron's previous post re. Russian oil (last month):
http://peakoilbarrel.com/opec-update...russia-peaked/

Given the central importance of Russian oil and Saudi oil to the global export market, any constraint on their ability to produce and export (regardless of cause) could have serious implications.

[Dayuhan]

As I stated before coal imports can substitute natural gas imports and indeed they do to some degree. Obviously in the short-term is limited by the existing infrastructure along along chain, but it is very important to state the obvious, as I often do. Things get more elastic with time of course...

The impact of infrastructure and transition cost on elasticity and substitution is often underrated, as when we hear facile solutions like "Europe can replace Russian gas with US gas" proposed. There are also common misunderstandings on the US gas glut... even if gas is very cheap in the US, consumption will rise slowly because transitioning from oil to gas doesn't happen overnight. LNG and CNG are perfectly viable vehicle fuels, but nobody wants to buy the vehicles unless the fueling infrastructure is in place and nobody wants to install the fueling infrastructure until the vehicles are out there. A utility with oil fired power plants is not going to just shut them down and build gas plants. The transition will happen if the gas price stays low, but as you say, it will take time, likely decades

Given the central importance of Russian oil and Saudi oil to the global export market, any constraint on their ability to produce and export (regardless of cause) could have serious implications.

True, but understanding the nature of the constraint is critical to formulating policy. Even the term "maximum" raises questions: absolute maximum or maximum possible with existing levels of infrastructure and investment?

[Rick M]

All good points, Steve.

We have at least two major problems. First, we will never know what the ultimate recoverable reserve (URR) is or 'ought to be' because there are so many complex factors & interactions including geology, technology, investment, infra, market forces, royalties and other gov't policies, etc. Consequently, we have a very good understanding of past production but present production is dynamic and future production is a bit of a crap-shoot.

Second, energy (and oil supply in particular) is so fundamental to modern life that a significant constraint in supply (regardless of cause) would probably cause such turmoil that effective policy responses would be next to impossible. This was the point stressed by both Hirsch and by Bundeswehr, though in different ways. Hirsch argued that we need to plan and implement mitigation strategies at least one decade before peak (ie. our best guess as to when peak may occur, but that's very difficult to predict as we are seeing).

Bundeswehr warned that economies function within a narrow band of relative stability: although economies can sustain their principal functions despite cyclical fluctuations and the occasional shock, there is the potential for an economic tipping point to be breached. Over-stressed economic systems could suddenly find themselves beyond that band of stability, at which point the entire system could react chaotically. Given the multitude of interconnections within our modern economy, one can readily imagine chain reactions which could destabilize the entire global economic system.

James Hamilton has done excellent analyses of the interactions between high oil prices (which are now required to maintain fracked LTO and bitumen production) and recessions. I think we've underestimated the role of high oil prices in both creating the 2008 financial mess and in perpetuating the ongoing recession. I also think we are wasting precious time between the peak in conventional oil production (which virtually everyone agrees has occurred) and the impending peak and decline of US LTO.

As for policy responses to oil shocks, it's worth noting that both Canada and USA seem to have backed away from formal planning for fuel emergencies. The planned government response now seems to be one of non-response: the term that's used is "full price pass-through." This strategy strikes me as doomed to fail (primarily because of its effects on vital food supply chains) and therefore irresponsible. But I also appreciate the near-impossibility of attempting to ration/allocate, pick & choose, subsidize, etc.

I will let Bundeswehr have the final word:
We are unable to think about the consequences of Peak Oil via our everyday experiences, and can only draw partial historical parallels. It is accordingly difficult to imagine what kind of impact a gradual withdrawal of one of the most important sources of energy would have on our civilization. Psychological barriers account for the suppression of irrefutable facts and lead to an almost instinctive rejection of in-depth discussion of this difficult issue.
The occurrence of Peak Oil is, however, unavoidable.

[Firn]

Elon Musk - The Future of Energy and Transport is a long, quite interesting interview and Q&A with one of the most acclaimed innovators of the last years. Personally I'm always quite sceptical when somebody gets showered with so much praise, however so far the achievments are indeed great and he certainly has a very sharp intellect. His approach to the question about biofuel shows a part of his approach to things, which is of course surprisingly basic and almost painfully obvious. Other scientists came to the same conclusion and have been quoted. That basic insight gets of course supported by an amazing effort in many areas.

The oil crisis has certainly shown the world how painful an energy supply shock can be for the global economy. In normal times our global markets are doing a mostly great job at solving the market problems. Given how much damage a lack of supply can do the importance of energy security rightly demands answers on how to avoid such big or even bigger shocks in the future.

Personally I think that in the long run the key is both a moderation and shift in consumption as well as far higher share of renewable energy production on home and friendly soil. The importance of fossil fuels in the Western energy mix should decrease considerably while ideally getting supplied by larger numbers of entities. It's energy competitors must get increasingly cheaper and more efficient in production, transport and storage. Thankfully technological progress makes the renewable approach ever more attractive and in some cases it is already the cheaper option.

Arguably deposits like those now getting depleted in the USA should ideally be regarded more as national treasure and reserves for difficult times rather then cheap but weak short-term boosts for the economy.

[Dayuhan]

The oil crisis has certainly shown the world how painful an energy supply shock can be for the global economy. In normal times our global markets are doing a mostly great job at solving the market problems. Given how much damage a lack of supply can do the importance of energy security rightly demands answers on how to avoid such big or even bigger shocks in the future.

Personally I think that in the long run the key is both a moderation and shift in consumption as well as far higher share of renewable energy production on home and friendly soil. The importance of fossil fuels in the Western energy mix should decrease considerably while ideally getting supplied by larger numbers of entities. It's energy competitors must get increasingly cheaper and more efficient in production, transport and storage. Thankfully technological progress makes the renewable approach ever more attractive and in some cases it is already the cheaper option.

Oil shocks to date have, for the west at least, been less a matter of lack of supply than of very high prices: the oil has always been there, it's just been expensive. If supply does get really tight, the largest impact will be in oil-importing developing countries, who will find themselves priced out of the consumption picture, likely with serious unrest as a consequence.

To me the key to making a transition away from fossil fuels happen is maintaining a high price for fossil fuels. It sounds self-destructive and it would certainly be unpopular, but as a question of energy policy I think the US should be committed to keeping oil prices in the $100/bbl range. Of course that also means subsidizing a number of unpleasant regimes, but those regimes are less dangerous than the potential consequences of cheap oil.

[Rick M]

Thanks for the Musk video, Firn. I was not aware of it. Also for your observations, Steve.

I note that early in his presentation Musk said, "Sustainable energy... I mean the ability to produce and consume energy in a sustainable manner is the probably biggest challenge of the 21st century" (or words to that effect).
Personally, I would have voted for population/population control but energy is certainly top-three.

Musk comes across as a sensible, strategic guy... attentive to details, a visionary who remains realistic. His observations on energy production (35th min) make perfect sense (emphasis on solar). He is confident in his existing lithium-ion batteries and expects further improvements re. both energy density and price.

The implications for Peak Oil are obvious: such improvements could really take the sting out of future constraints of oil supply, which are bound to come eventually.

He certainly has a cautionary note re. deep shale hydrocarbons (52nd min) re. climate change and not much good to say about land-based biofuels (1:17), for very good reasons.

I agree that we need a 'floor price' for oil. So does Robert Hirsch. I'll bet that Musk would argue the same: a sudden return to cheap oil could undo much that he and others have achieved. The current price of roughly $100 is a bit of a sweet spot: low enough to not cripple the economy (though it certainly limits recovery/growth) but high enough to stabilize production of bitumen and LTO and support investment in alt-energy. Yes, there is a self-destructive aspect to it but there will be much more pain further down the line if we fail to make necessary changes.

Personally, I think a somewhat higher price ($115 - $120?) would be beneficial. As long as we regularly see people idling their vehicles in mall parking lots just to run the a/c, we know that oil is still too cheap and that many people can indeed absorb an even higher price (despite their ongoing complaints about "pain at the pump").

But it's a delicate balance, as the Bundeswehr team warns. If energy prices are unaffordable and the ripple effects cause unemployment, a collapse in suburban property values, mortgage default & unpaid taxes, unaffordable food prices, etc then things could destabilize fairly quickly.

[Firn]

Oil shocks to date have, for the west at least, been less a matter of lack of supply than of very high prices: the oil has always been there, it's just been expensive. If supply does get really tight, the largest impact will be in oil-importing developing countries, who will find themselves priced out of the consumption picture, likely with serious unrest as a consequence.

My point as well.

To me the key to making a transition away from fossil fuels happen is maintaining a high price for fossil fuels. It sounds self-destructive and it would certainly be unpopular, but as a question of energy policy I think the US should be committed to keeping oil prices in the $100/bbl range. Of course that also means subsidizing a number of unpleasant regimes, but those regimes are less dangerous than the potential consequences of cheap oil.

Well ideally from an energy security point the world market prices should be lower with the state slapping a higher tax on it. In that case you give your citziens the right incentives and collect quite a bit of revenue for your budget to be used for energy alternatives. Of course we know that increasing those taxes is highly unpopular. Low international prices would of course inflict further harm on the globe by pushing climate change.

[Rick M]

"world market prices should be lower with the state slapping a higher tax on it."

I agree with your second point but lowering market prices seems to be an impossibility apart from the usual vacillations.
Global production of conventional oil has been on a plateau for almost a decade. Indeed, some analysts believe that the decline may have begun. In any case, global supply has been buoyed by increased LTO and bitumen production, both of which are already expensive and about to get worse.

Here in Canada the Globe & Mail has had several recent articles about the high costs of bitumen production.
http://www.theglobeandmail.com/repor...oard/follows/?

This recent article gives an interesting perspective on Bakken production and provides an update on global supply:
http://peakoilbarrel.com/bakken-production-data-june/

[Firn]

I was going to agree with you earlier, but run out of time. Obviously the policies of countries even as important as the USA and China can influence the oil price to a limited degree. The global supply depends of course partly on that it and price expectation of the market (which are obviously tied). Both are known to flactuate to a very considerable degree which result in those boom and bust cycles in investments into the respective sectors.

From a global point of view there is no doubt fossil fuels will face increasingly high production costs. It takes increasingly more investment to bring a given energy unit to market. Renewable energy has on the other hand overall been trending downwards, sometimes very rapidly. Now in some cases like on-shore wind the quality of the locations tends to drop but overall there is still much scope left. Storage technology like batteries benefited from the rise in energy density somewhere around 7-10% in the last decade while the costs per watt decreased even more. Nobody knows how quickly progress will be but there will be some.




The biggest challenge for the political leaders is to support an efficient transition, limiting misallocation and short-term disruption. The macroeconomic benefits for diverting those investment euros and dollars from fossil fuel exporters into the local economy might get overstated in some cases but they do exist. Without arguing about details, just one example:

Better Racking Drives Down Solar’s Soft Costs

“The current generation and the next generation of integrated racking are now being standardized,” Cinnamon said. “Zep did that so well that SolarCity* bought them.”

“Racking and mounting, at $0.16 per watt, is one of the single largest cost categories for benchmarked rooftop residential installations in the U.S.,” the study reports, and “can have at least a $0.12 per watt impact on the total installed cost.”

Zep competitors that do versions of integrated racking are emerging, like Lumos, Solon, SunPower, Andalay Solar, VeriSol and Cinnamon’s Spice Solar startup. And competing strategies like prefabricated and plug-and-play products are being put in place by companies like PanelClaw, SunLink, and Renusol.

I'm pretty sure there is still much scope in the installation side of that vastly increased business.

*Musk is it's CEO.

[Firn]

Batteries for Electric Cars is a short overview by the BCG.

Current Costs and Forecasting Methodology.

Most sources estimate the current cost of an automotive lithium-ion battery pack, as sold to OEMs, at between $1,000 and $1,200 per kWh. Citing the current cost of consumer batteries (about $250 to $400 per kWh), they further predict that this price tag will decline to between $250 and $500 per kWh at scaled production. However, consumer batteries are simpler than automotive batteries and must meet significantly less demanding requirements, especially regarding safety and life span. Nonetheless, $250 per kWh persists as the cost goal for an automotive battery pack. Given current technology options, we see substantial challenges to achieving this goal by 2020.

I think after this it becomes clearer why Elon Musk is pushing hard for the 'gigafactory'. I have no idea if it will work, but it is clear that he sees considerable scope for economies of scale in the production of batteries specifically designed for EV. Needless to add that the underlining trends are in my humble opinion strongly in the electric vehciles favour.

[Firn]

I think we have an excellent recent example of tradeoffs between short and high energy prices: Ukraine.

We discussed it earlier, and it shows how low energy prices for many consumers due to (very) high subventions and some external discounts can make a country highly vulnerable once much higher prices get charged. It is of course a special case with the energy prices rising by at least a factor 2 for some.

[davidbfpo]

Being a typical English summer day, with a host of very news worthy items in the foreground, it is a good time to announce this:

National Grid announced on Tuesday that it would begin recruiting idle or mothballed power plants, which would be paid to ensure they could fire up if needed as a "last resort".

The Grid had said in June that the emergency plan to boost power supplies would not be needed this year. However, it has resorted to using it because five of the power plants it had expected to be running this winter are now shut down or are in doubt.

Link:http://www.telegraph.co.uk/finance/n...h-worsens.html


This is nothing to do with any Russian dependency, rather mishaps with a number of generating plants in the UK.

[Firn]

Both demand and supply emergency measures were already due to be used in winter 2015-16 when Britain's spare capacity margin was already expected to fall to as low as 2pc.

The measures will be funded by consumers and are estimated to add £1 a year to household energy bills.

The additional margin of safety doesn't seem likely to destroy the British economy. Said that it seems that:

i) It was a great deal of bad luck that so many plants have at the same times problems

Two nuclear power plants have been temporarily shut down amid safety fears, two coal-fired power plant units have been partially shut after fires, and one gas-fired power plant unit is being shut because it is unprofitable.

ii) A decreasing pool of flexible plants like that gas-fired one which has been priced out of the market makes the energy security more susceptible to such streaks of bad luck.

The energy sector is overall in a transistion phase which pace depends on a number of factors differing between regions and countries. Careful management with enough ressources is certainly needed.

[Rick M]

The most recent forecast from the EIA in consistent with previous reports in expecting light tight oil (LTO) to peak prior to 2020.
The International Energy Outlook (IEO) was released a couple of days ago and although EIA formerly predicted LTO to peak in 2019, then in the 2017 - 2020 time frame, this time EIA predicts 2017, followed by a brief plateau, with decline beginning in 2020.

Here is the link:
http://www.eia.gov/forecasts/ieo/more_overview.cfm

The box on the right of EIA's page contains six Data Tables. There is a slight discrepancy between Table 4 (all liquids) which shows peak in 2017 @ 14.3 while Table 5 (C&C) shows peak in 2018 @ 9.9.

Both Tables show US decline starting in 2020 which is probably the most relevant issue here.