The Energy Futurist

Energy politics at the piano bar

Posting in Energy

Energy futurist Chris Nelder imagines having a few drinks with the IEA, Newt Gingrich, and Michele Bachmann at a piano bar.

She was dressed up for a night on the town, her blond hair teased into a frisky friz, but her makeup couldn’t completely hide decades of hard living, drinking and sorrow. Looking like she would have been more at home in a dive bar than a piano lounge in a nice family restaurant, she belted out Christmas carols with gusto, trying to prod her even more drunken friend into singing with her. But the latter just mumbled along, gazing listlessly at the top of the piano, looking as though she hadn’t smiled in years, and eventually just put her head down on the padded armrest. The frisky blond got louder and more animated. Her desperation was palpable. I imagined her dragging her friend out of the house earlier in the evening, saying, "Cyn, we’re gonna go out, meet some nice people, have some drinks, sing some Christmas carols, get into the holiday spirit, and we’re gonna forget all about it for one night, OK?!"

My parents and I continued to sing along. Selfishly and with a slight twinge of guilt, I kept trying to think of tunes I could remember, but that she might not know the words to well enough to sing along. I wanted to be able to hear my parents harmonizing next to me, not the pleading, slightly flat, hoarse braying of the gal across the piano.

Our table was called and as we left to go into the restaurant, the piano player gave us a sad but grateful look. The musically fun part of his evening was ending, and he was resigning himself to another long night of having some drunk demand that he play the same song he just played ten minutes ago, because she doesn’t remember singing it.

Naturally, it made me think about energy. Specifically, the IEA, Newt Gingrich, and Michele Bachmann.

Liquid fuel supply in the IEA’s World Energy Outlook 2011

As it does every year, the International Energy Agency offered another set of palatable stories about the future of energy last month, in its World Energy Outlook 2011. Unfortunately, within those 666 pages, I didn’t find one story I could really believe about the outlook for oil.

My research says it’s unlikely that total liquid fuel supply will ever reach 90 million barrels per day (mbpd), let alone the 103.7 mbpd by 2035 projected in the New Policies Scenario. [Note: I am using IEA’s supply data in this section.] Against the global average 5.1 percent per year depletion rate the IEA estimated in its 2008 WEO, it’s hard to imagine that conventional crude will only fall 1.4 mbpd from 69.3 mbpd in 2010 to 67.9 mbpd in 2035. IEA sees production from active fields in 2010 dropping two-thirds to 22 mbpd by 2035—a loss equivalent to twice the production of all OPEC countries in the Middle East—but believes that OPEC can make up the loss from undeveloped fields that have already been discovered, including additions of nearly 3 mbpd from Saudi Arabia, and 5 mbpd from Iraq. Given Saudi Arabia’s recent statement that it does not intend to increase production capacity beyond its current level, and the ongoing domestic unrest in Iraq, this scenario seems less than realistic.

The New Policies Scenario outlook for unconventional oil (from tar sands, shale, extra-heavy oil and other marginal sources) also stretches credibility, projecting a four-fold increase from 2.6 mbpd in 2010 to 10 mbpd in 2035, including an additional 3 mbpd from Canadian tar sands. Production from the tar sands of Alberta has only grown from about 1 mbpd in 2007 to 1.6 mbpd in 2010, but was projected four years ago to be a full 1 mbpd higher by now. Production costs have increased substantially in recent years, prompting some operators to delay or scale back on further investment. For example, Syncrude Canada cancelled a 200,000 barrel-per-day expansion plan last month. I certainly wouldn’t bet that Venezuela, notorious for its capricious treatment of foreign technology partners, will maintain good relations with them for the next 24 years such that it can add 2 mbpd from the extra-heavy oil of the Orinoco belt. And I regard all projections of increased production from shale as pure speculation at this point. The price tag for this new supply is a whopping $8.7 trillion, of which over 80 percent would be spent outside the Middle East and North Africa.

If the New Policies Scenario isn’t believable, then the Current Policies Scenario is even less so, projecting all liquids supply rising to 110.6 mbpd by 2035 while phasing out fossil-fuel subsidies, crude oil prices rising to $140 a barrel, and cellulosic ethanol becoming commercially viable. In my view, none of those assumptions are likely. Demand in the West would be destroyed long before prices could be sustained at that level, and cellulosic ethanol is a long way from being economically viable or scalable.

Liquid fuel supply under the third and final 450 Scenario is more within the realm of reason, falling slightly to 86.1 mbpd. However, it relies on an ambitious slate of strategies to keep atmospheric carbon under 450 parts per million: All the world’s dominant economies would participate in carbon pricing and emissions market trading, fossil-fuel subsidies would disappear in every oil importing nation, carbon capture and sequestration technology would take off, strict energy efficiency measures would be implemented, and fuel-economy standards would rise substantially. Given the failure of the international climate summits at Kyoto in 1997, Copenhagen in 2009, Cancun in 2010, and the now-unfolding failure of the COP 17 summit in Durban, none of those policies seem likely any time soon. Further, the 450 Scenario would require an additional $15.2 trillion in investment, on top of the $8.7 trillion imagined in the New Policies Scenario.

Underpinning all of the scenarios are the assumptions I find most faulty: a 3.6 percent compound average annual growth in GDP from 2009 to 2035, with population rising to 8.6 billion people by 2035. With the developed world’s economies currently teetering on the brink of a debt-deflation disaster, and naught but a flurry of temporary measures on offer to address it, it’s incredibly Pollyannaish to imagine that global economic growth will continue at such a rate for the next 24 years. If the Olduvai scenario I described in October is close to correct, the world will be more than 10 years past the peak of all fossil fuels by 2035, having lost over one-quarter of its oil supply and nearly all available net oil exports. Population and GDP would have to follow the primary energy supply down those curves, albeit after a short period of overshoot.

With such an enormous gulf between any of the IEA’s scenarios and the Olduvai model, what can you possibly believe?

Here’s one way to bring the ends together.

The IEA has done an admirable, even heroic job of trying to paint a reasonable scenario that averts catastrophe, year after year, while slowly backing into the truth. They admitted that supply was getting tight in 2007, then acknowledged depletion in 2008. They reduced their oil supply outlook from 121 mbpd by 2030 in 2004, then to 116 mbpd in 2006, then to 104 mbpd in 2008; and then in 2009, they held their oil target steady at 105 mbpd but introduced the alternative 450 Scenario. Now they have three different scenarios, and the WEO report has reached epic proportions, half the length of War and Peace. It takes a lot of yarn-spinning to get out of their corner now.

At the same time, they have pounded out an increasingly strident drumbeat of warnings: "The world’s energy system is at a crossroads" . . . "global trends. . . are patently unsustainable". . . "the era of cheap oil is over". . . "Time is running out and the time to act is now."

The IEA clearly, unambiguously knows what we’re up against. But they can't just come out and say it, being a political organization serving at the pleasure of an industrialized world that is utterly dependent on perpetual economic growth. They simply can’t talk about the coming Age of Less.

What they can do is offer the 450 Scenario, allowing them to project declining oil demand without capitulating to the notion of declining oil supply, while maintaining an acceptable economic growth outlook if the world takes a radical and altruistic, we’re-all-in-this-together policy turn. This is why I call the 450 Scenario their "climate change stalking horse." It was never meant to be a credible scenario. It is a veiled warning.

Unfortunately, IEA did not offer a time-series fuel supply chart for the 450 Scenario. But using their CO2 output chart as a proxy, both the 450 Scenario and the Olduvai model suggest similar production curves for fossil fuels,  rising to peaks around 2015-2020. Production then falls back to 1990 levels by 2035 in the 450 Scenario, but falls to the same point more gradually in the Olduvai model, which is not constrained by intense energy efficiency efforts.

Olduvai model

IEA CO2 emissions model, all scenarios

Now that’s a scenario I can believe. No doubt the IEA is grateful that they don’t have to make charts going out to 2100.

Visions of sugarplums

Some different approaches to optimistic forecasting have been offered in the GOP presidential race. In one debate, candidate Newt Gingrich suggested that the U.S. could achieve an energy surplus if we’d only "open up American oil" and pursue "a massive all-sources energy program." How, exactly, he thinks that’s possible, we don’t know, but Art Berman did the math at The Oil Drum, and found it pure fantasy. Since Gingrich compared the challenge to winning World War II, I assume he was just trying to stir up a little patriotic spirit among his base, and has no idea where all that additional oil might come from.

At an earlier debate, candidate Michele Bachmann promised that she would bring back $2 gasoline, but again, offered no strategy for how she might do that. It was just her ludicrous campaign fantasy, and a cynical one at that, presuming that her audience wouldn’t remember that gasoline hit $2 a gallon in December 2008 because the economy had just crashed, not because a Republican president had promoted more oil-friendly policy, and that gasoline had been $4 a gallon before the crash under the same president. (Unless she meant that she would crash the economy again, and bring back $2 gasoline that way, which is certainly possible.)

What’s interesting about the claims of these presidential hopefuls is not how serious they are — for they clearly are not — but how many people will buy into their fantasies, and why.

Which brings me back to that gal in the piano lounge last weekend. She just wanted to smile and get a little warm glow going. And who could blame her? I certainly don’t. I had my own reasons for tossing back a few drinks, putting everything aside and trying to get into the holiday spirit that night.

She really thought she could do it, for her and her friend, if she only put a little effort into it. The IEA thinks we really could make it over the Hubbert Curve of fossil fuels, if we would only get serious about climate change. Gingrich and Bachmann think we really could make it if we only get serious about drilling every last inch of America. And sometimes, I think we really could make it if we only got serious about energy transition. But really, I just want to be happy and comfortable and secure, just as GOP voters do. I want to believe there's a smooth path into the future, somewhere, somehow. I'm willing to believe their hopeful, pleading glances and smile back, if only for a few bars of a peppy holiday number.

Maybe we should all just get together at the piano, have a few drinks, and sing "Have a Holly Jolly Christmas."

Photo: Old postcard, Oscar's Futuramic Piano Bar, Oakland, CA

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Chris Nelder

Columnist (Energy)

Chris Nelder is an energy analyst and consultant who has written about energy and investing for more than a decade. He is the author of two books on energy and investing, Profit from the Peak and Investing in Renewable Energy, and has appeared on BBC TV, Fox Business, CNN national radio, Australian Broadcasting Corp., CBS radio and France 24. He is based in California. Follow him on Twitter. Disclosure