Peak Oil, the Economic Meltdown, and the 2008 World Energy Report

“The world’s energy system is at a crossroads. Current global trends in energy supply and consumption are patently unsustainable….environmentally, economically, socially.” – IEA, World Energy Outlook 2008 Edition

“Once the economy recovers and the demand bounces back, we think about 2010, 2011, we may be caught by surprise and this will be a nasty surprise, which would mean that we can see prices which may be even higher than what we have seen last summer“  – Dr Fatih Birol, IEA Chief Economist, November 2008

The International Energy Agency [IEA] released their annual and much anticipated World Energy Outlook this week.  The reason for much of the anticipation was the inclusion in this years report of a depletion analysis of the world’s 800 operating oil fields.  The reason this depletion analysis is so important, is that it gives the world a clear picture of just how much new oil needs to discovered and brought on line just to maintain production at current levels.  The news is not encouraging.

The IEA estimates “that the average production-weighted observed decline rate worldwide is currently 6.7% for fields that have passed their production peak.”  This decline rate is predicated on substantial investment in Enhanced Oil Recovery techniques to mitigate a “natural decline rate estimated at 9.1% for post peak fields”.  To put this into perspective, using the 6.7% figure, about 5.025 million barrels per day of production would have to be brought on line every year just to equal current declines in production.  That’s the equivalent of one new Saudi Arabia every two years!

Incredibly, the IEA thinks that not only can we keep up with current decline rates, but that we can grow production by an average of 1% per year to the year 2030.  They base this assertion on a projected oil and gas exploration and development investment of $8.4-Trillion between now and the year 2030.

However, this is where IEA’s confidence in a stable future oil supply begins to erode.  The bulk of this investment would have to be made in the 13 member states of OPEC where the IEA thinks most of reserves will be found.  Aside from the possibility that those reserves may not exist, given the growing forces of “Resource Nationalism” and “saving reserves for future generations”, this investment is doubtful.  In addition, because some 30 million barrels per day of new capacity is needed by 2015, substantial new investment needs to be made NOW to avoid an oil supply crisis after 2010.  This investment must be made in the face of falling oil prices and a global economic meltdown.  The current and inconvenient reality is that exploration and development projects are being postponed and cancelled rather than initiated, setting us up for Dr. Birol’s nasty surprise sometime after 2010.

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The Obama Energy Plan and our Homes

How will Obama’s energy polices affect our homes?  We won’t really know until his proposals are debated and enacted by congress, but we can get a sense of what might happen from his campaign’s position statements.  From his campaign website’s fact sheet his stated position on building energy efficiency is as follows:

“Obama…will establish a goal of making all new buildings carbon neutral, or produce zero emissions, by 2030.  [He] will also establish a national goal of improving new building efficiency by 50 percent and existing building efficiency by 25 percent over the next decade to help us meet the 2030 goal.”

This is straight from the playbook of Ed Mazra’s Architecture 2030 Challenge.  As evidenced by the following quote from the 2030 website, the 2030 Challenge is predicated on climate change and the reduction of green house gas emissions associated with the Building Sector.

“Rapidly accelerating climate change (global warming), which is caused by greenhouse gas (GHG) emissions, is now fueling dangerous regional and global environmental events. Data from the U.S. Energy Information Administration illustrates that buildings are responsible for almost half (48%) of all GHG emissions annually. Seventy-six percent of all electricity generated by US power plants goes to supply the Building Sector. Therefore, immediate action in the Building Sector is essential if we are to avoid hazardous climate change.”

I have two issues with the 2030 Challenge.

One is that the 48% responsibility for GHG emissions attributed to buildings is overstated.  The emissions assigned to the building sector are primarily the indirect result of drawing on electrical power generated from coal and natural gas fired power plants, so the question becomes whether to focus our resources on the building “demand” side, or the power plant “supply” side, or some combination of both.  In that broader context, we may find that it is much easier to deal with a few hundred power plants than to transform 150 million residential and commerical buildings.  From a public policy perspective, both the demand and supply side should be considered as a synergistic whole.

My second issue is more fundamental.  Architecture 2030 asks and answers the wrong question.  The question that Architecture 2030 asks is what actions should we take to mitigate the effect of the building sector on climate change.  However, the greater question is what actions should we take to render the building sector sustainable.  Once sustainability is on the table then we have to consider carrying capacity and carrying capacity overshoot at which point climate change is just another canary in the coal mine.

Carrying capacity is all about the ecological limits (capacity) of our planet’s resources and sinks.  By considering GHG emissions as the primary driver for building energy improvements, policy makers are overlooking the much more immediate and serious resource issues of peak oil and gas.  Since both of these peak events will be evident as early as 2010, all buildings should be built or retrofitted to a net zero energy and carbon standard NOW, not 22 years from now.

However, I digress.  Since it will take the actual emergency of these peaking events to mobilize the political will to enact a national zero energy standard, the question is what can we expect when Obama takes office next year.

The first likely step will be to start the process of improving building efficiency by 50% through our building codes.  A significant improvement is already in the works for the residential sector with the IECC 2009. However, at this time, the 30% improvement authored by the Energy Efficient Codes Coalition, will only be a voluntary appendix to the next release of the code.  In addition, once the new code is released, it has to be reviewed and adopted by hundreds of city, county, and state authorities.  In the process, these authorities often dumb down new energy code provisions in response to local politics.  We can also expect a major push back from a decimated housing sector deeply concerned about adding any new code mandated building costs.

My best guess is that under Obama, the voluntary 30% improvement provision authored by Energy Efficient Codes Coalition will be supported by Obama’s Grant Program for Early Adopters policy proposal.  This proposal creates a competitive grant program for states and localities that “take the first steps in implementing new building codes that prioritize energy efficiency, and provides a federal match for those states with leading-edge public benefits funds that support energy efficiency retrofits of existing buildings.”

The grant proposal creates a policy that respects local politics and helps to support those areas of country that have the political will to move forward with improving building energy efficiency.

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The Pickens Plan

I have nothing against wind power and think it will be an important part of our future energy mix.  However, I think The Pickens Plan is misleading and will not lead to the advertised reduction in oil imports.

The Pickens Plan

• The goal of the plan is to replace 1/3 of our oil imports in 10 years.

• We would first replace existing natural gas fired power plants (20% of our generating capacity) with wind turbine power.  According to Pickens, this will cost about $1-trillion for the wind turbines and another $200-billion for additional grid/transmission infrastructure.

• We would then take the natural gas displaced from power generation and use it to fuel compressed natural gas [CNG] cars and trucks instead of using gas and diesel fuel.

All this sounds simple enough, but as usual the devil is in the details.  I see three main fallacies.

Fallacy One – A variable and uncontrollable power supply like wind cannot replace a flexible, on-demand power source like natural gas.   The following is from the DOE’s July 2008 report titled “20% Wind Energy by 2030”:

“There are two separate and distinct power system challenges to obtaining 20% of U.S. electric energy from wind. One challenge lies in the need to reliably balance electrical generation and load over time when a large portion of energy is coming from a variable power source such as wind, which, unlike many traditional power sources, cannot be accessed on demand or is “nondispatchable.

Transmission system operators must ensure that enough generation capacity is operating on the grid at all times, and that supply meets demand, even through the daily and seasonal load cycles within the system. To accommodate a nondispatchable variable source such as wind, operators must ensure that sufficient reserves from other power sources are available to keep the system in balance.

However, overall it is the net system load that must be balanced, not an individual load or generation source in isolation. When seen in this more systemic way, wind energy can play a vital role in diversifying the power system’s energy portfolio.”

Translation:  There is a limit to how much of a variable power source like wind can be accommodated by the system and the DOE estimated that limit to be about 20% of the total electrical power generated.  In addition, after adding this new wind power, the system will continue to need natural gas fired, on-demand, dispatchable power to achieve a balance between supply and demand.

The bottom line – Few if any gas fired power plants can be displaced by wind power.

Fallacy Two – Utilities are unlikely to decommission any of their gas fired power plants.   In 2009, congress will probably enact a Cap & Trade policy for greenhouse gases.  Since coal fired power plants emit 2 times more CO2 than gas fired plants,  to reduce emission costs, utilities are much more likely to decommission older coal plants as new wind generation capacity comes on line rather than gas plants.  It’s even more likely that they’ll just use the additional capacity to meet growing demand.

The bottom line – Few if any gas fired power plants will be displaced by wind power.

Fallacy Three – In the near future, we will not be able produce enough natural gas to meet current demand let alone meet any new demand for transportation.

U.S. natural gas production peaked in 1973 and we have just managed to maintain production levels at near 1973 levels by extracting “unconventional” gas from tight sand and shale formations, deep water sources in the gulf of Mexico, and by tapping into coal bed methane gas.  We are now working almost twice as hard to extract the same amount of gas, and since 1990 the number of active wells has increased from 250,000 to over 450,000.  In addition, since 1996 production per thousand feet of well drilled has fallen from 350 MMcf/1,000ft to 60 Mmcf/1,000ft.  Based on the current trends, U.S. production may soon fall off a cliff.

As a result, 20% of our needs are now met by imports. Canada provides most of these imports with a much lessor amount coming in the form of liquid natural gas [LNG] from Trinidad and few other sources.  Unfortunately, Canadian production is now in decline [~3% per year] and may be unable to supply our import needs as early as 2010.

The arctic pipeline of Sarah Palin fame will be capable of supplying 8% of our current demand, but will not be on line until 2018 at the soonest.  Our best near term option is to import and compete for LNG on the global market at more than twice the cost of our existing supply.  This will put us at the mercy of Middle Eastern and Russian suppliers which control more than 50% of the global supply.  In addition, it is doubtful the the current LNG infrastructure of tankers and de-gasification terminals is adequate to meet U.S. demand.

Bottom Line – Don’t run out and purchase that compressed natural gas [CNG] vehicle any time soon

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