Special Report: Peak Oil

Rising Energy Transition Scale, Declining Vanity Project Credibility

All the nationalistic talk about green energy vanity projects obscures the basic bottom line that energy prices have to rise, will rise, and could rise very fast by future shock spiraling back from the fantasy future to the tormented present.

By Andrew McKillop
Published April 01, 2010

Since about 2005, as oil prices maintained their march upwards to hit USD $147 a barrel in 2008, political leaderships and corporate deciders in the big oil importer countries never ceased raising the scale for energy transition.

This transition, they said, was urgently needed to cut CO2 emissions and avoid planetary catastrophe. Saving the planet from climate change apocalypse through energy saving, "decarbonized" fossil energy, and green renewable energy development was described as the biggest challenge ever facing mankind.

If this challenge was ignored, the catastrophe described in lurid terms with scant regard to scientific credibility and with ever more exaggerated shock forecasts by Global Warming conference circuit speakers, would threaten civilization as we know it. Without urgent action, tens of millions of climate change refugees would be displaced and tens or hundreds of millions of people could die, before 2099.

Government-friendly media followed close behind the apocalyptic speeches of senior OECD political leaders at the microphone, calling for ever bigger, more expensive, more complex and and more prestigious green energy projects. In the run-up to the failed Copenhagen climate summit at end 2009, some OECD leaders, including US President Barack Obama, German Chancellor Angela Merkel, French President Nicholas Sarkozy and British Prime Minister Gordon Brown made impassioned and exaggerated claims for how much, and how quickly "brown energy" can and must be phased out - and replaced by low carbon energy.

Figures bandied around by these leaders at the time of the conference went as high as implying an 80% or 90% shift away from CO2 emitting fossil fuels by 2040. This effort would be extended to energy transition in the low income countries, mostly in Africa, where as much as USD $100 billion a year would be mobilized by about 2020, by controversial and unsubstantial funding mechanisms, which received little support even among the OECD countries.

Estimates given in the press and media for the costs of energy transition in the developed, oil-intensive OECD countries, and in emerging China, India, Brazil, Indonesia and other big population countries, range up to as much as US$ 15 to 30 trillion, for the 25 years to 2035.

The Cash Was Not Forthcoming

Methods for raising these gigantic funds were at all times controversial, shadowy and unclear, but included the concept of a new world reserve currency called Carbon Money, replacing all other moneys while also supporting the financial burden of global energy transition.

Carbon taxes would or could become global, irrespective of the economic development stage of each country. Carbon finance and the trading of carbon emissions credits and derived and related financial instruments, such as Clean Development Mechanism offsets, would expand radically from current levels.

Carbon finance and trading is estimated by the World Bank as attaining about USD $126 billion a year in gross turnover value, in 2009, but 'trickle down' or 'leakage' from this global turnover on financial exchanges, to concrete and physical green energy spending on the ground, is very low.

Carbon Money did not appeal to the few remaining creditor nations of the planet. The concept was openly rejected by the Chinese and Indians, Saudis and Russians at the Copenhagen farce.

Climate summit failure was without doubt perceived as a deep humiliation for the most extreme advocates of climate change crisis and a forced march to green energy among OECD leaders, headed by Obama, Merkel, Sarkozy and Brown, leading to their careful avoidance of talking about this failure, following rejection of their eccentric and unworkable, never openly described Carbon Money or "CO2 Bancor" proposal.

This Keynes-style, appealing new route to "forgetting debt" in the debt-strangled economies of the OECD group and financing massively expensive green energy vanity projects was most likely considered the most attractive reason for proposing Carbon Money, as quick fix for saving public finances in the short-term, if not the climate in the long-term.

OECD leaders passed on the concept to the IMF, which now has to run with the carbon money ball-and-chain, and may soon abandon or radically modify it.

Is Green Energy Feasible?

Speaking on March 11, 2010, Chinese vice minister for Industry and IT Miao Wei described massive wind farms in China as essentially "vanity projects". Reasons he gave were that wind electricity costs more than coal or nuclear, wind farms have large land needs, the better locations have already been utilized, and siting wind mega projects on cheap land in China's dusty deserts would likely accelerate wear and tear of the mills, cutting their useful lifetimes to 20 years or less.

Financing the shift to green energy remains the key limit on achieving the extreme high ambitions of OECD leaderships for global CO2 emissions cuts. Until the Copenhagen failure, many OECD leaders focused carbon taxes as a way to partly subsidize green energy and energy saving investments and spending, but these raise energy costs through making large energy taxes even larger.

In the few countries that operate carbon taxes, public support and approval of these taxes is generally low. Carbon taxes are already controversial due to dispute over whether they should replace or add onto existing corporate sector carbon finance and trading.

On the short time-frame of the six months from September 2009 to March 2010, European political leadership support to carbon taxes waxed strong and then collapsed. Between times, Climategate and the Copenhagen conference failure had cast a deep shadow on the confused public image of climate change apocalypse, leading to even the most government-friendly media starting to give some coverage of reasonable scientific doubt on the extent and severity of climate change.

Countries that had vigorously proposed setting carbon taxes started diluting their commitment. By March 23, 2010 the French Prime Minister Francois Fillon announced there would be no carbon tax in France, in an exact reversal of what he announced on Sept 10, 2009.

This was despite President Sarkozy saying many times that this new and small tax, able to garner about 3 or 4 billion Euro a year (the French national budget deficit for 2010 is around 150 billion Euro), was the way to signal that energy consumers must change their ways "to save the planet".

Feed In, Fuel Up and Move On

Official-source scenarios and studies for the cost and financing of energy transition, which are extremely variable, usually imply a very major role for the 'free play of market forces' to raise capital investment needs for world spending. This spending need is separate from or additional to expected and forecast, high levels of spending needed for conventional "brown energy", as we note below.

The financial challenge of how to fund green energy expansion far exceeds any possible product from carbon taxation or carbon finance and emissions trading, as they are currently operated in a limited number of OECD countries.

For green business promoters the context is a lot simpler. As in any boom-bust, the urge is to profit from investor naivety and rack up earnings right now, in a new and fragile sector where the previous and apparent cast-iron political and public opinion support is showing dangerous signs of reality fatigue.

The race to always beat the competitors and grab the biggest slice of the action is now faced with a "best by" date, as political, corporate and technical credibility slumps for saving the world with green energy through demanding massive handouts of public funds for green energy and for expanding carbon finance operations.

Reinforcing the sudden loss of credibility for green energy salvation delivered by the Copenhagen climate summit farce, the costs, time needed, and technical or resource limits on "switching" to green energy are becoming a little better known.

Political leaderships in the OECD countries have started understanding the credibility loss they have suffered on this issue. The timing is bad, since it comes hard on the heels of their bungled, expedient and massively expensive bailout of the bank, insurance and finance sector meltdown.

The never publicly-stated hope that quick launch of massive green energy spending could or might trim rising oil prices, like the unsure technical and industrial feasibility of 'ramping up' green energy and energy saving, and creating 'thousands of jobs' have also added to rising doubt on the feasibility of green energy transition.

Losing credibility on the climate issue after massive government bailouts of entirely speculative finance sector operators, the future for prestigious green energy vanity projects is now uncertain if not canceled.

Several OECD countries which until the Copenhagen failure gave unstinting and uncritical support to green energy subsidy through a range of methods, including special high "feed in" tariffs, grants and cheap loans, have now started scaling back this support.

In some cases, for example cuts in previous large subsidies for solar electricity in countries like Germany, this reduced financial and economic support to high-cost, high-tech green energy has had major impacts on the share price of the most exposed corporations exploiting these subsidies.

Forward subsidy and support for electric car and battery technology development has also started diminishing in several countries, with predictable impacts on the share price and borrowing capability of corporations whose leaders speculated on continued government-source funds coming their way.

In the case of both government deciders, with typical tenures of four or five years, and corporate deciders who strive to increase earnings each year, the potential for quick abandonment of a politically unpopular, unprofitable new high-tech sector with heavy capital spending needs is large and could lead to a quick decline in green energy vanity spending.

Low Carbon High Cost

The heroic pressure to force growth of green or low carbon energy, like all national prestige and corporate vanity projects, was fed by a fragile mixture of climate change fear, corporate greed and public ignorance. Media presentation of sensational images of Arctic ice melt, droughts, rain storms, and even tidal waves could all be linked by the keywords 'global warming'.

Cost and time limits on shifting to all-green low carbon energy, and the longevity and reliability of green energy were pushed to the back of the list for consideration.

National prestige strivings in green energy, like any other politicized rush to beat other nations with unsure but innovative technology ignores the cost and time dimension. The bottom line of how much these ever bigger vanity projects cost, how long they would take to install and implement, and how technologically reliable and sustainable they are was given low prominence.

These inconvenient questions, unlike Al Gore's "Inconvenient Truth", were shifted down the list of questions that polite people don't ask and politicians or media presenters coyly sidestep.

Like other never-completed, failed and abandoned heroic technology projects, comparable with the 'Titanic' ship or 'Concord' airplane, these proud, high tech, innovative and costly projects were in theory to be followed by vast fleets and mass production of the same items. This would deliver rising profits for the corporate players who bet on the new tech, in this case green energy, while also satisfying political leadership needs for popular winning strategies.

However, in the case of technological weakness, in-built obsolescence, over-high costs, difficult implementation and disappointing performance of the new technology, it will be treated as a gimmick and quickly dumped in the dustbin of history.

Also like the cases of 'Titanic' and 'Concord', technical performance alone is far from enough to save the day. The key reason is always the same: cost. This can be direct, as in the case of 'Concord' fuel costs, or induced and related in the case of iceberg protection navigation aids, which did not exist at the time, for the 'Titanic'.

Making comparisons of low carbon non-fossil energy, and today's real world energy system about 85% fossil based (and about 14% nuclear + hydropower) is difficult. They can, however, be made using outline figures from world energy transition proposals, concepts and outline plans from different sources.

These are sketched out with some precision by energy agencies like the IEA and EIA, by OECD studies, by national economic agencies, from the UN's IPCC (itself fast losing credibility through its bungled attempts to exaggerate global warming), and from reports to the Davos Forum, think tanks university research centers and other sources, including corporate study groups across the world.

Most of these studies take a hypothetical low growth scenario for world total energy demand to around 2030 or 2040, and forecast what part of that future demand could or might be met by low carbon "cleaned up" fossil energy, energy saving, and non-fossil green alternatives.

Targets for "penetration" of alternate energy are often in the range 25% to 33% of total needs by about 2035. Costs are set by forecasting usually low capital costs of green alternate energy, backed by optimistic forecasts for driving capital costs lower by R&D and 'ramped up' production.

Energy technologies covered by 'green or alternative' sometimes include nuclear power and large-scale hydropower, and sometimes do not. Where these are included as 'alternate low carbon energy', the target for transition can extend above 40% of projected total energy needs in 2035-2040 being supplied by non-oil, non-coal and non-gas sources.

However, not even the more fanciful scenarios can match claimed targets of "80% reduction in CO2 by 2035", if this needs an 80% switch away from fossil energy, as announced by Obama, Merkel, Sarkozy and Brown before Copenhagen.

Energy-saving forecasts vary widely, as do forecasts for the rate of cutting the energy intensity of economic output, where manipulated data can give impressive, but unreal data. This leads to an extreme high range of figures, scenarios and guesstimates ripe for cherry-picking the most favourable, optimistic - and unlikely.

Extreme High Spending

From these scenarios, studies and data sources, we can give a range of around USD $15 to $30 trillion in current dollars being needed, to 2030 or 2040. Expressed in barrels-of-oil-equivalent terms, by 2035 the broad category of 'alternate, green and decarbonized energy' sources and systems could or might deliver about 75 million barrels equivalent per day.

Annual minimum investment amounts needed for this massive target would be close to USD $1 trillion, and cover spending on green energy, energy saving and "decarbonized" fossil energy.

This massive spending would need to start now, and be sustained for 25 years, if the global target of replacing or "decarbonizing" up to 25% to 33% of world total commercial energy demand in 2035 was treated as so important it had to be achieved.

Whenever the non-hydro renewable energy sources are forecasted as taking a higher role, sometimes 15% or 20% of world total energy supply in 2035 (compared with about 1.5% today), the costs spiral even further.

As noted above, most energy scenarios aim for about 25%-33% of projected world total energy demand in 2035 being either green, eliminated by energy saving, or supplied from "decarbonized" fossil energy. Capital raising and investing for the other 67%-75% also has to be estimated and costed. This still large majority component of "conventional brown energy" will certainly continue needing very heavy spending.

Current majority-fossil energy capital expenditure was heavily trimmed by the recession from 2007 highs, but standing at about USD $600 to 650 billion in 2009 for world total commercial energy spending. This ranges from oil and gas through coal and uranium to electric power, including wind and solar PV.

IEA forecasts are that world oil and gas capital expenditure, alone, could hit USD $1 trillion a year by 2016, mainly due to fighting depletion and paying for high cost LNG infrastructures and extended continental gas pipelines.

Adding the two strands of "alternate" and "conventional brown" energy spending needs to 2035, which for "decarbonized" fossil energy is mainly based on presently unworkable and/or extreme high cost CO2 capture and sequestration being applied at coal fired electric power stations worldwide, generates very far-out numbers.

These are reminiscent of OECD government bailouts to the finance sector in its hour of fear and crisis, in 2008-2009, except they become annual for 25 years or more.

Average amounts needed for this low credibility scenario of forced and rapid development of green and "decarbonized" fossil energy, plus rising conventional fossil energy investment, could attain or exceed USD $2.25 trillion a year in current dollar values. This would concern a long-term spending program of at least 25 years. As noted, the operative term is 'low credibility'.

Unlikely and Uncertain

One thing is sure, the chance of a quantum leap in energy sector spending was already low before the global financial crisis, its slow-growth aftermath, and the Copenhagen climate summit wipeout. Today it is even less likely. This returns us to the present, and cumulative growth of "present generation vanity project" spending in low carbon energy.

This is usually exaggerated through including turnover on the gaming tables of carbon finance, including recycled Clean Development Mechanism credits, emissions credits futures and derivatives, and related highly complex financial paper.

Actual physical investment spending on non-hydro renewable energy equipment, installations and infrastructures, excluding revenues from existing, was likely running at about USD $85 billion a year in late 2009. Accumulated world spending on equipment, installations and infrastructures in non-hydro renewable energy since 2003 could be placed at no more than USD $350 billion.

For comparison, this is about a quarter of the US national budget deficit for year 2010 announced by Obama, earlier this year. What we can be sure about is that "present generation" green energy will surely and certainly deliver high priced energy and electricity for users.

Feed-in tariffs for solar electricity in the countries which have specially favoured this vanity tech, like Germany, which is now tending to cut back these subsidies, are often in the range of 15 US cents per kWh, and higher. This reality bite is always absent from the fact-free euphoric promotion of corporate low carbon mega projects flashed in the media.

To be sure, doubling or tripling electricity prices to consumers would work magic on the ROI for low carbon vanity projects, but the same also applies to oil. Doubling the price from the current barrel price around US$ 80 a barrel, to USD $160 a barrel, would surely favour "ecological" small-engined cars and could even save presently floundering fuel ethanol and biodiesel project ventures.

The need for "favourable financing" to save the world with high-priced energy underpins the unlimited potential for corporate appetite, and ensures continued growth of the predictable calls for bigger government hand-outs, cheaper loans and higher prices for sustainable power, called "feed-in tariffs".

These government favours will save us all from Biblical Flood "before the end of the century", and higher oil prices before the end of 2010.

Energy Security

Right behind the strident claims of global warming apocalypse made by star speakers on the climate change talk circuit, headed by Al Gore, comes the notion of energy security. This is national security flowing from the biofuel barrel and spinning windmill rotor.

Fighting the kiss of death they received at the Copenhagen farce of Dec 2009, global warming rhetoricians and hucksters now add energy security as another key benefit from their green energy vanity projects. Along with low carbon energy, massive spending on green energy would cut oil import bills, lead to lower oil prices, and reduce or eliminate dependence of the democratic oil importer countries on what are presented as dangerous and despotic oil exporter states, notably inside the OPEC group.

Oil import dependence on friendly, democratic Russia and environment-conscious Canada would also be slashed. Cheap or at least secure and home-brewed green energy would then generate balanced trade with the rest of the world, improve national finances in other ways, and perhaps also strengthen the national currency.

Along with the green jobs, and prevention of Arctic ice melt, the consumer public would be yet more enthralled by the energy security they will have, but this will need heavy spending.

For the type of targets announced, supposedly implying they are feasible by Obama, Merkel, Sarkozy and Brown before Copenhagen, this cost as we note above could attain far above USD $1 trillion a year for a 25 year spending program.

The strategic shift in rhetoric to oil security, instead of saving polar bears, as the rationale for big spending is typically fact-free and distorted. The difference between net and gross oil imports, and the value of for example crude oil imports against refined product exports, is usually and carefully avoided.

Al Gore in February 2010 quoted oil import costs to the USA as "hundreds of billions of dollars a year", and for at least two of them he was right, if we take the USA's most-recent record year (2007), for the gross deficit on its oil trade.

At current net oil import rates of about 9.1 million barrels per day and current barrel prices around USD $80, the US oil trade deficit is about USD $15 billion a month, or USD $180 billion for year 2010.

Current total net oil imports of all 27 importer OECD countries were around 24.5 million barrels per day in November 2009. If we assumed a year-average barrel price of USD $100, the annual net oil import cost would be about USD $882 billion.

This can be compared with spending by OECD governments to bailout failed financial sector players, or gamblers, provide subsidies to car buyers, aid other economic sectors, and finance national budget deficits. This spending is likely running at over USD $2.25 trillion for 2008-2009 and comfortably covers several years total oil import costs for all OECD importers at a high year-average barrel price.

Another somber fact emerging from this USD $882 billion-a-year OECD total oil import bill, with a year average 100-dollar barrel, is that as noted above, IEA published forecasts claim that world oil and gas investment spending must rise to USD $1 trillion a year by 2016.

Average barrel prices and average natural gas prices needed to finance this can be guessed.

Sustainable Energy And The Growth Economy

The drive to imagining a sustainable energy future itself depends on imagining - or hoping - the global growth economy is sustainable. This is very far from sure. When or if China and India were able to repeat the OECD sustained high-growth economy of the 'Trente Glorieuse' period through 1950-1975, their oil demand would rise so high no possible investment amounts in world oil and gas could satisfy this new demand.

If OECD oil demand shrank by 60% or 75% from current rates this could buy time but would be far from sustainable, beyond about 20 years.

Shifting away from oil and quite soon natural gas are becoming recognized as "long-term" goals by many political deciders in the OECD group, and in Emerging economies - but for the OECD group these are not long-term goals.

Oil saving and energy efficiency are short-term goals for application through the long-term, to cut oil intensity (average demand per capita) by large amounts in a short historical period of time. Possible targets should be as high as a 60%-75% cut in oil intensity within 15 years.

The more likely alternative is do-nothing economic and energy policy responses, and vanity spending on low-yielding, unsustainable green energy projects. This will surely increase the potentials for a hard shift back into economic recession or worse.

From a much lower peak than today for global energy demand in 1929, some countries experienced more than ten straight years of falling energy needs in a recession-type "sustainable economy". Economic recovery from the 2008-2009 recession is simple to identify: shrinking rates of energy demand contraction, then rising rates of energy consumption.

These are, to be sure tracked and anticipated by oil and coal traders, if not yet by uranium and natural gas traders. Some OECD countries through 2008-2009 recorded short-term falls in oil demand close to 7.5% or above, electricity demand in some countries has shown falls far above 10%, coal demand also contracted far and fast, showing that depending on the type and severity of recession commercial energy demand can fall much more than GDP output.

This underlines that the energy economy is itself variable. Growing demand is only sure if the growth economy survives. This adds another challenge to the drive for low carbon energy: Are we sure it will be needed? Other and related questions include: How long does the growth economy survive?

Government funding to "a green energy future" is already tending to fall back, as signaled by the French abandonment of carbon tax and falling support from other governments to low carbon vanity projects. This sets the scene for discussing the real issue of what the sustainable economy means.

There is no trace of this, today. The simple question of what energy transition really means - including using less - is always eluded, in the rush to spend more on prestigious dream projects.

The general public is screened from the basic bottom line that energy prices have to rise, will rise, and could rise very fast by future shock spiraling back from the fantasy future to the tormented present.

When the price shock arrives, much higher energy prices will then work their own magic both on economic growth, and on future energy demand, with likely drastic impacts on forecasted green energy needs and break-even costs. At that time, green energy investing will be even more of a loser than it is today.

Andrew McKillop is a writer and consultant on oil and energy economics. Since 1975 he has worked in energy, economic and scientific organizations in Europe, Asia, the Middle East, and North America. These include the Canada Science Council, the ILO, European Commission, Organization of Arab Petroleum Exporting Countries, the UN Economic and Social Commission for Asia and South Pacific, and the World Bank. He is a founding member of the Asian chapter of the International Association of Energy Economics. He is also the editor, with Sheila Newman, of The Final Energy Crisis (Pluto Press, 2005).


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By canbyte (registered) | Posted April 03, 2010 at 02:08:34

Kudos for another of Andrew's brilliant cut-the-crap articles. I hope Ryan will someday give us readers an electronic mechanism to easily 'follow' one's favourite, difficult-to-read-though-he-may-be author - always a mind bender. In the meantime, I can try to promote Andrew's articles on green-brainwashed and other syncophantic sites like Treehugger in hopes his factuals can harmonize expectations with reality, in open minds at least. In the meantime though, we should be alert to any opportunities to achieve a less energy intensive economy through optimization and conservation prior to the price shock, as he says, we should all anticipate. Notwithstanding the normal high costs of green activities he outlines, every garbage truck trundling along our many highways and byways carries in its bosom, all manner of missed and squandered opportunities .

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By Kiely (registered) | Posted April 07, 2010 at 11:54:31

Phew… cutting through all the statistics.

Am I to understand that this author does not believe in the viability of future green energy technology?


Does he simply not want governments to pay for it?

This article is a bit of a convoluted mess. Note to the author: "lies, damn lies and statistics" my friend. If you want to make a point I find succinct to be the best approach.

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By SyncKnoMo (anonymous) | Posted October 07, 2013 at 20:16:13

centesimus C 101 centum unus centum et unus (100 1). The extent of transcriptional activation of MSAcontaining promoters by MYB3RA2 depends Alex Shelley.

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