Last week we covered the 2007 outlook for renewables in detail. This week, we step back a bit and look at the big picture, because that’s what affects the price of oil, and the price of oil, along with global warming, is one of the twin engines driving the renewables industry’s awesome growth.
Supply Stays Tight
According to the IEA, in 2007 the supply growth outside of OPEC should roughly balance out the demand growth, which it will have to do, because OPEC production remains flat at 28.8 mbpd. Many peakers have observed that OPEC’s announced production cuts, particularly Saudi Arabia’s, may be simply a way to hide the fact that they’re in terminal decline and can’t do much about it.
As for the price, one analyst I respect, Tim Guinness of Guinness Atkinson Funds, puts the 2007 probabilities for the price of WTI (West Texas Intermediate crude) as follows: 10% for under $50, 40% $50–60, 40% $60–80, and 10% over 80. Based in his predictive track record, I think these estimates are a bit on the conservative side, and we should see $80 oil this year, no problem. One factor that I don’t think he, or most other analysts, has taken into account is the price increases that will likely be the result of all the pressures I’ve described on the oil business as a whole.
As for natural gas, our number-one source of imports, Canada, may have 10% less to sell us in 2007, due to reduced drilling (in turn due to higher costs) and the increased consumption of gas by the tar sands boom. Since North America is past the peak of gas production and the hope of increasing imports in the form of LNG from places like Qatar is still several years off, this means that a suddenly cold winter could leave poorer customers in the cold, or that a hot summer could cause more major grid failures.
But supply and demand issues aside, the oil and gas picture is considerably worse once you factor in the geopolitics. With Russia, Venezuela and Bolivia all making bold moves to renationalize their oil and gas assets in 2006, kicking out the Western oil majors, there is no reason to think that they’re going to be any nicer this year—or that other countries that have enough military might to defend themselves might not try to follow suit. Russia really has Europe by the short hairs, especially in the icy grip of winter, and Venezuela has become a stone in the shoe for the U.S., because we can’t live without its imports—not with Canada and Mexico both on the downslope. The biggest sticks on the block, the U.S. and the U.K., are increasingly vulnerable to geopolitical disturbances to their supplies of fossil fuels. I think it’s safe to expect that terrorist attacks on facilities in Nigeria and Angola will continue in 2007, because they were remarkably successful in 2006. And let’s not forget that Africa is one of the two places in the world that has any hope of seriously increasing its exports of oil and gas right now, since the world’s major producers are all past the peak (or likely so).
States Step into the Breach
Hydrocarbon fuels are increasingly under attack for their greenhouse gas emissions. While President Bush buries his head in the sand, still refusing to admit that global warming is man-made and breaking his campaign pledge to regulate C02, the states and cities have stepped into the leadership void and taken action:
By the end of the year, we should have at least a dozen states with laws intended to reduce greenhouse gas emissions.
Twenty states already have portfolio standards that require their utilities to produce some percentage of their power from renewable sources.
In his State of the State address last week, California Gov. Arnold Schwarzenegger announced that he will order, by executive decree, a 10% cut in motor vehicle emissions of greenhouse gases. (Under state law, the governor has the authority to regulate fuel content.) A 10% cut in emissions will translate to a 20% drop in gasoline consumption and more than triple the size of the state’s renewable-fuels market, because burning biofuels produces less carbon than oil. This will offer some much-needed confidence for biofuel manufacturers, particularly Pacific Ethanol, the largest independent marketer of ethanol in the West. “The opportunity is there, not just for us but for others to see a critical path to additional production of renewable fuels for the California market,” said Bill Jones, chairman. “That’s very important for financing additional plants and the long-term viability of an emerging industry.”
From a global warming perspective, the latest statistics show that 2006 was the hottest year yet, and 2007 is “set to be the hottest on record worldwide due to global warming and the El Nino weather phenomenon,” according to the British Meteorological Office. “This new information represents another warning that climate change is happening around the world,” the office said.
In terms of public opinion on global warming, Big Oil just took another big hit with the publication of a report last week by the Union of Concerned Scientists showing that Exxon has “funneled nearly $16 million between 1998 and 2005 to a network of 43 advocacy organizations that seek to confuse the public on global warming science.” The campaign has deliberately distorted global warming research and attacked state and local actions to regulate carbon dioxide emissions. And that $16 million is just from Exxon; we don’t yet know how much has been spent on disinformation by the oil industry as a whole. So that cat’s out of the bag. Now that the public has proof that Big Oil is trying to confuse them and stymie the debate, it won’t be quite as easy to mislead the public about global warming anymore.
The Chinese Threat
Beyond public opinion and policy, the global warming threat is bigger than ever in real terms. We have new reports that in China the emissions from increased burning of coal are suffocating and killing people. Those emissions are also killing trees in California and rendering fish stocks around the world even more unsafe to eat—due to the increased levels of mercury that bioaccumulate in fish after being expelled into the atmosphere by coal plants.
Sounds bad, but how bad is it?
Really bad.
China only recently learned that some ten new coal plants—8.5 gigawatts’ worth!—had been built in Mongolia without its knowledge or permission. They join 2,000 older, very dirty plants, and another 500 more coal-fired power stations that are on the way. China’s coal output has doubled over the last five years, and they are on course to overtake the U.S. in coal consumption within two years.
After years of resisting any caps on their greenhouse gas emissions, China now has goals to curb their emissions and reduce their energy consumption by 20% per unit of national income by 2010. But, as the world’s second largest energy consumer, with an economic growth rate of some 10%, they are a major (and opaque) factor in any global effort to get climate change under control.
Take vehicles, for example. The number of vehicles in China is expected to explode from 25 million today to 175 million by 2020. They now have one car per 280 people, but they are industrializing rapidly and they want to live like us—with one car for every two people. From an energy standpoint, as the U.S. industrialized we went from oil consumption of about one barrel per person per year in 1900 to 27 barrels in 1970. China now consumes about 1.3 barrels per person per year. To put all of that in perspective, let’s not forget that China has five times the U.S. population at about 1.5 billion.
Other Renewables & Solutions
Ethanol and biodiesel may be getting a disproportionate share of the spotlight given the urgency of the liquid fuels issue, but all other solutions and forms of renewable energy are also set for explosive growth. Senator Harry Reid, the new Senate majority leader, is coming out strongly in support of solar, wind, geothermal, biomass and nuclear power. “We can’t do it overnight but I think we have to set goals,” he says, indicating that we can expect much more along these lines.
There is even a growing coalition of bipartisan support for raising the fuel economy standards, joined by Senator Reid and Senator Ted Stevens (R-AK). As any peak observer can tell you, raising these standards is by far the lowest of the low-hanging fruit for dealing with an impending shortage in liquid fuels. It’s a no-brainer, and pays off immediately.
The outlook for solar and wind is nothing but rosy. The annual growth rate for solar photovoltaics is estimated at 11.2% in the EIA’s 2007 outlook, implying that the PV market will double in about six years. For wind, their projected growth rate is 5.2%, which seems on the low side given other available projections.
Even geothermal energy, once an all-but-forgotten part of the energy mix, is getting goosed with federal and state incentives.
It’s Hip to be Green
Everywhere I turn, I am getting media messages about reducing my energy load and my carbon footprint. By the end of 2007, I predict that a sizable number of Americans will take concrete measures to do their bit, be it simply replacing some light bulbs with LEDs or compact fluorescents, or buying carbon credits to offset their last vacation, or buying a hybrid, or putting solar thermal and solar PV panels on their roofs. It’s not quite hip to be green just yet, but by the end of the year it will be.
Plug-in hybrids may be the biggest winner of all, with their potential to displace some of our imported oil with domestically produced electricity, particularly electricity produced by clean, green sources, and at a lower cost than gasoline to boot. I read somewhere that Toyota originally made the Prius with a plug-in option for the European market, which was removed for the U.S. market. I’m not sure under what sort of rationale that dubious decision was made, but when that option is restored for cars in the U.S., hopefully in at least some models before the end of the year, I predict a boom in their sales. Again: it’s a no-brainer!
But I think the most profitable RE investments in 2007 will be the least-noticed players, tiny little off-the-radar companies that are quietly figuring out how to squeeze a little more utility out of the energy that goes into all sorts of devices, from small battery powered gadgets to passenger cars. More efficient engines, LED lights, buildings that turn off their own lights at night, more energy efficient computers and displays, smarter thermostats . . . the list is virtually endless. In a post-peak world, we will have to find ways to do more with less, all across the board. We have an entire infrastructure to replace! This is going to be a huge growth sector in 2007, despite its lack of sex appeal.
In sum, I think the time has finally arrived when it’s no longer political suicide to talk about energy conservation. And as Sen. Obama has observed, the lack of political will has been the primary reason for our lack of motivation to deal with these problems—problems that we’ve known about for decades. The CFR has given the all-clear , and now it’s safe to be green . . . and well on its way to being cool.
Chris Nelder
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