Our energy future

It has been a big news week for the global energy sector, which just so happens to be particularly important for two resource rich countries whose fortunes are very closely aligned – Canada and Australia (should we introduce the term Canastralia?).

The first important news is Canada’s decision to withdraw from the Kyoto Protocol, unable to meet its 2012 emissions targets.   In a rare moment of political honesty, Prime Minister Harper said “The writing on the wall for Kyoto has been recognised by even those countries which are engaging in a second commitment”.

Australia is involved in negotiating a second round emissions commitment in Durban.  However, we weren’t always so chummy at these events.  In Kyoto we bargained hard to have our emissions target softened, so rather than decrease emissions, our obligation was only to increase emissions by 8%.  Then we chose not to ratify the agreement until Kevin Rudd made it an election promise in 2007.  Now, although the government is promoting the fact we are on track to meet our soft target, many are skeptical that even that will occur, given the current scale of investment in energy generation and resource sectors.

An objective observer can only conclude that any international commitment to greenhouse gas emissions reductions will not get in the way of development of energy resources.

Which leads nicely into some other news this week.  A Draft Energy White paper was released this week, taking a frank look at Australia’s energy sector and its future.  It notes that the trend for global energy demand will be very sensitive to the strength of the commitment to greenhouse gas emissions reductions.  Given the conflict between the economic interests of the major polluters and energy exporters, and the environmental aims of a binding global agreement, I don’t expect climate agreements to influence the growth in global energy demand.  The growth trend of the BRICs (Brazil, Russia, India and China), and the pace of economic recovery in the US and Europe, will have a far greater impact on the future pattern of energy demand than any climate agreement.

The graph below shows the noticeable impact of the 2008 financial crisis on global energy demand, and some potential scenarios for energy growth.

For Australia, where there is currently massive investment in expanding coal and gas export capacity, the composition of energy use is an important consideration.  I expect, from the below scenarios, to see a future more closely aligned with the current policies outcome.

The below forecast of the price paths for energy commodities, under a scenario with a moderate global climate agreement, shows that coal prices are most likely to be affected, while less greenhouse gas intense resources will see greater demand.

 

My expectation is that this scenario is unlikely, and the price divergence between coal, and oil and gas, will be less extreme in reality.

Other news locally is includes a deal that would see Chinese oil company Sinopec is increasing its stake in Queensland’s coal seam gas industry, through a $70billion deal with Origin Energy and ConocoPhillips, and a continued upswing in mineral and energy exploration statistics released by the ABS.

It is becoming more clear that Australia’s economic future will be more closely tied to global energy markets over the coming decades.  Canada has been honest about their position and withdrawn from climate agreements. In Australia, we may just find that our conflicted position, of committing to a domestic emissions reductions scheme, while being economically dependent on energy exports to countries not bound by climate agreements, will come unstuck as there reality of the situation finally bites.

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Comments

  1. RS, thanks for this. You may be interested in a recent article in PNAS titled “The supply chain of CO2 emissions”, available freely at http://www.pnas.org/content/early/2011/10/13/1107409108.full.pdf

    This quantifies were we sit regarding the trade of CO2, and we are in with the big boys.

    The second item that is changing global gas markets is ‘unconventional gas’, mostly shale. The recoverable reserves are going up all the time, eg current estimates put WA’s shale gas reserves in excess of WA’s conventional reserves – unbelievable when you consider the size of Gorgon, Wheatstone, Pluto etc. http://www.eia.gov/analysis/studies/worldshalegas/

    What does all this mean? We better start thinking about adaptation, I for one can’t see emissions going down any time soon.

    • Thanks. But ‘it’? That climate agreements won’t be allows to get in the way of the economic interests of the big energy producers and consumers? Or that Australia’s future economic interests will be more closely aligned with global energy markets?

      I, of course, have mentioned in previous articles that a diverse economy is more stable and less prone to external shocks. But we need to be clear that resource sector growth (particularly growth as a proportion of the whole economy) will occur whether we support other domestic industries or not. As such, we need to understand the global market for energy, and keep an eye out for risks and opportunities.

      • Not quite

        that on the one hand our government is making so much noise about saving the climate (and penalizing wage earners and small business) while on the other hand allowing us to export enough coal to drive the planet to extinction

        the blatant dishonesty of it is breathtaking

        but where has the public discussion of this disconnect been until now – and just how far do you think your post will go?

        It will have zero impact – or, at “best”, you will be bought off or bullied one way or another into submission and silence

        pop

        • Mr Poet, you took the words out of my mouth…

          on the one hand our government is making so much noise about saving the climate … while on the other hand allowing us to export enough coal to drive the planet to extinction

          This is one point where I dare say the MineBot and I agree. The hypocrisy of those who support a carbon tax, while simultaneously cheering on the mining boom, is simply breathtaking.

          The MineBot may be many things, but it is not a hypocrite.

      • Perhaps I mis-read you. My reading was that as our economic interests are aligned with global energy EVENTUALLY climate agreements won’t be allowed to prevail. Particularly if climate agreements continue to be as fluid and non-committing as they have been to date, largely failing to comprehensively secure global adherence.

        ie At some point Australia will concede the conflicted position we are in as an energy producing nation, opt for economic need over commitment to climate agreements ( climate agreements in which no other equivalent nations participate).

        • “My reading was that as our economic interests are aligned with global energy EVENTUALLY climate agreements won’t be allowed to prevail.”

          Yep. But the subtle part is our economic interest is for OTHER countries not to curb energy use, as they support our energy exports. Domestically, it doesn’t really matter what we do (for example, only about 18% of coal produced in Australia is consumed in Australia, the rest is exported) Coal and gas producers will simply sell to export markets instead of locally where possible (some investment might be needed to make this possible in some areas).

          We can save face politically by introducing the emissions trading scheme, but it may or may not have much of an impact on domestic energy use, and an immeasurable (if any) impact globally.

          If a few more major greenhouse gas emitting countries choose not to partake in future climate negotiations, then our domestic emissions trading scheme might be scrapped (by either political party).

          • Then we agree! As I said, spot on – except I don’t see it as saving face to introduce emissions trading scheme if few others do…

          • The MineBot has pinpointed the hypocrisy at the core of Australian energy policy: We are becoming increasingly reliant on exporting climate catastrophe to the rest of the world, while making half-hearted efforts to reduce emissions at home.

            Its an absurd position, that a five year old can see through, but our senior policymakers and (left-leaning) media pretends it makes sense.

            Naturally I would prefer this situation was resolved by Australia slashing coal exports (or even better, the world no longer demanding our black death) but I have no illusions about the chances of this happening.

            If the climate scientists are even half right, history will not judge our nation well.

          • Lorax,

            I’m glad we can all agree on something.

            I have suggested in the past that our best chance of doing anything positive for the climate is to cap the rate of coal exports. But even that won’t have much impact – marginal reserves in other countries will simply be the next resources to be developed/extracted.

            So why bother? One reason is to save our energy reserves for the long term. New areas of national accounting, which try to estimate a balance sheet of non-renewable natural resource, suggest that may be a worthy consideration. In a way it will force us to invest in other areas of economic activity.

            But, we have to be honest about our position is a larger global economic machine. You can almost equate energy with economic activity – which many in fact do. There is a whole area of research showing that energy consumption is actually the best way to measure the size of the economy.

            Energy demand will grow, and we can either miss out in the short term, in order to have a more diverse economy, or we can take advantage now, and simply do our best to handle any volatility affects us via global energy markets.

            There is not right way to ‘manage the boom’. Personally I prefer a more diverse export base, but in the longer term I see energy resource exports becoming an even larger part of the economy no matter what we do.

            If I was in charge, I would have the resource States be more vigilant with setting incremental changes to resource royalties, and having those States be more strict with their budget to allow them to stimulate activity when income from minerals falls.

          • So why bother? Prisoners dilemma!

            For all of these issues, the answer is always: “why bother, when someone else is not pulling their weight?”. If we follow this path to its logical conclusion, we all die.

            It is the ultimate failing of politics, economics and civilisation itself.

            The MineBot escapes this logic trap through denial. I’m sorry, but every rational bone in my body tells me its extremely unlikely that so many scientists can be so completely wrong about this, which means denial is not an option for me. Maybe it is for you, I don’t know.

            If denial is not an option, and failure to reduce carbon emissions means catastrophe, then we have to do whatever we can to reach some sort of global agreement, however unlikely, and however damaging to Australia’s short term economic interests.

  2. darklydrawlMEMBER

    “Canastralia” hehehe… Reminds of “Chimerica” which was used to describe the symbotic financial relationship between the US and China.

    Maybe the concept in Mr Orwell’s ‘1984’ about super economic block isn’t so crazy after all….

  3. The ETS is not about emissions reduction. Instead, it allows Australia to buy carbon permits form overseas to fulfill it’s international obligation. It is a hedge. In the event that other countries do not commit, we can lower the price of permits. Of course, going down that path will doom the human race in a resource war long before we witness the effect of catastrophic global warming.

    The bigger issue is the price of energy : Australian may not be able to afford to burn coal or gas. The idea that a country cannot afford to consume its own resource may sound absurd, however there are many countries in the world where this is happening. (e.g. Nigeria, Burma, Venezuela). Without major wars, Indian and China is set to become fabulously rich, and the current projection is for China to overtake USA in GDP by 2030. If they follow the pattern of consumption in the West, energy will become very expensive.

    The Australian rock lobster industry gives us a taste of the future. Once Australia start exporting lobster to China/HK/Taiwan, the increase in lobster unit price has exceeded CPI since 1990 (with the exception of 2003/2004 due to SARS). Half a lobster in Sydney will set you back $80 at most restaurants, and those are the smaller ones rejected for export.

    To achieve energy security, Australia will need energy sources which cannot be readily exported, and it just so happens that most of them do not emit carbon. Otherwise, Australians faces the fate of being a pauper in a resource rich country. (unless you’re working in the mining industry).

    • Very interesting POV. I have also vaguely pondered over this dilemna of absolute energy demand. turns out energy intensity is a driving force that will keep on surprising to the upside, at least in emerging countries. Then it doesn’t come as any surprise that ChinIndia are wandering around with cash slothed pockets picking on relatively cheapest sources of energy. And here is our political elite pondering over ideological musings. One wonders If we are doomed to this fate for failing to see what lies ahead.

    • >(unless you’re working in the mining industry)

      something seldom discussed is how much of the “big bucks” the “miners” actually end up keeping. I hear rent prices of $1500 ~ $2000 pw and other high living costs. So I would wonder if quite a large amount of their gross incomes are not then bled back into who ever else is attached (a la leech) to this body?

  4. adelaide_economist

    All good, but you need to keep in perspective that Stephen Harper is pretty much a Canadian John Howard… the ‘honesty’ in rejecting greenhouse accords will probably last as long as Canada has a conservative government.

  5. Haha It’s EXTREMELY unlikely that coal’s price will moderate to a flat line in 2040.

    Every year, we mine more than the year before. At the current AVERAGE rate of increased production, there will be 0 coal left by 2052.

    Sure, this is never going to be the reality, but it’s a damn scary number either way.

  6. Technology experts like Jesse Ausubel of the Rockefeller Institute have been pointing out for years that humanity’s energy systems have been “decarbonising” all along, and on continued natural free market trajectories, carbon will all but disappear from them within a century or so. This is because humanity has tended to both urbanise and become more mobile; hence energy requirements favour sources that are less bulky and easily transported. These sources just happen to involve less carbon; carbon represents most of the “mass” in energy sources. We do not heat high density multistory urban dwellings with log fires any more (the famous London smogs used to kill thousands of people every winter), or run trains by shoveling bulky coal into their boilers while on the move.

    Current energy systems vie with each other based on their own economic advantages and disadvantages. Electricity runs down wires; the ultimate in unobtrusive energy supply to multitudes of fixed locations thus far. A tank of petrol or diesel is sufficient for a vehicle to drive hundreds of kilometres. But batteries are not yet as efficient as tanks of liquid fuel. Liquid fuels are not suited to delivery to end users by pipe, but gas fuels are.

    Natural gas is a lower-carbon source of energy than petrol by a factor of about 25%, and coal by a factor of about 50%. We have reached a kind of economic tipping point with its use, where better methods have been devised to extract it, and investment in extraction and distribution are proving highly profitable. Hardly a week goes by without the announcement of the discovery or the commercialisation of yet another significant natural gas “field”. In fact, the international “Oil and Gas Journal” often contains several such discoveries in each of its weekly issues.

    New discoveries of oil fields and new methods regarding the extraction of it from known locations, keep delaying “peak oil”, apart from the “gas revolution”. But Ausubel predicts that oil will be supplanted as an energy source before humanity runs out of it, and (superabundant) coal is already in the process of being supplanted. The best opportunity for “de-carbonisation” of the energy system, is offered by hydrogen fuel, which releases no carbon at all on combustion, just water vapour. Ausubel suggests that eventually, methane will be economically extracted from coal beds, leaving the coal behind; and hydrogen extracted from the methane. He suggests that energy companies know what they are doing, to a greater extent than most people are giving them credit for. Meanwhile, hysteria regarding scarcity of resources is a handy excuse for higher prices and profits for energy companies.

    • PhilBest

      To begin with your ‘decarbonising’ myth. If you are exponentially increasing the consumption of resources that produce less carbon dioxide per unit energy compared to another resource, you are hardly ‘decarbonising’. Increasing annual global CO2 emissions should be enough to show you this.

      Your ‘superabundant’ arguments for coal, oil and gas are severely flawed. The issue has never been about the resource that is in the ground rather the rate that they can be extracted. As we have used the easiest to extract and most concentrated reserves first, it is becoming increasingly difficult to maintain the production of oil, gas and coal.

      ‘Peak oil’ for conventional oil occured in 2006 at 73mbd. It has been on a plateau since and is expected to begin its decline around 2015 (taken from US military report)

      Since 2006 we have barely increasing total liquids production with gains from natural gas liquids. In terms of barrels of oil equivalent total liquids production is still hovering around 82mbdoe (reached in 2008) remembering that the energy in an equivalent barrel of natural gas liquids to oil is just 0.6 times (and should help you to understand why total liquids production is often misleadingly quoted as around 88mbd).

      To avoid peak oil, the majority of expansions must come from the Middle East (according to the IEA). Political obstructions rather than physical obstructions being the problem here.

      And the ‘shale gas’ revolution in the US has resulted in gas production that is still below its peak in the 1970’s. All they needed was an exponential increase in gas rigs for steady gas production.

      Finally I suggest reading two papers on peak coal, from David Rutledge and Patzek and Croft. Rutledge claims that we will have consumed 90% of the total reclaimable resource by around 2070 at about 40% of the peak rate. This is hardly the ‘thousand year’ resource that people claim.

      In the context of peaking global coal production, reduction of Australia’s coal exports could make a big difference throughout the world, being one of the only countries that has decades before we reach peak production (assuming no restrictions on mining).

  7. So what we really need are cost competitive (with coal & gas) sources of energy that don’t emit carbon, because it sounds like all the trading schemes in the world are likely to do squat about global warming, especially if India & China aren’t signed up.

      • What worries me about trading schemes for carbon credits, is they will be gamed. The markets will of course skim off some nice fees from it all, but I bet it all become so complex with rights being shifted around all over the place, that we lose track of it all, and no actual reductions take place on the ground, but much money will be wasted. So I’m starting to think that maybe we would be better off just directing all this effort and money straight into developing renewables and safe nuclear technology.

  8. Our whole society absolutely depends on continued use of coal and oil. Nothing else will ever come close. Turn off whichever coal power plants people don’t like and see how long the greenies view last.

    CO2 is a gas useful to plants and a precursor of the useful but dangerous oxygen we breathe but it only exists as a very small part of the air. It doesn’t need to be taxed. On the other hand, use of coal and oil generates some real pollutants we could as well do without and taxes may limit this and restrain the rampant exploitation of the rest of the corporate world’s energy reserves.

  9. A couple of things.

    The Kyoto Protocol was always based on contraction and convergence and per capita emissions. On that basis China and India develop and have increasing total emissions while already developed countries are supposed to reduce emissions in total or at least on a per capita basis (Australia has argued that its population growth means less reduction and that countries with falling or stable populations must do more). So exporting coal is not necessarily hypocritical.
    http://en.wikipedia.org/wiki/Contraction_and_Convergence

    Australia would have grid parity for solar PV in remote areas if costs of electricity in high sun rural areas reflected transmission losses. The greatest reduction in emissions comes from powering the places more remote from generators with renewables (wind & Solar). By overpowering areas most remote the existing grid could conceivably be harnessed to pump power towards the generators/cities. Using solar thermal with molten salt storage would extend renewables coverage of the day. As the cost of emissions tightens, expect coal fired generators to focus on reducing transmission losses by repowering more remote areas whose usage profile more closely matches solar and wind availability. I expect this will work its way from central Australia towards the location of the generating plants.