1 THE ENERGY CHALLENGE: THE BIG PICTURE
Global primary energy demand is predicted to grow by 44% from 472 quads in 2006 to 678 quads in 2030. Over that period of time the world will need to invest, annually, 1% of global GDP to maintain and expand energy supply in order to meet these energy projections. Power generation, transmission and distribution will absorb almost 60% of this investment.
When considering growth in primary energy demand it is instructive to look at the demand for crude oil. The reason for this is twofold: crude is the most internationally traded of all the hydrocarbons and it also constitutes the single largest component of global primary energy (35% in 2008 followed by coal at 29%). Crude therefore tends to set prices for other forms of primary energy and hence to a large extent dictates global energy prices.
Since the dawn of the Industrial Revolution in the latter part of the 18th century the developed world has seen a gradual transition from wood to coal and, about 100 years after that and towards the end of the 19th century, from coal to oil. Notwithstanding two world wars, crude oil prices have been remarkably steady through much of the 20th century. That period of stability was interrupted by the Yom Kippur war in 1973 and again by the Iranian Revolution in 1979. Price volatility subsided in the mid ‘80s however that period of relative stability was short-lived and was brought to an end by the invasion of Kuwait by Iraqi forces in August 1990.
Other major events since that have impacted on oil price levels and volatility, have been the initiation of Operation Desert Storm in January 1991 and the March 2003 invasion of Iraq by US and UK forces (with support from Australia and Poland). Lesser events which have provided a back-drop of steadily increasing pressure on oil prices have been increased demand from emerging economies (principally China and India).
What all this means from a practical perspective is that today oil prices, in real terms, are higher than at any time since the 1860s Pennsylvania Oil Boom (which represented the birth of the oil age) apart from a brief period of a few months during the Iranian revolution in ’79-’80. These trends are illustrated in the following graphic which shows both nominal and real crude prices from 1861 to 2008;
Source: BP Statistical Review of World Energy
1.1 The future: the end of cheap oil
It is often said that the world is running out of crude oil: there is talk of peak oil and some say world production has already peaked. However the world is not running out of oil. There is oil in many locations. There are 165 billion barrels in the Alberta tar sands, there are tar sands in Orinoco and there is oil 5 to 10 miles below the ocean floor in the Gulf of Mexico, off the coast of Brazil and yet more oil in shale in locations such as Wyoming and Colorado.
The world is not running out of oil but what the world is going to run out of and arguably has already run out of, is the oil that you can afford to burn, not just burn in the form of gasoline and diesel fuel that we consume in cars but, maybe more fundamentally, the way we burn oil to run the global economy. Modern economic theory and practice encourages us to export our domestic manufacturing overseas so that we can exploit cheaper labor elsewhere. The result is supply chains that stretch around the world to take advantage of labor cost differentials which can migrate from country to country at a moment’s notice largely as a result of energy price fluctuations that are increasingly beyond our control.
No matter how goods are moved around the world, whether by air, boat, rail, truck, or something else we are almost always burning crude oil to do it. Soon we will no longer be able to do that because the cost of raising 4 million barrels of oil out of the Canadian tar sands or the cost of replacing the rapidly depleting Middle East fields with deep water oil, the very prices that will be needed to get that oil out of the ground are the very same prices that will destroy the economics of the over extended supply chain and which will usher in a new energy era – a post cheap oil economy.
It is tempting but not correct, to think that even if it is difficult to find new sources of cheap oil we can maintain existing sources of cheap production. However this is unfortunately not correct. In 2006 currently active oil fields were producing about 71 million barrels per day (mbpd) of crude. The International Energy Agency forecasts that between now and 2030 output from those currently producing fields will decline by 62%, to 27mbpd. In other words even if demand stays flat the world needs to find an additional 43mbpd of production between now and 2030 just to stay where we are.
2 THE UNITED STATES
Until the 1950’s the United States was largely self-sufficient in energy. In 1949 coal provided 38% of total primary energy, followed by crude oil which provided 33%. However even at that time the US was importing 13% of its annual crude requirements and those imports have continued to grow steadily since. In 1969, when Neil Armstrong landed on the moon and also about the time when US domestic production peaked at around 11mbpd, the US was meeting 77% of domestic crude demand through domestic production. In 1973, at the time of the Yom Kippur war and the first OPEC oil price shock, the figure had declined to 63%. The situation improved or held steady for 10 years although the decline continued in the mid eighties. At the beginning of Operation Desert Storm in January 1991, the US was able to meet barely half of its domestic demand from domestic production and by 2003, when the US and UK invaded Iraq, the figure had fallen to 37% and America was able to produce less than 7mbpd of crude.
So what, one might ask. The answer is that the threat to America’s national security of increased dependence on nations that are more often than not hostile to US interests, has become acute. In 2006 the Council on Foreign Relations convened a task force which produced a report – The National Security Consequences of US Oil Dependency. The co-Chairs of that task force were John Deutch, former Director of the CIA and former Undersecretary of Energy and James R. Schlesinger, former Defence and Energy Secretary. From the Executive Summary:
“The lack of sustained attention to energy issues is undercutting U.S. foreign policy and U.S. national security. Major energy suppliers—from Russia to Iran to Venezuela—have been increasingly able and willing to use their energy resources to pursue their strategic and political objectives. Major energy consumers—notably the United States, but other countries as well—are finding that their growing dependence on imported energy increases their strategic vulnerability and constrains their ability to pursue a broad range of foreign policy and national security objectives. Dependence also puts the United States into increasing competition with other importing countries, notably with today’s rapidly growing emerging economies of China and India. At best, these trends will challenge U.S. foreign policy; at worst, they will seriously strain relations between the United States and these countries”.
Although the report produced much hand-wringing at the time its message was largely forgotten in the deepening Gulf War, the energy policy of the Bush administration which was primarily based on a unilateral and aggressive foreign policy to secure additional crude resources and the build-up of the financial crisis the first signs of which began to be evidenced in early 2007 but which did not become widely apparent until Summer 2008.
The US presidential election campaign in late 2008 was full of election promises about improving US energy security. The Republican camp was focused mainly on free trade, low taxes and drilling in US national parks and offshore. The Democrats were primarily interested in carbon charging, energy efficiency and promoting alternative fuels. We all know how the election turned out but what did a Democratic President bring America? At a very high level it bought reduced emphasis on aggressive foreign policy and increased emphasis on domestic R&D, in order to improve national energy security.
3 ENERGY SECURITY AND THE ROLE OF NANO TECHNOLOGY
Bankers and the financial sector may have displaced energy from the front pages of newspapers, but energy security remains at the top of the global and national agenda. Why? Because energy demand is rising inexorably while maintenance of supply is becoming increasingly problematic.
The Institute for NanoEnergy (INE) was set up in recognition of the challenges posed by increased emphasis on energy security. INE recognizes the enormous contribution that nano-technology can make to power generation and energy efficiency and we talk more about that contribution in our ‘Research’ section.