Dr. Faustus and the global energy conundrum

There should always be a counter argument to prevailing wisdom. It’s the basis of rational discourse and the driving force of civilisation. The concept sits uneasily within the rose coloured glasses wonderland that exists in the minds of the punters of everything from property to stocks here in the Klondike.

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By  Stephen Corley Published  January 15, 2006

|~||~||~|There should always be a counter argument to prevailing wisdom. It’s the basis of rational discourse and the driving force of civilisation. The concept sits uneasily within the rose coloured glasses wonderland that exists in the minds of the punters of everything from property to stocks here in the Klondike. However, one needn’t descend into the land of the Yahoos just because everyone else is there. So continuing the trend from last week, whilst I wrote that oil is in its dotage and that demand squeezes will ensure high prices for the future, there is another side. I was reminded of this when contacted by someone who insisted that renewable or alternative energy sources must and will come into play in the coming years. Thanks must go also to Mckinsey, who in a recent report on the challenges facing the big five global oil companies concluded perspicaciously, that they face shrinking margins or shrinking volumes. Most experts recognise that the age of conventional oil will fade during the next century. Fortunately, price and technology will allow for production of heavy oil, tar sands and shale oil, whose combined global reserves far exceed those of conventional oil. The problem with these deposits is that their extraction involves one of the dirtiest processes known to mankind and any progress towards a less oil reliant economy will almost certainly need to consider environmental issues. Coal liquefaction and gasification, improved gas-to-liquids technology and alternatives to oil led initially by conventional and unconventional natural gas all offer additional potential. Natural gas is a cleaner burning and more efficient method of producing power than oil. Contrary to some reports, natural gas resources worldwide are substantial. Better still, unconventional forms of natural gas, such as coal gas, shale gas and tight gas, are often found in regions where oil is not. This is good news for energy markets, which are overly dependent upon supply from the five countries that control nearly 75% of the world’s conventional oil reserves. The challenge of natural gas is not resources, however, but deliverability. As LNG ports are permitted and built around the globe, natural gas will become a global commodity and help reduce issues of deliverability that have caused price volatility. Natural gas combined with other non-coal sources of fuel will likely surpass oil as a percentage of total global energy consumption between 2015 and 2020. This crossover already happened in the United States around 1994. In 1972, the US atomic pioneer Alvin Weinberg remarked, “We nuclear people, have made a Faustian bargain with society.” The deal was that nuclear scientists gave us almost limitless electricity for our heaters, kettles and TVs, and all we had to accept in exchange was the ultimate risk of hell on earth. In the last three decades, the pact hasn’t gone away, though it has changed. If Dr. Faustus were with us now, the bargain the nuclear industry would have him strike with Mephistopheles would be one that would save us from the climate chaos caused by coal and oil pollution. Nuclear power offers probably the most controversial future in a world looking to diversify from oil dependence. Its inability, though, to carve a foothold in the public imagination is due to fear and on the part of those holding the purse strings, price. The first is driven by ignorance and the second, in an era of post US$60 per barrel oil, is becoming irrelevant. One of the common misconceptions surrounding nuclear power is the lack of a solution for the disposal of waste. The entire industry has produced about 40,000 metric tons of used nuclear fuel over the past four decades. If used fuel assemblies were stacked end-to-end and side-by-side, this would cover a football field about four yards deep. There are signs that suggest a reassessment is happening, as France for example has laid its cards firmly on the table in favour of domestic nuclear powered electricity. Given that France is the world’s fifth largest economy, this is an event of some significance. History suggests that our human ability to learn from lessons of the past is marginal. Likewise we forget events quickly. As the memory of Chernobyl fades then the nuclear lobby may get its way. Indeed it seems certain that the US will accelerate their nuclear power development proposals. Unfortunately nuclear power doesn’t resolve the environmental problems resulting from vehicle emissions, nor does it offer a quick fire solution as the average development programme for new energy plants is ten years. It seems energy demand in Asia and other developing regions will continue to outpace supply and keep oil prices high and volatile. Even a switch to gas power would benefit the region under present price levels. The inescapable conclusion must remain that the GCC will benefit from a secure revenue stream for years to come. Stephen Corley is a business consultant with experience in fund and asset management. ||**||

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