Energy, the World Economy, and Peak Oil

Johns Hopkins Bloomberg School of Public Health Peak Oil and Health Conference Energy, the World Economy, and Peak Oil March 12, 2009 Stuart Chaitkin Senior Associate, JHSPH 1 Overview Energy, Economy, Development, and Health Oil our master resource Peak oil is imminent Peak Oil s challenges Options for response Two Big Problems Suggested Next Steps: New Energy Regime 2 Energy and Economy Energy use drives world economic activity. Energy is the world s largest business. Economies can use energy wisely or poorly. U.S.: Energy used per $ of economic activity has dropped ~ 40% since 1970. Two main reasons: Shifted from manufacturing to service economy Exported manufacturing to places like China, India, Japan Exported a lot of energy use Increased end-use energy efficiency of buildings, appliances, even cars But U.S. energy use (especially of oil) remains quite inefficient. 3 Energy, Economy, Development, & Health In modern industrial societies Economic development generally requires abundant, inexpensive energy. But, beyond a certain level, additional energy use per capita tends not to raise the HDI. Industrial societies would be wise to: conserve energy resources improve energy efficiency use renewable resources For less-developed societies > 1 billion people suffer from energy poverty and the poor health often associated with that condition. Anticipated economic development is critically threatened without: available and affordable energy resources (particularly oil) HDI vs. Energy use per capita, 1999/2000 HDI: composite indicator developed by UNDP to show countries relative well-being in social as well as economic terms. A long and healthy life Access to knowledge A decent standard of living HDI = Human Development Index 4 Source: World Energy Assessment, 2004 Update, Part II Energy and Environment Energy exploration, acquisition, and use is responsible for the largest portion of environmental insults on the world s ecosystems. Impacts on all our key resource systems: Land Water Air Global climate And our people 5 Oil = World s Largest Energy Source Energy Source Oil Fossil Coal 86.3% Natural gas Hydro Nuclear Renewables TOTAL World s Total Use of Primary Energy 2006 % 36.4 % 27.0 % 22.9 % 6.3 % 5.9 % 1.6 % 100 % Quads 171.7 127.5 108.0 472.3 Q USA 40.0 % 22.5 % 22.2 % 99.9 Q Quad : 1 quadrillion Btus Source: EIA, International Energy Statistics China 18.7 % 70.5 % 2.8 % 73.8 Q 6 1

How does the world use its oil? World Oil Use, by sector, 2006 Sector Transport Industry n-energy use Other sectors Share of World Oil Use 60.5% 9.5% 16.5% 13.5% Other sectors includes agriculture, commercial, and residential From 1973 to 2006, world oil use grew by 55%. Transport sector use of oil grew by 106%. Oil is a Unique Energy Source Energy dense Storable Transportable Versatile Source: IEA, 2008 Key World Energy Statistics 7 8 Oil is Our Master Resource DIRECT USE dominant fuel of the transport sector gasoline diesel jet fuel space heating power factories, industrial processes INDIRECT USE to generate electricity USE as a FEEDSTOCK to create hundreds of products: Petrochemicals - plastics - synthetic fibers - synthetic rubbers - detergents - chemical fertilizers Also: - lubricants, pesticides, waxes - food additives, pharmaceuticals - boat resins, ink dyes, perfumes - ethylene (film, garbage bags) Oil is truly fundamental to the world s economy. [Cheney, 1999] 9 Oil and the World Economy Nearly all economic activity depends directly or indirectly on the availability of oil. Imagine reverting back to pre-oil energy sources for: Manufacturing Agriculture Transportation Imagine a world without oil-derived plastics, rubber, etc. July 2008: world oil production set record high: > 86 million barrels a day Oil prices also hit a record high that month: ~ $147/barrel The world probably spent > $330 billion on oil just in that month. World Oil Use 85 mbd mbd = million barrels per day @ $35 $ 1.09 trillion Annual World Payments for Oil Price of Oil (per barrel) @ $50 $ 1.55 T @ $100 $ 3.10 T World GDP ~ $ 55 trillion @ $150 $ 4.65 T 10 U.S. Energy Consumption, in quads by source & sector, 2007 U.S. Petroleum Consumption historically, by sector, mbd Source: tice the huge growth in oil use in the transport sector. EIA, AER But, what happened in 2008 when oil & gasoline prices spiked and 2007 the financial crisis sent the U.S. economy into a deep recession? Source: EIA, AER 2007 1 quad is a quadrillion (10 15 ) Btus 11 Petroleum demand in the U.S. dropped 6% in 2008, per API. 12 2

Transport Sector Dominates U.S. Oil Use But the 30% of oil used elsewhere is still a large portion of the nation s energy Transport sector Autos Light trucks Heavy trucks Airplanes Other Transport Everything else % of U.S. Oil Use 25% 18% 16% 6% 5% 30% 70% 13 How Dependent on Oil are the Other Sectors of the U.S. economy? Oil is also the largest source of energy for the U.S. s industrial sector. Largest oil-consuming industries include: chemical lumber and wood, paper products petroleum industry itself Functions for oil in industry include heat, process heat, power, feedstock, and lubrication. Shortages of oil would put pressure on the other fuels that power our industrial sector. Another sector deeply affected: Agriculture 14 Peak Oil is Imminent World faces continually declining availability of conventional oil not far in the future. International Energy Agency (IEA) warned last vember that: The world s energy system is at a crossroads. Current global trends in energy supply and consumption are patently unsustainable environmentally, economically, socially. What is need is nothing short of an energy revolution....the sources of oil to meet rising demand, the cost of producing it and the prices that consumers will need to pay for it are extremely uncertain, perhaps more than ever. IEA s View of Declining Oil Availability Average annual observed decline rate worldwide is currently 6.7% for fields that have passed their production peak. IEA expects that decline rate to increase to 8.4% per year in 2030. AEO 2008 Executive Summary ends by saying: it is becoming increasingly apparent that the era of cheap oil is over It is within the power of all governments to steer the world towards a cleaner, cleverer and more competitive energy system. the time to act is now." Source: IEA Annual Energy Outlook 2008, Executive Summary, p.3, emphasis added 15 Source: IEA AEO 2008 16 The Challenges of Peak Oil Declining Availability Oil shortages So, what are we to do to? Option A. Reduce demand for oil s services to the economy. Liquid fuels shortages Demand Destruction Economic, Social Hardship Price increases for oil and its potential substitutes 17 Option B. Substitute other energy sources for conventional oil. But, are substitutes actually available In a timely manner? At large enough scale? At acceptable economic cost and environmental harm? to avoid severe economic and societal disruption? 18 3

Option A. Reduce Demand for Oil s Services to the Economy 1) Reduce use of the services that oil provides to the economy DIRECT USE, INDIRECT USE, FEEDSTOCK USE Examples: Drive fewer miles; take fewer flights Use fewer feedstock products (e.g., plastics, fertilizers, pharmaceuticals) 2) Become more oil-efficient Use vehicles (cars, planes) that are more fuel-efficient Modify industrial processes to be more oil-efficient But, can we change quickly enough? NOT LIKELY Inertial forces are strong Long lead times are needed to replace equipment Major expenditures and investments are needed Option B. Use Substitutes for Conventional Oil We would need substitutes for each of oil s versatile uses: Direct use transport fuel huge problem in the U.S. no quick fix gasoline (autos) diesel (trucks) jet fuel (airplanes) space heating relatively small problem in the U.S. switch to natural gas or electric heating (fueled by?) powering factories switch to natural gas or coal? t good. Indirect use to generate electricity not really an issue in the U.S. As a feedstock for hundreds of products what are those substitutes? The current destruction of demand for oil around the world te due largely to the intense financial and credit crisis is not Easy, cost-effective substitutions have already been made. a healthy model for how we ought to adjust to the expected Electricity can t replace oil for all of its uses. reductions in oil availability that peak oil will bring upon us. 19 20 The End of Cheap Oil it is pretty clear that there is not much chance of finding any significant quantity of new cheap oil. Unconventional Oil is t Cheap Any new or unconventional oil is going to be expensive. Lord Ron Oxburgh, Former Chairman, Shell Source: Forward to The Oil Crunch, Securing the UK s Energy Future First report of the UK Industry Taskforce on Peak Oil & Energy Security, 2008. 21 Which Resources Won t (Easily, Quickly, Cleanly, or Cheaply) Replace Conventional Oil? As a LIQUID fuel Unconventional oil tar sands (oil sands) oil shale Coal-to-oil Natural gas-to-oil Biofuels As non-liquid ENERGY Coal Natural gas Nuclear Renewables 22 Criteria for Sustainable Substitute Energy Fuels renewable transportable, storable, energy-dense high energy returned on energy invested (EROEI) scalable ecologically sane SO 2, NO x, CO 2, water, land Other Possible Criteria Reasonably affordable Minimal security risks Investor-friendly I m re-defining and expanding the characteristics of energy that Aric McBay, in Peak Oil Survival, had described as being necessary to maintain industrial society. 23 Possible Oil Substitutes Tar/oil sands, oil shale Coal Coal-toliquids Natural gas Gas-to-liquids Biofuels Nuclear Renewables Difficulties with Oil Substitutes FIVE CRITERIA FOR SUSTAINABLE ENERGY SOURCES renewable Some Maybe scalable At great Maybe, at great t yet At great t yet high EROEI transportable, storable, energy-dense Makes electricity; not easily storable Make electricity, not easily storable There are no silver bullets that can substitute for oil. ecologically sane t quite Maybe t really 24 4

We Have Two Big Problems As oil shortages develop, we would want to: Use substitutes for oil to replace the energy services that the world economy has been getting from the oil it depends on so much. Replace the energy services that those substitutes for oil were providing before they were used to replace the energy services that the world has been getting from the oil it depends on so much. New oil and/or energy replacements Some Existing Potential Oil Replacements Oil we depend on World Energy Use Unconventional Oil, Other Fossil Fuels, Nuclear, Renewables 25 Worldwide Economic Effects of Peak Oil The Hirsch report prepared for the U.S. Department of Energy in 2005 concluded: The long-run impact of sustained, significantly increased oil prices associated with oil peaking will be severe. Virtually certain are increases in inflation and unemployment, declines in the output of goods and services, and a degradation of living standards. Without timely mitigation, the long-run impact on the developed economies will almost certainly be extremely damaging, while many developing nations will likely be even worse off. Peaking of World Oil Production: Impacts, Mitigation, & Risk Management, Robert L. Hirsch, SAIC, p.30. [Emphasis added.] 26 Big as our current economic problems are, peak oil means a very high probability of worse problems to come. The Oil Crunch, Securing the UK s Energy Future First report of the UK Industry Taskforce on Peak Oil & Energy Security, p.5. 2008 (Emphasis added) 27 Suggested Next Steps: Energy Revolution End denial acknowledge that peak oil is coming and is likely to impose severe impacts on the world s economic activity. Borrowing from Heinberg, we should: Begin a massive (not a modest) shift to a new renewable energy-based regime Retrofit fundamental elements of our economic system to match that new energy regime: Transport system Agriculture/food system Electricity system Buildings In the meantime: Start planning seriously for oil shortages Establish protocols (other than price) for rationing oil to critical sectors. Is our future: ENERGY REVOLUTION or CHAOS? 28 5