[A-List] The Energy Challenge 2004

[Bill Totten <shimogamo@xxxxxxxxxxxxx>]

by Murray Duffin

http://www.energypulse.net  (September 10 2004)


The new administration's priority attention to energy is a much needed step in
the right direction. The report of the National Energy Policy Development Group
(NEPDG) might be considered a reasonable first pass (a grade of B-?), given that
it was produced in a relatively short time, and driven from a petroleum industry
point of view. However from a perspective of the challenge we face and the
nation's real needs it must be given a failing grade.

The NEPDG report has seven key weaknesses that must be addressed and have so far,
during the last 3 years, been ignored. In priority order these are:

1. Time Horizon:  The energy challenge to 2020 can to some degree be addressed
as outlined in the report, but doing so will put the future beyond 2020 in more
jeopardy than it is in now. No policy and no projections that stop short of 2050
should be allowed. The present approach will address the problem for those of us
over fifty at the expense of our grandchildren.

2. Supply Limits:  Limits to the supply of oil and natural gas are ignored.
Worldwide oil availability will be in decline long before 2020, and natural gas
by 2030. (Natural gas production in North America is already in decline, since a
peak in 2002). Neither will be significant in the energy picture by 2050, but
replacements must be developed.

3. Hydrogen:  The inevitable - and probably at least thirty-year - effort of
shifting from a hydrocarbon to a hydrogen economy is largely ignored. The Bush
administration has put some priority on the development of a hydrogen economy
since the NEPDG report was issued, but this is seen by many as a way to postpone
the real needed actions.

4. Efficiency and Conservation:  The potential on the demand side is severely
underestimated, and the priority for the demand side is far too low.

5. Renewables:  Far too little attention is given to either the potential of
renewables, or the challenges of realizing their potential, and the shift to
renewables is not optional. Only the timing and rate of speed are optional.

6. Relative Costs:  Saving energy costs much less than developing additional
supply, and can have an impact much more quickly. The report fails to touch
on this subject.

7. Regulations, Incentives, and Perverse Incentives:  This subject is touched
on lightly, relative to distributed power, but is largely ignored. It is a key
topic to be dealt with in any effective energy policy.

Energy will be the most important issue facing the country in this decade, even
more than, but inseparable from, terrorism. We need a policy and strategy that
set aside partisan differences, ignore special interest pressures, and give the
Energy Challenge the priority it deserves.

The worst aspect of this problem is that present legislation (passed in the
House and pending in the Senate) is largely based on the NEPDG report, remains
unchanged since late 2001, and is largely contrary to the country's real needs.
There is major emphasis on development of new domestic supplies with large
subsidies for oil, gas, coal and nuclear, and little attention to the demand
side or to renewables. In spite of the fact that, since the legislation was
written, oil prices have doubled, coal prices have nearly doubled, natural gas
prices have more than tripled, and energy company profits have soared, the
proposed subsidies haven't changed. Also E&D activity hasn't exactly soared.
Clearly domestic prospects are not attractive enough for development on the
shareholders money, but legislators don't get it.


ASSERTIONS

The energy challenge we face is the most important issue of this decade in terms
of its impact on future generations. If we get the answers right, we have a good
chance to take the challenge in stride, with no more than minor economic impact.
If we get them wrong, this decade will prove (in retrospect) to have been the
most important decade in the country's history. The decisions we make can either
set us on a path of smooth transition to a new energy economy, or on a slide
toward a future of deprivation for our children and grandchildren and
generations to come. Unfortunately, most of our elected leaders are
living in a world of no information, misinformation, or disinformation.
Unless this situation changes, they are unlikely to make the best decisions.

No information results mainly from the fact that energy has not been an issue,
so the homework has not been done. Misinformation derives mainly from dealing
with assumptions and opinions rather than facts, well-meaning but one-sided
viewpoints, too short time horizons (twenty years or less), and expecting that
the future will be like the past. Disinformation comes mainly from two sources,
one of which has some claim to innocence:

<>  Economic models that are based on invalid and usually unstated fundamental
assumptions

<>  Selfish special interests that are, at best, economical with the truth.

Following is a set of declarations or assertions that introduce the key issues,
and that can be made with a high degree of confidence:

1. Supply side

<>  World conventional oil availability will be in decline by the end of this
decade, and no amount of additional drilling will change that.

<>  USGS (United States Geologic Survey) year 2000 projections of oil
"potential" availability from 1996 through 2025 are demonstrably invalid.

<>  American oil production has been in decline for years - the lower 48
since 1970 and Alaska since 1988  -  and the decline is irreversible.

<>  A key European oil supply source, the North Sea, is now in decline also.

<>  America consumes about 25% of world oil, and imports over 60% of her oil
supply. As major LCD's (like China) develop and OPEC populations explode,
America will not be able to maintain her present share of world oil at any price.

<>  Unconventional oil is not a solution to the coming shortage, because it
cannot be produced fast enough, regardless of how abundant it may prove to be.

<>  Developing presently restricted North American oil and gas sources will
likely be both necessary and economically desirable, but this is a short-term
palliative, not a solution, and will only hasten the ultimate depletion of a
resource with better uses than powering SUVs. A policy of "drain America first"
is strategically very shortsighted.

<>  Natural gas growth projections from now to 2020, made as recently as 2000
will not (and can not) be met, and before 2030 worldwide natural gas
availability will also be in decline. Oil has declined 2% to 4% per year for
many years in the lower 48, is declining at 6% per year or worse in the North
Sea, and has declined at more than 10% per year in Prudhoe Bay in spite of major
secondary recovery activities. There is a real risk that natural gas supply in
North America will "fall off a cliff" sometime in the next one to five years.

<>  Before 2050, neither oil nor natural gas will be significant as energy
sources in the US. Whether by exhaustion or replacement with alternatives is
our choice.


2. Alternatives to oil and gas

<>  Nuclear power will be an important part of the solution, but it is not
politically palatable right now, and will need to be based on Integral Fast
Reactors when restarted to avoid fuel shortages in only a few decades. Work
on IFRs is presently forbidden in the USA.

<>  Coal will be a major source for decades yet, and can probably become
economically clean, with considerable R & D. However, if we maintain the growth
trend of coal of the last thirty years, it too will peak (at 2-3 times the
present consumption) and will be in decline before the end of the century.

<>  Wind power is an economical alternative, and there is enough harnessable
wind to meet America's total energy needs, but there are problems of variability
to be overcome.

<>  Solar power will also be part of the solution, but it needs a lot of
R & D to become economical for all but a few special applications. It can be
economical for peaking power now, but the utility industry seems to be ignorant
of the potential.

<>  Bio-mass, mainly in the form of agricultural waste, will also be a
significant contributor, especially for replacement of a good fraction
of petroleum shortages.

<>  Other alternatives (geo-thermal, tidal, wave) must also receive attention.

<>  All alternatives require major investment to be realized and demand a
long-term commitment and plan.


3. Demand side

<>  Even with the present fuel mix, America could maintain its present economy
on less than half the energy presently consumed, without individual sacrifice.

<>  Changing to renewable sources of primary energy also reduces the primary
energy needed. A complete switch from fossil fuels to renewable energy would
reduce non-nuclear primary energy needed by at least 50%.

<>  Both the industrial and consumer segments of the economy have vast
opportunities to reduce energy waste, by both conservation and efficiency.

<>  Retrofitting the economy to reduce waste will create jobs and economic
benefits for at least a few decades.

<>  Reducing energy demand can be achieved for less than half the cost per
kilowattt-hour of increasing supply.

<>  New, high-tech, and sophisticated developments will contribute, but the
greatest early gains will come from simple, low-tech, well understood, and
easily applicable improvements.

<>  While market advocates deride the need for government intervention, we must
face the fact that we do not have, and probably cannot have, a free market.
Demand side initiatives are presently impeded by both lack of appropriate
incentives and presence of perverse incentives and subsidies.

<>  Prior to 1996 and so-called "deregulation", California was the nation's
leader in addressing demand side incentives and disincentives, and California
is the most energy efficient state in the union.

<>  California has only scratched the surface.

<>  Demand side initiatives are vigorously opposed by major selfish special
interests - foolishly, myopically, amorally, and unpatriotically. Government
has always had to bridle big business, and this issue is no different.


SEVERAL CONCLUSIONS CAN BE INFERRED FROM THE ABOVE ASSERTIONS:

<>  Our time horizon must go well beyond twenty years. What we decide now
and launch in this decade must look to 2030, 2060, maybe even 2090.

<>  We must develop alternatives to fossil fuels.

<>  We must develop the alternatives while we still have the fossil fuels,
or we will not have the energy with which to develop them.

<>  Demand side initiatives are both quicker and more economical than supply
side.

<>  In the very short term (ten years) we face rising energy costs (with
possible brief respites) that will act like a tax, slowing economic growth.
Energy-wise this is a good thing!  Frantic supply side initiatives to prevent
this result will not succeed, and will be counterproductive in the medium and
long run.

Clearly we need a balanced and measured approach; focused on the long-term
national interest, unswayed by short-term special interests, and dealing with
all of supply side, demand side, alternatives, regulations, and incentives.


BACKGROUND

In dealing with the question of energy, we need to start by trying to understand
and/or suppress some of the sources of confusion. We also need to start with a
basis of facts before getting to projections, assumptions and opinions. Finally,
we need to quantify issues as much as possible, always within a comparable
framework. The following will address a few key aspects of these topics.

1. Metrics <1>

We need to understand a few key metrics in order to quantify our discussion,
within a consistent framework. The key metrics are:

Quads <2> - A quad is a quadrillion Btu's of energy, or 293 billion
kilowatt-hours of energy. In 2000 the USA consumed about 98 quads,
of which 35 quads or 36% were consumed in supplying 11 quads of electricity,
and 26 quads or 27% powered transportation. Primary sources were:

    Coal        22 quads
    Oil         38 quads
    Gas         23 quads
    Nuclear      8 quads
    Renewables   7 quads


KWh/MWh - Kilowatt hours and megawatt hours. Power is measured in watts. Energy
is measured in watt hours. A watt hour is 1 watt of power applied for 1 hour. A
KWh is one thousand watt hours. A MWh is one million watt hours. Scientists use
joules to express energy, but KWh are more familiar and more useful here.
(1 KWh = 3.6 million joules or 3.6 MJ)

Gb - Gigabarrels or billion barrels. Oil production, consumption and reserves
are usually expressed in Gb. The world consumed nearly 28 Gb of oil in 2000,
or about 76 million barrels of oil per day. We are now at 83 Mb per day or near
31 Gb per year in 2004. The USA consumes about one-fourth of that or 7+ Gb per
year = 19+ million barrels per day.

- For calibration, ANWR reserves are estimated to be 10.4 Gb as the most likely
number with only about 6 Gb considered recoverable. The 30 Gb quoted by Senator
Murkowski in 2001 is a 5% probability figure.

- World oil production capacity in late 2004 is estimated as under 85 million
barrels per day, with the only slack capacity now available being for heavy/sour
crude.

Tcf - Tera cubic feet or trillion cubic feet. The Europeans use Tcm or trillion
cubic meters. One cubic meter is about 35 cubic feet. Annual natural gas
production, consumption and resources are expressed in Tcf. Daily or weekly
consumption is expressed in Bcf or billion cubic feet.

- One Tcf of natural gas provides about 299 billion KWh or 1.02 quads of primary
energy when burned efficiently (one cubic foot = .299 KWh)

- USA proven reserves are a little more than 160 Tcf, and consumption has
averaged very near 20 Tcf per year for the last decade. Discovery approximately
equaled consumption during the 1990s, but is now falling well short.

Bst - Billion short tons. Coal production is expressed in short tons. One short
ton of top grade USA anthracite has the embedded energy of 4.4 barrels of oil.
However, USA coal averages nearer 3.4 barrels. The 1998 USA production of 1.1
Bst of coal provided the primary energy equivalent of 3.75 Gb of oil.

Boe - Barrels of oil equivalent. In order to be able to grasp the relative
amounts of primary energy from different sources, coal and natural gas are
sometimes expressed in Boe. For the USA on average, 1 short ton of coal is
equivalent to 3.4 barrels of oil. 5,600 cubic feet of NG = 1 barrel oil, or
1 Tcf = 180 Mb of oil.


2. Economists

Economists tend to base all their beliefs and assumptions on two underlying and
usually unstated principles, both of which are demonstrably invalid. These are:

<>  Resources, or at least natural resource availability, will increase with
price. For this to be true, the potential supply would have to be unlimited, at
least over the time horizon considered. The corollary, that resource scarcity
will drive up price, is true in the absence of substitution.

<>  If it could be done, it would already be being done. This assumption ignores
the ignorance of what is possible, adoption time lags, priorities, conservative
engineering practices and technology developments.

This first principle leads economists to ignore or assume away physical limits
to supply and thus overestimate resource availability, in our case fossil fuels,
especially oil and natural gas. It also assumes away practical limits on
recovery rates, even if the plentiful resource exists.

The second principle leads to the conclusion that no energy economies or
efficiencies are possible, because everything possible is in practice, and
therefore the only way to reduce energy is to downsize the economy. When this
assumption underpins an economic model, the model inevitably produces false
conclusions.

Beware of any "expert" input from economists on the subject of energy,
and check who sponsors their work.


3. Economics

When Vice President Cheney or Secretary Abraham downplay the demand side
potential in the economy, they are acting out of ignorance of what is possible,
and reacting uncritically to the inputs of economists (as described above).

In fact, retrofitting the national infrastructure, industrial, commercial and
consumer, would create millions of jobs. Reducing dependence on imported oil
would both improve the balance of payments and reduce the national security
costs of ensuring the supply lines. Energy efficiencies can be realized at much
lower costs per KWh than adding to supply, and usually more quickly also. The
USA has been the victim of unlimited cheap energy and has therefore lacked
incentive to address the demand side. Switzerland, lacking our blessing, has an
energy intensity per unit of GDP less than 1/2 of ours and can not be considered
economically deprived.

As it is we now face, during the next thirty years, irreversibly declining
supplies and increasing costs of oil and gas. The resulting increase in energy
costs will act like a tax, slowing economic growth. We can mitigate this problem
by vigorously addressing development of alternatives (renewables), and - more
effectively in the very short run - by emphasizing, not downplaying, demand side
improvements.


4. Philosophy

Regrettably, we can not address the energy challenge without accepting the fact
that some tradeoffs have to be made. For example, producing truly efficient
cars (see www.hypercar.org) will negatively impact the steel and machine tool
industries, while benefiting the chemical, plastics and electrical equipment
industries.

Another issue that we do not have to address urgently now, but that is implicit
in the whole discussion, is the limits to growth. For a very short period in
human history (about 200 years) we have been able to develop a philosophy of
unending economic growth, powered by limitless cheap energy. Even with a
successful conversion to renewables, we will reach insurmountable limits to
energy in less than 200 years, at present world growth rates. Other limitations
will kick in before energy, for example, food.

We probably have less than 100 years to shift to a philosophy of sustainability
and progress without growth. Energy is a good starting point.

While addressing a present US challenge, we must not ignore the far future or
the world.


References:

<1> For easy conversions, go to www.processassociates.com/process/convert/cf_eue.htm

<2> Figures extrapolated from 1999 EIA Annual Energy Review.

Copyright 2004 CyberTech, Inc.

http://www.energypulse.net/centers/article/article_display.cfm?a_id=819

The author, Murray Duffin, is a seventy year old "concerned and informed citizen",
retired from the position of Corporate Vice President for Total Quality and
Environmental Management of a leading European based multi-national corporation
with more than $5 billion in annual revenues and 35,000 employees in the field
of microelectronics. Born in Canada and naturalized in 1964, he has lived and
worked abroad, in Europe and Asia, for 27 of his 44 working years. He has a
BScEE 1956 from the University of Manitoba, Canada, and has done post-graduate
study, first in electronics at UCLA and then in Business Administration at
Arizona State University. He has authored numerous published papers and
lectured extensively on Total Quality Management, primarily in Europe.

Under his leadership, his employer became the only corporation in the world to
win all of the European Quality Award, the Singapore Quality Award, and the
Malcolm Baldridge National Quality Award, each at the level of the local total
corporate entity. They also won the Malaysian, Maltese and Moroccan Quality
Awards at the local plant level. They were the first non-American-owned
corporation to win the Malcolm Baldridge Award.

In addition they were the first corporation in the world to have all plants
worldwide (seventeen) EMAS validated and ISO 14001 certified. In 1999 they were
identified in the "Dow Jones Sustainability Group Index" as the world's leading
electronic sector company for sustainability, and were the only semiconductor
company awarded the highest (AAA) rating by
Innovest Environmental Research.

The combination of TQM and environmental responsibility in industry led directly
to considerations of energy efficiency. During his last five years in corporate
management he led a worldwide effort involving seventeen factories that effected
a thirty percent reduction in energy in per unit of good production out, with
the needed capital investments having an average economic payback under two
years. This work provided evidence that a properly designed greenfield plant
could operate on less energy than traditionally needed by a microelectronics
factory.

Since retirement he has also designed and built one house and retrofitted
another to provide comfortable living on one third of the energy of similarly
sized conventional neighborhood homes.

For the last five years his number one preoccupation has been the energy
future of the world, but more particularly, out of concern for children
and grandchildren, of the USA.

http://www.energypulse.net/centers/article/article_display.cfm?a_id=819

Bill Totten     http://www.ashisuto.co.jp/english/