Fossil fuels becoming more 'sustainable'

Nov. 2, 1998
World Energy Demand by Fuel Type [80,460 bytes] Fossil fuels are expected to dominate the global energy industry well into the next century, as a result of continuing technological improvements. Better methods of finding and producing oil and natural gas, increased efficiency in energy production, and improved environmental performance all play a role in petroleum's healthy outlook. And, while renewable energy sources will account for an increasing share of energy supply, technological and
Fossil fuels are expected to dominate the global energy industry well into the next century, as a result of continuing technological improvements.

Better methods of finding and producing oil and natural gas, increased efficiency in energy production, and improved environmental performance all play a role in petroleum's healthy outlook.

And, while renewable energy sources will account for an increasing share of energy supply, technological and economic shortcomings will prevent them from supplanting fossil fuels for several decades.

At the World Energy Council's 17th Congress in Houston last month, a number of organizations and companies presented their views on the energy industry outlook. Several of the papers focused on greenhouse gas emissions and purported catastrophic climate change, and the effects of greenhouse gas mitigation efforts on energy economics.

Current industry climate

Setting the stage for some of the presentations to come was a paper, presented on behalf of the OPEC secretariat, outlining the trends that have led to the energy industry's current operating environment.

Characterizing the industry in the 1990s, the secretariat says, have been: the liberalization of many former centrally planned economies; trade alliances such as the World Trade Organization and the North American Free Trade Agreement; and, since late 1997, the Asian economic crisis.

At the same time, international trade and financial flows have confirmed the reality of a global economy. As a reflection of this trend, world exports grew an average 6%/year during 1990-96 vs. 2.5%/year during 1970-76.

Financial flows have increased even more dramatically, the secretariat notes. Net private capital flow into Asia and Latin America was $150 billion in 1996 vs. about $13 billion/year in the 1980s.

"Such changes in the world economy are having a dramatic impact on the energy and petroleum industry," said the organization.

The collapse of Europe's centrally planned economies caused a sharp decline in energy demand-particularly in oil demand-in the region. This was followed by moderate growth, said OPEC, but with pronounced changes in product slate and demand patterns. As a result, the average barrel consumed has become lighter.

On the supply side, the opening up of exploration and production activities in the former Soviet Union and other previously locked-up regions will eventually translate into sufficient petroleum supplies to meet growing world demand.

Other factors affecting global energy supply and demand are: the "commoditization" of energy products; the diversification of energy companies; the restructuring and streamlining of energy firms; advances in energy technology; and, in the short term at least, poor returns on investment resulting from low oil prices.

"These fundamental moves in the energy and oil industry, against the background of the globalization of the world economy, are expected in the medium to long term to reinforce competition within, and rationalization of, the industry, resulting in a lower cost of products to end users."

The secretariat expects world energy demand to continue to grow at an average rate of 2%/year, with oil losing share and gas gaining it over the next decade (see table, this page). It warns, however, that its forecast is "tempered by the uncertainties arising from the Asian economic crisis in the short term, and by the global warming debate in the medium to long term."

"It is not yet clear exactly what impact either factor will have. The greenhouse gas emission targets established in the Kyoto Protocol are likely to have an impact on energy consumption levels, but the exact extent is as yet unknown. However, it is clear that the 'security of demand' is the overriding concern in the near term, rather than the 'security of supply.'"

Greenhouse gases

Purported catastrophic climate change, and its relation to emissions of greenhouse gases-particularly CO2-is a key factor in the energy industry's future.

The relationship between climate-change policy, such as the Kyoto agreement, and the economics of energy-intensive industries was outlined by Paul N. Cicio of Switzerland's International Federation of Industrial Energy Consumers (Ifiec). Ifiec is a global nongovernmental organization representing energy-intensive industries such as basic chemicals, refining, rubber, pulp and paper, iron and steel, glass, aluminum, food processing, and cement.

"Efforts to limit emissions of greenhouse gases could have significant consequences for the world's economy, especially among energy-intensive industries that rely heavily on available, affordable energy to remain competitive," said Cicio.

"First, they rely heavily on energy input to manufacture their products. Using current technologies, growth in these industries will require increased energy use.

"Second, sharp increases in energy costs, or the cost of emissions reductions that affect only developed nations, will reduce the ability of energy-intensive industries in those nations to compete in world markets."

Ifiec doesn't see emissions reductions and economic growth as contradictory goals.

"Climate-change policy raises long-term, environmental, economic, trade, and lifestyle issues," said Cicio. "Ifiec believes that environmental protection and economic growth can be achieved without loss of competitiveness, so long as policies focus on long-term goals and provide the time (necessary) to develop and incorporate more-efficient technologies as capital stock turns over.

"The time period of 2008-12, as spelled in the Kyoto agreement, does not meet these criteria." In fact, Ifiec believes 30-40 years are necessary to develop and implement adequate CO2-reduction technologies.

Cicio doesn't believe, however, that drastic emissions-reductions measures have been proven necessary: "As a result of continuing investment in energy efficiency, electricity cogeneration, and fuel switching, industrial energy consumers have a long-term, consistent record of reducing carbon emissions per unit of output. This progress can continue and should be the goal of any policies addressing climate change that affect energy-intensive industries.

"Industrial energy consumers can and will continue to improve energy efficiency. However, what most of us cannot do is reduce energy use to some pre-1990 level and keep it there, or reduce it from there and economically grow."

It doesn't make economic sense to make emissions reduction the sole goal, says Cicio: "It is important for policymakers to address the need for continued economic growth, capital formation, and job creation as they develop climate-change policies."

Even though Ifiec sees climate change science as unconfirmed, it sees technology as the only means by which industrial energy consumers can cope with the regulatory requirements associated with reducing greenhouse gas emissions. And governments can help promote development of the necessary technological advances.

"Governments should deregulate/ liberalize energy markets to encourage technological change," said Cicio. "Competition between and within energy producing segments will result in more-efficient and low-cost production of energy."

Governments could also make climate-change policy more effective by agreeing to implement fair and consistent measures evenly across all nations, with no "transfer" of emissions gains from one country to another.

The annual rate of greenhouse gas emissions growth in developing countries is 3.5%/year, says Ifiec. That is almost three times that of the developed world. If this rate persists, these countries will be responsible for more than half of the world's greenhouse gas emissions by 2015.

"Developing nations must participate in any climate change protocol," said Cicio. "To do otherwise will result in the movement of jobs from industrialized to developing nations and further accelerate the growth of worldwide emissions. This is particularly the case for energy-intensive industries.

"If near-term, steep emissions reductions are required of only developed nations, energy-intensive industries will face sharply higher energy or emission reduction costs. The consequences will be a reduction in national economic development and competitiveness in world markets.

"Legally binding agreements to cut greenhouse gas emissions by tradable emission permits, taxes, or other instruments are premature and counterproductive," he said. "In short, near-term reduction mandates, proposed energy taxes (EU), emissions caps (U.S.), or other mechanisms will delay longer-term stabilization, if rising energy costs deplete the capital necessary to develop and deploy technologies that reduce emissions."

Instead, Ifiec said it supports "negotiated voluntary agreements between industries and governments that develop realistic goals that are achievable and consistent with sound practices."

Sustainability

A sustainable, economic energy supply is often considered the "holy grail" of the energy industry. The term is commonly associated with solar and wind power and other "renewable" sources, but at the WEC Congress it was being used to describe fossil fuels.

Donald M. Condon Jr., of Conoco Global Power Inc., said, "Private industry is looking for business practices that are healthy for both the bottom line and the world around us. Companies are exploring how sustainable development can be used to improve competitiveness and create jobs while protecting and enhancing the environment.

"We think, for instance, that the convergence of gas and power presents us with an important opportunity to make this happen.

"The $215 billion electric and the $95 billion gas industry are moving from being largely separate, regulated entities to become one large, integrated, and private energy business. As a result of this convergence, the gas industry will become the electric industry's most important source of fuel, and the electric industry will be the gas industry's most important new market.

"Economic growth and increasing environmental concerns are helping to shape this changeellipseA move to gas as the fuel of future choice can have significant, positive impacts on sustainability."

Robert L. Bradley Jr. of the Institute for Energy Research, Houston, also sees petroleum as increasingly sustainable.

"Although overshadowed by the post-Kyoto interest in carbon-free energy sources, fossil fuels are on the ascent," said Bradley. "Market share remains dominant at approximately 85%, and all economic and environmental indicators are positive.

"Numerous technological advancements have made coal, natural gas, and petroleum more abundant, more versatile, more reliable, and less polluting than ever before, and these technologies are being transferred from developing to emerging markets. These positive trends can be expected to continue in the 21st century."

Bradley examined the sustainability of energy sources and concluded, among other things:

  • Positive economic and environmental trends make an intriguing case that fossil fuel energies will be increasingly sustainable in the 21st century.
  • The major "discontinuity" that could displace fossil fuels in the next century is more political than scientific or economic. (Bradley calls it "climate-change alarmism" and said, "Anomalies in the scientific case for catastrophic climate change, however, could make the issue a transient political problem rather than a death warrant for carbon-intensive energies.")
  • The Kyoto-inspired strategy of mass energy conservation and substitutions to renewable sources will fail, if their enabling technologies do not improve enough to ensure affordability and convenience of use.
  • Fossil fuels' market share will increase next century if environmentalists succeed in discouraging use of hydroelectric and nuclear power, the two largest noncarbon energy sources.

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