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No sign of Peak Oil

Nor, for that matter, of peak coal or gas. Fossil fuels, said to be on the path for an effective demise in the rich world later this century, will actually continue to fulfil the major part of our energy needs for the foreseeable future. So says the latest BP Energy Outlook. Gone is ‘Beyond Petroleum’, back comes making the most of what they do best, albeit in straightened times given the stubbornly low oil price. To be fair to BP, this has been their consistent story even through the period of what is often described as greenwashing. Since they know the business better than anyone and are broadly in line with the IEA and other key players, there is every reason to suppose their view is credible and realistic.

According to supporters of the concept, Peak Oil would see production capacity simply unable to meet demand, with the inevitable economic consequences. Having got used to oil at $100 a barrel, that would begin to look cheap. As the price escalated, minds would become concentrated on both saving energy overall and developing more economic alternatives. As ever, simple supply and demand would drive innovation.

But forecasters have got it wrong once again. As oil prices dropped steeply in 2014, the once-dominant OPEC producers kept the taps open, looking to maintain market share in the face of surging US competition, rather than cutting production to force prices up. However, the forecasters were wrong in this case as well. Rather than decimating the North American shale oil producers, the weaker ones went to the wall but many carried on pumping.

The costs of fracking (and re-fracking) and drilling multiple horizontal wells from a single well-head had come down to a point at which losses were bearable, albeit further drilling was discouraged. Breakeven cost for US oil in general is about $36 per barrel, although the average for shale is around $58 (see breakeven cost for top oil exporters). The figure for Saudi Arabia, in contrast, is just $9.90.

Nevertheless, the consequences of continuing low oil prices are worse for Middle Eastern countries and other ‘cheap’ oil producers because their economies are also heavily dependent on oil exports. So, while a single industrial sector may take a hammering in the USA, Saudi Arabia needs about $105/barrel to balance its budget (Fiscal breakeven cost for the top oil-dependent economies). For such countries, the economic and social costs could be severe, while shale oil production can be scaled back but then quickly revived when the market picks up.

On a more parochial note, plans in EU member states for continued expansion of renewable energy were based on a projected reducing need for subsidies as conventional energy prices rose steadily. Now, however, it begins to look as though subsidies will escalate for the foreseeable future. In the UK, for example, the realities of photovoltaics having very limited potential at such a high latitude and the building of more onshore wind farms meeting continued resistance from local communities has made offshore wind an increasingly attractive proposition politically.

Politically attractive maybe, but hardly so economically. As last week’s newsletter pointed out, offshore wind farm operators are being offered energy prices of at least £115 per MWh, over £20 more than the much-criticised strike price for electricity from the proposed Hinkley C nuclear plant ((Guaranteed) power to the people). Even these inflated prices, paid for by consumers, don’t take account of the additional costs of transmission, grid strengthening and conventional backup.

The result is a rethink of at least some aspects of the subsidy regime and a somewhat lukewarm attitude to renewables in the UK (although Germany seemingly is set to push ahead with yet more wind and solar, seemingly oblivious to the negative consequences of the policy instruments chosen: replacement of clean and flexible gas by new lignite stations). The much-vaunted prospects of carbon capture and storage (CCS), always just over the horizon and apparently destined to remain so, has had yet another false start as funding for a demonstration project has been pulled.

Even the renewable energy industry itself if not united. Power firm Drax urges biomass subsidy rethink puts the case for biomass being a more cost-effective option than other renewables, taking into account additional costs not normally included in the headline figures. The £105 per MWh paid to Drax for energy generated mainly from imported American wood pellets is certainly higher than the maximum of £82.50 paid for the latest onshore wind farms. However, an analysis conducted for the energy generator by NERA Economic Consulting and Imperial College argues that the overall cost to consumers of decarbonisation could be £2bn lower if biomass power stations were allowed to bid for new renewable energy contracts.

The precise figures can be criticised, but the thrust of the argument is undeniable: the only valid way of comparing competing technologies is to analyse the overall system cost. The Department of Energy and Climate Change is said to be looking into the use of whole system costing, with work due to finish shortly. According to energy minister Angela Leadsom, "Once this project is completed DECC will be able to better quantify system costs to inform policy decisions. Any future policy development, such as future renewable support, will be informed by the improved evidence base developed through this project".

Let’s hope so. The wind and solar industries will doubtless put up strong resistance, because the higher-than-reported overall costs of their technologies is a secret they would rather was not made public. We can expect to hear much more of this kind of thing: "The additional costs of having variable generation on the system are low and for the most part renewable generators already pay these costs," said Renewable UK's director of policy, Dr Gordon Edge. "If we're going to talk about system costs, then we also need to talk about the undoubted economic benefits that wind generators also bring," he added.

What those ‘undoubted economic benefits may be to those other than the foreign-owned suppliers of wind turbines and photovoltaic panels, we wait to find out. 

Current Issues

Future costs of UK energy supply

The Scientific Alliance recently published part 1 of an examination of National Grid's Future Energy Scenarios, dealing with security of supply. We are now pleased to publish part 2 - cost of supply. The authors - Dr Capell Aris and Colin Gibson - conclude that building more gas and nuclear stations would be considerably less expensive than any of the NG scenarios, as well as offering better energy security.

What's New

14 October 2016: Read the new report by Dr Capell Aris, published jointly with the Adam Smith Institute - Solar power in Britain: the Impossible Dream