Suppose you worked at the Energy Information Administration (EIA), the agency within the U.S. Department of Energy charged with keeping data and making projections on energy, and you had to produce an annual report with a scenario for the next 25 years.
Being an intelligent and informed investor, you might grapple with the $147 to $33 range in oil prices over the last year and try to imagine how such volatility might happen in the future.
You might be tempted to model a few economic factors such as GDP growth rates and credit availability, and how they affect investment in energy supply.
You might consider the price at which producing a barrel of oil or a thousand cubic feet of natural gas becomes profitable, and the price at which it becomes too expensive and destroys demand.
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You might take peak oil, peak gas, and peak coal into account, since the best available models on those subjects all suggest peaks within the time frame of your scenario.
You might extend the line tracing the 40-year trend of declining U.S. oil production.
You might look at the steadily falling prices of power generated from wind and solar and the steadily increasing prices from fossil fuels, and include those in your model.
You might take a cautiously optimistic view of the future of unconventional fuels like shale gas and biofuels, since their commercial history is short and good data is hard to come by...plus there are all those niggling questions about things like long-term production rates, net energy return and fuel-vs.-food tradeoffs.
You might include a tip of the hat, at least, to some sort of future pricing for carbon emissions, since it's all the rage right now and it seems likely that something will happen along those lines before 2035, even if this year's Copenhagen summit is a failure.
You'd wind up with thousands of linked, detailed spreadsheets, employing all sorts of advanced mathematical functions to tease coherence out of chaos.
And you'd most definitely ring the alarm bell that we've got a serious energy supply problem on our hands and we'd better do something about it, fast.
You'd probably point out that moving aggressively to renewables could solve the climate change problem, and do it without a global agreement on emissions.
But then, you're not working for the EIA.
Anatomy of an Illusion
If you were, you'd do something like this...
You'd get out your crayons and your graph paper, and starting with your most recent data, you'd plot a nice, steady 1.5% global growth rate for energy demand over the next 25 years.
You'd do something similar for supply so that it matches demand at prices that also climb at a nice steady rate. For oil prices, call it, oh, how about 0.4% per year? That sounds pretty good.
You'd draw basically flat lines into the future for all the fuels dominant today, since you know they have serious challenges ahead, and then draw sharply rising lines for the latest and greatest technology, projecting enormous growth rates for things like shale gas and enhanced oil recovery.
You'd be sure to count all possible supply from new sources — like a new gas pipeline from Alaska — even if those projects don't yet exist. Hey, it could happen!
You would not, however, factor in any CO2 reduction, because policies to control it don't exist.
Naturally, you'd assume that the next 25 years would show gradual economic growth, so there wouldn't be any troublesome issues like credit availability or depressed consumer demand to worry about.
You'd wind up with a chart like this:
AEO 2010, Figure 1: U.S. Primary Energy Consumption. Source
In sum, you'd present a picture of the future that looks like a continuation of the best parts of the past, with none of the bad parts.
You'd assert that the declining trend of U.S. oil production would be reversed by the miracle of technology, and grow from 5 million barrels per day (mbpd) in 2008 to over 6 mbpd in 2027, then flatten out for decades to come. You certainly wouldn't try to explain how that would happen while mature fields continue to decline — in fact, you wouldn't mention decline rates at all.
You'd explain that, even though domestic biofuels will fail to meet their 2022 renewable fuels target, they'll exceed it by 2035 as new sources that don't exist commercially today, like biomass-to-liquids and cellulosic ethanol, suddenly bloom.
To that you'd add some major gains from efficiency and "structural changes" like switching to hybrid cars — hey, what if the fleet of alternative vehicles tripled in the next five years? — eliminating about 90% of the new energy demand that would otherwise result from a constantly growing economy.
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You'd do away with the problem that much of the U.S. nuclear fleet has to be rebuilt in the next 25 years because the reactors are past their expiration dates and living on extended operating licenses already, by assuming that they'll get another extension to operate beyond 60 years. So you won't have to worry about any loss in nuclear capacity.
Finally, you'd toss in a scenario for electricity production where renewables grow modestly then flatten out, while the use of cheap biomass suddenly explodes for unknown reasons.
You won't explain where that biomass comes from, or the net energy of using it, or any difficult details like that.
You'd continue the recent sharp growth curve for wind for a few years then flatten it out, perhaps because you don't think a storage solution will be found to address the intermittency issue. After all, it's not your job to know about emerging technologies like flywheel storage systems or V2G — it's your job to make the future look kinda like the past, only better.
That would give you a chart like this:
AEO 2010, Figure 5: Projection of U.S. non-hydropower electricity sources. Source
And voilá! You'd be able to claim that U.S. oil demand peaked in 2005, and would remain flat around 19 mbpd for the next 25 years — even while the economy continued to grow. It's like magic!
Just Doing Your Job
It wouldn't bother you in the least that none of your projections use the best available information on these complex matters.
You'd be completely untroubled by the fact that oil prices averaged $74 in 2007, $100 in 2008, and $59 in 2009, but you drew straight lines into the future. Presumably, all that volatility owed to noise outside your sphere of consideration, and won't happen again.
You'd sleep just fine at night despite the obvious vapidity, in retrospect, of the oil price predictions in your 2004 annual outlook... nor would you be perturbed if I overlaid your 2010 prediction on it in chart form:
Three AEO 2004 oil price projections, plus AEO 2010 Reference Case. Chart by Chris Nelder.
You'd be careful to follow the lead the IEA set in its recent annual report and arrive at basically the same prediction they did for future oil supply, while trying not to piss off your bosses.
You'd be sustaining the illusions that everybody around you believes in and supporting their religious beliefs about endless growth rates, American ingenuity, and so on. Nobody would fault you for that!
You could do all this secure in the knowledge that, apart from a few snarky financial bloggers out there who nobody reads anyway, you'll never be challenged on any of it. The press will dutifully report your projections verbatim, and won't ask you any difficult questions.
And when the business and policy leaders of America drive the whole enterprise off the net energy cliff because they relied on your expert opinion and neglected to invest in the renewable energy solutions of the future in time, you wouldn't worry your pretty little head about it.
After all, that's not your job.
[Author's note: This is based on the "early release" of the EIA's 2010 Annual Energy Outlook which offered only a summary press release, a slide deck of charts and some data, without the main text. Perhaps when the final report is released in March 2010 they will explain themselves better, but I doubt it. The EIA does an excellent job of collating and reporting historical energy data, but they should be statutorily barred from making projections.]
Until next time,
Chris
P.S. While the EIA may rule the data roost in the U.S., my colleagues Nick Hodge and Sam Hopkins scour a world's worth of energy info to bring Green Chip International readers top global clean energy stocks. To learn why more and more of the clean energy investment action is taking place beyond American shores, read Nick and Sam's new report: Racing to Build the Perfect City.
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I do think you underestimate the connection between our food supply and our energy. Some 95% of global human food comes from petro chemical based fertilizers. When we discuss the concept of Peak Oil, we are more importantly talking about Peak Food. Once we have no cheap petro chemicals left and are unable to convert petro chemicals into cheap fertilizers we are immediately moving back to sustainable global population densities similar to those of the early 1800s - Pre Petroleum.
Sadly our stomachs will be empty not long after our fuel tanks go dry. Nuclear, wind and solar could all provide for our pure energy needs, but they will not provide the cheap chemicals to produce the nitrogen and other chemicals we need to feed our increasingly unsustainable over population of humans.
Governments just don't want to begin to think about the chaos, war and disease that comes with global food shortages and starvation - which we come closer to every day. Want to or not, one way or another our species will deal with these problems. Planning for them and trying to adapt would seem to be the intelligent approach, but I suppose we will just continue to delegate that responsibility, write reports like you have dissected, and most of the population will just pray. You don't have to be particularly religious to understand that old proverb that god (and or luck) always favors the best planner.
Over a year ago, while I was still employed full-time by an engineering firm, I did an energy market analysis using 2007 EIA Outlook. I came away with the belief that it is very difficult to predict future energy prices since it is closely tied to geo-political circumstances beyond our control. It is prepostoreous to think that a group of bureaucrats can peek into 25 years down the road with any degree of accuracy when we can not even predict what will happen next week!
Only and the only way we can predict the cost of energy well into the future- 5-10-20 years is when US controls the supplies we consume. Renewables are the only way we can reasonably predict our future costs.
You are not taking into consideration ticked off people like me who decided to think their way through the wet paper bag! It took me 2 years of redoing the plan, researching on the net, so I could get the maximum kW for the buck. I see a period of 20 to 50 years while people switch to this system that uses NO oil products, releases NO carbon or any pollution. Of the 350 Billion gallons/mo of water we use in the USA, ONE percent will be recycled & produce ALL the energy for our homes & cars, when every building has this power system installed. This gives us free electricity, heat & rocket fuel for our vehicles. Call or write for more.
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You article is extremely interesting.
here is a letter I recently wrote to my local newspaper, needless to say they did not publish any of it....
So the Copenhagen Summit is upon us! Let's sign another agreement pledging to reduce greenhouse gas emissions and save the planet. The Kyoto Agreement was generally a disaster, countries signed the treaty then ignored many of the clauses that they decided were not in their economic interest!
If mankind has spent the last 100 years altering the climate because of our carbon emissions, then I'm afraid that there is nothing we can do now! Why? Consider a few simple facts:
1. In our lifetime world population is expected to grow by between one and three billion people! Where will they live? What will they eat? Will they drive a vehicle, catch a bus or plane? How do they heat their homes?
2. Globally we currently burn roughly 85 million barrels of oil each and every day! We also burn the equivalent of 50-60 million barrels of natural gas and 50-60 million barrels of coal per day, and these figures are set to rise considerably over the coming decades as China has pledged to extract 25% more coal to feed the hundreds of old style power stations it is currently building; and constructs thousands of miles of superhighway for the millions of cars it intends to produce for the masses. And what China does India and other emerging nations follow!
3. Many of the ways we are told to reduce carbon emissions by our governments just do not work! Switching off appliances, home insulation, driver-share schemes and the like may save a little energy, but it's like throwing pebbles at an oncoming Tsunami and expecting it to recede! Recycling our household waste which is then sent off to China or India or elsewhere cannot save CO2, and in fact probably increases emissions! Driving electric cars will make little difference unless the batteries are recharged from totally renewable sources!
I believe that we are being spun elaborate lies by the people who rule us. They are well aware that if it were possible to alter climate change then we would have to dismantle our whole way of life, start again from year zero, close factories, schools and whole towns, force the population onto communal farms to live a simplistic rural existence. This is what Pol Pot and Kymir Rouge attempted in the 1970's for different reasons. The result was the destruction of their society, famine, war, and the genocidal death of millions!
Unfortunately this could be the ultimate outcome in coming years anyway if the planet warms, peak oil is reached and crops fail....hold on tight and pray you and your children grow old and get safely into your graves before this happens....the future may not be bright.
Colin Friedlos
Coundon
Coventry
England
I think you misunderstand what the EIA AEO represents, it is not a "forecast". The Annual Energy Outlook produces a "Reference Case", not a forecast, the distinction is important. Their Reference Case assumes current laws and regulations and includes technologies that are projected to be "Commercially" available within the next 10 years. The Reference Case is essentially a "business as usual" case.
If you follow the EIA and their analyses, you will notice that as legislation is proposed in congress ... waxman/markey, Lieberman/Warner climate legislation, RPS legislation, etc. the EIA is called on the model the impact...they do so against the backdrop of the Reference Case, it allows people to gauge the impact.
Couple thoughts on your comments related to commodity prices. You complain about price volatility. The EIA is generating an average/median expected price based on its assumptions, in other words a trendline. All the business people I know understand that volatility occurs around a trendline. You have specific heartburn with the oil price forecast, I am find it to be somewhat shocking that the EIA is expecting a 3%+ REAL rate of oil price growth over the next 25 years. This means that the AVERAGE price of oil is expected to increase by a factor of 2.5 in real dollars by 2035. In nominal dollars, assuming low inflation (2.5%) this means $250/bbl on average in 2035 dollars. If oil price volatility is 50% (conservative), a 1 in 20 price event on the high side would exceed $500/bbl. A more aggressive (realistic) volatility would mean close to $1,000/bbl for the 1 in 20 event. As a business person looking at this reference case, that is what I see and frankly it is as i said, somewhat shocking.
Related to your comments on "Peak Gas", not going to happen in our lifetimes, shale frac'ing aqdvances have ensured that. If the Japanese are successful in commercially extracting methane hydrates, it won't happen in this millenia.
With the fantastic freedom of speech in this country, I openly recognize your right to say all these nasty things, but you should remember that those of us who toil over how to represent the chaos of human behavior are highly trained (I personally have a PhD in Chemical Engineering), and we are doing the best we can with the resources/data/tools we have. We also hold a full series of peer reviews every year, so if you truly want to help and not just complain, volunteer your time offering constructive criticism as part of the process.
As a side note, criticizing work is one thing, but you're attacking people. Any one of us could be your mother/father, brother/sister, etc. The term civil servant doesn't imply you can treat us poorly, so stick to the flaws in our assumptions or algorithms not to whether we sleep at night.