THE future of energy: beyond the turmoil

(through R&D and new technology).

n the short run, the impact of low carbon technology “winners” governments have (foolishly) picked is going to be tough. All those offshore windmills are going to remain very expensive and politicians who have rushed to say otherwise (in part, on the basis of peak oil) have not helped. Telling people something is going to be economic when it is unlikely to be is hardly the way to get carbon credibility. Better to face down the lobbyists and to tell the truth: offshore wind is very expensive and likely to remain so.

oliticians can of course carry on with this deception for as long as not much offshore wind is built. But as the rush in the next nine years towards perhaps as much as 30 gigawatts gets underway to meet the EU 2020 target, the impact on the bills will start to show. Here there are two conditions which need to be met: that customers can actually pay; and that they are willing to vote for politicians who will force them to pay. By around 2016, both of these conditions will be put to the test.

Fortunately there is a better way forward. The first step is to recognise that peak oil alarmism is nonsense. Oil is not likely to run out any time soon, and in any event it is fungible—replaceable—with gas. The second step is to recognise the impact of the shale gas revolution—and the implications for the wider production of carbon based fuels. The problem is there is too much fossil fuel, not too little—and if we burn it all we will fry. This is the real threat. The third step is to be realistic with the politics. Truth telling comes hard, but it is a much better way of addressing the politics of climate change than claiming that the transition to a low carbon economy can be relatively painless. This was the mistake in the political interpretation of the 2006 Stern Review—with its claim that the transition to a low carbon economy could be achieved for the very low cost of 1 per cent of GDP per year, based largely on renewables and energy efficiency (and no policy costs at all). The 1 per cent was quoted across the European and world political spectrum with little appreciation of the assumptions on which it was based.

sensible transition would start by getting rid of the coal. Gas is cheap and gasfired power stations are quick to build. Unless we switch from coal to gas globally, coal will carry on growing—and polluting. It is very simple: either we burn the coal and get serious global warming—or we switch away. Only gas can do this quickly—and in this case at virtually no net economic cost. With this breathing space, the efforts should go into R&D, and in deploying the technologies that are near to reaching the market—things like smart grids, smart meters and system IT, and electric cars. In this transition period there is of course room for some windmills and solar, but at the margin. It is better to spend the extra pound on R&D than offshore wind.

The main security risk for Europe lies in Moscow Barring a Saudi crisis, the Gulf is not the worry, says Simon Henderson

What is energy security? Not having to queue for petrol? Not having to pay too much? Not being vulnerable to shortages of natural gas? Never having a power failure? It is all these and more.

How does a country achieve energy security? There are many answers. Some would argue that it has been achieved when there is no need to import energy, particularly oil. A refinement (or perhaps a debasement) of this argument is that the oil should not have to come from the Middle East. Hav

Simon Henderson is Baker fellow and director of the Gulf and Energy Policy programme at the Washington Institute for Near East Policy.

ing a range of energy sources—oil, gas, coal, nuclear, hydro, solar, wind, biomass—would seem sensible. For those who remember the 1984-85 British miners’ strike, having power stations that can run on inputs other than coal is an advantage.

s energy security achievable? Perhaps, but there are always other insecurities, which should not be ignored. Kuwait probably thought it had energy security until Saddam Hussein’s tanks rolled across the border in 1990.

he Middle East and energy security often seem twinned, as shown by presentday anxieties and Saddam’s invasion of Kuwait. One of my early childhood memories in Potters Bar was walking past a filling station that was closed because the

48 · prospect · april 2011

What happens if trouble spreads to Saudi Arabia? Saudi Arabia tops all the charts for oil: it has the most plentiful reserves (about 20 per cent of the world total), it is the largest exporter (around 8m barrels per day, equivalent to about 10 per cent of world demand), and it has the greatest spare capacity (more than 3m barrels per day, almost at the turn of a tap).

o wonder the world is always concerned about the stability of Saudi Arabia. These days, not only is the country in a tough neighbourhood (Iran across the Persian Gulf, revolutions across the Arab world), but there is concern because of potential unrest at home and an increasingly aged and unhealthy leadership. If the Saudi government were unwilling to increase production to make up for a decline elsewhere, it would have a major effect on the price of oil. The effects in other financial markets would also be significant, as higher prices slowed down growth across the world.

The Paris-based International Energy Agency (IEA) calculates that Opec has 4.7m barrels per day of spare capacity. Industry experts judge that 3.3m is closer to the mark. Apart from Saudi Arabia, only Abu Dhabi, the lone oil-rich member of the United Arab Emirates, can really help in increasing supplies.

Apart from worrying which oil state will be next to topple, there is also the concern that Saudi Arabia’s facilities are vulnerable to sabotage. An al Qaeda attack on the Abqaiq processing plant five years ago was narrowly averted. If the terrorists had been better trained, much of the plant’s 6m barrels per day of capacity would have been lost. (Since this near miss, the US has been working with the Saudis to improve their infrastructure protection.) Also, the kingdom’s estimated 2m Shiites, co-religionists of Iran, mostly live in this area.

An additional concern is that Saudi decisionmaking is held tightly by the top princes. But King Abdullah, 88 this year, is in poor health; so is Crown Prince Sultan, 87, and Prince Nayef, 77, is said to be slowing down.

The world’s main developed economies, which make up the IEA’s membership, have 1.6bn barrels of oil held in reserves. This equates to 145 days’ worth of imports. But there is a continuing debate about whether these stocks should be accessed only to make up for physical shortages or instead to manipulate prices downwards.

How high could prices go? If there is prolonged disruption, one recent industry survey concluded that the price per barrel could rise by another $150. If the IEA released its reserve stocks, the increase might be kept to $125.

The good news is that since the price shocks of the 1970s, oil is a less important component in the economies of the industrialised countries. But for that disruption, another $100 or more on the price of a barrel of oil would still be tough. For many other countries, it could still be catastrophic.