Archive for the ‘hybrid electric vehicles’ Category

Renewable Energy: Gradually Coming of Age

The 17th Session of the Conference of Parties (COP 17) to the United Nations Framework Convention on Climate Change (UNFCCC) is currently holding in Durban, South Africa. It aims to agree on a successor to the Kyoto protocol which expires next year. A recent report by the International Energy Agency (IEA) reinforces the urgent need for that agreement. According to the IEA, if the world is to stand a better chance of keeping the rise in global temperature below 2o C — and therefore avoid the deleterious effects of climate change — it must maintain a (universally-accepted) carbon emission ceiling of less than 450 parts per million, ppm; however, many scientists maintain that significantly lower values are more realistic.  With the current, global, carbon-emissions trajectory, that ceiling will be breached by 2017, due principally to fossil fuels. Fossil fuels account for more than 70% of global electricity generation and as a result, electricity accounts for about 40% of energy-related carbon dioxide emissions.

A rapid increase in renewable or “clean” energy’s proportion of the global energy mix therefore becomes imperative. Global investment in clean energy has grown at a compound annual rate of 29% since the year 2004, to more than US$1 trillion, Bloomberg New Energy Finance reports.

China which leads the world, spent US$54.4bn in 2010 according to Pew Charitable Trusts. The country, which currently derives more than 92% of its primary energy consumption from fossil fuels, has set a target of 15% share for clean energy in its energy mix by the year 2020; this is almost quadruple ExxonMobil’s projection of a 4% share for renewable energy in the global energy mix by the year 2040. BusinessGreen, in a recent publication, reports that, “The IEA predicts China’s electricity demand will grow by an average of four per cent per year to reach 9,000 terawatt hours (TWh) by 2035, which represents a tripling of its 2009 demand and equates to 18 times that of France.”

Of the world’s largest wind energy and solar energy companies by capacity, three and seven respectively are Chinese. Chinese entry into the sector has bred steep competition, driving down equipment costs. Bolstered by lower equipment costs as well as vast improvements in technological and operational processes, production economics for some subsectors of the renewable energy industry is already at par with coal, nuclear and natural gas in some locations and will most likely attain global parity in the very near future. According to Bloomberg New Energy Finance for example, wind energy produced by the average wind farm will be at price parity with natural gas by the year 2016, just about five years away.

Growth of the renewable energy industry has not come without challenges which in recent times have stemmed principally from the industry’s own success story: a rapid capacity expansion which, with falling demand — due to the global economic decline — has led to a large supply overhang. The case of Solyndra, a recently-bankrupt manufacturer of solar energy components in the United States is typical. The effects can be collateral. For example, some manufacturers of batteries for electric vehicles also became insolvent when demand for particular vehicle lines slipped due to the global economic decline. There are also concerns that First Solar, one of the world’s largest solar companies may be under viability pressures following the earnings downgrade just a few weeks ago.

Some commentators have derided the state subsidies extended to the renewable energy sector; it is noteworthy however, that in  2007 for example, fossil fuel subsidy in the United States was more than three times that for renewable energy, according to the Energy Information Administration (EIA). Even large corporations such as those in the financial and automotive sectors, have been beneficiaries of massive government financial assistance. In addition, complaints about the whirring of wind turbines in residential areas for example, pale in comparison to outcries over incidents such as the infamous Macondo well explosion or the despicable degradation of the Niger Delta environment, all associated with fossil fuels production.

Growth in renewable energy is expected to be driven by government policies especially among the Organization for Economic Cooperation and Development (OECD) countries. In addition, a global economic rebound is expected to see an uptick in numbers of the more efficient electric and hybrid vehicles at the expense of standard gasoline- or diesel-powered ones.

All said, while fossil fuels will most likely remain the dominant form of energy consumed over the next few years, renewables will take increasing proportions of that consumption.

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The Imminent Oil Price Shock: Reality Or Hype?

Capital expenditure in the oil and gas sector has been plummeting since the precipitous fall of global crude oil prices from the July 2008 peak of about US$147 per barrel for the benchmark Brent. Worldwide Rig Count for example has fallen from 3,009 in April 2008 to 2,055 in April 2009. Several projects have either been delayed or cancelled completely. The impact is further detailed in a recent report which indicates that about 2 million barrels per day has been removed from the global crude oil production capacity, a further 4.2 million barrels per day delayed for about 18 months while capital expenditure reduced by about US$100 billion from the value a year ago.
These have inevitably led to intense speculation about a price shock occasioned by weak fundamentals, in this case the inability of supply facilities to meet demand requirements (due to withdrawal of the enabling capital investment) in the event of an economic rebound.

Two major points are noteworthy here:

First, fundamentals played little if any role in last fortnight’s minor price surge or the major one of 2008 for that matter. For example despite the massive supply overhang in the week ending 08 May 2009, the weak global demand and reports of deepening economic recession in Europe especially the OECD countries, crude oil prices surged albeit briefly above the US$60 per barrel mark, the highest since December. Perhaps with the surge-on-rebound warning in mind, speculators viewed as a green flag, data showing that China’s oil imports increased by 13.6% year-on-year in April, as well as others showing fewest U.S. job losses since October. (While the U.S. is the largest crude oil consuming nation accounting for about a quarter of global production, China accounts for the largest marginal increase in consumption.) A false start then it was.
The oil cartel, Organization of the Petroleum Exporting Countries (OPEC), had always held that the oil price shock of 2008 had no fundamental support as prices were spiraling higher while the market was adequately supplied and that without such support, the steep fall was inevitable; an argument only belatedly acceded to. Some have argued that the mere concept of a “proper price” for oil (independent of such underlying factors as supply, demand and the likes) is itself a fundamental item but if that is not classical speculation, one wonders what is.

Secondly, concerns about the inadequacy of supply facilities to meet demand requirements on an economic rebound may not altogether be justifiable and for three reasons:

Brazil is expected to account for the largest addition to global crude oil reserves in the medium term and not surprisingly so. In the last two years alone massive discoveries have been made in the deep offshore Santos basin, about 300 kilometers from Rio de Janeiro. Prominent among these are the Tupi, Sugar Loaf and Jupiter fields. Estimates of the total potential reserves are put at 80 billion barrels of oil equivalent (boe) according to the president of the industry regulatory body, ANP. Some other independent sources put the value at 120 billion boe. Production from the Tupi field alone is expected to top 1 million barrels per day in 3 to 5 years. It has been acclaimed the world’s largest deep offshore discovery in history and set to launch Brazil into the league of the world’s top 10 oil producing countries. The internationally acclaimed Petrobras (Petroleo Brasileiro) the state-owned oil company which has developed state-of-the-art offshore production technologies is committed to rapid development of these fields even in these tight fiscal regimes. The project is based on an average oil price range of US$35 to US$40 per barrel and with current prices about the US$60 per barrel mark and rising, there is ample room for progress. The company has raised just about all the requisite finance for this medium term project and is even in the process of inviting international bids for concessions in this pre-salt basin; the bids are expected to be fiercely competitive. While production details are still being determined, the output is certain to exceed by a large margin, the said outages attributed to the current low expenditure regime. Perhaps as an indication of her increasing oil might, Brazil recently signed a contract for the supply of about 805 million barrels of crude oil over 10 years to China, widely regarded as a major driver of global oil demand.

Figure 1 shows the projections for oil prices by the Energy Information Administration in the IEO 2008 and IEO 2009 Reference Cases. In the more recent 2009 case a gradual increase in oil price is indicated. No fundamental support for a price shock is shown.
Finally, the increasing proportions of alternative energy sources in the global energy mix conduces inevitably to a reduced demand for oil. The automotive efficiency standards alone as introduced by the Obama administration in the U.S. is expected to reduce crude oil consumption by 1.8 billion barrels by the year 2016 a mere 7 years away. This is roughly equivalent to the total U.S. domestic crude oil production for the whole of 2008. That is a massive reduction. The increasing use of ethanol in gasoline blends will further displace gasoline in automotive fuels. Biodiesel which is cheaper and 30 to 40% more efficient than petrodiesel is expected to displace the latter in increasing proportions. Hybrid and battery-powered vehicles are gradually coming on-stream. For example Toyota is upgrading its successful Prius for re-launch in the next few months. The requisite infrastructure base for electric vehicles is also being provided. The U.S. Department of Energy estimates in its March 2009 Energy Outlook that hybrid electric vehicles will account for about 40% of all cars and light trucks by the year 2030.
Many are understandably dyspeptic about change especially in the energy calculus, but the reality stares us all in the face. While automobile companies in Europe and Asia were improving on efficiency and emissions standards, those in the U.S. with brazen state support skimped citing job losses among others. Today those same U.S. companies are teetering on the brink of collapse while their counterparts are gobbling up market share. Toyota and Honda are reportedly closer to meeting even more stringent standards than their U.S. counterparts.

In a recent Business Week article, Ed Wallace detailed how major media organizations were complicit in their reportage, with speculators on an imminent oil price surge which had no fundamental basis; as well their reluctance last year to give any prominence to contrary views (which have since proved correct) on the drivers of the 2008 oil price shock. But this just will not go away.
There may well be an oil price surge as the global economy rebounds from the current recession, but contrary to gratuitous media reports, it is, save for extenuating circumstances (outages, war or the equivalent, etc) unlikely to hold any fundamental support.
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