Monday, January 16, 2012

Global Energy to 2030: Market & public policy failure to help us meet our needs.

January/ 16/ 2012
Zoltan Ban
Sustainable Economics

A short review of our energy demand evolution from 1990 to 2008 (based on EIA data, publicly available.  2008 is the last year for complete information on energy.).

            In 1990, we had the collapse of communism in Eastern and Central Europe, which caused a drop in energy demand in the region of roughly one third within the first few years of transition. In 1997, we had the Asian financial crisis, which also dampened economic activity on a global scale.  The 2000-01 tech bubble burst is also worth mentioning as a dampener on economic activity.  Throughout this period, we also had the constant advance of technology, which achieved remarkable improvements in energy efficiency.  This should be expected, especially in the last decade or so as commodity prices rose to new highs. Given all the factors that acted as a dampener on energy use, why did we still increase our appetite for energy by 40%? 

The Answer is simple.  We also had some factors that worked towards increasing our demand for energy, which more than made up for the above-mentioned dampeners on energy demand.  The increase in the world’s population is one of the main factors, but it most certainly is not the only one.  The shift of manufacturing activities to lower cost places has encouraged the decline of product durability, along with the desire for a fast-paced change in technological innovation, which actually requires a less durable economy as an incentive to innovate.  There is, of course, also the rise of a still relatively minor middle class in the developing world, which is creating a huge swell of demand for energy. 

The effect of the low hanging fruit pattern of harnessing the planet’s natural resources is also a reason why we increased demand for energy, and we shall continue to do so going forward.  The history of petroleum production and its energy return on energy invested trends is the perfect example of this trend.  About six or seven decades ago, petroleum wells were yielding about 100 units of energy for every unit of energy imputed in the production process.  Today that ratio stands at roughly 20 to 1, and technology did not seem to help reverse that trend, nor should we expect it to in the future.  By 2030, the ratio of energy imputed to energy produced for petroleum will likely fall to below 10/1.      

Looking to the future

In the age of new sustainability consciousness in the developed world, we most certainly did get millions of people who consciously gave up many consumption privileges, such as a personal vehicle, or even eating meat, in the hope that they can alleviate the suffering of those around the world, who cannot even afford clean water, or in some cases a bowl of rice.  Their efforts were more than offset by the few hundred million new members of the global middle class, mainly form India, China and other developing nations, who now want to have a regular shower, electrical appliances and a personal motorized mode of transport.  Moreover, yes, most of them found a taste for meat. We still have billions more around the world, awaiting their chance at the good life, so the modest declines of energy use in the developed world will be more than offset by the masses around the world who are now looking to increase their per capita use of energy two or even three fold in the next few decades.

Given the 40% increase in energy we experienced, despite many factors and events which acted as dampeners on energy use, what should we expect to be the minimum level of energy consumption level going forward, which will allow for a continuation of the current global status quo for the next two decades?  The answer is at least 30%, and yes I do believe that we can increase production by that much, if we consider geological realities alone.

The chart bellow represents my view of what this 30% increase in energy production will look like, if we are to only consider geological factors, and include the facts we know about our energy sources.  It is also a scenario that I see as unachievable if we leave it to global free market forces, and current public policy trends to get us there.  One of the things that should stand out from this chart is the rise to prominence of coal as the dominant source of energy.  A chart of the EIA version of what the energy picture will look like in 2030 is posted on the right side as a comparison.


The EIA projected in its 2010 report a very different scenario, which I disagree with in its assumptions.  They actually see a 40% increase in energy demand, and they continue to project that petroleum liquids will still be the largest energy source.  So in other words they predict that by 2030, petroleum production will rise to about 111 mb/d (million barrels per day), from the current level of about 87 mb/d.  Of the 24 mb/d increase, they project that 10 mb/d will come from unconventional sources, such as bio-fuels, Canadian oil sands, extra heavy crude, such as the kind found in Venezuela and other such previously underdeveloped sources.  On this projection, I am in agreement with the EIA.  The part that I strongly disagree with is their projection of conventional crude contributing 14 mb/d.  The International Energy Agency (IEA) also disagrees with them, because they also confirmed in their 2010 energy report that conventional crude has peaked in 2006, at a level of about 70 mb/d, out of a total liquid fuel supply of around 88 mb/d we have currently according to them.  Interestingly, the EIA also seems to be ignoring their own data, which shows that crude + condensates, which makes up over 80% of total oil supply also reached a plateau in 2005 as my graph below shows, which was constructed using their data. 

The following chart is my prediction of what energy production will look like for the next two decades, if we add the most likely policy and market direction to the geological realities that I envisioned as being able to provide us with that 30% rise in energy production.

As we can see, the total I envision when public policy and market trends are thrown in as factors we should take into consideration, is much lower by 2030, than what I suggested was feasible, strictly based on geological factors.  In fact the most likely outcome will be an increase of 15%, compared to current levels, and that is unfortunately not nearly enough to ensure global economic and geopolitical stability.

The market clearly favors petroleum liquids over other sources of energy, due to its consumer friendly qualities (the price difference between petroleum and gas is clear evidence of this).  I foresee therefore, that the current higher price for this resource will persist, in the absence of economic turbulence and that in turn will nudge conventional petroleum over its current plateau that it formed in the past years.  Unconventional petroleum will also ramp up fast.  The side effects of this however will be faster depletion rates for conventional fields, and even permanent damage to the fields, causing a steeper decline after its second peak, which will likely occur around 2020.  At this point, conventional crude declines will be greater than increases in non-conventional supplies.  By 2030, we will be back to where we started from in 2010.

Note:  In assessing the most likely production curve for conventional crude fields, I assumed a current global proven reserve base of 800 billion barrels, which is less than the official number of about 1100 billion barrels.  I did this mainly to account for the 300 billion barrels of political OPEC reserves that most likely exist only on paper.  I also assume that average field recovery rate around the world will improve from about 40% currently, to about 50% by 2030.  This will however mean a slowing rate of production to reserve ratio.  I also assume that about 7 billion barrels will be found on average every year, which is about what the average has been for conventional fields in the past decade.

Public policy favors natural gas, as a result, a faster ramp up, to a higher rate of production than I envisioned by 2030 will occur.  The faster ramp up, by about 35% till 2025, will also cause depletion to occur faster.  By 2030, the total increase from current levels will probably be less than the 30% I envisioned to be geologically possible.  The reason that public policy is so inclined to choose gas over coal is because it is an energy source that can provide the same amount of energy with only one third of the emissions as a by-product, compared to coal.  It is an easy way to claim victory in our efforts to reduce our carbon footprint in the short to medium term, without demanding of us to face up to some harsh realities, and without them having to roll up their sleeves and work towards a truly viable and meaningful solution, like the one I am advocating in my book, which I shall mention in a moment.   

Coal will rise rather modestly, until about 2025, and only then start ramping up, because we will likely not see any market price signals or public policy shifts for this to occur until 2020 at least, and response time should take about five years.  The end result will be that coal will fall far short of what we will need, in order to make up for shortfalls.  Coal production will likely rise about 30% from current levels, which is bad news for the environment on one hand because; it is way more than what is recommended, if we are to stand a chance to avoid ecological disaster.  On the other hand, it is also bad news, because the 50% increase that I envision as crucial for global economic and social stability will not materialize.

In the other sources of energy section, which comprises all non-hydrocarbon sources of energy, we have nuclear, which will grow less than is possible, due to uranium availability constraints as the only variable.  The reason for that is Fukushima.  Wind and solar will continue to be disadvantaged at least until 2025, as the price of gas will stay moderate as long as the ramp up of production will continue.  So we should expect less than 30% growth from this energy sector as well.

I cannot pretend of course that my view of future energy supply availability is likely to be completely accurate.  I based my model on the geological political and economic facts and trends we know currently to be true.  There may be factors, geological, political and economic, which I may have overlooked.  I do think, however, that it is likely to be more accurate than the EIA model which envisions a 40% increase, mainly based on the assumption that it is what the global economy needs for smooth sailing, rather than what is possible.  The fact that they are currently being rebuffed by their own data on recent production of conventional crude, casts serious doubt on their own model; therefore, I believe there is room to challenge their conclusions in regards to our energy supplies for the future.

We should be worried of the side effects, given their reputation as a serious organization, because their clearly flawed reports will actually be the ones that public officials, as well as private sector economists will base their assumptions on.  We cannot make good decisions, if the information we have available to us is flawed, or corrupted by political interests and social pressures. 

I experienced a similar situation that turned out very bad during my childhood, where public officials made decisions based on flawed information.  During Ceausescu’s brutal communist regime in Romania, local party officials had an interest to report higher agricultural harvest and industrial production, than what the true yearly results were.  As a result, the central government decided to export more than the maximum that would have still provided for the local population with the minimum requirements.  The result was something that I hope I will never go through again, but realistically fully expect to experience within my lifetime, in the absence of some serious changes.  Thinking back to those times, I remember that I did not understand why we lived the way we did, but I had an excuse, for I was only a child.  The reality is however that even most adults failed to understand this, and most who experienced those things as adults, before the system collapsed in 1989, still do not understand why things happened the way they did.  The reality was that the system was operating on faulty information, which occurred due to the very pressures of the system.  We are unfortunately experiencing a similar phenomenon in the western world right now, as exemplified by the very obviously flawed energy projections made by the EIA, which are also in part flawed, due to the pressures that exist within our current system.


If my model for future energy supply is in fact closer to the most likely scenario rather than other more optimistic models, such as the one constructed by the EIA, then we have to face up to a very troubling fact.  We no longer have the capacity to adapt within the current global order, to the circumstances we face.  The market and public policy, both of which have a shorter view of the horizon than is necessary to produce the right results, given our circumstances, can actually inhibit our capacity to meet our needs.  The only alternative therefore is to come up with a way to change the way we define our needs, and improve the process of meeting them.

I do present a solution, in the form of a standardized global trade tariff, in my newly released book, entitled “Sustainable Trade”, meant to replace current multilateral and bi-lateral trade agreements.  This standardized tariff is tailored to encourage more efficiency, a stronger defense of basic human rights, and a smaller environmental footprint of our economic activities, while it still allows market forces to do their magic of providing incentives for innovation and meet consumer demands.

I think that voluntary goodwill such as the Kyoto fiasco or the new paradigm on the part of the political left, that “people power” can change the world locally and eventually globally, can safely be discounted as viable solutions to our problems, given the failures of these ideas, which we currently witness.  Same can be said about the proposed global race to the bottom that the business friendly political right advocates, when it comes to human and environmental protection.  We cannot turn to a socialist-communist, command economy utopia.  I can testify to its folly, since I lived it, growing up in “utopia” of Eastern Europe.  We cannot do nothing, as the near economic meltdown we witnessed recently, in conjunction with commodity price spikes, clearly shows us that sticking our heads in the sand and hope for the best, will not lead to a pleasant future.  I therefore see no other option than to fight for the re-shaping of global trade to provide the right incentives for a more efficient, more durable, and less destructive global economy.  I hope to convince others of this as well, because failure is definitely not a desired option.


  1. Why do you think EIA would lie? What interest would have? Have think that the true that you think “is hidden” is actually well known by certain leaders, but it is just not made public for “everyone”...So, it is not that is “not known”, but rather it is not known for everyone, only for “certain some”...Again why do you think this would happen?

  2. James, thanks for being the first to comment.
    Having experienced a failed system on my own skin, I can now say after reflecting back to those times with confidence, that having a culture that promotes "yes men" was a big part of the failure.
    I believe we now also reached such a point, where presures exist within our system to promote such a culture.
    I do not think that the EIA releases two separate reports, one for the elite, and one for the general public. There is always a danger of such practices leaking out. I believe that the view of our elites is influenced by the same information the rest of us have awailable to us.
    In a world where we are all wise guys, who want to be ahead of the pack, can you imagine the panic that would be created by an official report that would claim that, we are not alright, and we do not have many real solutions to tackle the problem?
    The collapsed system I lived in had its own cultural presures built within it, we have ours, and unfortunately we do not seem very good at tackling cultural dysfunction. I recomend a book I read by Jarred Diamond, entitled "Collapse", which I found to be very enlightening in this subject.

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    2. I understand that the regime in which you were living was "hiding the truth" and the data were misreported, however those who were doing this knew very well the real data. Same thing here...OK, if there is a pressure on EIA to misreport the real numbers, then still somebody from within would know the real numbers too. Is EIA sweetening the truth just to make the game of certain people? It would hurt its credibility!!
      On the other hand, people like you following on the subject could realize the reality...Internet is full of info! Plus, any reasonable enough person is realizing that we are living in finite material world and the resources are finite as well....Now the problem is when all these will be less and less how we'll manage...?! the population is rising especially in those regions that lack resources...
      PS: Like the writing, but concerned about the pessimistic image you are promoting. Look forward for more staff. I'll get your book on-line. I'm very curious about your solution, especially that everybody is commenting and criticizing, but no real solution to our increased needs so far.
      I deleted the previous comment by mistake!

    3. I hope you will enjoy the book, and I will also post more articles on a regular basis.