Climate Change and the Energy Problem

Physical Science and Economics Perspective

David Goodstein, Michael Intriligator

• Publisher: WSPC
• Year: 2012
• ISBN:
  9789814407113
• Topic: Physical Sciences
• Subtopic: Energy

This important compendium deals with the primary world problems of global warming and the coming energy crisis. In alternating chapters, it lays out the nature of the two interrelated problems, and specifies the various economic considerations. Thus, it describes the coming shortfall of fossil fuel energy in detail and then presents the economic factors governing possible solutions.

Written by two world renowned academics — a physicist who writes about the nature of the problem, and an economist who discusses various scenarios and solutions, this unique must-have book highlights the problem from the point of view of a scientist and an economist.

Contents:

• The Science of Energy and Global Warming
• Energy Market Structures and Regulatory Structures
• The Future
• The Economics of Global Energy Security
• Energy Myths and a Brief History of Energy
• The Economics of Energy and Climate Change
• Where Do We Go from Here?
• The Future of Energy Based on Technological Innovation
• Summary

Readership: Undergraduates, graduates, professionals, academics and the general public interested in energy studies, environmental economics, geophysics and public policy.

CHAPTER 1

THE SCIENCE OF ENERGY AND GLOBAL WARMING

The world will soon start to run out of conventionally produced, inexpensive oil. As the 2010 oil-spill disaster in the Gulf of Mexico showed vividly, drilling for oil in deeper waters and other risky locations is extremely dangerous. It took hundreds of millions of years for the Earth to build up the supply of oil that we started with, and we have used up roughly half of the accessible supply in a mere 150 years. We will certainly run out of cheap oil before long.

If we manage to overcome the shock of the end of cheap oil and turn to coal and natural gas, which are the two other forms of fossil fuel, life may go on more or less as it always has — until we start to run out of those resources as well by the end of this century. And by the time we have used up all the fossil fuel, we may have rendered the planet unfit for human life. Even if life does go on, civilization as we know it will not survive unless we can find a way to live without fossil fuels.

Technically, it might be possible to accomplish that. Power plants can run on nuclear energy, and even after that is gone, there will always be sunlight and its derivatives, such as wind and hydroelectric power. Part of that power can be used to generate hydrogen fuel or charge advanced batteries for use in transportation. There are huge technical problems to be solved surely, but most of the scientific principles are well understood, and we humans are very good at solving technical problems. In fact, if we put our minds to it we could start trying to kick the fossil-fuel habit now, protecting the planet’s climate from further damage and preserving the fuels for future generations as the source for chemical goods. A total of 90% of the organic chemicals we use, including pharmaceuticals, agricultural chemicals, and plastics, are made from petroleum. There are clearly better uses for the stuff than burning it up.

To make such an about-face will require global political leadership that is both visionary and courageous. It seems unlikely that we will be so lucky. A few years ago, when a little volume like this was first written, not that many people were paying much attention to this problem. Now almost everybody pays lip service to it, but the fact remains that precious little is being done.

Of all the fossil fuels, oil is the most important to us by far. It sexistence has been known since ancient times because of natural seepages at the surface of the Earth. Ancient people in the Middle East and the Americas used oil for a variety of medicinal, military, and other purposes. It was thought to be useful as a laxative, for example. (Do not try this at home!) The Persians in the siege of Athens in 480 BCE used oil-soaked blazing arrows. But by and large, oil was little needed and little used until the nineteenth century.

By the beginning of the nineteenth century, the growth of urban centers made it necessary to search for a better means of illumination, whose forms had barely changed since antiquity. For a while, whale-oil lamps served the purpose, and whaling became a significant industry. But by the middle of the century, whales were becoming scarce. Kerosene derived from coal was also widely used, but a better substitute for whale oil was needed. In August 1859, Edwin L. Drake, a former conductor on the New York and New Haven railroad, drilled the world’s first successful oil well near Titusville in Northwestern Pennsylvania. Sooncoal–oil refineries were processing cheap oil instead of coal; and oil became widely used for illumination as well as lubrication.

Then in 1861, German entrepreneur Nikolaus Otto invented the first gasoline-burning engine, the direct ancestor of the engines in our cars today; and soon demand for oil as a fuel began to grow. Within a few decades, oil was being found in and extracted from fields all over the globe. Since E. L. Drake drilled that first well, roughly 50,000 oil fields have been discovered worldwide, but most of the discoveries have been insignificant. About half the oil ever discovered has been found in the 40 largest fields.

In the 1950s, Shell Oil Company geophysicist Marion King Hubbert predicted that the rate at which oil could be extracted from wells in the United States would peak around 1970 and decline rapidly after that. At the time his prediction was not well received by his peers, and it was dismissed, but he turned out to be uncannily accurate. United States oil extraction peaked at around nine million barrels per day in 1970 and has been declining ever since. Today it is just a little over five million barrels a day. Oil companies now routinely use Hubbert’s methods to predict future yields of existing oil fields.

Recently, a number of oil geologists have applied Hubbert’s technique to the entire world. Hubbert himself had done that and came up with a prediction of the year 2000 for the worldwide Hubbert peak. Other geologists have used different assumptions and somewhat different data, but their conclusions have been remarkably similar. The worldwide Hubbert peak for easily accessible oil will occur very soon, possibly within this decade. There are highly respected geologists who disagree with that assessment, and the data on which it is based are subject to dispute. Nevertheless, Hubbert’s followers have succeeded in making a crucial point — the worldwide supply of oil, as with any mineral resource, will rise from zero to a peak, and after that it will decline forever. We will be in trouble not when we pump the last drop, but when we reach roughly the halfway point, and the amount we can extract begins to drop, while the insatiable demand for oil continues to rise.

Some say that the world has enough oil to last for another 100 years or more, but that view is almost surely mistaken. The peak, which will occur when we have used up roughly half the easily accessible oil made by nature for us, will come far sooner than that. When the peak occurs, increasing demand will meet decreasing supply, with disastrous results. We had a foretaste of the consequences in 1973 when some Middle Eastern nations took advantage of declining United States supplies and created a temporary, artificial shortage. The immediate result was long lines at gas stations and despair for the future of the American way of life. After the worldwide Hubbert peak, the shortage will not be artificial, and it will surely not be temporary.

There are those who see a silver lining in this dire situation. Since the beginning of the Industrial Revolution, we have been pouring carbon dioxide and other greenhouse gases into the atmosphere precisely because we have been burning fossil fuels. This has resulted in an increase in global temperature that will continue and might accelerate. Could it be that Hubbert’s peak will prevent us from destroying our planet?

The climate of the Earth is in a fragile, metastable condition that probably was created by life itself. Primitive life forms were responsible for oxygenating the atmosphere, and they were also responsible for laying down huge quantities of carbon in the form of coal and other fossil fuels. If after Hubbert’s peak we take to burning coal in large quantities, then Earth’s so-called intelligent life will be reconverting that carbon and oxygen into carbon dioxide. We cannot predict exactly what that will do to our climate, but one possibility is that it will throw the planet into an entirely different state. The planet Venus is in such a state because of a runaway greenhouse effect that has rendered its surface temperature hot enough to melt lead. We have a grave responsibility to prevent the same thing from happening on Earth.

Some economists say that we do not need to worry about running out of oil because while it is happening, the rise in oil prices will make other fuel economically competitive and oil will be replaced by something else. However, they do not tell us what that something else might be. There is nothing on the horizon that looks like an adequate substitute for cheap oil. And besides, as we learned in 1973, the effects of an oil shortage can be immediate and drastic. Meanwhile, it may take many years, perhaps even decades, to replace the vast infrastructure that supports the manufacture, distribution, and consumption of the products of the 20 million barrels of oil that Americans alone gobble up each day.

One certain effect of the coming shortage of cheap oil will be steep inflation, because gasoline, together with everything made from petrochemicals and everything that has to be transported, will suddenly cost more. Such an inflationary episode will certainly cause severe economic damage, perhaps so severe that we will be unable to replace the world’s vast oil infrastructure with something else. That is a prospect we would rather not think about.

Thus far, we have been speaking about cheap, easily accessible oil. There are other kinds of oil, including heavy oil or tar sands or oil sands, as well as the oil found deep in the oceans. Although there may be large supplies of these types of oil, they are difficult and expensive to extract.

Canada, for example, has large supplies of tar sands in its province of Alberta, which have been renamed as oil sands to attract investment. These are solid deposits that must be strip-mined at enormous cost to the environment. Even then, it takes two tons of ore to make one gallon of a substance that is not rich enough to distill into gasoline, so hydrogen must be added. Accordingly, Alberta has some of the largest plants in the world for extracting hydrogen from methane. The net result is that even though Canada has copious supplies of this substance, it will not easily replace the cheap oil once that resource starts to run dry.

Oil found deep beneath the ocean presents special problems and dangers, as the 2010 oil spill in the Gulf of Mexico made clear. Nuclear power plants are so expensive, feared, and controversial that none has been built in the United States for many years and some countries (for example, Italy) have outlawed them completely. The recent disaster at the Fukushima Daiichi power plant in Japan has made things even worse. When the oil crisis comes, opposition to nuclear power is likely to weaken considerably, but it will take at least a decade or more for the first new power plants to come online (something like 20 new nuclear power plants are currently under consideration in the United States now). And because the use of nuclear fuel is pretty much limited to power plants, nuclear energy will not easily be a substitute for oil. If instead we manage to switch to coal or natural gas, we will, in a few reckless generations, have depleted the Earth’s endowment to us and altered its climate to an extent that we cannot now predict.

The only alternative to that dark vision of the future is to learn to live largely on nuclear power and on light as it arrives from the Sun. Will we have the wisdom and ability to do that? If we do, can a civilization as complex as ours live on those resources?

These are big questions, and their answers depend heavily on social and political factors. But there is also a large component of science and economics underlying all of this. We can hope, if we are wise to alter the laws of people, but we cannot change the laws of nature. A major objective of this book is to sketch out, for those who are not specialists, both the opportunities and limitations that nature has provided for us. Only if we understand both, we can hope to proceed with wisdom.

CHAPTER 2

ENERGY MARKET STRUCTURES AND REGULATORY STRUCTURES

Today, energy is universally recognized as an essential resource in every modern economy such as those of Western Europe, North America, and Australasia, and, in addition, the modernizing economies of China and India. As noted in the previous chapter, changes in the availability and price of energy have major impacts on the environment, on standards of living and economic growth, and, indeed, on every aspect of economies that rely on accessible energy supplies to sustain and to improve the quality of life of their citizens.

Before the shock of the 1973 Organization of Petroleum Exporting Countries (OPEC) oil embargo, discussed in greater detail below, the extent to which energy problems could disrupt the comforts of modern life was not readily appreciated. In the United States, forexample, energy was generally obtainable at a relatively low cost and its easy availability was taken for granted. Some warned of problems ahead, but there was little immediate concern and those who did sound alarms were widely dismissed as Cassandras and shunned by the oil industry as well as governments. All that changed with the OPEC embargo, which caused oil prices to quadruple between 1973 and 1975. The 1979 revolution in Iran, which overthrew America’s longtime ally, the Shah, once again led to major disruptions in oil supplies and an even more pronounced price spike. The 1973 embargo raised oil prices by about $5.50 a barrel, from about $4.00 to over $9.50. At that time, Americans consumed about 17.3 million barrels of oil a day, so that the increase amounted to an oil levy of $35 billion, or 2.5% of GNP. The 1979 price shock was even bigger, with oil prices rising by about $21 a barrel, equivalent to a levy of $144 billion on United States users, or about 6.5% of GNP. These events finally forced governments and citizens throughout America and the Western world to recognize the problems associated with energy scarcity and to acknowledge the damaging potential of future energy crises. Meanwhile, in the United States, oil production for the lower 48 states had reached the peak predicted by Hubbert in 1970. Within a few years, the public would also become far more aware of the relationship between energy policies and environmental concerns, which constitute the main focus of this book.

Almost all energy products have a market structure characterized by a relatively small number of intensely competitive major producers, a larger number of smaller producers, and an abundance of consumers. Economists refer to this type of market structure — one with few sellers and many buyers — as an oligopoly. Within the oil industry, several major producers dominate the market for refining, shipping, and distribution. They include the multinational oil companies—the so-called “supermajors” of BP (formerly British Petroleum), Chevron, ExxonMobil, ConocoPhillips, Shell, Eni, and Total S.A., as well as many so-called “majors” and “independents”. They are all highly competitive with one another in all aspects of the industry, vying for everything from drilling rights to marketing opportunities.

As to oil reserves, the largest of these are nearly all controlled today by national oil companies, including, in descending order of the size of their reserves, the National Iranian Oil Company, the Saudi Arabian Oil Company, the Qatar General Petroleum Corporation, the Iraq National Oil Company, Petroleos de Venezuela S.A., the Abu Dhabi National Oil Company, the Kuwait Petroleum Corporation, the Nigerian National Petroleum Corp., the National Oil Company (Libya), and Sonatrach (Algeria). It goes without saying that these large oil-producing national entities form an oligopoly for the world crude oil market. Anytime they collectively agree to reduce their supply of crude, the price of oil rises.

In this oligopoly situation, with few producers, each firm can have an influence on price. For example, if Saudi Arabia, which is a major producer of crude oil, decides to reduce its production that has the potential to significantly affect the world price of oil. Ultimately, however, the impact on price would depend on what other producers do in response. If they increase their production to offset the Saudi cuts, oil prices would not be significantly affected. Thus all the major producers must consider what their fellow producers would do, a situation referred to by economists as “mutual dependence recognized”. Such recognition requires all the firms in the industry to take into account the probable or even possible behavior and reactions of the others, a situation of strategic behavior. Economists study such behavior using the tools of game theory, looking at the various players’ possible strategies and at how the other players, or actors, might counter them. Some or all of the actors might collude to deal with this situation: The OPEC cartel is an example of such collusion.

The major oil companies are motivated by profit from the sale of their energy and, as a result, are focused on their market share. They know from experience that when exploration yields insufficient reserves to maintain their share of the market, they must start to push for alternative sources of supply, such as ethanol. These would also include energy sources typically financed by governments, such as nuclear power, and, more recently, emerging wind and solar power technologies.

As to the buyers of final products of the energy industry, whether for oil, gas, or coal, they are a mixture of very large firms that also represent a type of oligopoly and small entities that tend to be closer to the perfectly competitive model of firms that do not collude. Thus, there is a strong asymmetry between the sellers and the buyers, with the sellers having much greater influence than the buyers.

The structure of the natural gas market is also one of oligopoly, with a handful of major national suppliers: Russia, the United States, the Arab League, the European Union, Canada, Iran, Norway, Algeria, Qatar, the Netherlands, Saudi Arabia, and Indonesia. The product is shipped via pipeline or in the form of Liquefied Natural Gas (LNG), and many competing firms distribute it to consumers. It is for the most part consumed in the countries in which it is produced or sold on an inter-regional basis within contiguous countries or trading blocs. For example, Russian gas is shipped by pipeline to Eastern and Western Europe. Gazprom, by far the largest firm in Russia and one of the largest energy-supplying firms in the world, controls this supply. It has in recent years started to supply oil as well as natural gas.

In the United States, the energy industries, including oil, natural gas, and coal, are regulated at the local, state, and national level. Locally, permits are issued to those who seek to explore for energy products. The standards for regulation at the statewide level are based on those originally established in the 1930s for the Texas oil fields by the Railroad Commission of Texas, which, despite its name, has played the leading role in regulating the state’s production of oil and natural gas. Historically, these standards favored domestic producers by ensuring that imported oil prices remained lower than those of domestic oil, requiring consumers to pay more for domestically produced oil.

In 1890, the United States Congress passed the Sherman Antitrust Act to regulate monopolies, specifically the petroleum industry. Its actions were aimed primarily at Standard Oil, which, under John D. Rockefeller, had initially established a monopoly on the refining of oil and subsequently expanded into every aspect of the petroleum industry, from exploring to retailing. President Theodore Roosevelt first moved against Standard Oil as a monopoly in 1901, and in a 1911 landmark decision, the Supreme Court found that the company’s policies had violated antitrust legislation and ordered that the firm be broken up. This decision eventually had impacts on price manipulation as the successor companies started to compete. Many of these companies still exist as Exxon (formerly Standard Oil of New Jersey), Mobil (formerly Standard Oil of New York), Chevron (formerly Standard Oil of California), and Amoco (formerly Standard Oil of Indiana). In 1914, the Clayton Antitrust Act was passed to prevent monopolies from forming through mergers. Today, the Antitrust Division of the Department of Justice and the Federal Trade Commission enforce this antitrust legislation and the earlier Sherman Act. The late 1970s and particularly the years of the Reagan administration saw an increasing trend toward widespread deregulation. Crude oil prices and refined petroleum products were deregulated in 1981.

Internationally, this was also a period of considerable change and ferment on the energy front. The 1970s witnessed the rise of OPEC a cartel of oil-producing nations in the Middle East, Asia, Africa, and Latin America. OPEC was actually founded in the year 1960 with the assistance of the United States, but gained control of crude oil supplies in the early 1970s through its member nations’ takeovers of the major private oil companies that had established its oil fields. It continues to be extremely influential in the international oil industry, coordinating its members’ crude oil production activities and attempting to limit production to ensure that prices make exports profitable. Collective action on the part of its members can cause a surplus or shortage of oil on world markets, which in turn affects oil prices.

The OPEC cartel first struck the West as a force to be reckoned with after the 1973 Arab–Israeli war, when its seven Arab nations, meeting that October in Kuwait, announced a 5% cutback in supply, a sharp price i...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Preface
• Acknowledgement
• Contents
• 1. The Science of Energy and Global Warming
• 2. Energy Market Structures and Regulatory Structures
• 3. The Future
• 4. The Economics of Global Energy Security
• 5. Energy Myths and a Brief History of Energy
• 6. The Economics of Energy and Climate Change
• 7. Where Do We Go from Here?
• 8. The Future of Energy Based on Technological Innovation
• Summary