1

The Global and National Context of EnergyFrank Clemente Ph.D.Senior Professor of Social Science & Energy PolicyPenn State Universityfac226@psu.edu

2

Driver A -- The Inexorable Growth of Population

4.4

5.3

6.1

6.8

7.6

8.2

4

4.5

5

5.5

6

6.5

7

7.5

8

8.5

Wor

ld P

opul

atio

n in

Bill

ions

1980 1990 2000 2010 2020 2030

3

Driver B – The Momentum of Economic Growth – World GDP in Trillion 2000 Dollars

3446

88

129

154

0

30

60

90

120

150

Trill

ion

Dol

lars

of G

DP(

Purc

hasi

ng

Pow

er P

arity

)

1990 2000 2010 2020 2030

4

Driver C – Modernization – The Rise of the Automobile

0

50

100

150

200

250

300

350

400

2002 2030

Tota

l Veh

icle

s (M

illio

ns)

U.S. China India Mexico Brazil

In 2002, there were 812 million vehicles. By 2030 there will be 2.1 billion.

Source (Dargay and Gately 2006)

5

Competition for Energy- Over 3.5 Billion New Kids on the Block

1.3 1.3

20

0.5 0.8

18

1.6

6.4

18

0

3

6

9

12

15

18

Perc

enta

ge o

f Wor

ld's

Sha

re

China India Other Asia

Oil NG Population

Asia has 56% of the world’s population but only 12% of the oil and NG

6

Demand for Energy: The Rising Tide

78

205

85

262

99

301

107

404

110

489

131

570

0

100

200

300

400

500

600

700

800

Qua

drill

ion

BTU

Con

sum

ed

1980 1990 2000 2010 2020 2030

U.S Rest of the World

One Quad Equals 172 Million Barrels of Oil

77

8

Scale Beyond Our ExperienceIncremental Energy Consumption in the next 25 years will be more than 50%

greater than the last 25 years.

0

50

100

150

200

250

Quad

rilli

on B

TU

Oil Natural Gas Coal

1980 2005 2030

9

Everything, Everywhere, All the Time:Increases needed by 2030 to meet demand

● Nuclear power 38%

● Oil production 43%

● Renewable energy 61%

● NG production 64%

● Coal production 74%

10

Fossil Fuels- the Continuing Core

87% Fossil Fuels86% Fossil Fuels

2004

39%

24%

24%

14%

Oil Natural Gas Coal Other

2030

34%

27%

26%

13%

Oil Natural Gas Coal Other

1111

Declining U.S. Oil and NG Production

1212

Greater Demand but Less Supply Means Higher Prices

1313

Our Growing Dependence on Foreign Crude Oil

0

2

4

6

8

10

12

14

16

1949 1959 1969 1979 1989 1999 2009 2019 2029

Mill

ion

Bar

rels

/ D

ay

Production

Imports

Peak, 1970

Alaska

EIA Forecast

Dependence

14

Annual Cost of U.S. Petroleum Imports, 2002-2006

$103 B

$133 B

$180 B

$251B

$302 B

$0

$30

$60

$90

$120

$150

$180

$210

$240

$270

$300

$330

2002 2003 2004 2005 2006

Ave

rage

Ann

ual C

ost (

Bill

ion

Dol

lars

)

The Cost of Dependence

15

The Shaky Foundation of Global Oil Supply (%)—examples only:

• Depletion – Mexico (4%) Kuwait (3%), UK (2%)

• Competition – Russia (13%)

• Instability – Nigeria (3%), Iraq (3%)

• Hostility – Iran (5%), Venezuela (3 %)

16

Has World Crude Oil Production Peaked?

74.1

73.9

73.673.6

73.2 73.3

73.5

73.5

73.5

73

73.5

74

74.5

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

Mill

ion

Bar

rels

Per

Day

2005 2006 2007

17

The Toll of Depletion

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Trouble Next Door: The Decline of Cantarell Field

● Cantarell yields 60% of Mexico’s oil production

● In 2005, Cantarell had the second largest output in the world

● The field is in irreversible decline that may exceed 14% per year

● The socioeconomic implications for Mexico, and ultimately the U.S., are enormous

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Deliverability is the Issue

● The debate over peak oil obscures underlying problems of deliverability.

● Reserves are only useful if we can produce flows to consumers

● The cost of producing these flows is sharply escalating—steel, labor, energy.

20

Jack Field is a Signal● 175 miles offshore

● 7,000 feet of water

● 20,000 feet below seabed

● $100 million cost for one well

● Set 6 world records

● 5th generation deepwater rig

● Take 6 years to develop

● To be determined—volume and quality of oil; does NG predominate?

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● Public Oil Companies have access to less than 25% of world’s oil

● Over 75% controlled by National Oil Companies –Russia, Iran, Saudi Arabia, etc.

● Use of oil and NG resources to gain political leverage

● Retaining oil for domestic use – e.g. petrochemicals

The Rise of Resource Nationalism

22

Actual and EIA Predicted Oil Prices

23

Are these EIA Forecasts for 2015 Realistic?

● Wellhead oil prices will decline 21%

● U.S. oil production will increase 14%

● Lower 48 oil reserves will increase 21%

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The Price of Unrealistic Optimism

●Gives a false sense of security

●Chills investment in alternatives

●Ultimately serves to tighten the yoke of dependence

25

A View of Peak Oil

● Peak oil is inevitable. All fields decline. The Earth is the largest field.

● While the timing of Peak Oil is a matter of debate, depletion in many major fields cannot be denied.

● The socioeconomic impacts of Peak Oil will be so significant that it is essential to start mitigation now.

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Natural Gas Production Decline is a Growing Problem in Both U.S. and Canada

Year Average NG Well Productivity (mcf/d)

1970 4341980 2641990 1632000 1422005 120___________________________________________________

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We Continue to Build Out NG Demand Infrastructure

● Since 2000 over 95% of new power plants have been NG based

● We average about 700,000 new NG heated homes per year

● Ethanol and biodiesel production uses extensive amounts of NG

2828

NG Power Plants Changed Everything

● NG production is declining so competition for fuel is intense

● Power plant demand raised the price of NG for businesses and homeowners

● The wellhead price of NG increased 193% in just 7 years.

2929

● Since virtually all new plants are NG, the marginal price of electricity is now set by NG

● None of this was predicted by the Energy Information Administration (EIA)

NG Power Plants Changed Everything cont.

3030

ELECTRICITY RATES

Retail Prices Paid for Electricity by All Consumers

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007

cen

ts p

er

kw

hr

United States

Source: State Energy Data System (SEDS), Energy Information Administration (EIA)

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0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

2002 2003 2004 2005 2006

Year

$/mcf

Price Forecasted by EIA Actual Price Commercial Consumers Paid

Problem Missed in EIA Forecasts: Commercial NG Prices as an Example

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Relentless Optimism from EIA, 2000-2006

● Wellhead price of NG was underestimated in 21 of 22 annual forecasts (95%)

● Consumption of NG by electric generators was underestimated in 22 of 22 forecasts (100%)

● Production of NG was overestimated NG production in 19 of 22 forecasts (86%)

3333

Going Out on a Limb

● We continue to build NG power plants

● We are counting on Alaskan Pipeline NG by 2017

● We are counting heavily on Liquefied Natural Gas (LNG) imports

3434

We are betting the Alaskan Pipeline will be operational by 2017

• Has been on the books for years , in 2000 prediction was 2006 at $1.50/mcf

• Costs have escalated to “well over $30 billion”

• Recent statement : “ may have to wait for new cost environment”

3535

The incredible bet that LNG imports will increase 600% by 2020

● Supply is suspect. Conoco Phillips: “Unfortunately, the supply of LNG is not as plentiful as one would have thought…The amount of LNG coming into the U.S. is going to be less and it’s going to be deferred”

● Global competition for LNG will intensify as demand increases amidst limited supply. Projected global consumption of NG/LNG will increase from 99 TCF in 2004 to 163 TCF in 2030.

● U.S. is the market of last resort for LNG. Europe and Japan will pay what it takes.

36

Most Natural Gas Reserves Are in the Middle East & AsiaMost Natural Gas Reserves Are in the Middle East & Asia

RISKY AND DISTANT SOURCES

Source: Global Energy Decisions.

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Extreme Dependence

States which get over 40% of their electricity from NG in stressed condition (e.g. heat wave):

● Louisiana (92%)● Texas (56%)● California (54%)● Massachusetts (53%)● Oklahoma (53%)● Nevada (51%)● Mississippi (47%)● Florida (42%)● Arizona (41%)

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The Burden of Higher NG Prices Falls Most Heavily on Three Groups

● Manufacturers – chemical, plastics, glass, fertilizer

● Blacks in poverty – about 10 million people

● Female Heads of Households in poverty and their children – 4 million families

39

Coal as a Backstop Technology

● Carbon capture and storage are essential to any significant expansion of coal conversion in the U.S.

● Coal is positioned to compete with unconventional hydrocarbons, such as tar sands, heavy oil, shale oil, gas-to-liquids, etc.

● As the “backstop technology” coal may be called upon to meet the burgeoning demand for both liquid fuels and NG in Asia, Europe and North America.

40

Coal as the Continuing Core of Electricity

2005

20%

17%

51%

12%

Nuclear Natural Gas Coal Other

2020*18%

19%

54%

8%

Nuclear Natural Gas Coal Other

* Source: EIA forecast.

4141

Coal is Abundant, Secure and Available at Affordable and Stable prices

42

0

2

4

6

8

10

12

14

Jan-01 Oct-01 Jul-02 Apr-03 Jan-04 Oct-04 Jul-05 Apr-06

$ / m

mbt

u

Coal Petroleum Natural Gas

Natural Gas: Average Cost = 5.7

Volatility = 2.0

Petroleum Average Cost = 4.4

Volatility = 1.3Coal

Average Cost = 1.4Volatility = 0.1

COAL vs. NG: 1/4th Cost with 1/20th Price Volatility

43

Technology Has Enabled Greater Coal Use With Lower Emissions

-100%

-50%

0%

50%

100%

150%

Criteria Emissions Electricity from Coal

- 53 %

116 %

1970 1980 1990 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

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The Constraints on Nuclear Power

● No new nuclear reactor has been ordered since 1978

● There is no high level waste repository in the United States.

● Seven states have passed legislation forbidding the construction of new nuclear plants until the high level waste issue is resolved

● The cost of uranium has increased over 500% in the last 4 years as China, India and other nations plan dozens of new units

● Powerful opposition to nuclear power brought the program to a halt in the 1970’s and has not disappeared

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Other Generation Options –we need them all

● Hydroelectric facilities are already in the most productive locations and new facilities are virtually impossible to site.

● Wind generation is intermittent and requires backup conventional power plants.

● Solar Thermal is relevant in only some parts of the country and subject to the same intermittency as wind.

● Biomass electricity production produces substantial amounts of pollutants and particulates. And biomass generates the greatest number of worker deaths and injuries.

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Five Points to Remember

1. Worldwide growth in energy demand is unprecedented

2. U.S. is a growing nation. We have less than 4% of the world’s oil and NG but 27% of the coal.

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Five Points to Remember cont.

3) We are an increasingly smaller part of an ever larger cast

4) We cannot afford to dismiss any source out of hand – coal, nuclear, renewables

5) Electricity cannot be stored