Responding to urgent energy challenges - IEA calls for greater investment in the oil sector and for CCS to be made eligible to receive revenues generated by the CDM

“With oil prices surging over USD 110 a barrel and growing concerns over the environmental repercussions of the world’s spiraling energy demand, the dialogue between energy producing and consuming countries is more meaningful than ever”, said Nobuo Tanaka, Executive Director of the International Energy Agency (IEA), in his key note address to the 11th International Energy Forum (IEF) today in Rome. Stressing the value of this unique forum for policy dialogue to which Ministerial delegations and senior policy makers from over 90 countries have been invited this year, he detailed IEA analysis of the key global energy challenges the world needs to address in the coming years.

High Oil Prices

“Current oil prices are too high, especially for developing countries which face other significant cost increases, and considering the threats to global economic growth at the moment”, Mr. Tanaka emphasised. Amid various views about the reasons behind the price rally – some blame market fundamentals, others speculation and financial flows - the IEA sees a combination of different factors driving this phenomenon: primarily, strong demand growth in the developing world coupled with constraints in bringing new oil to the market. During the past five years, spare capacity has fallen below the 3-4mb/d typical of the past decade. IEA analysis shows that there is no quick fix on the supply side and spare capacity is likely to remain tight. This underscores the need for more investment.

Investment

“Investment is one of the main challenges we are facing in the global energy sector”, Mr. Tanaka said: “USD 22 trillion in investment will be needed in energy-supply infrastructure by 2030. The oil sector alone needs USD 5.4 trillion. Although spending has recently increased, supply growth could remain sluggish, because of increasing costs and a proliferation of above-ground risks, such as more frequent access limitations and tighter fiscal and regulatory regimes.” The IEA calls for investment now to ensure adequate supplies of all forms of energy. Unless current policies change, world energy demand will more than double by 2030. There is a clear need for governments and industry to do all they can to increase the output response of new investment and for national and international oil companies to enhance cooperation. In the short to medium term, increased energy efficiency can yield substantial savings in energy consumption and can help improve the country‟s energy security while at the same time reducing CO2 emissions.

Climate Change

Climate change is another key challenge, against the background that fossil fuels will still continue to dominate the global energy mix in the foreseeable future. Without new policies, CO2 emissions could jump 56% by 2030, leading to an eventual increase in average global temperature of up to 6oC.

With this in mind, the IEA is currently analysing what would be needed to meet the most ambitious IPCC scenario of cutting emissions by 50% by 2050. A report to be presented at the G8 Summit in Hokkaido will show that meeting such a target would entail a huge amount of investment and unprecedented technological breakthroughs such as in carbon capture and storage (CCS). Mr. Tanaka urged Ministers gathered in Rome to support making CCS eligible to receive revenues generated by the Clean Development Mechanism (CDM) as it could accelerate deployment of this crucial new technology. “The deployment of CCS should be a ‘litmus’ test for the seriousness of environmental negotiators dealing with climate challenge.”

“In short”, Mr. Tanaka said, “the world´s energy economy is on a pathway that is not sustainable”. This is valid for the oil market, where there is an urgent need for investment, to ensure an adequate cushion between supply and demand returns to the market. This is also true from an environmental perspective. “In the long term, to meet environmental concerns, we will require a veritable energy revolution that completely transforms the way we produce and use energy. However, the energy sector should not be viewed only as the cause of the climate problem but also as part of the solution”, Mr. Tanaka said. After all, it readily lends itself to provide the type of transferable skills required to prosper in a low carbon economy.

An essential step in this process would be to continue the dialogue between producers and consumers, Mr. Tanaka said and stressed that the dialogue had already resulted in concrete achievements such as the Joint Oil Data Initiative (JODI). “It must now focus on areas where progress is needed and where mutually beneficial outcomes are possible”, he said, citing as an example cooperation between the IEA and OPEC on carbon capture and storage — a technology which would be doubly beneficial as it would lead to lower CO2 emissions while enhancing oil recovery.

My take on all this:

While I have no doubt that current oil prices are hurting developing nations more than they are the US and EU, Japan, et al., and I also agree that these prices are the result of a mix of factors, mostly supply, I was still disappointed by the lack of clarity in the IEA statement. They say that there “is no quick fix on the supply side”, but they call for more investment. Are they taking the classic Cornucopian viewpoint and that the supply shortage is due to above-ground factors, and that it can be relieved in time with greater investment? Or are they both more enlightened and more short-sighted, and they see the peak looming but want to get at least some relief in the shorter term, even at the price of making the longer term situation even worse? At this point in human history, I’m not sure which view would be more damaging.

When they speak of investment, they seem to want a mix of more energy coupled with conservation. As long as the increased energy supply is from an extremely low CO2 source (with no other nasty problems hanging over it) then I agree. I would have preferred a little more emphasis on the conservation front, perhaps as an implicit poke at the US to get moving on that front.

I’m not sure why the IEA is focusing on the 50%/2050 goal, when so much discussion from experts assumes that the real goal should be 80%/2050, but that’s the least of my concerns with this portion of the IEA release. I find their emphasis on CCS, to the point of essentially elevating it to silver bullet status, very unnerving. We don’t even know for sure that we can make CCS work on the scale needed, or what it will truly cost to retrofit it onto the thousands of coal-fired electricity plants around the world, almost none of which were sited or designed and built with CCS in mind. In that light, the IEA release sounds like a very polite way of saying, “We have to do everything we can to get CCS working, now, because without it we’re screwed beyond belief.”

And then the release returns to the oil issue, and how investment can provide “an adequate cushion between supply and demand”. Taking them at their word, just how long, one wonders, does the IEA think this cushion would last? If the peak in world production is really just three or four years off, as I and many others think, then a wave of new investment now wouldn’t even bring new supply online before we hit the peak. And even then, all it would do is help deplete oil reserves even quicker. We would literally be paying now for the ability to steal oil from our future selves.

I agree completely that we need to take a more holistic view of the situation, and consider both energy and environmental issues as one tightly interwoven mega-topic. But that view has to be based on a realistic accounting of the peak oil situation and the steps we can and must take to reduce our CO2 emissions.