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World Energy Outlook 2013

Each year, the International Energy Agency puts out a lengthy report called the World Energy Outlook. New Zealand is a member of the IEA, and we pay membership fees to them in exchange for policy advice and so on (although we don’t seem to listen to it). The 2013 World Energy Outlook came out this week, and doesn’t seem to have gotten a whiff of coverage in the Herald, so I guess it’s up to me.

Incidentally, when the 2012 edition came out, the soundbite that made headlines around the world was that the US was going to “become the world’s largest oil producer by around 2020, temporarily overtaking Saudi Arabia, as new exploration technologies help find more resources” – see this Herald article for example. The media tended to gloss over the most important message of the report, which is that greenhouse gas emissions continue to increase, and we actually need to reduce them to have a reasonable chance of avoiding major global warming – but current trends are not taking us in the right direction. Thanks to Dr Sea Rotmann for making this point. As for the suggestion that the US will dramatically increase its oil production, I’ve heard murmurings that the US government was leaning on the IEA quite heavily to make this prediction, and reality may fall short somewhat. We’ll have to wait and see.

I do have to give “mad propz” to Brian Fallow at the Herald for writing some great analysis on the 2012 report earlier this year. He notes:

We already have… more [fossil fuels] than we can possibly ever burn if we are to have a fighting chance of keeping global warming to 2 degrees celsius above pre-industrial levels. And that is the goal the world’s Governments, including ours, signed up to in Cancun in 2010.

[The] 2012 World Energy Outlook, released six months ago, says: “No more than a third of proven reserves of fossil fuels can be consumed prior to 2050 if the world is to achieve the 2°C goal, unless carbon capture and storage technology is widely deployed.”

…Carbon capture and storage being a method of “storing” emissions from coal plants, which has not yet been shown to be commercially viable, and may not ever be.

Anyway, on to 2013. Maybe the IEA are setting themselves up for the kind of media coverage they got last year; their press release this week only devotes one paragraph to climate change, stating that “Energy-related carbon-dioxide emissions are projected to rise by 20% to 2035, leaving the world on track for a long-term average temperature increase of 3.6 °C, far above the internationally-agreed 2 °C climate target.”

The report itself, though, makes the point much more strongly:

  • Under the IEA’s “New Policies Scenario” – which is a bit more optimistic than ‘business as usual’, and assumes that governments do initiate carbon taxes, trading schemes etc where they have said they will do so – the level of greenhouse gases in the atmosphere will keep rising, “from 444 parts per million (ppm) in 2010 to over 700 ppm by 2100″.
  • Global agreements call for the long term concentration to stabilise at 450 ppm. Note, though, that the current 444 ppm is a bit overstated, and comes down to 403 ppm when cooling aerosols are excluded (IEA, p79). Clearly, the path we’re on does not achieve the goal signed up to by the world’s governments.
  • “This would correspond to an increase in the long-term global average temperature of 3.6°C, compared with pre-industrial levels (an increase of 2.8°C from today, adding to the 0.8°C that has already occurred)”.
  • “As the source of two-thirds of global greenhouse-gas emissions, the energy sector will be pivotal in determining whether or not climate change goals are achieved”. And that’s the kicker. Note that the energy sector includes oil, gas, coal, and other energy sources – so transport emissions are included here.

Here’s what happens to (energy) greenhouse gas emissions over the next 20 years, based on the “New Policies Scenario”:

The world can still meet its targets, with greenhouse gas concentrations stabilising at 450 parts per million in the future, but each year of delay makes that goal harder to reach, and more expensive. This is something the IEA says every year, and maybe it’s the “stuck record” factor that means these reports don’t get the coverage they should. But just because we’re haven’t been thinking about it as much since the GFC, doesn’t mean that the processes driving climate change have gone away.

I’ll just make one more point and leave the rest for another day (it’s an 800 page report, and a bit too much info for just one blog post). A lot of the changes that need to be made can be made for no economic cost; they pay for themselves. The IEA has listed four of the big changes, which “if implemented promptly, cut 80% of the
excess emissions in 2020 relative to the 2°C target”, and make it much easier to achieve the overall target. The four policies are:

1.        Adopting specific energy efficiency measures (49% of the emissions savings).
2.        Limitng the constructon and use of the least-efficient coal-fired power plants (21%).
3.       Minimising methane (CH4) emissions from upstream oil and gas production (18%).
4.       Accelerating the (partial) phase-out of subsidies to fossil-fuel consumption (12%).

Some of these aren’t that relevant to New Zealand – but number 1 certainly is. The IEA notes that the efficiency measures they advocate include “new or higher energy performance standards in many fields: in buildings, for lighting, new appliances and new heating and cooling equipment; in industry, for motor systems; and, in transport, for road vehicles”. In light of these recommendations, the shift towards greener building in New Zealand is a positive trend. We don’t have any regulations on road vehicles in terms of greenhouse gas emissions, but maybe it’s time we did. I’ll look at this more in the future.

Any of our readers who are students may like to go and have a look at the report for themselves – it’s not too hard to read, and there’s an executive summary so you don’t have to read the whole thing! If you’re at the University of Auckland, you can access it through the OECD iLibrary here.

The Decline of Car Culture in the West

We’ve covered this before, but it’s worth repeating. The OECD nations are all driving less, while developing nations are all driving more. Basically, and I bet almost 99% of westerners will be shocked at this thought, but people in China, India, and, yes, Iran, are increasingly more able to do what we used to do without thinking about it: They are outbidding us for oil. More on that later, but first here is a nice summary of the US situation from the New York Times:

Here are some quick points from the article:

1. decline preceded financial crises by 2 to 3 years [but that crisis intensified it]
2. US Vehicle Miles Travelled is now 9% below peak and equivalent to 1995 percent level per capita.
3. it definitely reflects a generational shift:

‘From 2007 to 2011, the age group most likely to buy a car shifted from the 35 to 44 group to the 55 to 64 group, he found.’


4. and seems to be related to new technology:

‘The percentage of young drivers is inversely related to the availability of the Internet, Mr. Sivak’s research has found.’

Perhaps Joyce’s investment in Ultra Fast Broadband will be the complete undoing of the longed for great economic outcomes from his other and much much more expensive idea; The RoNs programme?!

A couple of charts from Advisor Perspectives:

VMD_June 2013

VMD +gas price_June 2013

 

Anyone still think that pushing up the petrol price won’t or can’t influence driving behaviour? More contradiction in government policy; the recent and continuing fuel tax rise is in order to fund their lavish road building programme but those extra nine cents are adding to the incentive to park the car and find another way around. This government is over investing in the wrong mode for the times.

These charts also make it clear that this is no blip; this is a discontinuity. A once in a lifetime shift in direction by our culture. We really, really, need to be designing policy with this fact in the front of our minds. It seems there is a problem here, because if there is one group that haven’t got the memo it’s the older wealthier male, that’s right, the group that makes all these kinds of decisions for us:

The Driving Boom — a six decade-long period of steady increases in per-capita driving in the United States — is over. 

Americans drive fewer total miles today than we did eight years ago, and fewer per person than we did at the end of Bill Clinton’s first term. The unique combination of conditions that fueled the Driving Boom—from cheap gas prices to the rapid expansion of the workforce during the Baby Boom generation — no longer exists. Meanwhile, a new generation — the Millennials — is demanding a new American Dream less dependent on driving.

From the Frontier Group, PDF here  [my emphasis]. And here’s how they illustrate this change to the American Dream:

Frontier Group cover image

Nevermind, cos all that fracking business is going to make petrol as cheap as chips again isn’t it? Er, No. Here is a link to a long [50mins] interview with a Texan Oil Geologist, Jeffery Brown, who explains the technicalities and economics of this in a straightforward language just why, despite all this talk of abundant supply, the price of oil stubbornly stays high and will almost certainly keep going up:

Jeff Brown and JH Kunstler

In short, we are scrapping the bottom of the barrel; not in total, there’s still a lot of oil in the ground, but for the rate at which we are consuming it the corresponding production flow is too low because all the easy to get fields are diminishing. The supply demand balance is now determinedly hitting into geological and practical limits. We have to use less.

But we are aren’t we? Well if that ‘we’ is the OECD then that’s true, the US and Europe certainly are. In fact these two areas have shed about 5million barrels a day in consumption at just the same time that China and India have increased their imports by this amount and then some:

oil-consumption-by-part-of-the-world

The developing world is outbidding the ‘west’ for this most crucial of commodities. Listen to Jeff Brown above for how this can be. Basically the developing countries can put that same oil to more productive use than we can. Because they are only beginning to base their economies on liquid fuels their uses of this valuable resource are more useful than ours. Jeff Brown’s example above is that the fuel an Indian farmer uses to run a pump to irrigate his fields is a more productive use of that fuel than us westeners burn driving to the mall to pick up a latte in an SUV.

While this is true for now these countries will also hit a limit to what they can afford as well, especially as they are beginning to use it less efficiently too [many there are pursuing last century's lifestyle too] and that includes the producing countries, especially when, because of either rising consumption or falling production or both, they flip from being net exporters to becoming net importers. As have the UK, Indonesia, Vietnam, Egypt, and a few others recently.

Egypt seems topical so here’s the oil history, note it’s much more the rising consumption than the decline in production that is troubling them. But still that’s half a million barrels not on the global market for other net importing countries like New Zealand to buy and burn. It basically is not good for social harmony to run low on energy:

Egypt energy data browser

 

From here: The Energy Data Browser

Here’s a brilliant comparison. Italy has been hard hit by recession, in 2011 apparently more bicycles were bought there than cars, but there’s a different story in Iran, despite the US sanctions:

per-capita-energy-consumption-italy-vs-iran

 

Both of these charts are from Gail the Actuary on The Oil Drum, in a fascinating article on the politics of oil, here. And basically illustrate how the old postwar definitions of the world are being inverted.

It is true that the US/Canada are in different shape compared to Europe because of the Shale and Tar Sands resource, as Gail’s charts below show. But while that uptick in US production is significant the really good news is that drop in consumption. Europe’s chart is showing the rapid decline of the North Sea fields swallowing any new production. And remember Shale Oil faces swift almost immediate declines unlike conventional fields and is extremely expensive to extract. The US production honeymoon is only half the story and will not be permanent.

 

united-states-liquids

 

europe-liquids

What matters now more than ever is what sources and forms of energy we have available and especially what uses we put it to. If only the US were putting more of that Shale resource into transitioning away from oil-dependency, and from other fossil fuel sources for electricity, then it would be of even greater value. And here in New Zealand if only we understood our wealth in electrons and our relative poverty in hydrocarbons must shape the way we live more if we are to prosper through the coming century. Unfortunately those in charge are determined to cling to old models despite of the facts.

And the key to people understanding that this shift is necessary and is not to be feared is that prosperity and happiness are not dependant on us all burning ever more amounts of oil and other fossil fuels, in fact quite the reverse is clearly the case. I do believe as a society we are going to power down, but that will not necessarily mean a step back in time to a less comfortable existence, but if we do it well it will mean a more sophisticated society just one based on less brute force.

There is a Saudi proverb I really like [for they too, despite their current riches, face the same problem, perhaps even more so]:

“My Grandfather rode a camel, my father drove a car, I fly a plane; my son will ride a camel”

It seems to me that the son’s camel will be different from the grandfather’s one:

solarcamel_transporting vaccines across the desert

[Solar Camel: delivering vaccines in the desert]

 

Oil, Thatcher, and the Wealth of Nations

Data visualisation specialist Jonathan Callahan has produced by far the most interesting response to the death of Margaret Thatcher I’ve yet to see, originally posted as a comment on The Oil Drum and reproduced below. Using his Energy Data Browser he has linked significant points of Thatcher’s career to the North Sea Oil boom. This connection is useful to further unpack issues around the vulnerabilities of nations [and governments] more generally to oil dependancy.

Before having a look it is worth noting a couple of things. The Data Browser turns the figures from the annual BP Statistical Review into visualisations of where regions and nations sit on the Energy Import/Export seesaw. As such it depends on BP’s policies and accuracy. For instance the oil category is an ‘all liquids’ measure not crude oil only [the best stuff], so biofuels, lease condensate, bitumen and all sorts of products with different energy content and utility are all included. The key issue, however, is illustrated very clearly: North Sea Oil gave the UK some 25 years as a net exporter of liquid fuels. And that’s now over. Thatcher’s achievements, whatever your view of them need to be seen in the context of this temporary boom, as do Blair’s. For example; it is easier to close down one energy industry [coal mining] when you happen to have a new one just coming on stream [North Sea Oil].

UK Liquid Fuels and Thatcher. J Callahan

UK Liquid Fuels and Thatcher. J Callahan

This approach should also be extended to include the Prime Ministers that followed Thatcher: Major and Blair both also had the good fortune to preside over the North Sea oil bubble. And Blair, like Thatcher, took his country to war and failed to plan for the decline of this energy windfall. Neither of these following PMs deviated from Thatcher’s line; taking the short term opportunity offered by this finite resource with no attempt to either husband it nor use it to invest in its replacement [unlike the other beneficiaries of the North Sea resource; The Netherlands, Denmark, and Norway, all of whom have been more circumspect with their shares]. Also the focus through this period in the transport sector was all on privatisation, PPPs, and other financial rearrangements but nothing on core issues like energy security [part of what is meant by the term sustainability] just gaming the market. In the UK the North Sea hydrocarbon riches have been used by both Parties to pursue social agendas and to fund foreign adventures.

This energy-centred analysis can also be extrapolated to the present which is looking increasingly like a direct continuation of the difficult economic crises of the 1970s in Britain [energy supply costs as cause of economic and social problems]. It’s almost as if the North Sea bounty never happened. Much harder for Cameron to continue Thatcher’s social confrontations without the happy boon of both the oil and its excise revenue. With North Sea production now increasingly in the rear view mirror, it looks very much like a wasted opportunity, most of it sold, after all, at around $10-15 a barrel. Nothing like an unrestrained free market to efficiently strip a resource as quickly as possible [again; compare and contrast to the more controlled exploitation by the other beneficiaries of this same resource]. So whenever I read praise of Thatcher’s or Blair and Brown’s financial management with no mention of the North Sea largess I find it hard to take seriously.

Given the example of Thatcher’s long hold on power and the lasting changes her government was able to make to British society it is easy to see why our current government is so keen on the idea that there must be oil under our land or seas somewhere; bending over backwards with sweetheart deals and law changes to try to entice oil companies to look for it. The search for oil has been going on for many decades here yet New Zealand has always been a net oil importer and the gap between production and consumption [see below] has widened considerably over the last 20 years. Our entire economy is extremely vulnerable to either restrictions in supply or rises in price of this commodity [two sides of the same coin].

NZ OIL 1974-2011

NZ OIL 1974-2011

Therefore I would argue, and the example of the UK North Sea resource supports this, that the far better direction for any government is to work on reducing our dependancy on this very hard to replace input. With urgency. To work towards a situation where the quantities we are either producing or importing are used in the most value-added and vital parts of the economy and not simply squandered on more inefficient and wasteful uses.

Oil can be replaced by other energy sources in many applications [like electricity generation, which largely happened after the 1970s oil shock] but this is most difficult in the transport sector, oil is by far the best and most efficient source of liquid fuels: Oil issues are transport issues and visa-versa.

OIL CONSUMPTION 2011

Because the vast majority of the use [and waste] of oil products is in the Transport sector this is the area that desperately needs new thinking and leadership from all levels of government. This is not easy but there are significant things that can be done now, changes that do not require currently unavailable or unaffordable technologies. For example the provision of much more effective urban public transport and in the electrification of as much of freight and passenger transport systems as is possible. As well as much more imaginative management of alternatives systems like our legacy rail network that are almost certain to become part of the answer to this problem.

The more we can bring that pink line in the chart above down, and in a structural way, the better. Consumption has plateaued since around 2004 but it will take a great deal more effort than just hoping people will buy smaller/hybrid/EV cars or spending enormous sums [virtually the entire transport budget] to straighten out some State Highways to get it meaningfully lower. This is true whether someone gets lucky and finds significant new oil or not; the less we are wasting the more beneficial any find would be [as well, of course, helping to reduce the production of the negative externalities that comes with burning all these fossil fuels]. The key metric for every country is the net figure; imports minus exports and the closer consumption is to zero the better this this sum will always be.

We are, unlike the UK, in a very much better position with regards to electricity generation, and there is still a great deal that can be done to improve from the current 80% renewable figure. 100% renewable generation is an important task; it certainly would be better to not be burning gas and coal to make electricity. [Although they are making some good moves in the UK now too].

Unfortunately I guess our extremely short election cycle is one thing that works against longer term views, but then the UK’s five year cycle didn’t help them plan better for the future either. So the lack of any vision simply beyond trying to maintain ‘business as usual’ for a just little bit longer is really the problem. Shame.

And there is less excuse now with the very clear example above.

Our driving trends aren’t unique

Following on from my post this morning around the Harbour bridge, I was pointed to this article from the US on trends on the amount of vehicle miles travelled each year. The post starts as

It’s now common knowledge that annual changes in the volume of driving no longer follow the old patterns.

For 60 years, the amount of vehicle miles traveled (VMT) rose steadily. Predicting more driving miles next year was like predicting that the sun would rise or that computer chips would be faster. The only direction seemed to be up.

Then, after 2004, per-capita VMT fell 6 percent, which has led to a decline in total VMT since 2007.

The most recent data are from July, traditionally America’s biggest month for driving. In July 2012, Americans clocked over 258 billion miles behind the wheel, a billion fewer miles than the previous July despite a slightly stronger economy and cheaper gasoline. In fact, you’d need to go back to 2002 to find a July when Americans drove fewer miles than July 2012.

Has America’s long increase in driving turned a corner or just taken a prolonged pause? The answer matters a lot.

They have then gone further and done some modelling of what the graph might look like based on a couple of scenarios:

But what surprised my was just how similar the graph on the numbers is to what we see with the harbour bridge so I decided to do some similar modelling. I looked at the average year on year percentage increase for four different time periods and modelled them out to 2027, 15 years from now.

  • From when we can first get data for the Harbour bridge in 1975 through to when the volumes peaked in 2006
  • From when we can first get data for the Harbour bridge in 1975 through to 2012
  • The last decade from 2002 to 2012
  • Since traffic peaked in 2006 through to 2012

Doing so gave a spooky familiar graph even though they are looking at miles travelled while we are looking at vehicles per day over the bridge. Here is what our result looks like:

As I said they are remarkably similar and just like the post we have to ask ourselves, are we really going to see a return to the old days? Sure there will probably be a bit of a pick up in the future if the economy improves but it seems hard to imagine it will be anything like what we have seen. Especially because the drop off in vehicle numbers preceded the global financial crisis, as it has done all over the developed world and because we know that on this particular route that thousands of people have chosen to use the Northern Busway once that opened. And are likely to continue to as improvements continue in Auckland’s transit systems.

The author of the US post comes to the same conclusion:

It won’t be surprising if an upturn in the economy leads to some increase in driving, especially if gas prices don’t also surge. But it’s harder to imagine that we will switch back to the sizeable increases in VMT that took place almost every year for six decades after World War II. Even if driving continues to increase at the rate of population, this would be a long-term slowdown that should correspond to major changes in transportation policy.

With the important observation that:

While we can’t yet see “the new normal,” it’s a good bet that it won’t be the same as the old normal.

Do we really want to be making $5 billion bets based on this uncertainty? Or should we pay more attention to this seven year old change, as it may well be generational, as the article urges:

Congress needs to stop trying to build out our grandparents’ transportation system.

Well certainly not unless they can guarantee the petrol prices our grandparents paid too.

Brittle Thinking

This post is a follow on from Stu’s, here, on the transport minister’s extraordinary answers to questions in parliament concerning the wisdom of his extremely unbalanced transport spending programme.

You will recall that Mr Brownlee thinks that petrol price is irrelevant to decisions about transport investment. Or at least I think that’s what he means by:

“it’s clearly evident then that the pump price is an extremely irrational input into the consideration of strategic transport policy.”

And that somehow supermarket discount vouchers are the proof of this… or something? The use of the word irrational here is apt as it is increasingly becoming the right word to describe almost every utterance by Mr B on transport matters. Regardless, let’s try to look at what he seems to be saying.

Basically the idea is that the only rational transport policy is one that builds roads whatever the price of the fuel needed to be able to use those roads. He is not saying that he thinks petrol is going to get cheaper, or even stop getting more expensive, but rather that it doesn’t matter how expensive it gets- we will still always need more roads than we have now. And why, because people will always drive more and more no matter what it costs; there can never be enough roads. And as this government always repeats, our exports need more and more roads to be able to get to port on trucks. So much so that these special new roads, despite duplicating existing ones and existing rail lines are certain to greatly add to our nation’s wealth; they are of National Significance. No matter like fuel cost can apparently have any bearing on this. It is all rather faith-based after that, because the mechanism for these great outcomes are hard to identify beyond a few incremental efficiencies; like slightly lower fuel costs, exactly the work that would be undone by higher fuel price.

As petrol has been rising pretty much all this century we can probably test this price-doesn’t-matter theory of Mr Brownlee’s with some facts. Here is the average pump price adjusted for inflation from our friends at the MED [a little out of date - we're well in the $2.20s/l now].

As has been observed we are not quite in the price territory at the pump that we were in the mid 1980s when we adjust for inflation, so we have yet to see unprecedented prices but we do seem to be heading that way. It is also interesting to note that that earlier peaks were initially because of a rise in crude price but persisted in NZ because of a crash in the NZD after the crude prices declined, as the chart below shows. The mid 80s was a time of the big retreat in price after the end of the OPEC embargo and the beginning of the long period of stable western supply from the North Sea, Mexico, and Alaskan fields, all now well in decline.

[The figures below are for continental US deliveries not the Tapis or Dubai crude that our supplies typically are- which are usually higher]

It is also obvious from the chart above that we are now in crude price territory that when it last happened was called a ‘shock’ [the red peak]. That price event, a clear discontinuity, was caused by a cartel of major producers, OPEC, withholding their supply. This time the ever rising price is caused by an inability of all the world’s producers going flat-out to meet demand. And this is despite unheard of sums of money being used to squeeze every last drop from difficult and inaccessible sites with ever trickier and more risky technology. The production from these new and expensive unconventional, ultra deepwater, and shale plays only means that the decline in older conventional fields is just being kept up with- for now. Supply/Demand on a knife edge: Price goes up. Economics 101.

Who knows what lies ahead but this is already a longer lasting and more serious discontinuity from the long term average than the OPEC shock. So at the very least there is a good risk of the crude price continuing to rise simply because of the increasing demand from the big developing nations; China, India, Brazil etc. and a continued inability to increase the rate of production simply because the accessible stuff is no longer to be found. Compounded by the fact that the marginal barrel is now so expensive to extract.

Going back to the first chart and we can see that the curve of the price rise this century at the pump in NZ is not nearly as steep as the crude price rise. This is principally because the NZD dollar has appreciated against the USD throughout this period [and because the taxation part of the price has not risen as fast]. So we have been shielded from much of the rise by our unusually high dollar.

OK so here’s a second level of risk; perhaps the crude price will stop rising, well even that won’t stop the prices at the pumps going up if the NZD settles down to its historical average of around 60 USc. Or even both could happen at once! Oil up and NZD down… $3-4 a litre anyone?

Chart below from ANZ RESEARCH here [thanks to Kent]

So the point here is that the RoNS by entrenching an already unbalanced [another way of saying inelastic] infrastructure is in fact a dangerously risky policy and the complete reverse of what Ken Shirley describes as ‘sensible’. It increases the nation’s exposure to both crude price risk and exchange rate risk. Its a radical and low odds gamble with our tax money [No Ken it is not yours]. 12 billion is not a trivial sum to gamble with.

Or does this not matter at all? No-one’s bothered by higher fuel prices; we don’t need any alternative to filling her up? We won’t change our habits; driving is too damn useful and enjoyable.

Ok so price at the pump has risen from the all time low in 1999 even if not as much as it has before or what might be ahead. Let’s now look to see if there have been any changes in driving through this period, you know; elasticity.

Here is a chart from the MoT. They aren’t so free with their info as MED, at least in terms of datasets easily available to download on their website, so this doesn’t cover as much time as I would like but still there is a lot to see.

VKT by vehicle Type

*VKT=Vehicle Kilometres Travelled.

First we can see that for all this government’s framing of transport decisions as being about what the road freight lobby wants by far the greatest users of our roads are passenger cars. So especially when it comes to congestion it is all about light passenger vehicles. Secondly we can see that there is a clear levelling off of VKT in this sector despite the population growth throughout this period. Some elasticity then. It seems we hit a kind of a wall around 2005 and have been wobbling around on a kind of VKT plateau for the next six years. Important to note that this change precedes the global downturn significantly. In 2005 the price at the pump was only around $1.50 on our chart above and of course it’s now over 25-50% higher than that. I have no idea if there’s a magic price where we are likely be ‘encouraged’ to bend in an even more visible way but it may well be that we haven’t reached it yet.

It looks like light commercial vehicles have increased their travel a bit over the period, as have motorcycles. Of course we know that in Auckland over this period PT use has grown consistently. A rise in PT and more use of lighter vehicles is a rational response to rising fuel costs and something I expect to continue. And, as described here this offers some exciting opportunities for improving our cities and our lives, as well as our efficiency.

Is this not elasticity? 3m to 11m in around 8 years. Even the plateau shows elasticity as the growth hits a limit it slows, and the limit here is the capacity of the network, critically limited by a lack of rolling stock and bottleneck and deadend at Britomart. Elasticity enabled by improvements to service and amenity. All PT use in Auckland is increasing of course; 50m to 70m in the last six years, in direct contradistinction to all the driving stats which are flat at best.

But there is way in which what Brownlee says is true and that is we have built a system that simply does not allow much elasticity in transport mode choice, because for most people there are few options if any, that are as complete, as well funded, and therefore viable as driving. So therefore we are mostly all forced to cut almost every other item of spending before we stop buying petrol at any price. At what point does that become impossible? At different times for different households and businesses I guess. Essentially though I am arguing here that there is an inelasticity of opportunity not simply a cheerfulness about paying any price at all for petrol, ‘cos we just love our cars so much!’ as the minister implies.

But this only goes to highlight the great risk of a policy that further reinforces this inflexibility; what is another word for the inelastic? Brittle.

We have an extremely brittle infrastructure set that is highly vulnerable to exactly the sort of price escalations we are seeing. And what is more likely to snap is outside of transport statistics; peoples lives and livelihoods are what will snap. For example families not being able to pay for other essentials including food because they have to buy petrol to work. As they say in the US: ‘No transit; no job’.

So by all means build huge highways to lift the profitability of big trucking and to smooth the way for Omaha bach owners, but expect to keep having to pick up the tab at the other end of society, in social welfare, unemployment, housing costs, and all the other deficits of increased poverty and inequality. As is usually the case when user pays is applied to public spending it is regressive; it reinforces advantage and increases exclusion.

So in summary:

1. people do seem to be trying to bend away from dependence on the increasing costs of driving where they can, but most have little option.

2. we may not have yet reached the breaking price point but it won’t be pretty if we do, and I’m sure it is already contributing to real hardship now.

3. having identified an inelasticity wouldn’t a wise government seek to increase options rather than be so determined to reinforce this vulnerability in our nation’s infrastructure and therefore the brittleness of society’s fabric?

Or to put it in terms that the government might understand, with its strange conflation of its work with that of running a business: The RoNS are a classic management mistake: a bold investment in last century’s successful line, which is now mature and certainly needs maintaining and some improving but is no longer growing, and missing the opportunity to invest in the new growth products ‘moving forward‘.

We can only build for the future.

 

Adendum: Comparison with the US: http://www.advisorperspectives.com/dshort/updates/DOT-Miles-Driven.php

 

Oil Strike!

The Herald on Saturday ran a big feature on the role of oil in the NZ economy:

Pain at pump offset by $2bn exports

The reason for this is the publication by Edison Investment Research of the first ever New Zealand Petroleum Sector Yearbook [Commissioned by whom? The government?]. The general tone of the article is reassuring or even exciting for anyone who might be concerned about the cost of filling their gas tank- with much of the emphasis going on the fact that NZ has been recently exporting around $2billion worth of oil products a year, certainly I got the impression from the report that things are booming in the NZ oil patch. So I thought I’d have a closer look at the numbers:

NZ OIL 1974-2011

Helpfully the Ministry of Economic Development has quite a lot of data on their website. The volumes are Thousands of Tonnes and seem to include every form of petroleum product; all liquids and even LPG. [Note; It isn't clear whether they are straight volumes or in 'oil equivalent' volumes, as different products have different densities and therefore value.]

Lots of interest here. Yes we have been exporting between 1-3mt per year since the mid 1980s, pretty much everything we can produce. And there has been local production since the mid 70s, around the time of the OPEC oil shock. So clearly a fair bit of work has been going on for quite a long time in the hunt for oil in NZ. And output has wobbled about a bit but this is not the most important issue visible in the chart above. The most important point is that these are not net exports; we import way more than either we used to or than we have ever produced. Its that pink line that really matters. We are a member of that most vulnerable of clubs: Net Oil Importing Nations.

The Herald article reports it thus:

The yearbook finds that in 2004 exports from petroleum sales totalled $502 million but by 2008 this had surged five-fold to $2.63 billion.

Good news! By selecting one of the weaker years, both in volume produced and oil price, and comparing it to the highest ever it can look like we’re on to an on going winner. Ok so the purpose of the report is to talk up the prospects of the industry and to persuade us that finding more oil is the best answer to our concerns about our dependence on this increasingly expensive substance. The article does go on to concede that even if much much more was produced here that wouldn’t lead to cheaper fuel -in contradiction of its own headline:

In the local market the upstream exploration and production sector has very little bearing on the downstream market for petrol, Edison analyst John Kidd says.

Actually the the real case is not ‘very little‘ but rather ‘none whatsoever‘; we’ll be paying the market price however much is produced here, especially as we won’t even own it. Regardless, the general tone here is all very bullish- don’t worry it’s all going to be great, that’s certainly the vibe for those only skimming the news. Yet it is clear that what has driven the fluctuations in the production numbers over the last almost 40 years is the geological reality in the field: the first production peak of 1997 reflects the highest ever flow rate of the Maui field which then immediately went into decline. The slightly higher 2008 peak is a result of the Pohokura and Tui fields at or near their highs. And since then these [and other minor sources] have been joined by Maari and Kupe fields. Already all of these fields are producing at a lower rate just a couple of years into their lives [the 2012 figures are lower still]. Saudia Arabia it is not.

Yes but any amount of oil is worth pumping out because the stuff is so valuable. You bet. Though of course those high prices also hold for those 7mt we are importing as well. Looking at that chart with the nation’s general wealth and balance of payments in mind we can all be grateful that the rate of growth in imports of the 1990s didn’t continue until now because then we’ed be importing- and trying to pay for- around 9mt per annum. And because we export everything we find [Marsden Pt refinery can't use the local stuff- although IIRC that will change] the level of imports flattening off is not a result of finding more locally and pulling it out of the ground, but because we have not been burning it quite so wantonly since those price rises really started hurting around 2005.

It takes a huge amount of work, expertise, and investment to find this oil, and while the government does receive royalties and locals get good jobs along the way much of the value heads off overseas to the foreign investors in the local oil industry [hitting us in the 'Invisibles' account, not mentioned in the Herald article]. So while every barrel of local oil does help to offset the ones we import it is not a straight swap in value. We still have to use a huge amount of our precious export returns to pay for this stuff; and it ain’t getting cheaper. That’s a lot of milk.

So what do we do with all this black gold and where could we best put effort into trying to reduce our dependence on the stuff? Here’s where it goes:

 

Cherry Pie: Another interesting chart. International transport is basically 3/4 Aviation fuel and 1/4 Shipping Fuel Oil. Non-Energy Use is stuff like bitumen, lubricants, and solvents. Very surprised and encouraged that Ag, Forestry, and Fishing is only 6%. There are some other bits and pieces, but wonderfully we don’t burn much of this valuable commodity to heat our homes or make electricity any more [we largely got off that after the little warning provided by the OPEC squeeze of the 70s]. So clearly Domestic Transport is the area that you would target if looking for savings in the oil import bill, so what’s going on here?:

Ok so flying and shipping aren’t the issue here. I think it is pretty clear where this is heading: We’ve struck oil! 9/10 of 2/3 of all that oil we import is all used in cars trucks and trains to move us and our stuff around on land. Not down on the farm, not at sea or in the air, but on our roads and rails. Or 4.3 mt of the 7mt.

Effort and attention to lower this figure while still improving our connectivity is surely as important as looking for new supplies. Yet this idea seems to be considered impossible by the government, if they think of it at all. It’s just not as sexy as ‘Drill Baby, Drill’. And nor does it have a multi-billion dollar industry and well funded lobbyists fighting for it. Indeed it isn’t easy as the structures that we built up in the age of the steep increase in imports in the first chart above, when oil hit the low of 10 bucks a barrel, mean we have little choice or flexibility in how we move things and people.

Well here’s one thing we should do immediately, because we are no longer in the age of cheap oil and likely never will be again, and therefore need to change our ways to face this new reality:

When making decisions around investment in new transport projects the analyses should include calculations of whether or not they help us to significantly change our lives and businesses in ways that reduce our dependence on imported oil. So clearly this would privilege all forms of electric propulsion, but also the much more efficient rail and sea freight over truck freight. As well of course urban, provincial, and intercity public transport. But especially active and electric urban modes where there is growing demand and a high number of, frankly, low value car journeys that could easily be substituted if appealing alternatives were more available.

Individuals and individual businesses have been doing what they can to reduce their exposure to the increasing cost of road travel; we can see this not only in the flattening off of the import line above but also in the flat-lining of the kilometres travelled on our roads since around 2005. A date that precedes the global financial crash but not the start of the steep increase in oil price. But this isn’t enough, individuals and businesses cannot do much more by themselves. They need options to allow them to make the changes that they clearly want to be able to do.

It seems that there is an idea that has a hold in the minds of many who have mostly lived through the age of ever increasing vehicle growth and fuel use that it is in some way causally linked to economic success. But research shows here that is no longer true. In fact the reverse is almost certainly the case now, as we continue our dependence on this increasing expensive input we put our competitiveness further at risk.

The challenge is to grow the economy while reducing our exposure to this input. And if anywhere can New Zealand can; we have a fantastic renewable electricity resource, the sea freight we so rely on for export is a relatively modest user of hydrocarbons, as is the primary production sector, and we have already arrested the growth in waste so now it is time to really turn that pink line in the first chart around. The first step is to let go of the lazy and out of date assumption that nothing can be done, that hydrocarbon use is, as Mr Brownlee says; ‘inelastic’.

Well it will certainly remain fairly inelastic while there is no policy to address this in land transport. The charts above clearly show this where the opportunity lies. The national significance of spending $12 billion on new duplicate highways is increased dependence on oil imports, while at the same time letting a huge opportunity to invest in a better and freer future slip by. Tragic.

I am not calling for us to stop looking for oil, but I am calling for an active effort to reorient our infrastructure away from inefficient and inflexible oil dependence with just as much vigour; the results will almost certainly be quicker, more significant, and longer lasting. We just have to stop thinking like it is still last century on energy and land transport matters. Governments love to talk about innovation, but it is no good just wishing for miracle new technologies while investing in yesterday’s world; there are fresh things we could start doing today, like these Smart policies for example.

Because after all just how valuable that oil we do find is depends on how much we are using ourselves. It’s the net figure that really matters.

 

POST SCRIPT: Here is a link to the current government’s Petroleum Action Plan. Precisely one half of the problem, looking for more; not thinking anything about how to use less.

Here is a more sophisticated view of the world we are now in:  http://gregor.us/policy/the-demise-of-the-car/

‘A paradigmatic shift in global energy usage is underway that has finally become more well-defined, and more visible.’

 

Enrique Peñalosa

For those that didn’t make it to our film night or haven’t seen Gary Huswit’s Urbanized here is a little more on what was, for me, one of the highlights of the film. Dr Enrique Peñalosa. The implausibly suave ex-Mayor of Bogota. Interviewed on one of his cycleways riding in a suit, pausing mid interview to greet people zipping by.

Enrique Peñalosa

Enrique Peñalosa was Mayor of Bogota from 1998-2001. He transformed this very divided city by prioritising spending on the poor instead of the rich, which included building a BRT system and cycle and walking infrastructure instead of highways. He also built a lot of libraries, kindergardens, and public parks. Naturally this all made him very unpopular with some very powerful sections of society but, despite his short time as mayor, he did still manage to transform the city in ways that persist today. Here’s an interview with him from 2007 on Streetfilms.

Now of course Bogota is a very different place to Auckland. In particular Auckland has a less extreme social hierarchy, or at least a bigger middle income group, but still, the more I read about Peñalosa the more I find his approach both relevant and inspiring. For example this is true everywhere:

“Urban transport is a political and not a technical issue. The technical aspects are very simple. The difficult decisions relate to who is going to benefit from the models adopted.” -Enrique Peñalosa

Too many decisions have been made in Auckland and New Zealand through processes that privilege technicalities over outcomes. In other words lower order issues of through what process to fund infrastructure or what we are used to building gain priority over higher order questions of what kind of society do we want. We have the cart before the horse. Remember that the fateful coup that totally redirected all of Auckland’s transport infrastructure away from people and towards the car in the mid 1950s was achieved with the words: “It’s a technical matter”.*

“We had to build a city not for businesses or automobiles, but for children and thus for people. Instead of building highways, we restricted car use. … We invested in high-quality sidewalks, pedestrian streets, parks, bicycle paths, libraries; we got rid of thousands of cluttering commercial signs and planted trees. … All our everyday efforts have one objective: Happiness.” -Enrique Peñalosa

Of course enabling productive business is important but only in order to serve the greater good of human happiness; business, like faster transport is not an end in itself. Furthermore the world’s economy is a wholly owned subsidiary of the environment. It is not an either/or situation. We cannot delay living better. Fitting sustainably into the reality of a finite planet is not something we can turn our attention to after we have somehow become rich while despoiling it. Sustainable practices are not, as our current government speaks about them, some kind of wasteful cost, but a real benefit. And this century we are going to have to change pretty much every detail of our lives in order to accommodate pressures that just weren’t as pressing in the last one;

“The world’s environmental sustainability and quality of life depends to a large extent on what is done during the next few years in the Third World’s 22 mega-cities. There is still time to think different… there could be cities with as much public space for children as for cars, with a backbone of pedestrian streets, sidewalks and parks, supported by public transport.” -Enrique Peñalosa

I am constantly surprised by how little debate there is in New Zealand about these issues, how out of date the terms of most of the conversation is, and how resistant to change our institutions are. But then I think this is because we are relatively lucky: We have been fortunate by being insulated from the worst of the ongoing crisis in the global economy by high commodity prices and having China’s mine as our largest trading partner. And by the fact we have a thinly populated and therefore relatively unspoiled country. The urgent problems facing the whole world can feel quite distant here, for which we are right to feel grateful, but not complacent. It is a feature of the increasing interconnectedness of both the world’s economy and its biology that we cannot escape these mega-issues; change is coming whether we welcome it or not.

And here’s the thing: The more the pressures of this century unfold the clearer it becomes how much better life could be by adapting to them rather than just pretending that we can go on indefinitely as we are. That Republican idea that this way of life is non-negotiable is as pig-headed as it is certain to be untrue: It will be re-negotiated. Cities that stop building for cars and invest instead in Place and People are becoming better, safer, more resilient, richer, and yes, happier, than those that cling to the late 20th century model.

The only constant in life is change. And it is a lot more pleasant to choose to change than to wait until it is forced on you. This is true personally and collectively, and when it comes to cities, the ones that are better adapted, ‘fitter’ in the Darwinian sense, for the forces at work this century will be the most successful.

It is instructive to recall that mid 1950s moment that plunged Auckland from having about the highest public transport rates in the developed world to later that century having the lowest as proof that quite extreme change is not only possible but more frequent than might be thought. That was, of course, a top-down revolution and currently we have a government that refuses even to have a conversation or thought about change. In fact its actions can be read as a wilful attempt to force continuity onto the world by simply ignoring any factors that don’t fit its model. Yet there is more than a nagging fear concealed in its anxiety to rush through its plans with such urgency, like unconsciously it knows that the game is up- this is the last great highway mania. And of course systems have momentum and tend to persist; but the corollary to that is that things also go on until they don’t….. Interesting times.

It seems we may have to experience crisis directly before we are ready for our own Peñalosa.

* See Paul Mees Transport for Suburbia RMIT 2010 pp20-29 for the history of this pivotal event.

Here’s trailer for the film:

The Peak Oil debate rears its head

An article in the Guardian by environmentalist writer George Monbiot has led to some really interesting debate around whether peak oil will happen, when it might happen, whether it’s happened already or whether the old adage of “the stone age didn’t end because we ran out of stones” might be true or not.

Monbiot begins by saying this:

The facts have changed, now we must change too. For the past 10 years an unlikely coalition of geologists, oil drillers, bankers, military strategists and environmentalists has been warning that peak oil – the decline of global supplies – is just around the corner. We had some strong reasons for doing so: production had slowed, the price had risen sharply, depletion was widespread and appeared to be escalating. The first of the great resource crunches seemed about to strike.

Among environmentalists it was never clear, even to ourselves, whether or not we wanted it to happen. It had the potential both to shock the world into economic transformation, averting future catastrophes, and to generate catastrophes of its own, including a shift into even more damaging technologies, such as biofuels and petrol made from coal. Even so, peak oil was a powerful lever. Governments, businesses and voters who seemed impervious to the moral case for cutting the use of fossil fuels might, we hoped, respond to the economic case.

I have found myself in the same conundrum. Is peak oil a good thing or a bad thing? In the New Zealand context, with a wealth of renewable energy options, I’ve probably found myself falling on the side of peak oil being a good thing – a resource scarcity that means we can make a start weaning ourselves off oil and all the environmental, social and economic damage having extremely cheap oil seems to wreak – particularly in the area of transport.

But Monbiot now suggests that the “peakers” might have got things wrong – with the potential for significantly more oil to be pumped out over the next few decades than we had foreseen. This is based on a report by oil executive Leonardo Maugeri, published by Harvard University. Monbiot picks up on what the report says:

[The report] provides compelling evidence that a new oil boom has begun. The constraints on oil supply over the past 10 years appear to have had more to do with money than geology. The low prices before 2003 had discouraged investors from developing difficult fields. The high prices of the past few years have changed that.

Maugeri’s analysis of projects in 23 countries suggests that global oil supplies are likely to rise by a net 17m barrels per day (to 110m) by 2020. This, he says, is “the largest potential addition to the world’s oil supply capacity since the 1980s”. The investments required to make this boom happen depend on a long-term price of $70 a barrel – the current cost of Brent crude is $95. Money is now flooding into new oil: a trillion dollars has been spent in the past two years; a record $600bn is lined up for 2012.

And it’s not just in politically difficult areas where the additional oil is coming from. In fact, much of the increase – according to the report – will be from the USA:

But the bigger surprise is that the other great boom is likely to happen in the US. Hubbert’s peak, the famous bell-shaped graph depicting the rise and fall of American oil, is set to become Hubbert’s Rollercoaster.

Investment there will concentrate on unconventional oil, especially shale oil (which, confusingly, is not the same as oil shale). Shale oil is high-quality crude trapped in rocks through which it doesn’t flow naturally.

There are, we now know, monstrous deposits in the United States: one estimate suggests that the Bakken shales in North Dakota contain almost as much oil as Saudi Arabia (though less of it is extractable). And this is one of 20 such formations in the US. Extracting shale oil requires horizontal drilling and fracking: a combination of high prices and technological refinements has made them economically viable. Already production in North Dakota has risen from 100,000 barrels a day in 2005 to 550,000 in January.

The gist of Monbiot’s article is not in the “hooray we’re saved”, but rather from a climate change perspective that we can’t depend on peak oil to save us from climate change – because (according to his article) there’s plenty of oil left to fry us all.

There have, of course, been quite a few responses to the article. Including a further piece in the Guardian by writer Jeremy Leggatt.

Ahead of the credit crunch, commentators echoed the incumbency mantras right across the media. Ahead of the oil crisis, the same is happening. Just Google “peak oil myth” and see what comes up. Yesterday George Monbiot joined this group with an article entitled We were wrong about peak oil. There’s enough to fry us all.

The many misunderstandings he relays begin with the title. There is more than enough potential oil resource below ground to create the climate disaster he refers to. Peak oil is not about that. It is about when global production falls never again to reach past levels: a disaster, if the descent hits an oil-dependent global economy years ahead of expectations. This descent depends on flow rates in oilfields, not the amount of oil left. What worries those who believe the global oil peak is imminent is the evidence that the oil industry will not be able to maintain growing flow rates for much longer.

As is noted above, there is a very important distinction to be made between the amount of oil in the ground and the rate at which that oil can be extracted. The oil industry needs to suck out of the ground a pretty big amount of oil, each and every day, in order to avoid oil prices increasing dramatically and that amount needs to grow as demand increases around the world. Much of the newer “unconventional” oil alluded to in the debates has the potential to create masses of oil, but because it’s so intensive to get the stuff out, you can’t create masses of it at any one time.

Leggatt continues:

Many within the incumbency itself are sounding alarms. Every year, when the Association for the Study of Peak Oil (ASPO) meets, recently retired oilmen queue to give their latest assessments of how their industry is getting its asset assessment wrong. The latest ASPO event was held a few weeks ago in Vienna, which I attended.

There has been “a boom in oil production” of late, Monbiot says. Wrong. Global production has been essentially struggling along a plateau since 2004, as Bob Hirsch, an ex-Exxon advisor to the US Department of Energy describes. Hirsch expects the descent to begin in one to four years.

Monbiot is correct that there has been a small increase in oil production in the United States in recent years. But can that continue, as he infers? Gas-industry whistleblower Art Berman describes how the shale gas gold-rush of recent years, now extending into shale oil, may well be a giant ponzi scheme: decline rates in wells are unexpectedly fast, meaning more and more have to be drilled at ever more expense, meaning ever more money has to be borrowed against cash flows from production that fall ever further behind. He looks at the resulting disaster in the balance sheets of oil and gas companies, and expects the bankruptcies to start any time soon. John Dizard has also warned of this particular bubble, in the Financial Times.

Even if oil production in America could somehow grow all the long way back to self sufficiency, what of the global picture, when conventional oil peaked back in 2006, as the International Energy Agency (IEA) has shown? The six Saudi Arabias of new production that would be needed to lift production to 100m barrels a day by 2030, according to the IEA, are a laughable prospect to the whistleblowers of ASPO, as many presentations in Vienna showed. The IEA clearly does not believe it is feasible. Neither do many still active in the incumbency, not least Total’s head of exploration, who recently warned that peak is just around the corner.

Further critique is available here, which looks at – in more detail – the actual study by Leonardo Maugeri, picking some pretty big holes in it.

Much of the confusion about peak oil seems to relate to a bit of a misguided assumption that it’s all about “when the oil runs out”. Higher prices and a shift into more unconventional methods of extracting oil may well mean that we don’t run out of oil for many hundreds of years to come – which is a pretty good thing considering how quite a lot of pretty useful and valuable stuff is made out of oil, we wouldn’t want to be without it.

The issue is much more around what happens if we can’t supply enough oil to meet demand, with the market response obviously being that prices increase hugely. A much higher price for oil makes little difference to whether I can still have a largely plastic laptop, whether the plastic pens on my desk can continue being made and so forth – this is real high value stuff that utilises oil very efficiently and it’s heartening to know that there will still be some oil for this really high value stuff a long way into the future. What really matters is the low value, inefficient use of oil – which I suspect is particularly in the form of private transportation. We may still have plenty of oil in the future, but if it’s twice the price that has a big impact on what our future transport planning should be looking at.

Interestingly, this process is already happening all around the world, with reduced driving being a big contributor to the fact that developed world countries are using much less oil per capita than we were a few years ago. We just need to wake up to this fact.

Walking the Tightrope

There has been a noticeable change in the reporting of global oil supply issues recently, although not locally. First I was quite surprised to see this article in the UK’s Daily Telegraph. Surprised because hitherto the Telegraph has largely run skeptical views on Peak Oil:

Plateau oil meets 125m Chinese cars

The clever, or coy, replacement of ‘peak’ with ‘plateau’ refers to the fact that global oil supply has been bouncing around on a bumpy plateau since 2005 despite the ever rising price signal from the market. Economics 101 says that this shouldn’t happen; increase in price should lead to an increase in supply. And as the years of no meaningful addition to supply keep accumulating it seems we really have met a geological limit to oil production. As the article points out:

‘The West has the disquieting experience of watching crude soar even as we languish in stagnation.’

And the reason for this is that ‘The West’ or the OECD, for the first time, is not the source of the demand that is driving the increase in price. Hence the reference to 125m Chinese cars, as this is the number of additional cars the article claims are due to hit Chinese roads over the next five years. This is a bit of an oversimplification as it isn’t just in China by any means where demand is growing but all over the developing world this is the case, including the countries that are net exporters of oil like in the Middle East. So much so they increasingly have a smaller quantity to export even where they are maintaining production.

Here’s a consumption graph, sure China and India are steadily growing, but look at that ‘non-OECD’ demand [including Chindia]. Soon to overtake the OECD as the biggest draw on world oil supply. This really is the beginning of a new era.

souce: Samuel Foucher/Logi Energy LLC

Note that there has been a decline in Europe and US, which largely reflects contracting economies. Also something of shame that Japan is not separated out here as post Fukushima they are the only sizable OCED nation to be increasing imports, but not because of a booming economy, quite the reverse, in order to replace the knocked out nuclear energy source.

So you can see why the title of the article with chart is called:

Oil demand shift: Asia takes over

Vietnam; efficient use of transport!

A great image illustrating a very sharp summary of the current situation:

The realization that oil prices aren’t about them anymore has been slow to dawn on Americans after a century of being the world’s swing consumers. But the fact is that the world’s developing economies have been outbidding the developed OECD countries for oil since 2005. Some time this year, non-OECD oil demand will overtake OECD demand, and they will stay in the driver’s seat for the remainder of oil’s reign as the lifeblood of the global economy.

And:

Further, this new demand trend is already structurally baked-in. There is really nothing that America can do about it other than to consume less.

The sheer numbers of the global population using oil more efficiently will doom us to being the buyer of last resort under virtually any U.S. fuel economy standard. The roughly one billion people in the U.S. and Europe combined are now competing for oil with four billion people in Asia and over one billion more in Latin America, the Former Soviet Union and the Middle East. It’s like a tug-of-war with five people on one end of the rope and one on the other.

The article concludes with this sobering observation:

The conclusion should be obvious and indisputable: We’ll just hand over the keys. As I said last October, OECD economies should expect growthless stagnation at best. Oil has become a zero-sum market where the developing world’s gain will be the OECD’s loss. It’s time we woke up to the new reality of oil demand and acted accordingly. Not by imagining that we’ll be running more than 240 million slightly more efficient vehicles in the future, but by transitioning to rail and retiring them altogether.

The important point is that peak or plateau oil is not about oil suddenly running out but rather the competition for it heating up yet the supply not growing, and at some point beginning to decline. For The US this comes with the uncomfortable and no doubt to many unacceptable idea that they no longer call the shots in this vital market. At least in NZ we have never suffered from this burden but we are nonetheless just as vulnerable to being all but priced out of the oil market as this decade unfolds.

For now the appreciating NZ dollar has allowed us to stay slumbering on this issue as the international oil trade deals in USD, so the rising crude price has not meant reciprocal rises at the pump here. However this makes us doubly vulnerable as all it will take for $3/litre is for the NZD to settle down closer to its historical average with the USD. But then factor in any continuation of rising crude prices too and things could get very alarming very quickly. And all of this without anything special happening like Iran being attacked by the Israelis or any other above ground event [also, of course, possible].

The reason this isn’t understood as much as you might expect is that this is a very big departure from everyones’ experience, so despite seven years of stagnant production it just doesn’t fit with a lifetime of available oil and of the oil market’s responsiveness to the requirements of the West. Really big changes are not only not anticipated they are often not even accepted once they’ve happened. Welcome to the new century.

Further links:

http://gregor.us/ [short and sharp]

http://www.theoildrum.com/node/8998 [shows role of  high oil costs in Euros in current economy, good stuff in the comments here too esp. about US v. Euro train use]

Supply chart, non-opec including the world's biggest producer: Russia

 

Briefing to the Transport Minister – Part 1

The government has released the briefings ministers received from their ministries and of course this blog is fairly interested in what the transport ministry has to say. The briefing has been split into two sections, one giving an overview of the portfolio and the other the policy challenges and upcoming decisions.

The first briefing gives a fairly high level description of what the portfolio is about, what the ministry does and what powers the minister has. It also goes through the various law and rule changes that have happened recently and the levels of funding that the ministry/portfolio is involved in. Overall there isn’t really anything new in here but that is what I would expect to see.

The second briefing on the policy challenges and upcoming decisions is much more interesting as it gives a good indication on the ministries thoughts which are what are likely to heavily influence the minister. The first section that really caught my eye was the section on oil prices on page 17. It seems that there is a bit of confusion in the message they want to deliver, first up there is a sort of high level comment about oil prices saying:

Almost all road transport is fuelled by petroleum products. This fuel source will persist over the next 20 years, but electric and plug-in hybrid vehicles will gradually become more widely used, as the real price of oil continues to increase. However, petrol and diesel will probably still fuel around 85-90 percent of vehicles in 2030.

In the short-term, people resist changing transport usage as costs increase. However,over longer time periods, oil price increases are more likely to induce changes in travel, lifestyle, and locational decisions.

but later on the same page they say

New Zealanders have a range of preferences for how they arrange work, shopping, socialising, and participation in education. These lifestyle preferences usually require travel. In the short term, individuals are reluctant to  make lifestyle changes when the cost of transport increases. However, sustained oil price increases are more likely to induce change in travel patterns over longer periods:
• In the medium term (say 2–5 years), people can purchase more fuel efficient vehicles and make greater use of public transport, cycling and walking, where those choices are feasible.
• In the longer term (5–20 years), people will be more willing to make substantive and permanent changes to lifestyles in order to reduce their transport demand. For example changing patterns of social interaction, and living closer to places of employment and education.

So in 20 years time with high oil prices most vehicles will still be powered by oil based fuels but at the same time now where near as many will be driving them as most people would have made large changes to their lives to reduce their demand for transport or at least oil fuelled transport (but more on that soon).

The next thing that caught my eye was in the section on Land Transport starting at page 20. In the very first comment they say:

It will be increasingly important to manage the existing land transport network to its full potential.

There are wider economic impacts that cannot easily be estimated and considered in the traditional benefit cost ratio (BCR) evaluation framework. The current BCR assessment is based on a relatively high discount rate (8 percent real) and a 30-year horizon. This rate tends to discount away the benefits of long-life projects, such as motorways.

In the cities, cars remain the dominant means of people transport. Urban transport networks will need to become more effective through better use of infrastructure, urban planning, demand management tools and public transport increasing its role.

They acknowledge that we need to move away from the traditional BCR framework but this is exactly the thing they slammed the CRL business case for, it has also noted here in the past about just how much impact having a high discount rate and relatively short assessment time frame has on the outcomes of projects.

Continuing to work my way through the document I really had to have a chuckle at these two comments:

55. New investment in State highways is evaluated by the NZ Transport Agency (NZTA) using three criteria.

(a) Strategic fit which considers national strategic objectives as specified in the Government Policy Statement on Land Transport (GPS)

(b) Effectiveness which considers how well proposed activity would achieve the GPS impacts identified in strategic fit

(c)  Efficiency which measures the BCRs

57. The major highway projects tend to score well on strategic fit. The BCRs for major improvements to the network have declined in recent years.

Basically that means the government tells the NZTA what projects it want and if the NZTA goes to do them then they can tick off two of the three assessment boxes which means that economic considerations get largely pushed out of the way and that is evidenced in the last part of comment 57. In just 5 years we have gone from have over half of all approved projects having high BCR’s to over half of them having low BCR’s. That’s an astounding change in such a short time considering there are a large number of projects out there that haven’t even been approved yet, things like Puhoi to Wellsford or the group of projects in Wellington.

The last thing I will cover in this post is showing just how much our transport expenditure has changed over time, as you can see spending has really ramped up in the last few years and in the space of about 5 years we have more than doubled how much we spend as a percentage of GDP. Of note the transport and storage sector accounts for around 5.2% of all of our GDP

There is quite a bit more to cover, especially the parts that relate to Auckland but I will leave that for the next post