From the EU Observer

EU says joint-up energy grid will cost €1 trillion

ANDREW WILLIS
10.11.2010 @ 17:01 CET


EUOBSERVER / BRUSSELS - The European Commission has unveiled a new energy strategy for the coming decade, calling for the unification of the bloc's fragmented energy networks by means of €1 trillion in infrastructure investments.

The plan also highlights the need for greater energy savings and a more unified approach when negotiating contracts with non-EU states, together with a new drive to boost Europe's energy technology and innovation. Concrete legislative proposals will follow over the next 18 months.

"The energy challenge is one of the greatest tests for us all," EU energy commissioner Gunther Oettinger told journalists in Brussels on Wednesday (10 November). "Putting our energy system onto a new, more sustainable and secure path may take time but ambitious decisions need to be taken now."

In order to "Europeanise" the bloc's energy policy, member states must end their protection of national energy champions, said the commissioner, a struggle clearly highlighted by the roughly 40 legal battles currently underway between the EU executive and national capitals.

Previous calls to unify the EU's energy market have met with strong opposition, although Mr Oettinger's German nationality adds considerable weight to this latest initiative, with Berlin traditionally being a leading opponent to market liberalisation.

By linking European gas and oil networks, the commission hopes to prevent future energy crises similar to the gas price dispute between Russia and Ukraine in January 2009, which left several EU states without Russian gas during the height of one of Europe's coldest winters in recent times.

Ahead of the bloc's first European Summit dedicated to energy on 4 February 2011, Mr Oettinger said greater energy efficiency was also a key element of the plan, indicating his intentions to come forward with binding rules in this area.

New incentives will also be unveiled to help homeowners and local authorities to renovate draughty buildings in order to cut energy bills. On Tuesday the European Parliament's energy and industry committees unexpectedly adopted a report calling for binding energy efficiency targets to be implemented across the bloc.

"Making the EU target to reduce energy consumption by 20 percent by 2020 binding will be crucial if it is not to be missed," said French Green MEP Yannick Jadot.

Parliament's Green group was disappointed by the commission's new energy strategy however, saying it showed a "shocking pro-nuclear bias" and dubbed its energy efficiency targets as "vague."

Socialists also called for a greater emphasis on energy efficiency, with a number of environment NGOs in agreement. "Improving energy efficiency is the simplest method to fight climate change and you can see the benefits immediately," Brook Riley, a campaigner with Friends of the Earth, told this website.

The new EU strategy follows a recent report by International Energy Agency that predicts peak oil production around 2035, with prices reaching over $200 a barrel.

Mr Oettinger considers the issue even more pressing. "The amount of oil available globally, I think, has already peaked," he said while presenting the EU plan.

Francois,

A question I meant to ask: So, oil has peaked because old fields are running out. Okay. But an analyst I know of insists that there is probably still plenty of oil left and not just tar sands or whatnot. He says that the real problem is that this potential "new" oil is located in thugocracies like Russia, Venezuela, Sudan, Iran - Places no sane western investors would risk tens of billions in, especially in hard assets, locked there for decades.

Thus, as opposed to other commodity cycles, where an increase in price lead to an ramp-up of capacity which eventually glut the market, here, oil producing companies are just refusing to respond to price incentives and invest...

Hence the increasing inelasticity of the supply side of the oil market.

What do you or your friends at Oil Drum think of that explanation? It certainly matches with the price mvt we've seen in the last decade or so but the question I have is that I'd like independent confirmation of the fact that, theoretically, some good oil would be available in places like Sudan, Venezuela etc - if only it could be developped...

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I don't think that this is true. Most oil producers lie about their reserves. Within the OPEC cartel, they always had a reason to lie (overstate their reserves), because their quota was calculated on the basis of their stated reserves, i.e., if they stated more, they were allowed to sell more. Thus in reality, the official reserves, as reported e.g. by the EIA, are likely overstated and not understated, because they simply take whatever they get in numbers from the individual countries.

The issue is not only quantity, but also quality of the oil. Saudi Arabia still has quite a bit of oil in the ground ... but the sweet light crude is slowly running out, i.e., they still have a lot of heavy sour, which so far they didn't use much, but this oil is much more expensive to produce, because it takes much more refining, before it can be used. Hence numbers alone don't cut it.

Oil is such a precious commodity that investors can always be found who will risk their money if they are allowed to do so. A country may choose, not to exploit (or at least export) oil resources for political reasons, and this will even happen more and more, as we come down from the peak. Countries will first satisfy their own needs, before they export; thus if there is no longer enough, many countries will simply stop exporting, and those countries that don't have oil of their own, will get to feel the crunch first. Yet, it won't happen, because no investors can be found.

However, it is hard to predict whether the rear side of the peak will be driven by shrinking supplies or by shrinking demand. Even the EIA just a few days ago issued a new report, in which they predict a stiff increase in the oil price over the coming years. Yet, I am not sure that this is what is going to happen.

Our economy has become so fragile that it simply cannot stomach very high oil prices any longer. Thus, a rise in energy prises will invariably lead to a stagnation of the economy, leading to a reduction in demand for energy. Therefore, the prices may actually not rise all that much.

Originally Posted by Francois Cellier

Thus in reality, the official reserves, as reported e.g. by the EIA, are likely overstated and not understated, because they simply take whatever they get in numbers from the individual countries.

Thanks!

Quote:

The issue is not only quantity, but also quality of the oil. Saudi Arabia still has quite a bit of oil in the ground ... but the sweet light crude is slowly running out, i.e., they still have a lot of heavy sour, which so far they didn't use much, but this oil is much more expensive to produce, because it takes much more refining, before it can be used. Hence numbers alone don't cut it.

OK. Interesting.

Quote:

Oil is such a precious commodity that investors can always be found who will risk their money if they are allowed to do so.

Hmmm... This, I am not sure.

Quote:

A country may choose, not to exploit (or at least export) oil resources for political reasons, and this will even happen more and more, as we come down from the peak. Countries will first satisfy their own needs, before they export; thus if there is no longer enough, many countries will simply stop exporting, and those countries that don't have oil of their own, will get to feel the crunch first. Yet, it won't happen, because no investors can be found.

So that wasn't really what I meant. A country like Venezuela might be sub-investing in their own reserves for different reasons: Lack of technical know-how is one. But, first and foremost, because Chavez spend all the profit for the present-day oil sales in buying out social peace and preserving his own power...

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Originally Posted by Gilles de Rais

So that wasn't really what I meant. A country like Venezuela might be sub-investing in their own reserves for different reasons: Lack of technical know-how is one. But, first and foremost, because Chavez spend all the profit for the present-day oil sales in buying out social peace and preserving his own power...

Sure, this is correct. However, it doesn't really matter. The oil of Venezuela is heavy sour anyway, i.e., it cannot be produced with a profit below $70/barrel. This is the primary reason why Chávez held back when the price of oil dropped to $35/barrel. At the current oil price, he can produce again profitably, and he does.

Of course, the big oil companies don't appreciate it when they get nationalized, as this happened in Venezuela and also in Bolivia, but other players will fill the gap, such as the Chinese in the case of Venezuela.

Finally, it doesn't really matter yet, whether all the oil that could be brought to market is being brought to market at once. Until now, we are still on the plateau, i.e., there is still enough oil for those who can afford it. Eventually, all of the conventional oil that can be produced at the current oil price will be developed and sold, thus if Venezuela holds back for a little while, this has relatively little effect on the market. When the market needs it, conventional oil that can be produced, will be produced.

The US military is apparently the largest single oil consuming organisation in the world:

I can't find a .gov source, but this blog post seems to have a degree of credibility:

The US military is warning of serious oil shortages by 2015.

The US Joint Forces command issued a Joint Operating Environment report earlier this month that states that surplus oil production capacity could disappear within two years and that there could be serious shortages by 2015.

This was quoted in the UK Guardian newspaper:

"By 2012, surplus oil production capacity could entirely disappear, and as early
as 2015, the shortfall in output could reach nearly 10 million barrels per day,"
says the report, which has a foreword by a senior commander, General James N
Mattis.

It adds: "While it is difficult to predict precisely what
economic, political, and strategic effects such a shortfall might produce, it
surely would reduce the prospects for growth in both the developing and
developed worlds. Such an economic slowdown would exacerbate other unresolved
tensions, push fragile and failing states further down the path toward collapse,
and perhaps have serious economic impact on both China and India."

The US military says its views cannot be taken as US government policy but admits
they are meant to provide the Joint Forces with "an intellectual foundation upon
which we will construct the concept to guide out future force developments."

Clearly, the US army has to plan for contingencies. And fuel supply is a major one, considering the US army because it is believed to be the world’s biggest single user of gasoline.

It follows a recent interview in French newspaper Le Monde, in which Obama’s main oil advisor Glen Sweetnam admitted “a chance exists that we may experience a decline” of world liquid fuels production between 2011 and 2015.


This moves the peak oil debate forward. No longer an aluminum foil hat brigade thing, it’s something being discussed by the world’s major superpower – both government and military.

It's something we should all fear, as, according to the Guardian:

The Joint Operating Environment report paints a bleak picture of what can happen
on occasions when there is serious economic upheaval. "One should not forget
that the Great Depression spawned a number of totalitarian regimes that sought
economic prosperity for their nations by ruthless conquest," it points out.

The Guardian is being very Mancunian. I very much doubt that ruthless conquest is about to break out, ever since the United States realised that it was a seriously stupid idea. But tensions over oil, like tensions over water, are likely to shape much of the next century.