Data from the US Energy Information Administration show that conventional crude oil production - oil from wells accessed using typical drilling techniques - has been essen- tially flat at around 74-million barrels per day (mbpd) since 2005. Looking at the history of con- ventional crude oil discoveries, this is not surprising - they peaked in the mid-1960s and have been on a declining trend ever since.

Since 2005, all liquid fuels production - which includes natural gas liquids, biofuels, gas-to-liquids and unconventional oil - has been growing much more slowly than in previous decades - at less than 1% a year - while demand in the developing world has burgeoned. The trillion-dollar question is: For how much longer can growth in these unconventional sources of oil offset the declining production from existing conventional fields, estimated by the International Energy Agency to be depleting at about 6.5% each year?

There are three types of unconventional oil resources, namely heavy oil, oil sands and oil shale. Heavy oil, which is mostly located in Venezuela’s Orinoco belt, is denser and more viscous than conventional oil and requires special extraction and refining techniques. Oil or tar sands - the bulk of which is located in Canada’s Alberta province - consist of sandstone impregnated with heavy oil. Oil shale, found predominantly in the western US, is oil trapped in shale rock.

Technically, recoverable resource estimates for unconventional oil vary widely but are generally very large - possibly several times the roughly one- trillion barrels of oil consumed globally to date. But, economically, recoverable reserves are substantially smaller than total geological resources.

The methods involved in extracting oil from unconventional sources are quite different from those used to extract conventional oil. In the case of shale oil, extraction involves similar hydraulic fracturing processes used to extract natural gas from shale. Oil sands production is a massive surface mining opera- tion, followed by extensive use of natural gas to produce synthetic oil.

The hugely capital-intensive nature of these production processes means that marginal production costs - typically estimated at between $80/bl and $100/bl - are much higher than those of conventional oil. As the world shifts increasingly from conventional to unconventional oil sources, the floor under market oil prices will continue to rise.

The higher production costs reflect the most crucial energy variable of all: the energy return on investment (EROI) ratio, which measures the energy delivered by a process relative to the energy required to find, extract and process the energy resource. Experts estimate the EROI for oil shale and oil sands at about 4:1 at best, compared with a global average for conventional oil of about 18:1 today, and nearly 100:1 in the 1930s.

A further downside to unconventional oil is that its environmental impacts are significantly worse than those of regular oil. The freshwater demands are much greater and the carbon dioxide emissions can be up to twice as high for each barrel of oil. Fracking and oil sands production also pollute freshwater sources. These environmental costs are largely externalised, that is, the public pays for it indirectly.

Returning to peak oil - the key issue is the flow rate, that is, how much oil can be brought to market in a given year. There are economic and physical constraints on how much oil can be extracted from low-EROI, high-cost unconventional oil reserves, arising from the highly capital-intensive nature of this business.

Several peer-reviewed articles in academic journals have shown that the depletion of older, conventional-oil fields will soon outpace the gains from new unconventional oil sources. Chris Skrebowski, consultant editor of the UK-based Petroleum Review and director of Peak Oil Con- sulting, maintains a large database of current and forthcoming oil pro- jects. His latest forecast is that global spare oil capacity will be exhausted by 2015. After that, we are looking at a long downhill slide for total world liquid fuel production.

So, while there will be plenty of investment in unconventional oil sources, it will not materially change the peak oil phenomenon - at best, it will delay the date of the global peak of all liquids by a few years. And the switch to unconventional oil is setting a triple-digit floor to international oil prices, thereby putting brakes on global economic growth.

The bottom line is that the peak oil challenge has not gone away. If we do not intentionally wean our civilisation off oil quickly, we face increasingly severe economic shocks as well as intensifying climate destabilisation and environmental degradation as we burn dirtier fuels.

Published in Engineering News , 18 May 2012

Albert Bartlett, an American professor of physics, famously declared that “the greatest shortcoming of the human race is our inability to understand the exponential function”. A simple explanation of how compound growth works and what it would mean for some key variables in South Africa will show why.

Exponential growth refers to a quantity that increases by a certain percentage each unit of time. For example, suppose you have R100 on January 1, 2012. Then, if it grows by 10% a year, you will have R110 on January 1, 2013. In another year’s time, you will have R121, as the 10% growth rate is applied to (compounded on) R110 – not your original R100. After a decade of such growth, you will have R259. Nice work if you can get it.

A continuous process of exponential growth at a constant rate has a couple of very interesting properties.

First, it results in a doubling of the starting value after a certain number of time periods. It is actually very easy to calculate an approximation of the doubling time for an annual growth process: a quantity growing at a fixed rate of x% a year will double every 70 years divided by x (70/x) years. So, if the growth rate is 7%, the doubling time is ten years (70/7). If the rate is 10%, doubling takes place after just seven years (70/10), and so on. In our earlier example, your money will double in seven years, and will double again (to R400) after about 14 years.

The second surprising feature of continuous exponential growth is that the quantity added in the last doubling cycle is greater than the cumulative sum of all previous cycles. Take the simplest example of doublings: 1, 2, 4, 8, 16. The last doubling cycle added up to 16, while the previous cumulative sum was 15 (1 + 2 + 4 + 8).

Now let us apply our new arithmetic skills to some pertinent aspects of collective South African life: the economy, mining and coal production.

Suppose our economy – as measured by real gross domestic product (GDP) – were to grow by 7% a year, which is the rate our Finance Minister has said is necessary to reduce unemployment, then the GDP will double every ten years, which sounds very nice.

But consumption of goods also produces a stream of waste. So, assuming the structure of our economy remained more or less the same, as did our consumption habits, we would double the annual volume of garbage produced every ten years. If the rate of growth continued at 7% for a few decades, then each new doubling cycle would produce more waste than was generated in our entire history. You can easily imagine that our cities’ landfills would very quickly be overflowing.

Next, let us assume mining production also grew merrily at 7%. Then, after a decade, we would have doubled the annual extraction of minerals, which would bring in a lot of foreign exchange, profits to the mining companies and taxes for the State.

But, if we maintained this rate of growth for several doubling cycles, then, in each new decade, we would mine nearly as much ore as we mined in our entire previous history! (Note that the actual historical growth rate in mining output was mostly considerably less than 7%, which means that we cannot say the very next doubling cycle would produce more than our actual cumulative production at this point in time.)

Not only that – our mine dumps would grow prodigiously, and the amount of new acid mine drainage released into our precious rivers would, before too long, exceed all that went before it.

But just as significant, our remaining – finite – mineral reserves would be depleted at an accelerating rate.

David Rutledge, a professor at the California Institute of Technology, has estimated that our country has about ten-billion tons of mineable coal remaining. At the 2010 rate of production of 25-million tons, we would have just less than 40 years of coal remaining. But, if production grew at 4% a year, then the reserves would run out after just 24 years.

This coal example, by the way, is not at all realistic. Coal output cannot keep steady – or keep increasing – for a number of years and then suddenly collapse to zero. It will reach a peak – possibly around 2020 – and then gradually decline year after year.

So, next time you hear a politician or economist talk about the merits of continuous growth, think about the downsides of the arithmetic as well. Your children are counting on you.

Published in Engineering News , 11 May 2012

Arguably the world’s pre-eminent authority on resource geopolitics is Michael T Klare, professor of peace and world security studies at Hampshire College, in the US, and author of Resource Wars, Blood and Oil and Rising Powers, Shrinking Planet. Klare says we are “entering a new epoch – the Geo-Energy Era – in which disputes over vital resources will dominate world affairs”. He also identifies three flash points for 2012: the Strait of Hormuz, in the Persian Gulf, the Caspian Sea basin and the South China Sea.

Some 17-million barrels per day (mbpd) of oil transit the Strait of Hormuz, representing one-fifth of global production and one-third of the world’s seaborne oil. Late last year, Iran’s VP warned that Iran would close the strait if the US imposed sanctions on his country’s oil exports. Sanctions have, of course, been legislated and are due to take effect from July. This is a game of brinkmanship with potentially devastating economic consequences, as oil prices would skyrocket if the strait was closed for any length of time.

Some analysts argue that the West’s standoff with Iran over its nuclear programme is really a cover for geostrategic manoeuvres aimed at securing Western access to Iranian oil and gas – the Islamic republic boasts the second-largest reserves of both – and curbing Chinese access to these.

The second hot spot highlighted by Klare is the Caspian Sea basin, an area which includes Russia, Iran, Turkey and a number of former Soviet republics. Since the dissolution of the Soviet Union, most of the ‘stans’ have forged ties with the US and the Europe Union and, more recently, with China.

The Caspian region is well endowed with oil and gas, and has a long history of military conflict, which could erupt once more. Pipelines, which are necessary to export the oil and gas, feature strongly in the geopolitical wrangling as Russia tries to maintain its dominance in this area, the republics vie for autonomy and the US and China seek to secure access to the rich energy resources.

In recent years, notable deposits of oil and gas have been discovered in the South China Sea, which is bordered by China, the Philippines and Vietnam. Two groups of mostly uninhabi- ted islands in the sea have become highly contentious, with all three countries claiming some of them and their surrounding waters.

The US views the South China Sea as a criti- cal area and has close military ties with the Philippines and Vietnam. In January, President Barack Obama announced a shift in US military strategy and resources from Europe and the Middle East to “the arc extending from the Western Pacific and East Asia into the Indian Ocean and South Asia”. This includes a new military base for marines in northern Australia, as well as increased naval presence in the area.

Besides Hormuz, several other notable oil ‘choke points’ are identified by the US Energy Information Admi- nistration. The second-largest is the Strait of Malacca, between Indonesia and Malaysia, which is a conduit for 15 mbpd of oil and half the world’s seaborne cargo. Others include the Suez Canal, the Panama Canal, the Danish Straits, the Strait of Bab el-Mandab, between the Horn of Africa and the Middle East, and the Turkish Straits, which link the Black Sea with the Mediterranean Sea. Closure of any one of these choke points would add considerably to shipping costs and times for oil cargoes and push up world oil prices.

There are other regions where hydrocarbons are fuelling geopolitical tensions. One is the Eastern Mediterranean Sea, where large gasfields have been discovered in recent years. The US Geological Survey estimates that Israel’s recently discovered Leviathan gasfield may contain 12-trillion cubic feet (tcf) of technically recoverable resources, which would make Israel self-sufficient in gas and a net gas exporter. However, tensions between Israel, Greece, Turkey, Lebanon and Cyprus over maritime borders and economic zones are rising.

And, as the Arctic gradually melts owing to global warming, the surrounding nations of Russia, Canada, the US, Norway and Danish-administered Greenland are scrambling to gain access to the newly accessible oil and gas deposits.

Thus far, South Africa has – perhaps, thankfully – not found significant oil- or gasfields. But our country is a world leader in several strategic mineral resources, and so could yet find itself the object of world powers’ aggressive attention.

Published in Engineering News , 30 March 2012

Adjusted for general consumer price inflation, however, the 2008 peak retail petrol and wholesale diesel prices would be equivalent to about R13.43/ℓ and R12.60/ℓ respectively, if measured in today’s rands. Still, the persistently rising fuel prices are putting increasing strain on household budgets and company balance sheets.

So, why are fuel prices stubbornly high, and where might they be headed?

Fuel prices in South Africa are deter- mined by the Department of Energy in line with an import parity pricing formula. The so-called basic fuel price (BFP) – which comprises about half the retail price – is benchmarked on international refined fuel prices. To this are added fuel taxes and levies – comprising about 30% of the final price – and retail margins as well as transport costs, which account for the remaining 20% of the price.

Only the BFP component varies from month to month – levies and retail margins are set once a year. The BFP, in turn, depends on two factors: the inter- national crude oil price – measured in dollars – and the rand:dollar exchange rate.

The rand has fluctuated between about R6.75 and R10.12 to the dollar over the past four years, but has been relatively stable for a couple of years and is now trading at almost the same level as it was in July 2008.

The major driver of local petrol and diesel prices over the past decade has been the price of crude oil. Between 1986 and 2003, the oil price traded in a remarkably stable and narrow range, averaging about $20/bl. From 2003, it rose steadily for several years and then spiked dramatically to reach an all-time nominal peak of $147/bl in mid-2008.

This oil price was more than the global economy could bear and, together with the financial crisis, it precipitated the Great Recession. Demand for oil fell steeply and the oil price plunged to around $40/bl in December 2008. Since then, the price has ratcheted up again, and has traded in triple digits since January 2011. Brent crude is now around $125/bl and, in euro terms, is at a record high.

Several reasons are frequently cited for the current high price of crude. Top of the list is the ongoing confrontation between the West and Iran over the latter’s nuclear programme. The sanctions that the US and the European Union have imposed on Iran’s oil and banking sectors are starting to limit Iran’s ability to export its oil. Further, threats by Israel to pre-emptively bomb Iran’s nuclear installations are adding a significant risk premium to oil prices.

Compounding the pressures are short-term disruptions to supplies from Syria – which is a year into its civil war – as well as South Sudan and Yemen.

But these short-term geopolitical factors do not explain the long-run trend in oil prices, which is driven by fundamentals of demand and supply.

Demand for oil is still growing rapidly in many emerging economies. China, which leads the pack, is expected by the International Energy Agency (IEA) to increase its oil consumption by about 400 000 bbl/d this year. Beijing has also begun to fill its new strategic petroleum reserve.

Meanwhile, glo- bal crude oil production has been basically stagnant for the past six years, apart from an increase in biofuel output that has, in turn, boosted food prices. The IEA says it is likely conventional crude oil output peaked in 2006.

Most new oil is being found in hard-to-access deep-water offshore fields, polar regions, Canadian tar sands and American oil shale. These sources typically have marginal production costs in excess of $85/bl or more. The world is rapidly running out of cheap, easily accessible conventional oil, and is being forced to turn to dirtier, more costly unconventional sources.

With the Saudi Arabians having ramped up production to offset losses from Iran and elsewhere, global spare oil capacity is now down to about 2.7-million barrels per day, according to the IEA. This means that the slightest market disturbance can trigger big price fluctuations.

The biggest short-term threat to oil prices is the Iran situation. A military strike on the Persian Gulf country would likely lead to a temporary closure of the Strait of Hormuz, through which a fifth of the world’s oil supply transits each day. In this case, the oil price would skyrocket.

On the other hand, if the eurozone debt crisis triggers a financial meltdown, the oil price could drop considerably, although probably not for very long.

So, brace yourself for more wild gyrations on the oil price roller coaster; better still, look for ways to get off it by reducing your reliance on petroleum.

Published in Engineering News , 13 April 2012

Thus far, the polarised debate in South Africa has been waged primarily between those keen to exploit a potentially vast source of energy and those worried about the environmental and health implications of fracking. What has yet to be adequately discussed is the economics of shale gas production. While it is still very early days in South Africa, experience in the US – where the modern shale gas industry is nearly a decade old – is a useful point of departure.

Many pundits have presented shale gas as a game changer in the US energy market. Certainly, shale gas production has risen dramatically, from less than one-billion cubic feet of gas a day (bcfd) in 2003 with the advent of horizontal drilling and fracking to almost 20 bcfd – about a fifth of US gas consumption – by the middle of last year.

As a consequence, the price of gas has fallen precipitously, from spikes of over $12 per thousand cubic feet in 2006 and 2008 to under $2.50 per thousand cubic feet at present.

But this early success has led to exaggerated claims about the future potential of shale gas, and also conceals problems that are emerging in the industry.

The first problem concerns resource and reserve estimates. Resources refer to the quantity of gas that could theoretically be extracted using current technology, while reserves have to be commercially viable at today’s prices. Experience in the US has shown that only about 10% of the total area of a gas-bearing shale formation yields economically productive wells.

The US Potential Gas Committee estimated in April 2011 that the country’s probable mean resources amounted to 550-trillion cubic feet. Arthur Berman, a Texas-based petroleum geologist who has extensively researched the gas industry, suggests that about half these are likely to become commercial, to be added to the 273-trillion cubic feet of existing proved reserves.

And in its 2012 Annual Energy Outlook, the US Energy Information Administration (EIA) downgraded its technically recoverable shale gas resource estimate by 42%.

Thus, contrary to claims by the industry – and frequently echoed by the Obama administration – the US does not have 100 years’ worth of natural gas reserves at current consumption rates, but more like 23 years, says Berman.

The second problem with the industry hype is that the overall decline rate for US natural gas wells is estimated at 32% a year, and the rate is considerably higher for shale gas wells – between 63% and 85% in the first year, according to Canadian gas expert David Hughes. This means that well drilling activity has to be maintained continuously just to keep the rate of gas output constant.

But drilling is an expensive business. Writing for Foreign Policy magazine, Chris Nelder cites analysis that “finds that nearly all operators need at least $4 per thousand cubic feet to break even while drilling new wells in existing plays, and at least $8 when one includes all costs, including leasing of gasfields, overhead and debt service”.

So, at current prices, many companies are running at a considerable loss. In late January, one of the largest shale gas producers in the US, Chesapeake Energy, announced its intention to reduce drilling; since then, others have followed its lead.

Berman warns that the US shale gas industry is exhibiting all the classic signs of a bubble, just like the gold rushes of the nineteenth century.

Berman and his colleague, Lynne Pittinger, have concluded that “shale gas will remain an important part of the North American energy landscape but its costs will almost certainly be higher, and its abundance less than many now believe”.

There are two lessons for South Africa. Firstly, the EIA’s technically recoverable resource estimate for South Africa of 485-trillion cubic feet is both premature – the figure was based purely on a desktop study compiled prior to any exploratory drilling – and potentially misleading, since technically recoverable reserves are usually much greater than economically recoverable reserves. Nonetheless, if just 10% of the technically recoverable reserves were economically viable, this would represent ten years of South Africa’s total primary energy supply, or provide feedstock for gas-to-liquid fuel production equivalent to nearly 50 years of current petroleum consumption. However, the second lesson from the US experience is that the consumer price of shale gas would likely be considerably higher than many people currently hope.

These economic considerations need to be weighed against potential environmental and social costs and benefits, and compared with alternative energy sources. These issues will be explored in subsequent columns.

Published in Engineering News, 16 March 2012

http://www.engineeringnews.co.za/article/shale-gas-debate-needs-a-dose-of-economic-realism-2012-03-16

The majority of our country’s politicians and economic commentators have painted themselves into a corner of empty promises and ineffectual policies by telling us the only way to create jobs and reduce poverty is to grow the economy at much faster rates.

The Minister of Finance, Pravin Gordhan, said in October last year that the economy must grow by seven percent a year. The Democratic Alliance maintains that a growth rate of eight percent is necessary. In November the Development Bank of Southern Africa said GDP must grow by 10 percent a year for a decade to create the 5 million jobs targeted by the government.

And yet in the national budget presented by Mr Gordhan on Wednesday, the 2012 growth forecast was revised down to 2,7 percent from the 3,4 percent projected last October. The growth rate is now forecast to increase moderately to 3,6% in 2013 and 4,2% in 2014.

But even these projections seem overly optimistic in the face of several near-term threats to the global and local economic outlook.

The first risk is that the Euro zone will sink into recession as a result of its sovereign debt crises and associated fiscal austerity measures. President Zuma has correctly warned that SA will not be able to escape the economic troubles in Europe, given that the region is our largest trading partner.

The so-called ‘economic recovery’ in the United States has also yet to deliver anything meaningful more than three years after the financial crisis. The US unemployment rate lies somewhere between 9 and 20 percent, depending on which definition you choose. Even powerhouse China’s economy seems to be coming off the boil, and the country may face a bursting real estate bubble similar to the one that landed Japan in the economic doldrums in the 1990s.

The second major category of risks consists in festering geopolitical tensions. The hottest spot of the moment is as usual the Middle East. The violence in Syria continues to escalate and threatens to draw in troops from other countries. But Russia and China – wary after the west’s military intervention in Libya – have drawn a line in the sand by vetoing the UN resolution calling for Syrian President Assad to step down.

More ominously, the hostile war of words between western powers and Iran over the latter’s nuclear programme continues unabated. The Israeli leadership is still threatening a ‘pre-emptive’ military strike on Iran’s nuclear enrichment facilities. Meanwhile, the United States and Europe have imposed stringent economic sanctions against Iran, whose economy and populace are now clearly suffering.

Should this situation spiral into another regional conflagration, it will have devastating economic consequences for the globe as a whole and for SA in particular – around half of our oil imports are sourced from Iran and Saudi Arabia. Iran has vowed to respond to an attack by closing the Strait of Hormuz, the world’s preeminent oil ‘choke point’ through which one third of the world’s seaborne oil is shipped.

The third – related – risk to the world and SA economy is another spike in oil prices, which in 2011 averaged a record high of $111 per barrel. Already, the price of oil is acting as a brake on the global economy. Spare oil capacity is now minimal and any further disruption to supplies could send prices towards or even above $150.

Most of these medium term threats are symptomatic of deeper underlying trends, namely the depletion of cheap and easily accessible resources and the degradation of ecosystems that provide vital services to human societies.

World oil production has been essentially flat for seven years and looks set to begin its inevitable descent with the next few years. This will be followed by peaks and declines in many other key resources, including coal and rock phosphates. Water and food are becoming increasingly scarce, thanks in part to climatic changes and land degradation, while the world population continues to grow by over 70 million a year. An increasing frequency and severity of natural disasters – many of them climate related – are adding to the economic stresses.

As a result, economies across the world are paying much higher prices for energy and many other raw materials, which is exacerbating financial imbalances and putting extra strain on highly-indebted countries.

In short, the world is encountering ecological constraints on growth. And in the absence of continuous growth, our debt-based monetary systems falter and implode. Thus without a return to cheap and abundant energy – which would require miraculous technological breakthroughs and a war-time effort to roll them out – debt crises and associated socio-political ructions are going to snowball.

So does this gloomy global trajectory mean that the poor of our country are destined to live in worsening deprivation and misery, and that their ranks will be swelled as more households drop out of the middle class?

If current mind-sets, values and policies prevail, the answer is probably ‘yes’. Exceptional socio-economic circumstances call for real paradigm shifts and radical policy innovations. SA needs to abandon its narrow obsession with GDP growth and adopt the broader goals of economically, socially and ecologically sustainable development.

We need an expansion of sectors that are labour-absorbing and energy and resource efficient, such as repair, maintenance and recycling, small-scale agro-ecological farming, localised production-consumption systems, decentralised renewable energy generation, and so on. We need to reduce our dependence on unsustainable industries such as primary extraction, urban sprawl, and financial speculation. In other words, the quality, type and sectors of growth are crucially important.

Although there have been welcome steps taken toward a ‘green economy’ in several recent policy documents, such as the New Growth Path and the Industrial Policy Action Plan, implementation has lagged behind rhetoric. This is partly due to obstruction from powerful vested interests – most notably the ‘minerals-energy complex’ – which are taking SA further down an unsustainable, resource-intensive and polluting path.

But almost all the policy frameworks – aside from the largely ignored National Framework for Sustainable Development – are still operating within an outdated paradigm. The green economy should not be seen as a subsector of industry. Rather the entire economy – agriculture, manufacturing, construction, services, etc. – needs to undergo a fundamental transition to sustainability on a scale equivalent to the earlier agricultural and industrial revolutions.

There are many ways that our economy and policies could be reoriented to deliver more genuinely sustainable development and to bolster society’s resilience to economic and financial shocks.

The first step must be to reduce unnecessary wastage of energy and materials and to boost efficiency and resource productivity throughout the economy.

The government is right to allocate massive funds to infrastructure spending. But this should be geared much more toward renewable energy and more sustainable transport systems such as integrated rapid transit, passenger and freight rail, and non-motorised transport in cities – and less on expanding export rail lines and ports that assume the global economy will continue to grow for decades.

As identified in the National Planning Commission’s Development Plan, the extension of basic services to the poor needs to be accelerated, including clean water and sanitation, health care, affordable electricity and quality education. If we can build world-class soccer stadiums and a high-speed railway, why can we not achieve these fundamentals?

Unemployment could be tackled by massively expanding the Department for Social Development’s Community Work Programme and the various “Working for… ” programmes – such as water, wetlands, fire, energy, etc. These labour-absorbing activities also help to rehabilitate ecosystems that provide essential public goods and services to society.

The crucial agriculture sector must gradually be weaned off fossil fuels and adopt practices that restore degraded soils and conserve scarce water. An army of small-holder organic farmers needs to be trained with a mix of indigenous and modern knowledge and skills.

In the construction sector, sprawling housing developments on the outskirts of cities need to give way to high-density urban redevelopments, sustainable human settlements involving mixed land-use zoning, and green building techniques and materials.

Where will the money come from to fund these programmes?

The government’s fiscus can be augmented through appropriate taxes on resource rents, including a windfall tax on the super-normal profits of synthetic fuel producers and mining companies. Fiscal incentives – mixes of taxes and rebates – can be used to promote firm and household-level green investments. Profligate state spending on bloated salaries and elite privileges must be reined in.

Even more importantly, the transition to a sustainable and more equitable economy urgently requires serious monetary system reform. An obvious place to start is a financial transactions tax to bring speculative capital down to earth where it may be put to productive use. We should also follow the example of Brazil and North Dakota’s state banks, which rightfully place the enormous power of money creation in public hands rather than leaving it to private commercial interests.

If ecological limits mean that we cannot grow our way out of poverty and unemployment, then we must share our way out. The poor need to consume more for their basic needs to be met, while the wealthy should consume less to reduce their ecological footprints. Businesses can contribute to reducing inequality by capping executive pay and introducing employee ownership schemes. Government officials should be held accountable for their use of public funds and receive performance-related remuneration.

This need not be viewed as a fanciful wish list in the face of entrenched ideologies, cultural norms and institutional relations. Rather, it is hopeful call to action for human beings individually and collectively to evolve their consciousness and behaviours in response to a fundamentally changing reality.

Published in the Cape Times, 13 March 2012

]]> http://www.ideas21.co.za/2012/03/converging-crises-demand-an-economic-paradigm-shift/feed/ http://www.ideas21.co.za/2012/03/barrelling-down-the-wrong-track/ http://www.ideas21.co.za/2012/03/barrelling-down-the-wrong-track/#comments Tue, 13 Mar 2012 07:16:40 +0000 Jeremy http://www.ideas21.co.za/?p=156 To mix the favourite metaphors of the departments of transport and energy, transport is the heartbeat of the economy, but energy is the lifeblood. Transport in South Africa is overwhelmingly dependent on liquid petroleum fuels. Petrol, diesel, jet fuel and heavy fuel oil provide 98% of the energy used by the transport sector and electricity contributes the rest.

Thus transport planning, which is intrinsically long-term given the life span of infrastructure, must be based on a realistic assessment of energy and oil security. Although there have been some welcome shifts in South Africa’s transport policy and planning in recent years, some aspects are still heading towards dead ends.

The International Energy Agency has stated repeatedly that the era of cheap oil is over. Data from the United States Energy Information Administration show that conventional crude oil output has been on an “undulating plateau” since 2005.

The production of unconventional oil, which includes extra-heavy oil from Venezuela’s Orinoco deposits, Canada’s tar sands and shale oil in areas such as North Dakota in the US, has increased in recent years. But this has come at a much higher marginal cost of production and an even higher cost to the environment in the form of massive pollution and greenhouse gas emissions. In short, the oil industry is scraping the bottom of the proverbial barrel in an age of “extreme oil”.

Oil is running out
Mature oil fields are depleting at an average rate of more than 5% a year and many analysts expect total liquid fuel production to enter terminal decline within a few years.

Meanwhile, world oil exports have been declining at about 2% a year since peaking in 2005 as oil exporting nations, such as Saudi Arabia and Iran, consume a growing share of their own crude.

Biofuels are proving more damaging to global society than they are worth by pushing up food prices and incentivising the destruction of old-growth forests.

In the face of stagnant oil supply and rapidly rising demand in the emerging economies, oil prices have trended steeply upwards, from less than $40 a barrel in 2004 to $111 on average in 2011 and more than $120 now. Tension in the Middle East threatens another “super-spike”, perhaps above $150 a barrel.

In South Africa a new oil refinery will not improve energy security in a future of diminishing world crude output and rising prices. And although a third of our petroleum fuels are produced by Sasol and PetroSA from coal and gas, consumers pay prices benchmarked on international oil prices.

We have been warned
In the past few years we have had ample warnings of what the continued dependence on imported oil will mean, such as bitumen shortages, petrol stations running dry, aeroplanes grounded and farmers losing crops. These energy developments should be critically informing the government’s infrastructure planning for road, air and rail transport.

Expenditure on the maintenance of the existing road network is necessary, especially before the costs of bitumen and diesel rise even higher. But, in the context of peak oil, spending on new roads for the most part does not make long-term sense, including the R25-billion allocated by the treasury in the current budget cycle for new national roads.

The Gauteng Freeway Improvement Project, which is projected to cost R20-billion, represents a massive misallocation of resources. Following public opposition to the road tolling, the government has decided that taxpayers will bail out the South African National Roads Agency Limited — and subsidise Gauteng motorists — to the tune of R5.8-billion. All this money should rather have been spent on more efficient mass transit. We can only hope the same mistakes are not repeated in other parts of the country.

Government policy regarding air transport is even more questionable. The Airports Company of South Africa has, in recent years, spent billions upgrading the OR Tambo and Cape Town international airports and building the brand-new King Shaka International Airport in Durban. Although useful during the 2010 World Cup, how will these upgrades benefit South Africa in a future characterised by massive debt deleveraging in the Western economies combined with surging fuel prices?

Moreover, the national carrier, SAA, recently asked the government for a R6-billion “recapitalisation” — read bailout — to improve its cash flow and fund the purchase of a fleet of 20 new aircraft. Management says it expects the airline to make a loss in the 2012 financial year, mainly as a result of — you guessed it — high oil prices. Why should South Africa’s beleaguered taxpayers continue to subsidise a loss-making entity with a bad management record that serves a privileged minority?

Finally something is being done about rail infrastructure
Fortunately, there is some good news on the transport policy front: rail infrastructure is at last starting to be overhauled. Transnet has embarked on a R300-billion capital expansion programme. However, most of this is geared towards expanding capacity on coal, iron-ore and manganese rail lines to boost exports. Only R7.7-billion has been budgeted for expansion of Transnet’s general freight capacity, which should progressively take the place of road-based freight transport.

Passenger rail is making a comeback. In late February the department of transport announced that the government would soon issue a tender for 7 200 new train coaches and locomotives, to be procured in the next 20 years at a cost of R128-billion.

Although that might sound like a lot of money, consider that South African households spent R67-billion on private motor vehicles in 2010 alone. So, from a societal cost perspective, two years of new car purchases would be equivalent to the entire passenger rail upgrade.

The other bright light is the development of integrated transit systems in major cities, led by bus rapid systems in Johannesburg and Cape Town. Fully loaded buses are far more energy efficient than single-occupant cars.

In the 2012 Budget Review R300- billion was pencilled in for a proposed high-speed rail link between Gauteng and Durban. Given its huge price tag — and the strong likelihood of cost overruns — this should be a low priority relative to the provision of mass transit in cities and upgrading existing freight rail.

In their seminal book, Transport Revolutions, Richard Gilbert and Anthony Perl argue persuasively that we electrify our transport systems and power them increasingly with renewable energy.

This task is both monumental and pressing — and thus each rand spent on unsustainable oil-dependent infrastructure will cost the nation dearly in terms of future constrained mobility and economic losses. The government must urgently reconsider its transport strategies.

Published in the Mail & Guardian, 9 March 2012

http://mg.co.za/article/2012-03-09-barrelling-down-the-wrong-track/

For most of the past couple of centuries of industrial capitalism, the majority of economists, politicians and citizens in general have taken energy supplies for granted. The exceptions were local energy constraints, periods of war, and infrequent incidences of politically-driven supply disruptions such as the 1970s oil shocks triggered by the Arab Oil Embargo and the Iranian Revolution.

But in recent years, two huge challenges to our energy situation have loomed increasingly large and are forcing people to give energy the serious consideration it deserves. The first is anthropogenic climate change, which the majority of scientists ascribe mostly to the burning of fossil fuels. The second challenge – which is still the elephant in the room – is the rapid depletion of cheap and easily accessible reserves of oil, coal and gas.

A Dutch researcher writing on TheOilDrum.com website recently made available a useful data compilation providing global primary energy consumption by energy type (see Figure). An analysis of historical energy patterns shows an astonishing growth in energy consumption and highlights our current dependencies.

World energy consumption 1830-2010

In 1830, the Industrial Revolution was just two generations old in Great Britain, was in its infancy in Germany, and was still in gestation in the United States. Total global energy consumption rose from approximately 24 exajoules (10^18 joules) in 1830 to over 550 exajoules (EJ) in 2010. In the past century alone, energy consumption has grown by a factor of ten. On a per capita basis, energy consumption quadrupled between 1830 and 2010.

In 1830, biomass accounted for over 95 percent of the world’s energy supply. Even today, much of the poorer developing world’s population still relies on traditional biomass fuels like wood and animal dung for cooking and heating. Despite the enormous growth in fossil fuel use over the past century, consumption of biomass energy has continued to grow each year, rising from 23 EJ in 1830 to 63 EJ in 2010. A surge in the last decade is largely due to a huge expansion of ethanol and biodiesel production, driven mainly by government subsidies.

Britain was the first country to exploit its coal reserves in the late eighteenth century, at first mainly because it was running short of wood. Globally, coal replaced biomass as the largest source of energy as recently as 1905. Ironically, the fastest growth in coal consumption occurred in the early part of the new millennium, as China ramped up production to feed its break-neck industrialisation.

Commercial oil production began in the U.S. in 1859, but did not overtake biomass energy until 1955. Oil superseded coal as the dominant energy source in 1964, and still provides the greatest share of primary energy today at over a third.

Natural gas has been the relative late-comer amongst fossil fuels, but has grown rapidly since the 1950s. Where it is abundantly available, it has become the fuel of choice for home heating and increasingly for electricity generation.

Commercial nuclear power generation, derived from the fission of enriched uranium atoms, began in 1954. It was historically the fastest growing new energy source, taking just 12 years to progress from 1 EJ to 10 EJ. But nuclear power has levelled off since 2000, and faces an uncertain future after Fukushima.

Hydroelectricity generation kicked off in the 1870s but has grown very slowly, reaching 12 EJ in 2010. Other renewable electricity generation from solar, wind and geothermal energy sources amounted to just 2 EJ in 2010 – invisible on the figure. This is equivalent to the energy obtained from coal in 1848 and from oil in 1912, shortly after the launch of the model-T ford car.

The figure clearly shows how dependent our industrial society is on fossil fuels. In 2010, 80 percent of the world’s primary energy supply was derived from fossil fuels, 11 percent from biomass, 5.5 percent from nuclear energy, 2.2 percent from hydropower and just 0.4 percent from solar, wind and geothermal energy.

Humanity is now reaching an epic turning point in its energy history. World conventional crude oil production has been basically flat since 2005, and unconventional oil and biofuels have only added marginally to production rates since then. An increasing number of analysts are expecting world liquid fuels output to begin declining within the next few years as discoveries of new oil fields cannot keep up with the depletion of old fields. And a number of recent academic studies have thrown serious doubt on the common assumption of abundant coal reserves.

Installed capacity of renewables like solar and wind have been recording spectacular growth rates in excess of 20 percent a year for several years, but this is off an extremely low base. The transition from depleting and polluting finite fuels to renewable sources of energy represents a monumental and urgent transition for humanity.

Published in Engineering News, 2 March 2012

http://www.engineeringnews.co.za/article/a-century-of-addiction-to-fossil-fuels-2012-03-02

For decades, fusion has been the holy grail of nuclear energy researchers. ‘Hot’ fusion – the process that creates energy in the sun and hydrogen bombs – involves the fusing of hydrogen or deuterium atoms into helium. After decades of research, scientists have yet to crack the problem of managing the extreme temperatures involved. ‘Cold fusion’, which, in theory, would create useable energy at room temperatures, has for a long time been a similarly elusive dream.

In 1989, two scientists at the University of Utah, Pons and Fleischmann, claimed to have demonstrated a cold fusion reaction that produced excess energy, that is, more energy than would be yielded by a normal chemical reaction.

However, other researchers had great difficulty in replicating the Pons-Fleischmann experiments, and the whole notion of cold fusion became discredited as ‘junk science’.

Nonetheless, some scientists scattered around the globe have continued this line of research and, in the past few years, there has been a renewed explosion of interest in the subject.

The term ‘cold fusion’ has fallen out of favour, to be replaced by the more accurate label of low-energy nuclear reactions, or LENRs.

Scientists working in several labo- ratories have claimed to have produced excess heat energy when mixing hydrogen gas with nickel or palladium under certain conditions. Remarkably, the reactions produce no greenhouse gases or radioactive waste.

Last year, an Italian engineer and entrepreneur named Andrea Rossi catapulted himself to fame – or possibly infamy – by claiming to have invented a device – called the energy catalyser, or E-Cat – that produces commercially viable quantities of LENR energy using a special catalyst.

In October, Rossi performed a demonstration of a 1 MW E-Cat to a handful of scientists and a potential buyer at the University of Bologna. Subsequently, Rossi said he sold his device to an unnamed American buyer, which some people have speculated could be a branch of the US Department of Defense.

With Swedish company Hydro Fusion acting as the agent, the website ECAT.com is advertising 1 MW units for sale at $1.5-million each – a 25% price cut after two months, resulting from a “close and successful colla- boration with the first (still undisclosed) customer” and “new favourable and scalable production processes”. That price would equate to about R47-billion for capacity equal to the Medupi power station, which has a price tag of upwards of R120-billion. The fuel and maintenance costs are said to be a negligible $1/MWh each, while the estimated life span of a device is 30 years. ECAT.com claims that 10 kWh household units will be available for purchase by next year.

Rossi’s claims triggered a storm of debate, with many critics saying it was a scam, as his device defied the known laws of physics. Rossi has yet to allow independent scientific validation of his device, arguing that he wants to secure a patent first.

In recent months various competitors have emerged with similar assertions.

Greek company Defkalion Green Technologies issued a press release in November stating that it will begin selling an LENR device dubbed Hyperion this year. Another statement, released on January 23, invited inde- pendent third parties to test the reactors.

In mid-January, the US National Aeronautics and Space Administration (Nasa) released a short video in which a Dr Joseph Zawodny says that the LENR process “has the demonstrated ability to produce excess amounts of energy cleanly, without ionising radiation, without producing nasty waste”. He says this heat could be used on a household scale for space and water heating and converted into electricity generation, on an industrial scale for power generation and, ultimately, for transportation.

On his blog, Zawodny subsequently stated: “When considered in aggregate, I believe excess power has been demonstrated. I did not say, reliable, useful, commercially viable, or controllable.” Nevertheless, he says the video was released as part of a patent application filed by Nasa for an LENR device.

Most recently, several blogs are reporting that scientists at the Massachusetts Institute of Technology held a short course on cold fusion in the last week of January, where a successful LENR demonstration was apparently conducted.

If commercial energy from LENR proves to be viable and cheap, it could completely revolutionise the world’s energy systems, rendering fossil fuels and conventional nuclear fission reactors obsolete and making fresh- water through desalination affordable. But a widespread transition to LENR energy would likely take a decade or two.

It is still too early to tell whether commercial LENR is imminent or will turn out to be a red herring. But this story is definitely one to watch.

Published in Engineering News, 17 February 2012

http://www.engineeringnews.co.za/article/is-low-energy-nuclear-reaction-new-physics-or-an-old-scam-2012-02-17

Every year the National Treasury increases so-called ‘sin taxes’ on cigarettes and alcohol, both addictive substances whose use results in large health and social costs. So why not impose a similar tax on another substance that is a national addiction, deleterious to our long-term health and depleting globally – namely, oil?

Consumers already pay taxes and levies on petroleum fuels – amounting to about a third of their retail prices, which are now near their all-time nominal highs over R10 per litre. Further fuel price increases would hurt poor people who generally spend a large proportion of their meagre incomes on transport. Rather, the Treasury should impose a ‘syn’ tax – a windfall tax on the profits of synthetic fuel producers Sasol and PetroSA, which together contribute about a third of our fuel supplies. At the same time, consumers should begin a ‘rehab’ programme to address their oil addiction.

A windfall tax on synfuel profits will not make any difference to the price of fuel paid by consumers. This is because national fuel prices are determined by the Department of Energy on an ‘import parity price’ (IPP) basis. That is, local ‘basic fuel prices’ are benchmarked on international refined petroleum product prices, to which are added transport costs, wholesale and retail margins, and levies and taxes. Thus Sasol and PetroSA sell their synthetic petrol and diesel at the same prices as the companies – Engen, BP, Shell, Chevron and Sasol again – that refine imported crude oil.

Any increase in international crude oil prices or a weakening of the rand exchange rate pushes up local fuel prices, raising the rate of inflation and hurting SA’s consumers but boosting the profitability of synfuel producers. PetroSA recorded a R871 million net profit in fiscal year 2011, while Sasol Group operating profit increased by 25% to R30 billion.

Sasol is SA’s largest company by sales and market value and contributed R25 billion in direct and indirect taxes in the past financial year, ranking it amongst the country’s largest corporate tax payers. PetroSA by contrast is wholly owned by the state.

So should an extra windfall tax be imposed on the synfuel producers? This question was addressed comprehensively by a special Task Team appointed by then-Finance Minister Trevor Manuel in 2006. The Task Team found that both Sasol and PetroSA have benefitted extensively from state support over several decades.

Sasol was created and funded by the Apartheid state in the 1950s, but was privatised in 1979 and is now listed jointly on the JSE and the New York Stock Exchange. Sasol’s first synfuel unit was financed by the state-owned Industrial Development Corporation. The company has always been guaranteed full uptake of its products at import parity prices, enjoyed low tariffs on the pipeline network constructed by Transnet over the years – which gave Sasol market access for synfuels and gas and amounted to a subsidy of approximately R860 million per year – and benefited from tariff protection between 1979 and 2000 to the tune of at least R6 billion.

Moreover, Sasol was privatised “on terms very favourable to investors”, thereby benefitting a small group of shareholders, 40 percent of whom are foreigners.

Mossgas, which later became part of PetroSA, benefitted from tariff protection on the same basis as Sasol, ultimately enjoying subsidies from motorists amounting to R1.5 billion up to November 2004. Soeker, which discovered the gas feedstock, was funded by government but later absorbed into PetroSA. The state invested R13 billion in Mossgas and R8 billion in Soekor, and wrote off loans to these entities amounting to R8 billion and R1.5 billion, respectively.

The Task Team cited several independent estimates of the costs of production for existing CTL and GTL; these ranged between $22-45 per barrel and $18-30 per barrel, respectively. Even though these costs have surely risen over the past five years, the profitability of the synfuels producers indicates that they are considerably lower than recent crude oil prices.

In short, the Task Team commented that “very large amounts of the tax payers’ money have been used to support and maintain the synthetic fuels industry”. Thus they recommended the imposition of a windfall tax of R1.25 per litre of synfuel at an oil price of $110 per barrel, which would garner over R10 billion in annual tax revenue.

However, then-Finance Minister Trevor Manuel shunned this advice, saying the tax might undermine further investment in the synfuel industry, which he argued was necessary for bolstering energy security. An additional reason cited by the Treasury was that it could not be sure whether the windfall profits were of a cyclical or structural nature. With hindsight, it is clear that oil prices have been trending upwards for at least eight years now. And they are expected to shoot much higher after the world passes ‘peak oil’ production.

As it happens, at the same time that the Task Team released its report, Sasol announced that it was considering building a new coal-to-liquid plant, dubbed Mafutha. But the company later said it needed partial government funding for an investment set to cost in excess of R50 billion.

Last year Sasol put project Mafutha on ice because of concerns about the costs of greenhouse gas mitigation and the quality of coal in the Waterberg field. Thus the main justification for withholding the windfall tax has not materialised – and given climate change and other pollution concerns, that might be for the best.

The proceeds of a syn tax should not be used to subsidise domestic fuels, as this would encourage our oil addiction. The revenues should instead be utilised to reduce SA’s dependency on oil imports. Global oil production has been essentially stagnant for six years and an increasing number of analysts warn that we are at or near ‘peak oil’ production, and that annual output will begin an inexorable decline within the next few years. As the International Energy Agency’s chief economist Fatih Birol is fond of saying, “we must leave oil before oil leaves us”.

Thus syn tax revenues should be invested in renewable electricity capacity and more efficient and sustainable transport systems, like electrified rail for both freight and passengers. Subsidised public transport would be a much more sustainable form of support to poorer commuters than fuel subsidies.

In a country with amongst the highest levels of inequality in the world, it is iniquitous that a few private shareholders – many of whom are foreigners – should profit at the expense of our citizens. Our government should follow the example set by their Australian counterparts – in respect of their mining ‘super-tax’ – and divert resource rents to sustainable investments for the benefit of all South Africans.

Published in the Mail & Guardian, 10 February 2012

http://www.mg.co.za/article/2012-01-20-barrelling-towards-fuel-shortages/