Bill Totten's Weblog

Sunday, December 12, 2004

The Energy Challenge 2004

by Murray Duffin (September 10 2004)

The new administration's priority attention to energy is a much needed step in the right direction. The report of the National Energy Policy Development Group (NEPDG) might be considered a reasonable first pass (a grade of B-?), given that it was produced in a relatively short time, and driven from a petroleum industry point of view. However from a perspective of the challenge we face and the nation's real needs it must be given a failing grade.

The NEPDG report has seven key weaknesses that must be addressed and have so far, during the last 3 years, been ignored. In priority order these are:

1. Time Horizon: The energy challenge to 2020 can to some degree be addressed as outlined in the report, but doing so will put the future beyond 2020 in more jeopardy than it is in now. No policy and no projections that stop short of 2050 should be allowed. The present approach will address the problem for those of us over fifty at the expense of our grandchildren.

2. Supply Limits: Limits to the supply of oil and natural gas are ignored. Worldwide oil availability will be in decline long before 2020, and natural gas by 2030. (Natural gas production in North America is already in decline, since a peak in 2002). Neither will be significant in the energy picture by 2050, but replacements must be developed.

3. Hydrogen: The inevitable - and probably at least thirty-year - effort of shifting from a hydrocarbon to a hydrogen economy is largely ignored. The Bush administration has put some priority on the development of a hydrogen economy since the NEPDG report was issued, but this is seen by many as a way to postpone the real needed actions.

4. Efficiency and Conservation: The potential on the demand side is severely underestimated, and the priority for the demand side is far too low.

5. Renewables: Far too little attention is given to either the potential of renewables, or the challenges of realizing their potential, and the shift to renewables is not optional. Only the timing and rate of speed are optional.

6. Relative Costs: Saving energy costs much less than developing additional supply, and can have an impact much more quickly. The report fails to touch on this subject.

7. Regulations, Incentives, and Perverse Incentives: This subject is touched on lightly, relative to distributed power, but is largely ignored. It is a key topic to be dealt with in any effective energy policy.

Energy will be the most important issue facing the country in this decade, even more than, but inseparable from, terrorism. We need a policy and strategy that set aside partisan differences, ignore special interest pressures, and give the Energy Challenge the priority it deserves.

The worst aspect of this problem is that present legislation (passed in the House and pending in the Senate) is largely based on the NEPDG report, remains unchanged since late 2001, and is largely contrary to the country's real needs. There is major emphasis on development of new domestic supplies with large subsidies for oil, gas, coal and nuclear, and little attention to the demand side or to renewables. In spite of the fact that, since the legislation was written, oil prices have doubled, coal prices have nearly doubled, natural gas prices have more than tripled, and energy company profits have soared, the proposed subsidies haven't changed. Also E&D activity hasn't exactly soared. Clearly domestic prospects are not attractive enough for development on the shareholders money, but legislators don't get it.


The energy challenge we face is the most important issue of this decade in terms of its impact on future generations. If we get the answers right, we have a good chance to take the challenge in stride, with no more than minor economic impact. If we get them wrong, this decade will prove (in retrospect) to have been the most important decade in the country's history. The decisions we make can either set us on a path of smooth transition to a new energy economy, or on a slide toward a future of deprivation for our children and grandchildren and generations to come. Unfortunately, most of our elected leaders are living in a world of no information, misinformation, or disinformation. Unless this situation changes, they are unlikely to make the best decisions.

No information results mainly from the fact that energy has not been an issue, so the homework has not been done. Misinformation derives mainly from dealing with assumptions and opinions rather than facts, well-meaning but one-sided viewpoints, too short time horizons (twenty years or less), and expecting that the future will be like the past. Disinformation comes mainly from two sources, one of which has some claim to innocence:

<> Economic models that are based on invalid and usually unstated fundamental assumptions

<> Selfish special interests that are, at best, economical with the truth.

Following is a set of declarations or assertions that introduce the key issues, and that can be made with a high degree of confidence:

1. Supply side

<> World conventional oil availability will be in decline by the end of this decade, and no amount of additional drilling will change that.

<> USGS (United States Geologic Survey) year 2000 projections of oil "potential" availability from 1996 through 2025 are demonstrably invalid.

<> American oil production has been in decline for years - the lower 48 since 1970 and Alaska since 1988 - and the decline is irreversible.

<> A key European oil supply source, the North Sea, is now in decline also.

<> America consumes about 25% of world oil, and imports over 60% of her oil supply. As major LCD's (like China) develop and OPEC populations explode, America will not be able to maintain her present share of world oil at any price.

<> Unconventional oil is not a solution to the coming shortage, because it cannot be produced fast enough, regardless of how abundant it may prove to be.

<> Developing presently restricted North American oil and gas sources will likely be both necessary and economically desirable, but this is a short-term palliative, not a solution, and will only hasten the ultimate depletion of a resource with better uses than powering SUVs. A policy of "drain America first" is strategically very shortsighted.

<> Natural gas growth projections from now to 2020, made as recently as 2000 will not (and can not) be met, and before 2030 worldwide natural gas availability will also be in decline.
Oil has declined 2% to 4% per year for many years in the lower 48, is declining at 6% per year or worse in the North Sea, and has declined at more than 10% per year in Prudhoe Bay in spite of major secondary recovery activities. There is a real risk that natural gas supply in North America will "fall off a cliff" sometime in the next one to five years.

<> Before 2050, neither oil nor natural gas will be significant as energy sources in the US. Whether by exhaustion or replacement with alternatives is our choice.

2. Alternatives to oil and gas

<> Nuclear power will be an important part of the solution, but it is not politically palatable right now, and will need to be based on Integral Fast Reactors when restarted to avoid fuel shortages in only a few decades. Work on IFRs is presently forbidden in the USA.

<> Coal will be a major source for decades yet, and can probably become economically clean, with considerable R & D. However, if we maintain the growth trend of coal of the last thirty years, it too will peak (at 2-3 times the present consumption) and will be in decline before the end of the century.

<> Wind power is an economical alternative, and there is enough harnessable wind to meet America's total energy needs, but there are problems of variability to be overcome.

<> Solar power will also be part of the solution, but it needs a lot of R & D to become economical for all but a few special applications. It can be economical for peaking power now, but the utility industry seems to be ignorant of the potential.

<> Bio-mass, mainly in the form of agricultural waste, will also be a significant contributor, especially for replacement of a good fraction of petroleum shortages.

<> Other alternatives (geo-thermal, tidal, wave) must also receive attention.

<> All alternatives require major investment to be realized and demand a long-term commitment and plan.

3. Demand side

<> Even with the present fuel mix, America could maintain its present economy on less than half the energy presently consumed, without individual sacrifice.

<> Changing to renewable sources of primary energy also reduces the primary energy needed. A complete switch from fossil fuels to renewable energy would reduce non-nuclear primary energy needed by at least 50%.

<> Both the industrial and consumer segments of the economy have vast opportunities to reduce energy waste, by both conservation and efficiency.

<> Retrofitting the economy to reduce waste will create jobs and economic benefits for at least a few decades.

<> Reducing energy demand can be achieved for less than half the cost per kilowattt-hour of increasing supply.

<> New, high-tech, and sophisticated developments will contribute, but the greatest early gains will come from simple, low-tech, well understood, and easily applicable improvements.

<> While market advocates deride the need for government intervention, we must face the fact that we do not have, and probably cannot have, a free market. Demand side initiatives are presently impeded by both lack of appropriate incentives and presence of perverse incentives and subsidies.

<> Prior to 1996 and so-called "deregulation", California was the nation's leader in addressing demand side incentives and disincentives, and California is the most energy efficient state in the union.

<> California has only scratched the surface.

<> Demand side initiatives are vigorously opposed by major selfish special interests - foolishly, myopically, amorally, and unpatriotically. Government has always had to bridle big business, and this issue is no different.


<> Our time horizon must go well beyond twenty years. What we decide now and launch in this decade must look to 2030, 2060, maybe even 2090.

<> We must develop alternatives to fossil fuels.

<> We must develop the alternatives while we still have the fossil fuels, or we will not have the energy with which to develop them.

<> Demand side initiatives are both quicker and more economical than supply side.

<> In the very short term (ten years) we face rising energy costs (with possible brief respites) that will act like a tax, slowing economic growth. Energy-wise this is a good thing! Frantic supply side initiatives to prevent this result will not succeed, and will be counterproductive in the medium and long run.

Clearly we need a balanced and measured approach; focused on the long-term national interest, unswayed by short-term special interests, and dealing with all of supply side, demand side, alternatives, regulations, and incentives.


In dealing with the question of energy, we need to start by trying to understand and/or suppress some of the sources of confusion. We also need to start with a basis of facts before getting to projections, assumptions and opinions. Finally, we need to quantify issues as much as possible, always within a comparable framework. The following will address a few key aspects of these topics.

1. Metrics <1>

We need to understand a few key metrics in order to quantify our discussion, within a consistent framework. The key metrics are:

Quads <2> - A quad is a quadrillion Btu's of energy, or 293 billion kilowatt-hours of energy. In 2000 the USA consumed about 98 quads, of which 35 quads or 36% were consumed in supplying 11 quads of electricity, and 26 quads or 27% powered transportation. Primary sources were:

Coal 22 quads
Oil 38 quads
Gas 23 quads
Nuclear 8 quads
Renewables 7 quads

KWh/MWh - Kilowatt hours and megawatt hours. Power is measured in watts. Energy is measured in watt hours. A watt hour is 1 watt of power applied for 1 hour. A KWh is one thousand watt hours. A MWh is one million watt hours. Scientists use joules to express energy, but KWh are more familiar and more useful here. (1 KWh = 3.6 million joules or 3.6 MJ)

Gb - Gigabarrels or billion barrels. Oil production, consumption and reserves are usually expressed in Gb. The world consumed nearly 28 Gb of oil in 2000, or about 76 million barrels of oil per day. We are now at 83 Mb per day or near 31 Gb per year in 2004. The USA consumes about one-fourth of that or 7+ Gb per year = 19+ million barrels per day.

- For calibration, ANWR reserves are estimated to be 10.4 Gb as the most likely number with only about 6 Gb considered recoverable. The 30 Gb quoted by Senator Murkowski in 2001 is a 5% probability figure.

- World oil production capacity in late 2004 is estimated as under 85 million barrels per day, with the only slack capacity now available being for heavy/sour crude.

Tcf - Tera cubic feet or trillion cubic feet. The Europeans use Tcm or trillion cubic meters. One cubic meter is about 35 cubic feet. Annual natural gas production, consumption and resources are expressed in Tcf. Daily or weekly consumption is expressed in Bcf or billion cubic feet.

- One Tcf of natural gas provides about 299 billion KWh or 1.02 quads of primary energy when burned efficiently (one cubic foot = .299 KWh)

- USA proven reserves are a little more than 160 Tcf, and consumption has averaged very near 20 Tcf per year for the last decade. Discovery approximately equaled consumption during the 1990s, but is now falling well short.

Bst - Billion short tons. Coal production is expressed in short tons. One short ton of top grade USA anthracite has the embedded energy of 4.4 barrels of oil. However, USA coal averages nearer 3.4 barrels. The 1998 USA production of 1.1 Bst of coal provided the primary energy equivalent of 3.75 Gb of oil.

Boe - Barrels of oil equivalent. In order to be able to grasp the relative amounts of primary energy from different sources, coal and natural gas are sometimes expressed in Boe. For the USA on average, 1 short ton of coal is equivalent to 3.4 barrels of oil. 5,600 cubic feet of NG = 1 barrel oil, or 1 Tcf = 180 Mb of oil.

2. Economists

Economists tend to base all their beliefs and assumptions on two underlying and usually unstated principles, both of which are demonstrably invalid. These are:

<> Resources, or at least natural resource availability, will increase with price. For this to be true, the potential supply would have to be unlimited, at least over the time horizon considered. The corollary, that resource scarcity will drive up price, is true in the absence of substitution.

<> If it could be done, it would already be being done. This assumption ignores the ignorance of what is possible, adoption time lags, priorities, conservative engineering practices and technology developments.

This first principle leads economists to ignore or assume away physical limits to supply and thus overestimate resource availability, in our case fossil fuels, especially oil and natural gas. It also assumes away practical limits on recovery rates, even if the plentiful resource exists.

The second principle leads to the conclusion that no energy economies or efficiencies are possible, because everything possible is in practice, and therefore the only way to reduce energy is to downsize the economy. When this assumption underpins an economic model, the model inevitably produces false conclusions.

Beware of any "expert" input from economists on the subject of energy, and check who sponsors their work.

3. Economics

When Vice President Cheney or Secretary Abraham downplay the demand side potential in the economy, they are acting out of ignorance of what is possible, and reacting uncritically to the inputs of economists (as described above).

In fact, retrofitting the national infrastructure, industrial, commercial and consumer, would create millions of jobs. Reducing dependence on imported oil would both improve the balance of payments and reduce the national security costs of ensuring the supply lines. Energy efficiencies can be realized at much lower costs per KWh than adding to supply, and usually more quickly also. The USA has been the victim of unlimited cheap energy and has therefore lacked incentive to address the demand side. Switzerland, lacking our blessing, has an energy intensity per unit of GDP less than 1/2 of ours and can not be considered economically deprived.

As it is we now face, during the next thirty years, irreversibly declining supplies and increasing costs of oil and gas. The resulting increase in energy costs will act like a tax, slowing economic growth. We can mitigate this problem by vigorously addressing development of alternatives (renewables), and - more effectively in the very short run - by emphasizing, not downplaying, demand side improvements.

4. Philosophy

Regrettably, we can not address the energy challenge without accepting the fact that some tradeoffs have to be made. For example, producing truly efficient cars (see will negatively impact the steel and machine tool industries, while benefiting the chemical, plastics and electrical equipment industries.

Another issue that we do not have to address urgently now, but that is implicit in the whole discussion, is the limits to growth. For a very short period in human history (about 200 years) we have been able to develop a philosophy of unending economic growth, powered by limitless cheap energy. Even with a successful conversion to renewables, we will reach insurmountable limits to energy in less than 200 years, at present world growth rates. Other limitations will kick in before energy, for example, food.

We probably have less than 100 years to shift to a philosophy of sustainability and progress without growth. Energy is a good starting point.

While addressing a present US challenge, we must not ignore the far future or the world.


<1> For easy conversions, go to:

<2> Figures extrapolated from 1999 EIA Annual Energy Review.

Copyright 2004 CyberTech, Inc.

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