Wednesday, January 02, 2008

Energy Leap Year?

The complex uncertainties affecting energy markets will probably undo most of the forecasts that analysts and economists seem obliged to offer, as the new year dawns. I prefer to highlight the trends I'm following, since those tend to be more durable. Monday's look back at 2007 focused on oil prices and climate change. I expect both to feature prominently in 2008's energy-related news, connected in interesting ways with the Presidential election cycle. In addition to domestic politics and geopolitics, there is a growing list of key energy technologies that bear watching, with the possibility of developments that could change our perspective on the long-term future of energy. However much the global situation has begun to resemble a re-run of the 1970s, we have never had more energy options, or greater incentives to pursue them.

Oil prices have started the year at near-record levels, and the predictions that oil will shortly break $100/barrel seem pretty safe. The larger question is whether it will remain there, or gradually fall back, as demand growth moderates and the global oil industry produces as much of a supply response as it can. Warnings of a collapse below $40/bbl seem exaggerated, but no one investing in renewable energy or other alternatives can afford to ignore them entirely. That downside risk can be managed, but it could be an expensive distraction.

With regard to climate change, the negotiations on the Bali framework for a follow-on agreement to the Kyoto Protocol are unlikely to conclude this year, particularly since the international community recognizes that it could be dealing with a very different set of US counterparts beginning next January. It remains to be seen whether climate change will become a key election issue, in light of concerns about the economy, immigration, and other urgent problems. The fact that it hasn't, so far, is a reflection of the relative agreement among the Democratic candidates on the need for urgent action, and among most of the Republicans that climate change is real but can wait. Once they have chosen their nominees, the parties owe the country a lively debate on the their divergent views on this subject, since the enactment of limits on greenhouse gas emissions could transform our economy and way of life more than anything else the candidates are proposing.

Even if it doesn't become fodder for the election debates, the urgency of tackling climate change is likely to grow. The most prominent American climate scientist recently revised downward his assessment of the ultimate concentration at which atmospheric CO2 must be stabilized, to a level below the current 381 parts per million, in order to prevent catastrophic warming. Since achieving a stable 450 ppm was already going to require a 70% reduction of global emissions from current levels by mid-century, getting to 350 ppm effectively means cutting developed-world emissions radically, starting more or less now, and short-circuiting the prodigious growth of emissions in the developing world. If this view becomes the consensus, expect a lot more focus on preparing humanity to adapt to a hotter planet, because a lot of folks are going to conclude that 350 ppm can't be attained.

On a more optimistic note, the sheer number of companies and universities working on new energy technology greatly increases the chances of dramatic developments in biofuels, solar power, energy efficiency and other areas. 2008 could see the start-up of commercial-scale--if not yet economical--cellulosic ethanol production, and the start of construction on an advanced coal-fired power plant with full sequestration of its CO2 emissions. Meanwhile, a battery breakthrough along the lines of the "nanowire" battery recently announced by Stanford University would provide a big boost to the electrification of transportation via plug-in hybrid or all-electric cars, or potentially enable wind and solar power to compete into more attractive peak-load electricity markets.

I'll also be observing with great interest whether the growing public and media interest in "green" becomes embedded in a new set of greener social values, manifested by a shift in consumer and voter priorities. Governments can lead and markets nudge, but unless voters are prepared to support measures that will cause themselves personal pain, or hundreds of millions of consumers to change their preferences and usage patterns, it's going to be a long wait for technology alone to solve our problems.

No discussion of the trends affecting energy this year would be complete without at least a mention of macro-economic factors. The unfolding debt crisis, weak dollar, and increasing linkages between food and energy all bear watching. Throw in the inevitable Wild Cards--random, unpredictable events, such as last week's assassination--and 2008 promises to be at least as interesting in energy terms as 2007 was.

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