The world is still hooked on fossil fuels

From Russia to Iraq, the demand for gas and oil is fuelling an increasingly violent global power struggle

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If the Iraq Crisis tells us anything, it's that we live in a world utterly dominated by fossil fuels. If ever you are tempted to doubt that, consider everything that’s happening at the moment.

Russia has cut off gas supplies to Ukraine, and Germany is pushing the European Union to reduce the region’s dependence on Russian gas. Our Prime Minister has just proudly announced a deal whereby BP and Shell will supply liquefied natural gas to China – the centrepiece of his meetings with the Chinese PM Li Keqiang.

Unless I am unduly cynical, one of the reasons why Iran has become our new best friend is that the West would quite like its help to preserve the oil output of Iraq, as well as smoothing the path towards open market access for Iran’s own supplies.

Then consider this about coal, the least fashionable of the fossil fuels. Last year consumption grew by 3 per cent, making it faster-growing than both gas and oil. Its share of total primary energy production was 30.1 per cent, the highest since 1970.

Some numbers underline the importance of fossil fuels – they come from the new BP Statistical Review of World Energy, out this week. In total more than 85 per cent of global energy comes from them. Of the rest, hydro-electric power is 7 per cent, nuclear 5 per cent, and all the renewables added together – wind, biofuels, tidal barrages, etc – just over 2 per cent. We hear so much about renewables – we anguish over the intrusion of wind farms, and are urged to switch to electric cars – that it is worth observing that a carbon-free future is a long way off.

Clean electricity? Well, renewables worldwide account for only 5.3 per cent of electricity generation and the fastest-growing fuel for power stations is coal. Last year China and India accounted for 88 per cent of coal’s growth. They are building new coal-fired stations an awful lot faster than we in Britain are shutting down our few remaining ones.

There is a broader point here. More than half of the world’s energy now is consumed in the emerging and developing countries, which have accounted for the entire increase in energy demand over the past decade. The EU countries are using less energy than at any time since 1995, even though their overall GDP is 35 per cent higher than it was then.

Recession unsurprisingly cuts demand yet more: last year the country with the sharpest fall in energy use was Spain, down 5 per cent. But then Spain has six million people unemployed, a rate of 26 per cent, and more than a million of them have not had a job since 2010.

But while the developed world is not using much more energy than it was 10 years ago (the EU a bit less, the US a bit more), it is increasing supplies. The reason is the fracking revolution, which has transformed the North American energy balance.

Two tipping points occurred last year. The US passed Russia to become the largest producer of oil and gas combined – Saudi Arabia is a distant third. And China passed the US to become the world’s biggest oil importer, with China going up and the US going down. Oil imports to the US are the lowest since 1988.

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Fracking is fascinating for a host of reasons. There is the environmental story, with real concerns about long-term damage to the landscape. There is the political impact on the self-confidence of US, which may conceivably become a net exporter of energy by 2020.

If that were to happen China would have a profound need to maintain open trading borders, while the US would become more insouciant about that. You can already feel that bit of the swagger in back in American industry’s step.

One reason for that is that US companies are benefiting massively from cheap natural gas. The price of gas in Europe is roughly three times that it fetches in the US. The oil price pretty much evens up around the world, but transport and infrastructural blockages mean that there are big differentials in gas prices.

Eventually the US will build the port facilities and liquefied natural gas plants to enable it to export its gas, and work has begun. But this will take years, so meanwhile the gas has to be used within the country, hence very low prices.

Step back from the US and note that fracking does something else. It means that “peak oil” – the idea that the there is a physical limit to the amount of oil than can be produced – will be delayed by at least a decade, maybe two or three.

Ten years ago the conventional calculation was that the world had about 40 years of supply left – in the sense that there were that many years of proven reserves. Now we are up to 53 years of supply. We are finding oil faster than we are using it.

 

So what should we conclude from all this, other than the obvious that the world is a fossil-fuelled economy and will remain so for many years to come? I suggest three things.

One, we should be relieved that there are substantial supplies of fossil fuels, for we have yet to develop cost-efficient alternatives. We should therefore welcome fracking, partly because it reduces dependence on unstable regions but also because it buys us time.

Two, that is not an argument against trying to economise on energy use. That remains as important as ever, and we can sensibly and cost-effectively do more.

Three, the technologies we in the West develop (including fracking but especially conservation) will benefit us. But even more important, they will help the emerging world increase living standards without putting an unbearable burden on the Earth’s resources.

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