Fracking, climate change, solar in the security mix

The global oil market is going through an upheaval, with non-OPEC production led by North American producers surging while OPEC’s traditional price-setting role changes. First, US oil production and proven oil reserve growth over the past several years is astonishing. Despite the current oil price decline, US oil production growth in 2015 is expected to grow around 1 million barrels per day. However, those growth rates probably won’t be sustained over the long term.

Second, if you look at the world’s largest oil reserve holders and countries that have reserve-to-production ratios in excess of 100 years, they are almost exclusively OPEC members. The cartel’s market influence has diminished in the face of robust non-OPEC production, but the group’s power is likely to endure over the long term purely due to the sheer volume of oil its members collectively control.

The Saudis will remain the de facto leaders of OPEC until another country can build comparable spare production capacity, which in the Saudis case is currently around 2 mmb/d. Saudi Arabia has 266 billion barrels of proven high-quality, cheap-to-produce oil reserves. The US, in contrast, boasts only 44.2 billion barrels of mostly expensive-to-produce oil reserves. Technology is a wild card that has the potential to unlock additional petroleum resources and reduce production costs, but it would be a mistake to discount Saudi Arabia’s power as an oil country, particularly over the long term.

That means, of course, that the Bahrain-based Fifth Fleet will remain a key asset. Add the Iranian nuclear talks, the predations of the Islamic State of Iraq and the Levant (ISIL), and the simmering tensions between Israel and its neighbors to the oil that flow through the Strait of Hormuz and there seems little doubt we will keep substantial naval, air and expeditionary forces in the area for the foreseeable future.


But these shifting energy markets raises larger strategic questions.

Colin spoke with one of the wisest analysts about the energy sector and its national security implications, Tony Cordesman of the Center for Strategic and International Studies. A former senior Pentagon and NATO official, Cordesman also served as director of policy and planning for resource applications at the Department of Energy. He doesn’t foresee any immediate major strategic shifts created by the energy market changes. At the same time, he acknowledges that major technological and market shifts have usually gone unnoticed until they hit us in the face.

Cordesman points to the solar and nuclear markets, where we have all been expecting or hoping for major technological breakthroughs “since the Nixon administration.” Then he notes that, in the oil market, “no one predicted that the most critical technological breakthrough would prove to be fracking.” Can we expect a breakthrough in the solar, nuclear or biofuel arenas? “It may take 25 to 50 years or it will happen almost without warning,” he predicts.

The current situation in the alternative energy world: We’re seeing the strong growth of renewable energy, albeit from a low base. The growth rate of installed US solar power capacity has been impressive, but that growth rate has slipped in the past few years as the technology has gained market share. “U.S. solar power capacity would need to grow at an annual rate of 22 percent in order for solar to provide 10 percent of the nation’s electricity in 2030, from less than 1 percent now,” Breaking Energy recently reported.

Wind and solar are used to generate electricity but coal will remain a significant source of US power generation for decades, although its market share looks likely to decline — for environmental reasons. The renewable energy story is important, and while it is changing the way utilities do business, wind and solar are only beginning to compete with fossil fuels on price. In most cases, their competitiveness is a result of tax incentives often referred to as subsidies. Also, the intermittent nature of these resources is a technical challenge that must be overcome in order to efficiently integrate large volumes of wind and solar energy into the power grid during times of peak demand. Creative financing and technological advances – particularly in energy storage – will help renewable electricity sources compete over time, but coal and natural gas will remain significant components of the US power generation mix for the foreseeable future.

At the international level, the issue of burning coal to generate power is far more complex. It is cheap and represents a comparatively cost-effective way to electrify large portions of the global population that currently have no access to power. Indeed, nine countries are collectively about to build roughly 550 gigawatts of new coal-fired capacity over the next two and a half decades.

And Then, Climate Change

In many ways, reducing emissions from coal-fired power generation is the key to dealing with climate change. China has been acting to address coal plant emissions due to its dangerous air pollution levels, which is an important piece of the climate change puzzle.

This poses a great conundrum for China. The Communist Party’s leaders are trying to forge a China united between rural and urban areas and that requires huge and fast economic development — much of it dependent on the use of cheap and readily available coal. Weaning themselves off of coal may be promising in terms of reducing emissions, but Cordesman says they are unlikely to be able to accept the economic tradeoffs.

For the same reasons, many other developing countries including India, Bangladesh and Pakistan are increasing their coal-fired power generation fleets.

Some think the ship has already sailed on preventing the impacts of climate change and now focus on adapting to extreme weather and other consequences as opposed to mitigating emissions such that they limit global temperatures from increasing more than 2 degrees Celsius.

Optimists remain however, and international agreements are not the only thing to focus on when thinking about what the world is doing to address the issue. “At every level—individuals, families, cities, states, provinces, even multinational corporations—efforts to cut CO2 are underway,” David Biello, associate editor for environment and energy at Scientific American, wrote in a recent post. He goes on to point out, “these are first steps and they are coming at a quickening pace, which suggest a possible future free of catastrophic climate change. More and faster should be the new slogan for action to address global warming. How much more and how much faster should be the only issue for negotiation.”