Peak Oil and Switzerland s Opportunities in Clean Tech

Transcription

1 Peak Oil and Switzerland s Opportunities in Clean Tech Dr. Daniele Ganser, Swiss Institute für Peace and Energy Research (SIPER), Basel A white paper written in cooperation with DWS Investments September 12, 211

2 2 / Content Summary 3 1. Crude Oil Price 4 2. Peak Oil 5 3. Population Growth 5 4. Crude Oil Demand in Switzerland 6 5. Declining Discoveries 7 6. Climate Change and Nuclear Power 8 7. Clean Tech and Renewable Energy 9 8. Renewable Energy s Share in Switzerland 1 9. Renewable Energy is the Clear Winner 1 1. Conclusion 11

3 / 3 Summary By 22, as productivity of oil fields starts to wane, maximum output, or peak oil of under 1 million barrels per day (mbd) will be reached. Oil supply shortages will lead to price shocks, possibly plunging economies into recessions. The price of crude oil will also sink as a result, but when peak oil has been reached, the price will increase to well over USD 15 and stay high and very volatile. Amid increasing upwards pressure on oil prices, world demand for clean tech solutions requiring little or no oil will increase. As soon as broad market pene tration is achieved, demand for crude oil will sink. In the new clean tech market in Switzerland, heating oil will be replaced by heat pumps, renovations and insulation of houses, solar energy and photovoltaic technologies. With regards to transportation, due to the rising cost, demand for diesel and petrol will decline, while highly fuel-efficient vehicles (requiring less than 4 liters per 1 kilometers), hybrid and pure electric vehicles will grow in popularity. The aviation industry will find no alternative substitute for cheap kerosene, meaning that high tickets for air travel will partially eliminate demand. On the whole, demand for electricity will increase. Due to climate change, in Switzerland, coal-fired power generation will become increasingly unattractive. Gas-fired plants could be used to meet domestic power demand, providing the country firmly adheres to plans for a gradual phase-out of nuclear energy, which the Swiss Federal Council aims to achieve following the accident in nuclear plants in Fukushima. In sum, the demand for renewable green energy generated by water, wind, the sun, biomass and geothermal will increase significantly, securing strong growth for the clean tech industry.

4 4 / 1. Crude Oil Price The 2th century was the Crude Oil Century. Never before, and never again has there been so much cheap fossil energy available to humans in such great quantities. Thanks to the discovery of large oil fields, during the 2th century, the supply could be continually expanded. Global demand, as measured in barrels of oil (159 liters) increased from one million barrels per day (mbd) at the end of the First World War to 88 mbd in 21, an amount equal to 44 supertankers per day. Due to plentiful supply, in the previous century, the price of oil remained very low, and until 1973 was below USD 2 per barrel. After the first oil price shock, the end of the Bretton Woods system of fixed exchange rates, and the start of a long-term dollar decline, the oil price began to rise, but through to the end of the century returned to a relatively low level of around USD 2 per barrel. Only with the advent of the 21st century did the price of oil begin to rise sharply, reaching in the summer of 28 a record level (thus far) of just under USD 15. As a result of the financial crisis and sub sequent recession, the oil price fell by more than USD 1, to then climb once again back above USD 1. Never before has the price of oil been so volatile. The era of cheap crude oil (below USD 3 per barrel) is over, and it is not going to return. Crude oil price Up until 2, the price of oil was around USD 2. Since then, it has markedly increased and fluctuates today around USD 1.

5 / 5 2. Peak Oil The term peak oil doesn t refer to the end of the age of crude oil, but rather to the maximum level that the world s crude oil supplies can achieve. Even in 25, there will still be oil, but it will be less plentiful, and available only at higher prices. After all, crude oil is present only in finite quantities. Oil is produced today in relevant amounts in only 3 of the world s 197 countries. Some of these countries have reached maximum production, namely peak oil, and are now concerned about a drop in production. These countries include Great Britain, Norway, Mexico and the U.S. In addition, demand for oil is also growing in producer countries, putting pressure on the remaining oil available for export (peak export). Peak oil will be reached prior to 22, reduced supply will be met by strong demand, and this will drive the price of oil higher, leading to a drop in demand. Peak thus refers in this context to the top, the summit. Every successful crude oil and natural gas drilling site has a production profile that starts at zero, rises until it reaches maximum output peak production and then over time drops back to zero, as the pressure in the field abates. Without exception, every production follows this path. But not only does every successful crude oil and natural gas well have a maximum output, or peak production. The same is true for every oil and gas field, every oil and gas production region, in the end, for the entire world. The quicker a drilling site, a field or a reservoir is put into production, and the more the production increases, the faster the reserves will be exhausted, and the decline in production set in. At which point in time, and at what level the production volume of a field peaks, or a country reaches maximum output, can often be identified only in looking back from an historical perspective. One example is the Forties Oil Field in the North Sea, first drilled in 1975, which reached its peak at the start of the 198s, after which production began to decline. Peak Volume of oil per month Forties Oilfield, North Sea Every oil field, and every oil producing nation, reaches peak oil. After that production begins to decline. The production curve of the oil field Forties in the North Sea. Source: Department of Trade and Industry, U.K. Source: Department Trade and Industry, UK 3. Population Growth Crude oil is present in large amounts on the planet. No one knows when exactly available supply will be completely exhausted. What has been documented to date is only that there has been a rapid increase in oil consumption during recent history. The age of crude oil began in 185. At the outset, only relatively small amounts were extracted and consumed. By the eve of the First World War, consumption had just reached one million barrels per day. At the end of the Second World War, global consumption had climbed to 6 million barrels. After the end of World War II, the world experienced its first real oil glut: when the Cuban Missile Crisis occurred in 1962, global daily consumption had reached 22 million barrels. At the time of the Chernobyl nuclear accident in 1986, global oil consumption stood at 61 million barrels per day. In 21 the amount had risen as high at 88 million barrels, equivalent to the capacity of 44 supertankers. In sum, daily consumption rose in just over half a century from 6 to 88 million barrels. Never before has humanity experienced such an increase in demand for crude oil. The twentieth century can rightly be described as the century of cheap oil. 1 If we take 5, barrels of crude oil per day as the production threshold, only 3 countries in the world produce oil. In Europe, these are Great Britain, Norway and Russia; in the Middle East Saudi Arabia, Iraq, Iran, Kuwait, Qatar, Oman and the UAE; in Africa Nigeria, Libya, Egypt, Algeria and Angola; in the Americas the U.S., Venezuela, Colombia, Mexico, Canada, Argentina, Brazil and Ecuador are among the major oil pro ducers; in Asia India, China, Indonesia, Australia, Kazakhstan, Azerbaijan and Malaysia produce more than 5, barrels per day. The largest conventional reserves are in the 12 OPEC (Organisation of the Petroleum Exporting Countries). Figures from: BP Statistical Review June 211. Figures for crude oil production include oil sands, oil shale and liquid natural gas (NGL).

6 6 / 4. Crude Oil Demand in Switzerland Demand for crude oil, now as in the past, has come from the transport industries (petrol, diesel and kerosene), as well as for heating (heating oil), electricity (diesel generators) and synthetic materials (organic polymers, or plastics). The world s population has consumed these products in steadily increasing amounts. The world population during the century of oil also rose more strongly than ever before: from 2 billion people (1922) to 3 billion (1959), then 4 billion (1974), 5 billion (1987), and at the end of the last century to 6 billion (1999). Currently the global population is growing at a rate of about 8 million people per year (a number roughly equal to the population of Germany) and is on track to reach a new record of 7 billion. The price of crude oil will be driven higher and clean tech solutions will gain market share when, in the context of peak oil, the dynamics of rising demand are met with a decline in oil supply. Demographics Population in Billion World Population Billion World Population Billion Developing Developed Population to 25: Developed and developing world Source: United Nations Population Reference Bureau Rest of World 5.3 Billion India 1.8 Billion China 1.4 Billion Developed Countries 1 Billion In the last 1 years the world s population grew from 2 billion to 7 billion people. In keeping with the global trend, Switzerland s oil consumption also has risen. During the 19th century, Switzerland s demand for energy was largely met by wood, coal and hydroelectric power, while only small amounts of crude oil were consumed. In the entire year of 191, Switzerland consumed only 58, barrels of oil. Today that amount would not be enough to cover even three days of Swiss consumption. Prior to the start of the Second World War, the yearly consumption of crude oil in Switzerland totaled 3.3 million barrels. After the war, consumption rose rapidly. In 195, crude oil imports and consumption had risen to over 7 million barrels per year. In 1972 the consumption of crude oil products in Switzerland reached a maximum level of nearly 1 million barrels per year. Following the oil crisis in 1973, the heating oil portion of consumption began to decline. In the future, with peak oil, high heating oil prices are to be expected. Heating oil will increasingly be pushed from the market by strong competition from clean tech solutions such as heat pumps, solar thermal power, wood and building insulation technologies. Although the fuel energy needed for heating has slightly declined over the years, Switzerland still remains highly dependent on crude oil imports. One reason is the need for fuel for transport, so that consumption of crude oil in 21 still totaled about 88 million barrels. That is 24, barrels, or 38 million liters per day, equal to about 5 liters per person per day. We consume more crude oil than milk. Crude oil, with a share of 57 percent, is Switzerland s dominant energy source. There can be no talk about the country being independent when it comes to energy. Energy consumption in Switzerland 191 to 21 TJ Other renewable energies District (long-distance) heating Electricity Gas Petroleum-based fuels Crude oil combustible Industry waste Coal Wood Crude oil is by far the dominant type of energy used in Switzerland. Consumption is equal to 5 liters a day per person. Red and light brown show the use of crude oil, which has increased sharply since the Second World War. Source: Swiss overall energy statistics 21

7 / 7 5. Declining Discoveries The International Energy Agency (IEA) in Paris confirmed in its most recent World Energy Outlook published in November 21 that the production of crude oil already reached its maximum level of 7 mbd in 26, and many well-known fields are now seeing production declining. Discoveries of new oil fields, and better recovery rates from known fields, unconventional oil from oil sands in Canada, and deep sea (more than 5 meters below the surface), as well as liquid natural gas, should help to compensate up for the decline in conventional crude oil, according to the IEA. But whether this will truly succeed is uncertain. Even though new oil fields are discovered every year, the development over the past 5 years is disappointing. Those fields which have been discovered are small, they are unconventional types, or are located well below the sea. In the 195s, crude oil discoveries amounted to over 5 billion barrels per year. Today they have shrunk to, on average, 1 billion barrels per year. In terms of numbers, the number of new crude oil fields discovered is declining. As a result, it is unavoidable that production in the context of peak oil also will be sharply reduced. Crude oil discoveries Billions of Barrels/Year Discovery Consumption Projected Discoveries The peak in terms of crude oil discoveries was already reached in The gray vertical bars show how much new oil is discovered every year. The black line tracks the worldwide consumption of crude oil. Source: ASPO More effective exploitation of known fields is also difficult. Among other things, it can mean that output declines even more rapidly. PEMEX, Mexico s state-controlled oil production company, has been following the decline in crude output of the Cantarell field, Mexico s largest and most important, for several years. It reached a peak in 21 of 2.1 million barrels per day. After various efforts to better utilize the field, production at first fell only slightly. In 25 Cantarell produced 2.32 million barrels per day. In 29, Cantarell was producing just 77, barrels per day. The field will never return to its maximum production levels. The drop in output of these supergiant fields weighs heavily on overall production, and can only be compensated with difficulty, or not at all.

8 8 / 6. Climate Change and Nuclear Power In the past decades, a rise in the average temperature of the earth s surface atmosphere and in the oceans has been recorded, which the scientific community first termed climate change. According to the Intergovernmental Panel on Climate Change (IPCC, 27), the average temperature measured near the earth s surface between 196 and 25 has risen by.74 C. The decade from 2 to 29 was by far the warmest ever measured, followed by the 199s, which were in turn warmer than the 198s. How much of this warming can be attributed to humans, and what the impacts will be of further increases in temperature is still the focus of ongoing scientific research. But according to the IPCC, it is highly probable that human beings have been the main factor driving climate change, mainly through burning fossil fuels such as crude oil, coal and natural gas, which release CO 2, the greenhouse gas. In Switzerland and other countries, laws have been implemented to lower CO 2 emissions or to at least keep them from rising (CO 2 fuel tax). Those in business, feeling a sense of obligation, are working with political policymakers to reduce CO 2 emissions and encourage on more sustainable practices. Climate change demonstrates how crucial it has become to find replacements for coal through renewable sources of energy, such as photovoltaic and geothermal technology. In Germany, Austria and Switzerland, nuclear energy is a politically controversial topic. Both advocates and opponents of nuclear power have debated for years over whether nuclear power or coal is better for the environment. A total of 44 nuclear power plants in 32 countries provide about 4 percent of the world s energy needs. Up until the tragic accident in the nuclear plants in Fukushima following the earthquake and subsequent tsunami that hit the country on March 11, 211, adherents of nuclear power had high hopes for it, which were then Global Temperatures Temperature Anomaly ( C) Source: NASA Annual Mean 5 year Running Mean In the 2th century, the average air temperature of the earth s surface increased by.74 Centigrade. dashed. Nuclear energy is not part of the clean tech sector. Austria has no nuclear power plants. Immediately following the disaster in Fukushima, Germany shut down seven old nuclear power plants, and also plans to shut down the remaining nine still in operation in the country by 222. In Switzerland, if getting out of nuclear energy is the goal, there are no plans to replace five nuclear plants. The demand for renewable green energy from water, wind, solar, biomass and geothermal will increase significantly in the 21st century, securing strong growth for the clean tech industry.

9 / 9 7. Clean Tech and Renewable Energy The term clean tech refers to all technologies, processes and services that conserve resources and protect the environment. Renewable electricity produced using photovoltaic technology; hydroelectric power, wind, biogas and geothermal technology are examples of the types of energy sources provided by the clean tech industry. The sector also includes production of heat through solar thermal technology and wood, along with energy-efficient construction and measures to reduce emissions, along with recycling, filter technology and waste disposal. Clean tech businesses are also getting better at organization within their various industries. In Switzerland, the new industry association Swiss cleantech was founded in December 29. It has grown in the meantime to more than 2 members as of autumn 211. The group has five main goals, according to its president Nick Beglinger: 1) to improve reliability with regards to supplies, as well as resource and energy efficiency; 2) to create attractive jobs in Switzerland; 3) to improve the quality of life in Switzerland; 4) to profit, both short- and longer-term, from the strong growth in clean tech markets; 5) to contribute to sustainable global development. Meyer Burger Technology AG is among the most well known publicly listed Swiss companies operating in the clean tech space. In 1999, Meyer Burger became the first company to sell band saws for the solar industry, which are used to separate hard materials such as silicone. Today, Meyer Burger sells complete solutions for the solar industry. Over the past six years, its share price has risen strongly, and along with it, the potential for clean tech stocks. The sharp drop in its share price in 28 illustrates that the clean tech industry is not immune to the concerns that arise during financial crises, however. But this industry can also make up losses to continue its growth at a high level. Meyer Burger Closing price Source: Meyer Burger Technology AG Volume The share performance of Meyer Burger from 26 to 211 shows that while the clean tech industry can suffer during financial crises, it also can make a good recovery.

10 1 / 8. Renewable Energy s Share in Switzerland Non-renewable sources of energy coal, natural gas, crude oil and uranium dominate world energy production, accounting for more than 85 percent of the overall supply. The clean tech industry s vision is to create a new world in which renewable sources supply 1 percent of the world s energy. According to this goal, homes will be plus energy houses that produce renewable energy in a decentralized manner. Ships will run on solar energy and wind. Wind power, waterpower, wood and geothermal technology will provide electricity and heat. Lightweight automobiles will serve as storage units and, like electric bicycles, will be powered by electricity from renewable sources. Mobility will become quieter, and the pollution of air and water will decline. It is uncertain whether or not this optimistic vision will become reality. But it is clear that we are still a long ways from achieving it. In fact, pessimists see an opposite scenario developing: wars will be fought over dwindling resources, which will destroy large portions of the environment, and will have a devastating impact on the world s population. Share of renewable energy for final consumption, 27 In Switzerland, the portion of renewable energy within the total of all energy sources remains relatively small at 18 percent, dominated by hydropower and wood. Wind, sun, biogas and geothermal still comprise only a small portion of the total. In the future, Switzerland will see strong growth in the clean tech industry, and its portion relative to overall energy will expand. This is likely in part due to the major disasters in Japan (Fukushima) and in offshore drilling in the Gulf of Mexico (Deepwater Horizon). It could also follow new laws coming into effect pertaining to CO 2 emissions and climate protection, as well as a result of prices. With regards to prices, oil here plays a key role. Oil prices are likely to rise, based on what is projected in terms of peak oil. Costs for Switzerland, an oil importer, will also continue to increase. In 199, Switzerland imported 1 billion Swiss francs worth of oil (including tax). By 28, for nearly the same amount of oil imports, it paid 2 billion francs. Clean tech is profiting from the rise in cost of oil. Meanwhile, the market is seeking alternatives to crude oil, and the price of these for end-users is becoming increasingly attractive. End consumption of non-renewable energy 81.7% 77,289 terajoules End consumption of renewable energy 18.3% 158,131 terajoules 1 End-consumption for renewable heating. 2 Total renewable energy consumption. Source: Federal Office of Energy, Swiss statistics for renewable energy Sun 1.13% Ambient heat 1.79% Wood % District heat 1.53% Renewable Portion from waste 1.47% Biogas 1.19% Biofuels 1.5% Water, solar electricity, wind, etc % 9. Renewable Energy is the Clear Winner Among the various categories of renewable energy, photovoltaic has been one that has continued to gain attention. The production of electricity using photovoltaic technology is a new phenomenon in the history of energy production. After Russia launched the first satellite into orbit, the Sputnik, in 1957, the US followed in 1958 with unmanned spacecraft Vanguard that for the first time was equipped with solar cells. Thus, photovoltaic energy at the outset was a product of the space industry, hardly something that average citizens could afford or gain access to. In the last 1 years, a revolution has occurred in photovoltaic technology, making it accessible to the broad public. In Switzerland, with an investment of 27, Swiss francs, photovoltaic power can be generated from a 35-square meter rooftop installation that produces about 5, kwh of electricity per year, according to data provided by solar industries. The technology is practical and affordable.

11 / Conclusion The return on the investment, calculated over an operational life of 25 years, depends on the electricity price and whether or not the owner of the cells receives feed-in compensation. Even as recently as the mid-199s, photovoltaic and wind energy were hardly used even in the wealthy OECD countries. But since then, capacity has increased significantly. The clean tech industry is growing. Gigawatts Electricity production from renewable sources 4 35 Gigawatts ,5 5,4 5,7,8,9 1,2 1, ,8 2,2 23 3,9 2, As sociologist Peter Gross at the University of St. Gallen has said, the future is uncertain, fortunately! We are living in a multi-option society, one offering a multitude of new opportunities. The choices we make will depend on us. There is a real danger that a shortage of oil will lead to recessions and a battle over resources. But the development of clean tech also offers an alternative: at the point where peak oil and other factors have driven the oil price significantly higher, renewable energies will gain ground and expand in terms of popularity. The market will look to tried and tested solutions to replace non-renewable energy, providing the price of the alternative fuels makes it feasible. It is already possible today to run homes without oil and natural gas. With four million homes in Switzerland, the potential is enormous. Production of electricity using renewable energy sources such as sun, wind, water, biogas and geothermal energy will be determined by the price. Generating energy from renewable sources has become more attractive in the wake of disasters such as the one in nuclear power plants in Fukushima. In sum, the energy revolution offers an opportunity for Swiss industry and for investors. Gigawatts Gigawatts , , , ,4 31,3 24, ,5 2 17, ,1 7,6 1, Electricity production from renewable sources such as wind and sun has increased significantly in the past 1 years Dr. Daniele Ganser is a historian and peace researcher at Basel University, and heads the Swiss Institute for Peace and Energy Research. His research includes areas of peak oil and the global battle for oil Source: Ren21: Renewables 211: Global Status Report. July 211

12 DWS Schweiz GmbH Uraniastrasse 9 CH-81 Zurich, Switzerland Deutsche Bank AG Important Notes DWS Investments is the mutual fund business of the Asset Management division of Deutsche Bank Group, collectively referred to as Deutsche Bank. The opinions and views presented in this document are solely the views of the author and may differ from those of DWS Investments and the other business units of Deutsche Bank. Although information in this document has been obtained from sources believed to be reliable, DWS Investments makes no representation or warranty as to its accuracy, completeness or fairness, and it should not be relied upon as such. All opinions and estimates, including forecasts and forward-looking statements, reflect the judgment of the author as at the date of this document, involve a number of assumptions which may prove invalid and are subject to change without notice. As of 9/211 This document is for information/discussion purposes only and does not constitute an offer, recommendation or solicitation to conclude a transaction and should not be treated as giving investment advice. It has been prepared without consideration of the investment needs, objectives, financial circumstances, or fiscal aspects of any investor. This document and the information contained therein must not be distributed in the United States. The distribution and publication of this document may be subject to restrictions in other jurisdictions.