Locavores, locastores and locavolts have caught my attention lately - 3 strands of the “relocalisation” idea that tends to get a lot of attention in peak oil circles.

Another localisation oriented idea that gets less press attention is the concept of local currencies (or “locabucks” as I’m now dubbing them), an idea which has its roots in the Great Depression as a mechanism for escaping the liquidity trap - and thus might be relevant again in the not-too distant future if present trends continue.

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Local currencies in the 1920’s and 1930’s

The most frequently cited examples of local currency were issued in the Bavarian town of Schwanenkirchen and the Austrian community of Wörgl, described in this article on “Laboratory readings: Wörgl’s Stamp Scrip – The Threat of a Good Example?“:

On July 5th 1932, in the middle of the Great Depression, the Austrian town of Wörgl made economic history by introducing a remarkable complimentary currency. Wörgl was in trouble, and was prepared to try anything. Of its population of 4,500, a total of 1,500 people were without a job, and 200 families were penniless.

The mayor, Michael Unterguggenberger, had a long list of projects he wanted to accomplish, but there was hardly any money with which to carry them out. These included repaving the roads, streetlighting, extending water distribution across the whole town, and planting trees along the streets.

Rather than spending the 40,000 Austrian schillings in the town’s coffers to start these projects off, he deposited them in a local savings bank as a guarantee to back the issue of a type of complimentary currency known as ’stamp scrip’. This requires a monthly stamp to be stuck on all the circulating notes for them to remain valid, and in Wörgl, the stamp amounted 1% of the each note’s value. The money raised was used to run a soup kitchen that fed 220 families.

Because nobody wanted to pay what was effectively a hoarding fee [technically known as 'demurrage' and often referred to as "negative interest"], everyone receiving the notes would spend them as fast as possible. The 40,000 schilling deposit allowed anyone to exchange scrip for 98 per cent of its value in schillings. This offer was rarely taken up though.

Of all the business in town, only the railway station and the post office refused to accept the local money. When people ran out of spending ideas, they would pay their taxes early using scrip, resulting in a huge increase in town revenues. Over the 13-month period the project ran, the council not only carried out all the intended works projects, but also built new houses, a reservoir, a ski jump, and a bridge. The people also used scrip to replant forests, in anticipation of the future cashflow they would receive from the trees.

The key to its success was the fast circulation of scrip within the local economy, 14 times higher than the schilling. This in turn increased trade, creating extra employment. At the time of the project, Wörgl was the only Austrian town to achieve full employment.

Six neighbouring villages copied the system successfully. The French Prime Minister, Eduoard Dalladier, made a special visit to see the ‘miracle of Wörgl’. In January 1933, the project was replicated in the neighbouring city of Kirchbuhl, and in June 1933, Unterguggenburger addressed a meeting with representatives from 170 different towns and villages. Two hundred Austrian townships were interested in adopting the idea.

Unterguggenberger was opposed to both communism and fascism, championing instead what he referred to as ‘economic freedom’. Therefore, it was deeply ironic that the Wörgl experiment was first branded ‘craziness’ by the monetary authorities, then a Communist idea, and some years later as a fascist one.

The Wörgl experiment was watched by John Maynard Keynes and Irving Fisher, who saw a fast-depreciating currency as a possible answer to the 1930s “liquidity trap” and documented the subsequent use of “scrip” in the United States (Fisher is also infamous for predicting, a few days before the Stock Market Crash of 1929, “Stock prices have reached what looks like a permanently high plateau.”).

Wörgl’s venture into local currencies ended when its scrip was declared illegal by Austria’s central bank in 1933, after a further 200 other communities commenced launching copycat currencies, threatening the monopoly of currency issuance by the state. The town went back to 30% unemployment. In 1934, social unrest exploded across Austria.

The Schwanenkirchen effort had a similar outcome - in November 1931, the German Government passed an emergency law ending the circulation of the “Wara”.

Local Currencies Today

Local currencies are still alive in central Europe today, with something like 65 regional currencies competing with the Euro, according to Ambrose Evans-Pritchard.

The most frequently cited example is the Chiemgauer - a local currency (also called schwundgeld, scrip or specie) accepted by 550 restaurants, bakeries, hairdressers, co-operative banks and a network of supermarkets in the Bavarian region of Chiemgau (though petrol stations remain a glaring exception, other than some biofuel outlets). Notes are used like legal tender and can even be accessed by debit card.

The Chiemgauer was issued in January 2003 at a rate of 1:1 against the euro, and is designed to lose 2pc of its value every quarter. Usage is reportedly expanding by 70pc a year, though monthly turnover was a meagre €135,000 when Evans-Pritchard wrote his article.

Evans-Pritchard says the Chiemgauer is one of 16 regional currencies that have emerged across Germany, Austria and northern Italy since the launch of the euro five years ago, with another 49 regions in the pipeline. They are mostly issued by activists, farmers, eco-enthusiasts, anti-globalists, and citizen committees.

The actual turnover of these currencies remains miniscule, so the Eurozone authorities are relaxed about competition for the time being. The Bundesbank is keeping an eye on them however, publishing a report titled “Regional Currencies in Germany, Local Competition for the Euro?”.

Local currencies aren’t restricted to the Germanic world - there are some examples alive and well in the Anglosphere as well, including Ithaca HOURS, Berkshares (which have gathered some mainstream media attention) and the Totnes Pound. Dutch organisation STRO is also implementing pilot projects in Brazil, Central-America, Asia and the Netherlands.

John Robb thinks local currencies are a useful tool for building resilient communities, but notes that they remain “a lifestyle choice” at present. Robb believes that the Worgl experience in the 1930’s indicate that scrip “adoption, velocity and robustness” could be accelerated by:

* Allowing community members to use it to pay all or part of their tax liabilities to local governments. This instantly establishes a market for the currency. Also, pay local government employees a portion of their wages in scrip.

* Deflating [devaluing] the value of the scrip (optimally, one percent per month) to promote immediate use rather than hoarding.

* To the extent possible, connecting scrip to local production rather than retail. Locally produced food (farmer’s markets), energy (via local microgrids), products (personal fabs), and labor/services. Further, work with local banks to establish checking accounts for scrip and to enable conversions hard currencies (at a slight discount).

Local Currencies And The Environment

Another reason for interest in local currencies has sprung from ecological concerns, outlined by Bernard Lietaer as follows:

The most recent reason for interest in stamp scrip and similar alternative monetary systems in the West or in Japan [Otani 1981; Henderson, 1981; Kennedy, 1988 ; Suhr,1989] results from environmental concerns.

“The higher the money-rate of interest, the higher is the pressure on entrepreneurs to avoid internal costs, that is, to externalize into the environment as much as the cost as is possible. Thus under neutral money, when interest goes to zero, this additional burden on resources will cease” [Suhr, 1988, page 112].

When it pays more to cut a tree, sell the wood and let the proceeds earn interest than simply let the tree grow, it is predictable that “economic pressures” will be felt to cut more trees than is optimal from an ecological viewpoint. Stamp Scrip would reverse that process. It is interesting to notice that this point was also demonstrated in practice: indeed during the experiment with stamp scrip in Austria during the Depression of the 1930’s, the incentive for not hoarding was such that people preferred to invest in replanting trees.

As ecological concerns are gradually creeping to the top of political agendas worldwide, this aspect alone justifies the experimentation suggested in this note.

These three objectives: spontaneous creation of employment, inflation control, and ecologically conscious growth are the three results that eonomists can predict from the introduction of stamp scrip.

However, even more persuasive than any theoretical discussion is compelling evidence from case histories: such systems have indeed been used in the past in a variety of cultures, sometimes for centuries, and have always had a significant positive impact.

Conclusion

Local currencies can be an effective tool for enabling communities to escape from a liquidity trap, however they appear likely to remain in common use only as long as liquidity is in short supply or inter-regional trade is heavily restricted (or, perhaps, biased).

Retaining convertibility into other stores of value (a hard currency, or a commodity such as gold) is important to avoid pitfalls like the “company store” phenomenon, where the people being paid in scrip have no way of redeeming it for goods outside a very restricted set of businesses.

Ensuring that scrip is devalued at a well understood rate is also important to keep the velocity of money high.

Postscript - Silvio Gesell and “The Ascent of The West”

The idea of local currencies was first described by Silvio Gesell, in his book “The Natural Economic Order“.

Only money that goes out of date like a newspaper, rots like potatoes, rusts like iron, evaporates like ether, is capable of standing the test as an instrument for the exchange of potatoes, newspapers, iron and ether.

Gesell also wrote an essay entitled “The Ascent of the West”, which was written to challenge the cultural pessimism of Oswald Spengler’s “The Decline of the West”.

Gesell hoped that humanity would gradually be able to regenerate itself under a reformed economic order and experience a new cultural renaissance.

Its worth noting that local currencies did exist prior to the (literal) Renaissance before they were replaced with centralised currencies.

Centralized currency — invented during the Renaissance, really — favors the kinds of business practices and centralization of power that actually works against good, honest, local commerce. In short, it favors Wal-Mart over, say, Community Supported Agriculture.

There are other kinds of money – and they were in existence until they were outlawed by kings and queens looking to centralize authority. Money that is lent into existence by a central bank will tend towards scarcity and competition. Money that is earned into existence by people in a specific place has very different properties, and works on a model of abundance.

Gesell was a German theoretical economist who grew up in Europe, before moving to Argentina in 1887. A depression stuck Argentina shortly thereafter, which caused him to study the structural problems caused by the monetary system, before moving back to Europe in 1911.

His experiences during an economic crisis at that time in Argentina led Gesell to a viewpoint substantially at odds with the Marxist analysis of the social question: the exploitation of human labour does not have its origins in the private ownership of the means of production, but rather occurs primarily in the sphere of distribution due to structural defects in the monetary system. Like the ancient Greek philosopher Aristoteles, Gesell recognised money’s contradictory dual role as a medium of exchange for facilitating economic activity on the one hand and as an instrument of power capable of dominating the market on the other hand. The starting point for Gesell’s investigations was the following question: How could money’s characteristics as a usurious instrument of power be overcome, without eliminating its positive qualities as a neutral medium of exchange ?

He attributed this market-dominating power to two fundamental characteristics of conventional money:

Firstly, money as a medium of demand is capable of being hoarded in contrast to human labor or goods and services on the supply side of the economic equation. It can be temporarily withheld from the market for speculative purposes without its holder being exposed to significant losses.

Secondly, money enjoys the advantage of superior liquidity to goods and services. In other words, it can be put into use at almost any time or place and so enjoys a flexibility of deployment similar to that of a joker in a card game.

These two characteristics of money give its holders a privileged position over the suppliers of goods and services. This is especially true for those who hold or control large amounts of money.

They can disrupt the dynamic flow of economic activity, of purchases and sales, savings and investment. This power enables the holders of money to demand the payment of interest as a reward for agreeing to refrain from speculative hoarding thereby allowing money to circulate in the economy.

This intrinsic power of money is not dependent on its actual hoarding, but rather on its potential to disrupt economic activity which enables it to extract a tribute in the form of interest in return for allowing the “metabolic exchange” of goods and services in the “social organism”. The “return on capital” is accorded priority over broader economic considerations and production becomes attuned more to the monetary interest rate than to the real needs of human beings. Long-term positive interest rates of interest disturb the balance of profit and loss necessary for the decentralized self-regulation of markets. Gesell was of the opinion that this led to a dysfunction of the social system exhibiting very complex symptoms: the non-neutrality of interest-bearing money results in an inequitable distribution of income which no longer reflects actual differences in productivity. This in turn leads to a concentration of monetary as well as of non-monetary capital and therefore to the predominance of monopolistic structures in the economy.

Since it is the holders of money who ultimately decide whether it circulates or stands still, money can’t flow “automatically” like blood in the human body. The circulation and the correct dosage of the monetary supply can’t be brought under effective public control; deflationary and inflationary fluctuations of the general price level are inevitable. In the course of the business cycle when declining interest rates cause large amounts of money to be withheld from the market until the outlook for profitable investments improves, the result is economic stagnation and unemployment.

… to a Neutral Servant of Economic Activity

In order to deprive money of its power, Gesell did not advocate recourse to measures aimed at outlawing the taking of interest such as the canonical prohibition of medieval. On the contrary, he envisaged structural changes in the monetary system involving the imposition of carrying costs on the medium of exchange, thereby counteracting the tendency to hoard and neutralising the liquidity advantage of conventional money. The imposition of such carrying costs on liquid monetary assets - comparable to a demurrage fee for freight containers in the field of transport economics - would deprive money of its power to dominate the market while allowing it to fulfil its designated function as a medium of exchange facilitating economic activity. Counteracting disruptions in the circulation of the medium of exchange due to speculative hoarding would allow the quantity and velocity of the monetary supply to be periodically adjusted to match the volume of production and the overall level of economic activity in such a way that the purchasing power of the monetary unit could be made to possess the same long-term stability as other weights and measures.

In his earliest works Gesell referred in particular to “rusting bank notes” as a method for implementing an “organic reform” of the monetary system. Money which had hitherto been “dead foreign matter” with respect to both the social system and the natural world, would thus be integrated into the eternal cycle of life and death, becoming transitory and losing its characteristic of limitless self-multiplication by means of simple and compound interest. Such a reform of the monetary system would constitute a regulative holistic therapy; by removing the cause of disruptions in monetary circulation Gesell envisaged that the self-healing powers of the dysfunctional social “organism” would gradually increase allowing it to recover from the diverse economic and structural symptoms of crisis, ultimately reaching a state of equilibrium, in harmony with the rest of the natural order.

In his main work, Die Natürliche Wirtschaftsordnung durch Freiland und Freigeld (The Natural Economic Order through Free and and Free Money), published in Berlin and Bern in 1916, Gesell explained in detail how the supply and demand of capital would be balanced in the case of uninterrupted currency circulation so that a reduction of the real rate of interest below the presently existing barrier of around 3-4% would become possible. Gesell used the term “basic interest” (Urzins) to denote this pure monetary interest rate of around 3-4% which is found to vary little historically. It represents the tribute of the working people to the power of money and gives rise to levels of unearned income far in excess of that suggested by its magnitude. Gesell predicted that his proposed currency reform would gradually cause the “basic interest” component to disappear from the monetary loan rate leaving only a risk premium and an administrative charge to allow lending institutions to cover their costs. Fluctuations of the market rate of interest around a new equilibrium point close to zero would allow a more effectively decentralised channeling of savings into appropriate investments. Free Money (Freigeld), a medium of exchange liberated from the historical tribute of “basic interest”, would be neutral in its impact on distribution and could no longer influence the nature and extent of production to the disadvantage of producers and consumers. Gesell envisaged that access to the complete proceeds of labour brought about by the elimination of “basic interest” would enable large sections of the population to give up wage- and salary-oriented employment and to work in a more autonomous manner in private and cooperative business organisations.

In 1919, Gesell was appointed “People’s Representative for Finances” in the short-lived Bavarian Soviet Republic and immediately wrote a law for the creation of Freigeld. His term of office lasted only 7 days, and he was fortunate to escape a charge of treason after the overthrow of the Soviet Republic and its integration back into Germany.

Gesell’s ideas spawned a political movement in Germany called “Freiwirtschaft” (Free Economy) party, which contested the 1932 elections without success. After the Nazi Party’s seizure of power in 1933, many Free Economy supporters supported the new regime in the hope that Hitler might act on the earlier rhetoric of Gottfried Feder concerning “the smashing of interest-slavery”. This proved to be a false hope and in the spring of 1934 the various Free Economy organisations which had not already voluntarily disbanded were finally outlawed.

Given the final destination of the pre-war Free Economy movement, I figured it was worth checking to see if Gesell held some of the more unpalatable views common to the time, such the “blood and soil” beliefs held by some of the greens that joined the Nazi “rogue coalition“. It seems from this account that Gesell was no nationalist though, and explicitly rejected this line of thought.

Towards the end of the last century Gesell extended his vision of socio-economic reform to include reform of the system of land tenure. He derived inspiration in this respect from the work of the North-American land reformer Henry George (1839-1897), author of Progress and Poverty, whose ideas about a Single Tax on the rental value of land became known in Germany through the activity of land reformers like Michael Flurscheim (1844-1912) and Adolf Damaschke (1865-1935).

In contrast to Damaschke, who only advocated taxing the increase in values for the benefit of the community while retaining the principle of private ownership of land, Gesell’s reform proposals followed those of Flurscheim who called for the transfer of land into public ownership, compensating the former owners and thereafter leasing the land for private use to the highest bidder. Gesell argued that as long as land remains a tradeable commodity and an object of speculative profit, the organic connection of human beings with the earth is disturbed.

In contrast to the proponents of nationalist or racially-oriented Blut und Boden ideologies, Gesell rejected the association of “blood” with “land”. As a widely travelled citizen of the world he viewed the whole earth as an integral organ of every individual. All people should be free to travel over the surface of the earth without hinderance and settle anywhere regardless of their place of birth, color or religion. …

From his earliest writings onwards Gesell distanced himself from racist ideologies, aiming to develop an objective critique of structural defects in the economic order free from the subjective racial prejudice of anti-Semitic demagogues whose diatribes against so-called “Jewish” usurers he criticised as a “colossal injustice”. Like many of his contemporaries he was greatly influenced by Darwin’s Theory of Evolution and viewed his program of reform as a means for encouraging a more healthy evolution of human society. However, Gesell should not be classified as a “Social Darwinist” because he believed that extremes of wealth and poverty reflect structural defects in the economic order rather than real differences in aptitude and productivity. Opposed to ultra-nationalist triumphalism he advocated the promotion of mutual understanding between Germany and its eastern and western neighbours. He called for the abandonment of expansionist politics and the formation of a voluntary confederation of European states to promote international cooperation. Gesell also drew up proposals for an international post-capitalist monetary order, advocating an open world market without capitalist monopolies, customs frontiers, trade protectionism and colonial conquest. In contrast to subsequently established institutions such as the International Monetary Fund and World Bank, which act on behalf of the powerful within the existing framework of unjust structures, or the present preparations for European Monetary Union, Gesell called for the establishment of an International Valuta Association, which would issue and manage a neutral international monetary unit freely convertible into the national currency units of the member states, operating in such a way that equitable international economic relations could be established on the basis of global free trade.

Gesell’s political leanings seem to be best described as “individualist-mutualist”. I like Robert Anton Wilson’s explanation of individualist-mutualist theory, so I’ll let him outline the idea and a few alternatives to Gesell’s ideas regarding money. From “Left and Right: A Non-Euclidean Perspective “:

In the late ’50s, I began to read widely in economic “science” (or speculation) again, a subject that had bored the bejesus out of me since I overthrew the Marxist Machine in my brain ten years earlier. I became fascinated with a number of alternatives - or “excluded middles” - that transcend the hackneyed debate between monopoly Capitalism and totalitarian Socialism. My favorite among these alternatives was, and to some extent still is, the individualist-mutualist anarchism of Proudhon, Jossiah Warren, S.P. Andrews, Lysander Spooner and Benjamin Tucker. I do not have a real Faith that this system would work out as well in practice as it sounds in theory, but as theory it still seems to me one of the best ideas I ever encountered.

This form of anarchism is called “individualist” because it regards the absolute liberty of the individual as a supreme goal to be attained; it is called “mutualist” because it believes such liberty can only be attained by a system of mutual consent, based on contracts that are to the advantage of all. In this Utopia, free competition and free cooperation are both encouraged; it is assumed persons and groups will decide to compete or to cooperate based on the concrete specifics of each case. (This appeals to my “existentialism” again, you see.)

Land monopolies are discouraged in individualist-mutualist anarchism by abolishing State laws granting ownership to those who neither occupy nor use the land; “ownership,” it is predicted, will then only be contractually recognized where the “owner” actually occupies and used the land, but not where he charges “rent” to occupy or use it. The monopoly on currency, granted by the State, is also abolished, and any commune, group, syndicate, etc., can issue its own competing currency; it is claimed that this will drive interest down to approsximately zero. With rent at zero and interest near zero, it is argued that the alleged goal of socialism (abolition of exploitation) will be achieved by free contract, without coercion or totalitarian Statism.

That is, the individualist-mutualist model argues that the land and money monopolies are the “bugger factors” that prevent Free Enterprise from producing the marvelous results expected by Adam Smith. With land and money monopolies abolished, it is predicted that competition (where there is no existential motive for cooperation) and cooperation (where this is recognized as being to the advantage of all) will prevent other monopolies from arising.

Since monopolized police forces are notoriously graft-ridden and underlie the power of the state to bully and coerce, competing protection systems will be available in an individualist-mutualist system, You won’t have to pay “taxes” to support a Protection Racket that is actually oppressing rather than protecting you. You will only pay dues, where you think it prudent, to protection agencies that actual perform a service you want and need. In general, every commune or syndicate will make its own rules of the game, but the mutualist-individualist tradition holds that, by experience, most communes will choose the systems that maximize liberty and minimize coercion.

Being wary of Correct Answer Machines, I also studied and have given much serious consideration to other “Utopian” socio-economic theories. I am still fond of the system of Henry George (in which no rent is allowed, but free enterprise is otherwise preserved); but I also like the ideas of Silvio Gesell (who would also abolish rent and all taxes but one–a demmurage tax on currency, which should theoretically abolish interest by a different gimmick than the competing currencies of the mutualists.)

I also see possible merit in the economics of C.H. Douglas, who invented the National Dividend–lately re-emergent, somewhat mutated, as Theobold’s Guaranteed Annual Wage and/or Friedman’s Negative Income Tax. And I am intrigued by the proposal of Pope Leo XIII that workers should own the majority of stock in their companies.

Most interesting of recent Utopias to me is that of Buckminster Fuller in which money is abolished, and computers manage the economy, programmed with a prime directive to _advantage_ all without _disadvantaging_ any — the same goal sought by the mutualist system of basing society entirely on negotiated contract.

Further Reading:

* Bernard A. Lietaer - A Strategy for a Convertible Currency

* Shwarz, Fritz - The Experiment in Worgl

* Werner Onken - A Market Economy without Capitalism

* FEASTA - Money Systems

* Transaction.net

* Tim Boucher - Free (Online) Banking & The Free Banking Era

Cross-posted from Peak Energy.

This month’s edition of National Geographic has a feature article on “Soil“, which looks at the steady degradation of agricultural land and the problem this poses in world where the population is heading for 9+ billion people - effectively calling attention to the “peak dirt” problem (however soil is renewable, so any “peak” should be able to be reversed if sufficient time and effort is put into doing so).

The article uses an acronym I’ve never come across before to describe the problem faced by those trying to draw attention to the issue: MEGO (My Eyes Glaze Over) - a phenomenon which should be familiar to anyone who has ever talked about peak oil, global warming or any of the other “limits to growth“.

This year food shortages, caused in part by the diminishing quantity and quality of the world’s soil, have led to riots in Asia, Africa, and Latin America. By 2030, when today’s toddlers have toddlers of their own, 8.3 billion people will walk the Earth; to feed them, the UN Food and Agriculture Organization estimates, farmers will have to grow almost 30 percent more grain than they do now. Connoisseurs of human fecklessness will appreciate that even as humankind is ratchetting up its demands on soil, we are destroying it faster than ever before. “Taking the long view, we are running out of dirt,” says David R. Montgomery, a geologist at the University of Washington in Seattle.

Journalists sometimes describe unsexy subjects as MEGO: My eyes glaze over. Alas, soil degradation is the essence of MEGO.

One subject that features in the article is soil restoration, including a look at “terra preta” - rich, fertile artificial soils found in the Amazon. In this post I’ll have a look at modern day techniques to produce terra preta (often called biochar or agrichar) which have the potential to increase soil fertility, generate energy and sequester carbon all at the same time.

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The History Of Terra Preta

Terra Preta (”black earth”) was discovered by Dutch soil scientist Wim Sombroek in the 1950’s, when he discovered pockets of rich, fertile soil amidst the Amazon rainforest (otherwise known for its poor, thin soils), which he documented in a 1966 book “Amazon Soils”. Similar pockets have since been found in other sites in Ecuador and Peru, and also in Western Africa (Benin and Liberia) and the Savannas of South Africa. Carbon dating has shown them to date back between 1,780 and 2,260 years.

Terra preta is found only where people lived - it is an artificial, human-made soil, which originated before the arrival of Europeans in South America. The soil is rich in minerals including phosphorus, calcium, zinc, and manganese - however its most important ingredient is charcoal, the source of terra preta’s color.

It isn’t entirely clear if the Amazon Indians whose old settlements terra preta is found at deliberately created the soils or if they were an accidental by-product of “slash and smoulder” farming techniques, though the emerging consensus seems to be that the Indians deliberately created the material, with some early European accounts in the area noting the practice still being performed.

The key ingredient is apparently the activated carbon in the charcoal. Activated carbon has a complex, spongelike molecular structure - a single gram can have a surface area of 500 to 1,500 square meters (or about the equivalent of one to three basketball courts). Having this material in the soil has several beneficial effects, including a 20% increase in water retention, increased mineral retention, increased mineral availability to plant roots, and increased microbial activity.

It has also been shown to be particularly beneficial to arbuscular mycorrhizal fungi, which form a symbiotic relationship with plant root fibers, allowing for greater nutrient uptake by plants. There is speculation that the mycorrhizal fungi may play a part in terra preta’s ability to seemingly regenerate itself.

Pyrolysis and Eprida

Modern day producers of biochar (agrichar) take dry biomass and bake it in a kiln to produce charcoal. Biochar is the term for what is left over after the energy is removed: a charcoal-based soil amendment - this process is called pyrolysis. Various gases and oils are driven off the material during the process and then used to generate energy. The charcoal is buried in the ground, sequestering the carbon that the growing plants had pulled out of the atmosphere. The end result is increased soil fertility and an energy source with negative carbon emissions.

Eprida is a company founded by Danny Day, which is attempting to commercialise the idea by building systems that turn farm waste into hydrogen, biofuel, and biochar (see here for a short movie explaining their process).

The Eprida technology uses agricultural waste biomass to produce hydrogen-rich bio-fuels and a new restorative high-carbon fertilizer (ECOSS) …In tropical or depleted soils ECOSS fertilizer sustainably improves soil fertility, water holding and plant yield far beyond what is possible with nitrogen fertilizers alone. The hydrogen produced from biomass can be used to make ethanol, or a Fischer-Troupsch gas-to-liquids diesel (BTL diesel), as well as the ammonia used to enrich the carbon to make ECOSS fertilizer.

We don’t maximize for hydrogen; we don’t maximize for biodisel; we don’t maximize for char…By being a little bit inefficient in each, we approximate nature and get a completely efficient cycle.

The potential power of biochar lies in this closed loop production process , where agricultural practices involving biochar production see increasing returns of crop yields, energy and soil fertility over time.

Biochar also has potential to address problems such as waste disposal and rural development. A significant proportion of the world’s population relies on charcoal as a cooking fuel, the production of which drives deforestation in Africa and other places.

Replacing traditional charcoal kilns with modern pyrolysis units could reduce the demand for wood from forests by increasing the efficiency of energy production and adding the ability to use any source of biomass, including agricultural waste products. This would also help to reduce respiratory diseases in the developing world, particularly amongst children.

There has also been speculation that pyrolysis could be a useful technique for dealing with the huge swathes of Canadian forests that have been killed by pine beetles recently.

Some industry participants believe that energy, rather than agriculture, will be the key driver for adopting biomass pyrolysis. Desmond Radlein of Dynamotive Energy Systems has been quoted as saying “It is wishful thinking that people will switch to renewable fuels unless it is cheaper. All of this is tied to the price of oil; as it goes up, many more things are possible.”

Another company active in the pyrolysis sector is Best Energies. Technical Manager Adriana Downey recently had an interview with Beyond Zero Emissions, talking about some of the pilot programs they have been running and plans to build the first fully commercial scale pyrolysis plant in Australia.

Lukas’s program with the NSW DPI (Department of Primary Industries) in Northern NSW have basically taken some of the agrichar material that we’ve made here at Best Energies and they’ve been trialling that material in different agronomic applications to see how the agrichar, when its applied, can help crop-productivity and improve the sustainability of agriculture as well as, and what you guys are more interested in, sequester carbon long-term in soils and also decrease the potent greenhouse gas nitrous oxide emissions from soil. …

The agrichar when it’s applied to the soil has a good effect on the general physical structure of the soil. Because the agrichar has a really high surface area, it means that there’s lots of pores in the soil which can then retain moisture and act as little reservoirs for the water to be retained in the soil. As well as this, all of the surface area helps to bind nutrients in the soil and also provides a microhabitat for micro organisms in the soil which are essential for the natural processes in the soil which allow micro organisms to flourish.

Carbon Capture Potential

There is a large difference between terra preta and ordinary soils - a hectare of meter-deep terra preta can contain 250 tonnes of carbon, as opposed to 100 tonnes in unimproved soils from similar parent material, according to Bruno Glaser, of the University of Bayreuth, Germany. The difference in the carbon between these soils matches all of the carbon contained in the vegetation on top of them.

The ABC’s “Catalyst” program last year had a feature on “Agrichar – A solution to global warming ?” (shown below) in the lead up to an international biochar conference in Terrigal, NSW, which included Tim Flannery talking about the potential for sequestering gigatonnes of carbon in the soil.

This year’s International Biochar Initiative conference has just been held in Newcastle-upon-Tyne in the UK.

It is not yet clear what the limits are to how much biochar can be added to the soils using these techniques, however some fairly extravagant claims about biochar’s capacity to capture carbon have been made. Soil scientist and author of “Amazonian Dark Earths: Origin, Properties, Management” Johannes Lehmann believes that a strategy combining biochar with biofuels could ultimately offset 9.5 billion tons of carbon per year - an amount equal to the total current fossil fuel emissions. Lehmann also notes that unlike biodiesel and corn ethanol, biochar doesn’t take land away from food production.

If true, this would be an interesting form of geoengineering to try and reverse the effects of global warming (and one far less risky than some of the alternatives proposed) but I would still question our ability to turn all the world’s oil, coal and gas reserves back into rich soil via burn - atmosphere - pyrolysis loop.

Criticisms

A number of criticisms have been made about biochar. These include:

* The technology to implement the process is still immature.
* Scientists don’t know how much charcoal farmers should use, how they should apply it, or which feedstocks work best.
* Farmers are reluctant to spread unproven products on their fields, so the few companies manufacturing biochar have struggled to find buyers.
* Charcoal production can generate toxic waste if performed incorrectly.
* The energy needed to produce, transport, and bury biochar could outweigh the carbon savings.
* Some analysts say the economics of the process will not be acceptable until carbon markets are established, allowing farmers to earn carbon credits for applying biochar to their fields.
* Some environmental activists claim that applying the process on a large scale would result in further rainforest clearing which would actually degrade soil quality and increase global warming.

Rhizome In The Amazon

Jeff Vail recently had a post on a “Rhizome Template in the Amazon ?“, which looked at a paper by Mark Heckenberger suggesting that a dense civilization of networked villages once existed in the Amazon, which Jeff noted was interesting because it “appears to show a form of organization that permits density without significant hierarchy”.

The paper shows that the Xingu region of the Amazon was once populated by a grid-like pattern or villages, each connected by a precisely aligned network of roadways (the Xingu river is the Amazon’s second longest tributary, with the region currently experiencing tension over plans to dam the river).

Here’s an alternate mode of organization–a networked “grid,” “lattice,” or “peer-to-peer” structure of small, minimally self-sufficient villages, or “rhizome” as proposed in my article The Hamlet Economy. The Xingu settlement structure seems to consicously model itself in the latter pattern. Heckenberger even notes that each village was surrounded by a buffer zone of “managed parkland,” exactly the kind of fall-back, resiliency-enhancing production zone that I recommended for rhizome. Here’s a link to a satellite image of one section fo Xingu settlement.

Did this Xingu civilization really develop a dense, ecologically sustainable civilization without hierarchal structure? Or did they simply find a new way to impose hierarchy without developing the signatures of “central places”? Was this a conscious reaction to prior abuses of hierarchy, or simply an expedient to survival in the dense forrests and poor agricultural soils of the Amazon? We don’t know the answers to these questions at this time, but the research of Heckenberger and his colleagues suggests that there is still a great deal for us to learn from the past about how we can best live in the future

Heckenberger also examined the terra preta pockets in the region, which is described briefly in an interesting article by Charles Mann in The Atlantic Monthly called “1491“.

Scientific American also notes the correlation between the lost cities of the Amazon and terra preta in “Ancient Amazon Actually Highly Urbanized“, as does The Vermont Quarterly in “Pay Dirt“.

Terra preta, Woods guesses, covers at least 10 percent of Amazonia, an area the size of France. It has amazing properties, he says. Tropical rain doesn’t leach nutrients from terra preta fields; instead the soil, so to speak, fights back. Not far from Painted Rock Cave is a 300-acre area with a two-foot layer of terra preta quarried by locals for potting soil. The bottom third of the layer is never removed, workers there explain, because over time it will re-create the original soil layer in its initial thickness. The reason, scientists suspect, is that terra preta is generated by a special suite of microorganisms that resists depletion. “Apparently,” Woods and the Wisconsin geographer Joseph M. McCann argued in a presentation last summer, “at some threshold level … dark earth attains the capacity to perpetuate—even regenerate itself—thus behaving more like a living ’super’-organism than an inert material.”

In as yet unpublished research the archaeologists Eduardo Neves, of the University of São Paulo; Michael Heckenberger, of the University of Florida; and their colleagues examined terra preta in the upper Xingu, a huge southern tributary of the Amazon. Not all Xingu cultures left behind this living earth, they discovered. But the ones that did generated it rapidly—suggesting to Woods that terra preta was created deliberately. In a process reminiscent of dropping microorganism-rich starter into plain dough to create sourdough bread, Amazonian peoples, he believes, inoculated bad soil with a transforming bacterial charge. Not every group of Indians there did this, but quite a few did, and over an extended period of time.

When Woods told me this, I was so amazed that I almost dropped the phone. I ceased to be articulate for a moment and said things like “wow” and “gosh.” Woods chuckled at my reaction, probably because he understood what was passing through my mind. Faced with an ecological problem, I was thinking, the Indians fixed it. They were in the process of terraforming the Amazon when Columbus showed up and ruined everything.

Scientists should study the microorganisms in terra preta, Woods told me, to find out how they work. If that could be learned, maybe some version of Amazonian dark earth could be used to improve the vast expanses of bad soil that cripple agriculture in Africa—a final gift from the people who brought us tomatoes, corn, and the immense grasslands of the Great Plains.

All in all I think biochar is worth exploring further in some depth.

Further Reading:

Nature: Putting the carbon back “Black is the new green”:
http://www.nature.com/nature/journal/v442/n7103/full/442624a.html

Biochar overview from Cornell University:
http://www.css.cornell.edu/faculty/lehmann/biochar/Biochar_home.htm

Terra Preta web site from the University of Bayreuth
http://www.geo.uni-bayreuth.de/bodenkunde/terra_preta/

The Earth Science Forum:
http://forums.hypography.com/earth-science/3451-terra-preta.html

Biochar summary from Georgia Tech:
http://www.energy.gatech.edu/presentations/dday.pdf

Terra preta mailing list: Terrapreta@bioenergylists.org
http://bioenergylists.org/mailman/listinfo/terrapreta_bioenergylists.org

FAO: Organic Agriculture And The Environment
http://www.fao.org/docrep/005/Y4137E/y4137e02.htm

WorldChanging: A Carbon-Negative Fuel
http://www.worldchanging.com/archives/007427.html

Hen and Harvest: Black Magic
http://henandharvest.com/?p=118

Peak Energy: On population growth and the green revolution - “The Fat Man, The Population Bomb And The Green Revolution”
http://peakenergy.blogspot.com/2007/10/fat-man-population-bomb-and-green.html

Peak Energy: On worms and soil - “The Turning Of The Worm”
http://peakenergy.blogspot.com/2007/01/turning-of-worm.html

Peak Energy: On Mycelium - “Nature’s Internet: The Vast, Intelligent Network Beneath Our Feet”
http://peakenergy.blogspot.com/2008/07/natures-internet-vast-intelligent.html

(Hat tip to Erich J Knight and Aaron Newton for providing some of the links used in the post)

Cross-posted from Our Clean Energy Future.

The New York Times recently had an editorial on Samsung’s “Corn Phone“, which is being heavily promoted as environmentally friendly as the casing is made from bioplastic. Somewhat to my surprise, they point out that it is neither - firstly because the bioplastic is made from corn (and is thus contributing to the problems that corn based ethanol is causing) and secondly because phones have become nearly throw away items that are rarely recycled.

The electronics industry has been a major polluter, from the manufacturing end to the landfill. The dizzying pace at which consumer electronics become obsolete (What, you’re still using that old phone?) compounds the problem. And increasingly rich countries are offloading the disposing, and often the incinerating, of phones and computers to poorer countries.

Unfortunately Samsung’s new cellphone relies on a flawed equation: corn equals green. It is really time to throw out this formula for good. Bioplastic derived from corn requires special handling in recycling, and the difficulty of those processes makes them energy inefficient. Bioplastic also creates another market for corn, a much smaller market than the ethanol market, but growing nonetheless. New industrial demands for corn are driving up world food prices and are increasing the pressure to convert more nonagricultural land to corn production.

The truly green solution for electronics makers is to close the loop between manufacturing and recycling: reusing the plastics we so quickly and happily toss away to make new cellphones.

While Samsung’s phone doesn’t seem to have passed the “greenwash” test, peak oil poses a problem for plastic production for which bioplastic could be one potential solution, so in this post I’ll have a look at what is happening in the industry and how our desire for plastics could perhaps be satisfied in a post oil world.
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Plastic and peak oil

Chemicals and plastics are an integral part of peak oil concerns, as oil is the primary raw material used in their production, leading to the conclusion that as we pass the peak the shrinking availability and rising price of oil will cause a reduction in supply of these products.

There are 3 basic approaches to dealing with this scenario in a positive way:

1. Substitution: Use other materials - cardboard or paper packaging for example, or going back to using metal eating utensils instead of disposable plastic ones. Many other items currently made with plastic can also be made with wood, glass or metal (or even popcorn).

2. Recycling: Some plastics can be recycled - or converted back to oil for that matter, though the net energy benefit of this is debatable. Plastic recycling is already widely practiced though we have a long way to go before all recyclable plastics reach the correct destination. Recycling plastic not only reduces the amount of feedstock required to make the material, it also reduces the energy required in manufacturing by around 70%.

3. Bioplastics: Use carbohydrates to create plastics instead of hydrocarbons, an endeavour which was historically known as “chemurgy“.

By and large, substitution would often seem to be a good thing in terms of reducing the amount of waste that ends up in our landfills (and the number of nurdles floating around in the oceans), though there are drawbacks like the extra effort and cost required to make objects out of materials that can’t simply be injection moulded the way plastics can.

As a result, while substitution and recycling will often be the best way of dealing with the decline in availability of oil as a feedstock for plastic manufacture, we will likely still want to make new quantities of plastic each year - which leads us to bioplastics.

Bioplastic in Context

At this point bioplastics still comprise just a tiny fraction of the overall market, though one growing at an impressive rate of over 20% per year. The European Bioplastics Association says 1.5 million tonnes of bioplastics will be manufactured annually by 2011.

In comparison, according to the NZ plastic industry, 150 million tonnes each year of petroleum based plastics are produced (estimates for total production vary wildly unfortunately - BusinessWeek recently quoted a number of 500 million tons, while Biopact quotes a number of 200 million tonnes).

Plastic production is estimated to consume around 5% of global oil production each year (again, estimates vary quite a lot, and depend on if just feedstock is counted or if the energy to produce the plastic is also included) which represents the largest use outside the transport and energy sectors.

Developments in Bioplastic

Bioplastic developments have been appearing in the news with great regularity in recent years - The Economist recently noted that the number of patents granted for industrial biotechnology now exceeds 20,000 per year - with the rising price of oil increasing interest in them.

While bioplastic is often considered “green”, this isn’t necessarily true. Even if we ignore the problems associated turning food into packaging (in the case of corn based bioplastics), there are still many forms of bioplastic which aren’t biodegradable. There is also the energy required to power farm machinery used in growing biomass feedstock, to produce fertilisers and pesticides, to transport biomass to processing plants, to process the biomass and ultimately to produce the bioplastic - most of which currently comes from non-renewable sources (though this could eventually be remedied, in time).

The best approach for dealing with the limits on bioplastic production (besides the substitution and recycling options) is similar to the approaches Amory Lovins talks about for dealing with the biofuels problem - redesign products so they need less bioplastic, and produce the bioplastic by harvesting from polyculture, perennial crops like switchgrass grown on non-agricultural land.

Designer Phillippe Starck, a recent high profile convert to green thinking (dubbing all his previous work “unnecessary”) recently explained his choice of environmentally unfriendly polycarbonate as the material for a new chair design, which should give you an idea of some of the trade-offs currently facing designers considering alternatives to plastics:

Wired: Recently, you have begun to look at the environmental impact of your designs. How does a plastic chair fit in?

Starck: The stupidity of the ecological movement is that people kill trees for wood. It’s ridiculous. The best ecological strategy is to make products of a very high creative quality, so you can keep them for three generations. I prefer to make a very good chair in the best polycarbonate than make any shit in wood that will be in the trash one year later.

Wired: Why not use recycled plastic?

Starck: It’s a little joke of a material. You can do almost nothing with it. And I also refuse bioplastic, which comes from something that people can eat. Scientists agree that we have a real food problem, a famine approaching. It’s a crime against humanity to take something you can eat and make a chair — or use it as gas for your SUV.

There are also some concerns about greenhouse gas emissions, though these seem questionable.

Some examples of bioplastic producers and uses include:

* US company Metabolix, manufacturer of a biodegradable bioplastic called Mirel, has announced that they have genetically engineered a way to generate “significant amounts” of bioplastic by growing it in directly in the fast growing perennial plant switchgrass. Metabolix is also looking to use a technology developed in Queensland to produce plastic from sugarcane (without affecting sucrose production) at a cost of $1 to $2 per kilogram.

* Mazda is looking to use cellulose based bioplastic in cars from 2013.

* Australian firm Plantic produces a biodegradable bioplastic from corn starch which is used in packaging, using a technology developed by the CSIRO.

* US firm NatureWorks (a subsidiary of agribusiness giant Cargill) has opened a factory in Nebraska, producing 140,000 tonnes of a biodegradable plastic known as PLA, using corn starch. Wal*mart is a major customer, using the material for food containers.

* Dow (the world’s largest producer of conventional plastics), is building a factory in Brazil that will produce polyethylene using ethanol made from sugarcane. It is due to open in 2011 and will produce 350,000 tonnes of the material a year. The Times quotes a Dow spokesman as saying that using sugarcane to make polyethylene (rather than the usual naptha-based crude oil or natural gas) is economic with oil prices even when they are at $45 per barrel.

* Brazilian company Braskem is also aiming to produce 200,000 tonnes of polyethylene a year from ethanol.

* NEC has developed a recyclable bioplastic which remembers its shape

* Researchers at New York’s Polytechnic University have genetically engineered a bioplastic that can be converted into biodiesel after it has been used, resulting in funding from DARPA and interest from the US military.

* A process developed at the University of Waikato in New Zealand will allow animal waste like blood meal and feathers to be turned into a biodegradable plastic.

* Researchers at Iowa State University and Cornell are looking at using nanoclay particles and nanotechnology techniques to make bioplastics that biodegrade faster and have improved mechanical properties (such as strength).

* Novomer is trying to commercialise a process developed at Cornell for producing bioplastic from carbon dioxide and orange peels (a rare useful example of carbon sequestration).

* Canada’s National Research Council is researching the use of bacteria that produce bioplastic from maple syrup and sap, harnessing the large surplus of syrup.

* Fabric manufacturer Interface is looking to make plastic from potatoes in Maine.

* Japanese firm NTA is looking to produce bioplastic from Kenaf grown in Queensland.

* The rising price of polyurethane is causing some surfboard manufacturers to turn to plant based biofoam.

Summary

The 5% of oil consumption that is related to plastic production seems to be a form of low hanging fruit that we could dispense with fairly easily, with a combination of mandating the use of recyclable plastics and/or bioplastics and making sure that materials are recycled wherever possible, while also looking to be more efficient in our usage of the stuff in the first place.

Bioplastics aren’t a silver bullet in this respect but they are a useful tool for helping to eliminate one form of oil usage, so I think they should be encouraged and promoted - particularly biodegradable versions manufactured from non-food crops or waste.

Cross-posted from Our Clean Energy Future.

One Bullroarer at TOD ANZ a week or two ago featured an article from the ABC on the possibility of mining low grade Australian platinum reserves to supply rising demand for catalytic converters and hydrogen fuel cells - World ‘needs Australia’s platinum to build cleaner cars’.

An Australian researcher has warned that the drive to put cleaner, hydrogen-fuelled cars on the road will stall unless new reserves of platinum are found. Platinum is one of the key components of catalytic converters, catalysing carbon monoxide from exhaust fumes. It is also a critical component of fuel cells for hydrogen-powered cars. However 80 per cent of the world’s reserves come from just three mines.

John Mavrogenes says a team of geochemists from the Australian National University has identified new methods to detect platinum deposits. They are simulating the intense heat and pressure of the Earth’s magma to discover whether platinum can be extracted from other minerals. “This work may help geologists find new reserves around the world in places that haven’t been searched before,” he said. Professor Mavrogenes says if the platinum price remains at its current high, Australia could mine lower-grade deposits. …

The three major mines that produce platinum are in South Africa, Siberia and the United States. “If we go to more and more uses of platinum we’re going to need more than they can produce,” Professor Mavrogenes said. “Existing reserves would meet less than 20 per cent of the world’s platinum demand if all cars went hydrogen.”

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The Hydrogen Economy

The dream of the hydrogen economy is one that has been around since the 1970’s, and has been heavily hyped by sources ranging from Wired (as a key component to their long boom vision), the European Hydrogen Association and Jeremy Rifkin to George W Bush (who seemed primarily interested in supporting the gas and nuclear industries).

The term was originally coined by chemistry professor John Bockris (also an alchemist, cold fusion researcher and winner of the Ig Nobel prize).

The basic vision is that hydrogen is used to fuel vehicles containing hydrogen fuel cells, rather than internal combustion engines, creating no pollution other than water.

Global hydrogen production is currently derived from natural gas (48%), oil (30%), coal (18%) and electrolysis of water (4%). Given that hydrogen is currently largely derived from fossil fuels, the first obstacle facing the “hydrogen economy” dream is shifting away from these sources to extracting hydrogen from water.

Hydrogen is also used for producing ammonia and cracking heavier grades of oil, which means that peak oil and gas pose a number of problems to the hydrogen dream - the primary sources of present day hydrogen become less plentiful, and demand for hydrogen increases as we resort to heavier grades of oil (and coal to liquids) to keep the habit going.

Criticisms of the hydrogen economy

Critics of the hydrogen economy aren’t hard to find, with frequently raised objections including:

* The use of natural gas (both from a global warming point of view and a depletion point of view)
* The inefficiency of electrolysis techniques in converting other forms of energy into hydrogen
* The difficulty of distributing and storing hydrogen
* The cost of setting up a hydrogen based infrastructure to replace the existing oil based infrastructure
* Safety concerns about storing hydrogen on board vehicles
* The cost and complexity of hydrogen fuel cells
* Availability of platinum for large scale use in fuel cells

Amory Lovins’ Rocky Mountain Institute (pdf) argues that many of these objections are either myths or can be overcome.

Fuel cell expert Ulf Bossel and energy commentator Joe Romm (author of The Hype About Hydrogen) are probably the most frequently cited critics, arguing that the inefficiency of the hydrogen conversion process is wasteful and compares unfavourably to alternatives - specifically the “electron economy” where electricity is the energy carrier of choice.

Bossel says “In a sustainable energy future, electricity will become the prime energy carrier. We now have to focus our research on electricity storage, electric cars and the modernization of the existing electricity infrastructure”.

The diagram above shows that both the efficiency of electrolysis and the efficiency of fuel cells are key factors in making hydrogen as a transport fuel less attractive than the electric transport option.

Peak Platinum

Even if we assumed that hydrogen fuel cells could be made significantly more efficient, and thus more competitive with the electric vehicle option than they are currently, we still have the issue of the scarcity (and thus the cost) of platinum to deal with, as platinum is the material traditionally used as the catalyst in cells.

In 2005, South Africa was the top producer of platinum, accounting for around 80% of world production, followed by Russia and Canada. Significant deposits are also found in Zimbabwe, the United States and, as noted in the introduction, Australia. South Africa has been expanding production rapidly to take advantage of soaring prices - causing some controversy in affected townships.

When discussing rare metals, the subject of peak minerals is usually quick to arise. The idea has been covered at a number of venues in recent years - including The Oil Drum, New Scientist (with some good graphics here and here) and WorldChanging.

The New Scientist article estimated that there are 360 years of platinum reserves available if we continue to extract it at the current rate of production - however this drops to 15 years if predicted growth in demand is taken into account.

One analyst at Resource Investor has predicted that we may have already reached “peak platinum” production, though this seems to be predicated on the belief that production of hybrid and electric vehicles will remove the demand for both fuel cells and catalytic converters in future years, rather than a firm belief in supply constraints.

Another analyst at the UK Department For Transport, looked at the platinum supply situation for fuel cell vehicles and concluded:

The above projections, coupled with the statements from Cawthorn (1999) about accessible platinum reserves in South Africa, suggest that platinum availability should not be a constraint to the introduction of hydrogen fuel cell cars. If South Africa alone can deliver up to 5% per year additional platinum supply between 2000 and 2050, this equates to an additional 13.6 million oz in 2030, 24.8 million oz in 2040 and 42.9 million oz in 2050, which is sufficient to meet demand under any of the scenarios considered.

However there are many important assumptions and uncertainties built into this model. For example, this additional South African platinum supply would be insufficient to meet worldwide platinum demand by 2040 under Scenario 2 (realistic penetration) if any one of the following alternative assumptions is made:

* South African supply can only be increased by 4% per annum instead of 5%.
* Jewellery demand grows at more than 2% per annum - it is currently assumed to remain constant but grew by an average of 6% per annum between 1994 and 2001.
* Fuel cell stacks require more than 0.3 oz of platinum per car in 2040 - it is currently assumed that only 0.2 oz will be required but this is a factor of 10 less than current stack technology.
* The demand for cars grows by more than 55% per decade - it is currently assumed to increase by 45% per decade based on USDOE projections.

The platinum loading for fuel cell stacks is an important factor in determining the commercial viability of fuel cell cars as well as determining potential platinum demand constraints. The price of platinum is not likely to be a constraint to the introduction of fuel cell vehicles if the expected reductions in platinum loadings are achieved. At current platinum prices and the target platinum loading of 0.2 oz per car, the platinum required for a single car would cost about $90 or $1.5/kW, compared to a cost target of $50/kW for the whole fuel cell engine.

In the wake of the New Scientist article, the Wall Street Journal noted that if the most dire predictions are true, recycling of rare metals will be the only way to manufacture some types of machinery. Hazel Prichard, a geologist at the University of Cardiff in the UK, is developing ways to extract platinum from the dust and grime of city streets - apparently, urban grit contains 1.5 parts per million of platinum.

Its worth noting the contrarian view of metals depletion, expressed by Herman Kahn in his book “The Next 200 Years“, which points out that reserves data for minerals is often very dubious when there is sufficient known supply available to meet hundreds of years of demand - and that recycling can change the picture dramatically in any case.

Either way, the platinum supply concern may not be an insoluble problem, as recent reports from Japan claim Nisshinbo Industries and the Tokyo Institute of Technology have developed a platinum-free, carbon-based catalyst for fuel cells which they hope to commercialise in 2009 (first for home use, later for use in vehicles). Their catalyst is made from nanospheres of carbon. While 10 times as much carbon is required compared to the platinum equivalent, the cost is one 10th of using platinum. Diahatsu also claims to have a platinum free catalyst, using cobalt or nickel.

Another platinum free alternative being pursued is being researched at Monash University, where chemist Bjorn Winther-Jensen is looking at layering an active conducting polymer onto Gore-tex to make a cheap catalyst.

Alternative Methods For Producing Hydrogen

The discussion following the Australian platinum supply article at TOD ANZ noted the recent, highly publicised, research into a new catalyst for electrolysis at room temperature using cobalt and phosphate which MIT modestly described as a
“‘Major discovery’ from MIT primed to unleash solar revolution“. The process also requires platinum, which seems to limit the potential for cheap and universal application of the technique.

The news was covered extensively pretty much everywhere - see Technology Review, Green Car Congress, The Guardian, The Press Association, Wired, Renewable Energy World, EE Times and Scientific American, with much of the coverage being heavy on hype and short on facts and accuracy.

Joules Burn at The Oil Drum was less impressed, cynically commenting on the story in Local Scientist Splits Water, Saves World, Gets On TV. Bruce Sterling didn’t see what the big deal was either, and nor did Joe Romm, who was positively scathing about the news.

There are other schemes for generating hydrogen that don’t require electrolysis, at various stages of maturity.

A group at the University of Birmingham in England is looking at using microbes to produce “biohydrogen” from waste, and claim their technology has an added bonus - leftover enzymes can be used to scavenge precious metals from spent automotive catalysts that can then be used to make fuel cells.

Another biotechnology based approach to hydrogen generation is being pursued at the University of Queensland and Berkeley University, in this case using algae.

So Is Hydrogen Worth Pursuing At All ?

Whether or not the MIT discovery, or any of the other alternatives, really does lead to cheap, abundant hydrogen seems open for debate for the time being.

If we assume for a moment that it is possible to generate hydrogen on a large scale in a reasonably cost effective manner, the issues around distribution, storage and fuel cells still remain - particularly when comparing a hydrogen fueled transport system to one using electric cars.

The car industry, apart from BMW and Honda, seems to have pretty much given up on using hydrogen for vehicles, but enthusiasm remains for using fuel cells in some niche applications where problems are minimised, such as buses, which are refueled at a central location and have fewer concerns about weight and storage size.

Another niche where distributed hydrogen generation may be applicable is cogeneration (CHP) at home, something Jamais Cascio noted in his comment on the MIT announcement. Japan would seem a likely candidate for proving this on a large scale given that they seem to be the most enthusiastic about using hydrogen at home.

The other likely candidate for using hydrogen is energy storage in renewable energy generation - though perhaps not for home scale PV the way Nocera has been suggesting. An Australian company called WHL (previously Wind Hydrogen) has been looking at building wind farms which store excess energy in the form of hydrogen and use it to generate power later, when the wind isn’t blowing. The Lolland Hydrogen Community in Denmark has been experimenting with a similar concept, as has a ship called the Hydrogen Challenger.

Melbourne based company Solar Systems is also looking to combine hydrogen energy storage with a solar power plant, using excess heat to improve the efficiency of electrolysis.

Cross posted from Peak Energy.

I spent a week in Malaysia back in June, loafing about in the sun on the island of Langkawi. While I mostly tried to ignore the news flow, I did read the local paper each day and there seemed to be plenty of energy related stories on the boil. These ranged from prominent exposure of the global “energy and food crises” to more locally focused issues, which I’ll take a look at in this post.
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Tourism

Tourism is Malaysia’s third largest foreign exchange earner after manufactured goods and palm oil, so rising fuel prices are likely to crimp the local economy (although palm oil exports would seem likely to offset the impact on the other 2 sectors).

This was borne out anecdotally during my visit, as the resort driver who took us to the airport at the end of our visit noted that off season was much quieter than normal, with a occupancy rate of around 30% compared to the usual 50%, which he blamed on the rising price of oil. This doesn’t seem to be reflected in overall visitor numbers so far though, so perhaps it is just the higher-end resorts that are being impacted so far.

As taxi drivers go he seemed remarkably well-informed about energy issues, following this opening gambit with a long line of questions about my opinion of the future of oil prices, the pros and cons of using LPG / CNG fuelled cars vs electric cars, what energy sources Australia used to generate electricity, how much fossil fuel we export and the impact of the Australian drought on rice prices.

Oil Production

Malaysian oil reserves, believed to be around 4 billion barrels, are estimated to last less than 20 years at the current rate of production. The country is now widely assumed to now be past peak. The country is still a net oil exporter, however there has been speculation that this may end as soon as 2011, becoming yet another example of the “export land” phenomenon.

The EIA forecasts that Malaysia’s oil production will fall to 693,000 bbl/d in 2008, a 13 percent decrease from 2006 levels. Most new oil fields are located offshore. Recent finds have largely been off Sabah state on the island of Borneo, with 26 deepwater fields discovered since Murphy Oil discovered the Kikeh field in 2002. Seven of these fields are slated for development over 2008 to 2012. For the time being, these new fields are compensating for the depletion of existing fields, with production rebounding somewhat recently.

Oil represents around 10% of Malaysia’s export income.

Peak oil wasn’t mentioned in the local press during my visit, though Shell was doing a roadshow of their latest scenario planning output - Blueprints or the Scramble.

Petronas

Petronas is Malaysia’s national oil company - wholly owned by the government and reporting directly to the Prime Minster (not Parliament). It ranks in the top 100 corporations globally, is the 8th most profitable in the world and the most profitable in Asia.

Petronas’ oil income has enabled the Malaysian government to fund all sorts of grand experiments, from the famous Petronas Towers in Kuala Lumpur to paying for Malaysian astronauts to go into space as passengers on Russian expeditions - some of this expenditure has come in for criticism from people concerned that this dwindling income stream could be put to better uses and is often being wasted.

This criticism has increased in recent months, as Petronas’ soaring income has been matched by cuts to government fuel subsidies, resulting in a 40% jump in the price of fuel (though it is still cheap enough for smugglers to try to arbitrage the price difference between Malaysia and Thailand it seems, judging by the local press) and sparking protests across the country.

The government has responded to the unrest by offering a special dividend to “ease the people’s burden”.

The company is trying to adapt to declining discoveries in its home market by expanding abroad in a variety of locations, including Myanmar, Russia, Mauritania, South Africa, Sudan and Iran.

Palm Oil And Food Prices

Malaysia is one of the world’s largest producers of palm oil - an important feedstock for biodiesel production.

The price of palm oil has soared in recent years, from around 1200 ringgit per ton to almost 4000 ringgit per ton - only recently sinking back to the 3000 ringgit per ton mark.

Oil palm cultivation uses 67 percent of Malaysia’s agricultural land, and around 500,000 people work in the industry. The country expects palm oil production will hit 20 million tonnes by 2020.

There has been concern expressed locally as well as internationally about the impact on food prices of using palm oil for fuel instead of for cooking. There are also concerns that continued expansion of oil palm cultivation will mean extinction for the orang utan.

During the mild panic that erupted over rising rice prices in the first half of the year, the Malaysian government threatened to start bartering palm oil for rice, bypassing international commodity markets entirely.

Gas Prices And Rubber Gloves

Rubber prices have soared in recent years, with rubber plantations now expanding rapidly as a result, sometimes at the expense of palm oil plantations.

My energy enthusiast taxi driver noted that this has been positive for rubber farmers like his father, who are frequently small holders and traditionally had a difficult and lowly paid job. Apparently over the past decade incomes for these farmers have increased 10 fold, from something like $30 per month to $300 per month (no - you won’t get rich becoming a rubber farmer).

Gas prices have also risen sharply, amplified by cuts to government subsidies.

The combination of these two factors has meant trouble for rubber glove manufacturers, who use both rubber and gas in glove production. One Malaysian business, Kossan, is the world’s third largest glove manufacturer - producing 12 billion items per year - with gas comprising the bulk of production costs. Another Malaysian producer, Top Gloves, is the world number one, producing 30 billion gloves per year.

Glove manufacturers aren’t the only ones impacted, with the price of tyres and rubber boots also on the rise.

Somewhat surprisingly, given Malaysia’s relatively plentiful gas supplies, peninsula Malaysia has insufficient supply to meet demand, with 23% of gas used imported.

This has lead to the bizarre situation of the country building coal fired power plants to meet its energy needs, baulking at building a gas pipeline and instead relying on Indonesian coal exports. On a slightly brighter note, the coal plants are replacing a lot of existing diesel fuelled generators, and the government is promoting the upgrade of old gas turbines to new efficient models.

Cross posted from Peak Energy

An explosion at Apache’s Varanus Island gas plant in Western Australia on June 3 cut off 30 per cent of the state’s domestic gas supply. Supplies to mines and industry in the Pilbara region (the heartland of Australian iron ore mining) fell by 45 per cent.

The supply disruption was exacerbated by an inability to start alternative forms of power generation - the coal fired Collie power station, for example, had damaged turbine blades and could not immediately return to service.

This has had a large impact on the local economy (the WA Chamber of Commerce and Industry estimates the crisis will have cost the state $6.7 billion, assuming energy supplies are fully restored by December) and makes an interesting case study of the effects of a sudden reduction in energy supplies.

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The explosion

The cause of the explosion is rumoured to be a corroded pipe that ruptured, though Apache is remaining coy about responding to this theory for the time being.

The National Offshore Petroleum Safety Authority, which is investigating the incident, said it would be “inappropriate to pre-empt the findings by releasing any investigation material beforehand”. The WA opposition is calling for a Royal Commission to investigate the incident, similar to the one that examined the 1998 Longford plant explosion and fire, which cut household gas supplies in Victoria for two weeks.

The situation has been exacerbated by the lack of any contingency plans for a disaster, in spite of police warnings that these were needed and highlighting potential weaknesses at the facility. The company reportedly responded to one of the issues raised - the need to have spare parts available - by asking “How can we justify having a $8 million component sitting on the shelf ?”.

A few years ago there was a minor bout of hysteria about the hospital in the nearby (by WA standards) town of Port Hedland serving halal meals to patients, so I’ve been (pleasantly) surprised that no one has tried to gain any political mileage by trying to wield the “power of nightmares” and invoke the terrorism bogeyman as a possible cause.

This might be because the whole issue has disappeared from the Australian political scene since the unceremonious departure of unloved ex-Prime Minister John Howard, but it could also be because there has been a long standing military operation protecting vital infrastructure in the area, thus making the possibility remote.

WA gas supply

WA holds the majority of Australia’s natural gas reserves and is a fairly large producer of gas by global standards (much of the gas produced being exported to North Asia in the form of LNG from the North West Shelf gas project on the Burrup peninsula).

WA is much more reliant on gas for its energy needs than other states - the most recent figures from the Australian Bureau of Agriculture and Resource Economics (ABARE) show WA uses 385,000 terajoules of natural gas a year, compared to Victoria’s 258,000 terajoules and NSW’s 140,000 terajoules. The gas is mostly used to generate electricity - 60% of WA’s power supply comes from gas.

Varanus Island produces 380 terajoules of gas, sourced from the Harriet and John Brookes joint ventures, with most of it distributed to the south west of the state via the 1600 km Dampier to Bunbury pipeline. Up to 60 terajoules of gas is transported to the Kalgoorlie region via the Goldfields gas pipeline, which services big mining customers.

Impact on the economy

Gas supplies to mines and industry in the Pilbara region have fallen 45 per cent, those to the Goldfields have fallen by 20 per cent and the state’s southwest, where most of the population lives, has seen a 20 per cent reduction for large industries and commerce, and a further 25 per cent drop for mid-sized businesses.

As a large swathe of business has been affected, almost every industry sector has been vocally complaining about how much suffering it is enduring and how much special assistance or priority access to energy supplies it needs.

* The WA Food Industry Association has called for government support, claiming it will “lose market share” and businesses may have to stop production.
* The mining industry has decreased production. Examples of companies flagging decreased output include nickel producer Minara Resources, goldminer Newcrest Mining and mineral sands miner Iluka Resources.
* Alcoa (Australia) notified customers it was declaring force majeure on its supply contracts for alumina.
* BHP Billiton brought forward a four-month shutdown of its Kalgoorlie nickel smelter, freeing up gas supplies for its Worsley aluminium refinery (which caused a rise in global nickel prices due to the tight supply situation).
* Fertiliser manufacturer Burrup Holdings delayed its float on the stockmarket, after its gas suppliers issued it with a “force majeure” notice.
* Wesfarmers has also reported disruption to its fertiliser and LPG businesses.
* Midland Brick, the world’s largest brickworks, has had to shut down its kilns on a number of occasions.
* Laundry services have shut down, with the hotel industry struggling to find supplies of clean linen.

Responses to the disruption

The Varanus Island incident has rekindled the security of energy supply debate first sparked by the January shutdown of the North-West Shelf project, which put two-thirds of the state’s gas supply offline for a shorter period of time.

At one point WA premier Alan Carpenter was warning he might he might need to invoke emergency powers to seize control over all gas and electricity supplies in the state, though he seems to have calmed down since then - although he has announced that energy security will be a key issue in future.

The major supply side response for many larger gas customers has been to switch to diesel generation instead. This comes at a fairly large price, as diesel costs around 10 times as much as gas, according to the WA Office of Energy.

The cost of switching from gas to diesel to gas had meant that some large gas-fired power generation units with secure gas supply contracts with the (still online) north west shelf project have remained on gas instead of switching to diesel where possible, causing some controversy.

The other major supply response has been to restart 2 mothballed coal fired power stations - the 110 megawatt Kwinana Unit One (which Premier Carpenter says should free up about five terajoules of gas a day) and the 340 megawatt Muja AB power station at Collie (prompting some protests about reopening the dirtiest generation facility in the state). The state government has also asked local utility Verve Energy to consider building a new coal fired generator in Collie.

While the WA state government was happy to revive the local coal industry, it has remained firmly opposed to nuclear power, with Carpenter stating “There will be no nuclear power, no nuclear waste and uranium mining in WA while I am the Premier”.

Carpenter has also announced a (tiny) investment of $6 million into low carbon emissions technology, with the money being used for the construction of a 2 MW solar power station in Kalgoorlie and the development of an oil mallee harvesting machine. More usefully, he has also announced an expanded public transport network, including a link from the Perth city centre to the airport, light rail and tram routes, and the extension of existing railway lines.

Robert Amin, Curtin University’s chair of Petroleum Engineering, criticised the state government’s lack of contingency plans, recommending WA should have at least a month’s worth of gas stored in underground reservoirs for use in such situations, noting that depleted gas reservoirs in Dongara were ideal.

The WA Liberal opposition proposed an assortment of measures to respond to the crisis, including:

* accelerating development of natural gas reserves
* duplication of the pipeline network from the north west to southern WA
* using LNG tankers to ship gas from the north
* interconnection the pipeline network to the eastern states

Some of these seem a bit random, given that duplicating the pipeline, for example, would have made no difference at all to the current situation.

A gas interconnection to the east coast would be an interesting (albeit expensive) project - it would have the benefit of increasing supply options for the east (mitigating the depletion of Cooper Basin and Bass Strait fields), but would also likely rapidly increase east coast gas prices to be in line with those of the international LNG market.

Summary

Overall, the reaction to the incident has been less than inspiring, with the response largely being to switch back to the dirty and depleting alternatives of coal and diesel. No real thought seems to have been given to ways of making the state’s energy supplies more resilient in future, or to the fact that diesel is getting increasingly expensive and will likely to be much harder to obtain in future years.

A better response would have been to instead begin planning to embed more distributed generation, along with smarter demand management, into the grid from a variety of sources. Given that WA has high quality solar resources, particularly in the north west where they are world class, and a vast amount of space for wind and wave power generation, I would hope that efforts are undertaken to start substituting (or at least supplementing) both coal and gas fired generators with alternatives that don’t depend on the continued extraction of finite resources.

The most useful action taking during the crisis I’ve seen so far was Alcoa (the largest single user of gas) deciding to push ahead with WA’s first “tight gas” development - the Warro gas field in the state’s mid-west. Managing Director Alan Cransberg said that if it proves to be commercially viable it could supply up to 10 per cent of domestic gas demand - but denied the Varanus Island prompted the decision, instead pointing to the tight gas supply situation that already existed beforehand.

Cross posted from Peak Energy.

This is a guest post from anawhata.

“Oil is an incredible, irreplaceable gift of nature which packs energy in a dense, easily transportable form.” - Jérôme Guillet – Energy
Industry Investment Banker 

The hard facts

• The world price of oil in US dollars has doubled in the last year (June 2007 to June 2008) from
  US$67/barrel to over US$135/barrel
• The world price has gone up by 6 times in 6 years, from US$20/barrel in 2002 to over US$135/barrel by mid 2008
• With hindsight we can see that the great cheap oil era lasted 16 years from 1986 to 2002 when the price was mostly in the range $15 – 25/barrel, coming off a $39 peak during the “oil shock” of 1980 (equivalent to about US$95/barrel in 2008 money). The short sharp spike seen at the end of 1990 was due to the first Gulf War.

Within Australia we have been somewhat insulated from the latest sequence of price rises by the falling value of the US$, so our petrol and diesel prices have risen by comparatively less as the A$ has climbed to around US95 cents, as shown in the chart below.

In Australian dollar terms we have seen the price of oil rise by “only” 3½ times in 6 years.

Obvious questions raised by the price rises are:

1. What has caused the startling rise over the last 12 months?
2. Why has the price risen steadily for the past 6 years?
3. Why shouldn’t we get back to the $20/barrel we enjoyed in the 1990’s?
4. What caused the noticeable dip in price from mid 2006 to early 2007?
5. Why does the oil price seem to be going up at an accelerating rate since the dip in 2007?
6. Has the price stopped going up yet?
7. What prices might we expect over the next 1, 3 or even 5 years to come?
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Source: 1986 onwards - EIA monthly WTI spot price in money-of-the-day

http://tonto.eia.doe.gov/dnav/pet/pet_pri_spt_s1_m.htm

Pre 1986 EIA Refiner Acquisition Cost of Imported Crude Oil in money-of-the-day

http://www.eia.doe.gov/emeu/cabs/AOMC/Overview.html

Starting with Questions 1 and 2, the accelerating curve of recent price rises is due to the growth in
oil supply not keeping up with steadily growing demand around the world.

Oil is getting more expensive because surplus production capacity has diminished and continues to diminish, as shown in the chart on the next page. Oil industry volumes are of enormous scale (86 million barrels per day – a barrel is 159 litres), and the costs of supply infrastructure are in the billions and trillions of dollars.

Lead times for new industry infrastructure are typically 3 to 10 years. All new mega-projects on the production
side are well known out as far as 2012, and few seem likely to boost global supply by enough to overcome declines in old oil fields. See
the comprehensive listing of oil megaprojects at http://en.wikipedia.org/wiki/Oil_Megaprojects/2008. Note that major oil projects are developing
a history of running late, often years late, as they encounter challenging technical difficulties operating in extreme environments like deep ocean or freezing Arctic conditions.

Rapid demand growth is often blamed for rising prices – demand growth in developing countries, particularly
China and India, and in key oil supplying nations such as Saudi Arabia and Russia. But the decline of mature oil fields throughout the world
is an even greater source of demand for new oil supplies than the growth of end user demand. Declining fields are losing 5.2% of total oil production per year thus requiring about 3.5 million barrels/day of new oil each year for the global oil supply to stay the same. (Nobuo Tanaka, International Energy Agency) http://www.iea.org/Textbase/press/pressdetail.asp?PRESS_REL_ID=267. Recent annual growth in end user demand, on the other hand has not exceeded 1.5 million barrels/day.

The balance between growing capacity from new infrastructure investments and declining output from old infrastructure has seen global production capacity climb at a slower rate than consumption for the past 25 years, as shown in the following chart. 

Source: Goldman Sachs based on EIA data 

Convergence of the two curves shown above indicates serious supply tightness over the last 2 years which explains
much of the recent price surge, with perhaps $5 – 10 per barrel in volatility added by an influx of investment funds seeking a safe haven from the falling US$.

The analysis by Goldman Sachs in the next chart below suggests that price rises to date have already destroyed demand amounting to about 5 million barrels/day or 6% of current world consumption. Any further price rises may be expected to cause further demand destruction and consequent hardship for those being priced out of the fuel market. 

This brings us to Question 3 – Why shouldn’t we get back to the $20/barrel we enjoyed in the 1990’s?

It’s simple – the world has used up practically all the easy “light sweet” crude oil that used to pour out of desert sands for $3 – 4/barrel and be easily refined into saleable products. Discovery of oil peaked more than 40 years ago – see the chart below.  

Not only is it costing much, much more to find and extract each new barrel of oil (typically $60/barrel for new deep offshore wells) but most of the oil we can now get is shifting towards “heavy” and/or “sour” grades that require billions of dollars of new investment in refineries to process them.

“The oil is getting harder to extract. Most oil comes from ageing, waning giant fields discovered long ago. There are no more giant fields to find, only lots of small ones, difficult ones or fields deep under the ocean. The remaining crude oil is heavier, thicker, dirtier, quite simply cruder! It’s difficult to get out, expensive to get out, slower to get out. So, the rate of oil extraction will decrease.”

Michael Lardelli on Perspective, ABC Radio National, 26 June 2008

There is no going back to $20/barrel
short of a world recession that shuts down demand for oil, and for everything
else. 

Now let’s look at recent price volatility.
Question 4 – What caused the noticeable dip in price from mid
2006 to early 2007?

Prices climbed during 2005 due to Hurricane
Katrina and fears of war with Iran, then kept on climbing until August
2006.

“Oil was in a bit of a bubble
in July 2006. The way you could tell it was in a bit of a bubble was
that speculators were net long by a large number of contracts (115,000)
and inventories were high. . . . The oil situation now is very different.
Speculators are now net short. Inventories are very low of the products
and types of oil in demand.” http://www.theoildrum.com/node/4227#comment-370311 – 26^th June 2008

When the 2006 hurricane season passed
without incident and oil supplies remained marginally ahead of demand
the market appeared to decide that risks had been over-priced, and prices
fell by $10 - $15/barrel for the start of 2007. Then they began rising
again. 

Is our situation getting worse?
Question 5 - Why does the oil price seem to be going up at an accelerating
rate since mid 2007?

Actual oil prices are set by refiners
bidding to buy tanker-loads. Recent media fuss about speculators refers
largely to oil futures prices rather than actual spot prices for which
a buyer and a seller have to actually exchange funds for a tanker-load
of crude oil costing between US$100 and US$400 million. Not many speculators
have this sort of cash or know what to do with a 250,000 tonne tanker.

This year many refineries have been finding it harder to buy oil of a grade they can economically refine, especially the 50% of US refineries located in the Gulf of Mexico who are suffering steep declines in overseas supply from their nearby sources in Mexico, Venezuela and Nigeria.

Mexico is in oil-induced political and financial turmoil because its one massive oilfield Cantarell has gone
into rapid decline for geological reasons while Mexico’s (subsidised) domestic oil consumption is growing. Mexico is seeing its largest single
source of foreign income decline every month, while domestic demand for oil is growing at a pace that will see Mexico become an oil importer by 2014 according to some estimates. (http://www.theoildrum.com/node/4092)

Mexico’s Oil Production is Collapsing

At the same time

• Venezuela’s output is declining, partly due to Hugo Chavez’s ejection of foreign oil companies.
• Nigeria’s output has been reduced to its lowest level in 25 years by terrorist attacks from local guerrillas
• Russia’s output (which is only exceeded by Saudi Arabia’s) has unexpectedly declined by 0.9% this year
• Britain’s North Sea oil peaked in 1999 and is declining at 5% - 8% per year.

The table on the following page shows, for oil exporting nations, net export declines accelerating from 2006 to 2007. Monthly data for 2008 shows that the overall downward trend is continuing. It is the declining volume of tradeable oil on global markets that is causing steep price rises this year when we are seeing only moderate abatement of growth in global demand.

More buyers are pursuing a tightening supply of exported oil, so small variations in availability are all that is needed to push deal prices upward. For example, on 28^th June Bangladesh, hard-hit by energy shortages, was reported to have struck a deal with Kuwait for supply “at a premium price”.

If declines in the supply of tradeable oil were not enough to create a tight market, buyers are reacting nervously to talk of attacks on Iran by Israel or the USA, and it only takes a rumour to send oil prices on another upward jump.

Source: datamunger at http://www.theoildrum.com/node/4082/353705 using EIA data 

Units – thousands of barrels per day 

Critically, Saudi Arabia appears now unable to perform the role of market stabiliser that it played from the 1980’s until the 2000’s on the basis of its known ability to pump up to 20% extra volume at short notice. Depletion of Saudi Arabia’s giant oil fields appears to have taken away its ability to help the world in this way, though the Saudis will not directly admit they no longer have this power.

It seems likely that since 2007 OPEC has lost effective cartel power because few of its members have the ability to pump more oil. This means the cartel as a whole can do practically nothing to bring down prices even though key members like Saudi Arabia have much of their wealth tied up in Western economies and are clearly concerned about damage to their own interests if oil prices go any higher – thus the Saudi conference held on the 22^nd of June 2008. 

So what happens next? Questions 6 and 7 – Has the price stopped rising and what prices might we expect over short-term and medium-term planning horizons?

Price rises did indeed pause in mid-June after an astonishing $11 run-up on Friday 6^th June. Traders may have been waiting for an outcome from the Saudi conference on 22^nd

June, which was soon seen to have provided little new knowledge or cause for optimism.

Game on. Futures topped $140 for the first time on 26^th June. 

So what will next week, next month and next year bring?

“Predictions are always difficult, especially about the future.”
Niels Bohr 

There are essentially two patterns of oil price prediction being made by informed pundits:

1. Ongoing steady price rises driven by the continuing supply-demand squeeze
2. A big discontinuity caused by demand destruction of a major sort, followed by a short period of lower prices then a resumption of ongoing steady price rises driven by the continuing supply-demand squeeze.

Pattern A
– Ongoing steady price rises

Proponents of ongoing price rises are betting on geopolitical and economic stability and the ability of a resilient world to keep steadily adjusting to rising oil prices, as we have done for the past six years.

Typical projections of this type are from Jeff Rubin, Chief Economist at Canada’s CIBC World Markets. The following table is from Jeff Rubin’s April 2008 report http://research.cibcwm.com/economic_public/download/sapr08.pdf

Two months later Rubin has revised his April price projections drastically upwards in CIBC WM’s June 2008 report http://research.cibcwm.com/economic_public/download/sjun08.pdf . 

He explains “We are compelled to once again raise our target prices for oil. We are lifting our target for West Texas Intermediate by $20 per barrel to an average price of $150 next year and by $50 per barrel to an average price of $200 per barrel by 2010.” 

Pattern B – Price moves down then up on a rising trend

The other school of oil price projections makes the common-sense point that serious demand reduction and perhaps economic recession in some countries will be triggered when oil prices reach a critical level – when “demand destruction” becomes really destructive. Proponents suggest that such a free-fall in demand from one or more larger consuming countries such as the USA will be dramatic enough to drop price back to, say, US$100/barrel for a period of time.

Some writers guess that the critical price point to cause such sudden and significant demand destruction may be US$200 - 300/barrel, based on percentages of world GDP, but the accompanying analysis is weak and the arguments published to date do not convincingly pinpoint a critical price for oil above which it cannot go. 

A graphic example of the “dramatic recession” school of price projections is shown below. Given the great variety of geopolitical events and economic factors that could influence actual supply, demand and price there is little hope for more precise forecasting of price and timing than the indicative story set out below.  

Conclusion:

Stay awake, expect oil prices to be in dynamic movement.

Conservatively, plan for US$200/barrel by 2010, but don’t be surprised if a recession somewhere drops price back to US$100, for a short while, or sudden war in the Middle East sends prices skyrocketing.

Expect the fundamentals of fading supply growth and growing demand to push prices ever higher in the 5 year horizon, perhaps well beyond US$300/barrel.  

The implications in terms of Australian pump prices in A$/litre are shown in the table below. These pump price estimates are made on the basis of some reasonable assumptions:

• Current excise and GST rules stay the same, keeping Australia’s fuel taxes significantly lower than any other OECD country except the USA, Canada and Mexico
• Australia’s prices continue to be driven by average Singapore refined product prices. Singapore
  product prices are most influenced by the price of Malaysian Tapis crude which normally sells for a few dollars more than US West Texas Intermediate
• Freight, insurance, wharfage and wholesale and retail margins rise only moderately with world oil price
• A$/US$ exchange rate moves up from the current 95 cents to parity due to continued weakness in
  the US$ compared with commodity-driven support for the A$
• No net impacts from the Emissions Trading Scheme which starts in 2010 and might add another 10 cents/litre.

Indicative Estimates of Pump Price

“When you think a litre of petrol costs too much, ask yourself how much you would have to pay someone to push your car 10 kilometres.” 

Finally, let’s look on the bright side. There is plenty to like about moderately higher oil prices, if communities, businesses and economies take heed and get time and help to adjust.

Less traffic, less congestion and less pollution would be a big plus for most of us.

New business opportunities should spring up in areas such as energy conservation, Natural Gas conversions, cleantech industries, electric vehicles and freight optimisation.

Having the world place a higher value on energy from oil will change a lot of business decisions, improving our resource efficiency and enhancing sustainability.

Anawhata comments: The above is my effort to explain the recent history and possible outlook for oil prices to non-TOD audiences who lack awareness or understanding of peak oil. I think all of us know how tricky it is to explain these big issues to intelligent people who simply lack the basic knowledge we take for granted about peak oil. I have chosen to focus this piece specifically on prices, with the minimum possible mention of related causes like oil field reserves, depletion rates, the export land model and so on. Most of these topics underlie my argument, but are not highlighted because I will lose the audience if I stray too far away from the central topic of prices. I have anchored the whole argument around the undeniable facts of recent oil price history.

You will see TOD contributors’ fingerprints and exact words throughout, and I hope I have credited key people correctly and sufficiently. In any case, TOD thought leaders, you know who you are. Thank you for educating and informing me and so many others. I welcome suggestions to clarify and improve the story, remembering that I have to keep it as simple as possible for a lay audience. In particular please help me correct any errors of fact or understanding on my part.

This is a guest post from Cameron Leckie of ASPO Australia.

The first post on this series on the future of air travel¹ looked at the fuel economy of the aircraft fleets in service with QANTAS and Virgin Blue on fuel economy and fuel economy per passenger perspective. Not surprisingly, the smaller aircraft were more economical than the larger aircraft, however the larger aircraft, in general, were more economical on a per passenger basis. Thank you for all those who commented on the previous post and the information that you provided.

This post gets to the crux of the matter. Profit and loss! No business can survive on sustained losses; sooner or later it will become insolvent. This post will investigate how long Australia’s two largest airlines, QANTAS and Virgin Blue can remain profitable in the era of high oil prices.

How long can they remain profitable?

This post will examine in some detail Australia’s two largest airlines with the aim to establish how long they will remain profitable in an era of high oil prices.

[break]

The approach taken is to develop growth figures across a number of categories based on the airlines historical data. The data has been obtained from the financial reports of both airlines.² The time frame that has been used is from FY 2003/04 through to 2006/07. The historical growth rates will then be projected forward until 2018. After developing the base case, a number of differing scenarios will be developed that will provide an indication of how long we can expect the airlines to remain profitable. The factors that have been considered and the per annum growth rates over the period are displayed in table one.

Table One: Factors considered in determining the future profitability of QANTAS and Virgin Blue.

This table shows that expenses have been growing at a faster rate than revenue for the last four financial years, mainly due to the significant increase in fuel costs over that period.

To determine the airlines future profitability, the revenue and expenses of the airline have been related to its capacity, or Available Seat Kilometres (ASK) giving two values, being revenue per ASK (R/ASK) and expenses per ASK (E/ASK). For as long as an airline can keep R/ASK greater than E/ASK an airline will remain profitable.

Using the historical growth rates, a baseline (or business as usual) projection has been made for the period 2008 to 2018. The non fuel and fuel expenses have been calculated separately and summed to provide the projected expenses. Using this baseline projection, fuel as percentage of total operating cost, increases from 24% in 2007 to 58% in 2018 for QANTAS and 27% to 75% for Virgin Blue. Chart one and two detail the future profitability of QANTAS and Virgin Blue respectively using this baseline.

Chart One: Baseline for the future profitably of QANTAS and Virgin Blue. Based upon historical growth rates for the period FY 2003/04 to FY 2006/07 projected to 2018.

Using this baseline, QANTAS will make a net loss from 2009 and Virgin Blue from 2012. Over time the losses per ASK increase and at some point the airlines will become insolvent. This baseline will be now used to develop a number of other scenarios. The scenarios that will be used are described below:

• Scenario one. Revenue, fuel costs and capacity growth continues to grow at historical rates whilst on-fuel costs reduce.
• Scenario two. Revenue and fuel costs continues to grow at historical rates (calculated according to provided capacity), whilst non-fuel costs and capacity reduce.
• Scenario three. Fuel costs continues to grow at historical rates (calculated according to provided capacity) whilst revenue, non-fuel costs and capacity reduce.
• Scenario four. Fuel costs remain constant relative to capacity whilst revenue, non-fuel costs and capacity reduce.
• Scenario five.
  Fuel costs remain constant relative to capacity whilst revenue, non-fuel
  costs and capacity increase at historical rates.

2% per annum has been used as the figure declining costs, capacity growth and revenue. Obviously, higher or lower figures will result in changes to the predictions developed.

Some of these scenario’s assume that the airlines can increase revenue and reduce non fuel operating costs in an era of high oil prices. Oil prices have been negatively impacting airlines for some years now. For example in the QANTAS annual report of 2005 it stated that ‘Qantas’ greatest challenge remains the cost of fuel, which we believe will stay at the current high levels.³ As a result airlines for a number of years have been reducing costs. The easy cost saving options have already implemented, meaning that to further reduce costs will be increasingly difficult. The airlines will no doubt continue to raise fuel surcharges in an effort to increase revenue. Unfortunately for the airlines, each fare increase will result in fewer passengers, meaning that their Revenue Seat Factor or Load factor will fall, leading to further capacity reduction.

Chart two and three provides a summary of the profit/loss per ASK for the base case and the five scenarios for QANTAS and Virgin Blue respectively.

Chart two. Summary of profit/loss for QANTAS against the base case and four scenarios.

Chart three. Summary of profit/loss for Virgin Blue against the base case and four scenarios

This chart shows the fairly sobering picture that, with the exception of scenario four and five, both QANTAS and Virgin Blue are likely to become unprofitable between now and 2018. The scenario’s have not been assigned probabilities, however my gut feel is as follows:

• The price of jet fuel will continue to increase at or above the current rate as we approach and past peak oil.
• Both airlines will slow their capacity growth over the next couple of years before reducing it.
• Both airlines will attempt to reduce their non-fuel operating costs, although this may be difficult due to inflation.
• Revenue will decrease over time as fewer passengers can afford to travel, due to increases in the cost of air travel and the worsening economic situation associated with the onset of peak oil. I don’t see passenger numbers beginning to fall for a year or two yet, as I don’t think that the pinch from higher fuel prices has as yet significantly changed spending habits (either that or we are just going further into debt?).

This most closely resembles scenario three, meaning that as early as 2010, both of Australia’s major airlines could cease to be profitable. At some point, if they continue to be unprofitable they will become insolvent.

Winners and losers

The impact of Australia’s two largest airlines collapsing would be enormous. But, as in all situations, there are winners and losers. The losers would include:

• Those people who work for the airlines.
• Those individuals and funds managers invested in airlines, airports and associated infrastructure.
• The industry that supports aviation, including component manufacturers, maintenance and repair, air traffic control, catering etc.
• Airports, including the corporations that own them, security staff, retailers operating from airports, car hire companies, taxi drivers.
• Tourism, including tour operators, hotels, restaurants and retail outlets in tourist centres.
• Organisations that rely upon air travel for movement of personnel for meetings, courses and work such as mining, government and many other businesses.

The winners list is somewhat shorter:

• Public transport such as trains and buses.
• Long distance bus companies.
• Telecommunications companies, particularly those support tele-conferencing, video tele-conferencing
  and other technologies allowing people to work from home.
• Our climate.
• Oil depletion may slow due to reduced fuel demand.

Hopefully Cambridge Energy Research Associates (CERA) vision of an undulating oil production plateau⁴ will eventuate (see here for a response to CERAs view⁵), demand will soften and the airlines will remain marginally profitable for the next decade or two. Personally however, I don’t ascribe to hope as a method of fixing problems, particularly problems of such magnitude.

Inaccuracies

The model is relatively simple, and as a result has some inherent inaccuracies. These include:

• Not all revenue is derived from passengers. For example, only 79% of QANTAS’ revenue came from passenger revenue in 2006-07. The bulk of the remainder came from air freight and tours and travel services. Higher oil prices will likely have a negative effect on these revenue sources as well, so this should not have a significant impact on the model.
• Does not specifically account for changes in foreign exchange rates and changes in the oil price. My first model attempted to oil prices and foreign exchange rates to calculate total oil costs, however there was too many unknowns (such as hedging strategies) to make this viable.
• Does not consider the performance of differing groups within the airlines. For example QANTAS has domestic, international, regional and Jetstar amongst its groups. The performance amongst these groups could vary significantly. Whilst operating statistics are available for each of these business units, the financial data is not so easy to source.
• Historical growth rates are not an accurate prediction of future growth rates. To counter this, the model will be updated over time using a four year moving average. The FY 07/08 full year results will be interesting.
• The impact of oil supply disruptions has not been considered, however with minimal capacity to surge current oil production, we are probably only an extreme weather event, terrorist act or geo-political event away from physical shortages. This would most likely be a very costly for airlines.

Conclusion

This analysis provides some very worrying findings. Both of Australia’s major airlines could become unprofitable within a couple of years if current trends continue and unviable at some point shortly after that. There is some hope that a reduction in capacity and non-fuel operating costs with a steadying of fuel costs may allow the airlines to remain profitable, but with peak exports likely past and peak oil in the not to distant future, this is a slim hope.

From a risk management perspective, the collapse of airlines would have a major negative impact on the Australia economy. Based on this analysis, it is almost certain that the airlines will collapse, it is only a matter of time unless fuel prices are reduced, and quickly, to a more manageable level over the long term. Declining exports and discoveries whilst demand continues to increase, means that it is unlikely that this will occur. The net result is that Australia faces an extreme level of risk.

With so much at stake, it would be reasonable to expect that our nation’s leaders would be doing everything in their power to prepare the nation for a new age of higher oil prices. Over recent weeks, there has been much discussion by the major political parties on issues such as FuelWatch⁶

and reducing either the GST or excise on petrol, but very little on practical methods of reducing our dependence on oil. I will leave it to you to decide how well we are being served by our leaders on an issue of such vital importance to the future of our nation.

The final post in this series will consider the airlines response to peak oil, particularly looking at alternative fuels and new aircraft types and determine whether there is any hope for airlines and air travel in a world of high oil prices.

1 http://anz.theoildrum.com/node/4143#comments_top
2 http://www.qantas.com.au/info/about/investors/index and http://www.virginblue.com.au/AboutUs/Virginbluecorporateinformation/Investorinformation/index.htm
3 http://www.qantas.com.au/infodetail/about/investors/2005AnnualReport.pdf
4 http://www.cera.com/aspx/cda/public1/news/pressReleases/pressReleaseDetails.aspx?CID=8444
5 http://www.theoildrum.com/story/2006/11/15/83857/186
6 http://assistant.treasurer.gov.au/DisplayDocs.aspx?doc=pressreleases/2008/023.htm&pageID=003&min=ceb&Year=&DocType=0

Last year I took a look at the question “Should Natural Gas Be Used To Power New Zealand ?“, after reading an article from NZ PEPA executive John Pfahlert arguing that New Zealand should be building new gas fired power stations instead of trying to become carbon neutral, and concluded that this seemed a rather risky strategy - depending on continuing offshore exploration success.

The view of the Australian government and gas industry seems to be that our gas supplies are essentially unlimited, with the phrase “more than a century of supplies left” bandied about at every opportunity. Ex-Prime Minister John Howard used to dream of Australia becoming an “energy superpower“, with a vastly expanded gas (LNG) export industry being a cornerstone of this vision, based on Western Australian LNG exports from offshore gas fields.

In this post I’ll have a look at how much gas Australia has and how long it will last under a variety of scenarios - from an indefinite continuation of the current rate of production to a pell-mell conversion to use gas for all our energy needs combined with a rapid expansion of LNG exports.

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In the lead up to the Australian election last year, the APPEA (Australian Petroleum Production and Exploration Association) was also arguing that gas should be our fuel of choice for power generation as we transition away from coal to a clean energy future, an idea which received a limited amount of support from Labor during the campaign. Since the election, the APPEA has continued to promote the vision of a gas fuelled power industry, recommending that at least 70 per cent of new electricity generating stations constructed in Australia to be fuelled by natural gas by 2017 and maintaining that “Australia’s vast reserves of clean, natural gas are the key to meeting the nation’s energy needs while reducing greenhouse gas emissions and maintaining economic wellbeing”.

New Energy Minister Martin Ferguson also views natural gas as the key to Australia’s energy security for liquid fuels, in the form of gas to liquids (GTL - as well as its more environmentally unfriendly cousin, coal to liquids, or CTL) and compressed natural gas (CNG). The view that CNG is a way to reduce our consumption of foreign oil is quite a common one, judging by some of the comments made on TOD ANZ - and elsewhere - from time to time.

The thing that strikes me as being rather quaint, to put it mildly, is that we pay anywhere from about $8 billion to $25 billion to import the oil and we get a paltry $4 billion for the gas that we sell to overseas countries. It seems odd to me, especially given gas is a superior fuel for many, many purposes including the use in motor vehicles - Ollie Clark, Natural Gas Vehicle Association

Recently Western Australia has announced that it will build a new coal fired power station to meet growing energy demand, ruling out a natural gas fueled plant because of supply shortages. This situation which seems to be at odds with both the APPEA’s recommendation and with the notion that we have so much natural gas that we can not only be a large LNG exporter but also use it to fuel both our power plants and our transportation system, along with more traditional domestic and industrial uses.

Australian Natural Gas Reserves

Most of the data in this section was sourced from a paper published earlier this year by Mike Roarty of the Parliamentary Library research section on “Australia’s natural gas: issues and trends“, and Brian Fleay’s paper “Natural Gas, “Magic Pudding” or Depleting Resource” (pdf), which in turn used data from the Geoscience Australia “Oil & Gas Resources of Australia 2004” (pdf) report. Where newer information has been available I’ve linked to the source (more often than not either The Australian’s Nigel Wilson or Bloomberg’s Angela McDonald-Smith, who do the most comprehensive coverage of local energy news).

Cooper Basin - The largest onshore conventional gas reserves occur in the Cooper/Eromanga Basins in north-east South Australia and south-west Queensland. This source currently supplies much of the domestic eastern Australian gas market (South Australia, the Australian Capital Territory, New South Wales, and Queensland), but is mature and now depleting rapidly.

Bass Strait - Victoria and Tasmania are primarily supplied by the Gippsland Basin offshore from south east Victoria, with a newer development in the area, the Kipper field, expected to come online in 2011. There have also been new developments in the Bass and Otway Basins offshore south western Victoria - including the Yolla, Minerva, Casino, Geographe and Thylacine fields. In recent years, BHP have upgraded their estimated of Bass Strait gas reserves, with the Gippsland Basin thought to still contain around 7 tcf of gas.

The older fields in the south east are expected to have run down by 2020, but the newer developments in Bass Strait should extend that date out by another decade.

North West WA - Carnarvon and Browse Basins - Over 90 per cent of the reserves are located offshore from northwest Western Australia (Carnarvon and Browse Basins) and in the Timor Sea to the north of Australia (Bonaparte Basin) - far away from the primary domestic gas markets in the south east.

The Carnarvon Basin is home to the existing North West Shelf gas fields - with the Gorgon / Jansz fields being the largest in the country. The area includes a number of fields supplying gas into the domestic gas network, particularly for use by the mining industry. Besides the existing North West Shelf gas project, other planned new LNG projects in the area include the Pluto (at the early stages of construction), Gorgon, Wheatstone and Scarborough fields.

The Browse Basin is the most active new frontier, with the area seeing successful exploration in recent years - reserves figure for Inpex’s Ichthys field recently being upgraded by 3.3 tcf to 12.8 tcf of gas, for example. Woodside’s planned Browse LNG development is also in this basin.

Northern Territory - Bonaparte Basin / Timor Sea - The area between the Northern Territory and East Timor is the other region currently producing significant amounts of gas (and oil) with an LNG plant recently starting operation in Darwin and other fields being considered for development.

The division of gas revenues from the region between East Timor and Australia has been the subject of a lot of controversy over the years, which has contributed to continuing delays in developing the Greater Sunrise field.

Papua New Guinea - For many years it appeared that a gas pipeline would be built between Papua New Guinea and Australia, enabling east coast gas markets to access the gas reserves held by PNG (estimates range from 14 tcf to 40 tcf). Hopes of this occurring were still flickering as recently as the beginning of the year, however Oil Search and ExxonMobil have now decided to develop an LNG plant instead, making any future pipeline project very unlikely.

How Much Gas Do We Have ?

As at 1 January 2005, Australia’s Category 1 and 2 reserves totalled around 144 trillion cubic feet (tcf), according to the Geoscience Australia report, a slight decline on the previous year.

According to the Financial Times (quoting PFC Energy), Australia has so far produced only about 15 per cent of its gas resources, compared with 25 per cent for Norway and more than 80 per cent for the US’s lower 48 onshore reserves. Whereas US production has peaked (and Norway’s is expected to peak within a matter of years) Australian production is expected to expand until 2030.

The table above has been adjusted to include the reserves revisions I’ve noticed since 2005 - Gippsland Basin from 3.1 to 7 tcf and Browse Basin from 30 tcf to 33 tcf (if you know of any others, please leave a comment).

Since then, based on an annual consumption rate of around 1.8 tcf, we have consumed around 5.4 tcf of gas, which would bring the current reserves number back down to around 144 tcf.

To put the Australian figure in context, proven world gas reserves are estimated to be over 6200 tcf - Australia has around 1.4% of the total.

How do we use the gas ?

In the domestic market, gas is primarily used for :

1. Manufacturing (36% of the total) - smelting, fertilisers, plastics and glass/brick/cement production
2. Power generation (32%)
3. Mining (13%)
4. Residential use (12%) - water heating, space heating and cooking

Obviously these will be joined by transportation if Mr Ferguson’s plans for GTL/CNG are put into practice, and power generation will increase in importance if the APPEA’s suggestions are implemented.

The fertiliser industry is an interesting one - globally the industry seems to be migrating towards natural gas supplies, particularly in the middle east, but also to Western Australia, where the Burrup plant now produces around 6% of the world’s tradeable ammonia.

The rest of our gas goes to the export market, in the form of LNG (plus some condensate).

At present, there are 2 LNG plants in operation - the North West Shelf gas project (operated by Woodside Energy) near Karratha in WA, and the ConocoPhillips Darwin LNG plant in the Northern Territory. The North West Shelf project is the third largest LNG exporter in the world, with its fifth LNG train due to commence operation this year, bringing the capacity of the plant to 16.3 million tonnes (0.85 tcf).

A number of other projects are underway, in planning or actively under consideration - the table below lists all Australian LNG projects (using conventional gas).

Australian LNG exports currently rank in the top 3 globally, however looking at new projects around the world, you can see that Australia’s LNG exports will shrink in importance as projects in Qatar, Iran and Russia, in particular, start to deliver large volumes of LNG.

Political Factors

As I noted in the preamble, Western Australia recently opted to build a new coal fired power station instead of using gas as originally planned, due to the shortage of gas in the south of the state.

The WA domestic gas shortage has resulted in a local pressure group called the “DomGas Alliance” being formed to try and force the oil and gas companies holding offshore leases to either develop the fields or relinquish the leases - a move the APPEA oddly claims would “discourage exploration”.

Martin Ferguson has also backed the “use it or lose it” idea, though he has apparently already been called in for a “quiet chiding” over this issue by the APPEA.

The APPEA is also unhappy about the state passing a law to force developers of LNG plants to set aside 15% of their reserves for domestic consumption, which is the only sign of the Export Land Model making any form of appearance for Australian energy production - and a pretty feeble one at that.

A planned expansion of the pipeline from Dampier to Bunbury should partly alleviate the gas supply issue by 2010, though in the short term an explosion at Apache Energy’s Varanus Island plant has left the state gasping for gas, particularly the mining industry. This outage is expected to take months to repair.

One interesting side effect of the WA law is that BHP is considering building a floating LNG plant for the Scarborough and Thebe fields, partly to avoid these sorts of regulations.

Woodside have also been considering a floating platform for the greater Sunrise project, again in part to avoid any political risks associated with a plant in East Timor.

The only other form of notable state government intervention in the sector is the Queensland government’s “smart energy policy” which mandates that 18% of power consumed in the state come from gas by 2020 (up from the earlier 13% target).

The recent federal budget eliminated a tax break for condensate production by the North West Shelf venture, prompting an expression of annoyance from Woodside CEO Don Voelte. At the time it was rumoured the industry would probably see the money returned via incentives for GTL production or faster development of LNG projects.

This has duly happened, with Ferguson kicking off a review of the tax system by Treasury secretary Ken Henry that will “include an assessment of the barriers to investment in large-scale downstream gas processing projects in Australia, the particular hurdles faced by remote gas developers, and consideration of the future policy framework for new sunrise industry development in the gas sector, including new LNG, gas-to-liquids and domestic gas projects”.

The point of tax breaks isn’t clear to me, given that the primary constraints on development of LNG projects in Australia are firstly finding a customer who will sign up for a long term supply deal and secondly availability of skilled labour and service companies - neither of which will be altered in the slightest.

It may perhaps encourage the development of a GTL project which might otherwise be unviable as a standalone LNG project though, such as Wheatstone.

The most obvious impact of the LNG export industry on the local gas market has been to push gas prices up, as the market is exposed to international supply and demand forces rather than purely local ones. Western Australia has already seen this (Santos CEO David Knox saying prices are headed for “LNG parity“) and the same thing seems likely to occur on the east coast.

Another impact of the LNG export industry is that it will further increase the nation’s dependence on income from fossil fuel exports.

Coal is currently our major export earner, which has prompted concern about Australia suffering from what is known as “The Dutch Disease” - the theory that an increase in revenues from natural resources will deindustrialise a nation’s economy by raising the exchange rate, which makes the manufacturing sector less competitive. The term was coined in 1977 by The Economist to describe the decline of the manufacturing sector in the Netherlands after the discovery of natural gas in the 1960s.

With the value of gas exports likely to rise to a similar level to that of coal if all the planned LNG projects go ahead, we could see more than a quarter of national GNP coming from these 2 industries.

How long will the gas last ?

According to the Parliamentary Library report, our resources are “capable of sustaining our future production and exports well into and probably throughout the 21st Century”. While the paper was published on April 1, it appears to be serious.

Australia’s natural gas consumption for 2005–2006 amounted to 1,184 PJ. Additionally, exports in that year were 12.5 million tonnes (Mt) of LNG equivalent to 685 PJ - a total of 1,869 PJ (equivalent to around 1.77 tcf). Given the reserves and resources figure quoted of 144 tcf, this would mean our gas supplies would last for 81 years at the current rate of consumption.

One complicating factor is the use of biogas. According to the ESAA renewable sources of gas (primarily landfill gas) comprise about 16 per cent of Australia’s domestic gas use - which would equate to around 189 PJ (or 0.18 tcf).

Taking this into account, supplies under this simplistic scenario would last around 90 years - roughly the “end of the century” timeframe mentioned in the Parliamentary Library report.

Of course, neither domestic consumption nor exports are expected to remain static, so let’s consider a few additional scenarios.

Note - as these scenarios are just examples, I haven’t been particularly rigorous in running the numbers - they should be accurate to within 5% or so. Please bear this in mind if you feel the urge to nitpick - however if you can see any gross errors in the calculations please feel free to derive some alternate figures and explain them in the comments - its entirely possible the conversion factors have gone badly awry in the more complicated scenarios.

Scenario 1 - Increasing domestic demand and exports until 2020, remaining stable thereafter

The figure above shows the forecast growth in production from ABARE and the ESAA - continuing growth in domestic gas use and a sizeable expansion of LNG export capacity. By 2020, production is expected to reach 4500 PJ per year (or 4.3 tcf).

Allowing for biogas production at the same rate as today, this would mean natural gas supplies would last until 2046 - approximately 38 years.

Scenario 2 - Increasing domestic demand to 2030, static LNG exports from 2020

If domestic gas use continues to expand at the rate shown above, we’d expect to be using 2000 PJ per year for domestic purposes. Assuming no new LNG plants are built after 2020, we would be producing almost 5000 PJ per year (or 4.75 tcf).

Again, allowing for biogas production at the same rate as today, this would mean natural gas supplies would last until 2044 - approximately 36 years.

Scenario 3 - Increasing domestic demand and exports until 2020 (then stable), GTL/CNG for all transportation from 2020

As our energy minister is a strong advocate of using gas for transportation, it is worthwhile considering what would happen if the vehicle fleet was switched over to use CNG and GTL products, combined with scenario 1 for domestic use and exports.

Kiashu was kind enough to try and work out how much gas it would take to replace our current consumption of petrol and diesel, and came up with this set of calculations:

Petrol usually has about 34.6MJ per litre. Natural gas here in Australia is 38.87MJ per cubic metre at atmospheric pressure. Both vary a bit, obviously, but we can use this for some guesstimates. So we see that 1lt petrol is equivalent in energy to 34.6/38.87 = 0.89m3 natural gas.

An ABS survey [pdf- http://www.ausstats.abs.gov.au/ausstats/subscriber.nsf/0/12594B5543CA578CCA2571E2001C705D/$File/9208055005_2006.pdf] tells us that petrol use is a bit uncertain, figures are within about 10% only, but nowadays it’s about 20Glt annually [numbered pp78, pdf p13-14].

20Glt petrol is equivalent in energy to 17.8 Gm3 of natural gas.

However, the natural gas must be compressed to 200-220 atmospheres - call it 210. As with the air car, this takes energy. The energy E required to compress air at 25C is,

E = 110,000 x ln (P1/P2) /m3/mol

There are 44.74 moles of methane in 1m3 of natural gas - natural gas is usually about 95% methane, and 5% carbon dioxide, propane, butane, sulphides and so on. Let’s assume it’s all methane to save ourselves the headaches. We’re compressing it to 210 times atmospheric pressure, so P1=210 and P2=1, so the energy required to compress 1m3 of natural gas into CNG will be,

E = 110,000 x ln (210) = 588,181J = 0.59MJ

0.59MJ is 0.59/38.87 = 1.5% of the energy of the natural gas. So turning NG into CNG uses 1.5% of the energy content. Put the other way, you only get 98.5% of the energy from CNG you would from burning NG directly. Thus, 20Glt petrol is equivalent, after compression of NG into CNG, to 18.07Gm3 of NG (not a typo - we don’t care about the volume of the CNG, only the NG feedstock)

I don’t know about CNG efficiency compared to petrol and diesel. If that’s lower or higher it’ll obviously affect how much natural gas we need. But we can say that a figure somewhere on the cricket pitch is 18 billion cubic metres of natural gas to replace the 20Glt of petrol we use these days. …

Hmmm, actually the ABS here says that in 2006 total fuel use was 16.3Glt petrol + 5.74Glt diesel = 22Glt. Must be more than 22Glt by now… but you can take the conversion factor of lt petrol —> m3 natural gas of 100% –> 90% as being about right. For every 1Glt fuel you replace you want 900M m3 of natural gas.

By my calculations, 900 million m3 of gas equates to 32 billion cubic feet of gas (or 0.032 tcf). So for 22 Glt of fuel, we are looking at 0.7 tcf of gas per year for the present day vehicle fleet.

If we assume the fuel consumption of the national vehicle fleet remains static, and it suddenly switches from petrol and diesel to CNG/GTL in 2020, we’d be consuming 5 tcf per year minus biogas.

This means natural gas supplies would last until 2042 - approximately 34 years (ie. the new gas powered vehicle fleet could be used for just over 20 years before we had to junk it and replace it with electric transportation).

Scenario 4 - Increasing domestic demand and exports until 2020 (then stable), domestic gas use for all new power generation

As noted in the preamble, the APPEA is keen for us to transition to cleaner energy source by using gas for power generation until we get finally around to replacing coal (the dominant source at present) with renewable energy sources.

Doing the numbers (with some input from kiashu again), natural gas contains around 38.8MJ/m3, or 10.78Kwh. Our natural gas reserves of 144 tcf (4077 billion cubic metres) could therefore generate 43,950 billion Kwh (or 3.26 tcf per trillion Kwh) - at 100% efficiency.

Modern natural gas plants manage around 55% efficiency in the turbines, so if we allow for another 5% loss in the system we’ll end up with about 23,000 billion Kwh (or 6.26 tcf per trillion Kwh).

National electricity generation in 2006 was 255 billion Kwh. Historically, electricity generation has been increasing at around 3% pa.

Assuming that we generate all new power from gas, natural gas supplies would last until 2043 - approximately 35 years (ie. the new - and old - gas fired generation capacity could be used for just over 30 years before we had to junk it and replace it with renewables as well).

Conclusion

There are a myriad of scenarios that could be applied (try working out one where the export land model applies to our gas exports for example, which would increase the timeframes somewhat, or one where exports keep increasing after 2020, which would significantly decrease the timeframes), but I think its safe to assume that if we start treating natural gas as a silver bullet we will run out in less than 40 years - with gas fired power for new generation being much less intensive in its use of gas than using GTL/CNG for transport.

One factor which may slow the rate of extraction is the inability of the industry to develop projects as quickly as it might like - Woodside has pointed out that the supply of skilled labour simply isn’t sufficient to develop the pipeline of projects as fast as the industry would like.

The X Factors - What Other Sources Of Gas Do We Have ?

In the scenarios outlined above I’ve used our current known gas reserves as the total supply available.

There are a number of ways of further increasing (or extending the use of) our gas supplies :

1. “Just find more”

Martin Ferguson’s preferred approach to oil and gas depletion is apparently to “just find more“. This isn’t totally out of the question of course - the recent expansion of “Australia” to include all of the continental shelf (see pdf map here) will no doubt include more oil and gas - but how many more years worth is an open question.

The APPEA argues that Australia has 50 sedimentary basins, of which just 12 are producing oil and gas (4 basins have been deemed non-commercial) and that there is still potential for drilling in little explored areas. Acsording to a recent report, only 17 per cent of Australia’s offshore sedimentary basins and 26 per cent of potentially prospective onshore basins are covered by petroleum permits”.

How much potential there is depends on your view of exploration programs. If you think that exploration is now a well understood science, and that companies target the most likely areas when exploring, then you’d assume that there isn’t a great deal of gas left to be found.

If, on the other hand, you think that exploration is similar to roulette (the cynical view), or that governments and oil companies wish to restrain discovery and production (the conspiratorial view) then there may be much more - maybe twice as much as has currently been discovered.

The safest assumption to make is the first one.

2. Efficiency improvements

There are some obvious areas of improvement that could be made to reduce gas usage on the power generation and domestic use front. A number concentrated solar thermal plants under construction are combined with gas fired power to reduce total gas consumption (though obviously the long term direction for these plants is to burn no fossil fuels at all).

Another mechanism for improving the efficiency of gas usage in power generation is cogeneration (capturing energy from waste heat, which is already done by some large scale industrial users, is another useful technique).

Usage of gas in plastic production could be reduced in some cases by producing bioplastic instead.

Finally, usage of gas for water heating could be reduced or even eliminated using solar hot water heaters.

3. Biogas

As noted earlier, biogas is already providing a proportion of our gas production. Getting a handle on just how much gas could be produced from biomass is quite difficult, but if you consider that methane from waste bananas alone could power a town of around 25,000 people, there is obviously quite a lot of potential. If you read the preceding link you’ll see that the German Greens have proposed some incredibly ambitious targets for biogas production in Europe, so it is conceivable that biogas could provide a significant proportion of our energy needs.

Of course, if we produce enough, someone may decide to start turning it into LNG and shipping it offshore, so this wouldn’t necessarily be a panacea.

3. “Unconventional” gas sources, Coal Seam Methane and Shale Gas

The real X-factor for gas production in Australia is unconventional gas sources, in particular coal seam methane and gas from shale. As both coal and shale are plentiful (and likely to remain so for some time), these are likely to provide significant quantities of gas.

No one seems to be attempting to extract gas from shale in Australia at this point in time, so I won’t attempt to quantify how much gas we could possibly obtain from this source (see this post for a discussion of unconventional gas, including from shale, in the US).

Coal seam methane, on the other hand, is now the focus of a boom in Queensland. As there has been so much activity in the area lately (and reserves numbers are so vague) I’ll make this the subject of a separate post - and re-run the scenarios based on various estimates of CSM potential.

Cross-posted from Peak Energy

This is a guest post by Kiashu, advocating an alternative to hypermiling.

Recently there have been a few articles on hypermiling - driving your car to make the most efficient use of fuel. They mention taking junk out of your car so it has less weight in it, not hitting the accelerator hard, and so on. What’s remarkable is that none of these articles suggested, “don’t drive”. Not even “don’t drive so much.” So that is my immodest proposal: “Don’t drive, or at least not so much.” I realise that this is insane radicalism, but there you go.
“But I need to drive! I have no options!”
“Perhaps. But do you need to drive so much? Is every kilometre you drive essential?”
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As noted by the World Health Organisation [1Mb pdf],

More than 30% of trips made in cars in Europe cover distances of less than 3 km and 50% less than 5 km. These distances can be covered within 15–20 minutes by bicycle or within 30–50 minutes by brisk walking.

The short journeys use up a disproportionate amount of fuel, so even if your six a week 5km trips to the shops are just 6x 5km = 30km of your weekly 200km of driving, they’ll make up more than 30km/200km = 15% of your fuel use. This is because engines reach their peak efficiency after fifteen minutes or more of driving, and short journeys involve more stopping - your engine burning fuel for you to stay still is as inefficient as you can get.

Eliminating these short trips in your car can save you a lot of fuel, as well as improve your health. A little while ago a friend was explaining to me how he drove 1.5km to the train station every day. “If I walk, I get sweaty, I can’t be sweaty in the office.”
“Take off your tie! Put it on at work. And anyway, if you get sweaty with a 15 minute walk, then you need to walk more.”
“No, I’m okay. I just need to get something more fuel-efficient, perhaps a motorbike.”
The next week he told he’d been to the doctor. “He says I need to lose weight and walk more.”
This, I think, a fairly common thing. Your arse widens to fit into the seat you sit in all day.

But as well as short trips, at least two-thirds of trips are discretionary. You can do without them. The following is the data of purpose of journey by car from 1992, the most recent year available for such data for Australia as a whole. [source, ABS]

• Shopping, 25.7% of all trips, 13 minutes average trip time
• Work, 22%, 31′
• Social activities, 18.7%, 20′
• Voluntary & community activities, 9.3%, 18′
• Active leisure, 7.4%, 32′
• Child care, 9%, 13′
• Domestic activities, 5.4%, 16′
• Education, 2%, 22′
• Personal care, 0.5%, 16′
• Passive leisure, 0.1%, 22′

We have here figures for the percentage of all trips taken for that purpose. The average time spent driving each day is 1hr27′. The average time per trip doesn’t add up to this 87′ because not every trip is done every day; but when the trip is taken, that’s the average time of it.

Only about a third of trips (work, child care, and possibly education) are non-discretionary and more or less unavoidable, assuming zero public transport and not able to bike, walk, etc. The rest can be set aside (”passive leisure”, driving just for fun) or rearranged for efficiency - shopping from distant shops can be done weekly all in one go, etc.

Next to how much you use the car it’s irrelevant whether you keep an extra spare tyre in the back, hit the accelerator hard or not, and so on. It just doesn’t matter. The most effective way to save fuel is not to drive.

I suggest a couple of experiments. Keep a logbook in your car, and over a month note each trip, start time, end time, odometer at start and finish, and the purpose of each trip - like in the table above. After that month sit down and look over your logbook. Figure out how many of your trips were discretionary - driving 1km to the shops, going for a Sunday drive, etc - and how many avoidable - you went to the shops for the fourth time this week, you could have taken the bus but got up late so had to drive to get there on time, that sort of thing. Now divide those trips into your monthly fuel bill. So you get a figure for how much you’re spending on trips you didn’t have to take.

This expense is only going to get greater. Peak fossil fuels is simply that over time demand for fossil fuels goes up while their supply goes down, so naturally the price leaps up. And any rational response to climate change means that the price of polluting will go up. So you couldn’t be bothered walking to the shops, it was late and you had a long day. That trip may look fine at $1.50/litre fuel, but how about at $3/lt? $10/lt? That’s $40 a gallon, by the way. If you say that it’s still worth it, then next time you go to the pump, set aside that extra money you’re willing to spend. Do that a few times, and see if you can really do without that extra cash and not spend it on something else. If so, I suggest the Red Cross. If not - well then it’s time to stop those unnecessary trips.

Now the second experiment. For just one week don’t use your car at all. Just imagine that it’s broken and in the workshop. What do you do? Give up on life, quit your job, stay at home? Nope - you find a way to cope. After the week, imagine that you’ve just learned to fix it will cost more than you can afford at the moment - you won’t have the money for another three weeks. Now what? Well, another three weeks go by… are you dead yet? Or did you find a way to cope?

So, here’s my fuel-saving tips, my immodest proposal.

1. Get rid of your car.
2. Or at least, stop trips you could do some other way.

Radical ideas, I know. Probably communist or Islamofascist or something. But with peak fossil fuels and climate change, we’re facing a radically new world whatever we do. We simply won’t be able to keep on truckin’. May as well get used to it.

I think it’s better to do by choice what is going to be forced on you one day anyway. It’s better for me to do a light walk which is comfortable every day in my thirties than to not walk, have a heart attack at 58, open heart surgery, and then do a light walk which is very painful. It’s better to live on less money than I earn (rather than spending it all or getting into debt) because one day I may earn less, and then I’ll be used to it, or have savings to tide me over. It’s better to grow a few pots of fruit and vegies now so that if food is really expensive later I can just grow more then, than it is to grow nothing now and have to learn it all very quickly later. Sharon Astyk recently noted that two-thirds of Americans “die in debt, in pain and alone.” We should be able to do better than this, and a lot of it depends on how we choose to live our lives.

I was once taught the Seven P’s: proper preparation and planning prevents piss-poor performance. We don’t all have to rush out and live on our own self-sufficient homesteads, or form lobby groups to hassle the government, or anything like that. But as Edison said, we live like squatters, not as if we owned the property. We have to stop that. Get rid of your car, it’s an albatross around your neck.

I know, I know. “I can’t, I’m the exception, lots of people can do it, but I can’t, it’s impossible, I’m helpless, poor me.” I know, I know. Just try the two experiments I suggested. Many things seem impossible, then we try them and they turn out to be possible - not easy, but possible.

Cross-posted from GWAG.