Energy: 2011 in Review

Japan is used to earthquakes, and the odd tsunami leaves the people there down but never out. When these events caused the back-up generators at the Fukushima nuclear power plant to fail, the result was the worst nuclear accident since Chernobyl – and by some measures, it was worse.

The disaster has returned to the energy debate a very important fact: nuclear accidents are extremely rare, but they are also extremely costly when they do occur. Reuters has cited a Nikkei report putting the cost at around $257 billion. This is almost certainly not the right number as it is still quite early days, but the order of magnitude is probably on target. By way of comparison, it’s in the same ballpark as the amount in the European Financial Stabilization Facility, three times what China spends on the People’s Liberation Army every year, or the entire debt servicing costs of the US national debt for 2010.

Some countries have decided to give up on nuclear power, notably Germany. Others have put their plans into mothballs until the political situation cools off, e.g., China. There is no getting away from nuclear power, though. There are over 400 operating plants in the world right now, and we are not about to turn them all off. A great many are coming to the end of their planned lifetime – America’s were built to last about 40 years. The Nuclear Energy Institute observes that America’s newest plant, Watts Bar 1 in Tennessee, was built in 1996, and the oldest is in Oyster Creek, New Jersey, with an operating license dating from 1969. It takes years to build a new plant, and most countries that use nuclear power need to start planning new plants or replacement technologies – indeed for some, this work should have happened years ago.

New designs will make nuclear power safer. The new AP-1000 is one of a new generation of reactors with passive safety features that keep working even when the power goes out. Bill Gates and the Chinese state nuclear authority are cooperating on a “traveling wave reactor,” which could run for decades on depleted uranium and produce significantly smaller amounts of nuclear waste than conventional reactors.

But we have to remember that uranium-235 is not easy to clean up, has proliferation issues, and despite what an entire generation thought it knew, is not green. Plutonium reactors have the same problems to an ever greater degree. In the end, just how much risk are we willing to run? That’s a question that has yet to be answered.

And that brings us to the second F, fracking. Short for “hydraulic fracturing,” fracking is a method of unlocking natural gas trapped in rock formations. By pumping water and chemicals into the ground, engineers have discovered a way to breakup the rocks and release the molecules of gas trapped inside – much like you squeeze the water out of a sponge. Natural gas burns cleaner than oil or coal, America has more natgas than it knows what to do with, and it is cheaper than conventional alternatives.

Fracking, however, is suspected of causing damage to the local water supplies. A recent documentary by Josh Fox called Gasland investigated this, and while the industry claims it to be mere propaganda, the scene of a man lighting his tap water on fire does stick in the mind.

Fracking is also has been blamed for minor earthquakes. This has brought the development of natural gas in many countries to a slowdown if not a halt. Lancashire, England, is not noted for earthquakes, but Cuadrilla Resources admitted that its fracking activities have caused quakes – below 3.0 on the Richter scale. These aren’t enough to get a Californian out of bed, but they are noticeable and can effect building foundations even if fracking isn’t hurting the local water supply.

France became the first nation to ban fracking this summer (note that about 80% of its electricity is nuclear in origin), and Australia is in the midst of a debate on it. China is simply moving ahead with fracking. This issue is going to increase in prominence in 2012, and beyond. Again, the question is how muck risk are we willing to take.

The third and final F is finance, and what we have seen in the last while is the use of energy commodities as speculative vehicles, driving up the costs of all forms of energy and distorting the market. Simply put, investors have been buying oil and other energy sources and holding them as a speculative play the same way they traditionally bought stocks and bonds. Demand has been up as a result, and Goldman Sachs put out a research note in March that said for every million barrels of oil speculators (not users of oil like refiners or auto owners) there was an 8-10 cent increase in the price of a barrel. “Using Goldman’s 8- to 10-cent estimates and data on speculators’ positions from the U.S. Commodity Futures Trading Commission, Reuters calculated that as of last Tuesday [7 April 2011], the total speculative premium in U.S. crude oil was between $21.40 and $26.75 a barrel, or about a fifth of last Tuesday’s price.” In other words, since they didn’t like the stock market, and didn’t trust the bond market, speculators tacked a 20% tax onto oil.

Of course, this can be stopped by banning all speculation in oil and other energy products, but that is hardly plausible nor really desirable. Speculators do provide liquidity to markets under certain conditions and are useful to an extent because of that. The heightening of demand by speculators can make marginal sources of energy more economically viable, encouraging long-term alternatives. Nothing would bring solar power, wind, tidal and geothermal on line faster than West Texas Intermediate crude hitting $250 a barrel.

This is an issue that isn’t going away in 2012 – not with the eurozone’s issues still not resolved, not with America’s budget impasse in Washington, not with tens of millions of Chinese, Indians and others wanted to enter their countries’ middle class. Short-term price distortions are likely in a variety of energy subsectors as hedge fund money flows around the world.

In 2012, we are likely to see more of the same. The clash between energy needs and environmental protections will continue; the drive to development in the BRICs and other rising powers will increase demand for energy; the ability of petro-dictatorships to stifle freedom will likely track the price of oil; and the problem of proliferation will follow nuclear energy wherever it goes.

Yet, I don’t think it appropriate to end on a negative note. There is enough energy for all 7 billion of us to live well – if we are smart enough, careful enough, and visionary enough.