US AND GLOBAL ENERGY PERSPECTIVES

JAMES R. KATZER

Oil and gas are likely to continue to provide much of
our energy needs for the foreseeable future

Rarely a week goes by that the topic of energy—its availability, security, and cost—doesn’t show up on the front pages of US newspapers. Energy, after all, has been very much on the national consciousness for several decades. International instability, rising oil and gasoline prices, and short-term supply disruptions remind us that the global economy is heavily energy-dependent.

Extensive analysis of global energy supply and demand indicates that the world will need increasing amounts of energy. As populations and economies grow, and as standards of living increase, the demand for energy increases in close concert with this growth. The challenge is how to utilize familiar as well as less-common sources of energy to meet that growing demand. If the past is any indicator, market forces will play a major role in shaping future energy scenarios.

PROJECTING FUTURE DEMAND

Energy models giving 20-year forward projections have proven quite accurate predictors of actual energy use. Over the last decade, for example, total primary energy demand has grown in line with projections, from roughly 175 million barrels/day of oil equivalent (MBDOE) to 200 MBDOE in 2000. Projections through the year 2020 indicate that total primary energy demand could rise to more than 290 MBDOE. These projections, which are consistent with those of a number of organizations, including the International Energy Agency, include a 1.1 percent per year decline in energy intensity, or primary energy demand per unit of gross domestic product (GDP), which is consistent with experience since 1971.

Thus, global primary energy demand probably will increase by about 50 percent during the next 20 years, and could double by 2050. Oil likely will account for 40 percent of energy demand through 2020, when projected oil demand will reach 110 million barrels per day (bbl/day), compared with about 75 million barrels per day currently.

Natural gas is likely to meet about 26 percent of the primary energy demand by 2020. Coal demand is projected to grow slightly, holding its own as a percentage of total energy demand. The net result, according to these projections, is that by 2020 fossil fuels will account for about 85 percent of the world’s primary energy mix, a slight increase from the mix today.

There are “other” primary energy sources that contribute smaller, but still significant, amounts to the energy mix. Biomass (primarily the traditional plant/woody fuels of developing economies and municipal solid waste in the developed countries) is the largest contributor to this “other” category, providing about 10 percent of total primary energy. Biomass is growing, but is expected to maintain no more than its current share. The outlook for nuclear energy is flat at about 6 percent of total primary energy, reflecting constraints on new installations and phase-outs of older units. Hydroelectric and geothermal power tend to be limited by available sites, making it unlikely that combined they will contribute more than about 3 percent to the energy mix in 2020. Wind and solar power, in contrast, are projected to grow rapidly, but from an extremely small base.

If the above projections are on target, do we have adequate oil reserves? And what will the cost be in 2020? Historically, crude oil demand projections have proven fairly accurate. In 1980, the world oil demand was 65 million barrels per day (bbl/day). That year, Exxon projected demand would rise to 76 million bbl/day in 2000. This projection was essentially on the mark. It’s likely that the 2020 projection of 110 million bbl/day has an equally good chance of being accurate.

Projecting future proven reserves of crude oil is much harder to do. Although the world consumed about 500 billion barrels of oil between 1980 and 2000, the proven oil reserves increased by 400 billion barrels over the same period.Current reserves total about 1,030 billion barrels.

At present consumption levels, the world has a 40- year supply of oil (without any further reserve additions). But, to date, there always has been a 30-40 year proven reserve balance. If this balance can be maintained —and there is every reason to believe it will be for the foreseeable future—there will be ample oil to supply the demands of society well into the future.

Experience also suggests that projecting crude oil prices is risky. Historically, natural resource costs, such as metals, e.g., copper, or grains, e.g., corn, and including crude oil (outside cartel pricing times) and coal, typically have not increased in constant dollars on a long-term trend basis. Past price fluctuations suggest that market mechanisms are effective at balancing energy supply and demand. Technology advances help boost supply, and help encourage replacement and substitution. Conservation efforts and new, more efficient technologies also can help temper demand and prevent scarcity.

THE COST OF ELECTRICITY

Electricity generation, growing at an annual average rate of 2.7 percent, is the largest user of primary energy. In the United States, over 80 percent of new electricity generation capacity is based on natural gas, and utilizes high-efficiency combined-cycle generating technology, which is the cutting-edge technology. Natural gas is the preferred power-generation fuel globally, except in countries that have other large indigenous fossil resource bases, such as coal.

At today’s natural gas price of about $3.30 per million BTUs, a combined-cycle generator fueled by natural gas is the lowest-cost, cleanest, and preferred technology for power generation, and produces electricity that costs about 3 cents per kilowatt-hour. Gas has the highest energy utilization efficiency, and produces less than half the CO₂ emissions per kilowatt-hour, compared to coal. However, it also is the most sensitive to fuel price changes, as illustrated by the recent turmoil in California’s energy markets.

Coal-fired power plants, on the other hand, require high initial investment costs, but have the lowest and most stable fuel costs. Electricity generated by a new coal plant costs about 5 cents per kilowatt-hour, though older, paid-down coal plants typically can generate cheaper electricity than gas plants. Coal is plentiful throughout the world, and today’s known coal reserves will last over 240 years at current consumption rates. North America has 25 percent of the recoverable coal reserves. Coal has higher emissions, including higher CO₂ emissions per kilowatt-hour, than other generation technologies.

Nuclear power plants are expensive to build and operate. Current electricity produced by nuclear technology costs around 7-8 cents per kilowatt-hour, significantly higher than electricity produced by coal or natural gas plants. New nuclear power technologies may be able to bring nuclear power-generating costs closer to that of coal or gas plants.

Many believe that renewable energy sources are the future for electricity generation. Renewables, a category that includes solar, wind, geothermal, and hydropower, have the technical potential to meet large portions of the world’s energy needs. Geothermal and hydropower generation are limited by the availability of locations and are not expected to grow beyond their current proportion. The high cost of renewable energy is a huge hurdle, however. Cheaper and better technologies will be needed for them to play a more significant role in the future. Two promising technologies are wind power and photovoltaics.

Wind power is one technology that has seen enough cost reductions over the last 20 years to make it almost competitive in some regions, at 5-7 cents per kilowatthour. The cost reductions have been made possible through improvements in the technology and the development of ever-larger wind turbines. Current turbines stand 250 feet tall, have 150-foot blades, and can generate up to 1.5 megawatts.

Wind power generation is growing at about 25 percent per year, but this growth is starting from a very small base. Wind generating capacity in the United States in 2000 was about 2.6 gigawatts, only about 0.3 percent of the total US generating capacity. The United States accounts for 19 percent of the total global wind power generating capacity, which currently is about 17 gigawatts. To keep wind power’s current share in perspective, though, it’s useful to note that total global electrical generating capacity is about 3,800 gigawatts.

The growth in wind power in the United States and Europe has been spurred by liberal subsidies. Windgenerated electricity in the United States, for instance, has benefited from a 1.5 cent/kilowatt-hour federal subsidy since 1991. The Danish government has provided a 3.9 cent/kilowatt-hour subsidy on wind-generated power, and Germany requires utilities to purchase wind-generated electricity at 9.7 cents per kilowatthour for 5 years and then 6.6 cents after that.

Solar photovoltaics (PV) is another renewable technology with many attributes in its favor. The cost of PV has decreased steadily, but still is an order of magnitude higher than electricity generated from fossil sources. Offgrid solar PV typically requires storage batteries and associated power electronics which almost double the cost of the electricity. Even so, PV frequently is the cheapest technology to provide electricity in off-grid applications, like running an emergency roadside telephone, or powering lights, refrigerators, and water pumps in houses far from the nearest main electrical line.

However, crystalline silicon PV technology is still too expensive to become broadly competitive. Newer, thin- film PV technologies, such as cadmium-indium-disul- fide, are on a significantly lower cost curve, but will not bring PV costs in line with electricity from fossil resources in the foreseeable future. Marked improvements in module efficiency and system costs (power electronics) are needed to make PV competitive.

Another major challenge with these renewables is what happens when they are not able to produce electricity. As long as the overall power grid has excess generating capacity, small amounts of renewables can be added to it without materially affecting the operability of the grid or the cost of the electricity. To incorporate larger amounts of renewables, though, storage must be added, or new fossil capacity must be built or be available as backup. Either option markedly increases the cost of electricity. Otherwise, who goes without power when the wind is not blowing or the sun not shining?

TURNING TO TRANSPORTATION

The world has an abundance of fossil fuels (oil, natural gas, and coal) that will last through and beyond the 21st century. Globally, about 60 percent of crude oil is consumed as transportation fuel; the figure is about 80 percent in the United States. Crude oil is a product of international trade and is readily deliverable to wherever it is needed. The same can be said about liquid hydrocarbon fuels, e.g., gasoline, diesel fuel, and jet fuel.

Fossil fuel use results in emissions of CO₂, one of many greenhouse gases. Increased CO₂ emissions are of concern to some because of the global climate change potential that has been attributed to greenhouse gases generated by human activity. If global climate change is a problem, it is a long-term problem, and requires long-term solutions based on multifaceted and integrated research, assessment, and corrective programs. Rapid reductions in fossil energy consumption would have large negative impacts on the growth of the world’s economies. Likewise, rapid shifts to other sources of energy—to achieve a significant reduction in CO₂ emissions over a reasonable period of time—would add significantly to energy costs and, in turn, limit economic growth.

In transportation, increased energy-use efficiency can result in reduced emissions of CO₂ and other pollutants. This has triggered major efforts to develop advanced internal combustion engine technologies, such as direct injection gasoline or advanced diesel engines, for automobiles and trucks. Massive efforts also are under way to develop fuel cell vehicles. Over the long term, these new technologies may change the nature of transportation and the fuels required.

Over the short term, however, fossil fuels will be the dominant energy source in the transportation sector. Many new technologies will require rippling changes throughout the sector, and higher costs to the consumer. Advanced internal combustion engines, for example, may require changes in hydrocarbon fuel composition, including a sharp reduction in sulfur levels, which would be necessary for the optimal performance of high-efficiency engines and after-treatment systems. Changing the fuel composition can be accomplished during the refining process, but with some increase in the cost of the fuels produced.

And switching the transportation sector to renewable fuels like ethanol or biodiesel, even if it were possible, would mean much higher fuel costs at the pump. We consume about 125 billion gallons of gasoline in the United States per year.We produce from corn and consume about 2.2 billion gallons of ethanol blended in gasoline each year in the United States. Ethanol production could be expanded by a factor of perhaps 4-5, but this still would be only a small fraction of our gasoline consumption.

Renewable fuels like ethanol are significantly more costly than standard gasoline, and experience suggests that customers will buy them only if they are “incentivized” in some way. For example, the cost of bulk gasoline, excluding taxes, transportation to the local service station, and the cost of marketing at the station, is between $0.55 and $0.85 per gallon, depending on crude oil prices. Ethanol, on the same basis, is about $1.40 per gallon, or about $1.90 per gallon on an energy equivalent basis. Today, the US subsidy on ethanol is $0.53 per gallon, which is about $0.70 per gallon on an energy equivalent basis. The subsidy is about equal to the cost of a gallon of gasoline. Although not possible, the hypothetical replacement of all the gasoline consumed with ethanol would cost the consumer (or taxpayer) over $100 billion per year, a significant amount. The picture is similar with biodiesel.

Another area of current high interest is the use of hydrogen in transportation because of its potential to enable zero-emissions vehicles. Each of the auto companies has developed experimental fuel cell vehicles. Eight auto makers and the four major international oil companies, along with major technology suppliers, are working together in the California Fuel Cell Partnership to understand the issues associated with fueling and operating fuel cell vehicles under realworld conditions. With the exception of one vehicle that is methanol powered, those currently under study are all hydrogen-fueled vehicles.

The absence of a production, distribution, and marketing infrastructure poses a significant barrier to the widespread use of hydrogen as a fuel source. The magnitude of the infrastructure issue can be understood by considering the current US transportation fuel supply infrastructure, which has been built up over many years, is highly optimized, and handles relatively higher density liquid fuels. This fuel infrastructure has a book value of almost $1 trillion dollars and a replacement cost of $2-3 trillion.

Fuel cost, though, is potentially the biggest issue with hydrogen-fueled vehicles. Although hydrogen may be the most abundant element in the universe, significant energy must be expended to remove it from hydrocarbons or from water. If hydrogen is produced via electrolysis, using electricity from the grid at an average residential cost of 8 cents per kilowatt-hour, the energy cost alone in the hydrogen produced would be over $3 per gallon on an energy equivalent basis, several times the pre-tax cost of gasoline today. This energy cost does not include any cost of capital for the electrolysis unit; nor does it include the capital and operating costs associated with the compression, storage, and dispensing of highpressure hydrogen (6,000 psi) at the station. These additional costs can be expected to translate into a hydrogen cost to the consumer that exceeds $6 per gallon of gasoline on an energy equivalent basis.

Advances in technology may make the fuel cell car the vehicle of the future—one day. And new technologies can be expected to drive down the cost of alternative fuels and expand their use. Technology breakthroughs, such as making it possible to convert cellulose more economically directly to ethanol, which today is made from a limited supply of grain (corn) by a process that requires a lot of energy, will be needed to bring the cost of biofuels down to where they can play a signifi- cant role in transportation. Such a breakthrough also would enable the use of a “renewable” cellulose resource, including wood and other plant matter, as well as municipal waste, while keeping grains for the food supply.

For the next two decades, though, our energy future is fairly clear.We can expect to continue to rely heavily on traditional energy sources like oil, gas, and coal. Beyond that, there are many options on the table. Leaps in technology cannot be predicted, but if the past is prologue, new, improved technologies will bring down the cost of energy, including renewables. Similarly, the environmental impact of energy utilization will be reduced. For example, CO₂ emissions from fossil fuels can be managed to the degree needed by sequestration, but at a cost.

In the end, alternative forms of energy should compete in the marketplace. Similarly, today no one can yet pick the winners in the race for cleaner, more efficient cars. Consumers should and will be the final decisionmakers. They will balance factors such as price, convenience, reliability, safety, and environmental considerations. Those options that miss the mark will move to the edge of the table—or simply fall off.

Additional Resources:
Nakicenovic, Nebojsa, Gurber, Arnulf, and McDonald, Alan. Global Energy Perspectives. Cambridge (UK), Cambridge University Press, 1998.
International Energy Agency, World Energy Outlook, Assessing Today’s Supplies to Fuel Tomorrow’s Growth, 2001 Insights. Paris, IEA/OECD Publications, 2001.
International Energy Agency, World Energy Outlook, 2000 Edition. Paris, IEA/OECD Publications, 2000.

James R. Katzer (CC ’01) is the strategic planning manager at ExxonMobil Research and Engineering Company. The co-author of Chemistry of Catalytic Processes, he was formerly professor of chemical engineering at the University of Delaware, where he helped establish the Center for Catalytic Science and Technology.

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