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At the brink of a new energy economy (1) comments
By Tayo FAGBULE | Friday, May 15 2009 | Scibiz
  
 Seventeen years ago, Peter Drucker, a management guru, in his book "Managing in a Time of Great Change" highlighting four new markets, presciently noted "The second of new markets call it -environmental market - may end up presenting an even greater opportunity". "It has three separate components [the market for water and air purification equipment, the agrobiology market and the energy market], all rapidly developing". Drucker regards the energy market as "the biggest component of the environmental market". Petrol-guzzling cars, coal-hungry power plants are some of the high polluting energy sources that need to be cut down on.
For oil-rich countries like Nigeria that experienced decent GDP growth in the last five years, this does not portend good news. More so, as recessions associated with a financial crisis tend to be more severe. Economies like the US, whose consumption drove global growth, will recede due to rising unemployment and tight credit. The days of cheap credit are over. Developed economies have stepped up their reserves i.e., the number of days refined oil is kept as backup. According to the Oil Market Report by the International Energy Agency (IEA), forecasted global supply of oil is less than demand primarily because oil importing countries are reserving more.
How will it impinge on the Nigerian economy? Rapid reversal of foreign portfolio investments, foreign credit and trade finance has affected Nigeria. But there's more. Global energy demand has slumped. A barrel of oil, which mid-last year soared to a high of $147, is middling around the $50 per barrel mark.
An IEA scenario projected that revenues from oil and gas would increase between 2007 and 2030. Specifically, it said "Cumulative government revenues from oil and gas output (from royalties and taxes) in these ten [oil-rich sub-Saharan African] countries are projected, in aggregate, to total $4 trillion over 2007-2030. Nigeria and Angola remain the largest exporters, with combined cumulative government revenues of about $3.5 trillion."
Growth in demand will come from China, the Middle East and other emerging East Asian economies. Close to 80 percent of projected increase in output to meet this demand will come from national oil companies (NOCs) like NNPC.
Cost of exploiting non-conventional oil eg, tar oil in Canada, is higher compared to the cheapest sources, in Africa and the Middle East. Limited access of international oil companies (IOCs) to these sources and the capacity of NOCs to explore and produce enough will lead to higher prices. To what extent will the global downturn upend chances of such a scenario?
New Green Deal
In response to the IMF's call for countercyclical policies, particularly expansionary fiscal policies, governments of developed economies have embarked on a 'New Green Deal' reminiscent of the New Deal that helped end 1930s depression. Several countries are aggressively channeling part of their stimulus packages towards renewable energy sources eg, wind energy, lithium-ion batteries and biofuels. The US, with its $120 billion green-stimulus package, consumed 24.3 million barrels of oil per day in 2008. It has decreed an increased consumption of biofuel (21 billion gallons of "advanced" biofuels a year by 2022).
Last week, the US formally declared it will regulate carbon emissions. Expectedly, fuel prices in the gas-guzzling US will increase. Dependence on foreign-oil will invariably decline while incentivising investment in and consumption of renewable energy. Backed by tax breaks, loan guarantees, millions of dollars in grants and broader support in an imminent energy bill.
The era of high oil prices may be coming to an end, maybe not in the immediate future. Yet the transition has begun. For instance, Germany and the UK have joined the bandwagon of countries offering cash for clunkers, eg, nine-year old rundown cars in exchange for new fuel efficient cars. Before the US decision, absence of a carbon tax made biofuel unattractive. With the impending cap on emissions the pump price of petrol will rise in the US. Then, powering cars on biofuel will make economic sense.
All the same, investors are worried that the US government's enthusiasm may wane. Critics admit that objectives such as energy security, climate change, job creation, assisting farmers, are good. However, they want to see them backed by decisive, not fickle, policies. Because, like every invention there are risks of failure: which technology will work best and be adopted by all? More importantly, the world's fixation with fossils fuel is not going to ebb overnight.
IEA's World Energy Outlook for 2008 envisaged that oil and gas will remain vital sources of energy for the world. But by 2010, renewable energy resources eg, wind, solar, geothermal, tide and wave energy are to overtake gas as the second-largest source of electricity. Underestimating the consequences of the worst financial crisis in seventy years would be puerile. It is catalysing rapid change. Change that is urging the search for the next generation biofuel: cellulosic ethanol.
Food, feed and fuel
President Obama's alternative energy stimulus aims to reduce America's fossil fuel addiction, burn cleaner energy and reduce environmental pollution. Cellulosic ethanol has been tagged the next generation biofuel. In the US, start-ups are springing up, swooning funds.
Cellulosic ethanol made from non-food materials like switch grass, or waste material like corncobs, paper trash, wheat straw and biomass is replacing corn ethanol. Earlier, urged by US government subsidies, US farmers had invested heavily in corn. But high food and fuel prices had resulted in bankruptcies, and idle capacity.
Climate change, dietary shifts of a burgeoning middle class in emerging economies and population growth is fueling a rising demand for fuel (biofuel), food (grains) and feed (protein), respectively. Last year's food crisis - partly due to US corn subsidies to promote corn ethanol production - may have abated. However, demand for food, feed and fuel have increased demand for agricultural commodities.
But the amount of acres, unchanged for decades, will have to increase. An opportunity for Nigeria's hardly exploited arable land? Food-based ethanol, derived from corn, sugarcane, soybean etc, is being replaced by ethanol sourced from non-food crops like jatropha. A new economy: energy agriculture, is germinating. And a critical need: large parcels of land for growing energy crops, is unmet.
Multinational companies, partnering with start-ups, have been induced by this emergent $3 billion industry. However, commercialisation of the venture is dogged by several factors. Scalable bio-refineries, ubiquitous biofuel stations fitted specifically to pump biofuel into tanks and land dedicated to growing such plants are some of the barriers. Production is a Herculean task. For instance, 30 billion gallons of biofuel requires over 300 million tons of materials and 30 million acres of land. Compatibility with existing infrastructure, refineries, car engines, fuel pumps etc, is another issue.
Then again, demand for cellulosic ethanol raw materials e.g., waste, will obey the law of demand and supply. Higher demand for waste means increased costs of such inputs which in turn will drive up the price of its output: energy. Thus, big international oil companies like Shell, with deep pockets and patience, are said to be likely better positioned to reap the rewards.
Shell is particularly interested in sourcing sustainable biofuels because of its twin advantage: contribution to the reduction of CO2 emissions and the fit between biofuels and its downstream capabilities. Jeroen van der Veer, Shell's CEO, projects that in 5-10 years, commercial next generation biofuels will make up 10 percent of the world's liquid fuels.
The world is at the brink of a new energy economy and biofuel is the new currency.
Tayo is a financial economics analyst with the BusinessDay Newspaper
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(1) comments Click Here to Add Your Comment |
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closer than the brink
By Francis Onwumere | on Friday, May 15 2009 | 09:57:22 AM
Nice write! If the forecasts or campaign promises made by President Obama is anything to go by then by next year the impact of biofuels would be greatly felt...good for some, bad for others, this new economy |
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