Adaptation = Survival

This blog first appeared on the website of think tank and strategy consultancy SustainAbility

Riding home recently on a “Boris Bike“ – so named after London’s inimitable mayor, Boris Johnson, credited with conceiving the new bicycle sharing scheme – I witnessed a phenomenal collision between two riders that resulted in one of them flying several feet through the air at head height.  Spectacular! Moments earlier, I had felt a prescient discomfort as I rode behind the perpetrator of the accident that was about to happen.  Just as I am ultra-wary when I see motorists maneuvering half a ton of steel while speaking on a mobile phone wedged between shoulder and crooked neck, as I approached this chap in his late 30s – wobbling around on his Boris Bike like a 3 year old – I decided to give him a very wide berth as I overtook.  He was apparently enjoying himself as his front wheel invited him to randomly explore the full width of the road ahead.  On hearing the surprisingly loud collision behind me, I turned in time to see a Lycra-clad helmet-wearing cyclist launch from his mangled racer in a graceful arc towards the road surface.  Ouch!

Apart from feeling immense sympathy for the poor victim, my thoughts turned to what can happen to us when our environment suddenly changes.  If this seems an unlikely mental leap, I should explain that I’m currently engrossed in a fabulous book called Deep Survival by Laurence Gonzalez that explores, among other things, how human beings respond to unexpectedly changing circumstances.  Gonzalez recounts the tale of MP William Huskisson, run over and killed by George Stephenson’s famous Rocket steam locomotive on its maiden journey along the Liverpool & Manchester Railway in 1830.  Until that moment, it is conceivable that Huskisson’s only experience of locomotion had been the humble – and relatively slow – horse and cart.  Perhaps he was so taken aback by the dawning railway age that his survival instincts failed to prepare him for this sudden change in his environment.

In the case of my cycling anecdote, the appearance of thousands of Boris Bikes on London’s roads in the last few weeks has introduced a rather exciting random element to navigating the city streets: numerous spirited folk who probably haven’t been in the saddle for their entire adult lives.  I’m expecting a string of early casualties, both cycling novices and other road users coming into contact with them.  Paris went through a similar experience when it implemented its own bike share scheme three years ago.

In the future, adapting to our changing environment will be – as it has always been – critical to our survival.  This of course means adaptation to the impacts of climate change, resource depletion, water scarcity, migration, etc.  But it also means adapting to the technologies and systems we develop in an effort to mitigate those impacts.

Take electric vehicles.  It’s now almost universally accepted that their high energy efficiency and compatibility with the full range of sustainable carbon-free energy sources make EVs an essential piece of the sustainability puzzle.  But already one of the unique selling points of electric vehicles – that they’re incredibly quiet and therefore reduce noise pollution – has been portrayed as a grave danger for pedestrians, in particular the blind and partially sighted.  In response, Nissan is fitting a synthesiser to its forthcoming LEAF EV, to warn bystanders of its impending arrival.

I have to question whether implementing technology fixes atop technology fixes might be distracting us from the larger challenges facing us: we need to redesign our urban landscapes so that low-impact mobility modes that already exist (walking, cycling, and mass-transit) are preferred by the majority because they’re safer, cheaper, nicer, and more convenient than higher-impact alternatives.  At the same time, we will inevitably need to behave differently in order to thrive within our changed environment.  And along the way, we need to be prepared for a few bumps in the road. 

BP: Tainting by Numbers

This blog first appeared on the website of think tank and strategy consultancy SustainAbility

At the time of writing, it appears BP’s desperate attempts to contain the Deepwater Horizon spill are drawing to a close.  Although the oil seepage would appear to have been halted for good, it seems wholly inappropriate to label this a success.  As Exxon found with their Valdez spill (which was ‘only’ one-fifth the size of this episode), the full scale of the tragedy won’t be known for many years to come – and it may yet culminate in what would have seemed ludicrous at the start of this year: the disappearance of the BP brand.  

So many thousands of column-inches have been dedicated to the disaster over the last few months, what more can be written about the estimated 5 million barrels of oil that escaped into the Gulf of Mexico?  Well, I thought it might be interesting to visualise this headline number – 5 million barrels – in terms that are meaningful to the majority of folk left cold by the oil industry vernacular.  When numbers get serious, as Paul Simon sang, we see their shape everywhere.  But sometimes we need a little help to appreciate their scale and significance.  For instance, companies are fond of presenting their energy efficiency gains and greenhouse gas reductions as “like taking 175,000 cars off the road”, or “equivalent to closing a coal-fired power station”.  

With that in mind, here’s my take on 5 million barrels of oil.  I invite readers to continue adding to this list – it might even be a cathartic experience: 

5 million barrels of oil…

  • Amounts to 210 million gallons – or 800 million litres – of liquid black gold
  • Which is enough to fill 320 Olympic-sized swimming pools
    • or half fill the old Giants Stadium (which is more than the Red Bulls ‘soccer’ team ever managed)

5 million barrels of oil…

  • Would produce in a typical US refinery around 100 million gallons – or 350 million litres – of motor gasoline
  • Which is enough to drive a Ford Focus roughly 4.3 billion miles – or 7 billion km
    • or more than 9,000 return trips to the moon (assuming the roads were nice and clear)

5 million barrels of oil…

  • Would have fetched around $735 million at the July 2008 record high oil price of $147/bbl
  • Which is equivalent to ~18 hours worth of BP’s 2008 revenues
    • or the entire annual GDP of The Gambia

5 million barrels of oil…

  • Contain roughly 8 TWh of energy
  • Which is equivalent to 2 × 500 MW coal-fired power plants running non-stop at full capacity for a year
    • or the energy consumed annually by 320,000 average UK households

Big Oil’s electric shock

This article first appeared on the website of Better Place

A great indicator that disruptive innovations are nearing the all-important tipping point is when powerful incumbents start peddling nonsense masquerading as facts, to sow doubt about the viability of the emerging technology or business model.  There’s nothing particularly sinister about this.  By scrambling to erect roadblocks to new market entrants that threaten their hegemony, oligopolies are only doing what comes naturally to an organism under attack by an existential threat.  And if your job is to find, extract, refine, distribute and sell liquid fuels, then electric cars certainly qualify.

I’m thoroughly heartened when I read statements from Big Oil about the “many barriers” that must be overcome before electrons can make a significant dent in a mobility sector dominated by petroleum.  Heartened because as recently as two years ago I would have been hard pressed to find any commentary at all from the oil majors about transport electrification.  Back then, the tune was all about the prospects for second generation biofuels and the supposed holy grail that is hydrogen.  But today, barely an eyebrow is raised when senior executives from the likes of ExxonMobil or Shell claim that electric cars hold genuine future promise, but not before we decarbonise the power supply.  In other words: “You EV guys are very well meaning – and we wish you well – but until the world stops burning coal, allow motor manufacturers to continue tinkering with incremental efficiency gains while we drill, baby, spill!”.

The decarbonised grid storyline is becoming the new conventional wisdom.  And like much conventional wisdom, when examined closely it turns out to be patent nonsense, though on the surface it appears reasonable.  We begin to understand why it is flawed when we examine what I call the Four Truths that we can hold to be self-evident.  They hold whenever we elect to set fire to carbon-based fuels in order to benefit from motorised kilometres:

(1) Large is better than small

Megawatt (MW) scale plants are able to run hotter, therefore more efficiently, than the kilowatt (kW) scale engines that power motor cars.  This truth has its roots firmly in the basic laws of thermodynamics, which are not subject to revision.

(2) Constant load is better than variable load

Combustion facilities have an optimal operating efficiency that is achievable more or less continuously in a power plant.  In vehicles, the engine speed is seldom constant, as it is dictated by the variable driving conditions.

(3) Stationary is better than mobile

In practical terms it is far easier to manage, collect, and process combustion emissions from stationary plants than from mobile vehicle tailpipes.

(4) Few is better than many

The greater the number of emissions sources, the harder it becomes to do anything about them.

Notice that truths (1) and (2) relate to energy efficiency, while (3) and (4) are all about emissions control – this is why (1) and (4) are not merely different ways of expressing the same point.  And what should we conclude from these truths?  It is better to burn fuel – be it coal, crude oil, natural gas, or biomass – in hundreds of large, stationary power plants running at constant speed rather than millions of small, mobile internal combustion engines running variably.  Put differently, all else being equal electricity beats liquid fuels on energy efficiency and emissions control.

The real killer for Big Oil is that for years we’ve been led to believe that petroleum was too valuable to turn into electricity.  It’s true only if your core business is shackled to the liquid transport fuel paradigm.  From an energy efficiency, energy security and environmental perspective, crude oil is far too valuable to waste in automobiles.  The same goes for coal, natural gas, and biomass.  Biofuels – the tenuous lifeline of the liquid fuel company – break against the rocks here.  Far better to convert the biomass into heat and electricity to displace dirty coal.

So back to the conventional wisdom.  Let’s imagine a world in which 100% of our primary energy comes from fossil fuels.  Electric mobility wins, hands down.  But of course, we don’t live in such a world.  The world we live in has a steadily decarbonising electricity supply, while oil majors are forced to exploit ever-more exotic and energy-intensive forms of black gold.  They’ll have a helluva job making diesel or gasoline from wind turbines and solar panels.

The Future of Oil

This article, co-authored with John Elkington, first appeared in China Dialogue and was repeated on the Guardian Environment Network

The race for the world’s remaining oil reserves could get very nasty.  Recently, Nigerian militants announced their determination to oppose the efforts of a major Chinese energy group to secure six billion barrels of crude reserves, comparing the potential new investors to “locusts”.  The Movement for the Emancipation of the Niger Delta (MEND) told journalists that the record of Chinese companies in other African nations suggested “an entry into the oil industry in Nigeria will be a disaster for the oil-bearing communities”.  

Whatever the facts, the end of the first decade of the twenty-first century is likely to be seen by future historians as the beginning of the final chapter of a unique, unrepeatable period in human development.  Even oil companies now see the Age of Oil in irreversible decline – even if that decline spans decades. International oil companies (IOCs) increasingly accept that they must transform themselves completely – or expire – by mid-century.  

Superficially, the so-called “super majors” appear to be in good health. Fortune’s Global 500 list places the “big six” – Shell, ExxonMobil, BP, Chevron, Total, and ConocoPhillips – among the seven largest corporations in the world, as measured by 2008 revenues.  In third place, Wal-Mart stands alone as the only top seven company not dedicated to finding, extracting, processing, distributing and selling the liquid transportation fuels that drive the global economy, although few business models are as dependent on the ready availability of relatively cheap oil. 

Worryingly for such companies, 2008 may prove to have been the high water mark for the global oil industry, with geological, geopolitical and climate-related pressures now creating new market dynamics.  The oil question is now, more than ever, a transport question.  Cheap and reliable supplies of transportation fuel are the very lifeblood of our globalised economy.  So it matters profoundly that we are entering an era in which oil supplies will be neither cheap nor reliable. 

For the likes of Shell, BP, and ExxonMobil, whose rates of liquid hydrocarbon production peaked in 2002, 2005, and 2006 respectively, the current economic paradigm requires them to replace reserves.  Investors primarily value IOCs on this basis, as well as their ability to execute projects on time within budget.  A key problem for the IOCs is that petroleum-rich countries feel increasingly confident in the ability of their own national oil companies to steward their domestic resources.  So generous concessions once offered to IOCs in return for technical and managerial expertise are now deemed unnecessary.

The imperative to satisfy investor expectations fuels an increasingly risky growth strategy, which drives IOCs towards energy-intensive (and potentially climate-destabilising) unconventional oil substitutes, such as tar sands (in Canada), gas-to-liquids (in Qatar), and coal-to-liquids (in China and elsewhere).  These pathways are not chosen as ideals: they are more or less reflexive responses to external market pressures.

Meanwhile, the uncomfortable fact is that our economies are addicted to liquid hydrocarbon transport fuels, the consumption of which creates a catalogue of negative side effects.  And we cannot hope to address this addiction by way of our “dealers” developing even more damaging derivatives of the same drug. 

As if that were not enough, there is the hot topic of “peak oil”, defined as the point at which global oil production reaches a maximum rate, from where it steadily declines.  The basic principle is uncontroversial: production of a finite non-renewable resource cannot expand endlessly, and this has been demonstrated in practice at national level all over the world.  The heated debate centres on the point at which the peak in global oil production is likely to be reached. 

“Early toppers” argue that the peak has already been passed, and that the world will never produce more than 85 million barrels per day.  By contrast, “late toppers” point to the huge scale of unconventional reserves – for example, Alberta’s tar sands resource is vast – that remain untapped, as well as the potential bounty locked away in frontier regions such as the Arctic Ocean, where global warming is opening up new areas for oil and gas exploration. 

Unfortunately, what matters is not the absolute size of these unconventional and frontier resources, but the rate at which they can be developed and brought to market.  By definition, this is the “difficult” oil.  Production rates are determined by a series of significant financial, social, and environmental constraints that raise grave concerns for the viability of a global economic system made possible by liquid transport fuels. 

At the same time, leaders of all the major economies finally acknowledge what scientists have long been warning: to avoid catastrophic climate-change impacts, the global average surface temperature increase must be limited to 2° Celsius compared with the pre-industrial era.  To stand any reasonable chance of avoiding a 2° Celsius rise, our best understanding of the climate change science suggests that global greenhouse-gas emissions must peak within the next five to 10 years, and then decline by more than 80% on 1990 levels by 2050.  Realistically, meeting this requirement will demand that we engineer a transition to a zero-carbon energy system by mid-century. 

So what might a zero-carbon energy system look like?  As well as dramatic improvements in the energy efficiency of buildings and appliances, and massive deployment of sustainable renewable energy technologies, we will no longer be allowed to burn fossil fuels without capturing and sequestering the carbon dioxide emissions.  This implies that we must restrict our use of fossil fuels to stationary facilities, such as power plants, where carbon capture and storage (CCS) is practical (see “Outlook and obstacles for CCS”).  Strikingly, a zero-carbon energy system will also mean that no liquid hydrocarbon fuels, with the exception of biofuels, can be consumed in mobile applications such as transport. 

This does not make pleasant reading for international oil companies.  Their core business today may be described as: digging geological carbon resources out of the ground, converting those resources into liquid fuels, then marketing those fuels to consumers who set them on fire in internal combustion engines to move around.  By 2050, these activities will all be considered to be strikingly primitive. 

Why $40 per barrel is no cause for complacency

This article, co-authored with David Strahan, first appeared on the website of think tank and strategy consultancy SustainAbility

These days it is comforting to have one thing not to worry about.  As the world teeters on the edge of a full-blown depression, and business is crushed between slumping sales and seized-up credit markets, at least the oil price is in retreat.  From an historic high of $147 per barrel last July to around $40 today, the price of crude has collapsed so quickly it is tempting to believe it means the end of the energy crisis; that the spike was just some speculative aberration; and that all talk of ‘peak oil’ is so 2008.  

It is true that the horizon has been utterly transformed.  Last year the big issue keeping many company bosses awake in the small hours was rising energy bills – this year all manner of competing spectres haunt their sleepless nights.  But to relegate oil simply because the price has slumped is to misunderstand the causes of the recent spike and collapse, and therefore the future outlook for energy prices and what it means for business and the climate.  

It is commonplace to blame $147 oil on booming demand in China and India, but that is only one half of the equation.  The other is that global oil production between early 2005 and mid 2008 was stagnant, at around 86 million barrels per day.  So for three years the oil supply was a zero sum game: the East consumed more, and with production static, the price of crude had to rise to force the West to consume less.  Under the circumstances the oil price was a one way bet.  But in the past, rising demand has always been met by increased output, so the key question is: why did global oil production fail to grow?

Analysts divide the oil producing world into two halves: OPEC and the rest.  Non-OPEC output has underperformed against forecasts every year this century.  Because it depends on production from regions that are increasingly mature, non-OPEC output is widely expected to peak by around the end of this decade.  But OPEC also failed to raise its game, and this is unlikely to have been the result of deliberate market manipulation.  At $147 per barrel, the incentive to pump more oil rather than risk destroying demand would have been irresistible, if it were possible.  In fact, there are good reasons to suspect that the cartel’s members have been exaggerating the size of their reserves for decades (most observers attribute the sharp jump in proved reserves of several Middle Eastern members during the 1980s to a dispute over production quotas, which created an incentive to overstate reserves).  So OPEC’s collective inability to respond to record prices by raising production may suggest its output is approaching its geological limits.  If we have not yet arrived at the oil peak, we seem at least to be in the foothills.

The subsequent oil price collapse is just as misunderstood as the spike that preceded it.  Of course, the price is falling because demand is shrinking, and that’s due to the recession.  But what caused the recession?  The obvious culprit is the banking crisis, which has clearly been extraordinarily damaging.  But so too are oil price spikes; every major recession since World War II has been preceded by one.

It’s not hard to see why: the global transportation system – moving goods, workers and consumers around, thereby enabling an increased level of economic activity to take place – is almost entirely fuelled by crude oil.  When the price of oil soars, almost all aspects of modern daily life become more expensive.  And as the oil exporters accumulate more of the world’s money, so everyone else has to make do with less.

The 2008 spike not only set a new record high oil price, in both absolute and inflation-adjusted terms, but it was also very sudden, with the price almost trebling in around eighteen months.  So it seems highly likely that even without the credit crunch, the oil market fundamentals would have been sufficient to push us into a global recession.

Far from being a source of relief, today’s relatively low oil price is as damaging in its own way as the spike.  Oil companies around the world are cancelling or delaying investment in planned production projects, because they are uneconomic at current levels; $60 billion of investment in the Canadian oil sands was shelved in the three months to January alone.  At the same time, existing global production capacity is constantly shrinking, as oil fields age and reservoir pressures decline.  The International Energy Agency (IEA) estimates that capacity is currently shrinking by around two million daily barrels per year, and that this decline rate will accelerate in future (World Energy Outlook 2008).  Oil production projects have long lead times, so the combination of declining reserves and limited investments means there is a very real danger that when economic growth returns, oil supplies will be inadequate to meet demand, and the price will spike once more.  And the cycle starts all over again.

Extreme volatility in the oil price will of course mean the same for gas and electricity.  Natural gas purchasing agreements are tied to the price of crude, meaning that extreme volatility in the oil price means the same for gas and electricity – as has been demonstrated in the past two years.

This is likely to wreak havoc with company budgets, and share valuations – at least for those companies that do not take steps to reduce their exposure.  A recent analysis of the correlation between energy costs and the share valuations of logistics companies showed that financial markets can reward fuel thrift and punish profligacy.  A 10% rise in energy costs was credited with precipitating a 10 cent fall in FedEx’s share price, but a rise of 3 cents for UPS.  It turns out that fuel-per-package-delivered is a key performance indicator for UPS, for which managers are held accountable.  So in addition to carbon reduction, cost cutting, and resilience to short term supply disruption such as the UK fuel duty protests of 2000 (which are likely to become more frequent as the oil supply tightens) there is now yet another reason for companies to eliminate their dependence on oil.

When the next spike occurs depends crucially on the depth of the recession – or depression – although analysts such as Barclays Capital forecasts that in the fourth quarter of this year the oil price will average $87 per barrel, rising to $96 twelve months later.  But for as long as the oil price stays low, it’s not just bad for the future oil supply, but also for investment in renewable electricity generation, where the economics are judged against the cost of electricity from gas fired power stations.  The impact is worsened by the low price of allowances in the EU Emissions Trading Scheme (ETS), now languishing at around 10 EUR per tonne of CO2, where most energy analysts believe it is impotent as a stimulus for green energy investments.  (The economic slowdown has thus highlighted one of the inherent flaws in the existing EU ETS: emissions allowances are allocated in advance, on the assumption that economies will grow.)  Major projects such as the London Array offshore wind farm are in the balance, while plans by the legendary oilman T Boone Pickens to build the world’s largest wind farms in Texas have already been put on hold.  Paradoxically, one of the indirect impacts of falling oil consumption is that investments in green energy technologies are less economically viable.

If we are still in the foothills of peak oil, there is good evidence to suggest we will reach the summit well within most companies’ planning horizons.  We are clearly already in deeply unsustainable territory: discovery of oil has been falling for over forty years, while consumption has risen inexorably, save for a couple of brief recessionary interludes.  Today, for every barrel of oil we discover, we consume three; annual production is already falling in over sixty of the world’s 98 oil producing nations.  Many oil companies and forecasters expect trouble at least by the middle of the next decade – whether or not they strictly accept the term ‘peak oil’.  Shell expects global production to plateau, Total’s chief executive, Christophe de Margerie, says the world will never produce more than 89 million barrels per day, and the IEA says we face a “supply crunch”.

Given the prominence of the peak oil debate, no CEO can claim they were not put on notice about this fundamental threat to their business, irrespective of their role within the economy.  It is hard to imagine any sector prospering today in the absence of a functioning transportation system.

The good news however is there is absolutely no shortage of energy.  The sunlight that hits the earth in an hour contains enough energy to run the global economy for a year.  But while solar, wind, wave, tidal and geothermal energy can all be harnessed to generate clean electricity, they cannot hope to solve the oil crunch – and with it many of the environmental consequences of our crude oil addiction, not least climate change – as long as the global economy runs on liquid hydrocarbon fuels.

There is scant evidence that governments have awoken to the scale of the peak oil crisis, the impacts of which will surely be felt well before the worst effects of climate change start to kick in.  Oil market psychology lurches between two extremes: complacency and panic.  What we need is to find the middle ground: a sense of urgency and an appetite for action commensurate with the challenge, and to sustain it even when oil prices are low.  The trick for corporate leaders will be to figure out what the post-petroleum economy is going to look like, what technologies and policy frameworks will be required to expedite the transition, and what risks and opportunities will emerge within the changing regulatory environment.  In short, they will need to plan how to survive – or better still, profit from – the inevitable transformation.