When global crude oil sources are ranked and graphed by size and production cost, lignite coal is among the biggest, the most expensive, and the last one on the list. Lignite and Solid Energy need peak oil; it’s a lifeline for them, not a threat

Solid Energy and the mining industry would like you to believe lignite will “cushion” ordinary New Zealanders against oil price shocks. There’s heady talk, of diesel fuel self-sufficiency, and a bit of mildly misleading talk, about “keeping prices at today’s level”.

The industry’s interest in lignite tells us peak oil is near, or here. If not for the coming oil price shocks, there would be no business case for lignite to liquid fuel. It has the largest production costs. It would be priced out of a cheap oil market.

For Solid Energy, peak oil is a lifeline. For the rest of us, it ranks among New Zealand’s biggest economic threats. Contrary to what the industry would have you believe, lignite is not a “cushion”. Not only does it fail to fix the economic problem: it adds to the environmental one (which of course has economic implications, too).

I asked retired Greens co-leader Jeanette Fitzsimons when she first started talking about peak oil. “This issue has driven my work now for 30 years,” she replied:

I first talked about it in the seventies in relation to the two oil shocks of 1973 and 1979 … It also drove my work in the eighties at Auckland uni on biogas and other renewables. In the nineties the price of oil dropped to $10/bbl and I only talked about it privately because until the price rose again no-one was going to listen … [she went on, to give several other post-2004 examples, of her efforts as an MP to examine the issue].

She persisted, despite being ignored, marginalised, politely snickered at, or, as recently as six years ago (such as this exchange from a 2004 oral question), simply not understood:

Jeanette Fitzsimons: What does the Minister understand by the term “peak oil”, and when does he expect it to occur?
Hon Dr Michael Cullen: I have to confess that, for once, the member has floored me; I do not understand what is meant by the term “peak oil”.

Now, a Parliamentary research paper, The next oil shock? (October 2010) says the future is about to arrive.

It sums up other authorities, of which there are many: Dr Fatih Birol of the International Energy Agency, Lloyds of London, a UK Industry Taskforce on Peak Oil and Energy Security (“The oil crunch: a wake-up call for the UK economy”), the US Department of Energy, a bunch of scientists here, the big oil companies (examples including BP and Shell) … and that names only a few.

International, wide-ranging, credible, expert government and industry sources prove what some of us already knew: that our somewhat earlier Kiwi source was serious and credible, too.

It sketches the grim economic features of peak oil: a global supply crunch, falling short of rising demand; oil price shocks; rising prices for everything else, driven by transport fuel dependency (“when the price of oil increases, the cost of nearly all economic activity rises”); falling consumption of other stuff, because of our inelastic demand for fuel and the rising prices; continual recession.

It predicts this from 2012; but recalling 2008 prices, but for the global financial crisis, it may in fact be here now.

“The world may be entering an era defined by relatively short periods of economic growth terminating in oil price spikes and recession,” it concludes.

The paper ranks and graphs conventional and non-conventional world crude oil sources, by volume and their cost of production [p 2].

Even at the peak of conventional oil (1.3 trillion barrels used, with an estimated 1.7 trillion left in the ground, for which extraction is more difficult), that picture shows how we've hardly scratched the surface of all possible oil sources: an estimated further 6 trillion barrels, with non-conventional sources including the Arctic, tar sands, deep water drilling, and coal to liquid fuel.

It perhaps explains the misplaced confidence that oil will never run out, and we have ages to adapt.

However, the path from conventional to non-conventional sources comes at rising cost, starting now.

Along with coal to liquid fuel, New Zealand’s oil reserves are ‘non-conventional’: challenged by deep difficult water (eg, in the Great South Basin) and geographical isolation.

Gerry Brownlee’s plans for petroleum, and Solid Energy’s lignite plans, are a sign of the time. As depicted, coal is a massive resource that dwarfs conventional oil sources, but it is also the most expensive, and ranked last:

the IEA estimates lignite to liquids production costs are US$60-$110 per barrel, so high oil prices are needed to make lignite to liquids viable.

If it wasn’t for peak oil, our untapped oil reserves would make no business sense, particularly not lignite. And since most of the non-conventional sources, again lignite in particular, are massively more environmentally damaging than conventional crude, it was never going to make environmental sense, and particularly not now.

Industry spokesperson, Straterra's Chris Baker said, in response to the report I’ve been quoting, that lignite would help “cushion New Zealand”. Solid Energy’s annual report this year rationalises it in terms of “keeping prices at today’s level”, as in:

79% [of people polled by Colmar Brunton] think that it would be good if coal could be converted to transport fuel to keep prices at today’s level.

They may indeed “think that it would be good”, but it won’t happen, with lignite or without it. The “cushion” is a disguise:

  • At “today’s level” of $70 to $80/bbl, lignite costing $60/bbl to produce might be in the market, just.
  • A cynic might speculate that a lignite to liquid fuel producer, subject to up to $110/bbl production costs, would want the price to rise a little more, to hedge his bets and boost profitability — not stay at “today’s level”, at all.
  • Crude is a global commodity. New Zealanders will pay the world price: the rising price that is needed by a producer, to make lignite economic.
  • Without coal to liquid sources, the supply crunch would be worse. So it’s not untrue to say it would help keep prices down, relatively speaking (just not relative to today).
  • But as prices rise, so will the economy of cleaner technology and fuels, not just lignite.
  • Oil probably peaks too soon, for the new technology and fuels.
  • Domestically-produced lignite would make a nicer NZ Inc picture: tax, dividends, balance of payments and so on.
  • Hey! NZ Inc = Saudi Arabia, with bonus water!!
  • The window on the big environmental picture and the news for the ordinary New Zealander is, however, pretty bad.
  • We can see, already, climate damage done by conventional sources.
  • If you look at that same graph, in terms of the mammoth potential climate damage (taking into account not just the non-conventional sources’ volume, but their adverse impact — double or triple the adverse impact, in case of lignite) it is scary, scary stuff.

We should all be concerned about peak oil, but some of us are perhaps a little more concerned than others.

Lignite is a great idea for Solid Energy. This peak oil ‘opportunity’ offers “coals of New Zealand” a lifeline. But it's their own future, that they're insuring with this proposal, not ours.

Comments (9)

by Petone on November 10, 2010
Petone

Great post thanks, was thinking of recommending Clint’s paper for a Pundit article.  It appeared on morning report the other week..   http://www.radionz.co.nz/audio/national/mnr/2010/10/14/parliamentary_rep...
.. but nobody at Radio NZ appears to have picked up the ball since.  I thought it would have been an obvious follow-up to Kim Hill’s interview of Farouk al-Kasim on Sept 25.  As a senior veteran of two of the world’s major oil provinces Farouk probably knows more about oil than anyone in this entire country, and when she asked his view of peak oil, his reply: ”Inevitable.” should be a major red flag to anyone working on energy or economic policy.  Policies like building more motorways for example, or any policies predicated on economic growth.

I disagree with one small point in the post.  Crude is not completely a global commodity.  Many major producers eg Saudi Arabia, Iran, Venezuela, Mexico allocate much of their production for subsidised domestic sale, leading to inflated domestic consumption and reduced amounts available for export.  Other countries like China are sewing up reserves around the world with long-term fixed-price contracts. This means not all of the world supply is fungible, so we pay even higher prices when there is a shortage.  It is a great pity that we are now busy selling off what little oil NZ has, when it is going to be much more useful to us later in times of scarcity.

by Claire Browning on November 10, 2010
Claire Browning

Always happy to defer to a man who listens to Morning Report, knows words like 'fungible', and uses them in a sentence.

by Claire Browning on November 10, 2010
Claire Browning

More substantively (if not at all articulately):

It's interesting, isn't it, the different philosophies about ... (I was going to say protectionism, but that isn't right) ... domestic security. China securing food supply is another example. You'd think it's just basic public policy stuff, but no -- we're still all about the export-at-any-cost-and-let-it-trickle-down. Which of course, it doesn't, except the price of blocks of cheese, or whatever.

by Petone on November 10, 2010
Petone

Next time I might even capitalise morning report.

And thanks for the link to Jeanette's article (under the "double" link, for anyone interested), she's always been miles ahead of the pack. The only real way to offset emissions is to sequester carbon in the ground, and by far the easiest way to do that is to not dig it up in the first place.

 

 

by James Samuel on November 11, 2010
James Samuel

Dropping by to quickly offer this link to a short video of Jeanette talking about this issue and the current government energy strategy ... http://www.youtube.com/watch?v=8uYeqTGRT8E

by Claire Browning on November 11, 2010
Claire Browning

Next time I might even capitalise morning report ...

No, really, I hardly noticed; I was so bloody impressed by 'fungible' and, um, distracted, by the need to look it up ...

by Denis Tegg on November 12, 2010
Denis Tegg

As you highlight, the NZ Parliament Report sketches "the grim economic features of peak oil" and concludes “The world (read NZ) may be entering an era defined by relatively short periods of economic growth terminating in oil price spikes and recession,”

kinda serious stuff huh? What I wonder could be more newsworthy or politically charged than a predictable and imminent event which could force NZ into a series of recessions?

Yet apart from a one-off mention on Morning report and the the odd provincial newspaper, the report was ignored by all of our main-stream media. There was no push back from big business other than the soothing "we are cushioned" statement from Straterra and complete silence from Labour and National. The Government Defence White Paper totally ignores the threat of peak oil to global security while the US and German military both warn it's a major issue.

It seems we are indeed "cushioned" in this complacent kiwi bubble  - that we are somehow immune to global oil shocks and their grim economic effects.  Maybe if we don't talk about it and pretend its not happening, it will go away?

Which is why your post is so welcome.

by Claire Browning on November 12, 2010
Claire Browning

Cheers Denis. And I'm sorry; I meant to work in a link to your blog somehow, and then I forgot, so thank you.

Yet apart from a one-off mention on Morning Report and the odd provincial newspaper, the report was ignored by all of our main-stream media ...

Better keep reading Pundit!

by Petone on November 12, 2010
Petone

"The next oil shock?" report gets a mention over at Permaculture in Oz:
http://permaculture.org.au/2010/11/10/peak-oil-the-debate-is-over/
In fact they've hosted a copy themselves, presumably in case it disappears from the parliamentary library.

I like the way Clint phrases it in the report, that oil is not an ordinary good:
"To put it another way, because oil is central to the global economy, the world’s maximum capacity to supply oil acts as a cap on world economic output, one that the global economy may hit repeatedly in coming years."

You'd think this is fairly obvious but so far no NZ economists, main-stream commentators or government officials seem to grasp the point.  The ramifications are of course frightening to conventional economic thinking.. that at some point quite soon, we have to plan for a capped economy, capped tax-base, and thus capped pretty much everything else.  Every year our government runs round with a frontier mentality is a year wasted in that transition.

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