Introduction to Energy Scenarios for Ireland

Overview

“Oil is like a fickle lover – you know you are going to have to live without her at some time” Dr. Fatih Birol, the International Energy Agency’s chief economist told a conference on Ireland’s energy security at Dublin Castle in February 2005.

Birol made this comment because the International Energy Agency (IEA), like everyone else, accepts that the Earth’s oil and gas resources are finite and, while they may never be totally exhausted, at some stage in the future the amount of energy that the world will get from them each year will reach a peak and then begin to decline. There is also universal agreement that this production peak will have far-reaching effects on the way we live our lives. This is because energy use is fundamental to everything we do and the present level of global output is only possible because fossil fuels are available to power our production and distribution systems. Figure 1, an IEA graph, shows the extremely close relationship between overall world output and world energy use. The existence of this relationship means that, when oil and gas output begins to decline, world output will begin to decline too unless replacement sources of energy can be developed sufficiently rapidly to make up for the shortfall. More than that, unless the replacement sources are expanded by more than the shortfall, the world economy will cease to grow at anything like its current pace.

All this is non-controversial. Where the experts disagree is when the peak outputs of the two fuels will occur. Here is a selection of their recent projections for oil.

The main reason for the big difference in timing between those who think that oil deliveries will peak in the next five years and those with a much longer time horizon is that the first group are mainly petrogeologists who know that the oil has to be found before you can extract it and that it is not worth using more energy for extraction than the oil will deliver when burned. The other group are economists like Dr. Birol who argue that what it is possible to extract is not fixed but determined by

“the mix of knowledge, technology and investment that sustains the process of exploration and production sufficiently to meet short- and medium-term demand expectations. Reserves depend on the interaction of this process, government policies and, finally, the price people are willing to pay for oil products. Since we cannot know future technology or prices, we cannot quantify future reserves. This should not be a concern, since it is these processes that are important. Ultimately, as [Morris A.] Adelman commented, ‘oil resources are unknown, unknowable and unimportant’ “

It is no business of ours to take sides between these two positions. Instead, we will use them as the basis of four scenarios or story-lines in order to explore how life in Ireland might be affected should either of them prove to be reasonably correct.

Natural Gas Peak

Alternative Gas Peak

Far fewer experts have projected when the peak in gas production might occur than they have for oil but here is a graph from the Association for the Study of Peak Oil. It shows that ASPO expects the world’s output of conventional gas to cease to increase until around 2012, although a limited amount of extra gas will become available after that from unconventional sources, like methane from coal mines. Around 2040, however, the total supply of gas from all sources will fall sharply.

Other experts think that there will be no plateau with the result that the peak of gas production will come much sooner, as shown in this graph from a recent issue of the Oil and Gas Journal which puts it at around 2020.

Again, we don’t have to take sides. What we can say is that the total amount of energy that the world will be able to obtain from oil and gas together can be expected to begin to decline at some point in the next fifty years. We can add that serious falls in global output will result unless the world’s economies have either developed replacement energy sources by the time the decline sets in or have learned to run their affairs using much less energy. Or both.

The timing of the global oil and gas peak in relation to Ireland’s preparedness for it will determine the extent to which Irish output and incomes fall. We are in no better position than most people to say whether the peak will occur in two years' time or, as the IEA suggests, in thirty. This does not matter as far as this study is concerned as we have developed a pair of scenarios based on an immediate oil peak and another set on a thirty year one. The actual outcome is likely to lie somewhere between these two bounds.

The effects of the oil and gas peak on Ireland will be determined not just by its timing but also by the attitude the government takes. If there is a reasonable time to the peak, will the government be proactive and create the circumstances in which consumers and the other components of the Irish economy can prepare? Or will it say "it is up to the business sector" and do little or nothing? Similarly, if the peak takes place soon, will it do all it can to assist the re-adjustment process or will it stand back and leave it to the market alone to decide the country's course? This gives us our two pairs of possible scenarios.

Scenarios

In one pair, the petrogeologists prove to be right and the oil peak occurs within the next two years. Oil prices rise sharply, as they are already doing as we write, and the rise pulls gas prices up too, which is also happening. In one of the scenarios, Ireland has a pro-active government, and more importantly, is part of a pro-active global community which does what most nations have done in wartime when a vital commodity got scarce and introduces a system under which oil and gas is distributed by rationing rather than by the market. This is the Fair Shares scenario which we compare with what we call the Localisation scenario for reasons which will become apparent. Under this, all nations rely on the market to determine who gets the remaining gas and oil, with the richest naturally getting the most and the poorest being squeezed out.

Scenario Summary

The other pair of scenarios assume that the combined oil and gas peak does not occur for 25 years. In one of these, we have a proactive government which accepts that the peak will happen and does everything it can to enable the country to prepare for it. We call this the Enlightened Transition scenario. In the other scenario, we have a government which believes that it is entirely up to the market to determine if and how Ireland should respond to some hypothetical future energy shortage. We call this the Business as Usual scenario as it assumes that the economy will continue to develop on current lines at least until the oil and gas peak gets very near.

What we are hoping the four scenarios will do is establish the limits within which Ireland’s energy future will probably lie. No government is going to be as pro-active as that in the Enlightened Transition scenario or, we hope, as laissez-faire for as long as the one in the Business-as-Usual one. The future will probably lie somewhere in between. Similarly with the two immediate peak oil scenarios – there probably won’t be as much international co-operation as envisaged in the Fair Shares projection but we hope that the market won’t be as dominant as in the Localisation case.

Assumptions

We have ruled out certain events happening within the 50-year time horizon of the four scenarios, not because we think that some very real threats to our current way of life can be ignored, but purely to simplify matters. We have assumed, for example, that

• Climate change has no impact beyond an increasing frequency of floods and storms. If a major climate change occurs, such as the Gulf Stream ceasing to run, all bets are off.

• Disease or some other catastrophe does not wipe out a significant proportion of humanity.

• Powerful countries do not wage war over oil, water or other supplies leading to a worldwide destabilisation.

Our other major assumptions are:

• Ireland continues to work within the framework of the EU
• Net foreign direct investment in Ireland ceases after 2012. There would still be in inflow of capital but it would be matched by an outflow from Irish residents investing abroad. The effect of this assumption is to require that Ireland’s imports and exports balance each other and that a capital inflow does not make it possible to import more energy than would otherwise be the case.
• The world begins to take climate change more seriously and its actions to control emissions cause fossil energy prices to increase by 3% a year above trend in the post-Kyoto protocol period following 2012. Note that all energy prices are expressed in relation to wages. In other words, to eliminate inflation from the discussion, we assume that wages stay constant and that the price of energy and other goods and services move up and down in relation to them.
• Energy is required for all forms of production. If energy prices rise, we therefore assume that the price of every product rises by the extra cost of the energy used to make it. Of course, technological changes have the potential to reduce energy use and we will be asking panels of people drawn from all sections of Irish life to tell us what such changes might be. We will then use a computer model to calculate what effect the expected technological changes might have on the relative prices of each sector.

Finally, we have assumed the most positive outcomes for each scenario. Each set of circumstances could lead to far worse results.