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‘Will be a bit of a fire sale to unload hydrocarbon assets’

Amory Lovins speaks on issues including an undeclared coal cartel, IEA’s record in forecasting trends
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First Published: Sun, Nov 18 2012. 11 17 PM IST
Amory Bloch Lovins says oil is becoming uncompetitive even at low prices before it becomes unavailable even at high prices.
Amory Bloch Lovins says oil is becoming uncompetitive even at low prices before it becomes unavailable even at high prices.
Updated: Mon, Nov 19 2012. 12 03 AM IST
New Delhi: Amory Bloch Lovins, chairman and chief scientist at Rocky Mountain Institute, a Colorado, US-based non-profit organization, is a proponent of renewable energy. Lovins was in New Delhi last week to speak at the Hindustan Times Leadership Summit and spoke in an interview on wide-ranging issues from an impending fire sale of hydrocarbon assets acquired by India and China to an undeclared cartel of coal exporters and even the bad record of International Energy Agency (IEA) in forecasting trends. Edited excerpts:
There is a perception of increasing rivalry between India and China for quest of energy resources, thereby inflating prices. Where will this quest lead these two major economies?
At some time, both countries will realize that they don’t need those resources because they have better and cheaper resources to do the same things and then there will be a bit of a fire sale to unload assets that they acquired at inflated prices. It will be interesting to watch all the traders trying to fit through the exit at the same time.
When do you see this happening?
It could be a decade but it could also come earlier. It is like many commodity bubbles. It is like the rare earth scare...I will give you one indication. China in September produced around 8% less coal-fired electricity than previous September, even though the economy had grown 7% or 8% meanwhile. Coal-fired electricity production in the first quarter was more than reversed by the shrinkage in the second and third quarter even though the economy grew, which most countries would call a robust growth—slower than usual for China but still quite rapid. And this is the first time that this has ever happened outside major natural disasters and national holiday periods. So, what appears to be going on is mainly the rapid growth of Chinese efficiency in renewables.
It’s interesting that you say that this wake-up call will happen within 10 years or so. In the light of it, what happens to big energy projects such as the gas pipeline project from Turkmenistan to India through Afghanistan and Pakistan, also dubbed as the peace pipeline?
They would fall under increasing competitive pressure to serve much less robust markets than had been projected when they were built. Some of them may get into financial troubles. It’s not that all the demand goes away overnight, but the long-term trend will be very different than the destiny originally foreseen.
It may be happening for China, but what about India?
Those who don’t see the big picture will be most startled by it, I suppose. We already hear of some major players in the Indian electricity industry realizing that their way forward not only in the rural areas is super-efficiency, distributed renewable and micro grids.
For India, coal has always been projected as the mainstay of the energy paradigm. According to IEA’s latest energy outlook, India would become the world’s second largest consumer of coal after China, playing a major role in international energy pricing. Your views?
China and India have both been importing a lot of coal and planning to import much more because of their logistics problems, both mining and delivery of coal. The world’s coal export market is served by...it is rather concentrated. Six countries control four-fifth of it. Any one of them can move the market. They realized rather recently that they can charge more like oil parity, so they doubled and trebled the prices. Whereupon these big government-sponsored coal plants got caught in the price-cost squeeze.
And having to choose whether to subsidize electricity output or coal input forever, the government decided to support the coal side and make Coal India Ltd sell at low costs and it became obvious to everybody that there was no business case for more coal plants, and since then, around 42 gigawatts of coal plants, which were planned, have been mothballed. This is an extremely important development and a very healthy thing for India.
With a significant portion of crude oil supplies coming from outside OPEC (Organization of the Petroleum Exporting Countries), do you any time see a resurgence of OPEC’s importance on the world’s energy scene?
In effect, there is now an OCEC (Organization of the Coal Exporting Countries) as well, which is an undeclared cartel of coal exporters exercising their market power to double or treble the price, except that they have killed their markets by doing so.
They are Australia, Indonesia, the US; they are the usual suspects. They are simply exploiting the room to price at oil parity and Indonesia has even said that it will tax coal exports heavily and then in two years there wouldn’t be any.
I think they have killed the goose that laid the golden eggs in a way because the changes in Indian and Chinese energy policy in particular take away their markets and they price themselves out of the market. OPEC has done the same thing. The US is becoming a major oil producer. This puts OPEC in a very difficult position and already it was going to preside over a stagnant and then declining market.
I don’t care what the IEA model says about that. I can tell you that the automakers round the world have strategic intent to do electrified ultra-light, carbon-fibre autos, the first of which enter mass production next year in Germany for Volkswagen and BMW.
IEA’s is an econometric model with all its strength and weaknesses. Econometric models basically steer your car by looking in the rear-view mirror. They assume that the future will be like the past, only worse. In fairness, there are many excellent people at IEA and they do some things very well. I wouldn’t say forecasting is one of them. They have a very bad record in forecasting renewables in particular, systematically underestimating progress both in the short and long terms.
While the Indian government has been talking about electricity to all for a long time, there still is a significant part of the population that doesn’t have access to electricity. How does this reflect on the policy planners?
There is certainly a huge unmet need and a huge lost human potential that must trouble the conscience of many Indians.
IEA has predicted in its latest energy outlook that crude oil price will rise to $215 per barrel in nominal terms in 2035. Your take on that?
Well, if you follow the unconventional economic model, that’s what you get. Let me tell you a story. In 1850, most American houses were lit by whale oil lamps and we exported a good deal of fuel oil to Europe, but whales were getting shy and scarce. And during 1850s as the price of whale oil went up, it elicited competition mainly at the time from synthetic fuels made from coal, both oil and gas.
But, in 1859 (Edwin) Drake struck oil in Pennsylvania and (John Davison) Rockefeller started building refineries. In the nine years before Drake, whale oil had already lost at least five-sixths of its lighting market to the competition, to which the whalers paid no attention. They were sounded to run out of customers before they ran out of whales. So the whalers were soon reduced to begging for federal subsidies on national security grounds, and 20 years after Drake, Edison invented the electric light, and then the fuels went away.
Will the crude meet the same fate?
Clearly what happened to whale oil is what is happening to oil today. Oil is becoming uncompetitive even at low prices before it becomes unavailable even at high prices...the Stone Age didn’t end because we ran out of stones. So, $215 per barrel sustained price scenario doesn’t make sense to me because even today’s prices have already elicited and put in train innovations that can get the world off oil at for about $25 per barrel. You don’t get markets clearing at $225 if the cost of replacement is $25.
What about Iran and the increasing tensions given the fact that the war against Iraq had oil as the base of it as no weapons of mass destruction were found? Is this a continuation of American adventurism?
I don’t think that there is any of that (weapons of mass destruction) left. That was an artefact of the Bush administration and this administration is very much cautious and fact-based.
What about then the new sanctions imposed on Iran?
Well, it adds a wild card dimension that Israel could attack Iran. The whole Middle East is a tinder box, even more than usual.
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First Published: Sun, Nov 18 2012. 11 17 PM IST