Energy Shift: Game-Changing Options For Fueling The Future (Future Of Business Series) (BUSINESS BOOKS) - Softcover

Spiegel, Eric

Softcover

ISBN 10: 0071508341 ISBN 13: 9780071508346

Publisher: McGraw-Hill, 2009

Synopsis

Transportation fuel and electric power prices,energy security, and climate change have beenon every business leader’s mind. Recent shiftsin scientific knowledge, public awareness, andpolitical will are causing governments to takemeaningful regulatory and legislative action.And multinational corporations are factoring newrealities and uncertainties into their strategiesand operations.

Energy Shift: Game-Changing Options for Fuelingthe Future is a one-stop resource for busy executivesand senior policymakers who need a reliable,accessible guide to the big strategy questionssurrounding energy.

Supported by the latest studies, articles, andresearch conducted by Booz & Company, EnergyShift is a visual guide that puts the most up-to-dateinformation on the future of energy in ahandy, easy-to-use format. It provides essentialknowledge on the forces shaping the energy industry,alongside practical advice for making thetough decisions that leaders in all walks of lifewill face.

Energy Shift helps you distinguish media-drivenmyths and misconceptions from the actual effectsthe energy crisis will have on a variety of businessesand organizations―from the smallestlocal enterprise to the largest multinational.

Additionally, this forward-thinking handbook discussesthe new opportunities that will arise forinvestors, corporations, and governments in suchareas as

• Oil
• Coal
• Natural gas
• Nuclear energy
• Transportation alternatives, includingbiofuels, electricity, and hydrogen
• Renewable energy sources, including wind,solar, geothermal, and biomass
• Carbon reduction

By 2030, the way the world uses energy will bemassively transformed, and along the way therewill be daunting challenges and abundant opportunities.The most savvy business leaders will bethe ones already prepared to act, not react, usingthe information found in Energy Shift.

About this title

About the Authors

Eric Spiegel is a Senior Partner in Booz & Company’s McLean, Virginia, office and leads the firm’s work for global energy, chemical, and utilities clients.

Neil McArthur is an Amsterdambased Senior Partner, member of Booz & Company’s Global Executive Committee, and leader of the firm’s business in Europe.

Excerpt. © Reprinted by permission. All rights reserved.

ENERGY SHIFT

Game-Changing Options for Fueling the FutureBy ERIC SPIEGEL NEIL MCARTHUR ROB NORTON

The McGraw-Hill Companies, Inc.

Copyright © 2009 Booz & Company Inc.
All right reserved.
ISBN: 978-0-07-150834-6

Contents

Chapter One

LOOKING BEYOND UPHEAVAL

ENERGY PRICES are extraordinarily volatile, and have recently hit record highs. Economists worry about the effects on gross domestic product (GDP) growth. Politicians raise alarms about energy dependence and the security of foreign oil and gas supplies. Scientists warn of irreversible damage to the earth from the uncontrolled use of fossil fuels. There is much talk about conservation and alternative energy sources.

Welcome to ... the late 1970s. For anyone who remembers that time, the crisis atmosphere surrounding energy since 2006 evokes more than a little déjà vu. It is tempting to take comfort in the fact that there was no economic apocalypse after the energy crises of the 1970s. Instead, most energy prices fell back to their earlier levels within a few years; governments, businesses, and consumers adapted; and the world economy not only survived but prospered. It's reasonable to wonder: why can't things go back to normal now, just as they did then?

But the similarities between the current energy situation and the 1970's oil crises are limited and somewhat superficial, and the differences are more pronounced. To be sure, many of the most critical factors are uncertain, particularly when the time it takes to change large-scale infrastructure is taken into account. But there's one thing we can say with confidence: the energy situation is not going back to normal, at least if "normal" means the industry structure and stability of the 1990s.

Every chief executive and senior manager today will be forced to confront the reality of uncertain and unstable energy markets over the next two decades or more. For leaders in organizations that are involved in energy production or that use energy as a key input, the impact will be immense. The structure of their industry will undergo significant change—slowly at first, but accelerating over time as early innovations succeed and the rest of the industry falls in step. All other businesses will be affected as well. The goods we produce, the devices we create, the computer systems we rely on, the transportation and logistics networks we use—all will depend on what happens to energy supply, demand, and prices.

This book will help you understand the major forces that are shaping the future of energy and the choices that will face leaders in all walks of life. It will help you distinguish the myths and misconceptions that you read in the newspaper from the actual situation and its implications for any business or organization, from the smallest local enterprise to the largest multinational.

The signs of discontinuity in the energy sector today are unmistakable. The most obvious is the spectacular volatility in energy prices, especially the price of petroleum, in the early twenty-first century. As recently as 2003, a barrel of crude oil sold for less than $30 in 2008 dollars—close to the inflation-adjusted level that it had trended around throughout the late 1980s and 1990s. Since then, however, the price has risen dramatically, to as high as $147 per barrel, far eclipsing its previous record high set during the oil shock that followed the Iranian Revolution in 1980 ($103.76 in 2008 dollars). A price of $100 per barrel, which seemed unthinkable a few years ago, became seen as unremarkable. Price increases for the other major fossil fuels—natural gas and coal—more than doubled over the same time period. The energy price runup was less sharp in Europe and other regions, since oil prices are denominated in dollars and the dollar had depreciated significantly relative to other currencies. Recent European oil prices went as high as 80, however, around the record set in the 1980s, adjusted for inflation. Then, during the financial crisis of autumn 2008, global oil prices suddenly fell to $50 a barrel—still a major net gain—leaving tremendous uncertainty about the future price.

In addition to the direct pain that energy costs inflict upon businesses and consumers, they are also pushing up the prices of many other goods. Rising energy costs, for instance, have contributed to a surge in world food prices. These have risen some 60 percent in the last few years and have produced deprivation (in some cases, provoking riots) in parts of the developing world. Prices of other commodities, including minerals and raw materials, have also risen rapidly. Such "second-order" factors, or other significant economic trends affected by changes in energy costs, are sending shocks through the economy. They present urgent problems for many managers who are struggling to maintain stable costs and revenues while engineering cleaner, greener operations for their companies.

Back in the 1970s, energy prices rose solely because of uncertainties about supply—specifically, about political instability in the Middle East. Today, the stability of the Middle East remains a concern, but more fundamental factors are driving this price rise. The current world energy situation is the result of three colliding long-term trends: the relentless increase in energy demand driven by world economic growth, the slow drop-off in crude oil and natural gas supplies from producers outside the Organization of Petroleum Exporting Countries (OPEC) and the former members of the Soviet Union (FSU), and an intensifying need to reduce greenhouse gas emissions. The result is a widening awareness that the way we have used energy in the past is unsustainable in the future.

The steep, sustained rise in worldwide energy demand slowed during the economic downturn of 2008 but will resume as growth returns. It is driven both by economic growth in the developed world and by the surging growth and rising populations of newly industrializing nations. Oil and natural gas production, meanwhile, has been leveling off since the late 1990s, and over the last five years, it has been consistently too slow to keep pace with demand. This new dynamic is a discontinuous, unprecedented change in the historical trend for energy supply and demand.

The other major difference between the last energy crisis and the current one is the level of concern about global warming. Environmentalists in the 1970s worried mostly about the effects of air pollution on health and the quality of life. Solving those problems seemed to be a matter of incremental change, achievable using existing technologies, and was not a matter of urgent public concern. Today, rising levels of greenhouse gas emissions have created widespread fear that energy use is endangering the earth's climate, and these emissions are a major focus of national and international policy debates. Public and political concerns about the urgency of the climate change problem continue to grow, convincing many former skeptics that comprehensive changes in energy policy and practice will be needed to forestall future damage.

For businesses, the concerns about climate change will have major implications. If the prices of high-carbon fossil fuels like petroleum and coal rise to reflect their environmental impact—which will happen if global climate-change regulation is enacted—then the basic business models of some industries, such as the power-generation industry, will change drastically. But all businesses will be significantly affected as higher prices spread across the world economy and lower-carbon alternatives become more competitive and more prevalent. What executives and decision makers need in this environment is a balanced and transparent understanding of their exposure to carbon-based fuels: the costs of these fuels, their advantages and drawbacks, and the alternatives that are available today or are under development. Exposure in the sense of dependence on a high-carbon fuel or one with uncertain supply could be as damaging as exposure in the sense of financial commitment to a risky investment. In the same way that well-managed investment firms limit their exposure to risk, well-managed energy consumers will start hedging and limiting their exposure to energy sources.

MYTHS AND REALITIES

If the energy realities are more daunting today than they were in the 1980s, the solutions are also very different. Last time, there was a pervasive move toward energy efficiency in some parts of the world (such as Japan) and ultimately a "return to normalcy" that took place naturally when OPEC's prices fell. A resolution of the current crisis will not happen by itself. It means finding a solution that ensures two seemingly incompatible things: first, that the world will have sufficient energy supplies to enable continued economic growth in the developed world and continued opportunity for newly industrializing nations, and second, that industrial society can slow or, better still, reverse the increase in energy-related greenhouse gas emissions.

The only way this will happen is by accomplishing an energy shift that is unprecedented in history—a transition away from the carbon-intense fuels and technologies of the past. The shift has already started, as can be seen in everything from the rise of biofuels and hybrid autos to the building of large wind farms to the popular opposition against the construction of new coal-burning power plants. But what we have seen so far is only the beginning of a vast reshaping of the energy landscape. The landscape as we know it took more than a century to develop, and it will take decades to shift to its new form. This transition will shape every aspect of business and daily life between now and 2030.

Life during an energy shift is rife with tension, and for good reason: the forces that are affecting this shift, and that will determine how quickly it can be accomplished, are still difficult to see clearly. A huge amount of information and analysis about the upheaval in the energy markets is churned out each month, but much of it reflects the biases of different industries, interest groups, and other constituencies. A good deal of this material is also imperfectly grounded in economic and business reality, and some of it is naïve.

One useful way to better understand your options is to start examining some of the persistent myths about energy, and the constituencies that benefit from their promulgation. These myths are relevant because they can drive public opinion, and hence public policy; and because business practices will also be based on these myths, in some cases leading to severe competitive disadvantage.

The Global Oil Depletion Myth

The world is running out of oil.

Reality

This myth has become popular among some environmentalists, antigrowth activists, and others promoting alternative energy sources and conservation and, in some cases, opposing industrialization and unfettered economic growth. It has also been popularized by an ongoing argument (often referred to as "peak oil"), based on some supply estimates, that the world has passed the maximum global petroleum production rate.

Belief in this myth is tempting, and it makes a compelling story. But it's not true. Despite the current imbalance between supply and demand in oil and other fossil fuels, and despite the peak oil view, the world is not running out of this substance. No matter what happens, long-term supplies will be available. There are plenty of fossil fuels still in the ground in existing reserves, and new reserves continue to be discovered in regions like Central Asia and South America. There are also vast proven reserves of "unconventional oil," which can be derived from oil sands, oil shale, and even coal. Using known technology, these sources could provide enough hydrocarbons to fuel a petroleum-based economy for many decades to come—if companies and policy makers are willing to deal with the environmental costs and higher prices. These sources could enhance energy security for many countries, including the United States, Brazil, Russia, China, and India.

However, in one sense, the depletion argument is right. The short- to medium-term constraints on oil supply are significant, especially those on cheap, easily recoverable oil. Unconventional oil sources are more expensive and are also likely to prove unacceptable from an environmental perspective unless expensive new technologies are deployed to limit greenhouse gas emissions. Therefore, while oil will remain abundant, it will not necessarily be the "easy oil" we have seen in the past, and oil will most likely play a much more limited role in the global economy post-2030.

The China Myth

Rising prices are all Asia's fault.

Reality

This myth has gained currency because it makes it easier for people in the West to ignore their own role in boosting energy prices. It places all the blame on the newly industrializing nations of Asia. It is true that the growth in energy demand in China—as well as in India and other industrializing nations—has been significant. And mainstream forecasts envision that energy demand in developing Asian countries will more than double over the next 30 years. A new middle class is rapidly acquiring cars, major appliances, and a more energy-intensive lifestyle, and its demands will echo those of consumers in the West.

But the full truth is more complicated. For one thing, price pressures can just as easily be blamed on growing energy demand in the developed world. Petroleum usage in North America, for instance, has increased as much as in China in the past 20 years. And underlying demand will continue to grow in the United States and other mature economies.

Also, demand is only part of the price equation. One reason that prices remained low during the 1980s and 1990s was that oil production from nations outside OPEC and the former Soviet Union was growing steadily. This reflected the development of new reserves in the North Sea, Canada, Mexico, and Brazil, among other places. Non-OPEC and non- FSU production, however, began to flatten in the late 1990s and actually declined starting after 2002, as output and reserves in established oil-producing nations like the United States dwindled and fewer new reserves were found. Since then, the OPEC producers who control the most economic and easily recoverable oil and gas reserves in the Middle East have been straining to increase their capacity to produce more oil, but they have not been able (or willing) to do so quickly enough to keep pace with demand. More broadly, the supply crunch has extended across the energy spectrum. The costs of supplying other forms of energy have also climbed in recent years as a result of a dramatic rise in the costs of production equipment such as coal-mining machinery, liquid natural gas (LNG) terminals, refinery vessels, and infrastructure of all kinds.

The "Easy Ethanol" Myth

Biofuels are the green solution for transportation.

Reality

This myth is promoted by those in the agricultural sector who stand to benefit from the development of biofuels, and by those in countries like the United States and Brazil whose first priority is energy security. It is also a seemingly attractive story for environmentalists. And there are some reasons to be optimistic about the biofuel potential. Ethanol made from sugarcane, in particular, is a viable alternative today to petroleum; biofuels made from other sources such as cellulose, algae, and waste products could contribute a significant volume to the fuel pool, especially if the supply of agricultural land expands.

But from an environmental perspective, the biofuels available today are estimated to save from 20 percent (corn ethanol) to 80 percent or higher (sugarcane and cellulosic ethanol) in greenhouse gas emissions. This is at best neutral, and in some cases harmful, once the effects of land use are factored in: the impact on climate change of continuing to farm land that would otherwise revert to grassland or forest. Biofuels have also been implicated in food shortages and rising food prices. Since food and petroleum prices are inevitably linked, the impact of biofuels on gasoline prices may be muted. And there are water scarcity issues as well; countries that face water shortages may simply not be able to expand into biofuel production.

Even the next generation of cellulosic biofuels may not solve these problems in the short run. In the long run, with enough technological development, some futuristic biofuel approaches, like algae-derived biofuels that don't require large amounts of land, could someday prove to be a long-term alternative to petroleum. But these will take decades to come to fruition, with many obstacles along the way.

The Carbon-Free Power Myth

We can meet the world's needs for electric power and reduce greenhouse gas emissions within a decade or two relatively painlessly by switching to carbon-free renewable energy sources such as solar, wind, and geothermal energy.

Reality

This myth resonates deeply with those who are concerned about the environment, because it tells people what they most want to hear. And it's true that these renewable energy sources—especially wind and solar power—hold tremendous promise for the future, and ultimately may hold much of the answer to global climate change (and to many countries' concerns about energy security). But today they supply only a few percent of electric power generation, and significant technological breakthroughs in storage and efficiency, as well as massive investments in transmission infrastructure, will need to be made before renewables can compete on a wide scale, cost-effectively, with traditional fuels. Even using optimistic assumptions about renewables, much of the world's electric power needs in 2030 will be filled, as they are today, by fossil fuels. However, the next 20 years are likely to see renewables taking larger percentage shares in power generation, and will lay the groundwork for a more significant shift to lower-carbon and carbon-free sources in the future.

(Continues...)

Excerpted from ENERGY SHIFTby ERIC SPIEGEL NEIL MCARTHUR ROB NORTON Copyright © 2009 by Booz & Company Inc.. Excerpted by permission of The McGraw-Hill Companies, Inc.. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

Edition details

• Publisher: McGraw-Hill
• Publication date: 2009
• Language: English
• ISBN 10: 0071508341
• ISBN 13: 9780071508346
• Binding: Paperback
• Number of pages: 208