Bill Emmott - International Author & Adviser

Article

A short window of environmental opportunity
Voice - 2009

The great recession of 2007-09 looked as if it would lead to a continual fall in the oil price, as demand for this "black gold" slumped. But instead, markets and politics confounded us. The oil price did not keep on falling. Instead it bounced back, doubling to more than $70 by August, a level sustained until the end of 2009. This, to me, is the big surprise of this crisis. But it is also the main thing that has persuaded me to become an environmental optimist.

            Why did oil bounce back? One reason is that the world economy began to stabilise. Demand for oil promised to begin a slow recovery, in the second half of the year. China, one of the world´s biggest oil consumers, rebounded especially strongly, following a vast programme of cheap lending by state-owned banks. However, despite this better news, the likelihood is that demand for oil is unlikely to grow rapidly for several years. So there has to be another reason for the doubling in the oil price. That second reason is that the supply of oil is constrained.

            During the great inflation in the oil price in 2003-08, oil companies doubled and trebled their investments in production and exploration. A huge new oilfield was discovered off the coast of Brazil. Production was expanded in several African countries, including Angola and Sudan, often thanks to investment by Chinese state-owned oil firms. Iraq began to increase its oil output for the first time since well before the American invasion. Saudi Arabia, holder of the world´s biggest oil reserves, embarked on a major investment in expanding production capacity. Yet all of this investment takes a long time to have an effect on supply—longer, in fact, than I realised. Thanks to the global economic crisis, indeed, much of the investment has been slowed down to save money.

Meanwhile, supply remains dominated by the OPEC oil producers´ cartel, and those countries have succeeded in cutting their output sufficiently to keep prices high. Russia, whose output is similar to that of Saudi Arabia, co-operated with this supply restraint and chose not to increase investment in new production facilities. The unity of OPEC in the effort to keep oil prices from collapsing even further has been impressive and quite surprising.

            Unless there is some sort of new political division inside OPEC, leading some countries to cheat their output quotas and to increase supply, what this all means is that prices for oil and other fossil fuels are likely to remain quite high until the investments in Latin America, Africa and other non-OPEC sources start to really produce large amounts of oil. This doesn´t have to mean a rise back to $150 a barrel or more. But it could well mean prices of $60-100, at least. How long might this period last? We cannot know, for sure. But slow economic recovery and difficult conditions in the financial system could well mean that investment in expanding production and finding new oil will continue to be fairly slow. If so, this high-price period could last quite a long time—a decade, even.

            Like in 2008, that is bad news for global economic recovery. But it is pretty good news for the environment and for global warming. High prices for fossil fuels would again encourage the search for substitutes and the investment in new technologies. The same could, in theory, have been achieved by governments´ raising taxes on oil and other fossil fuels, and introducing tough regulations on energy efficiency. But the truth is that during a painful recession, governments were unlikely to implement such measures. Higher prices will have a much more meaningful effect than political statements in favour of cleaner, greener behaviour.

            I do not mean to argue that clean, green statements by politicians have no meaning or importance at all. Just the opposite: the fact that in President Barack Obama America has elected a president who is determined to make clean, green statements at every opportunity and who is positive about trying to achieve a global agreement at the Copenhagen climate change conference at the end of this year could prove very important. It is also good from an environmental point of view that in their fiscal stimulus packages the governments in Japan, America, Britain, France, Germany and many others all made a point of including investments in "green jobs" and new energy technologies. But on their own, these statements and this willingness would not have had much impact. High oil prices will do much more.

China´s contribution

They will, in fact, do more to help mitigate the problem of global warming because of their likely coincidence, during this window of opportunity, with the other big change in the global economy that I already outlined: the convertibility and upvaluation of the Chinese Renminbi.

            Chinese participation in the Copenhagen deal, was vital, for the reasons stated earlier: without China, America will not sign up; and China is now the world´s biggest producer of greenhouse gases. Protectionism in America and Europe will be encouraged if China does not sign up to some form of emissions-controls, making a legally binding commitment in the treaty to be negotiated for the Mexico conference in 2010. Chinese negotiators are already showing signs that they are willing to compromise in order to make a deal possible. Most of all, though, what the world needs is for China as a whole to feel that greater energy efficiency and lower-carbon production is in the country´s national interests. My belief is that the combination of rising oil prices and an appreciating currency is exactly what is needed to persuade China that cleaner, greener production will be good for it.

            Like Japan in the 1970s, China now needs to start to move upmarket, to transform itself from a dirty, labour-intensive producer of cheap manufactures and industrial materials into a more diverse, higher technology economy. One contribution to that will be an expansion of Chinese government spending on social services, including health and education. Another will be the revaluation of the Renminbi, which will make China a higher-cost producer in international terms, forcing industry to seek faster productivity growth and higher value products. A third will be high oil prices.

            That stimulus for higher oil prices will not last. Investment in increased production will, eventually, succeed in increasing the supply of oil sufficiently to outpace the growth in demand. But it looks to me as if it could last long enough to have a beneficial effect. And if that is correct, then corporate efforts to develop greener technologies, such as electric cars and solar power, will produce results much sooner than anyone now realises. Generation after generation of Japanese successes in cars and in consumer electronics, and generation after generation of American and Asian successes in personal computers, show that product innovation can happen extraordinarily rapidly if the incentive is there to seek them, and as the scale of production increases.

 Already, car makers are bringing forward the development and introduction of electric engines that was previously scheduled to be introduced in five or ten years time. Suddenly, electric, hybrid and highly fuel efficient cars will become normal sights on our roads and in car showrooms. Similarly, small wind turbines and solar panels are going to make the jump from luxury, niche products into mass-market availability.

But will this save the planet?

This optimism about the environment is surprising. Normally, one would expect a global recession, with all the political pressures that come from it, to make environmental progress less likely, not more likely. Cynics who never believed politicians and chief executives who claimed to want to be green looked likely to be vindicated, as plans to bring in anti-global-warming measures would surely be postponed. But the combination of tightly controlled oil supply, China´s need to revalue its currency and America´s election of Barack Obama look to me likely to produce a much more optimistic prospect.

            Don´t expect miracles. Emissions of carbon dioxide and other greenhouse gases are not going to plummet overnight. But the important fact about global warming is that they do not need to plummet. The implications of the scientific work done by the Intergovernmental Panel on Climate Change, the specialist UN body on the subject, are that what is needed is a gradual but steady reduction in emissions over the course of this entire century. Neither the rich world nor the poorer countries need to change their societies nor their behaviour drastically or immediately. What they need to do is to ensure that their behaviour changes steadily and permanently.

            The problem of China and India from an environmental point of view has been that their population size and economic growth potential have threatened to neutralise the benefits of any major cuts in emissions by the rich world of Europe, America and Japan. If China and India were simply to follow the path of industrial development, urbanisation and energy use that the rich world followed, then greenhouse gas emissions would certainly grow and the global temperature would rise substantially. But this is not likely to happen, for a simple reason. When the rich world was industrialising, fossil-fuel energy was quite cheap. Now, it is much more expensive. So the industrialisation path followed certainly by China, and eventually by India, will come to reflect the impact of that costly energy.

            The only question is whether fossil-fuel energy will remain costly. If it were to fall in price again, as new sources of supply become available, then China and India could truly follow the dirty western pattern. Hence my hope that current high prices persist, for long enough to stimulate the invention and development of alternative forms of energy. If they do, and if China also does revalue and float its currency, then my expectation is that China, at least, will become part of the solution for our planet´s environmental ills, not a part of the problem as before. It will be part of the solution because it will have a strong interest in becoming greener and more energy efficient, and because its government and its companies, both state-owned and private, will throw billions of dollars and millions of people into the effort to try to develop or even invent new energy technology.

            India and the other poorer developing countries promise to be more of an obstacle. India has become famous as a fast-growth economy yet it is at best one-third as rich as China. When the Renminbi revalues, the gap will widen further. It is also a democracy, and although voters in a democracy will certainly vote to improve the protection of their local environment if they feel in danger from it, they are unlikely to vote for higher taxes or strict regulations to help protect the planet. They will feel, with some justification, that the people who should pay to protect the planet are the rich. In the further negotiations this year in Mexico, they will therefore be more stubborn than China, which frankly can afford to turn green and anyway needs to.

            This can, however, be dealt with, in two ways. First, the poorer developing countries can be offered a deal under which they have to commit themselves to reducing emissions, or emissions growth, only one or two decades in the future, and only when their total emissions pass some threshold that corresponds to a greater level of economic development. Second, as has already happened to a small extent, money can be paid by the rich world into a United Nations administered fund, which would be used to help finance the transfer of energy-efficient technology to the poorest countries. That is exactly what the Copenhagen deal envisages—and, crucially, China agreed that it should not receive any of that money itself. For, politically, it was never likely to be possible to persuade American, European or Japanese voters to agree to pay money to China to help it improve its technology—and thus its competitive position.

            The climate-change deal might not be secured during 2010 on schedule; the Mexican successor to Copenhagen might have to be delayed if a proper deal is to be reached. That delay would not, however, be much to worry about. Climate change caused by global warming is a long-term phenomenon. We can, in fact, be patient for political deals, as long as governments and economic forces are pushing in the right direction.

What could go wrong

In response to such rosy, optimistic predictions and analyses, environmentalists tend to produce three main arguments. The first is that things are more urgent than I am saying: that if we do not act, through imposing tight government regulations and high taxes much sooner and more vigorously, then rising temperatures will produce natural disasters such as hurricanes, flooding, droughts and heatwaves, and that sea levels will rise sharply, putting islands and whole coastal communities under water. The second argument is to say that neither higher oil prices nor a Chinese currency revaluation will really have enough effect. The third argument is that thanks to continued global population growth, the pressure on the planet´s atmosphere is simply going to intensify, whatever we do in the short or medium term.

            In response to the first argument, there is no real answer. For to say this is to argue that the future will not follow patterns set in the past; that change will be non-linear, to use a more scientific term. This can neither be proved nor disproved. It is largely a matter of faith.

            In response to the second argument, the best answer is to say that we can wait to see. If energy prices are not high enough, then the right public policy response would be to do what both Japan and Britain have done in the past: to impose special taxes on fossil-fuel energy in order to increase the incentive to use less and to substitute other cleaner fuels. If China does not move upmarket to less labour- and energy-intensive industries, then the world will also face a different economic problem: protectionism, amid continued global imbalances of trade and capital flows. That would be a deeply pessimistic prospect, from the point of view of all our living standards. A return to protectionism would, however, be likely to make global economic growth much slower than it would otherwise be. That, in turn, would at least reduce the growth in greenhouse gas emissions too.

            The argument about global population growth is often presented as the simple consequence of arithmetic. The world´s population has risen from 1.6 billion at the start of the 20th century to a little over six billion now, at the start of the 21st. The United Nations estimates that by 2050 it will have increased by a further 50%, to nine billion. A planet whose resources were capable of supporting 1.6 billion people a century ago, or six billion now, will surely be far overstretched if it has to support nine billion. All our lifestyles will have to change, the argument goes, if mankind (and the planet) is to survive such pressures.

            This sort of thinking, however, is actually a form of pessimism about technology, the price mechanism and man´s ingenuity. So far, as our population has grown, man has become wealthier. This rise in population has coincided with the fastest rise in living standards the planet has ever seen, in all human history. The reason for that rise is economics, plus technology (which in turn is essentially a result of economic forces). So the pessimists´ case needs to show why the future is going to be different to the past.

Why will the pace of technological change slow down? Why shouldn´t man invent and develop ways to exploit the abundant energy of the sun, or of nuclear fission, or some other method not yet dreamt of? And in fact the arithmetic really suggests that this should now become easier, not harder. For although the absolute number of people on the planet is rising, the growth rate of the population is declining as fertility rates decline in most countries in the world. This decline in fertility rates appears to be correlated with wealth and consequential social change. So if the worst fears of environmentalists come true, and economic growth in the poorest countries remains fast for many decades, then the fertility rate in those countries will fall. By 2050, the annual growth in world population may be considerably lower than the 1.2% that is the rate today, and the total population could by then be less than the nine billion forecast.

In truth, the demographic problem the world faces in this century is ageing, not over-population. Thanks to rapid declines in fertility combined with substantial improvements in life expectancy, the average age of the world´s population is increasing. This is, of course, happening especially acutely in Japan, Scandinavia, Italy and some other European countries. But by mid-century, it will also be happening quite acutely in China. This raises social and economic issues, but it does not raise environmental issues.

Mid-century, moreover, is a long way off. Let us worry instead about problems closer to our own generations. I am suggesting that the oil age, or more broadly the fossil-fuel age, is going to come to an end much more rapidly than most people currently imagine. This would be excellent news from the point of view of global warming and other concerns about pollution, and it would be good from the point of view of technological research and investment, both of which stimulate the economy.

The end of the oil age

What this book is suggesting is that this era, the coming ten years in fact, will mark the end of the oil age. The domination of energy technology and hence of capitalism by oil began with its discovery 150 years ago, but it began fully with its large-scale use in transport a century ago. That period is now going to come to an end.

The oil age took many decades to get going, and in truth it will take several decades to disappear. While electronic technologies can change quickly, as people change telephones or computers quite rapidly, energy technologies are embedded in much costlier capital equipment: power stations, railways, ships, trucks, motor cars. Even if electric engines and batteries progress rapidly enough to defeat the internal combustion engine in cars and trucks, it will take many years before the world´s fleets of these vehicles are renewed, for example. Replacing power stations will take vastly longer. Many of China´s, indeed, are being fuelled not by oil or gas but an even dirtier fossil fuel, coal. To clean those up requires, in practice, not replacement but the development of cleaner coal-burning technology and of methods to capture and store carbon dioxide emissions.

Even so, it is the impact on the margin, on new purchases of equipment and on the growth in carbon dioxide emissions that will matter most, for the economy, for society and for the environment. That impact will begin to be felt quite soon, if the argument of this book proves to be correct. High prices will lead people and companies to choose electric and hybrid vehicles when they replace their current ones, and decisions about new power stations will follow a similar path. Faster than we at present expect, governments and electricity utilities will see a big advantage, both in terms of commerce and of politics, in investing in "smarter" electricity grids which allow users to control their consumption of electricity in much more sophisticated ways, and which allow small producers of electricity to supply some of it to the grid. Within a decade, all this could change our energy, transportation and power systems surprisingly dramatically.

There are, finally, two other points that need to be made. The first is that the main risk to this scenario is that the period of high energy prices proves to be too short to have a big impact on substitution and technological development. We have to wait and see, and also hope that governments are at that time politically strong and brave enough to respond correctly, from an environmental point of view, by raising taxes on fossil fuels to compensate for the price drop.

The second, though, is geopolitical. If the oil age is indeed coming to an end, as rapidly as I am suggesting, it will bring geopolitical consequences. We will need to be prepared for them. In particular, it will mean that the parts of the world that currently rely on income from oil, gas and other fossil fuels will no longer be able to do so. That means Russia, Saudi Arabia, the other Gulf states, Iran, Venezuela, Nigeria and several other African countries.

Since those regions are not exactly stable ones right now, we should not perhaps worry too much about this development, which anyway may not occur until the 2020s. Nevertheless, we should remind ourselves that for all their instability and fragility, it may be oil and gas revenues that currently prevent the Arab countries, Russia, Iran and Nigeria, for example, from collapsing altogether. These regions are dangerous today. If the oil age ends, they may become even more dangerous in the future. This makes it even more important to work to restrict the spread of nuclear weapons technology in these unstable regions.

            In the end, however, we should take a philosophical viewpoint. Behind every change in eras, every solution to old problems, lie new challenges and new problems. That is the predicament that Man has always encountered, but it is also the stimulus for human progress, over the centuries.


END.



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