THE ENERGY OF NATIONS

Jeremy Leggett is an international expert on energy matters as well as an entrepreneur – chairman of the renewable energy company Solarcentury. He is also chair of the financial think tank CarbonTracker, a consultant and speaker at conferences and meetings around the world, on which he draws in the course of his narrative. Most of the book is devoted to a historical analysis of energy trends and financial markets since 2004, with a shorter section on the future at the end of the book. Throughout, we drop in on reports from various meetings in which Leggett has been involved, often expressing a minority and unpopular view so far as the industry is concerned.

His analysis focuses on five potential shocks. The first is a crash resulting from oil depletion where supply is unable to meet global demand; this includes the debate about peak oil and the exact role of and prospects for fracking. The second risk is a further financial shock, where Leggett takes the view that 'systemic financial risk marches on almost unreconstructed in the financial services industry, despite everything we have learned about our collective ability to believe comforting narratives and ignore uncomfortable views.' The third risk is a crash related to climate change, while the fourth involves a carbon asset bubble in the capital markets due to the fact that there is far more carbon in fossil fuels than we can collectively afford to burn if we wish to keep global warming below 2°C (this means that energy companies may be overvalued). The fifth and final risk relates to a shale gas and tight oil crisis, heralded by many as a game changer. In this respect, the recent fall in oil prices, on which more below, changes the economics. In addition, a 2013 analysis of 65,000 shale gas wells in Canada showed quite sharp decline rates, meaning that $42 billion of capital had been invested to produce $32.5 billion in sales in 2012. And in North Dakota, 1,500 new wells are required each year to offset declines.

One of the most important questions is the prospect for oil and gas supply and demand up to 2030 and beyond. In 2008, the International Energy Agency conducted an oil-field by oil-field study of the world's existing oil reserves. They found that the average depletion rate of 580 of the world's largest fields, all past their peak production, is 6.7% (compound) a year. 2008 production was around 82.3 million barrels a day, while the forecast increased demand would require 106 million barrels a day by 2030. This would require 'oil from gas to expand almost to 20 million barrels a day, unconventional production to expand almost 9 million barrels a day, and on top of that more than 45 million barrels a day of crude oil capacity yet to be developed and yet to be found. All this adds up to 64 million barrels a day of totally new production capacity within 22 years.' This is six times the current production rate of Saudi Arabia. Leggett adds that much of this development would be uneconomic at oil prices below $70 a barrel. In addition, for these targets to be met, investment of at least $4 trillion would be necessary upfront. A similar analysis in 2012, however, projected a production of nearly 100 million barrels a day by 2035 with the shale gas boom spilling over into tight oil production so that the US could expect to become almost self-sufficient in oil and gas by 2035. However, only a tiny fraction of this projected oil reserve is recoverable. Moreover, new wells cost $10 million each and their production rates drop rapidly; and tight oil drilling between 1995 and 2011 has produced only 2 million barrels a day of extra capacity - so there is something missing in the official analysis here.

At the time of writing, Leggett was predicting an oil supply crash for 2015, partly on the basis of depleting easy to access crude oil by 4 million barrels a day each year. Then there is the continuing possibility of a financial crash. Germany is the country where renewables have been taken most seriously, showing that, with the right incentives, capacity can rapidly be increased. This should be considered in relation to action on climate change. Leggett's possible Road to Renaissance is based on the readiness of clean energy for explosive growth, along with its intrinsic pro-social attributes, increasing evidence of people power allied to pro-social tendencies in the human mind, and the power of political and economic context of a post crash situation. More radically, he believes that capitalism is killing our economies and threatening our children with an unliveable world - hence it needs to be re-engineered, root and branch, which could only happen after a sufficiently fundamental crisis.

It may look in the short term as if Leggett's forecast is too pessimistic. However, I was interested to receive this week a fascinating analysis of the fall in oil prices from the Intelligence Unit of the Asymmetric Threat Contingency Alliance (ATCA - see members' articles for a link to the full piece) where the most significant factor turns out to be the $8 trillion Carry Trade largely resulting from the liquidity created by Central Bank quantitative easing, especially in the US. This means that investors can borrow currency from a low interest rate country like the US, converting it into a currency with higher interest rates and invest in higher yielding assets, thus effectively shorting the US dollar. This is fine so long as the QE process continues, but since the Federal Reserve has decided to stop this and possibly to raise interest rates for the first time in seven years, the dollar has started rising, putting these same investors under pressure as their loans become more expensive to service. The rising dollar then has a negative effect on the oil price and indeed on other assets. This puts political pressure on those countries, like Russia, reliant on buoyant energy prices. The strengthening of the US dollar is an ironic development given the overall level of debt in the US economy. The report forecasts a general decline in assets and potential deflation during 2015 and beyond. Time will tell whether ATCA is right, but they certainly shed new light on the overall situation.