Tackling market reform to enable nuclear projects – The UK moves forward!

The UK is unique in its approach to the nuclear renaissance.  Once the cradle of the nuclear industry, with some of the world’s oldest plants and research centres, the UK has mostly dismantled its nuclear industry in recent years.  From privatizing British Energy to selling off Westinghouse and dismantling BNFL, it is fair to say that the industry has been through the ringer.  Yet, all of this restructuring has been in a context of encouraging the next round of nuclear new build to replace the current rapidly aging nuclear fleet, and meet both carbon reduction and security of supply targets over the next 40 years.

The thrust of the industry restructuring has been to get government out of the way and encourage private sector leadership for the next round of nuclear new build.  This is totally consistent with UK policies on electricity generation.  The UK was one of the first countries in the world to privatize electricity supply and today has a vigorous and effective private sector electricity generation infrastructure.

The path to new build nuclear has not been a fast one.  Numerous consultations since 2003 have slowly moved the issue forward.  The last one set in motion the Generic Design Assessment process with the regulator and the government’s move to simplify and improve the planning process.  But one thing has been a constant throughout.  Government has stated that it will move out of the way, and that it will be up to the private sector to implement nuclear new build.  Definitely a challenge, but the evidence to date is positive as the success of the site auctions shows.

But now, the most important piece of the puzzle has been launched.  In November of last year, government initiated a consultation on electricity market reform.  This consultation is due to close in early March.  It is this topic that I want to discuss today.

First of all, there is a very important statement in the consultation – it makes it clear that the current market structure is based, and was developed, to suit gas fired generation.  To quote the high capital costs and low operating cost of low-carbon generation are not well suited to the UK market where gas is the marginal plant. This is because gas is generally the price setting plant and can pass through any changes in gas or carbon prices to the electricity price. Therefore electricity and gas prices (and hence revenues and costs) tend to move together. By contrast low-carbon generators are price takers and are more exposed to gas or carbon price volatility.” High capital cost, low operating cost nuclear plants are at a considerable disadvantage in this type of market.

The objectives of government are:   security of supply, decarbonisation and affordability.  Meeting these objectives the four broad principles of cost effectiveness, durability and flexibility, practicality and coherence will be used to judge the effectiveness of different market design options.

The four elements of change under consideration in this consultation are:

–        Carbon price support where the price of carbon is maintained to provide more incentive to low carbon options

–        Feed in tariffs to guarantee revenues to specific generation types to provide the certainty necessary to support the project financing

–        Capacity payments to ensure that adequate capacity is built to ensure security of supply

–        Emissions performance standards which simply prohibits plants from emitting more than a maximum amount of carbon.

It is generally the first two items that we will discuss here as these are the ones that help to support nuclear power plants.  First and simple to understand is the concept of a minimum carbon price.  This provides an institutionalized economic advantage to low carbon generating options such as nuclear power.

Levelised Cost of Generation Technologies (UK Consultation)

The bigger issue for nuclear is the potential use of Feed In Tariffs to provide market support to nuclear.  While often used around the world for renewable projects, this is the first time a market is suggesting that feed in tariffs  be used for large projects such as nuclear plants.  Feed in tariffs are used to support renewables primarily because these plants are not sufficiently economic to compete in the market thus requiring subsidy in the form of tariffs that are usually significantly higher than the market price.  This is not the case for nuclear.  As shown in the figure above, nuclear plants are indeed competitive with the alternatives.  It is their risk profile that is the issue.  So the real question becomes – will a feed in tariff be sufficient to incentivize new build nuclear plants?

To answer this question, we must first discuss the nature of nuclear projects.  They are different than renewable projects in that they not only have relatively high capital costs, but they also have very long project schedules – and this is the difference that matters.  Why?  Because taking 10 to 15 years from planning to in-service offers up a very different risk profile than a wind project that takes two years to build.  This is why it is difficult to enter the market.  The timetable is just too long and the price of electricity so many years in the future is too uncertain.  So the question becomes – can a nuclear generator adequately predict the electricity price he needs to be profitable so far in advance?  And then will a fixed tariff be the right solution?

Another way to look at it is to consider the risk I like to call “completion risk”.  This is the overall  risk of bringing in the plant on time and on budget.  A nuclear project can only proceed when there is a willing party to take on this risk.  So while price certainty helps, it does not do much good if the project is late and over budget.  This means the owner can lose substantial money if the plant is late and/or over budget – or in the extreme to lose the entire investment in the case where the plant is never completed.  This is the best way to gain understanding into this issue.  Having certainty for the price of electricity does no good if electricity is never produced.  This is why a power purchase agreement or a feed in tariff is not sufficient to raise financing on a non recourse project basis.  Someone must take the completion risk.

In the US, this issue is clearly understood.  This is why they have turned to a loan guarantee as the mechanism for project support.  This works as it protects the owner from project failure limiting his risk to the equity in the project (usually around 20% in this case).  This does not eliminate the completion risk but it mitigates it sufficiently to encourage new build projects to proceed.  I am not commenting on whether or not an owner should be protected as this is a matter of policy;  but what is clear is that no company will risk bankruptcy over a single project.

Does this mean that a feed in tariff should not be part of the solution?  Not at all.  It can be an important part of a package that helps to reduce the risk of a large nuclear project.  In this case the UK is recommending a “contract for difference” model where the nuclear plant operates in the market and collects a difference if there is a shortfall from its agreed tariff and reimburses most of the overage if the market price exceeds the agreed tariff.  Now indeed this is a complex model and gives the illusion of operating in the market when in fact, the opposite is true.  What is actually being done is a continuous comparison to the market to illustrate how well the pre-agreed price compares with the market price.

In the case of project delay or overruns, the owner can lose substantial amounts of money, even if the market price of the day has risen significantly compared to what was anticipated as the electricity price will be limited to the pre-agreed tariff.  I would suggest some flexibility to allow the operator to enjoy a larger portion of the upside in this case to recoup his losses.

The other big issue with all of this is that the market soon ceases to be real as more and more of the operating plants operate outside of it as the system is decarbonized.  Do we really want a market and then have, say 80%, of the plant operate at pre-agreed prices ?  In this case, how can the market price really reflect the system?

As you can see there are many issues when devising a way to modify the markets to meet these needs and there is lots of work to be done to get to the right answer.  But what is important here is the clear understanding that current market design is suitable for gas but not necessarily for other sources of generation, primarily those with high capital costs and longer project schedules even though they’re economically competitive.  It is great to see this important discussion on market redesign begin.

Happy New Year 2011!

Looking back at my blog from last January, I can probably start the same way – “Where did the time go?”  2010 has been a very busy year with a huge amount of activity in the nuclear sector around the world.  I am certain that we can expect an even more active year in 2011.

This year the industry movement from west to east has continued.  Last year the success of the Koreans in the export market was the newsmaker – in 2010 it was all about China.  China continued to expand its nuclear program increasing its target for 2020 to about 80 GW from the previous 40 GW.  The first of its updated CPR 1000s came into service at Ling Ao 2 and there are now 13 nuclear units in operation (2 more than this time last year) and 27 units under construction (9 more units than at this time last year).  And there is no sign of this program slowing down!  In fact, it is continuing to accelerate with a target of bringing 10 units a year into operation from 2020 to 2030.

Of more importance, China has now expressed its intentions to start exporting nuclear plants by 2013.  Work is currently under way to upgrade the CPR 1000 design to meet Generation III requirements.  After having visited Daya Bay it is easy to see how this can become a successful export product for China.  There has also been important progress in the first Asian nuclear export.  The UAE announced that there has been progress on their project as the Koreans have now prepared and submitted the license application to the regulator for the first APR 1400 units to be build outside of Korea.

There is no better measure of the growth and breadth of the Asian nuclear programs than looking at progress with nuclear plant costs.  Reports are that the cost of new plants continues to decrease while costs are increasing in the west.  This is a direct result of the continuing strong commitment to new units and the large amount of experience being gained with each project.

Although things are moving more slowing in the west there has been some important progress.  In the US, Southern Company has been granted its loan guarantee for the Vogtle Plant.  On the other hand, issues with guarantee fees have caused Constellation to give up on its merchant plant at Calvert Cliffs.  EDF is now looking to move forward without them.  There has also been little progress in increasing the amount of loan guarantees available to the industry as a whole n the US.  We expect to see good progress this year for the projects in both Georgia and South Carolina.  The US is also putting significant effort into small reactors.  There are a number of designs under development as the industry searches for a way to make nuclear power both more affordable and more attractive to a broader range of utilities.

In the UK, the Generic Design Assessment process has been progressing well.  Similar to the US, the issues going forward with new build projects are related to the sharing of risk.  Late in the year there was a significant breakthrough as the UK government embarked upon a consultation to make changes to the UK electricity market to make it easier for both nuclear and renewable projects to proceed as part of the UK’s carbon reduction policy.    This consultation has a number of approaches to encourage large capital projects, the most important being the possibility of having a feed in tariff that applies to nuclear power plants.  The consultation will close in March and I will likely write about this in more detail sometime soon.

In Canada, the year started with a number of issues related to nuclear refurbishments, radioisotope production and the future of AECL.  However, later in the year, the refurbishment projects turned the corner as the Wolsong Unit in Korea was the first to complete its fuel channel installation and is expected to be back in service later this year.  This has benefited the Point Lepreau refurbishment project where the issues facing the project have now been resolved.  There has also been good progress at Bruce as the Unit 1 & 2 Restart project is nearing completion this year.

Of great importance, the middle of the year saw the NRU reactor go back into operation resuming the much needed production of medical isotopes after an extended outage and major repairs.

But the big issue in Canada remains the privatization of AECL.  Originally expected to be completed within 2010 it is now expected that an announcement is imminent.  Frankly it cannot come too soon for the Canadian industry.

And finally, the role of nuclear in reducing carbon has been accepted internationally.  The IEA, in its 2010 World Energy Outlook (WEO), see an important role for nuclear.  And of more importance, mid year they published the “Nuclear Roadmap” showing the potential role that nuclear can really play in achieving global carbon reduction objectives.  This scenario has nuclear increasing from its current 14% of global production to about 24% by 2050 and has a scenario going all the way to 38%.

Definitely it was another busy year for the nuclear industry.  And it looks like things are only going to continue in 2011.  More growth in Asia is a given.  Breakthroughs in the US and UK are likely and big decisions are coming for the Canadian industry.  And I have not even mentioned the numerous other countries that are now studying and moving forward with plans to consider new nuclear plants.

So Happy New Year to all and lets get ready for an exciting 2011.

Delivering Happiness – about shoes and nuclear power plants!

As I write this I am on my way home from speaking at an event in Hong Kong put on by a think tank called Civic Exchange.  I want to thank Civic Exchange for asking me to participate and congratulate them on their format.  The topic for this, their 14th energy forum, was “Expanding Hong Kong’s Nuclear Power Base“.  Hong Kong has recently issued a paper on climate change and is having a consultation to seek input on its recommendations.  One of these recommendations is to increase the amount of nuclear generation coming from the mainland from the current 23% to 50% of electricity supply by 2020 as part of a plan to reduce Hong Kong’s carbon intensity.

The format of the event was excellent.  More than presentations (I was asked to provide an international perspective on nuclear power), it was a conversation.  After opening remarks by 5 speakers – on Hong Kong’s plan, on China’s nuclear plans, an international perspective, a view from Greenpeace and finally thoughts from the utility – the floor was opened to more than an hour and a half of questions and discussion.  The room was full and the discussion was very lively.  I believe that we all left that room with a little bit more understanding of the issues and I expect that many attendees were able to continue to develop their own point of view.  Overall a success!

This brings me to the book that I read recently called “Delivering Happiness” by Tony Hsieh, founder and CEO of  Now is essentially an online retailer that started selling shoes over the internet.  After 10 years in business growing to over $1 billion in revenues, the company was sold to Amazon for more than $1 billion dollars.

So what does selling shoes online have to do with nuclear power?  A pretty good question.  But it’s not about shoes – it’s about providing a customer experience that WOW’s the customer (I like that term – the objective is absolutely clear!).  Or as evolved their vision – their business is about “delivering happiness”.  They also created a unique work environment where employees are valued and feel a part of something.  I could go on but I would rather suggest you read the book.

What struck me at this event in Hong Kong is that after years of trying to defend our industry, we seem to have accepted the current position; the position that yes, we may not want nuclear power, but it is what we’ve got and if we want to fight climate change, then it needs to be part of the mix.  We have accepted the “we are the green option of last resort” argument.  It is what finally allowed politicians to stand up and support nuclear power after years of avoiding the issue.  But is that enough?  I don’t think so.  In fact, being the option of last resort just plain sucks.

What we really have with nuclear power is something special, an electricity source that is essentially carbon free, offers a high level of security of supply and uses a fuel that is both abundant and has no real other use or value.  It is also an economic option offering both competitive electricity costs and of even more importance in this volatile world of fossil fuel pricing, it offers long term price stability.

Are their issues?  Yes.  And it is positive events like this one in Hong Kong that enables us to have the conversation that we need to have with our stakeholders.   And yes we need to improve our delivery capability so that projects are routinely on time and on budget.  We are far from perfect.  In fact, I welcomed the talk by Greenpeace as I think we need to be constantly challenged to improve.  We work in an industry with the world’s most rigorous safety standards with regulators always pushing us to improve safety.   This is our safety culture and we should be proud.  We have a good case and we should be out there building the relationships with our customers so that they understand what we all understand, that nuclear power is not the option of last resort but rather is one of the best options available to meet our global needs as an essential part of a low carbon electricity infrastructure.   Nuclear plants are wonderful places to work providing high quality stable jobs and the nuclear industry can be a vibrant exciting place to have a fulfilling career.  The communities where we have plants have clean air and good jobs.

After completing a project for a new client earlier this year, we received a compliment that still resonates with me.  Yes, we were told that they were happy with our report – and that’s great as we strive to provide a high quality service providing unique insights into the nuclear industry.  But of more importance, we were told that they enjoyed the experience of working with us – and that is what I will always remember – as that is what we all need to work towards in our jobs as we play our role in this industry.  So what does this have to do with selling shoes?  I want to achieve the same customer experience as –  a unique customer experience building  strong lasting relationships with high quality services that meet their needs, all with an exceptional overall experience.  In other words, I want them to always be “WOWed”.

We all need to strive to deliver this level of service to our communities to ensure that nuclear power achieves its potential as a key contributor to solving the issue of climate change while providing low cost reliable electricity.

I don’t want nuclear power to be the option of last resort.  Let’s all do our part to ensure that we are wanted for our positive attributes, not just tolerated as the least bad solution.  And that means always working hard to improve.

A bit rambling, but that’s what I thought about when I read this book – we all need to work together to “deliver happiness”.

Yes – we are environmentalists!

Inspiring!  That is the best word I can think of to describe Stewart Brand’s book “Whole Earth Discipline.”  My faith in people has been restored.

To be frank I have heard Stewart Brand speak twice when I went out and bought his most recent book.  His conversion to an ardent supporter of nuclear power was interesting and indeed exciting.  And while he is an excellent speaker, his book is even better.

As an experienced and life long environmentalist, he has the credentials to support his case; and what a case it is.  He argues that being open minded to science and technology is the route to solving environmental issues.  And of most importance, he is willing to listen and learn with time and to modify his beliefs based on this learning.  He even openly criticizes some of the environmental movement as they are stuck in their beliefs and are not willing to take advantage of good information to support their ultimate cause.

He then goes on to blast three key areas of long term environmental criticism as just plain wrong.  Or as he says quite eloquently “Cities are green.  Nuclear energy is green.   Genetic engineering is green.”  His book has a chapter on each and the case is quite compelling.  He then uses part of his book to establish how not to repeat the mistakes we made on these three.  Can you imagine??

With the greens (and he proudly says that it is cool to own a colour) seeming to win on their most recent and perhaps most difficult issue, climate change, Brand is critical.

“The long-evolved green agenda is suddenly outdated – too negative, too tradition-bound, too specialized, too politically one-sided for the scale of the climate problem.  Far from taking a dominant role, environmentalists risk being marginalized more than ever, with many of their deep goals and well-honed strategies irrelevant to the new tasks.  Accustomed to saving natural systems from civilization, Greens how have the unfamiliar task of saving civilization from a natural system – climate dynamics.”

There is too much of value in this book to repeat here.  For our interest, those of us in the nuclear industry it is so nice to actually see someone hear what we have been saying for years.  I accept that we have not necessarily been good at delivering the messages, but yes, a thoughtful and experienced environmentalist has listened and heard our arguments.  Of importance are the comments on nuclear safety.  Quoting from Bill McKibben, “Nuclear power is a potential safety threat, if something goes wrong.  Coal-fired power is guaranteed destruction, filling the atmosphere with planet-heating carbon when it operates as it is supposed to.”

And of more importance, he recognizes that nuclear power is actually the safest of all of our forms of energy, with radiation killing no one in the United States, when all the alternatives have; and yet it is the one form of energy we fear the most.

It is easy to go and on but the best recommendation is to read the book.  It has given me faith in the environmental movement when we need it most, and has shown that new thinking is possible.  The planet has hope after all.

So what are you waiting for?  If you want to be inspired, go and read this book now!

Climate change or peak oil – does it really matter?

Has it been that long since my last blog entry?  Been extremely busy this winter and of course, busy is good!  But on the other hand, I have a set of topics piling up that I would like to write about.

Earlier, I blogged when I read Jeff Rubin’s book “How the World is going to get a Whole lot Smaller”.  When I posted the blog, I had good feedback.  I was told that if I read this book, then I should definitely read “The Long Emergency” by Jeff Kunstler.    Having been written in 2005 it is getting a bit dated.  This makes it even more interesting because as you read, reality can be compared to the author’s predictions over the last 5 years.

I really did enjoy the book. The concepts are similar and predate Jeff Rubin.  In summary, Jeff Kunstler is convinced that the age of peak oil is upon us and that the world is going to be a very different place sooner rather than later.  A number of his predictions have come to pass including the housing crisis and the very deep economic recession that we are just coming out of.  Unfortunately the book then goes on to predict doom and gloom- basically the complete collapse of society as we know it.  While he may be right, and I hope not, the trouble with this is that it discourages readers from paying attention to the main message.  And this message is an important one now being put forward by Jeff Rubin as well.

I do believe him when he says that we are at or near peak oil.  I also believe that there is no magic bullet to replace oil and that those who postpone decisions to adapt on the basis that “technology will save us” tend to be somewhat deluded – or in reality are just avoiding the issue.  On the other hand, I don’t believe that the world will come to an end and I do believe that there is technology that will help us delay the large scale effects to give us even more time to adapt.   But remember, adapting means changing behaviour. 

For example, look at one industry.  Publishing. How much carbon is used in the manufacture and distribution of books, magazines and newspapers?  Look at the business model.  Books are published in a big print runs.  They are then transported to book shops where they are to be sold, generally on consignment.  If not sold, the books are returned (more transport) to be destroyed.  While I don’t have the numbers I can assume the carbon costs to be significant.  So why am I talking about this?  Well, along comes technology – an e-reader or now an Apple IPad and what happens?  Millions of books, magazines and newspapers no longer have to be distributed in hard copy, but can now be distributed electronically thus reducing the carbon footprint of this one industry by a huge amount.  Now I don’t want to get into the discussion about the merits or e-readers here – and in fact I do want to blog about it at a later date – but just assume that it does come to pass.  Then assume there are other industries that can also do the same.  You see where I am going.

So now let’s bring climate change into the equation.  I am one who certainly does believe that the carbon we are putting into the atmosphere is having an impact on our climate.  But even if you don’t, then focus on peak oil.  If we take action to curb climate change then we can put in place policies to reduce oil consumption before the natural economics affect us too drastically.  i.e by implementing carbon reduction policies to reduce carbon, we must price it and thus try and reduce use.  Bacuase as we all know from the recent events, nothing is as effective in changing behaviour than changing costs.  This artificially pushes us to the same situation that would come naturally once peak oil has come and oil becomes scarcer.  Of course people like Jeff Kunstler believe we are already too late!

This is why Copenhagen was such a big disappointment,  In a sense it re-enforces  the views in the Long Emergency that our dependence on oil is so great that we just don’t have the political will to go in the right direction.  Very discouraging.

As we saw from this last recession, when demand drops so does the price of oil. In fact what we see is that it doesn’t really take that much of change to impact the price quite dramatically.  With the price risking to almost $150/bbl in early 2008, it dropped to less than $50 by the end of 2008 and has continued to rise modestly since then.  Now at over $80, once again there is fear that high oil prices will impact the economic recovery!  Therefore the only policy is to price carbon and keep the price of oil from dropping by adapting the carbon price as necessary.  Anything else will just lead to short term change and then back to the status quo.

One thing is certain.  Oil is a finite resource. Yes we may find more but yes it will be more expensive to exploit.  At some point we are gong to have to accept that we need to start to shift to a less oil dependent economy. And given oil’s uses outside of energy doesn’t it make sense to use alternatives?  So I will conclude by suggesting that climate change is our warning – start to act now to save the environment or wait until the oil is well past peak and have no plan to save society.

What do you think?

Lower demand and more renewables – is Surplus Base Load Generation here to stay?

Late in November I blogged about a recent phenomenon being experienced in some systems – Surplus Baseload Generation (SBG).  This is being experienced in Ontario, Canada due to falling electricity demand and the increased use of variable renewable energy sources such as wind and solar.

At that time, I started a poll asking about the future of baseload power.  Since then, the IESO in Ontario has published its latest Reliability Outlook.  The numbers are striking.  Demand was down 6.4% in 2009.  The following graph shows that demand is not expected to reach pre-economic crisis peaks even by 2018.

Ontario Demand Forecast

As of result the province continues to experience Surplus Baseload Generation (SBG).  Forecasts of SBG are now made daily.  With the growth of renewable generation SBG is expected to continue into the future.  This will certainly impact any decision for building new nuclear, as nuclear plants are most suited to providing long term stable baseload power and energy. 

The commitment to renewable energy continues to grow.  Wind generation in Ontario rose by more than 60 per cent in 2009 over the previous year, to 2.3 TWh.  Ontario has implemented the Green Energy Act, arguably making it one of the “greenest” jurisdictions in North America.  Just this past week, government announced a $7 Billion deal for 2,500 MW of new renewable generation from a Korean consortium led by Samsung C&T.  The deal includes the implementation of new manufacturing in the province for both wind and solar components.

While the above chart does not show baseload, with 1,000 MW of wind on the system and 11,500 MW of nuclear, this spring, Ontario started to experience SBG on a weekly basis.  This resulted in nuclear unit reductions on 54 days, nuclear shutdowns on five days and water spillage at hydro facilities on 33 days.  In the Reliability Outlook the projection is for 1600 MW of wind by 2013.  With the Samsung deal and other FIT program renewables, we could be approaching 4,000 MW of wind and solar in the coming years while the overall demand is not expected to increase dramatically.  Therefore, the baseload requirements will be further squeezed from the bottom as renewable generation has priority to the system when available.  In other words, both renewables and nuclear are “non flexible” load i.e. not readily dispatchable.  Clearly SBG will be an ongoing issue. 

And now, for the results of my earlier poll.  Although the number of votes was somewhat modest, the trend was clear. 

While the comments suggested that baseload is important, only 10% of respondents thought that renewables will have a small impact on the use of baseload.   The most votes were for “Medium Impact” as it seems to be recognized that renewables are here to stay and that the nature of electric grids are going to be changed forever.

Have we reached peak oil?

I just finished reading Jeff Rubin’s book “Why Your World Is About to Get a Whole Lot Smaller: Oil and the End of Globalization“.  Was a good thought provoking read.  In summary, Rubin is stating that the world has reached peak oil production and that ultimately prices will continue to increase post economic crisis and supply will continue to dwindle.  The ultimate effect of this on society is that transportation costs will increase so high that it will no longer be economic to source goods from low labour cost countries like China and others.  The cost of transportation will more than offset the lower production costs.  The result will be a return to building factories much closer to market.  So in the case of North America, jobs will return as making product locally will once again become economic.

In fact there are really two issues as I see it, combined into one.  On the one hand, he notes that transportation costs will become so high that we move jobs closer to home.  On the other hand, the high cost of oil will mean that we won’t be able to sustain our current standard of living so we will have to do with less.

I think that a good case is made with some evidence that we may indeed have achieved peak oil.   The case for the world getting smaller is somewhat more anecdotal in nature.  Rubin also accepts that people are smart and that technology may indeed come to rescue although he does not think it will come fast enough for us to avoid large structural change in our economies.   

There have been numerous reviews of this book so I will not try and do another review.  In my case, I would like to focus on making a few points that came to me as I thought about these issues.  And yes, the book does make you think.

First, while the world may try and get smaller once again as it was in the past, we cannot forget the great strides in communications technology.  So while we may not be able to travel as much, we will continue to be aware of the goings on all around the world.  The internet will continue to bring us together with increasing global collaboration.  Just imagine all of the ways that improved technology can reduce oil use.  And we know from this recession that it doesn’t take a really huge drop in demand for oil prices to fall.  Think of all of the communications technology that can reduce consumption.  For example, how much oil does it take to print and distribute newspapers?  Well, it now looks like the future will have paperless newspapers fed to us on e-readers.  How about magazines?  Books?  If we eliminate these from use (or even reduce their use dramatically as a start) what will the impact be?  No oil to ship the paper to the factory, no printing requiring energy, no packaging and most of all, no distribution.  And this is only one example.  How about business travel?  Of course, it will never go to zero but with improved video conferencing the need to travel by plane to far away places or even by car somewhere closer is being reduced.  Look at the reductions in business travel already apparent in this recession.  In these cases, it means that we will hopefully be able to use oil to transport only what needs to be transported as we get more efficient and reduce overall transportation.

He discusses climate change as well.  This is also an important point.  The global concern about carbon emissions is leading us to price carbon, thus increasing the cost of oil from its normal economic position.  The goal is to use policy to change behaviour and find ways to move off oil to more carbon friendly forms of energy.  This means that governments are working to try and encourage fuel switching BEFORE the oil actually runs out due to concerns about its current use – not due to concerns about its scarcity.  This should have a positive impact as policies continue to encourage demand reduction in advance of a global supply catastrophe.

Next, if he is right and factories once again move closer to home, yes, blue collar jobs long lost to far away places may indeed come back home to North America.   But the current trend of white collar jobs moving off shore will not be reversed.  It is ironic that the man on the factory floor may once again have a good job while the engineer designing the process may more often be in places with low cost professional labour.  Engineering, accounting and other professions in the service sector that produce mostly paper will not see their jobs return as the internet will assure that quality work can be done literally anywhere around the world.  So does this mean that in the next phase of globalization it is the higher paying jobs that will be moved away to lower cost locations while the low paying jobs return home? 

Was an enjoyable read.  I am interested in other’s thoughts on this book. Let me know what you think.