(John Kemp is a Reuters market analyst. The views expressed are
By John Kemp
LONDON Jan 25 Hydraulic fracturing and
horizontal drilling have laid to rest concerns about peaking oil
and gas supplies for a generation, but they have also made the
search for comprehensive policies to restrain greenhouse gas
emissions more urgent.
In a world where fossil energy remains abundant and
relatively cheap the economy will combust increasing quantities.
Oil and gas reserves will last long after the planet has been
gently cooked unless governments enact deliberate policies to
Fracking has solved one problem (peak fuel) but sharpened
another (climate change). Policymakers and voters can no longer
rely on increasing scarcity, and rising oil and gas prices, to
restrain demand and carbon emissions through the market.
Public support for policies to tackle global warming by
curbing use of fossil fuels is broad but not deep. For a
minority of environmentally minded voters and policymakers
climate change is the over-riding priority. But for most voters
and politicians climate is only one of number of competing
priorities that include quotidian concerns about growth, jobs,
income and quality of life.
In surveys, most voters express general support for policies
aimed at limiting emissions through curbing the use of fossil
fuels. However that support quickly evaporates when restrictions
entail substantial changes in behaviour or quality of life such
as large increases in the cost of international air travel,
motor fuels and home heating.
Most voters want to avoid climate change. But they also want
to continue taking holidays and visiting relatives on other
continents, commuting from the suburbs and countryside to work,
and having access to a wide range of energy-intensive products
at affordable prices.
So far, the political process has struggled to enforce
voluntary curbs on oil and gas consumption. The shaky curbs
agreed under the Kyoto process have fallen victim to the
recession as household priorities in the advanced economies
shifted from climate to jobs and incomes.
Isolated policies to curb emissions continue to move forward
in jurisdictions such as the EU, Australia and California.
Policymakers have, however, pushed back proposals for more
comprehensive global measures until at least 2020, in effect
admitting the problem is too hard for now.
PEAK OIL GOES AWAY
The relationship between energy prices and climate change is
complex. In some instances, rising prices for gasoline, gas and
electricity have sapped voters' enthusiasm for ambitious
decarbonisation targets that would push their fuel bills up even
Under pressure from voters anxious about soaring utility
bills, Britain's enthusiastic climate minister Chris Huhne has
been busy rebranding clean energy as affordable energy, a point
echoed by U.S. President Barack Obama in his State of the Union
address on Tuesday.
Obama did not mention either carbon or emissions at all, and
climate only once. But the word clean or cleaner got eleven
mentions, and the president made sure that the first was twinned
with cheaper, promising "a strategy that's cleaner, cheaper and
full of new jobs".
The same rebranding is widespread. In an information paper
on "Policy considerations for deploying renewables", published
on November 23, the International Energy Agency (IEA) put
protecting climate and other environmental issues third after
energy security and encouraging development in its list of
reasons why governments and consumers should take measures to
increase the share of energy from renewable sources
In general, however, fears about future scarcity and rising
oil and gas prices have been an important spur to emissions
control. Concerns about peaking oil and gas enabled policymakers
to promote emissions control as a cost-saving measure in the
short and medium term, as well as having long-term benefits in
terms of global warming.
The biggest reductions in fossil fuel use (the switch to
nuclear energy in France and Japan in the 1970s and 1980s, the
ethanol blending mandate in the United States in 2005 and 2007)
have all been spurred by spiking oil and gas prices.
Price rises ensured that the private and national interest
in cutting usage of expensive fuels coincided with the public
and international interest in curbing emissions, overcoming the
obstacles to policy action.
The IEA, which is supposed to be watchdog for energy
consuming countries, often seemed to welcome the surge in oil
and gas prices in 2003-2008 because it sharpened the incentives
for conservation and emissions control. As the IEA recognised,
fear of even worse rises in future was the most effective
stimulus to action.
Fracking now threatens to change all that. Just as hydraulic
fracturing is transforming the outlook for oil and gas supplies
in coming decades, it is also revolutionising the context for
emissions control policies and climate change.
In the mid-2000s, policymakers could draw on the prospect of
shrinking oil reserves, medium term shortages, and rising prices
to make the case for aggressive action to promote efficiency,
clean energy and behavioural changes to cut energy consumption.
Now policymakers must make the same case in a world where
supplies have been substantially enhanced and prices could be
flat or even falling in the medium term.
PLENTIFUL, CHEAP FUELS
The best way to appreciate the magnitude of the problem is
to examine how market expectations for medium-term oil and gas
prices have shifted in the last four years.
In July 2008, five-year forward oil futures contracts
implied that the market expected prices to be around
$140 per barrel in 2013.
Obviously that expectation looks unlikely, barring
geopolitical upheaval. In the short term it has been mostly
invalidated by the recession. But profound shifts in both
consumption (from ethanol blending and efficiency) and supply
(fracking and deepwater drilling) have done more to change the
Mostly as a result of the fracking revolution, the market
now expects oil prices to be as low as $90 in 2017 based on
five-year forward prices.
The shift in expectations for North American natural gas has
been even more dramatic. Five-year forward gas prices
have more than halved from $10.50 per million British thermal
units (mmBtu) in 2008 to just under $5.
There is no guarantee the market's current five-year
forecasts will prove any more accurate than those in 2008.
However, neither markets, nor policymakers, now expect serious
shortages of oil and gas in the next decade.
The IEA has written about "a golden age of gas". A similar
revision of its medium-term outlook for oil is probably not far
behind. Policymakers can no longer rely on a forecast of
ever-rising fossil fuel prices.
By taking away the spectre of peak oil and gas, fracking has
cruelly undercut one of the most important (complementary)
arguments for curbing carbon emissions.
Policymakers can no longer hide behind the market to tackle
emissions. In future, they will have to make the case for curbs
directly, based on climate effects. Past experience suggests it
is difficult to catalyse sustained and aggressive reductions in
emissions based on climate effects alone but fracking means
politicians and environmental campaigners have no other choice.