The Dynamics of Oil, Coal, Gas and Carbon and Their Interrelationship

As the Price of Carbon continues to change worldwide, its intricacies affect its relationship with coal, oil and gas and become extremely complex. At the most basic level carbon prices aid cleaner energy sources with becoming more sales competitive with traditional sources such as fossil fuel. Carbon Prices also diminish want at the fringes.

As the prices of carbon reaches to different geographies, the interrelationship between coal, oil, gas and carbon becomes more difficult. At the simplest level, carbon prices lessen want for fossil fuels at the margin and aid in cleaner energy sources to become competitive with fossil fuels.

These key scenarios include Supply shocks and Demand Boom. Supply Shocks come in two types, Constraints and Surplus, both types imply negatively correlated carbon and fossil fuel prices.

With constraints (peak oil scenario) Fossil fuels are finite resources. Once half of the ultimately recoverable crude oil reserves have been depleted, production inevitably will fall, according to traditional peak oil theory. Crude oil production may be near its peak, and natural gas may follow soon after. The peak oil scenario addresses the "other environmental issue" in fossil fuels: their exhaustibility. If it is true that we are facing an energy crisis increasingly limiting our ability to produce large quantities of fossil fuel on short notice supply scarcity will drive fossil fuel prices higher. Fossil fuel scarcity and higher prices will create an environment where renewable energy is more competitive as a substitutable energy source and de-carbonization may be self-sustaining.

Constraints (peak oil scenario): Fossil fuels are exhaustible resources. Once half of ultimately extractable crude oil reserves have been depleted, production most likely will fall according to peak oil theory. Unrefined oil production may be at its peak, and natural gas will follow closely after.

Constraints (peak oil scenario): Fossil fuels are exhaustible resources. Once half of ultimately recoverable crude oil reserves have been depleted, production inevitably will fall, according to traditional peak oil theory. Crude oil production may be near its peak, and natural gas may follow soon after.
Surplus (coal glut scenario): Although other fossil fuels may be more constrained, coal is still plentiful, and the technologies for extracting it are improving. High prices for oil and natural gas may stimulate the availability of coal, and new technologies may in fact make it extremely cheap.

2. Demand boom (Emerging market growth) - Conservation and efficiency notwithstanding, world energy demand is likely to grow substantially over the next 20-50 years, and much of it likely supplied by fossil fuels, unless clean energy sources can scale up production rapidly. Demand-led scenarios imply positively correlated carbon and fuel prices.

If oil and and gas use drives the total demand for carbon, the peak oil scenario implies that oil and gas prices and carbon prices will tend to move in opposite directions.

If energy demand stays constant as supplies dwindle:
Higher oil and gas prices will promote switching to alternatives in transport and electricity markets,
Switching can occur without extremely high carbon prices,
Total oil and gas use will decline, along with emissions from oil and gas.

To the extent that oil and and gas use drives the total demand for carbon, the peak oil scenario implies that oil and gas prices and carbon prices will tend to move in opposite directions.

The coal glut scenario (negative correlation for carbon and coal prices) addresses the possibility that coal may become extremely inexpensive and plentiful as global reserves remain substantial and the technologies for extracting and utilizing it improve in the medium term, bringing more of this resource to market. In this case, better technologies and substantial reserves allow for more coal to be supplied at cheaper prices. Other things equal, the quantity used will increase, driving up demand and prices for carbon offsets in a cap-and-trade carbon market. As coal prices collapse, carbon prices move higher to stop a massive shift towards coal use under a cap-and-trade system with a carbon target. Without a cap-and-trade carbon market in this scenario, there would be catastrophic emission consequences.

The emerging market growth scenario (positive interrelationship possible for fuel and carbon prices) focuses on the recent growth of emerging market energy demand. Together with industrialized energy use this promotes demand for all energy sources. This scenario sees fossil fuel prices rising as well, but, in this case, due to increased global demand. the outcome is greater fossil fuel use, even at higher cost. With more fossil fuels being used, there is more demand for carbon offsets, and so fossil fuel and carbon prices rise in tandem.

The correlation between fossil fuel and carbon prices depends on which of these scenarios prevails.

In our current situation these scenarios can and probably will happen simultaneously, but the correlation of fuel and carbon prices will depend on which one prevails. Up until now, it looked like the emerging market growth scenario with tight energy markets would be most likely to win in the foreseeable future.

However, in the context of market events, as the world moves into a likely recession, energy supplies will come under less pressure in the near-term, and prices are likely to remain lower.

In terms of the carbon price in Europe, the relationship between carbon and energy prices has been a function of the fuel switch between coal and gas leading to a reasonably high correlation between oil prices and carbon prices.

Long-term outlook
In the long-run, the emerging market growth scenario looks most likely to dominate, with peak oil and coal gluts both likely.

Article Source: http://www.mycontentbuilder.com

Abhi Uppal is a recognized expert in Clean Technology and Renewable Energy.

Please Rate this Article

5 out of 54 out of 53 out of 52 out of 51 out of 5 

Not yet Rated