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The nuclear power implications of OPEC prices
The nuclear power implications of OPEC prices
L.G. Brookes It is g e n e r a l l y a s s u m e d - not unr e a s o n a b l y - t h a t q u a d r u p l i n g oil prices offers a g r e a t o p p o r t u n i t y to nuclear p o w e r and that installation rates should n o w be m u c h h i g h e r than if prices had s t a y e d d o w n . M r B r o o k e s argues t h a t this v i e w is t o o facile: the effect of raised oil prices on W e s t e r n economies is complex and Ionglasting; nuclear p o w e r prospects are at least as likely to be depressed as e n h a n c e d - unless m o r e w e i g h t is given to l o n g - t e r m strategic factors. M r L.G. B r o o k e s is w i t h the E c o n o m i c s and P r o g r a m m e s Branch of the U n i t e d K i n g d o m A t o m i c Energy A u t h o r i t y , 1 1 Charles II Street, London, S W l Y 4 Q P , U K. The author is grateful to the UK Atomic Energy Authority for permission to publish this article but it must be understood that the opinions expressed in it are his own and not necessarily those of the UKAEA.
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A simple model of nuclear installation Figure 1 shows in a greatly simplified form the way in which the nuclear component builds up. Starting from the assumption that the case for nuclear power at some level has been made out (ie that there is a load factor at which nuclear power is preferable to other systems), the demand for it is created by: • the growth of the electricity system; and • the retirement of over-age plant of all types; and constrained by" • the need to maintain a healthy component of peak and 'low merit' plant (ie low capital cost plant that is only brought into operation at or near times of peak demand); and • the load factor at which nuclear plant breaks even with nonnuclear plant - below this critical load factor, non-nuclear plant has the edge, and the rate of nuclear installation may have to be constrained so as not to pass this threshold. The breakeven load factor is determined by the relationship between nuclear and fossil fuel prices but it should be clear from Figure 1 that until so much nuclear plant has been installed that the 'tail end' of it is operating at the breakeven load factor, relative fuel prices play no part in the rate at which nuclear power can be installed; and it may be 15, 20 or more years after the start of a regular nuclear power programme before installation is constrained by considerations of relative prices. This is, of course, all assuming that there is some load factor at which nuclear power is preferable. This was the case in the UK even at the old oil prices. It is quite possible that the new prices may have taken some countries through this threshold by making nuclear plants economic in the small sizes that they need, where, previously, they might not have been economic in these sizes. Apart from this consideration it would seem, however, that the more important factor affecting nuclear power growth is the rate of expansion of the electricity system as a whole. It is no help to nuclear power - quite the reverse - if high oil prices simply make an already good case stronger whilst reducing the size of the market. Let us, therefore, consider how growth rates are likely to be affected by the action of the OPEC countries, and whether there are any further implications for nuclear power strategies. ENERGY POLICY June 1975
The nuclear power implications of OPEC prices Assumptions: 50 GW of r,on nuclear stat,ons at year 0 Plant lifetime = 40 years Not less than 20~ of all new and replacement plant to be non nuclear for operational reasons 20"5 of plant operates at full availabildy [80%1 remainder in merit order to match load Nuclear, may take up 80% of all new and replacement plant subject to /he marginal toad factor not falling below the breakeven point with fossil plant
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T h e e c o n o m i c e f f e c t o f raised oil prices The chain of effects of raised oil prices is broadly as follows: 1. First the OPEC countries demand more money for their oil and make it clear that they intend there to be a transfer of real income from consuming countries to producer countries. 2. But, with a few comparatively unimportant exceptions, current expenditure by OPEC countries is less than 50% of their oil earnings. For the most part the remainder of their oil income is placed on short-term deposit in the Western banking system where it earns a rate of interest that can scarcely be keeping pace with inflation at present. 3. Thus - as a whole - the consuming countries earn from the OPEC countries the money to pay for something under half of the oil they use, and it could be argued that the OPEC countries lend them the money to pay for the remainder (though only in the sense that these cash deposits go some way to maintain national liquid reserves - the money remains the property of the oil producers who can withdraw it at any time~). The effect is to leave consuming countries in heavy debt to the producing countries, with, in addition, a steadily mounting burden of annual interest to pay. 4. The effect on individual consuming countries is to absorb in higher oil prices, and the prices of goods in which oil plays a part, a large 125
The nuclear power implications of OPEC prices
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sum in spending power that was hitherto spent on other goods and services. This faces the consuming countries with two choices: either they must allow consumption of those goods and services to fall - which will cause unemployment; or they must create, by government expenditure or tax adjustments or otherwise, a compensating addition in spending power to maintain demand - which is inflationary. (There is a third course which has some painful consequences in the short term but has long-term advantages. It will be mentioned later.) To put the figures into perspective, oil imports now cost the U K approximately £3 billion 2 a year. Just over £2 billion of this represents the increase in prices since October 1973. Of this, perhaps something under £ 1 billion may be offset by the increased real demands of the oil producing countries (representing a transfer of real goods and services from U K consumers to the oil countries). This leaves a deflationary impost of just over £1 billion. This needs to be compared with the U K gross national product of £55 to £60 billion. Attempts to restore to U K consumers (by pay increases and by tax and other adjustments) the real consumption that they have lost as a result of the transfer of real incomes to the OPEC countries are bound to be inflationary - since it amounts to two sets of incomes chasing the same goods. The effect of compensating for the quasi-tax element in the raised prices - to prevent the unemployment that would otherwise follow from a reduction in demand - is more complicated. It amounts to closing our eyes to obligations to transfer real income or assets to the OPEC countries at some time in the future - ie when they come to spend their deposits. Ideally we should be taking steps now to meet those future obligations and this would be bound to have some effect on our current patterns of production and consumption. To the extent that surplus OPEC funds on deposit find their way into the economy as short-term loans to industrial and personal borrowers there is a risk of some double compensation for the deflationary effect of this money; and this would certainly be inflationary. Note that the raised oil prices with no fully compensating increase in OPEC imports have the external effect of putting all the consuming countries in debt to OPEC so that they cannot (as they could with the erstwhile more multi-directional fluctuations in world trade) liquidate their debts as a whole by adjusting their trade with one another: the reduction of one consuming country's debt can only be at the expense of another's - the so-called 'beggar your neighbour' policies. There is the further external effect that a large part of the international money supply that lubricates the wheels of world trade is all flowing into one corner of the world economic system - namely OPEC. Thus, although there is, apparently, a great deal of international liquidity in the form of what has come to be called petrodollars, this liquidity lacks the multi-directional flow necessary to facilitate world trade. Attempts to spread it by what has come to be called recycling can only be made against the risk that the owners can withdraw it at short notice. The reduction in world trade brought about by international liquidity problems and by countries succumbing to the temptation to try to solve their problems at the expense of others in the same plight has yet a further effect. It sets off a reduction in demand in ENERGY POLICY June 1975
The nuclear power impfications of OPEC prices
export industries that exacerbates unemployment and tempts the consuming countries to put yet more purchasing power into their economies - by fiscal and monetary means - in an attempt to maintain demand and keep up employment. This carries the risk of further inflation. Those countries that view inflation more seriously than they view unemployment take the opposite course of deflationary measures which reduce demand, lower business confidence, and lead to lower levels of investment which - in due course - slow the pace of technological progress and productivity. This can defeat the object by curbing output per man whilst expectations of higher real incomes expressed in the form of pay claims remain unabated. 9. The high rate of inflation in the consuming countries that goes with this chain of events makes the oil producers feel that they are being cheated because their oil dollars and pounds buy fewer goods. This sets them on the path to further increases in oil prices which can only give another spin to the wheel. 10. A subsidiary problem is that the reduction in economic activity and the loss of business confidence that stems from the upheavals in the monetary system and the problems of a high rate of inflation leads to a flight from traditional homes for savings into more tangible goods - namely commodities. The resulting great disturbance to the world's commodity markets creates further confusion and disarray. This is a grisly tale of woe. It is not only that some of the effects are directly damaging to Western economies. There is also the problem that both national and business decision makers have suddenly found themselves swept into uncharted seas: familiar institutions are no longer able to play their traditional roles - the Stock Exchange is an obvious example; and the situations and the quantities are very atypical and experience is no guide on how to handle them. In the U K we have monthly trade deficits that would, only a little while ago, have caused concern if they had been annual deficits; and the Chancellor is planning for a government borrowing requirement of monster size (£9 billion). Almost the only thing we can be sure of is that the effects as a whole are seriously detrimental to national and world economic performance: we shall be lucky to prevent our economy slipping backwards in the next few years, where once we had hopes of increasing our growth rate. Other Western countries are similarly affected to a greater or lesser degree. In practice the situation is likely to be even worse than it is painted above. So far we have dealt mainly with first order effects. There are in addition what are called multiplier effects. If we reduce our imports from other countries they are unable to buy so much of our exports which leads us in turn to cut back further on imports and so on. There is a similar internal effect: the reduction in the earnings of our export industries reduces incomes in those industries; thus incomes that would have been spent on other home-produced goods are not spent and this too produces a chain reaction, or multiplier, effect. This is what some forecasters mean when they talk about the oil crisis carrying the danger of spiralling down into a deep world slump. Then there is a subtle, semi-technical effect of raised energy prices. This effect may relieve unemployment but it halts - and may reverse the path towards higher income per capita. It is that higher energy costs shift the breakeven point between labour-intensive and energy-
ENERGY POLICY June 1975
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The nuclear power implications of OPECprices
intensive solutions to industrial problems. Activities which - at the old energy prices - were worth mechanising and conducting in an energyintensive way may no longer be worth treating in this way. They may either remain predominantly labour-intensive, or a solution that errs on the side of labour-intensiveness may be adopted. It is a matter of simple economics: if the balance between labour and energy costs changes, the balance between labour-intensive and energy-intensive methods also changes. Unemployment may be relieved but it takes more men than would otherwise have been the case to produce the same quantity of goods. Hence it is a step back from the high levels of GNP per capita that energy-intensive processes provide. It is again a move towards lower real incomes per head at a time when the momentum is strongly towards higher money incomes. Finally the uncertainty about energy supplies and prices tempts consuming countries to expand indigenous supplies - even at higher cost; and in general there has been a flight towards measures for energy independence. Such constraints on sources of supply and the associated reductions in trade between countries are bound to lead to sub-optimal solutions to economic problems and hence to reductions in real output and income.
The effect on the demand for energy Reduced economic performance means reduced demand for energy in general and electricity in particular. Given that it is the annual increment to the electricity system rather than its total size that provides the scope for building up the nuclear power component, it follows that the demand upon the nuclear power industry is highly sensitive to the electricity growth rate, which is in turn sensitive to the performance of the economy as a whole. If we are to look forward to a high rate of growth for the nuclear industry we must therefore assume either that some relief to the underlying economic malaise is in sight or that there is some reason for believing that nuclear power expansion can be maintained against the general stream of economic performance.
Is relief in sight?
3More recently Professor Adelman - whilst not w i t h d r a w i n g his general view of cartels - has pointed to factors in the Arab oil case tending to prolong the high prices.
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Some optimists - and this includes eminent economists like Professor Maurice Adelman 3 of MIT and Professor Milton Friedman, better known for his monetary theories - believe that cartels are inherently unstable and that the OPEC cartel is no exception and will crack before very long. With the greatest respect, I believe this scenario overlooks the highly atypical pattern of most OPEC economies. The optimistic argument is based on the belief that the oil-producing countries will behave like classical entrepreneurs and act to maximise the net present value of their assets. This means assuming a preference for current rather than future earnings that can be quantified by reference to the interest rate. (A real interest rate of 10% means that consumers would need to be paid £110 to encourage them to defer for one year the satisfaction they get from spending £100 today - ignoring inflation.) It also implies that the producers will make judgements balancing the appreciation of the value of oil in the ground against their assumed preference for earnings today rather than in the future. The more they fear a fall or stagnation in future oil prices the more likely they are (so it is said) to accept lower (or stable) prices today ENERGY POLICY June 1975
The nuclear power implications of OPEC prices
'*Deflationary in the sense of diverting purchasing power from other goods.
ENERGY POLICY June 1975
and offer unrestricted quantities in return for those prices. The optimists believe that OPEC, sooner or later, will break ranks as one or more members decide to get the best return they can while the going is good. I will explain why I think this thesis may turn out to be wrong. The occasion of the quadrupling of oil prices was the Yore Kippur War and it was associated with the decision of the Arab countries to manipulate supplies for political purposes. But the reason why this was possible was that non-Arab oil was phasing out as a real largequantity alternative to Middle East oil. In particular we had the declared intention of the USA to import 50% of oil requirements in 1985 from Middle East sources. Underlying these events was the disquiet of the oil-producing countries at being heavily dependent upon a single wasting asset for their incomes. This concern leads them to be more interested in extending the life of their asset than in maximising its net present worth: return per barrel thus becomes more important than the percentage return on their capital asset. So great is their concern about future spending power and so easily can they meet the cost of current needs that it could be assumed that they have a preference for future rather than current consumption, which implies a negative interest rate. This is indeed all they are receiving on the funds deposited in the banking systems of the West because inflation rates are, in general, running at a higher level than the interest that is being paid. (Because banks are beginning to be embarrassed by the volume of short-term Arab deposits - which cannot be re-lent on a long-term basis for fear of withdrawal by the A r a b s some of them are offering rates below the general level of interest rates.) However, although in logic they ought to be satisfied with a negative interest rate they are in fact complaining about the deflation of the value of their money holdings and have made noises about relating oil prices to some cost of living index. Such a move would permanently build inflation and/or unemployment into the system unless we can bring about some compensating flow of demand for the Western goods that would otherwise remain unsold or unproduced because of the deflationary effects of high oil prices. 4 Some of the producing countries show signs of appreciating this problem and would accept stable or slightly lower prices for oil, as a contribution to stemming inflation and maintaining the purchasing power of their bank deposits. Relatively small countries with very large sums of money in the bank - enough to maintain their entire populations for some years have an attitude towards the marketing of their one income-earning asset that is quite different from that of countries with small reserves and diverse economies that depend heavily upon maintaining their own momentum. There is every reason to suppose that the oil producers would heavily restrict output and tolerate a low level of current earnings (supplemented by withdrawals of savings) in the interests of maintaining the long-term price of their product. If, therefore, new supplies of oil come to be marketed on a fairly large scale then the Arabs may not respond in the traditional way by lowering their price (to boost demand) and raising their output to maintain their earnings. It seems more likely that they would restrict output - very severely if necessary - to avoid depleting their reserves for lower per-barrel returns. If this is so the consuming countries must accustom themselves to high oil prices and must adapt their economic policies to match. A 129
The nuclear power implications of OPEC prices
great deal of the present difficulty is due to the Arabs spending only the lesser part of their earnings on goods and services from the West and from Japan. There is one semi-permanent solution to reconciling, on the one hand, their determination to have a transfer of real spending power from the West to themselves, and an assured future income with, on the other hand, the Western problem of steering between the Scylla of inflation and the Charybdis of unemployment. It is for the OPEC countries to put their money into productive capital investment either in the Western countries themselves or in the Third World with the Western countries providing the technological know-how and plant. This would enable the Arabs to acquire an interest in long-term income-earning assets that would provide a more assured return on their surplus funds than they get from 'hot' money in Western banks, whilst the West would acquire alternative employment for the resources thrown into unemployment by the deflationary effect of higher oil prices. There is, however, a sting in the tail. It would be necessary for the transfer of consumer spending power from the West to the oil-producing countries actually to take place. The higher proportion of the Western working population employed on production goods must be balanced by a lower level of expenditure on consumption goods - in other words a lower standard of living than would otherwise be the case. It is to be hoped that the long-term effect of a higher level of investment would be higher productivity levels and hence some catching up with incomes per capita, but any attempt to counter the initial reduction in consumption by higher wages or fiscal and monetary measures of one sort or another could only be inflationary. This solution - since it would substitute activity in the capital goods industry for the production of consumer goods - would, once equilibrium had been re-attained, maintain economic activity and the demand for energy would be unabated. This state is obviously not one that could be brought about at a stroke; and it would call for universal recognition (ie throughout the consuming countries) not only that this would be the right solution (I doubt whether there is a great disagreement about this) but that it can and should be brought about. Failing this, setbacks in international trade would continue to bedevil economies such as ours that depend to a substantial extent upon such trade to maintain their output. This halcyon solution is unlikely to be applied quickly, although the hard facts of the situation will tend to make the participants gravitate towards it. We can, therefore, look forward - if that is the right expression - to some years of economic embarrassment with, other things being equal, low energy and electricity growth rates. There may, however, be some relief for the nuclear power industry as a result of the widespread current concern with energy futures and I will return to this later.
Putting North Sea oil in its place Just as Baby Bunting was comforted by the promise that Daddy would soon bring him a rabbit skin to keep him warm, so we are becoming accustomed to the belief that we shall all be warm and comfortable when North Sea oil starts to flow. Undoubtedly we are very lucky in having this windfall advantage over the other oil-consuming countries but there are two points we must remember: 130
ENERGY POLICY June 1975
The nuclear power implications of OPEC prices
•
•
the net 5 benefit from North Sea oil will amount to only a relatively small proportion of our total income - unlike the case of the Middle East oil states; and our economic fortunes will continue to depend very heavily upon the level of world overseas trade; and the earnings from the North Sea may be insufficient to compensate for damage to our economy from a reduced level of world trade.
Whether the North Sea acts as no more than a mild analgesic or puts us on the road to full recovery depends very greatly on how we respond to the opportunity that it offers us. The prime effect of indigenous energy is to reduce the balance of payments deficit, or to bring about surpluses. This relief of a major constraint on U K economic performance gives us an unprecedented opportunity to expand our economy in other directions. Unless we seize this opportunity the wealth from the North Sea oil and gas could become simply inflationary to the extent that it is not offset by increased imports of consumer goods. This situation poses nice problems of national economic management. Should our oil and gas supplies be eked out to give us energy independence for a maximum period or should we seize this opportunity to 'go for growth' using exports to balance the inevitable imports of capital plant and consumer goods that follow from attempts to expand the economy? There may well be a threshold effect. If our non-oil deficit together with our obligations to service Arab debt turns out to be substantially larger than our earnings from exports of oil then we shall remain in the 'stop' part of the 'stop-go' cycle. We may not be so far down the pit as hitherto but economic disaster - like death - knows of no fine shades. If our new-found asset is to be of really lasting value we must use it to equip and strengthen our economy, being prepared to sell as much oil as is necessary to keep our external account in balance while we do so. Direct imports of capital goods and import pressures created by the earnings of the capital goods industry may be such that we can only balance them by exporting oil on a significant scale. In doing our sums we may have to take account of the fact that once we become oil exporters there will be a natural bias against buying other goods from us. We may then find our membership of the EEC - with its taboos against trade restrictions within the Community - an invaluable asset. To sum up, the North Sea may do much to help us weather the world economic storm but - I suggest - only if we respond boldly and imaginatively to the opportunity it offers. A 'piggy-bank' attitude towards this stock of wealth could easily result in its doing little more than stoke the fires of inflation.
Alternative views of the economic future
SThere are dividends to be paid to foreign investors and the cost represented by diversion of resources from other activities into the offshore oil industry.
ENERGY POLICY June 1975
It is only fair to say that there are more optimistic views of the future of the U K economy than the one given in this paper. There is a wellsupported school of thought that argues that - because the oil producers are not greatly increasing their demands upon the real output of the consumers - the real effect on the Western economies ought to be small. Furthermore because the money paid for oil must find its way back into the Western banking system, the new balance of payments deficits are more apparent than real: they exist only 131
The nuclear power implications of OPECprices because capital flows do not figure in these balances - they only show up as changes in monetary reserves. And it is true that U K reserves have stood up well and even increased during the year in which high oil prices have been in force. 6 Just taking the payments at their face value, the increases are not really crippling: they only represent a small percentage of gross national product, and if our economy could continue to grow at the rate of the last few decades it would only take a year or two to put us back in our old position. Like many other observers I have found these sentiments appealing, and I still think they ought to apply. Unfortunately the writing on the wall is discouraging; the general disarray caused by the abruptness of the change and the reaction of consumer countries to being presented, overnight, with large balance of payments deficits seems to be leading to reduced levels of internal and external economic activity that feed on one another and which could take quite a long time to reverse. In addition, there are some more basic real adverse factors. First the general move towards alternative - more costly - sources of energy will be an additional real burden on Western economies; and secondly a more general - and very natural - tendency towards autarky, if only to escape the risk of political pressures from outside suppliers, will automatically lead to additional constraints on patterns of trade and sub-optimal solutions to economic problems. These factors will almost certainly continue to be with us even if we find a way through the morass of financial and monetary difficulties.
The strategic case for nuclear energy
eAIthough the fragility of these reserves is illustrated by a fall of $1 billion in December 1974 because of Saudi Arabia's insistence on payment in dollars instead of sterling.
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The examples shown in Figure 1 illustrate that despite a breakeven load factor as high as 50%, it is as long as 17 years before nuclear power programmes need be restricted for economic as distinct from operational reasons. A lower breakeven load factor - associated with higher oil prices and reduced economic performance - postpones by 15 years (to 32 years) the time when the nuclear percentage need be held down below the share that operational considerations would dictate; but this advantage is, in the examples given, more than offset by the slower rate of growth of the electricity system. It is important to remember however that these are only hypothetical examples, chosen to illustrate the mechanisms at work. They show the direction the quantities are likely to take in the short term though not the precise quantities themselves. In the longer term other factors are likely to be increasingly dominant and account must be taken of these now because there will be insufficient time to do so later. They are: • The oil prices, which are bound to rise sooner or later anyway, reflecting increasing pressure of demand on limited supply. Under ordinary market conditions the increases would have been absorbed without economic damage. There is no reason to suppose that the West will not, given time, recover its equilibrium whilst the underlying market price catches up with the present contrived prices. Cases 1 and 2 in Figure 1 will therefore tend to converge to a combination of the dominant features of each of them. • The growth of world demand for energy, which, even on fairly modest economic predictions, is such that a new major source of energy must be widely adopted well before the end of the century if the reasonable economic expectations of a world which is preENERGY POLICY June 1975
The nuclear power impfications of OPEC prices
dominantly poor are to be met. Even quite pessimistic estimates of the economic effects of the current crisis postpone the problem by a surprisingly short period. The point is expanded below.
7F.G. Adams and P. Miovic. 'On relative fuel efficiency and the output elasticity of energy consumption in Western Europe', J o u r n a l o f Industrial Economics, Vol XVII No 3, November 1968. 8L.G. Brookes, 'Economic Prosperity and Nuclear Power,' A n n a l s o f N u c l e a r Science a n d Engineering, Vol 1, reporting work done in 1971/72. 9M.K. Hubbert, 'Energy Resources'. In: Resources and Man, US National Academy of Sciences, Freeman & Co., San Francisco. 1969.
Figure 2. World consumption and potential world production of useful energy from fossil fuels. l i n e - Predicted w o r l d consumption on t w o different sets of assumptions about national GNP growths. Continuous
Figure 2 shows estimates, made two or three years ago, of the imbalance between ranges of world demand for energy and of the supply from the traditional sources. All the figures are in terms of useful energy - that is making allowance for the differing efficiencies in use of the different fuels. 7 These estimates showed a possible shortfall of useful energy by about 40%, in the median case, by 2000 AD, with the gap widening thereafter. Undoubtedly some of this deficiency could be made up from some of the non-traditional sources of fossil energy or from higher extraction rates from traditional sources, and it was postulated at the time these estimates were made 8 that about half the gap might be made good in this way, with the other half being supplied in the form of nuclear energy as the only new source of energy sufficiently mature technologically to make an effective contribution within the timescale. This implied building up the world nuclear capacity to 5500 GW by 2000 A D - 100 times the present nuclear capacity and about 5½ times the present installed capacity of electrical plant of all types in the world. This represents a daunting prospect for the nuclear industry, though it can be demonstrated that it should be possible. The assumption was of a modest average load factor of 50% for nuclear plant. Taking 60% - a reasonable figure the target falls to 4600 GW - still a very high figure to aim at. This is not an apocalyptic world model forecast based on simplistic exponential projections. The forecasts of GNP growth on which it was based were derived from a region by region - and, in some cases, country by country - study of past economic performance and sober consideration of future prospects. In most cases future growth was tapered to recognise that constraints on growth bite harder as absolute levels of output rise. The forecasts of fossil fuel production were those of M. King Hubbert 9 who went through a period of being regarded as somewhat conservative in his estimates but who is being vindicated by current thinking about the problems of estimating reserves. The resulting assessment of 4600 GW as the total world nuclear power plant requirement for the end of the century is, if anything, conservative in relation to the declared nuclear plans of individual countries.
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ENERGY POLICY June 1975
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The nuclear power implications of OPECprices
A rough estimate of the effect on energy demand of the new situation is that by 2000 A D demand could be 25% lower than the median estimate in Figure 2. But, surprisingly, although this greatly reduces the estimated gap at 2000 ao, it postpones for only five years the estimate of the point in time at which the traditional sources of fossil fuel cease to be sufficient to meet requirements and postpones for perhaps only six or seven years the target date for building up to a world nuclear power system of 4600 GW. Thus although the reduced economic prospects in the short term seem to damage the outlook for the world nuclear industry the long-term requirement is not much altered. We have simply been given a few more years to meet a tough target. However, the responses will tend to be determined by the short-term situation and this could be dangerous. It has been argued that man has been instinctively right in the way he has tackled his problems; that is by coming up with what have been called, somewhat pejoratively, 'technological fixes' to get him out of difficulty, increase his control over resources, and widen his options for the future. He is now faced with a new difficulty: the lead times for his 'fixes' are beginning to get longer than the warning that he gets of trouble ahead. The size of the estimate of apparent nuclear power requirement mentioned above and the formidable task it would represent is, almost in itself, enough to suggest that action to meet the future problem has been left too late. The fortuitous setback that now faces the developed world should be viewed as a providential second chance to plan our way out of our future difficulties. We shall need the large new sources of energy that uranium consumed in fastbreeder reactors can give us; and no time should be wasted in moving towards a predominantly nuclear-fuelled electricity system with an increasing proportion of breeder reactors. We have new problems in the shape of having to embark on the necessary capital investment at a time when economies are already under strain and when the energy inputs to the investment programme must come from sources that have become more costly and more uncertain, but these difficulties should make us all the more determined to move towards a wider choice of options for meeting our future energy needs. And, as earlier sections of this article suggest, the present UK financial position (and that of other oil-consuming countries) is consistent with a switch away from consumption and towards investment. This is, of course, only one of a number of estimates that might be made of the world energy balance three decades ahead. But it is significant that quite major changes in the input figures - for example, the assumption that total energy demand might be scaled down by 25% to allow for economic setbacks - make relatively little difference to the difficulty of the task to be faced. We are simply given a handful of extra years to reach the target figure. However, the case for a substantial nuclear component in energy systems cannot nowadays be put forward without mentioning the statements currently being made that nuclear power is a net consumer of energy even though it may come out on top as a means of producing electricity. These statements have their origin in the current wave of interest in what is called energy accounting or energy budgeting - a special and limited form of economic analysis in which only one resource, namely energy, is treated as constrained. Applied properly, the technique shows the decision maker the energy implications of the options confronting him. But it inevitably poses questions as well as 134
ENERGY POLICY June 1975
The nuclear power implications of OPECprices
attempts to answer them because the decision maker would always have to consider what other constraints would be brought to the fore by measures to relieve a real or imagined energy constraint. Proponents of energy analysis acknowledge this limitation but it tends to be overlooked by readers whose attention is caught by any accompanying apocalyptic pronouncements. The dismissal of the claims of nuclear energy to be a potentially large addition to the world's energy resources is based on a somewhat precarious structure of conventions and assumptions. First the nuclear system is credited only with the heat equivalent of the electrical output whereas it is, of course, the nuclear heat that substitutes for other fuels. This makes a difference by a factor of about three on the output side of the nuclear energy balance sheet, even before making any allowance for the fact that electricity tends to be used at very high efficiencies in final use. Secondly, the role of the fast-breeder reactor in making available very large quantities of energy from the material rejected by the thermal reactors is ignored for unconvincing reasons. And finally., the existing high percentage growth rate of nuclear systems (essentially a phenomenon of the early stages of penetration of electricity systems) is assumed to be maintained for a very long time, although it is axiomatic that this rate must, before long, fall to the all-electricity growth rate which must in turn ultimately fall to the all-energy growth rate. This highly unlikely scenario of nuclear growth is crucial to the adverse view of what nuclear power has to offer. Without it, the other adverse conventions and assumptions would be insufficient to produce an adverse balance. It is, of course, a truism that any system will bankrupt itself if it attempts to sustain growth at a rate high enough to absorb all its income - even though it may pay off to do this for a short initial period. Nuclear systems neither will nor can do this. They would very quickly bump their heads against the ceiling of total energy requirements and long before they got there the net energy flow would be overwhelmingly favourable. It follows that any fossil fuel 'subsidy' to the nuclear system must be very short-lived, small in relation to total energy consumption, and very soon obliterated by massive returns as soon as the growth rate starts to flatten. It would, of course, be very very much less than the corresponding 'subsidy' that would be called for if the same increment in electricity were met by using fossil fuel. On the conventions of the energy analysts fossil fuel production of electricity calls for a permanent subsidy - even in the zero growth case - of three therms of primary fuel for every therm of electricity produced.
ENERGY POLICY June 1975
135
L.G. Brookes It is g e n e r a l l y a s s u m e d - not unr e a s o n a b l y - t h a t q u a d r u p l i n g oil prices offers a g r e a t o p p o r t u n i t y to nuclear p o w e r and that installation rates should n o w be m u c h h i g h e r than if prices had s t a y e d d o w n . M r B r o o k e s argues t h a t this v i e w is t o o facile: the effect of raised oil prices on W e s t e r n economies is complex and Ionglasting; nuclear p o w e r prospects are at least as likely to be depressed as e n h a n c e d - unless m o r e w e i g h t is given to l o n g - t e r m strategic factors. M r L.G. B r o o k e s is w i t h the E c o n o m i c s and P r o g r a m m e s Branch of the U n i t e d K i n g d o m A t o m i c Energy A u t h o r i t y , 1 1 Charles II Street, London, S W l Y 4 Q P , U K. The author is grateful to the UK Atomic Energy Authority for permission to publish this article but it must be understood that the opinions expressed in it are his own and not necessarily those of the UKAEA.
124
A simple model of nuclear installation Figure 1 shows in a greatly simplified form the way in which the nuclear component builds up. Starting from the assumption that the case for nuclear power at some level has been made out (ie that there is a load factor at which nuclear power is preferable to other systems), the demand for it is created by: • the growth of the electricity system; and • the retirement of over-age plant of all types; and constrained by" • the need to maintain a healthy component of peak and 'low merit' plant (ie low capital cost plant that is only brought into operation at or near times of peak demand); and • the load factor at which nuclear plant breaks even with nonnuclear plant - below this critical load factor, non-nuclear plant has the edge, and the rate of nuclear installation may have to be constrained so as not to pass this threshold. The breakeven load factor is determined by the relationship between nuclear and fossil fuel prices but it should be clear from Figure 1 that until so much nuclear plant has been installed that the 'tail end' of it is operating at the breakeven load factor, relative fuel prices play no part in the rate at which nuclear power can be installed; and it may be 15, 20 or more years after the start of a regular nuclear power programme before installation is constrained by considerations of relative prices. This is, of course, all assuming that there is some load factor at which nuclear power is preferable. This was the case in the UK even at the old oil prices. It is quite possible that the new prices may have taken some countries through this threshold by making nuclear plants economic in the small sizes that they need, where, previously, they might not have been economic in these sizes. Apart from this consideration it would seem, however, that the more important factor affecting nuclear power growth is the rate of expansion of the electricity system as a whole. It is no help to nuclear power - quite the reverse - if high oil prices simply make an already good case stronger whilst reducing the size of the market. Let us, therefore, consider how growth rates are likely to be affected by the action of the OPEC countries, and whether there are any further implications for nuclear power strategies. ENERGY POLICY June 1975
The nuclear power implications of OPEC prices Assumptions: 50 GW of r,on nuclear stat,ons at year 0 Plant lifetime = 40 years Not less than 20~ of all new and replacement plant to be non nuclear for operational reasons 20"5 of plant operates at full availabildy [80%1 remainder in merit order to match load Nuclear, may take up 80% of all new and replacement plant subject to /he marginal toad factor not falling below the breakeven point with fossil plant
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POLICY
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T h e e c o n o m i c e f f e c t o f raised oil prices The chain of effects of raised oil prices is broadly as follows: 1. First the OPEC countries demand more money for their oil and make it clear that they intend there to be a transfer of real income from consuming countries to producer countries. 2. But, with a few comparatively unimportant exceptions, current expenditure by OPEC countries is less than 50% of their oil earnings. For the most part the remainder of their oil income is placed on short-term deposit in the Western banking system where it earns a rate of interest that can scarcely be keeping pace with inflation at present. 3. Thus - as a whole - the consuming countries earn from the OPEC countries the money to pay for something under half of the oil they use, and it could be argued that the OPEC countries lend them the money to pay for the remainder (though only in the sense that these cash deposits go some way to maintain national liquid reserves - the money remains the property of the oil producers who can withdraw it at any time~). The effect is to leave consuming countries in heavy debt to the producing countries, with, in addition, a steadily mounting burden of annual interest to pay. 4. The effect on individual consuming countries is to absorb in higher oil prices, and the prices of goods in which oil plays a part, a large 125
The nuclear power implications of OPEC prices
5.
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2Thousand million,
126
sum in spending power that was hitherto spent on other goods and services. This faces the consuming countries with two choices: either they must allow consumption of those goods and services to fall - which will cause unemployment; or they must create, by government expenditure or tax adjustments or otherwise, a compensating addition in spending power to maintain demand - which is inflationary. (There is a third course which has some painful consequences in the short term but has long-term advantages. It will be mentioned later.) To put the figures into perspective, oil imports now cost the U K approximately £3 billion 2 a year. Just over £2 billion of this represents the increase in prices since October 1973. Of this, perhaps something under £ 1 billion may be offset by the increased real demands of the oil producing countries (representing a transfer of real goods and services from U K consumers to the oil countries). This leaves a deflationary impost of just over £1 billion. This needs to be compared with the U K gross national product of £55 to £60 billion. Attempts to restore to U K consumers (by pay increases and by tax and other adjustments) the real consumption that they have lost as a result of the transfer of real incomes to the OPEC countries are bound to be inflationary - since it amounts to two sets of incomes chasing the same goods. The effect of compensating for the quasi-tax element in the raised prices - to prevent the unemployment that would otherwise follow from a reduction in demand - is more complicated. It amounts to closing our eyes to obligations to transfer real income or assets to the OPEC countries at some time in the future - ie when they come to spend their deposits. Ideally we should be taking steps now to meet those future obligations and this would be bound to have some effect on our current patterns of production and consumption. To the extent that surplus OPEC funds on deposit find their way into the economy as short-term loans to industrial and personal borrowers there is a risk of some double compensation for the deflationary effect of this money; and this would certainly be inflationary. Note that the raised oil prices with no fully compensating increase in OPEC imports have the external effect of putting all the consuming countries in debt to OPEC so that they cannot (as they could with the erstwhile more multi-directional fluctuations in world trade) liquidate their debts as a whole by adjusting their trade with one another: the reduction of one consuming country's debt can only be at the expense of another's - the so-called 'beggar your neighbour' policies. There is the further external effect that a large part of the international money supply that lubricates the wheels of world trade is all flowing into one corner of the world economic system - namely OPEC. Thus, although there is, apparently, a great deal of international liquidity in the form of what has come to be called petrodollars, this liquidity lacks the multi-directional flow necessary to facilitate world trade. Attempts to spread it by what has come to be called recycling can only be made against the risk that the owners can withdraw it at short notice. The reduction in world trade brought about by international liquidity problems and by countries succumbing to the temptation to try to solve their problems at the expense of others in the same plight has yet a further effect. It sets off a reduction in demand in ENERGY POLICY June 1975
The nuclear power impfications of OPEC prices
export industries that exacerbates unemployment and tempts the consuming countries to put yet more purchasing power into their economies - by fiscal and monetary means - in an attempt to maintain demand and keep up employment. This carries the risk of further inflation. Those countries that view inflation more seriously than they view unemployment take the opposite course of deflationary measures which reduce demand, lower business confidence, and lead to lower levels of investment which - in due course - slow the pace of technological progress and productivity. This can defeat the object by curbing output per man whilst expectations of higher real incomes expressed in the form of pay claims remain unabated. 9. The high rate of inflation in the consuming countries that goes with this chain of events makes the oil producers feel that they are being cheated because their oil dollars and pounds buy fewer goods. This sets them on the path to further increases in oil prices which can only give another spin to the wheel. 10. A subsidiary problem is that the reduction in economic activity and the loss of business confidence that stems from the upheavals in the monetary system and the problems of a high rate of inflation leads to a flight from traditional homes for savings into more tangible goods - namely commodities. The resulting great disturbance to the world's commodity markets creates further confusion and disarray. This is a grisly tale of woe. It is not only that some of the effects are directly damaging to Western economies. There is also the problem that both national and business decision makers have suddenly found themselves swept into uncharted seas: familiar institutions are no longer able to play their traditional roles - the Stock Exchange is an obvious example; and the situations and the quantities are very atypical and experience is no guide on how to handle them. In the U K we have monthly trade deficits that would, only a little while ago, have caused concern if they had been annual deficits; and the Chancellor is planning for a government borrowing requirement of monster size (£9 billion). Almost the only thing we can be sure of is that the effects as a whole are seriously detrimental to national and world economic performance: we shall be lucky to prevent our economy slipping backwards in the next few years, where once we had hopes of increasing our growth rate. Other Western countries are similarly affected to a greater or lesser degree. In practice the situation is likely to be even worse than it is painted above. So far we have dealt mainly with first order effects. There are in addition what are called multiplier effects. If we reduce our imports from other countries they are unable to buy so much of our exports which leads us in turn to cut back further on imports and so on. There is a similar internal effect: the reduction in the earnings of our export industries reduces incomes in those industries; thus incomes that would have been spent on other home-produced goods are not spent and this too produces a chain reaction, or multiplier, effect. This is what some forecasters mean when they talk about the oil crisis carrying the danger of spiralling down into a deep world slump. Then there is a subtle, semi-technical effect of raised energy prices. This effect may relieve unemployment but it halts - and may reverse the path towards higher income per capita. It is that higher energy costs shift the breakeven point between labour-intensive and energy-
ENERGY POLICY June 1975
127
The nuclear power implications of OPECprices
intensive solutions to industrial problems. Activities which - at the old energy prices - were worth mechanising and conducting in an energyintensive way may no longer be worth treating in this way. They may either remain predominantly labour-intensive, or a solution that errs on the side of labour-intensiveness may be adopted. It is a matter of simple economics: if the balance between labour and energy costs changes, the balance between labour-intensive and energy-intensive methods also changes. Unemployment may be relieved but it takes more men than would otherwise have been the case to produce the same quantity of goods. Hence it is a step back from the high levels of GNP per capita that energy-intensive processes provide. It is again a move towards lower real incomes per head at a time when the momentum is strongly towards higher money incomes. Finally the uncertainty about energy supplies and prices tempts consuming countries to expand indigenous supplies - even at higher cost; and in general there has been a flight towards measures for energy independence. Such constraints on sources of supply and the associated reductions in trade between countries are bound to lead to sub-optimal solutions to economic problems and hence to reductions in real output and income.
The effect on the demand for energy Reduced economic performance means reduced demand for energy in general and electricity in particular. Given that it is the annual increment to the electricity system rather than its total size that provides the scope for building up the nuclear power component, it follows that the demand upon the nuclear power industry is highly sensitive to the electricity growth rate, which is in turn sensitive to the performance of the economy as a whole. If we are to look forward to a high rate of growth for the nuclear industry we must therefore assume either that some relief to the underlying economic malaise is in sight or that there is some reason for believing that nuclear power expansion can be maintained against the general stream of economic performance.
Is relief in sight?
3More recently Professor Adelman - whilst not w i t h d r a w i n g his general view of cartels - has pointed to factors in the Arab oil case tending to prolong the high prices.
128
Some optimists - and this includes eminent economists like Professor Maurice Adelman 3 of MIT and Professor Milton Friedman, better known for his monetary theories - believe that cartels are inherently unstable and that the OPEC cartel is no exception and will crack before very long. With the greatest respect, I believe this scenario overlooks the highly atypical pattern of most OPEC economies. The optimistic argument is based on the belief that the oil-producing countries will behave like classical entrepreneurs and act to maximise the net present value of their assets. This means assuming a preference for current rather than future earnings that can be quantified by reference to the interest rate. (A real interest rate of 10% means that consumers would need to be paid £110 to encourage them to defer for one year the satisfaction they get from spending £100 today - ignoring inflation.) It also implies that the producers will make judgements balancing the appreciation of the value of oil in the ground against their assumed preference for earnings today rather than in the future. The more they fear a fall or stagnation in future oil prices the more likely they are (so it is said) to accept lower (or stable) prices today ENERGY POLICY June 1975
The nuclear power implications of OPEC prices
'*Deflationary in the sense of diverting purchasing power from other goods.
ENERGY POLICY June 1975
and offer unrestricted quantities in return for those prices. The optimists believe that OPEC, sooner or later, will break ranks as one or more members decide to get the best return they can while the going is good. I will explain why I think this thesis may turn out to be wrong. The occasion of the quadrupling of oil prices was the Yore Kippur War and it was associated with the decision of the Arab countries to manipulate supplies for political purposes. But the reason why this was possible was that non-Arab oil was phasing out as a real largequantity alternative to Middle East oil. In particular we had the declared intention of the USA to import 50% of oil requirements in 1985 from Middle East sources. Underlying these events was the disquiet of the oil-producing countries at being heavily dependent upon a single wasting asset for their incomes. This concern leads them to be more interested in extending the life of their asset than in maximising its net present worth: return per barrel thus becomes more important than the percentage return on their capital asset. So great is their concern about future spending power and so easily can they meet the cost of current needs that it could be assumed that they have a preference for future rather than current consumption, which implies a negative interest rate. This is indeed all they are receiving on the funds deposited in the banking systems of the West because inflation rates are, in general, running at a higher level than the interest that is being paid. (Because banks are beginning to be embarrassed by the volume of short-term Arab deposits - which cannot be re-lent on a long-term basis for fear of withdrawal by the A r a b s some of them are offering rates below the general level of interest rates.) However, although in logic they ought to be satisfied with a negative interest rate they are in fact complaining about the deflation of the value of their money holdings and have made noises about relating oil prices to some cost of living index. Such a move would permanently build inflation and/or unemployment into the system unless we can bring about some compensating flow of demand for the Western goods that would otherwise remain unsold or unproduced because of the deflationary effects of high oil prices. 4 Some of the producing countries show signs of appreciating this problem and would accept stable or slightly lower prices for oil, as a contribution to stemming inflation and maintaining the purchasing power of their bank deposits. Relatively small countries with very large sums of money in the bank - enough to maintain their entire populations for some years have an attitude towards the marketing of their one income-earning asset that is quite different from that of countries with small reserves and diverse economies that depend heavily upon maintaining their own momentum. There is every reason to suppose that the oil producers would heavily restrict output and tolerate a low level of current earnings (supplemented by withdrawals of savings) in the interests of maintaining the long-term price of their product. If, therefore, new supplies of oil come to be marketed on a fairly large scale then the Arabs may not respond in the traditional way by lowering their price (to boost demand) and raising their output to maintain their earnings. It seems more likely that they would restrict output - very severely if necessary - to avoid depleting their reserves for lower per-barrel returns. If this is so the consuming countries must accustom themselves to high oil prices and must adapt their economic policies to match. A 129
The nuclear power implications of OPEC prices
great deal of the present difficulty is due to the Arabs spending only the lesser part of their earnings on goods and services from the West and from Japan. There is one semi-permanent solution to reconciling, on the one hand, their determination to have a transfer of real spending power from the West to themselves, and an assured future income with, on the other hand, the Western problem of steering between the Scylla of inflation and the Charybdis of unemployment. It is for the OPEC countries to put their money into productive capital investment either in the Western countries themselves or in the Third World with the Western countries providing the technological know-how and plant. This would enable the Arabs to acquire an interest in long-term income-earning assets that would provide a more assured return on their surplus funds than they get from 'hot' money in Western banks, whilst the West would acquire alternative employment for the resources thrown into unemployment by the deflationary effect of higher oil prices. There is, however, a sting in the tail. It would be necessary for the transfer of consumer spending power from the West to the oil-producing countries actually to take place. The higher proportion of the Western working population employed on production goods must be balanced by a lower level of expenditure on consumption goods - in other words a lower standard of living than would otherwise be the case. It is to be hoped that the long-term effect of a higher level of investment would be higher productivity levels and hence some catching up with incomes per capita, but any attempt to counter the initial reduction in consumption by higher wages or fiscal and monetary measures of one sort or another could only be inflationary. This solution - since it would substitute activity in the capital goods industry for the production of consumer goods - would, once equilibrium had been re-attained, maintain economic activity and the demand for energy would be unabated. This state is obviously not one that could be brought about at a stroke; and it would call for universal recognition (ie throughout the consuming countries) not only that this would be the right solution (I doubt whether there is a great disagreement about this) but that it can and should be brought about. Failing this, setbacks in international trade would continue to bedevil economies such as ours that depend to a substantial extent upon such trade to maintain their output. This halcyon solution is unlikely to be applied quickly, although the hard facts of the situation will tend to make the participants gravitate towards it. We can, therefore, look forward - if that is the right expression - to some years of economic embarrassment with, other things being equal, low energy and electricity growth rates. There may, however, be some relief for the nuclear power industry as a result of the widespread current concern with energy futures and I will return to this later.
Putting North Sea oil in its place Just as Baby Bunting was comforted by the promise that Daddy would soon bring him a rabbit skin to keep him warm, so we are becoming accustomed to the belief that we shall all be warm and comfortable when North Sea oil starts to flow. Undoubtedly we are very lucky in having this windfall advantage over the other oil-consuming countries but there are two points we must remember: 130
ENERGY POLICY June 1975
The nuclear power implications of OPEC prices
•
•
the net 5 benefit from North Sea oil will amount to only a relatively small proportion of our total income - unlike the case of the Middle East oil states; and our economic fortunes will continue to depend very heavily upon the level of world overseas trade; and the earnings from the North Sea may be insufficient to compensate for damage to our economy from a reduced level of world trade.
Whether the North Sea acts as no more than a mild analgesic or puts us on the road to full recovery depends very greatly on how we respond to the opportunity that it offers us. The prime effect of indigenous energy is to reduce the balance of payments deficit, or to bring about surpluses. This relief of a major constraint on U K economic performance gives us an unprecedented opportunity to expand our economy in other directions. Unless we seize this opportunity the wealth from the North Sea oil and gas could become simply inflationary to the extent that it is not offset by increased imports of consumer goods. This situation poses nice problems of national economic management. Should our oil and gas supplies be eked out to give us energy independence for a maximum period or should we seize this opportunity to 'go for growth' using exports to balance the inevitable imports of capital plant and consumer goods that follow from attempts to expand the economy? There may well be a threshold effect. If our non-oil deficit together with our obligations to service Arab debt turns out to be substantially larger than our earnings from exports of oil then we shall remain in the 'stop' part of the 'stop-go' cycle. We may not be so far down the pit as hitherto but economic disaster - like death - knows of no fine shades. If our new-found asset is to be of really lasting value we must use it to equip and strengthen our economy, being prepared to sell as much oil as is necessary to keep our external account in balance while we do so. Direct imports of capital goods and import pressures created by the earnings of the capital goods industry may be such that we can only balance them by exporting oil on a significant scale. In doing our sums we may have to take account of the fact that once we become oil exporters there will be a natural bias against buying other goods from us. We may then find our membership of the EEC - with its taboos against trade restrictions within the Community - an invaluable asset. To sum up, the North Sea may do much to help us weather the world economic storm but - I suggest - only if we respond boldly and imaginatively to the opportunity it offers. A 'piggy-bank' attitude towards this stock of wealth could easily result in its doing little more than stoke the fires of inflation.
Alternative views of the economic future
SThere are dividends to be paid to foreign investors and the cost represented by diversion of resources from other activities into the offshore oil industry.
ENERGY POLICY June 1975
It is only fair to say that there are more optimistic views of the future of the U K economy than the one given in this paper. There is a wellsupported school of thought that argues that - because the oil producers are not greatly increasing their demands upon the real output of the consumers - the real effect on the Western economies ought to be small. Furthermore because the money paid for oil must find its way back into the Western banking system, the new balance of payments deficits are more apparent than real: they exist only 131
The nuclear power implications of OPECprices because capital flows do not figure in these balances - they only show up as changes in monetary reserves. And it is true that U K reserves have stood up well and even increased during the year in which high oil prices have been in force. 6 Just taking the payments at their face value, the increases are not really crippling: they only represent a small percentage of gross national product, and if our economy could continue to grow at the rate of the last few decades it would only take a year or two to put us back in our old position. Like many other observers I have found these sentiments appealing, and I still think they ought to apply. Unfortunately the writing on the wall is discouraging; the general disarray caused by the abruptness of the change and the reaction of consumer countries to being presented, overnight, with large balance of payments deficits seems to be leading to reduced levels of internal and external economic activity that feed on one another and which could take quite a long time to reverse. In addition, there are some more basic real adverse factors. First the general move towards alternative - more costly - sources of energy will be an additional real burden on Western economies; and secondly a more general - and very natural - tendency towards autarky, if only to escape the risk of political pressures from outside suppliers, will automatically lead to additional constraints on patterns of trade and sub-optimal solutions to economic problems. These factors will almost certainly continue to be with us even if we find a way through the morass of financial and monetary difficulties.
The strategic case for nuclear energy
eAIthough the fragility of these reserves is illustrated by a fall of $1 billion in December 1974 because of Saudi Arabia's insistence on payment in dollars instead of sterling.
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The examples shown in Figure 1 illustrate that despite a breakeven load factor as high as 50%, it is as long as 17 years before nuclear power programmes need be restricted for economic as distinct from operational reasons. A lower breakeven load factor - associated with higher oil prices and reduced economic performance - postpones by 15 years (to 32 years) the time when the nuclear percentage need be held down below the share that operational considerations would dictate; but this advantage is, in the examples given, more than offset by the slower rate of growth of the electricity system. It is important to remember however that these are only hypothetical examples, chosen to illustrate the mechanisms at work. They show the direction the quantities are likely to take in the short term though not the precise quantities themselves. In the longer term other factors are likely to be increasingly dominant and account must be taken of these now because there will be insufficient time to do so later. They are: • The oil prices, which are bound to rise sooner or later anyway, reflecting increasing pressure of demand on limited supply. Under ordinary market conditions the increases would have been absorbed without economic damage. There is no reason to suppose that the West will not, given time, recover its equilibrium whilst the underlying market price catches up with the present contrived prices. Cases 1 and 2 in Figure 1 will therefore tend to converge to a combination of the dominant features of each of them. • The growth of world demand for energy, which, even on fairly modest economic predictions, is such that a new major source of energy must be widely adopted well before the end of the century if the reasonable economic expectations of a world which is preENERGY POLICY June 1975
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dominantly poor are to be met. Even quite pessimistic estimates of the economic effects of the current crisis postpone the problem by a surprisingly short period. The point is expanded below.
7F.G. Adams and P. Miovic. 'On relative fuel efficiency and the output elasticity of energy consumption in Western Europe', J o u r n a l o f Industrial Economics, Vol XVII No 3, November 1968. 8L.G. Brookes, 'Economic Prosperity and Nuclear Power,' A n n a l s o f N u c l e a r Science a n d Engineering, Vol 1, reporting work done in 1971/72. 9M.K. Hubbert, 'Energy Resources'. In: Resources and Man, US National Academy of Sciences, Freeman & Co., San Francisco. 1969.
Figure 2. World consumption and potential world production of useful energy from fossil fuels. l i n e - Predicted w o r l d consumption on t w o different sets of assumptions about national GNP growths. Continuous
Figure 2 shows estimates, made two or three years ago, of the imbalance between ranges of world demand for energy and of the supply from the traditional sources. All the figures are in terms of useful energy - that is making allowance for the differing efficiencies in use of the different fuels. 7 These estimates showed a possible shortfall of useful energy by about 40%, in the median case, by 2000 AD, with the gap widening thereafter. Undoubtedly some of this deficiency could be made up from some of the non-traditional sources of fossil energy or from higher extraction rates from traditional sources, and it was postulated at the time these estimates were made 8 that about half the gap might be made good in this way, with the other half being supplied in the form of nuclear energy as the only new source of energy sufficiently mature technologically to make an effective contribution within the timescale. This implied building up the world nuclear capacity to 5500 GW by 2000 A D - 100 times the present nuclear capacity and about 5½ times the present installed capacity of electrical plant of all types in the world. This represents a daunting prospect for the nuclear industry, though it can be demonstrated that it should be possible. The assumption was of a modest average load factor of 50% for nuclear plant. Taking 60% - a reasonable figure the target falls to 4600 GW - still a very high figure to aim at. This is not an apocalyptic world model forecast based on simplistic exponential projections. The forecasts of GNP growth on which it was based were derived from a region by region - and, in some cases, country by country - study of past economic performance and sober consideration of future prospects. In most cases future growth was tapered to recognise that constraints on growth bite harder as absolute levels of output rise. The forecasts of fossil fuel production were those of M. King Hubbert 9 who went through a period of being regarded as somewhat conservative in his estimates but who is being vindicated by current thinking about the problems of estimating reserves. The resulting assessment of 4600 GW as the total world nuclear power plant requirement for the end of the century is, if anything, conservative in relation to the declared nuclear plans of individual countries.
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B r o k e n l i n e - Predicted potential pro-
duction of fossil fuels on t w o different assumptions about total world reserves. (Including petroleum, solid fuel, natural gas & natural gas liquids, excluding tar sands and oil shales.)
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A rough estimate of the effect on energy demand of the new situation is that by 2000 A D demand could be 25% lower than the median estimate in Figure 2. But, surprisingly, although this greatly reduces the estimated gap at 2000 ao, it postpones for only five years the estimate of the point in time at which the traditional sources of fossil fuel cease to be sufficient to meet requirements and postpones for perhaps only six or seven years the target date for building up to a world nuclear power system of 4600 GW. Thus although the reduced economic prospects in the short term seem to damage the outlook for the world nuclear industry the long-term requirement is not much altered. We have simply been given a few more years to meet a tough target. However, the responses will tend to be determined by the short-term situation and this could be dangerous. It has been argued that man has been instinctively right in the way he has tackled his problems; that is by coming up with what have been called, somewhat pejoratively, 'technological fixes' to get him out of difficulty, increase his control over resources, and widen his options for the future. He is now faced with a new difficulty: the lead times for his 'fixes' are beginning to get longer than the warning that he gets of trouble ahead. The size of the estimate of apparent nuclear power requirement mentioned above and the formidable task it would represent is, almost in itself, enough to suggest that action to meet the future problem has been left too late. The fortuitous setback that now faces the developed world should be viewed as a providential second chance to plan our way out of our future difficulties. We shall need the large new sources of energy that uranium consumed in fastbreeder reactors can give us; and no time should be wasted in moving towards a predominantly nuclear-fuelled electricity system with an increasing proportion of breeder reactors. We have new problems in the shape of having to embark on the necessary capital investment at a time when economies are already under strain and when the energy inputs to the investment programme must come from sources that have become more costly and more uncertain, but these difficulties should make us all the more determined to move towards a wider choice of options for meeting our future energy needs. And, as earlier sections of this article suggest, the present UK financial position (and that of other oil-consuming countries) is consistent with a switch away from consumption and towards investment. This is, of course, only one of a number of estimates that might be made of the world energy balance three decades ahead. But it is significant that quite major changes in the input figures - for example, the assumption that total energy demand might be scaled down by 25% to allow for economic setbacks - make relatively little difference to the difficulty of the task to be faced. We are simply given a handful of extra years to reach the target figure. However, the case for a substantial nuclear component in energy systems cannot nowadays be put forward without mentioning the statements currently being made that nuclear power is a net consumer of energy even though it may come out on top as a means of producing electricity. These statements have their origin in the current wave of interest in what is called energy accounting or energy budgeting - a special and limited form of economic analysis in which only one resource, namely energy, is treated as constrained. Applied properly, the technique shows the decision maker the energy implications of the options confronting him. But it inevitably poses questions as well as 134
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attempts to answer them because the decision maker would always have to consider what other constraints would be brought to the fore by measures to relieve a real or imagined energy constraint. Proponents of energy analysis acknowledge this limitation but it tends to be overlooked by readers whose attention is caught by any accompanying apocalyptic pronouncements. The dismissal of the claims of nuclear energy to be a potentially large addition to the world's energy resources is based on a somewhat precarious structure of conventions and assumptions. First the nuclear system is credited only with the heat equivalent of the electrical output whereas it is, of course, the nuclear heat that substitutes for other fuels. This makes a difference by a factor of about three on the output side of the nuclear energy balance sheet, even before making any allowance for the fact that electricity tends to be used at very high efficiencies in final use. Secondly, the role of the fast-breeder reactor in making available very large quantities of energy from the material rejected by the thermal reactors is ignored for unconvincing reasons. And finally., the existing high percentage growth rate of nuclear systems (essentially a phenomenon of the early stages of penetration of electricity systems) is assumed to be maintained for a very long time, although it is axiomatic that this rate must, before long, fall to the all-electricity growth rate which must in turn ultimately fall to the all-energy growth rate. This highly unlikely scenario of nuclear growth is crucial to the adverse view of what nuclear power has to offer. Without it, the other adverse conventions and assumptions would be insufficient to produce an adverse balance. It is, of course, a truism that any system will bankrupt itself if it attempts to sustain growth at a rate high enough to absorb all its income - even though it may pay off to do this for a short initial period. Nuclear systems neither will nor can do this. They would very quickly bump their heads against the ceiling of total energy requirements and long before they got there the net energy flow would be overwhelmingly favourable. It follows that any fossil fuel 'subsidy' to the nuclear system must be very short-lived, small in relation to total energy consumption, and very soon obliterated by massive returns as soon as the growth rate starts to flatten. It would, of course, be very very much less than the corresponding 'subsidy' that would be called for if the same increment in electricity were met by using fossil fuel. On the conventions of the energy analysts fossil fuel production of electricity calls for a permanent subsidy - even in the zero growth case - of three therms of primary fuel for every therm of electricity produced.
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