The oil spill in the Gulf of Mexico has already been described as the biggest environmental crisis in US history. The efforts to stop the leak, repair the damage to the ecosystem and compensate those whose livelihoods depend on clean waters will come at a tremendous cost to BP. We still don’t know what the final bill will be — or how BP and its reputation will manage.
Tough questions are rightly being asked of the oil industry, but the disaster raises wider issues than the culpability of a few companies. It poses a fundamental question about whether our dependency on oil and other fossil fuels is sustainable.
Oil, coal, gas and uranium make up 90 per cent of the world’s traded energy. As these supplies deplete and demand increases, energy companies are taking greater risks to find new reserves. I fear, as we are pushed into more difficult terrain, that this means more danger and risk.
We have already encountered kidnap attempts on gas workers in Africa, piracy attacks on oil tankers, coalmines collapsing at extreme depths and now we have an oil spill 5,000ft under the sea. And energy companies are considering exploring the even riskier and remote territory of the Arctic.
Insurance companies, such as Lloyd’s, have the dual role of paying claims when these risks become real and advising business on how to manage those risks so that their enterprises don’t become uninsurable. For example, in the 1870s it was an insurance company that promoted the development of fire sprinklers in factories.
Energy risks now account for just over 6 per cent of Lloyd’s business at £1.4 billion. We have already paid out on claims for the loss of the Deepwater Horizon rig and our total claims from this tragic incident could amount to $600 million. We need to ask: what can be done to reduce the chances of this happening again? And are the environmental and economic costs of continuing our quest to meet the demand for finite and hard-to-reach fossil fuels proving too much?
If the slick in the Gulf is the first indicator of the potential economic chaos we face as demand pushes us into ever riskier places, then securing our energy supply means investing in clean and renewable energy technology.
Many are unprepared for a volatile energy supply as insufficient investment in fossil fuels collides with breakneck growth in the East. Business-as-usual forecasts suggest a 40 per cent increase in global energy demand by 2030, yet there have not been enough new projects to meet it.
The changes will be dramatic. Energy prices are likely to rise: some commentators suggest oil may reach $200 a barrel; regulations on carbon emissions will intensify; reputations will be won or lost as the public demand that businesses reduce their emissions; and the price tag for the massive investment into new sources of energy required is estimated at $26 trillion.
Just as the Gulf of Mexico disaster hit thousands of businesses, these energy shocks could reverberate across company balance sheets everywhere in the coming years. But there is a worrying lack of awareness among all businesses of how inextricably linked their futures are to stable access to energy.
A transition to a more resilient energy system could transform the economy, just as coal did two centuries ago. We have already taken the first steps: renewable energy made up two-thirds of new energy installations in Europe last year and China became the world’s largest manufacturer of wind-power generators and the second largest installer. And several insurers, including Lloyd’s syndicates, now have units dedicated to insuring the renewable energy market.
Exciting energy delivery and storage models are evolving that use intelligent communication between the grid and appliances; that allow non-energy businesses to profit by selling energy back to the grid; and that pave the way for lucrative markets in efficiency and renewable power. Most leading economies are planning these “smart grids”, which if extended widely enough could shift non-renewable and renewable energy surpluses from country to country.
At Lloyd’s we are seeing more and more renewable energy technology coming into the market for insurance; we recently had a British company with a system to turn household waste into biofuel. This will avoid landfill and reduce our dependence on fossil fuels — exactly the sort of innovation we need to encourage.
Markets for these low-carbon energy products could be worth at least $500 billion per year by 2050. This is a precious opportunity for economies edging out of recession, as those countries that succeed in delivering the most efficient low-carbon energy systems will export their skills and technology.
Nations are recognising that green energy is no longer just a friendly optional extra; it’s an increasingly essential aspect of protecting energy security and an economic opportunity.
The Obama Administration’s response to the oil leak leaves little doubt that environmental regulations will be strengthened. This regulation by political force, sweeping across several industries, will only add to the pressures that the energy sector faces.
Most renewable and clean energy technology will be developed and provided by the private sector — and this leaves energy businesses with important choices to make on their strategic direction. Stronger policy incentives are needed to give these businesses and investors confidence to make decisions. Long-term political commitment is needed for new technologies and processes to be developed, piloted and scaled up; inventions in the clean energy sector have taken two to three decades to reach the mass market.
The Copenhagen summit was a missed opportunity but we need global agreement on emissions targets. Governments need to identify a clear path towards sustainable energy that businesses can follow. But making the leap to cleaner energy involves a feat of imagination as well as money.
There’s one other lesson to learn from the attempt to stem the flow of oil from the Deepwater Horizon rig: the longer we wait to take action, the harder it is to clean up the mess.
Richard Ward, chief executive of Lloyd’s. Lloyd’s and Chatham House will publish a report, Sustainable Energy Security: Strategic Risks and Opportunities for Business.