Energy and a Nuclear Iran
The Islamic Republic of Iran has a new President, and he seems fully committed to seeing Iran's nuclear program through. This is hardly surprising, given the "bipartisan" support that nuclear power apparently enjoys in Iran, but it is still worrying. I recently wrote an analysis of Iran's nuclear ambitions for Geopolitics of Energy, a Canadian energy journal. The complete text of the article follows. Note that this is much longer than my usual postings.

APRIL 2005/GEOPOLITICS OF ENERGY
An Energy Perspective on Iran's Nuclear Program by Geoffrey Styles

Although the controversy over Iran’s alleged development of nuclear weapons has featured prominently in the news, the interplay between this issue and the global energy industry has generally been neglected. This is surprising, considering Iran’s status as the second largest oil producer and exporter within OPEC. There are two aspects of the relationship between Iran’s nuclear program and the energy industry that merit further consideration. The first deals with the positioning of nuclear power within Iran’s energy portfolio, while the second relates to the unique leverage that current oil market conditions give Iran in withstanding international pressure. Taken together, they suggest that the world could soon have to reckon with a nuclear-armed Iran.

An Odd Choice
Iran makes an unusual candidate for civilian nuclear power, compared to other countries with nuclear power. Most of these fall into either of two categories: those that lack other energy resources to support their economies, such as France, Japan and South Korea, and resource-rich countries that developed nuclear power as a consequence of their pursuit of nuclear weapons, including the US, former USSR, UK, and arguably China. Blessed as it is with hydrocarbon reserves, Iran does not fall into the former category, and it claims not to fall into the latter. Does it represent a unique case?

The dichotomy described above can be attributed at least in part to the large development costs associated with nuclear power plants, compared to their fossil fuel alternatives. For example, the capacity cost for a current-generation nuclear plant is between $1400 and $2000/kilowatt(1), while a natural gas combined cycle plant can be built for approximately $600/kW of capacity(2). That means that a 2,000 MW nuclear complex would cost between $2.8 and $4 billion, even though the same electricity could be produced by a gas turbine plant costing around $1.2 billion. In a country with limited capital for investment, this difference translates into less generating capacity being built over time.

Advocates of nuclear power would argue that fuel savings largely offset the high upfront costs of nuclear power over the life of a plant. Where natural gas is expensive, this would indeed be true. But natural gas is so plentiful in Iran that a more apt comparison would simply add the investment cost of developing another natural gas field for dedicated power plant supply to the cost of the combined cycle units.

At a conservative heat rate (3) of 7,000 BTU/kW, such a power plant would consume 336 million cubic feet per day of natural gas, requiring a gas field on the order of 3 trillion cubic feet (TCF) to supply it. If Iran’s finding and development cost for gas is under $.50 per thousand cubic feet, as seems likely, then the incremental capital component for gas supply would be below $1.5 billion, bringing the total gas-fired equivalent of a nuclear power plant to $2.7 billion, slightly below the low end of the nuclear estimate.

While this simple comparison might seem unfair, because it omits the costs of pipelines and other gas infrastructure, it also leaves out the much more substantial costs of nuclear fuel processing plants, spent fuel reprocessing plants, and waste storage facilities, all part of the complete fuel cycle Iran is building. In short, on the most favorable basis possible, nuclear power is more expensive than natural gas-based power, in a gas-rich country like Iran.

The Displacement Argument
A more sophisticated argument for nuclear power relies on using nuclear plants to support Iran’s hydrocarbon economy by freeing up oil or gas that could be exported to earn hard currency. The validity of this argument hinges on whether Iran’s oil and gas industry is running short of reserves or the ability to develop them.

Iran’s domestic energy consumption has been growing steadily. From a total energy consumption of 1.5 quadrillion BTUs (quads) in 1980, Iranian domestic energy use has expanded to almost 6 quads by 2002 (4), for an average growth rate of about 6% per year over this period. In fact, Iran now consumes over a third of its oil production of 3.9 million barrels per day (MBD), leaving only 2.5 MBD for export (5), though the consumption figure includes some petroleum products that are exported from Iran’s large refineries.

In spite of higher domestic use, Iran seems in no danger of running out of oil. From 1980 to 2003 its reported oil reserves grew from 58 billion barrels to 90 billion barrels, jumping again to 125 billion barrels in 2004 (6). This puts Iran’s reserves in the same league as Iraq’s, near the top of the list for both OPEC and the world as a whole. Iran is also attracting investment from a diverse group of countries to develop these resources. This includes Japan, which is helping develop the giant Azadegan field, and France’s Total and Italy’s ENI, each with stakes in major oil and gas projects (7).

In addition, as Iran’s energy consumption has grown, much of the incremental demand has been met by natural gas. While accounting for only 15% of energy use in 1980, gas now covers 45% of Iran’s total energy needs (8) and continues to expand, as well it should. Iran’s natural gas reserves, at 940 TCF (9), are second only to Russia’s and would last 350 years at current rates of production. These reserves have attracted China’s interest, resulting in a $100 billion commitment for future LNG sales (10).

From a purely economic perspective, Iran’s investments in nuclear power must be considered in competition with investments to develop its ample untapped oil and gas reserves. Iran’s finding and development costs for oil and gas must certainly be lower than the average of those facing the international oil companies, which operate in increasingly difficult geological and political environments. As a result, though lacking the actual figures known by the Iranian government, it is hard to imagine that the implied cost of natural gas displaced from the electricity sector by nuclear power would compete with incremental gas development.

Considering its resource base and the relative costs, Iran’s best alternatives for energy development consist of new oilfields for exports, new gas fields to fuel combined cycle power plants, and new gas fields to fill LNG export plants. In short, Iran’s assertion that it needs nuclear power to support its energy needs does not stand up to scrutiny.

Other Reasons
There are two other possible rationales for pursuing nuclear power, beyond weapons development. The first relates to reducing greenhouse gas emissions. Climate change has become an issue of global importance, and the ratification of the Kyoto Treaty by Russia in late 2004 put the treaty into effect in those countries that had previously ratified it. Unsurprisingly, Iran is not on this list (11).

In fact, much of Iran’s present and future economy remains tied to energy sources that emit large quantities of greenhouse gases, both in their production and ultimate consumption. While a growing body of environmentalists is coming to the realization that climate change may be a bigger environmental concern than nuclear power, which emits no greenhouse gases, this argument would not be very credible coming from Iran.

Another motivation that cannot be dismissed so lightly is national prestige. There is probably a large component of this in Iran’s nuclear power ambitions, going back to the time of the Shah. However, there are better and cheaper ways to raise prestige than building nuclear power plants and a complete nuclear fuel network. As The Economist recently noted, “The only real difference between a civilian nuclear-fuel cycle and a military nuclear fuel cycle is one of intent.” (12)

What If It Is A Duck?
In considering Iran’s nuclear program, it is important to learn some lessons from the recent experience with Iraq. In hindsight, Saddam Hussein’s post-UNSCOM program for weapons of mass destruction was a Potemkin village, a combination of external bluff and internal corruption. Therefore, it is vital to consider alternative explanations for “obvious” facts. A beast that waddles and quacks like a duck is not always a duck.

At this juncture, the evidence of a covert nuclear weapons program masquerading as a civilian nuclear power program is entirely circumstantial. The same evidence might support a scenario based on the logic of Iraq’s Ba’athists, that it is beneficial to have one’s neighbors believe one will soon have genuine WMD capabilities. But as Saddam learned to his chagrin, engaging in a "shell game" with inspectors from the International Atomic Energy Agency can be hazardous. Although it is understandable that the Iranians might feel threatened by US rhetoric and wish to safeguard their expensive equipment, drilling tunnels and moving centrifuge parts around the country (13) only increases international uncertainty, rather than decreasing it. This is exactly the wrong thing to do, unless there really is a clandestine weapons program that needs to be hidden.

From an energy and economic perspective, however, as discussed above, the visible parts of Iran’s ostensibly civilian nuclear program do not make a great deal of sense. Even divorced from Iran’s record in regional politics and its support for terrorism, the energy picture alone is sufficient to raise suspicions that Iran’s intent may be other than its leaders have stated. If these suspicions are indeed correct, then it is essential to understand just what leverage the US and EU might have over Iran, and vice versa, and much of this depends on the energy markets.

In negotiating with Iran, there are two main threats that could be brought to bear, in addition to an array of possible incentives. The first threat is that failure to open up the entire country to inspection will be met with military action. This is the same threat that was made with Iraq, and because that threat was executed in 2002, the ability of the US and its allies to carry out a similar campaign in a larger, more populous country has been greatly diminished.

In the Iraq War the US government apparently assumed that its combat forces would only be engaged for a relatively short time, replaced post-victory by coalition forces, regional forces, or a reformed Iraqi army. Instead, most of the combat power of the US remains committed to Iraq and to Afghanistan for years to come. Short of attacking Iran from Iraq, and thus risking the hard-won gains of the Iraq War, there appear to be few military options beyond air strikes. Their effectiveness would be reduced by the degree to which Iran has dispersed its nuclear facilities, and they might not be worth the attendant political costs.

The more credible threat would appear to be economic sanctions. However, the US has had economic sanctions in place against Iran since the 1980s, and they have been effective mostly against US companies, because their foreign competitors weren't under such constraints. Little impact on Iran is apparent. Any action to restrain Iran would have to be multilateral and strongly enforced, although the prospect of UN sanctions is complicated by the growing relationship between China and Iran, which includes energy, arms and consumer products (14).

Even if the European Union were willing to join the US in imposing sanctions and cutting off its substantial trade in oil and goods, the likelihood that such a threat could be carried out without Iran resorting to some form of oil export embargo is low, and all parties must surely understand this. Could the world do without Iran's oil and gas just now, if international sanctions were imposed? The current alignment of global oil supply and demand make such a disruption almost unthinkable. Iranian leverage over global crude oil markets is at a 25-year high.

Three years ago the global energy supply could and did lose production equal to Iran's without creating a severe price spike. When Venezuela's oil workers went out on strike, eliminating 2.3 million barrels per day of oil exports, other producers quickly filled the gap. Prices went up for a few months, and then came back down. Since then, though, the combination of rapid demand growth, persistent production problems in several countries, and a conservative approach to new oil investments has eliminated that cushion.

Incremental global crude oil production capacity is near zero, reflected by prices for West Texas Intermediate crude over $50, and Iran's leaders know this. They also remember the events of 1979, when the loss of Iranian exports as a result of the Islamic Revolution sent oil prices to levels that have not been matched since, in real dollars. Given a $50 dollar per barrel starting point, it is not so hard to imagine another Iranian embargo sending prices to $80 or even $100, at least until strategic reserves were tapped and markets rebalanced.

So far, the global economy has been remarkably resilient in the face of large demand-driven oil price increases, largely because it is much less leveraged to oil as an input for economic activity than it was thirty years ago. But at some level, the impact would become severe, particularly for developing countries, some of which still subsidize petroleum products for their population.

There is no denying that international economic sanctions and an oil embargo in response would exact a large cost on Iran. But just as high oil prices have raised the stakes of such an action for all parties, they have also enhanced Iran’s ability to weather such an economic storm for a period of time. Several years of higher-than-average oil prices have built up the country’s foreign exchange reserves and kept external debt low (15).

Nor do incentives appear to offer the solution, considering that Iran’s Foreign Minister was recently quoted as saying that no incentive can replace Iran’s legal right to use nuclear technology (16).

The largest uncertainty in this mix may be the potential internal political consequences of a confrontation with the international community over nuclear development. Would Iran’s reformers close ranks with the ruling mullahs or seize the opportunity to evict them from office? How would the population react? The answer seems inherently unknowable, as the post-invasion experience in Iraq suggests.

Learning to Live with It
With the negotiating options of the US and EU hampered by threats that either lack credibility or invite a trumping response, is there any real alternative to acquiescing and simply hoping that Iran’s leaders are serious when they say they have no interest in nuclear weapons? In the short run, perhaps not. And if Iran is in fact closer to achieving a functional nuclear weapon than anyone suspects, the short run could be the whole game.

In the longer term, however, time is not on Iran’s side. History suggests that high oil prices will lead to both greater energy efficiency and to new production capacity, either of conventional oil or unconventional alternatives, such as oil sands and renewable energy. Any combination of higher production and lower demand that restored a capacity cushion of 2-3 million barrels per day would not only ease prices, but also undermine Iran’s negotiating strength.

In addition, every positive development in Iraq, including the expansion of Iraq’s trained military and police forces, restores a bit of credibility to the military threat, by turning the US troop presence in Iraq from a liability into a strategic asset.

Considering how these balances might shift over the next several years, the best current option appears to be playing for time. The current US/EU “carrot and stick” approach can thus be successful, even if it does not result in the desired concessions from Iran. Simply remaining engaged and postponing the timing of any international crisis over Iran’s nuclear development opens up degrees of freedom that don’t exist today.

This approach may turn out to be nothing more than an updated version of the subtitle of the classic 1960s film, “Dr. Strangelove, Or How I Learned To Stop Worrying And Love the Bomb.” (17) However, all the other obvious approaches rely on either a much greater degree of certainty about Iran’s intentions than anyone currently possesses, or a larger appetite for enduring substantial economic pain than is evident in either Brussels or Washington, D.C.

Footnotes

1 “The Economics of Nuclear Power”, Uranium Information Centre, Ltd., October 2004.
2 “GridWiseTM: The Benefits of a Transformed Energy System”, Appendix A, Table A.1 “Generation Scenario Assumptions and Sources”, Pacific Northwest National Laboratory, September 2003.
3 Siemens Westinghouse website, Combined Cycle Plant Ratings.
4 Energy Information Agency, US Department of Energy, International Energy Annual 2002, Table E1 “World Total Primary Energy Consumption”.
5 Energy Information Agency, US Department of Energy, “Top Petroleum Net Exporters 2003”.
6 Energy Information Agency, US Department of Energy, “World Proved Crude Oil Reserves, January 1, 1980-January 1, 2005 Estimates”.
7 Energy Information Agency, US Department of Energy, “Country Analysis Brief, Iran”, March 2005, 5-7.
8 op. cit., Table 2.4 “World Dry Natural Gas Production, 1980-2002”.
9 Oil & Gas Journal, December 20, 2004.
10 op. cit., 20.
11 UN Framework Convention on Climate Change website, “Kyoto Protocol Status of Ratification”, 19 April 2005.
12 “A World Wide Web of Nuclear Danger,” The Economist, February 26, 2004.
13 Elaine Sciolino and David Sanger, “Pressed, Iran Admits It Discussed Acquiring Tools for Nuclear Arms”, New York Times, February 28, 2005.
14 Frederick Stakelbeck, “The Growing Tehran-Beijing Axis”, In the National Interest, January 2005.
15 International Monetary Fund, “IMF Concludes 2004 Article IV Consultation with Islamic Republic of Iran”, Public Information Notice No. 04/109, September 27, 2004.
16 “No economic incentive can replace Iran’s rights”, IranMania News, http://www.iranmania.com/, March 15, 2005.
17 Dr. Strangelove, Dir. Stanley Kubrick, Columbia, 1963.

Relying on Arabia
I just read a review in the Wall Street Journal of a new book on the reliability of Saudi oil reserves. The author, Matthew Simmons, is one of the leading skeptics about the ability of the Kingdom to increase--or even maintain--its oil production in the future. Despite new pipelines bringing new oil onto the market from the Caspian Sea region and West Africa, Saudi oil remains essential to the maintenance of an oil-based global economy, even if we intend to replace oil with some other energy source in the next twenty years. Mr. Simmons doubts the Saudis can continue to play this role, even ignoring the political frictions within Saudi society. How worried should we be?

Mr. Simmons may be right to question the condition of the half dozen key producing fields in Saudi Arabia, including Ghawar, the largest oil field in the world. However, recent Saudi presentations on their production plans look solid, at least to this (non-geologist) engineer's eyes. For me, though, the key uncertainties reside in the historical data on OPEC's reserves.

If you look at reported oil reserves in the 1980s, it's clear that something odd was going on within OPEC, particularly among its Persian Gulf members. In 1985 Kuwait increased its reported reserves by about 1/3. In 1988 Iran and Iraq doubled their reserves, while the UAE tripled theirs. And in 1990, Saudi Arabia increased its reported oil reserves from 172 billion barrels to 258 billion, about where they stand today. Now, it's not unusual for companies or countries to restate their reserves. But you don't need a suspicious mind to wonder how the state oil companies of the Middle East could have suddenly found a quantity of oil equal to the total that Saudi Arabia claims to have today, all in the span of a couple of years. And if memory serves, OPEC was embroiled in serious internal disputes over quotas in the same period, with reserves playing a role in how much each member got to produce, in a market that was suddenly flooded with oil.

For the sake of argument, then, let's postulate that this upward revision was spurious, and that Saudi Arabia hasn't found a drop of new oil since 1980--an extremely conservative assumption. Since then, Saudi production has averaged a bit over 7 million barrels per day. That means they have produced a cumulative 66 billion barrels of oil, leaving them with about 100 billion barrels of their 1980 reserves. By comparison, the US produced roughly the same quantity of oil as Saudi Arabia over this period, from reported reserves that never exceeded 30 billion barrels and that have slipped to 22 billion barrels today. In fact, only if Saudi Arabia has mis-stated its reserves going all the way back to its early 1970s, pre-nationalization figure of 137 billion barrels would we have real cause for concern about the level of aggregate reserves.

Despite the compelling arguments of Mr. Simmons and others about the reliability of Saudi reserve data, I continue to believe that we should be more focused on the factors of geopolitics and industry economics that might cause future oil production to fall short of demand.

Fighting Climate Change, One Car At A Time
When I worked at Texaco, several colleagues and I tried to sell the company on the idea of packaging emissions credits with the fuel we sold. The idea was simple: selected service stations would feature a "green pump", at which prices would be a couple of cents per gallon higher. This premium would go to planting trees and engaging in other activities that would offset the greenhouse gas emissions from the gasoline sold at these pumps. We didn't get very far, but now another colleague has sent me a link to a company that does something similar, dealing directly with consumers.

TerraPass sells an annual membership to car owners. The proceeds are invested in a variety of projects that reduce emissions through energy efficiency, renewable energy, or conversion of methane to CO2 (which reduces its global warming impact by a factor of 20.) If you aren't sure how much your car emits, and thus how much you need to offset, the TerraPass website includes a calculator that helps you figure this out. Although it didn't include my specific model and year, it included one similar enough to estimate that I was responsible for 6500 lb. of CO2 per year.

This is a terrific idea, for two important reasons. First, each of us needs to take greater responsibility for our own impact on the climate. It's all too easy to blame big companies and expect them to clean up the world, but I'm the one making the choices about when and how I drive my car. Second, unlike traditional air pollution, greenhouse gas emissions uniquely lend themselves to the kind of approach TerraPass is taking. Planting a tree in Bolivia to remove a pound of CO2 from the atmosphere is exactly equivalent to not emitting that same pound in Los Angeles. This is the principle at the heart of carbon trading, of which the TerraPass concept is a specialized, mass-market form.

I wish them well, and have just signed up for the recommended $39.95/year Efficient TerraPass.

Too Big To Ignore
After several weeks of reruns and sporadic postings due to travel, EnergyOutlook is back to its normal schedule. On my return, two stories caught my interest. The first involves the potential geopolitical ripples surrounding the belated bid by CNOOC for Unocal, exemplified by yesterday's lead editorial in the New York Times. The second is captured in a headline in the Financial Times, suggesting that high energy prices are finally starting to bite. I don't have much new to say about Unocal, having commented on this recently. The impact of high oil prices is another matter.

There's been lots of debate over whether we are in an energy crisis. While I still come down on the side of the nays--it looks to me more like a dress rehearsal for a crisis--it seems unlikely that energy prices could double and then plateau without forcing a significant realignment of the global economy. This was less obvious when the futures markets were steeply backwardated, that is, when prices for delivery a few years out were much lower, suggesting an imminent return to historical averages. But the price curve has long since flattened--with future prices close to current levels all the way out to 2011--and increasing numbers of analysts and industry executives are suggesting that current prices are here to stay, at least for the next several years.

The US economy is less leveraged to energy now than in the 1970s, particularly in terms of the energy input required for each dollar of GDP, but that doesn't mean that economics have been repealed. A sustained, long-term increase in energy prices puts energy- and transportation-intensive sectors at a disadvantage to those that use less energy. This should be even truer in rapidly growing countries where GDP additions require more energy, as, for example, in China.

This brings us to a conundrum that appears relevant to the pending Unocal transaction. If you look at the equity values of the major oil companies, including Chevron, they do not reflect $50 oil prices going out into the future. If Chevron's share price is built on a lower implied future price, how much over that price can they offer for Unocal's assets without incurring the wrath of the market? Should we be surprised that a Chinese company, reflecting policy concerns about the security of its home country's energy supply, might value Unocal's oil and gas reserves at a higher level than the US equity market--or Chevron's bid? Cutting through all the potential political maneuvering, this contest will likely boil down to a difference in views over the future value of the underlying commodity. It will be interesting to watch this game play out in the weeks ahead.

Climate Politics Signal
Because of the position of the current administration on ratification of the Kyoto Treaty, climate change has generally been viewed as a Democratic cause. But there are signs that this partisan divide may be breaking down, particularly in light of recent statements by Senator Pete Domenici (R-NM). It's worth recalling that the Rio Treaty, which laid the groundwork for Kyoto, was negotiated under the first Bush Administration. For that matter, the original Clean Air Act, along with other key environmental legislation, was enacted under another Republican administration (Nixon.) Protection of the environment must by definition be a bipartisan issue, even if the two parties disagree on how to go about it. It's high time for this administration to consider at least the kind of modest, "no regrets" approach suggested by Senator Domenici. Not only would it generate economic benefits in this country, but it should provide some necessary common ground with our friends across the Atlantic, who regard our current approach as irresponsible and downright un-neighborly.

Energy Outlook will return to its normal 5-day per week posting schedule next Monday.

11th Hour
It remains to be seen whether the China National Offshore Oil Corp. (CNOOC) will make a last-minute effort to outbid Chevron for Unocal. CNOOC has been interested in Unocal, with its heavy weighting of Asian oil and gas reserves, for months. They would have to top Chevron's $16+ billion dollar offer, and in doing so would raise a number of significant questions about the compatibility of their motives with their status as a partially privatized state enterprise. This is a deal that makes sense only to Beijing's Politburo, not to CNOOC's
shareholders, who stand to lose significant value.

The track record of national oil companies acquiring energy assets outside their home countries is poor. When you consider only the national oil companies of oil consuming countries, the picture gets even worse. Japan is a good example. In the wake of the 1970s oil crises, the Japanese government spent billions buying into oil projects around the world. All they have to show for this effort is a concession off Saudi Arabia's Neutral Zone and a few other dribs and drabs. Meanwhile, Japan has purchsed 99% of its oil needs in the open market.

Aside from any geopolitical concerns a CNOOC purchase of Unocal might raise, this investment would do little to guarantee more oil for China. If Unocal's oil makes sense for China, it will go there anyway, regardless of who owns it. That's how the global oil market works. Otherwise, it will end up elsewhere, unless CNOOC's management is willing to destroy economic value for their public shareholders by suboptimizing the value of its production. CNOOC's outside directors should focus squarely on this issue, as they consider whether to trump Chevron.

Informal Hybrid Tally
Some people count state license plates on long road trips; I count hybrid cars. On our current family trip to the Midwest, I can report that since leaving the New York Metropolitan Area, and including our travels around Minnesota’s Twin Cities, I’ve seen exactly three hybrids, two Toyota Priuses and one Honda Insight. Though hardly statistically significant, I think this still indicates the magnitude of the challenge facing us, if we want to reduce petroleum consumption.

Geo-greens such as Tom Friedman see hybrids and their variations (including plug-in hybrids) as a key technology for improving gas mileage and reducing our dependence on the Middle East. While I believe the Geo-greens are confronting the right issues, they must also recognize just how steep the hill is that they are climbing, and how long it will take. Our past energy choices are deeply embedded in our culture and physical infrastructure. There are no quick, easy fixes.

Nor can we confine our focus to vehicle fuel economy or think that shifting from petroleum to electricity will solve all our problems. As I suggested recently, our driving habits matter as much as our choice of cars--perhaps more, because it takes a generation to change the characteristics of the total car fleet enough to make a difference. We desperately need a national debate on all of this, but also we need to understand the parameters and define the boundaries correctly.

Sooner or later, we will face another real energy crisis, whether as a result of geopolitics or geology. The last eighteen months have included several features of such a crisis, without being a full-blown crisis. This should have served as a kick in the pants, but it hasn’t. There is still time, but not much, because it will take so long to effect change, unless it is imposed on us.

The Missing Natural Gas
Last Wednesday the New York Times carried a lengthy article on the need for imported liquefied natural gas (LNG) to fill the growing gap between US domestic natural gas production and steadily growing demand. While the Times painted a clear enough picture of the dilemmas posed by LNG--in terms of safety and security of supply--their analogy between the need for LNG imports and the historical growth of our oil imports fails in one important respect: we have chosen to restrict our domestic natural gas supply for reasons having little to do with energy policy.

The US natural gas situation is quite different from the greatly depleted state of our oil reserves, from which we've already pumped out 80-90% of the original oil that we can extract with current technology. In contrast, the DOE reports proved natural gas reserves of 189 trillion cubic feet, some 13% larger than they were in 1992. In fact, they are the second largest outside the Middle East.

As is usually the case for natural gas, though, the problem arises not so much from the underlying resource as from infrastructure and investment, complicated by restrictions on access. The US gas industry has been starved of investment dollars for the infrastructure needed to bring more gas to market, and of the ability to drill in places where we know there is more gas. Consider the bans on offshore oil and gas drilling imposed in areas such as California and Florida. Although targeted mainly at preventing oil spills, such as the one that blighted Santa Barbara's beaches in 1969, they make no distinction between drilling for oil and drilling for gas, which incurs little or no risk of spills. As a result, billions of cubic feet of natural gas that US consumers and industry desperately need today are not being produced. In the case of Florida alone, the resources in question appear sufficient to supply all of that state's gas needs for the next twenty-plus years.

If our demand for natural gas continues to grow--something I regard as positive, because of its lower emissions of greenhouse gases, compared to oil or coal--then sooner or later we will need to import more of our needs from outside North America. But with sensible stewardship of the domestic resource, including differentiating between the risks of offshore gas drilling and offshore oil production, that time needn't have come so soon.

The normal evolution of energy-producing devices typically involves many iterations of technology development and scaling up, until the device produces enough power to be both useful and economical. Wind turbines are a good example of this path. But an article in MIT's Technology Review describes an interesting technology that has followed a very different path, effectively waiting until the power needs of potential applications become small enough to match the modest output of the energy source. It won't be running your car--or even your cell phone--anytime soon, but it could be the key to unlocking the vision of tiny, ubiquitous radio-frequency sensors for civilian and military applications.

Beta radiation, in which radioactive substances emit electrons as they decay, was discovered over a century ago, but it has taken this long to find an application that matches the relatively low electric currents that can be produced by harnessing this kind of radiation. These "betavoltaics" are entirely different from the nuclear batteries that have been used on unmanned spacecraft for decades. Those worked by turning the heat produced by the decay of a radioactive isotope, usually Thorium, and turning it into electricity.

While betavoltaics may end up being useful only for battlefield sensor networks and their non-military analogs, you never know. Perhaps some other nifty new technology will come along that will only be possible with this kind of power source, and that we won't be able to live without. But just as millions of people today believe that cell phones and power lines cause cancer, putting anything powered by beta-decay into our homes could be a pretty tough sell.

What Might Have Been (Reprise)
Since many of the energy options available to us, including next-generation nuclear power plants, LNG import terminals, and even wind and solar power, have drawbacks that many among us find unpalatable, greater efficiency remains as an important option. However, as I pointed out in this posting from last October, the end result might not be quite what we'd expect.

Several weeks ago, the New York Times printed an article comparing US and French energy policies and energy efficiency over the last several decades. The article was subsequently picked up by the International Herald Tribune, from which this reprint was taken. While interesting in its own right, I think it also provides a fascinating glimpse of a world that might have been, had energy efficiency remained a core value of this country after the resolution of the oil crises of the 1970s.

In fact, such a world is not entirely fanciful, since many commentators have suggested that the US should have imposed high gasoline taxes in the aftermath of 9/11, in order to wean the country off imported oil and to dry up the ultimate funding source for many terrorist groups.

Using France as a proxy for a more energy-efficient USA, we can draw some interesting conclusions. For example, from 1971 to 2001, oil's share of total energy in France dropped from roughly 2/3 to just over 1/3, with nuclear power taking up most of the slack. Over the same period, oil reliance in the US dropped from about 48% to 40%. Had the US followed the French pattern, even if the energy alternatives chosen were different, we would today use about 5 million barrels per day less oil than we do, and our oil imports about would be roughly half of the current 10 million barrels per day.

The intervening 30 years would have looked very different. Among other things, the SUV trend would probably never have happened--with signficant consequences for US carmakers--and we would be driving smaller, less powerful cars. We might even be living in smaller homes, watching smaller TVs, and so on. On a larger scale, the geopolitical implications might have been dramatic, too, including a different relationship with the Middle East.

There's a catch, of course. Over the last 30 years, a side-by-side comparison of the French and US economies (using OECD data) shows that ours grew by an additional 20% of GDP, creating more jobs and greater wealth in the process. While there are complex reasons for this, setting an artifically high value on energy in France, compared with its real-world cost, in this period no doubt contributed to the difference in performance. ( Persistent high unemployment also seems to have been a key factor in the recent French "no" vote on the EU constitution.)

Hardly anyone doubts that the US could become much more energy efficient if we chose--or had to--but we should keep in mind that we would also be choosing a different economy, with different outcomes, some better and some worse.

Justice, At Last
When Unocal first appeared to be destined for a Chinese buyer, I remarked on my concern about the fate of its obscure but pivotal patents on reformulated gasoline. When Chevron announced it was buying Unocal, my concern eased, because at least these patents would be in US hands, although they seemed to present a thorny problem for a company that had campaigned and litigated against their enforcement. Now, the best possible outcome seems to have been reached, with the FTC consent decree for the acquisition including Chevron's agreement to cease enforcement of the patents for the remainder of their lives.

For many of us who have followed this issue since its inception, the granting of those patents represented both an injustice against a group of companies that had cooperated, with government approval, to try to create the most cost-effective means for achieving California's stringent gasoline quality specifications relative to reducing air pollution. Although I wasn't involved in this directly, I worked in the downstream in California at the time, and people I respected were adamant that Unocal had patented work done by and with others, then turned around and attempted to collect royalties from the same companies that had contributed to the knowledge and formulations behind the patents. In this vein, the waiving of future rights under these patents--and perhaps even Unocal's absorption (and disappearance) into a larger company--seems like just desserts.

LNG Disaster Movie (Reprise)
With controversy over the permitting of LNG terminals in the US--including the proposed Broadwater facility in Long Island Sound--still running highone of the key issues remains the level of risk associated with these facilities. Here's a posting from last May on the subject:

The Wall St. Journal and the NY Times, along with numerous other publications, have described the obstacles companies face in attempting to build LNG import terminals around the country. Seven have already been cancelled in the face of public opposition. I find two things remarkable about all this. The first is that these projects would face such overwhelming opposition at a time of genuine energy insecurity, and with crude oil at record high nominal prices. Domestic natural gas commands a price equivalent to the high crude price, and since this doesn't seem to be stimulating much new production, the only alternative is to increase imports.

If you've been reading my blog for a while, you know I don't consider LNG to be quite the panacea that some claim, but it is certainly part of the answer--a big part as long as we insist on steadily increasing our gas demand while holding discovered US gas reserves off the market for environmental reasons.

The other remarkable feature of this situation is the degree of fear being instilled by those opposed to the LNG terminals. Although I don't fault communities for wanting a say in the kind of industrial facilities that will be in close proximity to them, those discussions should still be based on fact and not wild ravings. The Wall Street Journal cited one LNG opponent who claimed that the destructive potential of an LNG tanker was equivalent to 55 Hiroshima bombs (see analysis below). This reflects an irrational fear, bolstered by junk science. It's hard to argue with, but we cannot base the nation's energy policies on paranoia.

Many have picked up on the explosion at the LNG plant in Skikda, Algeria as evidence of the risks of handling LNG, but even if that were a fair comparison--and there are good reasons why it is not--it is actually a pretty good illustration that the risks are similar to those associated with many kinds of industrial facilities and not orders of magnitude greater, as activists assert.

Having recently seen prosaic and trusted objects turned into deadly weapons, it is natural to worry a bit more about LNG than we might have a few years ago. Every LNG tanker--along with every crude oil or gasoline tanker, tank truck, or rail car--has the potential for destructive misuse. Yet we have not grounded all airplanes for fear they will be turned into cruise missiles, nor can we shun every link in the energy chain on which we all rely. While we can minimize risk, we cannot eliminate it. And if you don't want the LNG terminal in your neighborhood, for reasons that seem perfectly valid to you, just exactly whose neighborhood are you proposing as an alternative? Or are you and your neighbors prepared to take your houses off the gas grid and heat them with something else?

Finally, for anyone interested in the atomic bomb comparison, a few facts:
1. A fully loaded LNG tanker of 120,000 cubic meters capacity holds about 50,000 tons of methane.
2. The yield of the Hiroshima bomb was equivalent to 21,000 tons of TNT.
3. Conservatively assuming that TNT and methane have the same energy content gives you a ratio of 2.5, not 55, but we are not done yet.
4. An atomic bomb releases its energy (from the conversion of matter into energy, via our old friend e=mc^2) in 1/1000th of a second. This makes for a stupendous flash and explosion, with a surface temperature comparable to that of the sun. This is why every H-bomb has an A-bomb trigger.
5. A chemical explosion of methane requires a narrow range of air/fuel mix (5-15%) that could not achieved all at once for the entire volume of an LNG tanker. In the real world, it would many seconds and probably minutes to consume all the available fuel.
6. The difference between points 4 and 5 above is analogous to the difference between going from 60-0 mph by hitting a brick wall, compared to a panic stop using the brakes. The same energy is released, but in very different ways.
7. If it were easy to liberate nuclear weapon yields from large quantities of fuel, we would be doing this routinely. The closest we get is something like this. And note that there is an enormous distinction between achieving A-bomb-like overpressures in a very limited radius with a fuel/air device vs. the kind of wide-scale effects of an actual nuclear explosion.

The Long Future of Oil (Reprise)
As I travel for the next couple of weeks, I'll be mixing new postings with some from last year that my newer readers may not have seen. The first of these, from last December, should make an interesting companion piece to discussions of "peak oil", even if the NY Times link now points to their archives. With or without a peak, we'll be looking for oil in unusual places in the decades ahead:

It's fashionable to talk about the coming Hydrogen Economy, and though I may often sound like a skeptic, I think that many of the elements of a hydrogen-based energy network could be in place within twenty years or so. However, an article about the petroleum potential of the deep Arctic waters got me musing about the long-term future of oil, which may be much longer than some expect.

If you extrapolate current trends, by 2040 most of the conventional production in the US, Canada, and North Sea will be tapped out, and virtually every current producing country outside the Middle East will be in decline. Even if hydrogen (presumably generated by some non-fossil fuel source, such as renewables or nuclear) were to make major inroads into oil demand by this time, there would still be a need for significant quantities of oil, to supply those parts of the world that couldn't afford to make a transition to hydrogen, and for aviation, petrochemicals and other non-road demand sectors.

Saudi Arabia (assuming it still exists as a country 35 years from now; after all, it is only about twice that old now) should still be a major producer in 2040, as would Iraq and Iran. But would the world want to rely entirely on Middle Eastern oil, and could the Middle East by then cover even a diminished global appetite for oil? Where else might the oil come from?

That's where the potential described in the article on the Arctic comes in. By 2040, a substantial proportion of the world's oil--even if oil were well on its way to becoming obsolete--would have to come from unconventional sources, such as oil sands or heavy oil. In addition, resources that have yet to be identified, in ultra-deep waters or ultra-remote areas, such as the Arctic and Antarctic, would have to contribute materially to supply. That would raise all sorts of interesting questions about who owns the rights to those resources. Nor can one discount the possibility that in 35 years biotechnology and/or nanotechnology could either unlock the huge amounts of presently unrecoverable oil in abandoned reservoirs, or generate synthetic oil in large quantities.

Note that I haven't said anything about the price required for this to play out, or about the possibility of a truly superior energy technology, such as nuclear fusion. Barring such a development, and depending on the future attitude toward climate change and the long-term decarbonization of energy (which some claim is starting to reverse with the growth of China and India), oil could still be an important commodity well into the next century. Finding it implies some pretty exotic technology, rivaling anything the Hydrogen Economy has up its sleeve.

Climate Scandal?
The UK's Guardian newspaper has reported that the Bush Administration's stance on climate change was influenced by lobbying from ExxonMobil and the American Petroleum Institute. I suppose in certain quarters this could be regarded as newsworthy, but I doubt it will raise much of a fuss on this side of the Atlantic, since it's a good bet that many Americans already believed this without any evidence. Anyone looking to drum up a scandal will probably be disappointed, and it's likely to be drowned out by the reaction to a verdict in the Michael Jackson trial, whichever way that goes.

Until quite recently, ExxonMobil has been vocal in its opposition to anything to do with climate change, running op-ed ads playing up the scientific controversy on the subject. Their current ads focus on Exxon's investment in R&D and other actions that would reduce emissions, without ever really coming out and saying that climate change is at least partially man-made or even that's it's bad. What should be more noteworthy is the number of oil companies that have broken with the nay-saying and left anti-climate change lobbying groups. BP, Sunoco and Shell participate in the voluntary reduction program of the Pew Center on Global Climate Change. Chevron accepts that fossil fuels contribute to climate change and is reducing emissions and researching emissions-reduction technologies. Other companies fall out all over the spectrum.

Climate change is a serious problem, as I've argued in this blog since its inception. But just as it's timely for environmentalists to reevaluate their concerns about nuclear power in the context of climate change, we need to get past seeing the fossil fuels industry as a monolithic obstacle to addressing global warming. It's also time to stop regarding Kyoto as some kind of litmus test, now that it's gone into force.

There are probably ten good reasons why the Kyoto Protocol is imperfect and inadequate, balanced by at least ten other reasons why it's better than nothing. The ultimate solution, however, will require major, long-term changes in how we produce and consume energy, and we're going to need the expertise, infrastructure, and technology of the large energy companies to make this happen. If a few--however large--are still lagging behind the pacesetters, that will likely come back to haunt them as a competitive disadvantage, later.

Better Biodiesel
Technology Review reports on a new, much more efficient process for producing biodiesel from plants. As I indicated the other day with respect to ethanol from cellulose, this kind of improvement will be essential in making biofuels competitive with mineral fuels, from both a cost and energy-balance perspective.

Wasteful China?
Americans get a lot of grief for being inefficient with energy. We use a disproportionate quantity on a per capita basis, though when gauged as energy-per-dollar of GDP, the comparison looks much better and has improved by 20% since 1990. While there's clearly more that can be done in this area, recent reports suggest that improvements in China's energy efficiency might have a bigger impact, globally. As reported in a recent issue of Business Week, China uses vastly more energy per unit of output than Japan or the US. This wasn't a problem when China was an underdeveloped country, but in light of projections that it could pass the size of the US economy (on a purchasing-power-parity basis) in several decades, the long-term consequences of this trend would be disastrous for the whole world. China's continued energy demand growth at current rates could hasten a true global energy crisis.

The scale of the problem is significant. The World Bank has estimated that China's excess energy consumption costs it over $100 billion per year, and to the degree that it has helped push up global crude oil prices, it could easily be costing the rest of us another $100 billion annually. These kind of costs would justify some pretty substantial investments in efficiency.

Now, while I'm not suggesting we shouldn't worry about this, it does remind me of an analogous situation a few years ago. In the early 1990s, the combination of economic growth and an obsolete power grid made electric power supply in the Philippines seriously unreliable, particularly in the Manila area. In response, anyone who could afford them brought in diesel generators for backup--and sometimes primary--power at factories and office buildings, on a scale that distorted the demand for diesel fuel in the whole western Pacific. This went on for several years, and then just as companies were investing in refinery expansions to produce more diesel fuel, the market started to return to normal. Large investments had brought new gas-fired power plants and distribution capacity on line, and the diesel generators were shut down and sent elsewhere.

It's important to note that, although the diesel generators were much less efficient than the new power plants that replaced them, they made economic sense at the time, compared to lost factory production or office productivity. That fits the pattern of energy inefficiency we see in China today: making more widgets is more important than saving a few barrels of oil or tons of coal. But that won't always be the case. When the capacity to make widgets outstrips demand, efficiency will move up the priority ladder. And on a national level, China's leaders seem to understand this, as they busily line up supplies of LNG to fuel efficient, gas-fired power plants.

Since this transition will take time, if driven only by local economics, it's worth asking what the rest of the world can do to help it along. The connection between energy consumption and greenhouse gas emissions is an obvious place to start. Getting China to sign on for the next phase of Kyoto might thus benefit anyone that will be competing with China for oil and gas imports in the years ahead, even if others had to sign on to similar emissions reductions as a quid pro quo. Viewed in that light, the Kyoto process starts to look like a positive for US energy security, and China's relative inefficiency could be as much of an opportunity as a problem.

FYI, I'll be traveling for the next several weeks, and new postings will be somewhat less frequent.

Oil Storm
Some films have a lasting impact beyond their entertainment value, while others intended to deliver a powerful message disappear without a trace. Arguably, "The China Syndrome" changed the way the US looks at nuclear power, though it's hard to separate that from the coincidental occurrence of the accident at Three Mile Island. "The Day After Tomorrow" , on the other hand, had no apparent impact on attitudes toward climate change. It is anyone's guess whether last night's airing of "Oil Storm" on Fox's FX Channel raised the public's awareness of the risks of another oil shock. As simple entertainment, it left much to be desired.

The premise of "Oil Storm" was that two big events combine to cut off both a major source of US oil imports, as well as much of the key US production in the Gulf of Mexico. You can argue about how realistic it would be to have two such "worst case scenarios" happen together, but a quick glance over the last couple of years should remind us that we have seen any number of events that have had a major impact on the oil markets, including a paralyzing strike in Venezuela's oil industry, two wars in Iraq, protests by indigenous groups in Nigeria, and several hurricanes. The two key events in the film also complement each other nicely: while hurricane damage in the Gulf Coast would have an immediate impact on both prices and physical supply, a disruption in the Middle East, while ratcheting up prices instantly, would take a month to hit inventories, because of the long shipping times involved.

So how well did Fox handle this scenario? Ignoring the mawkish human interest vignettes, the producers seem to have done just enough homework on the industry to put together a superficially plausible storyline, while missing many key factors that would make reality rather different from what was portrayed. Viewed in the best light, the program served as a reminder of the degree to which we depend--both individually and as a nation--on key chunks of infrastructure that we will never hear about until something bad happens to them. However, there were so many defects of logic that this larger message may have gotten lost:

First, while the loss of the Louisiana Offshore Oil Port (LOOP) and the Louisiana offshore production, including the outer continental shelf, would indeed take close to 2 million barrels per day out of US oil supply until repairs could be effected, the Strategic Petroleum Reserve (SPR) is capable of pumping twice as much oil into the system for up to six months, during which time global supplies would rebalance. Furthermore, in a complex global system, rebalancing is the key word; it's not just a question of asking Saudi Arabia to produce more oil. At a high enough price, oil destined for other markets would flow here, and demand everywhere would slow down.

It's also easy to forget that even without the SPR, the loss of four million barrels per day would still leave us with as much oil, from domestic production and imports from Canada, Mexico, West Africa, and elsewhere, as the country consumed in the 1980s. There's an enormous difference between no oil and not enough oil, and "Oil Storm" never seemed sure which situation it was dealing with. And the idea that the whole country could be waiting on tenterhooks for a couple of cargoes of oil is simply ridiculous.

Then there's the relationship between oil prices and gasoline prices suggested in the show. At times I had the impression that the script writers didn't know how to divide by 42. For example, at the highest crude oil price attained in the film, $153/barrel, an equivalent gasoline price, including refining margin, taxes and dealer margin would be around $4.75/gallon. From that point, you can either let prices go up by more than this in order to slow demand enough to balance supply, or you control prices and get long lines, as was the case in the 1970s. "Oil Storm" gave us $7 gasoline and long lines, and I just didn't buy it.

The real question, of course, is not whether I bought into it, but rather the reaction of the TV audience. Was the balance between docu- and -drama good enough to grab and hold someone who wasn't expecting to write a blog about it on Monday? I'll be watching the ratings and waiting to see if this made-for-TV movie creates any ripples.

The Near Abroad
The end of the Cold War and the dissolution of the Soviet Union brought two kinds of renaissance to the lands of Russia's southern flank, or "near abroad". As countries such as Kazakhstan, Georgia, Azerbaijan, and Kyrgyzstan became independent for the first time in decades or centuries, they had to sort out their own styles of government. Recent events show that this process is still unfolding. At the same time, a region that had been shrouded in mystery and romance has again become a place of interest to the rest of the world. Initially, attention focused on the energy-rich countries bordering the Caspian Sea. Now, this focus is broadening to include the Black Sea countries that are crucial to the transit of Caspian oil and gas to the West. The Economist refers to this as a new Great Game.

The original Great Game referred to the rivalry between Russia and the British Empire over much of the same territory, with British India representing the ultimate prize. (This history of that period makes fascinating reading.) Subsequently, this term was conflated with oil exploration and applied to the competition for various new oil provinces, including the Caspian region itself in the 1990s.

In the case of the Black Sea Great Game, the rivalry is again with Russia, which has lost one round with the opening of the Baku-Ceyhan oil pipeline, which follows a route scrupulously chosen to avoid Russian territory. Despite its proximity, Russia is at a disadvantage currently, because of the distrust that the new nations along its periphery hold for their old masters. Western capital and friendship with America must seem attractive counterweights to Russian influence. For that matter, some of the territory on the Russian side of the border doesn't look much more stable. The Caucasus is a multi-ethnic patchwork of republics, oblasts, and krais--including Chechnya--that are left over from the Czarist conquest of this region in the 18th and 19th centuries. It remains to be seen whether Russia can hold this fractious district together.

Don't count Russia out, though. It still owns a lot of key infrastructure on its territory, and its aggregate oil and gas reserves dwarf those of its former provinces. The absorption of much of Yukos into the Russian state oil company, and the relationship between Rosneft and Gazprom, are sure to have implications for the balance of energy power in the Black Sea and Caspian regions. Nor should we discount the possibility that a future US administration might exchange some of our new influence in this region for closer ties with Russia, which could be worth much more in the long run. While Central Asia and the Caucasus may never be as important as the Middle East, they are back on the map and will retain a higher profile than they have had in a very long time.

Perceptions of Peak Oil
I've devoted a fair amount of space over the last year and a half to the idea that global oil production may be approaching a geological limit and will then begin to decline. While I still believe that other factors, such as industry consolidation and geopolitics, loom as more imminent threats to our ability to keep expanding oil production, it's clear that the "peak oil" story has continued to percolate into the public's awareness over this period. It has migrated from the pages of Scientific American, to the Wall Street Journal and New York Times, finally reaching CNN's Headline News Channel the other day. There is an entire "Peak Oil Webring" of blogs and other websites devoted to the topic. This is now an idea that can't be ignored or dismissed out of hand.

Just as I regard public perception of climate change--rather than the underlying science--as the key factor influencing the steps that the US will take concerning global warming, I'm beginning to think that the key aspect of "peak oil" is not whether the geological theories of King Hubbert and his adherents can accurately predict a peak in global oil production, but how many people believe this is so, and what it prompts them to do about it. In essence, "peak oil" is a meme, and the proliferation of that meme--whether it's correct or not--can alter the way we look at the future of oil.

An extended period of high and volatile oil prices, with producers straining to meet demand, is tailor-made for validating belief in "peak oil". Only after the fact can we truly determine whether these events were the early signposts of a permanent peak in oil production, or simply a temporary alignment of factors favoring producers at the expense of consumers. That suggests that the longer these market conditions persist, the more they will reinforce the idea that oil is nearing its peak, and the further this notion will move into the mainstream.

That could have many positive consequences. Congress and the federal government might finally focus on the need for more energy efficiency and aggressive R&D on alternatives. Some of the impediments to our continued shift toward natural gas, which will have to rely heavily on imports of liquefied natural gas, might be removed. "Peak oil" even dovetails nicely with efforts to reduce greenhouse gas emissions, since petroleum consumption in the transportation sector contributes to higher atmospheric carbon dioxide concentrations.

What would not be helpful, however, is a perception that further oil exploration and development are futile. Mathematically, half the world's conventional oil will still remain after production has peaked, so that even if this occurred next week, as much oil could be produced in the decades ahead as has been extracted in the 145 years since Colonel Drake's first well in Pennsylvania. Of course with much of the remaining oil reserves in the hands of OPEC, this won't necessarily be as cheap and painless as it has been.

"Peak oil" is an important issue to monitor, and its signposts will be measured in column-inches of newsprint and minutes of TV coverage, as much as in hard industry statistics. With many predictions focused on 2006, 2007, or 2010, it will be put to the test rather quickly. If we pass those years without experiencing a peak, or if oil prices revert to their historical range, the idea will lose steam and it won't matter if it turns out to be right in the long run. Meanwhile, look for an increasing number of alternative energy initiatives to reference an imminent peak in oil production as part of their justification.

Farms as Oilfields
The Economist recently ran a special report on biofuels. It's worth reading because it examines the subject from a distinctly international perspective. This is important, because most reporting here focuses on the conversion of US corn crops into ethanol for use as a gasoline additive, or on the occasional diesel car running on recycled fry-oil. As the biofuels industry becomes more global, it will play in increasingly important role in both energy security and international trade.

The two key non-US examples discussed in the report are European biodiesel and Brazilian ethanol. Both rival the US ethanol market in scale, as well as in the government subsidies involved. As I've argued before, if you want to understand the current biofuels business, you need to understand how different countries choose to subsidize their farmers, because despite its energy implications, current biofuels based on corn, cane and edible oils are very much agricultural support programs first, and energy programs second. If high oil prices persist, they may disguise this just long enough for the technology of the industry to alter this basic fact. Change is coming, and this is the main reason I'm a bigger fan of biofuels than I used to be.

Unfortunately, the Economist article mentions the transformation of biofuels technology almost as an afterthought. New processes based on biotech, allowing non-food crops and agricultural waste to be turned into ethanol and other useful chemicals, will almost certainly overturn the current business model, at least in the developed world. This is essential, because as biofuels scale up, they will compete with food crops for arable land. The transition to cellulose-based biofuels could happen within a decade, as enzyme costs come down and the dramatic difference in feedstock values begins to weigh in. I sincerely hope that the farmers whose livelihoods depend on subsidized ethanol or biodiesel are paying attention to these developments, and that the money they are investing in the explosion of current-technology ethanol plants isn't coming out of their retirement accounts.