Wednesday, May 31, 2006
When the first energy crisis arrived, with the Arab Oil Embargo of 1973-74, followed by the Iranian Revolution in 1979, US carmakers were caught flatfooted. The typical American car of the time was a massive station wagon with a 350 or 400 cubic inch V-8 engine. Average gas mileage: 10-12 mpg. (Average pre-Embargo pump price for regular gas: 36 cents per gallon, the equivalent of $1.63 today.) Detroit was forced to retool on the fly, resulting in such sterling vehicles as the Ford Pinto, Chevrolet Vega, and Chrysler K-Car. It took a federal bailout of Chrysler to keep the Big Three from becoming the Big Two, while Toyota, Nissan (or Datsun, as it was called then) and Honda filled the breech with small, economical and surprisingly reliable cars, seizing a giant chunk of market share that they've never given back.
It seems inconceivable that we could be poised for a second round of this, but when you look at Detroit's product slate, dominated by SUVs and various truck mutations, it's hard to avoid this conclusion. Just compare the fleet fuel economy of the various carmakers. GM's and Ford's domestic offerings score at just a shade over the required 27.5 mpg average for passenger cars and 21.0 for light trucks. Toyota, on the other hand, exceeds 34 mpg for cars and 23 for SUV/light trucks. Who is better positioned for a world of high gasoline prices? Who will gain market share, and at whose expense?
It didn't have to be this way. Although it isn't easy to gauge what consumers will want in the 3-4 years it takes to bring a new model to the market, Toyota's planners had the same market information to work from as their US peers. In the late 1990s, Toyota invested in hybrid technology as an option to replicate the efficiency advantage it enjoyed in the 1970s. This has been perfected in two generations of the Prius and now deployed to the mass-market Camry. But the Big Three participated in the 1990s Partnership for a Next Generation Vehicle, an industry-government consortium focused on developing the technology for an 80 mile per gallon car. Using the results of that effort, each of these manufacturers demonstrated prototype hybrids that got in excess of 70 miles per gallon.
Today Detroit is belatedly rolling out an array of more economical vehicles, including somewhat thriftier SUVs. Meanwhile, the gas guzzlers that were bought in large numbers while these cars were being designed have expanded our oil imports in a manner that could take decades to reverse. GM and Ford are paying for these product line decisions in reduced earnings and stock prices, while the country pays in the oil portion of our trade deficit, and consumers pay at the pump. The biggest beneficiaries of this second missed turn are the Japanese and Korean car manufacturers, whose dealerships are stocked with broad ranges of sleek, thrifty, and dependable cars--again.
Tuesday, May 30, 2006
While I agree with much of what Mr. McKibben says about the scale of the problem, the need to pursue multiple solutions, and the requirement for behavioral change, one of his "test questions" is simply wrong, and several of the others betray a preference for government not only to set the direction, lay out the rules, and measure the progress--as it should--but to drive the bus.
For example, although I've covered the topic of fuel taxation to near exhaustion, I think Mr. McKibben misses a really obvious solution in his prescription for top-down carbon taxes. Rather than trying to guess the level of taxation on fossil fuels that would "truly reflect the damage they do," we should determine the level of emissions reduction we need each year, establish a cap that reflects that, and let the market determine the cost of getting there. We've already seen in the SO2 market and the nascent CO2 credits market that substantial reductions can be achieved much more cheaply than experts have predicted. Any solution that doesn't have minimizing the cost of implementation as a primary objective will be vulnerable to postponement and waivers, the first time the economy slows down.
As to his assertion that China can't be held to the same standards, this is wrong for two important reasons. First, while it's certainly true that China bears little responsibility for the greenhouse gas emissions that accumulated in the atmosphere during the development of European and American industrial society, it is equally true that any successor to the Kyoto Agreement that exempts China's future emissions will be a dead letter from the day it's signed. Because of their rapid growth, China and India must participate in the process and take on emissions targets, even if those targets were to reflect increases over current levels. Without targets, the path of least resistance will be to try to develop as we have, and there simply aren't enough resources or emissions sinks on the planet to permit this.
The other problem here is rooted in America's basic pragmatism. While civilizational guilt might arouse a vigorous response to climate change in a Europe that is organized around atonement for its history of colonialism and world wars, it just won't sell here. Competition will be much more effective at getting American companies and American consumers to address this issue, along the lines described in today's New York Times business section. As Mr. McKibben suggests, we are all in this together, but giving China and India a free pass on climate change, based on some dubious moral calculus, is both bad policy and bad science.
Apologies for the bizarre spelling errors that cropped up in the first version of this posting!
Friday, May 26, 2006
From February 2004:
"Enron must also be viewed in the context of its times, in order to separate the chicanery from genuine innovation. It is easy to forget that the Enron mystique of the late 1990s arose not just from its earnings and stock price growth--both now seen as the result of overly "sharp" financial engineering--but from a variety of genuinely novel and clever--in the best sense--approaches to an industry that was going through major changes, some of which were not readily apparent to its largest players. For a few years, all the other energy players had to look at Enron and wonder what they themselves were doing wrong. It is too comforting and facile to write off that whole period as an anomaly based solely on legal and accounting transgressions.
We should also remember that Enron…appeared to possess the laudable knack of learning from its mistakes without becoming paralyzed by them. It would be fascinating to see someone reconstruct the financials of the real business, minus the swindles created to pump it up. The whole thing sank when Enron committed the cardinal sin (besides breaking the law) that any trader can make, and Enron was fundamentally a trading company. A trader can never, ever do anything to make the people he is dealing with doubt his credibility. The moment their financial house of cards started to collapse, it became impossible to sustain their trading volumes, and the death-spiral began.
There is something seductive and reassuring about watching successive Enron executives do the "perp walk", as we endow them in our minds with all the Seven Deadly Sins. Beyond the headlines, though, is what I believe to be a much more interesting and complicated story of a company that went out of its way to hire smart and clever people, gave them their run, but then let them down badly by never learning (or bothering) to rein them in when their ideas went out of bounds."
From June 2004:
"F. Scott Fitzgerald once said, "The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function." We might do well to apply this skill in many areas, but I see particular value in looking at Enron this way. This company created remarkably innovative financial products that addressed entire categories of previously unidentified consumer and business needs, but it also engineered conflicts of interest for its finance officials that were dazzling in their scope and degree of deception.
Meanwhile, I continue to believe that the wreck of Enron contains valuable nuggets of business innovation that will be mined by future entrepreneurs, when the market is again ready for them." (I don’t think you’d have to look very far for examples of this happening already, within trading companies and hedge funds.)
From the start this case has had all the morbid fascination of a car accident, and I’m sure there are any number of additional books, insider exposes, and perhaps even a feature film--not to be confused with last year's documentary and the previous TV movie--in the works. This week’s verdicts are surely not the last word; appeals could go on for years, despite the depleted personal finances of both men. In the meantime, Messrs. Lay and Skilling will have many years in which to contemplate the ultimate outcome of their ethical lapses.
Energy Outlook will observe Memorial Day and resume postings next Tuesday. Have an enjoyable long weekend/bank holiday.
Thursday, May 25, 2006
At the other extreme, environmentalists, venture capitalists and pundits such as Tom Friedman of the New York Times are calling for higher fuel taxes of one sort or another, in order to promote efficiency and stimulate the growth of alternatives. Senator Clinton's proposal to establish a $50 alternative fuel fund, financed by a fee on oil company profits, would likely fall into this category, once its full implications played out.
For example, it would shrink the capitalization of US energy companies like ExxonMobil, Chevron and ConocoPhillips that report their global profits here, relative to their European, Russian and Chinese peers that would only be taxed to the extent of their US operations. The Senator's plan, which exempts from taxation oil company profits reinvested in alternative energy, is also likely to create a bubble in the share values of alternative energy firms, since $50 billion is quite a lot of capital to set chasing the small--though rapidly growing--alternative energy sector. The net result of all this for US consumers is hard to predict, but it would certainly put a damper on the additional domestic resource exploration currently being stimulated by high oil and gas prices. How this would achieve the stated goal of reducing US oil imports without first expanding them is a paradox beyond my modest knowledge of economics.
Before we can hope to make sense of such a conflicting welter of proposals, we need to have a national debate on whether high retail fuel prices are good or bad in general--including the possibility of providing direct relief to buffer those least able to bear them. If we were to agree that higher prices, painful as they are, are ultimately beneficial because they reduce demand and lower our emissions of all sorts of bad things, including greenhouse gases, then we should abandon efforts to roll back prices through tax cuts or other interventions. At that point a floor-price tax or other surcharge on gasoline and diesel might provide a better way to fund Senator Clinton's $50 billion alternative energy program.
If, on the other hand, we decided that high fuel prices are bad for the economy and terrible for consumers, then we ought to unleash the only measures that can actually apply downward pressure on them: fast-tracking additional supply--including oil and gas, as well as alternatives--in tandem with improving efficiency, including more economical cars and lower speed limits (or stricter enforcement of existing speed laws.) We might even find that taxes on engine horsepower or higher "gas guzzler" fees make more sense than higher fuel taxes. And if manufacturers chose to absorb those taxes while they retooled to make more frugal models, that would be a business decision, just like GM's price-cap gimmick.
Not to pick on my SUV-driving readers, but the perfect example of our national schizophrenia on this issue is the driver of a 6000 lb. Ford Expedition--with its brick-like aerodynamic properties--who zooms down the highway at 80 miles per hour, pulls into a gas station, and curses the oil companies for charging $3.50 for premium unleaded. Until we begin to connect our own behavior as consumers and citizens with the prices we pay for energy, the national debate on this subject will continue galloping off in all directions.
Wednesday, May 24, 2006
The film has already stirred up controversy. John Tierney's op-ed in the New York Times (Times Select required for full access) suggests it avoids offending its core audience by skirting the role of nuclear power in reducing greenhouse gas emissions, and by failing to demand near-term sacrifices. Yesterday's Wall Street Journal included an op-ed by former Delaware governor Pete DuPont that went much farther, disputing the underlying science of climate change. Gregg Easterbrook, in today's New York Times, rebuts these counter-arguments, though I part company with his comparison of air pollution, which results largely from fuel impurities and incomplete combustion, to CO2 emissions that derive from the basic chemistry of combustion. Meanwhile, The Economist gave the movie a mild endorsement.
I intend to see "Inconvenient Truth" as soon as the constraints of getting a babysitter allow and will review it here. I don't expect to be surprised by its point of view. However, I'm already concerned about the degree to which the man and the message are becoming intertwined. As regular readers of this blog know, I regard climate change as a very serious risk that must be managed actively and creatively, on a national and global scale. I'd bet that a majority of those who are likeliest to pay to see Mr. Gore's film already believe this.
We lack a national consensus on climate change, and achieving one will require making an effective case to conservatives that it is a) a genuine problem and b) not something that can be left to the market to sort out. I doubt Mr. Gore is the best choice for that task. Worse, if "Inconvenient Truth" becomes a liberal cause celebre in the way that "Fahrenheit 9/11" did, this will further polarize the argument and impede the genuine progress being made toward a necessarily bi-partisan response. So while I can appreciate his passion for global warming, I wish Mr. Gore had confined his role in this film to one behind the scenes, and deferred to a neutral spokesman capable of reaching across the political divide to make the case to the whole country.
Tuesday, May 23, 2006
The X-Prize approach seems ideally suited for hydrogen. As with the commercialization of space travel, making hydrogen practical requires either a series of key breakthroughs in divergent research areas, or a truly novel combination of existing technologies. The other similarity of note is in industry structure, with both dominated by government agencies and large corporations, but with interesting work going on in small start-ups. As for space, the dollars involved here are unlikely to galvanize the biggest players to redouble their efforts, but they would be very material to new entrants struggling to stay alive while innovating.
As I commented the other day, there's been a recent wave of skepticism about hydrogen, and it is justified to some degree by the overly ambitious projections of a few years ago. The beauty of the H Prize from this perspective is that it is a very cost-effective way to fund basic research: you only pay for results, not for work that goes nowhere. Granted, we might shell out a few tens of millions for milestones that never add up to a workable energy system, but if we can't afford to spend a few millions on something potentially so important, then we ought to fold our tent and offshore the operation of the entire country to China and India.
Enthusiasts could point out that much work remains before the milestones in question can be reached, let alone integrated into a practical system. Still, it would be hard to justify spending much more on H2 than we do, given its deferred payoff. A modest H Prize looks like a clever and frugal way to stimulate the creative margin of what could be the next big wave in energy. It certainly pales in comparison to the billions we've spent on things such as grain ethanol that look appealing in the short term, but don't offer a fraction of hydrogen's long-term potential.
Monday, May 22, 2006
The basic idea behind offsetting emissions is simple--and it is entirely contrary to the patterns laid down in three decades of fighting local pollution. Emissions trading for greenhouse gases works because, unlike for other emissions, the effect of these emissions is not dependent on location. Thus the CO2 output of an American car can be exactly offset by building a wind turbine in China (instead of a gas turbine) or burning the methane from a landfill and turning it into CO2 (at a 21:1 reduction in net global warming impact.)
There are two reasons this makes good economic sense, as well as environmental sense. First, there is a wide disparity in the cost of achieving CO2 reductions. Capturing and sequestering the emissions from a coal-fired power plant--something that has yet to be implemented outside the laboratory--will cost between $50-$100/ton of averted CO2 emissions to the atmosphere. I've seen estimates putting the cost of the greenhouse gas savings from subsidized corn ethanol in the same range. But "low-hanging fruit" reductions are being effected at costs ranging from 0-$5 or $10/ton, and agricultural emissions reductions and the emissions benefits of wind and solar power can be quite cheap, depending on the circumstances. We're all better off if someone gets their reductions from the cheapest source possible, rather than paying top dollar to reduce their own, and the impact on the planet is exactly the same.
Just as importantly, the kind of large-scale reductions that will be required to make a real dent in the problem depend on changes in technology that will take years to implement and more years for existing vehicle fleets and capital stock to turn over. Trading and offsets provide a way to achieve meaningful reductions before these larger changes can roll through.
So while I can see how some might regard Terra Pass and Greener Miles as merely a way to reduce the guilt associated with buying an SUV getting 14 miles per gallon, this mechanism makes cars greenhouse-gas neutral, but in no way shields consumers from the impact of $3.00 gasoline. That's a much more powerful incentive for buying more efficient vehicles, and driving more frugally.
Friday, May 19, 2006
As the article describes, the "nanotechnology" label has been attached to a much broader array of items than suggested in Eric Drexler's original formulation in the 1980s. In some cases, this association is more hype than reality, but that won't matter if something like nano-sunscreen turns out to cause problems worse than the skin cancer it's intended to prevent. Concern about "bad nano" isn't exactly new. Bill Joy, a co-founder of Sun Microsystems, made headlines a few years ago with his warnings against the "gray goo problem." Even though the threat that concerned him is essentially unrelated to the red flags being raised now, this could all be conflated by opponents to turn nano into a another Frankenstein's monster.
If I were advising firms working in this area, I would urge them to be rigorous and proactive in formulating standards for product labeling, manufacturing, worker safety and health testing. There's no question this would raise their costs, but that seems preferable to a serious risk that could truncate nanotechnology's contribution in many areas, including energy.
Wednesday, May 17, 2006
Henry Kissinger's op-ed in the Washington Post describes an intricate but plausible diplomatic approach for dealing with Iran and North Korea. Its chief drawback may be that it would probably require someone with Dr. Kissinger's skills to implement successfully.
The other article comes from the Wall Street Journal (subscription may be required,) and it lays out a clever, energy-based counter to Iran's "oil card": cutting off Iran's imports of the gasoline its refineries can't produce in sufficient quantity to satisfy domestic demand. (I haven't vetted the statistics involved.) Pulling this off without triggering the oil export reduction the whole market fears would take great finesse, and nerves of steel.
Given that the direct use of force appears doubtful for reasons of its broader consequences in a post-Iraq world, I suspect our range of real options falls somewhere between these two scenarios. If you are wondering whether the Iran risk in the oil markets will resolve to the upside or downside, you could do worse than considering the implications of these ideas.
Tuesday, May 16, 2006
First, why might this option seem so appealing? Well, a car burning H2 produces no carbon dioxide and no pollutants that a good catalytic converter can't reduce to negligible levels. Moreover, the reengineering required to produce a car like this is trivial compared to producing a practical, economical fuel cell car. It involves delivering H2 to the vehicle, preventing it from all leaking or boiling away, and getting it into the cylinders effectively. That isn't simple, but it has been done on an experimental and prototype basis since the 1930s, and several carmakers are at work on it today. So you have the makings of a non-petroleum transportation system that doesn't require us to wait for fuel cells to become cost-competitive, at least on the automotive side of the equation. What could be so bad?
The problems start with hydrogen manufacturing. As virtually any good basic article on hydrogen will point out, most hydrogen today is produced by "reforming" natural gas, stripping hydrogen off the methane molecules and producing carbon dioxide as a byproduct. So right away, we have a notional zero-emissions vehicle that actually accounts for a fair quantity of emissions upstream of the car. (This is the knock on battery cars, too.) Just as bad, about a third of the energy content of the methane is lost in the process, not counting the energy cost of compressing or liquefying the hydrogen to get it to a fuel tank.
Then look at the car itself. Although an internal combustion engine can run quite nicely on H2, the efficiency gain is modest at best. In other words, there's no way to recoup the energy lost in making the H2 from natural gas. That's the main driver behind fuel cells, which have at least the potential to be 2-3 more efficient than an ICE. The "well-to-wheels" energy balance on the total Hydrogen ICE energy chain is no better than a conventional car running on diesel, and appears worse than one running on natural gas--a much easier conversion than equipping a car to burn hydrogen. That negates its greenhouse gas emissions benefits, as well. Hybridization doesn't change the outcome, either, since any of these fuel paths can be fitted to a hybrid car.
Now, at this point an advocate of this approach would probably interject that all these negatives disappear when you factor in hydrogen generated from renewable sources, such as wind, solar power, or biomass. That's true, too, but again only superficially. At the highest level, a system relying on hydrogen ICEs will require about twice as much primary energy as one feeding fuel cell cars. Even if you dismiss the potential of fuel cells altogether, you have to look at the entire system and assess whether your green electrons are better employed displacing coal or natural gas from power plants, rather than making H2. The outcome depends on the details of the system and is fairly complex to work through.
Nor are economics a good protection against this potential wrong turn in energy policy, because if H2 is offered for sale to the public at a price that is exempt from fuel taxes, it could well appear cheaper than gasoline, particularly in a market with high fuel taxes, such as Europe. In other words, short-sighted tax policy on H2 could mask the energy and environmental drawbacks of burning H2 in an internal combustion engine.
The last argument trotted out in support of the H2 ICE is that it could provide a bridge to a hydrogen fuel cell world, breaking the chicken-and-egg hurdle facing the infrastructure. Perhaps, but the likelier outcome is that the manufacturing economics favoring the H2 ICE would trump fuel cell cars for years, and we'd end up with millions of these things on the road before it became obvious how much energy they were using, compared to other alternatives.
So how do we avoid a result like this? Perhaps it's just a further refinement of public education. It wasn't so long ago that all hydrogen carried a green halo, until folks figured out there might be such a thing as "dirty hydrogen", with dirty being entirely in the eye of the beholder--I'd argue with their inclusion of nuclear-based hydrogen. Ultimately, it comes down to policies and incentives that promote the outcomes we want, in this case dramatically improved vehicle efficiency and reduced greenhouse gas emissions, rather than favoring specific pathways with advantageous treatment. A carbon trading system with a tight cap on emissions would sort the wheat from the chaff in this area pretty quickly.
Monday, May 15, 2006
Part of the new skepticism towards hydrogen is merely a function of greater familiarity. When it emerged in the 1990s as a serious possibility, largely as a result of the development of the Proton Exchange Membrane fuel cell, many of us failed to appreciate all the hurdles of technology and infrastructure development that would have to be surmounted. I recall predicting in the late 1990s that fuel cell cars would be mass-market within a decade. That now looks wildly optimistic. The sophistication of the media increased rapidly as well. The widespread recognition of hydrogen's role as an energy carrier, instead of a new energy source, occurred much faster than I expected.
But at the same time that this new realism arrived, it was permeated by pessimism that hydrogen could ever matter in our lifetimes. Articles such as this one from MIT's Technology Review, suggesting that practical hydrogen cars are 50 years away and arguing for greater efforts on hybrids and other near-term solutions, have become commonplace. At the heart of all of this is a phenomenon common to most radical technology changes: the S-curve. Simply put, the rate of change and adoption for a significantly different new technology proceeds gradually at first, gaining momentum almost imperceptibly, until it reaches a key transition point, at which it accelerates dramatically, with the slope of the curve going almost vertical for a time. Then it slows down again as it becomes mass market and improvements go back to being incremental. The automobile and personal computer followed similar paths, and hydrogen may, as well.
There are important reasons not to lose confidence in hydrogen's potential, at least until we discover truly insurmountable--rather than merely expensive and difficult--obstacles to its implementation. First, the ultimate growth of a hydrogen energy economy is essentially unlimited, because it doesn't rely on a single source of primary energy or eventually compete with food crops for arable land. Because it is only an energy distribution system, it would be as useful for handling hydrogen derived from natural gas as it would be for hydrogen sourced from nuclear fusion or orbital solar power stations. In addition, along with electricity, it shifts the entire environmental impact of the energy chain to its source, allowing greenhouse gas emissions to be captured where they are dense and concentrated, rather than diffuse and widely dispersed among end-uses.
I understand the temptation to shift research priorities away from hydrogen, in favor of technologies that can alter our near-term energy balance. We have genuine and serious problems today with an overstretched natural gas industry and in our reliance for crude oil imports on politically unreliable suppliers. But precisely because there are good options that can help with these problems, within a decade or so, most of them don't need the same level of basic R&D support that hydrogen does. $70 oil, if it persists the way the market expects, will pull biofuels and synthetic liquids fuels from gas and coal and into the marketplace. We're already seeing major energy companies investing in cellulosic ethanol and biodiesel. But slowing down hydrogen to pay for any of these would be equivalent to eating the seed corn. We will need all of these solutions--short-, medium-, and long-term--if we are to make a successful transition beyond the petroleum that made our entire society possible.
Friday, May 12, 2006
They suggest that combinations of acoustic, chemical and biological stimulation might even double the oil that can be recovered from existing deposits. The significance of this would be on a par with the development of deepwater drilling. Other than just the gross addition of reserves, it would have some very interesting implications for energy security and the environment:
- In contrast to the largest remaining untapped hydrocarbon reserves, which tend to be heavy and high in sulfur, or require physical separation from their source rock--think oil sands and oil shale--most of the today's production is relatively high quality and easy to process. Extending the lives of these fields, or giving them a new lease on life, would result in a lower requirement for refinery upgrading and produce fewer greenhouse gas emissions compared to "mined & manufactured" oil.
- At the same time, this kind of technological advance could extend the lives of mature fields in the most stable areas of the world, such as North America and the North Sea. With supplies in Venezuelan, Russia, and West Africa becoming more politically challenging by the day, that would have huge geopolitical benefits for the US and Europe.
- The potential benefits for employment and trade balances are similarly positive.
Before we get carried away, however, it's worth noting that I didn't see anything in the MIT article suggesting that we are on the verge of the Holy Grail of enhanced recovery: the ability to go back into abandoned oilfields and pump similar amounts out of them to what they produced in their heyday. The cost of re-drilling an abandoned well is close to that of drilling a new deposit, and the rewards much lower, even with sexy new enhanced recovery technology. What abandoned wells have going for them, however, is low risk. We know there is oil there, unlike "wildcat" prospects, where the success rate is something like 1 in 8 or 1 in 9, i.e. 7/8 or 8/9 dry holes (or uneconomic discoveries.)
Reincarnating old fields would be a big deal, because the US has already produced about as much as Saudi Arabia, roughly 180 or 190 billion barrels since Drake's Well. If we could add that much again to our reserves, the world would be a different place. But even if we can only double the reserves we have left now, adding an extra 20 billion barrels would give us a lot of negotiating leverage and buy us the time needed for biofuels and other alternatives to scale up.
Thursday, May 11, 2006
In a nutshell, the Economist concludes that concern about "peak oil" is overdone, or at least premature. They see supply continuing to grow, at least for the next decade or so, from both conventional and non-conventional sources, including oil sands. Probably the biggest vulnerability here is that their conclusion relies on one of the few industry analyst firms to come out strongly against the notion of an imminent peak in oil supply, Cambridge Energy Research Associates. CERA's findings are based on what I believe to be the most thorough field-by-field estimates available, but that doesn't mean their assumptions about decline rates and other technical elements are bulletproof. I'd feel a lot more comfortable if more industry experts agreed with their analysis.
Here are the key takeaways from this article:
- Even if the recent doubts about the size of Kuwait's oil reserves reveals that all the reserves around the Persian Gulf have been systematically overstated--something that I've always suspected, based on the pattern of reserve restatements and the rules of OPEC's quota system--it does not imply that OPEC is approaching a peak in production. After discounting them by 50%, the Reserves-over-Production ratios (R/P) for the key producers would still exceed 35 years, compared to less than 10 years for mature provinces like the US, Mexico and the North Sea.
- The reserves and production of major western oil companies, adjusted for merger effects, are stagnating because they are finding it increasingly difficult to gain access to it on commercial terms, not because the oil isn't out there. Recent news out of Bolivia, Venezuela and Ecuador reinforces this view. If the majors can't gain greater access to the high "R/P" provinces, they will enter a cycle of escalating capital requirements and diminishing returns from extraction.
- The oil industry is on the cusp of a transformation from a "discovery model" to a "manufacturing model", referring not to the role of refineries, but to the application of capital and technology to making the most of hydrocarbon reserves that have already been discovered, however challenging these might be. This has profound implications for future oil supply, with natural decline becoming less relevant to future supply projections. It will also change the long-term profit potential of the sector. Grinding out synthetic crude from oil sands and ultra-heavy oils is a fundamentally different economic proposition from finding and producing a billion barrel light crude oil field, such as Nigeria's Agbami field, the last great discovery of my former company.
Wednesday, May 10, 2006
Dear Representative Shays:
I urge you to support HR 4318, Representative Peterson's bill proposing to open the waters of the Outer Continental Shelf for natural gas drilling.
Although high oil imports have garnered greater attention than our natural gas supply, the latter is of more acute concern and presents fewer alternatives. Prohibitions on drilling and restraints on access have stalled the growth of domestic natural gas supplies and raised prices to a level between three and six times the historical average for this fuel. The consequences for American consumers and industry have been severe. In the winter of 2005-2006 we avoided gas curtailments only as a result of unusually warm weather, but this risk will return and grow with each successive winter season.
Residential purchasers of natural gas and electricity generated from gas are paying record prices, and a significant portion of the US chemical and fertilizer manufacturing sector faces extinction. Many facilities have already closed, costing thousands of jobs and increasing our trade deficit. This situation will only worsen if the large, and in some cases already identified, deposits of natural gas in the waters of the OCS, including those off Florida and California, remain off limits.
The environmental arguments against offshore oil drilling in sensitive areas simply do not apply to drilling for non-associated natural gas, which can be differentiated from oil deposits using modern seismic technology. The risk of a "gas spill" contaminating the shoreline is essentially zero. The opposition that remains stems from concerns about the intrusion of drilling platforms into the views enjoyed by tourists. Given the growing international competition for energy and the geopolitical challenges this accentuates, we can no longer afford to hold our energy security hostage to aesthetics.
Please support Congressman Peterson's bill and facilitate the continued growth of America's cleanest fossil fuel.
Update 5/19/06: Another setback for this idea, demonstrating clearly that even high energy prices and an urgent need for additional supplies can't overcome parochial and dysfunctional politics.
Tuesday, May 09, 2006
- 60 Minutes traveled to Brazil to see how that country's successful flexible fuel program worked, but apparently failed to note two key data points. First, the 40% or so of Brazil's fuel needs met by "alcool" amounts to 4.8 billion gallons per year. Last year the US produced 3.9 billion gallons. In other words, the US already uses nearly as much ethanol as Brazil, with its vast sugarcane industry--a much more efficient producer of ethanol than corn. Brazil's entire ethanol output equates to only 3% of US gasoline demand. Scaling that up to the point at which it would be material to our energy needs is a non-trivial proposition.
- The 60 Minutes report omitted the linchpin of corn ethanol's economic attractiveness in this country: the 51 cent per gallon federal tax credit for ethanol blending. If it requires that level of subsidy to compete with gasoline at $3.00 per gallon, growing its share of the market is going to cost taxpayers a fortune. The "green gold" mentioned by the Iowa ethanol co-op member isn't just coming from the marketplace, but from Washington, too.
- E-85 was mentioned by several of the segment's interviewees, including the CEO of GM, but none of them mentioned that a gallon of E-85 will only take you three fourths as far as a gallon of gasoline, because of its lower energy content and the richer fuel/air mixture required for complete combustion. For example, the government's mileage ratings for flex-fuel vehicles running on E85 are 26% lower for the 2005 Ford Taurus, and 22% lower for the Chevy Tahoe. With gasoline at $3.00/gallon, E85 should sell at $2.25/gallon or less to deliver comparable value. Despite this, E85 often sells for prices approaching those of regular unleaded.
Though it came late in the segment, I was pleased at the mention of cellulosic ethanol, which holds the only possibility of producing enough ethanol in the US to matter, without driving up the price of all the grains we consume. By comparison, corn ethanol is a dead end, though you'd never guess that from Sunday's program. Professor Kammen is right when he says it could provide a transition to cellulosic ethanol, but until the country can produce enough ethanol to replace the MTBE that is leaving the gasoline pool--one of the key contributors to today's high gas prices--E-85 can't be more than a niche product, and that mostly in the Midwest.
Monday, May 08, 2006
We've also seen municipalities in Texas and on Long Island organize boycotts of major oil company branded stations. The degree to which this hurts local businesses, rather than multinational corporations, seems to be more of an inconvenient detail than an actual deterrent against these empty gestures. In one positive development, Hawaii has rescinded its widely-publicized gasoline price cap , after discovering that it actually raised the fuel price paid by Hawaiians. The question that's rarely asked, however, is whether we are paying too much attention to the price of this commodity, which according to the government's Bureau of Labor Statistics accounts for less than 5% of the expenditures of the average household?
The average car in America drives about 12,000 miles per year and averages roughly 25 miles per gallon. That equates to 480 gallons of gas, or about 40 fill-ups. The average pump price for unleaded regular last year was $2.27/gal., compared to $2.92 last week. That means our average driver is paying about $300 more per year to tank up, equivalent to 0.7% more of median household income, or about the price of an iPod. Double that if there are two cars in the family. But no one is average. For everyone like me, using only 278 gallons last year, there's someone else driving an SUV 20,000 miles per year and getting 14 mpg. If they make $35k, they are going to be hit much harder: $925 worth, or an extra 2.6% of earnings--perhaps the entire after tax benefit of their last raise.
So while for many Americans high gas prices are really just an annoyance or inconvenience, as a New York Times business section op-ed suggests, for others it's either a genuine hardship or a brutal reminder that they ought to have paid much more attention to fuel economy the last time they bought a vehicle. Either perspective makes the public reaction to the proposed $100 gasoline rebate equally perplexing.
As shown above, the financial impact of higher gasoline prices for the vast majority of American is in the hundreds, rather than thousands of dollars per year. Practically every proposal I've seen for higher gasoline taxes, whether to curb consumption or to reduce greenhouse gas emissions, has included a provision for recycling at least part of the tax revenue as rebates to lower-income consumers. Although the abortive $100 rebate was unfunded, that was not the chief argument against it. Critics found it insufficient and insulting. Yet, compared to the alternative of rolling back gasoline taxes at the pump, the rebate was a much sounder piece of economic policy that wouldn't distort the supply-and-demand-balancing function of market prices.
Having thus demonstrated government's impotence to provide short-term relief, large numbers of us are still fulminating about something over which only consumers have any real influence. Blame whomever you like, but recognize that government cannot lower prices without impeding supply and demand. Oil companies can't create supply out of thin air, unless the projects to do so are already in the pipeline. Nor will taxing them harder create a single extra barrel of supply, though it may just dry up some we'd get otherwise. Instead, the action our state and local leaders ought to be calling for is not boycotts of Exxon stations, but rather carpooling, reduced highway driving speeds, and errand consolidation. Perhaps we need something like the old Smokey the Bear ads: only you can reduce gasoline prices.
Friday, May 05, 2006
Vattenfall's process is simplicity itself. It substitutes pure oxygen for the air consumed by normal power plant combustion, resulting in power plant exhaust that contains essentially only water and carbon dioxide. This is important, because the dilution effect of nitrogen from the air makes separating carbon dioxide from conventional power plant stacks prohibitively costly, and only relatively pure CO2 can be stored, or sequestered, in underground reservoirs and elsewhere, keeping it out of the atmosphere. And the beauty of this approach is that it can potentially be applied to every existing coal power plant.
I don't want to portray this as a free lunch, however. Working with pure oxygen is tricky and potentially dangerous. I have seen steel burning in a pure oxygen atmosphere. Retro-fitting coal plants with Vattenfall's technology will require not just adding a cyrogenic oxygen plant to each power plant, but probably also extensive changes to the metallurgy of some of the plant components. This will be costly and would only pay off in situations in which the power plant owner is required to manage its greenhouse gas emissions.
In the long run, I still think gasification is the better, more flexible process. But Vattenfall's "oxyfuels" concept answers the critical question of what to do about all the conventional coal power plants--more every year--versus the tiny number of coal gasification facilities actually under construction.
By the way, I was quoted in an article on energy trading in today's Stamford Advocate/Greenwich Time.
Thursday, May 04, 2006
The key fallacy in the author's argument is that oil supply is a zero sum game. That's wrong, unless everything that has characterized this industry in the past has changed in the last two years--or unless Peak Oil is here, now. While it is correct that oil tied up on long term contracts with China will not be available to other countries for years, if ever, Mr. Markman weakens his own case by pointing out the degree to which many of China's new suppliers are countries with which US and European firms won't deal. Arguably, if China weren't there as an eager, undiscerning buyer and investor, Sudan's oil would not be developed until its regime met international standards on human rights. So these volumes, at least, are additive to a market in which all oil is ultimately fungible.
Consider another example closer to home. Enbridge, the Canadian pipeline company, is considering building a new pipeline to the West Coast, along with a new export facility to send syncrude from Canada's booming oilsands projects to China. One might object that this is oil that ought to come to the US, to back out our imports from less reliable regions. However, there is some point beyond which Canadian oil investors may not wish to rely on a single market, however close. In the long run, some of the oil that would flow to China via this route would otherwise not be produced at all, because there would be no attractive home for it in a saturated US market.
The biggest risk I see for us from China's oil strategy--other than the pressure their demand puts on prices--is more subtle. It relates to a common practice within the energy industry that is unreported outside it. The crude diet of a typical American refinery, particularly a coastal refinery with direct access to international crude, is quite dynamic. It changes day by day and almost minute by minute, in response to changing market relationships between the prices of different grades of crude oil, and the prices of the resulting petroleum products. A cargo bought for refinery X this morning may be resold this afternoon and delivered halfway around the world, instead, depending on market shifts. This practice sounds inefficient but is precisely the opposite, allowing refineries to respond rapidly to small or large changes in demand among the different grades of gasoline, jet fuel and diesel fuel, and to shifts in crude oil availability.
But if key types of crude oil that have historically swung from the US to Europe and back, as markets fluctuated, were tied up by a buyer interested only in channeling gross barrels to its home market, then some of that responsiveness could disappear, and the result would be higher and more persistent spikes in the prices of the petroleum products consumers buy. This would be especially tricky if the barrels in question came from a source close to the US Gulf Coast refining concentration. Venezuela comes to mind, here.
Overall, Americans benefit if China opens up sources of oil supply that we wouldn't touch, because it reduces their call on the suppliers we will deal with, and puts downward pressure on global prices. But if they disrupt the international system of oil cargo trading, then this could add one more constraint on an already tightly squeezed US refinery system. Although that would harm US consumers, it would harm Chinese interests nearly as much, by foregoing opportunities to better the economics of their long-term oil supplies. The best outcome is for China to become as sophisticated in its trading practices as the international majors and financial players, thus adding to the liquidity of the market, even as they grow the pie.
Wednesday, May 03, 2006
Part of the problem is that there's been no general agreement on how we arrived at this juncture, and little effort to create consensus on this as a necessary foundation to any solution. This requires looking beyond our energy habits at basic changes in metropolitan population and employment distribution, as well as the intended and unintended consequences of three decades of federal and state environmental policies. This is not an argument for rolling back those standards, which have done good work in many places, but for understanding how they have helped to shape our present quandary.
We also need to agree on the basic elements of a solution, at the level of the criteria it must meet, rather than the specifics it must include. First, it must recognize the large "time constant" of the system, and the implementation lags this creates. Any response must incorporate short-, medium- and long-term elements that take this inertia into account. Second, it must hew to something akin to a modern restatement of the Hippocratic Oath: "First, do no harm." In this context, that means that we cannot create disincentives on the production of conventional energy in this country, while trying to foster alternatives that will only be capable of covering incremental demand, but not backfilling for base supply for many years. It must also balance supply and demand-side initiatives, leveraging longer-term technology options and nearer-term behavioral changes.
Finally, any solution that has a chance of succeeding must be as bi-partisan as our foreign policy used to be. It will need to enjoy sufficiently broad support to endure changes in Congress and the arrival of new administrations. That is perhaps the tallest order of all.
Tuesday, May 02, 2006
Gaining (and retaining) access in order to develop resources is the single biggest challenge facing the extractive portion of the energy industry in the 21st century. But it is mirrored by a less obvious, equally critical challenge on the part of the resource owners: attracting the capital and expertise necessary to bring resources to market. In their report on this story last night, the BBC World News trotted out a feckless talking head from a Washington-based NGO. He thought this was a wonderful development, because gas revenues were the only hope of the Bolivian people. Apparently, despite a Ph.D. in the subject, he understands development economics no better than Mr. Morales; those revenues would not exist without substantial investment and technical know-how from energy companies. And the notion that they are taking back resources that were stolen from them is a canard; Bolivia always owned the underlying gas. Rather, they are expropriating infrastructure that was paid for by others, and that they couldn't have built or paid for themselves.
We are beginning to see a dangerous trend here, and its logical extrapolation is a world that is not only much more challenging for the international oil and gas companies and their investors, but that would impose permanent energy constraints on the world economy. We saw this recently in Venezuela, and with the exception of ExxonMobil, the companies involved apparently concluded they had too much at stake to do anything but concede the incremental nationalization of their assets. Bolivia is a different case.
First, although Bolivia has the second largest natural gas resources in South America, after Venezuela, the world can live without its gas. Nor does Bolivia have a professional state energy company, as Venezuela does--or did before it was decimated after the strike of 2001-02. Bolivia without foreign investment in its energy sector will shortly be a Bolivia without an energy sector. Could Venezuela step into the gap, shoring up its revolutionary co-religionists? Perhaps, but that would stretch the already strained capabilities of PdVSA, the Venezuelan state oil company.
However unpleasant this might become, Bolivia is the place to stand on principle. The affected companies should evacuate all their third-country personnel and file a claim against Bolivia in the World Court and WTO. If they don't oppose this nascent trend there, they will find themselves fighting the same battle again, but on much more significant turf, such as Nigeria.
Monday, May 01, 2006
The main caveat in reading this piece, which could easily be lost in the gloss of current ad campaigns for ethanol and flexible fuel vehicles, is that it is premature to bank on the benefits of cellulosic ethanol conversion. This is an exciting technology, and it has the potential to reduce the cost of ethanol production, greatly improve the balance between ethanol's energy inputs and the energy content of the resulting fuel, while minimizing the future competition between food and fuel crops. But as of this point, the first large-scale cellulosic ethanol plant has not come on line. The cost of the enzymes required to convert cellulose to sugar, the critical step before fermentation, is still high and must come down before it even competes with traditional ethanol processes.
I am a big fan of this technology and its potential, but we have to keep it in perspective. Ethanol from corn currently accounts for about 2% of our transportation fuel. The ethanol industry will have its hands full doubling this over the next several years, in line with last year's energy bill. That still leaves plenty of room for other alternative fuels such as biodiesel, non-conventional hydrocarbons such as oil sands, gas-to-liquids and even shale, and additional supplies of petroleum from new fields and enhanced recovery from existing fields, as well as oil refinery expansion. In other words, ethanol is an important component of a solution, but it shouldn't distract us from the many other aspects of energy supply and conservation that require urgent attention.