You don't need me to tell you that conflict and instability in the Middle East remain primary reasons that oil is over $70/barrel and gasoline at $3.00/gallon in the US. The full implications of the war in Lebanon are less clear, however--particularly in its latest phase, with a mini-ceasefire in the wake of the bombing by Israel of a civilian shelter in Qana. Although neither Lebanon nor Israel exports oil, the possibility that the conflict could widen to include Hezbollah's sponsor, Iran, was enough to send oil markets up by about $4/barrel initially, though they have cooled since. How could the resolution of this crisis affect the future trajectory of energy prices?
The worst outcome would be a rapid spread of the present conflict to the entire region, sparking a broader Middle East war, or even a world war. However, in an op-ed in Sunday's Washington Post, the British military historian John Keegan comprehensively demolished the analogies between Lebanon and the events that started World War One. But even if the entire region is unlikely to go up in flames as a result of the present hostilities, that doesn't rule out some very serious consequences for energy. Mr. Keegan reminded us of the possible use of oil prices as a point of policy leverage. I don't see how that can be ruled out here.
A more realistic prospect is a stalemate favoring Hezbollah, with their mere survival being tantamount to victory. Whatever its military successes, Israel is losing the PR battle, and that could trump its air and ground power. Any resolution that preserves the status quo ante would embolden Iran and strengthen its nuclear program. If the outcome in Lebanon further undermines the solidarity of the West in this regard, or makes Iran less willing to negotiate, then it may calm the region in the short run, but it will elevate the likelihood of a more serious confrontation later. It would also increases the chances that a military solution might be attempted, a la Osirak. This is where the risk of a cutoff of Iranian oil exports rises to a near certainty.
The UN plan put forward by the US and UK looks like the best chance for neutralizing the Lebanese front and, indirectly, for keeping the heat on Iran. It would at least remove this latest threat to the region's stability and push the chances of wider war down by several notches. That ought to deflate some of the oil market risk premium, perhaps taking us back to the $65-ish level we were at only a few months ago. From there, improving fundamentals could push prices even lower. I will be more optimistic about this possibility when countries actually start volunteering to join the proposed international buffer zone force.
In the meantime, none of us enjoys having the price of energy held hostage to the unpredictable politics of a region that has known little peace in the last 50 years. The most important energy implications of this situation may well lie in the way it bolsters the energy security argument for renewable and other domestic sources. If Lebanon is a "recruiting poster" for Islamic extremists, it may also turn out to be one for American "Geo Greens."
Monday, July 31, 2006
Friday, July 28, 2006
Hotter than Hades
There's been a lot of speculation about whether the latest heat wave is a sign of global warming. I'm generally hesitant to infer cause and effect from such events. Climate is what we expect; weather is what we get, and the two are often miles apart. But even if the heat wave had nothing to do with climate change, it provided useful insights into life in a warming world. We usually focus on the emissions linkage with energy at the front end, but tend to be vague about potential energy costs or benefits on the other end. But when it's hotter than blazes for two weeks at a stretch, that imposes an extreme load on power supplies for cooling, as we have seen across much of the US. Our steady migration into hotter areas makes matters even worse. Anyone looking at power grid reliability and new power generation must surely be scratching their heads over how to incorporate this into their plans.
The answer is partly a function of how we picture further warming. If we see it as a broad, gradual increase in daytime highs, more or less evenly distributed around the world, then it might not be so bad. Unfortunately, that isn't the scenario most climatologists expect. Rather, they project widely varying temperature changes around the globe. With a nod to TerraBlog for highlighting it in their posting on the subject, this is illustrated in some helpful charts showing that, as a result of higher mean temperatures, greater temperature variability, or both, we could be in for a lot more hot weather than previously. A world that's a little warmer on average, but that includes more frequent and more intense heat waves would be much less comfortable for people and much less hospitable for the crops upon which we depend, even if those crops grew faster as a result of the elevated CO2 levels.
What are the implications of all this for energy demand, and will the result dampen or amplify the drivers of further climate change? I haven't seen a definitive answer, and I'm not sure one will be possible for a long time. But although the balance point between less need for heating and greater need for cooling is highly uncertain, it does foretell a shift in fuels. Today's winter heating fuels include a hefty contribution from oil, in the form of distillate heating oil and propane. By comparison, relatively little oil finds its way into the electricity used by air conditioning. That draws on a mix of nuclear, coal, and gas--and increasingly, cleaner sources such as wind and solar.
Thus, global warming ought to reduce winter demand for oil and increase summer demand for electricity and its source fuels. That makes the rapid development of a global LNG market even more essential. Whether this fuels shift gives rise to a "reinforcing loop" in global warming depends on how much of the incremental electricity will come from coal, and how much of that will be of a type that lends itself to carbon sequestration.
The answer is partly a function of how we picture further warming. If we see it as a broad, gradual increase in daytime highs, more or less evenly distributed around the world, then it might not be so bad. Unfortunately, that isn't the scenario most climatologists expect. Rather, they project widely varying temperature changes around the globe. With a nod to TerraBlog for highlighting it in their posting on the subject, this is illustrated in some helpful charts showing that, as a result of higher mean temperatures, greater temperature variability, or both, we could be in for a lot more hot weather than previously. A world that's a little warmer on average, but that includes more frequent and more intense heat waves would be much less comfortable for people and much less hospitable for the crops upon which we depend, even if those crops grew faster as a result of the elevated CO2 levels.
What are the implications of all this for energy demand, and will the result dampen or amplify the drivers of further climate change? I haven't seen a definitive answer, and I'm not sure one will be possible for a long time. But although the balance point between less need for heating and greater need for cooling is highly uncertain, it does foretell a shift in fuels. Today's winter heating fuels include a hefty contribution from oil, in the form of distillate heating oil and propane. By comparison, relatively little oil finds its way into the electricity used by air conditioning. That draws on a mix of nuclear, coal, and gas--and increasingly, cleaner sources such as wind and solar.
Thus, global warming ought to reduce winter demand for oil and increase summer demand for electricity and its source fuels. That makes the rapid development of a global LNG market even more essential. Whether this fuels shift gives rise to a "reinforcing loop" in global warming depends on how much of the incremental electricity will come from coal, and how much of that will be of a type that lends itself to carbon sequestration.
Thursday, July 27, 2006
Toil and Trouble
I read two articles on energy bubbles this week. In the first, Robert J. Samuelson of the Washington Post laid out a strong, logical case explaining why current high oil prices don't fit the classic conditions for a bubble. In the other, Daniel Gross of Slate suggested that the market for alternative energy investments was starting to look like a bubble, and that this might be a good thing. With all due respect, I think both of these gentlemen missed some important aspects of the current situation. If there is a developing bubble in energy, its growth will transfer even more money from consumers to the Middle East, and its ultimate collapse will deal alternative energy another setback from which it could take years to recover. None of that sounds positive to me.
First, let's look at the oil market. Although Mr. Samuelson is right to differentiate the strong influence of supply and demand on oil prices from the "irrational exuberance" that drove tech stocks in the 1990s, he also presents evidence for the influence of speculation in driving prices higher than fundamental factors alone would justify. The missing element is the degree to which speculation isn't just driven by the serious risks he lists, but by the expectation that prices next month or next year will be higher still. That creates demand for the financial instrument--oil futures contracts--that outstrips the demand for the underlying commodity. Because only a small fraction of oil futures are settled by actual physical delivery, there is no practical limit to the degree of this disconnection. And if, as a friend on Wall Street suggested to me recently, oil producing countries are plowing their profits back into oil futures--for lack of better investments--this only serves to inflate the balloon faster. As Mr. Samuelson notes, sooner or later this kind of bubble must pop, either because of the resolution of some major risk or a physical over-supply. That bursting would have serious consequences for the development of alternatives to oil.
Mr. Gross's take on alternative energy stocks is quite different. He points to the involvement of Silicon Valley entrepreneurs and the growing frothiness of some energy tech stocks, such as SunPower, and sees pleasant similarities to the Dot-Com era. While recognizing the catastrophic consequences for investors, he welcomes the green energy technology that he sees surviving a crash, drawing analogies to the recycling of bankrupt fiber-optic assets into new business models. There is a crucial distinction, though, which many other commentators on energy also fail to grasp sufficiently. Alternative energy technology is wonderful, but for it to matter, it must be deployed on a massive scale. The enormous investments necessary for that deployment will only be made, if corporations and investors see the prospect of positive long-term returns. That is the antithesis of boom-and-bust.
Perhaps it seems fanciful to worry about the consequences of a collapse of energy prices or alternative energy equities, when the market for both has never looked stronger. But from my perspective, that's exactly the right time to ponder such an outcome. In the early 1980s industry experts and corporate executives planned for the possibility of $100 oil (in 1980s dollars, no less,) but even as these serious conversations were taking place, the physical seeds of the subsequent market collapse were germinating around them. When the crash finally happened, it derailed most alternative energy projects and guaranteed that our world, 20 years later, would largely resemble the pre-crisis status quo.
I can't be certain that the recent easing of crude oil fundamentals is a harbinger of a similar retrenchment. What I am confident of, however, is that a return to even $40/barrel would severely undermine investor confidence in alternative energy and dry up political support for the subsidies that many of these technologies will require for years. That would be tragic, because our underlying concerns about climate change and an eventual peak in oil production won't have dissipated, even if oil prices return to a level much closer to their long-term average.
First, let's look at the oil market. Although Mr. Samuelson is right to differentiate the strong influence of supply and demand on oil prices from the "irrational exuberance" that drove tech stocks in the 1990s, he also presents evidence for the influence of speculation in driving prices higher than fundamental factors alone would justify. The missing element is the degree to which speculation isn't just driven by the serious risks he lists, but by the expectation that prices next month or next year will be higher still. That creates demand for the financial instrument--oil futures contracts--that outstrips the demand for the underlying commodity. Because only a small fraction of oil futures are settled by actual physical delivery, there is no practical limit to the degree of this disconnection. And if, as a friend on Wall Street suggested to me recently, oil producing countries are plowing their profits back into oil futures--for lack of better investments--this only serves to inflate the balloon faster. As Mr. Samuelson notes, sooner or later this kind of bubble must pop, either because of the resolution of some major risk or a physical over-supply. That bursting would have serious consequences for the development of alternatives to oil.
Mr. Gross's take on alternative energy stocks is quite different. He points to the involvement of Silicon Valley entrepreneurs and the growing frothiness of some energy tech stocks, such as SunPower, and sees pleasant similarities to the Dot-Com era. While recognizing the catastrophic consequences for investors, he welcomes the green energy technology that he sees surviving a crash, drawing analogies to the recycling of bankrupt fiber-optic assets into new business models. There is a crucial distinction, though, which many other commentators on energy also fail to grasp sufficiently. Alternative energy technology is wonderful, but for it to matter, it must be deployed on a massive scale. The enormous investments necessary for that deployment will only be made, if corporations and investors see the prospect of positive long-term returns. That is the antithesis of boom-and-bust.
Perhaps it seems fanciful to worry about the consequences of a collapse of energy prices or alternative energy equities, when the market for both has never looked stronger. But from my perspective, that's exactly the right time to ponder such an outcome. In the early 1980s industry experts and corporate executives planned for the possibility of $100 oil (in 1980s dollars, no less,) but even as these serious conversations were taking place, the physical seeds of the subsequent market collapse were germinating around them. When the crash finally happened, it derailed most alternative energy projects and guaranteed that our world, 20 years later, would largely resemble the pre-crisis status quo.
I can't be certain that the recent easing of crude oil fundamentals is a harbinger of a similar retrenchment. What I am confident of, however, is that a return to even $40/barrel would severely undermine investor confidence in alternative energy and dry up political support for the subsidies that many of these technologies will require for years. That would be tragic, because our underlying concerns about climate change and an eventual peak in oil production won't have dissipated, even if oil prices return to a level much closer to their long-term average.
Wednesday, July 26, 2006
Incremental Value
I love the New York Times. Just when I think I've exhausted a topic, they provide an irresistible opportunity to explore a new angle of it. When I wrote yesterday's posting on California's love/hate relationship with offshore oil production, I hadn't seen the Times' editorial on the same Senate bill, ironically entitled "Drain America First." The Times cites the "25% of consumption/3% of reserves" ratio that's been going around since the last election, in order to demonstrate the futility of further drilling to reduce America's dependence on imported energy. Fortunately for the rest of us, these figures fall into the category of accurate, but irrelevant. Although I have stated here many times that we don't have enough conventional oil left to become independent of imports at any reasonable level of demand, we certainly have enough to change the dynamics of the international oil market, and that could be very valuable.
Demonstrating this requires expanding our perspective on that 3% figure, and then looking at some economics. First, the reserves. Current US proved reserves total 21 billion barrels out of global reserves of 1.3 trillion barrels; that's less than 2%. But we also need to understand that these figures aren't static. In simple terms, oil gets discovered and moves into "resources", and when it becomes economical to produce, it's reclassified as "reserves." These get added to our previous view of reserves, at the same time we subtract what has actually been produced. We must regard our paltry 2 or 3% of global proved reserves differently, when we realize that we have produced 46 billion barrels over the last 20 years from proved reserves that never exceeded 28 billion.
The USGS has told the Congress that the Gulf of Mexico Outer Continental Shelf (OCS,) the subject of the current legislation, holds an additional 45 billion barrels (mean resource estimate with a 95% confidence of at least 41 billion.) This directly refutes the Times' assertion that the Gulf's remaining oil is insignificant. We can safely assume that these substantial resources could contribute at least an incremental one million barrels per day (MBD) to US oil production. One MBD out of 20 MBD of total oil demand is only 5%. But what if putting an extra 1 MBD into production pushed down the global oil price by $5/barrel? That's not far-fetched, if you look at the amount of global capacity cushion shrinkage that took us from $25/bbl to $40/bbl a couple of years ago, before all the extra political risks were layered on. The price of oil isn't set by the entire 84 MBD we use, but by the last 5-10%.
The oil market is a two-edged sword. When prices go up at the margin, they get applied across all the barrels we buy or produce, but the same is also true when prices fall. The value to the US of an extra 1 MBD of OCS oil would thus be two-fold. At $70/bbl, it's worth $25 billion in and of itself. But a $5 reduction on the 11 MBD we'd still have to import is worth another $20 billion. When you combine these two amounts, it makes the additional volume we could eke out of our OCS waters worth $120/bbl to us. With that kind of market leverage, is this really the optimum time to leave our undiscovered oil in the seabed?
Now, I admit I have glossed over some serious matters of production time-lags, exploration risk, project risk, market timing, and all of the things that any company bidding on new offshore leases in the OCS would have to consider. Nor have I suggested that merely increasing our oil supply constitutes a sufficient response to the current situation, or a real energy policy. I also haven't mentioned conservation or higher efficiency standards. These aren't mutually exclusive propositions, any more than adding to supply precludes keeping retail prices high via higher taxes. All policy choices remain open.
We can choose as a country not to produce this oil, because we fear the possibility of oil spills or are repelled by the sight of production facilities off our shoreline. These are legitimate choices, however inconsistent they are with our economic and strategic interests. But we must not delude ourselves into believing we won't be giving up anything of value in the process. If we don't open up the rest of the OCS, at least in the Gulf of Mexico, it will cost us billions of dollars a year in hard cash for decades to come.
Demonstrating this requires expanding our perspective on that 3% figure, and then looking at some economics. First, the reserves. Current US proved reserves total 21 billion barrels out of global reserves of 1.3 trillion barrels; that's less than 2%. But we also need to understand that these figures aren't static. In simple terms, oil gets discovered and moves into "resources", and when it becomes economical to produce, it's reclassified as "reserves." These get added to our previous view of reserves, at the same time we subtract what has actually been produced. We must regard our paltry 2 or 3% of global proved reserves differently, when we realize that we have produced 46 billion barrels over the last 20 years from proved reserves that never exceeded 28 billion.
The USGS has told the Congress that the Gulf of Mexico Outer Continental Shelf (OCS,) the subject of the current legislation, holds an additional 45 billion barrels (mean resource estimate with a 95% confidence of at least 41 billion.) This directly refutes the Times' assertion that the Gulf's remaining oil is insignificant. We can safely assume that these substantial resources could contribute at least an incremental one million barrels per day (MBD) to US oil production. One MBD out of 20 MBD of total oil demand is only 5%. But what if putting an extra 1 MBD into production pushed down the global oil price by $5/barrel? That's not far-fetched, if you look at the amount of global capacity cushion shrinkage that took us from $25/bbl to $40/bbl a couple of years ago, before all the extra political risks were layered on. The price of oil isn't set by the entire 84 MBD we use, but by the last 5-10%.
The oil market is a two-edged sword. When prices go up at the margin, they get applied across all the barrels we buy or produce, but the same is also true when prices fall. The value to the US of an extra 1 MBD of OCS oil would thus be two-fold. At $70/bbl, it's worth $25 billion in and of itself. But a $5 reduction on the 11 MBD we'd still have to import is worth another $20 billion. When you combine these two amounts, it makes the additional volume we could eke out of our OCS waters worth $120/bbl to us. With that kind of market leverage, is this really the optimum time to leave our undiscovered oil in the seabed?
Now, I admit I have glossed over some serious matters of production time-lags, exploration risk, project risk, market timing, and all of the things that any company bidding on new offshore leases in the OCS would have to consider. Nor have I suggested that merely increasing our oil supply constitutes a sufficient response to the current situation, or a real energy policy. I also haven't mentioned conservation or higher efficiency standards. These aren't mutually exclusive propositions, any more than adding to supply precludes keeping retail prices high via higher taxes. All policy choices remain open.
We can choose as a country not to produce this oil, because we fear the possibility of oil spills or are repelled by the sight of production facilities off our shoreline. These are legitimate choices, however inconsistent they are with our economic and strategic interests. But we must not delude ourselves into believing we won't be giving up anything of value in the process. If we don't open up the rest of the OCS, at least in the Gulf of Mexico, it will cost us billions of dollars a year in hard cash for decades to come.
Tuesday, July 25, 2006
California Contradictions
The Senate is currently considering modifications to the federal ban on offshore drilling, in parallel with the various House bills I mentioned recently. The opposition to this measure is led by the Golden State's two Senators, with Governor Schwarzenegger cheering them on. After reading the San Francisco Chronicle’s coverage, I was again struck by the hypocrisy of my home state on this issue. More than any other state, California has been defined by the car, and by extension, by the oil that fuels it. Few states, however, display California’s consistent aversion to the infrastructure that makes its prized mobility possible.
Californians own 13.3% of the nation’s cars and light trucks, compared to their 12% share of the total population. When I lived there from the early 1960s to the early 90s, life without a car was nearly unimaginable. Getting one's driver’s license was nearly the most important life passage, just behind birth and death, and possibly ahead of marriage. Despite decades of investment in mass transit systems, millions of Californians still find driving at least as much of a right and necessity as it was 20 years ago. As a result, the state consumes over a million barrels per day of gasoline, and almost 1.6 million of all petroleum products, resulting in a net state oil deficit of a million barrels per day.
California's petroleum industry has been an important contributor to the economy for over a century. Although the previously ubiquitous "rocking horse" pumping units are disappearing from Southern California's urban landscapes as old fields deplete, the state continues to rank third in the nation behind Texas and Alaska in production, even after a roughly 1/3 decline in volume since the 1980s. Along the way, it has produced 27 billion barrels of oil, roughly the same quantity as Kuwait.
16% of California's production comes from existing offshore platforms, though this figure is destined to fall, as long as the offshore drilling ban remains in place. While it is hard to say how much more oil it could be producing today had offshore drilling continued, the latest USGS assessment indicates that the state still has another couple of billion barrels of oil left to discover, more than half of which is likely to be offshore. That may not sound like much, but it’s potentially enough to displace a third of the state’s imports from overseas for a decade or two.
In spite of all this, California remains unalterably opposed to new offshore drilling, either close to shore or over the horizon, citing the risks to tourism and the environment. Unfortunately, this fails to weigh the small risk of spills from modern oil platforms against the much larger risk of spills from the growing number of tankers that bring in imports. As to tourism, I've traveled every inch of California's coastline, and I've never met anyone who avoided Malibu or Santa Barbara because their viewscapes include a few offshore platforms.
This is hardly the only area in which the Golden State's attitudes seem contradictory, but it's striking for the way it sets two of the most central things in California life against each other: the Pacific coast and the car. The result of this contradiction is high demand for oil, as long as coastal residents can't see its source, whether from Alaska, Saudi Arabia, or even Kern County. With real oil prices and the risk of supply disruptions at a 30-year high, this attitude looks increasingly irresponsible and unrealistic.
Californians own 13.3% of the nation’s cars and light trucks, compared to their 12% share of the total population. When I lived there from the early 1960s to the early 90s, life without a car was nearly unimaginable. Getting one's driver’s license was nearly the most important life passage, just behind birth and death, and possibly ahead of marriage. Despite decades of investment in mass transit systems, millions of Californians still find driving at least as much of a right and necessity as it was 20 years ago. As a result, the state consumes over a million barrels per day of gasoline, and almost 1.6 million of all petroleum products, resulting in a net state oil deficit of a million barrels per day.
California's petroleum industry has been an important contributor to the economy for over a century. Although the previously ubiquitous "rocking horse" pumping units are disappearing from Southern California's urban landscapes as old fields deplete, the state continues to rank third in the nation behind Texas and Alaska in production, even after a roughly 1/3 decline in volume since the 1980s. Along the way, it has produced 27 billion barrels of oil, roughly the same quantity as Kuwait.
16% of California's production comes from existing offshore platforms, though this figure is destined to fall, as long as the offshore drilling ban remains in place. While it is hard to say how much more oil it could be producing today had offshore drilling continued, the latest USGS assessment indicates that the state still has another couple of billion barrels of oil left to discover, more than half of which is likely to be offshore. That may not sound like much, but it’s potentially enough to displace a third of the state’s imports from overseas for a decade or two.
In spite of all this, California remains unalterably opposed to new offshore drilling, either close to shore or over the horizon, citing the risks to tourism and the environment. Unfortunately, this fails to weigh the small risk of spills from modern oil platforms against the much larger risk of spills from the growing number of tankers that bring in imports. As to tourism, I've traveled every inch of California's coastline, and I've never met anyone who avoided Malibu or Santa Barbara because their viewscapes include a few offshore platforms.
This is hardly the only area in which the Golden State's attitudes seem contradictory, but it's striking for the way it sets two of the most central things in California life against each other: the Pacific coast and the car. The result of this contradiction is high demand for oil, as long as coastal residents can't see its source, whether from Alaska, Saudi Arabia, or even Kern County. With real oil prices and the risk of supply disruptions at a 30-year high, this attitude looks increasingly irresponsible and unrealistic.
Monday, July 24, 2006
The Concept of the Car of the Future
When I was a kid, the car of the future was supposed to fly, swim, or do something radically different. I suppose it's appropriate for our era of diminished expectations that the main battleground of future car concepts is now over their means of propulsion and the consumer electronics that they'll embed or enable. Two current prototypes neatly exemplify these options: the Tesla Roadster and the Volvo V70 Multi-Fuel. They represent very different bets on the key choices for non-petroleum transportation energy.
Last week the PR machine for Silicon Valley's Tesla Motors, which makes the world's fastest and most expensive electric car, hit high gear. Over the weekend I received emailed articles featuring the $100,000 Tesla in the Washington Post, New York Times and Wired, as well as a link to some comments and concerns over at Slashdot. The car overcomes the range limitations that crippled GM's EV-1, by using large numbers of the lithium ion batteries that power your laptop computer. This apparently delivers up to 250 miles per charging cycle. The Tesla reaches 60 miles per hour in four seconds, has a top speed of 135, and looks very sleek. It will also dock your i-Pod. Unsurprisingly, Tesla has its own blog.
Volvo's Multi-Fuel station wagon is at the other extreme from the Tesla. It looks like a family car, and it can run on ordinary gasoline, ethanol blends up to E85, natural gas or a methane/hydrogen mix. It carries fuel tanks for both liquid and gaseous fuels, and it's not hard to imagine later versions that could handle straight hydrogen, or add hybrid-electric capabilities. I didn't read about this car in the New York Times, but rather had to dig it out of a report on the Michelin Challenge Bibendum, an annual competition for "sustainable mobility". This year's event featured cars fueled by biodiesel, gas-to-liquids synthetic diesel, and a propane-electric hybrid.
Our limited experience with alternative fuel vehicles so far suggests that their ultimate success hinges on two main factors: consumer response and infrastructure requirements. The former remains a bit of a mystery, and generations of very smart folks have lost fortunes by failing to anticipate it correctly. The latter appears more manageable, since it can be reduced to simpler questions of technical standards, logistics, and return on capital investment. Nevertheless, the methanol cars of the 1980s and the electric cars of the 90s foundered on their infrastructure requirements, and I've heard more than one energy executive suggest that the market will provide a return for replacing the current fuel-marketing system only once.
Tesla and Volvo are taking very different bets on infrastructure. Tesla relies on a single form of alternative transportation energy, electricity, with its existing infrastructure. The Roadster recharges at night in 3 1/2 hours on household current, and the company claims to have determined that on this basis, their car beats the alternatives in well-to-wheels efficiency. I would also argue that Tesla is taking a large bet on future battery cost reductions--if they have any mass-market aspirations--and on the long-term willingness of federal, state and municipal authorities to continue to forego collecting road taxes on cars that don't use petroleum-based fuels.
The Volvo, on the other hand, seems premised on a multi-fuel world, in which consumers will have many choices and will vary them periodically, depending on fluctuations in price and availability. This assumption fits nicely with the recent excitement about cellulosic ethanol and the practical success of natural gas conversions, at least for fleets such as taxis and government vehicles. And from my own observations of the failure of the EV-1, it seems better aligned than the Tesla with demonstrated consumer preferences for being able to hop in the car and refuel wherever it goes.
Whether either of these cars will ever be mass-produced or attain success on the scale of Toyota's Prius is almost irrelevant. Both of them advance the important debate on the future of transportation energy, and both could influence the design of cars for decades to come, if they can make it past their first hurdles of production and public acceptance.
Last week the PR machine for Silicon Valley's Tesla Motors, which makes the world's fastest and most expensive electric car, hit high gear. Over the weekend I received emailed articles featuring the $100,000 Tesla in the Washington Post, New York Times and Wired, as well as a link to some comments and concerns over at Slashdot. The car overcomes the range limitations that crippled GM's EV-1, by using large numbers of the lithium ion batteries that power your laptop computer. This apparently delivers up to 250 miles per charging cycle. The Tesla reaches 60 miles per hour in four seconds, has a top speed of 135, and looks very sleek. It will also dock your i-Pod. Unsurprisingly, Tesla has its own blog.
Volvo's Multi-Fuel station wagon is at the other extreme from the Tesla. It looks like a family car, and it can run on ordinary gasoline, ethanol blends up to E85, natural gas or a methane/hydrogen mix. It carries fuel tanks for both liquid and gaseous fuels, and it's not hard to imagine later versions that could handle straight hydrogen, or add hybrid-electric capabilities. I didn't read about this car in the New York Times, but rather had to dig it out of a report on the Michelin Challenge Bibendum, an annual competition for "sustainable mobility". This year's event featured cars fueled by biodiesel, gas-to-liquids synthetic diesel, and a propane-electric hybrid.
Our limited experience with alternative fuel vehicles so far suggests that their ultimate success hinges on two main factors: consumer response and infrastructure requirements. The former remains a bit of a mystery, and generations of very smart folks have lost fortunes by failing to anticipate it correctly. The latter appears more manageable, since it can be reduced to simpler questions of technical standards, logistics, and return on capital investment. Nevertheless, the methanol cars of the 1980s and the electric cars of the 90s foundered on their infrastructure requirements, and I've heard more than one energy executive suggest that the market will provide a return for replacing the current fuel-marketing system only once.
Tesla and Volvo are taking very different bets on infrastructure. Tesla relies on a single form of alternative transportation energy, electricity, with its existing infrastructure. The Roadster recharges at night in 3 1/2 hours on household current, and the company claims to have determined that on this basis, their car beats the alternatives in well-to-wheels efficiency. I would also argue that Tesla is taking a large bet on future battery cost reductions--if they have any mass-market aspirations--and on the long-term willingness of federal, state and municipal authorities to continue to forego collecting road taxes on cars that don't use petroleum-based fuels.
The Volvo, on the other hand, seems premised on a multi-fuel world, in which consumers will have many choices and will vary them periodically, depending on fluctuations in price and availability. This assumption fits nicely with the recent excitement about cellulosic ethanol and the practical success of natural gas conversions, at least for fleets such as taxis and government vehicles. And from my own observations of the failure of the EV-1, it seems better aligned than the Tesla with demonstrated consumer preferences for being able to hop in the car and refuel wherever it goes.
Whether either of these cars will ever be mass-produced or attain success on the scale of Toyota's Prius is almost irrelevant. Both of them advance the important debate on the future of transportation energy, and both could influence the design of cars for decades to come, if they can make it past their first hurdles of production and public acceptance.
Friday, July 21, 2006
Sample Energy Policy
For years, critics of our national approach to energy have argued for a comprehensive US energy policy, addressing the supply and demand aspects of energy security and setting out a plan for a transition to alternatives to imported fossil fuels. Last year's Energy Policy Act was a good start, though it suffered from the lack of a central organizing principle. With the publication last week of the UK's Energy Review, we have an example of a national energy policy organized around the goal of reducing greenhouse gas emissions, and the result is interesting for both its ambition and its pragmatism.
Having spent a couple of delightful years living in London, I pay extra attention to events in Britain. This explains my interest in a UK energy policy, but that's not why I'm drawing attention to it here. The UK is of course smaller than the US, with a population and economy one-fifth and one-sixth the size of ours, respectively. But while it starts from a rather different position of domestic energy resources and infrastructure, the challenges it faces are quite similar to ours: declining domestic energy production, growing imports, and the expanding demands of an increasingly high-tech society. It also brings a market orientation more similar to ours than that of any other EU member. The notable difference, however, is the added constraint of being bound by UK and EU commitments to make dramatic reductions in the greenhouse gas emissions implicated in climate change. So here is at least a hint at what a US energy policy might look like with a strong climate change overlay.
The focus on climate starts with the first paragraph of the press statement by the Secretary of State for Trade and Industry, who led the panel that created the report. It is reinforced throughout the document by aggressive targets and measures to strengthen emissions trading and the other mechanisms by which Britain intends to reduce its emissions. But the report also highlights the continuing importance of fossil fuels, promoting expanded oil and gas drilling in the North Sea and the development of the means to keep coal production and coal-fired power generation competitive in a low-carbon world.
One interesting features of the plan is its reliance on a broad range of technologies, rather than promoting one or two preferred paths. For example, renewables are advanced in both transportation fuel and power generation, but without specifying precisely which type to expand. The emphasis is on mechanisms and modes, rather than solutions that might change over time--e.g. distributed power, rather than fuel cells or microturbines.
A number of comments on the week's earlier postings picked up on the omission of nuclear power from most discussions of responses to climate change. Not so in the UK. The report isn't shy about taking on the challenge of the aging UK power plant fleet, and it justifies its recommendation for building a new generation of nuclear power plants on the basis of low emissions, as well as energy stability and security benefits . Although The Economist is skeptical that private industry will meet this challenge without further incentives, the report makes a strong environmental case for nuclear power.
There's also a major emphasis on efficiency, starting with such low-hanging fruit as setting higher standards for appliances and eliminating "parasitic loads" in electrical devices. That will be an easier pill for the public to swallow than its suggestion to expand emissions trading to encompass road transport and aviation--which will translate into higher fuel prices and airfares.
I started the week with a look at some of the things that have changed since the energy crisis of the 1970s. My readers reminded me of a few items I omitted, but later I realized I had missed the biggest change of all, climate change. Although on the surface it imposes an additional constraint on resolving our energy problems, it also functions as a practical mechanism for prioritizing technologies and approaches--as we see in the UK plan--creating a bias towards fuels that generate low emissions in both their consumption and production. Of course, the UK's Energy Review reflects a different social context and political system than ours, and I wouldn't strain the analogy by suggesting that a US energy policy would ever replicate theirs. Nevertheless, it's fascinating to see an energy policy formulated equally as an environmental policy, and in which all of the principal conventional and alternative energy technologies have an important role.
Having spent a couple of delightful years living in London, I pay extra attention to events in Britain. This explains my interest in a UK energy policy, but that's not why I'm drawing attention to it here. The UK is of course smaller than the US, with a population and economy one-fifth and one-sixth the size of ours, respectively. But while it starts from a rather different position of domestic energy resources and infrastructure, the challenges it faces are quite similar to ours: declining domestic energy production, growing imports, and the expanding demands of an increasingly high-tech society. It also brings a market orientation more similar to ours than that of any other EU member. The notable difference, however, is the added constraint of being bound by UK and EU commitments to make dramatic reductions in the greenhouse gas emissions implicated in climate change. So here is at least a hint at what a US energy policy might look like with a strong climate change overlay.
The focus on climate starts with the first paragraph of the press statement by the Secretary of State for Trade and Industry, who led the panel that created the report. It is reinforced throughout the document by aggressive targets and measures to strengthen emissions trading and the other mechanisms by which Britain intends to reduce its emissions. But the report also highlights the continuing importance of fossil fuels, promoting expanded oil and gas drilling in the North Sea and the development of the means to keep coal production and coal-fired power generation competitive in a low-carbon world.
One interesting features of the plan is its reliance on a broad range of technologies, rather than promoting one or two preferred paths. For example, renewables are advanced in both transportation fuel and power generation, but without specifying precisely which type to expand. The emphasis is on mechanisms and modes, rather than solutions that might change over time--e.g. distributed power, rather than fuel cells or microturbines.
A number of comments on the week's earlier postings picked up on the omission of nuclear power from most discussions of responses to climate change. Not so in the UK. The report isn't shy about taking on the challenge of the aging UK power plant fleet, and it justifies its recommendation for building a new generation of nuclear power plants on the basis of low emissions, as well as energy stability and security benefits . Although The Economist is skeptical that private industry will meet this challenge without further incentives, the report makes a strong environmental case for nuclear power.
There's also a major emphasis on efficiency, starting with such low-hanging fruit as setting higher standards for appliances and eliminating "parasitic loads" in electrical devices. That will be an easier pill for the public to swallow than its suggestion to expand emissions trading to encompass road transport and aviation--which will translate into higher fuel prices and airfares.
I started the week with a look at some of the things that have changed since the energy crisis of the 1970s. My readers reminded me of a few items I omitted, but later I realized I had missed the biggest change of all, climate change. Although on the surface it imposes an additional constraint on resolving our energy problems, it also functions as a practical mechanism for prioritizing technologies and approaches--as we see in the UK plan--creating a bias towards fuels that generate low emissions in both their consumption and production. Of course, the UK's Energy Review reflects a different social context and political system than ours, and I wouldn't strain the analogy by suggesting that a US energy policy would ever replicate theirs. Nevertheless, it's fascinating to see an energy policy formulated equally as an environmental policy, and in which all of the principal conventional and alternative energy technologies have an important role.
Thursday, July 20, 2006
Food vs. Fuel
When demand for oil goes up, so do prices, and this translates into higher product prices down the line. Anyone who thinks about energy understands this implicitly. With demand for biofuels rising, however, we're going to have to start thinking about the downstream implications for the alternate disposition of biofuel feedstock, especially as it relates to food prices. That was less of an issue a few years ago, when US ethanol production was under 2 billion gallons per year, and ethanol only accounted for about 10% of the corn crop. But with corn-based ethanol targeted to reach 7 billion gallons by 2012, it will become harder to ignore this competition.
The other day a friend suggested I look at the price of corn on the cob at the supermarket, indicating that it was much higher than last year. He proposed that this was due to competition with ethanol. I ran this idea by another friend with a strong agriculture background, and she assured me that this was unlikely, since food corn and ethanol feedstock corn were entirely different varieties. Her explanation for the higher prices focused on the high energy prices that are affecting agriculture and many other industries, in this case boosting the cost of fertilizer, cultivation, harvesting and shipment to market.
Whether we're already seeing it, or whether it lies a year or two in the future, it's inevitable that the demand for corn to feed the rapidly growing ethanol machine we're building will have manifest higher prices in many of the foods we consume. If you've read many food labels in the last few years, you won't be surprised by the number of places that high-fructose corn syrup has displaced cane sugar. Nor will substitution back to cane provide much relief, if increasing quantities of cane are going into ethanol, as well, in places like Brazil.
I looked at corn futures prices to see whether this effect was apparent already. The publicly available data I found in a quick internet search only went back a few years, and although this year's prices appear a little more volatile than last year's, they aren't dramatically higher, In fact, they are actually lower than they were several years ago. Too many factors influence corn prices for me to conclude that ethanol has had a big impact, yet. That doesn't make it any less inevitable in the future.
Our insatiable demand for energy and the enormous challenges faced by the global oil and gas sector have us looking in many directions for new supplies. Every alternative raises new challenges and new choices, though, whether it's the wildlife and aesthetic concerns posed by wind turbines, or the competition between food and fuel in agriculture-based biofuels. Breaking the latter dilemma will require the production of ethanol from the cellulose in non-food crops, but that's still a few years off, in any significant volume. Meanwhile, corn-based ethanol will continue to generate public controversy, whether over its energy balance, or its impact on the price of corn on the cob or a can of Coke.
The other day a friend suggested I look at the price of corn on the cob at the supermarket, indicating that it was much higher than last year. He proposed that this was due to competition with ethanol. I ran this idea by another friend with a strong agriculture background, and she assured me that this was unlikely, since food corn and ethanol feedstock corn were entirely different varieties. Her explanation for the higher prices focused on the high energy prices that are affecting agriculture and many other industries, in this case boosting the cost of fertilizer, cultivation, harvesting and shipment to market.
Whether we're already seeing it, or whether it lies a year or two in the future, it's inevitable that the demand for corn to feed the rapidly growing ethanol machine we're building will have manifest higher prices in many of the foods we consume. If you've read many food labels in the last few years, you won't be surprised by the number of places that high-fructose corn syrup has displaced cane sugar. Nor will substitution back to cane provide much relief, if increasing quantities of cane are going into ethanol, as well, in places like Brazil.
I looked at corn futures prices to see whether this effect was apparent already. The publicly available data I found in a quick internet search only went back a few years, and although this year's prices appear a little more volatile than last year's, they aren't dramatically higher, In fact, they are actually lower than they were several years ago. Too many factors influence corn prices for me to conclude that ethanol has had a big impact, yet. That doesn't make it any less inevitable in the future.
Our insatiable demand for energy and the enormous challenges faced by the global oil and gas sector have us looking in many directions for new supplies. Every alternative raises new challenges and new choices, though, whether it's the wildlife and aesthetic concerns posed by wind turbines, or the competition between food and fuel in agriculture-based biofuels. Breaking the latter dilemma will require the production of ethanol from the cellulose in non-food crops, but that's still a few years off, in any significant volume. Meanwhile, corn-based ethanol will continue to generate public controversy, whether over its energy balance, or its impact on the price of corn on the cob or a can of Coke.
Wednesday, July 19, 2006
Action Or Futility
My posting on Sunday's Discovery Channel global warming documentary elicited some sharp comments on the efficacy of our available responses. I think this issue merits a posting of its own, building on yesterday's. At issue is whether any program of conservation and transformation aimed at reducing our emissions can succeed at averting further warming, or if these measures are so futile that we should abandon them and either live with the consequences, or focus on counteracting them on the macro level via planetary reengineering. In my view, the answer lies somewhere in the middle.
We should start with what we think we know, as distinct from assumptions and suppositions about political and economic hurdles. My understanding from extensive reading and discussions on the subject is that:
- Further warming appears to be "baked in", even if we stopped emitting CO2 altogether, because of the delayed consequences of the greenhouse gases we've emitted to date, and the persistence of those gases in the environment. However, this warming would likely not be permanent: temperatures would rise, plateau, and then later fall back to "normal", as excess CO2 is absorbed into seawater and carbonates. Total timeframe, a couple of centuries. That's long for us, but short for nature.
- Continued growth in global emissions on the current trend line would more than double pre-industrial CO2 levels and likely increase temperatures by much more, up to 10 deg. F on average by 2100, vs. the 1 or 2 degree rise that is essentially predetermined.
That much is consistent with the data and models, though one of the key analyses of the historical, or "paleoclimate," the so-called "hockey stick" graph of Mann, et al, has been challenged again, this time by a panel of statisticians commissioned by the US Congress. Their findings, which are not widely accepted in the climate science community, don't undermine the conclusion that the earth is warming significantly, but they could change our understanding of the context of that warming, particularly if claims that the decade of the 1990s was the warmest in 1000 years turn out to be unsupportable. Even if current global temperatures are no greater than those in the Middle Ages, with part of the last century's warming merely a natural recovery from the Little Ice Age of the 17th-19th centuries, the extent and present rate of increase could still overshoot those earlier highs and take us into some very uncomfortable territory.
The combination of these facts (or at least current conclusions from available data) leads me to think we need a multi-fold strategy:
- Continue to expand our knowledge of climate processes and refine climate models.
- Reduce emissions below the status quo trend-line, in order to moderate the increases and buy time for the development and deployment of truly low-emission energy technologies.
- Investigate and plan adaptation measures to mitigate the impact of unavoidable warming, particularly in low-lying coastal areas and islands.
- Investigate the means of eventually intervening to restore the climate to pre-warming levels, and in particular to short-circuit the feedback mechanisms that some scientists speculate could create a "runaway greenhouse."
The first two measures are underway, guided by the UN Framework Convention on Climate Change and other international and national bodies. The third point remains controversial in some quarters but will probably prove necessary, if we are to avert humanitarian crises that could overwhelm our ability to respond. The fourth strategy is still viewed as fringe, or even irresponsible, but I wonder how many of us would hesitate to attempt this, if the alternative were the breakdown of global civilization or worse.
Ultimately, no one can predict whether we will be able to overcome the political, economic and social obstacles to mounting a meaningful response to global warming, or whether, if we do, it will be sufficient to prevent really bad outcomes. I still think the best way to look at all of this is as a global insurance policy, the premium for which shouldn't exceed the expected value of the cost.
Tuesday, July 18, 2006
Brokaw on Climate Change
A couple of months ago, in a posting on the release of the film "An Inconvenient Truth," I questioned whether Al Gore was the best person to convince climate skeptics of the reasons for concern and prompt action. At the time, I couldn't come up with an alternative who would be credible to those not already disposed to believe. In retrospect, I'm surprised I didn't consider Tom Brokaw, who hosted Sunday night's Discovery Channel special, "Global Warming - What You Need To Know." His down-to-earth charm and low-key delivery worked well in a two-hour program that combined ominous predictions with striking visuals. If I weren't already convinced, would this show have changed my mind? Quite possibly.
This program, a co-production of NBC News and the BBC, covered four aspects of climate change: the evidence, the contributing factors, the consequences, and, perhaps most effectively, our responses. The producers clearly have a strong point of view that humanity's actions are changing the climate, possibly irreversibly, and that the evidence of this is all around us. They traveled to the Arctic, Antarctic, South Pacific, China, Brazil, Patagonia, Australia, and various other places to put that evidence on film, and they interviewed an impressive array of climatologists and environmental scientists, including such well-known figures as NASA's Dr. James Hansen.
Although I'm not sure I'd call the presentation balanced, since absolute even-handedness clearly wasn't its purpose, it addressed many questions often posed by skeptics, including what makes this round of climate change different from those the earth has experienced in the past--beyond the simple fact that we're here to observe it firsthand. It looked at the degree to which some of the evidence of climate change might equally well be attributed to naturally-occurring cycles, and it also tackled the rapidly growing emissions in the developing world, particularly in China, in a forthright manner. On the whole, though, caveats were few and far between, and serious outcomes such as rising sea levels and mass extinctions were presented as strong likelihoods or virtual certainties. I'd have chosen a greater emphasis on risk, rather than prediction, but that may be one of the many reasons I'm not in the business of producing TV shows.
(As an aside, it occurred to me as I was watching this presentation that attitudes about the predicted consequences of climate change might by affected by one's views on evolution. If you start with a belief that the earth is only 6,000 thousand years old, for example, it might be difficult to fit all this into your worldview.)
The real reward for me--having heard all the arguments before--came in the last few minutes, when some clever animation made the daily "carbon footprint" of an average American family visible as little black chunks of carbon emanating from appliances and spewing out of vehicles, accreting to hover above each home--and later a whole city--as giant (50 tons/year) blocks vaguely reminiscent of the alien spacecraft in "Independence Day." One of the biggest problems associated with climate change is that we're dealing with invisible gases and consequences removed from their emission by many years; making them visible was a brilliant stroke.
Finally and somewhat surprisingly, given the program's deadly serious tone, there was a sustained positive note throughout: it isn't too late; we can solve this if we tackle it now. That worked nicely with Mr. Brokaw's natural, Mid-western optimism. I still haven't seen "Inconvenient Truth," so I can't compare the two. I'm also not sure what it says about NBC's commitment to this message that they chose to air it on the Discovery Channel, rather than on the parent network in prime time. You can catch the reprise this Saturday evening on Discovery.
This program, a co-production of NBC News and the BBC, covered four aspects of climate change: the evidence, the contributing factors, the consequences, and, perhaps most effectively, our responses. The producers clearly have a strong point of view that humanity's actions are changing the climate, possibly irreversibly, and that the evidence of this is all around us. They traveled to the Arctic, Antarctic, South Pacific, China, Brazil, Patagonia, Australia, and various other places to put that evidence on film, and they interviewed an impressive array of climatologists and environmental scientists, including such well-known figures as NASA's Dr. James Hansen.
Although I'm not sure I'd call the presentation balanced, since absolute even-handedness clearly wasn't its purpose, it addressed many questions often posed by skeptics, including what makes this round of climate change different from those the earth has experienced in the past--beyond the simple fact that we're here to observe it firsthand. It looked at the degree to which some of the evidence of climate change might equally well be attributed to naturally-occurring cycles, and it also tackled the rapidly growing emissions in the developing world, particularly in China, in a forthright manner. On the whole, though, caveats were few and far between, and serious outcomes such as rising sea levels and mass extinctions were presented as strong likelihoods or virtual certainties. I'd have chosen a greater emphasis on risk, rather than prediction, but that may be one of the many reasons I'm not in the business of producing TV shows.
(As an aside, it occurred to me as I was watching this presentation that attitudes about the predicted consequences of climate change might by affected by one's views on evolution. If you start with a belief that the earth is only 6,000 thousand years old, for example, it might be difficult to fit all this into your worldview.)
The real reward for me--having heard all the arguments before--came in the last few minutes, when some clever animation made the daily "carbon footprint" of an average American family visible as little black chunks of carbon emanating from appliances and spewing out of vehicles, accreting to hover above each home--and later a whole city--as giant (50 tons/year) blocks vaguely reminiscent of the alien spacecraft in "Independence Day." One of the biggest problems associated with climate change is that we're dealing with invisible gases and consequences removed from their emission by many years; making them visible was a brilliant stroke.
Finally and somewhat surprisingly, given the program's deadly serious tone, there was a sustained positive note throughout: it isn't too late; we can solve this if we tackle it now. That worked nicely with Mr. Brokaw's natural, Mid-western optimism. I still haven't seen "Inconvenient Truth," so I can't compare the two. I'm also not sure what it says about NBC's commitment to this message that they chose to air it on the Discovery Channel, rather than on the parent network in prime time. You can catch the reprise this Saturday evening on Discovery.
Monday, July 17, 2006
1973 or 1982?
In light of last week's events, it's getting harder to cling to my frequent assertion that we aren't living through a re-run of the 1970s, energy-wise. Not only are oil prices approaching their all-time, real-dollar highs of the late 70s and early 80s, but the outbreak of hostilities between Israel and Hezbollah raises the specter of past Middle East conflicts and their unpredictable outcomes. As markets try to assess the implications of all this, I find myself wondering if we are in another 1973--on the threshold of a massive global energy shock--or a 1982, a year in which Israel invaded southern Lebanon but the price of oil actually declined.
Nor have the leaders of the developed world come to grips with the core of the problem. Although the New York Times characterized it as heavily oil-centric, the Energy Communique from the weekend's G8 summit in Russia presents a solid list of appropriate longer-term energy focus areas, including data and market transparency, energy diversification and climate change. However, it fails entirely to connect the dots between the "high and volatile oil prices" that it cites as an important challenge, and the current geopolitical crises driving that volatility.
Even if we might be on the verge of another Middle East war, though, it's worth considering what's different, compared to 1973. We have a lot more cars and use a lot more imported oil now than then, as a result of a roughly 50% increase in population and policies that helped keep the price of fossil fuels low for two decades. But while our millions of SUVs get roughly the same fuel economy as the big sedans and station wagons of the early 1970s, many families also own a more economical car. The most popular "economy cars" thirty years ago barely achieved 30 mpg, but there are many models today that beat that figure handily, including hybrids that get up to 50-60 mpg. Nor were telecommuting and online commerce even an option back then. In a pinch, changes in established work and shopping patterns could deliver dramatic reductions in fuel consumption.
We also have a wider variety of available alternative energy options. Although gas- and coal-to-liquids and oil sands are all capital intensive, they are actual hardware today, not just long-term R&D projects. The same is true for wind and solar power, which can contribute by displacing natural gas that could be used to augment transportation fuels. Even if our attention has recently been diverted by hype about corn ethanol, the entire net energy contribution of which is equal to that of one good-size offshore oil platform, the prospect of practical cellulosic ethanol could revolutionize the whole biofuels sector. An oil shock today would cause a lot of economic pain, but it might just trigger the energy transformation that the previous one didn't.
Last week I observed that the fundamentals of the oil market were starting to look a little more positive, but for the moment that appears totally irrelevant. In a market in which between 25% and 50% of the price of oil is determined by risk, its near-term path will have little to do with actual supply and demand. The prospect of another major Mid-Eastern oil producer becoming involved in a war--if rumors of Iranian troops in Lebanon turn out to be true--could shatter all the old records. Or the current crisis will abate, and we will still be left with the riskiness of our ongoing problems with Iraq, Iran, Nigeria and North Korea.
Nor have the leaders of the developed world come to grips with the core of the problem. Although the New York Times characterized it as heavily oil-centric, the Energy Communique from the weekend's G8 summit in Russia presents a solid list of appropriate longer-term energy focus areas, including data and market transparency, energy diversification and climate change. However, it fails entirely to connect the dots between the "high and volatile oil prices" that it cites as an important challenge, and the current geopolitical crises driving that volatility.
Even if we might be on the verge of another Middle East war, though, it's worth considering what's different, compared to 1973. We have a lot more cars and use a lot more imported oil now than then, as a result of a roughly 50% increase in population and policies that helped keep the price of fossil fuels low for two decades. But while our millions of SUVs get roughly the same fuel economy as the big sedans and station wagons of the early 1970s, many families also own a more economical car. The most popular "economy cars" thirty years ago barely achieved 30 mpg, but there are many models today that beat that figure handily, including hybrids that get up to 50-60 mpg. Nor were telecommuting and online commerce even an option back then. In a pinch, changes in established work and shopping patterns could deliver dramatic reductions in fuel consumption.
We also have a wider variety of available alternative energy options. Although gas- and coal-to-liquids and oil sands are all capital intensive, they are actual hardware today, not just long-term R&D projects. The same is true for wind and solar power, which can contribute by displacing natural gas that could be used to augment transportation fuels. Even if our attention has recently been diverted by hype about corn ethanol, the entire net energy contribution of which is equal to that of one good-size offshore oil platform, the prospect of practical cellulosic ethanol could revolutionize the whole biofuels sector. An oil shock today would cause a lot of economic pain, but it might just trigger the energy transformation that the previous one didn't.
Last week I observed that the fundamentals of the oil market were starting to look a little more positive, but for the moment that appears totally irrelevant. In a market in which between 25% and 50% of the price of oil is determined by risk, its near-term path will have little to do with actual supply and demand. The prospect of another major Mid-Eastern oil producer becoming involved in a war--if rumors of Iranian troops in Lebanon turn out to be true--could shatter all the old records. Or the current crisis will abate, and we will still be left with the riskiness of our ongoing problems with Iraq, Iran, Nigeria and North Korea.
Friday, July 14, 2006
Pre-Summit Poll
The leaders of the G8 group of nations meet this weekend in St. Petersburg, Russia, and energy is a key theme of the summit. That seems appropriate, given the venue and in light of the apparently successful IPO of roughly 20% of Rosneft, the state oil company that absorbed most of Yukos last year. In advance of the summit, the BBC commissioned a poll of residents of 19 countries for their thoughts on energy, and the results are interesting. Large majorities across the globe see energy as a major economic, geopolitical and environmental concern, but as the Beeb points out, their agreement ends with the diagnosis; preferred solutions diverge widely, especially on the subject of higher energy taxes.
Worries about energy's role in climate change and other environmental issues topped the list with 81%, and are probably connected to the strong support (80%) for incentives to promote renewable energy. Unsurprisingly, attitudes toward nuclear power were very country-specific, with support strongest in the US and Asia and weakest in Europe and the former Soviet bloc.
The disparities on increasing energy taxes, which comes closest to a pocketbook issue of anything that was asked, likely reflect a reality not addressed in this poll or its methodology: where do energy and the environment rank among all the things the respondents care about? If people are more worried about jobs, families, and personal safety, will they really demand higher energy taxes? Has energy reached that over-arching point of dominant public focus, as it did in the 1970s? You can't tell from this survey, but the resilience of economic growth to higher energy prices, and the miniscule demand response to those prices, suggest not.
So what message should the G8 emissaries take away from the BBC poll? Maybe it's the one inferred by the Director of the Program on international Policy Attitudes, one of the organizations that designed the poll, who said, "...the way the world is producing and using energy is not viable. People around the world will be looking to the G8 leaders to address this issue and show a readiness to support significant new steps." In fact, the G8 Gleneagles Agreement was a good start on that. Perhaps the best thing the G8 could do this time around would be to concentrate on the geopolitical problems that have heaped enormous risk premia on the prices of oil and competing forms of energy. It's hard to focus our efforts on an enormous, gradual problem such as climate change, when everyone is fretting about terrorism, a widening conflict in the Middle East, Korean missiles and Iranian nukes.
Worries about energy's role in climate change and other environmental issues topped the list with 81%, and are probably connected to the strong support (80%) for incentives to promote renewable energy. Unsurprisingly, attitudes toward nuclear power were very country-specific, with support strongest in the US and Asia and weakest in Europe and the former Soviet bloc.
The disparities on increasing energy taxes, which comes closest to a pocketbook issue of anything that was asked, likely reflect a reality not addressed in this poll or its methodology: where do energy and the environment rank among all the things the respondents care about? If people are more worried about jobs, families, and personal safety, will they really demand higher energy taxes? Has energy reached that over-arching point of dominant public focus, as it did in the 1970s? You can't tell from this survey, but the resilience of economic growth to higher energy prices, and the miniscule demand response to those prices, suggest not.
So what message should the G8 emissaries take away from the BBC poll? Maybe it's the one inferred by the Director of the Program on international Policy Attitudes, one of the organizations that designed the poll, who said, "...the way the world is producing and using energy is not viable. People around the world will be looking to the G8 leaders to address this issue and show a readiness to support significant new steps." In fact, the G8 Gleneagles Agreement was a good start on that. Perhaps the best thing the G8 could do this time around would be to concentrate on the geopolitical problems that have heaped enormous risk premia on the prices of oil and competing forms of energy. It's hard to focus our efforts on an enormous, gradual problem such as climate change, when everyone is fretting about terrorism, a widening conflict in the Middle East, Korean missiles and Iranian nukes.
Thursday, July 13, 2006
What Goes Up...
Yesterday I looked at the risks hanging over the oil market; today I want to look at the fundamentals, particularly for gasoline. The news is again full of reports of higher gasoline prices and irate consumers. Prices certainly seem to be headed back up, and almost everyone blames higher crude oil prices. Is that right, or is the story more complicated? Answering that requires looking at the supply and demand for both crude oil and for gasoline, and their connection via refining.
Let's start with crude oil. Global production for January-April was up from the same period in 2005 by about 200,000 barrels per day (bpd,) as reported by the Energy Information Agency, on total production of over 84 million bpd. However, US production is down by more than half a million bpd, due to lingering effects of last year's hurricanes, combined with existing depletion trends. Consumption for the first three months of the year appears to have been down, at least in the developed world, though this may have been due more to weather than price-related conservation. US refinery throughput for the first half of the year was down, as well. Taken together, this suggests that global crude inventories should be higher, and we certainly see that in US commercial inventories, which are about 5% above their level in June 2005 and still well above the average of the last five years.
Now let's turn to gasoline. The EIA's latest update shows that gasoline production for the first half of the year was about the same as for the first half of 2005, while demand was up by a bit less than 1%. Despite this, gasoline inventories appear quite normal for this time of year. That's because gasoline imports have risen by about 25% in the same period. The part of the inventory story that has changed, though, is the breakdown between gasoline that is already blended and ready to ship immediately, vs. gasoline that still needs further blending, either at a refinery or a distribution terminal. The former has dropped and the latter increased significantly, as a result of the shift toward ethanol and away from MTBE as a gasoline additive. This correlates with a 60% increase in imported gasoline blending components.
So what does all this tell us? The difference between the crude oil and gasoline market fundamentals suggests a market that is still being driven by growing product demand and a strained refining system, rather than a shortage of crude oil--but with an enormous risk premium overlaid on both. For the first half of this year, US refineries were still dealing with the consequences of the 2005 hurricane season, either in terms of lingering damage or maintenance that had been deferred into the 1st and 2nd quarters of 2006. At the same time, crude oil prices were up by $14.50/barrel, this June vs. last June, driven by the proliferation of risks I discussed yesterday.
If you're looking for signs of just how difficult the refined product end of the market has become, I can't think of a better indicator than an announcement by Citgo, the US subsidiary of Venezuela's state oil company, that it is phasing out supply to 1,900 mid-western service stations, about 15% of its US network, because it can't produce enough gasoline to supply them and can't afford to cover the shortfall by buying the product from others. Geopolitical experts will scrutinize this news for signs of growing US/Venezuelan tension, but I think it could well be exactly what Citgo claims: the result of a very tight market. Most of the major oil companies are in a similar situation, needing to supplement their equity refining output with purchased product. It will be interesting to see if any of them follow Citgo's lead, in trimming marginal parts of their marketing networks.
Even if crude oil looks a bit oversupplied at the moment, with the futures market in contango, the lack of cushion in the downstream quickly translates every dollar increase in the price of crude oil into a comparable bump in gas prices. At the end of the day, although I have consistently looked for signs that the market might be poised to weaken, the combination of international petroleum risk factors and a stretched refined products market could forestall that for some time. It looks to be a long, expensive summer for motorists.
Let's start with crude oil. Global production for January-April was up from the same period in 2005 by about 200,000 barrels per day (bpd,) as reported by the Energy Information Agency, on total production of over 84 million bpd. However, US production is down by more than half a million bpd, due to lingering effects of last year's hurricanes, combined with existing depletion trends. Consumption for the first three months of the year appears to have been down, at least in the developed world, though this may have been due more to weather than price-related conservation. US refinery throughput for the first half of the year was down, as well. Taken together, this suggests that global crude inventories should be higher, and we certainly see that in US commercial inventories, which are about 5% above their level in June 2005 and still well above the average of the last five years.
Now let's turn to gasoline. The EIA's latest update shows that gasoline production for the first half of the year was about the same as for the first half of 2005, while demand was up by a bit less than 1%. Despite this, gasoline inventories appear quite normal for this time of year. That's because gasoline imports have risen by about 25% in the same period. The part of the inventory story that has changed, though, is the breakdown between gasoline that is already blended and ready to ship immediately, vs. gasoline that still needs further blending, either at a refinery or a distribution terminal. The former has dropped and the latter increased significantly, as a result of the shift toward ethanol and away from MTBE as a gasoline additive. This correlates with a 60% increase in imported gasoline blending components.
So what does all this tell us? The difference between the crude oil and gasoline market fundamentals suggests a market that is still being driven by growing product demand and a strained refining system, rather than a shortage of crude oil--but with an enormous risk premium overlaid on both. For the first half of this year, US refineries were still dealing with the consequences of the 2005 hurricane season, either in terms of lingering damage or maintenance that had been deferred into the 1st and 2nd quarters of 2006. At the same time, crude oil prices were up by $14.50/barrel, this June vs. last June, driven by the proliferation of risks I discussed yesterday.
If you're looking for signs of just how difficult the refined product end of the market has become, I can't think of a better indicator than an announcement by Citgo, the US subsidiary of Venezuela's state oil company, that it is phasing out supply to 1,900 mid-western service stations, about 15% of its US network, because it can't produce enough gasoline to supply them and can't afford to cover the shortfall by buying the product from others. Geopolitical experts will scrutinize this news for signs of growing US/Venezuelan tension, but I think it could well be exactly what Citgo claims: the result of a very tight market. Most of the major oil companies are in a similar situation, needing to supplement their equity refining output with purchased product. It will be interesting to see if any of them follow Citgo's lead, in trimming marginal parts of their marketing networks.
Even if crude oil looks a bit oversupplied at the moment, with the futures market in contango, the lack of cushion in the downstream quickly translates every dollar increase in the price of crude oil into a comparable bump in gas prices. At the end of the day, although I have consistently looked for signs that the market might be poised to weaken, the combination of international petroleum risk factors and a stretched refined products market could forestall that for some time. It looks to be a long, expensive summer for motorists.
Wednesday, July 12, 2006
Where Is the Good Scenario?
Living in a different city, I don't read the New York Times as regularly as I used to. I try to keep up with the musings of the "gray lady", though, even if a few days after the fact. That's how I ran across these scenarios for North Korea from last Sunday's Week in Review (Times Select required, unfortunately.) The author's conclusion fits the title, "Four Scenarios, and Not One Ends Happily." That started me thinking about scenarios for the energy market, and how they've been affected by the remarkable accumulation of negative risk over the last several years. It's pretty easy to think of ways things might get worse, but much harder to see what could ease conditions any time soon--and that could be the main reason why the price of oil remains over $70.
If you've read my profile, you know that my paying work is in the field of energy strategy and scenario planning, so anything with the word "scenario" in the title gets my attention, even if most of the time it's used in an almost trivial sense. I don't know how rigorously Mr. Sanger developed his four views of how things could turn out in the latest round of "The Dear Leader" and his followers vs. everyone else. (I haven't chimed in on this, myself, because unlike the confrontation with Iran, there hasn't been an obvious energy angle here, unless it's about nuclear power in developing countries.) I'm not sure he's captured the full range of possibilities, but I'm not prepared to dismiss his choices, either.
Stepping back from Korea to look at the broader array of issues affecting energy, it seems like we've gravitated towards the downside of virtually every situation that's cropped up since 2002. Consider:
- The war in Iraq has kept that country's production stuck at roughly pre-war levels, and they've only managed that with some remarkable ingenuity on the part of the production and pipeline engineers involved. Billions of barrels of untapped reserves await stability.
- Venezuela hadn't even recovered from the aftermath of the 2002-3 oil industry strike, when Sr. Chavez decided that the terms given to the international companies--the same ones whose facilities had kept Venezuelan production from imploding altogether--were too generous, and unilaterally "renegotiated" them.
- Iran seems to believe it can develop nuclear weapons and attract foreign investment to expand its oil and gas sector. This hasn't been entirely irrational on their part, given the way they've played their hand, but the market clearly understands that things could get very ugly, very quickly.
- Nigeria has been one of the real oil success stories of the last decade, but every time you turn around, some group of indigenous people has occupied an oil platform, kidnapped oil workers, accidentally blown up a pipeline, or in some other manner impeded getting the resource out of the ground and to market.
- The growth in Russian oil production played a central key role in holding down prices earlier in the decade, but for reasons that remain open to interpretation, the Kremlin chose to dismantle and effectively re-nationalize the company with the best track record at expansion.
- What are the odds against three major hurricanes in two years plowing through the heart of the US Gulf Coast oil and gas production and processing?
- I could go on, but almost the only thing we haven't had is a major disruption from Saudi Arabia, which a lot of us expected to see in the wake of 9/11.
When you create scenarios, you need to think about the opposing extremes of a given uncertainty, the upside and downside, and the combination of these factors usually creates at least one fairly positive scenario. But any "good scenario" that I could construct from the upside outcomes of the above issues would probably seem unrealistically upbeat, after what we've been through and continue to experience. And yet, experience tells us that we can't keep rolling sevens indefinitely; things could start to turn around, and they are past due to do so. A market so driven by risk, but for which the underlying fundamentals have at least begun to ease, as I'll discuss tomorrow, could drop suddenly and catch a lot of speculators by surprise. What are the odds for that, versus yet another nasty surprise emerging from a long list of possibilities?
Tuesday, July 11, 2006
Solar Convergence
If there's one alternative energy sector to which I've given short shrift in this blog, it's solar power. That's not because I think it lacks great potential. Instead, I've generally focused on fuels issues, since they are in the news more frequently and seem more urgent. Absent large numbers of battery-electric cars or solar-generated hydrogen, solar power won't affect the transportation energy markets for many years. Despite this, I'm intrigued by the apparent increase in important developments in solar technology, at least as reported in the news sources I follow. They suggest the beginnings of a technology convergence that could make solar power at least as important as wind power within a few years.
Wind and solar power diverged, when wind technology improved to the point at which it became essentially competitive--given modest subsidies or incentives--with conventional alternatives for generating electricity, such as gas-fired turbines. Solar has progressed, too, but remains farther from this kind of commerciality, even though its price hurdle is less difficult than wind's: solar power need only compete with the retail electricity prices that businesses and consumers pay their local utilities for delivered power, while wind must compete at the tougher wholesale level, which typically affords less than half the retail price.
So why has solar started to look more promising? It relates to developments in the same two key areas that moved wind out of the novelty category. First, there seems to be a sudden proliferation of new technologies that promise higher output at lower cost, enabling solar to be deployed in a wider market. More importantly, the capacity to produce solar cells or panels is being boosted by new manufacturing processes and by new cell technology that facilitates easier manufacturing at larger scales, with fewer bottlenecks of the kind that crystalline silicon has posed lately. More and larger "fabs" mean cheaper cells, which means higher demand, which drives the construction of more "fabs", in a virtuous cycle. There's some price at which you penetrate the full consumer power market (rather than small niches within it) and the cycle really takes off.
Here are some recent news items that I'd take as signposts of this kind of gathering momentum. Hardly a week goes by without something along these lines:
Wind and solar power diverged, when wind technology improved to the point at which it became essentially competitive--given modest subsidies or incentives--with conventional alternatives for generating electricity, such as gas-fired turbines. Solar has progressed, too, but remains farther from this kind of commerciality, even though its price hurdle is less difficult than wind's: solar power need only compete with the retail electricity prices that businesses and consumers pay their local utilities for delivered power, while wind must compete at the tougher wholesale level, which typically affords less than half the retail price.
So why has solar started to look more promising? It relates to developments in the same two key areas that moved wind out of the novelty category. First, there seems to be a sudden proliferation of new technologies that promise higher output at lower cost, enabling solar to be deployed in a wider market. More importantly, the capacity to produce solar cells or panels is being boosted by new manufacturing processes and by new cell technology that facilitates easier manufacturing at larger scales, with fewer bottlenecks of the kind that crystalline silicon has posed lately. More and larger "fabs" mean cheaper cells, which means higher demand, which drives the construction of more "fabs", in a virtuous cycle. There's some price at which you penetrate the full consumer power market (rather than small niches within it) and the cycle really takes off.
Here are some recent news items that I'd take as signposts of this kind of gathering momentum. Hardly a week goes by without something along these lines:
- A company called Nanosolar, Inc. has devised a new way to produce thin-film solar cells--an alternative to traditional crystalline silicon cells--using a process similar to newspaper printing. They announced the construction of a new facility that by itself would boost global solar manufacturing capacity by roughly 25%.
- Holograms may provide an inexpensive way to focus more of the sun's rays on collector, reducing the size--and thus the cost--of a solar array for a given power output and saving on manufacturing cost, as well.
- Entirely new materials such as quantum dots could pave the way for a third generation of solar cells, which will be both more efficient and lower cost than current approaches.
- A survey of the sector by a German tech analyst indicated that there were 50 companies working on new solar technologies, with significant new capital coming into the sector.
At the same time, the market for new solar arrays is being primed by a combination of high energy prices, growing environmental awareness, and big-budget incentive programs such as California's solar roofs initiative. The trick will be to get prices low enough to expand demand rapidly enough for it to become meaningful in terms of our total energy consumption, without drying up the profits that will be needed to fuel the continued expansion of the solar industry. That means that technology must continue to set the pace, and keep driving costs down.
There are many positive signs for solar, but we still need to keep them in perspective. Wide-scale implementation of photovoltaic arrays, particularly when combined with net-metering that allows excess solar power to be sold back into the grid, will reduce the call on peak-power generation from natural gas-fired turbines. That should free up gas for other uses. But without a breakthrough in the cost and efficiency of batteries, solar isn't going to have much impact on the demand fro big, base-load power plants, which in this country means coal. Until we can effectively shift solar power from where and when it's most abundant to where and when it's needed most, its contribution will be at the margin, not at the heart of our energy economy. That's still a pretty big market opportunity for today's solar startups.
Monday, July 10, 2006
Practical Limitations
Only a couple of years ago, Canada put itself near the top of the petroleum world by adding 174 billion barrels of oil sands to its proved oil reserves. This was accompanied by a deft PR initiative that included front-page articles in impressive media such as the Wall St. Journal and New York Times, touting Canada as second only to Saudi Arabia. There's no question that Canadian and international energy companies are investing billions of dollars to boost oil sands production dramatically, from roughly one million barrels per day to three or four in the next decade. Now, however, we're starting to see signs that the expectations surrounding this expansion may have been overly optimistic, as practical limitations set in. This has implications for how we look at all forms of alternative energy.
Extracting oil from oil sands is more difficult and expensive than producing the same quantities from conventional oil reservoirs, even those is deep water, far offshore. The oil in oil sands must be mined like coal, separated from its source minerals, and upgraded in refinery-like plants to turn the heavy "bitumen" into something roughly comparable to a medium-grade crude oil. As a result of all this extra effort, oil sands are inherently more capital-, labor-, and energy-intensive than conventional oil. So it shouldn't be surprising that as production ramps up, bottlenecks are showing up in all these areas: Shell is reporting inflation in the cost of the capital equipment necessary to expand its oil sands operation, and Fort McMurray, the hub of the Alberta oil sands infrastructure, is experiencing labor and housing shortages. There are also environmental limitations, which I've commented on previously. When we factor in all these real-world problems, Canadian oil sands look less like another Saudi Arabia--which has its own untapped heavy oil--and more like a second Venezuela, with comparable technical challenges but much lower political risk.
My purpose here isn't to denigrate the potential of oil sands. They're going to be tremendously important, particularly in helping to forestall a peak in oil production. But they also provide a classic illustration of what happens when we attempt to expand a new energy source to a multiple of its former output in a very short time. For oil sands, the bottlenecks are in labor and hardware; for ethanol they may well be in land use and railroad tank car capacity. Other new sources exhibit other limitations, including electric transmission line congestion, wind turbine production capacity, and shortages of raw materials for solar panels. That means that in addition to investing in the new energy sources themselves, we must expand the means to build them and connect them to markets, adding extra costs and delays.
Many of us are walking around with a false, "revolutionary" model of how energy will change in our lifetimes. It's been put there by the media, politicians and activists, many of whom were advancing an agenda or simply lacked the technical knowledge to appreciate the enormity of the task at hand. Watching the expansion Canada's oil sands provides the real-world challenge to this model of sudden, dramatic energy shifts. We need to understand this instead as an inexorable but gradual process, with revolutionary changes in technology--hybrid cars, for example--feeding into its margins at periodic intervals. That will challenge our patience with high prices, and it makes the aggregation of our personal choices about energy consumption as important as any new technology or project.
Extracting oil from oil sands is more difficult and expensive than producing the same quantities from conventional oil reservoirs, even those is deep water, far offshore. The oil in oil sands must be mined like coal, separated from its source minerals, and upgraded in refinery-like plants to turn the heavy "bitumen" into something roughly comparable to a medium-grade crude oil. As a result of all this extra effort, oil sands are inherently more capital-, labor-, and energy-intensive than conventional oil. So it shouldn't be surprising that as production ramps up, bottlenecks are showing up in all these areas: Shell is reporting inflation in the cost of the capital equipment necessary to expand its oil sands operation, and Fort McMurray, the hub of the Alberta oil sands infrastructure, is experiencing labor and housing shortages. There are also environmental limitations, which I've commented on previously. When we factor in all these real-world problems, Canadian oil sands look less like another Saudi Arabia--which has its own untapped heavy oil--and more like a second Venezuela, with comparable technical challenges but much lower political risk.
My purpose here isn't to denigrate the potential of oil sands. They're going to be tremendously important, particularly in helping to forestall a peak in oil production. But they also provide a classic illustration of what happens when we attempt to expand a new energy source to a multiple of its former output in a very short time. For oil sands, the bottlenecks are in labor and hardware; for ethanol they may well be in land use and railroad tank car capacity. Other new sources exhibit other limitations, including electric transmission line congestion, wind turbine production capacity, and shortages of raw materials for solar panels. That means that in addition to investing in the new energy sources themselves, we must expand the means to build them and connect them to markets, adding extra costs and delays.
Many of us are walking around with a false, "revolutionary" model of how energy will change in our lifetimes. It's been put there by the media, politicians and activists, many of whom were advancing an agenda or simply lacked the technical knowledge to appreciate the enormity of the task at hand. Watching the expansion Canada's oil sands provides the real-world challenge to this model of sudden, dramatic energy shifts. We need to understand this instead as an inexorable but gradual process, with revolutionary changes in technology--hybrid cars, for example--feeding into its margins at periodic intervals. That will challenge our patience with high prices, and it makes the aggregation of our personal choices about energy consumption as important as any new technology or project.
Friday, July 07, 2006
Another Trading Scandal?
It seems at least mildly ironic that the news of BP's alleged propane market manipulation should break only a few days before Ken Lay died. You might see this as an instance of, "The evil men do lives after them..." or as something that's simply part and parcel of energy trading, and of commodities trading in general. I take the latter view. Enron didn't invent market manipulation, and the lore of trading is replete with stories about this or that trader or company that managed to "corner" the market in some commodity, for some short period. Rather than citing this as justification for the regulation of over-the-counter trades, which typically involve transactions too esoteric or illiquid for the formal exchanges to bother with, I regard it as just one more example of personal greed, and one that our current laws are perfectly adequate to sort out.
I'm frankly a little surprised to see BP in the cross-hairs on this. Despite the descriptions of BP's more aggressive trading style, the major oil companies generally keep a tight rein on their traders, because of their aversion to adverse publicity and the recognition that their size attracts much higher levels of regulatory scrutiny than smaller firms enjoy. It is instructive to see how quickly BP responded here, and to note the titles of the individuals who've been fired or suspended. They did not shoot mere minions here, but rather some highly-compensated, senior business unit executives.
The other interesting aspect of this story is the participants' choice of the mid-continent propane market. While it's certainly not as large as the WTI market, it's not an itty bitty market, either. These guys would have been running a sizeable risk of getting stuck with some seriously over-priced product (or holding the high price end of a derivative on a market that could go south, with no one to bail them out.) The experience apparently cost them $10 million, an outcome consistent with most previous attempts to corner markets.
From my perspective of a decade of hands-on trading experience in a variety of physical, futures, and over-the-counter energy commodities, I'd conclude that you can't have thousands of bright, highly-motivated individuals chasing commodity trades literally 24/7--interrupting meals, sleep and even dates to work on deals--without this kind of thing happening occasionally. (Note the distinction between that and an operation that routinely and systematically exploited regulatory loopholes.) The economic and societal benefits of energy trading far outweigh the cost of the occasional trading scandal, by making US energy markets the most efficient in the world and genuinely reducing the costs consumers and businesses pay for energy products.
I'm frankly a little surprised to see BP in the cross-hairs on this. Despite the descriptions of BP's more aggressive trading style, the major oil companies generally keep a tight rein on their traders, because of their aversion to adverse publicity and the recognition that their size attracts much higher levels of regulatory scrutiny than smaller firms enjoy. It is instructive to see how quickly BP responded here, and to note the titles of the individuals who've been fired or suspended. They did not shoot mere minions here, but rather some highly-compensated, senior business unit executives.
The other interesting aspect of this story is the participants' choice of the mid-continent propane market. While it's certainly not as large as the WTI market, it's not an itty bitty market, either. These guys would have been running a sizeable risk of getting stuck with some seriously over-priced product (or holding the high price end of a derivative on a market that could go south, with no one to bail them out.) The experience apparently cost them $10 million, an outcome consistent with most previous attempts to corner markets.
From my perspective of a decade of hands-on trading experience in a variety of physical, futures, and over-the-counter energy commodities, I'd conclude that you can't have thousands of bright, highly-motivated individuals chasing commodity trades literally 24/7--interrupting meals, sleep and even dates to work on deals--without this kind of thing happening occasionally. (Note the distinction between that and an operation that routinely and systematically exploited regulatory loopholes.) The economic and societal benefits of energy trading far outweigh the cost of the occasional trading scandal, by making US energy markets the most efficient in the world and genuinely reducing the costs consumers and businesses pay for energy products.
Thursday, July 06, 2006
Putting All The Choices On The Table
Yesterday's New York Times business section featured a lengthy article on turning coal into synthetic gas or liquid fuels, as an alternative to importing more foreign oil and gas. It highlights a company called Rentech, whose technology for coal-to-liquids is an update of the old Fischer-Tropsch process, which supplied Germany with synthetic fuel during World War II. There's great potential in this process, particularly with oil prices so high and coal prices relatively lower. The article properly identifies the problem of managing the large greenhouse gas emissions inherent in this approach, but as I so often find in such pieces, it's more interesting for what it fails to mention that for what it includes.
The issue is fairly simple, though I've rarely seen it articulated in popular articles on alternative energy. It's wonderful that we have a widening array of choices for creating alternatives to conventional--which increasingly means imported--oil and gas. But when we look at the environmental consequences of producing synthetic gasoline or diesel fuel from coal or oil sands, we ought to compare them not just to other alternative energy processes, many of which have their own challenges in scaling up or avoiding unintended consequences, as this recent piece on ethanol reminds us. We also need to compare them to the simpler alternative of expanding the areas available to the industry for drilling conventional domestic oil and gas.
I know that offshore drilling is a hot-button issue. There's been a flurry of legislation trying to address it, and our best available compromise may be to treat drilling for non-associated natural gas differently from that for oil, thus avoiding at least some of the problems generating opposition. But however you view the drawbacks of offshore oil or gas drilling, whether from pollution risks to water, beaches, or "viewscapes," it's hard to see that they are worse than the consequences of producing the same amount of energy by turning additional surface-minded coal into gasoline. The biggest difference appears to be that the latter occurs somewhere in the heartland, while the former affects upscale beach communities. I'm not big on "environmental justice" as an issue, but the situation above seems like a classic example.
In the long run, I believe we'll need a significant contribution from every energy option now on the table, including LNG, gas-to-liquids, coal-to-liquids, oil sands, ethanol (preferably cellulosic,) wind, solar and advanced nuclear power. What's really at stake is the future energy mix and its overall environmental impact. As new options ramp up, though, we can't afford to be obtuse about how we compare them to the default option of increasing supplies from conventional sources by altering boundary lines that were drawn for social and political reasons. While we can't drill our way to independence, the downside of producing oil and gas reserves from areas currently off-limits looks lower than that of some of the alternatives we're considering.
The issue is fairly simple, though I've rarely seen it articulated in popular articles on alternative energy. It's wonderful that we have a widening array of choices for creating alternatives to conventional--which increasingly means imported--oil and gas. But when we look at the environmental consequences of producing synthetic gasoline or diesel fuel from coal or oil sands, we ought to compare them not just to other alternative energy processes, many of which have their own challenges in scaling up or avoiding unintended consequences, as this recent piece on ethanol reminds us. We also need to compare them to the simpler alternative of expanding the areas available to the industry for drilling conventional domestic oil and gas.
I know that offshore drilling is a hot-button issue. There's been a flurry of legislation trying to address it, and our best available compromise may be to treat drilling for non-associated natural gas differently from that for oil, thus avoiding at least some of the problems generating opposition. But however you view the drawbacks of offshore oil or gas drilling, whether from pollution risks to water, beaches, or "viewscapes," it's hard to see that they are worse than the consequences of producing the same amount of energy by turning additional surface-minded coal into gasoline. The biggest difference appears to be that the latter occurs somewhere in the heartland, while the former affects upscale beach communities. I'm not big on "environmental justice" as an issue, but the situation above seems like a classic example.
In the long run, I believe we'll need a significant contribution from every energy option now on the table, including LNG, gas-to-liquids, coal-to-liquids, oil sands, ethanol (preferably cellulosic,) wind, solar and advanced nuclear power. What's really at stake is the future energy mix and its overall environmental impact. As new options ramp up, though, we can't afford to be obtuse about how we compare them to the default option of increasing supplies from conventional sources by altering boundary lines that were drawn for social and political reasons. While we can't drill our way to independence, the downside of producing oil and gas reserves from areas currently off-limits looks lower than that of some of the alternatives we're considering.
Wednesday, July 05, 2006
Is Jet Fuel Next?
Over the weekend I had a chance to catch up on some of the articles that have languished during my recent relocation. It'll be a while before I feel fully caught up on events in the industry and the world, but at least I feel less out of the loop. One of the articles that caught my attention was this excellent report in the Economist on the environmental issues facing global aviation, particularly the growing focus on fuel consumption and greenhouse gas emissions from this sector. The article includes some interesting comparisons of the emissions from air travel relative to other modes, a topic that's come up in this blog from time to time. Their conclusion mirrors what I've said for years: aviation has gotten a relatively easy ride on the environment, but that won't last forever.
Air travel has been a great boon to mankind and is probably the signature innovation of the last century. But as it expands, so does its environmental impact, particularly when it is adding net new travel over long distances, rather than displacing existing travel via road or rail. The Economist cites EPA figures indicating that aircraft account for only about 3% of all greenhouse gas emissions, which is consistent with its roughly 4% share of total energy consumption, based on a share of just under 10% of total petroleum usage. But that modest share will rise, as air travel expansion outpaces other forms of energy consumption. It's startling to read that the growth in aviation emissions might offset more than a quarter of the EU's other emissions reductions by 2012, the end of the first Kyoto compliance period.
And while the Economist looks mainly at the impact on climate change, that's not the only issue the industry--both commercial aviation and its fuel suppliers--must worry about. For example, jet fuel has escaped most of the anti-pollution scrutiny and reformulation of the last couple decades. At 0.3% (3000 parts per million) its sulfur content, which was once comparable to that of diesel fuel, is 200 times higher than the ultra-low-sulfur diesel specification that has just gone into force in the US. While most of the sulfate emissions associated with burning jet fuel occur outside of urban pollution-control areas, they have long been thought to influence such climate-related issues as cloud formation. Oxides of nitrogen are even harder to avoid, given the high combustion temperatures in turbine engines.
I don't see any easy solutions. As the article points out, air travel is tightly linked with economic growth, and there's no handy alternative to kerosene-based jet fuel, unless it's the synthetic distillate from coal- or gas-to-liquids processes. These will have similar or even greater environmental implications, at least in terms of greenhouse gas emissions. At the same time, it's hard to imagine that air travel will get another "bye" in future climate change negotiations, as it did in the Kyoto Treaty. Stay tuned.
I don't see any easy solutions. As the article points out, air travel is tightly linked with economic growth, and there's no handy alternative to kerosene-based jet fuel, unless it's the synthetic distillate from coal- or gas-to-liquids processes. These will have similar or even greater environmental implications, at least in terms of greenhouse gas emissions. At the same time, it's hard to imagine that air travel will get another "bye" in future climate change negotiations, as it did in the Kyoto Treaty. Stay tuned.
Monday, July 03, 2006
Snob Appeal
Last Friday's posting about Ford's canceled hybrid car target generated some interesting comments. They go to the heart of how consumers choose cars, and they raise important questions about whether hybrids are just another car fad, or have the staying power necessary to contribute meaningfully towards improving overall fleet fuel economy.
One reader suggested that the main appeal of the Toyota Prius is social: driving one is seen to be cool and "with it", while the other hybrids that aren't doing so well don't carry that cachet. Rival automakers have made some very different choices in this area. Toyota chose to build its flagship hybrid as an all-new model, available only as a hybrid. If you see a Prius, you know it's a hybrid; if you see a hybrid Honda Accord or Ford Escape, you have to look hard for the badge identifying it as such. Not much potential snob appeal there. But is a hybrid a car or a feature? Even Toyota seems of two minds, pushing the Prius and its "hybrid synergy drive", but also touting the hybrid Camry (to be introduced shortly,) Highlander, and Lexus RX400h and GS450h, all variants of existing conventional models.
And if snob appeal or some form of "early adopter" behavior isn't the main driver, what is? The economics of hybrids are still shaky, though as another reader reminded us, the resale value of Priuses has held up very well. If we want economics to guide us, then we have to look beyond fuel costs and compare cars on their annual cost of ownership, which includes fuel, maintenance, depreciation and insurance. I'm not sure how many folks actually choose cars on that basis, however. If they did, would SUVs have ever become quite so popular?
I have enormous respect for the way Toyota has managed the Prius project, which must be viewed as a success, even though it will probably never turn a profit. However, for hybrids to matter, their future must be as a feature, rather than as the raison d'etre of a car. The jury is still out on whether consumers will adopt it on that basis, as they have things like air conditioning and automatic transmissions in the past.
Energy Outlook will observe Independence Day tomorrow. I wish my American readers a happy Fourth.
One reader suggested that the main appeal of the Toyota Prius is social: driving one is seen to be cool and "with it", while the other hybrids that aren't doing so well don't carry that cachet. Rival automakers have made some very different choices in this area. Toyota chose to build its flagship hybrid as an all-new model, available only as a hybrid. If you see a Prius, you know it's a hybrid; if you see a hybrid Honda Accord or Ford Escape, you have to look hard for the badge identifying it as such. Not much potential snob appeal there. But is a hybrid a car or a feature? Even Toyota seems of two minds, pushing the Prius and its "hybrid synergy drive", but also touting the hybrid Camry (to be introduced shortly,) Highlander, and Lexus RX400h and GS450h, all variants of existing conventional models.
And if snob appeal or some form of "early adopter" behavior isn't the main driver, what is? The economics of hybrids are still shaky, though as another reader reminded us, the resale value of Priuses has held up very well. If we want economics to guide us, then we have to look beyond fuel costs and compare cars on their annual cost of ownership, which includes fuel, maintenance, depreciation and insurance. I'm not sure how many folks actually choose cars on that basis, however. If they did, would SUVs have ever become quite so popular?
I have enormous respect for the way Toyota has managed the Prius project, which must be viewed as a success, even though it will probably never turn a profit. However, for hybrids to matter, their future must be as a feature, rather than as the raison d'etre of a car. The jury is still out on whether consumers will adopt it on that basis, as they have things like air conditioning and automatic transmissions in the past.
Energy Outlook will observe Independence Day tomorrow. I wish my American readers a happy Fourth.
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