The Long Energy Horizon

Periodically, we need to step back from our current energy challenges and consider the long-term future of energy. That's particularly true, given the likely duration of the climate challenge that parallels our energy concerns. Should we expect a century of incremental improvements on existing energy systems and technologies, to make them more efficient and reduce their impact on climate change, or do we face the prospect of more radical change? One of the persistent themes of this blog has been the absence of silver bullets. Whether we're talking about truly zero-emission cars, biofuels, or pollution-free energy from nuclear fusion, our options are likely to take longer, cost more, and present more trade-offs than we might wish. And we could be dealing with the consequences of our near-term choices for decades to come.

I believe it matters whether we view today's energy decisions as ad hoc responses to circumstances or as components of a major energy transition. Do we intend to shift away from the fossil fuels that still make up 86% of global primary energy supplies and toward less concentrated forms of renewable energy, or merely from one form of fossil fuel reliance to another: from petroleum-based liquid fuels to fuels derived from natural gas, coal and unconventional hydrocarbons? And if the hydrogen fuel cell is as much of a dead end as its critics suggest, does that mean we will remain wedded to the internal combustion engine for another 100 years?

One reason the answers to these questions matter is infrastructure. It shouldn't take falling bridges to remind us that infrastructure choices have consequences that last for decades. Our highly efficient petroleum product infrastructure, moving fungible products through common-carrier pipelines, makes it harder to distribute alternative transportation fuels at a competitive price. The investment required to build a parallel infrastructure for ethanol, hydrogen, or any other vehicle fuel incompatible with existing pipelines is enormous and will probably only be made once a clearly superior fuel emerges. Alternative fuels might require subsidies for decades, until we reach that point. Conversely, a premature investment in alternative energy infrastructure, such as ethanol pipelines, could result in some very expensive stranded assets later.

For all the recent enthusiasm about the potential of carbon sequestration to make our continued use of coal fit into a world being warmed by anthropogenic greenhouse gas emissions, it's hard to see this as a long-term solution, rather than a temporary measure to facilitate our transition to something else. The challenges of retro-fitting sequestration to existing facilities look daunting, and the high energy cost of extracting sequesterable CO2 from a coal power plant effectively shortens the life of our known reserves of coal. Peak Coal is as inevitable as Peak Oil, and carbon sequestration could hasten its arrival by decades.

Will a new, highly-concentrated form of energy emerge in time to provide a viable alternative to a world otherwise forced to rely on widely dispersed, low-intensity renewables--and much higher efficiency? A fascinating article in yesterday's MIT Technology Review newsletter casts serious doubts on the timing of nuclear fusion, including the version based on mining Helium-3 from lunar deposits. Nor is it clear that conventional fission power could expand sufficiently to take up the slack from fossil fuels.

With uncertainties like these, few of our current options look very robust. Despite my hesitation about the rate at which plug-in hybrid cars could enter the vehicle fleet, the PHEV technology looks like an excellent hedge against these big unknowns. It's a shame that ethanol-burning cars have hijacked the "flexible fuel vehicle" designation, because that's the essence of what a PHEV provides: the ultimate flexibility to switch between liquid fuels from oil, synthetic hydrocarbons or biomass, and electricity from any source, using infrastructure that's already largely in place.

No one can predict what the global energy system and primary energy mix of 2100 will look like, and even 2050 appears nearly as uncertain. However, it's not too soon to wonder how our current energy choices will mold and constrain that future, just as the choices for oil and internal combustion engines helped shape the last century.

Energy Outlook will be on vacation until after Labor Day. New postings will resume on September 4.

The Chavez Way (Re-run)

I see that President Chavez has moved another step closer to reshaping Venezuela into a Cuba with oil, by gaining preliminary approval for his constitutional "reforms", which include the removal of term limits on his rule. As preoccupied as we are with events in the Middle East and Afghanistan, we can't afford to ignore this self-declared foe of America's interests. I looked at some of the implications of his policies in this posting from last April:

The Chavez Way
It might be tempting to view the creeping nationalization of Venezuela's oil industry as an appropriate re-assertion of indigenous ownership of natural resources, taking them back from a greedy international oil industry dominated by rich European and American companies. President Chavez's energy minister, Sr. Ramirez, explains these actions (NY Times archives) by saying, "...this country and this government do not allow themselves to be blackmailed. We don't want companies that do not adjust themselves to our laws in our country." Unfortunately, this is a classically inverted piece of propaganda, in which the blackmailers claim to have been blackmailed, and the thieves complain they are the victims of theft. Herr Goebbels would recognize the emulation, conscious or not.

I don't need to recite my earlier comments about the degree to which Sr. Chavez's present power and growing political influence are largely the result of sophisticated oil processing hardware built and paid for by the same multi-national companies that have become his scapegoats. You can read those elsewhere, if you like. Instead, I think it's more important to contemplate the implications of the latest round of oil asset seizures for the global energy market.

Venezuela may not be Saudi Arabia, but in energy terms it is in the same league, in terms of its direct impact on the US energy situation. We rely on Venezuela for 11% of our oil imports, along with additional supplies of gasoline and distillate. The country has between a quarter and half of the western hemisphere's oil reserves, depending on how you count Canadian oil sands, and excluding Venezuela's undeveloped ultra-heavy Orinoco deposits. At the same time, a wholly-owned subsidiary of the Venezuelan state oil company supplies 10% of the US gasoline market. How many Americans realize that 14,000 Citgo stations provide are the local face of an increasingly hostile foreign government?

The re-direction of Venezuela's oil wealth has immediate consequences, raising the stakes in an already frothy, risk-driven oil market. It also has two less-direct, longer-term outgrowths. First, although I remain skeptical about the prospect of an imminent peak in global oil production, the peak in non-OPEC production is in sight, as mature basins in North America and the North Sea run down. The world will increasingly need to draw on the oil resources of OPEC countries, and access to that oil on commercial terms is key. Venezuela's actions remind other producers of the temptation, especially at times of high prices, of enjoying 100% of the proceeds of investments made in their countries by Exxon, Shell, et al, rather than having to share them. We have been down this path before, and its benefits are largely short term, as countries such as Libya and Kuwait have begun to realize. A return to the large-scale nationalizations we saw in the 1970s would guarantee the premature arrival of Peak Oil.

The other geo-political concern is not specific to energy. Surging oil income gives a disproportionate heft to the distorted economics of President Chavez's Bolivarian Revolution and make it more attractive and influential throughout Latin America. What he portrays as a fairer system is nothing more than the re-distribution of billions of dollars in resource rent. However, that may not be immediately obvious to the millions in poverty for whom his philosophy appears superficially more attractive than the international system of globalized trade, as we saw in Bolivia's recent elections. While much of our attention is focused on dealing with radical Islamic adversaries, we cannot ignore the dangers of an emerging petro-fascism to our south. Mr. Chavez has ways to hurt us of which Al Qaeda can only dream.

Supplying Nega-Watts

Language is a wonderful tool for communicating concepts, except when it impedes the transfer of important ideas. Energy efficiency might be an example of this paradox. Tom Friedman’s column in today’s New York Times addresses an important proposal concerning the incentives for utilities to invest in efficiency, and yet it repeatedly refers to efficiency as a potential energy supply, even though it clearly sits on the other side of the ledger, affecting demand. For that matter, efficiency is only a subset of the larger notion of conservation, which includes behavioral changes. To most people this probably sounds like semantics, but depending on the context, I think these are actually important distinctions.

I can see how for an electric utility, investments in improved end-user efficiency might be discussed interchangeably with investments in new power generation. Both involve large quantities of capital expended over a short period, with benefits that extend over many years. Both can be evaluated using similar analytical tools, resulting in expected returns that can be readily compared. An efficiency project—even if it’s a bundle of consumer-level improvements—can sit comfortably in a larger portfolio of mostly supply- or distribution-related projects, provided the incentives are properly aligned.

Consumers don’t think that way, however. Our household finances mainly revolve around day-to-day or month-by-month expenses, and our versions of big capital projects enter that framework in the form of mortgage, credit-card and car payments. Paying the electric bill is thus not directly comparable to buying a new refrigerator or heating-and-air-conditioning system, even if that purchase will have a direct bearing on the future magnitude of utility bills.

The logical way to bridge that gap is for utility companies that must routinely speak both “expense” and “capital” to offer consumers efficiency products that translate the latter entirely into expense terms, provided they can earn a return on this that compares to their returns on supply investments. If a home energy audit reveals that your refrigerator is an energy hog, your utility ought to be able to finance a new refrigerator at an attractive monthly rate that compares directly to the energy it saves, showing up as a line item on your monthly electric bill. I think that’s the essence of what Mr. Friedman is suggesting.

Conservation—including efficiency—remains one of our best tools for tackling greenhouse gas emissions and reducing our energy consumption. It’s easier to assess the benefits of that option if we do our energy accounting properly, keeping it clearly on the demand side of the ledger, rather than talking about "supplying efficiency." But while Americans still have ample opportunities to reduce our consumption to match better the very substantial energy supplies we still produce, high energy costs are already driving a large wave of efficiency improvements through our economy. Once we’ve saved all the energy that’s warranted by its current cost, how do we justify saving more? Including the climate externality as a direct cost will help, but that will still reach a limit, probably before we reach the engineering limits of efficiency. At some point we must decide much extra efficiency we want to buy, whether in electricity or in vehicle fuel economy.

Shining A Light in the Corner (Re-Run)

As the second anniversary of Hurricane Katrina approaches, I've been reviewing some of my comments on its aftermath. Many seem as relevant today as they did then. The following posting from September 2005 considers what Katrina revealed about the state of the US petroleum refining sector:

For most of the time that I have been involved in the energy business, with the exception of the last few years and a couple of brief windows that closed quite rapidly, the refining segment of the industry has been the least glamorous, least appreciated, and least career-advancing part of the industry to be associated with. In the aftermath of an almost-worst-case event for the US Gulf Coast oil and gas industry, we appreciate rather more the work that refineries do and how delicately balanced the whole system is. The best summation of the pivotal nature of these unappealing beasts is from the Saudi Oil Minister, who said, "We cannot keep producing oil with no refineries. There is a limit."

Part of the reason for the pickle we're in--in addition to poor historic returns and the costs and difficulties associated with permitting and environmental regulations--is that the industry finally escaped its vicious cycle of overbuilding every time the margins looked healthy. In fact, it had quite a bit of help in this regard from the government, which broke the back of the earlier independent refining sector (i.e., pre-Valero) with a series of environmental regulations that added enormously to the capital cost of the business without changing the products in a way that anyone seemed willing to pay even a penny more for. Only the majors and the largest independents could play that game for long, and even the majors tired of it, selling off dozens of refineries in the 1980s and 1990s, and even demolishing a few along the way.

Now, many of those regulations were necessary and beneficial. We can all see the consequences, though: an industry that couldn't withstand even a much smaller disaster than Katrina without severe disruptions, but that's finally making a healthy profit, for which it is widely reviled. Just as importantly, since Katrina a number of folks have been going through the numbers and have suddenly realized that the US doesn't just import vast quantities of crude oil. We also import between one and two million barrels per day of refined products that we lack the capacity to produce for ourselves. These quantities will only grow, until we get our consumption of transportation fuels under control, or find a good alternative.

These imports have consequences for the country as a whole, and for environmental regulators, in particular. So far, whenever we've wanted to tighten the specifications on the gasoline and diesel fuel sold in this country, to reduce their impact on the environment, the burden has fallen entirely on a domestic industry with no alternative but to comply. What else were the oil companies going to do, dismantle their refineries and move them to China? Now we've grown reliant on imports. When we want to reduce sulfur, aromatic compounds, or some other component or impurity further, will our foreign suppliers rush to comply? Will they invest in extra capacity to supply us, when other markets are growing at least as rapidly, but are less finicky about quality? And which will be the first company to build a new refinery in the US--with permits rushed through a worried Congress, perhaps--in the certain knowledge that the moment it starts up will be the beginning of a long slide back to returns you wouldn't accept on a bank cd?

Of course, the alternative is to nationalize them all and turn the whole downstream part of the oil industry into a utility, which is how we seem to expect it to behave most of the time, anyway. Somehow I can't imagine that outcome delivering anything like the kind of reliability and efficiency that the profit motive has done for over a century. If you are skeptical about that, there are plenty of examples to look at in other countries.

In an odd way, Katrina has done the same thing for oil refining that the 2003 Northeast Blackout did for electric power distribution. It has shined a light into a dark corner of the energy industry and scared the daylights out of anyone who bothered to look. What is waiting in the other dark corners, as a result of two decades of the expanding disconnection between our appetite for more energy and our low regard for the means of producing it?

Waves of Grain

Driving from Virginia to Minnesota over the last few days provided numerous reminders of the nation's de facto transportation energy strategy and the challenges entailed in shifting it. At least in the heartland, the cumulative effect of the last thirty years of policy is epitomized by long lines of big SUVs whizzing along at 75 miles per hour past endless fields of corn. Even after four years of high energy prices, the strongest consensus available is around adding more of the latter, rather than addressing the former, all to the mantra of "energy independence." We're fooling ourselves, in more ways than one.

Every time I pick on the idea of energy independence, someone points out that it isn't a bad long term goal. From a strategic planning perspective, however, long-term goals that don't credibly connect to real actions and outcomes are at best a distraction. At the same time, energy security--my preferred formulation for the concept--is still too abstract for most people, because it involves a complex brew of geopolitics, market dynamics, and trade-offs. I can't avoid the conclusion that at this stage, we'd be better off with a few simple goals, based on some verifiable statements of fact.

For example:

• Halt the growth in US oil imports, then reduce them based on a series of attainable targets. For more than 20 years, US oil production and consumption have been going in opposite directions, for reasons including government policy, geology, and consumer choice. Any strategy for stemming the growth of imports must have both a supply and demand component, along the following lines:


• Stabilize domestic oil production and expand our liquid fuels by stimulating production of biofuels, unconventional hydrocarbons, and conventional petroleum. The US may be the most explored and exploited oil province on the planet, but there are still significant reserves of oil to be produced, as part of a planned transition to the next generation of transportation energy. (I'll be writing more on this subject later in the week.) Unconventional hydrocarbons (coal-to-liquids, shale, etc.) have a role to play, though they should be required to produce no more greenhouse gas emissions than conventional oil, initially, and eventually much lower. Biofuels can contribute to our net energy balance, but not if they're used to prop up the production of large, inefficient vehicles.


• End the growth in transportation energy consumption through conservation and improved efficiency. Since the US population and vehicle fleet are still increasing, that means that per-capita consumption would have to start to fall, and vehicle efficiency to rise, as soon and by as much as practical. There are many possible carrots and sticks that could be employed. Closing the so-called SUV loophole in the Corporate Average Fuel Economy standards (CAFE) would be an excellent symbolic starting point, but we need to recognize that CAFE is the scorecard, not the means of reaching it.

Stemming the growth of oil imports may not sound very glamorous, and it probably wouldn't make a good campaign slogan, but compared to "energy independence" it has the virtue of being achievable using current technology, without assuming any miracles. It's also a logical and necessary milestone on our way to any more ambitious energy targets. And unlike some of the more xenophobic notions emanating from politicians and pundits, it would almost certainly be welcomed by both our suppliers and our fellow consuming nations, with whom we ought to be cooperating on a global concept of energy security.

The "Hail Mary" Pass

I hadn't seen any references to ocean sequestration of carbon dioxide in some time, and then within a week or so two different colleagues mentioned a company called Planktos to me. As you might guess from the name, they are pursuing a method of sequestration that involves seeding the ocean to stimulate plankton, which absorb CO2 via photosynthesis, eventually resulting in the sequestered carbon sinking to the sea bottom. Here's what I wrote about this idea in October 2004 (with some of the links updated):

A week or so ago the BBC evening news (on PBS) included a report on the possibility of sudden, rapid climate change as a result of accumulating carbon dioxide and other greenhouse gases in the atmosphere. The prospect of the climate changing dramatically within a decade or two--which has apparently happened in the geological past--reminded me of a novel strategy that might be able to counter such a development. It's called "ocean sequestration".

I've mentioned carbon sequestration before. Most of the work in this area currently focuses on recovering carbon dioxide from smokestacks, compressing it, and pumping it into disused oil or gas wells or other underground sinks. The technique looks very promising, but it is essentially industrial in nature, requiring substantial investment, infrastructure and expense, making it hard to deploy quickly or on a large scale.

Ocean sequestration differs in several important ways. First, it would tie up carbon using biological processes, by stimulating plankton growth and effectively capturing the carbon in the pelagic food chain and its solid wastes. As a result, it does not require large amounts of capital or infrastructure. Second, it removes CO2 directly from the atmosphere, rather than from a smokestack, and appears to be easily scalable, making it possible to tackle the much larger sequestration goals that sudden climate change would require. In other words, the rate of sequestration might exceed the total global rate of CO2 emissions. If the world were experiencing a runaway greenhouse effect, we would need a technique that could cut the absolute quantity of CO2 in the atmosphere--rather than just reducing the rate at which it is increasing--in order to restore equilibrium.

Although ocean sequestration is still in early stages of research, it has come in for serious criticism for its possible impact on ocean ecosystems. The jury is still out on these concerns, and it could turn out that they are negative enough to prevent this technique from becoming a standard approach for managing greenhouse gas emissions. But if faced with a choice between a rapidly changing climate--with its unpredictable effects not only on ecosystems but on human survivability--I'd like to think that we had at least one "Hail Mary" pass like this waiting in our playbook, just in case.

Catching the Flow

Of all the different technologies for producing energy, I've probably devoted the least space in this blog to those that extract energy from flowing water. Large hydroelectric dams are hardly novel; they generate about 7% of our electricity. But at least in the US, most of the attractive locations for large-scale hydropower have already been dammed or determined to be too pristine to exploit. "Mini-hydro", in the form of small dams or "run of river" installations is an interesting alternative, and it looks a lot more palatable than its larger cousin. The other day I ran across a link to a video report on a project that has fascinated me since I first heard about it in the late 1990s. It is a hybrid of hydropower and tidal power, tapping the tidal energy of the East River alongside Manhattan with turbines installed on the riverbed.

The initial size of this project is tiny; it will only power a supermarket and parking garage, when it runs, but the developers hope to scale up to 10 MW--still a lot smaller than the typical power plant or wind farm. This kind of tidal power application falls somewhere in the middle of the spectrum of renewable electricity sources: much more predictable than wind, but less reliable than geothermal or conventional hydro. Where it shines is in its unobtrusiveness, which might enable it to fly under the NIMBY radar in a way that wind turbines can't.

For that matter, the turbines used in the East River ought to work just as well in a river flowing due to gravity, like the St. Laurence, instead of one that reverses flow when the tide changes direction. It could provide a useful alternative to the standard approach to mini-hydro, which avoids large dams and reservoirs, but still entails diverting and empounding a portion of the flowing river. The reliability and environmental impact of "kinetic hydropower" remains to be determined, however. I will be watching the East River project with interest to see whether this emerges as a viable competitor or ends up as another interesting, but not very practical energy idea.

Bridges and Taxes

I'm a bit late to the party, regarding the recent proposal to increase the gas tax to help with the cost of repairing our decaying road infrastructure. Simply put, it seems like a no-brainer, and it would be an awful shame if the Congress and White House didn't deal with this, before the news cycle shifts away from the Minneapolis bridge collapse to more recent events. If we can't find a way to fund more urgent renovation of the decades-old infrastructure in this country, then we will deserve all the comparisons to spoiled rich kids burning through their inheritance from wiser parents.

I understand the arguments about the economic impact of raising taxes and the prospect that even a modest gas tax increase would be the camel's nose under the tent, setting the stage for a steeper gas tax hike to curb demand, or a carbon tax. That just doesn't wash, when you consider the current federal gasoline tax. Never mind the usual comparisons to European fuel taxes, which generally serve entirely different purposes, anyway. Look at how it stacks up against our own state gasoline taxes. They average 27 cents per gallon, after backing out the federal tax of 18.4 cents per gallon, and range from a low of 8 cents per gallon in Alaska to a high of 42.4 cents in New York. The current federal gasoline tax is less than what all but seven of our states collect on the fuel, and it has not changed materially since 1993, when President Clinton raised it by four cents and suffered serious political consequences.

Fourteen years worth of inflation have completely dissipated the value of that four cent increase, so that we are now contributing fewer real dollars to the highway trust fund than we did when Bill Clinton took office. If you consider the escalation of construction costs in just the last few years, including the cost of steel and concrete that have been affected by the enormous construction boom in Asia, the situation looks much worse. In other words, the five-cent increase proposed by members of Congress after the I-35W bridge came down would effectively only get the federal highway trust fund back to the purchasing power that it had in 1997, when it was last raised by 0.1 cents per gallon.

I don't think I'm naive about the political implications of raising the gas tax, one of this country's great sacred cows. But it's also clear that voters are willing to hold elected officials accountable for failing to address predictable disasters, or respond to them appropriately. Even if we need to call it a one-time inflation-indexing of the highway trust fund revenue, rather than a gas tax increase, we need to get on with it. This is an issue with no political agenda other than common sense. It would be a modest down-payment on reestablishing the kind of no-nonsense ethic that will be required if we are to have any hope of handling the much more complex and controversial challenges we face.

Solar Trash Cans?

It now goes without saying that new energy technology will play an important role in improving energy security and addressing climate change. While I have devoted numerous postings to that proposition, I am equally intrigued by clever applications of alternative energy to devices or processes that would be impractical with conventional energy sources. The solar trash bin is a wonderful example. It's not going to save the world, and some might even see it as a distraction, but I think it has merit based on its cleverness alone, aside from offering a couple of handy benefits.

Periodically my mother sends me newspaper clippings on topics she think will interest me. One of them reported the installation of two solar garbage bins at the beach in my home town. When she described this on the phone, I was scratching my head to ferret out the rationale for such an odd use of solar power, but it turns out to be as simple and elegant as anything to do with refuse can be. The solar panels energize a compactor that reduces the volume of trash by a factor of ten. That means that a relatively small container can hold as much garbage as a very large one, and it needs to be emptied much less often. So at the same time that it minimizes something that is usually an eyesore, it also saves on noise, emissions, fuel and the labor associated with frequent trash pickup in parks, beaches and similar locations.

At $4,500 each, it's not obvious that the economic return on the above benefits are high or even positive. I'm sure the company that makes them has a view on that, as do the many communities where these things are springing up. However, they look great and should raise awareness of solar power as something prosaic and useful today. They might even reduce littering, as long as the novelty of the device lasts. Could the same thing have been done with a power cord? Probably, but not without limiting its use to locations with accessible 110 V power. This idea required an energy source with the characteristics of solar photovoltaic power to be practical. I suspect we'll be seeing many more novel applications like this in the near future.

FYI, I'll be traveling throughout the remainder of August. My postings over the next few weeks may become a bit more sporadic, and they're likely to include some "summer re-runs." Responses to comments will probably also not be as prompt as usual.

1998 or 1934?

Last week one of the pillars of the case for global warming appeared to crumble, in the wake of reports that NASA's global temperature data had previously been distorted by a glitch in the data, perhaps even an unresolved Y2K problem. And apparently NASA only noticed the problem after a well-known critic of climate change pointed it out to them. The result of correcting this bug is that the revised US temperature data from NASA no longer indicate that 1998 was the warmest year in the last century. 1934 now holds that record. Does this call into question the entire edifice of climate change? No, but it does point out some pitfalls in the way that the public has been warned about it.

Somewhere between the scientists who generated the previous ranking of the ten warmest years, topped by 1998, and the folks who cited this statistic to emphasize the urgency of addressing climate change, some vital information was lost. Using the old data, the average temperature for 1998 was only 0.01 degrees Celsius warmer than the figure for 1934, expressed as temperature differences--"anomalies"--versus the average US temperature from 1951-1980. Once the data were corrected by NASA, that difference flipped to 0.02 deg. in favor of 1934. But in reality, no one could say that either of these years was warmer than the other--before or after the correction--because the uncertainty in the data is apparently 0.1 deg., or 10 times the original edge that 1998 had over 1934. (If you want a technical explanation of all this, from the perspective of climate scientists who deal with these issues routinely, I refer you to realclimate.org.)

Take a look at the actual revised data. It includes a lot of year-to-year temperature variation, with many years as much as 0.5-1.0 degrees C warmer or cooler than the preceding year. However, there's still a discernible trend, even though it may have stalled a few times. While the 1930s do seem to have been at least as warm as the 1990s, the current decade is on track to be warmer than any going back to 1880. By itself, that wouldn't be significant, but in the seventy years from 1880 to 1950 there were only 9 years in which the mean temperature exceeded the baseline 1951-80 average by 0.5 deg. C or more, and a dozen years when it was at least 0.5 deg. C colder than the baseline. Since 1980 that same comparison is 13 years to none. Consecutive colder-than-baseline years, which prior to mid-century were quite common, have vanished entirely. If these patterns don't add up to a nice straight line, then they at least ought to look peculiar enough to prompt concern. That message might not be as sensational as the one about individual or top-10 hottest years, but it is a lot more robust.

Now, it ought to be obvious that the basis of climate change is rather more complicated than whether 1998 was the warmest year in over a century, or if it was warmer or cooler than 1934. And yet, by having made such a big deal out of 1998 in the first place, or by allowing the media to focus so tightly on that factoid, some folks who perhaps ought to have known better tied the perceived validity of their argument about this critical issue to an inherently weak assertion. As a result, the science of climate change looks a tiny bit shakier today, when nothing of significance has actually changed. There's a lesson here for anyone trying to explain such a complex technical subject to a general population, using mass media in which news coverage has acquired many of the elements of entertainment programming. You can't bore your audience or talk over their heads, but you also can't reduce complex arguments to such thin reeds that they snap at the tiniest shift.

Northern Energy Hub

Imagine that you had a wealthy neighbor with an insatiable appetite for something that he had the capability of providing for himself, but apparently not the inclination. It might look like a good business opportunity. This is essentially the situation facing the Canadian Province of New Brunswick, which is at various stages of planning and constructing a new "energy hub" consisting of three big projects, an LNG terminal, a new refinery, and a nuclear power plant, all primarily intended to serve the market in the northeastern US. Yesterday I was interviewed by the St. John, New Brunswick radio affiliate of the Canadian Broadcasting Corporation on whether the expected US demand for these projects is likely to materialize.

Between the call from the show's producer and the actual interview I looked up the electricity forecast for the Northeast from the Energy Information Agency (EIA) of the US Department of Energy. The EIA expects electricity demand to grow by 22% by 2030, compared to 2005. That's somewhat slower than the average for the US as a whole, but still about 0.8%/year, and without any demand factored in for plug-in hybrid cars or other uses not already tapping the grid.

I suggested to the host that the key uncertainties for New Brunswick to consider were energy efficiency, the growth of renewables, and the Northeast's allergy to new energy infrastructure. Efficiency is clearly going to play a role, but will it reduce absolute demand or merely provide new headroom for growth--compact fluorescent light bulbs saving the power to run plasma TVs? Renewables could also satisfy much of the incremental demand in the region, helped along by state Renewable Portfolio Standards and a potential federal RPS, but only if big projects such as Cape Wind and the smaller Long Island wind farm can overcome strong objections by local interests. Nor does it seem very likely that the Northeast will build enough LNG import capacity of its own, given the opposition to projects like Broadwater.

The toughest question I received was for an up or down call on building a nuclear power plant in New Brunswick to supply the US. I hesitated, because it's not yet clear that nuclear power will be widely accepted as "green", even though some prominent environmentalists have endorsed it as a key strategy for countering climate change. The total regional demand growth anticipated by the EIA works out to about 7500 MW of new capacity within 25 years. One new nuke plant would deliver a big chunk of that, and unless its output got that "green e" label, it might face a tough fight for market share. But compared to the likeliest alternative source for baseload power in this period, a coal power plant with carbon sequestration, I think an export-oriented nuclear plant could succeed.

In order for New Brunswick to win the bet it is preparing to make, all that really needs to happen is for the public and governments of our northeastern states to continue doing what they've been doing: using energy in steadily growing quantities, despite high prices, and reacting with hostility whenever someone wants to build new infrastructure to meet their anticipated future needs. Of course, if they heeded the various wake-up calls they've been getting--the Blackout of 2003, climate change, and air quality problems--and suddenly started conserving or investing more, New Brunswick's new facilities might end up sitting idle.

Global Energy Security

A few weeks ago, when the National Petroleum Council's report on the US energy future was released, I promised to devote several postings to its chapters on supply, demand, geopolitics and technology. Geopolitics, covered in Chapter Four, it seems like a good place to start, because many of the issues with which it deals underpin the study's discussions of supply and demand. It is also extremely relevant to pending energy legislation, and perhaps even to election-year politics. As best I can tell, there's no way to download this chapter separately from the entire document, and I'd be remiss if I didn't point out that this is a very large file. The key message of the Geopolitics section is that a multilateral, market-based approach benefits the US much more than the pursuit of isolation and energy independence. That's hardly a surprising view for a body like the NPC, but the report grounds it in a realistic view of the current global situation.

Some of the key trends that the report's authors address include the challenges to globalization and expanding trade--of which they see energy as an integral component--and the growth of energy bilateralism and resource nationalism, both of which threaten the post-World War II international system that has benefited the US so much. They also look at some very interesting shifts that are taking place in long-established energy trading patterns, with the emergence of large developing countries as markets for the energy supplies of other developing countries.

The main focus of this chapter is energy security, and it applies a very global perspective to that concept. The US is hardly the only country in which this idea is gaining favor, and if we all pursued a go-it-alone mentality in this area, the resulting clash of consuming nations' energy interests would only benefit energy exporters. The study provides a useful set of criteria for energy security:

• A competitive market
• Stable and diverse supply with minimal disruptions
• Low price volatility
• Adequate spare capacity and logistical infrastructure
• Diverse energy mixes
• Protection of the global environment, including climate consideration
• Flexibility to accommodate shifting demand pattern
• Transparency and reliability of commercial relationships.

Interestingly, none of these seems restricted either to oil or to the US. Most could apply equally well to LNG, electricity, biofuels or any other form of energy that can cross international boundaries. Unfortunately, many of these principles are not reflected in the current US approach on ethanol, as embodied in both existing policy and the recent House and Senate energy bills. I have to wonder whether a global free market in biofuels might achieve more leverage on oil exporters than our heavily protected domestic ethanol program.

Like any overview, the 26 pages of the NPC study devoted to geopolitics skate over a number of issues that could have been explored in greater depth, not the least being its underlying assumptions about the superiority of a market approach in an energy environment that is increasingly dominated by large state players. Although it cites the actions and aims of these national oil companies many times, it only mentions OPEC once, leaving it to other chapters to cover one of the most important geopolitical dynamics in a tight global energy market.

Overall, the view of the NPC on energy geopolitics is diametrically opposed to that of the "green hawks" who see it as a zero-sum game, in which suppliers must be starved into submission by our rapid conversion to alternative energy. Although the NPC's internationalist, pro-trade position surely reflects the mainstream of opinion within the energy industry, it is unfortunately increasingly out of sync with a public and political sphere that has grown suspicious of free trade. Despite being the largest single recipient of global energy trade--a ranking we may shortly lose to Asia--many in the US yearn to be self-sufficient in energy, a condition we haven't experienced in my lifetime. The authors wisely remind us that it's no longer possible for the US to have an internal conversation about this, without influencing the plans of our suppliers and competitors.

The Cost of Driving

The other day I suggested that perhaps vehicle miles per gallon might not be the best measure on which to base energy and environmental policy, particularly as new transportation fuels come into the mix, including biofuels and electricity. While the European model based on grams of CO2 emissions per kilometer traveled has much to recommend it, it omits the economic element necessary for at least the energy side of policy. The more I reflect on this, the more I conclude that consumers will need more information, rather than just different information, in order to make decisions that support the policy directions set by Congress and the White House. That means adding not just emissions data, but also a common economic denominator that will help them to sort out the competing claims of different technologies. Fuel cost per mile has much to recommend it, in this regard.

Consider the table below, comparing several different vehicle and fuel options. The prices shown are for the week of 7/23/07, to align with a comparable E-85 price. The electricity price is the most recent national average consumer price from the DOE's Electric Power Monthly.

Although this data represents only a snapshot in time, it reveals several key challenges standing in the way of broad consumer acceptance of alternative fuels. Among other things, it shows that with the typical fuel economy penalty associated with E-85 in a flexible fuel vehicle capable of running on either gasoline or ethanol, the latter may be uneconomical outside the corn belt, where E-85 prices are often 20-30 cents below the national average. Diesel looks more attractive than ethanol, at least on this metric, particularly in biodiesel blends, provided they are priced closed to petroleum diesel.

The chart also shows that the total energy cost of a plug-in hybrid car is likely to be little below that for a conventional hybrid, calling into question the return available on the significant up-front premium that plug-ins are expected to require. If that premium is low, as some advocates of plug-ins expect, then this isn't a big problem. But if it approaches or exceeds the amount of the plug-in tax credit included in the House Energy Bill, which starts at $4,000 per vehicle and goes up based on battery capacity, then this looks like a very poor investment, ignoring the climate externalities that haven't been included in current fuel prices.

That's another reason to proceed with monetizing those externalities as soon as possible, whether via cap & trade or a carbon tax. Until they can be reduced to cents per mile and factored into this kind of chart, the comparisons above are truly apples and oranges, at least in terms of the associated climate impact. As it is, the presence or absence of taxes in current fuel prices distorts consumer decisions, and as I've noted before, the mechanism for collecting road taxes must be addressed before large portions of the vehicle fleet are using untaxed electricity or tax-shielded ethanol.

As alternative fuel vehicles, broadly defined, become more prevalent, it's going to get harder for consumers to make sensible choices among them without consistent data. This applies equally at the national policy level, where we are trying to nudge vehicles in the direction of lower emissions and energy consumption with the blunt tool of a CAFE standard relying on an obsolete measure of miles per gallon. Ultimately, a useful vehicle efficiency metric ought to reflect our priorities among oil security, energy security and climate change. Choosing the right metric might provide a golden opportunity to clarify those priorities, at last.

Not Just CO2

Over the weekend a clever article in the Times of London provided a useful reminder that climate change isn't just a question of carbon dioxide emissions. After counting the greenhouse gas emissions from the agricultural and animal husbandry supply chains that deliver our food--much of which involves gases other than CO2--it suggested that driving to the store might generate fewer emissions than walking there, at least in Britain. I haven't verified the details of the walk vs. drive calculation for the UK, let alone converted it to a US basis, but the basic principle is correct: virtually everything people do on a large scale contributes to climate change, and focusing exclusively on the CO2 emissions from energy--as with a carbon tax--could lead us down an expensive and inefficient path to addressing global warming.

The reason the comparison described in the Times article isn't as silly as it might sound rests firmly on the science of climate change and the wide variation in impact (GWP) of different greenhouse gases. When you examine the net impact of the increases in atmospheric concentration of all these gases since pre-industrial times, expressed as "increased radiative forcing"--the equivalent amount of extra energy heating up each square meter of the earth's surface--you find that CO2 accounts for just over half of the problem. Methane and nitrous oxide (N2O), both of which have large agricultural components, along with ozone and halocarbons (e.g. freons) contribute most of the rest.

Now, I might question the author's choice of a calorie source on which to compare the walker's emissions to those of a motorist. 100 grams of beef probably creates the worst-case scenario, from a climate change perspective, given the rate at which rainforest is being cut down to graze cattle, which produce lots of "enteric emissions,"as they are euphemistically described. And considering the changes in the British diet since the advent of Mad Cow Disease, the marginal calories seem as likely to come from a can of Coke or a pint of beer, as from a burger or steak. That could tip the balance back to walking, especially if the car in question were a Range Rover. However, it's not obvious--or at least it shouldn't be--without running the numbers, and that's something that most people aren't equipped or motivated to do.

I suppose there's a point here about the need for better education and tools to help people wade through choices like this, but this issue really goes to the heart of the ongoing climate policy discussion in this country. Legislation that ignores the impact of greenhouse gases other than carbon dioxide, or that focuses mainly on the energy sector, won't be nearly as effective as regulations that encompass all of the sources of anthropogenic global warming. Energy accounts for roughly 80% of US CO2-equivalent emissions, but because the gases associated with farming and cattle have such high GWPs, measures to reduce them offer much more leverage--and thus generally lower costs--than brute-force attacks on CO2 such as carbon capture and sequestration. That's one reason why cap-and-trade looks better than a simple carbon tax on energy. Even if we end up having to do all of these things--as appears likely--our priorities need to recognize the timing, sequence, and cost of our various options.

Ruling the Waves

One reason that the energy industry has fascinated me for as long as I can remember is the way in which it connects to nearly everything, especially in the realm of geopolitics. The UN Convention on the Law of the Sea (LOS) provides a great example. The LOS was a hot-button issue back in the 1980s and again in the early 1990s, before disappearing from sight--at least for the American public. When the Senate again took up the subject of its ratification earlier this year, the LOS suddenly reappeared in a flurry of duelling op-eds and editorials. While most of its remaining controversies involve issues of national security and military navigation, the LOS has profound implications for the energy industry, as our extraction technology makes increasingly-remote resources accessible. With most of the rest of the world having already ratified this treaty, we only stand to lose by continuing to defer our accession to it, at least from an economic perspective.

Reading the recent op-eds jogged a lot of old memories. The Reagan Era version of the LOS, like its cousin the so-called Moon Treaty, reflected the competing ideologies of the Cold War and appeared to impose a Soviet-style approach on the exploitation of much of the world's resource endowment, which lay beyond the limits of then-current technology. For many in the oil and gas industry at the time, the idea of drilling on the Outer Continental Shelf, in more than a mile of water, might have seemed as fanciful as drilling on the moon. But the US argued successfully against these provisions, and I regard it as highly significant that former Reagan Administration and Bush-I officials such as Kenneth Adelman and Lawrence Eagleburger are satisfied by the subsequent modifications to the LOS's mechanisms on resources.

The enthusiasm of the energy industry for this treaty is understandable. Companies need a clear delineation of resource rights, when they negotiate agreements for access to undersea oil and gas deposits, once technology advances bring them within range. That applies not only to margins of the US continental shelf, which under the LOS would extend beyond 200 miles in places, and up to 600 miles in the Arctic, but also to the offshore regions of Africa, Asia, Australia, Europe and South America, all of which already produce large quantities of oil and gas. However, this should be seen as more than just an extension of the industry's search for profits and shareholder value. A sizable fraction of the world's future energy supply will likely come from these seabeds, and it is also conceivable that in the future, important quantities of oil and gas will be found in the regions beyond any national waters, as defined by the LOS, and will thus fall under the purview of the International Seabed Authority. Until we ratify the treaty, the US cannot take up our permanent seat on that Authority's governing Council.

I'm also struck by the irony of another international treaty for which the US remains the most significant non-ratifying nation, even though an important chunk of it was renegotiated to suit our interests. Four successive US administrations have treated the LOS as US policy, despite our not having officially signed on. At the very least, this situation dilutes some of the congressional criticisms of the current administration over Kyoto, since in the case of the LOS their roles are largely reversed.

In concluding, I have to concede that there might still be a few serious security concerns that could trump our numerous other advantages in joining this treaty. Dismissing those is beyond my expertise, although I find it persuasive that many former military and government officials with impeccable security credentials have publicly endorsed the treaty's ratification. From a national and global energy perspective, formalizing our adherence to this agreement--and thereby gaining our rightful voice in its various bodies--seems to offer only upside, with negligible downside risk. It could also buy us some international good will and legitimacy, at a time when our stocks of those commodities have become depleted.

Maximum Fuel Economy

It's looking increasingly likely that the House version of energy legislation will pass without a specific fuel economy provision comparable to the Senate's higher CAFE standard. Thinking about fuel economy triggered some random thoughts concerning the way we're approaching this problem. While it is quite reasonable and pragmatic to ask how much additional fuel economy we need, we should also be asking two other, related questions: How much more fuel economy can automobiles deliver economically on current fuels without drastic redesign, and is fuel economy even the right metric, in a world that is shifting its focus beyond questions of oil price and availability to the larger consequences of energy use, including climate change?

The first question has long vexed automotive engineers, who don't set out to build cars that deliberately waste fuel. Engineering and economic trade-offs determine how close an actual engine comes to achieving its maximum theoretical thermal efficiency, which for internal combustion is somewhere in the neighborhood of 35-40%. The engines in our cars usually achieve less than 25%, sometimes much less. There are all kinds of strategies that can boost the efficiency of a spark-ignition, Otto-cycle engine--the kind in most American cars. Today's MIT Technology Review looks at one of those, HCCI, which changes the way fuel is mixed in the cylinders. It could achieve diesel-like efficiency gains, and it's welcome news that this may be possible using ordinary gasoline, rather than "designer fuels."

If you look at the other places that energy in a car disappears on its way from the gas tank to the wheels, the engine is only the biggest of many source of losses (see slide #6 of this presentation.) Some of these are unavoidable; you can only make a passenger car so aerodynamic, before it loses functionality. However, designers of hybrids such as the Prius didn't just add electricity; they tackled some of these other losses to boost the car's non-hybrid efficiency, too.

When you add up all the possibilities, and then layer on hybridization, turbo-charging, and other proven technologies, doubling the overall efficiency of any car ought to be possible. And by giving up a bit of weight and power, too, we might be able to triple the fuel economy of the least efficient cars on the road. So when our leaders talk about raising average fuel economy of the new car fleet from 25 mpg to 35 mpg, this should be entirely feasible without requiring the more radical--though possibly desirable for other reasons--step of plug-in hybridization, which adds an external electricity source to the car's powertrain. All of these strategies add cost, however, and that's the crux of the whole argument. Saving 137 gallons of gas per year, the typical quantity associated with boosting the average car's fuel economy by 10 mpg, is only worth about $400/year at current fuel prices. That limits the maximum economic investment in efficiency to about $2000/car. Finding the right solution for each model within that constraint will be the trick.

But is miles per gallon even the right metric? Even if we didn't care about greenhouse gas emissions, the inclusion of increasing quantities of ethanol in the US gasoline pool alters the meaning of the "gallon" part of that ratio. This is compounded by the lower energy content of ethanol. A US fleet running entirely on E-10 will inherently need 3% more fuel than one using 100% petroleum gasoline, reducing average fuel economy from 25 mpg to 24.25. Throw some E-85 and plug-in hybrids into the mix, and it gets even more confusing.

Perhaps Europe has the right answer to this. Their "fuel economy" regulations are based not on the usual European metric of liters of fuel per 100 kilometers, but on grams of CO2 emitted per 100 km. While I'm not sure they yet do this on a well-to-wheels basis--which would factor in the upstream emissions associated with producing gasoline, ethanol or diesel fuel--this just looks like a better metric for the 21st century. The easiest way to drive grams/100 km down is still to increase the efficiency of the vehicle itself, but it's not the only way. This perspective helps avoid potential dead ends that appear to reduce oil consumption, but don't actually reduce energy consumption or total emissions by very much. And it takes us back to the underlying question of the real goal that fuel economy regulations are intended to serve: Is it oil security, energy security, or climate change?

The Cost of Carbon

Today's Washington Post includes two articles highlighting the legislative complexities of regulating US greenhouse gas emissions in a way that would provide the right balance of incentives and penalties on emissions, without damaging the economy. One article reports on the introduction of a new cap-and-trade bill co-authored by Senator Lieberman, while Congressman Dingell's op-ed extols the benefits of a straightforward carbon tax. Without rehashing the tax vs. cap argument, the country's businesses and consumers are looking for a much clearer and simpler signal: what will be the cost of emitting carbon to the environment in the future, and specifically, will it be something other than zero?

In the late 1990s I led a scenario planning project on climate change at Texaco. We concluded that the key uncertainty was not the science, but rather the public's perception of the urgency of the problem, combined with actual manifestations of climate change. (Coincidentally, one of our leading signposts was a major hurricane devastating Atlantic City--right idea, wrong place.) In the course of discussing our findings, the team realized that if the world focused on dealing with climate change, then emitting the major byproduct of combustion, carbon dioxide, would cease being free for the first time since the discovery of fire.

Having just renewed my TerraPass subscription to offset my car's emissions, I know my own cost of carbon: $8/ton of CO2, which roughly equates to 8 cents per gallon of gasoline--a handy coincidence between the stoichiometry of combustion and the English system of measures. I'm sure TerraPass collects a profit on that, but the cost to me is still much less than it's likely to be under either a carbon tax or a strong carbon cap-and-trade system.

The Lieberman-Warner bill will join a number of recent bills in proposing dramatic reductions in US CO2 emissions. It would limit our greenhouse gas output to 30% of the current level by 2050, which works out to about 65% lower than our 1990 baseline under the Kyoto Protocol. Exact predictions of the level of carbon cost required to achieve such big reductions aren't possible, but a recent MIT study estimated it could exceed $50/ton by 2020 and $150/ton by mid-century.

So whether it's the single digit per-ton cost associated with voluntary offset programs, which remain controversial, or the double- or triple-digit levels associated with strict CO2 targets, it looks like the days of free carbon emissions are ending. Legislative debates about the best way to achieve cuts tend to obscure this central reality. The sooner the government makes it clear that there will shortly be a real cost to these emissions, the sooner corporations and consumers will start to plan and act accordingly.

Joining the Party Up North

Marathon's announced acquisition of Western Oil Sands Inc., a Canadian firm with a significant stake in the Alberta oil sands play, extends a sequence in which most of the large integrated oil companies have expanded their portfolios to include these unconventional hydrocarbons. With the notable exception of BP, the majors have all either been there from the start, decades ago, or bought their way in, as access to other opportunities around the world dried up. Marathon's move could signal a further shift, however, in which the next tier of the industry also looks north; this might not be limited to integrated firms or independent producers, either.

A decade ago, Venezuela's Orinoco Belt looked like the place that everyone had to participate, for many of the same reasons that Canada's oil sands now look attractive: enormous potential reserves with minimal exploration risk, a friendly government, and a big technology component that fits the international firms nicely. Like the Orinoco, oil sands exploitation involves big, upfront investments that pay healthy returns as long as oil prices are high. Unlike Venezuela, however, it's hard to imagine a scenario in which Canada would unilaterally change the terms of access or nationalize these resources. Political risk was always the Achilles' heel of the Orinoco, and the only risk in Canada that comes close to the same importance is climate change policy, given the high greenhouse gas emissions of oil sands extraction.

When you consider the characteristics of these projects, there is little that would prevent a company with no current upstream exposure or expertise from getting involved. Much of the capital of these facilities is tied up in the refinery-like processing hardware that turns the gooey bitumen into a synthetic crude suitable for pipeline transportation and handling in a conventional oil refinery. To the extent that upstream expertise is required, Canadian partners can provide it. So might an oil sands investment appeal to one of the big independent refiners, Valero or Tesoro?

On the face of it, the idea of a pure-play refiner integrating upstream might seem unlikely. These companies largely built their portfolios from the divestitures of majors that saw little benefit in integration. Part of their appeal to investors is their lack of exposure to the above-ground risks that bedevil the majors in places like Nigeria, Russia, and Venezuela. But in a scenario in which crude oil became not only expensive but hard to get, integration could again pay big dividends, and independent refiners could find themselves under-running their multi-billion dollar assets. One needn't even believe in imminent Peak Oil to imagine such a scenario. Unwillingness on the part of OPEC to boost oil output, the continued growth of Asian demand, and a wave of new refinery construction in the Middle East and Far East could combine to leave US refiners scrambling for feedstock. Companies with their own equity crude to run or trade would have a real edge, as we saw in the early 1980s. Having a lock on a supply of pipeline crude from Canada might be worth a lot in such an environment.

Please note that this idea is entirely speculative; I have no reason to believe that either Valero or Tesoro is pondering such an investment. But if I were in charge of strategy for either firm, this option would now be high on my list for consideration.