Several emails called my attention to Sunday's Dilbert comic, which comments on energy security, of all things. In eight panels Dilbert's dog, Dogbert, issues a pithy and substantive critique of the Geo-Green strategy for undermining the financing of Islamic terrorism by reducing our oil consumption, partly through the use of hybrid and plug-in hybrid cars. In the process, Scott Adams takes on Tom Friedman, James Woolsey and other advocates of this approach and aquits himself pretty well.
This prompted me to dredge up two postings from early 2005, with my early reactions to Geo-Green, pro and con:
Monday, January 31, 2005
Is "Geo-Green" The Answer?
Despite my usual soft spot for Tom Friedman and his normally insightful and bold commentary on geopolitics, his editorial in Sunday's New York Times oversimplified a bit too far with its "Geo-Green" energy strategy. Although he neatly describes the paucity of options for dissuading Iran's leaders from pursuing nuclear weapons (see Friday's posting) his prescription for reforming Iran and the rest of the Middle East by driving the price of oil back down to $18 per barrel rests on a shaky foundation.
Based on past oil market behavior, getting oil prices back to this level any time soon would probably require a combination of reduced global demand or increased global production on the order of 4 million barrels per day (MBD). Half of this volume represents a return to OPEC's recent "normal" quota of 25 MBD from its current, essentially flat-out quota of 27 MBD, while the other half mirrors the magnitude of demand drop that sent oil markets into free fall in the 1997 Asian Economic Crisis.
Although some new production will come on stream this year, most of the difference would have to come from the demand side, where Mr. Friedman's "geo-green" options of conservation and substitution via renewables and nuclear power reside. Since most petroleum is used for mobility, while most electricity is used for stationary purposes, the impact of renewables and nuclear on oil demand is fairly indirect and long-term. This leaves us with conservation, which is normally spurred by high prices--at least initially--rather than the low prices Mr. Friedman hopes to achieve. This is something of a paradox, unless he is willing to consider hefty new taxes on petroleum products to raise consumer prices without changing producer prices.
Even if I've overstated what it would take to drive oil prices down, there are other factors to consider. Although a low oil price world would benefit the US economy, along with some of the poorest nations on the planet, it would reduce the incentives to find more oil and to develop the technologies that must ultimately supplant oil. Along these lines, I suspect the likeliest stimulus for another period of low oil prices will come from the market itself. Petroleum is still a volatile and somewhat cyclical commodity, with a history of confounding expectations. Unfortunately for Mr. Friedman's thesis, the last period of $18 oil prices in the late 1990s didn't exactly unleash a tide of liberalization in the Middle East.
Wednesday, February 02, 2005
More Geo-Greens
On Monday I took issue with Tom Friedman's suggestion of a "geo-green" strategy for pressuring Middle East petro-states by reducing oil demand and thus driving down oil prices. Now I find that far from being alone in his views, there's a whole geo-green clique out there, including some neo-conservative heavyweights and keen environmentalists. While I stand by my previous posting on how hard it would be to move the oil demand needle appreciably, it's worth looking at the upside potential.
Start with some history. The last time there was a big push on oil conservation, the result was pretty impressive. After World War II oil demand grew steadily--doubling during the 1960s--until the first oil shock in 1973-74 caused it to stall. It resumed its growth path in the mid-70s, but from 1979, following the Iranian Revolution, to 1989 global oil demand was essentially flat. Along the way, the energy intensity of the US economy dropped sharply, even though the economy continued to grow. Even today, we use fewer BTUs, and certainly fewer barrels of oil, for each million dollars of GDP.
Could a similar drive to efficiency motivated by politics and patriotism, rather than just high energy prices or taxes, slow down or reverse recent trends in energy demand? It's entirely possible, but if we want this to have the maximum benefit, we are looking at the wrong target audience. Although getting Americans to drive more efficient cars and use energy more sparingly would have an impact, we have not been responsible for most of the recent surge in demand. The challenge and opportunity comes from the rapidly growing economies of Asia, and from China, in particular.
Between 2000 and 2004, China's oil demand grew by 2 million barrels per day (MBD), compared to an increase of about 1.3 MBD for the whole industrialized world. As its richest provinces reach the "take-off point" at which the demand for personal mobility soars, this trend will only accelerate. The time for cooperation on conservation is ripe, since China appears at least as concerned about its energy security as we are about ours (see my posting of 1/21/05.)
Getting China and India to develop along a more efficient path is the real prize, and it ought to be a money-spinner, since putting in the best and most efficient technology at the start should be much cheaper than retrofitting them here. In the process, this would do a lot to reduce the rapid growth of greenhouse gas emissions from developing economies, and it may turn out that the Clean Development Mechanism of the Kyoto Treaty is a handy way to transfer these technologies at a profit.
In essence, being geo-green could be quite beneficial and sensible, as long as our concept of "geo" encompasses the entire globalizing world.
Sunday, February 19, 2006
Friday, February 17, 2006
Royalty Relief
As if the oil and gas industry didn't have enough trouble defending its record profits for 2005, the media is stirring the pot with displays of outrage over "lost" oil and gas royalty payments from the same companies, under "royalty relief" laws passed in the late 1990s to encourage drilling in the deep waters of the Gulf of Mexico. Careful reading of the case presented in the New York Times and elsewhere reveals the basic flaw in the argument: current relief is a lagged effect from a period when the price of oil was much lower.
If the companies benefiting from royalty relief today had had any notion then that the price of oil would be $60 today, not only would they not have needed--or wanted--royalty relief, but they would have gone deep into debt to drill every conceivable prospect and build all the new production platforms they could. Remember, these companies were struggling to stay afloat with oil below $20 per barrel for all of 1998 and half of 1999, when the most extensive royalty relief was granted by the Clinton Administration.
If we were to revoke this relief now, retroactively, the companies in question would survive. What would not is the future availability of this kind of policy tool to encourage other risky energy endeavors, whether involving long-distance natural gas pipelines, synthetic fuels plants, or biofuels. Having seen the experience of deep water royalty relief, companies might just ask for cash up front, rather than promises of lower taxes later. Who could blame them? You don't have to like these companies to see the importance of keeping our word to them. This argument applies to the threatened revocation of their foreign tax credits, as well.
Note: I will observe Monday's Presidents' Day holiday with a relevant re-run and resume new postings on Tuesday.
If the companies benefiting from royalty relief today had had any notion then that the price of oil would be $60 today, not only would they not have needed--or wanted--royalty relief, but they would have gone deep into debt to drill every conceivable prospect and build all the new production platforms they could. Remember, these companies were struggling to stay afloat with oil below $20 per barrel for all of 1998 and half of 1999, when the most extensive royalty relief was granted by the Clinton Administration.
If we were to revoke this relief now, retroactively, the companies in question would survive. What would not is the future availability of this kind of policy tool to encourage other risky energy endeavors, whether involving long-distance natural gas pipelines, synthetic fuels plants, or biofuels. Having seen the experience of deep water royalty relief, companies might just ask for cash up front, rather than promises of lower taxes later. Who could blame them? You don't have to like these companies to see the importance of keeping our word to them. This argument applies to the threatened revocation of their foreign tax credits, as well.
Note: I will observe Monday's Presidents' Day holiday with a relevant re-run and resume new postings on Tuesday.
Thursday, February 16, 2006
Merci, Monsieur
However unhelpful France was in the final UN Security Council confrontation with Saddam Hussein, all may soon be forgiven. Now that the French Foreign Minister has publicly scorned Iran's pretense that its nuclear program is purely peaceful, the options available to Iran have narrowed, and the chances of success for their nuclear gambit have diminished.
I don't pretend to any special expertise on nuclear weaponry, or even on the detailed workings of nuclear power plants--beyond what any engineer outside that specialty possesses. However, my own assessment of the relative economics of Iran's fossil energy resources and the cost of constructing nuclear reactors, let alone an entire nuclear fuel cycle, led me to eliminate most other explanations for Iran's recent behavior in this area. It's good to have this suspicion confirmed by another government besides ours, and one whose credibility is not affected by the intelligence failures on Iraq's WMD.
It remains to be seen whether this move will induce Iran's government to return to serious negotiations, or, as President Ahmadinejad suggested the other day, it will simply withdraw from the Non-Proliferation Treaty (NPT) altogether. Unless they find a way to back down soon, though, Iran's leaders will find that most of the remaining paths lead to international sanctions. Exiting the NPT could produce an even more direct response. Either outcome would push energy markets to new highs, and this risk will affect the price of oil as long as the situation remains unresolved.
Meanwhile, China rushes to close a deal on developing one of Iran's largest oil fields, before sanctions spoil the game.
I don't pretend to any special expertise on nuclear weaponry, or even on the detailed workings of nuclear power plants--beyond what any engineer outside that specialty possesses. However, my own assessment of the relative economics of Iran's fossil energy resources and the cost of constructing nuclear reactors, let alone an entire nuclear fuel cycle, led me to eliminate most other explanations for Iran's recent behavior in this area. It's good to have this suspicion confirmed by another government besides ours, and one whose credibility is not affected by the intelligence failures on Iraq's WMD.
It remains to be seen whether this move will induce Iran's government to return to serious negotiations, or, as President Ahmadinejad suggested the other day, it will simply withdraw from the Non-Proliferation Treaty (NPT) altogether. Unless they find a way to back down soon, though, Iran's leaders will find that most of the remaining paths lead to international sanctions. Exiting the NPT could produce an even more direct response. Either outcome would push energy markets to new highs, and this risk will affect the price of oil as long as the situation remains unresolved.
Meanwhile, China rushes to close a deal on developing one of Iran's largest oil fields, before sanctions spoil the game.
Wednesday, February 15, 2006
In the Details
Here’s an article from MIT’s Technology Review filling in some of the gaps in analyzing the President’s proposals on fueling our cars with ethanol produced from crop waste and energy crops. The upshot is that we need to be alert to overly optimistic assumptions and possibly conflicting goals. The strategy is fine, but the details matter.
Last week I suggested that measures to reduce greenhouse gas emissions would automatically move us in the direction of greater energy independence. However, as this article points out, the converse isn’t necessarily true. As our largest domestic energy resource, coal has an important role to play in both areas, but employing it in ways that will make it nearly impossible to capture and sequester its greenhouse gas emissions in the future--as a source of small-scale process heat in renewable energy plants, for example-- could exact an unnecessarily high environmental price for reduced reliance on imported oil.
Cellulosic ethanol has truly exciting potential. Unlike some of the other future energy pathways we’re pursuing, it is a new net source of primary energy, something we will need badly in the years ahead. Despite this, we need to pay careful attention to the associated issues of land management and the environmental impact of fertilizer and other inputs, before pronouncing this the solution to our energy needs. There’s a long history of creating new problems in the process of solving the old ones, and we need to learn from that experience.
Last week I suggested that measures to reduce greenhouse gas emissions would automatically move us in the direction of greater energy independence. However, as this article points out, the converse isn’t necessarily true. As our largest domestic energy resource, coal has an important role to play in both areas, but employing it in ways that will make it nearly impossible to capture and sequester its greenhouse gas emissions in the future--as a source of small-scale process heat in renewable energy plants, for example-- could exact an unnecessarily high environmental price for reduced reliance on imported oil.
Cellulosic ethanol has truly exciting potential. Unlike some of the other future energy pathways we’re pursuing, it is a new net source of primary energy, something we will need badly in the years ahead. Despite this, we need to pay careful attention to the associated issues of land management and the environmental impact of fertilizer and other inputs, before pronouncing this the solution to our energy needs. There’s a long history of creating new problems in the process of solving the old ones, and we need to learn from that experience.
Tuesday, February 14, 2006
Accumulating Renewables
I've written a lot about time lags in the last few weeks, in terms of how long it will take for new forms of energy to come into the system, once we commit to invest in them. I believe the word I used to describe this was "daunting." The key to overcoming these lags, however, is our old friend compound growth. Wind power in Europe provides an excellent example, having reached a milestone figure of over 6,000 MW of new installations last year, a level that apparently wasn't expected to be reached until 2010. That brings total EU wind capacity to over 40 GW, about as much as ten nuclear power plants, after allowing for the intermittent contribution of wind. That still works out to less than 3% of Europe's total electricity generation last year, but it's on its way to becoming much more significant.
The growth rates that have been sustained for a decade have been astonishing. Additions have been growing at over 20% and capacity at over 30%. When you look ahead, though, you have to make some adjustments in your expectation of further growth. For one thing, unless the rate of additions increases, the growth in total wind capacity will gradually slow down. In fact, it will be hard to sustain even the current rate of growth in capacity additions, because of the growing scale of capital and other inputs this would require. Simply put, a big industry rarely grows as fast as a small one, and wind is on its way to becoming big.
For example, if new wind power additions continued to expand at 20% per year, wind's total contribution would grow from 3% of EU electricity generation to 10% by 2014, and to 20% by 2018. At that clip, it would hit 50% in 2024. If that sounds incredible, you're right. However, even if the growth in new wind capacity, i.e. the number of new wind turbines delivered each year, slowed from 20% to 10% by 2008, wind could still be generating 15% of the EU's power by 2020. For comparison, the EU's target for all renewable electricity in 2010 is 22%, but that includes hydropower, which already accounts for about 10%.
I think this example nicely illustrates both the potential for change and the inertia of the status quo. The figures above are on a par with the contribution of nuclear power in the US, which required several decades of development and construction and many billions in public and private funds. But it also shows that even an established technology such as wind, starting from a small but non-zero baseline and growing at double-digit rates, will take decades to make more than a modest dent in our energy problems. A brand new technology, starting from zero, will probably take longer.
I draw several lessons from this. First, it's going to take more than one "killer ap" to change the energy equation, just as we rely on multiple forms of energy today. We need several new energy technologies--growing at these kinds of rates--if we want to see dramatic change in the decade of 2010-2020. Second, the impact of these technologies will grow in much the way that the balance in a retirement account grows: gradually at first, and then faster, as the yearly additions gather steam. So, as I've suggested several times in the last week or so, the only material changes in the next five years or so will have to come from behavioral shifts, not technology. Add it all up and you see that we need policies that simultaneously foster serious conservation, aggressively promote new energy technology, and sustain the growth in conventional energy sources, including oil and gas production, to get us to a point at which new technology can have a material impact.
The growth rates that have been sustained for a decade have been astonishing. Additions have been growing at over 20% and capacity at over 30%. When you look ahead, though, you have to make some adjustments in your expectation of further growth. For one thing, unless the rate of additions increases, the growth in total wind capacity will gradually slow down. In fact, it will be hard to sustain even the current rate of growth in capacity additions, because of the growing scale of capital and other inputs this would require. Simply put, a big industry rarely grows as fast as a small one, and wind is on its way to becoming big.
For example, if new wind power additions continued to expand at 20% per year, wind's total contribution would grow from 3% of EU electricity generation to 10% by 2014, and to 20% by 2018. At that clip, it would hit 50% in 2024. If that sounds incredible, you're right. However, even if the growth in new wind capacity, i.e. the number of new wind turbines delivered each year, slowed from 20% to 10% by 2008, wind could still be generating 15% of the EU's power by 2020. For comparison, the EU's target for all renewable electricity in 2010 is 22%, but that includes hydropower, which already accounts for about 10%.
I think this example nicely illustrates both the potential for change and the inertia of the status quo. The figures above are on a par with the contribution of nuclear power in the US, which required several decades of development and construction and many billions in public and private funds. But it also shows that even an established technology such as wind, starting from a small but non-zero baseline and growing at double-digit rates, will take decades to make more than a modest dent in our energy problems. A brand new technology, starting from zero, will probably take longer.
I draw several lessons from this. First, it's going to take more than one "killer ap" to change the energy equation, just as we rely on multiple forms of energy today. We need several new energy technologies--growing at these kinds of rates--if we want to see dramatic change in the decade of 2010-2020. Second, the impact of these technologies will grow in much the way that the balance in a retirement account grows: gradually at first, and then faster, as the yearly additions gather steam. So, as I've suggested several times in the last week or so, the only material changes in the next five years or so will have to come from behavioral shifts, not technology. Add it all up and you see that we need policies that simultaneously foster serious conservation, aggressively promote new energy technology, and sustain the growth in conventional energy sources, including oil and gas production, to get us to a point at which new technology can have a material impact.
Monday, February 13, 2006
Conservation Code
Whatever your view on the energy initiatives President Bush proposed in this year's State of the Union address, their biggest contribution may be in stimulating an overdue debate about energy. And while countless citizens and pundits have remarked on the absence of conservation measures from the President's list of recommendations, I haven't seen many detailed suggestions of just what that would involve, if it is to make any noticeable difference in the next few years.
When most of us talk about energy conservation, what we really have in mind is investment-driven initiatives such as more efficient cars, buildings and appliances, or new technologies for generating electricity. But we need to understand that all of these require more than just a few billions in R&D spending; they entail investment in capital stock and vehicles in the trillions of dollars. Although they hold great potential to reduce our energy consumption in the future, the time lags involved are daunting, as I described in last Monday's posting. Cars and appliances last up to two decades, and buildings last longer. We should begin moving in this direction, but it's very much like the college savings plan you open when your child is born; she won't enjoy the benefits for years, and you have to support her in the meantime.
So if we want rapid progress on any of the energy goals that are being espoused, whether it's achieving full independence, drying up oil imports and our payments to OPEC, or simply getting the price of oil and its products back into a more comfortable range, the only way to have any real effect in the near term is through a change in our behavior as consumers. This could take the form of the self-discipline I referred to recently, or it could be imposed through heavy taxes.
How about some specifics? Well, in addition to the sensible and relatively painless suggestions you'll find at Save-a-Gallon, it would involve steps such as eliminating unnecessary travel, or shifting it to more efficient modes. If you think flying is the most efficient way to get somewhere, guess again. Trains are generally more frugal, and a family of four driving cross-country in a sedan uses less fuel than they would by flying to their destination. Cancel that coast-to-coast business trip and replace it with a tele-, video- or web-conference, saving 100 gallons of jet fuel. Consolidating errands helps, but shopping from home over the internet or by phone saves even more energy. Because our lives are so energy intensive, there's tremendous scope for savings, without having to invest and wait years for results. If it's worth investing billions or trillions in efficiency, why wouldn't we undertake all these non-investment measures, as well?
There's a downside to some forms of conservation, though. While a significant amount of energy can be saved without harming the economy--beyond lost margins for utilities, refiners and retailers--other cuts would ripple far beyond their source. That cancelled business trip affects an airline, hotel, rental car or taxi company, restaurants, and many other service providers. A few bucks worth of jet fuel can quickly turn into the "for want of a nail..." factor that reduces corporate profits and employment. For this reason, we need to clarify just how much conservation we really want.
Are we calling for the kind of comprehensive effort that would prioritize energy far beyond its market price and put the whole economy on an energy-war footing? Or, when we mention conservation, are we committing to the no-pain measures promoted by groups like Save-a-Gallon, but acknowledging that we'll have to be very patient waiting for the larger, investment-driven changes in our cars and homes to begin to bite? That policy choice ought to be an outcome of our national debate on the subject.
Note: I'll be traveling on business for several days, so new postings will be less frequent.
When most of us talk about energy conservation, what we really have in mind is investment-driven initiatives such as more efficient cars, buildings and appliances, or new technologies for generating electricity. But we need to understand that all of these require more than just a few billions in R&D spending; they entail investment in capital stock and vehicles in the trillions of dollars. Although they hold great potential to reduce our energy consumption in the future, the time lags involved are daunting, as I described in last Monday's posting. Cars and appliances last up to two decades, and buildings last longer. We should begin moving in this direction, but it's very much like the college savings plan you open when your child is born; she won't enjoy the benefits for years, and you have to support her in the meantime.
So if we want rapid progress on any of the energy goals that are being espoused, whether it's achieving full independence, drying up oil imports and our payments to OPEC, or simply getting the price of oil and its products back into a more comfortable range, the only way to have any real effect in the near term is through a change in our behavior as consumers. This could take the form of the self-discipline I referred to recently, or it could be imposed through heavy taxes.
How about some specifics? Well, in addition to the sensible and relatively painless suggestions you'll find at Save-a-Gallon, it would involve steps such as eliminating unnecessary travel, or shifting it to more efficient modes. If you think flying is the most efficient way to get somewhere, guess again. Trains are generally more frugal, and a family of four driving cross-country in a sedan uses less fuel than they would by flying to their destination. Cancel that coast-to-coast business trip and replace it with a tele-, video- or web-conference, saving 100 gallons of jet fuel. Consolidating errands helps, but shopping from home over the internet or by phone saves even more energy. Because our lives are so energy intensive, there's tremendous scope for savings, without having to invest and wait years for results. If it's worth investing billions or trillions in efficiency, why wouldn't we undertake all these non-investment measures, as well?
There's a downside to some forms of conservation, though. While a significant amount of energy can be saved without harming the economy--beyond lost margins for utilities, refiners and retailers--other cuts would ripple far beyond their source. That cancelled business trip affects an airline, hotel, rental car or taxi company, restaurants, and many other service providers. A few bucks worth of jet fuel can quickly turn into the "for want of a nail..." factor that reduces corporate profits and employment. For this reason, we need to clarify just how much conservation we really want.
Are we calling for the kind of comprehensive effort that would prioritize energy far beyond its market price and put the whole economy on an energy-war footing? Or, when we mention conservation, are we committing to the no-pain measures promoted by groups like Save-a-Gallon, but acknowledging that we'll have to be very patient waiting for the larger, investment-driven changes in our cars and homes to begin to bite? That policy choice ought to be an outcome of our national debate on the subject.
Note: I'll be traveling on business for several days, so new postings will be less frequent.
Friday, February 10, 2006
A Theory by Another Name
A posting at TerraBlog on a recently-publicized controversy at NASA got me thinking about the way the word "theory" has morphed from a neutral scientific term into a dismissive criticism. How often do you hear references to climate change that end with something along the lines of, "But of course it's just a theory"? Well, it is exactly that, which makes it neither more nor less true. Now, words change their meanings all the time; this is part of the beauty of a dynamic language like English. But some changes are unhelpful and should be resisted, because rather than increasing our understanding and clarity of expression, they hinder it. I'd argue that "theory" is a prime example.
According to the definition I learned in endless science classes on the way to an engineering degree, a theory is a hypothesis that fits the observed evidence and can be tested by experiment. The Wikipedia entry on the subject is a bit longer but boils down to pretty much that. So it is factually correct to refer to climate change, the Big Bang, evolution, gravitation, quantum mechanics, and a host of other things as theories. However, that description shouldn't be construed as calling these concepts into question, without reference to some specific evidence that contradicts them.
I'm old enough to remember when there were two competing cosmological theories--in addition to Creation. It turned out that the Big Bang fit the evidence much better, nor has it been disproven by anything we've seen. The competing "Steady State" theory is now all but forgotten. Even when they are superseded by more advanced theories, though, some theories remain valid as limited cases. It took Einstein to plug the gaps in Newton's Theory of Gravitation, but the latter still adequately describes the behavior of essentially every physical object in our world, from dropping a ball to programming a missile. At the same time, we should recall that the history of science is littered with utterly failed theories, such as the ether theory of electromagnetic propagation and the phlogiston theory of burning.
No one today can state with certainty into which category the theory of climate change will eventually fall: unchallenged, valid but limited, or ultimately false. All we can say--and this is what I think the current "scientific consensus" means--is that it fits the observed behavior of the climate over the period in question better than any alternative yet proposed. It also means we haven't found anything that conclusively disproves it. And until refined or disproved, we have no better way of predicting the future behavior of the climate.
I'd love to see an education campaign on the proper meaning of this useful word, to reclaim it from those who misuse it out of ignorance or ideology. This is not a slap at people of faith, of which I am one. If someone doesn't believe in climate change, evolution, the Big Bang, or quantum mechanics, he is entirely within his rights. But at the same time, simply referring to any of them as theories should not undermine it in the eyes of an educated person.
According to the definition I learned in endless science classes on the way to an engineering degree, a theory is a hypothesis that fits the observed evidence and can be tested by experiment. The Wikipedia entry on the subject is a bit longer but boils down to pretty much that. So it is factually correct to refer to climate change, the Big Bang, evolution, gravitation, quantum mechanics, and a host of other things as theories. However, that description shouldn't be construed as calling these concepts into question, without reference to some specific evidence that contradicts them.
I'm old enough to remember when there were two competing cosmological theories--in addition to Creation. It turned out that the Big Bang fit the evidence much better, nor has it been disproven by anything we've seen. The competing "Steady State" theory is now all but forgotten. Even when they are superseded by more advanced theories, though, some theories remain valid as limited cases. It took Einstein to plug the gaps in Newton's Theory of Gravitation, but the latter still adequately describes the behavior of essentially every physical object in our world, from dropping a ball to programming a missile. At the same time, we should recall that the history of science is littered with utterly failed theories, such as the ether theory of electromagnetic propagation and the phlogiston theory of burning.
No one today can state with certainty into which category the theory of climate change will eventually fall: unchallenged, valid but limited, or ultimately false. All we can say--and this is what I think the current "scientific consensus" means--is that it fits the observed behavior of the climate over the period in question better than any alternative yet proposed. It also means we haven't found anything that conclusively disproves it. And until refined or disproved, we have no better way of predicting the future behavior of the climate.
I'd love to see an education campaign on the proper meaning of this useful word, to reclaim it from those who misuse it out of ignorance or ideology. This is not a slap at people of faith, of which I am one. If someone doesn't believe in climate change, evolution, the Big Bang, or quantum mechanics, he is entirely within his rights. But at the same time, simply referring to any of them as theories should not undermine it in the eyes of an educated person.
Thursday, February 09, 2006
Allocating the Profit Pool
The Financial Times reported that BP expects to return up to $65 billion to shareholders over the next five years via dividends and share repurchases, if oil prices remain close to current levels. The same article suggested that the aggregate figure for Exxon, BP, Shell, Chevron and Total could reach $250 billion, based on estimates by UBS. This presumably represents a similar allocation of profits to 2005, when these companies collectively sent shareholders roughly 1.5 times as much money as they plowed back into the business. Politicians will draw their own inferences from these decisions, particularly given the magnitude of alternative energy programs these sums could fund. Nor do I believe the story here is as simple as a shortage of good opportunities for reinvestment. The response of the stock market plays a role, too.
While some company oil stocks did well over the last 12 months, with Exxon and BP outperforming the S&P 500 by about 4%--though Chevron has recently fallen back to even vs. a year ago--this is hardly the stock price performance you'd expect from companies generating the earnings and cash that these are, with no end in sight. Moreover, the valuations of these stocks clearly don't reflect today's oil prices continuing out into the future, even though that's just what the futures market shows. It's hard to account for this inconsistency, although futures prices are not a particularly good forecast of future prices. (Perhaps the best analogy is to quantum physics, with the futures contract behaving like a collapsed Schrödinger wave function.)
Back in the real world, you have a system of executive pay that has been carefully aligned by successive generations of compensation consultants to track the performance of each company's stock. Holders of large numbers of options, in particular, need to see steady appreciation in stock values, to cash in on their contingent pay. Now, if the market doesn't trust its own best estimate of the future price of the primary driver of cash flows for these firms, might it see a commitment by management to return large amounts of future cash to shareholders as less uncertain than risky oil prices, and could that give stock values the nudge that oil markets haven't?
I'm not suggesting that this fully explains the way oil companies are spending their profits. For the last two years I've been writing about the factors that make it hard for the Supermajors to replace reserves and production, including access to resources, materiality of opportunities, and queuing of technical capabilities. These all still loom large. But I certainly wouldn't discount the importance of smart people trying to succeed by the rules that have been set up for them. If we want them to do something different, such as investing in large-scale alternative energy, then we need to change the metrics for which we reward them, rather than browbeating and berating them.
While some company oil stocks did well over the last 12 months, with Exxon and BP outperforming the S&P 500 by about 4%--though Chevron has recently fallen back to even vs. a year ago--this is hardly the stock price performance you'd expect from companies generating the earnings and cash that these are, with no end in sight. Moreover, the valuations of these stocks clearly don't reflect today's oil prices continuing out into the future, even though that's just what the futures market shows. It's hard to account for this inconsistency, although futures prices are not a particularly good forecast of future prices. (Perhaps the best analogy is to quantum physics, with the futures contract behaving like a collapsed Schrödinger wave function.)
Back in the real world, you have a system of executive pay that has been carefully aligned by successive generations of compensation consultants to track the performance of each company's stock. Holders of large numbers of options, in particular, need to see steady appreciation in stock values, to cash in on their contingent pay. Now, if the market doesn't trust its own best estimate of the future price of the primary driver of cash flows for these firms, might it see a commitment by management to return large amounts of future cash to shareholders as less uncertain than risky oil prices, and could that give stock values the nudge that oil markets haven't?
I'm not suggesting that this fully explains the way oil companies are spending their profits. For the last two years I've been writing about the factors that make it hard for the Supermajors to replace reserves and production, including access to resources, materiality of opportunities, and queuing of technical capabilities. These all still loom large. But I certainly wouldn't discount the importance of smart people trying to succeed by the rules that have been set up for them. If we want them to do something different, such as investing in large-scale alternative energy, then we need to change the metrics for which we reward them, rather than browbeating and berating them.
Wednesday, February 08, 2006
The Big Picture Is Half Full
While Googling on "climate change" I ran across this column in a UK magazine. It highlights growing concerns about the consequences of climate change and frames a number of big, energy-and-environment issues as potentially conflicting with, or distracting attention from efforts to reduce greenhouse gas emissions. Although there's no shortage of important issues in front of policy makers these days, I think it's unnecessarily pessimistic to view energy security, "peak oil", and clean coal technology as somehow interfering with action on climate change.
Consider energy security. As I've argued repeatedly in this blog, greenhouse gas emissions provide an entirely complementary and efficient pathway for addressing energy security. Rigorous analysis of emissions entails a thorough examination of all the energy flows in the system. This approach also allows us to differentiate between marginally-useful and expensive energy solutions such as corn ethanol and distinctly positive ones, such as cellulosic ethanol. It also gives us the means of objectively comparing the net benefits of the plug-in hybrids I discussed in Tuesday's posting with alternatives such as more efficient internal combustion engines, or fuel cells running on hydrogen produced from fossil fuels.
As to peak oil, to the degree this is an imminent threat--and here I remain a skeptic--it is hard to imagine any serious effort to reduce greenhouse gas emissions that would not automatically defer and moderate the impact of a global peak in oil production, as a direct consequence of reducing the growth in petroleum consumption.
Likewise for clean coal, even without sequestering the CO2 emissions from coal-fired power plants, implementing technology such as Integrated Gasification Combined Cycle (IGCC) would dramatically reduce greenhouse gas emissions per kW-hour of electricity, while providing necessary baseload power to complement the small but growing contribution of intermittent solar and wind power.
So, without detracting from or minimizing the healthy debate surrounding each of these issues, it's false to see them as unrelated or in competition with one another. Managing climate change is going to take a lot more than a push for renewable energy--the author's implied hobby horse--just as addressing energy security must include more than reducing our oil imports. Far from competing, I think all these issues fit together in a large, complex pattern of interconnected energy and environmental concerns.
Consider energy security. As I've argued repeatedly in this blog, greenhouse gas emissions provide an entirely complementary and efficient pathway for addressing energy security. Rigorous analysis of emissions entails a thorough examination of all the energy flows in the system. This approach also allows us to differentiate between marginally-useful and expensive energy solutions such as corn ethanol and distinctly positive ones, such as cellulosic ethanol. It also gives us the means of objectively comparing the net benefits of the plug-in hybrids I discussed in Tuesday's posting with alternatives such as more efficient internal combustion engines, or fuel cells running on hydrogen produced from fossil fuels.
As to peak oil, to the degree this is an imminent threat--and here I remain a skeptic--it is hard to imagine any serious effort to reduce greenhouse gas emissions that would not automatically defer and moderate the impact of a global peak in oil production, as a direct consequence of reducing the growth in petroleum consumption.
Likewise for clean coal, even without sequestering the CO2 emissions from coal-fired power plants, implementing technology such as Integrated Gasification Combined Cycle (IGCC) would dramatically reduce greenhouse gas emissions per kW-hour of electricity, while providing necessary baseload power to complement the small but growing contribution of intermittent solar and wind power.
So, without detracting from or minimizing the healthy debate surrounding each of these issues, it's false to see them as unrelated or in competition with one another. Managing climate change is going to take a lot more than a push for renewable energy--the author's implied hobby horse--just as addressing energy security must include more than reducing our oil imports. Far from competing, I think all these issues fit together in a large, complex pattern of interconnected energy and environmental concerns.
Tuesday, February 07, 2006
Super Bowl Ads
It's hardly news that millions of Americans pay more attention to the ads in a Super Bowl broadcast than to the game itself. I've been monitoring these ads informally for years, as a sort of barometer of trends and things to come. Blame it on the famous Apple "1984" ad, which prompted me to buy my first home computer, and also launched the whole genre of Super Bowl ad spectaculars. So what did this year's show provide--other than a streaking sheep--and how is it relevant to the theme of this blog?
I think it's notable that three of the dozen or so car advertisements I counted were for hybrids. OK, many of the others were for giant SUVs or pickup trucks, but surely it says something about hybrids becoming more mainstream. Interestingly, the approaches taken by Ford and Toyota couldn't have been more different. Ford chose to cast its hybrid efforts, led by its Hybrid Escape small SUV, as environmentally friendly, playing on Kermit the Frog's familiar "not easy being green" theme. Toyota's ad for the hybrid version of its top-selling Camry went after inter-generational responsibility, economy and the growing immigrant market. My hunch is that Toyota, by being less overt in its environmental message, came off slightly better. However, they haven't had to respond to the same pressures on environmental issues as Ford, so I can understand the basis of both choices.
Ironically, the ad that looked like it was launching a breakthrough in advanced energy technology turned out to be for a razor. It says something about us that Gillette spent about as much developing and promoting its new Fusion shaver as the US government is putting into the clean coal, wind and solar technology R&D this year. Consumer values still trump societal benefits, and anyone working on or investing in alternative energy had better not rely on virtue as the main selling point.
I think it's notable that three of the dozen or so car advertisements I counted were for hybrids. OK, many of the others were for giant SUVs or pickup trucks, but surely it says something about hybrids becoming more mainstream. Interestingly, the approaches taken by Ford and Toyota couldn't have been more different. Ford chose to cast its hybrid efforts, led by its Hybrid Escape small SUV, as environmentally friendly, playing on Kermit the Frog's familiar "not easy being green" theme. Toyota's ad for the hybrid version of its top-selling Camry went after inter-generational responsibility, economy and the growing immigrant market. My hunch is that Toyota, by being less overt in its environmental message, came off slightly better. However, they haven't had to respond to the same pressures on environmental issues as Ford, so I can understand the basis of both choices.
Ironically, the ad that looked like it was launching a breakthrough in advanced energy technology turned out to be for a razor. It says something about us that Gillette spent about as much developing and promoting its new Fusion shaver as the US government is putting into the clean coal, wind and solar technology R&D this year. Consumer values still trump societal benefits, and anyone working on or investing in alternative energy had better not rely on virtue as the main selling point.
Monday, February 06, 2006
Clear Energy Goals
The President's comments about oil addiction have stirred up every commentator with any interest in oil, from every political, geopolitical, environmental, and economic perspective. Nicholas Kristof's column in the Sunday New York Times (Times Select subscription required) is a good example, seizing on the potential of plug-in hybrid cars to reduce oil dependency by delivering 100 miles per gallon or more, using nearly off-the-shelf technology. But not only does this exemplify the appeal of technology as a solution to our energy problems (see Friday's posting,) but it also reflects the current muddle of unclear and conflicting energy visions. Are we trying to save oil, emissions or energy in general?
Plug-in hybrids are a fascinating technology with great potential. But while offering one answer to our concerns about rising oil consumption, they raise a host of unanswered questions about our enormous energy economy and systems. Shifting the burden of powering cars from petroleum products to electricity only makes sense, if we believe that we can generate and deliver electricity at a lower cost than the energy equivalent of gasoline, with lower overall emissions--including not just local pollutants but also greenhouse gases--and without imposing unmanageable stresses on our already-strained electricity grids.
When you delve further into those issues, you run into all sorts of other problems, including tight domestic supplies of natural gas, with most gas import options, such as LNG and trans-continental pipelines, facing financial and NIMBY obstacles; Clean Coal power plant technology that is available, but can't be easily retrofitted to existing plants; nuclear power, with all its pros and cons; and chronic underinvestment in electric infrastructure. Considering these complexities, it's essential to state our energy goals clearly. It's fine to push for reducing our oil imports, as the President suggested, but we need to understand that this will not resolve our larger energy problems, without a more comprehensive plan.
For example, Geo-green advocates see the potential for using plug-in hybrids as a reverse oil weapon against Islamic extremism. That's a worthy goal, but I wonder if they appreciate what a slow-motion weapon this would be. Annual US car sales of 17 million units only represent 7% of the country's car and light truck fleet. If 10% of all new cars sold were plug-in hybrids--a sales goal it would take years to reach, once the technology is ready--it would still be another decade before they displaced 10% of the current fleet. So even if they got 1000 miles per gallon, they would only improve our fleet fuel economy by 10%, or about 2.5 mpg over 20 years. That's not trivial, but it won't reverse our oil import trends without broader changes in how we use the vehicles we already have.
The economics of all this begins to look shaky, too, when you consider that the more economical you make a car, the less benefit the next tranche of fuel economy provides. Consider a basic hybrid car costing $3,000 more than a conventional model and improving fuel economy from 20 mpg to 40 mpg. That saves the average driver $900 per year at $3/gallon but requires almost four years to pay for itself, ignoring tax credits that only shift who pays. Now let's say a plug-in option is available to take it from 40 mpg to 100 mpg. The additional annual fuel savings, however, only amount to $540, and that ignores the cost of off-peak electricity that, though cheaper than gasoline--partly because it isn't taxed--most definitely isn't free. So unless the plug-in upgrade is cheaper than the basic hybrid option, the payout for this extra level of fuel savings will be much longer.
We face huge, complex problems across the entire energy spectrum, and although they will yield to patient solutions, there are no quick or cheap fixes. Oil isn't a bad place to start, but this can't be done in a vacuum, without understanding and accounting for all the knock-on effects. Otherwise, we risk making the broader picture worse, particularly in the area of greenhouse gas emissions. Whether our long-term personal transportation will be based on plug-in hybrids or hydrogen fuel cells, we require a comprehensive strategy for the natural gas, renewables, coal and nuclear power that will generate the electricity and hydrogen upon which they would depend.
Plug-in hybrids are a fascinating technology with great potential. But while offering one answer to our concerns about rising oil consumption, they raise a host of unanswered questions about our enormous energy economy and systems. Shifting the burden of powering cars from petroleum products to electricity only makes sense, if we believe that we can generate and deliver electricity at a lower cost than the energy equivalent of gasoline, with lower overall emissions--including not just local pollutants but also greenhouse gases--and without imposing unmanageable stresses on our already-strained electricity grids.
When you delve further into those issues, you run into all sorts of other problems, including tight domestic supplies of natural gas, with most gas import options, such as LNG and trans-continental pipelines, facing financial and NIMBY obstacles; Clean Coal power plant technology that is available, but can't be easily retrofitted to existing plants; nuclear power, with all its pros and cons; and chronic underinvestment in electric infrastructure. Considering these complexities, it's essential to state our energy goals clearly. It's fine to push for reducing our oil imports, as the President suggested, but we need to understand that this will not resolve our larger energy problems, without a more comprehensive plan.
For example, Geo-green advocates see the potential for using plug-in hybrids as a reverse oil weapon against Islamic extremism. That's a worthy goal, but I wonder if they appreciate what a slow-motion weapon this would be. Annual US car sales of 17 million units only represent 7% of the country's car and light truck fleet. If 10% of all new cars sold were plug-in hybrids--a sales goal it would take years to reach, once the technology is ready--it would still be another decade before they displaced 10% of the current fleet. So even if they got 1000 miles per gallon, they would only improve our fleet fuel economy by 10%, or about 2.5 mpg over 20 years. That's not trivial, but it won't reverse our oil import trends without broader changes in how we use the vehicles we already have.
The economics of all this begins to look shaky, too, when you consider that the more economical you make a car, the less benefit the next tranche of fuel economy provides. Consider a basic hybrid car costing $3,000 more than a conventional model and improving fuel economy from 20 mpg to 40 mpg. That saves the average driver $900 per year at $3/gallon but requires almost four years to pay for itself, ignoring tax credits that only shift who pays. Now let's say a plug-in option is available to take it from 40 mpg to 100 mpg. The additional annual fuel savings, however, only amount to $540, and that ignores the cost of off-peak electricity that, though cheaper than gasoline--partly because it isn't taxed--most definitely isn't free. So unless the plug-in upgrade is cheaper than the basic hybrid option, the payout for this extra level of fuel savings will be much longer.
We face huge, complex problems across the entire energy spectrum, and although they will yield to patient solutions, there are no quick or cheap fixes. Oil isn't a bad place to start, but this can't be done in a vacuum, without understanding and accounting for all the knock-on effects. Otherwise, we risk making the broader picture worse, particularly in the area of greenhouse gas emissions. Whether our long-term personal transportation will be based on plug-in hybrids or hydrogen fuel cells, we require a comprehensive strategy for the natural gas, renewables, coal and nuclear power that will generate the electricity and hydrogen upon which they would depend.
Friday, February 03, 2006
Lagged Effects
Comments on this blog and in the media have pointed out that energy technology investments proposed by the President will not bear fruit for years, and will have little impact on reducing oil consumption this decade. This theme was anticipated in an article in MIT's Technology Review, contrasting the substantial funding for hydrogen-related energy research with the paucity of money for improvements to the internal combustion engine. It's worth considering whether the implied priorities are really appropriate.
Take one specific technology that the President mentioned Tuesday evening, better batteries for hybrid cars and electric vehicles--presumably including the promising plug-in hybrids. While probably nearer-term in its impact than hydrogen fuel cell cars, this is an area that has been under intensive development for years, yielding steady improvements but not the hoped-for quantum leap. That might still come, but it's hard to predict when. So even though hybrids are becoming mass market, with Toyota having sold 500,000 worldwide, it will still take years for their improved fuel economy to nudge our oil consumption trend-line, let alone for models with the anticipated "better batteries" to have a larger impact.
That's not an indication of futility, but it is a reality check as we ponder where to invest federal money and where to encourage private investment--and where little encouragement at all is needed. Looking at timelines alone is too simplistic. We also need to factor in potential impact, barriers to implementation, and costs of conversion, along with some gauge of the likelihood of success.
Better batteries look like a reasonable bet across most of these criteria. They would facilitate the large-scale use of electricity--and thus non-oil electric sources--in transportation in a way that's not possible today. They require lengthy fleet turnover, and perhaps some new infrastructure for home recharging, but they seem to have fewer barriers to overcome than, say, hydrogen. There's an important limitation to consider, however. So far nothing in the improved-battery hybrid car energy chain offers the potential for breaking through the thermal efficiency limitations imposed by the use of heat engines. That's why hydrogen is so alluring, if we can overcome the problems of making, storing and transporting it. A hydrogen fuel cell can double or triple the efficiency of an internal combustion engine, and that justifies a lot of patient R&D funding in this area.
Compare this with a better internal combustion engine. The potential impact would be quick but incremental. The area under the curve--total system fuel economy gains--could well be bigger than for improved hybrids within the next 10 years, though the benefits flatten out quickly. Barriers to implementation are low, as are relative costs of conversion, and likelihood of success is high. Given all that, why invest scarce federal R&D dollars in this, rather than providing some tax credits to manufacturers and letting them get on with it?
But however one apportions the mix of R&D funding, there is a hard truth that must be reckoned with: there is no new technology that can reduce our oil consumption by millions of barrels per day by 2010. The only factor that can bring about a major change within that interval is behavioral change, whether it's voluntary or stimulated by economics--prices, taxes and/or incentives. The silver bullet at this point is self-discipline, not some cool design.
Take one specific technology that the President mentioned Tuesday evening, better batteries for hybrid cars and electric vehicles--presumably including the promising plug-in hybrids. While probably nearer-term in its impact than hydrogen fuel cell cars, this is an area that has been under intensive development for years, yielding steady improvements but not the hoped-for quantum leap. That might still come, but it's hard to predict when. So even though hybrids are becoming mass market, with Toyota having sold 500,000 worldwide, it will still take years for their improved fuel economy to nudge our oil consumption trend-line, let alone for models with the anticipated "better batteries" to have a larger impact.
That's not an indication of futility, but it is a reality check as we ponder where to invest federal money and where to encourage private investment--and where little encouragement at all is needed. Looking at timelines alone is too simplistic. We also need to factor in potential impact, barriers to implementation, and costs of conversion, along with some gauge of the likelihood of success.
Better batteries look like a reasonable bet across most of these criteria. They would facilitate the large-scale use of electricity--and thus non-oil electric sources--in transportation in a way that's not possible today. They require lengthy fleet turnover, and perhaps some new infrastructure for home recharging, but they seem to have fewer barriers to overcome than, say, hydrogen. There's an important limitation to consider, however. So far nothing in the improved-battery hybrid car energy chain offers the potential for breaking through the thermal efficiency limitations imposed by the use of heat engines. That's why hydrogen is so alluring, if we can overcome the problems of making, storing and transporting it. A hydrogen fuel cell can double or triple the efficiency of an internal combustion engine, and that justifies a lot of patient R&D funding in this area.
Compare this with a better internal combustion engine. The potential impact would be quick but incremental. The area under the curve--total system fuel economy gains--could well be bigger than for improved hybrids within the next 10 years, though the benefits flatten out quickly. Barriers to implementation are low, as are relative costs of conversion, and likelihood of success is high. Given all that, why invest scarce federal R&D dollars in this, rather than providing some tax credits to manufacturers and letting them get on with it?
But however one apportions the mix of R&D funding, there is a hard truth that must be reckoned with: there is no new technology that can reduce our oil consumption by millions of barrels per day by 2010. The only factor that can bring about a major change within that interval is behavioral change, whether it's voluntary or stimulated by economics--prices, taxes and/or incentives. The silver bullet at this point is self-discipline, not some cool design.
Thursday, February 02, 2006
Breach or Bluff?
Today the governors of the International Atomic Energy Agency will determine whether or not to refer the case of Iran's nuclear programs to the UN Security Council. I will be surprised if either side proves willing to risk a full breach at this point, notwithstanding the bellicose statements emanating from Teheran. Iran's threatened response should probably be seen as further positioning, rather than anything final. But the danger in this school of negotiating lies in the chance that, at some point along the way, they will do something that the other side will see as irrevocable and set the world on a path to disaster.
The seriousness of this confrontation is underlined by the reported discovery of nuclear warhead plans in Iran, or at least of plans for fabricating the atomic trigger for a warhead. Even if this was only a promotional "freebie" from the A.Q. Khan nuclear technology smuggling ring, it suggests that Iran possesses the motive and means for building nuclear weapons, and presently lacks only the opportunity. Denying them that at an acceptable cost is the bottom line for the international community.
In that light, President Bush's remarks about Iran in Tuesday's State of the Union address seemed firm but much more measured than his "Axis of Evil" comment of a few years ago. At the same time, the EU-3 (Germany, France and the UK) have demonstrated remarkable resolve, so far. It would be much easier for them to waffle here, than to stand firm and take the consequences.
The situation is further complicated by the Russian processing offer, as described in a thoughtful op-ed in yesterday's New York Times. The authors, from the Wisconsin Project on Nuclear Arms Control, are concerned that this option will play into Iran's hands and allow them to finesse the IAEA and fracture the Security Council. But unless the Security Council is prepared to put teeth in any finding from the IAEA, this may still be the best option available, as a way to defer an actual crisis until we are in a better position to call Iran's bluff.
The seriousness of this confrontation is underlined by the reported discovery of nuclear warhead plans in Iran, or at least of plans for fabricating the atomic trigger for a warhead. Even if this was only a promotional "freebie" from the A.Q. Khan nuclear technology smuggling ring, it suggests that Iran possesses the motive and means for building nuclear weapons, and presently lacks only the opportunity. Denying them that at an acceptable cost is the bottom line for the international community.
In that light, President Bush's remarks about Iran in Tuesday's State of the Union address seemed firm but much more measured than his "Axis of Evil" comment of a few years ago. At the same time, the EU-3 (Germany, France and the UK) have demonstrated remarkable resolve, so far. It would be much easier for them to waffle here, than to stand firm and take the consequences.
The situation is further complicated by the Russian processing offer, as described in a thoughtful op-ed in yesterday's New York Times. The authors, from the Wisconsin Project on Nuclear Arms Control, are concerned that this option will play into Iran's hands and allow them to finesse the IAEA and fracture the Security Council. But unless the Security Council is prepared to put teeth in any finding from the IAEA, this may still be the best option available, as a way to defer an actual crisis until we are in a better position to call Iran's bluff.
Wednesday, February 01, 2006
Finding the Right Mix
A year ago, the energy focus of President Bush's State of the Union address was on the stalled energy policy bill, which finally passed the Congress last summer. This year, energy was one of the centerpieces of the speech, with the President emphasizing the importance of reducing our dependence on imported oil, especially from the Middle East. As this morning's New York Times reminds us, we've heard this refrain before, from presidents going back to Richard Nixon. Is reducing imports really possible, or is it mere rhetoric?
The challenge looks imposing, when you consider the recent direction of the two components that together determine the need for imports: our oil demand and domestic petroleum production. These two trends have been heading in opposite directions for years. Our oil consumption has been growing at 1-1/2% since the early 1990s--but more like 3% in 2004. Meanwhile, production is declining by about 4% per year, even before last year's hurricanes, which reduced US oil output in 2005 to the lowest level since 1949. In other words, the size of our "independence gap" is increasing by about 6% every year. Any realistic program for taming the growth of that gap, let alone reversing it, will require a combination of dramatic improvements in energy efficiency, additional alternative transportation fuels, and expanded conventional oil production. Last night's speech addressed the first two components of this mix.
President Bush highlighted several specific technologies for tackling our import dependence, including biofuels and other renewables, zero-emission coal power plants, and advanced hybrid cars. Although I still believe our primary focus should be on outcomes--specifying specific targets for energy savings and emissions reductions, rather than choosing technologies-- the solutions mentioned last night at least have a high likelihood of being important elements of our future energy system, and they all bear on our oil imports, either directly or indirectly.
I was particularly pleased to hear the President highlight the potential of advanced, biotechnology-based fuels. The grain ethanol we've relied on so far is simply not the answer to our energy problems. As I've mentioned previously, its energy contribution is uncertain--either modestly positive, or actually negative--and it certainly doesn't justify the billions of dollars in subsidies it has received. Technology will change that, as new processes offer the potential of both lower cost and much higher efficiency, while consuming crop waste, rather than crops.
Unfortunately, there was no mention of how the Advanced Energy Initiative will be funded. Initial estimates suggest it represents an increase of at least $700 million over energy programs already in place. Given growing calls for higher gasoline taxes, the President should at least have indicated why he has chosen not to raise the money for his energy initiative from that source, considering that less than a penny a gallon would have done the trick.
I suspect that once all the pundits have weighed in, the energy portion of the State of the Union will have pleased few of them. Those who have been calling for drastic measures will see it as too incremental and patient. Proponents of market-based solutions will bridle at further investment in technologies that remain highly uncertain, and are not yet competitive. As for me, I think it's a step in the right direction. Although I still regard energy independence as both practically unattainable and inconsistent with our trade-based economic system, there are many good reasons for getting our oil imports under control, and all the measures President Bush cited would help do just that, though it will take years to see the results. In addition, the highlighted energy technologies would all cut greenhouse gas emissions; if our response to climate change must wear the livery of energy independence, so be it.
The challenge looks imposing, when you consider the recent direction of the two components that together determine the need for imports: our oil demand and domestic petroleum production. These two trends have been heading in opposite directions for years. Our oil consumption has been growing at 1-1/2% since the early 1990s--but more like 3% in 2004. Meanwhile, production is declining by about 4% per year, even before last year's hurricanes, which reduced US oil output in 2005 to the lowest level since 1949. In other words, the size of our "independence gap" is increasing by about 6% every year. Any realistic program for taming the growth of that gap, let alone reversing it, will require a combination of dramatic improvements in energy efficiency, additional alternative transportation fuels, and expanded conventional oil production. Last night's speech addressed the first two components of this mix.
President Bush highlighted several specific technologies for tackling our import dependence, including biofuels and other renewables, zero-emission coal power plants, and advanced hybrid cars. Although I still believe our primary focus should be on outcomes--specifying specific targets for energy savings and emissions reductions, rather than choosing technologies-- the solutions mentioned last night at least have a high likelihood of being important elements of our future energy system, and they all bear on our oil imports, either directly or indirectly.
I was particularly pleased to hear the President highlight the potential of advanced, biotechnology-based fuels. The grain ethanol we've relied on so far is simply not the answer to our energy problems. As I've mentioned previously, its energy contribution is uncertain--either modestly positive, or actually negative--and it certainly doesn't justify the billions of dollars in subsidies it has received. Technology will change that, as new processes offer the potential of both lower cost and much higher efficiency, while consuming crop waste, rather than crops.
Unfortunately, there was no mention of how the Advanced Energy Initiative will be funded. Initial estimates suggest it represents an increase of at least $700 million over energy programs already in place. Given growing calls for higher gasoline taxes, the President should at least have indicated why he has chosen not to raise the money for his energy initiative from that source, considering that less than a penny a gallon would have done the trick.
I suspect that once all the pundits have weighed in, the energy portion of the State of the Union will have pleased few of them. Those who have been calling for drastic measures will see it as too incremental and patient. Proponents of market-based solutions will bridle at further investment in technologies that remain highly uncertain, and are not yet competitive. As for me, I think it's a step in the right direction. Although I still regard energy independence as both practically unattainable and inconsistent with our trade-based economic system, there are many good reasons for getting our oil imports under control, and all the measures President Bush cited would help do just that, though it will take years to see the results. In addition, the highlighted energy technologies would all cut greenhouse gas emissions; if our response to climate change must wear the livery of energy independence, so be it.
Tuesday, January 31, 2006
Taxes vs. Projects
Earnings season is upon us, and the oil companies' 2005 results will certainly energize their critics. The top three US firms, ExxonMobil, Chevron, and ConocoPhillips, collectively earned almost $64 billion last year, up from the prior year's combined $47 billion. These remarkable figures will reinforce calls for some form of windfall tax and reduce the likelihood of derailing the "inventory tax" already under consideration. If the industry is going to make a compelling case for retaining all its profits to reinvest for the future, it must do so soon.
Returning to the windfall profit taxes of the 1970s--or some updated variant--would be a costly error, but it's harder to make that case when companies spend billions buying back their own shares. The inescapable fact is that expanding these companies' alternative energy portfolios, while simultaneously replacing their current oil and gas production, will require investments on a vast scale. A billion dollars currently buys one deepwater production platform, and the world will need scores of them in the next decade. Refineries, oil sands and gas-to-liquids plants are even pricier. The best argument against new taxes is a full slate of conventional and alternative energy projects, coupled to straightforward explanations of how they support future demand.
While I'm struck by the way this industry has been singled out for opprobrium for turning a healthy profit--in contrast to other sectors with less risk and much lower capital needs--I am convinced that a good part of this resentment flows from the inadequacy of the industry's public education efforts over the years. How many people understand what it takes to get a gallon of gasoline to the corner service station, let alone truly appreciate the difficulty of replacing even 10% of our present fossil fuel supply with renewable energy? Now, perhaps that's a failing of our schools, but it's also a huge missed opportunity for an industry that has such frequent contact with its customers.
Whether we like these companies or not, it's in the interest of everyone who drives a car, flies, or heats a home with oil or gas, that they earn a return sufficient to induce investors to keep their money there, instead of putting it all into stocks like Google. That might seem an incredible notion today, but it was a serious problem for the industry only a few years ago, when oil prices were lower. Recreating that situation now with taxes, rather than low oil prices, would guarantee a return to the underinvestment that has contributed to today's energy problems.
Returning to the windfall profit taxes of the 1970s--or some updated variant--would be a costly error, but it's harder to make that case when companies spend billions buying back their own shares. The inescapable fact is that expanding these companies' alternative energy portfolios, while simultaneously replacing their current oil and gas production, will require investments on a vast scale. A billion dollars currently buys one deepwater production platform, and the world will need scores of them in the next decade. Refineries, oil sands and gas-to-liquids plants are even pricier. The best argument against new taxes is a full slate of conventional and alternative energy projects, coupled to straightforward explanations of how they support future demand.
While I'm struck by the way this industry has been singled out for opprobrium for turning a healthy profit--in contrast to other sectors with less risk and much lower capital needs--I am convinced that a good part of this resentment flows from the inadequacy of the industry's public education efforts over the years. How many people understand what it takes to get a gallon of gasoline to the corner service station, let alone truly appreciate the difficulty of replacing even 10% of our present fossil fuel supply with renewable energy? Now, perhaps that's a failing of our schools, but it's also a huge missed opportunity for an industry that has such frequent contact with its customers.
Whether we like these companies or not, it's in the interest of everyone who drives a car, flies, or heats a home with oil or gas, that they earn a return sufficient to induce investors to keep their money there, instead of putting it all into stocks like Google. That might seem an incredible notion today, but it was a serious problem for the industry only a few years ago, when oil prices were lower. Recreating that situation now with taxes, rather than low oil prices, would guarantee a return to the underinvestment that has contributed to today's energy problems.
Monday, January 30, 2006
Why We Trade (Futures and Derivatives)
My posting two weeks ago on energy trading elicited several comments, including one requesting my views on how risk management benefits those with actual supply or demand, as opposed to a purely speculative interest in the market. This is a question I used to field on a regular basis, when I was in the market. The top managements of companies that produce, refine and distribute oil and gas are often suspicious of these trader types--including their own trading staffs, at times--so I had to have a ready answer for this. As the market became more sophisticated with the introduction of all sorts of derivatives, the answer got a little more complex, too.
There are at least two fundamental reasons for "hedging" commodity price risk using futures, options and derivatives . I have always felt the second was more important (and valuable) than the first, though they can wind up overlapping for smaller firms:
During the time a barrel of oil is produced, transported, refined, and distributed to the point of sale, market prices can change significantly. This creates a whole chain of realized or unrealized profits and losses along the way, depending on whether the transactions involved are between business units of one company or between unrelated companies. Being able to fix, or "lock in" all or a portion of the revenue as soon as the oil is produced or acquired makes the resulting cash flows, which may be large enough to affect the firm's bottom line, much more reliable and predictable. The key is making sure that the financial instrument used for hedging has a close enough correlation to the actual commodity being hedged, to match paper profits or losses to their physical-world counterparts. In other words, as an old boss of mine used to say, "What you lose in the grapes you make up in the bananas."
The deeper argument for hedging is that it enables companies to do deals they wouldn't do otherwise, because they couldn't stomach the resulting risk. Doing riskier deals and laying off some of that risk is thus a non-zero-sum activity, because it provides economic value from activities that wouldn't have happened without a hedge. An example might be in order:
If you live in the Northeast and use heating oil, you've probably at least been tempted to buy your oil at a fixed price for the entire winter season, or the whole year. But when you look at the way heating oil prices fluctuate, as a function of crude oil prices, refining margins, and other supply and demand factors, you can appreciate that your local heating oil company--probably a fairly small business, compared to the major oil or refining companies--couldn't possibly absorb all that volatility without running a big risk of going bankrupt every year. Instead, they--or their supplier--hedge that risk using some combination of futures, options and derivatives to create a fixed price contract, which they can then extend to you, for some fixed markup.
All of this hedging depends on a liquid market--one in which transactions of the necessary size can be done whenever needed--with enough counterparties willing to go the other way. If the only players in that market were your competitors in the same segment of the industry, e.g. other heating oil suppliers, isn't it likely that most of them would want to go the same direction on any given day, because you're all looking at the same business drivers? That's where speculators come in. This is no different than the stock market; when you sell shares, you need there to be someone willing to buy them at a mutually-agreeable price, and not just because his situation mirrors yours perfectly.
Multiply this across the whole market, and you get a pretty complex place filled with producers, refiners, marketers, end-users and lots and lots of speculators from Wall St. firms and hedge funds. Each needs the others, if the market is going to serve their collective needs. And as long as the markets aren't manipulated or "cornered", society as a whole benefits from economic activity at every level of the market, at least some of which wouldn't have happened otherwise.
Friday, January 27, 2006
Nuclear Power Paranoia
The UK is considering expanded nuclear power as a way to help meet its commitment to reduce greenhouse gas emissions under the Kyoto Treaty. This idea is controversial, but even a few leading figures in the environmental movement have come around to this view. Unfortunately, there are others who, rather than engaging in this important debate with facts, find it more expedient to attempt to scare the British public to death. An advertisement by Greenpeace, running on UK television, shows how far they'll go to sink the nuclear option.
In the last decade or so, many environmental groups have moderated their previous extreme rhetoric and, in the process, gained much greater acceptance as legitimate participants in national and international debates over energy and environmental policy. I consider this a positive development, because it helps environmental issues that merit serious consideration to be seen as part of the mainstream. By running this ad--reminiscent of the famous/infamous "daisy" ad in the 1964 US election--Greenpeace sets back the larger cause of environmentalism by casting it as a form of irrational alarmism.
On balance this blog has been moderately in favor of nuclear power, largely on the basis of its potential as a low greenhouse-gas-emitting, base-load complement to renewable electricity sources such as wind and solar. At the same time, I recognize that it comes with drawbacks, including high project risks, proliferation issues and an unresolved, politicized waste problem, particularly here in the US. As the TerraPass blog in which I ran across the Greenpeace ad points out, there are legitimate safety concerns about nuclear power, but 9/11-style attacks with airplanes don't rank high on the list.
In short, I can see how reasonable people might differ over the pros and cons of this technology. What I can't grasp is the sanctimonious paranoia--or cynicism--that would motivate someone to engage in this kind of scare tactic. It doesn't advance the debate, and in the end I don't think it will aid the anti-nuclear power argument. It might even backfire.
In the last decade or so, many environmental groups have moderated their previous extreme rhetoric and, in the process, gained much greater acceptance as legitimate participants in national and international debates over energy and environmental policy. I consider this a positive development, because it helps environmental issues that merit serious consideration to be seen as part of the mainstream. By running this ad--reminiscent of the famous/infamous "daisy" ad in the 1964 US election--Greenpeace sets back the larger cause of environmentalism by casting it as a form of irrational alarmism.
On balance this blog has been moderately in favor of nuclear power, largely on the basis of its potential as a low greenhouse-gas-emitting, base-load complement to renewable electricity sources such as wind and solar. At the same time, I recognize that it comes with drawbacks, including high project risks, proliferation issues and an unresolved, politicized waste problem, particularly here in the US. As the TerraPass blog in which I ran across the Greenpeace ad points out, there are legitimate safety concerns about nuclear power, but 9/11-style attacks with airplanes don't rank high on the list.
In short, I can see how reasonable people might differ over the pros and cons of this technology. What I can't grasp is the sanctimonious paranoia--or cynicism--that would motivate someone to engage in this kind of scare tactic. It doesn't advance the debate, and in the end I don't think it will aid the anti-nuclear power argument. It might even backfire.
Thursday, January 26, 2006
Scale of Independence
In case you haven't run across their ads for it, Chevron is hosting an interesting discussion forum on energy issues at WillYouJoinUs.com. Recent topics have included improved conservation and stretching out our oil and gas supplies. The current subject is energy independence vs. interdependence; I posted the following comments on that issue there, and I thought they might be of interest to the readers of this blog:
"The last year in which the US was 100% self-sufficient in energy was 1957. Today, we use 100 quadrillion BTUs of energy in all forms, per year, while our production has plateaued at 70 quads. Balancing that equation, either by adding new supply or putting in enough efficiency to reduce our consumption to equal our own production, would require a change equivalent to all the energy we currently get from coal and nuclear power, combined. Factoring in that the magnitude of our energy deficit has doubled in the last decade, the likelihood of achieving independence any time soon is negligible.
If we raise the bar to require going off oil entirely (40 quads/year) the goal recedes even farther. Nor is there any single technology or set of technologies available today that can close these gaps within less than two decades, based on the most aggressive turnover of vehicles and capital stock that can be realistically imagined.
So this isn't a philosophical debate between the virtues of independence and those of interdependence; we have no choice. We must make a virtue of necessity and focus our efforts on the margins, where market prices are set. Reducing our energy consumption by 5% and shifting 5 quads per year (about 2.5 million barrels per day) from oil to natural gas would have a profound impact on energy markets, particularly if it were part of a larger strategy to replace further increments with large-scale renewables, such as biofuels.
Achieving even this modest level of change will require a combination of commitment, persistence and sacrifice that we haven’t experienced in decades. But, unlike independence, it could actually be done and would pay huge dividends by exerting leverage on our remaining energy imports."
Even though the discussion site is sponsored by a corporation as part of a PR campaign, I think the subject is important and the ideas diverse enough to encourage all my readers to visit WillYouJoinUs and post your own thoughts. While you're at it, you may also want to read this excellent article on energy security in this week's Economist.
By the way, an abbreviated version of my posting of January 10 was printed in the Letters section of yesterday’s Wall St. Journal (subscription required.)
"The last year in which the US was 100% self-sufficient in energy was 1957. Today, we use 100 quadrillion BTUs of energy in all forms, per year, while our production has plateaued at 70 quads. Balancing that equation, either by adding new supply or putting in enough efficiency to reduce our consumption to equal our own production, would require a change equivalent to all the energy we currently get from coal and nuclear power, combined. Factoring in that the magnitude of our energy deficit has doubled in the last decade, the likelihood of achieving independence any time soon is negligible.
If we raise the bar to require going off oil entirely (40 quads/year) the goal recedes even farther. Nor is there any single technology or set of technologies available today that can close these gaps within less than two decades, based on the most aggressive turnover of vehicles and capital stock that can be realistically imagined.
So this isn't a philosophical debate between the virtues of independence and those of interdependence; we have no choice. We must make a virtue of necessity and focus our efforts on the margins, where market prices are set. Reducing our energy consumption by 5% and shifting 5 quads per year (about 2.5 million barrels per day) from oil to natural gas would have a profound impact on energy markets, particularly if it were part of a larger strategy to replace further increments with large-scale renewables, such as biofuels.
Achieving even this modest level of change will require a combination of commitment, persistence and sacrifice that we haven’t experienced in decades. But, unlike independence, it could actually be done and would pay huge dividends by exerting leverage on our remaining energy imports."
Even though the discussion site is sponsored by a corporation as part of a PR campaign, I think the subject is important and the ideas diverse enough to encourage all my readers to visit WillYouJoinUs and post your own thoughts. While you're at it, you may also want to read this excellent article on energy security in this week's Economist.
By the way, an abbreviated version of my posting of January 10 was printed in the Letters section of yesterday’s Wall St. Journal (subscription required.)
Wednesday, January 25, 2006
Breaking Coal's Constraints
I just read an interesting commentary on coal over at EnergyCentral.com. We tend to think of coal as an essentially boundless resource in the US, limited more by its environmental impact, mine-safety concerns and capital constraints than by any physical restrictions on the resource. That may not be the case. The author suggests that factors in the rail industry, including the impact of the tremendous consolidation that's taken place in the last decade or so, are putting a cap on the amount of coal that can be shipped to power plants in the foreseeable future. Although that could have serious implications for our energy supply, this outcome seems far from certain, given the available alternatives.
For years, coal has suffered from a sharply divided image. Despite its leading role in electricity generation, providing an inexpensive domestic fuel for base-load power generation, coal's environmental profile has cast serious doubts over its future. The combination of local pollution, in the form of acid rain precursors and heavy metals, and its high greenhouse gas emissions put it at odds with the environmental trends of the last 25 years, including the widely-noted "decarbonization" of energy. The development of advanced clean coal technology, including Integrated Gasification Combined Cycle (IGCC) with its potential for sequestering carbon dioxide emissions and keeping them out of the atmosphere, has elicited surprisingly positive comments from ardent environmentalists. Wouldn't it be ironic if logistics, rather than environmental concerns, prevented coal from making its full contribution to energy security?
Fortunately, I think there are several reasonable, though not necessarily cheap, ways around this. If rail capacity can't or won't keep up, slurry pipelines might provide a good alternative. The technology to pulverize coal and create a coal-water slurry is off-the-shelf, and a lot of work has been done on additives to keep the coal in suspension while in transit. The slurry can either be burned directly, or the coal can be de-slurried and dried before use. The biggest problem with this approach is the high cost of power to run the pumps, which must move as much water as coal.
Another solution would be to treat stranded coal in the same manner contemplated for natural gas: onsite gasifiers could feed gas-to-liquids plants, producing liquid synthetic fuels that could then be shipped by product pipeline or rail tankcar. Even the latter would help alleviate rail capacity constraints, because of the higher value and higher energy density of GTL diesel vs. coal. The same train could carry many more BTUs of energy as diesel than as coal, and the value of the fuel could accommodate higher freight tariffs.
Finally, building power plants in proximity to coal supplies, rather than near their demand load--Mohammed going to the mountain, as it were--is a time-tested strategy, although new long-distance power transmission lines aren't necessarily more popular than rail expansions, and line losses put a limit on how far you can send the power economically.
Ultimately, if technology can successfully overcome the environmental and other constraints on wider use of coal, I don't see why it can't provide practical ways either to circumvent existing rail capacity limitations, or provide sufficient inducement to remove those constraints through additional rail investments. This might drive the cost of coal a bit higher, but there's little on the horizon that will make its main competitors, natural gas and oil, drastically cheaper any time soon, and, at the present stage of development, wind and solar power compete more with natural gas than with coal.
For years, coal has suffered from a sharply divided image. Despite its leading role in electricity generation, providing an inexpensive domestic fuel for base-load power generation, coal's environmental profile has cast serious doubts over its future. The combination of local pollution, in the form of acid rain precursors and heavy metals, and its high greenhouse gas emissions put it at odds with the environmental trends of the last 25 years, including the widely-noted "decarbonization" of energy. The development of advanced clean coal technology, including Integrated Gasification Combined Cycle (IGCC) with its potential for sequestering carbon dioxide emissions and keeping them out of the atmosphere, has elicited surprisingly positive comments from ardent environmentalists. Wouldn't it be ironic if logistics, rather than environmental concerns, prevented coal from making its full contribution to energy security?
Fortunately, I think there are several reasonable, though not necessarily cheap, ways around this. If rail capacity can't or won't keep up, slurry pipelines might provide a good alternative. The technology to pulverize coal and create a coal-water slurry is off-the-shelf, and a lot of work has been done on additives to keep the coal in suspension while in transit. The slurry can either be burned directly, or the coal can be de-slurried and dried before use. The biggest problem with this approach is the high cost of power to run the pumps, which must move as much water as coal.
Another solution would be to treat stranded coal in the same manner contemplated for natural gas: onsite gasifiers could feed gas-to-liquids plants, producing liquid synthetic fuels that could then be shipped by product pipeline or rail tankcar. Even the latter would help alleviate rail capacity constraints, because of the higher value and higher energy density of GTL diesel vs. coal. The same train could carry many more BTUs of energy as diesel than as coal, and the value of the fuel could accommodate higher freight tariffs.
Finally, building power plants in proximity to coal supplies, rather than near their demand load--Mohammed going to the mountain, as it were--is a time-tested strategy, although new long-distance power transmission lines aren't necessarily more popular than rail expansions, and line losses put a limit on how far you can send the power economically.
Ultimately, if technology can successfully overcome the environmental and other constraints on wider use of coal, I don't see why it can't provide practical ways either to circumvent existing rail capacity limitations, or provide sufficient inducement to remove those constraints through additional rail investments. This might drive the cost of coal a bit higher, but there's little on the horizon that will make its main competitors, natural gas and oil, drastically cheaper any time soon, and, at the present stage of development, wind and solar power compete more with natural gas than with coal.
Tuesday, January 24, 2006
Car Sharing
I've long been intrigued by the car sharing clubs that have sprung up in Germany and elsewhere around the EU. An article in the Wall St. Journal last week (subscription required) described how the clever use of wireless technology and the text-messaging feature of Europe's GSM cellphone standard has made these services more convenient and secure. Even though this approach, in which you rent cars in increments of hours instead of days, seems incompatible with the way most Americans view their cars, there are fledgling car-sharing organizations in some US cities (e.g., NY, Seattle and San Francisco.) Aside from its convenience, this system could also save a fair amount of gasoline.
That might sound counter-intuitive at first, if you assume car-sharing would mainly induce the car-less to car-share, instead of taking mass transit. But it should make it even more attractive for those who are fed up with the hassle and cost of owning cars in urban areas like Manhattan to give them up, on the assurance that they can micro-rent one any time for an errand or appointment. Even if these two customer categories canceled each other out, the scheme might still improve overall fuel economy, by reducing the number of SUVs on the road. After all, if you could get an SUV any time you really needed one for hauling capacity or traction, then you wouldn't need to drive one all the time.
Car sharing is also a good avenue through which to ramp up sales of fuel-efficient hybrid vehicles. Since hybrids typically achieve their best mileage in urban driving, they are ideal for lowering the costs of urban car-sharing. It also keeps the consumer risk associated with this kind of new technology to a minimum. Maintenance, battery life, and resale issues that might deter an individual buyer can be managed much more easily within a commercial fleet.
Improving the technology behind car-sharing, as described in the article, should do more than just make it more efficient and secure. It should make it more appealing, as well. I love the thought of being able to wave a smart card or cellphone at some random car on the street, hop in, and drive away. It wouldn't work for my suburban lifestyle, but if I lived in New York City, I'd sign up in a heartbeat.
That might sound counter-intuitive at first, if you assume car-sharing would mainly induce the car-less to car-share, instead of taking mass transit. But it should make it even more attractive for those who are fed up with the hassle and cost of owning cars in urban areas like Manhattan to give them up, on the assurance that they can micro-rent one any time for an errand or appointment. Even if these two customer categories canceled each other out, the scheme might still improve overall fuel economy, by reducing the number of SUVs on the road. After all, if you could get an SUV any time you really needed one for hauling capacity or traction, then you wouldn't need to drive one all the time.
Car sharing is also a good avenue through which to ramp up sales of fuel-efficient hybrid vehicles. Since hybrids typically achieve their best mileage in urban driving, they are ideal for lowering the costs of urban car-sharing. It also keeps the consumer risk associated with this kind of new technology to a minimum. Maintenance, battery life, and resale issues that might deter an individual buyer can be managed much more easily within a commercial fleet.
Improving the technology behind car-sharing, as described in the article, should do more than just make it more efficient and secure. It should make it more appealing, as well. I love the thought of being able to wave a smart card or cellphone at some random car on the street, hop in, and drive away. It wouldn't work for my suburban lifestyle, but if I lived in New York City, I'd sign up in a heartbeat.
Monday, January 23, 2006
High Tension
Speculation about a confrontation over Iran's nuclear program continues, as Iran moves its money out of European banks and the oil market exhibits a fine case of jitters. Yesterday's New York Times hinted strongly at one possible military scenario, while explaining its many undesirable consequences. In the same section, David Brooks's op-ed (subscription required) described the growing domestic political rifts over the various options available to us. The only parties heartened by all this must be President Ahmadinejad and the mullahs.
In David Sanger's article, various US officials--most off the record--described a possible air strike on Iran's nuclear facilities. It would have more in common with 2003's "Shock and Awe" air campaign in Iraq than with Israel's 1981 raid on Osirak. But unlike Iraq, Iran would not absorb such an attack without responding in ways that could quickly involve the entire region, throwing energy markets and stock markets into chaos. Iran's recent rhetoric suggests they see this as their trump card.
Meanwhile it's clear that Iran has gone to school on Saddam's methods for sowing division within the international community. As long as they can string out talks with Russia about external processing for their nuclear fuel, the likelihood of Russia or China participating in any meaningful international sanctions will remain low. Iran is stalling, and that is their best strategy at the moment; it may be ours, as well.
In the absence of a military option with acceptable costs, and without a broad consensus--in either Congress or the UN--on sanctions that would punish the Iranian government without backfiring elsewhere, both sides will keep posturing, until everyone's patience is exhausted. The ultimate outcome depends mostly on the true nature of the Iranians' goals and the strength of their determination to achieve them. Perhaps their intended model is Pakistan, which has suffered little lasting damage from joining the nuclear club. But will they risk ending up like North Korea, armed but isolated, or Iraq, which bluffed once too often?
In David Sanger's article, various US officials--most off the record--described a possible air strike on Iran's nuclear facilities. It would have more in common with 2003's "Shock and Awe" air campaign in Iraq than with Israel's 1981 raid on Osirak. But unlike Iraq, Iran would not absorb such an attack without responding in ways that could quickly involve the entire region, throwing energy markets and stock markets into chaos. Iran's recent rhetoric suggests they see this as their trump card.
Meanwhile it's clear that Iran has gone to school on Saddam's methods for sowing division within the international community. As long as they can string out talks with Russia about external processing for their nuclear fuel, the likelihood of Russia or China participating in any meaningful international sanctions will remain low. Iran is stalling, and that is their best strategy at the moment; it may be ours, as well.
In the absence of a military option with acceptable costs, and without a broad consensus--in either Congress or the UN--on sanctions that would punish the Iranian government without backfiring elsewhere, both sides will keep posturing, until everyone's patience is exhausted. The ultimate outcome depends mostly on the true nature of the Iranians' goals and the strength of their determination to achieve them. Perhaps their intended model is Pakistan, which has suffered little lasting damage from joining the nuclear club. But will they risk ending up like North Korea, armed but isolated, or Iraq, which bluffed once too often?
Friday, January 20, 2006
The New Sputnik
Tom Friedman of the New York Times is widely regarded as one of our most astute observers of global trends, a view I share. In today's op-ed (subscription required) he suggests that Iran's nuclear threat, climate change, and the shrinking of Detroit's auto industry are all aspects of a multi-faceted wake-up call to America--the Sputnik of our era--and all share energy as a common denominator. I agree. Our response to these challenges will largely determine our future success and prosperity as a nation. Unfortunately, I'm skeptical about his prescription that all this can be addressed by a gasoline tax fixing the price of the fuel between $3.50 and $4.00 per gallon, regardless of fluctuations in global oil prices.
Toyota has received a lot of media coverage recently for its past success and the prospect that it could overtake GM as the world's largest auto maker this year. Some commentators have cited Toyota as the best American carmaker, with US auto plants every bit as good as those in Yokohama or elsewhere. This year Toyota will roll out its newest Camry, the best-selling car in America, and one of its versions will be a hybrid estimated to get 43 miles per gallon. If Toyota thought US buyers wanted them, they have the technology and wherewithal to make every Camry a hybrid within a few years. I know Ford takes this possibility seriously, but I'm not sure that GM or Daimler-Chrysler do.
However tempting they might be as a way to nudge us in this direction, gasoline taxes can't substitute for informed consumers who value energy efficiency at least as highly as they do power windows and cupholders. It's worth reminding ourselves that decades of extremely high fuel taxes have not freed Europe, where gasoline currently sells for $5-6 dollars per gallon, from dependence on Middle East oil.
Advanced technology and alternative energy sources, including biofuels, wind, solar and clean coal, hold great potential for shrinking our need for oil in the future. But we will burn a lot more barrels of oil and a lot more cubic feet of natural gas before those alternatives can grow enough to become entrees, rather than mere appetizers in our 100 quadrillion BTU per year energy menu. Getting to that point will require all of our discovered-but-off-limits natural gas reserves and the Alaskan gas pipeline and LNG and Canadian tar sands and--in my view--ANWR's oil, in addition to clearing away the NIMBY obstacles that block many of these as much as they do the wider development of wind and solar power.
Meanwhile I hope Mr. Friedman will continue to remind us that many of our worries--high oil prices, Islamic extremism, increasingly unpredictable weather, and our trade deficit--are truly connected. We have more control over these factors than we give ourselves credit for, not at the ballot box, but in the choices we make as consumers every day.
Toyota has received a lot of media coverage recently for its past success and the prospect that it could overtake GM as the world's largest auto maker this year. Some commentators have cited Toyota as the best American carmaker, with US auto plants every bit as good as those in Yokohama or elsewhere. This year Toyota will roll out its newest Camry, the best-selling car in America, and one of its versions will be a hybrid estimated to get 43 miles per gallon. If Toyota thought US buyers wanted them, they have the technology and wherewithal to make every Camry a hybrid within a few years. I know Ford takes this possibility seriously, but I'm not sure that GM or Daimler-Chrysler do.
However tempting they might be as a way to nudge us in this direction, gasoline taxes can't substitute for informed consumers who value energy efficiency at least as highly as they do power windows and cupholders. It's worth reminding ourselves that decades of extremely high fuel taxes have not freed Europe, where gasoline currently sells for $5-6 dollars per gallon, from dependence on Middle East oil.
Advanced technology and alternative energy sources, including biofuels, wind, solar and clean coal, hold great potential for shrinking our need for oil in the future. But we will burn a lot more barrels of oil and a lot more cubic feet of natural gas before those alternatives can grow enough to become entrees, rather than mere appetizers in our 100 quadrillion BTU per year energy menu. Getting to that point will require all of our discovered-but-off-limits natural gas reserves and the Alaskan gas pipeline and LNG and Canadian tar sands and--in my view--ANWR's oil, in addition to clearing away the NIMBY obstacles that block many of these as much as they do the wider development of wind and solar power.
Meanwhile I hope Mr. Friedman will continue to remind us that many of our worries--high oil prices, Islamic extremism, increasingly unpredictable weather, and our trade deficit--are truly connected. We have more control over these factors than we give ourselves credit for, not at the ballot box, but in the choices we make as consumers every day.
Thursday, January 19, 2006
Gas-to-Liquids Impact
Yesterday's New York Times featured a story on the growing global industry to convert natural gas into synthetic diesel fuel, but it stopped well short of considering the implications of this expansion. Neither did it convey a clear idea of what is driving this development, beyond the economics of high oil prices. The actual story is more complicated. Although gas-to-liquids (GTL) has many positives, there is at least one significant drawback worth considering.
The historical perspective in the article was generally correct. The science behind this process has been around for many decades, helping to fuel Hitler's armies in World War II. Interest was revived in the 1970s, with plants built not just in Apartheid-era South Africa but also in New Zealand. Until very recently, however, GTL products have been much more expensive than conventional refined products from crude oil. The first large new GTL plant, a Shell facility in Malaysia, was helped by sales of valuable waxes and other byproducts, but the global markets for these products are too small to drive broader GTL expansion.
The prize here is twofold: harvesting the locked-up value of natural gas fields that are too far from markets to justify building pipelines, and producing diesel fuel that burns more cleanly than conventional diesel, especially with regard to particulate pollution. The Times cites a study by Cambridge Energy Research Associates (CERA) suggesting that GTL will contribute almost a million barrels per day of synthetic liquid fuels by 2010 and up to 2 million by 2020. As the cost per barrel of building GTL capacity falls, these numbers will continue to ramp up, tapping trillions of cubic feet of "stranded" gas. And there's the rub. At some level, GTL competes with the other technique for bringing stranded gas to market, LNG, or liquefied natural gas.
Today there's plenty of gas to fuel both processes, and the criteria for choosing one or the other are different enough that both can coexist. However, GTL has important advantages over LNG. Its output ships in conventional product tankers, rather than the expensive floating thermos bottles required by LNG, and it doesn't need costly and NIMBY-prone receiving infrastructure. If the capital costs of GTL fall faster than those for LNG, the former could eventually squeeze out the latter.
That would complicate plans to cover a growing fraction of US natural gas demand with imported gas, largely in the form of LNG. If the source gas isn’t available, because it’s been turned into diesel, then power plants will have to burn other fuels. While that could spur demand for additional renewable electricity from wind and solar, these are intermittent sources, so at some point there’s no substitute for a fossil-fuel fired plant, unless it’s a nuclear reactor. To put this in perspective, the 150,000 barrel per day Exxon project cited in the article will consume 1.8 billion cubic feet per day of gas, about the same quantity used last year by all the gas-fired power plants in the Northeast (New England plus NY, NJ and PA.)
As a consequence of these downstream tradeoffs, the net long-term environmental benefits of GTL are ambiguous. GTL fuel certainly burns cleaner than regular diesel, and that’s important because of the growing demand for diesel fuel, particularly in Europe. But the energy consumed in making GTL diesel dissipates much of the greenhouse gas benefit available from using natural gas directly, and the choice of GTL over LNG could result in more emissions from coal use.
Even if none of this product ever turns up at a service station in the US, it will still have a positive impact on fuel prices. The quantities of GTL under development may be small, relative to global oil consumption of 84 million barrels per day, but they represent an important component of incremental supply, where a million barrels per day one way or the other could be the difference between $35 oil and $50 oil. And by helping cover Europe’s growing diesel deficit, it will ensure that the US can continue to rely on a source of gasoline imports that we’d be hard-pressed to do without.
On balance, then, GTL is an important new source of clean liquid fuels, contributing to the global oil supply, but it complicates the prospect for wider use of natural gas in countries reliant on imports of LNG, including the US. As a result, its total environmental impact is mixed.
The historical perspective in the article was generally correct. The science behind this process has been around for many decades, helping to fuel Hitler's armies in World War II. Interest was revived in the 1970s, with plants built not just in Apartheid-era South Africa but also in New Zealand. Until very recently, however, GTL products have been much more expensive than conventional refined products from crude oil. The first large new GTL plant, a Shell facility in Malaysia, was helped by sales of valuable waxes and other byproducts, but the global markets for these products are too small to drive broader GTL expansion.
The prize here is twofold: harvesting the locked-up value of natural gas fields that are too far from markets to justify building pipelines, and producing diesel fuel that burns more cleanly than conventional diesel, especially with regard to particulate pollution. The Times cites a study by Cambridge Energy Research Associates (CERA) suggesting that GTL will contribute almost a million barrels per day of synthetic liquid fuels by 2010 and up to 2 million by 2020. As the cost per barrel of building GTL capacity falls, these numbers will continue to ramp up, tapping trillions of cubic feet of "stranded" gas. And there's the rub. At some level, GTL competes with the other technique for bringing stranded gas to market, LNG, or liquefied natural gas.
Today there's plenty of gas to fuel both processes, and the criteria for choosing one or the other are different enough that both can coexist. However, GTL has important advantages over LNG. Its output ships in conventional product tankers, rather than the expensive floating thermos bottles required by LNG, and it doesn't need costly and NIMBY-prone receiving infrastructure. If the capital costs of GTL fall faster than those for LNG, the former could eventually squeeze out the latter.
That would complicate plans to cover a growing fraction of US natural gas demand with imported gas, largely in the form of LNG. If the source gas isn’t available, because it’s been turned into diesel, then power plants will have to burn other fuels. While that could spur demand for additional renewable electricity from wind and solar, these are intermittent sources, so at some point there’s no substitute for a fossil-fuel fired plant, unless it’s a nuclear reactor. To put this in perspective, the 150,000 barrel per day Exxon project cited in the article will consume 1.8 billion cubic feet per day of gas, about the same quantity used last year by all the gas-fired power plants in the Northeast (New England plus NY, NJ and PA.)
As a consequence of these downstream tradeoffs, the net long-term environmental benefits of GTL are ambiguous. GTL fuel certainly burns cleaner than regular diesel, and that’s important because of the growing demand for diesel fuel, particularly in Europe. But the energy consumed in making GTL diesel dissipates much of the greenhouse gas benefit available from using natural gas directly, and the choice of GTL over LNG could result in more emissions from coal use.
Even if none of this product ever turns up at a service station in the US, it will still have a positive impact on fuel prices. The quantities of GTL under development may be small, relative to global oil consumption of 84 million barrels per day, but they represent an important component of incremental supply, where a million barrels per day one way or the other could be the difference between $35 oil and $50 oil. And by helping cover Europe’s growing diesel deficit, it will ensure that the US can continue to rely on a source of gasoline imports that we’d be hard-pressed to do without.
On balance, then, GTL is an important new source of clean liquid fuels, contributing to the global oil supply, but it complicates the prospect for wider use of natural gas in countries reliant on imports of LNG, including the US. As a result, its total environmental impact is mixed.
Wednesday, January 18, 2006
Hot Hybrids?
As I combed through email over the holidays, I ran across an interesting article from MIT's Technology Review about the potential to tap waste energy in cars using "thermoelectrics", which convert heat directly to electricity. The article focused on the possibility of using these materials to capture heat, e.g. from the car's exhaust, to run accessories or power steering. It now occurs to me that the best use of this technology might be as an adjunct to hybrid systems, boosting the stored electricity available to drive the car. That could make hybrids more efficient and attractive in the long run, giving fuel cells an even tougher competitor to beat.
The "holy grail" of energy efficiency is converting most of the chemical energy of our fuels into useful power, and much less of it into waste heat to the environment. The internal combustion engines that power our cars do a terrible job of this. The theoretical maximum efficiency of a heat engine is around 40%. Most car engines are lucky to deliver half of that, in the real world. In other words, for every gallon of gas you buy, you are only benefiting from the energy content of about one-and-a-half pints. What if you could turn that into 3-4 pints?
Two of the most popular energy efficiency technologies today, the hybrid car and the combined cycle gas turbine, are aimed directly at capturing energy otherwise lost as heat. This is done directly in the case of the CCGT, by using the hot turbine exhaust to generate steam to run another turbine, and indirectly in the case of a hybrid car, which recycles some of the energy lost in braking. Marrying a hybrid car drivetrain with thermoelectric material designed to turn engine heat into extra power might effectively give you a "combined-cycle car" with thermal efficiency approaching that of a fuel cell but without the latter's need for hydrogen infrastructure.
The biggest challenge in making this practical--aside from whatever is involved in perfecting the thermoelectric material--is maximizing the temperature at which the engine runs. If that sounds paradoxical or even dangerous, remember that the laws of thermodynamics dictate that the useful energy you can extract from something is related to its temperature. A CCGT is only as efficient as it is, because the turbine exhaust comes out at a couple thousand degrees F. By comparison, your radiator, the main heat sink for your car, keeps the engine block at 150-200 degrees, which is pretty low-level as heat sources go. This might be where ceramic engine blocks--an idea that has been floating around for decades--might shine, by operating at temperatures high enough to provide a nice heat source for thermoelectrics.
Now, I have to admit this whole idea is pretty speculative. But even if what I described never ends up in a car you can buy, it illustrates the diversity of ways to skin the vehicle efficiency cat. It is still premature to proclaim fuel cells, conventional or plug-in hybrids, or anything else the clear winner in this race.
The "holy grail" of energy efficiency is converting most of the chemical energy of our fuels into useful power, and much less of it into waste heat to the environment. The internal combustion engines that power our cars do a terrible job of this. The theoretical maximum efficiency of a heat engine is around 40%. Most car engines are lucky to deliver half of that, in the real world. In other words, for every gallon of gas you buy, you are only benefiting from the energy content of about one-and-a-half pints. What if you could turn that into 3-4 pints?
Two of the most popular energy efficiency technologies today, the hybrid car and the combined cycle gas turbine, are aimed directly at capturing energy otherwise lost as heat. This is done directly in the case of the CCGT, by using the hot turbine exhaust to generate steam to run another turbine, and indirectly in the case of a hybrid car, which recycles some of the energy lost in braking. Marrying a hybrid car drivetrain with thermoelectric material designed to turn engine heat into extra power might effectively give you a "combined-cycle car" with thermal efficiency approaching that of a fuel cell but without the latter's need for hydrogen infrastructure.
The biggest challenge in making this practical--aside from whatever is involved in perfecting the thermoelectric material--is maximizing the temperature at which the engine runs. If that sounds paradoxical or even dangerous, remember that the laws of thermodynamics dictate that the useful energy you can extract from something is related to its temperature. A CCGT is only as efficient as it is, because the turbine exhaust comes out at a couple thousand degrees F. By comparison, your radiator, the main heat sink for your car, keeps the engine block at 150-200 degrees, which is pretty low-level as heat sources go. This might be where ceramic engine blocks--an idea that has been floating around for decades--might shine, by operating at temperatures high enough to provide a nice heat source for thermoelectrics.
Now, I have to admit this whole idea is pretty speculative. But even if what I described never ends up in a car you can buy, it illustrates the diversity of ways to skin the vehicle efficiency cat. It is still premature to proclaim fuel cells, conventional or plug-in hybrids, or anything else the clear winner in this race.
Tuesday, January 17, 2006
Real Gasoline Prices
Last year, when the hurricanes helped push gasoline prices to their highest nominal levels in US history, many analysts suggested that we needed to look at this in terms of real dollars, which was only marginally higher than the previous record of the early 1980s. But it occurred to me that however accurate that might be as economics, it doesn't really reflect the way consumers think about prices. Many of us carry around a set of internal references about what things should cost, based on some period in which we focused on them. That would mean that there isn't any absolute sense of high and low prices, even within the same economic stratum, and that could have interesting policy implications.
The older I get, the more I notice myself comparing the prices of things to what they were when I was younger--a habit for which I used to chide my parents. On this basis, a carton of milk shouldn't cost $3, and a perfectly ordinary house has no business selling for more than a million. Gasoline is the most visible price in our economy, but have we really absorbed the way it has gone up and down over the years, relative to other things we buy?
For example, I can remember service stations posting prices of $0.359/gallon in the late 1960s and early 1970s (though it would occasionally drop below 30 cents during "price wars.") How do today's prices compare? Using the Consumer Price Index as a measure, that translates to about $1.90 in 2005 dollars. By the time I bought my first car in 1974, gas had jumped to about $.50/gallon, but that still equates to $2.00 now. In fact, when you look at historical gasoline prices converted to 2005 dollars, you see that from the end of World War II until the Iranian Revolution in 1979, gasoline averaged about $2.00/gallon. From then until 1985, it was around $2.50, hitting a high of $2.92 in 1981. And then from the oil price collapse in 1986 until 2004, it averaged $1.50/gal--coinciding with the rise of the SUV trend.
As a result, today's price of roughly $2.40 looks either in-line or out-of-line, as a function of which period you paid more attention to. And by extension, a $1.00/gal gasoline tax hike to spur efficiency would make the fuel seem twice as expensive to some of us, but only a bit pricier than usual for others. So if prices continue to drop from here, that could open up policy headroom for new gas taxes, while simultaneously reducing the effectiveness of a higher tax, depending on the individual perspectives of consumers.
The older I get, the more I notice myself comparing the prices of things to what they were when I was younger--a habit for which I used to chide my parents. On this basis, a carton of milk shouldn't cost $3, and a perfectly ordinary house has no business selling for more than a million. Gasoline is the most visible price in our economy, but have we really absorbed the way it has gone up and down over the years, relative to other things we buy?
For example, I can remember service stations posting prices of $0.359/gallon in the late 1960s and early 1970s (though it would occasionally drop below 30 cents during "price wars.") How do today's prices compare? Using the Consumer Price Index as a measure, that translates to about $1.90 in 2005 dollars. By the time I bought my first car in 1974, gas had jumped to about $.50/gallon, but that still equates to $2.00 now. In fact, when you look at historical gasoline prices converted to 2005 dollars, you see that from the end of World War II until the Iranian Revolution in 1979, gasoline averaged about $2.00/gallon. From then until 1985, it was around $2.50, hitting a high of $2.92 in 1981. And then from the oil price collapse in 1986 until 2004, it averaged $1.50/gal--coinciding with the rise of the SUV trend.
As a result, today's price of roughly $2.40 looks either in-line or out-of-line, as a function of which period you paid more attention to. And by extension, a $1.00/gal gasoline tax hike to spur efficiency would make the fuel seem twice as expensive to some of us, but only a bit pricier than usual for others. So if prices continue to drop from here, that could open up policy headroom for new gas taxes, while simultaneously reducing the effectiveness of a higher tax, depending on the individual perspectives of consumers.
Monday, January 16, 2006
Is Energy Trading a Dirty Word?
Sunday's New York Times business section led off with an article describing the state of energy trading, just over four years after Enron filed for bankruptcy. While the article was largely a human-interest piece on ex-Enron traders who have moved on to found their own trading operations, it also raised a number of interesting issues about the role and impact of energy trading. Here are some further thoughts on these topics, based on my own experience trading energy commodities from the mid-1980s to mid-1990s.
- Energy trading profits - The market for the last couple of years has been an ideal environment for traders. Volatility is the most important ingredient fueling the profitability of speculative trading, i.e. trading not directly related to managing the risk on an underlying business exposure. While many blame higher volatility on traders, I'd argue that the volatility arises from the well-documented combination of physical supply problems and geopolitical risk. In general, trading profits are a response to, rather than a cause of, volatility.
- Trader compensation - Given the huge profits available from trading around the world's trillion dollar a year energy flows, it shouldn't be surprising that some enterprising young folks--and trading is predominately a young man's game--are raking in incomes that put corporate executives to shame. But there are few things in life, other than owning your own business, in which personal contribution to profits is so easily measured, and in which rewarding good performance pays such large dividends for the firm. It's also worth noting that these salaries will fluctuate greatly, since it's unusual for even the best traders to keep winning big, year after year after year. The game changes rapidly; the deals that made you money last year get arbitraged away, and you have to keep innovating ahead of that curve to be successful.
- The role of hedge funds - Many of the same folks who blame trading for running up prices and volatility focus their ire on hedge funds. While these operations have brought billions of dollars of speculative money into energy trading, that isn't necessarily bad. From personal experience, I can tell you that markets involving only those with real stakes--companies with oil in transit, factory inputs to hedge, etc.--tend to be dull and illiquid. The oil company or utility trader needs a willing counterparty, and as often as not he won't find another oil company or utility that wants to take the opposite direction at the right time. That's where purely financial traders come in, and hedge funds are only the latest in a long line of non-fundamental players who have served that purpose. While they may occasionally drive the market, they have no intrinsic advantages over the companies that produce, refine and distribute the actual molecules and electrons.
- Recovering from Enron - Most of the people at Enron were smart, innovative, hard-working and honest. It's appropriate that the "scarlet letter" many of them received seems to be fading. I hope for their sakes that the trading operations in which they now work have a higher degree of transparency and checks and balances than Enron did, because the most important ingredient in sustained trading success isn't brains, but a solid reputation.
Politicians who think that regulating trading will bring down energy prices would be better advised to focus on the fundamentals that drive the markets. Stimulating more oil and gas production, facilitating gas imports, and fostering energy efficiency and cost-effective alternative energy will do a lot more for consumers than cracking down on speculation. Coincidentally, these actions will also make trading less profitable in the long run, by reducing market volatility.
Friday, January 13, 2006
Upping the Ante
Iran is back in the news, having broken the UN seals at Natanz and indicated its intention to restart its nuclear enrichment facility. As a result, the EU3 (Britain, France and Germany) seem prepared to refer the matter to the Security Council. I’ve discussed this issue at great length in previous postings and remain convinced of two things:
- Iran’s motives have little to do with producing electricity, and
- A major confrontation with Iran at this time would play havoc with energy markets.
There’s not much more to add at the moment, from my perspective. However, in the last few days we’ve heard some interesting commentary from Iranians, and it’s worth taking a look at these, if you haven’t already read them:
From the Wall St. Journal:
An indication that Iran’s theocratic hard line may not be as monolithic as it seems (subscription required.)
From the NY Times:
Ideas for averting a crisis
Anyone thinking that Iran's regime is innocuous and harmless should check out http://www.abfiran.org/english/memorial.php
Thursday, January 12, 2006
Under Duress
At the same time that the singer Harry Belafonte was leading a UN visit to Venezuela and proclaiming how many in the US support President Chavez's socialist revolution, the country's oil minister was tidying up the details of the recent "renegotiation" of contracts covering energy projects with Shell, BP, Total and Chevron, among others. The changes make these deals significantly less attractive for the oil majors, and much more so for Venezuela. They amount to a partial nationalization, on threat of total expulsion if the companies hadn't agreed.
For example, the Hamaca heavy oil project, with which I am familiar from my time at Texaco, was established with 30% ownership by one of the arms of PdVSA, the state oil company. The previous government of Venezuela was happy to have foreigners invest in the oil sector, because they brought significant expertise in dealing with the challenging types of crude oil that make up most of Venezuela's reserves, and represented an important new revenue source, via the taxes and royalties they would pay. The contract revision has hiked state ownership to 51%, giving PdVSA--the main vehicle for funding the government largesse that maintains the President's popularity--control of these assets and their future development.
It is worth noting that the international projects covered by this forced renegotiation have been a godsend for Mr. Chavez. Not only are they big money-spinners, but they were the primary means of preventing the total collapse of Venezuela's oil production following the crippling industry strike of 2002-3. Rather than gratitude, the emotion this seems to have spawned is envy.
Did the affected companies have any real alternative, other than conceding? Could they have collectively refused to deal and taken their cases to the WTO or the World Court? Perhaps, but given the current profitability of Big Oil, they don't exactly make the most sympathetic group of plaintiffs. Venezuela would argue that it was merely seeking its legitimate share of the value of its own resources, an argument that would probably find favor in international circles.
Nor would the companies' shareholders be likely to reward them for walking away from billions of dollars of investment and hundreds of thousands of barrels per day of production, even to stand on a principle with important implications throughout their international portfolios. Without access to enough similar, large-scale opportunities in other OPEC countries or Russia, the managements of these firms had little choice but to agree, however distasteful and unethical they might regard the circumstances.
There's an old rule about blackmail, though, and it leads to the following prediction. If President Chavez was able to justify breaking these contracts and re-writing them in order to claim a larger share of the present high prices, he will have even more incentive to "renegotiate" again in the future, when oil prices fall and his absolute revenues decline. The companies involved need to consider at what point they would call Mr. Chavez's bluff about the ability of local staff to keep these plants--which include very sophisticated refineries, in addition to the drilling rigs one normally thinks of--going indefinitely. Otherwise, they will again find themselves having to compete to buy the output of facilities they designed, funded, built and lost.
For example, the Hamaca heavy oil project, with which I am familiar from my time at Texaco, was established with 30% ownership by one of the arms of PdVSA, the state oil company. The previous government of Venezuela was happy to have foreigners invest in the oil sector, because they brought significant expertise in dealing with the challenging types of crude oil that make up most of Venezuela's reserves, and represented an important new revenue source, via the taxes and royalties they would pay. The contract revision has hiked state ownership to 51%, giving PdVSA--the main vehicle for funding the government largesse that maintains the President's popularity--control of these assets and their future development.
It is worth noting that the international projects covered by this forced renegotiation have been a godsend for Mr. Chavez. Not only are they big money-spinners, but they were the primary means of preventing the total collapse of Venezuela's oil production following the crippling industry strike of 2002-3. Rather than gratitude, the emotion this seems to have spawned is envy.
Did the affected companies have any real alternative, other than conceding? Could they have collectively refused to deal and taken their cases to the WTO or the World Court? Perhaps, but given the current profitability of Big Oil, they don't exactly make the most sympathetic group of plaintiffs. Venezuela would argue that it was merely seeking its legitimate share of the value of its own resources, an argument that would probably find favor in international circles.
Nor would the companies' shareholders be likely to reward them for walking away from billions of dollars of investment and hundreds of thousands of barrels per day of production, even to stand on a principle with important implications throughout their international portfolios. Without access to enough similar, large-scale opportunities in other OPEC countries or Russia, the managements of these firms had little choice but to agree, however distasteful and unethical they might regard the circumstances.
There's an old rule about blackmail, though, and it leads to the following prediction. If President Chavez was able to justify breaking these contracts and re-writing them in order to claim a larger share of the present high prices, he will have even more incentive to "renegotiate" again in the future, when oil prices fall and his absolute revenues decline. The companies involved need to consider at what point they would call Mr. Chavez's bluff about the ability of local staff to keep these plants--which include very sophisticated refineries, in addition to the drilling rigs one normally thinks of--going indefinitely. Otherwise, they will again find themselves having to compete to buy the output of facilities they designed, funded, built and lost.
Wednesday, January 11, 2006
Floor Price Pitfalls
A friend asked my opinion of a proposal in yesterday's Wall Street Journal to create an artificial floor price for oil by imposing a floating tariff, setting a minimum US oil price of $35/barrel. In his op-ed (subscription required) Mr. Marc Summerlin laid out a persuasive case for the benefits of such a tax. It would promote conservation and the development of alternative energy, while capturing revenue that might otherwise have gone to OPEC. Unfortunately, this idea has been around in various forms for decades, and it has many undesirable consequences beyond the energy markets.
The underlying concept has merit. In the absence of sufficiently liquid and affordable means for private firms to hedge against lower oil prices that would cripple alternative energy projects, the government could guarantee a floor price for oil, ensuring that alternative energy would be more competitive. The mechanism Mr. Summerlin suggests is a variable tariff that would kick in to keep the price of oil in the US above $35. If global conditions drove the price to $50 or $100, the full impact of those increases would be passed on to buyers. But a drop below $35 would be absorbed by the federal government in a dollar-for-dollar rise in the tariff.
A tariff on imported oil is another alternative to higher fuel taxes within the US. Both raise fuel prices and deter consumption, but they have very different effects on the economy and on the competitiveness of US products in the global marketplace. While a gas tax is imposed at the retail level, affecting consumers at the gas pump and raising the cost of all goods with a road-transport component, the proposed tariff would act at the producer level, driving up the cost of oil for refiners--thus raising the cost of gasoline, diesel and jet fuel--as well as for any businesses using oil or its derivatives in their manufacturing processes. That would make their products more expensive in the world market, relative to those of countries that don't impose such tariffs. As high as European fuel taxes are, they don't penalize their industries this way.
Another problem arises from the effect on domestically produced oil. Whenever the world price would fall below the level set by the tariff, US producers would begin to benefit from the artificially high price here. Unless taxed away in a manner matching the tariff, the US oil industry would receive a windfall. If this sounds familiar, that's because we tried something similar to this during the oil crises of the 1970s. The result was bureaucracy and market manipulation that rivaled anything seen with Enron. I started trading oil after the era of "Old Oil", "New Oil" and import certificates had ended, but I knew traders who lived in very nice houses and drove very impressive cars, as a result of exploiting those rules.
I also suspect Mr. Summerlin hasn't thought through the impact on the very futures market he's trying to help guide. The New York Mercantile Exchange's contract for West Texas Intermediate crude oil acts as the world marker price for oil, with a sizeable fraction of the physical crude delivered globally priced at a differential above or below it. The proposed tariff would terminate that role and truncate the market. Most of the volume would shift to the unconstrained London Brent contract, and the liquidity and influence of the US market on world prices would diminish.
It's possible that a narrower alternative to the tariff might achieve most of what the author intended. We could directly subsidize alternative energy projects for which the price of oil is a key factor. We might guarantee that oil sands projects, biofuels plants, and similar ventures always saw an effective oil price of $35 or more, without subjecting the whole economy to the distortions a tariff would create. Unfortunately, we tried that before, too, when the federal Synfuels Corporation guaranteed the market price for shale oil. The result was a set of billion-dollar boondoggles, none of which delivered meaningful benefits to the country. Similar mechanisms have perpetuated inefficient grain ethanol, at a high cost to taxpayers and with negligible energy benefits.
My regular readers know I have distinctly mixed feelings about higher fuel taxes, but I wouldn't hesitate to recommend them over either a tariff on imported oil or a price guarantee for alternative energy. Fuel taxes could raise at least as much revenue as a tariff and give a real boost to alternative energy and energy efficiency, while protecting the competitiveness of US exports and keeping the government out of the iffy business of picking technology winners and losers. The proposed tariff is just too similar to the failed energy policies of the 1970s.
An abbreviated version of this posting was published in the Wall St. Journal's Letters section on January 24.
The underlying concept has merit. In the absence of sufficiently liquid and affordable means for private firms to hedge against lower oil prices that would cripple alternative energy projects, the government could guarantee a floor price for oil, ensuring that alternative energy would be more competitive. The mechanism Mr. Summerlin suggests is a variable tariff that would kick in to keep the price of oil in the US above $35. If global conditions drove the price to $50 or $100, the full impact of those increases would be passed on to buyers. But a drop below $35 would be absorbed by the federal government in a dollar-for-dollar rise in the tariff.
A tariff on imported oil is another alternative to higher fuel taxes within the US. Both raise fuel prices and deter consumption, but they have very different effects on the economy and on the competitiveness of US products in the global marketplace. While a gas tax is imposed at the retail level, affecting consumers at the gas pump and raising the cost of all goods with a road-transport component, the proposed tariff would act at the producer level, driving up the cost of oil for refiners--thus raising the cost of gasoline, diesel and jet fuel--as well as for any businesses using oil or its derivatives in their manufacturing processes. That would make their products more expensive in the world market, relative to those of countries that don't impose such tariffs. As high as European fuel taxes are, they don't penalize their industries this way.
Another problem arises from the effect on domestically produced oil. Whenever the world price would fall below the level set by the tariff, US producers would begin to benefit from the artificially high price here. Unless taxed away in a manner matching the tariff, the US oil industry would receive a windfall. If this sounds familiar, that's because we tried something similar to this during the oil crises of the 1970s. The result was bureaucracy and market manipulation that rivaled anything seen with Enron. I started trading oil after the era of "Old Oil", "New Oil" and import certificates had ended, but I knew traders who lived in very nice houses and drove very impressive cars, as a result of exploiting those rules.
I also suspect Mr. Summerlin hasn't thought through the impact on the very futures market he's trying to help guide. The New York Mercantile Exchange's contract for West Texas Intermediate crude oil acts as the world marker price for oil, with a sizeable fraction of the physical crude delivered globally priced at a differential above or below it. The proposed tariff would terminate that role and truncate the market. Most of the volume would shift to the unconstrained London Brent contract, and the liquidity and influence of the US market on world prices would diminish.
It's possible that a narrower alternative to the tariff might achieve most of what the author intended. We could directly subsidize alternative energy projects for which the price of oil is a key factor. We might guarantee that oil sands projects, biofuels plants, and similar ventures always saw an effective oil price of $35 or more, without subjecting the whole economy to the distortions a tariff would create. Unfortunately, we tried that before, too, when the federal Synfuels Corporation guaranteed the market price for shale oil. The result was a set of billion-dollar boondoggles, none of which delivered meaningful benefits to the country. Similar mechanisms have perpetuated inefficient grain ethanol, at a high cost to taxpayers and with negligible energy benefits.
My regular readers know I have distinctly mixed feelings about higher fuel taxes, but I wouldn't hesitate to recommend them over either a tariff on imported oil or a price guarantee for alternative energy. Fuel taxes could raise at least as much revenue as a tariff and give a real boost to alternative energy and energy efficiency, while protecting the competitiveness of US exports and keeping the government out of the iffy business of picking technology winners and losers. The proposed tariff is just too similar to the failed energy policies of the 1970s.
An abbreviated version of this posting was published in the Wall St. Journal's Letters section on January 24.
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