Monday, May 31, 2004

Memorial Day
No blog today.

Friday, May 28, 2004

Could This Work?
Recently a friend emailed me one of those articles that provokes a really negative initial reaction but later percolates into your thoughts and triggers unexpected changes. The article in question proposes a radical solution to the urban problems of increasing traffic congestion and hazardous intersections. Rather than indicating a need for greater regulation of speed, lanes, and turns, it proposes creating a kind of traffic free market, in which cars and pedestrians must rely on seeing each other to navigate through the chaos. Thus traffic control would be an emergent phenomenon, not a result of laws and lights.

My first reaction was total rejection. Are they crazy? Have they driven in New York, with half the drivers distracted by cellphones and the other half trying to jam as many fares into each hour as humanly possible? When it comes to driving, I'm definitely a "stay within the lines" kind of guy, paying more attention to posted speed limits than apparently any other driver in the Northeast, so this kind of suggestion was guaranteed to raise my hackles.

Later, as I was driving back from a meeting I gave it more thought and concluded that this notion just might be bizarre and counter-intuitive enough to work. Clearly it has some serious research behind it; no one would suggest something like this without doing a lot of homework, because my first reaction would be the norm.

So why is it relevant to the theme of this blog? Well, consider the amount of fuel wasted by cars idling at traffic signals, or stuck in stop-and-go traffic, with endless cycles of acceleration and braking. I don't have good figures on it, but it is probably not trivial. In fact, it is one of the main reasons that hybrid cars are more efficient than conventional autos. By turning off the engine at stoplights and recycling some of the energy lost in braking, hybrids use less fuel than other cars and typically get better fuel economy in city driving than on the highway, where these effects are less important.

Even the so-called "mild hybrids" that will soon appear in the market, lacking the battery storage of conventional hybrids but also starting and stopping the engine seamlessly at intersections, rely on the fundamental assumption that traffic will look like it always has. But what if it doesn't?

If, as the article suggests, the new traffic pattern is one of somewhat slower progress between intersections, but less impeded flow through them and minimal complete stops, the whole idea of a hybrid or mild hybrid car would have to be reexamined. Clearly these reforms face an uphill battle in developed countries with established traffic patterns, but their major impact could be in the developing world. What if China continues on this path and others follow? A lot of assumptions about the shape of the future automobile might have to change as a result. Food for thought on a long weekend.

Thursday, May 27, 2004

The Fuel No One Loves
"It was the best of times, it was the worst of times." That's how Dickens began "A Tale of Two Cities", and it may aptly characterize this year for the coal industry. With increasing global attention on environmental concerns, including air pollution and climate change, coal is truly the fuel no one loves, but upon which we have come to depend heavily. This love/hate relationship could be put in sharp focus this year, spurred by two external events: record high energy prices and the release of a Hollywood blockbuster focused on the coal world's worst case scenario, sudden climate change.

After the oil crises of the 1970s, consumption of coal increased steadily but then plateaued as natural gas became the fuel of choice for new power plants, due to its much cleaner combustion. Consumption of coal is up this year, and prices in the international market are at 20-year highs. The reasons are similar to those behind the high oil prices: strong economic growth in China and the US, coupled with tight natural gas supply in the US. This looks to be an extremely profitable year for coal companies.

Factor in the dim prospects for increasing US natural gas production and the strident opposition to the siting of facilities to import it in its liquefied form, and you have a recipe for excellent growth prospects for coal. The fly in the ointment is its environmental performance.

Enforcement of New Source Review is now an election issue (see my blog of April 21), but with the price of natural gas expected to remain extremely high (two to three times its historical average) for years to come, coal-fired power generators can afford the cost of cleaning up their sulfate and particulate pollution. New generation "clean coal" plants, employing gasification and other technologies, will have almost none of these emissions. The one thing coal plants cannot currently address is their enormous emissions of carbon dioxide, the principal greenhouse gas implicated in climate change. So far, at least in China and the US, this has not been a fatal weakness. Heightened public awareness of the climate change issue could change that.

As I indicated when the film was first announced, I don't know if "The Day After Tomorrow" will be that trigger, or if it will take some large-scale weather event to shift public perception. Nor are coal-burning utilities oblivious to this. A number of them have been pursuing carbon trading and carbon offsets for several years, as a way to mitigate the impact of their coal consumption. I give these companies credit for recognizing climate change as a major risk management issue for their industry, whatever their personal beliefs about the underlying science might be.

So we are back to the paradox I started with: coal is either our salvation from a looming energy crisis, or the main villain in the climate change story. This year it could be seen as both.

Wednesday, May 26, 2004

Questionable Timing
I have a lot of respect for Gregg Easterbrook's opinions on energy matters. He writes well, and what he writes usually seems well-reasoned and well-researched. But I'm a little perplexed at the timing of his New York Times editorial advocating the imposition of a 50 cent per gallon gasoline tax. It also stands in odd juxtaposition to a highly sensible suggestion on the same editorial page concerning ways in which Saudi Arabia and the US could calm the current oil price frenzy.

Although much of Mr. Easterbrook's speculation about a world shaped by a 50 cent gas tax sounds plausible, it also provides a good example of "should'a, would'a, could'a" thinking. We will never know if a higher gas tax would have truly kept SUVs smaller or scarcer. And while higher taxes probably would have reduced crude oil imports, it seems quite a stretch to suggest that they would have diminished the geopolitical importance of the Middle East. No tax can change the fact that half of the world's oil reserves reside there.

Perhaps it would have been more instructive to discuss how the revenues from those higher gasoline taxes in Europe have been used, along with their impact on European consumers, factoring in differences in geography and mass transit options.

In any case, it appears we'll get our opportunity to see what sustained $2.00/gallon gasoline does to consumer behavior and to the economy, and we won't have to pass untenable legislation to do so. Later, if we all decide we like it this way, we can ask our Congressional representatives to add new taxes to keep gas prices from falling, as they eventually will. Something tells me that when that happens, we'll prefer keep the savings in our own pockets.

Tuesday, May 25, 2004

Detroit's Gamble
When I suggested a few years ago that Detroit was taking a big risk by remaining so focused on increasingly larger SUVs, while Japanese carmakers were pioneering hybrids and more flexible conventional vehicle types, people regarded me with amusement. At the time, I wasn't even thinking about high gas prices, but rather that all trends eventually end, and ones related to fad and fashion often end more abruptly and expensively than others. I saw hybrids as a contender for the Next Big Thing.

Now we are starting to get a sense of the possible exposure this strategy has created for Detroit, as described in this Business Week article. It doesn't have to result in a decade of pain like the 1980s, when Detroit offered few of the good small cars that the public demanded and the Japanese had perfected. However, I suspect that the only thing that will prevent such an outcome is some fairly nimble thinking by GM, Ford, and Chrysler, along with a willingness to lead the way in undercutting their own cash cows.

That is never an easy decision, especially when it appears so risky, but the alternative could see a further dramatic erosion of market share of the Big Three in their home market, since it is not only Toyota, Honda, and Nissan they must worry about, but also the newly respectable Hyundai and Kia. If gas prices are this high a year from now, Detroit will need a solid alternative to its largest SUVs.

Monday, May 24, 2004

Saudi Rebels?
It's hard to know what to make of the announcement by Saudi Arabia that it would increase oil production by half a million barrels per day in June, without prior OPEC concurrence. Does this signal a split in OPEC, just when its cohesion has been seemingly most effective at raising prices? Or is it mere theater for our benefit?

The Saudis have been signaling for at least the last month that they see the current price levels as being unsustainably high, in terms of their impact on the global economy and on future demand for oil. At the same time, they have blamed high prices on a number of issues other than the volume of crude being produced by OPEC: tight refinery capacity, conflicting US gasoline specifications, and speculation by hedge funds and others.

The key to all of this is inventories. Even if the extra crude that the Saudis will begin selling in June does not immediately turn into petroleum products, because refineries are full, it will prop up the very lean crude oil inventories that have contributed to the run up in prices. Once the market flattens or actually turns down, the incentive to bet on higher future prices diminishes and speculation should return to normal levels. Speculators that miss that shift will find themselves giving back most of their recent gains.

As others have noted, none of this is likely to make driving any cheaper this summer, but it should ease some concerns about how costly heating oil might be next winter.

Friday, May 21, 2004

One Less
Traveling today, so just a quick thought. When you are tallying up the countries that will contribute to meet growing demand for oil in the future, you need to scratch one from the list. Indonesia, one of the founding members of OPEC, has become a net importer of oil. Although its production might get back on a positive trend with additional investment, it's likely that economic and population growth will keep it from again becoming a significant net exporter.

Thursday, May 20, 2004

Is the System Broken?
I missed this article from the New York Times last week, describing testimony before the Senate on the influence of environmental regulations on the current high gasoline cost. From the description in the article, the non-industry participants reflected their ignorance of how the industry actually functions to deliver fuel to customers, and the industry representatives did a poor job of explaining the facts.

Let's start with the basics. Contrary to popular opinion, when you pull into an Exxon station, there's a high likelihood the gasoline you are buying on a given day was not refined by Exxon. This would be equally true of any other brand you could name. The reason is that the industry has been optimized over the years though a system of "exchanges" that reduce the cost to the companies and, more importantly, to consumers.

If companies could only market in those areas in which they could guarantee 100% supply from their own facilities, the retail gasoline market would look a lot more like the market for milk: most consumers would only have one or two brands from which to choose, and they would pay prices that were inflated by virtue of those companies having to maintain higher inventories, in order to be able to keep their stations supplied, and by less competition.

Instead, the industry evolved into a system in which each company supplies other companies in the markets served by its refineries, and in turn receives supplies in markets in which it has no refineries in close proximity. In addition, they buy product from third party refineries that produce more gasoline than their own marketing outlets require, or that have no service stations at all.

When a company ran short of product in a given market, either because of a refinery problem, or because sales were higher than anticipated, they would borrow or buy supplies from other companies that have temporary surpluses. The increasing complexity of environmental regulations governing local gasoline specifications across the country confounds this response and ensures that local supply disruptions that previously would have been covered by other companies instead result in outages or price increases.

For example, if Company A has a refinery problem that reduces its gasoline production, it calls Company B to ask to borrow some for a short time. But all of Company B's excess above immediate requirements has been blended for the specifications of other markets, for delivery by pipeline. This product cannot legally be sold in the market in which Company A is short. Result: Company A raises prices to slow sales and avoid running out entirely.

What we are witnessing is the undoing--as an unintended consequence of regulations designed to improve local air quality--of a highly flexible mechanism that for decades promoted both more market competition and higher reliability of supply. Although it is not clear how much impact this is having on prices at the moment, there's an excellent chance that we will see some truly startling price spikes this summer, as the system gets stretched further by higher seasonal demand.

Wednesday, May 19, 2004

Savings vs. Withdrawals
Many politicians are calling for changes to the Administration’s policy of continuing to fill the nation’s Strategic Petroleum Reserve (SPR), aimed at reaching a level of 700 million barrels by next year. Some are suggesting that oil be released from the reserve to put downward pressure on prices, while others, including Senator Kerry, are asking for a suspension of additions to the reserve. These two alternatives have very different ramifications.

First, in terms of the efficacy of SPR sales in dampening the market, the New York Times correctly cited the poor results achieved in past experiments of this type. There is little chance of better results today, given the very high utilization rate of US refineries. (96% based on the most recent data.) This means there are essentially no refineries that lack crude oil from which to make gasoline. The best-case result of a release might thus be to back out some deliveries of high-sulfur crude, replacing it with “sweeter” SPR crude, and improving refinery yields slightly. This would provide scant relief at the gas pump, which is the real issue for consumers, since they can’t burn crude oil in their cars.

More fundamentally, there’s a real problem with releasing SPR oil now. As most market commentators have noted--echoed in my blog yesterday--we are not in a crisis of disrupted oil supply, for which the SPR is intended. The chance of such a crisis is higher than normal now, as the current risk premium on oil attests. It is not prudent to release SPR oil unless and until we are in a real crisis, in which case we will need every drop and 659 million barrels will seem like a very modest emergency stock. This total is equivalent to only about 150 days’ shipments at the maximum SPR output rate.

Turning to the idea of halting additions to the reserve, my reaction in February (see posts of 2/17 and 2/18) was that it would make no real difference, since the SPR fill comprises only a tiny fraction of global demand. With oil prices over $40 today, I see things differently. The volume may still be miniscule, but a change in this policy could stimulate a change in market psychology, and that could be significant.

Rather than being based on detailed assessments of the chance of a disruption of shipments from Saudi Arabia or other key Middle East suppliers, a portion of the current risk premium on oil comes from traders assuming that the government’s actions in the market validate their own views of those risks. In other words, if the government is “going long”, so should I, because they have access to secret information that I don’t.

Taking a breather on additions until prices return to a more normal level would force market players to reassess their positions, and this might have a disproportionate impact on the market. That could be very helpful, and the foregone additions would make little difference in the country’s preparedness for a real crisis. It would also show that the Administration can be flexible in its responses, rather than simply continuing on a path that has become counterproductive.

By the way, there's an email chain letter circulating, trying to organize today as "Stick It To Them Day", a national gasoline boycott. This sort of thing would only harm the tens of thousands of independent businesspeople who own and operate most of the gas stations in the country, without sending any kind of signal to the global markets, unless people actually stop driving their cars, too.

Tuesday, May 18, 2004

Focus on Prices
It's hard to pick up a newspaper or turn on the TV news without seeing something about oil prices or gasoline prices. The NY Times Sunday edition had no less than three major articles, including this on the front page and a nice analysis of Saudi motivations in the Week in Review section. I liked the title of yesterday's Financial Times Online piece, "A new spike in prices raises fears for the world economy. But this is not the next great oil shock at least, not yet."

The FT goes into some detail on the causes of the current tight market, relating to higher-than-expected demand growth in the US and China, as well as concerns about Middle East security. Although it is a fine article, as far as it goes, I think it's also fair to say that what we are seeing today could be a dress rehearsal for a more serious situation down the road, relating to serious systemic supply constraints that I've discussed at length elsewhere in my blog. (See the posting of February 12, in particular.) Because whatever cause or set of causes to which the current conditions are attributed, I have yet to run across anyone suggesting that prices are high because the oil is simply not there.

True, production capacity has been stretched near the limit, with all the spare capacity in places that seem shaky for other reasons, but there is a clear sense that the overall global supply can grow from here to meet market demand, even if it takes a year or two to do it. That might not always be true, for reasons of access, inadequate investment, or actual geology.

As I said last week, I am fairly optimistic that the current prices will fall over the next four to five months, probably back to $30 or so. And it's not that hard to imagine that in a couple of years we could be back to $25 or less. Just look at the history of oil prices. In fact, I saw a quote over the weekend that made me much more confident in that view, with T. Boone Pickens proclaiming that "oil prices will never again fall below $30 a barrel." Statements like this, no matter how credible the source, are invariably wrong, and I love to bet against them.

But whether prices fall back soon or not is less important than the realization that there is a reasonable risk of a similar future crisis from which prices will not fall back, until we have made the enormous investments necessary to drastically reduce our dependence on oil. For that reason, it might just make sense to start now to adjust our habits accordingly.

By the way, my postings may be a bit spotty this week, as I'll be traveling on business.

Monday, May 17, 2004

The LNG Disaster Movie

The front page of last Friday's Wall St. Journal and the first page of the NY Times Business section both featured articles on the obstacles companies face in attempting to build LNG import terminals around the country. The Times article included a nice graphic showing where the proposed terminals would be, and what their current status is. Seven have already been cancelled in the face of public opposition.

I find two things remarkable about all this. The first is that these projects would face such overwhelming opposition at a time of genuine energy insecurity, and with crude oil at record high nominal prices. Domestic natural gas commands a price equivalent to the high crude price, and since this doesn't seem to be stimulating much new production, the only alternative is to increase imports.

If you've been reading my blog for a while, you know I don't consider LNG to be quite the panacea that some claim, but it is certainly part of the answer--a big part as long as we insist on steadily increasing our gas demand while holding discovered US gas reserves off the market for environmental reasons. (See my blog of March 11.)

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

Many have picked up on the explosion at the LNG plant in Skikda, Algeria (see my blog of January 21) as evidence of the risks of handling LNG, but even if that were a fair comparison--and there are good reasons why it is not--it is actually a pretty good illustration that the risks are similar to those associated with many kinds of industrial facilities and not orders of magnitude greater, as activists assert.

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

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

Friday, May 14, 2004

A Quicker Return on Hybrids?
Wednesday's Wall St. Journal Marketplace section (sorry, no link) carried a very good summary of current trends in auto technology, looking at a variety of different paths to greater efficiency and lower emissions. Their comment on the cost of hybrids echoed my own remarks of May 3, to the effect that it will take years for consumers to recover the higher costs of hybrid drive systems in fuel savings.

But as I read the article, something hit me that should have been obvious before. If the buyer finances the purchase, the hybrid premium is not incurred up front, but spread out over the financing term, and offset by whatever residual value premium the used hybrid might fetch when you sell it.

For example, if a hybrid costs $3500 more than a comparable non-hybrid, but is still worth $1500 more after four years, then at 6% the extra cost of owning the hybrid is about $650/year (after factoring in the present value of the trade-in). This is still more than the current $300 to $400 of fuel savings you'd enjoy (at current gas prices), but we haven't gotten to the tax break for buying a hybrid. Although this benefit is being phased out, you can currently deduct $2000 of the purchase price of a hybrid from your Form 1040. In the 25% tax bracket, that nets you $500, or most of the cost of the first year's hybrid premium.

Add it all up, and at least for someone who borrows to buy the hybrid and is in a typical tax bracket, the extra cost of a hybrid car might not be more than a few hundred dollars over the time you own it. And if, on top of this, you think hybrids are a cool technology and good for the environment, that might look like a pretty good deal.

Thursday, May 13, 2004

It's Alive
The media and internet have lately been brimming with commentary on the many ways in which the eastward expansion of the European Union may alter the nature of the existing body's economy and policies. The Economist has proposed an angle I haven't seen anyone else suggest: a possible revival of interest in nuclear power.

With a few notable exceptions, such as France, China, and until recently Japan, obtaining permits anywhere for a new nuclear power plant looked about as feasible teaching your horse to sing. But as the old saw tells us, the horse might just learn to sing, and that could happen if the Economist is correct in its assessment.

Certainly the EU will be inheriting a number of nuclear plants built with former Soviet technology. These can either be upgraded or decomissioned. But the latter choice entails replacing the lost electric generation, and that means more greenhouse gas emissions. Although the US isn't very interested in the Kyoto Treaty, it is still a Big Deal in Europe.

The EU has set some aggressive targets for adding renewable energy, but there is probably a limit to how many windmills you can put up without even the relatively good reception they've gotten so far turning sour. Nuclear remains the one large-scale alternative with no emissions of carbon dioxide or other greenhouse gases.

As the Economist suggests, price will be as big a big hurdle as anti-nuclear concerns, so the challenge to industry is to come up with safe, economical reactors that can be built relatively quickly. Standardization will be a big help, since the lack of it was one of the chief contributing factors in driving the costs of nuclear out of reach in the US, along with post-Three Mile Island concerns. In a future posting I'll talk about some of the radically new reactor designs being proposed.

Wednesday, May 12, 2004

The Taps Open
Last Wednesday I suggested that the only thing likely to bring prices down in the short run was a change in OPEC policy, driven by the Saudis. I concluded by saying that the price of oil in the near future will be largely what the Saudis desire it to be. They now seem to want it to be lower.

Saudi Arabia is in a unique position in the oil world. Not only do they wield enormous power as one of the largest exporters of oil, but their reserves give them a long-term perspective that few others can share or even afford. With 260 billion barrels of oil reserves, roughly a quarter of the known reserves on earth, they realize they are not playing a short-term game, and are also aware that consuming countries, while unable to do without their product today, have many more options than they did even a decade ago, given enough time and incentive to switch.

$40 per barrel seems to be the threshold at which the Saudis become concerned about upending the global economy and threatening the value of their long-term reserves. If the indicated 1.5 million barrel per day increase in OPEC quotas is approved at OPEC's June 3 meeting and actually translates into a comparable growth trend in oil inventories--instead of providing cover for quota cheating already occurring--then it should be sufficient to push prices closer to $30/barrel by the fall.

This stock build will only happen if non-OPEC production remains stable or grows somewhat, especially in Russia. Today's Wall St. Journal contains a good discussion on this topic.

At roughly $30 per barrel, the pressure on consumers should ease, despite the other factors that have contributed to high gasoline prices, including product specifications and refinery constraints. A drop of $8 or $9 per barrel of crude oil would not only eventually take 20 cents per gallon out of the cost of gasoline, but it would also change market psychology that encourages distributors to hold more inventory than they need, because they believe it will be worth more tomorrow. That could be good for another 5 to 10 cents per gallon.

All of this would help consumers, and it couldn't hurt incumbent politicians, either.

Tuesday, May 11, 2004

Is It Just the Curse?
Tom Friedman's Sunday New York Times editorial was entitled "The Curse of Oil." Along with a clever comparison involving robots, he focused on the differences in productivity and creativity between countries lacking natural resources, including Japan, Korea, and Taiwan, when compared to Saudi Arabia and other Arab countries that have abundant oil reserves.

Much has been written about the so-called "resource curse", particularly in relation to oil-rich West Africa. A sudden infusion of oil wealth can certainly work against the development of a healthy domestic economy and sound, transparent institutions. But although there is likely an element of this at play in the Arab world, I am not sure it is as important a factor as some others.

The comparison breaks down in other ways, as well. Mr. Frieman, himself, cites the more positive examples of Jordan, Morocco, Tunisia, Bahrain, Dubai, and Qatar, without noting that the first three have essentially no oil, while the latter three are (or were, in the case of Bahrain) blessed with a great deal of oil for their size. For that matter, Egypt probably didn't start the 20th century with a worse hand than Japan, in terms of resources, education, and institutions, though you'd never know it from a comparison of the two countries' situation today.

Finally, how does one explain the experience of the United States, which is the antithesis of the Resource Curse theory? Even in terms of oil--ignoring the profusion of other resources with which this country was endowed--we had as much under our land when Col. Drake drilled his first well in 1857 as did either Saudi Arabia or the entire former Soviet Union, and we have produced more of it to date than any other country.

At the end of the day, it's just too pat to say that the Arabs have poor economies because they have oil. Bernard Lewis and other scholars have more thoughtful explanations for the apparent discrepancies, as do Mr. Friedman's past columns.

Monday, May 10, 2004

Cheaper, Smaller Solar
The two main knocks on solar power today are that it is still expensive, on either a per kilowatt of capacity or per kilowatt-hour of delivered electricity basis, and that to get the cost down for the power you need, you have to cover large areas with solar cells of lower efficiency.

Technology Review recently reported on a new approach that would reduce both cost and the area entailed, by cheaply increasing the cell's efficiency. We already know how to make multi-bandgap solar cells that capture up to 36% of the light energy that shines on them, but these tend to be reserved for applications such as NASA's Spirit and Opportunity space probes, where the collection area available is at a premium and for use where the sun shines more faintly. But they are also quite expensive.

Being able to apply the same approach at even higher efficiencies, but at much lower cost, would improve solar's cost-competitiveness relative to other technologies and allow it to compete for applications that are currently impractical, due to size constraints. And in larger-scale installations, such as for distributed power, the same effect would reduce the environmental and aesthetic impact of the project.

As the article points out, more work is required, but this could be a big deal in a few years.

Friday, May 07, 2004

When Is the Crunch?
Paul Krugman's New York Times editorial today is titled "The Oil Crunch." His theme is the impact of growing oil demand from China and industrializing Asia competing with the growing US appetite for gasoline, against a backdrop of tighter supply in the future. His inevitable conclusion is higher oil prices, perhaps starting now, perhaps later.

In one key respect, his thesis echoes mine: the physical peak of oil production is not the key future event of concern; rather it is the point at which prices go only up, not down, because supply cannot keep up with demand. And his final assertion, that we can "neither drill nor conquer our way out of the problem" is ultimately correct. Where I think we part company is over the crucial issue of timing.

The reason this is so important is that it dictates the kind of response or adaptation that is possible. If the crunch is imminent or already here, then our responses are constrained to efficiency improvements and the increased exploitation of other hydrocarbons, such as gas and coal, plus a continued rapid growth of renewables. But let's be clear about the near-term potential of the latter. If we rapidly doubled the total amount of wind and solar power in use today, we would still cover only about 2% of the world's total primary energy demand.

On the other hand, if we face a decade or more of volatility with as much downward as upward price movement, or even a reversion to the mean oil price of the last decade or so, then many more options become available, including the start of a transition to hydrogen. This is probably the scenario most oil analysts believe, since oil company stock valuations currently reflect an underlying oil price below $30/barrel.

The other missing factor is the location of reserves. While it may be true that no major oil fields have been discovered since 1976 (though this depends heavily on your definition of "major", since a number of fields containing 500 million to 1 billion barrels have been found in that period, plus several over 1 billion), this ignores the number of large, known oil fields not presently being tapped, most of which are in OPEC countries. That implies a long-term increase in OPEC's market power.

And even though geology is not necessarily destiny, it can still provide useful hints about what to expect here. The current mean estimate of the total original conventional oil endowment, the amount of oil that was in the ground before we started drilling, and that can be accessed with current technology, is about 3 trillion barrels. To date, we have produced under 1 trillion barrels of this. That suggests that we still have a ways to go before we reach the midpoint of production, at which the adherents of King Hubbert's theories say production will start to fall.

So what should the average person make of all this? It is certainly confusing and potentially worrying. Right now, based on all the evidence and arguments, I think one should be equally skeptical of those saying that the end of oil is just around the corner and of those saying that the status quo (with growth) can be maintained indefinitely. That says that as a society we should be buying options on large-scale alternatives, but only exercising those that are "in the money" or close to being economical, today.

And what would the prospect of a revolution or catastrophic terrorism in Saudi Arabia do to all of this careful reasoning? I think you can guess, and that's part of what has the oil market unsettled at the moment.

Thursday, May 06, 2004

Where It's Windy
Sunday's New York Times covered a wind energy project that may prove as controversial as the proposed wind farm off Cape Cod has. The Long Island Power Authority plans to install up to 40 windmills a few miles off Jones Beach, a popular beachfront close to New York City. They would generate a total of 100-140 Megawatts.

The project is already generating the full range of expected responses from the community, including support from those who see wind power as an attractive alternative to burning fossil fuels, and opposition from those who feel the installation will ruin the view and deter beachgoers. One comment in the article raised a basic issue that is worth more discussion, since I have not seen explained well elsewhere.

The article cites a manager of a fishing company that sees itself threatened saying, "There's enough places on land where they can do this." Are there? I think we've forgotten something our great-grandparents knew innately; you can't put up a windmill just anywhere. There is a big difference between the random, intermittent winds we all experience and the reliable wind patterns that wind generators require. This is further complicated by the fact that it isn't the winds at the surface that matter, but those at the height of the generator hubs, 300 feet up in the air. Pilots understand this distinction pretty well.

Imagine prospecting for oil or some mineral, but with the added wrinkle that the resource is invisible and the amount available varies according to the season and the time of day. There are maps that identify the best wind resources in the country and grade them according to intensity and reliability. This information is essential in deciding where to site a wind installation. In fact, the wind map for Long Island shows "good" wind availability beginning offshore of Long Beach Island and continuing east along the southern shoreline.

The issue of tradeoffs has become a recurrent theme in my blog, and that's where we end up on this project. What do we value, and what are we willing to trade off to preserve it? One critic of this project was quoted saying, "Why, instead, isn't every government building using solar energy and every official driving a more fuel-efficient car?" This statement is framed as a tradeoff, but it comes across as a diversion. Perhaps we should be doing all of that and the Jones Beach wind project, in order to avoid having to build another gas- or coal-fired power plant to run our growing armada of appliances and gizmos. Or are we content to build the power plant and deal with a little more smog and acid rain, in order to keep a beach view? These are the tradeoffs we have to face up to, until we see the sales of air conditioners, electronics, and household conveniences fall, because consumers are no longer willing to pay the hidden costs of the power they consume.

Wednesday, May 05, 2004

What Will Bring Down Fuel Prices?
Last night's News Hour on PBS featured a segment on high gasoline prices and the public's reaction to them, ranging from outrage to bland acceptance, and including the standard level of denial that trading in a sedan or minivan getting 20 miles per gallon for a Suburban that gets 12 might be part of the problem. There was an intelligent discussion of the contributing factors, with crude oil prices leading the pack.

Other than a fall in crude prices, what could bring gasoline prices back to more normal levels in the near future? Lower demand? Not if SUV sales continue at their current, record rate, and not if the economy stays on a recovery path. A relaxation of the confusing welter of conflicting regional gasoline specifications? While the EPA is considering temporary waivers that would ease localized market distortions, this would will do little to reduce the current record average price. What about an easing of refinery bottlenecks? That would take a couple of years, and with the refining segment finally earning healthy profits, for once the industry seems disinclined to destroy them by investing in a wave of expansions. This takes us back to crude prices.

The list of culprits responsible for current high oil prices is long and varied: OPEC production policy, growing demand in China, the popularity of SUVs, instability in the Middle East, and a global economic recovery, particularly in the US. Other factors include fuel-switching due to tight natural gas supplies here, and continuing production problems in Venezuela in the wake of last year's disastrous petroleum industry strike. It is not that hard to account for the oil prices you have, but predicting future prices is a much tougher proposition.

What could cause the crude price to fall, and thus provide some relief on gasoline? Within three to five years, many things could and probably will drive prices back down to a more normal range, say between $20 and $25/barrel. But in the short run, assuming the demand factors I mentioned in the opening paragraph don't change, there is only one thing that will bring prices down: a visible growth trend in oil inventories.

If you were only going to look at one factor to try to assess whether the price of oil will rise or fall over a very short period, the level of crude oil inventories--excluding the government's Strategic petroleum Reserve--is your best bet. These inventories consist of oil that has already been produced or imported and is being held in tanks at refineries or somewhere in the distribution network. If crude inventories go up for a month and are above the level for the same time last year, the chances are good that the price of West Texas Intermediate, the marker crude traded on the NYMEX futures market, will fall.

According to the reports published by the Energy Information Agency of the Department of Energy, US crude oil stocks are currently just under 300 million barrels, up about 10% since the beginning of the year. This still puts them well below the average of the last five years. Inventories would have to increase a lot faster, say by an additional 10-15 million barrels over the next month, in order to signal a drop in prices. That looks unlikely, barring a change in OPEC policy that would make available the oil necessary to raise inventories.

At the moment, OPEC enjoys a remarkable degree of market control. Global conditions are ideal for them to be able to control prices through tight control of production by their member countries. OPEC's stated rationale is that failing to cut production now would lead to a rapid buildup of stocks and a price collapse that would be harmful to both producers and consumers in the longer run. On the surface, this is not as silly as it sounds. The price collapse in 1998 connected with the Asian Economic Crisis was a major factor in the wave of industry consolidation that followed, and has kept non-OPEC oil production on a slower growth path.

But in this case, OPEC's concern is fatuous and self-serving. All other indicators point upward, which was hardly the case in 1998. Demand is growing all over the world; non-OPEC oil production is stalled for the moment, as the North Sea reaches its peak of production, and as Russian production hits the limits of existing infrastructure. Nor is Iraq in a position to flood the market. And natural gas, which has lured demand away from oil for the last decade, has plateaued for now. From a structural standpoint, the risk of a price collapse right now is very low.

OPEC ministers point to the high level of speculation in the market, principally by hedge funds, as further rationale for their need to manage prices. But prices for delivery of physical crude have not weakened much relative to the futures prices, as one would expect in a speculation-driven market. This says that it is not just "paper barrels" that are in short supply, but real ones.

After going through all these factors, I can only see one logical answer to the question I posed above. The only thing likely to cause crude prices to fall any time soon is a change in OPEC policy. If you want to know what the price of oil will be over the course of the summer and into the fall, you need to ask the question in Riyadh and the other OPEC capitals. For now, at least, the price of oil will be largely what the Saudis decide it should be.

Tuesday, May 04, 2004

Nuclear Frees Up Oil
Tokyo Electric Power Co (TEPCO) recently announced it will restart two more nuclear plants in the next couple of weeks, as it recovers from last year's scandal concerning safety and maintenance data. This should take a small amount of pressure off oil prices.

Few countries still burn large quantities of fuel oil to generate power, but Japan is a notable exception. In fact, several Japanese utilities burn unrefined, low sulfur crude oil--primarily from Indonesia--directly in their power plants. The shutdown of so much of Japan's nuclear capacity last year increased demand for imports of crude oil and liquefied natural gas (LNG), contributing to the increase in global oil prices.

Each 2,000 MW nuclear complex brought back on line saves an amount of oil equivalent to the throughput of a small refinery, roughly 60,000 barrels/day. So restarting two more nukes, with two more to go, puts about as much oil back into the market as would be produced by a major offshore oil platform. This is modestly good news to help offset higher demand and OPEC's announced production constraints.

On a housekeeping note, you may have noticed some new text below each posting in this blog. Clicking on "comment" will bring up a form allowing you to post your reaction to my daily blog, as well as allowing you to see any previous comments on that posting. I've wanted to make the blog interactive from the start, and thanks to a friend alerting me to Haloscan, I was able to add that feature. I look forward to hearing from you!

Monday, May 03, 2004

Fast Lane for Hybrids
This recent article from the San Francisco Chronicle does an excellent job of cataloging the motivations of those who buy hybrid cars, which are becoming especially popular in the Bay Area.

It also highlights the apparent economic inconsistencies that some of these buyers display. Hybrids such as Toyota's Prius and Honda's Insight claim fuel economy in excess of 50 miles per gallon. But even at current high gasoline prices, this will only generate about $300-400 dollars per year of savings, when compared to comparable vehicles, such as the standard Honda Accord. (EPA ratings of 24 city/34 highway). This is not enough to compensate for the $3500 difference in the prices of the two cars, even after factoring in the Federal tax incentives that are being phased out.

So for those who claim to be buying these cars for economic reasons, something else must be at work, too. Among the other reasons cited in the article were environmental concern and the way these cars have attained critical mass in the local market. At one Toyota dealership mentioned in the article, hybrids account for over 20% of total sales. Other factors include a sort of techno-cool image related to higher incomes (and perhaps to the proximity of Silicon Valley.)

It's interesting that a new vehicle type that wasn't technically possible a few years ago is taking off now, with relatively little fanfare. Some experts have even suggested that while public attention is focused on the potential of fuel cell cars in the future, hybrids are the revolution that is here today.

The article provides hints at the kind of things that might make hybrids take off in a much bigger way, including the potential for carpool lane treatment. Having driven in rush hour in the Bay Area many times, the latter could be a powerful motivator, even though it's not yet law. Among issues not mentioned are possible future increases in federally mandated corporate average fuel economy standards and state-by-state legislation under consideration to limit greenhouse gas emission. If the mainstream projections of J.D. Power are for 1 million hybrids in 10 years, what is the upside case, were these other issue to become more prominent?

The beauty of hybrids is that they are completely compatible with current infrastructure, including both fueling and repair networks. With low barriers and solid benefits, we could be at the very early stages of a classic s-curve takeoff.