Yukos
The whole industry is watching events in Russia with great interest, as the Yukos drama plays out. Now the court has upheld the tax ruling, and Yukos is on the hook for $3.4 billion. With Russia seen as holding the main near term alternative to Middle East oil, the signals this case sends could be critical in attracting or repelling foreign investors.
I think we have to be cautions about reading too much into the fate of one company, however. There are many interpretations of this situation, which is complicated by national politics, personal ambition, and the desire of many Russians to see the injustices of the Yeltsin era rectified. Recall how Yukos and its peers were created, during a spasm of corrupt, winner-take-all privatization. So while Putin's actions look like a naked grab for power, they may also include an element of trust-busting, of the kind we saw in this country 100 years ago.
If the government forces Yukos into bankruptcy or dismemberment, our focus should be on what other steps Putin takes to reassure international investors and preserve the oil sector as the attractive engine of growth it has been in the last several years. That, more than the fate of Yukos itself, will indicate whether Russia wants its oil industry to be globalized or isolated.
Wednesday, June 30, 2004
Tuesday, June 29, 2004
The Picture of Dorian Gray
Today I’d like to talk about two companies. The first went through a lengthy period of reorganization and reinvention. It not only changed itself, but is on the way to transforming its entire industry. A darling of Wall Street, its competitors must take cognizance of its actions and direction, and many are scratching their heads at the implications of the changes they see. At the same time, it rewards its rank and file handsomely and is a generous contributor to the community.
The second company stands in stark contrast. It is the poster child for chicanery and corruption. Its top management benefited lavishly at the expense of stockholders and has been convicted or indicted for a wide range of felonies. Their hubris took down the entire company, leaving a wide swath of impoverished employees and shareholders in its wake.
Both companies are Enron, as perceived at different points in time. More intriguingly, the picture that emerges from an interview with Ken Lay published in the New York Times over the weekend, is that both may have been accurate. In any case, if the way the former Chairman of Enron managed his vast holding of Enron stock is any indication, he believed in the first, more attractive picture until the end. Contrast Ken Lay, borrowing money to preserve his stake in Enron, with Sam Wachsal, selling out in the face of insider knowledge of adverse news.
These days the media works overtime to create the impression that we live in a binary world. Our invasion of Iraq was first a quagmire, then a glowing victory of American arms, and now a debacle. Enron was the pacesetting firm in its industry; Enron is the devil.
F. Scott Fitzgerald once said, "The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function." We might do well to apply this skill in many areas, but I see particular value in looking at Enron this way. This company created remarkably innovative financial products that addressed entire categories of previously unidentified consumer and business needs, but it also engineered conflicts of interest for its finance officials that were dazzling in their scope and degree of deception.
At the same time it was working to turn the bland world of commodity energy sales into a customized, consumer-centric market, its traders were busily concocting intricate schemes to manipulate the California electricity markets, referring to their customers in the most callous language imaginable. (See my post of June 3, 2004.)
However naïve it may sound, I think it is possible—not certain, but possible—that Ken Lay genuinely believed in the transformation Enron was embarked on and was taken in as much as anyone by the fast footwork of a group of unethical finance executives. This doesn’t say much about his business acumen, but it might be enough to keep him out of jail. Meanwhile, I continue to believe that the wreck of Enron contains valuable nuggets of business innovation that will be mined by future entrepreneurs, when the market is again ready for them. I also look forward to a more complete history of Enron in the 1990s, once today's scandal fever dies down.
Today I’d like to talk about two companies. The first went through a lengthy period of reorganization and reinvention. It not only changed itself, but is on the way to transforming its entire industry. A darling of Wall Street, its competitors must take cognizance of its actions and direction, and many are scratching their heads at the implications of the changes they see. At the same time, it rewards its rank and file handsomely and is a generous contributor to the community.
The second company stands in stark contrast. It is the poster child for chicanery and corruption. Its top management benefited lavishly at the expense of stockholders and has been convicted or indicted for a wide range of felonies. Their hubris took down the entire company, leaving a wide swath of impoverished employees and shareholders in its wake.
Both companies are Enron, as perceived at different points in time. More intriguingly, the picture that emerges from an interview with Ken Lay published in the New York Times over the weekend, is that both may have been accurate. In any case, if the way the former Chairman of Enron managed his vast holding of Enron stock is any indication, he believed in the first, more attractive picture until the end. Contrast Ken Lay, borrowing money to preserve his stake in Enron, with Sam Wachsal, selling out in the face of insider knowledge of adverse news.
These days the media works overtime to create the impression that we live in a binary world. Our invasion of Iraq was first a quagmire, then a glowing victory of American arms, and now a debacle. Enron was the pacesetting firm in its industry; Enron is the devil.
F. Scott Fitzgerald once said, "The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function." We might do well to apply this skill in many areas, but I see particular value in looking at Enron this way. This company created remarkably innovative financial products that addressed entire categories of previously unidentified consumer and business needs, but it also engineered conflicts of interest for its finance officials that were dazzling in their scope and degree of deception.
At the same time it was working to turn the bland world of commodity energy sales into a customized, consumer-centric market, its traders were busily concocting intricate schemes to manipulate the California electricity markets, referring to their customers in the most callous language imaginable. (See my post of June 3, 2004.)
However naïve it may sound, I think it is possible—not certain, but possible—that Ken Lay genuinely believed in the transformation Enron was embarked on and was taken in as much as anyone by the fast footwork of a group of unethical finance executives. This doesn’t say much about his business acumen, but it might be enough to keep him out of jail. Meanwhile, I continue to believe that the wreck of Enron contains valuable nuggets of business innovation that will be mined by future entrepreneurs, when the market is again ready for them. I also look forward to a more complete history of Enron in the 1990s, once today's scandal fever dies down.
Monday, June 28, 2004
Where Are The European Hybrids?
I'm sure some of my regular readers are beginning to wonder if my blog is nothing more than a shill for hybrid cars, since I've written about them so often. In my defense, today's posting was triggered by a question from a friend, asking if hybrids are so great for fuel economy, then why aren't there lots of them in Europe, where gas is so expensive? This is an excellent question, since European driving patterns would benefit much more from hybridization than those in the US, where long highway trips make up a larger share of total vehicle miles. I didn't have a good answer, but set out to find one.
One factor is simply awareness. Several European manufacturers with hybrids in either prototype or planning don't market in the US at all. Fiat and Renault both appear to working on hybrids, but neither has been a factor here for many years.
More importantly, many European carmakers are placing their bets on other technology. For some, like BMW, that means an internal combustion engine running on hydrogen; my long-time readers know I think this is a dead end. Most, including VW, have focused their fuel economy improvements on updated diesel engines for passenger cars.
Diesels boost mileage at a much lower cost premium than hybrids, but in the past this came with a big penalty in noise and performance. Direct injection, "common rail" and turbocharging changed all that. Having driven a couple of modern diesel rental cars in Germany, I can tell you that there is no comparison to the diesel cars of yore--they drive and handle as well as other cars. The European trend toward diesel has been underway for so long, driven by lower fuel taxes than on gasoline, that soon half the cars on the road in Europe will be diesel powered.
This has a big impact on the attractiveness of hybrids there. If the representative car in Europe is a midsize diesel sedan getting more than 30 miles per gallon, how much better is a hybrid that gets somewhat higher mileage but costs significantly more up front and requires the more expensive gasoline? Rough calculations show that if gasoline costs 20% more than diesel and the hybrid costs $2,000 more up front, then it would take at least six years to pay out the investment. In Germany most people don't own the same car that long, because of the high cost of complying with annual safety and maintenance inspections.
As a result of all this, and contrary to what one might think, hybrids will probably be a bigger hit in the US than in Europe, until the cost differential between hybrids and diesels shrinks a lot.
I'm sure some of my regular readers are beginning to wonder if my blog is nothing more than a shill for hybrid cars, since I've written about them so often. In my defense, today's posting was triggered by a question from a friend, asking if hybrids are so great for fuel economy, then why aren't there lots of them in Europe, where gas is so expensive? This is an excellent question, since European driving patterns would benefit much more from hybridization than those in the US, where long highway trips make up a larger share of total vehicle miles. I didn't have a good answer, but set out to find one.
One factor is simply awareness. Several European manufacturers with hybrids in either prototype or planning don't market in the US at all. Fiat and Renault both appear to working on hybrids, but neither has been a factor here for many years.
More importantly, many European carmakers are placing their bets on other technology. For some, like BMW, that means an internal combustion engine running on hydrogen; my long-time readers know I think this is a dead end. Most, including VW, have focused their fuel economy improvements on updated diesel engines for passenger cars.
Diesels boost mileage at a much lower cost premium than hybrids, but in the past this came with a big penalty in noise and performance. Direct injection, "common rail" and turbocharging changed all that. Having driven a couple of modern diesel rental cars in Germany, I can tell you that there is no comparison to the diesel cars of yore--they drive and handle as well as other cars. The European trend toward diesel has been underway for so long, driven by lower fuel taxes than on gasoline, that soon half the cars on the road in Europe will be diesel powered.
This has a big impact on the attractiveness of hybrids there. If the representative car in Europe is a midsize diesel sedan getting more than 30 miles per gallon, how much better is a hybrid that gets somewhat higher mileage but costs significantly more up front and requires the more expensive gasoline? Rough calculations show that if gasoline costs 20% more than diesel and the hybrid costs $2,000 more up front, then it would take at least six years to pay out the investment. In Germany most people don't own the same car that long, because of the high cost of complying with annual safety and maintenance inspections.
As a result of all this, and contrary to what one might think, hybrids will probably be a bigger hit in the US than in Europe, until the cost differential between hybrids and diesels shrinks a lot.
Friday, June 25, 2004
Another Unwelcome Straw
Just when the oil markets start to settle down, and prices head back in the direction of $30, we get this. I guess if you're a Norwegian oilworker, you might think now is an optimal time to achieve your goals through a strike. For the rest of us, the timing couldn't be worse.
So far, the strike has taken 300-500,000 barrels/day of Norwegian crude off line. But if it expands, the entire sector is threatened, exceeding 3 million barrels per day, essentially all of it produced from offshore platforms in the North Sea. Although the US typically only receives about 150,000 barrels/day of Norwegian oil, this strike could have a disproportionate impact on US consumers for several reasons:
- Most of Norway's production is very high quality, low in sulfur and containing a high proportion of gasoline and diesel, and requires less intensive refining.
- With US refineries running essentially flat out, all our incremental gasoline supplies must be imported. To the degree that the suppliers of these imports are running Norwegian oil, the strike will further handicap them in delivering cargoes to the US.
- Although Saudi Arabia has pledged an increase of 2.5 million barrels per day, it will take a month or two for this extra production to gear up, and another month or two for it to reach market. In contrast, oil from the North Sea reaches European refineries in a few days and the US in about two weeks. That means there will be a lag before other supplies can make up for the lost Norwegian oil.
The net result will keep crude oil prices high, longer, and put further pressure on the US gasoline market. Hardly good news in the peak summer driving months.
Addendum: I saw on Saturday that the Norwegian government stepped in to end the strike and prevent it from affecting the rest of the country's oil fields. The market dodged a bullet, here.
Just when the oil markets start to settle down, and prices head back in the direction of $30, we get this. I guess if you're a Norwegian oilworker, you might think now is an optimal time to achieve your goals through a strike. For the rest of us, the timing couldn't be worse.
So far, the strike has taken 300-500,000 barrels/day of Norwegian crude off line. But if it expands, the entire sector is threatened, exceeding 3 million barrels per day, essentially all of it produced from offshore platforms in the North Sea. Although the US typically only receives about 150,000 barrels/day of Norwegian oil, this strike could have a disproportionate impact on US consumers for several reasons:
- Most of Norway's production is very high quality, low in sulfur and containing a high proportion of gasoline and diesel, and requires less intensive refining.
- With US refineries running essentially flat out, all our incremental gasoline supplies must be imported. To the degree that the suppliers of these imports are running Norwegian oil, the strike will further handicap them in delivering cargoes to the US.
- Although Saudi Arabia has pledged an increase of 2.5 million barrels per day, it will take a month or two for this extra production to gear up, and another month or two for it to reach market. In contrast, oil from the North Sea reaches European refineries in a few days and the US in about two weeks. That means there will be a lag before other supplies can make up for the lost Norwegian oil.
The net result will keep crude oil prices high, longer, and put further pressure on the US gasoline market. Hardly good news in the peak summer driving months.
Addendum: I saw on Saturday that the Norwegian government stepped in to end the strike and prevent it from affecting the rest of the country's oil fields. The market dodged a bullet, here.
Thursday, June 24, 2004
Dirty Bombs
An updated argument against nuclear power relates to our renewed fears of the proliferation of weapons of mass destruction. In the case of Iran, for example, it's very hard to distinguish a peaceful program from a weapons program. But along with concerns that more nuclear power now means more fissionable material available later for nuclear weapons, a number of commentators worry about the accumulation of radioactive material that could find its way into a "dirty bomb". This article in MIT's Technology Review puts that threat into proper perspective and is well worth your time.
All I would add is that, when it comes to setting our security priorities, we need to be very clear that actual nuclear weapons must be at the top of the list, with first call on funding. We should be much more aggressive in securing Russia's cooperation in decomissioning their old bombs and reactors, and getting the fissionable material under airtight security. When Russia was eager for help in this area in the 1990s, our response, though well-intentioned, was far too modest.
An updated argument against nuclear power relates to our renewed fears of the proliferation of weapons of mass destruction. In the case of Iran, for example, it's very hard to distinguish a peaceful program from a weapons program. But along with concerns that more nuclear power now means more fissionable material available later for nuclear weapons, a number of commentators worry about the accumulation of radioactive material that could find its way into a "dirty bomb". This article in MIT's Technology Review puts that threat into proper perspective and is well worth your time.
All I would add is that, when it comes to setting our security priorities, we need to be very clear that actual nuclear weapons must be at the top of the list, with first call on funding. We should be much more aggressive in securing Russia's cooperation in decomissioning their old bombs and reactors, and getting the fissionable material under airtight security. When Russia was eager for help in this area in the 1990s, our response, though well-intentioned, was far too modest.
Wednesday, June 23, 2004
Omens
Analysts expect OPEC production to reach its highest level in 25 years, as Saudi Arabia steps up output and the others do what they can, in an attempt to meet the current, unexpectedly high demand from consuming countries. Anyone looking for a plausible scenario of future oil markets should look around now, since this is, in effect, a dress rehearsal.
There's been a lot of commentary, including in this weblog, about geological and other constraints on oil production, and a general conclusion that today's conditions are not symptomatic of such a situation, but rather a coincidence of war, instability, infrastructure delays, and high demand. But today's oil market does share many features of the extrapolated status quo energy world:
- Declining production in key non-OPEC producers such as the US and North Sea
- Capital management and reinvestment issues in high cost OPEC suppliers (e.g. Venezuela)
- Steadily increasing reliance on OPEC production growth to cover essentially all incremental demand
- Increasing reliance on a couple of key non-OPEC producers, such as Russia, to balance growing OPEC market power
I don't know anyone who thinks that the US can find enough domestic oil to prevent our dependence on imports from going up steadily. After all, North America is the most mature, heavily explored and exploited oil province in the world, and we are well down the right hand tail of the bell curve in our prospects for new oil discoveries. But I don't agree with the impression created by the New York Times this Sunday that the quantity of oil in those parts of the US that are currently off-limits to drilling is too small matter in this equation. As a former oil trader, I believe it matters enormously whether we produce only 4 million barrels per day ten years from now, or 5 million.
The current price excursion hinges largely on a global difference of 1-2 million barrels/day, just as the 1998 price collapse did. A combination of offshore California, offshore Florida, Rockies, and Arctic National Wildlife Refuge production could get us that extra million barrels/day, for a decade or so, even accounting for depletion elsewhere. The key is what we'd do with the time this would buy. Would we get serious about reducing our consumption and bringing on alternatives, or would we pursue the same old combination of feckless policy and arguments about whose backyard takes the hit? If the latter, then to paraphrase an old Cold War dictum, it's time to stop worrying and learn to love OPEC.
Analysts expect OPEC production to reach its highest level in 25 years, as Saudi Arabia steps up output and the others do what they can, in an attempt to meet the current, unexpectedly high demand from consuming countries. Anyone looking for a plausible scenario of future oil markets should look around now, since this is, in effect, a dress rehearsal.
There's been a lot of commentary, including in this weblog, about geological and other constraints on oil production, and a general conclusion that today's conditions are not symptomatic of such a situation, but rather a coincidence of war, instability, infrastructure delays, and high demand. But today's oil market does share many features of the extrapolated status quo energy world:
- Declining production in key non-OPEC producers such as the US and North Sea
- Capital management and reinvestment issues in high cost OPEC suppliers (e.g. Venezuela)
- Steadily increasing reliance on OPEC production growth to cover essentially all incremental demand
- Increasing reliance on a couple of key non-OPEC producers, such as Russia, to balance growing OPEC market power
I don't know anyone who thinks that the US can find enough domestic oil to prevent our dependence on imports from going up steadily. After all, North America is the most mature, heavily explored and exploited oil province in the world, and we are well down the right hand tail of the bell curve in our prospects for new oil discoveries. But I don't agree with the impression created by the New York Times this Sunday that the quantity of oil in those parts of the US that are currently off-limits to drilling is too small matter in this equation. As a former oil trader, I believe it matters enormously whether we produce only 4 million barrels per day ten years from now, or 5 million.
The current price excursion hinges largely on a global difference of 1-2 million barrels/day, just as the 1998 price collapse did. A combination of offshore California, offshore Florida, Rockies, and Arctic National Wildlife Refuge production could get us that extra million barrels/day, for a decade or so, even accounting for depletion elsewhere. The key is what we'd do with the time this would buy. Would we get serious about reducing our consumption and bringing on alternatives, or would we pursue the same old combination of feckless policy and arguments about whose backyard takes the hit? If the latter, then to paraphrase an old Cold War dictum, it's time to stop worrying and learn to love OPEC.
Tuesday, June 22, 2004
Early Signs of Life?
Contrary to perceptions that only Halliburton subsidiaries and other US companies with close ties to the US administration are being considered for major oil projects in Iraq, Arabian Oil Company, Ltd. of Japan is apparently in talks with Iraq's South Oil Company for a large infrastructure project to upgrade the country's southern export facilities. The project would be a key component of plans to increase production from new and existing oilfields.
Clearly such an undertaking is contingent on resolving the horrible security situation in the country, both in terms of ensuring the safety of personnel and ending the perpetual sabotage targeted against the oil infrastructure. These are large caveats, in light of the daily news out of Iraq, but the prize is enormous, and Japan has long taken a strategic--if not always entirely economical--interest in Middle East oil production.
The transition government, which will attain sovereignty later this month, estimates that the deliberate destruction of oil facilities has cost Iraq $1 billion, as well as creating significant environmental damage. Those engaged in these acts know precisely what they are doing, and it is telling that their attacks have focused on causing temporary disruption, rather than permanent destruction of Iraq's oil assets.
The upside of a stable Iraq includes the chance of founding a second "central bank of oil", as Saudi Arabia has been called recently. As reliance on Middle Eastern oil grows in the future, it will be important from the perspective of consuming countries to spread out Saudi Arabia's current role as sole supplier of last resort. A healthy Iraq--however hard that might be to imagine today--would reassure markets for more than just the obvious security reasons.
Contrary to perceptions that only Halliburton subsidiaries and other US companies with close ties to the US administration are being considered for major oil projects in Iraq, Arabian Oil Company, Ltd. of Japan is apparently in talks with Iraq's South Oil Company for a large infrastructure project to upgrade the country's southern export facilities. The project would be a key component of plans to increase production from new and existing oilfields.
Clearly such an undertaking is contingent on resolving the horrible security situation in the country, both in terms of ensuring the safety of personnel and ending the perpetual sabotage targeted against the oil infrastructure. These are large caveats, in light of the daily news out of Iraq, but the prize is enormous, and Japan has long taken a strategic--if not always entirely economical--interest in Middle East oil production.
The transition government, which will attain sovereignty later this month, estimates that the deliberate destruction of oil facilities has cost Iraq $1 billion, as well as creating significant environmental damage. Those engaged in these acts know precisely what they are doing, and it is telling that their attacks have focused on causing temporary disruption, rather than permanent destruction of Iraq's oil assets.
The upside of a stable Iraq includes the chance of founding a second "central bank of oil", as Saudi Arabia has been called recently. As reliance on Middle Eastern oil grows in the future, it will be important from the perspective of consuming countries to spread out Saudi Arabia's current role as sole supplier of last resort. A healthy Iraq--however hard that might be to imagine today--would reassure markets for more than just the obvious security reasons.
Monday, June 21, 2004
Conservation
I suspect that some of my colleagues have gotten the idea that I don't place much importance on energy conservation. Although many speak of conservation as a source of energy--and a cheap one at that--I think that designation muddles the already confused distinction between supply and demand. Conservation lives in the world of consumer behavior and industrial demand, while true sources depend on technology, geology, and other engineering disciplines.
The New York Times presented a somewhat pessimistic view of conservation in this Sunday's Week in Review section, in an article entitled, "Suddenly, It's Hip To Conserve Energy." While acknowledging the contribution of energy-saving appliances and other legacies from our last energy crisis, the author suggests that as soon as prices fall again, the shine will go off hybrid cars and other new means of saving energy.
That may be true, but I think it gives too little credit to the lasting impact of such advances. If you think of conservation as occurring in cycles, with successive waves of energy-saving investment following each sustained spike in energy price, and then falling back to lower levels as prices revert to normal, the base efficiency of the economy will still improve dramatically over time.
For example, a Toyota Prius purchased today will continue to save gas for ten or more years, even if the original owner trades it in the moment prices fall below $2.00/gallon. In the same way, a new energy efficient boiler or HVAC plant at an industrial facility will save energy for decades, long after the economic drivers behind the project have disappeared. This legacy effect, along with the growth of the service and knowledge sectors of the economy, is one of the main reasons we use much less energy per dollar of GDP today than in the 1970s.
I also believe the article also focuses too much on oil, and the likelihood that its price will fall in the near future, returning us to the height of the fad for large SUVs. A higher proportion of energy conservation in the US will probably be driven by the high price of natural gas, which is unlikely to drop anytime soon, as I've discussed in previous postings. High natural gas prices will provide strong incentives for conservation for many years, so we should expect those graphs of BTUs/dollar of GDP to continue their downward slope, with attendant benefits for greenhouse gas emissions and our balance of trade.
Rather than seeing conservation as unimportant, I think it's a vital component of the long-term energy picture, but one that is essentially a foregone conclusion while energy prices remain volatile and "cheap and reliable energy" becomes a contradiction in terms, due to geopolitical disruptions and inadequate investment in new infrastructure.
I suspect that some of my colleagues have gotten the idea that I don't place much importance on energy conservation. Although many speak of conservation as a source of energy--and a cheap one at that--I think that designation muddles the already confused distinction between supply and demand. Conservation lives in the world of consumer behavior and industrial demand, while true sources depend on technology, geology, and other engineering disciplines.
The New York Times presented a somewhat pessimistic view of conservation in this Sunday's Week in Review section, in an article entitled, "Suddenly, It's Hip To Conserve Energy." While acknowledging the contribution of energy-saving appliances and other legacies from our last energy crisis, the author suggests that as soon as prices fall again, the shine will go off hybrid cars and other new means of saving energy.
That may be true, but I think it gives too little credit to the lasting impact of such advances. If you think of conservation as occurring in cycles, with successive waves of energy-saving investment following each sustained spike in energy price, and then falling back to lower levels as prices revert to normal, the base efficiency of the economy will still improve dramatically over time.
For example, a Toyota Prius purchased today will continue to save gas for ten or more years, even if the original owner trades it in the moment prices fall below $2.00/gallon. In the same way, a new energy efficient boiler or HVAC plant at an industrial facility will save energy for decades, long after the economic drivers behind the project have disappeared. This legacy effect, along with the growth of the service and knowledge sectors of the economy, is one of the main reasons we use much less energy per dollar of GDP today than in the 1970s.
I also believe the article also focuses too much on oil, and the likelihood that its price will fall in the near future, returning us to the height of the fad for large SUVs. A higher proportion of energy conservation in the US will probably be driven by the high price of natural gas, which is unlikely to drop anytime soon, as I've discussed in previous postings. High natural gas prices will provide strong incentives for conservation for many years, so we should expect those graphs of BTUs/dollar of GDP to continue their downward slope, with attendant benefits for greenhouse gas emissions and our balance of trade.
Rather than seeing conservation as unimportant, I think it's a vital component of the long-term energy picture, but one that is essentially a foregone conclusion while energy prices remain volatile and "cheap and reliable energy" becomes a contradiction in terms, due to geopolitical disruptions and inadequate investment in new infrastructure.
Friday, June 18, 2004
A New Era
Periodically I feel the need to include something in this blog that has no immediate implications for energy. Monday's planned launch of SpaceShip One is such an item. If successful, it will inaugurate a new era in humanity's conquest of space, beginning to move it out of the realm of things that governments do at great expense and toward something that private enterprise can do to make a buck.
Without in any way diminishing the achievements of two generations of astronauts and NASA employees, as well as Russian and other international space programs, this transition will mark the real beginning of our move out into the solar system, making accessible quantities of energy and resources far beyond anything we can imagine on earth. Solar power is much concentrated in space, without the atmosphere to absorb the sun's light, and a typical asteroid contains enough iron to meet the world's needs for a year.
None of this will be easy or cheap, but it has to start somewhere. Even though SpaceShipOne won't achieve orbital flight, it should reach an altitude of 100 kilometers, passing the threshold of space and qualifying for the first hurdle of the "X Prize".
I wish them luck, and I'll be eagerly tuned in to watch their progress.
Periodically I feel the need to include something in this blog that has no immediate implications for energy. Monday's planned launch of SpaceShip One is such an item. If successful, it will inaugurate a new era in humanity's conquest of space, beginning to move it out of the realm of things that governments do at great expense and toward something that private enterprise can do to make a buck.
Without in any way diminishing the achievements of two generations of astronauts and NASA employees, as well as Russian and other international space programs, this transition will mark the real beginning of our move out into the solar system, making accessible quantities of energy and resources far beyond anything we can imagine on earth. Solar power is much concentrated in space, without the atmosphere to absorb the sun's light, and a typical asteroid contains enough iron to meet the world's needs for a year.
None of this will be easy or cheap, but it has to start somewhere. Even though SpaceShipOne won't achieve orbital flight, it should reach an altitude of 100 kilometers, passing the threshold of space and qualifying for the first hurdle of the "X Prize".
I wish them luck, and I'll be eagerly tuned in to watch their progress.
Thursday, June 17, 2004
Hybrid Fever
There were two good articles on the prospects for hybrid cars in the last week. In the Sunday Style section, the New York Times covered some of the sociology of hybrids, for example the desire to be the first on your block with something new. The Financial Times looked at the introduction of the first hybrid SUV, the Ford Escape Hybrid, and focused on the benefits of stressing performance, rather than just fuel economy, to American consumers.
It's worth thinking about performance and what that really means to the average driver. Although carmakers have stressed horsepower as the key measure of a car’s performance, this indicator of maximum engine output isn’t that useful in assessing what most people are really interested in, namely good acceleration. That has more to do with torque, and electric motors are wonderful at providing lots of torque without the time lags associated with internal combustion engines. So hybrids can effectively deliver six-cylinder performance, but with four-cylinder economy, or better.
As the FT points out, this advantage erodes in sustained high-speed driving, where horsepower matters more, especially when towing. It will be interesting to see whether hybrids—as presently configured—meet the needs of the average motorist, or only of those seeking excellent gas mileage and low environmental impacts. Personally, I'm waiting for a hybrid sports sedan that gets 30 mpg and does 0-60 in under 7 seconds.
There were two good articles on the prospects for hybrid cars in the last week. In the Sunday Style section, the New York Times covered some of the sociology of hybrids, for example the desire to be the first on your block with something new. The Financial Times looked at the introduction of the first hybrid SUV, the Ford Escape Hybrid, and focused on the benefits of stressing performance, rather than just fuel economy, to American consumers.
It's worth thinking about performance and what that really means to the average driver. Although carmakers have stressed horsepower as the key measure of a car’s performance, this indicator of maximum engine output isn’t that useful in assessing what most people are really interested in, namely good acceleration. That has more to do with torque, and electric motors are wonderful at providing lots of torque without the time lags associated with internal combustion engines. So hybrids can effectively deliver six-cylinder performance, but with four-cylinder economy, or better.
As the FT points out, this advantage erodes in sustained high-speed driving, where horsepower matters more, especially when towing. It will be interesting to see whether hybrids—as presently configured—meet the needs of the average motorist, or only of those seeking excellent gas mileage and low environmental impacts. Personally, I'm waiting for a hybrid sports sedan that gets 30 mpg and does 0-60 in under 7 seconds.
Wednesday, June 16, 2004
Cuban Oil?
The Economist reports on wildcat drilling for oil off the coast of Cuba, in a deepwater zone of the Gulf of Mexico, just around the Yucatan from some of Mexico's most productive wells. Two foreign (and obviously non-US) companies are involved in the exploration. The implications of finding oil in Cuban waters are fascinating.
First, it would provide a major wealth injection into the moribund Cuban economy, and thus extend the longevity of the Castro government. All too often elsewhere, this has led to a rise in corruption, but the Cuban situation is sufficiently different from, say, West Africa, that such an outcome isn't a certainty. In any case, a major oil find would likely make the current US policy of isolation futile, leading the way to future engagement.
Second, if the oil resources were comparable to those on the other side of the Yucatan Peninsula, they could provide oil in excess of Cuba's needs, creating another oil exporter on America's doorstep. This would be a further incentive for normalization, however unpopular that might be with the exile community.
In addition, success in deepwater offshore Cuba could suggest attractive prospects elsewhere in the Gulf, beyond the recent deepwater developments and discoveries. That would be good news for US energy security, irrespective of the impact on Cuba.
Now it only remains to wait for the results of the drilling. If successful, oil could be flowing in four or five years, enough time to work out all the possibilities that my noodling above barely begins to cover.
The Economist reports on wildcat drilling for oil off the coast of Cuba, in a deepwater zone of the Gulf of Mexico, just around the Yucatan from some of Mexico's most productive wells. Two foreign (and obviously non-US) companies are involved in the exploration. The implications of finding oil in Cuban waters are fascinating.
First, it would provide a major wealth injection into the moribund Cuban economy, and thus extend the longevity of the Castro government. All too often elsewhere, this has led to a rise in corruption, but the Cuban situation is sufficiently different from, say, West Africa, that such an outcome isn't a certainty. In any case, a major oil find would likely make the current US policy of isolation futile, leading the way to future engagement.
Second, if the oil resources were comparable to those on the other side of the Yucatan Peninsula, they could provide oil in excess of Cuba's needs, creating another oil exporter on America's doorstep. This would be a further incentive for normalization, however unpopular that might be with the exile community.
In addition, success in deepwater offshore Cuba could suggest attractive prospects elsewhere in the Gulf, beyond the recent deepwater developments and discoveries. That would be good news for US energy security, irrespective of the impact on Cuba.
Now it only remains to wait for the results of the drilling. If successful, oil could be flowing in four or five years, enough time to work out all the possibilities that my noodling above barely begins to cover.
Tuesday, June 15, 2004
More Hubbert Admirers
Until recently, only geologists and petroleum engineers had heard of the Hubbert Curve. Now, while not exactly a household phrase, it is fast becoming a familiar concept. This article in the Washington Post (free sign-up required) does a good job of explaining it and considering some of its implications, without getting hung up on precise predictions of when it might occur.
A few of the authors' facts are a bit shaky, such as the assertion that no really large oil fields have been found in the last 30 years. At least one was found in that timeframe in the Caspian region. Does finding fewer of these "elephants" than we used to necessarily mean we're running out oil, or were they just the easiest to find, because of their size?
Nevertheless, the article raises the right concerns, with the right degree of urgency. Even if you are skeptical about an imminent Hubbert Peak, as I am, the more important message is that we cannot assume that oil production will continue to grow smoothly or endlessly to meet increasing demand. Geopolitics and oil industry economics can create a similar situation, and seeing that as credible doesn't require an act of faith, because it doesn't hinge on an event that can't be known until we have past it.
So whether you buy the arguments of Hubbert or not, it is still important to consider what might fill the gap if oil production stopped growing, but economies didn't. There are no easy answers, and we can't even rely on the markets to signal when we should begin investing in alternatives. That's why this whole subject falls into the realm of risk management, for both countries and companies. We still have time to do this properly, since it's pretty clear that the current market glitch is NOT a Hubbert-like event, even though it gives us a small taste of what one might be like.
Until recently, only geologists and petroleum engineers had heard of the Hubbert Curve. Now, while not exactly a household phrase, it is fast becoming a familiar concept. This article in the Washington Post (free sign-up required) does a good job of explaining it and considering some of its implications, without getting hung up on precise predictions of when it might occur.
A few of the authors' facts are a bit shaky, such as the assertion that no really large oil fields have been found in the last 30 years. At least one was found in that timeframe in the Caspian region. Does finding fewer of these "elephants" than we used to necessarily mean we're running out oil, or were they just the easiest to find, because of their size?
Nevertheless, the article raises the right concerns, with the right degree of urgency. Even if you are skeptical about an imminent Hubbert Peak, as I am, the more important message is that we cannot assume that oil production will continue to grow smoothly or endlessly to meet increasing demand. Geopolitics and oil industry economics can create a similar situation, and seeing that as credible doesn't require an act of faith, because it doesn't hinge on an event that can't be known until we have past it.
So whether you buy the arguments of Hubbert or not, it is still important to consider what might fill the gap if oil production stopped growing, but economies didn't. There are no easy answers, and we can't even rely on the markets to signal when we should begin investing in alternatives. That's why this whole subject falls into the realm of risk management, for both countries and companies. We still have time to do this properly, since it's pretty clear that the current market glitch is NOT a Hubbert-like event, even though it gives us a small taste of what one might be like.
Monday, June 14, 2004
Opting In to CO2 Limits
The body responsible for reducing air pollution in California recently decided to extend their boundaries by proposing regulations on emissions of carbon dioxide (CO2) from automobiles in the state. Now, according to the New York Times, several other states appear set to follow suit, including New York and Connecticut. While this approach might appear to some as laudable pragmatism in the face of a federal administration that disdains action on climate change, I believe it to be misguided and ultimately counterproductive.
There are two major problems with this kind of back-door response to climate change. The first results from a basic fact of life: CO2 is not a pollutant. A pollutant is something that contaminates the environment. CO2, to the contrary, is an essential component of our environment, linking animals and plants in the well-known “carbon cycle.” This is not mere semantics, because thinking of CO2 as a pollutant constrains us to approach it in the same way that we have approached past pollution problems.
Consider the sulfur and nitrogen oxides emitted by cars and power plants. These gases can only be reduced at the source, and three decades of environmental regulation have made great strides in managing these emissions, even though problems still remain. For CO2 and the other greenhouse gases, however, reduction at the tailpipe or smokestack is only one of several possible strategies for reducing the emissions that contribute to climate change, particularly if one is concerned about keeping the cost of emissions reductions low.
For example, there are vast quantities of emissions from agriculture that could be reduced or eliminated cheaply. The effect would be the same, because all CO2 emissions are equivalent, everywhere on the globe. While the greenhouse gas emissions from the transportation sector can’t be ignored, focusing exclusively on this sector would result in unnecessary distortions and economic penalties.
The other problem with addressing CO2 emissions this way relates to the charters of the agencies involved. The California Air Resources Board has worked aggressively to reduce air pollution, particularly in Los Angeles and the San Francisco Bay Area. Their efforts have paid off, even if they have created unintended consequences, including forcing Californians to pay more for fuel than residents of most other states. The majority of Californians is probably willing to pay that premium, because the results are visible: air pollution in the L.A. basin has improved significantly in the last 20 years, in spite of a major increase in both population and vehicle miles driven. But that support will only reach so far.
Fundamentally, the only way to achieve the goals that CARB and the other states have set forth is to improve vehicle fuel economy. Setting aside the argument over whether this parameter is under federal or state jurisdiction, we cannot ignore the fact that the decline in fuel economy over the last decade is largely the result of a change in consumer preferences. Californians, like other Americans, have demanded larger vehicles and, along the way, have insisted that these SUVs not require 10 minutes to accelerate to freeway speeds.
To improve fuel economy dramatically, you can make the car smaller and lighter, reduce the power of its engine, or add expensive technology to reduce energy consumption, as in hybrids. All of these solutions are possible today, but all impose costs that collide with the desires of the majority of current consumers. As a result, I believe this approach creates a hidden trap for the regulators.
So far, consumers have gone along with CARB and other air quality regulators , because most of the burden of compliance has fallen on carmakers and oil refiners, and the results have been apparent in their communities. Regulating automobile attributes that consumers truly care about, in order to mitigate a long-term problem without any visible local manifestation, could undermine that support. Once car buyers in California and elsewhere realize that these new rules will constrain their choices in terms of size, weight and horsepower, they may decide that CARB has overstepped its bounds. The reaction could cost CARB not only its ability to manage CO2, but also some of its mandate to tackle "normal" pollution.
If you have been reading my blog for a while, you know that I think climate change is a serious issue that merits action, and that my opposition to this approach is not obfuscation. We need a genuine national debate on this issue, and any response must have broad voter support, because it will impose costs across our entire economy, and beyond. For that reason, and the others I’ve outlined above, I believe that treating CO2 as a pollutant and letting local agencies charged with keeping the air clean regulate it will backfire. It is also undemocratic.
The body responsible for reducing air pollution in California recently decided to extend their boundaries by proposing regulations on emissions of carbon dioxide (CO2) from automobiles in the state. Now, according to the New York Times, several other states appear set to follow suit, including New York and Connecticut. While this approach might appear to some as laudable pragmatism in the face of a federal administration that disdains action on climate change, I believe it to be misguided and ultimately counterproductive.
There are two major problems with this kind of back-door response to climate change. The first results from a basic fact of life: CO2 is not a pollutant. A pollutant is something that contaminates the environment. CO2, to the contrary, is an essential component of our environment, linking animals and plants in the well-known “carbon cycle.” This is not mere semantics, because thinking of CO2 as a pollutant constrains us to approach it in the same way that we have approached past pollution problems.
Consider the sulfur and nitrogen oxides emitted by cars and power plants. These gases can only be reduced at the source, and three decades of environmental regulation have made great strides in managing these emissions, even though problems still remain. For CO2 and the other greenhouse gases, however, reduction at the tailpipe or smokestack is only one of several possible strategies for reducing the emissions that contribute to climate change, particularly if one is concerned about keeping the cost of emissions reductions low.
For example, there are vast quantities of emissions from agriculture that could be reduced or eliminated cheaply. The effect would be the same, because all CO2 emissions are equivalent, everywhere on the globe. While the greenhouse gas emissions from the transportation sector can’t be ignored, focusing exclusively on this sector would result in unnecessary distortions and economic penalties.
The other problem with addressing CO2 emissions this way relates to the charters of the agencies involved. The California Air Resources Board has worked aggressively to reduce air pollution, particularly in Los Angeles and the San Francisco Bay Area. Their efforts have paid off, even if they have created unintended consequences, including forcing Californians to pay more for fuel than residents of most other states. The majority of Californians is probably willing to pay that premium, because the results are visible: air pollution in the L.A. basin has improved significantly in the last 20 years, in spite of a major increase in both population and vehicle miles driven. But that support will only reach so far.
Fundamentally, the only way to achieve the goals that CARB and the other states have set forth is to improve vehicle fuel economy. Setting aside the argument over whether this parameter is under federal or state jurisdiction, we cannot ignore the fact that the decline in fuel economy over the last decade is largely the result of a change in consumer preferences. Californians, like other Americans, have demanded larger vehicles and, along the way, have insisted that these SUVs not require 10 minutes to accelerate to freeway speeds.
To improve fuel economy dramatically, you can make the car smaller and lighter, reduce the power of its engine, or add expensive technology to reduce energy consumption, as in hybrids. All of these solutions are possible today, but all impose costs that collide with the desires of the majority of current consumers. As a result, I believe this approach creates a hidden trap for the regulators.
So far, consumers have gone along with CARB and other air quality regulators , because most of the burden of compliance has fallen on carmakers and oil refiners, and the results have been apparent in their communities. Regulating automobile attributes that consumers truly care about, in order to mitigate a long-term problem without any visible local manifestation, could undermine that support. Once car buyers in California and elsewhere realize that these new rules will constrain their choices in terms of size, weight and horsepower, they may decide that CARB has overstepped its bounds. The reaction could cost CARB not only its ability to manage CO2, but also some of its mandate to tackle "normal" pollution.
If you have been reading my blog for a while, you know that I think climate change is a serious issue that merits action, and that my opposition to this approach is not obfuscation. We need a genuine national debate on this issue, and any response must have broad voter support, because it will impose costs across our entire economy, and beyond. For that reason, and the others I’ve outlined above, I believe that treating CO2 as a pollutant and letting local agencies charged with keeping the air clean regulate it will backfire. It is also undemocratic.
Thursday, June 10, 2004
What Should We Do with the SPR? (Rerun)
Last week's Barron's carried an editorial suggesting the sale of the Strategic Petroleum Reserve to private investors, arguing that this would remove another layer of government interference in the market. That approach is a somewhat more radical than my own modest suggestion of February 18:
Following on from yesterday's posting about the Strategic Petroleum Reserve, rather than asking about the timing of adding oil to the existing SPR, Senators Levin and Collins might instead have asked whether the SPR itself is the most efficient way to provide the desired protection from supply disruption.
The tricky aspect of such a strategic reserve is that it sends two signals: the intended one to suppliers about our ability to do without them in extremis, and an unintentional signal to the market affecting the overall psychology of holding inventory. In the last twenty years commercial crude oil stocks--in absolute terms and particularly when measured in days' supply--have declined significantly. While this might be coincidental, the mere existence of the SPR has reduced the risk of holding lower commercial inventories.
In addition, President Clinton's decision in the fall of 2000 to release crude oil from the SPR to try to hold down home heating oil prices sent a particularly confusing signal, since it directly undermined the incentive for companies to build inventories during low demand for use in periods of higher seasonal demand and prices.
The basic issue is providing an adequate backstop in case of actual disruption of supply, not trying to run the SPR for a profit or using it as a political tool to influence prices. This can certainly be done by a combination of government-owned storage and iron discipline on when to release stocks, as with the current SPR, but it could also be achieved or augmented by making commercial inventories less onerous for companies to hold.
Refiners are conservative people by nature. They are rewarded for running their facilities safely and profitably, and they work hard to avoid anything that interferes with that. Left to their own devices, they would hold lots of inventory, because it increases their flexibility and reduces the risk of running short of crucial inputs. But their accountants have been telling them for years that holding more inventory than absolutely necessary has dire tax and working capital consequences, and reduces the rates of return on their huge capital base. If companies were given incentives that eliminated these detriments, refinery managers would happily increase their inventories.
The other benefit of a scheme like this would be to circumvent the limits on how quickly the reserve could be drawn down when needed. The current limit on the SPR is 4.3 million barrels/day (MBD). At this rate, it would take almost six months to draw down the entire 700 million barrels on hand today. Holding equivalent volumes in hundreds of facilities, instead of a handful, would avoid this bottleneck.
Of course no one foreign supplier sells the US this much oil today, so one could argue that the likelihood of needing to draw down more than 4.3 MBD is low. But the loss of Saudi Arabia--not so hard to imagine in today's world--would take much more oil out of the world market and create major disruptions as traders tried to rebalance supply and demand.
But a side benefit of moving to a commercialized, incentivized structure would address precisely the concern of the two Senators. Decisions on when to add to inventory would be made by managers who are actively in the market, routinely making such decisions, rather than by government bureaucrats. Could such a system be gamed, a la Enron? Perhaps, but the incentives could be structured to minimize such behavior.
In many respects, though useful and better than blind faith, the SPR is an anachronistic holdover of a period of extreme regulation--remember the wage & price controls of the 1970s? Given the waves of deregulation that have swept industry after industry, it might be timely to look at this relic in a new light.
Last week's Barron's carried an editorial suggesting the sale of the Strategic Petroleum Reserve to private investors, arguing that this would remove another layer of government interference in the market. That approach is a somewhat more radical than my own modest suggestion of February 18:
Following on from yesterday's posting about the Strategic Petroleum Reserve, rather than asking about the timing of adding oil to the existing SPR, Senators Levin and Collins might instead have asked whether the SPR itself is the most efficient way to provide the desired protection from supply disruption.
The tricky aspect of such a strategic reserve is that it sends two signals: the intended one to suppliers about our ability to do without them in extremis, and an unintentional signal to the market affecting the overall psychology of holding inventory. In the last twenty years commercial crude oil stocks--in absolute terms and particularly when measured in days' supply--have declined significantly. While this might be coincidental, the mere existence of the SPR has reduced the risk of holding lower commercial inventories.
In addition, President Clinton's decision in the fall of 2000 to release crude oil from the SPR to try to hold down home heating oil prices sent a particularly confusing signal, since it directly undermined the incentive for companies to build inventories during low demand for use in periods of higher seasonal demand and prices.
The basic issue is providing an adequate backstop in case of actual disruption of supply, not trying to run the SPR for a profit or using it as a political tool to influence prices. This can certainly be done by a combination of government-owned storage and iron discipline on when to release stocks, as with the current SPR, but it could also be achieved or augmented by making commercial inventories less onerous for companies to hold.
Refiners are conservative people by nature. They are rewarded for running their facilities safely and profitably, and they work hard to avoid anything that interferes with that. Left to their own devices, they would hold lots of inventory, because it increases their flexibility and reduces the risk of running short of crucial inputs. But their accountants have been telling them for years that holding more inventory than absolutely necessary has dire tax and working capital consequences, and reduces the rates of return on their huge capital base. If companies were given incentives that eliminated these detriments, refinery managers would happily increase their inventories.
The other benefit of a scheme like this would be to circumvent the limits on how quickly the reserve could be drawn down when needed. The current limit on the SPR is 4.3 million barrels/day (MBD). At this rate, it would take almost six months to draw down the entire 700 million barrels on hand today. Holding equivalent volumes in hundreds of facilities, instead of a handful, would avoid this bottleneck.
Of course no one foreign supplier sells the US this much oil today, so one could argue that the likelihood of needing to draw down more than 4.3 MBD is low. But the loss of Saudi Arabia--not so hard to imagine in today's world--would take much more oil out of the world market and create major disruptions as traders tried to rebalance supply and demand.
But a side benefit of moving to a commercialized, incentivized structure would address precisely the concern of the two Senators. Decisions on when to add to inventory would be made by managers who are actively in the market, routinely making such decisions, rather than by government bureaucrats. Could such a system be gamed, a la Enron? Perhaps, but the incentives could be structured to minimize such behavior.
In many respects, though useful and better than blind faith, the SPR is an anachronistic holdover of a period of extreme regulation--remember the wage & price controls of the 1970s? Given the waves of deregulation that have swept industry after industry, it might be timely to look at this relic in a new light.
Tuesday, June 08, 2004
The Next North Sea?
Another posting from January, discussing the impact of declining oil production in the US and other mature non-OPEC regions:
US energy policy seems to lack a fundamental vision for what our federal energy funding should be buying us. I suggest that the goal should be to expand our energy options to keep our reliance on hydrocarbons from the Middle East from growing much further than it has. When we experienced our first energy crisis in the 1970s, this goal seemed clear. We lost sight of it when new non-OPEC supplies, from places like Alaska, the North Sea, the Gulf of Mexico and West Africa bailed us out. But we should have always seen that the bailout was only temporary.
Now the North Slope is deep in decline, producing less than half what it did in 1988. The North Sea is entering decline, and Gulf of Mexico production is only propped up by new technology allowing access to deeper water depths. Today it is Russia and the Caspian Sea region that appear as the bright hopes for keeping OPEC at bay for the next 20 years or so. But sooner or later the geological fact of the heavy concentration of oil reserves in the Middle East will become destiny, and there won't be another North Sea or Caspian waiting in the wings.
So let's not waste the next two decades that Russia and the Caspian can give us. It will take that long to make the transition to ways to produce and use energy that will make us less dependent, whether it's hydrogen, renewables (not alcohol--see Monday's post) or something more exotic.
But we can't just rely on foreign producers to limit the power of OPEC; we need to slow the decline of our own production, to preserve some leverage in the oil markets. It won't be easy. We have to begin with the inescapable truth that the US--at least the "lower 48"--is the most heavily explored and produced petroleum region in the world. Since Col. Drake's first well in PA in 1857, we have produced 80-90% of the oil that current technology can exploit. That amounts to about 200 billion barrels of oil, putting the US in a very exclusive club indeed; we were the world's Saudi Arabia before oil was ever found in the Kingdom.
While those days are past, it is hardly pointless--as some suggest--to try to find more oil here and to bring on production from areas currently off limits (e.g. offshore Florida.) Despite great improvements in oilfield technology, we still need new volumes to offset the severe decline from oilfields that have been producing for 20 or 30 years. Lifting environmental and land use restrictions on access to such reserves could also be linked directly to more funding for alternatives to oil, or to higher efficiency standards for cars.
The biggest challenge to slowing the decline of US oil production is that the oil industry sees much more attractive opportunities elsewhere, and has shed thousands of excellent jobs in the US in pursuit of a major geographical realignment of focus. Just watch the excitement Libya will generate once we drop sanctions.
Can we make investment in smaller, riskier US oil opportunities attractive, again? Tax breaks, accelerated depreciation, environmental offsets, and a host of other low-cost options could help enormously, but all would require a revised "sniff test" concerning "corporate welfare." That won't be easy in the current political climate, but the results could be extremely helpful while we wait for the Hydrogen Economy.
Another posting from January, discussing the impact of declining oil production in the US and other mature non-OPEC regions:
US energy policy seems to lack a fundamental vision for what our federal energy funding should be buying us. I suggest that the goal should be to expand our energy options to keep our reliance on hydrocarbons from the Middle East from growing much further than it has. When we experienced our first energy crisis in the 1970s, this goal seemed clear. We lost sight of it when new non-OPEC supplies, from places like Alaska, the North Sea, the Gulf of Mexico and West Africa bailed us out. But we should have always seen that the bailout was only temporary.
Now the North Slope is deep in decline, producing less than half what it did in 1988. The North Sea is entering decline, and Gulf of Mexico production is only propped up by new technology allowing access to deeper water depths. Today it is Russia and the Caspian Sea region that appear as the bright hopes for keeping OPEC at bay for the next 20 years or so. But sooner or later the geological fact of the heavy concentration of oil reserves in the Middle East will become destiny, and there won't be another North Sea or Caspian waiting in the wings.
So let's not waste the next two decades that Russia and the Caspian can give us. It will take that long to make the transition to ways to produce and use energy that will make us less dependent, whether it's hydrogen, renewables (not alcohol--see Monday's post) or something more exotic.
But we can't just rely on foreign producers to limit the power of OPEC; we need to slow the decline of our own production, to preserve some leverage in the oil markets. It won't be easy. We have to begin with the inescapable truth that the US--at least the "lower 48"--is the most heavily explored and produced petroleum region in the world. Since Col. Drake's first well in PA in 1857, we have produced 80-90% of the oil that current technology can exploit. That amounts to about 200 billion barrels of oil, putting the US in a very exclusive club indeed; we were the world's Saudi Arabia before oil was ever found in the Kingdom.
While those days are past, it is hardly pointless--as some suggest--to try to find more oil here and to bring on production from areas currently off limits (e.g. offshore Florida.) Despite great improvements in oilfield technology, we still need new volumes to offset the severe decline from oilfields that have been producing for 20 or 30 years. Lifting environmental and land use restrictions on access to such reserves could also be linked directly to more funding for alternatives to oil, or to higher efficiency standards for cars.
The biggest challenge to slowing the decline of US oil production is that the oil industry sees much more attractive opportunities elsewhere, and has shed thousands of excellent jobs in the US in pursuit of a major geographical realignment of focus. Just watch the excitement Libya will generate once we drop sanctions.
Can we make investment in smaller, riskier US oil opportunities attractive, again? Tax breaks, accelerated depreciation, environmental offsets, and a host of other low-cost options could help enormously, but all would require a revised "sniff test" concerning "corporate welfare." That won't be easy in the current political climate, but the results could be extremely helpful while we wait for the Hydrogen Economy.
Monday, June 07, 2004
Saudi Shortfall?
This rerun is from from Feb. 25, but much of it seems quite relevant in light of recent events:
The subject of oil depletion keeps cropping up. Yesterday an article in the New York Times confirmed what I had heard from colleagues in the upstream oil business a few years ago: production from the largest Saudi oilfields is declining, perhaps irreversibly.
We should not overreact. Saudi Arabia is not running out of oil, nor is the world, notwithstanding the arguments of the disciples of King Hubbert. But there is a very serious issue here, with implications for the economies of all oil-importing countries. For decades we have relied on Saudi Arabia as the "swing producer" within OPEC, able to make up for shortfalls elsewhere, such as when most of Venezuela's production was shut in at the end of 2002. The future of that role is now in doubt.
No one questions the Saudis' enormous reserves. They still rank #1, with 260 billion barrels of proved reserves, roughly a quarter of the world's total. Nor do they lack the necessary technical expertise to find and develop the new oil reservoirs needed to make up for the depletion of their venerable supergiant fields. But they do have the same problem as many smaller producing countries: the social demands of their growing population are competing away the internal funds necessary to revitalize their oil industry. In this light, the Kingdom's persistence in keeping out all foreign investment in the oil sector is a luxury that neither they nor we can afford.
The message the US and other G7 countries need to send the Saudis, consistently and with emphasis is, "Our oil companies have the capital you need, and together we have the expertise. Open up your oil sector, or we will do whatever we must to wean ourselves off the need for your oil. If you maintain your current posture, your oil reserves will end up locked under the sand, worthless to you or your descendants."
Without access to Saudi and Iraqi reserves, which can be developed quickly and relatively cheaply, the international oil majors will spend their investment dollars on increasingly remote and technically more challenging opportunities elsewhere, drilling in ever deeper water and finding ways to make smaller and smaller fields economical.
The same dollars that would unlock millions of barrels per day of Saudi oil will yield half or a quarter as much oil elsewhere and with longer lead times, creating the possibility that the majors will not be able both to meet growing demand and compensate for the decline of mature fields. That would lead to the kind of supply/demand collision I've referred to before, and to much higher oil prices as far as the eye can see.
In any case, this news heralds the importance of developing and deploying meaningful alternatives to oil. This must include renewable forms, such as wind and solar and the hydrogen-based technologies that would allow them to displace petroleum products, as well as fossil-based alternatives, such as gas-to-liquids and coal gasification. These actions can't replace Saudi oil anytime soon, but they would speak louder than all the diplomats we can send to Riyadh.
This rerun is from from Feb. 25, but much of it seems quite relevant in light of recent events:
The subject of oil depletion keeps cropping up. Yesterday an article in the New York Times confirmed what I had heard from colleagues in the upstream oil business a few years ago: production from the largest Saudi oilfields is declining, perhaps irreversibly.
We should not overreact. Saudi Arabia is not running out of oil, nor is the world, notwithstanding the arguments of the disciples of King Hubbert. But there is a very serious issue here, with implications for the economies of all oil-importing countries. For decades we have relied on Saudi Arabia as the "swing producer" within OPEC, able to make up for shortfalls elsewhere, such as when most of Venezuela's production was shut in at the end of 2002. The future of that role is now in doubt.
No one questions the Saudis' enormous reserves. They still rank #1, with 260 billion barrels of proved reserves, roughly a quarter of the world's total. Nor do they lack the necessary technical expertise to find and develop the new oil reservoirs needed to make up for the depletion of their venerable supergiant fields. But they do have the same problem as many smaller producing countries: the social demands of their growing population are competing away the internal funds necessary to revitalize their oil industry. In this light, the Kingdom's persistence in keeping out all foreign investment in the oil sector is a luxury that neither they nor we can afford.
The message the US and other G7 countries need to send the Saudis, consistently and with emphasis is, "Our oil companies have the capital you need, and together we have the expertise. Open up your oil sector, or we will do whatever we must to wean ourselves off the need for your oil. If you maintain your current posture, your oil reserves will end up locked under the sand, worthless to you or your descendants."
Without access to Saudi and Iraqi reserves, which can be developed quickly and relatively cheaply, the international oil majors will spend their investment dollars on increasingly remote and technically more challenging opportunities elsewhere, drilling in ever deeper water and finding ways to make smaller and smaller fields economical.
The same dollars that would unlock millions of barrels per day of Saudi oil will yield half or a quarter as much oil elsewhere and with longer lead times, creating the possibility that the majors will not be able both to meet growing demand and compensate for the decline of mature fields. That would lead to the kind of supply/demand collision I've referred to before, and to much higher oil prices as far as the eye can see.
In any case, this news heralds the importance of developing and deploying meaningful alternatives to oil. This must include renewable forms, such as wind and solar and the hydrogen-based technologies that would allow them to displace petroleum products, as well as fossil-based alternatives, such as gas-to-liquids and coal gasification. These actions can't replace Saudi oil anytime soon, but they would speak louder than all the diplomats we can send to Riyadh.
Friday, June 04, 2004
Summer Reruns
The blog (or rather the blogger) will be on vacation for the next week. Barring some major story on which I feel I just have to comment, I will be providing a selection of writings from the last five months. (The hundredth posting in this blog was yesterday.) So if you've been reading from the start, or you can't stand the idea of something that wasn't written in the last day, you may want to tune out until next Thursday.
Here is the first vintage blog, from January 8:
Access to Oil
It appears that several US companies will be getting contracts to develop new and existing oil fields as a result of the war in Iraq. The surprise is that the contracts will be with Libya, not Iraq.
Although Libya's reserves are much smaller than Iraq's, they are larger than those of either Nigeria or Mexico, and they are in close proximity to the major markets of Italy, France and the rest of the Mediterranean. Libya currently produces about 1.4 million barrels of oil per day, but this level has stagnated for some time, despite identified new oilfields. US investment and expertise can make a real difference--without any of the risks and bottlenecks we face in Iraq--once sanctions are lifted. That should happen soon, given Libya's new stance on WMD and its cooperation in the War on Terrorism.
This may not seem like a big deal, but it has to be viewed in the context of the steadily increasing global demand for oil, which is expected to increase by 40% over the next 20 years. One of the strategic goals of the war in Iraq was almost certainly the elimination of political barriers to developing key oil resources that will be needed to meet future demand, without relying solely on Saudi Arabia and the other Gulf states. The opening of Libya is a pleasant and probably unexpected consequence, though the big prize of open international access to Iraq's 100 billion barrels of reserves remains to be realized.
The blog (or rather the blogger) will be on vacation for the next week. Barring some major story on which I feel I just have to comment, I will be providing a selection of writings from the last five months. (The hundredth posting in this blog was yesterday.) So if you've been reading from the start, or you can't stand the idea of something that wasn't written in the last day, you may want to tune out until next Thursday.
Here is the first vintage blog, from January 8:
Access to Oil
It appears that several US companies will be getting contracts to develop new and existing oil fields as a result of the war in Iraq. The surprise is that the contracts will be with Libya, not Iraq.
Although Libya's reserves are much smaller than Iraq's, they are larger than those of either Nigeria or Mexico, and they are in close proximity to the major markets of Italy, France and the rest of the Mediterranean. Libya currently produces about 1.4 million barrels of oil per day, but this level has stagnated for some time, despite identified new oilfields. US investment and expertise can make a real difference--without any of the risks and bottlenecks we face in Iraq--once sanctions are lifted. That should happen soon, given Libya's new stance on WMD and its cooperation in the War on Terrorism.
This may not seem like a big deal, but it has to be viewed in the context of the steadily increasing global demand for oil, which is expected to increase by 40% over the next 20 years. One of the strategic goals of the war in Iraq was almost certainly the elimination of political barriers to developing key oil resources that will be needed to meet future demand, without relying solely on Saudi Arabia and the other Gulf states. The opening of Libya is a pleasant and probably unexpected consequence, though the big prize of open international access to Iraq's 100 billion barrels of reserves remains to be realized.
Thursday, June 03, 2004
Trader Tapes
The tv in the gym where I work out was tuned to CNN yesterday morning, when they reported on the taped conversations between Enron's electricity traders and others during the California Electricity Crisis of 2001. Some of the comments captured on tape were startling, others merely vulgar.
Many companies routinely tape record all conversations on traders' telephone lines, in case of subsequent disputes over the wording of transactions, so the traders are fully aware they are being recorded. That makes these remarks even more surprising and symptomatic of a toxic corporate culture.
As you know if you've been reading my blog for a while, I spent about ten years of my career in energy trading, handling both physical petroleum commodities and petroleum futures and options. For part of that time, I supervised a small trading operation. I can only say that if any traders that worked for me had ever uttered the kind of things these tapes captured, they would have been disciplined or worse.
When I began trading in the mid-1980s (before taping), my supervisors always impressed upon me that I was a public spokesman for my company, and that I should never say anything that I wouldn't want to read on the front page of the paper. That seemed eminently sensible, and it stuck with me. Now it's true that traders tend to be a boisterous lot, and the humor can sometimes get a bit raw, but the remarks I heard this morning went beyond anyone's idea of a joke. Once again, the arrogant behavior of Enron employees is tarring a whole swath of the industry, like a hazardous waste site that has not been fully remediated.
Perhaps there are traders out there today gloating in similar fashion over the high prices of gasoline and crude oil, but most of the people I dealt with during my time in that part of the business were ethical and honorable, and the few that weren't suffered for their poor reputations. Things may have changed, but I don't think they've changed that much.
By the way, the blog (or rather the blogger) will be on vacation for the next week. In the interim, I will be providing a selection of writings from the last five months. (The hundredth posting in this blog went up yesterday.)
The tv in the gym where I work out was tuned to CNN yesterday morning, when they reported on the taped conversations between Enron's electricity traders and others during the California Electricity Crisis of 2001. Some of the comments captured on tape were startling, others merely vulgar.
Many companies routinely tape record all conversations on traders' telephone lines, in case of subsequent disputes over the wording of transactions, so the traders are fully aware they are being recorded. That makes these remarks even more surprising and symptomatic of a toxic corporate culture.
As you know if you've been reading my blog for a while, I spent about ten years of my career in energy trading, handling both physical petroleum commodities and petroleum futures and options. For part of that time, I supervised a small trading operation. I can only say that if any traders that worked for me had ever uttered the kind of things these tapes captured, they would have been disciplined or worse.
When I began trading in the mid-1980s (before taping), my supervisors always impressed upon me that I was a public spokesman for my company, and that I should never say anything that I wouldn't want to read on the front page of the paper. That seemed eminently sensible, and it stuck with me. Now it's true that traders tend to be a boisterous lot, and the humor can sometimes get a bit raw, but the remarks I heard this morning went beyond anyone's idea of a joke. Once again, the arrogant behavior of Enron employees is tarring a whole swath of the industry, like a hazardous waste site that has not been fully remediated.
Perhaps there are traders out there today gloating in similar fashion over the high prices of gasoline and crude oil, but most of the people I dealt with during my time in that part of the business were ethical and honorable, and the few that weren't suffered for their poor reputations. Things may have changed, but I don't think they've changed that much.
By the way, the blog (or rather the blogger) will be on vacation for the next week. In the interim, I will be providing a selection of writings from the last five months. (The hundredth posting in this blog went up yesterday.)
Wednesday, June 02, 2004
Whither the Kingdom?
The attacks in Saudi Arabia over the weekend have the markets jittery, though perhaps not for the right reason. Traders fear that stepped up attacks on oil infrastructure, both human and physical, will impede the ability of Saudi Arabia to deliver the oil that the market is counting on. The Economist has an excellent article covering this prospect and its potential impact in some detail. As bad as this may seem, it is a short-run concern, compared to what these incidents may be signaling for the longer term.
More worrisome than the number of attacks against foreigners this year is that the perpetrators seem able to penetrate targets that have at least some level of security and then escape from the scene, despite a rapid response from police and other security forces. If this is an indication that the security apparatus of the Kingdom has been infiltrated or compromised through sympathy for Al Qaida within its ranks, then we could be in for a much rougher time ahead.
The longevity of the Saudi monarchy has been questioned for decades, but the House of Saud has clung to power through an astute balance of religious legitimacy, social benevolence and technocratic orientation, all backed by the use of force, when necessary. The post-9/11 world is putting pressure on the monarchy's ties to Wah'habi Islam, and the country's demographic bubble is eroding the welfare state. If the military and police were to prove unreliable, then the outcome could be precisely the kind of upheaval that some analysts have predicted for years.
The evidence so far doesn't support such a conclusion, but the Kingdom isn't exactly the most open society on the planet, either. This situation bears careful scrutiny in the months ahead.
The attacks in Saudi Arabia over the weekend have the markets jittery, though perhaps not for the right reason. Traders fear that stepped up attacks on oil infrastructure, both human and physical, will impede the ability of Saudi Arabia to deliver the oil that the market is counting on. The Economist has an excellent article covering this prospect and its potential impact in some detail. As bad as this may seem, it is a short-run concern, compared to what these incidents may be signaling for the longer term.
More worrisome than the number of attacks against foreigners this year is that the perpetrators seem able to penetrate targets that have at least some level of security and then escape from the scene, despite a rapid response from police and other security forces. If this is an indication that the security apparatus of the Kingdom has been infiltrated or compromised through sympathy for Al Qaida within its ranks, then we could be in for a much rougher time ahead.
The longevity of the Saudi monarchy has been questioned for decades, but the House of Saud has clung to power through an astute balance of religious legitimacy, social benevolence and technocratic orientation, all backed by the use of force, when necessary. The post-9/11 world is putting pressure on the monarchy's ties to Wah'habi Islam, and the country's demographic bubble is eroding the welfare state. If the military and police were to prove unreliable, then the outcome could be precisely the kind of upheaval that some analysts have predicted for years.
The evidence so far doesn't support such a conclusion, but the Kingdom isn't exactly the most open society on the planet, either. This situation bears careful scrutiny in the months ahead.
Tuesday, June 01, 2004
Cost or Cleanliness?
The market penetration of alternative energy sources depends on the difference in price between the alternatives and conventional fuels, such as oil and gas. This is a pretty standard assumption, but the New York Times recently suggested otherwise. This assertion rests on two foundations: first, that the cost of alternatives has become much more competitive in recent years, allowing other considerations to play a major role in project decisions, and secondly, that environmental concerns have increased to become the paramount driver of such projects.
I think there is merit in both of these arguments, particularly where wind power in concerned, but I also think the article is too cavalier about the influence of historically high natural gas prices over the last several years.
During the 1980s and 1990s, natural gas became the fuel of choice for power generation, because it was both clean and relatively cheap. For most of this period, gas averaged between $1.50-$2.00 per million BTU at the wellhead. But since 2000, the price of natural gas has been considerably higher, often a multiple of the historical average. This changes the economics of generating electricity with natural gas. So for any alternative energy projects considered since 2000, the main competitor has been costlier, and more importantly, the general perception is that gas will not become cheap again, anytime soon. The main beneficiary of this change has probably been coal, as I suggested last week, but it had to help wind power, too.
The other factor in this equation is the difference between the wholesale and retail cost of electricity, which plays out differently for wind and for solar power. Because wind is a medium-scale technology, unsuitable for small applications, it competes with wholesale power on the grid. That means prices in the range of 3-5 cents per kilowatt-hour, typically.
Solar competes in a different arena. Because it is scalable from the size of your calculator to an entire factory roof, it is an alternative to retail power from the local distribution company, which costs upwards of 10 cents per kW-hr. Solar still costs a multiple of this, but brings other benefits in terms of reliability, at least when the sun shines.
When these issues are taken into consideration, it is much less clear that the cost of conventional energy no longer matters in the development of alternatives, as the Times suggests. Too many other things have changed to be able to assert this confidently, without a deeper understanding of the motivations of consumers and energy project developers.
The market penetration of alternative energy sources depends on the difference in price between the alternatives and conventional fuels, such as oil and gas. This is a pretty standard assumption, but the New York Times recently suggested otherwise. This assertion rests on two foundations: first, that the cost of alternatives has become much more competitive in recent years, allowing other considerations to play a major role in project decisions, and secondly, that environmental concerns have increased to become the paramount driver of such projects.
I think there is merit in both of these arguments, particularly where wind power in concerned, but I also think the article is too cavalier about the influence of historically high natural gas prices over the last several years.
During the 1980s and 1990s, natural gas became the fuel of choice for power generation, because it was both clean and relatively cheap. For most of this period, gas averaged between $1.50-$2.00 per million BTU at the wellhead. But since 2000, the price of natural gas has been considerably higher, often a multiple of the historical average. This changes the economics of generating electricity with natural gas. So for any alternative energy projects considered since 2000, the main competitor has been costlier, and more importantly, the general perception is that gas will not become cheap again, anytime soon. The main beneficiary of this change has probably been coal, as I suggested last week, but it had to help wind power, too.
The other factor in this equation is the difference between the wholesale and retail cost of electricity, which plays out differently for wind and for solar power. Because wind is a medium-scale technology, unsuitable for small applications, it competes with wholesale power on the grid. That means prices in the range of 3-5 cents per kilowatt-hour, typically.
Solar competes in a different arena. Because it is scalable from the size of your calculator to an entire factory roof, it is an alternative to retail power from the local distribution company, which costs upwards of 10 cents per kW-hr. Solar still costs a multiple of this, but brings other benefits in terms of reliability, at least when the sun shines.
When these issues are taken into consideration, it is much less clear that the cost of conventional energy no longer matters in the development of alternatives, as the Times suggests. Too many other things have changed to be able to assert this confidently, without a deeper understanding of the motivations of consumers and energy project developers.
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