Friday, October 29, 2004

Energy Policies - George W. Bush
Some time ago, I promised another look at the candidates' energy policies, and time is running short to do this before next Tuesday. I reviewed Senator Kerry's and Senator Edwards' energy planks during the primaries (see my posting of February 27), and I'll take another run through the Kerry proposals on Monday. Meanwhile, here's a quick look at what George W. Bush's campaign website suggests would happen in a second Bush Administration.

The Bush energy agenda really boils down to three basic initiatives: removing obstacles to increasing domestic energy production, especially oil and gas; investing in infrastructure and technology; and fostering conservation and renewables. The first aspect is the most controversial, by far.

The basic premise of Bush's supply-side proposals is that there is still untapped oil and gas in hard to reach or environmentally sensitive areas, that the nation needs these resources, and that the energy industry can extract them with less environmental impact than previously possible. All three statements are true, though it's important to understand the distinction between what is possible for oil and for gas.

Without rehashing all of the facts I've covered in previous blogs, the US is far down the depletion curve in terms of its original oil endowment. We've produced something like 80 or 90% of what was there to start with (in terms of recoverable oil), and the goal of further development should be seen in terms of managing the rate of overall decline, rather than any possibility of becoming self-sufficient again. Having said that, I think it makes a big difference strategically if we are able to continue producing 5-6 million barrels a day for the next 20 years, or will instead see this fall to 3-4 million without the Arctic National Wildlife Refuge and other currently off-limits resources.

Gas is another story. The big drive for LNG imports, which the President supports, is necessitated by the stagnation of domestic gas supplies, due at least in part to access restrictions in sensitive areas. Promoting more use of gas is good for the environment and for US jobs, but the gas has to come from somewhere. Unless we want to see the steady advance of gas--with all its environmental benefits--stall and give way to dirtier fuels, we will need all of what Bush suggests: more domestic gas, a gas pipeline from Alaska, and LNG imports (which means finding a better way to balance local concerns with national and regional energy needs in deciding where to site LNG terminals.)

In terms of infrastructure, the national power grid, which is really a collection of regional grids, needs new both infrastructure and new ideas. A new electricity policy is overdue, though the specifics matter, and I haven't examined the details of what the Administration is proposing.

Environmental groups roundly criticized George W. Bush for inadequate measures on conservation and alternative energy, but his support for continued tax benefits for buying hybrid cars, plus the proposed extension of the wind power tax credit, would put real dollars in places where they will have a direct impact on advancing alternatives. My biggest quibble concerns his support for ethanol and biodiesel, most of which has neutral or negative consequences for energy security and provides little more than farm supports in a different guise. This money could be much more effective supporting other forms of renewable energy.

Finally, though Bush's hydrogen proposals have been seen as a distraction from saving more energy in the near term, it is vitally important to fund basic research and development on this now, if we expect to see any kind of progress towards a hydrogen economy within the next generation. Hydrogen is something that is most certainly not just "off the shelf". Still, there's little discussion--at least on the campaign website--of where all this "pollution-free" hydrogen will come from. As you all know by now, hydrogen is an energy carrier, like electricity, and not an energy source, like oil.

All in all, this list is sort of a "status quo on steroids". I'd like to see more emphasis on demand-management, particularly on closing the SUV loophole and broadening incentives not just for hybrid cars, but for efficient vehicles of any technology. On the supply side, I wish I saw an alternative to what Bush is proposing that wouldn't result in the US being even more reliant on foreign oil suppliers and on high-carbon fuels like coal in the future. I don't. The reality is we'll need more domestic energy and more imported energy, even as we become more efficient.

What disappoints me most is that an administration with such a solid energy background and access to the best talent in the energy industry couldn't have come up with a really A+ energy program, rather than a laundry list. We need a balance of vision, in the form of a grand strategy for reducing the country's reliance on unstable suppliers, and practicality in laying out attainable short-, medium-, and long-term steps to get us there. And the most potentially serious shortcoming is the administration's failure to connect energy to climate change, which could prove to be as large a global challenge as the War on Terror.

Thursday, October 28, 2004

Quite A Contrast
Most of the stories one hears about the oil industry in Africa tend to focus on corruption and the "resource curse", strikes and threats of violence against foreign companies, or environmental damage. By contrast, this story from the Financial Times concerning "black empowerment" in South Africa is almost heartwarming.

Since the end of the Apartheid era, the South African government has worked to involve black entrepreneurs in the downstream oil products business, often at the individual service station level, but as the article describes, sometimes at much larger scale, in the billions of Rand (@ ZAR 6.15 to the dollar). The result is a substantial economic stake in the the country's fuels business by the previously disenfranchised majority population, as well as employment opportunities and transfers of business practices and relationships.

Some might see this as a soft form of asset appropriation or nationalization, but I think it bodes well for the future of the country, especially when compared with the graft that is routine in places like Nigeria. It is also a much better outcome than companies like Mobil, which formerly owned the Engen assets that are going into the joint venture with Sasol referenced in the article, might have expected in a post-Apartheid South Africa. While the country still has a ways to go in deregulating the oil industry, its energy industry is probably on the best path of any sub-Saharan African nation.

Wednesday, October 27, 2004

Plowing It Back
With the international oil majors in the midst of releasing earnings that should set new records, based on sustained high oil prices, those who follow the industry are increasingly asking how much of this cash windfall will be reinvested to find and develop new oilfields. Share buybacks and healthy dividends are fine and good if the only goal is elevating stock prices, but the current market tightness poses a challenge that the industry must either meet or else run the risk of damaging the market's future potential and stimulating the rise of alternatives.

Another recent Financial Times editorial, though, points out that OPEC has been even more remiss in reinvestment than the majors have, for reasons that make perfect sense to the producing countries, if not to the global economy. Much of this comes down to metrics.

The indicators by which you evaluate your success have a lot to do with shaping your future direction, and for the last decade most of the private oil sector has focused on reducing expense , lowering finding and development costs, and improving upstream margins. Those are excellent metrics from a shareholder perspective, since they reward companies for developing only the most profitable projects, but not for a global economy that needs expanding reserves and production to meet future demand.

Similarly, for the OPEC countries the metric that matters most is the remittance from their national oil companies to their national treasuries, or, in some cases, to the pockets of corrupt officials. Investing in extra capacity has not been seen as a good way to maximize this metric, in a market that yields higher prices--and thus higher OPEC revenues--when supplies are tight.

Today's producers, driven by these two sets of metrics, could never have created the industry we see. Rather, we are living off the largesse of a previous era, when the industry's performance metrics supported growth in capacity and infrastructure, even if that didn't always maximize short-term profitability. The vintage of the key producing oilfields around the world (when they were discovered and first developed) reflects this, and has become the prime evidence for those suggesting a geologically driven peak in production is near.

Could it be that the relative age of these big discoveries reflects a recent marketplace of diminished rewards for the behavior that found those fields in the first place, rather than signifying a diminished universe of opportunities? Perhaps the key component of a peak in production--or at least a supply crunch--lies not in the earth's crust, but in the incentives driving corporate executives and national oil company chiefs.

Tuesday, October 26, 2004

Low-Profile Power
Hydrogen has been getting lots of coverage lately, but the other "H", hydroelectric power, quietly supplies about 4% of this country's total energy consumption and about 7% of our electricity. In fact, the primary publicity hydropower gets these days tends to be bad, relating to the environmental impact of dams, impediments to fish spawning, and some of the same age-related problems as much of our other infrastructure. And as with most other forms of renewable energy, it turns out that when deployed on a sufficiently large scale, it creates as many adversaries as supporters. Perhaps the answer lies in smaller scales: mini- and micro-hydropower.

The idea of mini-hydro, or "run-of-the-river" hydro, as it is sometimes called, is that the energy of the current is tapped without having to build a dam to pen in water and force it through large turbines. A mini-hydro turbine functions more like an underwater windmill. It may also be a better fit than conventional hydroelectric power in developing countries, requiring as it does less upfront investment and less infrastructure, such as construction roads that can permanently alter settlement and land-use patterns.

The whole subject of hydropower merits more discussion in the future, since it still represents the largest fraction--by far--of renewable power in this country and elsewhere. With the world looking for more power but lower greenhouse gas emissions, hydropower is an obvious part of the solution, and mini- and micro-hydropower may be the forms that will be most broadly acceptable, given today's concerns about dams.

Monday, October 25, 2004

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

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

Ocean sequestration differs in several important ways. First, it would tie up carbon using biological processes, by stimulating plankton growth and effectively capturing the carbon in the pelagic food chain and its solid wastes. As a result, it does not require large amounts of capital or infrastructure. Second, it removes CO2 directly from the atmosphere, rather than from a smokestack, and appears to be easily scalable, making it possible to tackle the much larger sequestration goals that sudden climate change would require.

It's important to recognize that all of the world's other efforts to deal with climate change, such as they Kyoto Treaty, focus on slowing the rate of increase in greenhouse gas concentrations in the atmosphere, not on reducing them in absolute terms. However, if we were in a runaway greenhouse effect, we would need a technique that could cut the absolute quantity of CO2 in the atmosphere, in order to restore equilibrium.

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

Friday, October 22, 2004

Overwhelmed by Barrels
I was late getting to yesterday's Wall Street Journal, or this item would have been Thursday's blog topic. The editorial page featured this item (subscription required) by Professor Steve Hanke of Johns Hopkins University concerning the impact on oil markets of the Administration's decision to continue filling the Strategic Petroleum Reserve (SPR). He asserts that this policy has added $10.00 per barrel to the price of oil. After following this topic for months, I must say that this is easily the most blatantly exaggerated assessment I've seen of the impact of the SPR fill, hinging on a fundamental misunderstanding of how the oil markets work.

You may recall that in previous blogs I had initially defended the SPR addition policy (see posting of February 17), which takes about 130,000 barrels per day out of a 15 million barrel per day physical market in the US. More recently, I concluded that suspending additions would be a good idea (see posting of May 19), but for very different reasons than Dr. Hanke claims.

The problems with his analysis start with the role that inventories play in the oil markets. While changes in inventory certainly influence prices, this does not happen in the way Dr. Hanke suggests, in terms of "the economics of storage", but rather by what those changes imply about trends in the supply and demand for oil. The notion that SPR additions "crowd out" commercial stocks in any physical sense is absurd. A more defensible conclusion would be that a larger SPR reduces the incentive for holding commercial stocks, but this only works over the long run, not on a week-to-week basis.

Dr. Hanke goes on to suggest that crude oil prices for current delivery, or "spot" prices, should normally be lower than prices for future delivery, or "futures". In fact, this state of the market, called "contango", occurs sporadically and normally only as the result of a current oversupply of physical oil.

In fact, Dr. Hanke's justification for his claim of a $10.00 per barrel SPR premium seems to rest entirely on the evidence of the market's response to the first President Bush's announcement of an SPR release coinciding with the onset of the Gulf War. As someone who was trading oil products in London that day, I can tell you that the conversation in the market had little to do with changes in inventory and everything to do with the prospect that a volume of oil greater than that produced by Kuwait would turn up in the market if the SPR were tapped, and that the risks of a wider regional war had diminished. (I freely admit that the price drop caught me and many other traders by surprise.)

Ultimately, it appears that Professor Hanke has made the classic mistake of an academic analyzing market data and arriving at a logical but erroneous conclusion, entirely divorced from market realities and, in this case, possibly clouded by politics. The only subject on which we seem to agree is the desirability of modernizing the entire concept of strategic oil storage.

Thursday, October 21, 2004

Fear of the Bear
Yesterday the Washington Post published an editorial highlighting the growing influence of Russia on energy markets. It has surpassed Saudi Arabia as the world's largest oil producer and is well-positioned by geology and geography to be the world's number one natural gas supplier. At a time when Russia's commitment to democracy and markets is less clear than a few years ago, it's reasonable for this realization to cause some concern.

I'm not sure that I can dispel these worries entirely, but I'd like to point out a few mitigating facts. First, Russian oil represents this generation's chance--analogous to the North Sea and North Slope 25 years ago--to forestall the total dominance of the oil markets by the Middle East. It may be the last such opportunity, as geology increasingly becomes destiny in terms of the disproportionate share of the world's oil endowment held by the countries around the Persian Gulf. Kremlin politics could still truncate this opportunity, by scaring off the international investors that will be needed for it to reach its full potential in oil.

Russia's share of global natural gas reserves is even more impressive than in oil, legitimately earning it the title of the Saudi Arabia of gas. But it is important to understand that global natural gas development is at a very different point than for oil. Gas exploitation is a full generation behind oil exploitation, and the kind of end-game in which Russia's dominant gas reserve position becomes the trump card is many decades away. The challenge for today's gas developers is not a scarcity of world-scale gas reservoirs; rather it is connecting those reserves--in places like Australia, Indonesia, Alaska and Russia--to long-term customer commitments and the capital required to build LNG plants and ships or multi-thousand mile pipelines. This game is in its early days.

Ultimately I think it's wrong, or at least overly pessimistic, to view Russia as a potential OPEC-like monopolist in gas. Though its economy has a lot of catching up to do, it is hardly a mono-resource developing country. Its oil and gas reserves create a terrific opportunity to align and integrate with the rest of the developed world, including the rapidly developing economies of Asia, rather than holding them hostage to scarcity later. A large part of our diplomacy with Mr. Putin should focus on helping him to see the benefits of such a relationship.

Wednesday, October 20, 2004

What Might Have Been
Several weeks ago, the New York Times printed an article comparing US and French energy policies and energy efficiency over the last several decades. The article was subsequently picked up by the International Herald Tribune, from which this reprint was taken. While interesting in its own right, I think it also provides a fascinating glimpse of a world that might have been, had energy efficiency remained a core value of this country after the resolution of the oil crises of the 1970s.

In fact, such a world is not entirely fanciful, since many commentators have recently suggested that the US should have imposed high gasoline taxes in the aftermath of 9/11, in order to wean the country off imported oil and to reduce the ultimate funding source for many terrorist groups.

Using France as a proxy for a more energy-efficient USA, we can draw some interesting conclusions. For example, from 1971 to 2001, oil's share of total energy in France dropped from roughly 2/3 to just over 1/3, with nuclear power taking up most of the slack. Over the same period, oil reliance in the US dropped from about 48% to 40%. Had the US followed the French pattern, even if the energy alternatives chosen were different, we would today use about 5 million barrels per day less oil than we do, and our oil imports about would be roughly half of the current 10 million barrels per day.

The intervening 30 years would have looked very different. Among other things, the SUV trend would probably never have happened, with all that implies for US carmakers, and we would be driving smaller, less powerful cars. We might even be living in smaller homes, watching smaller TVs, and so on. On a larger scale, the geopolitical implications might have been dramatic, too, including a different relationship with the Middle East.

There's a catch, of course. Over the last 30 years, a side-by-side comparison of the French and US economies (using OECD data) shows that ours grew by an additional 20% of GDP, creating more jobs and more wealth in the process. While there are many reasons for this, setting an artifically high value on energy versus its real-world cost in this period no doubt contributed to the difference in performance.

No one doubts that the US could become much more energy efficient if we chose--or had to--but we should keep in mind that we would also be choosing a different economy, with different outcomes, some better and some worse.

Tuesday, October 19, 2004

Tiny Turbines
Several years ago, microturbines were the hot new trend in small-scale, local power generation, either for backup power or off-grid applications. They were stealing a march on fuel cells, by being readily available now and by requiring only ordinary and widely-available fuels. These devices are essentially jet engines that have been shrunk to fit in a box the size of a small refrigerator. Now there is news of a new generation of even smaller turbines, built from a silicon chip, and aimed at powering small electronic devices.

It's too early to properly assess this technology and its potential for real-world practicality and reliability, but the implications are fascinating to consider. As with the small fuel cells that will shortly be available to run your cellphone, the goal of these micro-micro turbines (nanoturbines?) is to bypass the power density limitations of batteries by tapping the excellent energy storage of hydrocarbon fuels. Either approach could offer dramatically improved usefulness from handheld devices and laptop computers.

As promising as that seems, I am even more intrigued by the suggestion that clusters of these tiny turbines could potentially power entire homes. It wouldn't be good news for companies like Capstone or Plug Power , if building many little turbines out of silicon turned out to be cheaper than building a single home-sized microturbine or fuel cell.

I don't know if this development will pan out, but I see it as further evidence that we are on the leading edge of a wave of change in energy technology, the likes of which we haven't seen since steam, batteries and internal combustion were all competing to be the dominant power source for automobiles at the beginning of the 20th century. In the next few years we will find out whether it is cheaper to continue to build power plants as industrial-scale construction projects, or to create the same amount of electric generating capacity by mass producing small energy devices. I'd bet on the latter, particularly If the techniques involved are similar to those that have brought down the cost of computing power.

Monday, October 18, 2004

The Hockey Stick
One of the most compelling pieces of evidence for human influence in climate change is a famous chart showing variations in temperature over the last 1000 years. In this graph, the variation in temperatures over the last century clearly breaks out of the long-term pattern, resulting in the so-called "hockey stick" shape. That breakout coincides with the dramatic increases in fossil fuel use in the Industrial Era. So A+B = clear evidence of anthropogenic climate change. But it now appears that the analytical technique used to create the 1000 year temperature chart in question may have been flawed. If so, while not exactly destroying the notion of global warming, it would force us to rethink the distinction between natural and man-made warming.

If you've been following my blog for a while, you know I take climate change very seriously. My nose is attuned to the smell of anti-climate change propaganda, but this article from MIT's Technology Review doesn't come across that way. Rather, this is how science--and the scientific method--works. Someone analyzes a bunch of data, reaches a conclusion, and then others try to replicate that result and discover any flaws in the methodology. That process seems to be well represented here, with peer-reviewed articles, responses by the original researcher, and so on. It could take years to play out.

We know that there have been warming and cooling trends in the past, both from historical records and from the observable evidence of the geological past. The key question is where the current warming trend (which is real) fits in the context of previous ones. The hockey stick graph suggests it is unprecedented, but if that turns out to be invalid, then we must at least reconsider the relationship between human drivers of warming and natural ones. That could have profound implications for climate change policy, perhaps even pushing us toward an adaptation strategy and away from emissions management. Stay tuned.

Friday, October 15, 2004

Where Do Batteries Fit?
I ran across an article (subscription may be required) a while ago that has had me thinking about the future role of batteries in adapting renewable energy sources for power generation. Last Tuesday I talked about overcoming the intermittent nature of solar power by putting the solar collectors in orbit where the sun shines all the time. Another way, of course, is to store the energy generated when the sun shines or the wind blows, for later use.

There are already applications for which this is attractive, in places not currently connected to the electric power grid. Elsewhere, developers must contend with the cost and efficiency of storing electricity. A wind generator that nearly competes with electricity generated from a natural gas-fired turbine doesn't look nearly as cost-effective if you must pay for batteries to store some of its output before delivery.

The efficiency problem is less obvious. Storing electricity in a battery and retrieving it later is not a free ride. Some of the energy will be lost as heat, at too low a level to recover cost-effectively. That's just the Second Law of Thermodynamics in action, but it has implications for sizing a wind farm or solar collector array, if the power is going to be stored rather than delivered right away. And as battery arrays get bigger, managing the heat byproduct becomes a more important issue.

It's also important to think about how this stored power will be used. If the goal is to enable solar collectors to deliver power day and night, batteries may be a good choice, but so might reversible fuel cells. And if eliminating short-term fluctuations in wind is the issue, or covering brief periods of peak demand, then other technologies better suited to discharging large amounts of power in a short time, such as ultracapacitors, may be more appropriate.

In any case, what we are beginning to see is the shattering of the old paradigm that electricity must be generated as needed, or used as generated. Perhaps, like rainfall, it can be stored cost-effectively for delayed distribution.

Thursday, October 14, 2004

Just Shy of the Complete Picture
Gregg Easterbrook writes insightfully about energy. His latest piece at New Republic looks at the presidential candidates' energy policies. It is also an excellent overview of the current energy security debate in this country. While I recommend this article highly, I can't resist picking a nit or two, and mentioning something that goes well beyond nits. Since it's such a long article, I'll keep my comments brief.

First, either Mr. Easterbrook doesn't quite grasp how the oil markets work, or he has oversimplified for effect. Oil is sourced as it is because of a variety of factors, mainly centered on quality, price, and availability. Rather than saying, "I think I should have oil from Saudi Arabia", a refiner would say, "I need oil with the following characteristics, delivered in this timeframe, and costing no more than this discount off of West Texas Intermediate (WTI)." That makes backing out Persian Gulf oil a good more complicated than simply cutting our overall oil demand by a corresponding amount, because it involves refinery configurations that are expensive to change. But this is a nit compared to my other concern.

If I've said it once, I've said it here a hundred times: improving energy security can't be accomplished solely by reducing demand. Without a major initiative to open up off-limits US oil reserves (e.g. ANWR, or offshore California), by the time Mr. Easterbrook's 1/3 improvement in miles per gallon works its way through the system, US domestic oil production will have declined by an amount similar to the efficiency savings, and we will be importing just as much or more, including more from the Persian Gulf. Of course, if we don't improve vehicle efficiency, our future imports will be even higher.

And one last nit: while I'm pleased that he mentioned the real-world technology of integrated gasification and combined cycle combustion for coal, I think he is selling short its competitiveness in a market where natural gas is $6 or more per million BTUs, as far as the eye can see. (See my blog of March 18.)

So read the article, but consider that we might actually need the energy policies that both candidates are proposing, not just one or the other's.

Wednesday, October 13, 2004

Hydrogen Pessimism
An article from the British magazine Nature reports on a study that may dampen the enthusiasm of some advocates of a hydrogen economy. The authors' research looked at the difficulties in generating hydrogen without producing large quantities of the very greenhouse gases that the use of hydrogen is intended to eliminate. Their calculations suggest mind-boggling numbers of windmills or new nuclear plants (a million or a thousand, respectively) would be needed to produce enough greenhouse-free hydrogen to run the US transportation system. There is sound logic here, but also a glaring blind spot.

Few of us really think about the scale of global fossil fuel use, and how it relates to sunlight. The world uses 3.4 billion gallons of oil every day, to put in more familiar units of measurement. Each gallon started as sunlight and plants, compressed and processed by heat and pressure underground. In the space of a couple of centuries, we will consume an energy larder that took millions of years to create. It stands to reason, based on this kind of concentration, that replacing fossil fuels would require harvesting today's sunlight (either directly with solar collectors, or indirectly by harnessing wind that is driven by sunlight) on a truly awesome scale.

So far, then, the authors' dose of reality holds up pretty well. But I believe they have fallen into the same trap as those who focus only on the pristine tailpipe emissions of a hydrogen vehicle, without considering the source of hydrogen. The only way to compare energy systems is to examine the effect on the entire system using a measure such as the "well-to-wheels" efficiency. This is where the hydrogen opportunity--even hydrogen created from fossil fuels--shines.

Because of the much greater thermodynamic efficiency of a fuel cell compared to an internal combustion engine (or any other heat engine), a hydrogen fuel cell based transportation fleet has the potential to cut greenhouse gas emissions by roughly half. Add to this the compounding effects of other efficiency improvements (carpooling incentives, better mass transit), and the potential reduction in greenhouse gas emissions is even more impressive.

So while we may not get to zero emissions this century, reducing current emissions by half or more would be a tremendous improvement. (The Kyoto Treaty targets a reduction of about 8% vs. a 1990 baseline.) Just to be clear, though, I'm not saying this will be cheap, easy, or quick. But putting up impossible targets and impractical pathways and saying that proves that hydrogen isn't worth the effort is obtuse and misleading.

Tuesday, October 12, 2004

False Dichotomy
Having lived and worked in London for a couple of years, I probably pay more attention to news stories from the UK than the average person. As this story from the New York Times indicates, there is an interesting debate underway in Britain concerning renewable power and nuclear power. It highlights two major energy issues, one European, the other more specific to the UK.

The first deals with the challenge of a commitment, backed by a public sense of urgency, to address climate change by reducing greenhouse gas emissions. But this bumps up against another commitment, to reduce or eliminate nuclear power in key parts of Europe. At the moment all the large-scale alternatives, such as coal or natural gas, would increase greenhouse gas emissions. The EU and its member countries need to determine which priority is higher: climate change or de-nuclearization.

The other issue deals with the way that alternatives such as wind are being pitted against nuclear power in an either-or sort of public debate. I believe this is a false and misleading choice, because the two energy sources are so different. Wind, regardless of scale is an intermittent energy source that does best supplementing a power grid that has a lot of other incremental capacity that can be ramped up or down, as wind power fluctuates. Nuclear, by contrast, is an ideal base-load source that can run all the time, and that needs to in order to defray its large investment costs.

Nuclear plants--at least the current technology--come in 1000 Megawatt increments with large price tags and require up to a decade to build, while wind turbines are easily scalable in increments of up to 5 Megawatts and can be manufactured and installed in a matter of months. Each has environmental consequences, though neither emits greenhouse gases.

Considering all these differences, it seems clear that wind and nuclear are actually complementary technologies, rather than competitive. If the UK is serious about meeting its climate change commitments in the future, it will almost certainly need to make wide use of both of these options.

Monday, October 11, 2004

Happy Columbus Day
Hindsight or Not?
Every now and again I feel compelled to comment on a wider topic. Assessing the quality of past decisions has become a major political issue this year, and it has relevance in many other applications, including energy projects. The release of the final report of the weapons inspections in Iraq and the political reaction on both sides makes this discussion especially timely.

I don't recall the source of the following taxonomy of decisions and outcomes (I leave it to you to Google for it.) It goes something like this:
1. A decision that was made well and turned out well.
2. A decision that was made poorly and turned out poorly.
3. A decision that was made poorly but turned out well.
4. A decision that was made well but turned out poorly.

It's clear that type 1 is a good decision and type 2 a bad one. The outcome of type 3 is the result of other factors, often summed up as luck. But it's #4 that gives us the greatest difficulty. We're often tempted to call it a bad decision, instead of a bad outcome. But that's not really right, unless we believe that all factors can be fully anticipated, and that decision science should have eliminated all bad decisions by now.

And so we come to the reaction to Mr. Duelfer's conclusion that Iraq had no weapons of mass destruction at the time the Administration decided to go to war. How should the finding of an 18-month inspection process that had unfettered access in a prostrate country bear on the quality of the decision to go to war in 2003? In my view, and given the taxonomy above, not at all. (It's highly relevant, though, to how we assess US intelligence at the time, but that's another issue.)

This argument doesn't get the Administration off the hook for either the quality of their decision or the outcome, but it frames our assessment of the decision in terms of the information in the their possession at the time, along with the context in which it was made. At this point, it is possible to look at the evidence and legitimately differ on how well that decision itself was made.

With regard to the outcome, while it's tempting to compare it to the road not taken, an exact alternate outcome is inherently unknowable and can only be guessed at through a sort of reverse scenario process. For instance, is the world in which sanctions remained tightly in place--in spite of growing international criticisms about the cost to Iraqi civilians--and in which Saddam was contained in perpetuity, more or less credible than the world in which the consensus in the Security Council collapsed following an ambiguous completion of the UN inspections headed by Dr. Blix, leading to the end of sanctions and containtment?

So where does this leave us? Voters who see the decision to invade Iraq as a Type 2 (bad decision/bad outcome) would probably vote for Senator Kerry. Those who see it as, at worst, a Type 4 (good decision/bad outcome), are likely inclined to give President Bush another four years. Unfortunately, the whole debate distracts us from questions that I find more urgent and important today: which candidate has the better and more credible plan for turning the current situation in Iraq into something good, and which candidate is better equipped to make robust decisions with the imperfect information he is likely to have in future aspects of the war on terrorism? I don't think we've heard enough about either of these areas, from either candidate.

Friday, October 08, 2004

Oil Prices and the Election
A friend forwarded a copy of this week's other interesting energy editorial, Robert Samuelson's Washington Post piece on oil prices and the election. (Free site registration required.) In it, Mr. Samuelson weighs in on the depletion debate--at least by reference to the recent PFC Energy study--and finds both candidates' energy policies lacking, characterizing them as fantasies.

Before I quibble with a couple of his suggestions, I want to applaud him for being one of the very few commentators to recognize the obvious: that we need a energy policy that deals effectively with both supply and demand. Unfortunately, the Administration's policy has been largely supply-driven, while Senator Kerry's looks chiefly at demand management (via efficiency, rather than taxes,) as did the Clinton Administration's policies.

Now to my quibbles: Mr. Samuelson apparently sees the Strategic Petroleum Reserve as a way to help manage the market. Fill it when prices are low; stop when they go up. In my view, an SPR is worth filling most of the time, regardless of price (with rare exceptions such as now, with surplus global production capacity exhausted.) Better yet, it should be privatized by giving companies incentives to hold the inventory for us, and to manage the accompanying price risks using the standard tools of risk management.

And while proposing a high gas tax to encourage better fuel economy (see my blog yesterday for more on gas taxes), he misses the opportunity to suggest rationalizing the Corporate Average Fuel Economy (CAFE) standards by eliminating the SUV loophole, or eliminating CAFEs entirely as relics of a bygone era of government control. In practice, a more modest combination of these moves might achieve similar results, by giving carmakers the rights signals to produce lighter, more efficient vehicles and giving consumers the right signals to buy them. This would eliminate the carmakers' standard lament that when they build economical cars, no one wants them.

Even with these cavils, though, the article is an excellent commentary that I sincerely hope both campaigns are reading and digesting. Might there be a debate question or two in it?

Thursday, October 07, 2004

The Cost of Taxes
Let me start today by saying that Tom Friedman is my hero. In his columns in the New York Times and his appearances on PBS's News Hour and elsewhere, he has never flinched from the articulate description of the world's ills, as he sees them, no matter whose sacred cows are involved. Today is one of those rare occasions when I may agree in principle with his commentary, but must disagree strongly with its recommendations.

Mr. Friedman rightly points out that the resource curse of abundant oil has helped to create the conditions that have fostered a violently anti-Western, nihilistic strain of Islamic radicalism in the Arab world, along with the complacent or complicit attitude of many Arab governments towards it. But blaming our appetite for oil and suggesting that curbing it would stimulate genuine economic and social development puts too much of the responsibility for a century of stagnation on us and too little on them.

It's also important to understand the full implications of a sudden, large increase in gasoline taxes in this country. Europe has had taxes of the kind Mr. Friedman suggests for decades, and they have indeed resulted in a more efficient car fleet and better public transport. However, none of this was achieved overnight, but rather as a result of deliberate and remarkably persistent public policy. It is facile to suggest we should have done the same thing here; we didn't and must start from where we are.

Without a decade in which to transform the car fleet into a more efficient one, Americans would have only two choices: drive less or consume less of other products to pay for gasoline. Either choice exacts a price on the economy. In the former case, whatever economic benefit was attached to the incremental driving, whether it be shopping, an evening out, or some kind of work-related activity, is lost. In the latter, the overall demand for goods and services falls. We've seen some of this already, since gasoline prices have risen by more than $0.50/gallon over the last year.

Now, such a tax phased in over many years would probably be good policy and allow time for the necessary adjustments, but it would fall short of achieving what Mr. Friedman and others seek. Considering the cost to the economy of a suddenly higher gas tax, we need to ask if we are willing to change our lifestyles and make real sacrifices to achieve the impact such a move would have on the war on terrorism. Perhaps that's the real question Tom Friedman is asking us today.

Wednesday, October 06, 2004

The New Environmental World Order
Russia's announcement last week that, pending a vote in the Duma, it would ratify the Kyoto Treaty on climate change clears the final hurdle to putting the treaty into effect. I don't think that the reports of this event have really captured its full significance. Once the Russian ratification is official, the Kyoto Treaty will become international law and theoretically binding on its signatories. This may ultimately extend to anyone wanting to do business with the signatory countries, as well. Without exaggeration, we will be living in a new world, even if the US chooses to continue to ignore it.

The news of Russia's agreement is already affecting the markets for carbon emissions credits. One of the key uncertainties holding down the value of such credits has been removed, or at least drastically decreased. Other large uncertainties remain, however.

Unfortunately, the treaty that will go into effect is not as good as it should have been, largely because the Bush Administration chose to disengage from the process nearly four years ago. Ironically, some of the best features in the Treaty, such as the Clean Development Mechanism allowing a project that reduces emissions in one country to count toward the emissions quota of another country investing in the project, were principally the result of past US negotations and leverage. But as noted by critics on both sides of the argument, the existing Kyoto Treaty is flawed by exclusion of the countries whose emissions will grow the most in the next decade, and barely makes a dent in the scale of the actual problem.

If John Kerry is elected in November, look for an early effort to reengage in the Kyoto process. It's less clear how a returning Bush Administration would address the new reality of a Kyoto Treaty that our major trading partners will regard as law.

Tuesday, October 05, 2004

X-Prize Implications
You might well ask why a blog devoted to energy issues would even mention something like the winning of the X-Prize, a $10 million dollar award put up by the X-Prize Foundation for the first privately built and run spacecraft to fly to an altitude of 100 kilometers above the earth twice within a set period. What could this possibly have to do with energy, even in the most far out sense? The answer relates to a technology that might be the best long-term alternative to fossil fuels or nuclear power: space-based solar power.

Solar power developers routinely confront two major hurdles. The first is overcoming the intermittent nature of their energy source, with its diurnal and weather-based fluctuations. The second is, to put it bluntly, the NIMBY factor. But there is an unspoken third hurdle that underlies both of the others, in the atmospheric attenuation of sunlight.

Because surface-based solar collectors sit under a blanket of atmosphere, with shifting sun angles, cloud cover and night, the amount of energy hitting a sqare meter of solar collector is roughly 1/10th of what is available in space. That necessitates building collectors that are much larger, or trying to improve the efficiency of the collector, to turn more of the energy it does receive into electricity. It also forces developers to provide for some form of backup power, either from the grid, or from batteries or other storage. A solar collector sitting in orbit can be positioned to receive essentially 100% of the available solar radiation, 24/7.

I don’t mean to trivialize the task of building orbital solar power satellites and transmitting power to the surface of the earth. NASA and private industry have spent a lot of time and effort understanding what this would entail, and creating design studies and computer models. But in the studies in which I was involved a few years ago, one of the central issues was always the cost of getting a kilogram of material into orbit. If you had a space launch capability that could routinely put large payloads in orbit at low cost (several orders of magnitude lower than today’s cost), then a solar power satellite might start to make commercial sense.

Of course, the Space Shuttle, as we have learned so painfully, cannot function as a low-cost, reliable space truck. Nor will its successor, which will probably be merely a personnel shuttle to serve the Space Station. That is why Spaceship One is so important. Even though it is only a sub-orbital craft—incapable of entering orbit around the earth—it represents a major milestone on the path toward a privately-financed, low-cost, routine launch capability, and thus towards the day when a solar power satellite can be considered on its own economic and technical merits.

Monday, October 04, 2004

Knocking on OPEC's Door
In its Week in Review section, the New York Times expressed concern about dwindling non-OPEC oil reserves and the need for greater access to OPEC's reserves to boost future production. I think this is an issue that deserves a wider audience than industry experts and market analysts; its implications will drive economic and foreign policy decisions for decades to come. Still, in the process of highlighting the problem, the author has focused a bit too heavily on increased OPEC influence without considering the potential downside for these countries.

At this point, many of the large oil importing countries also have important domestic oil industries. This is true of the US, the EU, China, and to a lesser extent India. But as the domestic reserves of the developed countries wind down, their view of oil naturally becomes sharper and more objective. If a $1/barrel increase in the price of oil only puts money in the hands of foreigners, and a $1/barrel decrease harms no domestic constituencies, then the incentive to reduce consumption or find substitutes, in order to gain leverage over suppliers, grows.

If you look at OPEC this way, then the scenario in which it produces 100% of the world's oil without any foreign investment and with no non-OPEC competition is actually their worst nightmare, for the long run. Such a world has every incentive to switch away from oil, and none to keep paying distant and fractious suppliers. The graphic in the Times article nicely illustrates just how long the oil reserves of Persian Gulf producers might last, as well as what they stand to leave in the ground, if the world switched to a substitute in the next 20 years.

Consider Sheikh Yamani's oft-quoted epigram about the stone age not ending for lack of stones, and the oil age not ending for lack of oil. It suggests that the wiser heads in OPEC understand this issue, though I doubt they've made the connection to the surest way to avoid this trap: giving their customers a vested interest in their continued oil production by allowing them to invest in reserves and production. OPEC's best scenario is the one in which their oil is used first, not last--or possibly never.

So when we talk about our growing vulnerability to OPEC, let's not neglect to mention OPEC's growing dependence on us, and the leverage that may confer.

Friday, October 01, 2004

Not An Alternative Fuel Vehicle
Frequent readers may recall a posting last month discussing my search for a new car. (See September 9 posting.) The search is over and I'm driving the new car, an Acura TL. While not as exotic as some of the choices I was considering, it incorporates a number of beneficial advances over my seven-year old Audi.

Although I mentioned many new technologies that I needed to test, such as continuously variable transmissions, mild hybrids, and advanced diesels, most of them were eliminated for entirely mundane reasons. For example, the VW Passat Turbodiesel was unavailable because of the model year changeover; all the '04s had been sold, and the '05s would not arrive for some time, coming after the '05 gasoline versions. Others dropped out of the running due to price (Mercedes E320 CDI) or poor reliability reports. And the early favorite, the Mazda RX-8, was only available with rear-wheel drive, which isn't very practical in snow and ice (traction-control hype notwithstanding.)

Although the only newish powertrain technology my new Acura sports is Variable Valve Timing, which gives it class-leading power with acceptable fuel economy, the car has many other nifty features. Built-in satellite radio and a Bluetooth-enabled mobile phone handsfree link may not sound earthshaking, but they reflect an attitude towards technology that I find very appealing. And of course, don't dismiss styling and fun as selling points.

Although this discussion may sound quite tedious to someone who isn't shopping for a car, I think there's an important point to be made. I began my car search with as keen and positive an attitude about new powertrain technology as you are likely to find, yet I still ended up with a "normal car." At this point, the alternatives either weren't available (months-long waiting lists for new Toyota Priuses) or didn't constitute an attractive package for me. Had there been an Acura hybrid, I'd have paid up to get one, but the closest to that is the favorably reviewed Honda Accord Hybrid, which is not due until December. So even if I'm not representative of the average buyer, carmakers still have a ways to go to deliver the kinds of advanced technology cars that consumers will consider seriously.

I still plan to test-drive a Passat diesel once they come in--solely in order to report on it here--because it's such an interesting combination of styling, features, and fuel economy at a reasonable price point.