Monday, January 31, 2005

Is "Geo-Green" The Answer?
Despite my usual soft spot for Tom Friedman and his normally insightful and bold commentary on geopolitics, his editorial in Sunday's New York Times oversimplified a bit too far with its "Geo-Green" energy strategy. Although he neatly describes the paucity of options for dissuading Iran's leaders from pursuing nuclear weapons (see Friday's posting) his prescription for reforming Iran and the rest of the Middle East by driving the price of oil back down to $18 per barrel rests on a shaky foundation.

Based on past oil market behavior, getting oil prices back to this level any time soon would probably require a combination of reduced global demand or increased global production on the order of 4 million barrels per day (MBD). Half of this volume represents a return to OPEC's recent "normal" quota of 25 MBD from its current, essentially flat-out quota of 27 MBD, while the other half mirrors the magnitude of demand drop that sent oil markets into free fall in the 1997 Asian Economic Crisis.

Although some new production will come on stream this year, most of the difference would have to come from the demand side, where Mr. Friedman's "geo-green" options of conservation and substitution via renewables and nuclear power reside. Since most petroleum is used for mobility, while most electricity is used for stationary purposes, the impact of renewables and nuclear on oil demand is fairly indirect and long-term. This leaves us with conservation, which is normally spurred by high prices--at least initially--rather than the low prices Mr. Friedman hopes to achieve. This is something of a paradox, unless he is willing to consider hefty new taxes on petroleum products to raise consumer prices without changing producer prices.

Even if I've overstated what it would take to drive oil prices down, there are other factors to consider. Although a low oil price world would benefit the US economy, along with some of the poorest nations on the planet, it would reduce the incentives to find more oil and to develop the technologies that must ultimately supplant oil. Along these lines, I suspect the likeliest precursor to another period of low oil prices will be the market itself. Petroleum is still a volatile and somewhat cyclical commodity, and the market has a history of confounding expectations. Unfortunately for Mr. Friedman's thesis, the last period of $18 oil prices in the late 1990s didn't exactly unleash a tide of liberalization in the Middle East.

Friday, January 28, 2005

Persian Puzzle
With hindsight, Iran's nuclear program appears to be more sophisticated and dangerous than anything going on in Iraq after UNSCOM dismantled Saddam's last attempt to get the Bomb in the mid-1990s. The country we invaded turned out to be a Potemkin village full of walking booby traps, and our presence there has eroded the leverage available to us in dealing with the threat posed by Iran. The approach suggested in yesterday's New York Times editorial is probably as good as any still available to us. It advocates relying on collaborative diplomacy with sizeable carrots and sticks. Unfortunately, this ignores the energy dimension, which remains Iran's trump.

Three years ago the global energy supply could and did lose production equal to Iran's without creating a severe price spike. When Venezuela's oil workers went out on strike, eliminating 2.3 million barrels per day of oil exports, other producers quickly filled the gap. Prices went up for a few months, and then came back down. Since then, though, the combination of rapid demand growth, persistent production problems in several countries, and a conservative approach to new oil investments has eliminated that cushion. Iran's leaders know this.

Although it is just possible that the US and EU could put aside our present differences in order to present a common front to Iran, it is hard to imagine that Iran would sit still for the imposition of joint sanctions without playing the oil card. The existence of this option reduces the likelihood that Iran would take the threat of sanctions seriously enough to abandon its nuclear efforts. In effect, Iran already holds something nearly as good as a nuclear deterrent: the ability to throw a world oil market that is balanced on a knife edge--at twice its historical average price--into chaos.

Unfortunately, the diplomatic stalemate described above raises the odds of an eventual military confrontation. The consequences of a crisis over Iran's nuclear program are unpredictable and potentially disastrous, but in spite of that, the crisis seems all but inevitable.

Thursday, January 27, 2005

Climate Fiction?
Two weeks ago I posted some comments concerning Michael Crichton's latest novel, "State of Fear" (see posting of January 11.) One of the scientific papers cited by Dr. Crichton in support of his novel's arguments against climate change and the global response to it was by Dr. Gregory Benford, a physicist who is also a noted author of thrillers and award-winning science fiction. Now he and one of his collaborators have weighed in with an editorial in the San Diego Union, rebutting Dr. Crichton's interpretation of their peer-reviewed paper in Science, the journal of the American Association for the Advancement of Science.

The editorial by Drs. Benford and Hoffert is worth reading for its contribution to the controversy over the Crichton novel, but the source article struck me as much more interesting. If you are willing to tolerate a fair number of chemical equations (or like me, actually enjoy them), you will find it a fascinating overview of the relationship between energy and climate today, and as it might be in the decades ahead.

Dr. Benford and his collaborators discuss the evidence for a man-made greenhouse effect and the magnitude of the challenge it poses. They also show just how difficult it will be to avert its consequences. Along the way, they provide an excellent survey of the long-term prospects for renewable energy, including land- and space-based solar power, for nuclear power, and for truly clean fossil fuel use. Nor do they think small, covering every option I've ever heard of that could meet our energy needs, while stabilizing global warming. This includes strategies as exotic as using nuclear fusion to breed fuel for lots of new fission reactors.

Their conclusions are simultaneously sobering and optimistic, focusing on the need for major research and development efforts in a number of areas to make sure that we can actually produce greenhouse-free energy on a massive scale in the future, rather than merely having many interesting but unproven ideas in the laboratory or on paper. To this I would add something that they only hint at: we will also need an awful lot of fossil fuels to get us to the point of such a transition without putting the global economy into a nosedive that would hit developing countries hardest.

Unfortunately, the latter sounds a lot like what the opponents of climate change are saying, too. The trick--and the opportunity--is to tie the first proposition to the second. We could, for example, link drilling in the Arctic National Wildlife Refuge (ANWR) with doubling the research budget for renewable energy and nuclear fusion, funded by a surtax on ANWR oil. This kind of thing would have every vested interest on both sides howling, but it might just offer a workable pathway between irresponsible myopia toward the future and an impractical disregard for the needs of the present.

Wednesday, January 26, 2005

Well, it was bound to happen. I'm actually surprised it took this long, considering the sustained strength of energy prices and energy company earnings. Critics in the UK have started calling for a windfall profits tax, at least on domestic natural gas production, citing the level of oil company earnings exemplified by Lord Browne's comment in the Sunday Times that BP's profits for last quarter and last year would be "staggering."

We've been down this path before, and having started in oil trading just as the old system of price controls and oil windfall profits taxes in the US was being wound down, I saw first-hand how poorly such regulations work, and the kind of gross inefficiencies and distortions they promote. (Some other time we can get into "old oil" vs. "new oil" and how that was exploited by unscrupulous middlemen.) However, I must say with equal vigor that the industry is currently doing itself no favors in this regard by its conservative approach to capital investments.

It would be easier to quiet this chorus, which will only grow louder should prices rise again this year--or at least not moderate noticeably--if energy firms were seen to be reinvesting most of the cash flow thrown off by high prices. They need to increase their reserves and expand their production bases to keep pace with the growth in current and anticipated demand. Share buybacks and special dividends do little to dispel the notion that the industry is effectively taxing the entire economy and ought to be taxed in turn.

If capital spending doesn't soon pick up in line with market expectations of sustained high prices and demand, the oil companies are going to be in a major PR battle over where the money should go, instead. Wake up and smell the coffee, folks.

Tuesday, January 25, 2005

More Orphans
Last spring I wrote about the problems GM was having as the leases on its electric car, the EV-1, were running out and it was taking back the cars to scrap them (see posting of 3/29/04.) EV-1 lessees were not happy with this, preferring in many cases to keep the cars longer. Ford has encountered similar problems with its electric Ranger EV pickups, but it appears to have resolved matters more positively, now allowing lessees to purchase the vehicles.

The actual number of vehicles involved is tiny, only a few thousand, but this decision has much larger implications. All the big carmakers have advanced vehicle programs underway, involving hybrids, fuel cells, hydrogen internal combustion engines, or other technologies. Not all will pan out, but in order to avoid having that become a self-fulfilling prophesy, the auto companies must create a high level of trust that anyone who buys one of these cars will be treated fairly down the road, even if it turns out to be an "orphan."

It's also important to recognize that the bar for this is now much higher than in the past. Someone buying a 1959 Edsel would at least have been able to find mechanics who could fix it when it broke down; that might not be the case if BMW decided to stop servicing the hydrogen 745h, for example. Few consumers will buy a car they don't think will be supported, and the carmakers will only be able to recoup their enormous investments in their advanced technology vehicle programs if they turn out mass-market models at some point.

This creates a host of practical problems and could make the rollout of a totally new technology car even more expensive than it already is, by requiring a larger parts inventory than "just in time" programs would suggest, but it is all part of the price of entry and an investment in future success.

Monday, January 24, 2005

Beneficial Globalization
For the last several years globalization, shorthand for an incredibly complex and loosely-connected set of trends and actions, has taken a lot of hits for promoting environmental and damage and threats to endangered species, among other complaints. But here's a wonderful example of several key components of globalization--global finance and the application of global standards to local projects--being used to protect those same interests.

The proposed trans-Siberian pipeline project is of major importance to Russia and to energy consumers on both sides of the Pacific Rim. However, it will not be built without international financing, most likely from Japan, and that financing is much less likely to materialize if the local Russian authorities insist on locating the pipeline's terminus in the middle of a pristine tourist destination and wildlife habitat. They might not see it that way, yet, but I would put money on their having to revise their plans before the first Yen, Euro, or dollar is transferred.

What I find encouraging about this story is the apparent attitude of the environmental groups involved. The Japanese branch of Friends of the Earth--no friends of oil development in general--appear to understand that the project as a whole will likely go ahead and are focused on the terminal site decision. The executive director of Pacific Environment sums it up nicely in his quote, "The pipeline will be a test case of whether or not Russia can meet the top level environmental standards that the public expects from oil and gas projects around the world."

The potential of globalization to distribute human rights and environmental protection--as well as prosperity--much more widely makes it more of a blessing than a curse. I have a lot more sympathy for those who focus their criticism on specific facets or manifestations of globalization than for those who claim to be against it as a whole.

Friday, January 21, 2005

The Other Face of China
The energy world has been preoccupied with China's rapid growth in oil demand and the impact this has had on markets for the last year or two. This phenomenon is not unique to oil, with the prices of many commodities having shot up dramatically on the back of Chinese demand. But this week we had two reminders of another face of China, the political one often obscured behind its economic dynamism.

First, as a New York Times editorial yesterday pointed out, one of the main architects of China's recent growth died without fanfare, under house arrest. Nor did China's current leaders want Zhao Ziyang to be remembered with a state funeral, giving in on this only under pressure, because he chose the wrong side of the Tiananmen Square protests in 1989. So even as the world rushes to invest there, China is still waiting for its Gorbachev.

Another sign of China's less commercial face turned up in a Defense Department planning document describing the country's diplomatic and military efforts to shore up its energy supply lines, as part of a significant naval buildup. Now, this sort of thing is subject to multiple interpretations. One of my favorite books last year, The Pentagon's New Map, makes a strong case that China is likelier to be a great partner for the US in extending and solidifying globalization's benefits in Asia, rather than an adversary with which to start a new Cold War. Are their current actions just an expression of understandable insecurities, or do they portend a future conflict? I'd rather stay on the optimistic side of the fence, for now.

It's also worth recalling that history provides numerous examples--some quite recent--of countries that built huge fleets but failed to create a great navy, something that requires generations and a lot more than just ships and men. The very name of the "People's Liberation Army Navy" might offer a reassuring hint along these lines.

The takeway is that for all our current focus on trade and investment, we can't lose sight of the fact that China is a country, not just an economy, and a big, complicated one at that. It is likely to be at least as important in this century as Japan was in the last, but let us hope more along the lines of Japan in the second half of the Twentieth Century, rather than in the first.

Thursday, January 20, 2005

Executive Options
The FT reports that BP will alter its executive compensation plan to eliminate options and focus on stock grants (presumably restricted for some vesting period, or until retirement.) Although this is seen as improving the alignment of interests between management and shareholders, the article is silent on what may be the most important reason that some firms have seen options lead to behavior very much out of synch with shareholder value.

It's easy to forget how options derive their value. Many commentators, and even some option recipients, focus on the value of the shares into which the options are converted when the target or "strike" price is exceeded. Instead, as demonstrated by Messrs. Black and Scholes, the value of options comes from the amount of time remaining before expiration and the volatility of the underlying asset, in this case the stock price. The longer to expiration and the more volatile the stock price, the more valuable the option. This is very different from the benefit accruing to the stock itself, which must see prices rise steadily to generate attractive returns for its holder.

As attractive as options have been as a low-cost--at least initially--way to reward top employees and give them a "piece of the action", they actually reward the creation of stock cycles of seesawing prices; the wider the swings, the better. While this has not been a problem at BP and other major oil companies, it is prudent for them to move toward rewards that motivate the behavior they really want. After all, people are remarkably adept at figuring out how to maximize their benefits under any given compensation system, no matter how poorly it lines up with the goals you are trying to achieve.

Wednesday, January 19, 2005

All Those Flares
A headline in the Financial Times today caught my eye: Shell Faces Penalties Over Flare Deadline, with the first paragraph going into the environmental damage caused by flaring. When you evaluate the situation carefully, though, there is both more and less here than meets the eye, besides additional bad publicity for Shell.

The basic issue is simple. The production of most oil is accompanied by varied quantities of natural gas. Historically, much of this was "flared", or burned off at the wellhead in what amounts to a giant candle. I recall hearing astronaut accounts of flares in Saudi Arabia being visible from orbit. It's easy to forget that for decades natural gas was considered a valueless byproduct, and flaring was the best and cheapest way to dispose of it.

You see very little oilfield flaring in developed countries, not just because pollution standards are stricter, but because the gas is closer to markets in which its value more than offsets the costs of gathering it up and sending it through a pipeline to heat homes and run factories and power plants. It can also be compressed and reinjected into the oilfield, to keep well pressures up and enhance production. The problem for Shell and other producers in Nigeria is that there is no handy domestic market to consume and pay for the gas, and the cost of reinjection doesn't always have sufficient offsetting benefits.

In the 1990s the Nigerian government passed regulations requiring all producers to cease flaring by 2008. This seems fairly proactive from an environmental standpoint, but the greenhouse gas properties of methane, the main constituent of natural gas, make this less obvious. Since methane is 21 times more potent in its global warming potential than carbon dioxide, the greenhouse gas that gets the most attention, burning it and turning it into CO2--thus cutting its impact on climate change by a 95%--is not necessarily the worst thing one can do with it.

What Nigeria gets out of all this is a chance to earn royalties on some additional production of gas that might not otherwise be counted, and some brownie points from the EU and non-governmental organizations that are most concerned with climate change. In the process, the oil companies incur some additional production costs, and they are effectively forced to aggregate all this gas and do something useful with it in the market, either as LNG or using gas-to-liquids technology to convert it to clean diesel fuel. Along the way, they will generate some greenhouse gas offsets they can either trade or apply to their emissions elsewhere. None of this is bad, unless you think a difference of a percentage point or two in project economic returns, and ultimately in shareholder value, is awful.

While putting an end to flaring seems like a no-brainer, it is much more complicated and somewhat less beneficial than one's intuition might suggest.

Tuesday, January 18, 2005

Europe's Gas Dilemma
Natural gas is the fuel of choice for power generation, at least when it is available and its price is in rough parity--on an energy equivalent basis--with oil and other fuels. Europe, in particular, will see steady growth in gas consumption in the power sector as nuclear power stalls everywhere but France and as EU adherence to the Kyoto Treaty's greenhouse gas emissions targets makes coal unattractive. Fortunately, Europe sits at the doorstep of the world's largest gas exporter, with far and away the largest natural gas reserves on the planet: Russia. But therein lies the dilemma, as increasing reliance on Russian natural gas coincides with an assertive and increasingly autocratic Russian government.

Europe (EU-25) already imports 6.7 trillion cubic feet (TCF) of natural gas per year net of exports, with 4 TCF of it coming from Russia. This will only increase as North Sea oil--and its associated gas--dwindles and the continent's mature gas fields, such as the enormous Dutch Groningen field, deplete. Algeria, already a major supplier to Europe, can do more, but on a smaller scale and chiefly for countries fronting the Mediterranean. This leaves the Middle East as the only real alternative, with its attendant challenges.

How worried should Europeans, and especially Germans (as noted recently in the Financial Times) be about relying on Russia for the lion's share of their future natural gas needs? From a purely economic perspective, this seems as much of an opportunity as a challenge, since it would leave Russia with lots of Euros for either investment or consumer goods imports. But politically it could create a subtle form of veto that some might argue has already been exercised to give Russia a free hand in Chechnya.

In the long run, the situation gives Europe as much of an incentive as the US for the creation of a thriving global market for liquefied natural gas (LNG), and for the construction of the infrastructure necessary to import it. This might not displace Russian gas supplies, but it would help keep prices in balance with world levels and give traditional suppliers some healthy competition.

Monday, January 17, 2005

The Hidden Variable
Whenever you contemplate dramatically improving the gas mileage of cars in America, whether through new technology such as hybrids or by closing the loophole that led to the dominance of SUVs, you must confront two seemingly immovable obstacles: the size of the domestic vehicle fleet (236 million) and its very slow rate of turnover. The former will only increase, but what about the latter? This is the key to future transportation energy savings, in my view.

Conventional wisdom is that Americans will continue to turn cars over every 8 years, on average, or even longer (measured in terms of mean age of household vehicles). Only a few decades ago, that figure was closer to five years. Along the way, several things happened: cars got more expensive (though not by much as a fraction of average income--see below), families wanted to own more cars at the same time, and--with time out for bad behavior in the 1970s and early 80s--cars got progressively better and more reliable.

For years I've been asking what it would take to get us to turn our cars over more frequently, which would incidentally allow more efficient vehicle technologies to have a bigger impact much quicker. There are several possible answers, some of which have already come up short, such as leasing. My favorite is still technology-related coolness, which may explain part of the appeal of the Toyota Prius. But the sample size is too small so far to suggest whether this is changing how long people hold onto a car.

The best contender is probably a return to pizazz, as suggested in this Wall Street Journal guest editorial. I'm old enough to remember a time when the arrival of the new car models in the fall was a really big deal, whether you were in the market for one or not. Based on the steady increase in annual miles driven, cars command an even more central role in our daily lives now than back then, but they have relinquished much of their hold on our imaginations, perhaps partly for that very reason--familiarity breeds contempt.

If you are passionately concerned with reducing the amount of oil Americans use to run their cars, then paradoxically you should be thinking like a real marketer about how to get Americans much more excited about new cars. Could really bold styling, combined with more efficient technology, push that average turnover figure down to six or even five years again? That's what it would take to move America's miles per gallon into the same range as Europe's in our lifetimes. (Some other time we'll talk about what happens to the old cars, which don't all disappear into the crusher the way they used to.)

Note: In 1970 a middle-income family earned just under $10,000 and a new car averaged $3,500, or 36% of a year's income. In 2000 a middle-income family earned about $50,700 and an average new car cost a bit over $20,000, or 40% of a year's income.

Friday, January 14, 2005

Let's Keep It Clean
As I was going through some of my postings from last year, I ran across one from the early days of the UN Oil-for-Food scandal publicity. (See posting of 4/19/04.) My concern then was for a potential handover of Iraq to UN administration, but the parallels to the current tsunami relief effort are obvious. In particular, excerpting some of what I said then:

I believe there are compelling reasons for exposing the full extent of malfeasance in administering the Oil for Food fund, and the most important of these concerns the future, rather than the past. As the UN takes the lead role...we must aggressively manage the risks this will entail, and one of the largest is for corruption on a vast scale.

Although the current effort may be a better fit with routine UN activities than Oil for Food was, anyone who has done business in South Asia understands the temptations that those administering aid on this scale will face. Resolving the Oil-for-Food scandal promptly and publicly punishing those at fault--along with establishing strict new standards for contracting--will go a long way toward keeping the aid administrators out of trouble.

While I am not suggesting replacing the Secretary-General unless he is directly implicated, there are plenty of others who should clearly go, or at least be removed from any position involving contracting or funding. It would be a great shame if two or three years from now we learned about a "tsunami relief scandal", further compounding a tragedy of already staggering proportions.

Thursday, January 13, 2005

Transparency of Reserves
Yesterday I discussed the prospect of a peak in oil production. The scarcity of good data on global oilfield performance has fueled much of the uncertainty in this area, and nowhere is this truer than for Saudi Arabia's enormous reserves, which underpin both the present and future of global petroleum supply. Many have suggested that the Kingdom and its OPEC brethren stand to benefit from greater transparency (see my posting of 7/30/04), in effect reassuring their global customers of their longevity. This week's Economist (subscription may be required) suggests that the Saudis' historic reticence has begun to dissolve. That is welcome news, indeed.

This prompted me to do a little Googling, which turned up recent presentations on Saudi oilfield management practices, along with some pretty interesting scenarios for future production growth, relying to various degrees on undeveloped and unproved, but "probable and possible" reserves. Reading between the lines suggests that anyone expecting Saudi Aramco to double its production is dreaming, while the most vocal skeptics of Aramco's ability to sustain its current production well into the future, such as Matthew Simmons, are probably wrong, as well.

So the good news is that Saudi Arabia appears to have both the reserves and the expertise to crank out 10 million barrels per day as far as the eye can see. The bad news is that they don't seem to contemplate contributing more than another 2-5 million barrels per day (MBD) toward the roughly 20 MBD of incremental production required to meet projected global oil demand a decade from now. (And this ignores all the new production needed just to replace the natural decline in current production over that timeframe.)

There are two implications to draw from this. The first is that the Saudis might be extremely conservative about their production potential, to avoid depressing future prices. If so, can we count on this? The second and more definite implication is that it is going to take a lot of money and hard work to dig up the rest of that incremental production elsewhere. We will need Russia, Iraq, Iran, Libya, and the Caspian, plus a bunch of places hardly anyone has heard of to make up the difference. Or just a lot of synfuels and alternative energy.

Given the lead time required for either path, the major oil companies had better be thinking very hard about their project selection criteria and future production profiles.

Wednesday, January 12, 2005

The End Is Near...Or Is It?
I was surprised to see an article in MIT's Technology Review suggesting that global oil production may have already started to decline. On further reading, it is mostly a rehash of the same Hubbert Curve arguments about which I wrote extensively last year. (See, for example, my post of 9/22/04.)

Global oil production and demand are already at about 82 million barrels per day (MBD), up from roughly 75 million a day a few years ago. The entire industry, both supply and demand sides, seem to be working under the assumption that this will grow to roughly 100 MBD within a decade. So if we were actually to start falling off from 82 MBD, instead of tracking towards 100, that would suggest one hell of a disconnect on the part of a very large number of analysts, both inside and outside the industry.

My regular readers know that I have a healthy skepticism that production can keep up with growing demand indefinitely, but not because of the geology-based concerns of Deffeyes and Hubbert's other disciples, but simply because it's not clear that the industry (both OPEC and publicly-traded companies) has invested in enough projects to make that happen, while simultaneously compensating for the inherent natural decline of the fields already in production. (I'd be happy to be proved wrong on this, by the way, so if any of you has a field-by-field, country-by-country buildup of real projects that gets to 100 MBD, I'd love to see it.)

That is a far cry from saying that the peak is here, as this MIT article flirts with. For that matter, if production were actually going down globally, rather than up, would the price of oil really be retreating from its $50 highs of last year, or would it instead be well on its way to $75 or $100? From this I conclude that we have time, not for complacency, but to come up with the right set of alternatives with which to fill the gap when production of conventional oil can truly no longer keep expanding.

Tuesday, January 11, 2005

State of Fear?
A friend was kind enough to bring this review of Michael Crichton's latest novel to my attention. "State of Fear" deals with climate change and, in particular, with the global management of the issue by governments and non-governmental organizations (NGOs). Although the reviewer, a scientist, has some interesting comments about the assumptions upon which Mr. Crichton's story rests, there's a more important point to make than whether this book has its facts straight.

First, I must admit that I haven't yet read "State of Fear." While I have enjoyed many of Mr. Crichton's previous works, he's not on my "buy on sight" list. He enjoys a wide and loyal readership and a reputation for solidly researched ideas. (Interestingly enough, many in the science fiction community--to which a layman might be forgiven for thinking he belongs--regard him as fundamentally anti-science.) As a result, a Michael Crichton book critical of climate change science carries a bit more weight than the average thriller.

What concerns me is that if an author with Mr. Crichton's scientific background (a Harvard M.D.) and all the time and money in the world for researching his novel can get key facts about climate change wrong, as Dr. Schmidt asserts, then what chance do the rest of us stand of grasping the complexities of this issue? This is not an elitist argument that only a few scientists can really understand climate change, but rather that most of the public lacks the context for how science like this really works, because our education system does such a poor job of teaching the sciences, particularly the history of science.

That's a big problem, because if the central hypothesis of climate change is correct, then man-made influences are contributing to drive the climate away from the range that has allowed humanity to reach its present extent and state of development. More importantly, all this is happening at a rate that is too gradual to be readily observable by the average person. Taking action to stave off the worst potential consequences requires not just consensus but faith that the science here is working as it should and in a way we can all trust.

It might make for a good thriller premise to imagine that scientists and NGOs have conspired to concoct "climate change" for their own purposes, but this is at odds with any objective assessment of the current state of climate theory. Ultimately, Mr. Crichton's book may prove helpful if it stimulates the public's interest in this issue and prompts some tough questions, but not if it undermines our faith in the scientific method itself.

Monday, January 10, 2005

Which Is More Reliable?
This is entirely frivolous and a week out of date, but I just saw this item and had to share it. PG&E, the San Francisco-based utility, is offering a free wake-up call service, in case your power is out.

Think about that. Implicit in this service is the idea that land-line phones, which we all love to hate, are inherently more reliable than electric power delivery. I recall this vividly from the great northeast blackout of 2003. My home was one of millions without power, yet I was able to pick up the phone and call our local hospital to figure out when to take my wife--who was in labor--in for delivery.

I'm not posting this to knock the power grid or utilities. Rather, in spite of all the hype about other ways to deliver telephony, including voice-over-IP, cable and cellular--on which an increasing number of people now rely exclusively--none has yet attained the reliability of Mr. Bell's twisted copper wires. If you want to get excited about a vision of the future, just contemplate the possibility of phones that work everywhere, all the time, seamlessly switching between cells, local wireless nodes and satellites--all without any of us having to give a second thought to reception issues. That day can't arrive too soon.

Friday, January 07, 2005

Turning the Table
A few weeks ago I wrote about the changing "ecology" of the oil industry (see postings of 11/17/04 and 11/18/04), as the traditional relationships between the international majors and national oil companies shift. Today's headline concerning the possible acquisition of Unocal by China National Offshore Oil Co. (CNOOC) provides a concrete example of this trend.

Unocal has had an interesting history. It began as a regional west coast integrated producer/refiner/marketer and gradually acquired global interests. In the 1990s it changed direction dramatically, selling its US refining and marketing assets to Tosco, although it retained its valuable (and unusually acquired) patents for reformulated gasoline (RFG). It also shifted its focus to emphasize the international upstream, which was seen as being more profitable and less bound up by regulations. Unocal has come in for a lot of criticism and legal challenges for its operations in Burma.

There would be multiple ironies involved if CNOOC were to acquire Unocal, not the least being how well Unocal's strategy of disentangling itself from refining and marketing in the US has lowered the regulatory barriers to acquisition by a non-US company.

On further reflection, it is inconceivable that a foreign government should collect royalties on most of the gasoline designed to reduce air pollution in this country. As an absolute prerequisite of any transaction between Unocal and CNOOC, the FTC should require that the RFG patents be transferred to the Department of Energy, with the royalties used to fund renewable energy research. Granting them in the first place was questionable and contrary to the public interest, but they have survived legal challenges and probably cannot be revoked. That does not mean they should end up in the hands of one of our country's greatest potential commercial rivals.

Thursday, January 06, 2005

Another Look Ahead
Business Week recently published their 2005 Industry Outlook. There's not much to quibble with in their view of the energy industry, though it does focus heavily on the issues that produced the conditions we saw in 2004, rather than trying to anticipate any surprises in the new year.

In particular, I'm struck by their confidence in OPEC's ability to manage the supply side of the market, citing calls to cut production to avert an inventory bubble. It's worth recalling that OPEC's current discipline only dates back to the recovery from the 1998-99 price collapse, which required cooperation from Russia, Mexico and Norway to drag prices back above $10 per barrel. This was preceded by a decade of cheating, reminding us that there will be tremendous incentives for individual OPEC countries to cheat on any future quota reductions, particularly as prices continue to ease and their lofty 2004 revenues shrink.

There's also scant mention of any shift in consumer demand, despite evidence that sales of the largest SUVs are off dramatically, and sales of hybrids are growing as fast as Toyota can churn them out. Granted, it would take years for this to have any appreciable impact on aggregate demand, but it could be an important signal for long-term investors.

Otherwise, most of the big issues and their implications for corporate earnings are well represented in the article, with the exception of climate change. It's well worth a read.

Wednesday, January 05, 2005

Tsunamis and Risk
The catastrophic tsunami in South Asia is a prime example of a low-probability/high-impact event, as described in this excellent guest editorial in yesterday's Wall Street Journal (subscription required.) Mr. Posner also includes rapid climate change among the risks that share these characteristics. He goes on to discuss the challenges of addressing such threats before they occur, including the problem of getting them above the noise threshold of politicians.

There may be a more fundamental barrier, as well. There have been some interesting efforts to understand how and why people gauge risks improperly , including those of more common threats, such as smoking, car accidents, and environmental carcinogens. While the root-cause may be psychological, or even evolutionary, it still ought to be something that we can overcome, just as an individual with dysfunctional neuroses can overcome them with proper treatment. Without being alarmist, it should be sobering to contemplate potential disasters for which no global relief effort may be possible after the fact, because all regions were affected or the most capable responders were overwhelmed at home.

One of the biggest arguments I have with climate change skeptics is their insistence on an unrealistically high level of certainty concerning the likelihood of global warming and its consequences. When you consider the extreme effects that are possible, dwarfing what we've just seen in the Boxing Day Tsunami, they justify a sizeable effort to delay, mitigate, or perhaps even prevent them entirely, even if the cost of doing so is significant.

Tuesday, January 04, 2005

Another Competitor for Detroit
It was inevitable. With China on the verge of passing Germany as the number 3 carmaker globally, could anyone believe they would not be tempted by the world's largest auto market? An old name in groundbreaking imports, Malcolm Bricklin, will be importing a new name, Chery, to the US starting in two years.

Detroit has had to worry about competition from Japan, Europe and Korea for decades, but the prospect of competing with China--in some cases with car companies enjoying joint ventures with the world's top carmakers--may seem more daunting, given China's successes in low-cost production in other sectors. Does the answer lie in technology, and in moving the basis of competition onto platform a that Chinese companies won't be able to match for years?

Perhaps this is part of Toyota's motivation for its move into hybrids. After all, they have seen China coming for longer than we have, since so much Japanese investment has flowed into China and the rest of Asia for so long.

Monday, January 03, 2005

The Challenges of Oil
And so another year begins. I spotted two interesting articles in the New York Times over the weekend, which together illustrate some of the key challenges facing the world as we continue to seek new sources of petroleum. The first, from Sunday's front page, highlights the challenge of access for the international majors seeking to offset production declines in the mature parts of their portfolios. Libya is probably the best prospect available, given the restrictions in the Middle East and the concerns about rule of law in Russia. But as the article suggests, it won't be easy, and the removal of international sanctions hasn't created the yellow brick road, exactly.

The second article, from Saturday's business section, focuses on the impact of oil revenues on the countries producing it. Norway is often held up as an example of how this can be done without causing massive corruption on the one hand, or "Dutch Disease"--the enervation of the non-oil domestic economy--on the other. The temptation to use Norway's sequestered oil funds, which are growing rapidly at current oil prices, on projects other than the intended bolstering of social security must be enormous.

For someone who tries to think about the long-run implications of issues, reducing the leverage of dodgy states such as Libya and the economic distortions associated with oil wealth are powerful non-environmental arguments for increasing our use of renewable energy.

Saturday, January 01, 2005

Happy New Year!