Thursday, August 31, 2006

Higher Alcohols

After seeing another ad touting it in the Wall Street Journal, I finally Googled on "biobutanol", a new alternative fuel being promoted by a partnership of BP and DuPont. Butanol, or butyl alcohol, is nothing new as a chemical compound. It is merely a more complex, or "higher" alcohol than ethanol, containing four carbon atoms to ethanol's two. The "bio" appellation is presumably there to differentiate it from the standard petro-chemical sources of this compound, and to position it squarely in the ethanol/bio-diesel alternative fuel camp. So why might "biobutanol" merit this kind of fuss, and where would it fit in a forward-looking energy strategy?

The biggest benefits butanol offers as an alternative to ethanol in motor fuel derive directly from its chemical and physical properties. A little reference work reveals some useful comparisons:
  • The vapor pressure of butanol is well below that of ethanol at room temperature. That means a gasoline-butanol blend would not suffer from the volatility concerns that plague gasoline-ethanol blends, thus reducing evaporative emissions from vehicles using it.
  • Butanol's boiling point (between 181-243 deg. F, depending on which form of the compound you're looking at) is above ethanol's 173 deg. That puts it closer to or over the desired T50 (distillation curve midpoint) for reformulated gasoline. That could result in minor blending challenges for some refiners.
  • The octane of all the butanol isomers is a good deal lower than that of ethanol, and the octane of n-butanol, which would presumably predominate in fermentation, is the lowest, falling right at the 87 R+M/2 of regular unleaded gasoline. Compared to ethanol's 110 or so, there's little or no octane benefit from adding butanol to a gasoline blend.
  • As cited by DuPont, the combustion of butanol yields much more energy than ethanol, about 110,000 BTU/gallon, compared to 84,000. That puts butanol almost at a par with gasoline's 120,000 or so BTUs, so gasoline with a high butanol content wouldn't suffer the mileage loss experienced in ethanol-gasoline blends.
  • Importantly, butanol is much less soluble in water than ethanol. That means it is much less prone to the kind of separation problems that have kept ethanol out of petroleum product pipelines. It also suggests it should be easier to separate from water after fermentation than ethanol, requiring less energy.
  • A review of the Material Safety Data Sheet for butanol indicates it's in pretty much the same toxicity league with gasoline, and a good deal safer than methanol.

Overall, butanol--bio- or otherwise--compares well with ethanol and would eliminate many of the logistical constraints that add to the cost and complexity of using ethanol as a gasoline additive or extender. I don't see anything in the above to make me question BP's assertion that it can be used at higher concentrations than ethanol in unmodified cars. Even more intriguing is the possibility that butanol could be used as a diesel extender, too.

The big open questions about butanol hinge on the ease and economics of its manufacture in current ethanol facilities, using similar feedstocks. The BP/DuPont partnership also indicates that the detailed well-to-wheels comparison of energy and greenhouse gas efficiency versus other fuels hasn't been completed. I'll reserve judgment until I see whether it beats ethanol in these areas, as well as in its physical properties. I'd also want to be sure that it's been carefully scrutinized for the sort of unintended consequences that cropped up with MTBE. That means looking closely at its toxicity pathways and co-solvent properties in gasoline blends exposed to water.

Biobutanol raises some fascinating possibilities for our alternate fuels strategy. Its properties remind us that ethanol, which many regard as our most available and practical gasoline substitute, falls well short of a being an ideal motor fuel, particularly for use in a distribution system dominated by petroleum products. Whether or not butanol is the best alternative, it highlights the option of using traditional and biotech-based processes to produce fuels that are optimal for use in modern internal combustion engines, as well as highly compatible with conventional fuel distribution channels. An alternate fuel chosen for these properties would be immediately usable by most of the cars on the road, and it could be distributed to the largest number of service stations at the lowest possible cost. If it passes muster on all these criteria, butanol should create some very interesting choices for the owners of current and planned ethanol facilities.

Wednesday, August 30, 2006

Shifts vs. Shocks

For several years I have been commenting on the transformation of Venezuela's oil industry from a highly professional, arms-length operation into an instrument of geopolitical will and social leverage. I've also warned about the threat this change poses to US oil supply stability, which relies heavily on our Western Hemisphere neighbors, including Venezuela. President Hugo Chavez has just returned from China, claiming to have gained their support for his bid for a UN Security Council seat--perhaps in exchange for deals earmarking more Venezuelan crude for China and offering Chinese companies an entree to Venezuelan oil fields. After reflecting on this news for a while, I surprised myself by concluding that the oil part of this story might actually be a good thing. Although it undermines a regional supply strategy that enhanced US energy security for nearly three decades, the end result of this realignment could leave the US, China and Venezuela all feeling more secure.

As I've discussed in previous postings, geographic diversification of US crude oil supplies was one of our key strategies following the 1970s energy crisis. By 1983 our response to high prices had driven our oil imports down to 5 million barrels per day (MBD) from their 1977 high of nearly 9 MBD--a figure that wasn't exceeded again until 1994. At the same time, a greater focus on supplies from North and South America shrank our imports from the Persian Gulf from 2.5 MBD to less than 0.5 MBD. They've grown since then, but have never exceeded their 1970s peak in either absolute volume or share of total imports.

Although diversification suggests a "portfolio effect," the key to the success of this strategy was reliability. In the three decades between the Arab Oil Embargo and the PdVSA Oil Strike, Canada, Mexico and Venezuela were ideal suppliers. Diversification alone might have helped, but it was the reliability of this core group of Western Hemisphere partners that made the difference, and their proximity added another dimension of flexibility. The actions of President Chavez have altered that equation, perhaps permanently.

If the US and Venezuela go their separate ways, oil-wise, it's better for all concerned if this divorce happens gradually, rather than all at once. Our imports from Venezuela stood at 1.5 MBD last year, down from their 1997 peak of almost 1.8 MBD. In light of PdVSA's dismal record of trying to increase production after the post-strike sacking of management and technical personnel, it's likely that the target of 0.5 MBD of exports to China by 2009 or 2010 must come at our expense, rather than from incremental output. That shift will come at a price to both us and them. US refiners, particularly in the Gulf Coast, will have to line up alternate supplies that approximate the properties of Venezuelan crude, or face expensive refinery modifications. They will also pay more to ship crude from farther away. The resulting higher operating costs will put pressure on margins and on gasoline prices.

Venezuela won't get off lightly, either. A tanker voyage from Lake Maracaibo to Houston takes five days; from Maracaibo to China would be 45 days. Depending on whether it sells to China CIF (delivered) or FOB (ex loading port) Venezuela may have to expand its tanker fleet and/or chartering, bear more oil price risk on its cargoes at sea, and wait longer for payment. Unless it can take advantage of cheaper "backhaul" shipping by utilizing VLCCs that have discharged Middle East crude in the US, the net revenue from selling to China will be less than for comparable sales to us, without factoring in the discounts necessary to make Venezuelan crude attractive to Chinese refineries accustomed to a diet of Middle East grades.

So how could such a shift possibly be beneficial for the US? First, whether or not this oil is ever diverted to China, Venezuela must be stricken from our list of reliable suppliers. Sooner or later, Sr. Chavez will be tempted to act on the anti-American rhetoric of his Bolivarian Revolution. A gradual weaning off Venezuelan crude will cost US refiners money, but it will be easier to take than a sudden cutoff in the future. Either way, the value of Venezuelan crude for our diversification strategy is diminished. Most of the other suppliers available to US refiners look at least as dependable as the new Venezuela, and the situation might even prompt a new dialog with Mexico about ways to increase their production.

At the same time, if such a realignment is to work for Venezuela, Chinese refineries must invest to optimize on the properties of the heavier crudes that PdVSA produces. That would alleviate some of the pressure on light crude prices, which have gone up much faster than those for heavier grades in the last several years, dragged up in part by incremental Chinese demand. Increasing the global capacity to process heavy crudes would improve the incentives for producing these more abundant reserves, benefiting producers and consumers alike.

The net result of all this could leave China more secure in its supplies, on the bilateral basis it favors, while allowing the rest of the market to function as it should, in response to shifting conditions of supply and demand.

Tuesday, August 29, 2006

Globalization and Energy

A recent article on the Fed Chairman's view of globalization in the Washington Post got me thinking about the relationship between globalization and energy. There's been a lot of anti-globalization rhetoric over the last decade or so, but I haven't heard much relating to energy. In its current phase, the expansion of globalization is in lock step with expanded use of energy. Some of this can be attributed to the connection between economic growth and energy demand in general, but when we look at the replacement of domestic manufacturing by imports, or the offshoring of jobs--two aspects of globalization that have come in for criticism in the US--the energy consequences fall into a different category. Since globalization appears unstoppable, we have a vested interest in making it more energy-neutral, in order to avoid turning the present market-based resource competition into something more dangerous--or simply running into a wall of resource limits.

Globalization comes in many flavors, including both economic and social elements. I'm not sure of the energy implications of the latter, unless they are to be found in the backlash it spawns. One could argue that al Qaeda's fight isn't with the US, per se, but with the tidal wave of Western culture that could swamp fundamentalist Islam in a generation or two. I'll leave that mare's nest for others to unravel. In any case, the connections between economic globalization and energy are much clearer.

Consider China's rapidly growing export economy. Much has been written about the environmental consequences of shifting manufacturing from the US to China, where rules are more lax. The energy impact of this shift is also significant, because China's consumption of energy per unit of GDP is a multiple of that in Western Europe or North America, and will remain so even after planned efficiency improvements. In 2004 the US economy was four times more energy efficient than China's, when compared on the market-exchange-rate basis appropriate for trade. Even after allowing for differences in the two countries' economic mixes, manufacturing an item in China requires, on average, more energy than if it were made here, including the energy used in shipping it. That also has implications for the greenhouse gas emissions associated with manufacturing.

The energy impact of offshoring is more subtle, but may be nearly as important as the trade-based example above, because of the relative size of the service sector. A service job displaced from the US to India, for instance, almost certainly represents a net increase in global energy consumption. The US worker whose job is moved offshore doesn't stop using energy, even if he becomes permanently unemployed or retires as a result of the change. And the beneficiary of the transfer offshore will use more energy, as the accompanying increase in income translates into a standard of living that affords more consumer goods, and possibly a move to less dense housing. This needs to be quantified more rigorously than I've done here, but it looks like offshoring increases global demand for electricity, and possibly for transportation fuels.

If these two examples are representative, then further globalization will expand global energy demand and increase emissions of greenhouse gases more than would otherwise be the case. For all the benefits of globalization in moving people out of poverty, these side-effects are serious and, if left unchecked, will impose limits on the ultimate extent of globalization's spread. Addressing this will require great creativity and may result in some counter-intuitive solutions, such as subsidized technology transfer. The impact of this issue on energy security may be less direct than tackling vehicle fuel consumption, but in the current, largely demand-driven oil market, it offers a lever we shouldn't ignore.

Monday, August 28, 2006

Access vs. Responsibility

Chad was going to be a model for developing countries. It would show the way for other nations wishing to tap their mineral wealth, without bringing on the dreaded "resource curse" of corruption and anemic economic development. The mechanism chosen for this was a World Bank administered escrow fund, into which all oil profits would be paid, with funds administered by the Bank for agreed development priorities. Now Chad has announced the expulsion of two of the three international oil companies that produce the country's oil--and that invested their money, along with the World Bank, to build all the necessary production and pipeline infrastructure. The stated reason is a tax dispute, but reading between the lines, this is just an excuse to let the Chadian government bypass the escrow mechanism, which had already been modified to give them a larger direct take. The situation provides a prime example of the problems that extractive industries face in trying to gain access to resources, while avoiding criticism that they are indifferent to the needs of local populations.

Access to resources remains the principal challenge facing international oil and gas companies in this decade. Production in the countries that have provided them the greatest degree of ownership and control has either peaked or is near a peak, while most of the countries with the largest remaining reserves, particularly in the Middle East, limit access to their own national oil companies (NOCs). That leaves the oil majors with a few large opportunities in Russia and the Caspian--hardly a cake-walk to negotiate--plus a middle ground of non-OPEC developing countries such as Angola, Burma, Chad, Sao Tome, Sudan, and the like.

One of the interesting features of the situation in Chad is that it's not just Western companies that are under pressure. Besides Chevron, the other firm being kicked out is the Malaysian NOC, Petronas, which has been busily diversifying outside its home country. Petronas represents precisely the kind of company that is typically invited in, when the US and EU players lose their concessions or run into problems with "untouchable" regimes, such as Burma's. Coming on the heels of Bolivia's nationalization of its hydrocarbon sector, and the "renegotiation" of Venezuelan contracts, it certainly looks like all the international players--majors and NOCs alike--are in for a rough period.

That's not just bad news for them and their shareholders. As I've suggested on many occasions, I believe that the timing of Peak Oil will have more to do with geopolitics than geology. If the companies with the best technology and the biggest investment budgets can't get access to the best reserves, global oil production will suffer and prices will continue to rise for the foreseeable future. At the same time, social responsibility will become meaningless, if the companies that play by these rules lose out to those willing to do anything it takes to get a concession.

Friday, August 25, 2006

A Bigger Sink

The idea of capturing our carbon dioxide emissions before they get into the atmosphere is becoming increasingly mainstream. The prospect of practical carbon sequestration has changed the view of at least one major environmental group towards the use of coal, otherwise the most carbon-intensive of our fossil fuels. Historically, there was only one way to tie up carbon dioxide, by growing vegetation. More recently, two other avenues have shown potential, by transporting compressed or liquefied CO2 into geological formations or to deep ocean waters. A recent article from MIT's Technology Review suggests an improvement on undersea storage, injecting it into porous seabed sediment. If the long-term stability of this method proves out, it could greatly enhance the economics of undersea sequestration and dramatically expand its potential capacity.

It appears likely that no single sequestration strategy will dominate; sources of greenhouse gases are too diverse. Re-forestation remains a useful tool, with benefits beyond the capture of carbon, but its duration is typically limited to a century or two. Geological sequestration depends on underground formations such as depleted oil or gas reservoirs that aren't always conveniently located. Having a non-geological, sea-based option makes enormous sense, given the global distribution of coastal population and industrial centers.

Earlier versions of this approach raised serious concerns among environmentalists. Simply depositing compressed CO2 into the deep ocean could make the local ecology more acidic, and some of this CO2 would ultimately find its way into the atmosphere, reducing the sequestration benefit. My favorite antidote to a runaway greenhouse effect, seeding the oceans with iron and tying up CO2 in the resulting plankton "bloom", could have even more serious side effects.

The idea of depositing CO2 into seabed sediments, at temperatures and pressures that would keep the CO2 inertly in place, avoids most of the pitfalls of these other approaches. It is only feasible because of technology developed for deepwater oil drilling. The article makes it clear that this technique won't be inexpensive. For that matter, separating carbon dioxide from power plant exhaust isn't cheap, either, nor is compressing it sufficiently to ship it to the nearest reservoir or to pump it under the sea. But it could keep the fossil fuels upon which we rely economical enough in a carbon-constrained world for us to successfully shift to low- or zero-carbon sources of energy.

Therein lies the biggest argument that will be used against this approach, and against sequestration in general. Not only does it fail to force us off fossil fuels rapidly, but it enables their continued use during a longer, less disruptive transition to something else. Sequestration is a crutch for the carbon economy, no question, and some see that as inherently bad. I prefer to see it as the sine qua non of adapting our high-energy society to a warming world, without cutting the food-and-fuel lifelines of millions or billions of people.

Thursday, August 24, 2006

Perpetual Motion

The dream is older than science: someone finds a way to break all the known rules and produce perpetual motion, turn lead into gold, or in today's climate, create "free energy." I was already planning to write on this general topic, before an old friend sent me a link to the latest example of this phenomenon from an Irish company called Steorn. They claim to have a gizmo that produces net energy by means of a vaguely-described interaction of magnetic fields. Steorn has issued a challenge in the Economist for scientists to try to debunk their invention. The odds are billions to one that one of two outcomes will follow, as was the case in every previous instance of similar claims. Either Steorn will turn out to have missed counting all of the energy inputs into the system, thus ending up with an actual net loss, or they will have discovered a novel effect that can neither be scaled up nor turned into useful "work." In the one-in-a-bazillion chance that their claims hold up, I'll cheerfully eat these words--provided they are printed on rice paper, of course.

Whenever the price of energy spikes up, or something else causes us to worry about the sustainability of our present sources, the wild energy ideas come out of the woodwork. They get our attention, because we're already focused on energy, and in our hearts we want them to be true. I'm reminded of the "Dean Drive" controversy of the early 1960s. If you've never heard of it, you probably didn't grow up reading science fiction, because the letter columns of the better science fiction magazines were full of debates about whether or not Norman Dean's "reactionless drive" device was possible. No matter how much scientific training someone had, if he already believed in the possibility of space travel without rockets, he was more easily convinced that someone had devised a way to do it. Who wouldn't want free energy from a black box?

Another reason many of us may want to believe that a radical energy innovation could happen this way is that we've fallen in love with the story of the personal computer, developed in a garage, that ultimately dethroned the massive, centralized mainframes of IBM and its big competitors. What would be the role of big oil and gas companies, or of OPEC, in a world remade by the Steorn device, or something like it? As humble purveyors of petrochemical feedstocks and fuel suppliers to hobbyists, no doubt. Even highly reputable Ballard capitalized on this sort of romance about fuel cells a few years ago.

As to Steorn's gizmo, I believe it is telling that the video clip on their impressive website focuses mainly on the invention's geopolitical, environmental and convenience benefits, and on the resulting business proposition, rather than its actual features and construction. Nor does their management profile page indicate the background or even the presence of a "chief scientist", behind the parade of finance and IT types. The Chaos Manor ur-blog, on the other hand, which brings together a very astute community of science and technology folks, has taken a look at Steorn's idea on its Mail page, and is extremely skeptical--as we should all be. This certainly seems like the perfect news story for the "silly season."

I think we're witnessing a classic unintended consequence of high energy prices and perceived energy scarcity. If these conditions persist, we'd better prepare ourselves, both as consumers and as investors, for a proliferation of competing claims to have beaten the rules, energy-wise. I'm old enough to remember the claims of 200 mile-per-gallon carburetors. But as both Dr. Pournelle and my friend suggested, the real test of something like this isn't the claim, but an actual working unit, powering something that proves its usefulness. A car, refrigerator or phone powered by Steorn would do nicely. Of course that would make it harder to explain failure, later. By remaining in the realm of theory and assertion, inventors can always contend that their idea was crushed by the entrenched establishment, rather than fizzling out in plain sight. Stay tuned.

Wednesday, August 23, 2006

The Funding-Both-Sides Meme

Ever since I learned about the concept a few years ago, I've been watching out for memes, which are defined as "self-propagating units of cultural evolution." The world of energy has several important new memes that are starting to affect not just attitudes but also policies; ideas about peak oil and runaway global warming are spreading rapidly, even if both remain speculative. Another energy meme that I've been following for some time is at the heart of the Geo-Green movement. Call it the "Funding Both Sides" meme, as in, Through our addiction to oil, we are funding both sides in the war on terror. This one is also spreading rapidly, and it's turning up in this year's election rhetoric. How accurate is it, and, more to the point, what can we really do about it?

Credit this meme to Tom Friedman at the New York Times. I'm not sure he originated it, but he's been using it his columns at least since early 2005. He's beating this drum consistently and frequently, including in his recent "Addicted to Oil" segment on the DiscoveryTimes cable channel. But he's hardly the only one repeating it. Today I read about a Senatorial candidate in Tennessee who's picked it up and applied it to our concerns about Iran. He won't be alone in this, I'm sure.

As a statement of fact, it's so simple it's hard to refute. It contains obvious elements of truth, and that's an important feature of good memes. The US currently imports 10 million barrels per day (MBD) of crude oil and another 2 million or so of refined products. At current prices, we're talking about a monthly import tab of about $26 billion. Aside from Canada and Mexico--our two largest suppliers--a sizable portion of this, some 2.5 MBD, worth about $5 billion/month, comes from the Persian Gulf. So Saudi Arabia, Kuwait, Iraq, and the UAE are collecting roughly $60 billion a year in oil trade with us these days. Their governments end up with most of this money, because in all of these countries the government controls the oil industry. From there, it's a trickle-down effect. Just how much of that might eventually find its way into the hands of terrorists is a matter for speculation.

But that's not all. There's a good case to be made that America's sustained high oil demand and self-imposed production limits have helped drive up the global price of oil, so that these countries are getting more money from us and more money from their other customers, due in large part to our actions. The Persian Gulf exports more than 17 MBD, after accounting for domestic consumption. That equates to about $36 billion/month, about 2.5 times what it would have been in 2000, for an extra $20 billion/month. Even if only 0.1% of this ends up in the wrong hands, it's more than enough money to bankroll a large number of Islamo-fascist fanatics.

So you can see that our Funding Both Sides meme has solid, non-trivial underpinnings. My main objection has been to the unspoken portion of it, which goes something like this: we are funding both sides, and there are things we could be doing today, if only we had the right leadership--explaining the necessary actions and sacrifices to us in the right way--that would change this equation dramatically in short order. Unfortunately, that last portion is so unlikely as to be false from a practical standpoint. In the last two years, I've written numerous postings explaining in detail just how big this hurdle is, how long it takes to turn over vehicle fleets, existing power plants, appliances, and buildings to generate enough additional efficiency to reduce our oil demand by even a few million barrels per day.

Although not intended as a message of futility or resignation to the continuation of the energy status quo, I stand by that analysis, and my conclusion that the only lever available to us that could have a material impact in the next two or three years is a much higher fuel tax to squash demand--and that unless very carefully constructed, this could exact a huge price on our whole economy.

But that's not the whole story, either, as a comment on yesterday's posting reminded me. The signals we send to our suppliers--and our adversaries--may be just as important in determining their behavior as an actual reduction in demand that could take years or decades to materialize. Showing them that we are fully committed to a realistic plan for reducing oil imports could change the game, especially for those countries that are banking on their oil reserves to fund their economies--and perhaps international mischief--far into the future. Is that the unspoken message of the Geo-greens--or at least of the Geo- half of these strange bedfellows? If so, then count me in.

Tuesday, August 22, 2006

The Rope to Hang Us

Iran has just turned in a response that will apparently indicate a willingness to continue talking, but rejects the main provision of a UN Security Council directive to halt its Uranium enrichment program. This is hardly surprising, given their recent rhetoric and actions. In the year and a half since I analyzed Iran's motives for seeking nuclear capabilities, the stars have aligned in their favor. While the joint US/EU opposition to Iran's nuclear efforts has remained remarkably cohesive, successfully pushing through the Security Council Resolution last month, events have conspired against us. Last April I suggested that buying time, rather than an immediate confrontation, looked like our best option. Unfortunately, the horse has not cooperated by learning to sing.

Of the three main factors affecting Iran's ability to maintain its present course, all have evolved to strengthen the hand of President Ahmadinejad and the mullahs. Despite a gradual easing of market fundamentals, the price of oil has increased steadily over the last 18 months, trending from the mid-$50s to the mid-$70s. Part of this rise reflects the Iran risk premium, but there has been no shortage of other risks and disruptions, from Alaska to Nigeria and Venezuela. The ability of the market to absorb an interruption in Iranian crude oil deliveries through the use of spare capacity elsewhere--rather than by drawing commercial and strategic inventories--is minimal. Iran still holds the trump card on oil.

Nor has the security situation in Iraq improved, either in reducing the number of American troops within striking range of an Iranian reprisal, or in repositioning those troops to threaten Iran directly. The expansion of nihilistic violence in Iraq has benefited Iran in multiple ways, not least in pinning down the Coalition forces and reducing the appetites of their home countries for sustaining this effort, let alone taking on a larger project elsewhere in the region.

Finally, the Middle East as a whole looks even less stable than it did a year ago. Footage of the conflict in Lebanon reminded me of the order given by General Maximus in "Gladiator": "At my signal, unleash hell." Whether Iran ordered up this particular hell or not, any US military option against Iran's nuclear sites has to look less palatable now, both in its execution and regional consequences. And with various commentators remarking on the deflation of their reputation for invincibility, the odds against Israel undertaking an Osirak-type mission have increased, at least under the current government.

Yesterday the Wall Street Journal, which has been one of the most consistent and assertive voices against nuclear appeasement of Iran, published their assessment of the options. The title says it all, "In Iran Nuclear Standoff, Scant Leverage for West." (Subscription required.) Iranians have a reputation as tough negotiators, if not always brilliant strategists--at least not since 480 BC. It is hard to imagine them yielding here, until the price becomes much higher. As a Security Council member and key supplier of nuclear technology to Iran, the view of Russia on potential sanctions against Iran is critical. The circumscribed list of actions they seem willing to endorse doesn't inspire confidence that it will curb Iran's ambitions.

Where does that leave us? With an Iran motivated to call our bluff, and a Western coalition that needs to demonstrate more resolve that it has so far--France's current waffling on its earlier commitment to spearhead the UN force in Lebanon is particularly unhelpful in this regard. Given the economic interests of its members, the Security Council seems likely to choose near-term oil price stability over long-term international security. Unfortunately, that could set up an even larger crisis in the future, that would shatter both poles of that trade-off.

Monday, August 21, 2006

Where Gas Prices Bite

A conversation at a gas station yesterday got me thinking again about the price of fuel, and our response to it. When the guy filling up on the other side of the pump started to speak, I expected him to offer some comment about the heat and humidity, but instead he said, "Well, at least it's under $3.00 again." I hadn't noticed. If middle class, middle-aged folks are at a level of acceptance that expresses itself as "gripe-and-drive," however, other segments of the population are hit much harder. An article in last week's New York Times illustrated the impact on teenagers, in a way that reminded me of my own early driving years during the first energy crisis. Another generation is growing up with the idea that fuel is scarce and dear; how will that change their attitudes about energy?

Last week's national average gas price of $3.00/gallon for unleaded regular works out to $0.73 in 1974 dollars, the year I bought my first car, a 1965 Mustang. That compares with the 53 cents/gallon I was apparently paying then--though the price I remember is closer to 48 cents, which still seemed astronomical, compared to the 35 cents my parents were paying only two years earlier. Current teenagers recalling prices at or below $1.50/gallon several years ago must be even more shocked than I was.

So here's a group that is much more affected than most of us, and what are they doing, at least anecdotally? They're driving less, foregoing other purchases, shifting to more economical cars, carpooling, and exhibiting every other behavior that older adults talk about, plus a few extras such as asking passengers to chip in for the price of fuel. Economists will argue about how permanent these responses are, and whether they will add up to much in reduced demand, but it strikes me that we're making a pretty big impression on a generation that grew up with the idea that gasoline and electricity were incredibly cheap and likely to remain that way--much like my own Baby Boom generation.

What will that mean? Well, when you add it to the Millennial Generation's innate concern for the environment, we've got the makings of an enormous early-adopter group for clean, efficient energy technologies in the years ahead, even if energy prices fall back from current levels. It will be some time before they have the purchasing power to put much of this into effect, but marketing types have been talking for years about the impact this generation is likely to have on trends of all kinds, given numbers that approach those of the Boomers and dwarf the tiny Generation X. This doesn't negate the patience and cost involved in turning over inefficient infrastructure and vehicle fleets, but it could prove to be as powerful a driver of long-term change as any direct influence of price or tax policy.

Friday, August 18, 2006

Flaming Laptops

On the surface, the biggest energy story of the week was the success of BP and its partners on the Alaskan North Slope in keeping half or more of the Prudhoe Bay field running, despite major repairs to the gathering system pipelines. Given the drastic decline in Alaskan production since its peak in 1988, which has created large amounts of spare infrastructure capacity, this shouldn't be too surprising. In the long run, however, I think the more significant event might be one that wouldn't immediately be associated with energy and environmental strategy: Dell's recall of four million defective laptops batteries. Although less dramatic than the Hindenburg explosion, images of flaming laptops could become as much of an impediment to public acceptance of battery cars as the airship disaster has been for hydrogen.

For advocates of electric vehicles (EVs) driven only by batteries, as opposed to gas-electric hybrids or variants of the hybrid, one of the best technology pathways has been the steadily improving Lithium Ion battery. Lighter in weight than competing metal hydride or lead acid batteries, they promise comparable onboard energy density to gasoline--if not in actual BTUs, then at least in equivalent miles of range--without adding lots of performance-reducing weight to the vehicle. The Tesla Roadster I mentioned recently is based on this technology, employing 6,800 Li-ion batteries under the hood. Unfortunately, the problems encountered by Dell are inherent in this battery chemistry. The recharging cycle of Li-ion batteries must be carefully managed to prevent fires. Manufacturers have been wrestling with this problem for years, and have largely overcome it with better electronics, though not perfectly, as we have seen.

The point here is not that Li-ion batteries can't be made safe enough for use in cars. Rather, it's the perception, created by this incident, that Li-ion batteries could pose a serious safety risk in vehicles. If I were marketing competing battery technologies to carmakers, I would include this issue--perhaps with photos of flaming laptops--in every presentation I made. While engineers might scoff at this, the message wouldn't be lost on management: put a few hundred or a few thousand of these batteries in every one of your cars, and you risk embarrassing and expensive recalls, not to mention potentially devastating product-liability lawsuits.

The risk for consumers is comparable. It's not even the fear of your car going up in flames, though Hollywood has worked overtime for decades planting those images in our minds for gasoline-powered cars. Consider the inconvenience if your EV's battery pack is recalled. Unlike your laptop, the car won't run without it, and we're not talking about replacing one battery in a few million computers, which looks like it will take at least several weeks, but potentially thousands of batteries in what would eventually be large number of vehicles.

Let's be clear that I'm not implying the Tesla Roadster or any other car with Li-ion batteries is inherently unsafe. I understand that Tesla has engineered their vehicle to manage the battery cycle appropriately. But I do think this event represents a serious step backward for EVs--which have plenty of other problems of perception and reality to overcome. It also gives an advantage to hybrid cars and plug-in-hybrids. Because they require many fewer batteries than a true EV, they can get perfectly satisfactory performance from metal-hydride battery packs.

Thursday, August 17, 2006

Social Barriers to Clean Energy

Many of the comments posted here by my readers reflect the appeal and importance of nuclear power as a domestic alternative to imported energy and a key response to climate change. An editorial in today's Washington Post seems to share these views. The Post focuses on what they regard as the main impediment to building a new generation of nuclear power plants in this country: the absence of a permanent solution for handling nuclear waste. It is certainly a major impediment, but I don't agree that this is principally a technical and political problem. The politics that has blocked a solution to nuclear waste shares a common heritage with the opposition to offshore wind farms, LNG receiving terminals, and all manner of large energy projects.

We don't lack for viable technical options for dealing with nuclear waste. Long-term storage is the most obvious, of the type envisioned for Yucca Mountain, Nevada. Spent fuel reprocessing provides other benefits, including expanding the supply of reactor fuel and reducing the volume of highly-radioactive waste that must be "buried." More exotic solutions, including turning the waste into an inert glass, also look promising. Technologies for managing nuclear waste, even on the level of regional interim repositories, are available; what is not available is the political will to implement them.

Now, some of the political obstacles reflect important considerations about public safety and reducing the risk of nuclear weapons proliferation, especially in an era of nihilistic terrorism. Concerns about proliferation have held back reprocessing in the US for a generation, perhaps rightly so, though that calculus has arguably shifted with the end of the Cold War and the arrival of much greater proliferation risks from North Korea and Pakistan. But the other political dimension of nuclear waste management is grounded in the rampant NIMBY-ism that has spread from coast to coast in the last two decades.

I'm not suggesting that there aren't millions of Americans who oppose nuclear power as a matter of fundamental environmental or political principle. I respect their views, although concerns about climate change have eroded their solidarity of late. However, I believe a much larger segment of the population isn't anti-nuclear, per se, but rather worried about practical aspects of nuclear safety and the possibility of a nuclear accident affecting their community. This has much much in common with the opposition to LNG.

When you dissect the opposition to Yucca Mountain--separating out concerns about radiation leaks in a portion of the Nevada desert that hosted nuclear weapons tests for four decades-- much of it boils down to anxiety about how the waste will get there from the nation's 104 operating nuclear power plants, and from any new ones that might get built. While I don't relish the idea of casks of radioactive material passing through my own town by truck or rail, I also recognize that I and my family are actually at much greater risk from gasoline tank trucks and coal trains. In addition, the greenhouse gases released by these other fuels seem likely to change our world in much more profound and personally-impactful ways than any of the nuclear material shipped from power plants to storage, temporary or permanent.

Nuclear power isn't a panacea, but it is the largest-scale, most readily-available source of emissions-free primary energy, and it can expand enough to displace--not merely augment--large quantities of fossil fuels. Rather than competing with wind and solar power, it complements them nicely, providing steady base-load power to support their intermittent contribution. And by recharging plug-in hybrid cars, it can deliver transportation energy in direct competition with petroleum products. None of that will happen, however, unless we overcome our aversion to all of the less-attractive foundations of our economy. Unless we come to grips with our post-industrial squeamishness about large energy facilities and infrastructure, we will foreclose some of our best options for energy that is cleaner and less reliant on unstable or unpredictable foreign governments. That applies not just to nuclear power, but to offshore gas drilling and large-scale wind power.

Wednesday, August 16, 2006

1942ism vs. 1972ism

There's nothing I like better than finding an article that changes the way I look at the world. Although perhaps not quite up to that level, yesterday's Wall Street Journal (subscription required) included a very clever analysis of changing US political views on foreign policy and the War on Terror. The author, an editor at the Atlantic Monthly, proposes substituting what might be called era-based positions for the traditional liberal/conservative or isolationist/internationalist labels that are proving less useful today. As I absorbed Mr. Douthat's descriptions, they struck me as constituting mini-scenarios that go beyond explaining some of the political shifts we're witnessing. They also contain interesting implications for our possible energy futures.

The article sets up five distinct reference periods as a way of categorizing the views of politicians across the traditional spectrum, in the process accounting for some "strange bedfellow" groupings. Each period evokes a previous crisis to serve as a model for how we ought to manage the current situation. Briefly, these are

  • 1972ism sees Iraq as Vietnam redux, George W. Bush as Richard M. Nixon, and the threat to our civil liberties outweighing the risks to our security.
  • 1948ism regards the current international challenges as more suitable for containment than confrontation, with diplomacy and new or revamped multinational institutions preferred over a series of wars.
  • 1942ism puts us in the midst of this generation's version of World War II, in for a tough fight against an uncompromising ideology, but with a clear victory at the end of it.
  • 1938ism has us on the verge of a great struggle, with Iran's nuclear program and regional influence substituting for Nazi Germany's ambitions.
  • 1919ism sees the last several years as a reckless Wilsonian adventure, the antidote to which is to hunker down in our continental fortress.

These ideological perspectives create a set of neatly divergent scenarios for the period ahead. For each, it's not difficult to propose the kind of energy environment that would be consistent with the premised approach to foreign policy:

  • 1972 suggests a rapid disengagement from Iraq and a reduction in US assertiveness abroad. At home we would see dramatic shifts in fiscal policies and priorities, including a greater emphasis on renewable energy and windfall profits taxes on oil companies, along with new fuel taxes or carbon taxes, driven by a commitment to address climate change. We would need alternative energy, because the Middle East would become even more unstable than today, with civil war in Iraq spilling over into neighboring countries. Oil prices would soar, providing more incentives for home-grown energy.
  • 1948's emphasis on Realpolitik could bring significant relief on the energy front, with a renewed focus on international cooperation and a premium on stability over change, especially in the Middle East. Energy policy might even become a tool in this effort, with acceptance of Kyoto Treaty emissions limits and a greater emphasis on efficiency providing a quid-pro-quo for participation in new international security alignments.
  • 1942 looks a lot like the path we've been on, post-9/11. Our energy challenges won't ease soon, subjecting us to ongoing price volatility and periodic disruptions. There'll be little opportunity for supply to catch up with demand, unless the latter began to fall, as part of an economic contraction. Energy policy continues in the shadow of security concerns, and its impact would be modest, at best. Alternative energy grows at the margins.
  • 1938 bodes much worse ahead, as the West chooses between confronting Iran now or risking a more dangerous confrontation later, should diplomacy (read appeasement) fail and a nuclear Iran emerge. A cutoff of Iranian oil exports would be the least of our concerns, in the event of a war that could slow oil and LNG exports from the Persian Gulf to a trickle. Even if the shooting phase were brief, damage to oil and gas facilities in the region could hamper energy supplies for years. Deft use of OECD strategic petroleum reserves could dampen the impact, but would not protect consumers from severe price spikes and everything that entails. Every imaginable form of alternative energy would benefit, including those based on coal.
  • 1919 might involve a similar disengagement to "1972", but this would likely be a more muscular version, in which energy security gets nearly equal billing with homeland security. We'd see a dedicated effort, on a Manhattan Project scale, to roll out plug-in hybrid cars and ramp up ethanol, coal-to-liquids, wind power and any other domestic energy source, especially if clean ones. The Geo-Greens would own this scenario.

If the above analysis stretches Mr. Douthat's premise beyond its limits, it still offers some interesting insights. How we choose to deal with Islamo-fascism--for lack of a better term--and how it develops from here will have a strong influence on energy prices and policy, because of the location of the world's largest remaining oil reserves, along with a large part of the natural gas. Are we on the verge of a change in national strategy that would reduce the intensity or emphasis of the War on Terror, and in the process shift the status quo path for energy? Or will events such as last week's airliner plot reinforce our 1942ist resolve to "stay the course"? Are the mid-term elections shaping up as a choice between 1942ism and 1972ism? I look forward to your comments on this.

Finally, the article reserved one further era as a sort of "wild card." While I continue to regard 1914 as a poor fit to current circumstances, we can't entirely dismiss the possibility that we stand on the "edge of an abyss" as profound as World War I, with unfathomable consequences for how we access and use energy.

Tuesday, August 15, 2006

The Spanish Inquisition

Yesterday I read an op-ed in a local "throw-away" paper that sent me chasing for more mainstream sources to confirm its allegations. It concerned a surprising development in the debate over climate change in California, suggesting that the state's attorney general, Bill Lockyer, is using his office to uncover the sources of "disinformation" spread by "climate skeptics." He has apparently singled out several well-known--and impressively credentialed--opponents of the scientific consensus for this treatment. This can only undermine the public perception of the positive actions on climate change that I highlighted two weeks ago. Whatever the role of states' attorneys general in this issue, turning the climate critics into persecuted dissidents cannot advance the response to climate change in any useful way.

Regular readers of this blog know that my own views on climate change are probably closer to Mr. Lockyer's than to those of the skeptics he is trying to expose. But we part company on how to convince our leaders and the general public that this is a serious problem that must be addressed. To the degree that will depend on scientific inquiry and findings, then we must let the processes of science sort out what is correct and what is mistaken. Science does this through debate and peer review, not through clumsy efforts reminiscent of the "Spanish Inquisition" skit from Monty Python. If, as I expect, the scientific consensus on climate change is ultimately borne out by the accumulation of evidence and validation of models against actual climate data, then skeptics will gradually become marginalized and lose their support, including their financial backing. We also need to remember that, while the consensus that the planet is warming and that humans are at least partially to blame is strong, the consensus on appropriate responses is rather less clear.

The case in question transcends scientific freedom, however. Should corporations be free to consult whichever experts they wish, irrespective of the externally-deemed "correctness" of their positions? Having dealt with this issue from the inside, when I was at Texaco, I would argue strenuously that as long as those advisers aren't breaking the law, this is a matter for the management and shareholders of the corporations in question to resolve. While I might offer them different advice than they presumably receive from the individuals and organizations at issue in Mr. Lockyer's investigation, I cannot see that they are any less entitled to their freedom of association than are the environmental organizations backing Mr. Lockyer.

Climate change is becoming an intensely political issue, and Mr. Lockyer's tactics represent the sharp end of the political spear. But rather than turning climate skeptics into a cause celebre--reinforcing notions that those seeking action on climate change behave as a dissent-crushing conspiracy, a la Mr. Crichton's latest novel--environmentalists ought to spend less time ascribing disproportionate powers of persuasion and delay to their opponents, and more time examining the failings of their own arguments.

The reasons why the public has not responded to the urgings on environmentalists are complex and may have more to do with the contradictions inherent in our lifestyles and preferences, than with the work of a few well-connected doubters, however clever and effective. With the Supreme Court considering whether the federal government should regulate greenhouse gas emissions as pollutants, we ought to have the benefit of a broad debate on this subject, rather than turning it into the next form of political correctness.

Monday, August 14, 2006

Finding Connections

About the time of the Iranian Revolution and the second phase of the first energy crisis, PBS ran a documentary series called, "Connections," by a British journalist named James Burke. I was still at an impressionable age, and it changed the way I looked at the world. Gone was the neat progression of science taught in school, replaced by a chaotic and--though no one would have used the word in 1979--heavily networked set of successively dependent connections. A clever op-ed in the New York Times last week argued for a similar view of energy evolution, driven by our present view of scarcity. While the author, a Cornell engineering professor, raises some excellent points, I wish he had followed his argument to its implications for the way we approach alternative energy. The issue isn't just innovation, but how we choose to focus it.

Consider ethanol. My posting a week ago on that topic elicited many excellent comments, more than any subject I've tackled in months. Viewed through the lens of Dr. Sass's article, one of the main objections to our present corn-based approach to ethanol is the paucity of innovation it inspires. Extracting alcohol from food crops is something we've been doing for millennia. While the process has improved, and can be improved further, it's unlikely to yield the kind of breakthrough necessary to replace petroleum. Cellulosic ethanol production, on the other hand, offers precisely that potential, though it remains to be demonstrated at the necessary scale and cost. Cellulosic ethanol represents a radical innovation, and the breakthroughs that make it possible didn't come out of energy research at all, but as spinoffs of the biotech revolution, Connections-style.

Some of those posting comments here favor batteries over liquid fuels, effectively arguing that if electricity storage can match the energy density of gasoline--one of the factors that enabled it to beat its competitors at the dawn of the automobile age--then the inherent efficiency advantages of electric motors over internal combustion engines will win out. The Tesla Roadster I mentioned recently is a step in that direction. Much work remains, however, not the least in overcoming consumer apprehension about all-electric vehicles.

Hydrogen still remains an attractive option, but it must overcome many complex challenges to even compete with our present energy/transportation system, let alone supplant it. These include efficient hydrogen production from non-fossil fuel sources, safe and practical hydrogen storage and distribution, cheap-but-powerful fuel cells; the list goes on. But even if all of this research never makes hydrogen-powered cars a viable choice for consumers, there is at least a chance that some novel technology or combination of technologies will emerge out of this complexity and address our energy problems in unexpected ways. The Apollo Program delivered only six moon landings, but it gave us a new world here on earth.

We need serious, practical answers to the energy dilemmas we face today. At the same time, though, we should understand that relying on simplistic choices such as corn-based ethanol can only buy us time for the real solutions to blossom and mature. Trading geological and geopolitical limitations on energy for agricultural limits only makes sense if the end-game is something else, entirely. Perhaps someone is making the necessary connections to set that up, right now.

Friday, August 11, 2006

Banned Liquids and Jet Fuel

A couple of weeks ago, a friend sent me an article on the certification of a new, small passenger jet. He wondered about the energy implications, if they became popular. That question looks more important today, in the aftermath of the latest terrorist plot involving commercial airliners. Some industry experts this morning are predicting that air travel will soon be back to normal, once the initial jitters wear off and passengers adapt to the new security regulations. Others are less sanguine, and I'd put myself in that camp. In the short term, travelers will have to choose between flying, shifting to other modes, or canceling travel entirely, but in the long run, other options may change that calculation.

The last decade has seen steady growth in corporate jet travel, including the proliferation of fractional-ownership schemes and private chartering, such as those offered by NetJet and their competitors. Events such as yesterday's validate the benefits of keeping a firm's top executives and key personnel out of the commercial air travel system, and make expanded corporate access to controlled private jet seats look more attractive. And while personal safety looms large, the key consideration is the savings of time. If typical CEOs are worth $3,000/hour to companies, it doesn't take many hours of routine airport delays--let alone the chaos we saw yesterday--to justify putting them and their teams on their own planes.

Although the new, smaller jets from suppliers such as Honda and Eclipse fit into the context of the "Regional Jet" movement that has made scheduled jet travel more available to smaller communities, it will also reduce the hurdle for corporate private jet travel. That should enable much smaller companies to make the same choice as many Fortune 500 firms, while allowing the latter to push corporate jet travel down to lower layers of their organizations, as both a cost-savings and a perq. Having had the opportunity to travel this way frequently in the mid-1990s, I can attest to the convenience benefits.

The eventual impact of such a shift on jet fuel demand and greenhouse gas emissions isn't clear. Small jets are inherently less efficient, per passenger-mile, than large airliners, which average 40-50 pmpg. If they accelerate the existing trend for expansion of air travel, they will put more stress on jet fuel supplies and aviation emissions. But if small-jet travel grows because scheduled airlines become less attractive--as a result of widespread security risks and inconvenience concerns--the effect of any efficiency loss may be swamped by reduced airline fuel consumption, as some travelers simply opt out.

Looking at this from a broader perspective, the situation raises important societal trade-offs. Because of values-driven choices, our response to terror threats has moved us farther down the path toward the tongue-in-cheek suggestion that we would be safest flying in our birthday suits. As one industry official put it yesterday, "No system can survive if everyone is treated like Osama bin Laden himself." While security officials can only be praised for their rapid response to a critical threat, in the long run making air travel more spartan than it had already become--with the UK banning even books and magazines from hand luggage--cannot be the solution. Rapid expansion of the TSA Registered Traveler pre-screening program and other passenger-specific approaches look like sensible alternatives for keeping commercial air travel both safe and attractive.

Thursday, August 10, 2006

Stern Warnings

My comments on Monday about the shutdown of the Prudhoe Bay field in Alaska weren't the only ones to connect the event to further drilling in the Arctic. The Wall St. Journal (subscription required) cited this incident as direct evidence of the need to develop the Arctic National Wildlife Refuge. Environmentalists saw it instead confirming that arctic drilling isn't worth the risks. Others simply focused on the difficulty of exploiting resources in such inhospitable regions. But amidst all of this, a simple fact has been lost: in the status quo case, within fifteen years natural depletion is expected to reduce production from the North Slope permanently, by roughly the same amount as this short-term shutdown. That is the real context for any discussions of wider oil exploration in Alaska, and for our response to today's high energy prices.

Within the space of a year, we've seen hurricanes knock out the lion's share of Gulf Coast offshore oil production--simultaneously retarding future development projects--and a pipeline problem cripple the Alaskan North Slope. Although the full extent of the latter isn't yet clear, and limited workarounds may still be possible, these are stern warnings about our future.

Without major discoveries and development in Alaska, the North Slope will continue its decline, which is already well under way. Without geographic diversification from wider access to offshore resources, the planned deepwater developments in the portion of the Gulf of Mexico presently open for drilling won't offset the decline of our entire mature onshore and close-offshore production base. These shifts are pre-determined, and they will keep our energy costs high, even if new production from Russia or West Africa fills the gap, globally.

There are important differences between the crisis management associated with a sudden disruption and the careful planning associated with the slow, gradual decline of a major supply source. The impact of a temporary price shock is also not the same as that of a sustained increase in oil prices. But that doesn't mean that the former lacks lessons for the latter. The production problems we've experienced in the last year presage the further deterioration of our energy trade balance, at a time when we are more focused on energy security than we have been in decades.

While I remain enthusiastic about the potential for new technology and alternative fuels to reduce our dependence on imported oil over the long haul, I recognize the daunting scale of our energy usage and the delays inherent in turning over the vehicle fleet and moving technology from the test bed to the mass market. If we want lower energy prices any time soon, then we must aggressively reduce our demand and increase the supply of conventional fuels. And we must also recognize that lower prices, with all their benefits for the economy and consumers, would postpone the day when alternatives become competitive without subsidies.

Wednesday, August 09, 2006

Call in the SPR

As summer gas prices continue to simmer, and with the largest oil field in the US offline, suggestions that the President release oil from the Strategic Petroleum Reserve (SPR) will become increasingly strident. But even network news anchors are asking how much good this can do, given that the shortfall is on the West Coast, while the SPR oil sits in salt caverns on the Gulf Coast. Whether or not the current situation qualifies as a legitimate reason to release SPR oil into the market, it certainly highlights the limitations of the present strategic oil reserve.

When the SPR was established in the 1970s, relatively little foreign crude found its way to the West Coast. California was largely self-sufficient, other than some Indonesian crude brought in to make low-sulfur fuel oil for utilities. The Pacific Northwest refineries enjoyed a diet of Canadian crude, supplemented by occasional tankers from L.A., and the odd Saudi cargo. Once the North Slope field ramped up in the late 1970s, the West Coast was swamped with crude oil. There was no real or perceived need for a West Coast SPR.

Fast-forward 30 years, and oil production in both Alaska and California is in deep decline. Even without a disruption in Alaska, California's refineries depend on steady imports from a variety of sources. In this context, the current 688 million barrels of oil in the SPR don't seem very useful in addressing a serious West Coast oil shortage.

Releasing SPR oil would provide indirect assistance, allowing Gulf Coast refiners to divert tankers of suitable foreign crude to Seattle, San Francisco, or L.A., in exchange for SPR crude plus an appropriate differential to cover differences in timing, quality and transportation costs. This would happen pretty seamlessly in today's market, though it might be much more difficult in the kind of global oil crisis for which the SPR was really intended. That argues strongly for the creation of a regional West Coast reserve, if the SPR concept is to have meaning for the portion of the country west of the Rockies.

The production rate of West Coast oil fields isn't the only thing that's changed in three decades. Our whole approach to regulation and government intervention has shifted, as well. Would it really make sense in 2006 terms for the federal government, or a consortium of Western state governments, to buy up land, construct 20 or 30 million barrels of crude oil storage and the pipelines to connect it to refineries, and then acquire the oil to fill it? Or would it be more effective to provide suitable incentives for the private sector to do this, in a manner that would likely be much better integrated with the existing refinery supply network, and then manage the inventory on a semi-commercial basis?

Several years ago, I suggested a similar appear for the entire national SPR. The idea encountered a lot of skepticism, in the aftermath of Enron. The politics of changing the Gulf Coast SPR still look daunting, particularly after last year's hurricanes. However, starting up a market-based West Coast reserve would add protection that doesn't currently exist and test this approach for possible later application to the entire SPR. As I've frequently reminded my readers, the current situation is not a re-run of the 1970s, and we don't have to apply 1970s solutions to it. It's time for new thinking on how best to protect ourselves against oil supply disruptions, regardless of their cause.

Tuesday, August 08, 2006

Castro With Oil?

This weekend's Washington Post Outlook section (similar to the NY Times' Week in Review) was chock-full of articles speculating about whether Venezuelan President Chavez will assume the mantle of Castro's revolutionary leadership, once Fidel finally passes. SeƱor Chavez has had a busy travel schedule lately, making more stops on his world tour of anti-globalization and anti-Americanism, as described in another column in Monday's Post, culminating in an arms deal with Russia's President Putin. This would be worrying enough, geopolitically, if Venezuela weren't also our fourth largest oil supplier.

While several of the Post's contributors were skeptical that President Chavez has the charisma, stamina, or authentic revolutionary chops to step into Fidel Castro's shoes, they neglected to mention his remarkable run of luck. He has survived two separate coup attempts, once as instigator, once as victim, and a referendum that many thought would dislodge him. Francis Fukuyama's Sunday op-ed highlighted the role of oil in making Chavez's "Bolivarian Revolution" economically feasible, but it's worth recalling that Chavez's actions had put Venezuela's future oil revenues into a death spiral, by breaking the 3-month strike of the national oil company, PdVSA, and firing 18,000 managers and workers. By a bizarre quirk of fate or good luck, this was just about when the long march to $75/barrel began, with the US invasion of Iraq. So even though Venezuela's oil production has never entirely recovered from the strike, its oil revenue has risen dramatically.

As if that weren't enough, President Chavez has managed to increase, more or less unilaterally, both the royalties and ownership interest in the foreign-financed heavy oil conversion projects that were instrumental in preventing a complete collapse in Venezuelan production. The international oil companies involved may not be smiling, but they are still doing business with him, with the exception of ExxonMobil.

According to the Oxford Institute for Energy Studies, Venezuela's oil export revenues in 2000 were $27 billion, but their net from that was only about $11.3 billion, after accounting for tax and royalty rates that were intended to make the country's challenging oil reserves more attractive to international investors. At current prices, gross revenue on today's lower volumes should be roughly $50 billion, but their net take has probably tripled, after factoring in the recent changes in terms. That's quite a track record, but where does it go from here? While oil may yet hit $100, that won't necessarily add another $25/barrel to the price of the heavy oil Venezuela specializes in. We are into diminishing returns, here. Venezuela has only a few more levers to pull on oil revenues:
  • Completing the recent partial nationalization. However, if the companies involved actually know more about running these complex facilities than PdVSA's downsized staff, production would fall again.
  • Expanding production via more international investment. This would probably have to be done with a different group of companies, since the political risk models of the folks who've already been semi-nationalized must be flashing all sorts of warnings. Unfortunately, those same companies are the ones that best understand the intricacies of Venezuela's Orinoco Belt geology and the necessary upgrading technology. There's also a significant time lag involved in bringing new upgraders on-line.
  • Cutting off oil exports to the US. They'd have to hope that the resulting rise in world oil prices would more than offset the much higher freight costs to Venezuela's alternate markets in Asia or Europe, and that this could be done without triggering a direct response from us. This looks like a fool's bet.

So, unless the proponents of Peak Oil are correct and global production will never again keep pace with demand growth, Mr. Chavez could just be looking at the high-water mark of his oil revenues, at the same time that he has committed himself to foreign activities and transactions that will tie up an increasing share of them, on top of an ambitious domestic social agenda. There's no better antidote to good luck than hubris, and an extra $20 billion or so in oil money only goes so far in a region with an aggregate GDP of $2-4 trillion.

Monday, August 07, 2006

Alaskan Impact

Just when we were all looking to the Middle East, or possibly a Gulf Coast hurricane, for the next big oil market impact, it turns out that BP is shutting down operations of the Prudhoe Bay field, the largest field in Alaska and still one of the largest in the world, to repair corrosion in the pipeline system that gathers the crude from the wells from which it is produced. The New York Times estimated the loss at 400,000 barrels per day, and BP was not commenting on the expected duration of the outage. Since this took place over the weekend, outside of regular trading hours on the major world oil exchanges, we can only guess at the full impact on prices. It's worth thinking about how this will propagate through the system, to anticipate what the next several weeks could be like.

According to the Department of Energy, the Prudhoe Bay Field, the main oil field in the Alaskan North Slope and the largest single producer in the US, averaged 353,000 barrels/day (bpd) of production in 2004. Current production is probably a bit less than this, due to natural decline, but its not yet clear to what degree the shutdown will also affect the satellite fields that actually make up the larger share of Alaskan production today. Total production from the North Slope area amounted to 845,000 bpd in 2005. If we use the 400,000 bpd preliminary estimate, that equates to just under 8% of total US crude oil production, or a bit less than 0.5% of global production of 84.5 million bpd. Three or four years ago, with ample spare capacity, this would have hardly been noticeable.

In order to understand how an event like this will influence the market, you need to look at where this oil has been going. When the North Slope produced 2 million barrels per day in the early 1990s, it supplied most of the needs of the four Seattle-area refineries and constituted the primary source of California's oil imports. In addition, a steady volume found its way to the Gulf Coast, via tankers through the Panama Canal or transiting through Los Angeles and heading east via pipeline; these movements have essentially dried up. The bulk of Alaskan North Slope crude (ANS) deliveries now go to the Pacific Northwest, with another 150,000 bpd going to California. That means that the direct impact of this shutdown will be on the West Coast, particularly the Pacific Northwest region supplied by the Anacortes, Cherry Point and Ferndale, WA refineries--essentially Oregon, Washington and parts of Idaho--with a more modest impact on California.

Fortunately, West Coast crude oil inventories, like those in the rest of the US, are on the high side of average. This is crucial, because the alternate sources of supply for the West Coast are much farther away than Alaska. Refineries that have optimized around frequent receipts from smallish tankers that only spend a week or so in transit may be stretched by having to wait a month or more for supplies from Asia and the Middle East to make up the shortfall, via much larger tankers. This creates an entirely different inventory pattern.

The quality of the ANS crude will also play a role in how the shutdown will affect markets. For refineries that have enjoyed a diet of mostly ANS over the years, it won't be easy to switch to whatever else is available. Although not as easily refined as the benchmark West Texas Intermediate, ANS is a "medium" crude with much less sulfur than a likely short-term alternative, Saudi Heavy. Crude from Ecuador is a better match, but that's fully committed.

The likely outcome of all this is a massive reshuffling of oil supplies, first on the West Coast and eventually globally, to free up more optimum crudes for the Pacific Northwest refineries. Prices will drive that game of musical chairs: higher prices for the grades of crude oil that compete with ANS, and higher prices for the products that are made from it. In other words, Northwest refiners will have to outcompete the other outlets for the desired oil. And to the extent that the West Coast refineries can't find the right mix to match the output they achieved running the missing North Slope crude, they will have to import more products from elsewhere, competing with product imports going to other parts of the US.

When you follow that chain of consequences, a strictly West Coast supply disruption quickly snowballs to drive up the price of crude oil everywhere, and of petroleum products in regions entirely remote from the isolated West Coast supply system. So the price of WTI on the New York Mercantile Exchange will go up, but probably by less than the prices of the typical crude oils that most US refineries actually run, the heavier and higher sulfur grades that trade at a discount to WTI. And although the price of gasoline in San Francisco and L.A. may go up by less than in Seattle and Portland, it will go up, as will gasoline on the East Coast. This domino effect invariably prompts consumer advocates to decry "gouging" and sparks political hearings and investigations, but it's how a free market responds to a supply crunch.

And for anyone who doubts that potential production from the Arctic National Wildlife Refuge (ANWR) would be material to world or US oil prices, this will be an interesting test case, since the volumes we've just lost are comparable to the low estimate for ANWR.

Friday, August 04, 2006

Saviors and Skeptics

Today, as in the 1970s, there is no shortage of new energy solutions vying to displace fossil fuels, and oil in particular. Many of these are much farther along in their development than the options we were offered during the first energy crisis. However, now as then, we need to be alert to premature or exaggerated claims and retain a healthy skepticism. Yesterday's Washington Times op-ed advocating a comprehensive energy policy based on ethanol, by Sen. Richard Lugar and Vinod Khosla, provides a good justification for such reserve.

When someone claims that any particular technology or approach can solve our energy problems, we need to ask tough questions, even when the credentials of those making the claims are as impressive as these. For example:
  • How do its economics compare to conventional energy and other alternatives, on a pre- and post- tax and incentives basis?
  • How mature is the technology in question, and how much technological risk must be eliminated before it can be deployed widely?
  • Can it be scaled up to a level at which it could provide at least 10% of our primary energy needs? How much could it ultimately provide? How quickly can this happen?
  • Does it require entirely new infrastructure, and who will pay for it and why?
  • How does it compare to conventional energy and other alternatives in terms of its life-cycle ("well-to-wheels" or "well-to-outlet") pollution and greenhouse gas emissions?
  • Would it create new shortages in other areas, and how quickly could that happen?
Applying these questions to the two ethanol technologies underpinning the op-ed is instructive. The technology for corn-based ethanol is mature and low-risk. However, it has taken 30 years for it to reach a volume equal to 3% of our gasoline consumption, and targets to expand this to 7% still appear ambitious. Scale remains a major challenge. Nor are the economics and energy balance of corn ethanol as unambiguously positive as the authors indicate. A wide range of studies suggest ethanol produces up to 20-30% more energy than it uses. That means it can stretch fossil fuels, not replace them. As to emissions, after accounting for the "upstream" emissions from the coal, natural gas and diesel fuel that provide process heat, fertilizer, and cultivation and transportation of the corn, it is still lower than gasoline in its overall GHG output. Derivative shortages could be serious, though. As a major consumer of water and natural gas, corn ethanol will eventually force serious trade-offs. Who will thank us if we exchange oil depletion for depletion of the Mid-continent aquifers upon which much of our agriculture depends?

Turning to cellulosic ethanol, which is derived from non-food crops, or from the non-food portions of food crops, many of the above objections go away. What doesn't disappear is technology risk, which in this case remains large. As promising as it appears, cellulosic ethanol has neither been proved at industrial scale, nor can it yet compete economically even with corn-based ethanol. These conditions are expected to change within a few years, but until they do, it is premature to boast that it could supply the equivalent of 12 million barrels per day of oil at a price we can afford.

Nor would I single out ethanol for this scrutiny. The same tests need to be applied to other technologies, such as the wave and tidal power highlighted in yesterday's New York Times. If they are truly at the stage at which wind power was 15 years ago, as the article suggests, then they would have a hard time satisfying most of the above checklist.

Being skeptical doesn't mean being negative about the potential of new technologies to replace hydrocarbons. Whether Peak Oil is here, around the corner, or decades away, we must reduce our dependence on oil for all the reasons articulated by Senator Lugar and Mr. Khosla. However, the worst thing we could do now would be to make an early selection in favor of solutions that have not proved themselves, or that contain fatal flaws. Just as diversity of petroleum suppliers was the key strategic choice that kept oil prices low for nearly two decades, diversity of alternative energy solutions--at least until clear economic and technological winners emerge--looks like our best strategy today. Focusing on one too soon could even slow down the development of ultimately better solutions. The situation calls for urgency, not haste.

Thursday, August 03, 2006

Let's Make a Deal

A regular reader sent me a link describing energy legislation that he thought looked like a page from the Energy Outlook playbook: the "American-Made Energy Freedom Act" would open up the Arctic National Wildlife Refuge (ANWR) for drilling and put the royalties into a trust fund to support next-generation energy, including cellulosic ethanol and coal-to-liquids. When I recently broached a similar concept with a good friend who has spent many years in DC, she assured me that no one in Congress is ready for this kind of deal. She is probably right, though the recent maneuvering over House and Senate versions of offshore drilling reform makes me wonder if this could actually be the ideal time for a grand compromise.

Earlier this week, the Senate passed its limited version of offshore drilling deregulation. This must now be reconciled with the much broader reforms recently passed by the House. The Senate bill carried by a whopping 71 to 25 margin, but Democrats warned that this was the most expansive drilling program they'd go along with. If that's true, you have to wonder what ingredients would be necessary for something as radical as Rep. Nunes's proposal on ANWR to be considered:
  • Proponents would require both a sense of urgency and a concern that the window might be closing on further expansions of supply. The growing impact and voter reaction to high fuel prices provide the former, while the potential for a change in the party leadership of Congress after November ought to furnish the latter. They would also need to recognize that domestic conventional energy supplies will not be sufficient to close our growing energy import gap.
  • Opponents would need to face a real risk that the tactics they've employed to block ANWR and more offshore drilling thus far might be on the verge of failing, and that they could lose with nothing to show for it. They would also need to see that, even if the political tables turn in the next term, the supporters of more drilling might be in a similar position to block legislation on reducing energy demand and increasing environmental protections, as they have been with respect to ANWR.
Election years rarely feature groundbreaking legislation. It's generally too risky for both sides. But with consumers feeling the bite from higher energy prices, at the same time that a succession of hurricanes and heat waves has elevated environmental concerns, it might just be riskier to be seen standing in the way of strong measures to address both. What looks like the perfect recipe for a deadlock may turn out to be the ideal time for compromise.

A large portion of my career in the energy industry was spent in commodities trading, negotiating commercial energy transactions with other companies. My wife likes to remind people of this when she tells the story of how I purchased her engagement ring. That may not be directly relevant to the give-and-take that goes on in our Capitol, but one thing I learned in all those years of trading was that you can't always wait for your ideal time to make a deal. When conditions provide the right combination of market drivers and a motivated counterparty, that's the time to strike. Holding out for a stronger hand later risks encountering an unexpected change in the fundamentals that could make any kind of deal impossible. This could be just such a moment for sweeping energy/environmental legislation.

Wednesday, August 02, 2006

The Mantle of Leadership

For much of my lifetime, California was at the leading edge of trends in this country. That mantle slipped in the 1990s, and the end of the Dot-Com boom seemed like a tombstone on an era. Environmental activism was a big part of that leadership, and there, as in other areas, the state’s change in status was largely a matter of others catching up. Without exaggerating its significance, Monday’s agreement between California and the UK to cooperate on global warming reasserts that tradition of trend-setting. At a minimum, it has a much deeper context than positioning Governor Schwarzenegger's re-election campaign in the mainstream of California environmentalism.

It’s fascinating to see how differently this event is being reported across the Atlantic. While even the San Francisco Chronicle highlighted the non-binding nature of the agreement to cooperate on technology and market mechanisms to address climate change, London’s Guardian touted it as a short step away from joining the EU’s mandatory carbon trading system. Both papers, along with the more conservative Daily Telegraph, focused on the way this accord bypasses the federal government's more modest approach to global warming. The emerging pattern of climate response in this country is a patchwork of state, regional and local initiatives.

As a lapsed native son, I'm encouraged that California has evolved beyond its previous reliance on environmental mandates that left industry holding the bag--and the blame from consumers for higher prices--to embrace market-friendlier approaches to this most daunting and controversial of environmental issues. In the old days, the state’s bold targets of returning to year-2000 emissions by 2010, and to an almost-Kyoto-compliant 1990 level by 2020 would likely have been implemented by a combination of across-the-board cuts from stationary sources and direct interventions with carmakers on vehicle fuel economy. This is progress.

It would be easy to write off this agreement as mere political theater, as Mr. Schwarzenegger’s opponent, state Treasurer Angelides implied. However, doing so requires characterizing the event’s other attendees, including Virgin’s Richard Branson, BP’s Lord Browne, and the CEOs of PG&E and Edison International, as mere glitterati or groupies. These are serious business people, and their presence signals the importance that many businesses place on climate change, and their recognition of the need to support responses to it that are compatible with business, rather than inimical to it.

The other day I took California's leaders to task for their stand against offshore drilling, and today I’m praising them for being progressive on climate change. Some readers might see greater contradiction on my part than on the state’s. I’d prefer to say that emissions trading and smart, selective oil and gas drilling both derive from a pragmatic school of environmentalism that sees it integrated with everything else, rather than standing above everything.

Tuesday, August 01, 2006

For Want of a Nail

One of my persistent themes here has been the critical importance of infrastructure in enabling us to follow through on the energy choices we make. Pipelines, storage tanks, marine terminals and high-tension lines aren't very romantic, but they make the more glamorous and desirable parts of the system possible. I've commented specifically on the strain imposed on our rail network by our growing consumption of coal, and by our increasing appetite for ethanol, which can't be shipped in petroleum products pipelines. So I wasn't terribly surprised to read in Sunday's Washington Post that someone wants to build a new railroad in the Midwest to alleviate that congestion--and compete away some of the high freight rates that incumbent railroads have been able to charge. This project is a consequence--intended or not--of many of our other decisions, including those limiting the development of natural gas resources and infrastructure, and establishing preferences for grain-based fuels.

While railroads are generally considered more romantic than pipelines, our mental images of sleek Super Chiefs or modern TGVs collide with the reality of hundred-car coal trains and long lines of ethanol tank cars. I like trains, but I have some distinctly un-fond memories of lying awake on business trips and vacations, with hourly freights blowing their horns at every grade crossing for miles. However, if we're going to rely on our vast coal reserves and agricultural output to wean ourselves from imported energy, then we must reconcile ourselves to more railroads of this type in our future.

The Post article describes the opposition that this project is encountering from a variety of interests. In our country of 300 million empowered individuals, it's impossible to build almost any project without disturbing someone. I don't doubt that the Mayo Clinic and the farmers who stand to be displaced have legitimate concerns. What I wonder about, though, is the mechanism by which we would assess whether this railroad encroaches on more "back yards" than would the offshore natural gas platforms and pipelines, the avoidance of which made something like the proposed DM&E line virtually inevitable.

Nor am I exactly thrilled at the idea that, if this project moves ahead, it will likely receive multi-billion-dollar government loans or loan guarantees. In for a penny, in for a pound, though. If we're going to allocate billions in incentives for ethanol production, can we really stint on making sure the resulting ethanol plants can get their required inputs and deliver their product to market? These decisions are all inter-connected.

I can't predict whether Mr. Schieffer will get his new rail line approved. But I can safely predict that, until we begin to address our energy supply and demand policies in a more systematic and comprehensive way, we will continue to face awkward choices like this one, with little basis on which to trade off eminent domain and the common good against our natural NIMBY inclinations.