I couldn't let the 40th anniversary of the first moon landing pass by without comment, and not just because of what that event meant to a space-obsessed 11-year-old in 1969. Aside from numerous calls for an Apollo program for energy, or the periodic allusions to energy and climate change as the equivalent of the space program for our time, Apollo's extraordinary accomplishment might still have some lessons to teach us about what it takes to achieve goals of such a magnitude--as well as the proper limits of those lessons. It's also high time to give some serious thought to the role of space exploration in our future.
Although I had originally intended to post on this subject next Monday, on the anniversary of the day that Neil Armstrong stepped onto the lunar surface, it struck me as more appropriate to commemorate the entire mission and the enormous effort that went into planning and executing it. I was pleased to find a website called "We Choose the Moon" that will retrace the events of Apollo 11 in real time, beginning exactly 40 years after the launch on July 16, 1969. NASA has put up a 360-degree interactive panorama of the lunar landing site, and the New York Times has extensive coverage. As interesting as these sites are, however, none of them can recreate the feeling of that long-ago summer, when families and neighbors gathered around their TVs--many of them new color sets bought for the occasion. That cohesion proved fleeting, and it seems almost alien today. Sadly, so does the remarkable combination of urgency and patient, meticulous planning without which the moon landing would have remained as impossible as it must have seemed a decade earlier.
When President Kennedy made his speech to Congress in 1961 setting the goal of landing on the moon within the decade, the technology to deliver that outcome did not exist. The first American manned space flight by Alan Shepard had taken place just three weeks earlier, and the first unmanned Saturn V moon rocket wouldn't be flight-tested for another six years. The financial cost of the moon landing program was so high--roughly $150 billion in today's dollars--because so much of it had to be designed and built from scratch, from the vehicles to the entire infrastructure to assemble, launch, monitor and control them.
It was also high because despite the intense pressure of needing to pull off this feat within eight years, it involved the step-by-step incremental development and demonstration of the capabilities that would ultimately be required. For example, the Gemini Program, involving 10 manned launches in 1965 and '66, was mainly intended to test techniques such as rendezvous, docking and spacewalking that were integral to executing the Apollo concept for going to the moon. Then, between the disastrous Apollo 1 launch pad fire, which forced NASA to redesign the Apollo capsule, and "The Eagle has landed", there were four other manned Apollo flights, each testing incrementally more complex elements of the lunar mission. This was the epitome of combining bold strategic planning with planning by doing; that much, at least, seems broadly relevant to our current energy situation.
The US moon landing effort of the 1960s created a vast technical and industrial pyramid. At its apex was the delivery of a cumulative total of 12 Americans to the surface of the moon and their safe return home. If Apollo 13 had not experienced its well-documented accident, and if the last four missions hadn't been cancelled and recycled into the Apollo-Soyuz demonstration of US-Soviet Detente, plus three visits to the Skylab space station, that figure might have reached 22. Yet as impressive and unprecedented as that was, and in spite of a host of valuable breakthroughs and spinoffs in electronics, medicine, and other fields, this is precisely where all of the analogies between energy and Apollo break down. Remaking our energy systems to provide the safe, secure, affordable and environmentally-sound means of energizing the entire economy--national or global, take your pick--will be nothing like making a few trips to the moon and then turning our back on it for four decades. It will require a durable bi-partisan consensus in government for at least a generation and enduring public support of a kind that NASA was ultimately unable to sustain.
At the same time, the US manned space program has reached an existential crossroads. The shuttle is on its last legs, and its planned replacement, the Orion/Ares system won't be operational until at least 2015. The International Space Station could be "de-orbited"--allowed to burn up in the atmosphere--as early as 2016 if new funding and a renewed purpose aren't found. This is the context for a blue-ribbon panel that will advise the administration on NASA's future direction. Ambitious plans for a return to the moon and an eventual manned mission to Mars look vulnerable to budget concerns.
I would be remiss if I didn't also mention the enormous potential of space to contribute to solving our energy and environmental problems. Whether in the form of space-based solar power or potential deposits of exotic nuclear fuel on the moon, the long-term solutions to the earth's environmental challenges and resource needs must eventually capitalize on the boundless energy and materials available outside our atmosphere. I'm also mindful of the profoundly-expanded perspective that space exploration has provided us. The widely-recognized "Earthrise" photo from Apollo 8's trip around the moon in late 1968 probably did more to awaken our environmental consciousness than a thousand speeches and rallies.
With the economy sunk in a deep recession and the country grappling with the seemingly intractable issues of health care, gargantuan deficits, and a looming retirement crisis, I can't imagine a better time to recall a moment when we proved that we could accomplish almost anything, if we set our minds to it. I don't know how much the media intends to play up this anniversary. NASA certainly has big plans. Although 50th anniversaries tend to make bigger splashes, the ages of the Apollo 11 crew and the surviving scientists, engineers and others who made their journey possible preclude waiting another decade to stage a proper celebration of their achievement. I'm looking forward to explaining to my daughter just how thrilling it was to watch that first fuzzy broadcast from the moon.
Showing posts with label energy crisis. Show all posts
Showing posts with label energy crisis. Show all posts
Wednesday, July 15, 2009
Friday, May 01, 2009
Is the Energy Crisis Over?
A quick check of Google Trends this morning confirmed my gut feeling that, other than from government officials, references to an ongoing energy crisis have fallen significantly in the last year. Google's statistics show that searches on this phrase have fallen back to about where they were in 2004 or 2005, though still somewhat higher than 2007. Their track of news references shows this trend even more strikingly. Without graphing the correlation, it appears to go hand in hand with energy prices that have fallen to levels that are no longer adding to our economic pain and in some respects provide significant relief. Does our waning interest in an energy crisis reflect the archetypal fickleness of the American psyche, or has the energy crisis that generated such a fever pitch of concern last year truly abated, and if so, will it soon return? A quick tally of some key statistics provides a mostly positive assessment, at least for now. While this doesn't justify complacency, it seems like a genuinely positive indicator at a time when good news has been in short supply.
The question I posed would have been a lot easier to answer if the Energy Information Agency's handy one-page summary of US primary energy production and consumption had been updated since 2007, when about the best one could say was that our net energy imports had stabilized at just under 30% of total consumption. But looking at the major components of US energy supply and demand in 2008, we see more than a few "green shoots." Net imports of crude oil and petroleum products, a much more useful measure of our dependence on foreign suppliers than just looking at crude oil imports, have fallen steadily from a peak of 13 million barrels per day in the summer of 2006 to around 11 million barrels per day. That didn't occur because US crude production was up--it's not--but because of the lagged but profound response of demand to higher prices.
Even if petroleum imports begin growing again as the economy recovers, they will do so in a global market that for at least the next several years will have ample spare capacity--a crucial measure of the market's ability to meet higher demand without creating another severe price spike. In a webcast earlier this week, Global Insight, CERA and IHS Herold (the sponsor of this blog) presented analysis suggesting that the combination of lower demand and higher output have lifted global spare oil capacity from its minimum of barely a million barrels per day in 2005 to more than 6 million this year, or nearly 8% of demand. Together with high oil inventories in consuming countries, this should cap the eventual recovery of oil prices well below the levels we saw last year. It remains to be seen whether $80 oil would prove as harmful to the weak economic recovery most economists expect next year as $140 oil did to an economy teetering on the brink of collapse.
Natural gas presents a remarkable and more uniformly positive story. A few years ago I was seriously worried that a steady decline in US gas output, coupled with strong demand supported by environmental regulations were setting us up to become major importers of gas from outside North America, putting the US in much the same position for gas as we were already in for oil. What a difference a couple of years makes. As detailed in a recent Wall St. Journal article, gas production has rebounded sharply as a result of the exploitation of enormous deposits of gas in deep shales that until recently had looked inaccessible. Marketed gas production last year was up 7% over 2007 and a whopping 13% above its 2005 trough. As a result, imports are down, especially in the form of LNG. This mini "gas bubble" could deflate, if the low gas price and tight credit continue to depress drilling activity, particularly by the independent gas producers who were mainly responsible for the recent surge in production. But as the Journal notes, the underlying resource looks robust enough to carry us well into the future. Whatever its other pitfalls, the Pickens Plan would not fail for lack of natural gas.
If anything, the electricity picture is even more encouraging. Demand in 2008 was essentially flat, compared to the prior year, and the composition of generation shifted modestly away from coal (down 1%) and other fossil fuels (down 4%), while electricity from nuclear, hydro and other renewables expanded by 2%, led by a 51% increase in wind power output. Wind, solar and geothermal power accounted for just 1.6% of all generation, but the broader group of low-emission sources, including nuclear, made up nearly 29% of the total. This looks set to continue growing, as long as the current nuclear fleet, which accounted for 2/3 of that figure, stays on line and eventually expands.
I recently ran across an interesting analysis examining the extent to which the economic crisis might have been precipitated by an oil price shock--the primary feature of the energy crisis that attracted so much attention in 2007-08. I expressed similar suspicions last December, if in less elegant economic terms. Which was the chicken and which the egg is of more than merely academic interest, because if the energy crisis was a principal contributor to the bursting of a financial bubble that couldn't last forever, rather than merely another manifestation of that bubble, then it seems that the chances of another devastating energy price spike in our near future ought to be a little lower. That would be another piece of good news to add to a generally positive current view of energy.
The question I posed would have been a lot easier to answer if the Energy Information Agency's handy one-page summary of US primary energy production and consumption had been updated since 2007, when about the best one could say was that our net energy imports had stabilized at just under 30% of total consumption. But looking at the major components of US energy supply and demand in 2008, we see more than a few "green shoots." Net imports of crude oil and petroleum products, a much more useful measure of our dependence on foreign suppliers than just looking at crude oil imports, have fallen steadily from a peak of 13 million barrels per day in the summer of 2006 to around 11 million barrels per day. That didn't occur because US crude production was up--it's not--but because of the lagged but profound response of demand to higher prices.
Even if petroleum imports begin growing again as the economy recovers, they will do so in a global market that for at least the next several years will have ample spare capacity--a crucial measure of the market's ability to meet higher demand without creating another severe price spike. In a webcast earlier this week, Global Insight, CERA and IHS Herold (the sponsor of this blog) presented analysis suggesting that the combination of lower demand and higher output have lifted global spare oil capacity from its minimum of barely a million barrels per day in 2005 to more than 6 million this year, or nearly 8% of demand. Together with high oil inventories in consuming countries, this should cap the eventual recovery of oil prices well below the levels we saw last year. It remains to be seen whether $80 oil would prove as harmful to the weak economic recovery most economists expect next year as $140 oil did to an economy teetering on the brink of collapse.
Natural gas presents a remarkable and more uniformly positive story. A few years ago I was seriously worried that a steady decline in US gas output, coupled with strong demand supported by environmental regulations were setting us up to become major importers of gas from outside North America, putting the US in much the same position for gas as we were already in for oil. What a difference a couple of years makes. As detailed in a recent Wall St. Journal article, gas production has rebounded sharply as a result of the exploitation of enormous deposits of gas in deep shales that until recently had looked inaccessible. Marketed gas production last year was up 7% over 2007 and a whopping 13% above its 2005 trough. As a result, imports are down, especially in the form of LNG. This mini "gas bubble" could deflate, if the low gas price and tight credit continue to depress drilling activity, particularly by the independent gas producers who were mainly responsible for the recent surge in production. But as the Journal notes, the underlying resource looks robust enough to carry us well into the future. Whatever its other pitfalls, the Pickens Plan would not fail for lack of natural gas.
If anything, the electricity picture is even more encouraging. Demand in 2008 was essentially flat, compared to the prior year, and the composition of generation shifted modestly away from coal (down 1%) and other fossil fuels (down 4%), while electricity from nuclear, hydro and other renewables expanded by 2%, led by a 51% increase in wind power output. Wind, solar and geothermal power accounted for just 1.6% of all generation, but the broader group of low-emission sources, including nuclear, made up nearly 29% of the total. This looks set to continue growing, as long as the current nuclear fleet, which accounted for 2/3 of that figure, stays on line and eventually expands.
I recently ran across an interesting analysis examining the extent to which the economic crisis might have been precipitated by an oil price shock--the primary feature of the energy crisis that attracted so much attention in 2007-08. I expressed similar suspicions last December, if in less elegant economic terms. Which was the chicken and which the egg is of more than merely academic interest, because if the energy crisis was a principal contributor to the bursting of a financial bubble that couldn't last forever, rather than merely another manifestation of that bubble, then it seems that the chances of another devastating energy price spike in our near future ought to be a little lower. That would be another piece of good news to add to a generally positive current view of energy.
Wednesday, December 17, 2008
Oil Shock II
As OPEC's members and friends meet in Algeria to agree on deeper cuts in oil output, the effectiveness of their actions will depend greatly on the nature of the demand slump to which they are responding. If it proves to be merely a dip in the long-term growth trend, similar to the one associated with the Asian Financial Crisis of the late 1990s, then their current decline in revenue will likely be short-lived. If, on the other hand, the response in consuming countries is similar to that following the energy crisis of the 1970s and early 1980s, then OPEC and indeed all oil producers face protracted problems. In that case, they might have to hope that the chief economist of the International Energy Agency is correct in his new assessment that the credit crisis will hasten an expected peak in global oil production, perhaps sending oil prices beyond their summer 2008 highs within a few years.
Although the narrative concerning the present financial crisis and global recession is bound up in the collapse of the US housing market and the vast global debt bubble that fueled it--a bubble that had to burst sooner or later--it seems remarkably coincidental that it would begin to deflate just as oil prices raced past their previous inflation-adjusted peak of around $90 per barrel. Because that price rise took place over several years and was driven as much by demand as by supply constraints, the resulting oil shock wasn't as sharp or obvious as the one triggered by the Arab Oil Embargo of 1973 or the Iranian Revolution of 1979. But between 2003 and 2007, the US net oil import bill rose from around $100 billion per year to $300 billion, based on refiner acquisition costs. It crested at an annualized rate of $500 B per year in July. This added significantly to the US trade deficit, and the resulting sustained double-digit inflation in consumer energy costs helped push the annualized consumer-price inflation rate past 5% this summer. With the energy spike having folded, the November 2008 annualized CPI rate has fallen to 1.1%.
If in retrospect these indicators describe a true oil price shock, then what might OPEC and other oil producers expect in the years ahead? Well, in the aftermath of the last oil crisis, from 1979-83 global oil demand fell by 10%, the current equivalent of over 8 million barrels per day (MBD), based on last year's global consumption of 85.8 MBD. It didn't reach its 1979 level again until 1989. The effect on OPEC was devastating. With demand lower and non-OPEC output expanding steadily, OPEC's oil was squeezed out, losing a third of its former market share. Oil prices remained low for another fifteen years, contributing to the growth of the exurbs and the SUV fad.
History rarely repeats exactly, and it would be simplistic to think that we're likely to replicate the oil price environment of the mid-to-late 1980s. There's no tidal wave of non-OPEC conventional oil coming from places like the North Slope and North Sea, which looked technically challenging at the time but seem relatively easy, compared to today's opportunities. Biofuels have added the equivalent of around 0.5 MBD in the last several years, and Canadian oilsands a similar amount, but production in most non-OPEC countries is peaking or in decline, notably in Mexico and Russia. And as the IEA's Dr. Birol notes, tight credit and low prices will slow additions to supply from all sources, while natural decline erodes today's base production. That makes demand the crucial factor, particularly the behavioral elements of demand. Although rarely discussed in these terms, vehicle fuel economy faces diminishing returns. Boosting US fleet average miles per gallon from 13 to 25 under the original CAFE standard in the 1970s and '80s saved three times more fuel per mile than the mandated increase to 35 mpg will--in fact more than moving the entire fleet to 100 mpg plug-in hybrids would. Vehicle miles traveled have recently declined in the US. Along with the appetite of Asian consumers for their first cars, this will have as much impact as fuel economy on total oil consumption, and thus on prices.
Although the oil price shock of the last several years can't be blamed for the full extent of the mess we're in, it is at least a plausible candidate for the trigger that caused the debt bubble to pop now, rather than a few years from now. That has important implications, because current conditions may be setting the stage for another, possibly sharper oil shock shortly after the economy begins to recover. Although we face a drastically altered set of energy concerns going into 2009, energy policies that promote both conservation and increased supply look just as essential as they did a year ago.
Although the narrative concerning the present financial crisis and global recession is bound up in the collapse of the US housing market and the vast global debt bubble that fueled it--a bubble that had to burst sooner or later--it seems remarkably coincidental that it would begin to deflate just as oil prices raced past their previous inflation-adjusted peak of around $90 per barrel. Because that price rise took place over several years and was driven as much by demand as by supply constraints, the resulting oil shock wasn't as sharp or obvious as the one triggered by the Arab Oil Embargo of 1973 or the Iranian Revolution of 1979. But between 2003 and 2007, the US net oil import bill rose from around $100 billion per year to $300 billion, based on refiner acquisition costs. It crested at an annualized rate of $500 B per year in July. This added significantly to the US trade deficit, and the resulting sustained double-digit inflation in consumer energy costs helped push the annualized consumer-price inflation rate past 5% this summer. With the energy spike having folded, the November 2008 annualized CPI rate has fallen to 1.1%.
If in retrospect these indicators describe a true oil price shock, then what might OPEC and other oil producers expect in the years ahead? Well, in the aftermath of the last oil crisis, from 1979-83 global oil demand fell by 10%, the current equivalent of over 8 million barrels per day (MBD), based on last year's global consumption of 85.8 MBD. It didn't reach its 1979 level again until 1989. The effect on OPEC was devastating. With demand lower and non-OPEC output expanding steadily, OPEC's oil was squeezed out, losing a third of its former market share. Oil prices remained low for another fifteen years, contributing to the growth of the exurbs and the SUV fad.
History rarely repeats exactly, and it would be simplistic to think that we're likely to replicate the oil price environment of the mid-to-late 1980s. There's no tidal wave of non-OPEC conventional oil coming from places like the North Slope and North Sea, which looked technically challenging at the time but seem relatively easy, compared to today's opportunities. Biofuels have added the equivalent of around 0.5 MBD in the last several years, and Canadian oilsands a similar amount, but production in most non-OPEC countries is peaking or in decline, notably in Mexico and Russia. And as the IEA's Dr. Birol notes, tight credit and low prices will slow additions to supply from all sources, while natural decline erodes today's base production. That makes demand the crucial factor, particularly the behavioral elements of demand. Although rarely discussed in these terms, vehicle fuel economy faces diminishing returns. Boosting US fleet average miles per gallon from 13 to 25 under the original CAFE standard in the 1970s and '80s saved three times more fuel per mile than the mandated increase to 35 mpg will--in fact more than moving the entire fleet to 100 mpg plug-in hybrids would. Vehicle miles traveled have recently declined in the US. Along with the appetite of Asian consumers for their first cars, this will have as much impact as fuel economy on total oil consumption, and thus on prices.
Although the oil price shock of the last several years can't be blamed for the full extent of the mess we're in, it is at least a plausible candidate for the trigger that caused the debt bubble to pop now, rather than a few years from now. That has important implications, because current conditions may be setting the stage for another, possibly sharper oil shock shortly after the economy begins to recover. Although we face a drastically altered set of energy concerns going into 2009, energy policies that promote both conservation and increased supply look just as essential as they did a year ago.
Monday, June 30, 2008
The Anti-Manhattan Project
If rising oil prices truly constitute an oil shock capable of destabilizing the economy, and if climate change poses a threat not just to the weather, but to our security, then it is fair to say that we face an urgent and complexly-linked challenge requiring immediate action. Nothing could be less consistent with that view of our present situation than the recent decision by the Bureau of Land Management to impose a two-year moratorium on new projects to generate solar power from federal lands in the West. Its appearance in the midst of a lengthy struggle within the Congress to renew expiring investment and production tax credits for solar, wind, and other forms of renewable electricity is yet another symptom of our disjointed approach to the defining crises of our times. It also suggests that our biggest need may not be for a monumental, government-led R&D effort, but rather for a comprehensive streamlining of the mechanisms for deploying the technologies we already have.
Sometimes it's good to pause and reflect, rather than blurting out one's first reaction to a news item such as this. If I had written a posting about this story on Friday, it would have probably turned into a rant against bureaucracy, when in truth the folks at BLM are just doing their jobs within the charter they've been given--and with considerable encouragement from mainstream environmental groups that are concerned about the impact of large-scale development on the desert southwest, a region for which I have a particular fondness. But that does not make this decision any less myopic, viewed in the larger context of the necessity to construct large-scale clean-energy alternatives, in order to make the transition away from our multiply-unsustainable reliance on fossil fuels. In particular, utility-scale solar thermal power represents an especially promising pathway for delivering predictable quantities of electrical power into existing power grids, as an alternative to coal-fired power plants. The states included in the ban possess the country's most promising solar resources.
Over the last several years, as energy prices mounted, pundits and politicians regularly issued calls for a new Manhattan or Apollo Project approach to solve our energy problems. I'm not convinced, however, that we need another massive, centrally-directed research effort. R&D must certainly play a role, as evidenced by the DOE's recent feasibility scenario for expanding wind power to supply 20% of US electricity. Technology has been developing at an impressive rate for a variety of options, with help from growing infusions of capital from the private sector, and these efforts should be supported. But without consistent policy at the federal level, and in the absence of a fast track to implementation, to enable projects based on these technologies to be built by the gigawatt, we will be left with the current set of unappealing trade-offs between economic growth, energy imports, and global environmental impact for many years longer than necessary.
Instead of a new Manhattan Project for energy, I wonder if we should revive the old position of "energy czar" and endow it with enough authority to coordinate and streamline the federal response to our conjoined energy-and-environment crisis. The reorganization of the national intelligence community along these lines may have delivered mixed results so far, but while energy is as complex as intelligence, it is surely less ambiguous and subjective. Even a czar who could merely remind agencies such as the BLM that our problems are too urgent to take a two-year time-out would serve a useful purpose.
Sometimes it's good to pause and reflect, rather than blurting out one's first reaction to a news item such as this. If I had written a posting about this story on Friday, it would have probably turned into a rant against bureaucracy, when in truth the folks at BLM are just doing their jobs within the charter they've been given--and with considerable encouragement from mainstream environmental groups that are concerned about the impact of large-scale development on the desert southwest, a region for which I have a particular fondness. But that does not make this decision any less myopic, viewed in the larger context of the necessity to construct large-scale clean-energy alternatives, in order to make the transition away from our multiply-unsustainable reliance on fossil fuels. In particular, utility-scale solar thermal power represents an especially promising pathway for delivering predictable quantities of electrical power into existing power grids, as an alternative to coal-fired power plants. The states included in the ban possess the country's most promising solar resources.
Over the last several years, as energy prices mounted, pundits and politicians regularly issued calls for a new Manhattan or Apollo Project approach to solve our energy problems. I'm not convinced, however, that we need another massive, centrally-directed research effort. R&D must certainly play a role, as evidenced by the DOE's recent feasibility scenario for expanding wind power to supply 20% of US electricity. Technology has been developing at an impressive rate for a variety of options, with help from growing infusions of capital from the private sector, and these efforts should be supported. But without consistent policy at the federal level, and in the absence of a fast track to implementation, to enable projects based on these technologies to be built by the gigawatt, we will be left with the current set of unappealing trade-offs between economic growth, energy imports, and global environmental impact for many years longer than necessary.
Instead of a new Manhattan Project for energy, I wonder if we should revive the old position of "energy czar" and endow it with enough authority to coordinate and streamline the federal response to our conjoined energy-and-environment crisis. The reorganization of the national intelligence community along these lines may have delivered mixed results so far, but while energy is as complex as intelligence, it is surely less ambiguous and subjective. Even a czar who could merely remind agencies such as the BLM that our problems are too urgent to take a two-year time-out would serve a useful purpose.
Monday, June 23, 2008
Transition Time
The cover of this week's issue of The Economist is devoted to the future of energy, and to the proposition that large-scale change is "closer than you think." The magazine includes a 14-page special report providing a useful overview of the major technology options for replacing conventional sources of energy. Its editors are correct that it is now possible to imagine a world that relies much less on oil and coal than today's, and that the present demand-driven spike in energy prices and a generation's progress on alternative energy technology make that prospect much more realistic now than similar aspirations during the previous energy crisis. Unfortunately, the report is essentially mute on the crucial question of timing, thus avoiding the apparent paradox that the energy transformation eagerly anticipated by so many might require a significant further contribution from fossil fuels, in order to bring it to fruition.
I see two visions competing for share of mind with regard to energy: one paints a future world in which clean energy is plentiful and cheap enough to support sustained global economic growth, while in the other the urgency of dealing with climate change forces us to kill off the hydrocarbon economy quickly and build a low-emissions energy future on its ashes. As convinced as I am that our energy plans must address climate change, I do not find the latter view very motivating or convincing. Nor do I think it would be terribly appealing to anyone who is dismayed by the relatively modest economic slowdown now playing out as a result of high energy prices and the fallout from the subprime crisis--a pale shadow of what a true oil crash would look like.
How close are alternatives to being able to replace fossil fuels? The progress that has been made in the last 30 years is certainly encouraging. For example, the cost of producing electricity from wind was once a large multiple of the cost of conventional power. That gap has shrunk so much that a 2 cent-per-kilowatt renewable electricity tax credit--which is still in jeopardy--appears to be the difference between profit and loss. But in order for renewables to make serious inroads into the market shares of power produced from coal and natural gas, wind and solar power must first reach a scale at which their annual capacity additions can cover the average annual growth of electricity demand. In the US, that figure has varied between 1-2%, which amounts to roughly an additional 60 billion kWh of net generation each year. That means that, at an average capacity factor of 30%, we would need to add 29,000 MW of wind, solar and other renewable electrical capacity per year. According to the American Wind Energy Association, installed US wind power capacity grew by 5,244 MW last year, and should grow by at least that much this year. Grid-connected solar is still much smaller, though growing somewhat faster than wind.
Turning to liquid fuels, although demand growth in the US has stalled for the time being, due to high prices and lower economic growth, covering 1% annual growth in liquid fuels also looks challenging. Although US corn ethanol volume increased by 1.7 billion gallons last year and was on a pace to add at least that much new output this year, prior to the Midwest flooding, after adjusting for its lower energy content this amounts to 0.8% of US gasoline demand and only 0.3% of our total petroleum demand. Covering the 1% annual growth that would be consistent with stronger economic growth and lower energy prices would require the energy equivalent of an incremental 5.5 billion gallons per year of ethanol each year, without accounting for the significant quantities of oil and natural gas consumed in producing this fuel.
Conservation and efficiency can and should help to decrease the height of these goalposts, and we see that in the apparent shrinkage of US gasoline demand, as consumers adjust to the reality of $4 fuel. But whether needed to cover normal historical growth in energy demand, or merely as an important milestone along the path toward actually eroding the market shares of oil and coal, it will take wind, solar and biofuels several more years of sustained high growth rates to attain that scale. And that will still be the case, even if changes in consumer preferences speed up the planned improvement in US new-car fuel economy and bring more plug-in and all-electric vehicles and efficient homes and appliances into the market. For a system this large, massive change cannot happen overnight.
All of this makes for an uncomfortable transition period, during which we will remain frustratingly reliant on sources of energy that we know emit unsustainable quantities of greenhouse gases into the atmosphere, while leaving us vulnerable to unstable foreign suppliers. Although I am optimistic about the potential of alternative energy sources and improved efficiency to alleviate both of these problems in the longer term, I remain pragmatic about how much can be done right now. However viscerally satisfying the prospect might seem to many people, we cannot yet turn our backs on the fossil fuels that supply 85% of our energy needs today. Doing so prematurely would align us with the path of perpetual energy scarcity, rather than long-term clean energy abundance, just as much as if we abandoned the alternative energy technologies that are only now starting to produce on a scale that really matters. It's a shame The Economist didn't tackle the subject of managing our expectations during the energy transition they described so ably.
I see two visions competing for share of mind with regard to energy: one paints a future world in which clean energy is plentiful and cheap enough to support sustained global economic growth, while in the other the urgency of dealing with climate change forces us to kill off the hydrocarbon economy quickly and build a low-emissions energy future on its ashes. As convinced as I am that our energy plans must address climate change, I do not find the latter view very motivating or convincing. Nor do I think it would be terribly appealing to anyone who is dismayed by the relatively modest economic slowdown now playing out as a result of high energy prices and the fallout from the subprime crisis--a pale shadow of what a true oil crash would look like.
How close are alternatives to being able to replace fossil fuels? The progress that has been made in the last 30 years is certainly encouraging. For example, the cost of producing electricity from wind was once a large multiple of the cost of conventional power. That gap has shrunk so much that a 2 cent-per-kilowatt renewable electricity tax credit--which is still in jeopardy--appears to be the difference between profit and loss. But in order for renewables to make serious inroads into the market shares of power produced from coal and natural gas, wind and solar power must first reach a scale at which their annual capacity additions can cover the average annual growth of electricity demand. In the US, that figure has varied between 1-2%, which amounts to roughly an additional 60 billion kWh of net generation each year. That means that, at an average capacity factor of 30%, we would need to add 29,000 MW of wind, solar and other renewable electrical capacity per year. According to the American Wind Energy Association, installed US wind power capacity grew by 5,244 MW last year, and should grow by at least that much this year. Grid-connected solar is still much smaller, though growing somewhat faster than wind.
Turning to liquid fuels, although demand growth in the US has stalled for the time being, due to high prices and lower economic growth, covering 1% annual growth in liquid fuels also looks challenging. Although US corn ethanol volume increased by 1.7 billion gallons last year and was on a pace to add at least that much new output this year, prior to the Midwest flooding, after adjusting for its lower energy content this amounts to 0.8% of US gasoline demand and only 0.3% of our total petroleum demand. Covering the 1% annual growth that would be consistent with stronger economic growth and lower energy prices would require the energy equivalent of an incremental 5.5 billion gallons per year of ethanol each year, without accounting for the significant quantities of oil and natural gas consumed in producing this fuel.
Conservation and efficiency can and should help to decrease the height of these goalposts, and we see that in the apparent shrinkage of US gasoline demand, as consumers adjust to the reality of $4 fuel. But whether needed to cover normal historical growth in energy demand, or merely as an important milestone along the path toward actually eroding the market shares of oil and coal, it will take wind, solar and biofuels several more years of sustained high growth rates to attain that scale. And that will still be the case, even if changes in consumer preferences speed up the planned improvement in US new-car fuel economy and bring more plug-in and all-electric vehicles and efficient homes and appliances into the market. For a system this large, massive change cannot happen overnight.
All of this makes for an uncomfortable transition period, during which we will remain frustratingly reliant on sources of energy that we know emit unsustainable quantities of greenhouse gases into the atmosphere, while leaving us vulnerable to unstable foreign suppliers. Although I am optimistic about the potential of alternative energy sources and improved efficiency to alleviate both of these problems in the longer term, I remain pragmatic about how much can be done right now. However viscerally satisfying the prospect might seem to many people, we cannot yet turn our backs on the fossil fuels that supply 85% of our energy needs today. Doing so prematurely would align us with the path of perpetual energy scarcity, rather than long-term clean energy abundance, just as much as if we abandoned the alternative energy technologies that are only now starting to produce on a scale that really matters. It's a shame The Economist didn't tackle the subject of managing our expectations during the energy transition they described so ably.
Wednesday, June 18, 2008
Mutually Inclusive Solutions
The combination of the current presidential campaign and the high price of energy is prompting a long-overdue national debate on the relative contributions of the various energy options available to us. A new grassroots campaign, "Drill Here, Drill Now, Pay Less" is putting our self-imposed constraints on oil drilling at the center of that discussion, where it deserves to be, based on the scale of oil's contribution to the economy and the difficulty of replacing it any time soon. However, for this debate to be productive, we need to shed some of the hyperbole on both sides, and approach this as something other than a mutually exclusive proposition. The harsh reality of this energy crisis is that solving it will require more conventional energy, much more alternative energy, and a much greater emphasis on conservation, of which efficiency is only one component. Above all, we must learn an uncharacteristic degree of patience. It took us a decade to get into this fix; it could take at least that long to put this crisis behind us, and its ultimate resolution is unlikely to resemble the status quo ante.
Start with the rampant misunderstandings about the way oil production works. How often have we heard that the US consumes a quarter of world oil but has less than 3% of global reserves? That's true, but it is equally true--and much more relevant--that the US produces 10% of the world's oil output (including natural gas liquids) and has produced a cumulative 200 billion barrels from "proved reserves" that never exceeded 40 billion barrels. Nor do assertions that the remaining US oil resources would only amount to a few years of consumption correspond to the way oil is actually extracted. Oil fields produce over an interval determined by geology and technology, not wishful thinking. New fields brought on line this year will operate for anywhere from 10-40 years, and our current output is the aggregation of hundreds of thousands of wells in thousands of oil fields, with half of total production and 2/3rds of our reserves coming from the top 100 fields, a fifth of which were discovered since 1990.
In order to make sensible plans, we must also factor in the relative contribution of new increments of supply from the various possible sources. For example, after accounting for the oil, natural gas and electricity that go into its production, an extra billion gallons per year of corn ethanol yields the net energy equivalent of only 14,000 barrels per day of oil--the amount we get from a single, highly-productive deepwater oil well. A 3.5 MW wind turbine delivers, on average, as much electricity as could be generated by 230,000 cubic feet per day of natural gas. It takes 300 such turbines to produce as much energy as the least productive of the top 100 US gas fields. Replacing the energy content of current US net imports of petroleum and natural gas would require the equivalent of an extra 837 billion gallons per year of ethanol and 55,000 large wind turbines. Cut these figures in half to account for the potential contribution of conservation and energy efficiency, and they are still overwhelming, without a substantial contribution from additional conventional energy supplies.
On the other side, proponents of expanded drilling access need to be clear about the uncertainties and time lags involved. No one can predict the exact quantity of economic oil reserves--even at the current $130/bbl--into which the current estimate of up to 85 billion barrels of untapped US oil would translate. Members of Congress are already complaining that companies aren't drilling all the prospects that have been opened up to them in the eastern Gulf of Mexico, no doubt reflecting the availability of drilling rigs and personnel, and the relative rankings of all of the undrilled inventories of the lease holders. Nor does an exploration program yield immediate production. If a new field is adjacent to existing infrastructure, it might be brought onstream in three or four years. But that's not relevant to the portions of the offshore that are currently off limits. If new pipelines are required, that raises the bar for what will be economic, and it could extend the time from discovery to first production by years. With regard to the areas currently under drilling bans, we are thus debating our energy mix in the middle of the next decade, not today, and it's not obvious how the futures market would react to a green light for expanded drilling. Near-term price relief at the pump could be essentially zero, unless a perceived wave of new US supplies in 2012-2016 was sufficient to dry up the speculation that has compounded the very real tightness in the current global supply/demand balance.
As for the repeated assertions that more drilling won't amount to a hill of beans, we should apply some critical thinking and common sense to forecasts suggesting that even large increments of future production, as from the Alaskan National Wildlife Refuge, would hardly cause a ripple in world oil markets. I wonder how many of the economists responsible for these estimates have ever traded a barrel of oil. With enough supplies from all new sources, including oil, gas, and biofuels, we could shift the market dynamic that has tilted so strong in OPEC's favor and bring oil prices down, even if only to create policy headroom for a cap & trade system or carbon tax to address climate change.
Nor are the environmental trade-offs in this discussion as simple as many advocates would have the public believe. The latest science casts doubts on the greenhouse gas benefits of biofuels versus conventional fuels, and conventional oil emits less CO2 from well to tailpipe than the large-scale default options of extracting hydrocarbons from oil sands, oil shale, or coal. Producing more oil in the US, where industry practices are more strictly regulated than in developing countries, would not create an environmental catastrophe--perhaps quite the opposite.
I'm encouraged that this subject is finally getting the attention it merits and requires, even if the quality of the debate still leaves something to be desired. If we accept that there are no simple and obvious solutions to the fix we're in, then we should be willing to engage in a rational debate without resorting to unflattering characterizations of opposing viewpoints--or of the people holding them. At the same time, nothing should be off the table simply because it offends someone's sensibilities or beliefs. The potential contribution of expanded US oil drilling should not be dismissed out of hand or without carefully considering the combination of alternatives that would be required to make up for its continued exclusion, or without a serious assessment of whether replacing all oil use is even our highest priority, when power generation accounts for 20% more of our greenhouse gas emissions than transportation. Energy security can no longer be divorced from climate policy, and it's going to take real creativity and cooperation founded on mutual respect to tackle both of these problems simultaneously, as we must.
Start with the rampant misunderstandings about the way oil production works. How often have we heard that the US consumes a quarter of world oil but has less than 3% of global reserves? That's true, but it is equally true--and much more relevant--that the US produces 10% of the world's oil output (including natural gas liquids) and has produced a cumulative 200 billion barrels from "proved reserves" that never exceeded 40 billion barrels. Nor do assertions that the remaining US oil resources would only amount to a few years of consumption correspond to the way oil is actually extracted. Oil fields produce over an interval determined by geology and technology, not wishful thinking. New fields brought on line this year will operate for anywhere from 10-40 years, and our current output is the aggregation of hundreds of thousands of wells in thousands of oil fields, with half of total production and 2/3rds of our reserves coming from the top 100 fields, a fifth of which were discovered since 1990.
In order to make sensible plans, we must also factor in the relative contribution of new increments of supply from the various possible sources. For example, after accounting for the oil, natural gas and electricity that go into its production, an extra billion gallons per year of corn ethanol yields the net energy equivalent of only 14,000 barrels per day of oil--the amount we get from a single, highly-productive deepwater oil well. A 3.5 MW wind turbine delivers, on average, as much electricity as could be generated by 230,000 cubic feet per day of natural gas. It takes 300 such turbines to produce as much energy as the least productive of the top 100 US gas fields. Replacing the energy content of current US net imports of petroleum and natural gas would require the equivalent of an extra 837 billion gallons per year of ethanol and 55,000 large wind turbines. Cut these figures in half to account for the potential contribution of conservation and energy efficiency, and they are still overwhelming, without a substantial contribution from additional conventional energy supplies.
On the other side, proponents of expanded drilling access need to be clear about the uncertainties and time lags involved. No one can predict the exact quantity of economic oil reserves--even at the current $130/bbl--into which the current estimate of up to 85 billion barrels of untapped US oil would translate. Members of Congress are already complaining that companies aren't drilling all the prospects that have been opened up to them in the eastern Gulf of Mexico, no doubt reflecting the availability of drilling rigs and personnel, and the relative rankings of all of the undrilled inventories of the lease holders. Nor does an exploration program yield immediate production. If a new field is adjacent to existing infrastructure, it might be brought onstream in three or four years. But that's not relevant to the portions of the offshore that are currently off limits. If new pipelines are required, that raises the bar for what will be economic, and it could extend the time from discovery to first production by years. With regard to the areas currently under drilling bans, we are thus debating our energy mix in the middle of the next decade, not today, and it's not obvious how the futures market would react to a green light for expanded drilling. Near-term price relief at the pump could be essentially zero, unless a perceived wave of new US supplies in 2012-2016 was sufficient to dry up the speculation that has compounded the very real tightness in the current global supply/demand balance.
As for the repeated assertions that more drilling won't amount to a hill of beans, we should apply some critical thinking and common sense to forecasts suggesting that even large increments of future production, as from the Alaskan National Wildlife Refuge, would hardly cause a ripple in world oil markets. I wonder how many of the economists responsible for these estimates have ever traded a barrel of oil. With enough supplies from all new sources, including oil, gas, and biofuels, we could shift the market dynamic that has tilted so strong in OPEC's favor and bring oil prices down, even if only to create policy headroom for a cap & trade system or carbon tax to address climate change.
Nor are the environmental trade-offs in this discussion as simple as many advocates would have the public believe. The latest science casts doubts on the greenhouse gas benefits of biofuels versus conventional fuels, and conventional oil emits less CO2 from well to tailpipe than the large-scale default options of extracting hydrocarbons from oil sands, oil shale, or coal. Producing more oil in the US, where industry practices are more strictly regulated than in developing countries, would not create an environmental catastrophe--perhaps quite the opposite.
I'm encouraged that this subject is finally getting the attention it merits and requires, even if the quality of the debate still leaves something to be desired. If we accept that there are no simple and obvious solutions to the fix we're in, then we should be willing to engage in a rational debate without resorting to unflattering characterizations of opposing viewpoints--or of the people holding them. At the same time, nothing should be off the table simply because it offends someone's sensibilities or beliefs. The potential contribution of expanded US oil drilling should not be dismissed out of hand or without carefully considering the combination of alternatives that would be required to make up for its continued exclusion, or without a serious assessment of whether replacing all oil use is even our highest priority, when power generation accounts for 20% more of our greenhouse gas emissions than transportation. Energy security can no longer be divorced from climate policy, and it's going to take real creativity and cooperation founded on mutual respect to tackle both of these problems simultaneously, as we must.
Wednesday, March 19, 2008
Crisis Management
I wanted to offer a few more thoughts after yesterday's lengthy posting about the nature of the energy crisis in which we find ourselves. Where before we thought we faced two very tough challenges, between energy and climate change, it's now clear we have three mammoth problems to overcome. Energy and climate must now be addressed in the context of a financial crisis, the full extent of which we don't yet understand, as we saw over the weekend. The only good news is that they're not entirely independent of each other. Efforts expended on one front can help with the other two, and finally identifying our energy concerns as a crisis might inject some urgency and move us past the current emphasis on "energy independence."
I'm sure some of my readers are surprised it's taken me three days to mention Bear Stearns. I have no idea what its bailout/fire sale means for the firm's energy group, which includes at least one family friend, and probably a few former colleagues. I can only wish them well. As Robert Samuelson noted in his Washington Post column yesterday, this financial crisis is different from any recent one, because of the enormous uncertainties involved in the interconnections between companies such as Bear, other investment banks (foreign and domestic), and the rest of the financial system. If the financial crisis triggers a major contraction across the entire US economy--an outcome that is hardly predetermined, no matter how much the media talks up this risk--it could dry up capital for urgent energy projects, even if expanding green energy becomes an economic recovery initiative. Nor do I see how the economy could fail to affect our response to climate change, at least with regard to any measures that would result in a net increase in energy costs or taxes on consumers. Rich countries tackle big environmental problems; countries that feel poor have other priorities. Will images of melting glaciers alter that calculus?
The conjunction of these daunting problems provides further incentives to shed our outdated ideas of energy independence. Someone recently sent me a copy of "Gusher of Lies: The Dangerous Delusion of 'Energy Independence.'" I plan to read it and review it here soon, but I didn't need it to tell me that we have no more hope of solving our energy problems autonomously than we do of managing climate change or restoring our financial system in isolation. Despite clarifications by the advocates of energy independence, including folks whom I respect, such as Tom Friedman and James Woolsey, that of course they don't mean actual energy independence but merely reduced dependence, words do matter. This is the wrong drum to beat in the current global economy, unless we all want to end up a lot poorer, overall.
Diversification, rather than elusive notions of independence, played a crucial part in getting us out of the last energy crisis, and it remains the killer strategy. Now it must encompass both geography and a much broader menu of energy choices. That includes many things we can do here in the US, by way of expanding renewable and conventional energy, improving vehicle efficiency, and bridging electricity from a variety of sources into vehicles. But if Brazil can make ethanol at a lower cost than we can, with fewer energy inputs and less environmental impact, are we really better off continuing to boost corn ethanol output that has already tripled since 2002, competes with food supplies, and might actually increase global greenhouse gas emissions? Crisis management across three dimensions will require tough decisions and ruthless prioritization. So far, we haven't even found the right way to begin this conversation.
I'm sure some of my readers are surprised it's taken me three days to mention Bear Stearns. I have no idea what its bailout/fire sale means for the firm's energy group, which includes at least one family friend, and probably a few former colleagues. I can only wish them well. As Robert Samuelson noted in his Washington Post column yesterday, this financial crisis is different from any recent one, because of the enormous uncertainties involved in the interconnections between companies such as Bear, other investment banks (foreign and domestic), and the rest of the financial system. If the financial crisis triggers a major contraction across the entire US economy--an outcome that is hardly predetermined, no matter how much the media talks up this risk--it could dry up capital for urgent energy projects, even if expanding green energy becomes an economic recovery initiative. Nor do I see how the economy could fail to affect our response to climate change, at least with regard to any measures that would result in a net increase in energy costs or taxes on consumers. Rich countries tackle big environmental problems; countries that feel poor have other priorities. Will images of melting glaciers alter that calculus?
The conjunction of these daunting problems provides further incentives to shed our outdated ideas of energy independence. Someone recently sent me a copy of "Gusher of Lies: The Dangerous Delusion of 'Energy Independence.'" I plan to read it and review it here soon, but I didn't need it to tell me that we have no more hope of solving our energy problems autonomously than we do of managing climate change or restoring our financial system in isolation. Despite clarifications by the advocates of energy independence, including folks whom I respect, such as Tom Friedman and James Woolsey, that of course they don't mean actual energy independence but merely reduced dependence, words do matter. This is the wrong drum to beat in the current global economy, unless we all want to end up a lot poorer, overall.
Diversification, rather than elusive notions of independence, played a crucial part in getting us out of the last energy crisis, and it remains the killer strategy. Now it must encompass both geography and a much broader menu of energy choices. That includes many things we can do here in the US, by way of expanding renewable and conventional energy, improving vehicle efficiency, and bridging electricity from a variety of sources into vehicles. But if Brazil can make ethanol at a lower cost than we can, with fewer energy inputs and less environmental impact, are we really better off continuing to boost corn ethanol output that has already tripled since 2002, competes with food supplies, and might actually increase global greenhouse gas emissions? Crisis management across three dimensions will require tough decisions and ruthless prioritization. So far, we haven't even found the right way to begin this conversation.
Monday, November 26, 2007
Lessons from the First Energy Crisis
Periodically, it's good to reflect on what we learned from the energy crisis of the 1970s and assess the continued relevance of these lessons for our current situation. While some of the insights gained during that turbulent decade have held up well, the world has also changed in important ways, and hanging onto outdated assumptions and solutions won't help us cope with the steady rise of energy prices. Because high oil prices have come on more gradually than in the dual supply shocks of three decades ago, there's not even a consensus on whether today's conditions qualify as an energy crisis. If not, it wouldn't take much to propel us into one.
The energy problems that began with the Arab Oil Embargo in October 1973 and peaked after the Iranian Revolution in 1979 were resolved through a combination of responses, including energy efficiency improvements, fuel switching, diversification of suppliers, and a wave of non-OPEC oil production from places like the North Slope and North Sea. However, despite large public and private investments at the time, the contribution of alternative energy sources to bringing oil prices back to earth was essentially nil.
Some of these strategies look as useful today as they did then, while others are either unavailable or were essentially one-time plays. For example, in 1973 US refineries produced 2.8 million barrels per day (bpd) of residual fuel, much of which was consumed in power plants. Since then, refinery upgrades have turned most of that output into additional gasoline and diesel fuel, while a combination of coal, natural gas and nuclear power assumed oil's place in electricity generation. With current resid production running below 700,000 bpd, and most of that used as marine fuel or road asphalt, that trick can't easily be repeated. Nor is there a groundswell of new crude oil production waiting in the wings. As a result of federal and state drilling bans and limits on access to foreign reserves, combined with rising drilling costs and shortages of key personnel, it's unlikely that we could swamp today's high prices with higher volumes.
The good news lies elsewhere. Efficiency and conservation still offer tremendous scope opportunities, and diversification of supply looks as useful now as it did then, though we need to update our definition of supply to encompass a wider array of liquid fuels and sources. Efficient, low-cost ethanol from Brazil and the Caribbean looks like a helpful counterweight to obstreperous or unreliable oil suppliers. In fact, the current geographical distribution of our energy imports is in need of rebalancing, as political risk in Venezuela--one of our supply anchors for two decades--increases, and production from Mexico's largest oil field, Cantarell, falters. Brazil may be able to help there, too, as its output expands.
That brings us to alternative energy, a.k.a. "cleantech." Despite skepticism about how rapidly it can scale up to displace meaningful quantities of traditional energy--an issue I think has been under-appreciated within the growing cleantech community--alternatives are in a much better position to contribute now than they were in the '70s. What we really need is clear policy guidance on where these alternatives would best fit in a shifting energy diet: covering incremental energy demand, displacing coal and its high greenhouse gas emissions, backing out imported oil, or substituting for nuclear power that might otherwise be expanding at the same time. Whether this is done explicitly, or implicitly through an emissions cap & trade mechanism or "renewable energy standards" that allocate a share of a specific market to renewables, we should understand that alternatives are decades away from being able to substitute for all of these other energy sources at once. Setting priorities will help us maximize the benefits from renewable energy and other alternatives.
Because the roots of our current energy circumstances are different from those of the 1970s' energy crisis, we shouldn't expect the solutions to be identical. Some of the old winning strategies still work, while others face new constraints, the largest of these being the need to reduce greenhouse gas emissions. As daunting as all this sounds, I'm optimistic about the end result, given adequate supplies of stamina, focus and innovation.
The energy problems that began with the Arab Oil Embargo in October 1973 and peaked after the Iranian Revolution in 1979 were resolved through a combination of responses, including energy efficiency improvements, fuel switching, diversification of suppliers, and a wave of non-OPEC oil production from places like the North Slope and North Sea. However, despite large public and private investments at the time, the contribution of alternative energy sources to bringing oil prices back to earth was essentially nil.
Some of these strategies look as useful today as they did then, while others are either unavailable or were essentially one-time plays. For example, in 1973 US refineries produced 2.8 million barrels per day (bpd) of residual fuel, much of which was consumed in power plants. Since then, refinery upgrades have turned most of that output into additional gasoline and diesel fuel, while a combination of coal, natural gas and nuclear power assumed oil's place in electricity generation. With current resid production running below 700,000 bpd, and most of that used as marine fuel or road asphalt, that trick can't easily be repeated. Nor is there a groundswell of new crude oil production waiting in the wings. As a result of federal and state drilling bans and limits on access to foreign reserves, combined with rising drilling costs and shortages of key personnel, it's unlikely that we could swamp today's high prices with higher volumes.
The good news lies elsewhere. Efficiency and conservation still offer tremendous scope opportunities, and diversification of supply looks as useful now as it did then, though we need to update our definition of supply to encompass a wider array of liquid fuels and sources. Efficient, low-cost ethanol from Brazil and the Caribbean looks like a helpful counterweight to obstreperous or unreliable oil suppliers. In fact, the current geographical distribution of our energy imports is in need of rebalancing, as political risk in Venezuela--one of our supply anchors for two decades--increases, and production from Mexico's largest oil field, Cantarell, falters. Brazil may be able to help there, too, as its output expands.
That brings us to alternative energy, a.k.a. "cleantech." Despite skepticism about how rapidly it can scale up to displace meaningful quantities of traditional energy--an issue I think has been under-appreciated within the growing cleantech community--alternatives are in a much better position to contribute now than they were in the '70s. What we really need is clear policy guidance on where these alternatives would best fit in a shifting energy diet: covering incremental energy demand, displacing coal and its high greenhouse gas emissions, backing out imported oil, or substituting for nuclear power that might otherwise be expanding at the same time. Whether this is done explicitly, or implicitly through an emissions cap & trade mechanism or "renewable energy standards" that allocate a share of a specific market to renewables, we should understand that alternatives are decades away from being able to substitute for all of these other energy sources at once. Setting priorities will help us maximize the benefits from renewable energy and other alternatives.
Because the roots of our current energy circumstances are different from those of the 1970s' energy crisis, we shouldn't expect the solutions to be identical. Some of the old winning strategies still work, while others face new constraints, the largest of these being the need to reduce greenhouse gas emissions. As daunting as all this sounds, I'm optimistic about the end result, given adequate supplies of stamina, focus and innovation.
Thursday, October 18, 2007
Buying High
An article on oil prices in yesterday's Washington Post reminded me that the federal government has resumed purchasing crude oil to inject into the Strategic Petroleum Reserve (SPR.) Whether this involves paying cash for crude or swapping it for barrels the government receives as royalty-in-kind, the net result is less crude available for delivery to refiners, at a time when commercial oil inventories are shrinking globally and prices are in record territory. The 70-100,000 barrels per day going into the SPR hardly seems sufficient to drive up prices by the $15/barrel we've seen since August, but that doesn't mean the psychology of the market is unaffected. It's also a terrible deal for taxpayers.
My long-time readers know that I regard the present SPR as an outmoded relic of the energy crisis of the 1970s. It has served a useful purpose during crises, but it has also discouraged industry from holding larger inventories closer to where actual demand occurs. All of this could be rectified, and I've made that case before. If we are stuck with the current SPR for the foreseeable future, though, the question becomes how it ought to be managed. I haven't changed my view that it shouldn't be used by the government to dampen oil prices in non-crisis periods. The releases in 2000 to moderate heating oil prices were well-intended but shouldn't have occurred. However, that's not the same thing as saying it makes sense to pay record high prices to fill the SPR, since there's no guarantee that the oil would be sold for a higher price later.
Look at how volatile oil prices have been this year. They've ranged from a momentary high yesterday of $89/barrel to a low of $50.48 on January 18. While plenty of traders expect oil to go even higher, I would not want to bet my home or my 401-k against seeing prices dip below $60 some time next year, even if the long-dated oil futures are currently around $75 all the way out to 2015.
Given this kind of volatility, what would be a reasonable course for a government that ultimately intends to acquire an additional 205 million barrels of oil to reach the stated 1 billion barrel target? Well, if the government only bought oil when it was below $60/barrel, it might still be able to reach its target, but at substantially lower cost. If such a policy had been in place this year, the roughly 3 million barrels purchased since August would have had to be deferred, at a savings of up to $60 million. Such a mechanism would also function as a sort of soft floor price, without the pitfalls of a tariff-based floor, while still providing some of the reassurance that investors in renewable energy are seeking.
As an old oil trader, I know that the actual details of such an arrangement would be more complicated than that simple description above. You can't gear up to put oil into the SPR on a moment's notice, to capture some blip in the market. But I would also bet that the DOE could hire a suitable US-based trading company to manage the purchasing process along these lines and deliver the oil within a suitable window, for a fee that would look minuscule compared to the effective premium we're paying right now to top up the SPR during a price spike.
My long-time readers know that I regard the present SPR as an outmoded relic of the energy crisis of the 1970s. It has served a useful purpose during crises, but it has also discouraged industry from holding larger inventories closer to where actual demand occurs. All of this could be rectified, and I've made that case before. If we are stuck with the current SPR for the foreseeable future, though, the question becomes how it ought to be managed. I haven't changed my view that it shouldn't be used by the government to dampen oil prices in non-crisis periods. The releases in 2000 to moderate heating oil prices were well-intended but shouldn't have occurred. However, that's not the same thing as saying it makes sense to pay record high prices to fill the SPR, since there's no guarantee that the oil would be sold for a higher price later.
Look at how volatile oil prices have been this year. They've ranged from a momentary high yesterday of $89/barrel to a low of $50.48 on January 18. While plenty of traders expect oil to go even higher, I would not want to bet my home or my 401-k against seeing prices dip below $60 some time next year, even if the long-dated oil futures are currently around $75 all the way out to 2015.
Given this kind of volatility, what would be a reasonable course for a government that ultimately intends to acquire an additional 205 million barrels of oil to reach the stated 1 billion barrel target? Well, if the government only bought oil when it was below $60/barrel, it might still be able to reach its target, but at substantially lower cost. If such a policy had been in place this year, the roughly 3 million barrels purchased since August would have had to be deferred, at a savings of up to $60 million. Such a mechanism would also function as a sort of soft floor price, without the pitfalls of a tariff-based floor, while still providing some of the reassurance that investors in renewable energy are seeking.
As an old oil trader, I know that the actual details of such an arrangement would be more complicated than that simple description above. You can't gear up to put oil into the SPR on a moment's notice, to capture some blip in the market. But I would also bet that the DOE could hire a suitable US-based trading company to manage the purchasing process along these lines and deliver the oil within a suitable window, for a fee that would look minuscule compared to the effective premium we're paying right now to top up the SPR during a price spike.
Wednesday, October 03, 2007
Waiting for Sputnik
Tomorrow's fiftieth anniversary of the launch of Sputnik seems like an odd sort of event for Americans to commemorate, unless the lesson is that we can start out behind and still win. I've seen many Sputnik articles and commentaries in the past week, and one of the better ones, in Monday's Washington Post, included some useful reminders of just how wrong our immediate post-Sputnik predictions about the future turned out to be. We may not have colonies on the Moon and Mars, but, as the author put it, "Sputnik plus the Internet equals Google Maps." That sort of unpredictability of ultimate outcomes might apply equally well to our current perceptions about energy and climate change, for which a wake-up call as dramatic as Sputnik's might yet lie somewhere ahead.
Aside from ushering in the Space Age, Sputnik was one of those remarkable "caught napping" moments in US history. Although I have no recollection of the immediate aftermath, since I was an infant at the time, the shock wave from Sputnik certainly shaped my childhood and influenced my educational choices. Anyone looking for a comparable current influence from energy or the environment would come up short. Even though both of these concerns routinely make headlines, the effect of these issues on our daily lives remains modest. Our children aren't yet growing up in a nation urgently reorganizing itself to meet the challenges these issues represent, as it did around the parallel arms and space races with the Soviet Union. Many still hope they won't have to, and that oil prices will fall and climate change prove illusory.
In thinking about what a Sputnik for energy or climate might look like, it's helpful to consider why neither meets that standard, today. It has taken oil prices roughly four years to triple their former average level, and the increase owes as much to higher demand spurred by economic growth as to supply constraints. That's very different from the oil shocks of the 1970s. As to climate change, while our awareness is growing steadily, the feedback loop of cause-and-effect, response-and-reaction is longer than our attention spans. The fact that there is still argument about our contribution to the problem and what to do about it is strong evidence that we haven't reached the galvanizing moment at which all doubt is cast aside.
So what would qualify? Certainly not just a politician or media figure telling us that one or the other problem is urgent. We hear that ever day about a host of issues. It would have to be something external and dramatic. On energy, the possibilities are easy to imagine: We awaken one morning to discover that Osama bin Laden has taken over a major Middle East producer, or Hugo Chavez has decided to export 100% of Venezuela's oil to China. Or the Saudis announce that their production has peaked, and oil futures soar to $200. On the climate side things are trickier. Most of the big signals only make sense as part of a larger pattern, after the fact. It's impossible to discern whether individual hurricanes, droughts, or heat waves are signposts of global warming or just random weather events. Melting icecaps may be as close as we come, but they still lack the gut-wrenching immediacy of a Sputnik, Pearl Harbor, or 9/11.
As unwelcome as that kind of surprise might be, it almost seems necessary to overcome the complacency of gradual change--the proverbial "boiling frog". Absent a Sputnik moment for energy and climate change, how do we convince the public of the need for action, for the equivalent of a Manhattan Project or Apollo Program to address these problems, if that's what it takes? Perhaps, for a change, we will have to trust in the good judgment of our fellow citizens, if we provide them all the facts--including those that do not align with our view of impending catastrophe--and lay out all of the choices and their likely consequences. That by itself might be as novel and empowering as another Sputnik.
Aside from ushering in the Space Age, Sputnik was one of those remarkable "caught napping" moments in US history. Although I have no recollection of the immediate aftermath, since I was an infant at the time, the shock wave from Sputnik certainly shaped my childhood and influenced my educational choices. Anyone looking for a comparable current influence from energy or the environment would come up short. Even though both of these concerns routinely make headlines, the effect of these issues on our daily lives remains modest. Our children aren't yet growing up in a nation urgently reorganizing itself to meet the challenges these issues represent, as it did around the parallel arms and space races with the Soviet Union. Many still hope they won't have to, and that oil prices will fall and climate change prove illusory.
In thinking about what a Sputnik for energy or climate might look like, it's helpful to consider why neither meets that standard, today. It has taken oil prices roughly four years to triple their former average level, and the increase owes as much to higher demand spurred by economic growth as to supply constraints. That's very different from the oil shocks of the 1970s. As to climate change, while our awareness is growing steadily, the feedback loop of cause-and-effect, response-and-reaction is longer than our attention spans. The fact that there is still argument about our contribution to the problem and what to do about it is strong evidence that we haven't reached the galvanizing moment at which all doubt is cast aside.
So what would qualify? Certainly not just a politician or media figure telling us that one or the other problem is urgent. We hear that ever day about a host of issues. It would have to be something external and dramatic. On energy, the possibilities are easy to imagine: We awaken one morning to discover that Osama bin Laden has taken over a major Middle East producer, or Hugo Chavez has decided to export 100% of Venezuela's oil to China. Or the Saudis announce that their production has peaked, and oil futures soar to $200. On the climate side things are trickier. Most of the big signals only make sense as part of a larger pattern, after the fact. It's impossible to discern whether individual hurricanes, droughts, or heat waves are signposts of global warming or just random weather events. Melting icecaps may be as close as we come, but they still lack the gut-wrenching immediacy of a Sputnik, Pearl Harbor, or 9/11.
As unwelcome as that kind of surprise might be, it almost seems necessary to overcome the complacency of gradual change--the proverbial "boiling frog". Absent a Sputnik moment for energy and climate change, how do we convince the public of the need for action, for the equivalent of a Manhattan Project or Apollo Program to address these problems, if that's what it takes? Perhaps, for a change, we will have to trust in the good judgment of our fellow citizens, if we provide them all the facts--including those that do not align with our view of impending catastrophe--and lay out all of the choices and their likely consequences. That by itself might be as novel and empowering as another Sputnik.
Tuesday, June 19, 2007
Do No Harm
The Senate and House of Representatives are both feverishly working on new federal energy legislation, and it's a reasonable bet that a bill will end up on the President's desk within a few months. However, it is still anyone's guess as to precisely what provisions will survive or be added along the way, as the process converges toward an eventual conference to iron out differences between the two bodies' differing energy visions. As the final legislation takes shape, however, we can only hope that our elected representatives will see the wisdom of adopting the credo of at least doing no harm. The potential for wasteful and counterproductive energy policy is enormous, particularly in two areas: the functioning of the petroleum products market and the promotion of alternative fuels.
The API ran a full page ad in today's Washington Post with a tag line of, "It's 2007, not 1977." That echoes a theme I've expounded here for several years. Many of the measures introduced to deal with the energy crisis of the 1970s were either ineffective or downright harmful. We should have learned from that experience, and from the much more successful market-oriented approaches of the subsequent decades. While fuel prices may be high again, we have seen none of the incredibly disruptive gas lines and runouts that plagued us then. In particular, the "anti-gouging" provisions espoused by some in Congress look like standby price controls, aimed at the point in time when the ability of the market to rebalance supply and demand is most essential, as we saw after the hurricanes of 2005. This idea clearly fails the "do no harm" test.
Turning to alternative fuels, it's rare that I agree with the editors of The New York Times on energy policies, but their editorial of May 30th on the impact of coal liquefaction on energy security and climate change was spot on. "A policy designed to solve one problem should not make the other worse," they said, citing the high greenhouse gas emissions associated with coal-to-liquids (CTL) plants. A recent posting on the Clean Car Congress site provides useful supporting data from a Carnegie-Mellon study comparing CTL, conventional fuels, and plug-in hybrids.
So in this regard, it is one thing to codify a greatly increased biofuels mandate that relies on production from unproven cellulosic ethanol technology to meet its long-term goals, but quite another to turn the understandable ambitions of coal-state legislators into a national policy that would double down our bet on the equally unproven technology of carbon capture and sequestration (CCS.) Even if cellulosic ethanol didn't take off as expected, we would still end up with liquid fuels that--however costly at the pump and the supermarket--could reduce both our oil imports and our greenhouse gas emissions by modest amounts. However, if we went ahead with CTL, but CCS proved either ineffective or uneconomical, we'd end up with a synthetic fuels industry that would roughly double our greenhouse gas emissions per gallon of gasoline or diesel. That would make a farce of any national effort to reduce those emissions via cap-and-trade or some other mechanism.
If we are indeed headed for a "grand compromise" on energy that would incorporate meaningful elements of energy efficiency and conventional and alternative energy supply, then those crafting a compromise must hold firm in excluding provisions that would sabotage either the ability of the fuel marketplace to respond to sudden shocks, or our first steps toward reducing our enormous greenhouse gas emissions. In the give-and-take world of Capitol Hill that won't be easy.
The API ran a full page ad in today's Washington Post with a tag line of, "It's 2007, not 1977." That echoes a theme I've expounded here for several years. Many of the measures introduced to deal with the energy crisis of the 1970s were either ineffective or downright harmful. We should have learned from that experience, and from the much more successful market-oriented approaches of the subsequent decades. While fuel prices may be high again, we have seen none of the incredibly disruptive gas lines and runouts that plagued us then. In particular, the "anti-gouging" provisions espoused by some in Congress look like standby price controls, aimed at the point in time when the ability of the market to rebalance supply and demand is most essential, as we saw after the hurricanes of 2005. This idea clearly fails the "do no harm" test.
Turning to alternative fuels, it's rare that I agree with the editors of The New York Times on energy policies, but their editorial of May 30th on the impact of coal liquefaction on energy security and climate change was spot on. "A policy designed to solve one problem should not make the other worse," they said, citing the high greenhouse gas emissions associated with coal-to-liquids (CTL) plants. A recent posting on the Clean Car Congress site provides useful supporting data from a Carnegie-Mellon study comparing CTL, conventional fuels, and plug-in hybrids.
So in this regard, it is one thing to codify a greatly increased biofuels mandate that relies on production from unproven cellulosic ethanol technology to meet its long-term goals, but quite another to turn the understandable ambitions of coal-state legislators into a national policy that would double down our bet on the equally unproven technology of carbon capture and sequestration (CCS.) Even if cellulosic ethanol didn't take off as expected, we would still end up with liquid fuels that--however costly at the pump and the supermarket--could reduce both our oil imports and our greenhouse gas emissions by modest amounts. However, if we went ahead with CTL, but CCS proved either ineffective or uneconomical, we'd end up with a synthetic fuels industry that would roughly double our greenhouse gas emissions per gallon of gasoline or diesel. That would make a farce of any national effort to reduce those emissions via cap-and-trade or some other mechanism.
If we are indeed headed for a "grand compromise" on energy that would incorporate meaningful elements of energy efficiency and conventional and alternative energy supply, then those crafting a compromise must hold firm in excluding provisions that would sabotage either the ability of the fuel marketplace to respond to sudden shocks, or our first steps toward reducing our enormous greenhouse gas emissions. In the give-and-take world of Capitol Hill that won't be easy.
Thursday, May 24, 2007
Advice from the Czar
In a counterpoint to yesterday's posting, it seems that although many 1970s energy notions are well past their sell-by dates, there are still some figures from that period who have useful advice to impart. While I was focused on "energy theater" in D.C., I missed seeing an eminently sensible op-ed in the NY Times on the requirements of effective energy policy. It was written by President Ford's energy advisor, Frank Zarb. Describing our problems with a level of objectivity that evokes nostalgia, he observed, "The basic elements of a responsible energy policy are not complicated, but the politics are horrendous." While the first portion of that sentence is bit of an over-simplification, its punchline is spot on.
I'm just old enough to remember news reports during the first energy crisis that began something like this: "In Washington today, Energy Czar Frank Zarb said..." I was always amused by the coincidence of an official with such an alliterative name and title. After President Ford died last year, Americans were able to reconsider his brief but challenging term of office from the vantage point of three decades. The pragmatism and frankness of his administration looked wise, rather than naive, after so many years of arguing about ideology. Mr. Zarb's comments on energy policy reflect that same kind of pragmatism, criticizing the mistakes of others in the mildest terms, and looking back to look ahead, rather than score points.
A glance at yesterday's weekly report from the Department of Energy reminds us how much the problem has evolved since Mr. Zarb ran one of its predecessor agencies. Not only does the US now import twice as much crude oil as we produce--that ratio was 1:3 back then--but we rely on foreign refiners to satisfy 12% of our gasoline demand (2006 average). If a new poll is right about the level of gasoline prices necessary to induce consumers to change their driving habits--$4.38/gallon--it will be extremely difficult to reverse these trends. Nor can our energy problems be solved in isolation from the local environmental concerns that were mostly evident in the 1970s and a global challenge that certainly wasn't. Ultimately, energy security is a much more appropriate target and mindset now than energy independence, which might have looked achievable in 1975.
Mr. Zarb is entirely correct that any effective US energy policy must employ coordinated efforts to increase supply and reduce demand, and that we cannot ignore some of our best options. That would mean simultaneously tackling the politics of fuel taxation, fuel economy, energy infrastructure, offshore drilling, nuclear power and nuclear waste--on a practical, rather than ideological basis. Are we really ready for that, or are we happier looking for scapegoats? The poll referenced above offers an answer: a third of Americans blame high gas prices on oil company greed, compared to only 15% who attribute them to supply and demand.
I'm just old enough to remember news reports during the first energy crisis that began something like this: "In Washington today, Energy Czar Frank Zarb said..." I was always amused by the coincidence of an official with such an alliterative name and title. After President Ford died last year, Americans were able to reconsider his brief but challenging term of office from the vantage point of three decades. The pragmatism and frankness of his administration looked wise, rather than naive, after so many years of arguing about ideology. Mr. Zarb's comments on energy policy reflect that same kind of pragmatism, criticizing the mistakes of others in the mildest terms, and looking back to look ahead, rather than score points.
A glance at yesterday's weekly report from the Department of Energy reminds us how much the problem has evolved since Mr. Zarb ran one of its predecessor agencies. Not only does the US now import twice as much crude oil as we produce--that ratio was 1:3 back then--but we rely on foreign refiners to satisfy 12% of our gasoline demand (2006 average). If a new poll is right about the level of gasoline prices necessary to induce consumers to change their driving habits--$4.38/gallon--it will be extremely difficult to reverse these trends. Nor can our energy problems be solved in isolation from the local environmental concerns that were mostly evident in the 1970s and a global challenge that certainly wasn't. Ultimately, energy security is a much more appropriate target and mindset now than energy independence, which might have looked achievable in 1975.
Mr. Zarb is entirely correct that any effective US energy policy must employ coordinated efforts to increase supply and reduce demand, and that we cannot ignore some of our best options. That would mean simultaneously tackling the politics of fuel taxation, fuel economy, energy infrastructure, offshore drilling, nuclear power and nuclear waste--on a practical, rather than ideological basis. Are we really ready for that, or are we happier looking for scapegoats? The poll referenced above offers an answer: a third of Americans blame high gas prices on oil company greed, compared to only 15% who attribute them to supply and demand.
Wednesday, January 31, 2007
Another Default Option for Gas
Not many people are paying attention to the US's other big energy problem, in natural gas. It hasn't intruded much on our lives this winter, because of prudent inventory management and a remarkably warm start to the season in the Northeast. That's why the price of natural gas is currently $7/million BTUs on the New York Mercantile Exchange, instead of up to $14, as it was last winter. But this year-ago comparison masks two important facts: $7 is still more than three times the average gas price in the 1990s, and US net dry gas production has been declining steadily and is currently 6% below its recent peak in 2001. The reasons for this are complicated, but the consequences are straightforward: our reliance on imports will grow and the economic incentives to turn coal into synthetic gas will increase. Although the latter looks beneficial from an energy security standpoint, the environmental impact could be severe. We need to think seriously about whether we prefer that to the environmental risks of opening up the country's untapped gas potential.
The history of turning coal into gas goes back a long way, even longer than that of turning it into liquid fuels. The gas lights that electric lights displaced a century ago typically burned a fuel produced by the local "gas works", which literally cooked coal to make synthetic gas, or "town gas." There are a number of updated processes for doing essentially the same thing, including the gasification processes frequently mentioned as a way to burn coal more cleanly and efficiently in power plants. MIT's Technology Review recently highlighted another new process, the goal of which seems to be the production of gas that competes into non-power markets, including chemicals and fertilizer. From a purely financial perspective, I can see the desirability of doing this, and it might just result in fewer facilities being "offshored."
The problem is that we'd effectively be replacing our cleanest fossil fuel with our dirtiest. If every such instance had as convenient a way to dispose of CO2 as the plant cited in the MIT article--thus freeing up natural gas for other uses where that's not possible--this would be a good thing. But if this idea takes off, it could quickly outstrip the market for CO2 in enhanced oil recovery, and the extra CO2 will simply be emitted to the atmosphere, compounding the challenge of reducing our greenhouse gas emissions.
Some analysts suggest that US natural gas production has peaked for geological reasons, just as our oil production peaked in the early 1970s. Although a growing share of our gas supply now comes from "unconventional" sources such as coal bed methane and "tight" gas, the US still has a lot of natural gas left. Political constraints on drilling matter as much as geology, here, and while I don't necessarily question the value judgments behind them, I do wonder if these constraints were imposed with a full understanding that the alternative to that foregone supply might not be coming from a wind farm or a landfill, but from yet another new opportunity for coal producers.
The history of turning coal into gas goes back a long way, even longer than that of turning it into liquid fuels. The gas lights that electric lights displaced a century ago typically burned a fuel produced by the local "gas works", which literally cooked coal to make synthetic gas, or "town gas." There are a number of updated processes for doing essentially the same thing, including the gasification processes frequently mentioned as a way to burn coal more cleanly and efficiently in power plants. MIT's Technology Review recently highlighted another new process, the goal of which seems to be the production of gas that competes into non-power markets, including chemicals and fertilizer. From a purely financial perspective, I can see the desirability of doing this, and it might just result in fewer facilities being "offshored."
The problem is that we'd effectively be replacing our cleanest fossil fuel with our dirtiest. If every such instance had as convenient a way to dispose of CO2 as the plant cited in the MIT article--thus freeing up natural gas for other uses where that's not possible--this would be a good thing. But if this idea takes off, it could quickly outstrip the market for CO2 in enhanced oil recovery, and the extra CO2 will simply be emitted to the atmosphere, compounding the challenge of reducing our greenhouse gas emissions.
Some analysts suggest that US natural gas production has peaked for geological reasons, just as our oil production peaked in the early 1970s. Although a growing share of our gas supply now comes from "unconventional" sources such as coal bed methane and "tight" gas, the US still has a lot of natural gas left. Political constraints on drilling matter as much as geology, here, and while I don't necessarily question the value judgments behind them, I do wonder if these constraints were imposed with a full understanding that the alternative to that foregone supply might not be coming from a wind farm or a landfill, but from yet another new opportunity for coal producers.
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