Iran and Oil Prices in 2018

The turn of the year brought the usual year-end analyses of energy events, along with predictions and issues to watch in the year to come. I tend to focus on tallies of risks and large uncertainties. There's no shortage of those this year, and the current unrest in Iran moves the risks associated with that country higher up the list, at least for now.

The implications of instability in Iran extend well beyond oil prices, but let's focus there for now. The sources of instability include both the internal economic and political concerns apparently behind the protests, as well as US-Iran relations and the fate of the Iran nuclear deal and related sanctions.

As former Energy Department official Joe McMonigle noted, a decision by President Trump to allow US sanctions on Iranian oil exports to go back into effect could remove up to one million barrels per day of crude oil from the global market. He sees the protests making the reinstatement of sanctions likelier. Whether that would lead directly to much higher oil prices is harder to gauge.

A little history is in order. Sanctions on Iran, including those covering the receipt of Iranian oil exports, were one of the main tools that brought its government to the nuclear negotiating table. For a roughly three-year span beginning in late 2011, international sanctions reduced Iran's oil exports by more than one million barrels per day, at a cumulative cost exceeding $100 billion based on oil prices at the time. The effectiveness of those sanctions was also enhanced by the rapid growth of US oil production from shale. 

Starting in 2011, expanding US "tight oil" production from shale began to reduce US oil imports and eased the market pressures that had driven oil back over $100 per barrel as the world recovered from the financial crisis and recession of 2008-9. In the process, shale made it possible for tough oil sanctions to be imposed on Iran and sustained without creating a global oil price shock.

Instead, oil prices actually declined over the period of tightest sanctions. By 2014 US oil output had grown by more than Iran's entire, pre-sanctions exports and cut US oil imports so much that OPEC effectively lost control of oil prices. Seeking to drive shale producers out of the market, OPEC's leadership switched tactics and attempted to flood the market, driving the price of oil briefly below $30. That cut even further into Iran's already-reduced oil revenues and put the country's leadership in an untenable position, forcing them to negotiate limits on their nuclear program. 

If Iran's oil exports were to drop again this year, for whatever reason, the impact on oil prices would depend on the extent to which the factors that allowed us to absorb such a curtailment just a few years ago have changed. One measure of that is that after several years of painfully low prices--at least for producers--the price of the Brent crude global oil benchmark is now well over $60. Yesterday it flirted with $68/barrel, a three-year high. 

That recovery is the result of a roughly 18-month slowdown in US oil production in 2015-16, an agreement between OPEC and key non-OPEC producers like Russia to cut output by around 1.2 million barrels per day, and production problems in places as diverse as Venezuela and the North Sea.

These events have largely put the oil market back into balance and worked off much of the excess oil inventories that had accumulated since 2014. Commercial US crude oil inventories, which are among the most transparently reported in the world, have fallen 100 million barrels since their peak last spring. However, they remain about 100 million barrels above their typical pre-2014 levels. 

Viewed from that perspective, a reduction in supply from any source might be exptected to send prices higher. However, although global oil demand is still growing, we should realize that today's tighter oil market is largely the result of voluntary restraint, rather than shortages. Potential production increases from the rest of OPEC, Russia and the US could more than compensate for another big drop in Iran's oil exports.

In particular, US shale output has been climbing again for the last year, boosted by rising prices and the amazing productivity of the venerable Permian Basin of Texas. Meanwhile, production from the deepwater Gulf of Mexico is also increasing as projects begun when oil was still over $100 reach completion. In its latest forecast the US Energy Information Administration projected that US crude production will reach an all-time high averaging 10 million barrels per day this year. Despite that, US shale producers still have thousands of "drilled-but-uncompleted" wells, or DUCs, waiting in the wings. 

So, short of instability in Iran morphing into a regional conflict involving Saudi Arabia and the other Gulf producers, oil prices might drift higher but would be unlikely to spike anywhere near $100. And that's without factoring in the scenario suggested by the Financial Times' Nick Butler, who proposes that the Iranian government might choose to break the OPEC/Russia deal and increase their oil exports, in order to boost their economy and mollify the protesters, thereby shoring up the regime. 

The last point brings us back from a narrow focus on oil prices to larger geopolitical uncertainties. As a noted Iran expert at the Council on Foreign Relations recently observed, Iran's religious government faces challenges similar to those that led to the collapse of the Soviet Union.

It's far from clear that 2018 will be Iran's 1989, or that President Rouhani is capable of becoming his country's Mikhail Gorbachev. Yet surely the 2015 nuclear agreement was a bet by the US and its "P5+1" partners that Iran would be a very different nation by the time its main provisions start to expire in the next decade. The whole world would win if that prediction came true.

On that note I'd like to wish my readers a happy start to the New Year. My top resolution is to post here more frequently and more regularly than in 2017. 

"All of the Above" Must Be Weighted by Common Sense

• "All of the Above" is just a cliché if not tempered by an appreciation of the strengths and weaknesses of different energy sources, and a standard basis of comparison.
• Renewable energy is gaining market share, but fossil fuels--especially oil and gas--will play crucial roles in the energy mix for decades.

Last month, Real Clear Politics and API hosted an energy summit in Washington, DC entitled, “Fueling America’s Future”. It was intended to provide a quick overview of most of the key technologies and issues associated with an all-of-the-above energy strategy for the United States. Going through the highlights of the webcast gives me an opportunity to summarize my point of view for new readers of this blog. I’d sum that up as “All of the Above”, with asterisks for the proportions and situations that make sense.

This slogan, at least in the manner in which it has been espoused by politicians in both parties, has attracted fair criticism for being overly bland and safe. I suspect that critique reflects a general sense that our energy mix has always been composed of all of the above, or at least all of the technologies that were sufficiently proven and economic to contribute at scale at any point in time. However, as both our technology options and choice criteria expand, our understanding of the evolving energy mix is hampered by metrics and assumptions that are overdue to be revisited.

The summit’s first panel examined the technologies of the mix, in a “lightning-round” format of five minutes apiece. The panel covered oil, natural gas, coal, nuclear and renewables, led by wind power.

The interim CEO of the main US wind energy trade association, AWEA, cited his industry’s progress in reducing the technology’s cost, increasing the domestic content in its US value chain from 25% to 67%, and expanding its market penetration. Mr. Gramlich was also surprisingly forthright about wind power’s continued dependence on federal subsidies, a point to which I’ll return in future posts.

He began with a statistic indicating that wind power was #1 in new US electric generation capacity last year. This is more than just a talking point, but it calls for some refinement if we’re to see an accurate picture of the changing US electricity mix. When most generating facilities operated within a narrow band of expected utilization, say 60%-80% of the time, comparing their nameplate capacities like this was satisfactory. Exceptions such as “peaking” gas turbines that only operate a few dozen or hundred hours a year were never the recipients of targeted government incentives.

Now, however, our energy mix includes technologies with effective utilization rates, or “capacity factors”, ranging from as low as 10% for solar photovoltaic (PV) installations in cloudy northern locations, to roughly 90% for nuclear power. Wind comes in around 20-35%, depending on site and turbine size. In terms of their likely annual power generation, new natural gas facilities actually led new wind farms by roughly 2:1 last year.

Given the enormous and largely unanticipated natural gas renaissance in the US, that shouldn’t surprise anyone. In my first blog post over nine years ago I posed a series of questions, including whether we were on the verge of an energy technology breakthrough. I had in mind something involving renewable or nuclear energy, energy storage, or vehicle technology. The shale gas revolution was already starting to emerge from obscurity, but I, along with most other energy experts at the time, remained oblivious to it.

The new head of the American Natural Gas Alliance described gas as clean, abundant and affordable. At least the last two points should be uncontroversial by now, backed up by market prices and resource assessments. We tend to think of gas as a bridge fuel to a lower emission future, but I think we’ll increasingly hear it called a “foundation fuel,” as Mr. Durbin did.

The spokesman from the Solar Energy Industries Association accurately referred to solar as our fastest growing energy source, though he didn’t explain how it would grow from 0.1% of US generation last year to more than 1% by next year. He alluded to a plausible inflection point based on policy and innovation, but his enthusiasm that solar was expanding rapidly outside California and the Southwest ought to worry us.

Until PV prices fall much lower than they have, a surge of installations in places like Vermont and Wisconsin means that taxpayers and ratepayers are paying more than they should to make that happen. And the global competition and “survival of the fittest” he touted has mainly resulted, not from capitalism, but from dueling government incentives for solar, especially in Europe and Asia. I’m much more positive about solar than the above might suggest, but like other renewables, it will cost less and achieve more for us in locations with high-quality resources.

The discussion on oil was more globally focused, based on BP’s forecasts and annual Statistical Review. Contrary to the widespread view of oil’s continued dominance, it has been losing market share over the last 40 years — including the last 13 years in a row — and stands at its lowest market share in the US since at least World War II.  The representative from BP linked this performance to oil’s concentration in transportation fuel, where it has been squeezed out by efficiency, low economic growth (and to some extent biofuels, which got short shrift in the session). At the same time, the growth of North American production, another dividend of the shale revolution, puts increasing pressure on OPEC. I’ll come back to this dynamic in future posts.

Wind and solar aren’t the only, or even the biggest, renewables, despite the attention they receive. I was glad to see hydropower–often the forgotten renewable–represented on the panel, though I was disappointed by the absence of geothermal power. Both are more geographically constrained, yet have features that wind and solar could only wish for.  Hydro generated nearly 7% of US electricity last year from just 3% of US dams, with significant potential for growth through retrofitting unpowered dams. The Executive Director of the National Hydropower Association quoted Senator Ron Wyden (D-OR), the new chairman of the Senate Energy and Natural Resources Committee, as saying, “Hydro is back.” That could prompt some interesting discussions.

I’m glad I wasn’t there representing coal, which must surely be the least loved energy source today. It continues to grow globally, with US coal exports playing a role, but the domestic US story is a “decline narrative” as the VP of the National Mining Association described it. He managed to find a note of optimism in the more efficient coal power fleet that will remain after 68,000 MW of old capacity retires by 2020, under pressure from various regulations and competition from natural gas. Unfortunately, efficiency alone isn’t sufficient. From my perspective, carbon capture and sequestration (CCS) is the key to reconciling coal’s convenience and low energy cost with its high emissions. CCS wasn’t mentioned by name, but was only alluded to as “technology that does not exist.” That dismisses it too lightly, as I’ll explain when time permits.

The head of government affairs for the Nuclear Energy Institute spoke last in the lightning round on technology. (The subsequent panel on energy issues is worth your time, too.) He emphasized nuclear’s anchor role in the US electricity mix, with 12% of US generating capacity contributing around 20% of the electricity supply at a cost of 2¢ per kilowatt-hour (kWh). Yet despite five new reactors under construction and a wave of license extensions, post-Fukushima the center of the nuclear industry is shifting to places like China and India. 66 reactors are under construction outside the US, mainly in the developing world, because that’s where demand is growing.

I’ve worked in various aspects of energy for more than 30 years, and for much of that time our energy mix and the forces that drive it have been in a state of flux. With that in mind, my recipe for “all of the above”  starts with what we have now, recognizes the inertia of existing fleets and infrastructure, and evolves as costs shift and our emphasis on environmental consequences grows.

Wind and especially solar will grow, but will add the most value when used with, rather than against the grain of their limitations. Nor will energy storage turn them into reliable, baseload energy sources like nuclear and coal, at least until it is much cheaper. The US natural gas opportunity looks transformative in a way that renewables don’t, yet, with value well beyond power generation. Coal will linger, but without effective CCS will remain vulnerable from many angles. Meanwhile, oil remains the indispensable fuel for transportation, which is the cornerstone of our global economy. Yet its indispensability will erode in increments each year, as EVs eventually grow from novelty to significance and new biofuels start to emulate oil’s trump cards of convenience and energy density. It’s a great time to be talking about energy, as it has been for the last nine years.

A slightly different version of this posting was previously published on Energy Trends Insider.

A Secretary of Energy for a Leaner DOE?

I've read a number of stories on President Obama's nomination of MIT physicist Ernest Moniz to be the next Secretary of Energy.  This overview of his background from the Washington Post is as good a place as any to start.  Although I haven't met Dr. Moniz, I've seen him on various panels and am familiar with some of his department's work, such as MIT's reports on the Future of Natural Gas, Future of Coal and Future of Nuclear Power.  As many comments since his announcement have suggested, it would be hard to find a more ideal steward of an all-of-the-above energy strategy. At the same time, this choice also reflects many of the key challenges facing the Department of Energy at this moment, not least the preservation of its R&D activities and other capabilities in a post-sequestration environment.  This is likely to be a different Department of Energy (DOE) than the one that Dr. Chu guided for the last four years. 

If I thought it likely that the DOE would continue to pursue large-scale industrial policy, such as the expanded energy loan guarantee program and other renewable energy deployment-focused activities that originated in the 2009 stimulus bill, I would be a lot more concerned that the President has selected another scientist and academic administrator to lead the DOE, instead of someone who has actually run a large energy business.  Lack of commercial experience was arguably a key factor in the DOE's decision to fund Solyndra even as its main business proposition was unraveling, along with promoting a premature and excessive expansion of US electric vehicle battery manufacturing capacity. 

However, the federal budget sequester is now in place and Congress has little appetite for expensive new programs.  Business acumen seem less critical for a department that must make do with less for the foreseeable future while remaining relevant in an administration focused on advancing renewable energy and reducing greenhouse gas emissions.  From the relatively little I know of Dr. Moniz, his prior experience in government--including a stint as an undersecretary of energy--and prominent role in a first-class research institution should equip him well for this task.

Dr. Moniz faces criticism from environmentalists for his views on nuclear power, natural gas and hydraulic fracturing ("fracking.")  It's hard to imagine any nominee for this job who wouldn't spark some level of controversy, given the conflicting energy goals we've pursued over the years.  I don't give much credence to the Post's inclusion of the views of Professor Howarth of Cornell on the Moniz nomination, considering that much of Dr. Howarth's widely-disseminated analysis of shale gas emissions has subsequently failed to withstand scrutiny.  In any case I prefer the choice of a Secretary of Energy who has some appreciation of the importance of the energy sources that still supply roughly 90% of our energy needs, and possesses a clear understanding of the complexities of the long transition to cleaner sources, rather than one exclusively focused on the latter. 

Our Shifting Energy Diet

It's fairly easy to agree on the desirability of shifting our energy diet away from fossil fuels and toward more renewable or sustainable sources, but it's much harder to agree on the time scale involved. While recognizing the great potential of renewable energy technologies such as wind, solar and geothermal power, along with advanced, non-food-based biofuels, I am convinced that the transition will take much longer than many hope--longer than many will have patience for, in light of pressing concerns about energy security and the environment. When considering future shifts in our energy diet, it's instructive to review some of the changes we've already experienced, and how long they took. The graph below displays the relative contribution of America's main energy sources since 1949, based on data from the Energy Information Agency of the US Department of Energy.

This chart, which compares the proportional, rather than absolute contribution of each source as a percent of the total, shows that the US energy diet has experienced constant change over the last seven decades. Some of these changes have been dramatic, such as the erosion of coal's market share in the 1950s and '60s by oil and natural gas, while others, such as the resurgence of biomass-based energy since the 1970s are less dramatic but still noticeable. On the scale of this graph the non-biomass renewables that I've lumped together appear relatively steady, because the recent rapid growth of wind and solar energy has so far only compensated for a contemporaneous decline in hydropower output. I'd expect the growth of that green segment to be more obvious in a few years, though still not on the scale of nuclear power.

The chart also reminds us that however prominent a given energy source might have become during this period, none overwhelmed the others. We talk a great deal about oil's dominance, yet it never exceeded a 48% share of our energy diet, and it has recently fallen below 37%. In fact, you'd have to go all the way back to the 1920s to find an energy source with a market share above 60%, which coal still enjoyed during the early years of oil's rise as the combination of mass-produced cars and the big oil finds in East Texas and Oklahoma upended the US energy landscape. That's one reason I generally find forecasts of renewables capturing 80% of the energy market within a few decades to be improbable.

Perhaps the most relevant example for renewables of a disruptive energy technology capturing a significant share of the market is commercial nuclear power, which contributed just 0.1% of US energy in 1962. That's about what solar provides today. Yet even with a major push by utilities and government and broadly favorable market acceptance until after the Three Mile Island accident, it still took nuclear power 25 years to reach a 6% share of total US primary energy, and nearly 40 years to reach its current 8% or so. Today's renewables also face similar limits on their potential market penetration, albeit due to very different factors relating to intermittency and the high cost of energy storage.

What would it take for renewables to repeat the model of oil's success against coal? In the absence of a high carbon price or incentives on a level unlikely to be either politically feasible or affordable in the current environment, I believe it would require technologies that don't just reduce greenhouse gas emissions or local pollutants, but actually enable something new and very attractive to consumers and businesses, along the lines of the quantum leaps in mobility and other economic activity that oil made possible. Otherwise, their promoters should be prepared to play a long game, in much the same way that the conventional energy industry did when it was building its market post World War II. Do investors and policy makers have the patience that requires?

By the way The Energy Collective is offering a free virtual conference on November 30 on the subject of "How to Save A Planet on A Budget." The conference includes panel discussions and case studies moderated by Marc Gunther of Fortune magazine, Jesse Jenkins of the Breakthrough Institute, and Gernot Wagner, economist at the Environmental Defense Fund. To register click here.

I'd also like to wish my US readers a pleasant Thanksgiving weekend.

Winners and Losers from the Gulf Spill

A comment on my recent posting on oil substitution opportunities in the aftermath of the Gulf oil spill got me thinking about potential winners and losers from the broad changes that seem likely to ensue from this disaster. Some of these outcomes would depend on new laws and regulations that could alter the basis of competition within the oil and gas industry, between it and other energy sectors, and between specific energy technologies. However, I also wouldn't discount the possibility of enduring changes in our perceptions of the oil industry and of the ways in which we use oil.

Until President Obama acted to freeze new deepwater leases and drilling permits, and even drilling that was already permitted and underway--a freeze that MMS appears to have used its own initiative to extend to all offshore drilling at any depth--natural gas seemed an obvious winner from any constraints on offshore oil drilling. Now I'm less sure, even if the President is apparently ready to allow drilling in shallow waters to resume. Superficially, gas should come out ahead, because the Gulf of Mexico accounts for a smaller fraction of US natural gas production than oil production, at 11% vs. about 30%. Yet it's also my understanding that offshore gas fields tend to decline more quickly than offshore oil fields, so that gas production in the Gulf of Mexico could drop faster than oil output under a deepwater drilling ban.

More importantly, shortfalls in Gulf Coast gas production could have a bigger impact on US natural gas prices than reduced Gulf Coast oil production would on crude prices. That's because the gas market is still mainly regional, connected by relatively small and expensive global flows of LNG, while oil is a truly global commodity with significant flexibility to work around localized production problems. Although the comparison is only approximate, you can see this effect by examining the impact of Hurricanes Katrina and Rita on the prices for Henry Hub natural gas and West Texas crude oil. Between August 25 and October 5, 2005, the gas futures price spiked by 45%, while WTI actually dropped by 7%, because of the extent of refinery shutdowns caused by the storms. (Gasoline futures shot up by 33% but quickly fell back to where they had been.) In other words, ensuring that gas remains cheap enough to be an attractive substitute for oil in transportation and other uses depends on either restoring gas drilling in the Gulf at all depths pretty quickly, or expanding onshore shale gas production even faster than recently.

The situation for renewables looks much less ambiguous. Even though, as I have pointed out frequently, renewable electricity sources such as wind, solar and geothermal power don't substitute for oil in any meaningful way, at least not without millions of electric vehicles that will take many years to roll out, perception is a good bet to trump hard-nosed realism in this situation. Extending the stimulus benefits for renewables, especially the cash grant program that substitutes for the tax equity market that stalled during the financial crisis, looks a lot likelier today than prior to April 20, despite the massive federal budget deficit. Similarly, the ethanol industry stands a better chance of getting the administration to relax the 10% blending limit on ethanol in gasoline--a limit that would otherwise stall ethanol growth until E85 takes off, if ever. The EPA is expected to rule on this soon.

Nuclear power looks like another big beneficiary of the oil spill, and again not because nuclear power would substitute for much oil in the near-term, though nuclear blogger Rod Adams properly reminded me recently that electricity from nuclear plants could be just as effective at backing out heating oil as natural gas, via efficient geothermal heat pump systems. Electrification could also displace some oil in rail transport, depending on the cost-effectiveness of electrifying long-distance freight tracks and locomotives. But in any case, nuclear stands as the likely surviving "conventional energy" pole of any grand compromise on energy and climate legislation, now that offshore drilling has become a dead weight instead of a vote-attractor in the Kerry-Lieberman climate bill. It is also the only other low-carbon energy source currently available on a scale large enough to substitute for the energy we get from oil, though not for oil's attributes as an energy carrier and storage medium.

Assessing whether the US oil & gas industry wins or loses from all this is harder than it looks. Other than BP--an obvious loser--some companies stand to gain from improved economics and increased emphasis on onshore drilling in places like the Bakken formation, from better onshore gas and LNG economics, or from picking up opportunities that BP won't be offered. Even if they're not barred from bidding on new leases around the world, BP just won't look like anyone's partner of choice, at least for a while. And don't forget OPEC, which from the first day of this disaster looked like the single biggest winner from our misfortune. Anything that makes non-OPEC oil production more difficult or costly shifts more market power to OPEC, which is sitting on top of more than three-fourths of the world's proved oil reserves, much of it still fairly cheap to develop.

With one very large caveat the US public, as both consumers and taxpayers, looks like the big loser from the likely energy outcomes of this spill--as distinct from those whose livelihoods and environment have been affected directly. We'll all pay more for energy, at least in the medium term, and we'll pay more to subsidize alternatives that still need help to become competitive, as well as those that should already have been weaned off subsidies after decades at the trough. We might turn that prospect on its head, however, if the spill drastically changed our attitude towards energy consumption. Until this event, oil was largely invisible. Every day in the US a thousand times as much oil as has been leaking into the Gulf flows through pipelines, tankers, barges, rail cars and tank trucks, and eventually through hoses into the fuel tanks of our cars, trucks, trains and planes, all unobtrusively out of sight. This undersea gusher provides a rare visual hint of the sheer scale of our oil consumption. Could seeing all that oil lead Americans to think differently about how they use energy, and from which sources? Let's check back a year after the well is plugged and the story has moved off the front pages.

Not-So-Grand Compromise

This week Senators John Kerry (D-MA) and Joe Lieberman (I-CT) finally released the draft energy and climate bill they had been working on with Senator Lindsey Graham (R-SC.) From all accounts, it was intended to serve as a response to the various criticisms of the climate bill the House of Representatives passed last summer, but in particular as a means for attracting support from Senators whose primary concerns about energy are focused on US energy security and competitiveness. Unfortunately, events have a way of disrupting even the sagest strategies. A cursory review of the new bill--all I've had time for thus far--reveals the degree to which it has been altered in response to the ongoing Gulf Coast oil spill. In the process, unless I've misread its revised provisions on offshore drilling, the expected "grand compromise" has turned into a poisoned chalice, at least for oil.

Like its climate-legislation predecessors and most major bills from the last several Congresses, Kerry-Lieberman (originally Kerry-Graham-Lieberman) starts out at 987 pages and is likely to grow much larger, as it accumulates support one vote--and thus typically one new provision or modification--at a time. I simply haven't had a chance to read the whole thing in detail, yet. Once I've done so, I'll comment on its other key provisions, including the cap & trade mechanism at its heart, which seems to have been influenced by the "cap & dividend" proposal of Senators Cantwell (D-WA) and Collins (R-ME). With so much attention currently directed at offshore drilling, that's where I focused my brief review.

While the bill was being prepared, there was much speculation about the incentives it would include for expanded offshore drilling, which, along with expanded support for new nuclear power, was regarded as one of the principal carrots to be offered to those in Congress who wouldn't otherwise be inclined to support a standalone cap & trade bill. Whatever form those incentives were expected to take, the bill's skimpy offshore drilling "subtitle" looks disappointing, if not downright negative.

On the positive side, it would extend the same royalty-sharing benefits to states pursuing new drilling that the four main Gulf Coast producer states of Texas, Louisiana, Mississippi, and Alabama currently receive from oil & gas exploration and production in the federal waters off their coastlines: 37.5% of lease premiums collected and the same percentage of production royalties. This is something that states such as mine, with an official state policy supporting drilling, have been calling for. But while it will be favorably received in Virginia, other states, particularly in the West and Midwest, regard this as an unreasonable diversion of federal revenue. Even if the Deepwater Horizon hadn't blown up, this provision would have been a tough sell.

The rest of the offshore oil subtitle appears to have been hastily modified in response to the spill. Among other things, it offers states a veto over new drilling within 75 miles of their shores. A glance at the map for the planned Lease Sale 220 offshore Virginia shows that at least a portion of it falls within 75 miles of the Delaware and Maryland coasts. Nor do I think this is an unreasonable provision; as we've seen in the Gulf, a spill off Louisiana clearly affects the shorelines and marine activities of neighboring states. By itself, this provision, which I believe was altered from an original 50 mile exclusion, would not rule out a resumption of new offshore leasing and drilling, once the causes of the current spill have been identified and new measures and regulations put into effect to reduce the risk of another occurrence to an acceptable level--however the Congress and administration might specify "acceptable".

The problem lies in Section 1205, which defines the impact studies that must be done prior to opening up an area for drilling. As drafted, paragraph (h)(2) effectively extends the 75 mile limit on the veto rights of non-drilling states, if the government's assessment "indicates that a State would be significantly impacted by an oil spill resulting from drilling activities within an area identified in a 5-year (leasing) plan". Under this paragraph, Florida or Alabama could potentially veto any new drilling off Texas or Louisiana. I'm not a lawyer, but that's what the text appears to say.

Without dismissing the legitimate concerns of neighboring states, this raises all sorts of practical problems. An exchange I had earlier this week with a Maryland-based blogger highlights one of them. He was blogging in support of Senator Ben Cardin's (D-MD) stance against any offshore drilling on the Atlantic coast. However, as I noted in my comment on his posting, Maryland consumed 272,000 barrels per day of oil in 2008, not one barrel of which was either produced or refined in that state. Just how far should offshore drilling be removed in order to satisfy the concerns of a state that is entirely reliant on energy produced by other states and foreign sources, which must bear whatever risks it entails? Is Louisiana far enough away? Is Saudi Arabia?

As compromises go, this one doesn't look very tempting. Unless I've misread the bill's offshore drilling provisions, it appears that their effective result would be to end all offshore drilling, not just in areas that were recently released from long-standing drilling moratoria, but in the long-established zones of the Gulf Coast that are becoming America's energy breadbasket. That would surely qualify as the kind of overreaction to the Gulf Coast spill of which the International Energy Agency has just warned, emphasizing the unintended consequences that we would risk. Perhaps those looking for something in exchange for supporting limits on greenhouse gas emissions will regard the bill's significant support for nuclear power as sufficient, though I'm skeptical. They could probably get the same thing in an energy-only bill, perhaps in exchange for a national renewable electricity standard. As for the crucial source of domestic transportation energy we would forgo if we turned our back on offshore drilling, there is currently no substitute available soon enough, or in sufficient quantities, to make up for its loss.

The Other Countdown

I missed commenting on the latest round of oil deals in Iraq, which could see that country's output quickly double and eventually quadruple, causing no small amount of anxiety within OPEC. It's looking increasingly likely that the world may need that oil sooner rather than later, though. While the backdrops of photos from Copenhagen display the "tck tck tck" mantra symbolizing the conference as our last, best chance to avert catastrophic climate change, we shouldn't forget that another clock with a shorter timeline is also ticking down on our last chances to prevent Iran from developing nuclear weapons.

Business leaders are often advised not to let the urgent drive out the important. Although climate change has been billed as having both attributes, so do Iran's nuclear ambitions, and their implications in the next decade take urgency to a higher level. Yesterday's Washington Post featured a chilling analysis of the progress Iran has been making on fronts other than the Uranium enrichment that has attracted so much attention. This includes a leaked memo from the International Atomic Energy Agency assessing Iran's capabilities and another purportedly from inside Iran showing that the government is working on a "neutron initiator." If these assessments are right, then the controversial National Intelligence Estimate of 2007 placed far too much faith in indications that the regime had decided to cancel work on a warhead. Our subsequent patience with them--and with our Security Council partners--has provided Iran with crucial time in which to advance its goals.

While we were in a poor position to ratchet up the pressure sufficiently in 2007 or 2008, when Iran's oil exports made the difference between high oil prices and a crippling oil shock, that constraint disappeared last fall. The combination of OPEC's current spare capacity of at least 6 million barrels per day and the prospect of Iraqi output increases that could dwarf Iran's exports has largely neutralized the threat of an Iranian embargo, perhaps permanently.

Now, it's still possible that the visible parts of Iran's nuclear efforts are a sham mounted mainly for our benefit, similar to the double feint concocted by Saddam Hussein, in which he claimed not to be doing something while doing just enough behind partially-closed doors to make that claim look false. In retrospect that strategy made a certain amount of sense for Iraq, which after its defeat by Coalition forces in the Gulf War could not have defended against a conventional attack from the larger neighbor it had fought to a standstill a decade earlier. However, it makes little sense for Iran, which already has powerful defenses and a wide array of weapons and allies with which to retaliate in case of an attack by the US, the only power that could seriously threaten it at this point.

If the op-ed in the same issue of the Post is correct about the difficulties of mounting effective deterrence once Iran has the Bomb, then we don't have much time left to exercise the remaining diplomatic and economic options in our playbook. That means assessing the positions of Russia and China with a gimlet eye and determining for ourselves whether they would ever sacrifice their trade and security connections with the Islamic Republic, in order to forestall nuclear developments that they likely see as not aimed against them in any case. As weak as our hand looks now, it will only get worse later. In the context of this countdown, today's relatively high inventories of crude oil and refined products look like a very good thing.

Green Energy and Productivity

In the last year or so the rationale for renewable energy has evolved from emphasizing mainly energy security and climate change to focusing on the creation of "green jobs" and the development of an industry that many perceive as the "next big thing": a new global growth wave along the lines of information technology and telecoms. Unfortunately, neither of these newer justifications withstands serious scrutiny. I've devoted several postings to the shortcomings of the green jobs angle, which founders on the mistaken notion that we should want an energy sector any bigger than the minimum necessary to furnish the energy needed by the rest of the economy. The IT analogy looks harder to dismiss, because it capitalizes on our innate affinity for technology, the newer and trendier, the better. I share that bias and have been fascinated by the technology of alternative energy since my undergraduate years. Yet as inherently cool as the devices for deriving energy from wind, tides, solar radiation, biomass, and exotic forms of nuclear energy are, that doesn't automatically set them up to be the next world-transforming and wealth-creating industry in the manner of IT in the 1980s and '90s.

Understanding where this analogy fails requires delving into the drivers of the IT revolution. It wasn't just that technology was improving by the quantum leaps in processing power and decreased cost described by Moore's Law. Nor was it merely the result of nebulous "market forces", though the market's ability to deploy capital nimbly to the cleverest entrepreneurs helped a lot. Fundamentally, IT took off and continues to grow because it spurred breathtaking improvements in productivity and innovation, not just within the computer industry itself, but more importantly across the entire economy. IT enabled the automation of numerous manufacturing processes, the discovery and exploitation of vast new energy resources, and the launch and sustained growth of entirely new industries, including cellphones, personal electronics and the Internet. Yet while renewable energy holds great potential for reducing our emissions and our unhealthy reliance on imported oil, it cannot offer the kind of productivity revolution that IT delivered.

Start with the fact that most forms of alternative energy are still uneconomical without government incentives or mandates. If you doubt that, recall that new US installations of wind power, which is generally regarded as the most cost-competitive of the newer alternative energy technologies, were on the verge of grinding to a halt when it appeared that the Production Tax Credit might not be renewed at the end of 2008, and again when the markets for translating those tax credits on future earnings into current cash froze up earlier this year. The wind sector only revived when the government provided a substitute Investment Tax Credit and made it available in the form of direct grants from the Treasury.

Now, there's a strong argument that these incentives are necessary to compensate for the inherent advantages of fossil fuel-based power generation that doesn't pay for the environmental externalities it creates. However, that doesn't alter the fact that the expansion of this industry is not being driven by the underlying wealth-creating force of productivity improvements, but by government funding and regulations. Thus much of the growth of the alternative energy sector comes at the expense of other parts of the economy, or of larger deficits that impair the long-term health of the economy. That might be necessary, but it won't create vast new wealth in the way that IT did.

In fact, as long as wind, solar and other forms of renewable energy require government support or mandates such as Renewable Portfolio Standards to keep them growing, they will tend to reduce the overall productivity of the economy by embedding higher energy costs into everything we do, whether those costs are reflected directly in higher energy prices or indirectly in higher taxes or bigger deficits. Meanwhile, less glamorous technologies associated with energy efficiency offer genuine productivity improvements today and well into the future, though probably still on a smaller scale than those wrought by IT, since energy accounts for only about 8% of GDP. I'd put the electrification of transportation into this efficiency category, too, once the cost and capability of batteries improve enough to make them attractive without massive subsidies.

Renewable energy looks likely to continue its impressive growth, building new companies and making fortunes for some entrepreneurs. It has great potential to contribute an important share of our future energy mix. Unlike IT, however, this transformation will largely be limited to the energy sector, with relatively little impact beyond it. Devices that consume electricity won't run any better on green electrons than on any other kind, and engines won't suddenly begin performing at higher levels on renewable fuels--in fact, the opposite is often the case. So rather than sugar-coating the green energy proposition with inflated claims that are likely to lead to disappointment later, a dose of stoicism seems to be in order, here. If accelerating the growth of renewable energy is the right thing to do for the planet and for our energy security, and if its long-term benefits outweigh the costs, we should dispense with the hype suggesting it will make us all rich and just get on with it.

Energy Principles

My critique of a proposal for expanded tax credits to promote the electrification of transportation prompted some interesting comments. It also got me thinking again about an underlying problem that leads to the kind of scramble for government favor and largess that is exemplified by such efforts and by the badly-flawed Waxman-Markey climate bill. We have seen endless debates on energy policy, energy strategy and energy tactics, but far too little on energy principles. It would save much time, effort and money if we had a guiding principle that eschewed favoritism toward any particular technology, in favor of technology-neutral regulations and federal investments in broadly-useful energy infrastructure. Even more importantly, we would benefit from a clear principle of focusing policy and incentives on our desired ultimate outcomes, such as reducing emissions or oil imports, rather than on individual pathways for achieving them.

Take the example of electric vehicles (EVs) and their infrastructure. The US government has no business promoting a single-focus solution like this. It does, however, have a vital interest in promoting much more energy-efficient cars, based on any technologies that achieve that result. If handing out consumer tax incentives for new cars is necessary to further that goal, they should be given on the basis of total energy consumption, using a comprehensive metric like the MPGe of the Automotive X-Prize, which counts all energy in all forms delivered to the car. The higher the MPGe, the bigger the incentive. That would make a lot more sense than doling out tax credits in proportion to the size of a car's battery. Along with the proposal by the EPA and Department of Transportation to let carmakers count EVs twice towards their new corporate fuel economy and tailpipe emissions targets, that would create a perverse incentive similar to the old "SUV Loophole", possibly setting the stage for a new generation of large, inefficient battery SUVs.

Shifting transportation energy from oil to electricity makes more sense if that electricity is used efficiently, particularly since low-emission sources still account for less than 1/3 of our electricity supply, and the wind power most often mentioned in connection with powering EVs accounts for just 1.6% of US generation this year. On that basis, investments in the smart grid and long-distance transmission lines would probably be as helpful in supporting future EV deployment as underwriting specific EV recharging infrastructure, while avoiding the risk of becoming orphaned if EVs don't catch on.

On the generation side, whether intentionally or not, the stimulus bill passed early this year helped put wind, solar, and other renewable energy sources on a more technology-neutral basis by making them all eligible for the same 30% federal tax credit previously available only to solar power. Yet this provision still contains at least one glaring omission, because it was established under a very specific definition of renewable energy, rather than encompassing all energy sources meeting criteria for very low emissions that would also include nuclear power. Putting nuclear and renewables on a common footing would go a long way toward ending protracted arguments about which technology receives more (undeserved) government support and which is most commercially competitive, and it would foster a future generating mix offering similar depth and flexibility to the one we have now, without undesirable greenhouse gases.

Ultimately, whether you like my choice of principles or prefer different ones, we need a common set of criteria for making the energy decisions we face, instead of treating each as an ad hoc opportunity for one option or technology and its backers to win at the expense of the others--and often at the expense of taxpayers. While we certainly need to get on with deploying lower-emission ways of producing and using energy, it is premature to bet the ranch on any one option. We should still be creating new options and pruning them along the way, based on principles aligned with the basic problems we are trying to solve. While that might sound idealistic to some, it strikes me as intensely practical and much more useful in the long run than the prevailing plague of energy "answer-itis", in which everyone wants to push a specific answer before we even agree on the right questions to ask.

The Influence of "Peak Oil"

An article in the Washington Post this weekend, together with a must-read interview in The Independent, a paper I used to read regularly when I lived in London, reminded me of an observation I made several years ago concerning the similarities between Peak Oil and Y2K. Having spent a fair amount of time in my former corporate role planning for the serious outcomes the latter might have produced, I don't intend this as a slam on the former. Without rehashing the technical arguments behind either phenomenon, it's worth spending a few minutes thinking about the consequences of a growing belief that we might be only a few years away from the end of oil, as we know it. Whatever one's take on the validity of the Peak Oil argument, it has already evoked noteworthy consequences, both positive and negative.

A week ago The Independent ran an interview with Fatih Birol, chief economist of the International Energy Agency (IEA). In it Dr. Birol repeated a warning he has issued previously, that higher-than-expected decline rates in the world's mature oil fields and "chronic underinvestment by oil-producing countries" are setting up a severe oil supply crunch within the next few years, as a recovering global economy resumes its growth in energy consumption. It's not hard to imagine the "green shoots" withering if oil reprised its 2007-8 march from around $70/bbl to nearly $150. From the supply side, I have little doubt that this is correct, for reasons I've mentioned frequently in the past: restrictions on access to resources, routine diversion of national oil company profits into social budgets at the expense of reinvestment, chronic project delays, and the inherently long timelags between discovery and production. I'm less convinced that the demand side of the equation would play out the same as last time, with that experience so fresh in our minds. At the very least, though, Dr. Birol describes a highly credible scenario, and belief in its likelihood could have far-reaching consequences, good and bad.

On the plus side, our reactions needn't go to the extent of the author of a Washington Post piece, searching for self-sufficiency on a small farm in New Mexico, to have a beneficial impact on consumption patterns. Our best chance of avoiding the apocalyptic outcomes that Mr. Fine fears is to live our lives on the assumption that the days of cheap oil are indeed past, and that it will be more expensive in the future. From initial reports of the transactions involved in the Cash for Clunkers program, many people already sense this, despite gasoline prices that remain one-third below where they were at this time last year. And while I certainly don't advocate survivalism as an indicated strategy for individuals, everyone who chooses to downshift in this way stretches out the supplies available for the rest of us, making the transition to more sustainable energy sources more manageable. Merely being prepared mentally for another oil crisis might reduce the likelihood of counterproductive behavior, such as hoarding, should we find ourselves in one.

Unfortunately, these psychological effects also point to the main downside of a widespread belief in imminent Peak Oil. While I remain unconvinced of the role of speculation in last year's spike in physical oil prices, to whatever extent the s-word was driving prices on the oil futures exchanges it was underpinned by a pervasive mentality that we were experiencing something truly unprecedented, backed by hints that oil supplies had already reached their natural limit. If you believe in the inevitability of Peak Oil, today's oil futures prices must look like a buy--a steal, even at levels over $90 for delivery in 2016 or 2017.

There are many good reasons to invest in the alternative energy sources that would help mitigate a true Peak Oil crisis down the road, and that hold the seeds of eventually escaping from that threat entirely. The real mark of success for our various renewable energy, nuclear renaissance, and energy efficiency efforts would be the eventual arrival of a peak in global oil output without crippling the economy. However, the dark side of Peak Oil is a self-defeating notion that no amount of increased investment in new oil production can make any worthwhile difference in this outcome.

If the IEA is right, we certainly can't escape this pickle by drilling alone. However, it's equally true that if oil production began to drop in the next few years, no other strategy, by itself or in combination--not even dramatic improvements in energy efficiency--could make a big enough difference to avoid a serious, economy-wrenching crisis. Many of the cars on the road in 2015 will either be those already on the road today or others very similar to them, if a bit thriftier with fuel. Nor could we electrify more than a small fraction of the global car park within that timeframe, let alone a US car fleet of 245 million vehicles at a time when sales (and thus turnover) have collapsed. Double today's biofuel output--which in that timeframe mainly means more corn ethanol, with all its problems--and we still won't have made a big enough dent.

Inescapably we will need as much more oil as we could eke out, because the whole world would be going through this transition at once. If we're saving the oil in ANWR, offshore California, and the Eastern Gulf of Mexico for a rainy day, then imminent Peak Oil would be that deluge, and it takes 5-10 years to go from bidding on leases to full production. Even if this bought us only an extra 1 million barrels per day--Mr. Pickens apparently thinks twice that--the value of that to the US in a world of $200 oil would be $73 billion/year in today's dollars, along with the possible preservation of critical services if the shortfall that went beyond a mere price spike. The US can't make up for the problem of "chronic underinvestment by oil-producing countries" of which Dr. Birol rightly warns, but we could certainly exacerbate it through deliberate under-investment in our own oil capacity.

Iran's Election

Oil markets seem unfazed by the unrest in Iran, in the aftermath of that country's Presidential election. Mahmoud Ahmadinejad and Iran's Supreme Leader, the Ayatollah Khamenei, remain firmly in control, and there's no reason to expect that the ongoing demonstrations against perceived election fraud constitute a threat to Iranian oil exports. In that respect, the markets have it right. However, the conduct of the election--more than its outcome--may have altered the calculations of the nations determined to constrain Iran's nuclear ambitions, and may have inadvertently nudged Israel a step closer to acting on its own, should diplomatic efforts to halt nuclear enrichment remain stymied. But even a preemptive attack on Iran's nuclear complex might only result in a brief spike in oil prices, at least in the short run, because the fundamentals look so different than just a year ago.

The disappointment of the supporters of Mir Housein Mousavi and the other opposition candidates is palpable. We may never know whether they were cheated or merely out-polled, as some observers have suggested. If the latter view is correct, then the government was doubly inept in its handling of the situation, leaping to proclaim Mr. Ahmadinejad the resounding winner and cutting off access to the outside world, thus creating at least the strong appearance of a stolen election--a virtual coup, as some have called it. This appearance of illegitimacy, accurate or not, could haunt the government and strengthen the resolve of the "EU-3" countries leading the nuclear talks with Iran. It could also make Israel's new government even more determined that such a nation should never attain nuclear weapons, at any cost.

As described in an op-ed in the Wall St. Journal last week, air strikes by Israel on Iran's nuclear facilities could result in all sorts of adverse consequences, though this might still be seen as the least bad option should Iran remain adamant in pursuing its nuclear program. Iran's leaders proclaim their peaceful intent, an argument that resonates with the non-aligned nations and their sympathizers. However, nothing has changed the conclusion that I reached when I examined this subject in depth in 2005: the likeliest explanation for Iran's behavior and for the existence of its visible nuclear program in a country so blessed with other energy resources is that it intends to develop nuclear weapons. Even the risk of alienating Iran's moderates and uniting the country behind the hard-liners looks like less of a deterrent, if those moderates will never be allowed to win an election.

During most of the Bush administration, Iran's nuclear efforts were effectively shielded by its implicit threat to destabilize the global oil market. As I noted last fall, that was a trump card, until the global recession slashed demand, and oil inventories and spare production capacity began to accumulate. We shouldn't be fooled by the current price of oil, in this regard. It's where it is not because supply is physically constrained, as it was for much of 2007 and into 2008, but because OPEC's discipline is holding 3.25 million barrels per day off the market, according to a recent IEA assessment. That quantity is roughly 50% larger than Iran's exports. Saudi Arabia alone could cover any shortfall from Iran, particularly once its new Khurais field starts up. While many of OPEC's big producers are hardly models of democracy themselves, the perception of an illegitimate regime in Tehran would lend them significant political cover to open their taps, if the need arose.

Timing is everything, and Iran's oil weapon has been neutralized, for now; any threat of an embargo would ring hollow. The longer-term outlook is less certain. Once a global economic recovery is well under way, growing oil demand and the decline of mature fields in other producing regions will erode the current global oil capacity cushion and restore Iran's leverage. Time is now on Iran's side, and its adversaries are likely to understand that very well. Don't be surprised if the pressure on Iran ratchets up in the weeks and months ahead, before this window closes.

No Nukes?

Interesting topics for blogging abound this week, including the election results in Venezuela and Russia, both of which have implications for energy. But the most important news may be the release of the new National Intelligence Estimate (NIE) on Iran’s nuclear ambitions, concluding that the country’s active weapons program was put on hold in 2003. I have been following this issue for some time, partly because of its importance for the future stability of the oil-rich Middle East, but also because it is so inherently fascinating. The key questions about the NIE are how likely it is to be correct, this time, and how it could alter diplomatic efforts to constrain Iran. At least based on the reporting I’ve seen so far, this report changes nothing and everything, simultaneously.

First, consider the conclusions of the new NIE. It reflects a dramatic shift in the consensus of the US intelligence community away from the notion that Iran has an active nuclear weapons program extending beyond the uranium enrichment we’ve been observing for several years, to a posture that the New York Times refers to as “agnosticism” about Iran’s nuclear ambitions. To paraphrase the old hair-color ads: do they or don’t they; only their leaders know for sure. The similarities to the pre-war intelligence about Iraq are striking, particularly because it’s not clear how much of this is based on reliable intelligence assets on the ground in Iran, instead of analysis of data gathered by means of electronic and satellite reconnaissance.

I am in no position to doubt the findings of the NIE with regard to any specific programs within Iran. The fact that its findings appear to coincide with the conclusions of the International Atomic Energy Agency certainly lends it additional credibility. So let’s assume that the NIE is correct, and that all actual work on weapons, including design, fabrication, and enrichment to the concentrations necessary for a bomb, has ceased. That still leaves us with the enigma of a major oil and gas exporter spending so much money on an energy source that is clearly more expensive than developing its vast unexploited hydrocarbon reserves. I looked at this in some detail in 2005, and I haven’t encountered anything that changes my conclusion that the best explanation for Iran’s nuclear activities involves nuclear weapons somewhere down the road. Even if Iran’s visible uranium enrichment program is entirely peaceful, it still constitutes an option on a future bomb effort. If anything, the NIE’s conclusion makes it all the more remarkable that Iran would create this option at such a high diplomatic cost, without actually planning to build a bomb.

Whatever I may think about this finding, however, what really matters is how it is interpreted by the US Administration, the Congress, and especially by the international community, including the UN Security Council and the key three European participants in the diplomatic effort to contain Iran’s nuclear program, Britain, France and Germany. While the NIE report is hardly a clean bill of health for President Ahmadinejad and the ruling mullahs, it is bound to undermine support for maintaining the current level of sanctions and other pressure on Iran, let alone stiffening them. And here at home, by rendering the nuclear threat from Iran more remote, the report should strengthen the hand of politicians arguing for engaging Iran’s leaders, rather than confronting them.

The NIE should also lead to lower oil prices. As the consequences of this report play out, and as pressure on Iran begins to ease, the oil market risk premium based on the possibility of military conflict with Iran should begin to abate. It could also contribute to higher oil production capacity in the long run, by easing the restrictions on international investment flowing into Iran’s energy sector. That ought to be good for a few bucks off the current oil futures price, not just in the front months, but all the way out to 2012 and beyond.

What are left with, then? With or without an active nuclear weapons program, Iran remains generally hostile to US interests and is actively engaged in manipulating the outcome in Iraq to suit its own regional geopolitical aims. Even if it is not on a path to achieving nuclear weapons in the next few years, it is laying the groundwork for being able to do so some time in the future, as noted in the NIE. While this report ought to come as a relief to everyone, it’s less obvious that it justifies pushing the “reset” button on our entire Iran strategy. That’s what I expect most of the arguing to focus on, in the weeks ahead. In the meantime, this news ought to reinforce the other bearish factors in the oil market.

Spheres of Influence

It would be tempting to view yesterday's meeting between Presidents Putin of Russia and Ahmadinejad of Iran as the beginning of a new "axis of oil"--two petro-authoritarians forging solidarity against the West. Mr. Putin's remarks in support of Iran's nuclear program were hardly helpful to the cause of inducing Iran to become more transparent about its efforts. But while high oil prices have enabled both of their countries to pursue much more ambitious agendas than would otherwise have been possible, I see a different interpretation of Mr. Putin's comments and handshake with Mr. Ahmadinejad. Russian interests in the region go back a long way, and the reestablishment of a "sphere of interest" seems entirely compatible with Putin's view of Russia's rightful position in the world order, and his own role within Russia.

The fact that the encounter between the two leaders took place against the backdrop of a regional summit of the countries bordering the Caspian is significant. The purpose of the gathering was to assert that the only countries that ought to determine the disposition of the Caspian's resources and its infrastructure (think pipelines) are those bordering it. That boils down to Iran plus the states of the former Soviet Union, and explicitly excludes the US and EU. If this were merely a question of sovereignty, no one could argue with it. However, this sort of exclusionary approach pre-dates the "near abroad" view of the USSR and hearkens back to the "spheres of influence" theory prevalent in late tsarist Russia, which sparred with the British Empire across this geography for generations in the "Great Game" of the 19th and early 20th centuries. Perhaps President Putin believes he's engaged in a Great Game II with the US.

It's not surprising that Mr. Putin would pursue such a policy, since his own ambitions seem to mirror those of his pre- and post-Revolutionary predecessors. As described in a recent article in the Economist, the two-term limit on the Russian Presidency probably won't constrain Putin's ability to retain power, via a clever switch to an elevated office of the Prime Minister. If he can pull this off, with the help of a 70% approval rating, Vladimir Putin could easily rule Russia for decades, since he just turned 55. And like the tsars, he can afford to think long-term about expanding Russian influence and reducing that of the US across Central Asia and the Middle East. In that respect, at least, he finds common ground with Iran.

While President Ahmadinejad didn't secure a promise from Russia to fuel the nearly-complete nuclear reactor at Bushehr, Putin's vague warning about any military action against Iran will embolden Iran in its pursuit of a nuclear enrichment capability that I continue to believe only makes sense in the context of a nuclear weapons program, whether current or aspirational. That development wouldn't be in Russia's interests any more than it would be in ours. Let's hope that Mr. Putin sees all this clearly, rather than regarding Iran as simply a convenient foil against the US, or worse, as a potential client state willing to do his bidding. That would make it much harder to employ a strategy of deterrence against a future nuclear-armed Iran, while paradoxically increasing the incentive for us to act against that eventuality now, before Russo-Iranian friendship turns into an alliance.

Nuclear Freakonomics

Several weeks ago a reader of this blog commented to me on the contrast between the periodic calls for a new Manhattan Project to tackle our energy problems and the results of the actual Manhattan Project sixty years ago, which have matured to provide large quantities of economical base-load electricity in the US and many other countries. Several recent articles have addressed the revived prospects for nuclear energy, including one in last week's Economist and another in last Sunday's New York Times Magazine. In the latter, the authors of "Freakonomics" examine America's sudden shift away from nuclear power and the consequences that has had for our greenhouse gas emissions. I couldn't resist quantifying their observations.

What if the Three Mile Island accident had never occurred, or if it hadn't coincided with the release "The China Syndrome", which amplified the public's perception of the event? Would nuclear power plants have still encountered the project delays that drove up their construction costs, contributing to the roughly 20-year hiatus in new plant activity? Any answers to these questions would be purely speculative, but if the industry had continued expanding at its previous rate, then instead of the current 104 reactors, we might easily have 200, contributing 40% of our total electricity supplies. Coal-fired power plants would supply only 32% of our power needs, instead of 50%, and we'd emit roughly 650 million tons less CO2 per year. That's over 10% of our current CO2 emissions.

Or what if the US Congress had voted in 1997 to ratify the Kyoto Protocol on greenhouse gas emissions, and the country had embarked on a major expansion of nuclear power to meet our commitments under the treaty? The first new reactors would have started up a few years ago, and we'd be on a path to meet our target of reducing our emissions below 1990 levels by 2012--or at least come a lot closer to that than now seems likely.

While these scenarios ignore real-world complications such as nuclear waste and proliferation, they underline an important point. Choices have consequences, and our decision a generation ago to leave nuclear power in limbo has added billions of tons of CO2 to the atmosphere since we made it, while constraining our options for addressing the challenges we face. The decisions we make now could have similar consequences, because while renewable energy technologies such as wind and solar power can add important quantities of low-emissions electricity in the decade ahead, they cannot match nuclear's baseload characteristics and 90% onstream capacity factor. As impressive as the addition of 2,454 MW of new US wind power capacity last year was, the resulting increase in net power generation is still less than that from one new nuclear reactor.

When we assess nuclear power as an option for dealing with our energy security and emissions concerns, we ought to consider what a new fleet of reactors would enable, in terms of reducing our reliance on coal--with its implied dependence on future carbon sequestration--and providing large quantities of reliable off-peak power for the plug-in hybrids and all-electric cars that look like our lowest net-environmental-impact alternatives for displacing gasoline in the medium term. Are those benefits significant enough to warrant a more pragmatic approach to nuclear power and its byproducts? I believe so, and there are at least a few environmentalists who share that view. On balance, the risks of nuclear power look more manageable than the uncertainties of climate change or an unstable Middle East.

Northern Energy Hub

Imagine that you had a wealthy neighbor with an insatiable appetite for something that he had the capability of providing for himself, but apparently not the inclination. It might look like a good business opportunity. This is essentially the situation facing the Canadian Province of New Brunswick, which is at various stages of planning and constructing a new "energy hub" consisting of three big projects, an LNG terminal, a new refinery, and a nuclear power plant, all primarily intended to serve the market in the northeastern US. Yesterday I was interviewed by the St. John, New Brunswick radio affiliate of the Canadian Broadcasting Corporation on whether the expected US demand for these projects is likely to materialize.

Between the call from the show's producer and the actual interview I looked up the electricity forecast for the Northeast from the Energy Information Agency (EIA) of the US Department of Energy. The EIA expects electricity demand to grow by 22% by 2030, compared to 2005. That's somewhat slower than the average for the US as a whole, but still about 0.8%/year, and without any demand factored in for plug-in hybrid cars or other uses not already tapping the grid.

I suggested to the host that the key uncertainties for New Brunswick to consider were energy efficiency, the growth of renewables, and the Northeast's allergy to new energy infrastructure. Efficiency is clearly going to play a role, but will it reduce absolute demand or merely provide new headroom for growth--compact fluorescent light bulbs saving the power to run plasma TVs? Renewables could also satisfy much of the incremental demand in the region, helped along by state Renewable Portfolio Standards and a potential federal RPS, but only if big projects such as Cape Wind and the smaller Long Island wind farm can overcome strong objections by local interests. Nor does it seem very likely that the Northeast will build enough LNG import capacity of its own, given the opposition to projects like Broadwater.

The toughest question I received was for an up or down call on building a nuclear power plant in New Brunswick to supply the US. I hesitated, because it's not yet clear that nuclear power will be widely accepted as "green", even though some prominent environmentalists have endorsed it as a key strategy for countering climate change. The total regional demand growth anticipated by the EIA works out to about 7500 MW of new capacity within 25 years. One new nuke plant would deliver a big chunk of that, and unless its output got that "green e" label, it might face a tough fight for market share. But compared to the likeliest alternative source for baseload power in this period, a coal power plant with carbon sequestration, I think an export-oriented nuclear plant could succeed.

In order for New Brunswick to win the bet it is preparing to make, all that really needs to happen is for the public and governments of our northeastern states to continue doing what they've been doing: using energy in steadily growing quantities, despite high prices, and reacting with hostility whenever someone wants to build new infrastructure to meet their anticipated future needs. Of course, if they heeded the various wake-up calls they've been getting--the Blackout of 2003, climate change, and air quality problems--and suddenly started conserving or investing more, New Brunswick's new facilities might end up sitting idle.

Rethinking Nuclear

Periodically, I've noted the growing interest in nuclear power as a source of low-greenhouse-gas energy, and the way this issue is splitting environmentalists. Designs for generating electricity safely and reliably using nuclear fission have improved steadily since the last big wave of nuclear construction peaked, at least in the US--Japan and France built dozens of plants after we stopped. But while the technology has advanced, I wonder whether our mindset about it remains stuck in the model that prevailed in the 1980s, when large, centralized power plants were the norm everywhere. Is it time to rethink the application of nuclear energy to maximize its leverage on reducing greenhouse gas emissions?

What if nuclear power hadn't been discovered before World War II, and instead had emerged from the laboratory only a few years ago? How might we consider exploiting an energy source with its properties today, without the baggage of the last sixty-plus years? Is it pre-determined that the only way to tap the energy of the atom is in 1,000 MW increments? The record of the US nuclear naval propulsion program suggests otherwise. Consider the difference between coal-fired power plants and those burning natural gas. There are important economies of scale in the transportation and handling of coal, and in the sizing of boilers, that create a strong bias towards large plants. In contrast, gas-fired power comes in a wide variety of sizes, from under 100 kW to hundreds of MW, at least in part because the fuel infrastructure is so simple. So is nuclear power more like coal or gas in this regard? It's probably somewhere in between, after you factor in the need to contain the radioactive fuel.

I can think of lots of ways to use a medium-sized source of intense heat that doesn't need to be re-fueled continuously, and making power is only a sub-set of those applications. Combined-heat-and-power (CHP) at facilities that need large quantities of process heat and currently burn huge amounts of fossil fuels might be a better, more efficient candidate. Oil sands production shares those characteristics, and there was a brief flirtation with this idea several years ago. And I recently ran across the website of a company that wants to use nuclear energy in an even more novel way, for coal-to-liquids. CTL requires both process heat and large quantities of hydrogen to upgrade solid coal to liquid hydrocarbons, and using nuclear power, rather than coal or natural gas for these purposes would shrink the net emissions of CTL fuels down to roughly the same range as petroleum products.

Realistically, we can't ignore the legacy of the Cold War or nuclear accidents, nor the prospect of further weapons proliferation or WMD terrorism. But that doesn't mean we shouldn't examine where a "clean sheet" approach to nuclear energy might take us, particularly if it involved smaller scales, quicker implementation, and fuel cycles that are less vulnerable to accidents or proliferation. That might not be sufficient to convince critics to turn in their "No Nukes" signs, but it would go a long way towards convincing the public that nuclear energy is a viable element of our low-carbon energy future.

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.

Renewables and Water

An email from a friend triggered a line of thought that fits with many comments here about how best to fit renewable power into an energy system that doesn't match its characteristics very well. In a response to last Friday's posting (which was featured in the Wall Street Journal's Energy Roundup blog) she mentioned attending a conference and hearing a proposal to use nuclear power to provide fresh water. This idea has been around for decades, and it has been implemented in a few places. As fresh water becomes increasingly scarce in many parts of the world, nuclear desalination could become attractive. But electricity is fungible, and it seems like a shame to waste hundreds or thousands of Megawatts of reliable, baseload power on an application that doesn't require either quality, at least not to the same degree as commercial and residential customers do. This seems like a perfect application for wind or solar power.

One of the perennial arguments against renewables is their intermittency or cyclicality. Adding energy storage to smooth this out--even low-cost pumped storage--affects project economics that still generally require subsidies to match the returns from conventional energy. Several of my readers have pointed out that widely dispersed wind farms are less variable in aggregate than individually, and large grids can accommodate reasonable quantities of intermittent power without requiring storage. Fair enough, but that will only take you so far, as countries with a high concentration of wind power in a small area, such as Denmark, have learned. This is one reason you see people talking about using wind to generate hydrogen, which can be accumulated non-ratably and dispensed as needed.

Desalination seems like another, even more useful way to avoid having to match the demanding standards of the power grid. We've been storing water for millennia, and there's nothing that says that the production from a desalination plant must feed directly into the water main, without spending some time in a tank or reservoir that would naturally buffer the unpredictable generation from a facility run by wind turbines. In fact, a developer could add power storage to the mix as well, by pumping the potable water uphill and using it to generate power at times of peak demand. And unlike reactors, which come in pretty large size increments, wind and solar are essentially infinitely scalable. This isn't an argument against nuclear power, which looks like an increasingly important option in a carbon-constrained world. It's just my sense that there are better uses for the steady, high-quality power output from a reactor.

Wind and solar power are now growing rapidly, from a very small base. But mightn't they grow even faster, if, instead of forcing their output to match our established usage patterns, clever developers channeled some of their efforts into applications for which the drawbacks of current renewable energy technology don't matter?