For most of the time that I have been involved in the energy business, with the exception of the last few years and a couple of brief windows that closed quite rapidly, the refining segment of the industry has been the least glamorous, least appreciated, and least career-advancing part of the industry to be associated with. I've described this situation before, but of course now, in the aftermath of an almost-worst-case event for the US Gulf Coast oil and gas industry, we appreciate rather more the work that refineries do and how delicately balanced the whole system is. The best summation of the pivotal nature of these unappealing beasts is from the Saudi Oil Minister, in Sunday's New York Times. "We cannot keep producing oil with no refineries. There is a limit."
The Times article, along with several other recent ones elsewhere, does a good job of explaining the current situation and how things got this way. I've posted comments on other people's blogs, trying to shed whatever light I can on remaining misunderstandings about this part of the petroleum "value chain." At the same time, I've been scratching my head about suggestions for a "strategic refining reserve" and ways to induce the industry to expand capacity. That won't be easy.
Part of the reason we're in the pickle we're in--in addition to all the points others have raised about poor historic returns and the costs and difficulties associated with permitting and environmental regulations--is that the industry finally escaped its vicious cycle of overbuilding every time the margins looked healthy. In fact, the industry had quite a bit of help in this regard from the government, which broke the back of the earlier independent refining sector (i.e., pre-Valero) with a series of environmental regulations that added enormously to the capital cost of the business without changing the products in a way that anyone seemed willing to pay even a penny more for. Only the majors and the largest independents could play that game for long, and even the majors tired of it, selling off dozens of refineries in the 1980s and 1990s, and even demolishing a few along the way.
Now, many of those regulations were necessary and beneficial. We can all see the consequences, though: an industry that couldn't withstand even a much smaller disaster than Katrina without severe disruptions, but that's finally making a healthy profit, for which it is widely reviled. Just as importantly, since Katrina a number of folks have been going through the numbers--which were always available on the DOE's Energy Information Agency website--and have suddenly realized that the US doesn't just import vast quantities of crude oil. We also import between one and two million barrels per day of refined products that we lack the capacity to produce for ourselves. These quantities will only grow, until we get our consumption of transportation fuels under control, or find a good alternative.
These imports have consequences for the country as a whole, and for environmental regulators, in particular. So far, whenever we've wanted to tighten the specifications on the gasoline and diesel fuel sold in this country, to reduce their impact on the environment, the burden has fallen entirely on a domestic industry with no alternative but to comply. What else were the oil companies going to do, dismantle their refineries and move them to China?
Now, however, we've grown reliant on imports, and Katrina makes us even more so, for the coming months. If we want to reduce sulfur, aromatics, or some other component or impurity further, will our foreign suppliers rush to comply? Will they invest in extra capacity to supply us, when other markets are growing at least as rapidly, but are less finicky about quality? And which will be the first company to build a new refinery in the US--with permits rushed through a worried Congress, perhaps--in the certain knowledge that the moment it starts up will be the beginning of a long slide back to returns you wouldn't accept on a bank cd?
Of course, the alternative is to nationalize them all and turn the whole downstream part of the oil industry into a utility, which is how we seem to expect it to behave most of the time, anyway. Somehow I can't imagine that outcome delivering anything like the kind of reliability and efficiency that the profit motive has done for over a century. If you are skeptical about that, there are plenty of examples to look at in other countries.
In an odd way, Katrina has done the same thing for oil refining that the 2003 Northeast Blackout did for electric power distribution. It has shined a light into a dark corner of the energy industry and scared the daylights out of anyone who bothered to look. What is waiting in the other dark corners, as a result of two decades of the expanding disconnection between our appetite for more energy and our low regard for the means of producing it?
Monday, September 12, 2005
Friday, September 09, 2005
Final Accountability
The UN's independent inquiry into the Oil-for-Food scandal, headed by former Fed Chairman Paul Volcker, issued its final report this week. This puts an end to an episode in international governance that goes beyond mere embarrassment. Its consequences have never been fully appreciated, and in my view, both the Volcker Report and Secretary-General Annan's appropriately contrite response still fall short in that regard, even though they support the need for UN reform.
Accountability is a word that has recently reentered our vocabulary in the context of the confused response to Hurricane Katrina. Politicians, pundits, and average citizens across the spectrum are calling for a thorough investigation that will hold those responsible for the poor execution of rescue and relief efforts accountable. Admission of responsibility for actions or inaction, without acceptance of responsibility for the consequences, does not meet the test of real accountability. And that is precisely my problem with Oil-for-Food.
The Iraq War was a war of choice for America and the allies that joined us. Whether you agree with that choice or not, it is hard in retrospect to argue that Iraq was an immediate danger to world peace or an immediate threat to this country. But just as this is now clear, it is equally clear that the circumstances that put this choice on the table were created by the perceived failure of international sanctions and the mechanisms by which they were enforced to deprive Iraqi of the means for acquiring weapons that threatened their neighbors, up to and including the unrealized potential--call it a too-clever bluff--of WMD.
In evaluating the failures of the UN's administration of Oil-for-Food, it's important to keep in mind the role that the program played within the international sanctions regime. Oil-for-Food was the key to the sustainability of sanctions, with its intended purpose of minimizing the impact on Iraqi civilians. The corruption of Oil-for-Food and the misallocation of the supplies it acquired created a machine that Saddam used to turn oil, food and medicine into cash for arms and palaces, while keeping his people in misery--misery that was highly visible to the international community and that was visibly eroding the resolve within the Security Council to maintain and enforce sanctions. (Mr. Volcker's finding that Oil-for-Food succeeded in maintaining "the international effort to deprive Saddam Hussein of weapons of mass destruction" ignores the rate at which support for sanctions was decaying in 2000-2002.)
I am not calling for Kofi Annan's head on a platter. Rather, I am disappointed and vexed that the UN has still failed to admit that its actions set the stage for a war that Oil-for-Food was established to prevent, and that has contributed to the tightening of global oil supplies. Anything short of this escapes true accountability and reduces the likelihood that the UN will be given such responsibility in the future.
Accountability is a word that has recently reentered our vocabulary in the context of the confused response to Hurricane Katrina. Politicians, pundits, and average citizens across the spectrum are calling for a thorough investigation that will hold those responsible for the poor execution of rescue and relief efforts accountable. Admission of responsibility for actions or inaction, without acceptance of responsibility for the consequences, does not meet the test of real accountability. And that is precisely my problem with Oil-for-Food.
The Iraq War was a war of choice for America and the allies that joined us. Whether you agree with that choice or not, it is hard in retrospect to argue that Iraq was an immediate danger to world peace or an immediate threat to this country. But just as this is now clear, it is equally clear that the circumstances that put this choice on the table were created by the perceived failure of international sanctions and the mechanisms by which they were enforced to deprive Iraqi of the means for acquiring weapons that threatened their neighbors, up to and including the unrealized potential--call it a too-clever bluff--of WMD.
In evaluating the failures of the UN's administration of Oil-for-Food, it's important to keep in mind the role that the program played within the international sanctions regime. Oil-for-Food was the key to the sustainability of sanctions, with its intended purpose of minimizing the impact on Iraqi civilians. The corruption of Oil-for-Food and the misallocation of the supplies it acquired created a machine that Saddam used to turn oil, food and medicine into cash for arms and palaces, while keeping his people in misery--misery that was highly visible to the international community and that was visibly eroding the resolve within the Security Council to maintain and enforce sanctions. (Mr. Volcker's finding that Oil-for-Food succeeded in maintaining "the international effort to deprive Saddam Hussein of weapons of mass destruction" ignores the rate at which support for sanctions was decaying in 2000-2002.)
I am not calling for Kofi Annan's head on a platter. Rather, I am disappointed and vexed that the UN has still failed to admit that its actions set the stage for a war that Oil-for-Food was established to prevent, and that has contributed to the tightening of global oil supplies. Anything short of this escapes true accountability and reduces the likelihood that the UN will be given such responsibility in the future.
Thursday, September 08, 2005
Not Just Oil
Right now the primary energy focus of the post-Katrina recovery is on the refineries that produce 10% of our gasoline, diesel/heating oil, and other petroleum products. At the same time, companies are scrambling to find enough crude oil to supply these facilities, once they restart, since a sizeable fraction of Gulf of Mexico crude oil production--a quarter of all domestic oil production--will be offline for some time. But a growing number of analysts are beginning to realize the implications of Katrina for natural gas markets, as described by today's Financial Times (subscription required.) We are in for a serious crunch, and the extraordinarily high gas prices on the futures market underline this view.
For some time, I have expressed concern that we are headed for a train wreck with regard to natural gas. Gas is our cleanest fossil fuel, and its consumption has grown rapidly as the preferred fuel for generating electricity most efficiently, with low emissions of all types, including greenhouse gases. Unfortunately, our supply of conventional natural gas has hit a stall point, for several reasons:
For some time, I have expressed concern that we are headed for a train wreck with regard to natural gas. Gas is our cleanest fossil fuel, and its consumption has grown rapidly as the preferred fuel for generating electricity most efficiently, with low emissions of all types, including greenhouse gases. Unfortunately, our supply of conventional natural gas has hit a stall point, for several reasons:
- The natural decline rates of mature offshore gas fields have exceeded expectations. In other words, existing wells in these fields are slowing down faster than new wells can be drilled, and the new wells lose productivity faster than in the past.
- Vast quantities of previously discovered gas have been placed off-limits by land-use restrictions and by offshore drilling bans that fail to differentiate between oil and non-associated gas deposits (i.e., gas not found in oil fields.)
- Imports from Canada face competition from growing Canadian demand, including demand for the gas required to fuel oil sands extraction projects in Northern Alberta.
- Imports of LNG have topped out at existing facilities, and construction of new import terminals has been impeded by permitting problems and blatant NIMBY-ism.
These trends were all in place before the hurricane hit. Now, with roughly 20% of US natural gas production out of action during the period in which gas must be injected into storage for use during the winter heating season, all remaining slack in the system has been eliminated, and we will face hard choices within a few months. Nor are there any policy decisions--including easing some of the post-9/11 shipping restrictions that have limited LNG imports at Cabot's Everett, MA facility--that could change this picture materially in time for the cold weather.
Instead, we are likely to see an acceleration of the existing response mechanisms, with domestic demand destruction filling in for expanded supply. That means shifting more power generation onto coal-fired plants, with the accompanying increases in emissions. We will also see beleaguered industrial users, particularly fertilizer and petrochemical producers that were already losing the competitive battle against imports from countries with cheaper gas, selling their long-term supplies back into the market and shutting down capacity. That will result in lost jobs and lost GDP.
Some of this would have been unavoidable, but much of it must be attributed not to Katrina--which merely exposed the flaws--but to years of bad policy decisions that have hobbled the fuel that was our primary safety valve during the previous energy crisis. Prompt action to rectify these policy faults, some of which were partially addressed in the recent Energy Bill, could put us in a much better position for the winter of 2006-2007. Meanwhile, it is not too early for us all to start cutting back on our natural gas consumption by reducing electricity use and keeping heater thermostats a couple of degrees lower than normal. That way, a few more cubic feet might find their way into storage, for use when we will really need them in January and February.
Wednesday, September 07, 2005
Banning "Gouging" from Our Vocabulary
Bravo for the Wall St. Journal's editorial today (subscription required) concerning gasoline price gouging. It's pretty gutsy, even for the flagship media outlet of capitalism, to praise a practice that carries so many negative associations, not just in the recent past, but throughout the history of this country. And yet, it's a useful reminder that we have chosen freely to live in a market economy, and price is the tool through which the market regulates the necessary balance between supply and demand.
The impulse behind the general condemnation of gouging is noble: no one should profit from the misfortune of his neighbors. The problem is that, no matter how heartfelt and compassionate the basis of this dictum may be, when it comes to the sale of a commodity like gasoline, it is unwise and counterproductive. Anti-gouging laws and prosecutions of those suspected of the practice send a signal to the market that the government is willing to restrain prices artificially at a time when supply is scarce, thus contributing to a mentality of hoarding and negating the feedback mechanism that reduces demand.
Think about this from the standpoint of competition, which is generally the test of how well a market is functioning. At latest count, there were roughly 170,000 service stations in the US, 90% or so of which are owned by individuals or small businesses, not by oil companies. Never a high margin activity, gasoline retailers must typically supplement with sales of convenience items with much higher margins, in order for a station to turn an acceptable profit for the owner. Despite frequent allegations of collusion and price-fixing, this is a highly competitive business. How many other stores post the prices of their products where you can see them while driving by? Any station pricing significantly higher than its neighbors would see its sales dry up in a day. By the same token, undercutting its neighbors' prices by a large increment would drive up sales, but at the expense of already skinny profits.
Of course, allegations of gouging are normally only raised in the context of unusual circumstances, such as in the aftermath of a disaster. Competition plays less of a role in situations like this, and it's easy to see how a station owner might be able to set prices very high and still expect to sell his product. In fact, in a disaster in which the means for producing and distributing petroleum products has been severely disrupted, that is precisely what he should do, to prevent all the product being sold quickly and then none being available at any price, until the next delivery, which might not come for days.
Why is running out so bad? Consider drivers who need to fill up on their way to work. If the most convenient station has no fuel, they will have to drive to the next one. If that station is out, too, many of these folks will just head to work and hope to fill up later, but some won't have enough gas to do that, and will be faced with the choice of driving around until they find a station that has fuel, or of missing work that day. The value of the time lost in this activity, and the work lost if they are unsuccessful, outweighs the incremental cost of filling up at a higher price. For work, you can substitute any other activity of social or economic importance, and the argument still applies. Runouts are bad for the economy and bad for society.
So far, in the case of Katrina, higher prices seem to have had their intended effect. As of yesterday's report from the Energy Information Agency of the Department of Energy, the average price of regular gasoline had risen to $3.06/gallon, with some regions as high as $3.29. By definition, that means that while some stations fall below these averages, others are above, and some well above. But as stressful as that has been for consumers, only a few stations have reported running out.
Returning to our compassionate impulses and public morality, doesn't it make more sense to put these into practice by finding ways to reduce the impact of market forces on those least able to bear them? A gas-tax rebate for low income consumers makes for better policy than interfering with the market's ability to balance supply and demand. I believe that most of our legislators and public officials, up to and including the President, understand this. After all, it's only the application of things you'd learn in the first week or two of any Economics course. Unfortunately, they find it more politically expedient to condemn gouging and promise hearings and prosecutions, rather than reminding the public that paying more for a scarce commodity is fully consistent with the principles on which this country was founded, even if it might be painful in practice.
The impulse behind the general condemnation of gouging is noble: no one should profit from the misfortune of his neighbors. The problem is that, no matter how heartfelt and compassionate the basis of this dictum may be, when it comes to the sale of a commodity like gasoline, it is unwise and counterproductive. Anti-gouging laws and prosecutions of those suspected of the practice send a signal to the market that the government is willing to restrain prices artificially at a time when supply is scarce, thus contributing to a mentality of hoarding and negating the feedback mechanism that reduces demand.
Think about this from the standpoint of competition, which is generally the test of how well a market is functioning. At latest count, there were roughly 170,000 service stations in the US, 90% or so of which are owned by individuals or small businesses, not by oil companies. Never a high margin activity, gasoline retailers must typically supplement with sales of convenience items with much higher margins, in order for a station to turn an acceptable profit for the owner. Despite frequent allegations of collusion and price-fixing, this is a highly competitive business. How many other stores post the prices of their products where you can see them while driving by? Any station pricing significantly higher than its neighbors would see its sales dry up in a day. By the same token, undercutting its neighbors' prices by a large increment would drive up sales, but at the expense of already skinny profits.
Of course, allegations of gouging are normally only raised in the context of unusual circumstances, such as in the aftermath of a disaster. Competition plays less of a role in situations like this, and it's easy to see how a station owner might be able to set prices very high and still expect to sell his product. In fact, in a disaster in which the means for producing and distributing petroleum products has been severely disrupted, that is precisely what he should do, to prevent all the product being sold quickly and then none being available at any price, until the next delivery, which might not come for days.
Why is running out so bad? Consider drivers who need to fill up on their way to work. If the most convenient station has no fuel, they will have to drive to the next one. If that station is out, too, many of these folks will just head to work and hope to fill up later, but some won't have enough gas to do that, and will be faced with the choice of driving around until they find a station that has fuel, or of missing work that day. The value of the time lost in this activity, and the work lost if they are unsuccessful, outweighs the incremental cost of filling up at a higher price. For work, you can substitute any other activity of social or economic importance, and the argument still applies. Runouts are bad for the economy and bad for society.
So far, in the case of Katrina, higher prices seem to have had their intended effect. As of yesterday's report from the Energy Information Agency of the Department of Energy, the average price of regular gasoline had risen to $3.06/gallon, with some regions as high as $3.29. By definition, that means that while some stations fall below these averages, others are above, and some well above. But as stressful as that has been for consumers, only a few stations have reported running out.
Returning to our compassionate impulses and public morality, doesn't it make more sense to put these into practice by finding ways to reduce the impact of market forces on those least able to bear them? A gas-tax rebate for low income consumers makes for better policy than interfering with the market's ability to balance supply and demand. I believe that most of our legislators and public officials, up to and including the President, understand this. After all, it's only the application of things you'd learn in the first week or two of any Economics course. Unfortunately, they find it more politically expedient to condemn gouging and promise hearings and prosecutions, rather than reminding the public that paying more for a scarce commodity is fully consistent with the principles on which this country was founded, even if it might be painful in practice.
Tuesday, September 06, 2005
"People Are Our Most Important Resource"
For years oil companies have included words like the above quote in their annual reports and other communications, but this cliche has never been more apt than now. One of the biggest challenges facing the companies attempting to repair and restart their refineries, pipelines, and oil and gas production facilities will be gathering up their workforces, which have been scattered throughout the South and Southeastern US. This article from the Houston Chronicle describes the problem in more detail. Based on reports of displaced refinery workers who are seeking jobs near the shelters in which they are living, this process could take some time. If so, finding or replacing missing employees could turn out to be the key factor in resuming normal operations.
Current indications suggest that about half the idled refineries, representing 5% of US capacity, will restart within days, while the other half could be laid up for weeks or months. If the latter all require major repairs, locally-available resources would be strained in the best of times. It's important to realize that over the last couple of decades, oil companies have responded to the same competitive pressures as other industries, outsourcing many functions--including most non-routine facility maintenance and repair--and trimming operating staffs to a point of lean efficiency. But that also means that if the hurricane created more than a few vacancies in key operating positions on vital units within a refinery, managers will be hardpressed to undertake the complicated procedures required for a safe startup.
After a disaster of this magnitude, refiners will likely have to employ the same approach as the affected electric utilities: bringing in employees and contractors from unaffected facilities all over the country, in order to fill the gaps. This adds complexity to an already arduous task, and likely adds further delays. As a result, deft management of existing inventories and expected imports remains critical. This burden falls on another group of key people.
Because the impact of refined product imports from Europe and elsewhere won't be felt for at least another week, the task of rebalancing the crippled products distribution system and minimizing localized outages rests with the oil company supply and distribution groups, which will need all their resourcefulness to respond to unpredictable changes in delivery schedules. I vividly recall dealing with this on a much smaller scale, when a single refinery or pipeline shut down unexpectedly, and I can only imagine the hours these folks have put in since Katrina hit. If you live east of the Mississippi and your region hasn't experienced runouts, it is probably the result of some very fancy footwork by a small number of stressed-out oil company traders and pipeline schedulers in Houston. Lets hope they can continue their magic until the cavalry arrives.
For years oil companies have included words like the above quote in their annual reports and other communications, but this cliche has never been more apt than now. One of the biggest challenges facing the companies attempting to repair and restart their refineries, pipelines, and oil and gas production facilities will be gathering up their workforces, which have been scattered throughout the South and Southeastern US. This article from the Houston Chronicle describes the problem in more detail. Based on reports of displaced refinery workers who are seeking jobs near the shelters in which they are living, this process could take some time. If so, finding or replacing missing employees could turn out to be the key factor in resuming normal operations.
Current indications suggest that about half the idled refineries, representing 5% of US capacity, will restart within days, while the other half could be laid up for weeks or months. If the latter all require major repairs, locally-available resources would be strained in the best of times. It's important to realize that over the last couple of decades, oil companies have responded to the same competitive pressures as other industries, outsourcing many functions--including most non-routine facility maintenance and repair--and trimming operating staffs to a point of lean efficiency. But that also means that if the hurricane created more than a few vacancies in key operating positions on vital units within a refinery, managers will be hardpressed to undertake the complicated procedures required for a safe startup.
After a disaster of this magnitude, refiners will likely have to employ the same approach as the affected electric utilities: bringing in employees and contractors from unaffected facilities all over the country, in order to fill the gaps. This adds complexity to an already arduous task, and likely adds further delays. As a result, deft management of existing inventories and expected imports remains critical. This burden falls on another group of key people.
Because the impact of refined product imports from Europe and elsewhere won't be felt for at least another week, the task of rebalancing the crippled products distribution system and minimizing localized outages rests with the oil company supply and distribution groups, which will need all their resourcefulness to respond to unpredictable changes in delivery schedules. I vividly recall dealing with this on a much smaller scale, when a single refinery or pipeline shut down unexpectedly, and I can only imagine the hours these folks have put in since Katrina hit. If you live east of the Mississippi and your region hasn't experienced runouts, it is probably the result of some very fancy footwork by a small number of stressed-out oil company traders and pipeline schedulers in Houston. Lets hope they can continue their magic until the cavalry arrives.
Monday, September 05, 2005
Friday, September 02, 2005
Yergin on Katrina
Today's Wall St. Journal includes an excellent op-ed by Daniel Yergin on the impact and implications of Katrina. Unfortunately, it only seems to be available to subscribers. Besides providing a good summary of how Katrina has affected the nation's energy system, he has some good suggestions about changing the way we think of energy security, shifting to a more comprehensive, supply-chain assurance approach and away from a focus on potential disruptions to crude oil supply.
Today's Wall St. Journal includes an excellent op-ed by Daniel Yergin on the impact and implications of Katrina. Unfortunately, it only seems to be available to subscribers. Besides providing a good summary of how Katrina has affected the nation's energy system, he has some good suggestions about changing the way we think of energy security, shifting to a more comprehensive, supply-chain assurance approach and away from a focus on potential disruptions to crude oil supply.
Those Unintended Consequences
For as long as I can remember, I've delighted in trying to think things through to their logical conclusions, even if those conclusions aren't readily apparent. John Tierney of the New York Times had a go at this game earlier this week, in an op-ed focused on the unintended consequences of granting special privileges to hybrid cars. The particular perk he had in mind was the use of carpool lanes by designated highly-efficient hybrids. He makes a good case that this will result in more pollution, congestion, and oil consumption overall, exactly the opposite of the intended outcome.
Without a careful analysis of the number of vehicles involved, city by city, I can't confirm that Mr. Tierney's conclusion is correct, though it's likelier to be right if this benefit is extended for more than a year or two. I also need to give some further thought to the alternative he proposes. In any case, he has uncovered a thorny problem at the heart of almost every alternative fuel and alternative transportation technology: the dilemma posed by the need to make the alternative--which typically starts out requiring some form of subsidy or incentive--attractive enough to catch on without creating a self-perpetuating constituency for preserving the incentive, long after it becomes unnecessary or counterproductive.
The classic example of this is the road tax on fuels. Alternative fuels are usually introduced with either no road tax or a reduced tax, to make them competitive with gasoline. Gasoline containing ethanol has received a tax break for decades, and you won't hear any advocate of natural gas or hydrogen suggest that they be fully taxed when used in cars. Of course, as the number of cars using these low-tax or tax-free fuels climbs, tax revenues will fall, and the impact will fall hardest on states and municipalities lacking the means to make up these revenues elsewhere. LPG, which has been used in cars for years, is still not fully-taxed in all states.
Now, I have no problem with subsidizing the fuels and car technologies that we want to promote, but doesn't it make sense to rethink the mechanisms that these incentives distort, in order to minimize any long-term disruptions? If we want a future in which fuel consumption declines or disappears altogether, then taxing cars or miles driven, rather than fuel, is a better way to pay for the infrastructure they use. (I'm sure we can find other things to do with the fuel tax revenue.)
The bottom line is that government bodies need to think through the consequences of their actions concerning alternative fuels and transportation, because of the persistence of the changes involved. Anyone proposing carpool-lane access for hybrids--or a tax holiday for alternate fuels--should be required to present a clear plan for what will happen when a sizeable fraction of the cars on the road qualify. In the process, they just might come up with a better way to achieve the goal they are pursuing, instead of narrowly focusing on one particular means of reaching it. In the meantime, the discussion about incentives for hybrids may become moot, if Katrina turns out to be the final tipping point for hybrid car sales.
For as long as I can remember, I've delighted in trying to think things through to their logical conclusions, even if those conclusions aren't readily apparent. John Tierney of the New York Times had a go at this game earlier this week, in an op-ed focused on the unintended consequences of granting special privileges to hybrid cars. The particular perk he had in mind was the use of carpool lanes by designated highly-efficient hybrids. He makes a good case that this will result in more pollution, congestion, and oil consumption overall, exactly the opposite of the intended outcome.
Without a careful analysis of the number of vehicles involved, city by city, I can't confirm that Mr. Tierney's conclusion is correct, though it's likelier to be right if this benefit is extended for more than a year or two. I also need to give some further thought to the alternative he proposes. In any case, he has uncovered a thorny problem at the heart of almost every alternative fuel and alternative transportation technology: the dilemma posed by the need to make the alternative--which typically starts out requiring some form of subsidy or incentive--attractive enough to catch on without creating a self-perpetuating constituency for preserving the incentive, long after it becomes unnecessary or counterproductive.
The classic example of this is the road tax on fuels. Alternative fuels are usually introduced with either no road tax or a reduced tax, to make them competitive with gasoline. Gasoline containing ethanol has received a tax break for decades, and you won't hear any advocate of natural gas or hydrogen suggest that they be fully taxed when used in cars. Of course, as the number of cars using these low-tax or tax-free fuels climbs, tax revenues will fall, and the impact will fall hardest on states and municipalities lacking the means to make up these revenues elsewhere. LPG, which has been used in cars for years, is still not fully-taxed in all states.
Now, I have no problem with subsidizing the fuels and car technologies that we want to promote, but doesn't it make sense to rethink the mechanisms that these incentives distort, in order to minimize any long-term disruptions? If we want a future in which fuel consumption declines or disappears altogether, then taxing cars or miles driven, rather than fuel, is a better way to pay for the infrastructure they use. (I'm sure we can find other things to do with the fuel tax revenue.)
The bottom line is that government bodies need to think through the consequences of their actions concerning alternative fuels and transportation, because of the persistence of the changes involved. Anyone proposing carpool-lane access for hybrids--or a tax holiday for alternate fuels--should be required to present a clear plan for what will happen when a sizeable fraction of the cars on the road qualify. In the process, they just might come up with a better way to achieve the goal they are pursuing, instead of narrowly focusing on one particular means of reaching it. In the meantime, the discussion about incentives for hybrids may become moot, if Katrina turns out to be the final tipping point for hybrid car sales.
Thursday, September 01, 2005
As Prices Head Higher
It's been fascinating watching the price of the most visible commodity in the world. In yesterday's session on the New York Mercantile Exchange light, sweet crude oil settled slightly lower, suggesting that for now the market has dialed in the impact of a lengthy shutdown of much of the Gulf Coast's oil production, along with the Administration's willingness to at least lend oil from the Strategic Petroleum Reserve (SPR) to refiners having trouble getting access to their normal supplies.
Gasoline, which poses more immediate supply problems, exceeded $2.90/gallon for part of the session but closed below $2.60. If you want to know where your local street price is headed, a good first approximation is to take that price, add in federal and state taxes, and another $.15-.20 for dealer margin. Where I am in Connecticut, that works out to about $3.30, vs. $3.059 yesterday afternoon at my local Shell station. But remember that local factors are going to create a wide variance around these figures, especially in states with no other supply than that from the affected refineries and pipelines.
Trying to predict where prices will go from here is tricky. Within a few days, we'll have a better sense of how long the key petroleum product pipelines and refineries will be down, and the market will be getting a sense of what's available to import, from where, and how long it will take to arrive. That should get us another price adjustment, probably up. In the meantime, the biggest factor of all, demand, will set the market direction. As I indicated the other day, with gasoline inventories already tight when Katrina hit, and refineries already running flat out, the only ways to make up for any lost production are with imports and reduced demand, and the latter will predominate until the former can come into play. How much will demand have to fall to balance the system in the meantime?
If you figure that demand in the three states most affected has fallen by a large fraction, say 2/3, then on a ratio of affected population to the whole, that should reduce US gasoline demand by about 3%. Since we've lost 10% of gasoline production for the time being, we need to cut another 7%. That amounts to 25 million gallons/day, or about the quantity used by 19 million cars. How do we cut that much? With prices approaching $3.00/gallon before Katrina, I have to believe it's going to take something much higher than that, $4 or $5, given how hard it is for consumers to adjust their usage patterns.
Finally, I'm disturbed by comments about price gouging. Sure, the guy in Georgia who jumped his price to $6 in one day deserves the trouble he will get, but we need to be very clear, here: This is not some scheme by Big Oil to squeeze money out of our pockets; this is a national crisis. If gasoline prices don't rise enough to slash demand by the quantities suggested above, then instead of a few outages--confined to locations that have lost their main supply source for a few weeks--we will have nationwide outages due to hoarding behavior. From my perspective, the higher prices go, the lower the risk of gas lines all over the country, with the accompanying penalty in lost productivity. I understand this will mean real economic hardship for those least able to bear it. Perhaps we need to be talking about an income tax rebate for the poorest Americans, rather than capping gasoline prices, as has been done in Hawaii.
It's been fascinating watching the price of the most visible commodity in the world. In yesterday's session on the New York Mercantile Exchange light, sweet crude oil settled slightly lower, suggesting that for now the market has dialed in the impact of a lengthy shutdown of much of the Gulf Coast's oil production, along with the Administration's willingness to at least lend oil from the Strategic Petroleum Reserve (SPR) to refiners having trouble getting access to their normal supplies.
Gasoline, which poses more immediate supply problems, exceeded $2.90/gallon for part of the session but closed below $2.60. If you want to know where your local street price is headed, a good first approximation is to take that price, add in federal and state taxes, and another $.15-.20 for dealer margin. Where I am in Connecticut, that works out to about $3.30, vs. $3.059 yesterday afternoon at my local Shell station. But remember that local factors are going to create a wide variance around these figures, especially in states with no other supply than that from the affected refineries and pipelines.
Trying to predict where prices will go from here is tricky. Within a few days, we'll have a better sense of how long the key petroleum product pipelines and refineries will be down, and the market will be getting a sense of what's available to import, from where, and how long it will take to arrive. That should get us another price adjustment, probably up. In the meantime, the biggest factor of all, demand, will set the market direction. As I indicated the other day, with gasoline inventories already tight when Katrina hit, and refineries already running flat out, the only ways to make up for any lost production are with imports and reduced demand, and the latter will predominate until the former can come into play. How much will demand have to fall to balance the system in the meantime?
If you figure that demand in the three states most affected has fallen by a large fraction, say 2/3, then on a ratio of affected population to the whole, that should reduce US gasoline demand by about 3%. Since we've lost 10% of gasoline production for the time being, we need to cut another 7%. That amounts to 25 million gallons/day, or about the quantity used by 19 million cars. How do we cut that much? With prices approaching $3.00/gallon before Katrina, I have to believe it's going to take something much higher than that, $4 or $5, given how hard it is for consumers to adjust their usage patterns.
Finally, I'm disturbed by comments about price gouging. Sure, the guy in Georgia who jumped his price to $6 in one day deserves the trouble he will get, but we need to be very clear, here: This is not some scheme by Big Oil to squeeze money out of our pockets; this is a national crisis. If gasoline prices don't rise enough to slash demand by the quantities suggested above, then instead of a few outages--confined to locations that have lost their main supply source for a few weeks--we will have nationwide outages due to hoarding behavior. From my perspective, the higher prices go, the lower the risk of gas lines all over the country, with the accompanying penalty in lost productivity. I understand this will mean real economic hardship for those least able to bear it. Perhaps we need to be talking about an income tax rebate for the poorest Americans, rather than capping gasoline prices, as has been done in Hawaii.
Wednesday, August 31, 2005
Symbolic SPR Move
There's been a lot of debate about whether releasing oil from the Strategic Petroleum Reserve (SPR) can help at all, in light of the refinery capacity problem we face. The short answer is that it can't hurt, and I applaud the Administration's decision to approve an SPR loan request, since at the very least this will remove some of the incentive for further speculation in the crude oil market, barring more bad news. Large-scale releases, though, should await a full assessment of the damage to oil production in the Gulf and the restarting of the idle refineries in the region.
The EPA's waiver of certain gasoline and diesel fuel specifications for the affected states will also ease some supply constraints, but I suspect that for this to be truly effective, it will end up having to be applied to a much wider area, including all the states receiving supplies from the Colonial Pipeline system.
There's been a lot of debate about whether releasing oil from the Strategic Petroleum Reserve (SPR) can help at all, in light of the refinery capacity problem we face. The short answer is that it can't hurt, and I applaud the Administration's decision to approve an SPR loan request, since at the very least this will remove some of the incentive for further speculation in the crude oil market, barring more bad news. Large-scale releases, though, should await a full assessment of the damage to oil production in the Gulf and the restarting of the idle refineries in the region.
The EPA's waiver of certain gasoline and diesel fuel specifications for the affected states will also ease some supply constraints, but I suspect that for this to be truly effective, it will end up having to be applied to a much wider area, including all the states receiving supplies from the Colonial Pipeline system.
The Path of Least Resistance Looks Closed
It might seem callous to start talking about long-term implications of the storm damage from Katrina, even as the rescue effort is underway and New Orleans remains inundated by floodwater. Unfortunately, our attention span has diminished to the point that we must discuss these things while both the public and our leaders are focused on them, and not on the next problem. The next few weeks will be dominated by the aftermath of the hurricane, and every trip to the gas pump will provide a vivid reminder. Now is the time to start thinking about how many of our energy eggs we should keep in this particular basket.
There are natural reasons why the Gulf Coast should have a large concentration of the country's energy infrastructure. Nature has provided a bounty of hydrocarbon reserves in this area, with sizable fractions of our oil and natural gas production coming from the coastline between Brownsville, TX and Mobile, AL. It was natural that so much of our refining system and crude and product pipelines would be concentrated in the same area, given their access to domestic, and later imported crude oil. But we need to talk about the additional concentration that is due, not to the natural incidence of resources, but to the difficulties entailed in building energy facilities elsewhere in the country.
When a company looks to add refinery capacity to its network, it is logical to add on to an existing facility, rather than start a new one from scratch, which requires a lot of extra investment in basic infrastructure, including water and power. But for the last two decades, there has been little choice available to these companies, even if it made more economic and logistical sense to start a new refinery elsewhere. Environmental regulations and permitting bureaucracy simply foreclosed this option. Refiners had to take the path of least resistance.
The result is that 10% of the country's refinery capacity was sitting in the path of Hurricane Katrina, and even this was a stroke of luck. Had the storm tracked further west and barreled down the Houston Ship Channel, instead of the Mississippi basin, the damage to our refined products infrastructure might be worse. Houston and the Texas coast is home to nearly 4 million barrels per day of refining capacity, in contrast to the 1.8 MBD or so that is shut down now in Louisiana.
We can't change this disposition now, nor should we contemplate it, but we can avoid repeating the same mistake with regard to another strategic energy input, natural gas. This morning's Wall Street Journal indicated that Katrina has knocked out nearly 20% of the country's natural gas production, due to the high proportion of supply coming from shallow and deep water gas platforms in the Gulf. This is nature's part of the equation, and we can't change where the gas reserves are found. However, we can rethink the default option for natural gas imports in the form of liquefied natural gas (LNG,) along with the offshore drilling bans that have contributed to the concentration of our supply.
A few months ago, I described the LNG scenario that I see taking shape: nearly all of the LNG terminals proposed for the East and West coasts are meeting fierce resistance, and the path of least resistance will see the majority sited in the Gulf Coast, adjacent to existing infrastructure. This approach has the advantage of filling in for declining onshore and shallow-water production, and tapping into existing pipelines for delivery to markets in the lower Midwest and East. However, not only will it do nothing to unravel existing transportation bottlenecks that make gas unduly expensive for customers in the Northeast, but it also further concentrates our key infrastructure into the area just hit by Katrina.
If last year's Ivan was a warning shot, Katrina should be the proverbial two-by-four between the eyes. It is time to diversify our energy risks to the degree we can, and that means siting LNG receiving facilities close to the markets they are intended to serve, not a thousand miles away in a zone that environmentalists have written off, because of its existing petrochemical base. If the damage to the Louisiana and Mississippi natural gas platforms turns out to be severe, we will have a long, chilly winter in which to contemplate this choice.
It might seem callous to start talking about long-term implications of the storm damage from Katrina, even as the rescue effort is underway and New Orleans remains inundated by floodwater. Unfortunately, our attention span has diminished to the point that we must discuss these things while both the public and our leaders are focused on them, and not on the next problem. The next few weeks will be dominated by the aftermath of the hurricane, and every trip to the gas pump will provide a vivid reminder. Now is the time to start thinking about how many of our energy eggs we should keep in this particular basket.
There are natural reasons why the Gulf Coast should have a large concentration of the country's energy infrastructure. Nature has provided a bounty of hydrocarbon reserves in this area, with sizable fractions of our oil and natural gas production coming from the coastline between Brownsville, TX and Mobile, AL. It was natural that so much of our refining system and crude and product pipelines would be concentrated in the same area, given their access to domestic, and later imported crude oil. But we need to talk about the additional concentration that is due, not to the natural incidence of resources, but to the difficulties entailed in building energy facilities elsewhere in the country.
When a company looks to add refinery capacity to its network, it is logical to add on to an existing facility, rather than start a new one from scratch, which requires a lot of extra investment in basic infrastructure, including water and power. But for the last two decades, there has been little choice available to these companies, even if it made more economic and logistical sense to start a new refinery elsewhere. Environmental regulations and permitting bureaucracy simply foreclosed this option. Refiners had to take the path of least resistance.
The result is that 10% of the country's refinery capacity was sitting in the path of Hurricane Katrina, and even this was a stroke of luck. Had the storm tracked further west and barreled down the Houston Ship Channel, instead of the Mississippi basin, the damage to our refined products infrastructure might be worse. Houston and the Texas coast is home to nearly 4 million barrels per day of refining capacity, in contrast to the 1.8 MBD or so that is shut down now in Louisiana.
We can't change this disposition now, nor should we contemplate it, but we can avoid repeating the same mistake with regard to another strategic energy input, natural gas. This morning's Wall Street Journal indicated that Katrina has knocked out nearly 20% of the country's natural gas production, due to the high proportion of supply coming from shallow and deep water gas platforms in the Gulf. This is nature's part of the equation, and we can't change where the gas reserves are found. However, we can rethink the default option for natural gas imports in the form of liquefied natural gas (LNG,) along with the offshore drilling bans that have contributed to the concentration of our supply.
A few months ago, I described the LNG scenario that I see taking shape: nearly all of the LNG terminals proposed for the East and West coasts are meeting fierce resistance, and the path of least resistance will see the majority sited in the Gulf Coast, adjacent to existing infrastructure. This approach has the advantage of filling in for declining onshore and shallow-water production, and tapping into existing pipelines for delivery to markets in the lower Midwest and East. However, not only will it do nothing to unravel existing transportation bottlenecks that make gas unduly expensive for customers in the Northeast, but it also further concentrates our key infrastructure into the area just hit by Katrina.
If last year's Ivan was a warning shot, Katrina should be the proverbial two-by-four between the eyes. It is time to diversify our energy risks to the degree we can, and that means siting LNG receiving facilities close to the markets they are intended to serve, not a thousand miles away in a zone that environmentalists have written off, because of its existing petrochemical base. If the damage to the Louisiana and Mississippi natural gas platforms turns out to be severe, we will have a long, chilly winter in which to contemplate this choice.
Tuesday, August 30, 2005
Quantifying Katrina
As the damage assessments from Hurricane Katrina start to roll in, a picture is emerging of what the next couple of weeks in the energy markets might look like. With the latest news indicating that the Louisiana Offshore Oil Port (LOOP) did not sustain serious damage and can restart as soon as power is restored, the immediate concern shifts to the shut down refineries in Louisiana and Mississippi. If the early report from Valero is indicative of the state of the other facilities, facing a delay of up to two weeks before they can restart, then the prospect of much higher gasoline prices will be a reality for some time.
Bloomberg indicates that refineries with a total throughput capacity of 1.79 million barrels per day (MBD) are shut down. Assuming a 50% gasoline yield suggests that 0.9 MBD of gasoline production are offline, out of a recent national rate of 8.7 MBD, or a bit over 10% of the total. Gasoline imports, currently running at 1.0 MBD, should be relatively unaffected, though a few tankers may have to divert to other ports to discharge their cargoes.
If the estimate of 2 weeks of downtime proves correct, and assuming all these plants start up smoothly, we are talking about lost gasoline production of up to 12.6 million barrels, in addition to corresponding shortfalls in other products, such as heating oil and jet fuel. With gasoline inventories, particularly on the East Coast and Midwest (PADD I and PADD II, respectively) starting out at the bottom of their seasonally-adjusted ranges, the spike in gasoline prices necessary to balance demand and prevent runouts is going to be stout.
For example, the NYMEX futures contract for gasoline (for delivery in New York Harbor) has popped up $0.41/gallon for the day, to $2.47. Translating that into a street price, by adding current average taxes and retail margins, would take us to something like $3.09/gallon for regular unleaded, an increase of about $0.48/gallon from the most recent reported national average price. With some suppliers already restricting dealer and distributor deliveries to historical levels, to prevent runouts, it could go higher.
Please note: I am absolutely not advising you to go out and fill up now, to avoid higher prices later. The single biggest thing you can do as an individual to influence the situation in a positive way is to stick to your normal habits and only fill up when you normally would. The distribution system is finely balanced, and a sudden decision by everyone to carry an extra 4 gallons in their cars' tanks would draw down a further 20% of the nation's gasoline inventories and give us the gas lines we've avoided so far. For that matter, dropping down a grade, to midgrade if you normally buy premium, or to regular if you normally buy midgrade, would also help, since lower octane gasoline uses less crude oil and is easier to make.
Finally, returning to the subject of imports, a refining system that has been running flat out for months will not be able to make up lost production, even if all the affected refineries restart without incident. That means that the only way to restore balance will be to reduce demand (via higher prices) and to attract enough additional imports to cover the difference. That only happens when the price here is higher than the price in Europe and Asia by enough to cover the shipping costs and provide traders with a profit. Even if we weren't dealing with a backdrop of steadily rising crude prices, it would probably take four or five weeks of sustained high gasoline prices in the US to get things back to where they were before Katrina hit.
As the damage assessments from Hurricane Katrina start to roll in, a picture is emerging of what the next couple of weeks in the energy markets might look like. With the latest news indicating that the Louisiana Offshore Oil Port (LOOP) did not sustain serious damage and can restart as soon as power is restored, the immediate concern shifts to the shut down refineries in Louisiana and Mississippi. If the early report from Valero is indicative of the state of the other facilities, facing a delay of up to two weeks before they can restart, then the prospect of much higher gasoline prices will be a reality for some time.
Bloomberg indicates that refineries with a total throughput capacity of 1.79 million barrels per day (MBD) are shut down. Assuming a 50% gasoline yield suggests that 0.9 MBD of gasoline production are offline, out of a recent national rate of 8.7 MBD, or a bit over 10% of the total. Gasoline imports, currently running at 1.0 MBD, should be relatively unaffected, though a few tankers may have to divert to other ports to discharge their cargoes.
If the estimate of 2 weeks of downtime proves correct, and assuming all these plants start up smoothly, we are talking about lost gasoline production of up to 12.6 million barrels, in addition to corresponding shortfalls in other products, such as heating oil and jet fuel. With gasoline inventories, particularly on the East Coast and Midwest (PADD I and PADD II, respectively) starting out at the bottom of their seasonally-adjusted ranges, the spike in gasoline prices necessary to balance demand and prevent runouts is going to be stout.
For example, the NYMEX futures contract for gasoline (for delivery in New York Harbor) has popped up $0.41/gallon for the day, to $2.47. Translating that into a street price, by adding current average taxes and retail margins, would take us to something like $3.09/gallon for regular unleaded, an increase of about $0.48/gallon from the most recent reported national average price. With some suppliers already restricting dealer and distributor deliveries to historical levels, to prevent runouts, it could go higher.
Please note: I am absolutely not advising you to go out and fill up now, to avoid higher prices later. The single biggest thing you can do as an individual to influence the situation in a positive way is to stick to your normal habits and only fill up when you normally would. The distribution system is finely balanced, and a sudden decision by everyone to carry an extra 4 gallons in their cars' tanks would draw down a further 20% of the nation's gasoline inventories and give us the gas lines we've avoided so far. For that matter, dropping down a grade, to midgrade if you normally buy premium, or to regular if you normally buy midgrade, would also help, since lower octane gasoline uses less crude oil and is easier to make.
Finally, returning to the subject of imports, a refining system that has been running flat out for months will not be able to make up lost production, even if all the affected refineries restart without incident. That means that the only way to restore balance will be to reduce demand (via higher prices) and to attract enough additional imports to cover the difference. That only happens when the price here is higher than the price in Europe and Asia by enough to cover the shipping costs and provide traders with a profit. Even if we weren't dealing with a backdrop of steadily rising crude prices, it would probably take four or five weeks of sustained high gasoline prices in the US to get things back to where they were before Katrina hit.
The Oil-centric Universe
In the time of Copernicus, the purveyors of conventional wisdom had to invent increasingly complex and esoteric mechanisms to contradict the growing evidence that the earth and planets revolve around the sun, and not vice versa. I've just read a fascinating article disputing one company's assessment of a trend of declining oil demand increases, over time. While the trend attributed to BP fails to explain the experience of the last couple of years, the author's rebuttal depends on seeing oil prices as the fulcrum of the entire global economy, much as Copernicus's foes saw the solar system. Even at a time of high and rising oil prices, it is vital to retain perspective and see oil as one component--albeit a strategic one--among many in a complex global system.
The article highlights two common fallacies about oil and oil prices. First, there's a tendency to see oil prices as the horse to the economy's cart. This forces the author to invent a bizarre "reverse elastic function" to explain how oil demand can continue rising in the face of increasing oil prices. One of the comments posted with the article provides a simpler, more obvious explanation: economic growth has been shifting the oil demand curve steadily to the right. We are experiencing a demand-driven market, in rapidly industrializing economies like China, and in mature countries with increasing wealth, such as the US. In other words, demand for oil grows as the demand for the things you can do with it expands, (e.g., driving to meetings, flying to vacations, or making plastic widgets) and as its price relative to other goods (e.g., food, entertainment, and health care) falls. This can then lead to higher oil prices. The same effect is at work in many other commodities, such as steel. But a supply-constrained market would not behave this way, particularly if the constraint were the result of something like Peak Oil.
Secondly, it's easy to forget the long lead times for the investments required to reduce energy intensity, and to conclude from this that oil demand is inelastic (or somehow inversely elastic.) Look at the experience of the last oil shocks. After dipping slightly following the embargo, oil demand resumed its upward trend. Then, several years later, coinciding with the rapid energy price rises of the 1979 Iranian Revolution, the impact of lower economic growth, massive energy conservation investment, and fuel-switching kicked in with a vengeance, reducing not just the rate of growth of oil demand, but cutting absolute oil consumption by millions of barrels per day per year for several years. The longer oil prices remain at current or higher levels, the more of this kind of investment we will see, particularly where the scope for it is largest, and the economic return associated with it greatest, as in China.
There is no good way to predict whether or when oil demand growth will slow or turn negative, or if oil supply will stall or rise rapidly enough to outstrip demand in the years ahead, though there's been at least one indicator of the latter recently. The uncertainties involved include the same uncertainties underlying the health of the global and national economy. But we needn't rely on counter-intuitive and counter-theoretical explanations for things we can see in the real world, when there are simpler explanations available.
In the time of Copernicus, the purveyors of conventional wisdom had to invent increasingly complex and esoteric mechanisms to contradict the growing evidence that the earth and planets revolve around the sun, and not vice versa. I've just read a fascinating article disputing one company's assessment of a trend of declining oil demand increases, over time. While the trend attributed to BP fails to explain the experience of the last couple of years, the author's rebuttal depends on seeing oil prices as the fulcrum of the entire global economy, much as Copernicus's foes saw the solar system. Even at a time of high and rising oil prices, it is vital to retain perspective and see oil as one component--albeit a strategic one--among many in a complex global system.
The article highlights two common fallacies about oil and oil prices. First, there's a tendency to see oil prices as the horse to the economy's cart. This forces the author to invent a bizarre "reverse elastic function" to explain how oil demand can continue rising in the face of increasing oil prices. One of the comments posted with the article provides a simpler, more obvious explanation: economic growth has been shifting the oil demand curve steadily to the right. We are experiencing a demand-driven market, in rapidly industrializing economies like China, and in mature countries with increasing wealth, such as the US. In other words, demand for oil grows as the demand for the things you can do with it expands, (e.g., driving to meetings, flying to vacations, or making plastic widgets) and as its price relative to other goods (e.g., food, entertainment, and health care) falls. This can then lead to higher oil prices. The same effect is at work in many other commodities, such as steel. But a supply-constrained market would not behave this way, particularly if the constraint were the result of something like Peak Oil.
Secondly, it's easy to forget the long lead times for the investments required to reduce energy intensity, and to conclude from this that oil demand is inelastic (or somehow inversely elastic.) Look at the experience of the last oil shocks. After dipping slightly following the embargo, oil demand resumed its upward trend. Then, several years later, coinciding with the rapid energy price rises of the 1979 Iranian Revolution, the impact of lower economic growth, massive energy conservation investment, and fuel-switching kicked in with a vengeance, reducing not just the rate of growth of oil demand, but cutting absolute oil consumption by millions of barrels per day per year for several years. The longer oil prices remain at current or higher levels, the more of this kind of investment we will see, particularly where the scope for it is largest, and the economic return associated with it greatest, as in China.
There is no good way to predict whether or when oil demand growth will slow or turn negative, or if oil supply will stall or rise rapidly enough to outstrip demand in the years ahead, though there's been at least one indicator of the latter recently. The uncertainties involved include the same uncertainties underlying the health of the global and national economy. But we needn't rely on counter-intuitive and counter-theoretical explanations for things we can see in the real world, when there are simpler explanations available.
Monday, August 29, 2005
Assessing Katrina's Impact (updated 2:09 PM EDT)
It was eerie watching the storm track of Katrina and recalling the remarkably similar starting point of the oil crisis scenario presented in June's somewhat schlocky TV movie, "Oil Storm". All my reservations about that scenario remain, but there's no disputing the importance of this stretch of Louisiana coastline and its oil and gas infrastructure to the nation's energy wellbeing.
One estimate of potential lost production made in advance of the storm suggested a loss of up to 13 million barrels of total production, but I suspect it will be days before we know the true extent of the damage. As a number of commentators have pointed out, it has taken a year to recover from the impact of last year's Hurricane Ivan on the industry, and Katrina had at least the potential to do worse.
As many of the analysts I've seen on CNBC and elsewhere have commented, the impact on gasoline will be more immediate and probably larger than on crude oil, given that roughly 10% of the nation's refining capacity is shut down at the moment, due to the storm. A quick glance at gasoline inventories shows that they have dropped considerably in the last six weeks, both in absolute terms and by comparison to their historical seasonal range. Even though overall US gasoline inventories are just barely within that range, much of the remaining flexibility in the system seems to be on the West Coast, where it is both unaffected by the storm and of no possible help to other parts of the country. That leaves inventories in the rest of the country very tight, with little buffer for a disruption like Katrina. Crude oil, by contrast, remains above its seasonal range.
Although much of the coverage has been thorough and professional, I wanted to strangle the reporter on CNBC who, standing in front of a gas pump in New Jersey, urged viewers to run out and fill up, before gas prices spike higher. This is completely irresponsible and a great way to turn higher prices into widespread outages and gas lines.
Thinking about this storm prompts two concerns, one short-term and one long-term:
It was eerie watching the storm track of Katrina and recalling the remarkably similar starting point of the oil crisis scenario presented in June's somewhat schlocky TV movie, "Oil Storm". All my reservations about that scenario remain, but there's no disputing the importance of this stretch of Louisiana coastline and its oil and gas infrastructure to the nation's energy wellbeing.
One estimate of potential lost production made in advance of the storm suggested a loss of up to 13 million barrels of total production, but I suspect it will be days before we know the true extent of the damage. As a number of commentators have pointed out, it has taken a year to recover from the impact of last year's Hurricane Ivan on the industry, and Katrina had at least the potential to do worse.
As many of the analysts I've seen on CNBC and elsewhere have commented, the impact on gasoline will be more immediate and probably larger than on crude oil, given that roughly 10% of the nation's refining capacity is shut down at the moment, due to the storm. A quick glance at gasoline inventories shows that they have dropped considerably in the last six weeks, both in absolute terms and by comparison to their historical seasonal range. Even though overall US gasoline inventories are just barely within that range, much of the remaining flexibility in the system seems to be on the West Coast, where it is both unaffected by the storm and of no possible help to other parts of the country. That leaves inventories in the rest of the country very tight, with little buffer for a disruption like Katrina. Crude oil, by contrast, remains above its seasonal range.
Although much of the coverage has been thorough and professional, I wanted to strangle the reporter on CNBC who, standing in front of a gas pump in New Jersey, urged viewers to run out and fill up, before gas prices spike higher. This is completely irresponsible and a great way to turn higher prices into widespread outages and gas lines.
Thinking about this storm prompts two concerns, one short-term and one long-term:
- Given the extremely tight global oil market, in which the loss of any production is immediately translated into extra dollars at the pump, I would urge the Administration to be very aggressive and proactive with the use of Strategic Petroleum Reserve barrels to cover any shortfall. My long-time readers know my aversion to using the SPR to moderate prices, but a hurricane counts as a genuine emergency; this is precisely why we have an SPR.
- It's still controversial whether climate change will increase the severity and frequency of storms like this. If it is proved out, then we need to factor this in when assessing the real productive potential of the deepwater Gulf of Mexico, one of the last high-potential oil basins in the US. Not only would more frequent major hurricanes in the Gulf reduce production by means of periodic outages, as we are seeing today, but higher insurance premiums on offshore facilities could actually change the economics of this kind of production, making it less attractive. That would mean less domestic production and higher oil imports, as well as higher prices.
The Forgotten Alternative Fuel
The Automobile section of the Sunday NY Times featured an article on the benefits of natural gas-powered cars, including being awarded coveted carpool lane status along with hybrids. Unfortunately, the Times neglected to mention that increasing the share of natural gas used in transportation--miniscule now--would inevitably result in gas imports in the form of LNG on a vastly larger scale than presently contemplated, and with even greater pushback on proposed facilities. As I read the article, it reminded me of a different "alternative fuel" for cars, one that is hardly ever mentioned: LPG.
The last time gasoline was this expensive, in the 1970s, there was a big rush to convert cars to the only practical alternative available at the time, liquefied petroleum gas (LPG), mostly propane with a bit of butane. While we don't see a similar response here today, this article from The Economist describes the growing enthusiasm for LPG cars in the UK, with nearly 125,000 such vehicles on the road. Because of tax policy, the difference in price between petrol and LPG in Britain is huge: $7.00/gal vs. $3.00/gal., at current exchange rates. Even if switching to LPG didn't improve the car's gas mileage, the conversion would pay out in a couple of years, under typical usage.
By comparison, there are 350,000 LPG cars on the road in the US, and growth has been much slower. While the pricing advantage vs. gasoline is much narrower here, I see several advantages for LPG that merit giving it more consideration:
The Automobile section of the Sunday NY Times featured an article on the benefits of natural gas-powered cars, including being awarded coveted carpool lane status along with hybrids. Unfortunately, the Times neglected to mention that increasing the share of natural gas used in transportation--miniscule now--would inevitably result in gas imports in the form of LNG on a vastly larger scale than presently contemplated, and with even greater pushback on proposed facilities. As I read the article, it reminded me of a different "alternative fuel" for cars, one that is hardly ever mentioned: LPG.
The last time gasoline was this expensive, in the 1970s, there was a big rush to convert cars to the only practical alternative available at the time, liquefied petroleum gas (LPG), mostly propane with a bit of butane. While we don't see a similar response here today, this article from The Economist describes the growing enthusiasm for LPG cars in the UK, with nearly 125,000 such vehicles on the road. Because of tax policy, the difference in price between petrol and LPG in Britain is huge: $7.00/gal vs. $3.00/gal., at current exchange rates. Even if switching to LPG didn't improve the car's gas mileage, the conversion would pay out in a couple of years, under typical usage.
By comparison, there are 350,000 LPG cars on the road in the US, and growth has been much slower. While the pricing advantage vs. gasoline is much narrower here, I see several advantages for LPG that merit giving it more consideration:
- It burns more cleanly than reformulated gasoline, resulting in lower vehicle emissions of all types.
- Because LPG is a byproduct of both oil refining and natural gas processing, its supply base is more robust than that of most other alternative fuels.
- Converting existing cars to LPG is less difficult than converting them to natural gas, and the onboard storage tank is smaller and lighter, because of LPG's higher density and lower pressure.
- Existing infrastructure for refueling, though not as ubiquitous as for gasoline, is widespread.
- The infrastructure for importing LPG is much less expensive and complex than that for LNG, and could likely be expanded with less opposition than LNG terminals are experiencing.
Even though US natural gas production has stagnated, global gas production is increasing, and LPG producing will increase with it, since propane and butane, the main constituents of LPG, must be separated out of natural gas to meet pipeline gas specifications. So, at least in theory, the future supply prospects for LPG look good. Increasing LPG use in cars and reserving natural gas for home heating, industry and power generation looks like a sensible approach, with US gas imports set to grow for the foreseeable future.
Friday, August 26, 2005
Cold Comfort
Occasionally I yield to the temptation to stray from my main topic of energy. This week's Economist provides a good excuse, with a fascinating comparison of the current wave of jihadist terrorism to the anarchist terrorists of the late 19th and early 20th centuries. I always appreciate this sort of historical perspective, particularly from a solid source, but I have to admit that I didn't find their thesis--that jihadists would eventually fade away, just as anarchists did--very comforting. On closer examination, this analogy has at least as many disturbing elements as it does reassuring ones.
The article presents the history of more than a generation's worth of bombings and assassinations by dedicated anarchists bent on bringing down the established order by violence. The similarities to the current situation are obvious. Unfortunately, it took a world war and the collapse of at least four empires to render the anarchists and their cause irrelevant. It's not clear whether their ranks were simply thinned by combat casualties, Bolshevik ruthlessness, and the Great Influenza, or if they just got too much of their own medicine and retired into quiet obscurity.
Although we might eventually look back on bin Laden and his ilk as a similar historical footnote, the risk of incalculably greater consequences outweighs the merits of a wait-them-out strategy. The world of 1900, while globalizing rapidly, was much less vulnerable than ours to infrastructure disruption, and it had barely contemplated the idea of a weapon of mass destruction, as we now understand the term. The stakes have changed by orders of magnitude.
I find it difficult to fit this article and the accompanying editorial (subscription required) into the context of The Economist's support for the War on Terror, including the invasion of Iraq. In addition, it's worth noting that the same forces that ended the anarchists' threat also shattered an entire generation of European youth and put Britain on the road to second-rank status. Does The Economist suggest that such a price awaits us in the War on Terror?
Regardless of one's views on Prime Minister Blair's crackdown on those who incite terrorism, or the provisions of our own Patriot Act, the history of anarchist terrorism does not provide the basis for a policy of patience and tolerance for Islamo-fascism. This conclusion leaves us without a lot of comfortable answers, but at least it forces us to face up to the unique nature of the threat posed by what Tom Friedman refers to as "super-empowered individuals".
Occasionally I yield to the temptation to stray from my main topic of energy. This week's Economist provides a good excuse, with a fascinating comparison of the current wave of jihadist terrorism to the anarchist terrorists of the late 19th and early 20th centuries. I always appreciate this sort of historical perspective, particularly from a solid source, but I have to admit that I didn't find their thesis--that jihadists would eventually fade away, just as anarchists did--very comforting. On closer examination, this analogy has at least as many disturbing elements as it does reassuring ones.
The article presents the history of more than a generation's worth of bombings and assassinations by dedicated anarchists bent on bringing down the established order by violence. The similarities to the current situation are obvious. Unfortunately, it took a world war and the collapse of at least four empires to render the anarchists and their cause irrelevant. It's not clear whether their ranks were simply thinned by combat casualties, Bolshevik ruthlessness, and the Great Influenza, or if they just got too much of their own medicine and retired into quiet obscurity.
Although we might eventually look back on bin Laden and his ilk as a similar historical footnote, the risk of incalculably greater consequences outweighs the merits of a wait-them-out strategy. The world of 1900, while globalizing rapidly, was much less vulnerable than ours to infrastructure disruption, and it had barely contemplated the idea of a weapon of mass destruction, as we now understand the term. The stakes have changed by orders of magnitude.
I find it difficult to fit this article and the accompanying editorial (subscription required) into the context of The Economist's support for the War on Terror, including the invasion of Iraq. In addition, it's worth noting that the same forces that ended the anarchists' threat also shattered an entire generation of European youth and put Britain on the road to second-rank status. Does The Economist suggest that such a price awaits us in the War on Terror?
Regardless of one's views on Prime Minister Blair's crackdown on those who incite terrorism, or the provisions of our own Patriot Act, the history of anarchist terrorism does not provide the basis for a policy of patience and tolerance for Islamo-fascism. This conclusion leaves us without a lot of comfortable answers, but at least it forces us to face up to the unique nature of the threat posed by what Tom Friedman refers to as "super-empowered individuals".
Thursday, August 25, 2005
Verbal Fallout
I'm watching with keen interest to see if Pat Robertson's idiotic call for the assassination of Venezuelan President Hugo Chavez--apology notwithstanding--will result in more than a diplomatic tussle. There's a long tradition of American private citizens making the State Department's job more difficult, but the timing of this incident could not have been worse for energy markets that are already stretched to the limit.
I haven't changed my long-term assessment of the political risk of investments in Venezuela, and the recent Yukos-style back-tax assessment on Chevron serves to reinforce this view. Although the move predated the Rev. Robertson's remarks, I doubt that Chevron's lawyers found his comments at all helpful, as they prepare to defend their contract with the Venezuelan government.
Mr. Chavez's behavior seems to be growing more erratic--witness his recent mock-trial of President Bush as an "imperialist"--and he certainly conveys the impression of a leader who holds all the cards. The reality is more complex, though. Having chosen to gut the Venezuelan state oil company, PdVSA, when its workers went out on strike a couple of years ago, and with massive social and foreign-aid programs depending on funds diverted from PdVSA's reinvestment budget, Mr. Chavez must rely on the international oil companies that have invested in major heavy-oil upgrading projects in the country to produce enough oil to compensate for the post-strike decline of Venezuela's conventional production. In short, he needs these companies to fund his Bolivarian Revolution, as much as they need him for their future production growth and reserve replacement.
Despite this, Mr. Chavez appears capable of a retaliatory gesture that could greatly inconvenience US companies and complicate the US oil supply situation, even if it also harmed Venezuelan interests in the process. A Venezuelan embargo on oil sales to the US would have only a modest effect on world oil prices, because they would not take their oil off the larger international market. But replacement volumes for US Gulf Coast refiners would have to come from further away and would likely be a poorer fit for their refinery configurations, resulting in short-term product imbalances, outages and price spikes. So let's hope the current furor dies down quickly, rather than escalating.
I'm watching with keen interest to see if Pat Robertson's idiotic call for the assassination of Venezuelan President Hugo Chavez--apology notwithstanding--will result in more than a diplomatic tussle. There's a long tradition of American private citizens making the State Department's job more difficult, but the timing of this incident could not have been worse for energy markets that are already stretched to the limit.
I haven't changed my long-term assessment of the political risk of investments in Venezuela, and the recent Yukos-style back-tax assessment on Chevron serves to reinforce this view. Although the move predated the Rev. Robertson's remarks, I doubt that Chevron's lawyers found his comments at all helpful, as they prepare to defend their contract with the Venezuelan government.
Mr. Chavez's behavior seems to be growing more erratic--witness his recent mock-trial of President Bush as an "imperialist"--and he certainly conveys the impression of a leader who holds all the cards. The reality is more complex, though. Having chosen to gut the Venezuelan state oil company, PdVSA, when its workers went out on strike a couple of years ago, and with massive social and foreign-aid programs depending on funds diverted from PdVSA's reinvestment budget, Mr. Chavez must rely on the international oil companies that have invested in major heavy-oil upgrading projects in the country to produce enough oil to compensate for the post-strike decline of Venezuela's conventional production. In short, he needs these companies to fund his Bolivarian Revolution, as much as they need him for their future production growth and reserve replacement.
Despite this, Mr. Chavez appears capable of a retaliatory gesture that could greatly inconvenience US companies and complicate the US oil supply situation, even if it also harmed Venezuelan interests in the process. A Venezuelan embargo on oil sales to the US would have only a modest effect on world oil prices, because they would not take their oil off the larger international market. But replacement volumes for US Gulf Coast refiners would have to come from further away and would likely be a poorer fit for their refinery configurations, resulting in short-term product imbalances, outages and price spikes. So let's hope the current furor dies down quickly, rather than escalating.
Wednesday, August 24, 2005
How Big A Bite?
I see a lot of commentary about the impact of high oil prices on the economy, such as this recent article from the New York Times and a segment on CNN last night. Not much of this coverage actually bothers to quantify the impact on consumers, though, relying instead on anecdotal evidence of curtailed spending on a host of items, or WalMart's concerns about slowing sales. This tends to be balanced by reminders that oil remains below its inflation-adjusted highs of the early 1980s, and that our economy uses less oil per dollar of GDP output. How big is the impact, really, and how concerned should we be?
Following the latest gasoline price hikes, we are currently paying $1.00/gallon more than we paid on average in 2003. For the average driver, with an average car, that results in an incremental cost of about $10.50 per week. For a household with two cars, that results in a fuel bill that is higher by $92 per month. You'll pardon me for thinking that this doesn't translate into many foregone Broadway tickets, as the Times suggests, but in a zero-net-savings economy, it is clearly money that consumers would have spent on something else, be it staples at WalMart or Lattes at Starbucks. When you aggregate $10/week across 200+ million cars and light trucks, the impact starts to become noticeable, even in a $12 trillion economy.
It's worth noting that even though gasoline demand remains at record levels, the result has been high prices, rather than the kind of gas lines we had in the 1970s. By contrast, we see China holding the price of gasoline artificially low, but running short of product, with drivers reportedly queuing for hours for a fill-up.
But as visible as the price of gasoline is--probably the most transparent price in our entire society--we have to remember that this is only one aspect of an across-the-board increase in energy prices. Wholesale heating oil and natural gas prices are more than double their historical averages, and electricity rates are going up, as the cost of the coal and gas that fuel most of our generating capacity rises.
Overall, this country consumes 100 quadrillion BTUs (quads) of energy each year, and the cost of 85% of it (the fossil fuel component) has gone up by roughly $4/million BTUs. That's a $320 billion/year drag on the US economy, with about a quarter of that applied to imports that contribute to our trade deficit. When you add this to the ongoing cost of a war, it's hard to imagine that we won't eventually get a recession, inflation, or both.
If there is a positive side to all this, then perhaps it is that we now live in the world that advocates of higher gasoline taxes have wanted for years, in order to hold down demand and curb emissions. Unfortunately, the lion's share of the revenue being collected--beyond energy company profits that get recycled via dividends, stock buy-backs and M&A--is going to the Middle East, rather than paying for alternative energy R&D or reducing the deficit. It will be instructive to see whether the growth in our energy demand stalls before the economy does.
I see a lot of commentary about the impact of high oil prices on the economy, such as this recent article from the New York Times and a segment on CNN last night. Not much of this coverage actually bothers to quantify the impact on consumers, though, relying instead on anecdotal evidence of curtailed spending on a host of items, or WalMart's concerns about slowing sales. This tends to be balanced by reminders that oil remains below its inflation-adjusted highs of the early 1980s, and that our economy uses less oil per dollar of GDP output. How big is the impact, really, and how concerned should we be?
Following the latest gasoline price hikes, we are currently paying $1.00/gallon more than we paid on average in 2003. For the average driver, with an average car, that results in an incremental cost of about $10.50 per week. For a household with two cars, that results in a fuel bill that is higher by $92 per month. You'll pardon me for thinking that this doesn't translate into many foregone Broadway tickets, as the Times suggests, but in a zero-net-savings economy, it is clearly money that consumers would have spent on something else, be it staples at WalMart or Lattes at Starbucks. When you aggregate $10/week across 200+ million cars and light trucks, the impact starts to become noticeable, even in a $12 trillion economy.
It's worth noting that even though gasoline demand remains at record levels, the result has been high prices, rather than the kind of gas lines we had in the 1970s. By contrast, we see China holding the price of gasoline artificially low, but running short of product, with drivers reportedly queuing for hours for a fill-up.
But as visible as the price of gasoline is--probably the most transparent price in our entire society--we have to remember that this is only one aspect of an across-the-board increase in energy prices. Wholesale heating oil and natural gas prices are more than double their historical averages, and electricity rates are going up, as the cost of the coal and gas that fuel most of our generating capacity rises.
Overall, this country consumes 100 quadrillion BTUs (quads) of energy each year, and the cost of 85% of it (the fossil fuel component) has gone up by roughly $4/million BTUs. That's a $320 billion/year drag on the US economy, with about a quarter of that applied to imports that contribute to our trade deficit. When you add this to the ongoing cost of a war, it's hard to imagine that we won't eventually get a recession, inflation, or both.
If there is a positive side to all this, then perhaps it is that we now live in the world that advocates of higher gasoline taxes have wanted for years, in order to hold down demand and curb emissions. Unfortunately, the lion's share of the revenue being collected--beyond energy company profits that get recycled via dividends, stock buy-backs and M&A--is going to the Middle East, rather than paying for alternative energy R&D or reducing the deficit. It will be instructive to see whether the growth in our energy demand stalls before the economy does.
Tuesday, August 23, 2005
Still in the Market
In case anyone seriously thought that China Inc. would retreat to lick its wounds after CNOOC's withdrawal from the bidding for Unocal, another Chinese state oil company, CNPC, has just agreed to acquire PetroKazakhstan for $4 billion. In the process, it outbid the Indian state oil company, ONGC. While Unocal offered plenty of strategic fit for state-owned CNOOC, this deal has none of the drawbacks that would have accompanied buying the California-based Unocal:
In case anyone seriously thought that China Inc. would retreat to lick its wounds after CNOOC's withdrawal from the bidding for Unocal, another Chinese state oil company, CNPC, has just agreed to acquire PetroKazakhstan for $4 billion. In the process, it outbid the Indian state oil company, ONGC. While Unocal offered plenty of strategic fit for state-owned CNOOC, this deal has none of the drawbacks that would have accompanied buying the California-based Unocal:
- No North American production to complicate matters
- No US regulatory approvals required
- No need to trade Asian gas production already committed Thailand for something else that could have reached China
- No pariah regimes to deal with (e.g. Burma)
Instead, we see a sensible, if somewhat pricey acquisition of a clever Canadian company with production in a country in China's strategic back yard (as well as Russia's), linked by a soon-to-be-completed oil pipeline to China.
More importantly, this is the face of China with which the international major oil companies are going to have to contend in the years to come: a tough competitor with a growing appetite and a willingness to pay over the mark for strategic assets in the countries open to foreign development of oil and gas reserves, and perhaps in some that aren't. Energy company strategists should banished any complacency over the relative ease with which Chevron outmaneuvered CNOOC from their thinking.
Monday, August 22, 2005
Peak Oil Cover Story
With the public's focus on energy matters understandably elevated for the last couple of years, two previously esoteric subjects have received a remarkable amount of attention in the press. I suspect that increased coverage of liquefied natural gas (LNG) owes as much to a carefully managed public relations campaign as to the slew of proposals to build terminals to import liquefied gas to meet our growing domestic demand. I'm less sure about the other big emerging issue, "peak oil". There's no obvious lobby for the "peak oil" issue, unless it is those who support various alternative energy technologies or greater conservation. This weekend, the adherents of "peak oil" achieved a coup of sorts: a cover article in the New York Times Magazine. It also provided another high-profile venue for the widely-disseminated views of Matthew Simmons on Saudi Arabia's productive capacity.
I've talked about peak oil in a number of previous postings, looking at both its technical and sociological aspects. Many of the articles that prompted these postings focused squarely on a geological peak in oil production, the point at which global production cannot be increased further, but rather begins to decline. The fact that this point cannot be predicted with any certainty--having previously been specified for dates that have come and gone--makes it all the more fascinating. While the Times article does a good job of covering this same ground, it includes some very interesting new insights and some nuances that bring it closer to my own views.
First, the author correctly assesses that the point at which growing production cannot keep up with expanding demand is more important and world-altering than the technical peak, which may occur years or even decades later. That point, rather than the peak itself, is the market discontinuity that could make every alternative energy technology ever dreamt of economical.
The article's discussion of the Saudi situation is also balanced and informative. While some of the commentary from past and present Saudi officials might seem self-serving, their focus on the importance of looking at demand, rather than future Saudi supply, seems apt. The clear message is that although the world can probably rely on the Kingdom to maintain its current production for years, we should not assume more than modest increases for the future. Even if the Ghawar field, which produces half of all Saudi oil, does not go into precipitous decline, tapping the vast remaining Saudi reserves will be qualitatively different from their past efforts.
You can think about this by analogy to the US. We've produced oil since the 1860s, and our cumulative production exceeds that of Saudi Arabia, though our "original oil in place" was somewhat less than theirs. But imagine how our oil industry would look if all of our most productive fields, including not just the East Texas field, but also the North Slope, West Texas, offshore Louisiana, etc., had been produced between 1860 and 1920, rather than the pattern of major new producing areas coming onstream every couple of decades. This is what the Saudis face. They will have to go from an industry that has drilled only a few thousand wells in its entire history, to one that will have to drill thousands or tens of thousands within a few decades, just to maintain current production. Whether they can access the industrial, financial and professional capacity to achieve this is exactly the right question to be asking.
The good news, from my perspective, is that the recent optimistic production forecast by Cambridge Energy Research Associates does not rely on massive increases in Saudi production to attain global production of 100 million barrels per day by 2010. But maintaining that production level and growing it further to meet new demand from China and India could prove a bridge too far, so we had better use the time this buys to ramp up alternatives, even if the price of oil were to retreat from its current level for a few years.
With the public's focus on energy matters understandably elevated for the last couple of years, two previously esoteric subjects have received a remarkable amount of attention in the press. I suspect that increased coverage of liquefied natural gas (LNG) owes as much to a carefully managed public relations campaign as to the slew of proposals to build terminals to import liquefied gas to meet our growing domestic demand. I'm less sure about the other big emerging issue, "peak oil". There's no obvious lobby for the "peak oil" issue, unless it is those who support various alternative energy technologies or greater conservation. This weekend, the adherents of "peak oil" achieved a coup of sorts: a cover article in the New York Times Magazine. It also provided another high-profile venue for the widely-disseminated views of Matthew Simmons on Saudi Arabia's productive capacity.
I've talked about peak oil in a number of previous postings, looking at both its technical and sociological aspects. Many of the articles that prompted these postings focused squarely on a geological peak in oil production, the point at which global production cannot be increased further, but rather begins to decline. The fact that this point cannot be predicted with any certainty--having previously been specified for dates that have come and gone--makes it all the more fascinating. While the Times article does a good job of covering this same ground, it includes some very interesting new insights and some nuances that bring it closer to my own views.
First, the author correctly assesses that the point at which growing production cannot keep up with expanding demand is more important and world-altering than the technical peak, which may occur years or even decades later. That point, rather than the peak itself, is the market discontinuity that could make every alternative energy technology ever dreamt of economical.
The article's discussion of the Saudi situation is also balanced and informative. While some of the commentary from past and present Saudi officials might seem self-serving, their focus on the importance of looking at demand, rather than future Saudi supply, seems apt. The clear message is that although the world can probably rely on the Kingdom to maintain its current production for years, we should not assume more than modest increases for the future. Even if the Ghawar field, which produces half of all Saudi oil, does not go into precipitous decline, tapping the vast remaining Saudi reserves will be qualitatively different from their past efforts.
You can think about this by analogy to the US. We've produced oil since the 1860s, and our cumulative production exceeds that of Saudi Arabia, though our "original oil in place" was somewhat less than theirs. But imagine how our oil industry would look if all of our most productive fields, including not just the East Texas field, but also the North Slope, West Texas, offshore Louisiana, etc., had been produced between 1860 and 1920, rather than the pattern of major new producing areas coming onstream every couple of decades. This is what the Saudis face. They will have to go from an industry that has drilled only a few thousand wells in its entire history, to one that will have to drill thousands or tens of thousands within a few decades, just to maintain current production. Whether they can access the industrial, financial and professional capacity to achieve this is exactly the right question to be asking.
The good news, from my perspective, is that the recent optimistic production forecast by Cambridge Energy Research Associates does not rely on massive increases in Saudi production to attain global production of 100 million barrels per day by 2010. But maintaining that production level and growing it further to meet new demand from China and India could prove a bridge too far, so we had better use the time this buys to ramp up alternatives, even if the price of oil were to retreat from its current level for a few years.
Friday, August 19, 2005
Belated Anniversary
As I catch up on the email and articles that accumulated during my vacation, one op-ed in the New York Times caught my eye, because I was looking for something marking the second anniversary of the Great Northeast Blackout. The author laments the scant progress since then in securing our power grids against a deliberate attack. Considering the paralysis resulting from an accidental overload in the Midwest, it's sobering to consider what a dedicated terrorist might achieve on purpose. And while putting guards on key substations and other energy nodes might be a good stop-gap, I don't see much commentary about the role of distributed power, and renewable distributed power in particular, in helping to reduce our vulnerability in this area.
If you start from the premise that we are grappling with smart, capable opponents, at least at the leadership level, it makes sense to be worried about our energy infrastructure. Rather than trying to block every conceivable vulnerability, and focusing most of our efforts on those that have already been exploited, we might be better served by establishing a "red team", i.e. a bunch of guys who can think like the terrorists, and letting them plan their worst. To such a team, our energy infrastructure would look irresistible, with its pervasive impact and abundant choke points.
In addition, a great deal has been written recently about the virtues of reducing our dependence on imported oil as a way of hobbling Al Qaeda and its supporters in the Middle East. This seems like a pretty indirect and slow-motion response, as I've suggested previously. Putting up solar panels, small wind turbines, and other highly-distributed means of generating electricity may work on a much smaller scale, but it has the virtue of being immediately effective, at least locally.
Although I always worry about the risk of of subsidizing an energy dead end, such as grain ethanol, it strikes me that providing more support for small-scale renewable power and the network protocols to accommodate it within the grid would be at least as useful as many of the other ways we have responded to the terrorist threat. It also aligns nicely with the need to reduce greenhouse gas emissions and manage our growing energy imports.
As I catch up on the email and articles that accumulated during my vacation, one op-ed in the New York Times caught my eye, because I was looking for something marking the second anniversary of the Great Northeast Blackout. The author laments the scant progress since then in securing our power grids against a deliberate attack. Considering the paralysis resulting from an accidental overload in the Midwest, it's sobering to consider what a dedicated terrorist might achieve on purpose. And while putting guards on key substations and other energy nodes might be a good stop-gap, I don't see much commentary about the role of distributed power, and renewable distributed power in particular, in helping to reduce our vulnerability in this area.
If you start from the premise that we are grappling with smart, capable opponents, at least at the leadership level, it makes sense to be worried about our energy infrastructure. Rather than trying to block every conceivable vulnerability, and focusing most of our efforts on those that have already been exploited, we might be better served by establishing a "red team", i.e. a bunch of guys who can think like the terrorists, and letting them plan their worst. To such a team, our energy infrastructure would look irresistible, with its pervasive impact and abundant choke points.
In addition, a great deal has been written recently about the virtues of reducing our dependence on imported oil as a way of hobbling Al Qaeda and its supporters in the Middle East. This seems like a pretty indirect and slow-motion response, as I've suggested previously. Putting up solar panels, small wind turbines, and other highly-distributed means of generating electricity may work on a much smaller scale, but it has the virtue of being immediately effective, at least locally.
Although I always worry about the risk of of subsidizing an energy dead end, such as grain ethanol, it strikes me that providing more support for small-scale renewable power and the network protocols to accommodate it within the grid would be at least as useful as many of the other ways we have responded to the terrorist threat. It also aligns nicely with the need to reduce greenhouse gas emissions and manage our growing energy imports.
Thursday, August 18, 2005
Capturing the Scale
The other day a friend suggested I have a look at an article on alternative energy in the current National Geographic. No one is going to confuse the Geographic with a cutting-edge science journal, but in this case I thought they did a great job of surveying the energy future and giving the general audience a sense of what might be in store, and how it relates to the fossil fuels that have gotten us this far. Most importantly, the article does a wonderful job of capturing the mind-boggling scale of the problem, with the Geographic's typical lovely photographs and clever charts, though most of these are only available in the print edition.
When I talk with people about alternatives to oil, gas and coal, and the subject turns to the obstacles that must be overcome, I almost always mention scale. In particular, I talk about how hard it is for anyone not familiar with the numbers involved to appreciate just how big the fossil fuel economy is, and how large a problem it is to consider supplanting it with something else, or a combination of somethings. Pictures of people standing next to a giant wind turbine blade, or the excellent chart showing how much of New York City would have to be devoted to energy generation, in the absence of fossil fuels, convey that message better than any Powerpoint chart can.
While I could fill up this posting with minor quibbles about omitted details or emphasis that could have been adjusted, I'd have no qualms about handing this article to anyone who wanted to know more about the subject and could only devote 20 minutes to it. Of course those reading this blog can guess that I'd probably mutter also a few words about things being much more complex than the Geographic's portrayal, and the picture on biofuels being not nearly so clear-cut. My biggest disappointment in the article, though, was purely a function of my own expectations: I was hoping for something as comprehensive and visually striking as the Geographic's special supplement on energy in February 1981, which I still have on my shelf.
The other day a friend suggested I have a look at an article on alternative energy in the current National Geographic. No one is going to confuse the Geographic with a cutting-edge science journal, but in this case I thought they did a great job of surveying the energy future and giving the general audience a sense of what might be in store, and how it relates to the fossil fuels that have gotten us this far. Most importantly, the article does a wonderful job of capturing the mind-boggling scale of the problem, with the Geographic's typical lovely photographs and clever charts, though most of these are only available in the print edition.
When I talk with people about alternatives to oil, gas and coal, and the subject turns to the obstacles that must be overcome, I almost always mention scale. In particular, I talk about how hard it is for anyone not familiar with the numbers involved to appreciate just how big the fossil fuel economy is, and how large a problem it is to consider supplanting it with something else, or a combination of somethings. Pictures of people standing next to a giant wind turbine blade, or the excellent chart showing how much of New York City would have to be devoted to energy generation, in the absence of fossil fuels, convey that message better than any Powerpoint chart can.
While I could fill up this posting with minor quibbles about omitted details or emphasis that could have been adjusted, I'd have no qualms about handing this article to anyone who wanted to know more about the subject and could only devote 20 minutes to it. Of course those reading this blog can guess that I'd probably mutter also a few words about things being much more complex than the Geographic's portrayal, and the picture on biofuels being not nearly so clear-cut. My biggest disappointment in the article, though, was purely a function of my own expectations: I was hoping for something as comprehensive and visually striking as the Geographic's special supplement on energy in February 1981, which I still have on my shelf.
Wednesday, August 10, 2005
Summer Re-runs
With the heat and humidity reaching their typical August extremes for the Northeast, it's time to retreat to the balmy California coast for a week or so. As usual, I've set up some links to past postings that I think are still relevant, particularly for newer readers of this blog. Energy Outlook will resume its normal new posting schedule on August 18, 2005.
The new Energy Bill includes provisions to streamline the approval of facilities to import liquefied natural gas (LNG). Why was this necessary, and what if LNG remains blocked?
Where the LNG Will Go (February 18, 2005)
The Energy Bill excluded drilling in the Arctic National Wildlife Refuge, but that doesn't mean the idea is dead. Is looking for a big-ticket trade-off more sensible than diehard opposition, and are its opponents and advocates even looking at ANWR in the right way? (two postings)
Trading ANWR (March 21, 2005)
Geo-Greens Against ANWR (March 22, 2005)
Nuclear power will also benefit from the Energy Bill via increased funding for R&D. Could nuclear power turn out to be the key to a Hydrogen economy?
How Much Hydrogen? (February 4, 2005)
Finally, as you start on that long driving vacation, is it worth paying up for premium gasoline, with gas prices so high?
Which Grade? (April 14, 2005)
With the heat and humidity reaching their typical August extremes for the Northeast, it's time to retreat to the balmy California coast for a week or so. As usual, I've set up some links to past postings that I think are still relevant, particularly for newer readers of this blog. Energy Outlook will resume its normal new posting schedule on August 18, 2005.
The new Energy Bill includes provisions to streamline the approval of facilities to import liquefied natural gas (LNG). Why was this necessary, and what if LNG remains blocked?
Where the LNG Will Go (February 18, 2005)
The Energy Bill excluded drilling in the Arctic National Wildlife Refuge, but that doesn't mean the idea is dead. Is looking for a big-ticket trade-off more sensible than diehard opposition, and are its opponents and advocates even looking at ANWR in the right way? (two postings)
Trading ANWR (March 21, 2005)
Geo-Greens Against ANWR (March 22, 2005)
Nuclear power will also benefit from the Energy Bill via increased funding for R&D. Could nuclear power turn out to be the key to a Hydrogen economy?
How Much Hydrogen? (February 4, 2005)
Finally, as you start on that long driving vacation, is it worth paying up for premium gasoline, with gas prices so high?
Which Grade? (April 14, 2005)
Tuesday, August 09, 2005
Climate Change and Hubris
Dr. James Schlesinger is someone I've always respected. He has the sort of stern, towering intellect that says little but means much. The prospect of having to debate someone of this caliber in person would doubtless turn my nerves to jelly. However, yesterday's Wall Street Journal included a commentary by Dr. Schlesinger entitled, "The Theology of Global Warming" (subscription required; summary here) and I feel obliged to comment about one aspect of this document. While the op-ed seems largely aimed as a warning about the risk of hubris in the projections of the scientific establishment concerning dramatic climate change, I find warnings of hubris just as appropriate for those who cannot accept that man's activities have become a major driver of the global environment, even at the scale of the climate.
I also question Dr. Schlesinger's characterization of the strong conviction of many scientists dealing with this issue as "theology". It does not require faith to see the available data as supporting the hypothesis that dangerous warming is occurring and that man-made sources play a role in the process. At the same time, I recognize that some, including scientists, politicians and bureaucrats, have attempted to apply these views with quasi-religious fervor. All parties should note that with the powers available to us in areas ranging from the atom to the gene, the old dictum about mixing religion and politics may be just as apt with regard to combinations of science and politics. Dissent serves a purpose, as long as it does not stand in the way of necessary action.
None of this changes my view that climate change remains one of largest risks facing both government and business. A risk is just that: something that might happen, with significant consequences if it did. Prudent people manage risks; fools ignore them. Dr. Schlesinger--no fool--is on record in previous statements agreeing that, despite his skepticism about anthropogenic causes of climate change, action should still be taken. I would add that new knowledge can always be incorporated later, but we cannot afford to wait for perfect information.
Dr. James Schlesinger is someone I've always respected. He has the sort of stern, towering intellect that says little but means much. The prospect of having to debate someone of this caliber in person would doubtless turn my nerves to jelly. However, yesterday's Wall Street Journal included a commentary by Dr. Schlesinger entitled, "The Theology of Global Warming" (subscription required; summary here) and I feel obliged to comment about one aspect of this document. While the op-ed seems largely aimed as a warning about the risk of hubris in the projections of the scientific establishment concerning dramatic climate change, I find warnings of hubris just as appropriate for those who cannot accept that man's activities have become a major driver of the global environment, even at the scale of the climate.
I also question Dr. Schlesinger's characterization of the strong conviction of many scientists dealing with this issue as "theology". It does not require faith to see the available data as supporting the hypothesis that dangerous warming is occurring and that man-made sources play a role in the process. At the same time, I recognize that some, including scientists, politicians and bureaucrats, have attempted to apply these views with quasi-religious fervor. All parties should note that with the powers available to us in areas ranging from the atom to the gene, the old dictum about mixing religion and politics may be just as apt with regard to combinations of science and politics. Dissent serves a purpose, as long as it does not stand in the way of necessary action.
None of this changes my view that climate change remains one of largest risks facing both government and business. A risk is just that: something that might happen, with significant consequences if it did. Prudent people manage risks; fools ignore them. Dr. Schlesinger--no fool--is on record in previous statements agreeing that, despite his skepticism about anthropogenic causes of climate change, action should still be taken. I would add that new knowledge can always be incorporated later, but we cannot afford to wait for perfect information.
Monday, August 08, 2005
Globalization's Arrow
One of the things that fascinates me about globalization is the parallels between its current manifestation and the first wave of globalization in the late 19th and early 20th centuries. Both were driven by financial liberalization and information revolutions, resulting in dramatic increases in global trade and capital flows. Last Thursday's Wall Street Journal (subscription required) cites a recent lecture by Niall Ferguson, historian and bestselling author, spelling out this comparison in great detail. The article leaves open the same question I've been asking for six or seven years: what could cause the direction of today's globalization to reverse, as it did at the onset of World War I?
One similarity between Globalization I (1880-1914) and Globalization II that has only been true recently is rising commodity prices, including energy. Free and expanding global trade in energy has not only been a key feature of the last thirty years, but is the foundation upon which the energy security of this country rests. This mechanism becomes more critical with each passing year, as the gap between our energy demand and our indigenous supply expands. But as long as the market remains tight and prices continue rising, the temptations to circumvent it will grow.
While some continue to look for signs of the type of "Guns of August" event that halted Globalization I in its tracks, the real vulnerability could be less drastic than war. For a while, the anti-Globalization movement looked like a candidate, though it seems to have peaked a couple of years ago. A response to rapid climate change could have the same effect, depending on how it played out. Or it could come from a competing approach to trade.
The recent tussle over Unocal illustrates two competing visions of world trade, and despite the pro-free-trade rhetoric from CNOOC and the seemingly-protectionist backlash in the US, we shouldn't mistake the difference between a system solidly based on private ownership of the oil and gas companies that invest in the production of global energy resources and sell into the free market, and a system of state-controlled enterprises managing resources earmarked for a state-subsidized internal market. If the next era of the energy industry turns out to be a race between these two systems, the risks for the entire globalization system will increase.
Those of us who've grown up during this sustained period of accelerating global trade and prosperity probably find it hard to imagine that this might not continue unabated. Yet I'm sure that someone living in 1910 would have felt a similar confidence, only to be proved disastrously wrong within a few years. Ironically, recent arrivals to prosperity, including China itself, stand to lose much more than the rich, developed countries if globalization goes into retreat.
One of the things that fascinates me about globalization is the parallels between its current manifestation and the first wave of globalization in the late 19th and early 20th centuries. Both were driven by financial liberalization and information revolutions, resulting in dramatic increases in global trade and capital flows. Last Thursday's Wall Street Journal (subscription required) cites a recent lecture by Niall Ferguson, historian and bestselling author, spelling out this comparison in great detail. The article leaves open the same question I've been asking for six or seven years: what could cause the direction of today's globalization to reverse, as it did at the onset of World War I?
One similarity between Globalization I (1880-1914) and Globalization II that has only been true recently is rising commodity prices, including energy. Free and expanding global trade in energy has not only been a key feature of the last thirty years, but is the foundation upon which the energy security of this country rests. This mechanism becomes more critical with each passing year, as the gap between our energy demand and our indigenous supply expands. But as long as the market remains tight and prices continue rising, the temptations to circumvent it will grow.
While some continue to look for signs of the type of "Guns of August" event that halted Globalization I in its tracks, the real vulnerability could be less drastic than war. For a while, the anti-Globalization movement looked like a candidate, though it seems to have peaked a couple of years ago. A response to rapid climate change could have the same effect, depending on how it played out. Or it could come from a competing approach to trade.
The recent tussle over Unocal illustrates two competing visions of world trade, and despite the pro-free-trade rhetoric from CNOOC and the seemingly-protectionist backlash in the US, we shouldn't mistake the difference between a system solidly based on private ownership of the oil and gas companies that invest in the production of global energy resources and sell into the free market, and a system of state-controlled enterprises managing resources earmarked for a state-subsidized internal market. If the next era of the energy industry turns out to be a race between these two systems, the risks for the entire globalization system will increase.
Those of us who've grown up during this sustained period of accelerating global trade and prosperity probably find it hard to imagine that this might not continue unabated. Yet I'm sure that someone living in 1910 would have felt a similar confidence, only to be proved disastrously wrong within a few years. Ironically, recent arrivals to prosperity, including China itself, stand to lose much more than the rich, developed countries if globalization goes into retreat.
Thursday, August 04, 2005
Global Warming and Bigger Storms
Even though the existence of global warming and its causes seem less controversial than they once were, the potential consequences of warming are still hotly debated. One of the outcomes that's been predicted for years is that continued warming will produce more frequent and more intense hurricanes and typhoons. However, this has generally been seen as a possible future event. Now a study from an MIT hurricane specialist indicates that we are already seeing this effect. Dr. Emanuel has apparently found that hurricanes in the North Atlantic doubled in total power since 1970, while North Pacific typhoons were 75% stronger. In a year with four named storms before early July and the earliest category 4 storm on record, that doesn't seem far-fetched.
Still, the study has drawn criticism from other climate scientists and must be regarded as preliminary. Dr. Emanuel's paper has appeared in Nature and will be subjected to the normal peer review. Even if some of the paper's findings are ultimately undermined, it's still sobering to contemplate that climate change might turn out to be something that my generation will experience directly. We could end up cursing our own inaction, rather than only worrying about what our descendents will say about us. That could turn out to be a good development, in a perverse way. Climate change, as an issue, has suffered from much of the same "Apres nous, le Deluge" attitude as Social Security reform and other seemingly intractable long-term problems that aren't yet full-blown crises.
Consider the insurance industry, though. It already pays more attention to climate change concerns than most other financial sectors. If a direct link were conclusively established between warming, the emissions that cause it, and the increasing insurance liabilities associated with more intense hurricanes, then the political winds around this issue might just start to shift in favor of prompt action. I'm sure this isn't the last we've heard on this subject.
Even though the existence of global warming and its causes seem less controversial than they once were, the potential consequences of warming are still hotly debated. One of the outcomes that's been predicted for years is that continued warming will produce more frequent and more intense hurricanes and typhoons. However, this has generally been seen as a possible future event. Now a study from an MIT hurricane specialist indicates that we are already seeing this effect. Dr. Emanuel has apparently found that hurricanes in the North Atlantic doubled in total power since 1970, while North Pacific typhoons were 75% stronger. In a year with four named storms before early July and the earliest category 4 storm on record, that doesn't seem far-fetched.
Still, the study has drawn criticism from other climate scientists and must be regarded as preliminary. Dr. Emanuel's paper has appeared in Nature and will be subjected to the normal peer review. Even if some of the paper's findings are ultimately undermined, it's still sobering to contemplate that climate change might turn out to be something that my generation will experience directly. We could end up cursing our own inaction, rather than only worrying about what our descendents will say about us. That could turn out to be a good development, in a perverse way. Climate change, as an issue, has suffered from much of the same "Apres nous, le Deluge" attitude as Social Security reform and other seemingly intractable long-term problems that aren't yet full-blown crises.
Consider the insurance industry, though. It already pays more attention to climate change concerns than most other financial sectors. If a direct link were conclusively established between warming, the emissions that cause it, and the increasing insurance liabilities associated with more intense hurricanes, then the political winds around this issue might just start to shift in favor of prompt action. I'm sure this isn't the last we've heard on this subject.
Unintended Consequences and Diminishing Returns
I've previously highlighted Southern California's success at cleaning up its air. Yesterday's New York Times included a fascinating and lengthy article on the subject. It goes into some detail on how L.A.'s historic problem with ozone pollution was brought under control, while describing a new, growing problem with roots in a classic unintended consequence. However, there are a couple of points worth adding, relating to useful lessons and possible future consequences.
Somehow, the impact of pollution abatement on gasoline prices in Southern California escaped mention, even though it was a clear harbinger of subsequent price spikes elsewhere. Starting in the 1980s, the specifications for gasoline sold in the South Coast Air Quality Basin became much more restrictive than in the rest of California or in other states. This effectively turned Southern California into a remote island. Fortunately, the island was normally self-sufficient, with a large concentration of oil refineries.
Whenever a local refinery problem restricted gasoline supplies, though, obtaining replacement supplies elsewhere entailed extra cost and time lags for blending and shipping the so-called "L.A. Spec" gas. As a result, pump prices jumped by 5-15 cents per gallon--on a much lower base than today's--depending on the magnitude and duration of the outage. I experienced this firsthand a number of times, as Texaco's lead products trader for the West Coast in the mid-to-late 1980s. In fact, this was the beginning of the Balkanization of gasoline specifications that has contributed to supply disruptions and price excursions in other locations, including the price spikes in the Midwest a few years ago. The whole country could be facing this on a larger scale next year, as companies like Valero voluntarily phase out the use of MTBE, as a consequence of the failure of the Energy Bill to provide litigation protection for the industry.
Even though Angelenos have willingly paid this premium for cleaner air, control of auto emissions in the region is approaching a point of diminishing returns. Short of eliminating these emissions altogether--something that is still years or decades away--pollution from cars may be overshadowed by the particulate emissions of the diesel engines associated with L.A.'s burgeoning foreign trade. As imports from China and the rest of Asia have grown, more and more ships, trains and trucks have converged on the freight nexus of Southern California's ports. The article makes clear that addressing this source of pollution will be tricky, for many reasons.
Regulators will face particular challenges in reducing the sulfur of the fuel that ships burn. Bunker fuel, as it is called, is the final residue of the oil refining process. It contains very complex hydrocarbon molecules and impurities and is the most expensive fraction of the barrel to clean up further. In fact, hundreds of thousands of barrels per day of this material have vanished from the market in the last 30 years, as refiners turned it into more valuable products like gasoline and diesel, using various conversion processes. Faced with a choice between removing most of the sulfur from this fuel, or turning it into gasoline, some refiners will opt for the latter, even if this means massive investments. So whether it's cleaned up or transformed into something else, the fuel that shipping companies will buy in the future will become more expensive. That extra cost will eventually find its way into the price of the goods we import.
Finally, even after thirty years, I'll never forget the first time I drove to L.A. from Northern California. The smog was so bad that you could taste it, and after a couple of days my car had acquired a layer of shiny, metallic-looking dust. I subsequently spent 10 years in L.A., off and on, and by the time I left in the early 90s, there were many more clear days than smoggy ones. That was a tremendous achievement, involving the efforts of state and local regulators, citizens, and industry--even if the latter sometimes had to be dragged kicking and screaming. But as the Times article suggests, replicating this success with a different pollutant will require new thinking and novel strategies for dealing with another set of stakeholders. The risks of getting this wrong could be even larger than they were with ozone.
I've previously highlighted Southern California's success at cleaning up its air. Yesterday's New York Times included a fascinating and lengthy article on the subject. It goes into some detail on how L.A.'s historic problem with ozone pollution was brought under control, while describing a new, growing problem with roots in a classic unintended consequence. However, there are a couple of points worth adding, relating to useful lessons and possible future consequences.
Somehow, the impact of pollution abatement on gasoline prices in Southern California escaped mention, even though it was a clear harbinger of subsequent price spikes elsewhere. Starting in the 1980s, the specifications for gasoline sold in the South Coast Air Quality Basin became much more restrictive than in the rest of California or in other states. This effectively turned Southern California into a remote island. Fortunately, the island was normally self-sufficient, with a large concentration of oil refineries.
Whenever a local refinery problem restricted gasoline supplies, though, obtaining replacement supplies elsewhere entailed extra cost and time lags for blending and shipping the so-called "L.A. Spec" gas. As a result, pump prices jumped by 5-15 cents per gallon--on a much lower base than today's--depending on the magnitude and duration of the outage. I experienced this firsthand a number of times, as Texaco's lead products trader for the West Coast in the mid-to-late 1980s. In fact, this was the beginning of the Balkanization of gasoline specifications that has contributed to supply disruptions and price excursions in other locations, including the price spikes in the Midwest a few years ago. The whole country could be facing this on a larger scale next year, as companies like Valero voluntarily phase out the use of MTBE, as a consequence of the failure of the Energy Bill to provide litigation protection for the industry.
Even though Angelenos have willingly paid this premium for cleaner air, control of auto emissions in the region is approaching a point of diminishing returns. Short of eliminating these emissions altogether--something that is still years or decades away--pollution from cars may be overshadowed by the particulate emissions of the diesel engines associated with L.A.'s burgeoning foreign trade. As imports from China and the rest of Asia have grown, more and more ships, trains and trucks have converged on the freight nexus of Southern California's ports. The article makes clear that addressing this source of pollution will be tricky, for many reasons.
Regulators will face particular challenges in reducing the sulfur of the fuel that ships burn. Bunker fuel, as it is called, is the final residue of the oil refining process. It contains very complex hydrocarbon molecules and impurities and is the most expensive fraction of the barrel to clean up further. In fact, hundreds of thousands of barrels per day of this material have vanished from the market in the last 30 years, as refiners turned it into more valuable products like gasoline and diesel, using various conversion processes. Faced with a choice between removing most of the sulfur from this fuel, or turning it into gasoline, some refiners will opt for the latter, even if this means massive investments. So whether it's cleaned up or transformed into something else, the fuel that shipping companies will buy in the future will become more expensive. That extra cost will eventually find its way into the price of the goods we import.
Finally, even after thirty years, I'll never forget the first time I drove to L.A. from Northern California. The smog was so bad that you could taste it, and after a couple of days my car had acquired a layer of shiny, metallic-looking dust. I subsequently spent 10 years in L.A., off and on, and by the time I left in the early 90s, there were many more clear days than smoggy ones. That was a tremendous achievement, involving the efforts of state and local regulators, citizens, and industry--even if the latter sometimes had to be dragged kicking and screaming. But as the Times article suggests, replicating this success with a different pollutant will require new thinking and novel strategies for dealing with another set of stakeholders. The risks of getting this wrong could be even larger than they were with ozone.
Wednesday, August 03, 2005
Specifying the Path vs. Choosing the Outcome
I'm struck by an unlikely analogy between the space program and alternative energy development. Consider the current plight of the US space shuttle. In spite of some intrepid inflight repairs, and assuming a safe landing by Discovery, the program will be hung up again with technical problems while engineers try to reconfigure the fuel tank insulation. Compare this to Russia's venerable Soyuz, whose managers brashly offered to throw together enough ships to rescue Discovery's crew, should that become necessary. The single-use Soyuz fleet has flown for 40 years--with some upgrades--and has had an exemplary safety record since the early 1970s.
Superficially, this resembles a classic tortoise-and-hare competition. Fundamentally, though, these two vehicles reflect the answers to two very different questions. Soyuz responds to a simple query: Can you build an inexpensive, reliable craft to carry humans to earth orbit and return them home? The Shuttle, on the other hand--for reasons related as much to Cold War strategic needs as to the scientific and technical goals that NASA was established to pursue--addresses a much more exacting specification, along the lines of: Can you build a reusable spacecraft to carry crew and large quantities of cargo and instruments to low earth orbit, loiter in orbit for extended periods, and return to earth and land like an airplane? The result is an infinitely more complex machine that has proven much more expensive and much less reliable than originally expected.
Now think about the US approach to our energy goals. The Energy Bill that awaits President Bush's signature includes funding for incentives and research that are fairly narrowly specified. There's money for coal gasification, for increased ethanol production, for incentives to induce consumers to buy hybrid cars, and so on. This money will get spent, and it will produce many of the intended results. But how will those results compare with the what we'd get if instead of specifying the path, it simply stated the desired outcome?
Instead of incentives for hybrid cars, for example, we could have had incentives based on graduated increments of gas mileage above the Corporate Average Fuel Economy standards. This could even have been made revenue-neutral by taxing cars getting equivalent increments of gas mileage below the CAFEs, all without changing CAFE. The result would reward efficient hybrids like the Toyota Prius or Ford Escape Hybrid, as well as efficient conventional cars like the Chevy Aveo or VW Jetta diesel, while treating hybrids like the Lexus RX400h as what they are, lifestyle choices that don't reduce fuel economy in a meaningful way. And with this kind of approach, we wouldn't have needed a separate category of incentives for fuel cell cars, as we will now have. Rather, the reward for an ultra-efficient car could have been set ultra-high, and any technology that would get us there would qualify. And that is my point in a nutshell.
The same issue came up in a conversation with a close friend in D.C. concerning coal gasification. She rightly pointed out that the answer to cleaner coal is not necessarily gasification--though I think it probably is. Rather, the answer is to specify what we mean by "clean coal" and to fund and reward anything that delivers on that. Imagine the entrepreneurial energy that would be unleashed if a portion of the money earmarked for specific line items in the Energy Bill were diverted to fund the energy equivalent of the X-Prize. It may not be good politics, but it would be very sound economics.
I'm struck by an unlikely analogy between the space program and alternative energy development. Consider the current plight of the US space shuttle. In spite of some intrepid inflight repairs, and assuming a safe landing by Discovery, the program will be hung up again with technical problems while engineers try to reconfigure the fuel tank insulation. Compare this to Russia's venerable Soyuz, whose managers brashly offered to throw together enough ships to rescue Discovery's crew, should that become necessary. The single-use Soyuz fleet has flown for 40 years--with some upgrades--and has had an exemplary safety record since the early 1970s.
Superficially, this resembles a classic tortoise-and-hare competition. Fundamentally, though, these two vehicles reflect the answers to two very different questions. Soyuz responds to a simple query: Can you build an inexpensive, reliable craft to carry humans to earth orbit and return them home? The Shuttle, on the other hand--for reasons related as much to Cold War strategic needs as to the scientific and technical goals that NASA was established to pursue--addresses a much more exacting specification, along the lines of: Can you build a reusable spacecraft to carry crew and large quantities of cargo and instruments to low earth orbit, loiter in orbit for extended periods, and return to earth and land like an airplane? The result is an infinitely more complex machine that has proven much more expensive and much less reliable than originally expected.
Now think about the US approach to our energy goals. The Energy Bill that awaits President Bush's signature includes funding for incentives and research that are fairly narrowly specified. There's money for coal gasification, for increased ethanol production, for incentives to induce consumers to buy hybrid cars, and so on. This money will get spent, and it will produce many of the intended results. But how will those results compare with the what we'd get if instead of specifying the path, it simply stated the desired outcome?
Instead of incentives for hybrid cars, for example, we could have had incentives based on graduated increments of gas mileage above the Corporate Average Fuel Economy standards. This could even have been made revenue-neutral by taxing cars getting equivalent increments of gas mileage below the CAFEs, all without changing CAFE. The result would reward efficient hybrids like the Toyota Prius or Ford Escape Hybrid, as well as efficient conventional cars like the Chevy Aveo or VW Jetta diesel, while treating hybrids like the Lexus RX400h as what they are, lifestyle choices that don't reduce fuel economy in a meaningful way. And with this kind of approach, we wouldn't have needed a separate category of incentives for fuel cell cars, as we will now have. Rather, the reward for an ultra-efficient car could have been set ultra-high, and any technology that would get us there would qualify. And that is my point in a nutshell.
The same issue came up in a conversation with a close friend in D.C. concerning coal gasification. She rightly pointed out that the answer to cleaner coal is not necessarily gasification--though I think it probably is. Rather, the answer is to specify what we mean by "clean coal" and to fund and reward anything that delivers on that. Imagine the entrepreneurial energy that would be unleashed if a portion of the money earmarked for specific line items in the Energy Bill were diverted to fund the energy equivalent of the X-Prize. It may not be good politics, but it would be very sound economics.
Tuesday, August 02, 2005
Chevron 1, CNOOC 0
CNOOC has apparently withdrawn its offer for Unocal, as of this morning. Given the support Chevron was garnering, including that of the proxy advisor, this was probably inevitable. Chalk it up to a successful PR campaign on Chevron's part, and to some tyro mistakes by CNOOC's management (and the Chinese leadership in Beijing.)
The most important lesson that should be drawn from this situation is to recognize that it was only the first round in a trend that is likely to continue. The underlying forces behind CNOOC's bid, including China's growing energy appetite, its limited resources relative to its population, and its still not-quite-market mentality favoring control of resources through direct ownership, suggest that we will face similar issues in the future. It would be helpful if that could happen in the context of some frank bi-lateral discussions concerning the "rules of the road" for future transactions in the energy space (or other areas we deem strategic.)
It's one thing to treat the first example as a one-off, resulting in some very mixed messages, but we'd better be prepared with a clearer and more consistent posture next time.
CNOOC has apparently withdrawn its offer for Unocal, as of this morning. Given the support Chevron was garnering, including that of the proxy advisor, this was probably inevitable. Chalk it up to a successful PR campaign on Chevron's part, and to some tyro mistakes by CNOOC's management (and the Chinese leadership in Beijing.)
The most important lesson that should be drawn from this situation is to recognize that it was only the first round in a trend that is likely to continue. The underlying forces behind CNOOC's bid, including China's growing energy appetite, its limited resources relative to its population, and its still not-quite-market mentality favoring control of resources through direct ownership, suggest that we will face similar issues in the future. It would be helpful if that could happen in the context of some frank bi-lateral discussions concerning the "rules of the road" for future transactions in the energy space (or other areas we deem strategic.)
It's one thing to treat the first example as a one-off, resulting in some very mixed messages, but we'd better be prepared with a clearer and more consistent posture next time.
Changing of the Guard
The attention focused on the death of King Fahd and the ascendance of Crown Prince Abdullah, the de facto ruler since Fahd's stroke in 1996, reflects both the ongoing importance of Saudi oil and the durability of the dynasty founded against the odds by ibn Saud. Whatever your views on the role the Kingdom has played in events ranging from OPEC and the 1973 Embargo, the Middle East peace process, the expulsion of the Soviets from Afghanistan, the Gulf War, and the War on Terror, we all have a stake in a smooth transition. There's little reason to think it will be otherwise, since the much more interesting transition from the aging sons of ibn Saud to his grandsons' generation remains years off. In light of this, it's worth spending a moment thinking about the future energy role of Saudi Arabia.
Despite widespread assumptions that the Saudis, who have the world's largest reserves of crude oil, must bear the lion's share of future production increases, there's little indication of this from Saudi Aramco, the state oil company. In fact, the company has suggested (FT subscription may be required) that they will only be able to increase capacity to 12.5 million barrels per day by 2009, and to 15 MBD eventually. That could be as much as 4 or 5 MBD less than the world will need, unless other producers can make up the slack. (The CERA study I referred to the other day provides some reassurance in that regard.)
Pronouncements like this only serve to bolster the arguments of those who believe the Saudis have consistently exaggerated their reserves and hidden signs of imminent decline in the country's largest oilfields. I see a simpler explanation. Saudi Arabia suffers from the same problems as many other countries that rely on oil exports for their income, such as Venezuela and Algeria. A growing population with high, unmet expectations has forced the government to siphon off much of its oil earnings to pay for social programs and job creation, instead of developing more oil. The current price spike has been a two-edged sword, enabling them to stave off social unrest, but also allowing them to postpone urgently needed reform. At some point, though, even these inflated revenues won't be adequate, and the Kingdom will have to consider allowing in foreign investors, as an alternative to domestic chaos.
The flip side of this argument includes various scenarios for the overthrow of the Saudi royal family and revolution of some sort, whether democratic or Islamist. These predictions have been around for longer than I've been in the industry, and they've usually underestimated the tenaciousness of the al Saud clan, as well as their savvy political sense. But if something like this did occur, our Iraqi experience suggests we'd be unable to intervene effectively. We would have to ride out the storm, which would blow oil prices through any ceiling we can imagine, especially if it started with prices as high as they are now.
At the same time, though, the combination of less ambitious future production expectations and the advent of new energy technologies such as hybrid cars and gas-to-liquids plants suggests that the importance of Saudi Arabia's oil to the global economy may not grow as much as conventional wisdom would suggest. The longer the Kingdom resists opening its doors to foreign investment, the likelier this view will prove to be correct.
The attention focused on the death of King Fahd and the ascendance of Crown Prince Abdullah, the de facto ruler since Fahd's stroke in 1996, reflects both the ongoing importance of Saudi oil and the durability of the dynasty founded against the odds by ibn Saud. Whatever your views on the role the Kingdom has played in events ranging from OPEC and the 1973 Embargo, the Middle East peace process, the expulsion of the Soviets from Afghanistan, the Gulf War, and the War on Terror, we all have a stake in a smooth transition. There's little reason to think it will be otherwise, since the much more interesting transition from the aging sons of ibn Saud to his grandsons' generation remains years off. In light of this, it's worth spending a moment thinking about the future energy role of Saudi Arabia.
Despite widespread assumptions that the Saudis, who have the world's largest reserves of crude oil, must bear the lion's share of future production increases, there's little indication of this from Saudi Aramco, the state oil company. In fact, the company has suggested (FT subscription may be required) that they will only be able to increase capacity to 12.5 million barrels per day by 2009, and to 15 MBD eventually. That could be as much as 4 or 5 MBD less than the world will need, unless other producers can make up the slack. (The CERA study I referred to the other day provides some reassurance in that regard.)
Pronouncements like this only serve to bolster the arguments of those who believe the Saudis have consistently exaggerated their reserves and hidden signs of imminent decline in the country's largest oilfields. I see a simpler explanation. Saudi Arabia suffers from the same problems as many other countries that rely on oil exports for their income, such as Venezuela and Algeria. A growing population with high, unmet expectations has forced the government to siphon off much of its oil earnings to pay for social programs and job creation, instead of developing more oil. The current price spike has been a two-edged sword, enabling them to stave off social unrest, but also allowing them to postpone urgently needed reform. At some point, though, even these inflated revenues won't be adequate, and the Kingdom will have to consider allowing in foreign investors, as an alternative to domestic chaos.
The flip side of this argument includes various scenarios for the overthrow of the Saudi royal family and revolution of some sort, whether democratic or Islamist. These predictions have been around for longer than I've been in the industry, and they've usually underestimated the tenaciousness of the al Saud clan, as well as their savvy political sense. But if something like this did occur, our Iraqi experience suggests we'd be unable to intervene effectively. We would have to ride out the storm, which would blow oil prices through any ceiling we can imagine, especially if it started with prices as high as they are now.
At the same time, though, the combination of less ambitious future production expectations and the advent of new energy technologies such as hybrid cars and gas-to-liquids plants suggests that the importance of Saudi Arabia's oil to the global economy may not grow as much as conventional wisdom would suggest. The longer the Kingdom resists opening its doors to foreign investment, the likelier this view will prove to be correct.
Monday, August 01, 2005
Watching the Fundamentals
Not many years ago, you could gauge the price and direction of oil and petroleum products in the US just by looking at the levels and trends of reported inventories. Anyone doubting that this no longer works, and that the US fuels market is strongly connected with the global market, need only look at the current market fundamentals as reflected in the inventories.
The Energy Information Agency of the Department of Energy released their latest weekly report on oil and oil products last Friday, showing production, imports, refinery utilization and inventories. The results are consistent with the recent pattern, with US crude oil inventories slipping but still at the top of their seasonally-adjusted historical-average range. Gasoline stocks exhibit a similar picture, both nationally and regionally, except for some tightness in the Rocky Mountains region. Distillate stocks (diesel and heating oil) are climbing toward the top of their seasonally adjusted range, as you'd expect. Anyone who'd spent the last several years on a desert island and was shown these inventory trends might reasonably think that crude oil was at about $25 and falling, with gasoline no more than a buck and a half at the pump.
So how can you have these kinds of market fundamentals and still be stuck at $60+ West Texas Intermediate crude and $3.00 gasoline? The details are complex, but I think two factors stand out. First, the fraction of crude oil we must import continues to rise, accounting for more than 10 million barrels per day (MBD) of the nearly 16 MBD run in US refineries. Imports of refined products also now make up about 10% of the 20+ MBD of gasoline, diesel and other petroleum products sold in the US. As long as the factors supporting the international prices of these commodities persist--high demand, tight refining capacity, and almost no spare crude production capacity--prices can't slip much here, no matter how high our inventories get.
Then look at the way that sustained demand growth shifts the relationship of historical data, when you compare inventory levels in terms of the number of days of demand they represent. With US demand rising 1 or 2% each year, after a few years a high absolute inventory figure can look average, or even low, in terms of days' usage. For example, US gasoline inventory reports for July 2005 averaged 212 million barrels, 6 million barrels higher than for the same month five years ago. However, the 2000 figure represented 24 days' demand, compared to 2005's 22.3 days. Effective inventory is 7% lower, despite totaling more barrels, because we are driving more.
All in all, then, while tracking of the EIA's raw statistics has suggested for some time that prices ought to be heading lower, I wouldn't bet on it until we see demand in China or the US slowing , or some sizable chunks of new production coming on line. We may have to wait until next year for either of these to have an impact.
Not many years ago, you could gauge the price and direction of oil and petroleum products in the US just by looking at the levels and trends of reported inventories. Anyone doubting that this no longer works, and that the US fuels market is strongly connected with the global market, need only look at the current market fundamentals as reflected in the inventories.
The Energy Information Agency of the Department of Energy released their latest weekly report on oil and oil products last Friday, showing production, imports, refinery utilization and inventories. The results are consistent with the recent pattern, with US crude oil inventories slipping but still at the top of their seasonally-adjusted historical-average range. Gasoline stocks exhibit a similar picture, both nationally and regionally, except for some tightness in the Rocky Mountains region. Distillate stocks (diesel and heating oil) are climbing toward the top of their seasonally adjusted range, as you'd expect. Anyone who'd spent the last several years on a desert island and was shown these inventory trends might reasonably think that crude oil was at about $25 and falling, with gasoline no more than a buck and a half at the pump.
So how can you have these kinds of market fundamentals and still be stuck at $60+ West Texas Intermediate crude and $3.00 gasoline? The details are complex, but I think two factors stand out. First, the fraction of crude oil we must import continues to rise, accounting for more than 10 million barrels per day (MBD) of the nearly 16 MBD run in US refineries. Imports of refined products also now make up about 10% of the 20+ MBD of gasoline, diesel and other petroleum products sold in the US. As long as the factors supporting the international prices of these commodities persist--high demand, tight refining capacity, and almost no spare crude production capacity--prices can't slip much here, no matter how high our inventories get.
Then look at the way that sustained demand growth shifts the relationship of historical data, when you compare inventory levels in terms of the number of days of demand they represent. With US demand rising 1 or 2% each year, after a few years a high absolute inventory figure can look average, or even low, in terms of days' usage. For example, US gasoline inventory reports for July 2005 averaged 212 million barrels, 6 million barrels higher than for the same month five years ago. However, the 2000 figure represented 24 days' demand, compared to 2005's 22.3 days. Effective inventory is 7% lower, despite totaling more barrels, because we are driving more.
All in all, then, while tracking of the EIA's raw statistics has suggested for some time that prices ought to be heading lower, I wouldn't bet on it until we see demand in China or the US slowing , or some sizable chunks of new production coming on line. We may have to wait until next year for either of these to have an impact.
Friday, July 29, 2005
Longer Days
In my discussion of the pending Energy Bill on Wednesday, I neglected to mention a provision that may actually have a greater impact on Americans than all the others combined: the extension of Daylight Savings Time (DST) by a month, starting next year. While its supporters argue this will reduce electricity demand by 1%, recent experience suggests that the net energy savings may be more modest and chiefly come in the form of load-shifting that would benefit areas where peak generating capacity is tight. But aside from its debatable energy benefits, the larger impact of extended DST may be symbolic, and I worry about the message being sent.
Anyone over 40 probably remembers the last time this step was taken. Daylight Savings Time was extended by President Nixon in the wake of the Arab Oil Embargo of 1973-74. Other responses to that emergency included the 55 mile per hour speed limit and the establishment of the Strategic Petroleum Reserve. But we're not really in an "energy crisis" now, but rather a market-driven adjustment to capacity constraints. What kind of signal does extended daylight saving time send, compared to the signals already being sent by higher energy prices?
More importantly, I'm concerned about the subtext of the message. "We're in a fix and the best we can do is reach back to a thirty year old emergency measure" doesn't really cut it for me. As I've suggested many times in this blog and in conversation with friends and colleagues, the most striking difference between the energy crises of the 1970s and the situation in which we find ourselves today is the wealth of options we now have: our sources of oil are more diverse, we have hybrid cars that can get more than 50 miles per gallon, natural gas is becoming a diversified global business--thanks to technology and cost improvements in LNG--and renewable energy, especially wind power, is ready for prime time. None of this was true in 1973 or 1979.
If adding a few more hours of evening daylight--and morning darkness--in March and November alerts Americans that we should be more efficient in our use of energy, that's great. But if it shifts our focus away from the real solutions that are now available to us and tells us that we are back in the same box as the 1970s, then it will merely be a counterproductive annoyance.
In my discussion of the pending Energy Bill on Wednesday, I neglected to mention a provision that may actually have a greater impact on Americans than all the others combined: the extension of Daylight Savings Time (DST) by a month, starting next year. While its supporters argue this will reduce electricity demand by 1%, recent experience suggests that the net energy savings may be more modest and chiefly come in the form of load-shifting that would benefit areas where peak generating capacity is tight. But aside from its debatable energy benefits, the larger impact of extended DST may be symbolic, and I worry about the message being sent.
Anyone over 40 probably remembers the last time this step was taken. Daylight Savings Time was extended by President Nixon in the wake of the Arab Oil Embargo of 1973-74. Other responses to that emergency included the 55 mile per hour speed limit and the establishment of the Strategic Petroleum Reserve. But we're not really in an "energy crisis" now, but rather a market-driven adjustment to capacity constraints. What kind of signal does extended daylight saving time send, compared to the signals already being sent by higher energy prices?
More importantly, I'm concerned about the subtext of the message. "We're in a fix and the best we can do is reach back to a thirty year old emergency measure" doesn't really cut it for me. As I've suggested many times in this blog and in conversation with friends and colleagues, the most striking difference between the energy crises of the 1970s and the situation in which we find ourselves today is the wealth of options we now have: our sources of oil are more diverse, we have hybrid cars that can get more than 50 miles per gallon, natural gas is becoming a diversified global business--thanks to technology and cost improvements in LNG--and renewable energy, especially wind power, is ready for prime time. None of this was true in 1973 or 1979.
If adding a few more hours of evening daylight--and morning darkness--in March and November alerts Americans that we should be more efficient in our use of energy, that's great. But if it shifts our focus away from the real solutions that are now available to us and tells us that we are back in the same box as the 1970s, then it will merely be a counterproductive annoyance.
Thursday, July 28, 2005
The Sierra Club and Ford
Hats off to the Sierra Club and Ford for finding a way to work together. While other environmentally-focused non-governmental organizations (NGOs) may feel that the Sierra Club has taken leave of its senses in helping Ford to promote a hybrid SUV, the Mercury Mariner, I think this represents a positive step towards addressing climate change and energy security in a context that will be palatable to most Americans.
It is certainly true, as a spokesperson from a more radical NGO--the Rainforest Action Network--implied, that even greater fuel economy and emissions reductions could be achieved if everyone just bought existing sub-compacts like the Ford Focus. However, the only way to make that happen would be by legislative edict. It hasn't even been possible to line up a majority of Congress to tighten the longstanding Corporate Average Fuel Economy standards for cars and light trucks, so don't expect a "mini-car mandate" any time soon.
As Amory Lovins of the Rocky Mountain Institute indicated in an interview in the Wall Street Journal's special section on the Car of the Future on Monday, the answer must lie in using technology to improve the performance of the cars people actually want to buy and drive. His suggested approach relies not only on hybrid engines, but also extensive use of carbon fiber materials to reduce the weight of cars without sacrificing safety. He makes a good argument that these interim measures would actually lower the hurdles that fuel cells must overcome for commercialization, and hasten a production fuel cell car.
Whatever the ultimate technology solution, which should be accompanied by effective policies to encourage Americans to reduce the number of miles they drive, it is important to get more cars like the Mariner on the road. If an endorsement from the Sierra Club helps that along, that's great.
Hats off to the Sierra Club and Ford for finding a way to work together. While other environmentally-focused non-governmental organizations (NGOs) may feel that the Sierra Club has taken leave of its senses in helping Ford to promote a hybrid SUV, the Mercury Mariner, I think this represents a positive step towards addressing climate change and energy security in a context that will be palatable to most Americans.
It is certainly true, as a spokesperson from a more radical NGO--the Rainforest Action Network--implied, that even greater fuel economy and emissions reductions could be achieved if everyone just bought existing sub-compacts like the Ford Focus. However, the only way to make that happen would be by legislative edict. It hasn't even been possible to line up a majority of Congress to tighten the longstanding Corporate Average Fuel Economy standards for cars and light trucks, so don't expect a "mini-car mandate" any time soon.
As Amory Lovins of the Rocky Mountain Institute indicated in an interview in the Wall Street Journal's special section on the Car of the Future on Monday, the answer must lie in using technology to improve the performance of the cars people actually want to buy and drive. His suggested approach relies not only on hybrid engines, but also extensive use of carbon fiber materials to reduce the weight of cars without sacrificing safety. He makes a good argument that these interim measures would actually lower the hurdles that fuel cells must overcome for commercialization, and hasten a production fuel cell car.
Whatever the ultimate technology solution, which should be accompanied by effective policies to encourage Americans to reduce the number of miles they drive, it is important to get more cars like the Mariner on the road. If an endorsement from the Sierra Club helps that along, that's great.
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