Continuing my look at the energy proposals of this year's presidential candidates, let's turn to the other winner of the Iowa Caucuses, Senator Barack Obama (D-IL.) Where Governor Huckabee's proposals for energy and the environment appeared broad and somewhat generic, Senator Obama's are quite detailed, including specific targets for emissions, fuel economy, renewable energy and vehicle technology and performance. Despite this contrast, however, the Senator's views reflect a very similar concern about the security and environmental implications of our energy use. Although I'm skeptical about some of Mr. Obama's energy goals, such as eliminating oil imports by 2030, he has clearly devoted much thought and attention to these issues.
Energy and the environment have been consistent themes of the Obama campaign from the start. Youtube has numerous clips of his comments on energy from speeches in many different venues, along with this historical primer on energy independence, highlighting the consistent, bi-partisan failure to deliver on this goal since the 1970s. It suggests that Mr. Obama knows how to achieve it, where others before him--including two Democratic administrations--didn't. Could politics and an absence of plain speaking really be the only reasons this goal hasn't been met?
The main pathways that Mr. Obama promotes for improving energy security and reducing emissions are clean energy and efficiency. He advocates much greater use of solar, wind and geothermal power--measured against a 25% renewable electricity standard for 2025--and more biofuels, including conventional ethanol, biodiesel, and cellulosic ethanol. He would expand the Renewable Fuel Standard in the 2007 Energy Bill from 36 billion gallons in 2022 to 60 billion gallons per year by 2030. And recognizing that none of this will spring from thin air, he proposes an Apollo Program-like R&D effort to advance a broad range of energy technologies, along with capacity-building measures such as cleantech job training and manufacturing conversion.
Unsurprisingly for a Senator from Illinois, Obama supports the development and deployment of clean coal technology. However, I couldn't find any mention of nuclear power on his campaign's website. When asked about nuclear power at an event, his carefully calibrated response indicated that he doesn't regard nuclear as an important element of his energy strategy. He implied that waste and safety concerns haven't been adequately met, though he failed to cite politics as a key obstacle in addressing the former. The part of his answer that I liked best was when he said, "There is no perfect energy source. Everything has some problems right now."
With regard to climate change, the Senator calls for a stricter version of the Warner-Lieberman greenhouse gas cap-and-trade legislation currently working its way through the Congress, referencing the earlier Sanders-Boxer Bill (S.309,) which he co-sponsored. His plan differs from Warner-Lieberman in requiring deeper cuts by mid-century and auctioning 100% of the emission allowances, rather than allocating a portion to various industries and organizations. It's a simpler approach, though when MIT compared Sanders-Boxer to, among others, the McCain-Lieberman cap-and-trade bill that was the precursor of Warner-Lieberman, they concluded that the former would result in a significantly higher CO2 cost, equivalent to adding about $1.00 per gallon onto then-current gasoline prices by 2030 and $2.00/gal. by 2050.
As with his other positions, Senator Obama articulates his views on energy in a forceful and compelling fashion. He conveys a sense that he understands the challenges, has a comprehensive plan for addressing them, and knows how to create the bi-partisan political and public momentum to get it done. But although he doesn't suggest this will be cheap--citing billions of dollars for his new Apollo Program--he does imply that it will be easier than Americans ought to expect. For example, when he talks about advancing automobile fuel efficiency to 43 miles per gallon, 8 mpg above the new CAFE standard for 2020 that emerged from the arduous negotiations for the 2007 Energy Bill, he says, "That is something that we can do, right now." Perhaps, if every car were a Prius-sized hybrid. Even Toyota's Camry hybrid--a model more similar to what most Americans actually purchase--only averages 34 mpg, and all but the smallest SUV hybrids are still in the 20s. Attaining 43 mpg across the whole fleet would be tough, and it would require significant changes in vehicle technology and in the kind of vehicles we drive. As I've noted before, even plug-in hybrids aren't quite the silver bullet they appear to be, in total energy terms. That's even more true for flexible-fuel vehicles.
As bold and comprehensive as Senator Obama's energy proposals are--certainly satisfying any definition of change--they don't break with party orthodoxy or embrace some pragmatic options that could accelerate his timetable for eliminating oil imports. He ignores the option of natural gas as a lower-emission, lower-cost alternative to oil, and he has dismissed the potential of our large, untapped oil and gas resources. In 2006 he voted against even a modest expansion of the allowed area for offshore drilling in the Gulf of Mexico. Although Mr. Obama prides himself on telling people what they need to hear, rather than just what they want to hear, I don't see much that might be unpopular with the party's base.
You can't watch Senator Obama speak without understanding his infectious popularity, especially with new voters and those jaded by partisan politics, pessimism and gridlock. In my corporate career and subsequent consulting, I have seen how difficult it is to strike a balance between the old and the new, between the things that provide the lifeblood of the organization today, and those that will be needed to sustain it into the future. Senator Obama has a big chunk of the latter down pat, when it comes to energy and the environment. Perhaps my age is showing, however, when I worry that a campaign that is so focused on new ideas and change could have a hard time accepting that some of those ideas might not be workable, or taking a fact-based look at why some elements of the energy status quo cannot be rejected out of hand, without disrupting the supply lines on which our economy depends. It's that sort of tempering that I'll be watching for, in the weeks and months ahead.
Friday, January 11, 2008
The Oil Price Tax
An article in today's Washington Post compared the recent rise in oil prices to a $150 billion dollar-per-year tax on the US economy, enough to negate the various economic stimulus plans being discussed by the Congress and White House. It's a shocking figure, and it helps feed the forecasts of recession, which tend to be at least partially self-fulfilling. But before we accept that $150 million figure at face value--despite its impressive pedigree--it's worth spending a moment on a few ballpark validations. Above all, we should remind ourselves that if high oil prices are a tax, they tax producers, not consumers, who rarely purchase crude oil to use in our homes or vehicles.
The article cites a 2004 comment from Fed Chairman Bernanke noting that firms don't always have the ability to pass on the full effect of a commodity price shock to their customers. At least for oil refineries, now is such a time. Most of last year's oil price appreciation occurred following the end of peak driving season, after Labor Day. Between August and December, the average monthly futures price for West Texas Intermediate crude oil on the New York Mercantile Exchange went up by $19.38 per barrel. The average for January so far would add another $5 to that, so let's call it $25/bbl. With US refineries running at 15.5 million barrels per day, and using the increase in WTI as a proxy for the change in the oil prices actually paid by refiners, their costs have gone up by about $11.5 billion/month. That's close to Professor Nordhaus's $150 billion annualized pseudo-tax.
As I noted above, however, consumers don't buy oil; they buy gasoline, diesel fuel and heating oil. Although the prices of all those products have gone up considerably since Labor Day, only retail heating oil has gone up by as much as crude oil. So far, the average retail price of diesel fuel has risen by about $20/bbl and gasoline by only about $13/bbl. At current consumption rates, the direct impact on consumers is thus around $6.6 billion/month, or $80 billion per year. That ignores increases in the cost of plane tickets, plastics, food and many other things that consumers buy that include a significant energy component, but then, the prices of those goods and services are influenced by many other factors aside from the price of energy. That indirect impact has been further buffered by the relatively low price of natural gas, which supplies a large fraction of the energy and feedstock for the broader manufacturing, chemicals and power sector, and which has been virtually unaffected by the recent change in oil prices.
When we consider the net impact on the entire US economy, we see an increase in the price we pay for imported oil and petroleum products on the order of $9 billion/month since September, or $108 billion/year. Consumers have experienced about three-quarters of that, with businesses absorbing the rest, for now, along with the residual higher cost of domestically-produced oil. If the price of oil remains at this level, more of the increase will flow through to consumers, particularly with the seasonal return of higher gasoline demand in the spring.
$100 billion is not a trivial sum, particularly when it's added to the ongoing expense of two wars and the ultimate cost of repairing the damage caused by the sub-prime debt meltdown. In particular, taking the annualized equivalent of $80 billion out of consumers' disposable income has to worry any business hoping to sell them some product or service this year. But in an economy with nearly $10 trillion of consumer spending, it's the rough equivalent of a 1% tax. Consumers, businesses and policy-makers might want to keep that in perspective, before they panic.
The article cites a 2004 comment from Fed Chairman Bernanke noting that firms don't always have the ability to pass on the full effect of a commodity price shock to their customers. At least for oil refineries, now is such a time. Most of last year's oil price appreciation occurred following the end of peak driving season, after Labor Day. Between August and December, the average monthly futures price for West Texas Intermediate crude oil on the New York Mercantile Exchange went up by $19.38 per barrel. The average for January so far would add another $5 to that, so let's call it $25/bbl. With US refineries running at 15.5 million barrels per day, and using the increase in WTI as a proxy for the change in the oil prices actually paid by refiners, their costs have gone up by about $11.5 billion/month. That's close to Professor Nordhaus's $150 billion annualized pseudo-tax.
As I noted above, however, consumers don't buy oil; they buy gasoline, diesel fuel and heating oil. Although the prices of all those products have gone up considerably since Labor Day, only retail heating oil has gone up by as much as crude oil. So far, the average retail price of diesel fuel has risen by about $20/bbl and gasoline by only about $13/bbl. At current consumption rates, the direct impact on consumers is thus around $6.6 billion/month, or $80 billion per year. That ignores increases in the cost of plane tickets, plastics, food and many other things that consumers buy that include a significant energy component, but then, the prices of those goods and services are influenced by many other factors aside from the price of energy. That indirect impact has been further buffered by the relatively low price of natural gas, which supplies a large fraction of the energy and feedstock for the broader manufacturing, chemicals and power sector, and which has been virtually unaffected by the recent change in oil prices.
When we consider the net impact on the entire US economy, we see an increase in the price we pay for imported oil and petroleum products on the order of $9 billion/month since September, or $108 billion/year. Consumers have experienced about three-quarters of that, with businesses absorbing the rest, for now, along with the residual higher cost of domestically-produced oil. If the price of oil remains at this level, more of the increase will flow through to consumers, particularly with the seasonal return of higher gasoline demand in the spring.
$100 billion is not a trivial sum, particularly when it's added to the ongoing expense of two wars and the ultimate cost of repairing the damage caused by the sub-prime debt meltdown. In particular, taking the annualized equivalent of $80 billion out of consumers' disposable income has to worry any business hoping to sell them some product or service this year. But in an economy with nearly $10 trillion of consumer spending, it's the rough equivalent of a 1% tax. Consumers, businesses and policy-makers might want to keep that in perspective, before they panic.
Thursday, January 10, 2008
The Context of Efficiency
Here's a nice example of the vital distinction between consumption and efficiency. If I told you that a company was about to introduce a new car model that was expected to average 56 miles per gallon, and that it was going to be so cheap that nearly anyone could afford one, that would sound like great news, wouldn't it? Perhaps it depends on the context in which that car is introduced, and our assumptions about what it will displace. The car in question is Tata Motors' eagerly-awaited "1-Lakh" car--referring to its 100,000 Rupees price equating to $2546 at yesterday's exchange rate--and the target market is millions of Indians who haven't been able to afford a car yet. Even at an expected efficiency of 56 mpg, though, the Nano, to give its proper name, will create incremental consumption of petroleum products and new greenhouse gases emissions.
At an initial 60,000 units per year, the Nano will hardly alter the global oil supply and demand balance overnight. If driven 5000 miles each, the entire first year's production would consume only 350 barrels per day of fuel, or about as much as 11,000 average American cars. Of course, we're talking about a potential market of tens of millions of such cars, and as today's Wall Street Journal reminds us, there are a number of carmakers and models competing for that market. Selling 50 million such cars here would increase our fleet average efficiency to 32 mpg and save over 800,000 barrels per day of gasoline and 120 million tons per year of CO2. Selling 50 million of them in India, however, could increase consumption by 300,000 barrels per day, while adding 42 million tons per year of CO2.
While efficiency is probably the single most powerful tool available to us in trying to bring global energy use and emissions under control, it doesn't tell the whole story. Consumption is what counts, and at least in the case of Tata's new model, every new car out the door adds to consumption, no matter how many miles per liter it gets, because at the entry level it's displacing bicycles, mass transit, and walking. That isn't the case in the US, where the market is mature and most new cars replace older cars. Here the fuel economy indicated on a new car's sticker is only one variable that will determine its ultimate consumption, along with the city/highway driving mix, total miles driven, and the owner's driving style and maintenance habits.
You might also expect a car powered by a 32-HP engine and weighing 40% less than Toyota's smallest US offering, the 36 mpg Yaris, to do even better than 56 mpg. Unfortunately, $2,500 won't buy much in the way of sophisticated engine efficiency upgrades, let alone pay for the kind of hybrid approach used in the Prius. In this light, the 100 mpg initial target that the MIT-led Vehicle Design Summit is working toward for an entry-level car for India looks pretty ambitious.
Value judgments about this sort of thing are complex. At the same time we recognize that the expansion of personal mobility in developing countries complicates the energy and environmental challenges we all face, we might also experience a vicarious thrill at the benefits it should bring, provided that Indians don't feel obligated to repeat every mistake we've made in the one hundred years (this October) since the first of 15 million Model Ts rolled off Mr. Ford's assembly line. Sharing the lessons we've learned about transportation may be every bit as important as the technology sharing that was a major theme at the Bali climate change conference last month.
At an initial 60,000 units per year, the Nano will hardly alter the global oil supply and demand balance overnight. If driven 5000 miles each, the entire first year's production would consume only 350 barrels per day of fuel, or about as much as 11,000 average American cars. Of course, we're talking about a potential market of tens of millions of such cars, and as today's Wall Street Journal reminds us, there are a number of carmakers and models competing for that market. Selling 50 million such cars here would increase our fleet average efficiency to 32 mpg and save over 800,000 barrels per day of gasoline and 120 million tons per year of CO2. Selling 50 million of them in India, however, could increase consumption by 300,000 barrels per day, while adding 42 million tons per year of CO2.
While efficiency is probably the single most powerful tool available to us in trying to bring global energy use and emissions under control, it doesn't tell the whole story. Consumption is what counts, and at least in the case of Tata's new model, every new car out the door adds to consumption, no matter how many miles per liter it gets, because at the entry level it's displacing bicycles, mass transit, and walking. That isn't the case in the US, where the market is mature and most new cars replace older cars. Here the fuel economy indicated on a new car's sticker is only one variable that will determine its ultimate consumption, along with the city/highway driving mix, total miles driven, and the owner's driving style and maintenance habits.
You might also expect a car powered by a 32-HP engine and weighing 40% less than Toyota's smallest US offering, the 36 mpg Yaris, to do even better than 56 mpg. Unfortunately, $2,500 won't buy much in the way of sophisticated engine efficiency upgrades, let alone pay for the kind of hybrid approach used in the Prius. In this light, the 100 mpg initial target that the MIT-led Vehicle Design Summit is working toward for an entry-level car for India looks pretty ambitious.
Value judgments about this sort of thing are complex. At the same time we recognize that the expansion of personal mobility in developing countries complicates the energy and environmental challenges we all face, we might also experience a vicarious thrill at the benefits it should bring, provided that Indians don't feel obligated to repeat every mistake we've made in the one hundred years (this October) since the first of 15 million Model Ts rolled off Mr. Ford's assembly line. Sharing the lessons we've learned about transportation may be every bit as important as the technology sharing that was a major theme at the Bali climate change conference last month.
Wednesday, January 09, 2008
Candidates & Energy: Huckabee
With the Iowa Caucuses and the New Hampshire Primary behind us, and Super Duper Tuesday less than a month away, it seems timely to look at where the major presidential candidates stand on energy and energy-related environmental issues. I'd like to start with a candidate whom I would have relegated to the also-ran category prior to his impressive win in Iowa, former Arkansas Governor Mike Huckabee. Mr. Huckabee's positions on energy represent an interesting mix that doesn't neatly match the "conservative" label with which he is generally tagged. Some elements are refreshing, while others strike me as naively unrealistic--although not necessarily more than those of other, more prominent politicians. This isn't meant to be a comprehensive examination, nor should it be construed as any kind of endorsement.
Mr. Huckabee's official website, mikehuckabee.com, identifies energy independence as a key issue for his campaign. It proclaims, "We will achieve energy independence by the end of my second term," and lays out a broad agenda that includes conservation, technology, oil exploration, biofuels, renewable electricity, clean coal and nuclear power. It alludes to a "comprehensive plan for energy independence," although it is not clear whether this already exists or would be created early in a Huckabee administration. Without the specifics, we have only the site's rhetoric from which to surmise that the plan would rely heavily on market-based solutions and federal R&D support, rather than mandates. Among other things, he is on record supporting drilling in the Arctic National Wildlife Refuge.
Governor Huckabee's approach to energy seems generally consistent with the Geo-Green movement that's been percolating for a while in policy circles. He explicitly links energy and the War on Terror, citing the widely-heard "funding both sides" argument. His suggestion that he'd like to "treat Saudi Arabia the same way I treat Sweden" will be popular with voters who see Middle East oil--of which the US actually consumes relatively little--as the root of all evil.
The obverse of the security focus in the Geo-Green framework is environmental policy, and here Mr. Huckabee stands out, along with Senator McCain, as being most aggressive among the Republican candidates on the subject of climate change, which he accepts--though he tends to sidestep the question of its anthropogenic origin. On moral grounds he supports a cap and trade approach to greenhouse gas emissions and places this in a broader context of environmental stewardship. Despite this, I could not find a direct reference to climate change on his campaign's website.
So how does all this strike me? It's hard for me to get past the choice of energy independence as a focal point for his energy policy. Even if this goal were technically possible and desirable--both points are debatable--the idea that it could be done within eight years simply isn't credible. When you consider the legislative, permitting, capital, and engineering & construction elements of such a timeline, it would be quite an accomplishment if the first wave of major facilities envisioned in such a plan--nuclear power and coal liquefaction plants, arctic oil wells--were onstream by the end of his second term in office. Perhaps it's meant metaphorically and not literally, as it seems. I've also never been very comfortable with the "beggar-thy-neighbor" tone of some of the Geo-Green arguments. I see strong synergies between energy security and climate change, but those benefits stand up quite well without being put into an adversarial, anti-Arab context.
On balance, Governor Huckabee's approach to energy fits the climate change/energy security template that has become increasingly mainstream in the last few years and that ought to appeal to independent voters and some Democrats, while emphasizing markets in ways that won't alienate Republicans. There's not a lot of depth evident, however, and if Mr. Huckabee ultimately wants to compete with Democrats who have developed extremely detailed energy proposals, his staff has a lot of work ahead of them.
Mr. Huckabee's official website, mikehuckabee.com, identifies energy independence as a key issue for his campaign. It proclaims, "We will achieve energy independence by the end of my second term," and lays out a broad agenda that includes conservation, technology, oil exploration, biofuels, renewable electricity, clean coal and nuclear power. It alludes to a "comprehensive plan for energy independence," although it is not clear whether this already exists or would be created early in a Huckabee administration. Without the specifics, we have only the site's rhetoric from which to surmise that the plan would rely heavily on market-based solutions and federal R&D support, rather than mandates. Among other things, he is on record supporting drilling in the Arctic National Wildlife Refuge.
Governor Huckabee's approach to energy seems generally consistent with the Geo-Green movement that's been percolating for a while in policy circles. He explicitly links energy and the War on Terror, citing the widely-heard "funding both sides" argument. His suggestion that he'd like to "treat Saudi Arabia the same way I treat Sweden" will be popular with voters who see Middle East oil--of which the US actually consumes relatively little--as the root of all evil.
The obverse of the security focus in the Geo-Green framework is environmental policy, and here Mr. Huckabee stands out, along with Senator McCain, as being most aggressive among the Republican candidates on the subject of climate change, which he accepts--though he tends to sidestep the question of its anthropogenic origin. On moral grounds he supports a cap and trade approach to greenhouse gas emissions and places this in a broader context of environmental stewardship. Despite this, I could not find a direct reference to climate change on his campaign's website.
So how does all this strike me? It's hard for me to get past the choice of energy independence as a focal point for his energy policy. Even if this goal were technically possible and desirable--both points are debatable--the idea that it could be done within eight years simply isn't credible. When you consider the legislative, permitting, capital, and engineering & construction elements of such a timeline, it would be quite an accomplishment if the first wave of major facilities envisioned in such a plan--nuclear power and coal liquefaction plants, arctic oil wells--were onstream by the end of his second term in office. Perhaps it's meant metaphorically and not literally, as it seems. I've also never been very comfortable with the "beggar-thy-neighbor" tone of some of the Geo-Green arguments. I see strong synergies between energy security and climate change, but those benefits stand up quite well without being put into an adversarial, anti-Arab context.
On balance, Governor Huckabee's approach to energy fits the climate change/energy security template that has become increasingly mainstream in the last few years and that ought to appeal to independent voters and some Democrats, while emphasizing markets in ways that won't alienate Republicans. There's not a lot of depth evident, however, and if Mr. Huckabee ultimately wants to compete with Democrats who have developed extremely detailed energy proposals, his staff has a lot of work ahead of them.
Tuesday, January 08, 2008
OPEC's Strategy
For many years there was a general sense in the oil world that OPEC had learned an important lesson from the energy crisis of the 1970s: let the price get too high for too long, and their customers will find ways to reduce their demand, by becoming more efficient and switching to other fuels. Until recently, analysts and pundits liked to guess at whether $50, $60 or $70 per barrel constituted the level at which that worry would kick in again, and the floodgates of supply would open. A snippet in Sunday's Washington Post started me wondering whether this paradigm were not only outdated, but has actually been supplanted by a new strategy of near-term revenue maximization. What if, aside from the serious challenges impeding the construction of enough new production capacity to keep up with rapidly growing global demand, OPEC has considered the implications of our growing concerns about climate change and energy security, and concluded it only has a few decades left in which to extract the most value from its resources?
While I read with amusement the satirical conspiracy report from former CIA Director James Woolsey in the Post's Outlook section, I don't imagine OPEC frets much about the prospect of food-based biofuels eroding their market share and profits. The entire 15 billion gallon-per-year "conventional biofuel" (a.k.a. corn ethanol) mandate in the new US Renewable Fuel Standard will add less than 400,000 barrels per day of oil-equivalent volume to a world market currently running at 85 million barrels per day , and cellulosic ethanol is not yet ready for prime time. OPEC can do their sums as well as we can, and they can see that with China and India growing as rapidly as they are, there is ample room for both oil and biofuels. However, they might not be so sanguine about the prospect of a serious effort to reduce greenhouse gas emissions by 70 or 80% by mid-century in the US and Europe.
What would emissions reductions of that magnitude mean for oil producers? Well, the EU and California--assuming it wins it suit against the EPA--are targeting specific tailpipe CO2 reductions that would require cars to consume 20-30% less fuel than the current fleet, within a few years. That will be achieved through a combination of hybridization, dieselization, downsizing, and the incorporation of other efficiency technologies. If the rest of the US follows California's lead, or even just meets the new 35 mpg CAFE standard, then together with Europe we're looking at several million barrels per day less consumption in 10-15 years, and that's just the beginning. Furthermore, the introduction of plug-in hybrid cars opens the door to a more serious potential competitor to oil than biofuels: electricity. And since oil accounts for a small and declining share of the world's electricity generation, that's a game in which OPEC won't participate, though it will benefit some OPEC countries like Iran and Algeria that are also large exporters of natural gas.
So if OPEC is facing a demand curve that may be going up today, but looks like it might peak within a decade, how worried should we suppose they are about the possibility that high prices might prematurely destroy some of that demand, compared with maximizing their cumulative oil revenue before the carbon era ends? If greater fuel efficiency and lower oil consumption are inevitable in the long run, anyway, why wouldn't they want to generate the highest possible income today, even if it accelerated that trend?
An editorial in this week's Economist suggests that high oil prices owe more to "peak nationalism" than Peak Oil. That's a theme to which I've devoted a lot of space for the last four years. Resource nationalism has been building for at least a decade, for reasons having little to do with concerns about climate change. But having found their way to a world of oil prices higher than they could have realistically hoped for not long ago, producers have ample reasons--including the idea that oil might go out of fashion sooner than previously expected--to want to remain there. We shouldn't delude ourselves that OPEC's interests and ours are aligned.
While I read with amusement the satirical conspiracy report from former CIA Director James Woolsey in the Post's Outlook section, I don't imagine OPEC frets much about the prospect of food-based biofuels eroding their market share and profits. The entire 15 billion gallon-per-year "conventional biofuel" (a.k.a. corn ethanol) mandate in the new US Renewable Fuel Standard will add less than 400,000 barrels per day of oil-equivalent volume to a world market currently running at 85 million barrels per day , and cellulosic ethanol is not yet ready for prime time. OPEC can do their sums as well as we can, and they can see that with China and India growing as rapidly as they are, there is ample room for both oil and biofuels. However, they might not be so sanguine about the prospect of a serious effort to reduce greenhouse gas emissions by 70 or 80% by mid-century in the US and Europe.
What would emissions reductions of that magnitude mean for oil producers? Well, the EU and California--assuming it wins it suit against the EPA--are targeting specific tailpipe CO2 reductions that would require cars to consume 20-30% less fuel than the current fleet, within a few years. That will be achieved through a combination of hybridization, dieselization, downsizing, and the incorporation of other efficiency technologies. If the rest of the US follows California's lead, or even just meets the new 35 mpg CAFE standard, then together with Europe we're looking at several million barrels per day less consumption in 10-15 years, and that's just the beginning. Furthermore, the introduction of plug-in hybrid cars opens the door to a more serious potential competitor to oil than biofuels: electricity. And since oil accounts for a small and declining share of the world's electricity generation, that's a game in which OPEC won't participate, though it will benefit some OPEC countries like Iran and Algeria that are also large exporters of natural gas.
So if OPEC is facing a demand curve that may be going up today, but looks like it might peak within a decade, how worried should we suppose they are about the possibility that high prices might prematurely destroy some of that demand, compared with maximizing their cumulative oil revenue before the carbon era ends? If greater fuel efficiency and lower oil consumption are inevitable in the long run, anyway, why wouldn't they want to generate the highest possible income today, even if it accelerated that trend?
An editorial in this week's Economist suggests that high oil prices owe more to "peak nationalism" than Peak Oil. That's a theme to which I've devoted a lot of space for the last four years. Resource nationalism has been building for at least a decade, for reasons having little to do with concerns about climate change. But having found their way to a world of oil prices higher than they could have realistically hoped for not long ago, producers have ample reasons--including the idea that oil might go out of fashion sooner than previously expected--to want to remain there. We shouldn't delude ourselves that OPEC's interests and ours are aligned.
Monday, January 07, 2008
The Biofuel Gap
When I was writing last Wednesday's posting on the year ahead, I was tempted to call 2008 the Year of Biofuel. That's wasn't because I think biofuel will necessarily be the most important energy development of the year, but because, of all of the provisions of the recently-enacted Energy Bill, its greatly expanded renewable fuel standard (RFS) will have the most immediate impact on domestic energy markets, and not all of it good. The new standard requires an increase in ethanol use in 2008 that could not be met by the domestic production facilities existing at the time of the bill's passage, or with current levels of imports, which already face a substantial tariff barrier. So while some ethanol producers struggled in 2007, with margins squeezed between rising corn prices and flat wholesale prices to blenders, it's hard to see how their fortunes could fail to improve this year.
The phase-in of the RFS in the Energy Bill instantaneously increased the size of the US ethanol market, starting on 1/1/08. The RFS previously in effect called for 5.4 billion gallons of renewable fuel to be used in 2008--well below the 6.4 billion gallons of ethanol the industry was on track to deliver in 2007. The new law hiked that to 9 billion gallons per year (GPY) of "conventional biofuel"--mostly corn ethanol--this year and 10.5 billion next year, increasing to 15 billion by 2015. With domestic production running at just over 7 billion GPY in October, the last month for which data is available, and imports contributing perhaps another half billion GPY, meeting the federal target this year will require a lot of new facilities to start up, or a lot more imports. In other words, demand suddenly exceeds supply, by mandate, and that ought to translate into a healthy increase in ethanol margins, once the EPA gears up to administer the new standard.
On the surface, this doesn't sound like much of a problem. After all, doesn't every additional gallon of ethanol reduce the amount of foreign energy we have to import and benefit the environment by reducing greenhouse gas emissions and local pollution? For a thorough answer to that question, I refer to you the excellent article on biofuels in the current issue of MIT's Technology Review, available in three parts on the Internet. But even if ethanol were as beneficial as its most ardent advocates claim, the Congress and President cannot sweep away with the stroke of a pen the logistical bottlenecks involved in getting ethanol from distilleries to gasoline blending terminals all over the country. Those problems helped depress ethanol prices last year and will have to be overcome on the ground, in order to expand the use of ethanol beyond the oxygenated fuel markets from which it has successfully displaced MTBE, which has fallen out of favor due to product liability concerns, or where its supply has been cheap and reliable enough to compete as a separate product, in the form of E-85 for "flexible-fuel vehicles."
As I understand it, companies unable to secure enough ethanol to meet their new quotas would have to purchase blending credits from other companies that blended in excess of their quotas--something that would only be possible if shortages were local, rather than national, and that could run afoul of the current 10% upper limit (E-10) on ethanol/gasoline blends into conventional cars. That would also increase the cost of fuel in areas that can't easily be supplied with ethanol. The alternative would be to apply for a waiver of the portion of the RFS that couldn't be filled practically. That could prove controversial, if the production from new ethanol facilities--however remote from the actual demand--were going begging. When I ponder what this is likely to mean for the business of getting motor fuel reliably to over 100,000 retail sites, I don't envy my former colleagues in the supply and distribution segment of the oil industry.
However unenthusiastic many of us are about corn ethanol, the new RFS is a fact, and our focus should be on minimizing the disruptions it could create in fuel markets. At least until the logistical problems can be addressed by new infrastructure, the best outcome would probably be for as much as possible of the incremental ethanol requirement to be consumed in the form of E-85 in the Midwest, where most corn ethanol will continue to be produced, thus minimizing the cost and constraints associated with distributing it to the most remote corners of the country for E-10 blending. One can only hope that the painful experience gained from this exercise will be useful in smoothing the way for the eventual introduction of cellulosic ethanol, which should be more economical and environmentally-beneficial, and for which a separate RFS quota starts to ramp up in 2010.
The phase-in of the RFS in the Energy Bill instantaneously increased the size of the US ethanol market, starting on 1/1/08. The RFS previously in effect called for 5.4 billion gallons of renewable fuel to be used in 2008--well below the 6.4 billion gallons of ethanol the industry was on track to deliver in 2007. The new law hiked that to 9 billion gallons per year (GPY) of "conventional biofuel"--mostly corn ethanol--this year and 10.5 billion next year, increasing to 15 billion by 2015. With domestic production running at just over 7 billion GPY in October, the last month for which data is available, and imports contributing perhaps another half billion GPY, meeting the federal target this year will require a lot of new facilities to start up, or a lot more imports. In other words, demand suddenly exceeds supply, by mandate, and that ought to translate into a healthy increase in ethanol margins, once the EPA gears up to administer the new standard.
On the surface, this doesn't sound like much of a problem. After all, doesn't every additional gallon of ethanol reduce the amount of foreign energy we have to import and benefit the environment by reducing greenhouse gas emissions and local pollution? For a thorough answer to that question, I refer to you the excellent article on biofuels in the current issue of MIT's Technology Review, available in three parts on the Internet. But even if ethanol were as beneficial as its most ardent advocates claim, the Congress and President cannot sweep away with the stroke of a pen the logistical bottlenecks involved in getting ethanol from distilleries to gasoline blending terminals all over the country. Those problems helped depress ethanol prices last year and will have to be overcome on the ground, in order to expand the use of ethanol beyond the oxygenated fuel markets from which it has successfully displaced MTBE, which has fallen out of favor due to product liability concerns, or where its supply has been cheap and reliable enough to compete as a separate product, in the form of E-85 for "flexible-fuel vehicles."
As I understand it, companies unable to secure enough ethanol to meet their new quotas would have to purchase blending credits from other companies that blended in excess of their quotas--something that would only be possible if shortages were local, rather than national, and that could run afoul of the current 10% upper limit (E-10) on ethanol/gasoline blends into conventional cars. That would also increase the cost of fuel in areas that can't easily be supplied with ethanol. The alternative would be to apply for a waiver of the portion of the RFS that couldn't be filled practically. That could prove controversial, if the production from new ethanol facilities--however remote from the actual demand--were going begging. When I ponder what this is likely to mean for the business of getting motor fuel reliably to over 100,000 retail sites, I don't envy my former colleagues in the supply and distribution segment of the oil industry.
However unenthusiastic many of us are about corn ethanol, the new RFS is a fact, and our focus should be on minimizing the disruptions it could create in fuel markets. At least until the logistical problems can be addressed by new infrastructure, the best outcome would probably be for as much as possible of the incremental ethanol requirement to be consumed in the form of E-85 in the Midwest, where most corn ethanol will continue to be produced, thus minimizing the cost and constraints associated with distributing it to the most remote corners of the country for E-10 blending. One can only hope that the painful experience gained from this exercise will be useful in smoothing the way for the eventual introduction of cellulosic ethanol, which should be more economical and environmentally-beneficial, and for which a separate RFS quota starts to ramp up in 2010.
Friday, January 04, 2008
Blaming the Buck
The lead editorial in today's Wall Street Journal (subscription required) attributes much of the recent increase in oil prices to the weakness of the dollar, and to the monetary policies of the Federal Reserve. As evidence for this argument, they present a chart of the relative value of oil in dollars, Euros, and gold for the last eight years. Although the editors make the obligatory nod to the growth of demand and problems of supply, they contribute to the general sense that our energy problems can be blamed on some unaccountable party: OPEC, oil companies, or now the Fed. This absolves us from the contribution of our personal consumption habits, while failing to differentiate cause from effect.
The Journal is hardly the first to notice the inconvenient relationship between a depreciating dollar and higher commodity prices. Among others, I suggested a few months ago that this might constitute a worrying feedback loop, with higher oil prices further weakening the dollar, a weaker dollar driving up oil prices, and so on. A closer look at the relative value chart in the editorial provides a sense of the relative importance of this factor among the many affecting global energy prices. Using gold as the measure of price stability ignores its status as an important industrial commodity, participating in the same global commodity trends affecting steel, copper, grains, and other goods affected by the sustained rapid growth of China, India and other developing countries. If instead we choose the Euro as our proxy for stable value, we see that the real price of oil has at least doubled since 2000, reflecting the 11% increase in global oil demand that consumed the surplus production capacity that had been left after the collapse of oil prices in the late 1990s, along with virtually every barrel of new capacity put into service since then. A weak dollar exaggerates but did not create this trend.
The other implication raised by the editorial is that Federal Reserve policy might offer a mechanism for pushing oil prices back to more comfortable levels. There's something to this, though the cure might be worse than the disease. A couple of interest rate hikes could pull the dollar out of its current slump, and lower oil prices would likely follow, not just because the dollar would be more valuable, but because the US economy would be pushed into recession, thereby reducing estimates of future US demand and easing speculative pressure on oil. That's hardly an appealing scenario, however.
What we're left with, then, is an interesting observation about another consequence of US policies that have generally promoted consumption but not production--and not just for oil--but one that offers no real help in addressing the problem. That lies with the fundamentals of supply and demand, more sensible energy policies, and the creation of a public consciousness that connects the results of policy and personal choices with the price at the pump--whether denominated in dollars, Euros, or ounces of gold.
The Journal is hardly the first to notice the inconvenient relationship between a depreciating dollar and higher commodity prices. Among others, I suggested a few months ago that this might constitute a worrying feedback loop, with higher oil prices further weakening the dollar, a weaker dollar driving up oil prices, and so on. A closer look at the relative value chart in the editorial provides a sense of the relative importance of this factor among the many affecting global energy prices. Using gold as the measure of price stability ignores its status as an important industrial commodity, participating in the same global commodity trends affecting steel, copper, grains, and other goods affected by the sustained rapid growth of China, India and other developing countries. If instead we choose the Euro as our proxy for stable value, we see that the real price of oil has at least doubled since 2000, reflecting the 11% increase in global oil demand that consumed the surplus production capacity that had been left after the collapse of oil prices in the late 1990s, along with virtually every barrel of new capacity put into service since then. A weak dollar exaggerates but did not create this trend.
The other implication raised by the editorial is that Federal Reserve policy might offer a mechanism for pushing oil prices back to more comfortable levels. There's something to this, though the cure might be worse than the disease. A couple of interest rate hikes could pull the dollar out of its current slump, and lower oil prices would likely follow, not just because the dollar would be more valuable, but because the US economy would be pushed into recession, thereby reducing estimates of future US demand and easing speculative pressure on oil. That's hardly an appealing scenario, however.
What we're left with, then, is an interesting observation about another consequence of US policies that have generally promoted consumption but not production--and not just for oil--but one that offers no real help in addressing the problem. That lies with the fundamentals of supply and demand, more sensible energy policies, and the creation of a public consciousness that connects the results of policy and personal choices with the price at the pump--whether denominated in dollars, Euros, or ounces of gold.
Thursday, January 03, 2008
Oil and Politics
When the price of oil on the New York Mercantile Exchange touched $100 momentarily yesterday, it sent ripples through the markets, media and politics. The reactions of the presidential candidates were as interesting as the event itself, since they almost uniformly reflected a sense of national victimization that seems out of place for a country that is still the world's third-largest oil producer, however much we must import to satisfy our appetite for the stuff. While OPEC and the broader global resource nationalism movement share responsibility for today's high prices, oil's long climb to $100 has been led at least as much by our insatiable demand for energy and the low priority we've attached to efficiency. The candidates missed a golden opportunity to remind Americans that we have largely made our own problem, when it comes to oil.
I must admit to a classic expert's failure to anticipate how the $100 price event would play out. As a former commodities trader, I had assumed that only a market close above $100.00 would trigger the flurry of reactions we saw yesterday, rather than what appears to have been a single, nearly meaningless trade executed at the magic level. Stepping back from the details, however, it's clear that whether oil closed at $100.01 or yesterday's actual $99.62/bbl, for all practical purposes we have reached a major threshold in our perception of the cost of the world's key commodity.
But while comments blaming oil companies for a price they don't control--in a market in which they hold a small and shrinking claim on the basic resource--reflect a worrying strain of populism, there's a lot of truth to Mr. Romney's suggestion that the situation reflects "lack of progress" on energy in Washington, DC. In fact, we are now paying for more than a decade of dysfunctional national energy policy, in which consumption was encouraged through fuel taxes well below the average of other large oil importing countries (and via the "SUV loophole"), while we simultaneously made it increasingly harder for companies to extract the significant quantities of oil that remain untapped under our lands and waters.
The good news is that although we still don't have anything that resembles a coherent national strategy for energy, we now have a number of useful components upon which we could build one, if we can give up all the tired, blame-shifting rhetoric and tackle the basics of supply demand: setting higher energy efficiency standards for vehicles and buildings, to ensure that we extract more value from the energy we use, while higher prices drive the technology and turnover of vehicle fleets and other capital stock to implement them; combining wind and solar power with resurgent nuclear power, to supply the necessary mix of baseload and peak power for a smarter, greener electricity grid that doesn't need imported fossil fuels; and deploying the amazing technology that US companies have created to tap arctic and offshore oil with the lowest environmental impact possible, fueling our existing fleet, while we convert it to electricity and more sustainable fuels.
$100 oil is telling us something, though we must be astute enough to interpret the message. Sensible responses to the first energy crisis, in the form of deregulation, diversification, and improved energy efficiency paved the way for an extended period of low energy prices and strong economic growth. Unfortunately, we clung to them too long, and we are reaping the harvest. We now have an opportunity to build the structure that will eventually wean us off fossil fuels entirely, while importantly providing a stable transition to that distant point. In the weeks ahead, I'll be reviewing the energy platforms of all the leading presidential candidates to see how they measure up to that standard.
I must admit to a classic expert's failure to anticipate how the $100 price event would play out. As a former commodities trader, I had assumed that only a market close above $100.00 would trigger the flurry of reactions we saw yesterday, rather than what appears to have been a single, nearly meaningless trade executed at the magic level. Stepping back from the details, however, it's clear that whether oil closed at $100.01 or yesterday's actual $99.62/bbl, for all practical purposes we have reached a major threshold in our perception of the cost of the world's key commodity.
But while comments blaming oil companies for a price they don't control--in a market in which they hold a small and shrinking claim on the basic resource--reflect a worrying strain of populism, there's a lot of truth to Mr. Romney's suggestion that the situation reflects "lack of progress" on energy in Washington, DC. In fact, we are now paying for more than a decade of dysfunctional national energy policy, in which consumption was encouraged through fuel taxes well below the average of other large oil importing countries (and via the "SUV loophole"), while we simultaneously made it increasingly harder for companies to extract the significant quantities of oil that remain untapped under our lands and waters.
The good news is that although we still don't have anything that resembles a coherent national strategy for energy, we now have a number of useful components upon which we could build one, if we can give up all the tired, blame-shifting rhetoric and tackle the basics of supply demand: setting higher energy efficiency standards for vehicles and buildings, to ensure that we extract more value from the energy we use, while higher prices drive the technology and turnover of vehicle fleets and other capital stock to implement them; combining wind and solar power with resurgent nuclear power, to supply the necessary mix of baseload and peak power for a smarter, greener electricity grid that doesn't need imported fossil fuels; and deploying the amazing technology that US companies have created to tap arctic and offshore oil with the lowest environmental impact possible, fueling our existing fleet, while we convert it to electricity and more sustainable fuels.
$100 oil is telling us something, though we must be astute enough to interpret the message. Sensible responses to the first energy crisis, in the form of deregulation, diversification, and improved energy efficiency paved the way for an extended period of low energy prices and strong economic growth. Unfortunately, we clung to them too long, and we are reaping the harvest. We now have an opportunity to build the structure that will eventually wean us off fossil fuels entirely, while importantly providing a stable transition to that distant point. In the weeks ahead, I'll be reviewing the energy platforms of all the leading presidential candidates to see how they measure up to that standard.
Wednesday, January 02, 2008
Energy Leap Year?
The complex uncertainties affecting energy markets will probably undo most of the forecasts that analysts and economists seem obliged to offer, as the new year dawns. I prefer to highlight the trends I'm following, since those tend to be more durable. Monday's look back at 2007 focused on oil prices and climate change. I expect both to feature prominently in 2008's energy-related news, connected in interesting ways with the Presidential election cycle. In addition to domestic politics and geopolitics, there is a growing list of key energy technologies that bear watching, with the possibility of developments that could change our perspective on the long-term future of energy. However much the global situation has begun to resemble a re-run of the 1970s, we have never had more energy options, or greater incentives to pursue them.
Oil prices have started the year at near-record levels, and the predictions that oil will shortly break $100/barrel seem pretty safe. The larger question is whether it will remain there, or gradually fall back, as demand growth moderates and the global oil industry produces as much of a supply response as it can. Warnings of a collapse below $40/bbl seem exaggerated, but no one investing in renewable energy or other alternatives can afford to ignore them entirely. That downside risk can be managed, but it could be an expensive distraction.
With regard to climate change, the negotiations on the Bali framework for a follow-on agreement to the Kyoto Protocol are unlikely to conclude this year, particularly since the international community recognizes that it could be dealing with a very different set of US counterparts beginning next January. It remains to be seen whether climate change will become a key election issue, in light of concerns about the economy, immigration, and other urgent problems. The fact that it hasn't, so far, is a reflection of the relative agreement among the Democratic candidates on the need for urgent action, and among most of the Republicans that climate change is real but can wait. Once they have chosen their nominees, the parties owe the country a lively debate on the their divergent views on this subject, since the enactment of limits on greenhouse gas emissions could transform our economy and way of life more than anything else the candidates are proposing.
Even if it doesn't become fodder for the election debates, the urgency of tackling climate change is likely to grow. The most prominent American climate scientist recently revised downward his assessment of the ultimate concentration at which atmospheric CO2 must be stabilized, to a level below the current 381 parts per million, in order to prevent catastrophic warming. Since achieving a stable 450 ppm was already going to require a 70% reduction of global emissions from current levels by mid-century, getting to 350 ppm effectively means cutting developed-world emissions radically, starting more or less now, and short-circuiting the prodigious growth of emissions in the developing world. If this view becomes the consensus, expect a lot more focus on preparing humanity to adapt to a hotter planet, because a lot of folks are going to conclude that 350 ppm can't be attained.
On a more optimistic note, the sheer number of companies and universities working on new energy technology greatly increases the chances of dramatic developments in biofuels, solar power, energy efficiency and other areas. 2008 could see the start-up of commercial-scale--if not yet economical--cellulosic ethanol production, and the start of construction on an advanced coal-fired power plant with full sequestration of its CO2 emissions. Meanwhile, a battery breakthrough along the lines of the "nanowire" battery recently announced by Stanford University would provide a big boost to the electrification of transportation via plug-in hybrid or all-electric cars, or potentially enable wind and solar power to compete into more attractive peak-load electricity markets.
I'll also be observing with great interest whether the growing public and media interest in "green" becomes embedded in a new set of greener social values, manifested by a shift in consumer and voter priorities. Governments can lead and markets nudge, but unless voters are prepared to support measures that will cause themselves personal pain, or hundreds of millions of consumers to change their preferences and usage patterns, it's going to be a long wait for technology alone to solve our problems.
No discussion of the trends affecting energy this year would be complete without at least a mention of macro-economic factors. The unfolding debt crisis, weak dollar, and increasing linkages between food and energy all bear watching. Throw in the inevitable Wild Cards--random, unpredictable events, such as last week's assassination--and 2008 promises to be at least as interesting in energy terms as 2007 was.
Oil prices have started the year at near-record levels, and the predictions that oil will shortly break $100/barrel seem pretty safe. The larger question is whether it will remain there, or gradually fall back, as demand growth moderates and the global oil industry produces as much of a supply response as it can. Warnings of a collapse below $40/bbl seem exaggerated, but no one investing in renewable energy or other alternatives can afford to ignore them entirely. That downside risk can be managed, but it could be an expensive distraction.
With regard to climate change, the negotiations on the Bali framework for a follow-on agreement to the Kyoto Protocol are unlikely to conclude this year, particularly since the international community recognizes that it could be dealing with a very different set of US counterparts beginning next January. It remains to be seen whether climate change will become a key election issue, in light of concerns about the economy, immigration, and other urgent problems. The fact that it hasn't, so far, is a reflection of the relative agreement among the Democratic candidates on the need for urgent action, and among most of the Republicans that climate change is real but can wait. Once they have chosen their nominees, the parties owe the country a lively debate on the their divergent views on this subject, since the enactment of limits on greenhouse gas emissions could transform our economy and way of life more than anything else the candidates are proposing.
Even if it doesn't become fodder for the election debates, the urgency of tackling climate change is likely to grow. The most prominent American climate scientist recently revised downward his assessment of the ultimate concentration at which atmospheric CO2 must be stabilized, to a level below the current 381 parts per million, in order to prevent catastrophic warming. Since achieving a stable 450 ppm was already going to require a 70% reduction of global emissions from current levels by mid-century, getting to 350 ppm effectively means cutting developed-world emissions radically, starting more or less now, and short-circuiting the prodigious growth of emissions in the developing world. If this view becomes the consensus, expect a lot more focus on preparing humanity to adapt to a hotter planet, because a lot of folks are going to conclude that 350 ppm can't be attained.
On a more optimistic note, the sheer number of companies and universities working on new energy technology greatly increases the chances of dramatic developments in biofuels, solar power, energy efficiency and other areas. 2008 could see the start-up of commercial-scale--if not yet economical--cellulosic ethanol production, and the start of construction on an advanced coal-fired power plant with full sequestration of its CO2 emissions. Meanwhile, a battery breakthrough along the lines of the "nanowire" battery recently announced by Stanford University would provide a big boost to the electrification of transportation via plug-in hybrid or all-electric cars, or potentially enable wind and solar power to compete into more attractive peak-load electricity markets.
I'll also be observing with great interest whether the growing public and media interest in "green" becomes embedded in a new set of greener social values, manifested by a shift in consumer and voter priorities. Governments can lead and markets nudge, but unless voters are prepared to support measures that will cause themselves personal pain, or hundreds of millions of consumers to change their preferences and usage patterns, it's going to be a long wait for technology alone to solve our problems.
No discussion of the trends affecting energy this year would be complete without at least a mention of macro-economic factors. The unfolding debt crisis, weak dollar, and increasing linkages between food and energy all bear watching. Throw in the inevitable Wild Cards--random, unpredictable events, such as last week's assassination--and 2008 promises to be at least as interesting in energy terms as 2007 was.
Monday, December 31, 2007
Looking Back at 2007
It's been quite a year for energy. Oil prices started the year in a slump that bottomed out just a shade above $50 per barrel for West Texas Intermediate crude (WTI), and then began a relentless march that matched the inflation-adjusted record price of the early 1980s and brought them within an eyelash of $100 per barrel. In light of all this drama, it seems surprising that the average price for the year will end up only about $6 per barrel higher than last year's average of $66.25. Along the way, though, high energy prices have seeped into the national consciousness, stimulating important new legislation and the beginnings of a major shift in long-established patterns of consumption. At the same time, energy has become even more inseparable from its consequences for the global climate. If 2008 proves half as volatile as 2007, we are in for some ride.
When 2006 ended, it appeared that oil prices had settled into a range that was just high enough to promote the development of biofuels and other alternatives, but not high enough to cause serious concern about the economy. That comfortable picture didn't last very long, however, as oil became intertwined with the problems of the dollar and the sub-prime credit crisis. WTI headed steadily higher, inflating at over 4% per month since January, despite the unraveling of one of the biggest geopolitical risks built into the market price, the prospect of armed conflict with Iran over its nuclear program. Only the post-Labor Day collapse of refining margins buffered consumers from the full impact of these increases, with US average retail gasoline prices ending 2007 only about half as much higher than they started, compared to crude oil prices. Nevertheless, $3.00 gasoline seems here to stay.
High prices were only half the energy story in 2007, however. If we had just been facing expensive fuel, I'm not sure the Congress would have been able to pass the recent Energy Bill, with its large increases in mandated fuel economy and biofuels production. Climate change came into its own as a mainstream issue for the American public this year, and it was a major factor in the Congressional debate over the energy bill. As I noted last week, "green" is now big, and that's because the scientific concerns about global warming are being matched by images of shrinking icecaps, encroaching sea levels, and drought-abetted fires.
When postings resume after New Year's Day, I'll look at the year ahead, as I did last year. It strikes me that the refurbishing of the ball that will drop in Times Square at midnight tonight with energy-efficient LED lights is a perfect reflection of the cusp at which we stand. Like many of the steps we took this year, it may be largely symbolic--considering how much energy can be saved in a device that only runs for a minute each year--but it could also be a harbinger of more serious measures to come. Happy New Year!
When 2006 ended, it appeared that oil prices had settled into a range that was just high enough to promote the development of biofuels and other alternatives, but not high enough to cause serious concern about the economy. That comfortable picture didn't last very long, however, as oil became intertwined with the problems of the dollar and the sub-prime credit crisis. WTI headed steadily higher, inflating at over 4% per month since January, despite the unraveling of one of the biggest geopolitical risks built into the market price, the prospect of armed conflict with Iran over its nuclear program. Only the post-Labor Day collapse of refining margins buffered consumers from the full impact of these increases, with US average retail gasoline prices ending 2007 only about half as much higher than they started, compared to crude oil prices. Nevertheless, $3.00 gasoline seems here to stay.
High prices were only half the energy story in 2007, however. If we had just been facing expensive fuel, I'm not sure the Congress would have been able to pass the recent Energy Bill, with its large increases in mandated fuel economy and biofuels production. Climate change came into its own as a mainstream issue for the American public this year, and it was a major factor in the Congressional debate over the energy bill. As I noted last week, "green" is now big, and that's because the scientific concerns about global warming are being matched by images of shrinking icecaps, encroaching sea levels, and drought-abetted fires.
When postings resume after New Year's Day, I'll look at the year ahead, as I did last year. It strikes me that the refurbishing of the ball that will drop in Times Square at midnight tonight with energy-efficient LED lights is a perfect reflection of the cusp at which we stand. Like many of the steps we took this year, it may be largely symbolic--considering how much energy can be saved in a device that only runs for a minute each year--but it could also be a harbinger of more serious measures to come. Happy New Year!
Friday, December 21, 2007
A Greener Christmas
I'm fascinated by the shifting emphasis this holiday season towards "greener" practices and greener presents. There's a growing trend toward holiday lights employing LED technology, which is much more efficient than incandescent bulbs, but without some of the drawbacks of the compact fluorescent lights (CFL) that are appearing in millions of homes and businesses. I've even received email solicitations suggesting emissions offsets as suitable holiday gifts. Now, I don't want to sound like the Grinch, here, but although these modest steps are all to the good, I think they still fall short of a genuinely greener Christmas. Efficient holiday lights are fine, but they're not going to halt global warming in a month's usage each year. If we're serious about solving the vast problems of climate change and energy security, the evolution of "green" into a marketing strategy can only be one element in a much larger effort.
Consider the presents we give and receive. I heard a statistic on the news the other night indicating that Americans would give out $8 billion in gift cards this year. As enthusiastic about emissions trading and voluntary offsets as I am, I don't see emissions credit gift cards overtaking the cash kind any time soon. Then consider the energy profile of some of last year's popular gifts, including those we gave ourselves. As I've noted before, one plasma TV wipes out the energy savings of multiple CFL bulbs. Even more modest consumer electronics such as cellphones, iPods and digital cameras make their own small contributions to higher energy consumption and the growing strain on our electrical infrastructure, particularly when we leave their recharging transformers plugged in all the time.
A truly Green Christmas would be one for which the most popular "gadget" gifts were either energy-saving devices themselves, such as the Kill-A-Watt meter, or more efficient replacements for existing gadgets with high energy consumption. And all gifts would come with clear disclosures of the energy used and emissions released during their production. If we're ever going to begin reducing energy consumption and greenhouse gas emissions in absolute terms, achieving a net carbon-neutral holiday season would be a great place to start.
We are a long way from that now, nor should we necessarily be consumed by guilt over this. A cultural change that deep can't happen overnight. Taking off my Scrooge hat, the good news is that it's not nearly as hard to imagine such a thing as it would have been only a couple of years ago. Perhaps we're starting to see climate change as our all-too-real Ghost of Christmas Future. Today, suggesting a carbon-neutral holiday season probably wouldn't get you laughed at, though it's not going to attract many invitations for eggnog and cookies. In that spirit, I would like to wish all my readers the joys of the season, even if it's not yet as green as it might be.
Energy Outlook will be on holiday break until 12/31.
Consider the presents we give and receive. I heard a statistic on the news the other night indicating that Americans would give out $8 billion in gift cards this year. As enthusiastic about emissions trading and voluntary offsets as I am, I don't see emissions credit gift cards overtaking the cash kind any time soon. Then consider the energy profile of some of last year's popular gifts, including those we gave ourselves. As I've noted before, one plasma TV wipes out the energy savings of multiple CFL bulbs. Even more modest consumer electronics such as cellphones, iPods and digital cameras make their own small contributions to higher energy consumption and the growing strain on our electrical infrastructure, particularly when we leave their recharging transformers plugged in all the time.
A truly Green Christmas would be one for which the most popular "gadget" gifts were either energy-saving devices themselves, such as the Kill-A-Watt meter, or more efficient replacements for existing gadgets with high energy consumption. And all gifts would come with clear disclosures of the energy used and emissions released during their production. If we're ever going to begin reducing energy consumption and greenhouse gas emissions in absolute terms, achieving a net carbon-neutral holiday season would be a great place to start.
We are a long way from that now, nor should we necessarily be consumed by guilt over this. A cultural change that deep can't happen overnight. Taking off my Scrooge hat, the good news is that it's not nearly as hard to imagine such a thing as it would have been only a couple of years ago. Perhaps we're starting to see climate change as our all-too-real Ghost of Christmas Future. Today, suggesting a carbon-neutral holiday season probably wouldn't get you laughed at, though it's not going to attract many invitations for eggnog and cookies. In that spirit, I would like to wish all my readers the joys of the season, even if it's not yet as green as it might be.
Energy Outlook will be on holiday break until 12/31.
Thursday, December 20, 2007
Calling Solomon
Since the passage of California's AB 32 legislation establishing a cap on greenhouse gas emissions, the state has been locked in a struggle with the federal Environmental Protection Agency over the implementation of its provisions on tailpipe emissions. The Supreme Court ruling in Massachusetts v. EPA was expected to pave the way for California to obtain the Clean Air Act waiver it sought, to regulate automotive CO2 emissions--and effectively fuel economy--at the state level. Yesterday, however, the EPA denied California's petition, setting up a court fight that could well find its way back to the Supreme Court, unless the 2008 Presidential Election resolves the matter, first. Both sides are at least half-right, and I don't envy those who will be called to discern where the greatest service to the national interest lies. In the end, I believe California will prevail.
California's argument for the waiver is straightforward. The Supreme Court has ruled that CO2 is a pollutant, and California has been granted waivers in the past to regulate pollutants more stringently than the country as a whole. Moreover, California's greenhouse gas emissions are large enough to matter on a global scale, and the state's elected representatives believe they have a mandate from their constituents to address those emissions aggressively and comprehensively. Failure to do so would contribute to the risk of adverse outcomes from climate change in California, with some pointing to reduced precipitation and coastal erosion as early indicators of such damage.
But while my heart is with California in this matter, my head is with the EPA. Even if we accept that CO2 is now recognized as a pollutant--the logic of this escapes me, but I concede my minority status--it still does not result in the kind of direct local impacts that provided the self-evident justification for granting the state's past waiver requests concerning regulation of the "criteria pollutants" that affect air quality and produce smog. Climate change is a global problem, the local ramifications of which cannot yet be predicted reliably. With the US struggling to maintain its competitive edge in a global marketplace for goods and services, should we really desire the further Balkanization of auto and fuel standards?
Both sets of arguments are legitimate and compelling. Where I believe the EPA's case fails is in the implied responsibility of turning down California's request. If there were a similarly comprehensive set of federal greenhouse gas regulations in place or waiting in the wings--even if it was not as stringent--the EPA would be right to ask California to follow the federal government's lead. Yet the energy bill provisions cited by the Administrator in defense of his decision don't constitute such a plan. Unless and until something like the Lieberman-Warner Bill, S.2191, passes, the closest thing we have to a national greenhouse gas regulation is an array of voluntary programs. And as the Washington Post pointed out, a list of states accounting for nearly half the nation's cars has lined up behind California, rather than the EPA.
There's an old saying, "Lead, follow, or get out of the way." The last year has seen the publication of an impressive collection of reports on the science of climate change and on the economic consequences of ignoring the problem or tackling it head-on. These reports, including three from the same Intergovernmental Panel on Climate Change (IPCC) that shared this year's Nobel Peace Prize with Mr. Gore, underline the urgency of the issue and provide the real underpinnings of California's waiver request. On these grounds and with the precedent of Mass. v. EPA, I believe the high court will ultimately find in California's favor, but time is wasting in the interim.
California's argument for the waiver is straightforward. The Supreme Court has ruled that CO2 is a pollutant, and California has been granted waivers in the past to regulate pollutants more stringently than the country as a whole. Moreover, California's greenhouse gas emissions are large enough to matter on a global scale, and the state's elected representatives believe they have a mandate from their constituents to address those emissions aggressively and comprehensively. Failure to do so would contribute to the risk of adverse outcomes from climate change in California, with some pointing to reduced precipitation and coastal erosion as early indicators of such damage.
But while my heart is with California in this matter, my head is with the EPA. Even if we accept that CO2 is now recognized as a pollutant--the logic of this escapes me, but I concede my minority status--it still does not result in the kind of direct local impacts that provided the self-evident justification for granting the state's past waiver requests concerning regulation of the "criteria pollutants" that affect air quality and produce smog. Climate change is a global problem, the local ramifications of which cannot yet be predicted reliably. With the US struggling to maintain its competitive edge in a global marketplace for goods and services, should we really desire the further Balkanization of auto and fuel standards?
Both sets of arguments are legitimate and compelling. Where I believe the EPA's case fails is in the implied responsibility of turning down California's request. If there were a similarly comprehensive set of federal greenhouse gas regulations in place or waiting in the wings--even if it was not as stringent--the EPA would be right to ask California to follow the federal government's lead. Yet the energy bill provisions cited by the Administrator in defense of his decision don't constitute such a plan. Unless and until something like the Lieberman-Warner Bill, S.2191, passes, the closest thing we have to a national greenhouse gas regulation is an array of voluntary programs. And as the Washington Post pointed out, a list of states accounting for nearly half the nation's cars has lined up behind California, rather than the EPA.
There's an old saying, "Lead, follow, or get out of the way." The last year has seen the publication of an impressive collection of reports on the science of climate change and on the economic consequences of ignoring the problem or tackling it head-on. These reports, including three from the same Intergovernmental Panel on Climate Change (IPCC) that shared this year's Nobel Peace Prize with Mr. Gore, underline the urgency of the issue and provide the real underpinnings of California's waiver request. On these grounds and with the precedent of Mass. v. EPA, I believe the high court will ultimately find in California's favor, but time is wasting in the interim.
Wednesday, December 19, 2007
Rethinking Fuel Economy
The President is expected to sign the compromise Energy Bill today. If sustained $3.00/gallon gasoline hasn't already put fuel economy front and center for American consumers, the bill's landmark 35 mile-per-gallon efficiency standard for the entire new car fleet should do so, as auto manufacturers start to modify their product lines to meet the new target. A recent episode of NPR's Science Friday included a fascinating discussion of what is possible in this regard, but the most interesting portion of the program focused on the efforts of a group of engineering students and faculty who are rethinking the entire concept of the car for new markets. As important as it is for the US to shift toward more efficient vehicles, the opportunity in large emerging markets such as India is even more critical, before consumers' expectations there are locked into a status quo that cannot be sustained, globally.
Contrary to some disingenuous comments we heard during the debate about the 35 mpg CAFE Standard, it is simply not realistic to imagine that US consumers will be able to purchase essentially the same cars as today, differing only in their ability to achieve dramatically better fuel economy. Consumer expectations of vehicle cost and performance and the engineering solutions necessary to deliver an average of about 10 mpg lower fuel consumption are headed for a minefield of trade-offs. Something must give, whether vehicle size and weight, performance, or sticker price. Two of the main constraints on Detroit are our expectations of being able to accelerate to highway speeds in 10 seconds or less, and traveling roughly 300 miles without refueling, regardless of vehicle size. What could engineers create if those expectations disappeared?
The work of the Vehicle Design Summit (VDS) seems aimed precisely at that conundrum, targeting a developing-country market in which consumers are seeking personal mobility without such preconceptions, and for which the notion of a 12 mpg SUV that can accelerate like a sports car is entirely alien. Their first-stage prototype is anticipated to achieve 100 miles per gallon, using a plug-in hybrid architecture with a small, highly-efficient onboard generator capable of running on a variety of fuels. And because it won't have to go 300 miles at a stretch, the size of the engine and battery pack can be minimized. That reduces both cost and weight, increasing energy economy further. And that's a key point; from what I can tell, VDS isn't just trying to reduce oil consumption, but rather the entire energy consumption of the vehicle, including the "embodied energy" and greenhouse gas emissions of the manufacturing process.
Having cars such as the ones VDS is designing available for developing-country consumers, as they reach the income levels at which car ownership rates take off, will be crucial in managing global emissions and getting the most out of the world's limited supplies of transportation fuels. As daunting as it may sound, it may actually prove easier to create an entirely new concept of the personal vehicle that is capable of achieving an actual 100 miles per energy-equivalent gallon, compared to boosting the current American car to 35 mpg by incorporating energy from electricity or biofuels that is conveniently ignored or under-counted for the purposes of the federal fuel economy regulations.
Contrary to some disingenuous comments we heard during the debate about the 35 mpg CAFE Standard, it is simply not realistic to imagine that US consumers will be able to purchase essentially the same cars as today, differing only in their ability to achieve dramatically better fuel economy. Consumer expectations of vehicle cost and performance and the engineering solutions necessary to deliver an average of about 10 mpg lower fuel consumption are headed for a minefield of trade-offs. Something must give, whether vehicle size and weight, performance, or sticker price. Two of the main constraints on Detroit are our expectations of being able to accelerate to highway speeds in 10 seconds or less, and traveling roughly 300 miles without refueling, regardless of vehicle size. What could engineers create if those expectations disappeared?
The work of the Vehicle Design Summit (VDS) seems aimed precisely at that conundrum, targeting a developing-country market in which consumers are seeking personal mobility without such preconceptions, and for which the notion of a 12 mpg SUV that can accelerate like a sports car is entirely alien. Their first-stage prototype is anticipated to achieve 100 miles per gallon, using a plug-in hybrid architecture with a small, highly-efficient onboard generator capable of running on a variety of fuels. And because it won't have to go 300 miles at a stretch, the size of the engine and battery pack can be minimized. That reduces both cost and weight, increasing energy economy further. And that's a key point; from what I can tell, VDS isn't just trying to reduce oil consumption, but rather the entire energy consumption of the vehicle, including the "embodied energy" and greenhouse gas emissions of the manufacturing process.
Having cars such as the ones VDS is designing available for developing-country consumers, as they reach the income levels at which car ownership rates take off, will be crucial in managing global emissions and getting the most out of the world's limited supplies of transportation fuels. As daunting as it may sound, it may actually prove easier to create an entirely new concept of the personal vehicle that is capable of achieving an actual 100 miles per energy-equivalent gallon, compared to boosting the current American car to 35 mpg by incorporating energy from electricity or biofuels that is conveniently ignored or under-counted for the purposes of the federal fuel economy regulations.
Tuesday, December 18, 2007
Bad Timing
Iran's nuclear program is in the news again, with Russia finally deciding to deliver the fuel for the idle nuclear reactor at Bushehr, which was built with Russian technology. This action is an inevitable consequence of the recent US National Intelligence Estimate (NIE) on Iran. But while the timing is unfortunate, since withholding the reactor fuel was part of the international diplomatic pressure on Iran, today's New York Times report is misleading, when it characterizes the Bushehr plant as being "at the center of an international dispute over its nuclear program." If anything, that facility and its fuel represent precisely the kind of nuclear power program that the international community has been encouraging Iran to pursue, in lieu of the indigenous fuel cycle it is developing. That's where the security risk arises, not from an internationally-supervised civilian reactor fueled by Russia.
I'm sure some will see the Administration's comments on this event as making the best of a bad situation, but I think this time the President has it right, to this extent: As he stated, “If the Iranians accept that uranium for a civilian nuclear power plant, then there’s no need for them to learn how to enrich.” However, I also think that Tom Friedman of the Times was correct the other day, when he noted that the timing and wording of the NIE have seriously undermined the global coalition to contain Iran's nuclear ambitions. "The peculiar (obtuse?) way the N.I.E. on Iran was framed has deprived all who favor a negotiated settlement of leverage." At a time when nothing in Washington, DC is taken at face value, those who were anxious to foreclose any possibility of a military strike against Iran's nuclear facilities have downplayed the document's description of the very serious risks and uncertainties surrounding the most worrying elements of Iran's nuclear program--uranium enrichment at Natanz and plutonium production from the heavy water reactor at Arak.
While the security implications of all this have become quite muddled, the energy consequences are perhaps even less obvious but no less important. In order for nuclear power to be effective as a strategy to combat climate change, its application can't just be limited to countries that are already part of the nuclear weapons "club", or to developed countries such as Finland that have decided to forgo nuclear weapons. As the climate change roadmap coming out of the Bali conference confirmed, emissions from developing countries must be included in a global solution, with appropriate technical and financial assistance from the developed world. That means that among other things, we must be able to transfer nuclear technology--as Russia has done in Iran--without creating a nuclear weapons proliferation nightmare. Iran's opaque and contrary approach to nuclear power elevates the risks of such transfers and simultaneously undermines the international mechanisms for ensuring that nuclear technology will be used for peaceful purposes. It would be impossible for them to follow this path absent the tremendous influence of their hydrocarbon reserves and exports. Those weigh heavily in the cost-benefit analysis for Russia and China, without whose continued cooperation the diplomatic effort to keep Iran from developing a nuclear-weapons capability will ultimately unravel.
I'm sure some will see the Administration's comments on this event as making the best of a bad situation, but I think this time the President has it right, to this extent: As he stated, “If the Iranians accept that uranium for a civilian nuclear power plant, then there’s no need for them to learn how to enrich.” However, I also think that Tom Friedman of the Times was correct the other day, when he noted that the timing and wording of the NIE have seriously undermined the global coalition to contain Iran's nuclear ambitions. "The peculiar (obtuse?) way the N.I.E. on Iran was framed has deprived all who favor a negotiated settlement of leverage." At a time when nothing in Washington, DC is taken at face value, those who were anxious to foreclose any possibility of a military strike against Iran's nuclear facilities have downplayed the document's description of the very serious risks and uncertainties surrounding the most worrying elements of Iran's nuclear program--uranium enrichment at Natanz and plutonium production from the heavy water reactor at Arak.
While the security implications of all this have become quite muddled, the energy consequences are perhaps even less obvious but no less important. In order for nuclear power to be effective as a strategy to combat climate change, its application can't just be limited to countries that are already part of the nuclear weapons "club", or to developed countries such as Finland that have decided to forgo nuclear weapons. As the climate change roadmap coming out of the Bali conference confirmed, emissions from developing countries must be included in a global solution, with appropriate technical and financial assistance from the developed world. That means that among other things, we must be able to transfer nuclear technology--as Russia has done in Iran--without creating a nuclear weapons proliferation nightmare. Iran's opaque and contrary approach to nuclear power elevates the risks of such transfers and simultaneously undermines the international mechanisms for ensuring that nuclear technology will be used for peaceful purposes. It would be impossible for them to follow this path absent the tremendous influence of their hydrocarbon reserves and exports. Those weigh heavily in the cost-benefit analysis for Russia and China, without whose continued cooperation the diplomatic effort to keep Iran from developing a nuclear-weapons capability will ultimately unravel.
Monday, December 17, 2007
The Greenspan Effect
I was struck by a comment on energy from former Federal Reserve Chairman Alan Greenspan last week. As quoted in the weekend Wall Street Journal, he said, "The notion of core pricing is fading in importance as: One, food prices driven by increased long-term demand for meat and milk rise with the growth of China and other developing countries, and as; Two, global oil supply peaks lower and sooner than has been contemplated earlier." You could write a dissertation for a Ph.D. in economics based on that sentence. In one thought, Mr. Greenspan suggests that measuring inflation without factoring in energy price increases is an outdated notion, and that high energy prices are likely here to stay. The absolute accuracy of such an assertion may matter less than the market's response to an utterance from someone with such impeccable credibility.
I don't know if it says more about Mr. Greenspan's extraordinarily long tenure as at the helm of the Fed, or the qualities of his successor, that many continue to regard him as the preeminent voice on the economy and seek out his views regularly. I don't remember quite the same thing occurring after Mr. Greenspan replaced Paul Volcker, whom many credit with eradicating the high inflation of the 1970s. In any case, Mr. Greenspan still has the knack for encapsulating vast economic trends in a few words, and those words can move markets.
For as long as I can remember, observers of the economy have focused on core inflation, excluding food and energy prices, as the key measure of price stability. Until recently, the logic of factoring out volatile energy prices was solid, because oil prices always seemed to revert to a long-term average price in the low- to mid-$20s. Since 2003, however, that rationale has broken down. Over the last five years the key indicator of oil prices, West Texas Intermediate crude oil traded on the New York Mercantile Exchange, has gone up by about 30% per annum--with very large spikes and dips around that trend. Substituting the DOE's record of US refiner crude oil acquisition prices, a broader indicator of the raw material cost of fuels, suggests that oil inflation has been running at 25%. Natural gas isn't far behind, with roughly an 18% inflation rate on wellhead prices since 2003. Mr. Greenspan's remarks recognize that you can't double energy costs every three or four years without swamping many of the other economic factors that the Fed and economists monitor. And as I noted the other day, the alternative energy supplies being promoted by US energy policy are unlikely to provide any price relief.
Mr. Greenspan apparently doesn't envy the task his successor now faces: simultaneously trying to stave off a recession, defend the value of the dollar, and protect against the reappearance of serious inflation, driven by the very factors that the core inflation rate ignores. This may not fit the classical definition of a liquidity trap, but it could be the practical equivalent of one, if the Fed can't reduce interest rates much further--or even if the market merely believes that to be true, validated by voices such as Mr. Greenspan's.
What does that mean for all of us non-economists? Well, for starters, it shifts the burden of averting a recession away from interest rates and toward tax cuts and other fiscal policies--hardly the flavor of the week in a Congress seeking new revenue to offset the cost of new programs and shrink the federal deficit. At the same time, Mr. Greenspan's endorsement of the idea of an approaching peak in global oil output will tend to keep energy prices high by supporting higher long-dated futures prices. That compounds the Fed's problem and could also lead to higher valuations for oil equities (some of which are in my personal portfolio.) To the degree that this all comes down to market expectations about the future, I can't think of a more credible influence on those perceptions than the former Fed chief.
I don't know if it says more about Mr. Greenspan's extraordinarily long tenure as at the helm of the Fed, or the qualities of his successor, that many continue to regard him as the preeminent voice on the economy and seek out his views regularly. I don't remember quite the same thing occurring after Mr. Greenspan replaced Paul Volcker, whom many credit with eradicating the high inflation of the 1970s. In any case, Mr. Greenspan still has the knack for encapsulating vast economic trends in a few words, and those words can move markets.
For as long as I can remember, observers of the economy have focused on core inflation, excluding food and energy prices, as the key measure of price stability. Until recently, the logic of factoring out volatile energy prices was solid, because oil prices always seemed to revert to a long-term average price in the low- to mid-$20s. Since 2003, however, that rationale has broken down. Over the last five years the key indicator of oil prices, West Texas Intermediate crude oil traded on the New York Mercantile Exchange, has gone up by about 30% per annum--with very large spikes and dips around that trend. Substituting the DOE's record of US refiner crude oil acquisition prices, a broader indicator of the raw material cost of fuels, suggests that oil inflation has been running at 25%. Natural gas isn't far behind, with roughly an 18% inflation rate on wellhead prices since 2003. Mr. Greenspan's remarks recognize that you can't double energy costs every three or four years without swamping many of the other economic factors that the Fed and economists monitor. And as I noted the other day, the alternative energy supplies being promoted by US energy policy are unlikely to provide any price relief.
Mr. Greenspan apparently doesn't envy the task his successor now faces: simultaneously trying to stave off a recession, defend the value of the dollar, and protect against the reappearance of serious inflation, driven by the very factors that the core inflation rate ignores. This may not fit the classical definition of a liquidity trap, but it could be the practical equivalent of one, if the Fed can't reduce interest rates much further--or even if the market merely believes that to be true, validated by voices such as Mr. Greenspan's.
What does that mean for all of us non-economists? Well, for starters, it shifts the burden of averting a recession away from interest rates and toward tax cuts and other fiscal policies--hardly the flavor of the week in a Congress seeking new revenue to offset the cost of new programs and shrink the federal deficit. At the same time, Mr. Greenspan's endorsement of the idea of an approaching peak in global oil output will tend to keep energy prices high by supporting higher long-dated futures prices. That compounds the Fed's problem and could also lead to higher valuations for oil equities (some of which are in my personal portfolio.) To the degree that this all comes down to market expectations about the future, I can't think of a more credible influence on those perceptions than the former Fed chief.
Friday, December 14, 2007
Save the Nukes!
As I was mulling over a story in the Wall Street Journal the other day, concerning the difficulties faced by companies seeking to re-license existing nuclear power plants in some parts of the country, it occurred to me that the nuclear industry might be missing a key message in this effort. Rather than merely portraying these facilities as beneficial producers of clean electricity, perhaps they should consider describing them as members of an endangered species, one that fills a vital ecological niche. When you consider the intensity of the campaigns against facilities such as Indian Point in New York State, the licenses for which expire in 2013 and 2015, "endangered" seems like a fair characterization. However, I don't expect to see many cars plastered with "Save the Nukes!" bumper stickers.
Despite the growth of wind and grid-connected solar power, the nation's 104 operating nuclear power plants generated two-thirds of our CO2-free electricity--and 19% of all US electricity--last year. The newest of these plants entered service in 1996 and the oldest in 1969. Even if the pending applications to build new reactors are approved, the first new plant would not enter service before the licenses for most of the 53 plants built before 1980 would expire, forcing them to shut down if not renewed. That would have severe economic and environmental consequences.
If you regard our energy economy as an artificial ecology, nuclear power occupies a key niche within it, as our largest source of low-emissions, baseload electricity. In fact, only three other currently-available technologies can furnish power meeting both of these criteria: "clean coal" with carbon capture and sequestration (CCS), large-scale hydropower, and geothermal energy. None of these is in a position to substitute for nuclear power at this point, at least in the US. Coal with CCS looks expensive and remains unproven at industrial scales. Essentially all of the sites for large hydro-electric dams have been used, and the trend is toward dam removal. And while geothermal power looks very promising, sites for conventional (natural steam) geothermal are limited, and advanced (dry rock) geothermal is not ready for prime time.
Nor can wind and solar power substitute for nuclear power, should any of the existing plants be shut down, at least not without the provision of power storage on a scale that is simply not yet practical, in order to buffer the intermittent output of wind, and shift the cyclic output of solar to match the power demand, or "dispatch curve." Without cheap storage, replacing the annual generation from Indian Point would require roughly 1,800 3.6 MW wind turbines. That's about 45 times the size of the recently-cancelled Long Island wind farm project.
It won't surprise my readers to learn that I was never "anti-nuke", though like many people I had virtually written off nuclear power on economic grounds for most of the 1980s and '90s. Climate change and the increasing competition for limited oil resources alters that analysis. When faced with the choice between sequestering billions of tons per year of carbon from new and existing coal-fired power plants, or a few thousand tons of radioactive waste, the challenges of the latter look a lot more manageable in the long term. Endangered nuclear power plants aren't as appealing as "charismatic mega-fauna", but the prospect of losing the output of the existing plants looks about as bad as losing the polar bears--and the two are not unrelated.
Despite the growth of wind and grid-connected solar power, the nation's 104 operating nuclear power plants generated two-thirds of our CO2-free electricity--and 19% of all US electricity--last year. The newest of these plants entered service in 1996 and the oldest in 1969. Even if the pending applications to build new reactors are approved, the first new plant would not enter service before the licenses for most of the 53 plants built before 1980 would expire, forcing them to shut down if not renewed. That would have severe economic and environmental consequences.
If you regard our energy economy as an artificial ecology, nuclear power occupies a key niche within it, as our largest source of low-emissions, baseload electricity. In fact, only three other currently-available technologies can furnish power meeting both of these criteria: "clean coal" with carbon capture and sequestration (CCS), large-scale hydropower, and geothermal energy. None of these is in a position to substitute for nuclear power at this point, at least in the US. Coal with CCS looks expensive and remains unproven at industrial scales. Essentially all of the sites for large hydro-electric dams have been used, and the trend is toward dam removal. And while geothermal power looks very promising, sites for conventional (natural steam) geothermal are limited, and advanced (dry rock) geothermal is not ready for prime time.
Nor can wind and solar power substitute for nuclear power, should any of the existing plants be shut down, at least not without the provision of power storage on a scale that is simply not yet practical, in order to buffer the intermittent output of wind, and shift the cyclic output of solar to match the power demand, or "dispatch curve." Without cheap storage, replacing the annual generation from Indian Point would require roughly 1,800 3.6 MW wind turbines. That's about 45 times the size of the recently-cancelled Long Island wind farm project.
It won't surprise my readers to learn that I was never "anti-nuke", though like many people I had virtually written off nuclear power on economic grounds for most of the 1980s and '90s. Climate change and the increasing competition for limited oil resources alters that analysis. When faced with the choice between sequestering billions of tons per year of carbon from new and existing coal-fired power plants, or a few thousand tons of radioactive waste, the challenges of the latter look a lot more manageable in the long term. Endangered nuclear power plants aren't as appealing as "charismatic mega-fauna", but the prospect of losing the output of the existing plants looks about as bad as losing the polar bears--and the two are not unrelated.
Thursday, December 13, 2007
Embedding High-Priced Energy
As the revised Senate version of the energy bill passed by the House of Representatives heads to another vote today, moving closer to a possible Presidential veto, it's ironic that arguably its worst element remains the least controversial, with both Houses of Congress and the White House aligned behind it. Despite my grumbling about the bill's lack of attention to conventional energy supplies, I believe the expanded Renewable Fuels Standard constitutes a serious error of judgment. Not only would this enlarge a policy with consequences for global food supplies that The Economist calls "reckless," but it embeds expensive energy in the US economy in ways that will be hard to unravel in the future.
I've devoted a lot of space in the last couple of years to the problem of ethanol's energy return on energy invested. This may seem like an abstract concept with few practical consequences, and it is certainly one that ethanol advocates usually dismiss out of hand, either because they don't understand its implications, or because they understand them all too well. Simply put, the fact that corn ethanol returns only 130 BTUs of energy for every 100 invested in its production means that it can never deliver a fuel that is much cheaper before subsidies than the petroleum products it is intended to replace.
Ethanol's biggest benefit is that relatively little of the energy it consumes comes from oil--mainly the fuel used in cultivation, harvesting and transportation to and from the distillery. The biggest contribution comes from the natural gas used for process heat and to make the fertilizer needed to grow the corn. For all the margin problems that ethanol producers have experienced this year, as corn prices rose and output expanded faster than the market could absorb, they have caught a significant break on natural gas prices. We shouldn't assume that gas will continue to trade at a 46% discount to its BTU value against oil, as it has in 2007, based on a comparison of the relevant futures prices on the New York Mercantile Exchange. Since January 2000, gas has sold at an average of 73% of oil's BTU value, and there have been years like 2003, when it approached BTU parity with oil. In the long run, with imports making up a growing share of North American gas supplies, and as gas's lower CO2 emissions begin to be reflected in its price, it could even command a slight premium over oil.
What does all this mean? Well, at the BTU price implicit in $85/barrel oil, the cost of energy in a quantity of ethanol sufficient to displace a gallon of gasoline would be approximately $1.45/gallon. Add the contribution of corn at $4 per bushel, and you're at $3.50/gasoline-equivalent gallon, before taxes/subsidies and transportation by rail to the blending terminal. That compares to an equivalent wholesale gasoline price of about $2.35/gallon at the tank-truck rack. This comparison doesn't look any better at higher or lower oil prices, either.
The Energy Bill would double the existing mandated target for corn ethanol from 7.5 billion gallons per year by 2012 to 15 billion by around 2017, while adding an additional mandate for 21 billion gallons of non-corn ethanol and other biofuel by 2022. But from the analysis above, whatever this would do to enhance the energy security of this country by reducing our oil imports, corn ethanol cannot reduce the cost of energy to the US economy, even though subsidies and the lower energy content of a gallon of E-85 may superficially mask that effect for consumers. Now, reducing the cost of fuel may not be the top priority of US energy policy, at a time when we are concerned about climate change and our growing reliance on oil imported from unstable suppliers, but it's certainly relevant to businesses and consumers, and it ought to be of some interest to voters. Sooner or later, someone is going to have a lot of explaining to do, once the public figures out that ethanol is not the panacea we have been led to believe.
I've devoted a lot of space in the last couple of years to the problem of ethanol's energy return on energy invested. This may seem like an abstract concept with few practical consequences, and it is certainly one that ethanol advocates usually dismiss out of hand, either because they don't understand its implications, or because they understand them all too well. Simply put, the fact that corn ethanol returns only 130 BTUs of energy for every 100 invested in its production means that it can never deliver a fuel that is much cheaper before subsidies than the petroleum products it is intended to replace.
Ethanol's biggest benefit is that relatively little of the energy it consumes comes from oil--mainly the fuel used in cultivation, harvesting and transportation to and from the distillery. The biggest contribution comes from the natural gas used for process heat and to make the fertilizer needed to grow the corn. For all the margin problems that ethanol producers have experienced this year, as corn prices rose and output expanded faster than the market could absorb, they have caught a significant break on natural gas prices. We shouldn't assume that gas will continue to trade at a 46% discount to its BTU value against oil, as it has in 2007, based on a comparison of the relevant futures prices on the New York Mercantile Exchange. Since January 2000, gas has sold at an average of 73% of oil's BTU value, and there have been years like 2003, when it approached BTU parity with oil. In the long run, with imports making up a growing share of North American gas supplies, and as gas's lower CO2 emissions begin to be reflected in its price, it could even command a slight premium over oil.
What does all this mean? Well, at the BTU price implicit in $85/barrel oil, the cost of energy in a quantity of ethanol sufficient to displace a gallon of gasoline would be approximately $1.45/gallon. Add the contribution of corn at $4 per bushel, and you're at $3.50/gasoline-equivalent gallon, before taxes/subsidies and transportation by rail to the blending terminal. That compares to an equivalent wholesale gasoline price of about $2.35/gallon at the tank-truck rack. This comparison doesn't look any better at higher or lower oil prices, either.
The Energy Bill would double the existing mandated target for corn ethanol from 7.5 billion gallons per year by 2012 to 15 billion by around 2017, while adding an additional mandate for 21 billion gallons of non-corn ethanol and other biofuel by 2022. But from the analysis above, whatever this would do to enhance the energy security of this country by reducing our oil imports, corn ethanol cannot reduce the cost of energy to the US economy, even though subsidies and the lower energy content of a gallon of E-85 may superficially mask that effect for consumers. Now, reducing the cost of fuel may not be the top priority of US energy policy, at a time when we are concerned about climate change and our growing reliance on oil imported from unstable suppliers, but it's certainly relevant to businesses and consumers, and it ought to be of some interest to voters. Sooner or later, someone is going to have a lot of explaining to do, once the public figures out that ethanol is not the panacea we have been led to believe.
Wednesday, December 12, 2007
The Twelve Days of Bali
I have been following with great interest the news out of Bali, where the thousands of delegates to the 13th Conference of the Parties to the UN Framework Convention on Climate Change have been meeting. Unlike the session in Kyoto ten years ago, the meeting in Bali is not intended to deliver a new climate treaty, but rather the guidelines for another couple of years of negotiations on an agreement to pick up where the Kyoto Protocol leaves off at the end of 2012. As such, the concluding statement out of Bali on Friday may not be terribly dramatic, unless the next couple of days produce a breakthrough on the issue of binding emission reduction targets. Although I disagree with its authors' interpretation of the data, a Wall Street Journal op-ed critical of the whole process asks the right question about the Bali outcome, in terms of how it will relate to an objective assessment of the success or failure of Kyoto.
The authors suggest that if Bali produces a framework that is little more than a bigger version of Kyoto, it will fail. They base this conclusion on their assessment that most of the countries that agreed to reduce emissions have fallen short of their commitments, at least at this point, and that where reductions have occurred, they resulted mainly from factors unrelated to the Kyoto targets and their implementation mechanisms, such as emissions trading and the Clean Development Mechanism. There's more than a grain of truth to this, but I believe reality is more complicated, and that Kyoto has not been an unmitigated failure. At a minimum, it has served as a global focal point on climate change, and the template on which national emissions reduction efforts--and of states such as California--have been based. Absent Kyoto, it's hard to imagine the same impetus for action.
As to the performance against Kyoto's targets, it is not as bad as often portrayed. However they get there, the EU has a reasonable chance of achieving its target of 2012 emissions that are 8% below what its member countries emitted in 1990. By the end of 2005 its emissions were already 1.5% lower than 1990 for the core 15 nations that signed Kyoto, and almost certainly lower than they would have been, had they not undertaken any of these measures--though one might argue about whether the process has been as efficient or the cost/ton of the cuts as low as possible. Even in the US, which did not ratify Kyoto and has so far avoided a firm commitment on reductions, our 16% growth of emissions since 1990 (14.5% taking the 2006 result into account) is well below the status quo projections I saw in the late '90s, which anticipated emissions growing by around 30%.
The Achilles heel of Kyoto, as most skeptics are quick to point out, is its treatment of the large developing countries. The growth of emissions in China alone, in just the last five years, has been larger than all the cuts that Kyoto asked of the EU and US combined. Nor is there any reason to expect that China's rate of emissions growth is about to turn negative, any time soon. Simply increasing the severity of cuts required of the Kyoto-compliant developed countries and adding the US and Australia to that list seem unlikely to attain the underlying goals that are being discussed in Bali, of ensuring that total global greenhouse gas emissions begin falling within 10-15 years, and that the rise in average temperature does not exceed 2 degrees Celsius.
If a bigger version of Kyoto is insufficient to the task, then what do we need? There are plenty of opinions out there, but I will be encouraged if the 12 days in Bali end with a charge to the negotiators of the details that is flexible enough to allow them to address the widely disparate political and economic circumstances of the world's nations, and particularly of the largest emitters. The key success criterion ought not to be its fit with our preconceptions about the relative importance of emissions cuts, technology transfer, and other key elements, but whether it results in a framework that can be implemented and enforced across all the big emitters, offering a realistic expectation of actually working, not just satisfying our notions of equity.
The authors suggest that if Bali produces a framework that is little more than a bigger version of Kyoto, it will fail. They base this conclusion on their assessment that most of the countries that agreed to reduce emissions have fallen short of their commitments, at least at this point, and that where reductions have occurred, they resulted mainly from factors unrelated to the Kyoto targets and their implementation mechanisms, such as emissions trading and the Clean Development Mechanism. There's more than a grain of truth to this, but I believe reality is more complicated, and that Kyoto has not been an unmitigated failure. At a minimum, it has served as a global focal point on climate change, and the template on which national emissions reduction efforts--and of states such as California--have been based. Absent Kyoto, it's hard to imagine the same impetus for action.
As to the performance against Kyoto's targets, it is not as bad as often portrayed. However they get there, the EU has a reasonable chance of achieving its target of 2012 emissions that are 8% below what its member countries emitted in 1990. By the end of 2005 its emissions were already 1.5% lower than 1990 for the core 15 nations that signed Kyoto, and almost certainly lower than they would have been, had they not undertaken any of these measures--though one might argue about whether the process has been as efficient or the cost/ton of the cuts as low as possible. Even in the US, which did not ratify Kyoto and has so far avoided a firm commitment on reductions, our 16% growth of emissions since 1990 (14.5% taking the 2006 result into account) is well below the status quo projections I saw in the late '90s, which anticipated emissions growing by around 30%.
The Achilles heel of Kyoto, as most skeptics are quick to point out, is its treatment of the large developing countries. The growth of emissions in China alone, in just the last five years, has been larger than all the cuts that Kyoto asked of the EU and US combined. Nor is there any reason to expect that China's rate of emissions growth is about to turn negative, any time soon. Simply increasing the severity of cuts required of the Kyoto-compliant developed countries and adding the US and Australia to that list seem unlikely to attain the underlying goals that are being discussed in Bali, of ensuring that total global greenhouse gas emissions begin falling within 10-15 years, and that the rise in average temperature does not exceed 2 degrees Celsius.
If a bigger version of Kyoto is insufficient to the task, then what do we need? There are plenty of opinions out there, but I will be encouraged if the 12 days in Bali end with a charge to the negotiators of the details that is flexible enough to allow them to address the widely disparate political and economic circumstances of the world's nations, and particularly of the largest emitters. The key success criterion ought not to be its fit with our preconceptions about the relative importance of emissions cuts, technology transfer, and other key elements, but whether it results in a framework that can be implemented and enforced across all the big emitters, offering a realistic expectation of actually working, not just satisfying our notions of equity.
Tuesday, December 11, 2007
Russia, Inc.
The overnight reaction to yesterday's endorsement by Russian President Putin of the Chairman of Gazprom as the next President of the Russian Federation reminds me of Lady Thatcher's comment after her first meeting with Mikhail Gorbachev, "We can do business together." I am struck by the deep weirdness of this announcement, which will surely have important implications for energy. It's impossible to imagine an American analog to such an event. Perhaps in some alternate universe President Bush is so popular that he could designate the Chairman of the country's largest energy company as the Republican nominee to succeed him, and have his choice be seen as a virtual shoe-in to become the 44th President of the United States, but this certainly has no counterpart in our reality. Yet that is effectively what seems to be playing out in Russia, in the wake of a landslide victory by Mr. Putin's party, United Russia.
High oil prices and the resulting growth of energy revenues have led the resurgence of Russia's economy during President Putin's second term, and the threatened or actual manipulation of energy flows has become a major lever for projecting Russian political influence beyond the country's borders. By some measures Russia already plays as pivotal a role in global energy supplies as Saudi Arabia. With the world's largest reserves of natural gas, it furnishes roughly 60% of Europe's natural gas imports, and its 2006 oil exports were only 25% below those of the Saudis. While Russia may no longer be a superpower, geopolitically, it has become one in energy terms.
If Russia under Mr. Putin emerged as one of the world's largest petro-authoritarian states, as Tom Friedman puts it, what is it likely to become under the leadership of the chairman of the board of the country's largest energy concern? And am I the only one struck by the added irony of a former German Chancellor playing a key role in the operation of that business? Still, Dmitry Medvedev is not one of the siloviki, and he apparently has legitimate democratic credentials. Considering all the speculation about the likelihood of Vladimir Putin putting forward a non-entity as President, so that he could shift Russia's locus of power to whatever new role he chose for himself, Mr. Medvedev is an interesting choice as Russia's next President.
While the Washington Post focuses on his loyalty and close ties to Mr. Putin, going back to their time together in the former Leningrad, where both served in the mayor's office, Gazprom under Medvedev has been far from passive. Whatever the internal politics of this choice, it is also an implicit recognition of the importance of energy markets to Russia's current and future success, and Mr. Medvedev has participated in a very assertive approach to those markets. Even as Russia's internal growth consumes more of its energy output, it will remain a major force in energy markets for the foreseeable future. With Mr. Medvedev at the helm, energy seems certain to play at least as large a role in the country's economic and foreign policy as it has under President Putin.
High oil prices and the resulting growth of energy revenues have led the resurgence of Russia's economy during President Putin's second term, and the threatened or actual manipulation of energy flows has become a major lever for projecting Russian political influence beyond the country's borders. By some measures Russia already plays as pivotal a role in global energy supplies as Saudi Arabia. With the world's largest reserves of natural gas, it furnishes roughly 60% of Europe's natural gas imports, and its 2006 oil exports were only 25% below those of the Saudis. While Russia may no longer be a superpower, geopolitically, it has become one in energy terms.
If Russia under Mr. Putin emerged as one of the world's largest petro-authoritarian states, as Tom Friedman puts it, what is it likely to become under the leadership of the chairman of the board of the country's largest energy concern? And am I the only one struck by the added irony of a former German Chancellor playing a key role in the operation of that business? Still, Dmitry Medvedev is not one of the siloviki, and he apparently has legitimate democratic credentials. Considering all the speculation about the likelihood of Vladimir Putin putting forward a non-entity as President, so that he could shift Russia's locus of power to whatever new role he chose for himself, Mr. Medvedev is an interesting choice as Russia's next President.
While the Washington Post focuses on his loyalty and close ties to Mr. Putin, going back to their time together in the former Leningrad, where both served in the mayor's office, Gazprom under Medvedev has been far from passive. Whatever the internal politics of this choice, it is also an implicit recognition of the importance of energy markets to Russia's current and future success, and Mr. Medvedev has participated in a very assertive approach to those markets. Even as Russia's internal growth consumes more of its energy output, it will remain a major force in energy markets for the foreseeable future. With Mr. Medvedev at the helm, energy seems certain to play at least as large a role in the country's economic and foreign policy as it has under President Putin.
Monday, December 10, 2007
Sine Qua Non
In order to function, a market must have both buyers and sellers. That point seems trivial, but in the context of an article in Sunday's New York Times, it has great significance for the global trade in oil. The Times picked up on a quiet trend that could dramatically alter the oil market, and with it, the global economy: the rate at which the economies of oil-exporting countries are soaking up their oil surpluses, due to a combination of subsidized consumption and the growth stimulated by high oil revenues. Even if this trend does not dry up the exports that currently satisfy the world's many oil importers--with the US topping the list--it will alter the competitive forces affecting both energy prices and the contractual terms for new production. It should also lend urgency to the national debate on energy policy.
Since participating in Texaco's first global energy scenario project ten years ago, I've been following the evolution of the industry's access to resources, one of three big energy trends identified by our scenario team. Increasingly, the international oil companies have been frozen out of the big reserve plays around the world, or forced to take secondary roles involving much less control. But within the last year, I've grown much more concerned about the potential impact of a factor that compounds the problem of access. As oil-rich developing countries grow, they consume more of their own oil, leaving less to export. And as often as not, much of that incremental consumption is driven by internal petroleum product prices that are well below international market prices, leading to inefficiency.
The 15 countries on the Department of Energy's list of the biggest oil exporters accounted for 90% of total global oil exports of 43.2 million barrels per day (MBD) in 2004, out of total consumption of 82.3 MBD. As the figure in the Times article shows, consumption in the largest of these exporters is growing at a multiple of the global rate, at a time when it has slowed or stalled in developed countries. (The decline shown for the US between 2005-2006 is somewhat anomalous, because it appears to be attributable not to products like gasoline or diesel fuel, which are still growing, but to the disposition of the bottom of the barrel, perhaps into additional coking capacity or exports.) In fact, the growth of consumption in oil-exporting countries may matter as much to the future of the oil market as the growth of China and India, which has received a lot more attention in the last several years.
This trend has a number of important implications. At the highest level, as the Times notes, a reduction of exports will put more pressure on prices, and thus on consumption in importing countries, effectively hastening the effects of Peak Oil. At the same time, a reduction in the number of net exporters, as countries with historic surpluses move into balance or deficit, will alter the dynamics of the market, as will shifts within the top rank of exporters. The resulting fewer major exporters will have more market power, and that will affect not only the market for their output, but also the competition for access to new oil fields. Meanwhile, the incentives for current oil importers to reduce consumption and develop more domestic production will grow, encompassing biofuels and hydrocarbons from conventional and alternative sources. In this light, the present high US reliance on oil imports looks even less sustainable, and a comprehensive energy plan addressing both supply and demand even more essential.
It isn't for us to tell oil-producing nations what to do with their own resources. We have no inalienable right to consume other countries' oil, unless they sell it to us willingly. Nor are we in a strong position to advise them about inefficiency, at least until we put our own house in order in this regard. That suggests the need for us to plan for a world, not necessarily with less oil, but with less of it available for us to import. Considering the scale of those imports and the present modest contribution of alternatives, the definition of energy independence we should all be able to agree on would focus on achieving sustained year-on-year reductions in our oil imports and creating enough new options to provide real leverage with our remaining suppliers. That's a very different notion from self-sufficiency.
Since participating in Texaco's first global energy scenario project ten years ago, I've been following the evolution of the industry's access to resources, one of three big energy trends identified by our scenario team. Increasingly, the international oil companies have been frozen out of the big reserve plays around the world, or forced to take secondary roles involving much less control. But within the last year, I've grown much more concerned about the potential impact of a factor that compounds the problem of access. As oil-rich developing countries grow, they consume more of their own oil, leaving less to export. And as often as not, much of that incremental consumption is driven by internal petroleum product prices that are well below international market prices, leading to inefficiency.
The 15 countries on the Department of Energy's list of the biggest oil exporters accounted for 90% of total global oil exports of 43.2 million barrels per day (MBD) in 2004, out of total consumption of 82.3 MBD. As the figure in the Times article shows, consumption in the largest of these exporters is growing at a multiple of the global rate, at a time when it has slowed or stalled in developed countries. (The decline shown for the US between 2005-2006 is somewhat anomalous, because it appears to be attributable not to products like gasoline or diesel fuel, which are still growing, but to the disposition of the bottom of the barrel, perhaps into additional coking capacity or exports.) In fact, the growth of consumption in oil-exporting countries may matter as much to the future of the oil market as the growth of China and India, which has received a lot more attention in the last several years.
This trend has a number of important implications. At the highest level, as the Times notes, a reduction of exports will put more pressure on prices, and thus on consumption in importing countries, effectively hastening the effects of Peak Oil. At the same time, a reduction in the number of net exporters, as countries with historic surpluses move into balance or deficit, will alter the dynamics of the market, as will shifts within the top rank of exporters. The resulting fewer major exporters will have more market power, and that will affect not only the market for their output, but also the competition for access to new oil fields. Meanwhile, the incentives for current oil importers to reduce consumption and develop more domestic production will grow, encompassing biofuels and hydrocarbons from conventional and alternative sources. In this light, the present high US reliance on oil imports looks even less sustainable, and a comprehensive energy plan addressing both supply and demand even more essential.
It isn't for us to tell oil-producing nations what to do with their own resources. We have no inalienable right to consume other countries' oil, unless they sell it to us willingly. Nor are we in a strong position to advise them about inefficiency, at least until we put our own house in order in this regard. That suggests the need for us to plan for a world, not necessarily with less oil, but with less of it available for us to import. Considering the scale of those imports and the present modest contribution of alternatives, the definition of energy independence we should all be able to agree on would focus on achieving sustained year-on-year reductions in our oil imports and creating enough new options to provide real leverage with our remaining suppliers. That's a very different notion from self-sufficiency.
Friday, December 07, 2007
The Missing Ingredient
Yesterday the House of Representative passed compromise energy legislation, an amended version of the previous HR.6 that the Senate passed earlier in the year, by a margin of 235-181. The bill now goes to the Senate for a final vote, which could take place this weekend. In her remarks closing the debate, Speaker Pelosi referred to the bill as a "shot heard 'round the world for energy independence for America." I wish it were so. While the bill contains many useful elements, including the 35 mpg fuel economy provision on which I've commented recently, on balance its thousand or so pages seem unlikely to worry the Middle East oil producers at whom this rhetoric is aimed. Because it fails to promote additional oil and gas production, it could actually reduce domestic energy production in the near term, worsening our reliance on imports. If anything, with its focus on the technology and production of renewable energy, the Energy Bill should raise more eyebrows on Wall Street and in Silicon Valley than in Caracas, Riyadh, or Tehran.
The renewable energy sources covered by HR.6 are going to be extremely important for the energy future of this country. Cellulosic ethanol, wind, solar and geothermal power constitute important new resources that also provide significant benefits for tackling our greenhouse gas emissions. We need them to become competitive and expand rapidly, in order to meet the challenges posed by climate change. However, they won’t supplant oil and gas or make the US independent of its foreign energy suppliers within the timeframe considered by this legislation. What is needed, then, is a transition from the current, fossil-heavy energy mix to a future diet built mainly around renewable energy and nuclear power. By excluding the most obvious source of new energy production available to us, this bill will make that transition more arduous and expensive than it has to be. Anyone expecting this bill to drive down the price of gasoline or heating oil within the next several years is bound to be disappointed.
Given the kitchen-sink nature of the "Energy Independence and Security Act of 2007", including the tougher CAFE standard, an expanded renewable fuel standard, a controversial 15% national renewable electricity standard, and assorted other subsidies and a few earmarks, it's hard to understand the absence of truly meaningful supply provisions. CAFE, ethanol and renewable electricity do not add up to energy independence, not by a long shot, though the demand-side measures in the bill should begin to slow the rate at which our energy dependence is growing.
One of the speeches I caught on C-SPAN's coverage of the House debate provided a clue as to why such a massive omnibus energy bill would rule out expanding US oil and gas production, which account for almost half of our present 71% level of energy independence. Representative Hinchey (D-Ithaca, NY), recited as part of the bill's justification the well-worn "3-25 Fallacy": Although it is accurate that the US consumes 25% of the world's oil, while possessing only 3% of global proved oil reserves, this ignores the fact that we have produced 1 out of 5 barrels of petroleum ever extracted and still contribute 10% of global production, ranking third behind Saudi Arabia and Russia, but ahead of Iran and Venezuela combined. And while our output is declining because of the mature nature of most of our oil fields, this is also occurring because we have chosen to leave many billions of additional barrels--barrels that would really get OPEC's attention--untouched.
Speaker Pelosi described the effect of the energy bill as being, "as immediate to them as the price at the pump they face when they fill up their tanks." Given the long phase-in of renewables and higher fuel economy standards, that is surely an exaggeration. As urgent as the problems of energy and the environment are, there is still time to get this right, and that ought not to be dictated by the legislative or electoral calendar. The question facing the Senate and, should they pass it, the President, is whether the many positive aspects of this bill are sufficient to outweigh its negatives, including its notable failure to increase domestic conventional energy production by opening up new areas for drilling or making it easier to add new refining capacity. No legislation is ever perfect, and we urgently need stronger energy policy. Nevertheless, a bill constructed on the premise of moving us towards energy independence--however unattainable that goal may be--should include more robust supply provisions than doubling our already problematic output of corn ethanol. While the country's former energy policy has been too oil-centric for years, this new policy is not oil-centric enough, when petroleum still accounts for 98% of the energy we use for transportation. If opening up additional offshore tracts and federal lands to drilling is a bridge too far for this Congress, then at least they ought to ensure that the 2007 Energy Bill is oil-neutral.
The renewable energy sources covered by HR.6 are going to be extremely important for the energy future of this country. Cellulosic ethanol, wind, solar and geothermal power constitute important new resources that also provide significant benefits for tackling our greenhouse gas emissions. We need them to become competitive and expand rapidly, in order to meet the challenges posed by climate change. However, they won’t supplant oil and gas or make the US independent of its foreign energy suppliers within the timeframe considered by this legislation. What is needed, then, is a transition from the current, fossil-heavy energy mix to a future diet built mainly around renewable energy and nuclear power. By excluding the most obvious source of new energy production available to us, this bill will make that transition more arduous and expensive than it has to be. Anyone expecting this bill to drive down the price of gasoline or heating oil within the next several years is bound to be disappointed.
Given the kitchen-sink nature of the "Energy Independence and Security Act of 2007", including the tougher CAFE standard, an expanded renewable fuel standard, a controversial 15% national renewable electricity standard, and assorted other subsidies and a few earmarks, it's hard to understand the absence of truly meaningful supply provisions. CAFE, ethanol and renewable electricity do not add up to energy independence, not by a long shot, though the demand-side measures in the bill should begin to slow the rate at which our energy dependence is growing.
One of the speeches I caught on C-SPAN's coverage of the House debate provided a clue as to why such a massive omnibus energy bill would rule out expanding US oil and gas production, which account for almost half of our present 71% level of energy independence. Representative Hinchey (D-Ithaca, NY), recited as part of the bill's justification the well-worn "3-25 Fallacy": Although it is accurate that the US consumes 25% of the world's oil, while possessing only 3% of global proved oil reserves, this ignores the fact that we have produced 1 out of 5 barrels of petroleum ever extracted and still contribute 10% of global production, ranking third behind Saudi Arabia and Russia, but ahead of Iran and Venezuela combined. And while our output is declining because of the mature nature of most of our oil fields, this is also occurring because we have chosen to leave many billions of additional barrels--barrels that would really get OPEC's attention--untouched.
Speaker Pelosi described the effect of the energy bill as being, "as immediate to them as the price at the pump they face when they fill up their tanks." Given the long phase-in of renewables and higher fuel economy standards, that is surely an exaggeration. As urgent as the problems of energy and the environment are, there is still time to get this right, and that ought not to be dictated by the legislative or electoral calendar. The question facing the Senate and, should they pass it, the President, is whether the many positive aspects of this bill are sufficient to outweigh its negatives, including its notable failure to increase domestic conventional energy production by opening up new areas for drilling or making it easier to add new refining capacity. No legislation is ever perfect, and we urgently need stronger energy policy. Nevertheless, a bill constructed on the premise of moving us towards energy independence--however unattainable that goal may be--should include more robust supply provisions than doubling our already problematic output of corn ethanol. While the country's former energy policy has been too oil-centric for years, this new policy is not oil-centric enough, when petroleum still accounts for 98% of the energy we use for transportation. If opening up additional offshore tracts and federal lands to drilling is a bridge too far for this Congress, then at least they ought to ensure that the 2007 Energy Bill is oil-neutral.
Thursday, December 06, 2007
The Momentum Shifts
What a difference a few weeks makes. A month ago, I was contacted by a TV news producer who was lining up "talking heads" for the day when oil broke $100/barrel--then expected at any moment. Subsequently, instead of breaching that level, the most-watched oil price has receded by more than 10% and the entire shape of the market has changed. Yesterday in Abu Dhabi, OPEC apparently concluded that the risk of a price collapse exceeds that of killing demand and held its quotas steady. What has changed since early November, and is the current weakness any likelier to persist than the market's flirtation with the inflation-adjusted all-time high price did?
While I share the general sense of momentary relief that oil prices are heading back into more comfortable territory for the economy--no one can call $85/barrel normal--I'm also oddly disappointed, and not just because I missed a chance to be on TV, for now. Breaking $100/barrel would have sent an important signal about the fundamental shifts that have taken hold in the global oil market in the last few years, and it would have underlined the need for consumer behavior to change, while we wait for more efficient cars, homes, and devices to become mainstream. It also would have set a new record oil price, settling the annoying controversy over what the 1980-81 historical high means today. That no longer seems likely, at least for the next few months.
Media analysis of the change seems focused on slowing global economic growth, oil inventories, and the new intelligence on Iran's nuclear program. You almost have to smile at the perversity of some of this, when traders take the otherwise bullish news of OPEC's failure to increase quotas as a signal that economic growth must be so weak that oil demand will fall, and prices with it. This contrasts with the fall in reported US oil inventories this week, which puts them right in the middle of their seasonally-adjusted historical average range, hardly a bearish indicator.
While I share the general sense of momentary relief that oil prices are heading back into more comfortable territory for the economy--no one can call $85/barrel normal--I'm also oddly disappointed, and not just because I missed a chance to be on TV, for now. Breaking $100/barrel would have sent an important signal about the fundamental shifts that have taken hold in the global oil market in the last few years, and it would have underlined the need for consumer behavior to change, while we wait for more efficient cars, homes, and devices to become mainstream. It also would have set a new record oil price, settling the annoying controversy over what the 1980-81 historical high means today. That no longer seems likely, at least for the next few months.
Media analysis of the change seems focused on slowing global economic growth, oil inventories, and the new intelligence on Iran's nuclear program. You almost have to smile at the perversity of some of this, when traders take the otherwise bullish news of OPEC's failure to increase quotas as a signal that economic growth must be so weak that oil demand will fall, and prices with it. This contrasts with the fall in reported US oil inventories this week, which puts them right in the middle of their seasonally-adjusted historical average range, hardly a bearish indicator.
From "This Week in Petroleum", December 5, 2007, Energy Information Agency
The most significant change, other than the absolute price level, is the dramatic decrease in "backwardation", the difference between the price of the prompt oil futures contract and those of succeeding months. Less than a dollar per barrel now separates the January 2008 and April 2008 contracts. A few weeks ago that spread was $3/bbl. This shift reflects a market that is in much better balance. That could be a function of easing physical supply and demand, a reduction in speculative pressure--as OPEC would have it--or a bit of both. Either way, the impetus that was driving prices ever higher seems to have crested for the moment, and we might even see a return to "contango", if the prompt market becomes oversupplied.
One of my futures trading mentors liked to say, "The trend is your friend, until it ends." As oil approached $100/barrel--a level with more psychological than real significance--the price seemed to have a life of its own. You can ascribe that to the impact of speculation, or the degree to which most global oil consumption is insulated from day-to-day changes in oil prices, requiring truly big spikes to bring demand back into line with supply. But whether speculators lost heart and chose to take profits, thus ending the trend, or the prospect of record oil prices finally cast a large enough pall over the global economy, prices have returned to where they were in October. The one certainty in all of this is volatility. Global supply and demand remain tightly balanced, and depending on the nature of the events ahead, we could soon be on verge of $100 again, or of $50. That's hardly reassuring for those investing in alternative fuels.
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