The problem with energy breakthroughs is that they actually require a Built Environment breakthrough. Energy transition, or the notion of disruptive energy technologies, are affairs that occur at the interface between an energy-source, energy-tools, and the built environment. I suppose coal was a kind of breakthrough for early 18th century (and wood-based) England but the barrier to coal adoption was that alot of England’s built environment was running on wood. You see, new energy sources or new energy technologies don’t distribute easily, or quickly, through the built environment.

It’s common among those who sell the idea of energy breakthrough to invoke electronic or digital adoption narratives. Breakthroughs in medicine, in electronic networks, and in other intellectual achievement distribute more easily upon existing systems. This is why I continue to believe that many (not all) in Cleantech Venture dont’ really understand the scale of our energy problem. Or, having understood the scale of our energy problem, many apply adoption pathways learned from other systems–that simply don’t translate to energy, and the built environment.

Let’s take a look at a 40 year chart of one of humankind’s oldest energy sources, Hydro energy, compared to use of Nuclear energy. It’s understandable that most would have considered nuclear power the epitome of energy breakthough, when first concieved. And, compared to hydro power, the chart seems to indicate a fast adoption of nuclear power–through the world’s built environment:

The disappointment comes, however, upon learning that Nuclear power still only provides a little more than 5.00% of the world’s primary energy. Hydro provides over 6.00%–thus eclipsing Nuclear after all these decades. No doubt, many will point to political and policy choices as barriers to adoption of nuclear. But, those political and policy factors are a direct outgrowth of nuclear’s enormous expense, time-to-completion, and safety costs. The barriers to nuclear power adoption relate more to the fact that it is not an energy breakthrough at all, in the sense that it did not easily dislocate coal, oil, or natural gas. Nuclear power neither undercut easily the cost of current energy sources, nor did it offer a way to easily transform existing energy sources to the built environment. This is why in the current debate between Amory Lovins and Stuart Brand (an excellent and friendly debate), I take the side of Lovins–who thinks we missed our date with destiny in nuclear, and that a grand pursuit of nuclear no longer makes sense.

I intend to write more this week on my experience at the (very fun) MIT Energy Conference, but the question one should ask all those who claim to be working on energy breakthroughs is how, in terms of engineering, time, and energy-cost, their idea will distribute through the current built environment.

-Gregor

While it’s true that states like Wyoming, New Mexico, North Dakota, and Colorado produce more total energy than they consume, what’s less understood is the rather amplified effect this can have when comparing these states to heavy energy importers such as California which consumes 3 times as much energy as it produces, or Florida, which consumes 8 times its energy production. California’s oil production for example at 600 kbpd (thousand barrels per day) is a nice resource to have when oil rises. But it’s not nearly as nice as Colorado’s natural gas production. Yes, Colorado uses more oil than it produces to run its vehicles, but it only uses 40% of its natural gas production. The rest is sold. And despite budgetary woes appropriately scaled to the Rocky Mountain state, the difference in unemployment, debt, and cash flow is reflective of Colorado’s energy surplus.

Pulling together state by state energy data can be work. I found I not only had to blend EIA Washington data with state data, but I had to find a common unit of account to make comparisons, and chose BTU. One chart of several I’d like to display from my February report is: California: Oil Production vs. Total Gasoline Use in Trillion BTU ‘81-’07.

California’s oil production peaked in 1985, but exclusive of all other uses for oil–jet fuel, bunker fuel, diesel, chemicals production–the state known for its massive highway system was actually producing enough oil as late as 1998 to cover its gasoline consumption. (The more comprehensive chart pitting oil production vs total oil use for California looks considerably worse, of course. To ease the pain of the data, I chose “California Poppy” color to track the gasoline use data. How do you like it?).

When oil and natural gas prices rise, states like Colorado see a cascade of earnings, revenues, and royalties flow into their state. Whereas states like California see a cascade of capital flow out of state. It’s really not very complicated. What’s helpful in these examples of course is that it makes plain the position of the United States as a whole, whose energy balance is unfortunately not like Colorado’s, but more like California’s.

-Gregor

The United States is the second largest consumer of coal in the world. Sitting just behind China, but ahead of India, Japan, Russia, South Africa, and Germany, the US consumes about 560 mtoe of coal each year. (million tons oil equivalent). US coal consumption has been largely flat the past 10 years, as the rest of the world has raced ahead. In 2008, the most recent year for available global coal use data, total world consumption of coal reached 3303.7 mtoe. Thus, the US accounted for nearly 17.00% of total world coal use. Within the US, coal accounts for nearly half (48.7% ) of all power generation. To give up coal completely would be impossibility but let’s imagine for a moment such a circumstance. Question: if the United States stopped using coal today, given current coal consumption trends, how many years would need to pass before the rest of the world (ROW) replaced the lost consumption from the US?

The answer to this question can be derived by a more complex interplay between the current trajectories in peak oil and global coal consumption growth. Or, by a simpler method which is to merely look at Developing world coal demand. In the monthly newsletter, I used both approaches. But before I give you my answer, let’s take a look at the chart of Developing world coal use:

Based on current trends, and using a conservative 4.00% annual growth rate in global coal consumption (when in truth it is currently closer to 4.7 -5.00%), I project that the world could replace 100% of lost US demand in 5 years. The force behind this trend of course is not the 2 billion people in the developed world, but the nearly 5 billion people in the developing world.

In my research archives I have an August 17, 2004 copy of the Financial Times which lays out in great detail Asia’s plans to build out coal-fired power generation. On a beautiful summer day in New England I still recall reading the following passage: In Asia, utility companies are planning around 1,000 new coal-fired plants with far less environmental scrutiny than in the US. One hundred are already under construction, mostly in China. Asia’s coal demand has indeed been unstoppable for years now. This raises a more serious question, however, than the one I posed here. And that’s this: when will the world transition fully back to coal, thus displacing oil as the primary energy source?

-Gregor

Notes to Chart:  In the above chart, the developing Asia portion is composed of:  Bangladesh, China Hong Kong SAR, Indonesia, Malaysia, Pakistan, Philippines, South Korea, Taiwan, Thailand, Other Asia Pacific.

Readers will no doubt draw their own conclusions from this chart. I will offer you mine. The supply surge you see coming out of 1999 is a depiction of how the oil business actually works. And that is producers are merely looking to make a healthy spread between the cost of production and the market price. In that 1999-2004 period the final, remaining portions of easy oil were pumped out of the ground among Non-OPEC producers. That spike, that moonshot of supply between 1999 and 2004 is not responding to an advance in the price of oil. It’s responding to a good enough price of oil, compared to production costs.

The peak in supply in 2004, accordingly, is the point in time where production costs (and time delays) begin to show up in the global supply system. Thus, just as the price of oil starts its heroic trajectory higher from 56.64 to 66.05, and then on to 72.34 and finally 99.67, the cost of oil production in Non-OPEC races ahead as the availability of new supply slows down and decline from existing fields start to take its toll. It is only with the advent of prices above 70.00 per barrel that Non-OPEC is able to start fighting decline, as it reaches for ultra-deep offshore, unconventional sources like tar sands, and conducts enhanced oil recovery on aging fields.

Now for the really bad news: there will be no supply surge this time from Non-OPEC when the world next exits recession. Unlike the last decade, when alot of idle supply across Non-OPEC (especially from Russia) was turned back on as the world exited those recession(s), Non-OPEC will only be able to increase oil supply now at much higher prices. How high? Well, it’s not even clear that Non-OPEC could repeat its 2004 performance of a sustained 42.068 mbpd at any price. We are actually looking at a situation where a certain floor in price is needed to simply keep 60% of total oil supply from declining even further. But should the world exit recession, I would expect a new normal for the price of oil at 120.00 dollars per barrel.

-Gregor

Data Notes: All data updated through the February 17, 2010 release of International Petroleum Monthly, which has supplied global production figures through November of 2009.

Meanwhile, BNN Television in Toronto put together several energy segments (including a debate on wind power) and I was pleased to be invited on air, to talk about energy surplus states, transport, and the problem coal presents to the economics of alternative energy. | see: BNN Squeeze Play from Toronto, Canada.

–Gregor

Photo: late 19th century newspaper boy.

Colorado produces about 40% more energy than it consumes. It’s an enormous producer of natural gas, and a minor producer of coal and oil. What’s impressive also in Colorado, based on my recent trip to Denver last Autumn, is to witness the accelerating level of awareness on the part of the Governor, Mayor(s), and Senators/Congressmen that any reduction in automobile use and related infrastructure would bring the state into even greater energy surplus. To this point, both the city of Denver and the State are very much behind efforts to build out both Denver and Front Range rail transport, and they are already very much underway in that effort.

It is perhaps instructive, therefore, that Colorado unemployment on both the narrow and broad measures sits below national averages. Narrow unemployment in the state is 7.5%, and under the broad measure is currently at 13.7%. But compare these to national averages at 9.7% and 16.5% respectively. For greater contrast, compare to states such as California, with its woeful 12.4% and 21.1% rates, respectively.

Colorado, which has been transitioning steadily to the use of natural gas in both its household and commercial sectors, still only uses 40% of the natural gas it produces. The other 60% is exported via major pipelines and, functionally speaking, Colorado produces alot of the natural gas supply that is pushed westward each day to the energy deficit states. The less Colorado uses cars, and the more it relies on its own natural gas, the further Colorado gets towards becoming a power-sector state, which is exactly the direction we must go in the post peak, post-liquids era. More broadly, to the extent Colorado uses net fossil fuel earnings to build more rail transport and while also embracing wind and solar (with its above average sunshine supply) the Rocky Mountain State is already conducting its own version of energy transition.

-Gregor

Photo: Willow Creek, Colorado 1942. By Andreas Feininger 1906-1999 via Library of Congress on flickr.

Further Reading: The Grand Energy Transition, by Robert Heffner

The 2007-2008 spike in gasoline prices drove large numbers of L.A. drivers to newly emerging public transport. As Los Angeles builds out its Metro system and awareness grows that car culture is in decline, we are seeing some proposals from the cycling community that are bold, and ambitious. Below is a map from the L.A. Bike Working Group that proposes a kind of cycling freeway system. I think that’s a great idea.

The Backbone Cycling Network echoes some themes in an essay I wrote for The Oil Drum, back in December. Project for a Revolution in Philadelphia proposed that cities, as the world now passes into another historic energy transition, begin to concentrate more fully in three, key areas: Food, Energy, and Wheels. While my essay was ostensibly about Philadelphia, I envisioned local agriculture, distributed energy, and rail and bikeway buildout as essential strategies for American cities to cope with the post-peak era.

Los Angeles, for its part, has to be commended for its Light Rail buildout and I would hope the city will additionally understand that a robust cycling culture adds value to the public transport system. Rail buildout takes time, and to the extent a city links its emergent transport system to bikeways the more quickly it will build ridership. Adoption of rail transport has not been the problem initially feared, when LA began to maneuver towards rail over 20 years ago. But whatever strategic advantages cities hope to realize. from new rail transport. can be nicely amplified by the promotion of cycling as yet another transportation solution.

There is an additional proposal before the City Council for expanding bicycle use in the city of Los Angeles, and I’m not going to evaluate that today, or compare it to the Bike Working Group’s. Rather, I just want to use the occasion to say that many in the resource and peak oil community are very concerned with transportation issues. And so I’d encourage all bike groups to feel confident that big trends in the world of energy are the wind at their backs.

-Gregor

Graphic: from Los Angeles Bike Working Group:  FaceBook Page | Backbone Network Page

Photos: from Rapha Rides Los Angeles (yes it’s a British maker of cycling gear but I like their stuff)

–from Pyrography, by John Ashbery 1987

The inevitable coming of the sovereign debt panic finally engulfed Europe this week as the derisively (or perhaps affectionately) named PIGS spilled their slop on the continent. But Portugal, Ireland, Greece, and Spain are hardly worthy of so much attention. In truth, they are little more than the currently favored proxies among the leveraged speculator community (cough) for the larger problem of all sovereign debt. Indeed, the credit default swaps on these smaller European satellite states were not alone this week in making large moves higher. UK sovereign risk rose strongly, and so did US sovereign risk. With a downgrade warning from Moody’s to boot.

Notable among three of the PIGS are their relatively small populations, and small contributions to either world or European GDP. While Spain has a population over 45 million, Portugal and Greece have populations roughly equal to a US state, such as Ohio–at around 10 million. And Ireland? The Emerald Isle has a population similar to Kentucky, at around 4 million. While the PIGS are without question a problem for Europe, whatever problems they present for Brussels are easily matched by the looming headache for Washington that’s coming from large, US states such as California, Florida,  Illinois, Ohio, and Michigan.

I’ve identified seven large US states by four criteria that are sure to cause trouble for Washington’s political class at least for the next 3 years, through the 2012 elections. These are states with big populations, very high rates of unemployment, and which have already had to borrow big to pay unemployment claims. In addition, as a kind of Gregor.us kicker, I’ve thrown in a fourth criterion to identify those states that are large net importers of energy. Because the step change to higher energy prices played, and continues to play, such a large role in the developed world’s financial crisis it’s instructive to identify those US states that will struggle for years against the rising tide of higher energy costs.

First, let’s consider a large state that didn’t make my list. Texas didn’t make the list because its unemployment rate has not risen high enough to reach my cutoff: a state must register broad, U-6 underemployment above 15%, and currently Texas has only reached 13.7% on that measure. Also, Texas’s total energy production nearly perfectly matches its total energy consumption. Of course, Texas has indeed had to borrow more than billion dollars so far to pay unemployment claims, thus technically bankrupting its unemployment trust fund. That meets my criteria. But, it’s instructive to note Texas’ energy production capacity in this regard, as that produces dollars. And one of the big reasons US states are under so much pressure, like their European counterparts, is that they cannot print currency. Being able to produce oil and gas is the next best thing to printing currency. So, Texas doesn’t make my list.

The seven states to make my list are California, Florida, Illinois, Ohio, Michigan, North Carolina, and New Jersey. Each has a population above 8 million people. Each has had to borrow more than a billion dollars, so far, to pay claims out of their now bankrupt unemployment insurance fund. Also, each state currently registers broad, underemployment above 15% as indicated by the U-6 measure for the States. And finally, each state is a large net importer of either oil, natural gas, electricity, or all three of these energy sources.

Let’s consider the overall predicament for residents of states like California, with its epic housing bust, Ohio and Michigan at the end of the automobile era, or North Carolina and New Jersey in light of the financial sector’s demise. Not only have states such as these permanently lost key sectors that once drove their economies, but, residents in these states are over-exposed to structurally higher energy costs. The prospect for wage growth in the United States is now dim. We are already recording year over year wage decreases in real terms. The culprit? Energy and food costs. My seven states are squeezed hard at both ends: no wage growth at the top, and no relief through cheaper energy costs at the bottom.

US wage growth in real terms has been stagnant for years. And the most recent decade of higher oil prices has been particularly punishing to states over-leveraged to the automobile like California, Florida, and North Carolina where highway and road systems dwarf public transport. While it’s true that states like Ohio and California produce some oil and gas, the size of their populations overwhelm any production with outsized demand for electricity and gasoline. In contrast, and as I mentioned, it will be revealing to see how this depression ultimately plays out in such states as Colorado, New Mexico, Wyoming, Oklahoma, North Dakota, and Louisiana which are all net exporters of energy.

Were it not for peak oil, gasoline prices would have fallen to a dollar during this depression as oil returned to the lows of the late 1990’s–if not even lower. Petrol at 90 cents a gallon would begin to chip away at the  painfully decreasing spread between punk wages and energy input costs, currently endured by underemployed Americans. Natural gas and coal prices are also much higher than they were at the lows of the 1990’s. And I need not remind: while energy prices are very 2010, the American workforce has lost so many jobs that our labor force has indeed returned the 1990’s.

21st century energy prices overlaid on a 20th century economy? That’s no fun at all. The mainstream economics profession, perhaps unsurprisingly, still does not pay enough attention to the interweaving of long-term stagnant wage growth, higher energy inputs, and the resulting credit creation that OECD countries took as the solution to resolve that squeeze. Given that one of out of eight Americans takes food stamps, a visit to states like Illinois, Florida, Ohio, and North Carolina would reveal that the difference between 15 dollar oil and 75  dollar oil, and 2 dollar natural gas and 5 dollar natural gas is large.

My seven states of energy debt represent a full 35% of the total US population. As with other US states, they face looming policy clashes between protected state and city workers on one hand, and the growing ranks of the private economy’s underemployed on the other. The recent circus at the LA City Council meeting was a nice foreshadowing that the days of unlimited borrowing by governments–against future growth based on cheap energy–is coming to an end. Washington can print up dollars and fund these states for years, if it so chooses. But just as with the 70 million people in Portugal, Italy, Greece and Spain, the 108 million people in these seven large states are probably facing even higher levels of unemployment as austerity measures finally slam into their cashless coffers, and reduce their ability to borrow.

-Gregor

Photograph: from FREZNO, a new book of photos by Tony Stamolis, available now at Process Books.  (I bought a copy and it’s brilliant. For those who study California, it’s a must-have addition to your bookshelf)

Podcast link here: Eric and Gregor February 2010.

-Gregor

Photo: Oscillon 520 by Ben Laposky, 1960. An early example of computer generated art, courtesy The Victoria and Albert Museum, London.

I came across this photograph today while listening to a macroeconomic panel session from Davos. I was multi-tasking at the time. Which is to say, I was writing my monthly research note which generally runs 15 pages. And so I was pushing global coal data into Excel, and making charts with that data, and then pulling those charts into Microsoft Word, and then testing it all out in quick conversions to Adobe Reader. (The charts are looking fine). The voice of Nouriel Roubini played in the background. He was saying something about the back half of 2010. Or was it the front half of 2011? Years that once seemed so far away are now arriving.

If you’re still thinking about the photograph, you could always google now for used rainbows. I’m sure you’ll find the photograph, and you may find other ideas too. After all, that’s exactly how I found that image: by breaking away from my writing as the Davos panel played in the background. I was getting to the part in my research report where I talk about oil surpassing coal. That happened in 1965. After several hundred years of coal domination, the world switched mainly to oil. As I search the LIFE magazine archives for 1965 photographs, David Rubenstein begins to speak from Davos. David was saying that alot of people were going to make alot money, from deals they did in 2009. He also said the worst for the economy was over. Then he takes a swipe at economists after offering faint praise for Roubini.

Just as they start to laugh at Davos I find a nice image of the Gemini space walk, November cover of LIFE magazine 1965. I also notice my stock market screen and see everything has turned red, as the afternoon close approaches. I’m liking my research note. In one of those rare coincidences that only comes along so often, I think back to the bedtime story I read the night before to my son: Mike Mulligan and His Steamshovel, published in 1939. Adoption of oil was slow and steady in the United States in the first half of the last century. And then it broke out strongly to the upside after World War Two. The 1939 children’s story captures this perfectly, as Mike’s beloved steamshovel, named Mary Anne, is replaced by oil based machines. Speaking of rainbows and 1939, The Wizard of Oz was made in 1939.

Today is Friday the 29th of January and I start to recall that last week I emailed BLS.gov, the Bureau of Labor Statistics, asking when they would produce the broader measure of unemployment for individual States. I search for the reply in my gmail inbox.  But by the time I learn the full year 2009 data for the States is due out today, I am already opening the link to the webpage. It’s here! Published. Right there in the Alternative Measures of Labor Underutilization for States section. (Alot of people don’t know about this data. It is, after all, a new series). There is of course one state in particular I am watching out for: no surprise, California.

Starting last year with a series of posts, a Financial Times article, and a couple of interviews, I began to make the case that California was so leveraged to cheap oil via its automobile system that now with the arrival of the high oil price era California would never be able to recapture the efficiencies that made it work so well, at 25 dollar oil. I  also conjectured that Americans would finally accept that we were in an inflationary depression should oil get to 100 dollars a barrel on top of, say, 15% unemployment in the Golden State. Well, we did see oil get as high as 84 dollars. And while the standard measure of unemployment has reached 12.4% in California (the highest since WW2), the broader measure rose as high as 19.6% at the end of the third quarter 2009. Given that I watch all data and news out of the state quite closely, I figured the final quarter would take U-6 above 20%. And that’s exactly what was reported today. California broad unemployment has now reached 21.1%.

If you recall the 1939 children’s story mentioned before, Mary Anne the steamshovel tries to prove her worth by digging a new town hall foundation all in one day. She and Mike dig so fast, however, that they wind up at the bottom of the pit with no way out. You know it’s the end of Mary Anne’s productive life as the world transitions from the Coal Age to the Oil Age. Mike proposes that she be kept down there, in what will become a Town Hall basement, to be refitted as the boiler plant for the new building. I suppose this is a consolation, a form of happiness. When I read the story to my son, he goes quiet.

My monthly research note has a tough message also. It was only 55 years ago that the world crossed over to use more oil than coal. In another five years, we will be going back to coal. As I restart the Davos videocast the voice of David Rubenstein comes back up again on my media player. David is saying you really can’t prevent bubbles.  Agreed. Then David says we’ll have bubbles for another 600 years to come. I don’t agree. Arif M. Naqvi, on the same Davos panel, makes the point that in world of plateauing and then declining oil supply, the GCC (Gulf Coast Council/MidEast countries) will increasingly gain influence over the remaining supply of oil, and that will spawn a number of serious pressures. Agreed, agreed, and agreed. Out of 227 sessions at Davos over five days, only two session actually contained the word “energy.”

As I study the unemployment data out of California, Michigan, South Carolina, I bring the Davos video to the front of all my windows and I can see the dark blue, windowless room in which the session has been taking place. They’re getting to the end now. A somewhat passionate man from California stands up to explain that his venture capital business had a great year last year, but the problem now in the world (as he sees it) is that innovation may not necessarily lead to a decrease in global unemployment. Into my research report I insert images of Wood, Coal, the logo from the World Economic Forum, and a photo of the 1965 space walk. I push the Davos video into the background again. But I can still hear the voice of a conference organizer. She pleads with everyone to exit as they prepare for the next session.

-Gregor

Photos: 1965 LIFE Magazine cover. | Mike Brodie (The Polaroid Kidd) from the Riding Dirty Face series, via Needles and Pens Gallery, San Francisco. | Mike Mulligan and His Steamshovel.