Peak Oil

The Future of Nuclear Energy: Facts and Fiction - Part IV: Energy from Breeder Reactors and from Fusion?

Mon, 09 Nov 2009 14:51:00 GMT

This is the fourth part of a four-part guest post by Dr. Michael Dittmar. Dr. Dittmar is a researcher with the Institute of Particle Physics of ETH Zurich, and he also works at CERN in Geneva.

The accumulated knowledge and the prospects for commercial energy production from fission breeder and fusion reactors are analyzed in this report.

The publicly available data from past experimental breeder reactors indicate that a large number of unsolved technological problems exist and that the amount of "created" fissile material, either from the U238 → Pu239 or from the Th232 → U233 cycle, is still far below the breeder requirements and optimistic theoretical expectations. Thus huge efforts, including many basic research questions with an uncertain outcome, are needed before a large commercial breeder prototype can be designed. Even if such efforts are undertaken by the technologically most advanced countries, it will take several decades before such a prototype can be constructed. We conclude therefore, that ideas about near-future commercial fission breeder reactors are nothing but wishful thinking.

We further postulate that, no matter how far into the future we may look, nuclear fusion as an energy source is even less probable than large-scale breeder reactors, for the accumulated knowledge on this subject is already sufficient to say that commercial fusion power will never become a reality.

(Links to 1^st, 2^nd, and 3^rd parts)

1. Introduction

Over one hundred years ago, physicists began to understand that a huge amount of energy could be obtained from mastering nuclear fusion and fission energies. For example, the production of only 1 kg of helium from hydrogen "liberates" a thermal energy of about 200 million kWh. In the sun, this fusion reaction transforms about 600 million tons of hydrogen into helium every second, thus liberating 4 × 10²⁶ Joules per second.

The understanding of nuclear physics and its technological applications proceeded with breathtaking speed. It took only seven years from the discovery of the neutron in 1931 to the observation of the neutron induced fission of uranium at the end of 1938. This was followed, on the 2^nd of December 1942, by a sustained nuclear chain reaction with a power of 0.5 Watt (and up to 200 Watt at a later time) by E. Fermi and his team in a laboratory located below the Chicago University football stadium [1]. The next steps in using nuclear energy were the explosions of the Hiroshima and Nagasaki fission bombs, on the 6^th and 9^th of August 1945, resulting in more than 100,000 deaths and the beginning of the nuclear arms race. Only a few years after the first fission bombs exploded, the USA and the Soviet Union had constructed hydrogen fusion bombs. These bombs were up to 1000 times more powerful than the Hiroshima fission bomb.

Also the peaceful application of nuclear fission energy advanced very quickly: by 1954, the thermal energy from a controlled fission chain reaction could be used to produce commercial electric energy [2]. During the next 30-40 years, a large number of commercial nuclear power plants were constructed in most industrialized countries.

The rapid scientific and technical success in bringing this form of power into the production of commercial energy was impressive. Many nuclear pioneers expected that nuclear fission and fusion would provide their grandchildren with cheap, clean, and essentially unlimited energy. In fact, these successes led most of us to a euphoric and blind belief in continuous scientific and technological progress.

In contrast to such dreams, nuclear fission energy nowadays is not cheap, and even the most optimistic nuclear fusion believers do not expect the first commercial fusion reactor prototype until after 2050. One observes further that nuclear fission energy has been stagnating for about ten years and that its relative share in the worldwide electric energy production has decreased from about 18% during the nineties to only 13.8% currently [3].

Furthermore, the average age of the existing nuclear power plants, the limitations of primary and secondary uranium resources as well as the problems related to nuclear proliferation and nuclear waste all lead to doubts about the prospects of the standard water moderated nuclear fission reactors. In fact, it seems clear at this point that as fossil-fuel energy production declines, sufficient energy to ensure the survival of our highly industrialized civilization cannot come from a rapid growth of nuclear fission energy of this sort.

The problem with the limited amount of economically producible uranium resources can theoretically be addressed with the mastering of the technology of nuclear fission breeder reactors. It is claimed that this technology could increase the amount of fissile material from uranium by a factor of 60-100 and much more if the thorium breeder cycle can be realized [4]. It is believed that breeder technology will enable us to bridge the time gap before nuclear fusion energy, which would become the "final solution" to all energy worries, can be mastered [5].

In this fourth and final part of the Future of Nuclear Energy report, we discuss the experience with past and current breeder reactors in Section 3. We analyze how the remaining problems will be addressed with the worldwide Generation IV breeder reactor program and with thorium based breeder reactors (Section 4). The remaining obstacles towards a controlled and sustained nuclear fusion reaction chain are presented in Section 5. In order to simplify the discussion, we start in Section 2 with some facts and basic physics principles of nuclear fission and fusion energies.

2. Energy from nuclear fission and fusion, some facts and physics

As we have discussed in detail in parts I-III of this report [6], the publicly available data on long term worldwide natural uranium supply are in conflict with even a moderate annual 1% growth rate for conventional water moderated reactors.

Consequently, believers in a bright future of nuclear energy should concentrate their efforts on either (i) the realization of nuclear fuel breeder technology based on the uranium cycle, U238 to PU239, and/or the thorium cycle, TH232 to U233, or (ii) the mastering of commercial nuclear fusion reaction. In this section, an overview of the existing and planned nuclear reactor types and the experience with fast breeder reactors (FBR) is given (2.1). This is followed by a basic summary of the most important principles relevant to the use of nuclear fission and fusion energies (2.2 to 2.4).

2.1. Some facts concerning existing and planned nuclear reactor types

The worldwide nuclear fission reactors produced 2601 TWhe during the year 2008, or roughly 14% of the worldwide electric energy.

For the year 2009, one finds that commercial nuclear energy production will come from 436 nuclear fission reactors with a combined nominal electric power of 370,260 GWe [7].

Table 1: The evolution of different reactor types and their corresponding electric power ratings from the IAEA/PRIS data base (October 2009) [7]. Another five reactors are listed in the "Long Term Shutdown" category, four of which are PHWR's and the fifth is the 0.25 GWe Monju sodium cooled FBR reactor in Japan.

The PRIS data base of the International Atomic Energy Administration (IAEA) shows that the dominant reactor type today including reactors that are currently under construction is the water moderated fission reactor type. The abbreviation PWR (PHWR) stands for pressurized (heavy) water reactor whereas BWR denotes the boiling water reactor. As can be seen from Table 1, these reactors provide over 94% of the nuclear fission power worldwide. The remaining 6% of the nuclear fission power comes from graphite moderated and water or gas cooled older and smaller reactors. It seems that the PWR type has won the competition for the existing reactors and for the next generation of reactors by a large margin.

One observes that only two FBR's are declared operational. A third FBR has been in a "long term shutdown phase" since 1995. The two operational FBR's contribute together 0.2% of the world nuclear power. This tiny contribution from FBR's today is even smaller than it used to be. In the list of 122 decommissioned reactors, one finds 6 FBR's with a combined power of 1.6 GWe, or 4.3%. In the list of 53 reactors (October 2009) currently under construction, one finds only two relatively small FBR's.

These numbers indicate not only that FBR's play a negligible role today and during the next 10 years, but also that their operation experience is far from being an economical and technological success story. Some more details on the worldwide experience with various types of commercial FBR and thorium fuel breeder reactors and their operation are listed below:

The best operation experience comes from the Russian BN-600 FBR reactor with a rated power of 0.56 GWe. This reactor has been operated commercially for 28 years and is scheduled to close in 2010 [8]. Its average energy availability is given as 73.79%. In a document from the IAEA fast reactor data base [9], one finds that this reactor would be better called a "Fast Reactor," as it was designed to use more fuel than it could produce. A new BN-800 reactor with 0.8 GWe is currently under construction in Russia, and its scheduled start is now given as 2014. Like its smaller "brother," it is designed to consume Pu239 rather than breed surplus fissile material.
The other "operating" FBR is the Phenix reactor in France. Phenix originally started operation with a power of 0.233 GWe in 1974. Since 1997, it is rated with 0.13 GWe only, and an energy availability factor of 60.23% is given for 2008. According to the WNA (World Nuclear Association) data base, it ceased power production in March 2009 and will continue being operated as a research reactor until October 2009 [10]. The larger Super Phenix reactor, with a power rating of 1.2 GWe, achieved a maximal energy availability of 32.6% only. This very low performance, in comparison to PWR's, was achieved during the last operational year (1996) after a very short lifetime of only 10 years.
The Monju reactor in Japan was closed after a serious sodium leak in 1995. For many years now, the reactor is scheduled to "restart the subsequent year." Perhaps this time, it will really restart during the first few months of 2010 [11].
A next generation FBR reactor is currently under construction in India. According to the current plans, it will start producing electric energy during the year 2011 [12].
The KNK II reactor in Germany is listed in the IAEA data base [9] with a tiny capacity of 0.017 GWe. During its operational lifetime, 1978 to 1991, it achieved an average energy availability factor of 23.65%. A larger FBR, the SNR-300, with a rated power of 0.3 GWe was completed in 1985, but for various reasons never started. A large 1.5 GWe FBR, the SNR-2, never completed even the design phase.
A limited experience with a thorium admixture in the nuclear fuel in commercial prototype reactors exists as well. A WNA document mentions two THTR's (Thorium High Temperature Reactors) [13]: one with 0.3 GWe in Germany, which operated commercially between 1986 and 1989; the second was the Fort St. Vrain reactor with a power rating of 0.33 GWe in the USA. It is listed as the only commercial thorium-fuelled nuclear plant, following closely the German design. It was operated between 1976-1989.
The WNA document mentions further that the experimental Shippingport reactor in the USA, with a power rating of 0.06 GWe, has successfully demonstrated the concept of a Light Water Breeder Reactor (LWBR) using thorium. The Shippingport reactor began commercial electricity production in December 1957. In 1965, the Atomic Energy Commission started designing the uranium-233 / thorium core for the reactor. The reactor was operated as a LWBR between August 1977 and October 1982.

Several countries have so far managed to construct GWe water moderated slow neutron reactors, mostly of the PWR type. These reactors were operated safely and efficiently for many years, using U235 fuel enriched to 3-4%.

In contrast, large breeder reactors, based on a large amount of initial fissile material and the transformation of U238 and Th232 for breeding new reactor fuel, have so far not even successfully passed a prototype phase.

2.2. Energy from nuclear fission and fusion, some basics

Atoms consist of a nucleus, made of protons and neutrons, and electrons. The size and the chemical properties of atoms are defined by the number of electrons surrounding the nucleus. The combined mass of the protons and neutrons, each 2000 times heavier than the electrons, defines roughly the mass of the atoms. As the nucleus is 100,000 times smaller than the atom, it follows that its mass density is huge in comparison with that of the atom. The same chemical characteristics can be expected for atoms with a fixed number of protons and with different numbers of neutrons, and the energy in chemical reactions is of the order of 1 eV (1.6 × 10^-19 Joule). As the nuclear properties of an atom depend on the number of neutrons, the name isotope has been introduced to separate the chemically identical atoms according to their numbers of neutrons.

Without going into details, it is known today that the energy source of the sun and other stars is nuclear fusion. This fusion starts from the large number of hydrogen atoms present in the sun. The fusion reaction in stars is possible because of the enormous gravitational pressure that overcomes the electric repulsive force between positively charged protons. Fusion is the source of all heavier elements that were formed in super-novae explosions of super large early stars and shortly after the big bang. For our subsequent discussions on nuclear fusion, it is important to note that a relatively low fusion power density of about 0.3 Watt/m³, is found in the sun [14]. In contrast, the power density envisaged for a hypothetical fusion reactor must be at least one million times larger.

The nucleus is bound by the very strong nuclear force, which acts against the repulsive electrostatic force of the protons. Measurements have shown that the mass of the various atoms is almost 1% smaller than the mass of the individual protons and neutrons combined. Following Einstein's famous E = mc² formula, this mass defect corresponds to a huge amount of energy, about 8 MeV (8 million eV) per nucleon. This energy is liberated when one manages to fusion different nucleons together. Starting from the different hydrogen isotopes, e.g. one proton, deuterium (one proton plus one neutron), and tritium (one proton plus two neutrons), a binding energy of up to a few MeV is found. Further fusion of these hydrogen isotopes into the helium nucleus liberates another roughly 20 MeV.

Neutrons and protons in heavy atoms, such as uranium, are less strongly bound than in lighter atoms, such as iron, and energy can be released in the fission of such heavy atoms. For example, 1 MeV per nucleon, or 200 MeV in total, will be liberated in the fission processes of U233, U235, and U238, each containing 92 protons and 141, 143, and 146 neutrons, respectively. The energy liberated per fission reaction is at least 100 million times larger than in a chemical reaction.

It is therefore not surprising that this has created an enormous interest in subatomic physics and its application for ultimate weapons and/or for the commercial use of energy.

2.2.1. Civilian and military use of nuclear energy, some remarks

The focus of this report is the commercial use of nuclear energy. As the evolution of nuclear energy has always been strongly coupled with the military sector, we feel that a few remarks about the dangers of nuclear weapons and the ambiguity of the commercial use of nuclear energy are needed. First of all, governments wishing to have nuclear weapons were not faced with unsolvable problems related to the development of fission bombs based on Pu239 and U235. This is especially true if nuclear physics and engineering knowhow had been built up under the umbrella of peaceful and commercial use of nuclear fission energy.

Furthermore, it is interesting to notice that advocates of nuclear fission energy like to explain why the dangers from nuclear weapons are far less alarming than believed. This is usually followed by the statement that their praised future nuclear energy technology will avoid proliferation problems. A similar appeasement in their argumentation is found with respect to safety and radiation issues. The existing nuclear power plants are claimed to be very safe, and risks are small compared to many other dangers of modern life. Yet, when their favorite future nuclear energy system is being introduced, it is always pointed out that it further reduces the remaining risks by a large factor.

For example it is often argued that U233 produced in a future Th232 breeding cycle will be useless for nuclear weapons. This argument is certainly flawed as countries who want to have nuclear weapon capability will most likely choose the simpler way to make a bomb using Pu239 or U235. Yet, those who know how to breed and separate hundreds of kg's of U233 can easily replace Th232 with U238 and produce a few tenths of kg's of Pu239, sufficient to construct a few nuclear bombs.

Those not yet convinced of the mutual support of peaceful and military applications of nuclear energy technology should rethink their positions with respect to the Nuclear Proliferation Treaty, the NPT, and to the so-called "evil" government of Iran.

A careful reading of the treaty [15] reveals that Iran, at least so far, is in agreement with the NPT obligations. However one finds that NPT member countries should not exchange nuclear knowledge with nuclear weapon countries outside the treaty. It is also worth remembering that the official nuclear weapon states, Russia, USA, UK, France, and China, have declared in the treaty their intention to eliminate nuclear weapons as quickly as possible. Almost forty years after these countries signed the NPT, they still have more than 20,000 nuclear warheads.

The nuclear arms race at the end of the second world war and during the subsequent cold war is well documented in many reports, books, and movies, and we refer to the extensive literature largely available now on the internet. Especially for those who are not yet convinced about the dangers of nuclear weapons, we would like to recommend the short you-tube video on the largest explosion ever, the 60 Megaton hydrogen bomb in Siberia in 1961 [16] and to Stanley Kubric's masterpiece movie "Dr. Strangelove, or how I learned to stop worrying and love the bomb" from 1964 [17]. This film, even though almost 50 years old, presents many still relevant ideas related to the 20,000 remaining nuclear warheads.

2.3. Liberating the energy from nuclear fission and fusion

As we have seen in the previous section, a large amount of energy per reaction can be liberated from the fusion of light elements and from the fission of heavy elements like uranium. However at least two additional conditions must be satisfied before such a process can be considered for energy production.

In order to obtain a useful amount of energy from nuclear reactions, a continuous and controllable fission or fusion must be achieved for a large number of atoms. For example 10²⁰ U235 atoms, i.e., 0.05 gr, the amount of U235 found in 6 gr of natural uranium, need to be split every second in a 1 GWe nuclear fission reactor.
Enough raw material must be continuously available to sustain this chain reaction.

Only three relevant isotopes satisfy these conditions for the nuclear fission process. These are the two uranium isotopes U235 and U233 and the plutonium isotope Pu239. The energy liberated in the fission process is carried dominantly (about 80%) by the two daughter atoms. This energy is relatively easily transferred to a liquid or gas, and the heat can be used to operate a generator.

The chain reaction is possible as each neutron induced fission reaction produces on average between 2-3 neutrons. As one neutron is needed to initiate another fission reaction, 1-2 excess neutrons minus some inevitable losses are in principle available to increase the reactor power or perhaps to start a nuclear fuel breeding process. The introduction of neutron absorbers allows to control the reactivity of the nuclear reaction and thus to increase or decrease the reactor power.

As we have seen in Section 2.1, most of the large scale nuclear power plants of today are of the PWR (pressurized water reactor) type. They use dominantly U235 as primary reactor fuel. In these reactors, the prompt fission neutrons, with kinetic energies of 1 MeV, are slowed down (moderated) by elastic collisions with the hydrogen nuclei in the water molecules to subeV kinetic energies. The nuclear fission probability with such slow neutrons is increased by a factor of up to several hundred. As a consequence, a large reactor can be efficiently operated and controlled with a relatively low initial enrichment of U235, and large scale power production with moderated neutrons has been mastered by many countries. The combined running experience of such large scale reactors, currently more than 13,000 years, has resulted in stable electric energy production combined with small or negligible risks during regular operation up to an electric power output of more than 1 GWe.

In contrast, the neutron escape rate in smaller reactors and in unmoderated fast reactors is much higher. Therefore, a chain reaction in FBR's with comparable reactor power is more difficult to control, and a larger amount of initial fissile material with a higher density is needed. One consequence is that the required technology to make such highly enriched nuclear fuel will always be faced with the problem of its dual use for bomb making.

The use of the excess neutrons for the transformation of the U238 and Th232 isotopes into fissile Pu239 and U233 looks very promissing, as the amount of fissile material could be increased theoretically by a factor of more than one hundred. The breeding reactions considered would use the excess neutrons according the two reactions:

Some advantages and disadvantages for the U238 → Pu239 and the Th232 → U233 breeding cycles and some practical problems are listed in Table 2. Some of these problems and their proposed solutions will be discussed in detail in

The US stimulus and "green jobs"

Mon, 09 Nov 2009 05:59:00 GMT

Recently, there have been worried or angry or outraged articles in the blogosphere about the stimulus money going to help create jobs in Canada, China, or going into the pockets of foreign multinational companies.
I'd like to make a few comments on this.
part of my series on wind power

one of the reasons US projects need to import foreign-manufactured turbines is that the US-based production capacity is currently equal to less than 2/3 of the overall US market for new installations. Just under 8,000MW will be installed this year, with a current manufacturing capacity of 5,500MW. Many manufacturers are investing to build new factories, but this will take time;
the main reason there is not enough manufacturing capacity is because the US has an appalling track record in supporting the industry: 3 times over the past decade, Congress allowed the main regulatory instrument, the PTC, to elapse, causing a catastrophic drop in installations:This had global consequences - the disappearance of one quarter of the world market is not an easy event to deal with - and almost caused the bankruptcy of several turbines manufacturers (some were bought out). Ever since, manufacturers have probably undersized their investments, in order to be able to deal with such a potential drop in demand, and they mostly avoided the US as a production base as a result, even though there are serious logistical advantages in this (heavy) industry to be located near your market. There is no secret: the only way to have manufacturing investment in an industry which needs no subsidies, but a specific regulatory framework is to have stable policies and, dare I say it, an industrial policy to promote both the wind industry (a good thing in itself) and the wind turbine manufacturing industry. This is still missing, right now. States are doing this at the local level, but it would make a lot of sense to do it at the federal level.
One of the reasons why the early federal grants have gone to European companies is that they are amongst the main investors in the sector in the US (and globally) - because they are familiar with the sector, because they know how it works, because they have better access to the (artificially scarce) turbines, and are willing to invest in the US whenever it makes sense to do so. The sector is now a strategic activity for most big utilities in Europe, initiially because they were forced by public authorities to invest, and now because they like the returns they get, and they have massive investment programmes at home and elsewhere. And the European suppliers are following them. Protectionism might choke that source of investment.
additionally, a large part of the money being invested in the US wind sector actually comes from European banks. The industry has largely been financed by project finance (which is my job), and that is a lending activity and not a capital markets activity - thus it did not interest US investment banks. So European bank balance sheet money has poured into the US wind sector to the tune of many billion dollars per year over the last several years. The financial crisis disrupted this for a while, but the European banks are now back at it. Again, protectionnism might be a double-edged sword.
furthermore, a lot of the US-based solar manufacturing industry has come to life thanks to the generous tariffs provided in Germany and Spain for solar power: this help built the local industry, but significant amounts also went to manufacturers from around the world, including some large US players.
While the worriers note that 50% of the jobs in wind come from manufacturing, it is also true that the other 50% are local (installation and long term maintenance and by nature not offshoreable - these will stay for the long run (that's more jobs than when you buy oil or coal-fired electricity, in any case); separately, building wind power generation is a good thing per se, avoiding carbon emissions, reducing dependency on fossil fuels (while natural gas is plentiful this year, there are still plenty of long term worries) and offering a stable-priced long term generation capacity.

As Natasha Chart noted in her sensible article on the topic, there are a few things that can be done:

local content requirements (say, 30-50% of the investment) are legal, and legitimate, and can help build up the local infrastructure and industry;
but they will work only in the framework of stable policies that are long enough, and credibly so, and not subject to the whims of politicians too scared of "socialism" or "subsidies" to keep at it;

The reality is - you get what you want. You cannot have the creation of large scale manufacturing employment without, again, an industrial policy. If you can't own up to a concept that too many seem to see as "socialist," all you'll get will be haphazard results, benefitting those that do have consistent policies and the infrastructure that goes with it, who will be able to take advantage of semi-random bursts of public support dictated by urgency or short term political grandstanding rather than properly designed.
In other words, if you want large-scale renewable energy investment, you have to accept the reality of the market today (ie it is dominated by European companies, with the Chinese pushing in), and put in place the policies that will make it attractive to invest in the US for the long term.

The Backside of Peak Oil

Mon, 09 Nov 2009 05:56:00 GMT

You'd be surprised how many people tend to overlook bad news.

This morning, this fact was reiterated for me. I had gotten into a disagreement with a friend of mine. She was born and raised in Alaska.

It was a simple conversation. . . but what started out as us catching up with one another quickly escalated.

Our conversation turned to the topic of Hurricane Ida. I remarked that it felt very late in the hurricane season. The Atlantic hurricane season officially ends with the month of November. The last I had heard, Ida was moving into the Gulf of Mexico and companies are beginning to evacuate their workers.

That makes perfect sense, right? The obvious result would be for output in the Gulf of Mexico to be disrupted.

The topic soon changed to U.S. oil production in general.

Unfortunately, my friend falls into the category of those who "overlook bad news" — especially when it comes to her home state's problem with oil production. I'm still amazed to find people that have no idea about peak oil.

She didn't realize was how bad things have gotten for some places. . .

Wall Street's Energy Bombshell

Morgan Stanley --and a group of other high-powered Wall Street banks-- just

announced they'll no longer fund fossil fuel-related energy projects.

That means trillions in "new money" will now be created in alternative energy.

And here's where the first round of profits will come from. . .

The Backside of Peak Oil

It's no secret that production in the United States has been tumbling down the backside of peak oil for the last three decades.

I haven't met anyone that believes U.S. production will ever return to its 1970 production level.
Believe me, peak oil in the U.S. isn't a myth. It's about as real as it gets.

In fact, it gets downright ugly when you look at our top oil producers.

Let's take a closer look. . .

Roughly half of U.S. oil production comes from just three states: Texas, Alaska, and California. When I said earlier that most people overlook bad news, I meant it.

In the last 29 years, Texas has managed to increase year-over-year oil production twice. Since 1981, production has fallen by 57%. As you can see from the EIA's data, record oil prices just weren't enough to save production.

My friend's home state isn't faring much better. Alaska's North Slope oil production — which makes up 98% of the state's production — peaked in 1988. Care to know how far Alaska is down from the peak? The state's crude production has plummeted 66% since the peak.

Coincidentally, Alaska's year-over-year production declined 14% in 2006, the same year that Texas squeaked out a 2.4% increase. (For now, let's just set the ANWR debate aside. We'll save that mess for another day.)

It's the same story for California, our third-largest oil producing state. The Golden State's crude production has declined 47% since peaking in 1985. You probably remember the Kern County Oil Flop from last August.

Doesn't paint a pretty picture, does it?

Fortunately, not all of U.S. future production is doom and gloom. . .

The Bright Spot in U.S. Production

Unlike Texas, Alaska, and California, our fourth-largest oil producer has a much brighter outlook.

After five straight years of production growth, North Dakota has officially claimed fourth place. As you know, we can attribute this state's success to developing the Bakken formation. Last year, production jumped nearly 40%.

That shouldn't come as a shock to my readers. They've known about the Bakken formation for years. And with the latest news about the new Three Forks-Sanish formation, can we really expect anything else?

In fact, it's downright profitable.

However, be sure to put things into perspective when comparing these states. Even though North Dakota's oil industry is booming, the state is only pumping approximately 215,000 barrels per day. That's compared to the one million barrels flowing daily from Texan wells. California was producing approximately 572,000 barrels of oil per day back in June.

Granted, North Dakota still has quite a ways to go before overtaking the third spot for U.S. oil production. . . but that gap will be narrowed considerably over the next decade. It's inevitable — especially when taking their declining production into account.

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So how can we be sure that things are still heating up for North Dakota's oil industry?

It's simple.

Just take a look at the latest auction of drilling rights. It brought in a record amount of money. Companies were shelling out an average of $1,214 per acre. A total of $71.6 million was raised.

Here's how it works: The winning bids have the right to drill for oil on the leases for five years. If they don't develop the land within the five years, the land can be leased again. In other words, these companies aren't looking to sit on that land.

Many of you know exactly what kinds of gains that can be made. Members of the $20 Trillion Report have been riding this oil boom for years and have had tremendous success trading the hottest Bakken players. I'll let you check it out for yourself.

There's no need to worry if you missed out on the first run. In fact, things are just getting started. Looking ahead, there's one thing that's missing from the entire picture and within the next two years, it's going to become blatantly obvious to everyone.

Without it, production from the Bakken will fade. . . and next week, I'm going to tell you exactly what it is they're missing.

Until next time,

Keith Kohl

Energy and Capital

The Next Benchmark for Oil Bulls

Sat, 07 Nov 2009 08:03:00 GMT

Welcome to the Energy and Capital Weekend Edition — our insights from the week in investing and links to our top articles from Energy and Capital and sister publications.

What began as a rally for oil this week ended in disappointment.

Opening at $77.02 per barrel on Monday, crude prices quickly moved higher.

By Wednesday, the EIA reported a four million barrel inventory drop. However, keep in mind that inventory levels are still 24 million barrels higher than a year ago. The news was enough to push oil over $80 per barrel.

The next obstacle for prices to overcome was the Department of Labor's report on Friday. Here's oil trader Phil Flynn weighing-in this morning on a recent productivity report by the Department of Labor:

The good side of this is that if productivity is that good inflation should remain lower than it might have otherwise. Which means central bankers can have more confidence keeping the pedal to the metal with this entire fiscal stimulus keeping the carry trade alive. Yet what may be more significant about this incredible number is that it may mean that the number of unemployed workers that we see in today's jobs report may be the peak of the recession.

Naturally, a stronger economic outlook would lead to increased demand. . . Unfortunately, that wasn't the case this week.

Stake Your Claim in the Stimulus Goldmine

With $787 billion in pork now sloshing around Washington D.C., one industry in particular stands to grab the lion's share.

And for the investors that get there first, this moneymaking opportunity is one that may just turn out to be the mother lode.

To learn more about the Stimulus Goldmine that could easily double when all of that pork gets spent click here.

On Friday, the Labor Department reported that unemployment had risen above 10%, marking a 26-year high. That certainly wasn't the bullish news we were hoping for.

Crude prices dropped as low as $76.71 per barrel. Going forward, we'll be looking for oil to hold the $77/bbl mark.

And in case you missed this week's top articles from Energy and Capital and our sister publications, I've included them below.

Enjoy your weekend,

Keith Kohl

Energy and Capital

Natural Gas Companies: One Natural Gas Buy for Winter. . . And One Investment Pitfall
Energy and Capital Editor Keith Kohl shows readers one reason to stay bullish on natural gas prices, as well as one trade that is ready to explode as natural gas prices rebound.

North Dakota's Recession-Proof Secret: How to Get Your Share in America's Top Oil Play
There's a very specific reason why North Dakota has been virtually untouched by this recession. Of course, there's only one way for investors to get a piece of the action. . . and our new report outlines exactly how you can profit from the country's hottest oil play.

Lithium-Ion Battery Stocks: The Billion-Dollar Battery Backbone
Energy and Capital's Nick Hodge reveals why you should be investing in the hottest sector on the market. In fact, smart investors are already gearing up for their next round of profits. . .

Top Biotech Stocks: Smart CEOs and the Race for a Cure
Wealth Daily Editor Steve Christ uncovers some of the best biotech stocks on the market today, highlighting one tiny research company that stands to make a killing.

How to Trade with a 94.2% Success Rate: Cherry-Picking the Top Stock Analysts in the Business
Lately, traders have been too hesitant to trade in today's volatile market. But that doesn't have to be the case for you. Ian Cooper and his readers have already banked 35% in five days, 28% in six days, even 47% after holding one stock for a week. Isn't it time you felt this confident about your trades?

Investing in Rare Earth Metals: The Saudi Arabia of the Arctic Holds the Key to these "Dragon Metals"
These aren't your everyday metals. Wealth Daily Publisher Brian Hicks weighs in on the latest boom in what's being called China's "Dragon Metals."

Thematic Trading: You Can Predict Trends in Any Market
Wealth Daily Editor Ian Cooper isn't your average trader. When most investors are cringing in today's market, Ian is calling his shots. He offers readers several ways they can predict the trend — no matter how the market is performing.

The U.S. Army's New Solar Plant: Why Uncle Sam is Building a "Green Coalition"
Green Chip Editor Sam Hopkins explains how the U.S. Army is creating a "Green Coalition" and offers insight as to how readers can take advantage of this new development.

Mongolia Mining

Fri, 06 Nov 2009 05:37:00 GMT

The commodity boom in Mongolia is just getting started. Vast fortunes will be made. Yours could be one of them. . .

Untouched for 19 years, the world's last great energy, metal, and mineral boom is about to launch in Mongolia. In fact it's already happening. A new tax law has recently changed the business climate, and the likes of Goldman Sachs, China Wealth Fund, Rio Tinto, and many other big players are rushing through the gates. . .

Here's the Deal

For the better part of a century, Mongolia has been known for its wealth of minerals: gold, coal, rare earth metals. Heck, the Russians had the whole place mapped out in the 1960s.

But under Russia, very little extraction ever took place. In the early 1990s, Mongolia finally broke free from its status as a Soviet puppet state and the country reacted like many former Russian states: It whipsawed from corrupt renegade capitalism back to its former communist party rulers and a collective mentality.

But neither of these systems was conducive to the massive capital inflows necessary to fund long-term gold, copper, and coal mines.

And as a result, during the commodity boom era of the 2000s, Mongolia was taken over by the anti-capitalists and strict laws were made placing punitive taxes on foreign companies after Mongolia's mineral wealth.

The world's 8^th largest economy is about to mandate the use of this company's wind power.

Get in now, and ride it for a quick 112% gain once the law goes into effect

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Then last year, the Moderate Social Democratic Party took power. This new group had a pragmatic approach to economics and political ideology. One of the first things those in power did was to cut the corporate tax from 68% to 30%. I bought one small gold miner in anticipation of this new law. . .

It is now up more than 458%.

See for yourself:

As you can see, the law passed in mid-August.

The first group to take advantage of the new law was Rio Tinto and its partners, who had been sitting on a concession for about 10 years. They reached an agreement with the government and are investing some $6 billion to build the world's largest gold mine within 100 miles of the Chinese border.

To give you some perspective, the square footage of this mining property is bigger than the state of Ohio. And the $6 billion investment — coupled with the expansion of the economy — will easily double Mongolia's $9 billion GDP.

An independent study projects the mine will be "capable of average annual production in excess of one billion pounds of copper and 330,000 ounces of gold for at least 35 years. Peak annual production in excess of 1.6 billion pounds of copper and 900,000 ounces of gold is projected to be reached six years after initial production."

This Is a Very Big Deal

As soon as the law passed, I started touching base with my contacts. I called James Passin, who runs the extremely successful Firebird Global Fund. James and I worked together for many years at the Taipan Publishing Group.

(You may have recently seen James' name in newspapers for hosting a fundraiser for former President Bill Clinton and the current Governor of Maryland, Martin O'Malley, at his New York brownstone.)

Name-dropping aside, knowing people on the ground is key.

In fact, over the past few years, Firebird has been buying up small companies in Mongolia in anticipation of the new gold rush.

The first thing James told me was that he owned a large portion of the largest broker in Ulaanbaatar who would be happy to show me around. He was also going to put me in touch with a national hero and wrestling champion who is very well-connected.

Mr. Passin's theory is that everyone knew about Rio Tinto (Market Cap: $89 billion). And yes, it might go up 50%. . . but the real money was going to be made in the banks, telecoms, and breweries — among others. The massive flood of liquidity taking over Mongolia (with a population of three million), would send fifteen-cent companies to five dollars almost overnight.

My friend's theory is hard to argue. My own research had given me the distinct feeling that Mongolia could be the Kuwait of Central Asia, with its oil, coal, gold, copper, uranium, rare earths. . .

The Rush Is On!

I'm not the only one who believes this. Just this week, China put up $700 million in a coal company.

According to Reuters:

Hong Kong sovereign wealth fund China Investment Corporation is planning a $700m investment in Iron Mining International, a mining company with interests in Mongolia. Iron Mining is backed by private equity firm Hopu and Singapore state investment group Temasek.

The deal tops off a billion dollar spending spree by the group this week into the Mongolian mining sector. CIC also took a $500m stake in Canadian company SouthGobi Energy Resources in the form of a 30-year secured debenture issued by the company. SouthGobi also has coal mining interests and exploration assets in Mongolia.

And an Australian Company just sunk another $195 million into coal. According to its press release:

Leighton Holdings Ltd. (LEI.AU) said Wednesday that it has secured an upgrade worth A$195 million of a mining contract in Mongolia.

Australia's biggest construction company said Energy Resources LLC has asked its subsidiary Leighton Asia to expand the production capacity of the UHG Coal Mine in the South Gobi region of Mongolia. The adjustment increases the contract's value to A$480 million, Leighton said.

My Flight Leaves Monday Morning at 6:48. . .

It's this type of market momentum that has me getting on a plane early Monday morning and flying 26 hours to Mongolia.

I will report my first impressions next week. The opportunities seem enormous, but you just can't run around half-cocked. . . There are reports to be read and people to talk to.

Look for the full report to be in your inbox on January 1, 2010. Truth be told, I'm not even worried about UB's temperature reached a chilly 13ºF at the high today — I haven't been this excited about an investment situation since the Russians were selling Gazprom for coupons.

And while the commodity boom in Mongolia is just taking off, we're already situated in the early stages of the greatest commodities bull market in history... one that my colleague Ian Cooper has been capitalizing on week after week. He's closed 93 winning trades with his resource and energy stock picks this year alone. To learn how his readers are enjoying gains of 3,124% since November. . . and how there's still time for you to get in before his next trade, just follow this link.

Meantime, stay tuned for news from on the ground,

Christian DeHaemer

Editor, Energy and Capital
(and soon-to-be-launched Crisis and Opportunity)

32% Gains. . . Each and Every Month

One group of energy investors has closed 45 winners in 12 months.

39 of them were double-digit winners.

Click here to see what their next move is.

Australian Renewable Energy

Fri, 06 Nov 2009 04:27:00 GMT

The government of Australia is targeting four homegrown renewable energy companies with over US$214 million in assistance.

Petratherm, Geodynamics, Victorian Wave Partners, and Hydro Tasmania will all be able to use funding from the capital in Canberra to advance the country's renewable energy capacity. Australia has a national goal of generating 20% of its electricity from clean sources by 2020.

As it stands, clean means renewable. Even Australia—the largest coal exporter in the world—has not advanced clean coal technology to the point where it is a medium-term rival with wind, solar, and water-driven generation.

Petratherm (ASX:PTR) and Geodynamics Ltd. (ASX:GDY) are both Sydney-traded developers of hot rock geothermal energy, which Australian Prime Minister Kevin Rudd and many companies hope to turn into the country's premier non-exportable clean energy resource.

Geothermal energy can't be loaded onto a tanker or put in a pipeline, so steam turbines will sent power straight to local cities and consumers. Fine-tuning of the new clean energy generation buildout process will come at sites like the 25 MW geothermal power plant Geodynamics is building in the state of South Australia.

The other two companies to receive pieces of the A$230 million pie Canberra dished out on November 6 were Hydro Tasmania and Victorian Wave Partners. The success of those two points to the Australian government's commitment to wave energy and hydropower as part of the continent-country's energy mix and advance toward the "20x20" target.

Geodynamics (ASX:GDY) shares rose by nearly 10% on the day's news, and Petratherm (ASX:PTR) doubled that, with a more than 20% gain on Friday.

-Sam Hopkins

Cheap Oil

Fri, 06 Nov 2009 02:43:00 GMT

When the US invaded Ba'athist Iraq, many ascribed that action to a desire to seize the country's vast oil reserves and develop them on terms favorable to us, presumably to keep the days of cheap oil rolling on. After six years of oil prices far above their pre-war level, the last vestiges of that theory should be laid to rest by a careful reading of today's headlines concerning the announced production deal between the Iraqi government and ExxonMobil and Shell. The terms looks anything but lucrative for the Supermajors, which have won the opportunity to revamp output at one of Iraq's largest mature oil fields, West Qurna. However paltry the returns might look for the firms involved, this development could have a bigger impact on oil price--and sooner--than some of the splashier recent announcements concerning big oil finds off Brazil and West Africa.

The reported terms of the deal struck by Exxon and Shell in Iraq continue the trend of allowing access only on the basis of working as contractors, rather than as partners with an ownership interest in the underlying resource via a typical production-sharing contract. According to the story in today's Wall St. Journal, the companies will receive just $1.90 per barrel for their efforts to boost the flagging output of the super-giant West Qurna field, the output of which could increase by more than the current oil production of Texas (including the Gulf of Mexico.) Moreover, because the project entails virtually no exploration risk--the reserves are well-established--and minimal technical risk, and is already connected to infrastructure, the only real limitation on how fast it could begin ramping up is the local security environment and the ability of the firms to line up equipment and workers. This will still require several years, but it should happen a lot quicker than the time required to develop a new field with tricky geology in deep water.

So what does this mean? Well, for ExxonMobil and Shell it offers a relatively quick boost in production and revenue. $1.90/bbl is skimpy compared to what companies can make on their own discoveries, but over volumes this large it could translate into an extra $700 million of annual cash flow for the next 20 years. As attractive as that sounds, though, it comes without the ability to book new reserves, which are so critical to the valuations of oil companies.

The implication for oil prices will depend on many other factors, but the steady growth of Iraq's oil production from the current 2.5 million bbl/day to a level commensurate with the country's reported 115 billion bbls of reserves could at least compensate for some large declines elsewhere and help maintain a reasonable cushion of spare production capacity as the global economy gets back on track. This hardly bodes a return to $20 oil prices--an eventuality that would be much less welcome in the carbon-constrained world we're entering than just a few years ago--but it could buy us enough time for fuel efficiency and vehicle electrification to match Peak Demand to an inevitable peak in global production.

EROWI - energy return of water invested

Wed, 04 Nov 2009 14:35:00 GMT

Energy Return of Water Invested (EROWI). From an article by Robert Service in Science Magazine.

The readers of "The Oil Drum" are familiar with the concept of "Energy Return of Energy Invested" (EROI or EROEI). It is the ratio of the energy produced by an energy plant during its life cycle to the amount of energy needed to build, operate and dismantle the plant.

EROEI remains one of the most useful parameters that can be used for evaluating an energy technology, but it is not the only one. Another element is the need of water. Water is needed for irrigation of plants to be used as fuel and all large plants using thermal engines need water cooling. We can speak, then, of Energy return of Water Invested (EROWI). It is a concept much more recent than that of EROEI, but which is rapidly gaining attention and may be not less important.

Recently, Robert F. Service reported the comparative table that you can see reproduced at the beginning of this post. The data are taken from an article by Dominguez-faus et al. published in "Environmental Science and Technology" in 2009. Service's paper, as most of the studies published so far in this field, is dedicated to showing how water thirsty biofuels are. It is another drawback for a technology which has also a low EROEI, needs large areas, and competes for land with food production.

But the problem is more general and doesn't just involve biofuels. Nuclear plants, for instance, seem to be especially vulnerable to water scarcity. During the past few years, several plants had to be shut or slowed down, or allowed to drain water into rivers at higher temperatures than considered safe. A set of references on the troubles of nuclear plants during heat waves can be found here .

The problem may affect all thermal plants which are large and inefficient enough; coal plants for instance. According to Service's data, the problem can be eased moving from "once through" to "closed loop" cooling. But, if it were easy, it would have been done already. Evidently, closed loop cooling is more expensive and, in practice, the result of increasing EROWI may be to reduce EROEI.

Water is, of course, a renewable resource but a lot of the water used today is "fossil" water. It comes from deep aquifers which can be drained empty as it has happened, for instance in Saudi Arabia . In addition, climate change may further reduce the water supply in many areas of the world. How much these factors will affect energy generation worldwide in the near future is difficult to say at present, but surely the problem shouldn't be underestimated. The EROWI problem, in the end, is just an indication that we are hitting yet another limit of our finite environment.

The EROWI concept is examined in depth, especially for biofuels, in an article titled "Burning Water: A Comparative Analysis of the Energy Return on Water Invested" by Kenneth Mulder, Nathan Hagens and Brendan Fisher, in press on AMBIO (The Journal of Human Environment) .

Peaking Power Plants

Wed, 04 Nov 2009 06:15:00 GMT

While peaking power plants, or "peaker plants" only run for a small percentage of the year, they play a major role in maintaining the American lifestyle. Though they go unnoticed for the most part, peaker plants hit the spotlight in 2003 in a big way.

At 4:10 on August 14th, 2003, the northeastern United States and some of Canada dark. In a matter of hours, 50 million people lost 61,800 megawatts of power...leaving New York, Toronto and much of the east coast in total darkness.

One in four businesses lost more than $50,000... per hour, and while numbers vary, it's safe to say that in the two days that the power was out, the blackout took a toll of about $6.4 billion on the economies of Canada and the USA. Yes, billion with a B.

And what sparked this catastrophic occurrence?

According to a U.S.- Canada Power System Outage Task Force report: an untrimmed tree branch.

You see, every day Americans plug more HD TV's, cell phone chargers and Nintendo Wiis into the complex system of wires, transformers and substations that make up (*cue dramatic music) "The Grid".

This system is extremely interconnected, as each power plant relies on a number of other plants to pick up the slack when one goes down, by revving up and delivering power to customers of the downed plant.

But this means that any time a major power plant fails due to overloading, it puts every other plant it's connected to at risk.

In the case of 2003, that domino effect was caused by an untrimmed tree branch that knocked out one measly power line...and boom...The Big Apple was shut down.

One of the solutions to this problem is to fix the grid. Now, that's no mean task when you consider the billions upon billions of dollars it would take to make all the necessary upgrades.

A more feasible, if temporary solution is peaker plants.

What are Peaker Plants?

Peaking power plants generally only run when there is high demand so that they can pick up the slack, when energy demand is high or another plant/power line is down, taking some of the pressure off of neighboring plants.

This can help to ease the load on the neighboring power plants, preventing them from failing when they exceed maximum capacity.

In the USA, this is most often in the afternoon of the summer months, when people first come home from work and crank up that A/C and start making dinner, all while most stores and businesses are still open.

When power demand is high, the engineers warm up the peaker plants and start to pump out additional energy.

Though these plants usually use natural gas, they can take a more green approach by using wind turbines, tidal current or solar energy, as they are also easy to stop and start.

Solar power is particularly attractive for new peaking power plant schemes because the sun is highest in the sky right around the peak hours.

I can tell you that when I walk into a room, I don't even think twice about whether or not the light is going to turn on after I hit the switch. Most people don't recognize the millions of miles of power lines on the side of the road anymore, it's just a part of daily life.

But the United States' energy infrastructure is a complex and almost mysterious system.

It's tough to know when to expect a spike in demand, and it's even tougher to fix very real problems in the system, but when it fails... it demands our attention and could cost us some serious money.

-Kyle Haas

"Carbon Debt"

Wed, 04 Nov 2009 04:17:00 GMT

A new term has entered our lexicon without much fanfare, but that is about to change. When the Conference of the Parties to the UN Framework Convention on Climate Change (UNFCCC) meets next month in Copenhagen, we will hear a lot more about "carbon debt" and the obligation that developing countries believe the developed world owes them for having used the atmosphere as a sink for CO2 and other gases since the Industrial Revolution. From my perspective, this approach looks counterproductive and risks scuttling the principal process for coordinating the actions of independent nations in addressing the most global of problems. The issues of international and inter-generational environmental equity raised by the accumulation of greenhouse gases (GHGs) are serious and complex, but framing them in this way will make it much harder to find acceptable middle ground, unless the delegations show restraint and common sense about how far to reach back into history to assess blame for a warming earth.

It was always going to be tricky reconciling the competing interests of the developed and developing worlds sufficiently to craft a new global climate agreement to replace the expiring Kyoto Protocol. In addition to large differences in per-capita wealth and income, many of the main players fall into one of two key categories: countries with large historical and current emissions of GHGs that are now moderating or even decreasing, and countries with relatively much smaller historical emissions but large and/or rapidly-growing current emissions. The nature of the cumulative climate impact of these GHGs makes that distinction a crucial one and the source of much rancorous debate. I've been thinking about the resulting issues of equity for some time, but I am extremely concerned by the turn that I see the negotiating process that started in Bali two years ago having taken.

The UNFCC doesn't make it easy to follow what's going on. Of all things it took a visit to a climate change skeptic's website to track down a reasonably current version of the negotiating draft that is being prepared for consideration in Copenhagen. That enabled me to locate the document on the UN site once I had its file name. Having scanned through it for references to carbon debt, I can see why they might have wanted to make it hard to find, since the principles embodied there are bound to strike most Americans as at least counter-intuitive. For starters, the notion of carbon debt is introduced early in the draft as a "guiding principle of the Convention", and described as, "historical responsibilities in greenhouse gas emissions and the related historical ecological debt generated by the cumulative greenhouse gas emissions since 1750 and the most recent scientific information." That word "debt" crops up many times in the document, with repeated references to the "emissions debt", "historical climate debt" and "adaptation debt" that developed countries "owe" to developing ones.

Lest you think that this is merely intended as an abstraction governing philosophical discussions of equity, the document makes it abundantly clear that this is about money and who shall pay whom. One of several examples in the text puts this in admirably concrete terms:

"Developed country Parties shall provide financial resources and transfer technology to developing country Parties to make full and effective repayment of climate debt, including adaptation debt, taking responsibility for their historical cumulative emissions and current high per capita emissions."

Unfortunately, as I noted in a lengthy posting on this topic a year-and-a-half ago, matters aren't nearly as clear-cut as this wording suggests. While the consequences of many decades' worth of emissions of CO2 and other long-lived GHGs certainly appear to be putting an unfair burden on developing countries, it would be equally unfair to the citizens of developed countries to tax them for emissions that occurred before the scientific consensus on global warming emerged in the last couple of decades. Arrhenius may have worked out that CO2 could warm the planet a century ago, but the relative importance of that effect amidst the many complex factors influencing the climate was anything but obvious then, and it is still not fully understood. It makes no more sense to burden modern Europeans and Americans for the emissions of our parents, grandparents, and great-to-the-nth grandparents going back 10 generations than it does to tax modern Chinese, Indians and Brazilians for the entire edifice of Western technology that has enabled their present and future development.

We are all in this together, and the only emissions we have control over are those that occur from here on out. Having said that, it's clear that without some recognition that developing countries didn't create this problem--no matter how much they might be contributing to it now--there will be no deal in Copenhagen. The only viable middle ground I see, if not from the standpoint of the inter-governmental delegations, then for the citizenry they represent, would be to recognize the disparities in historical emissions but impose an effective statute of limitations on them. No emissions prior to the establishment of the Framework Convention on Climate Change at the Second Earth Summit at Rio de Janeiro in 1992 should be counted for purposes of allocating emission targets or financial assistance. While such a compromise would greatly diminish the imputed carbon debt of the developed world and allocate a bigger portion of it to large developing countries like China and Indonesia--particularly when changes in forestry and land-use are factored in--it would hardly let the rich world off the hook. The countries of the OECD have collectively emitted on the order of 200 billion tons of CO2-equivalent GHGs since then--roughly half the world's total emissions in that interval.

It would be tragic if the Copenhagen climate conference could only arrive at a new global agreement on emissions by relying on a principle that American voters would ultimately find as unacceptable as the allocation of national emission-reduction targets in the Kyoto Protocol. It is challenging enough for our elected representatives to attempt to match federal tax revenues to our existing obligations, foreign and domestic. I can't imagine any President or Congress wanting to explain to the electorate--particularly with so many of them already exercised over growing deficits and the current tax burden--why they must pay higher taxes to send carbon-debt payments to some of the same countries that are competing for our jobs and industries, on the basis that previous generations of Americans put more CO2 into the atmosphere than past generations of Chinese, Indians and Brazilians. That sounds like political suicide to me.

Lithium-Ion Battery Stocks

Wed, 04 Nov 2009 04:11:00 GMT

Fix your eyes for 5 seconds on the performance of these battery stocks:

Need I say more?

It's not even Thanksgiving yet. . . and some of these stocks have tripled since Easter.

The Billion-Dollar Battery Backbone

Here's why you need to be investing in the hottest sector on the market. . .

Clean Energy

In the past few years, the capacity of solar and wind energy has absolutely exploded. And related stocks have followed suit.

Here's the thing: The sun doesn't always shine. And the wind doesn't always blow.

But when the sun is shining. . . and the wind is blowing. . . we can't use all the electricity these sources produce.

Batteries have emerged as the solution to this problem. Utilities from Shenzhen to Seattle are increasingly using batteries to store this excess clean power so that it can be used at times of high demand.

And it's been estimated that if, over the next decade, just 1% of energy storage demand is met, the industry will be worth at least $600 billion — most of which will end up on the balance sheets of battery technology companies.

Hybrid Cars

It's now largely accepted that the future of personal transportation is electric.

The Prius and the Volt are already media whores. . . and interest is growing in the Nissan Leaf, Fisker, and Tesla.

As this happens, batteries will consistently be replacing internal combustion engines. And battery manufacturers stand to make a killing.

Surely you remember the recent mega-interest in the IPO of A123 Systems (NASDAQ: AONE), the MIT battery spin-off company. It surged nearly 40% in its first week of trading.

Smart investors see the writing on the wall.

The Stimulus

Like it or not, the federal government is doling out billions of your tax dollars to further the development of advanced batteries.

This "free" money — in the form of grants and tax breaks — is giving a boost to the companies that manufacture those batteries.

Just take a look at some of the awards given already:

Johnson Controls — $299.2 million for the production of nickel-cobalt-metal battery cells, packs, and battery separators.
A123 Systems — $249.1 million for the manufacturing of nano-iron phosphate cathode powder, electrode coatings, fabrication of battery cells and modules, and assembly of complete battery pack systems.
KD ABG MI, LLC — $161 million for the production of manganese oxide cathode/graphite lithium-ion batteries.
EnerDel, Inc. — $118.5 million for the production of lithium-ion cells and packs.
General Motors Corporation — $105.9 million for the production of high-volume battery packs for the GM Volt.
Saft America, Inc. — $95.5 million for the production of lithium-ion cells, modules, and battery packs for industrial and agricultural vehicles and defense application markets.

The list goes keeps going and going and going. . .

Charging Your Portfolio

Investors have surely taken notice of this trident battery bullishness.

As you saw above, some of these stocks have surged more than 300% — just since March.

But it's not too late to climb aboard the battery bandwagon.

In fact, I've just put together a new report that details the best battery stock you can own now — and for the next five years.

It's a small Chinese outfit that already counts revolutionizing the lithium-ion battery in its list of successes.

The first time I told readers about it, the stock quickly spiked nearly 600%.

But the stock is gearing up for another run, backed this time by none other than the Oracle himself.

The company is going to quickly corner the lithium-ion battery market. . . and it's a steal at its current price.

To read all about the stock — and how you can get in before the next 600% run — click here.

Call it like you see it,

Nick

P.S. This tiny $10 company is about to become largest, most profitable battery company in the world. But its future wasn't always so bright. To learn more about its rags-to-riches story. . . and how you can get in on the "riches" part, click here.

Natural Gas Companies

Mon, 02 Nov 2009 07:27:00 GMT

Picking your next natural gas play isn't so easy anymore. . . or is it?

Back in March, we saw the first real buying opportunity for oil and gas stocks. At the time, nearly everyone I came across was in the trenches. Every company was either at or approaching a 52-week low.

I wasn't kidding when I suggested that those stocks were a screaming buy. Most of you agreed. Since then, energy stocks have taken off. And I'm not talking about a few gains here or there. . .

Unfortunately, not everyone agreed.

Stake Your Claim in the Stimulus Goldmine

With $787 billion in pork now sloshing around Washington D.C., one industry in particular stands to grab the lion's share.

And for the investors that get there first, this moneymaking opportunity is one that may just turn out to be the mother lode.

To learn more about the Stimulus Goldmine that could easily double when all of that pork gets spent click here.

I remember one reader in particular who didn't pull any punches. Yet after asking him whether or not he was taking advantage of that buying opportunity, he adamantly refused.

His reason?

He was too afraid to trade.

Right now, he's probably looking for a DeLorean and a bolt of lightning — flux capacitor and all.

If you were on board with us at the time, you made an absolute killing with your energy trades.

But let's face it: my hesitant readers shouldn't be looking back with regret. And this gentleman comes to mind because he recently sent me an e-mail. This time, however, he was less cynical when asking how I felt about getting back into natural gas.

And you should be able to guess what my sentiment on the matter was in my e-mail, and is today, as I write this. . .

U.S. Natural Gas

Last week, Baker Hughes Inc. reported the number of oil and gas rigs operating in the U.S. has increased to 1,069. If you're keeping track, that's 21 more rigs than the previous week. That number compares to 1,600 rigs drilling in September 2008.

Then again, if there were that many rigs operating right now, I'd be more than worried. And one glance at the latest EIA natural gas storage report would have you worried, too. . .

Take a look for yourself:

As you can see, inventory numbers are still rising. The last increase of 25 Bcf puts our working gas in underground storage at 3,759 Bcf. Although natural gas is currently trading around $5/Mcf, we're still a far cry from 2008 price levels.

Don't worry, we're not holding our breath for natural gas costing $14/Mcf anytime soon.

Once the cold weather kicks in, people will start turning the heat on and up. It might not be the massive demand spike the bulls would love to see, but couple the heating season with more industrial demand and prices could easily reach $6/Mcf.

Natural Gas Trading

So where to look when investing?

It's no secret that we're sticking with what works. In the case of the North American natural gas market, the clear winners are the various shale plays. Make no mistake, we're going to tap those resources. I've reiterated the importance of shale gas time and time again.

It makes sense, too.

After all, it's because of these shale basins that we can keep a positive outlook for U.S. natural gas production.

Your Next Shale Play. . . and the ETF to Avoid

This natural gas stock isn't a surprise.

We've been following Range Resources (NYSE: RRC) for quite some time. The company first attracted my attention with its Barnett success. As you're probably aware, the Barnett shale is what sparked this unconventional boom in natural gas.

Range recently announced another production increase, despite selling its Fuhrman Mascho Field in West Texas. The company's third-quarter production rose 13%. Production growth is something we've come to expect from these guys; this is their 27th consecutive quarter of growth in the third quarter.

According to Range's CEO, John Pinkerton: "The Fuhrman Mascho sale proceeds, coupled with our operating cash flow, should more than fund our 2009 capital spending program."

The company still expects to drill another 20 horizontal wells in the Marcellus shale before the end of the year.

Keep an eye on this one.

94% Success Rate Since February 2009

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Of course, there are some investment pitfalls.

When it comes to the United States Natural Gas Fund (NYSE: UNG), I can't help but side with my readers. You see, it didn't take very long for you to express your concern after the last time I brought up UNG. This ETF invests in the near-month contracts of natural gas on the NYMEX that are set to expire.

The problem is that we're not going to see the same price shock that we did in 2008. The downside to the unconventional boom is the large amount of supply. Add the weaker demand we're experiencing, and a price spike is simply out of the question.

Shale Profits

I'll let you make your own call on this one. Personally, I'd stick with our shale plays. And if you're looking for even better natural gas plays, feel free to check out our free report below.

The good news is that most of my readers have already established their natural gas positions from the $20 Trillion Report. In fact, they're still holding on to gains, despite the sell-off late last week. If you're interested in sharing their success, feel free to check our free natural gas report. If you haven't yet. . . I don't know what you're waiting for.

A year from now, I don't want you looking back with regret.

Until next time,

Keith Kohl

Energy and Capital

A Clunkers Look-back

Mon, 02 Nov 2009 05:19:00 GMT

Somehow I missed last week's minor tempest concerning this summer's Cash for Clunkers program (CFC.) It apparently started when auto industry publisher Edmunds, Inc. issued a report indicating that the effective cost to the government of the incremental sales stimulated by the program averaged roughly $24,000, rather than the $4,000 or so per car that participating buyers actually received. That's based on Edmunds' estimate of the sales they conclude would have occurred in the absence of CFC, shrinking its net contribution from 690,000 vehicles to only 125,000. This prompted a snarky response from the White House, questioning not only Edmunds' analysis but also their motives and basic competence, leading to a polite-but-firm rejoinder from Edmunds. Having expressed support for the CFC concept and its reported results in previous postings, I can't resist adding my own two cents on this affair.

Let's start with a basic fact: No matter how rigorously Edmunds or the federal government analyzes car sales data for this year, the number of cars that would have been sold during the months in question without the clunkers program is inherently unknowable, just as it is inherently unknowable how many jobs have been "saved" to date by the total stimulus program, of which CFC was only one small, belated aspect. This dispute hinges on differences of opinion and underlying assumptions, and the statistical projections of both sides must be taken with a grain of salt. However, any notion that it is somehow out of bounds to look back on the outcomes of such a program to assess its effectiveness should be rejected forcefully. Project look-backs, or post-completion reviews, are among the best tools that corporations have to learn from mistakes and improve future performance. These techniques are no less appropriate in the public sphere, particularly when the government is undertaking so many initiatives that would ordinarily be left to the private sector.

It's important to frame any look-back analysis with a clear understanding of what the project in question was intended to achieve. In this case, CFC was meant to boost car sales and consumer confidence at a time when both were at extraordinarily low levels. It was also aimed at improving the fuel economy of the US car fleet by retiring some of the least-efficient vehicles on the road. Judging it on the cost-effectiveness of the incremental sales it generated reflects a subtle but significant distinction in interpreting those goals, though as a taxpayer I'm certainly interested in knowing how CFC measured up against that criterion. Still, on the basic question of increasing sales, even the data presented by Edmunds are unambiguous.

Looking at the monthly car sales figures included in Edmunds' report, it is clear that US new-car sales jumped from a depressed annual rate of around 10 million units pre-Clunkers--a level too low to sustain the North American car manufacturing capacity now in place--to over 14 million, approaching the typical pre-recession sales for the industry. After the program ended, sales fell back to around the 10 million mark. Although CFC hardly restored the industry to good health, it provided the expected temporary boost in sales at a time when the recent bankruptcy filings of GM and Chrysler had raised new uncertainties for consumers. The fuel economy uplift on the average transaction was also significant, though as I mentioned at the time this amounted to a very small change in the overall fuel economy of a vehicle fleet numbering around 240 million cars and light trucks. So while CFC in retrospect looks to have been a very expensive way to help the industry sell more cars, its performance against the metrics most relevant to its conception stacks up pretty much as advertised.

The larger question raised by the Edmunds analysis concerns the degree to which the government can compensate for weak economic conditions in the private sector, and how expensive the incremental contribution of such efforts can prove, compared to the natural recuperative powers of the economy. Their assessment might also have implications for how we should evaluate the ongoing incentives for advanced technology vehicles. In that light, I have to wonder how much of the heat generated by this episode is instinctive bridling at perceived Monday morning quarterbacking, and how much relates to its potential to undermine the case for a second stimulus that is building in some quarters.

Energy Sector Outlook

Fri, 30 Oct 2009 07:02:00 GMT

With peak oil already upon us, sustaining oil supply is akin to running up the down escalator.

Or, as Nate Hagens put it at the ASPO peak oil conference earlier this month, "Technology is in a race with depletion and is losing (so far)."

The urgent question then is: Can renewables fill the gap of oil depletion?

Mind the Gap

The most recent global data summarized by fuel available from the EIA is, unfortunately, for 2006 and only preliminary (I know they're trying to improve their reporting, but seriously — they need to do better than that). But we'll use what we've got. . .

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In 2006, the total amount of energy the world consumed was 469 quadrillion BTUs, or quads.* Charted in percentage terms, the global fuel mix looks like this:

World Primary Fuel Mix, 2008. Chart by Chris Nelder. Data source: EIA Annual Energy Review 2008 (released June 2009)

If the latest information I gathered at the ASPO peak oil conference is correct (and I think it is, or at least as close to, correct as anybody is going to come at this point), then we should expect oil to begin declining at about 5% per year, starting around 2012-2014.

Of the 157 quads provided by oil, a 5% decline rate will give way to 7.85 quads lost per year, or 1.7% of the world's primary energy supply.

The "Geothermal and Other" category — supplying 1.6% of the world's primary energy — represents all the renewable sources combined: geothermal, solar, wind, biomass, and so on.

Since 1.7% is very close to 1.6%, we can put the challenge of substituting renewables for oil this way: Starting around 2012-2014, we will need to build the equivalent of the entire world's existing renewable energy capacity every year just to replace the lost BTUs from oil.

Fortunately, renewable energy of all kinds is enjoying a massive growth spurt, attracting trillions of dollars in investment capital. On average, the sector seems to be growing at about 30% per year, which is phenomenal. . . but it's not 100%.

In terms of BTU substitution, then, it seems unlikely that renewables can grow at the necessary rate.

Not Just BTUs

However, the challenge is more complex than mere BTU substitution.

Replacing the infrastructure, particularly transportation, that's based on oil with one based on renewably generated electricity will in itself require energy — and lots of it. As Vail pointed out, between 80% and 90% of the energy inputs for renewables must be made up front, before they start to pay any energy out.

Even if renewables were able to make up all of the lost energy from oil, still more would be needed to afford any economic growth.

In all, it seems a fair bet that it will take at least a decade for renewables to merely catch up with the annual toll of oil depletion. The gap will likely manifest as fuel shortages in the OECD, when the developing world outbids it for oil, and a long economic recession or depression. . . unless efficiency comes to the rescue.

To that point, Jeff Vail, an associate with Davis Graham & Stubbs LLP, said at the conference that population increase alone could offset as much as 30% of the improvement in conservation and efficiency. He noted that despite the recession, car sales are up 29% in India as people buy their very first cars.

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Falling Net Energy

Another driver of the down escalator is that the net energy (EROI, or energy returned on energy invested), of nearly all fossil fuel production is falling.

Dr. Cutler Cleveland at Boston University has observed that the net energy of oil and gas extraction in the U.S. has decreased from 100:1 in the 1930s; to 30:1 in the 1970s; to roughly 11:1 as of 2000.

Simply put: As the quality of the remaining fossil fuels declines, and they become more difficult to extract, it takes more energy to continue producing energy.

This begs the question: What EROI must the replacements have to compensate for oil depletion?

Vail presented several models attempting to answer it. In his optimistic scenario, assuming a 5% rate of net energy decline and an EROI of 20 for the renewables, the "renewables gap" was filled in year 3. In his pessimistic scenario, assuming a 10% rate of net energy decline and an EROI of 4 for the renewables, the gap wasn't filled until year 7.

For a sense of how reasonable those assumptions are, we must turn to the academic literature — since no business or government agency has yet shown any particular interest in EROI studies (much to my dismay).

Studies assembled by David Murphy put the average EROI of wind at 18 (Kubiszewski, Cleveland, and Endres, 2009); solar at 6.8 (Battisti and Corrado, 2005), and nuclear at 5 to 15 (Lenzen, 2008; Hall, 2008). No data is available for geothermal or marine energy. All the biofuels are under 2, making them non-solutions if the minimum EROI for a society is indeed 3 (Hall, Balogh and Murphy, 2009).

[A quick aside: The huge range of the nuclear estimate is one indication of how difficult it is to accurately assess the costs of nuclear, which is part of the reason I still haven't written the article I know many of you are hoping to see some day. I'm working on it, and still looking for current research with appropriately inclusive boundaries and updated numbers. Nearly everyone is still using cost estimates that predate the commodities bull run, not even realizing how it distorts their analysis. So far, I have found nothing to change my outlook that the nuclear share of global supply will stay roughly the same for several decades.]

I am not aware of any studies on the EROI of biomass not made into liquid fuels. For example, methane digesters using waste, landfill gas, and so on. . . but its sources and uses are so varied that if the numbers were available, they probably wouldn't be very useful. While such applications are generally good, they're not very scalable: They work where they work, and don't where they don't.

Theorem of Renewables Substitution

Where EROI analysis leaves us is unclear; it needs more research and a great deal more data. There are some useful clues in it, though.

First, we know that biofuels — at least the ones we have today — won't help much, other than providing an alternate source of liquid fuels while we're making the transition to electric.

Second, we know that solar tends toward Vail's pessimistic scenario, and wind fits the bill for his optimistic scenario.

But here's the rub: The lowest EROI source, biofuels, is the easiest to do, with the vigorous support of a huge lobby and Energy Secretary Chu himself. Rooftop solar is the next-easiest to do. . . but making up the lost BTUs takes longer, due to its moderate EROI. And the source with the highest EROI, wind, is the hardest. (I explained why solar is easier here.)

Therefore I propose the following, slightly snarky Theorem of Renewables Substitution: The easier it is to produce a source of renewable energy, the less it helps.

The Winner: Efficiency

All of these factors — the declining supply, the pressures of the developing world on demand, the renewables gap, and the theorem of renewables substitution — underscore how crucial efficiency is to addressing the energy crisis.

They also underscore how profitable the entire energy sector will be for many years to come.

With supply maxed out, and demand at the mercy of a developing world, the name of the game now is doing more with less. More efficient vehicles and appliances, building insulation, co-generation. . . and all the other ways to eliminate waste.

I know it doesn't have the sex appeal of oh, say, space based solar power. . . but it's where the real gains will be made.

Until next time,

Chris

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Editor's Note: This article is Part 3 of a series of Chris's reports from the 2009 ASPO Peak Oil Conference. See also Part 1 and Part 2.

* The thermal values (heat content) of various fossil fuels are typically measured in BTUs. One BTU is roughly equivalent to the heat produced by burning a wooden kitchen match. One cubic foot of dry natural gas contains approximately 1,031 BTUs. For those who prefer their data measured in joules, 1 quad = 1.055 exajoules (EJ, or 10¹⁸ joules). Renewable energy, however, is typically measured in kilowatt-hours (kWh), or the amount of energy delivered by a one-kilowatt source over the course of an hour. 1 kWh = 3412 BTUs.

China Wind Power

Fri, 30 Oct 2009 03:40:00 GMT

United States Commerce Secretary Gary Locke said on Thursday that China is moving to allow more parts from foreign manufacturers to be included in the Middle Kingdom's domestic wind power projects.

As it stands, Beijing requires that 70% of the components in wind energy turbines erected around China be produced by factories within the country.

Locke couldn't say exactly when the rule would change, but after the 20th U.S.-China Joint Commission on Commerce and Trade, America's top industrial diplomat did indicate that a policy shift is on the way.

That will be a boon to American wind energy component producers like American Superconductor (NASDAQ:AMSC), whose stock rose by over 10% in the week from October 26, compared to a 3% decline for the S&P 500.

China's loosening of domestic manufacturing requirements for wind power is also part of a bi-national wind power exchange that involves companies of all sizes.

In Texas, a consortium just announced a $1.5 billion Sino-American joint venture between Shenyang Power Group, Cielo Wind Power, and the U.S. Renewable Energy Group, a private equity fund. That collaborative effort will bring turbines from China to the Lone Star State via Chinese turbine maker A-Power Energy (NASDAQ:APWR).

Look for more news soon on the growing exchange in U.S. and Chinese wind power infrastructure expansion and the wind power stocks that could profit.

-Sam Hopkins

The Future of European Transport: iTREN-2030

Thu, 29 Oct 2009 14:23:00 GMT

On 21 October the final workshop was held in Brussels (Belgium) of the integrated transport and energy baseline until 2030 (iTREN-2030) modeling project. At the workshop a final scenario was presented that incorporated likely transport and energy policies, and the effects on European transport of a continued global plateau in oil production up to 2030. The integrated scenario was generated by four energy and transport models that have been linked in iTREN-2030 to increase the forecasting power of the transport policies of the European Commission.

In this post I describe the iTREN-2030 project and the different models, covering the POLES global energy supply and demand model in more detail, highlight the conclusions of the present integrated scenario, and give my reflection on the workshop commenting on some areas of improvement to augment the potential of the models.

The iTREN-2030 project is all the more important because the resulting model set and integrated scenario will be used by the European Commission (DG-Tren) in preparing the white paper on transport policies due for 2010. After discussion with the European Parliament and approval by the council of Minister, the European Union will as a result have set out its new course for the future of transport in the period up to 2020.

The iTREN-2030 project

The integrated transport and energy baseline until 2030 (iTREN-2030) project ran for 30 months starting May 2007 and ending October 2009. Funded by the 6th framework program of the European Commission the project aimed to extend the forecasting and assessment capabilities of TRANS-Tools, which is the EU transport network analysis model. Including the potential to include new policy issues. With the end goal of giving the European Commission the possibility to create coherent baselines wherein technology, transport, energy, environment and economic developments until 2030 are integrated. The project was carried out by a consortium of seven institutes among which ISI (Germany), NEA (Netherlands), TRT (Italy), TML (Belgium), IWW (Germany), IPTS (SPAIN), TNO (Netherlands).

In more detail the project entailed linking and improving four different models that already existed, thereby enabling a more integrated modeling exercise on transport and energy. The advantage of linking these models is the creation of a much more detailed outlook. Each model covers its own area (transport network, energy supply, passenger flows, emissions etc.) in much more details than the others do. By linking them many more variables and feedbacks within the system can be taken into account.

The four models are

- TRANS-Tools (PDF Description), the model mainly used by the European Commission which gives an overview of the European Transport Network covering passengers and freight and inter modal transport.

- TREMOE (PDF Description), a model that assesses the effects of different transport and environmental policies on the emissions of the transport sector in EU-27.

- POLES, (PDF Description), a model that simulates long term energy supply and demand developments for different regions of the entire world including sources such as fossil fuels and renewable energy soures as well as energy types such as heat and liquid fuels.

- ASTRA, (PDF Description), a system dynamics model that incorporates technology, employment and energy policy to analyse long-term consequences of European transport policies within the EU-27 plus Norway and Switzerland.

An overview of the four models and how they were linked is given in figure 1 below.

Figure 1 - Overview of the linkages in the iTREN-2030 project between TRANS-Tools, TREMOVE, POOLS and ASTRA, Source: iTREN-2030 website

Limits to understanding: transparency and accessibility of the models

To understand a scenario we need information on which assumptions, formulas and data have been used in its derivation. In the best case detailed documentation is made available alongside a copy of the model itself. Although all the models are accessible to the European Commission and the consortium, some of them are proprietary in case of iTREN-2030. TREMOVE and TRANS-tools can be downloaded at no cost on the internet, but ASTRA and POLES are not available. This creates boundaries in comparing the outcome of these models with other studies. As a consequence most questions at the final workshop were related to understanding what the consortium did on many specific input levels such as how a 'breakthrough' in electric cars had been implemented in the model.

The need for transparency was also brought up by the consortium as a recommendation by participants of previous workshops, and by participants in the final workshop. Some effort was made by the iTREN-2030 partners to increase input by organizing two additional workshops were participants were given the possibility to recommend input on specific terrains. One of the outcomes of these additional workshops was the addition of economic crisis effects in the integrated scenario presented at the final workshop.

The POLES Energy Model

Since the Oil Drum is a blog about Energy and our future, and the POLES model covers the energy aspects of this modeling project, I highlight its core as far as information is available. POLES was developed by the French research institute IIEPE-EPE together with French energy consultancy Enerdata and the Institute for Prospective Technological Studies of the European Commission (IPTS). It has seen several iterations and was used in the World Energy Technology 2050 outlook by the European Commission and the 2007 World Energy Council Policy Scenarios (PDF).

The Poles model divides the world in 47 zones. A total of 32 of these zones represent individual countries including the G7 countries, the European Union countries and BRIC countries. The other countries are modeled as 18 homogeneous regions. For example all of Africa except the northern countries are modeled as the region SSAF

Figure 2 - POLES country and region coverage, Source: iTREN-2030 POLES documentation

The model employs a 'backward' calculation from final energy demand to primary energy supply. Starting with estimating final energy demand in different sectors including different Industries (Steel, Chemical, Non-Metallic, other), Transport Modes (Road, Rail, Air, Other), and RAS (Residential, Service, Agriculture). Separate calculations are made for 12 non-fossil energy technologies and 12 power generation technologies. In the next step diffusion of new & renewable energy technologies is modeled and generation of these sources subtracted from final energy demand resulting in 'net final energy demand', subsequently electricity transformation in fossil fuel power plants is 'undone' resulting in the needed primary fossil fuels to supply the remaining total fossil) energy demand. Imports and exports are incorporated to simulate trade flows of fossil fuels.

Figure 3 - POLES model overview with arrows indicating model hierarchy, Source: iTREN-2030 POLES documentation

Oil and gas production is simulated by a discovery and reserve modeled using United States Geological Service (USGS) data from the World Petroleum Assessment 2000. Specifically:

- First the model estimates the cumulative amount of oil discovered as a function of the Ultimate Recoverable Resources (revision of USGS numbers with discoveries and production). Incorporating a recovery ratio that increases over time also depending on the price of the resource. In the World Energy Technology Outlook 2050 upon which iTREN-2030 was based the recovery rate for oil increased from 35% today to 50% in 2050.
- Secondly remaining reserves are calculated as being equal to the difference between cumulative discoveries and cumulative production. Using Rt+1 = Rt + DISt - Pt (where R = reserves, DIS = discoveries, P = production, subscript t = year of account).
- Thirdly, the model calculates production for non-OPEC based on a Reserves-to-Production ratio decreasing over time and the calculated remaining reserves, and for OPEC based on the oil needed to balance the oil market (OPEC total oil production = total oil demand - Non-OPEC total oil production).

The world oil price in the model is for the short-term based on the rate of capacity utilization in the OPEC gulf, and in the medium and long-term on the world R/P ratio (including unconventional oil). Unconventional oil comes into play at a certain price when it is deemed competitive versus conventional oil. The price of gas is calculated in three different regional markets (US, Europe and ?) depending on demand, domestic production and supply capacity in each individual market. The main driver in gas price determination is the variation in the Reserve-to-Production ratio in each market.

Figure 4 - POLES modeling of international energy market, Source: Enerdata Poles Presentation

More information on the POLES model can be found in this presentation describing the POLES model used for the World Energy Technology 2050 assessment.

An overview of the Integrated Scenario

In the iTREN-2030 an integrated scenario was made to show the effect of linking the various models. It was explicitly mentioned by the consortium that it was not the goal of the project to create the best scenario possible. This was a sub-objective from the main objective of linking and improving the models themselves. Nevertheless it was an interesting scenario worthwhile to show to The Oil Drum readers. The approach taken in the integrated scenario was to to incorporate likely future policies, with as policy drivers three factors influencing transport markets, namely climate policy, fossil fuel scarcity and new technologies. Also a fast recovery scenario for the economic crisis was included where GDP growth would continue to normal by 2012.

With respect to fossil fuel scarcity the project leader, Dr. Wolfgang Schade from the Fraunhofer Institute for Systems- and Innovation Research (ISI), presented two scenarios, one from the World Energy Outlook 2006 of the International Energy Agency, and the other from the Energy Watch Group from 2007. He made the remark that supply constraints due to aging wells require +3% of additional capacity per year while new discoveries have been limited. This figure is almost certainly too low given that three sources have independently from each other concluded that annual average declines are around 4.5% (CERA 2007, IEA 2008, Hook et al. 2009). Given the wide divergence of opinions over the issue of oil scarcity it must have been difficult for the consortium to decide upon which oil production scenario to take. In the iTREN-2030 project a choice was made to keep oil production at a plateau from 2005 until 2030, neither declining nor increasing. Shown in figure 5 below.

Figure 5 - iTREN-2030 slide on fossil fuel scarcity driver, Source: iTREN-2030 final workshop presentation

As to new technologies the project focused on five developments: 1) Biofuels, 2) fuel efficiency, 3) available alternative technologies including hybrid vehicles, compressed natural gas vehicles (CNG) and LPG powered vehicles, 4) Battery electric vehicles and hydrogen fuel cell vehicles, 5) New transport means including electric bikes, electric scooters, and segways. These developments were based on changes seen today that will accelerate.

Many European policies were incorporated. For Transport these included transport pricing for trucks on interurban networks after 2020, charging cars on interurban networks after 2025, city tolls for peak pricing after 2025, harmonization of fuel taxes, inclusion of air transport in the EU-ETS, liberalization of the railway system, CO2 regulation for cars (130 gCO2/km in 2015, 105 gCO2/km in 2020), CO2 regulation for light duty vehicles (170 gCO2/km in 2015, 150 gCO2/km in 2020), battery electric support leading to electric cars entering the market of city cars after 2012, and electric light duty vehicles for urban delivery after 2015, enforced implementation of CNG fueling stations, effective car labeling, regulation to use HDV low resistance tyres. Also all large scale European infrastructure road and rail projects were included by using TRANS-tools.

For Energy the policies included, 20% greenhouse gas emissions reduction by 20% in 2020 against 1990, 20% renewable energy in the final energy mix until 2020 (including 10% biofuels), the measures in the energy efficiency action plan of the European Commission and the deployment of demo-power plants for Carbon Capture Sequestration.

Results of the Integrated Scenario

Population and GDP developments in the integrated scenario were first shown in the workshop. Population and labour force developments, show a relatively stable population up to 2030 and a decline in the labor force by 5% from 2010 to 2030 due to demographics as the number of retired people increases by 32%, shown in figure 6.

Figure 6 - iTREN-2030 slide on population and labour force in the integrated scenario, Source: iTREN-2030 final workshop presentation

As to GDP, assumptions were inserted that the current economic crisis will be V-shaped and that a fast recovery will occur. In the integrated scenario the European Union is back to a constant growth pattern from 2012 to 2030. Growing at an average annual rate of 1.5% in EU-27, shown in figure 7. The total effect as modeled here is a 6.3% loss in GDP in 2010 versus a situation with continued growth from 2005 onwards, and a loss of 3.8% in 2030 versus a no crisis scenario.

Figure 7 - iTREN-2030 slide on GDP developments in the integrated scenario, Source: iTREN-2030 final workshop presentation

Although maritime and air developments were also shown I focus here on road transport as most changes occurred in road transport in the integrated scenario. The development of car fleets looked very promising under the assumptions used. Due to the assumption that oil production remains stable until 2030, oil price in the scenario rose to 90 euro per barrel and remained around that level until 2030. Combined with a stable GDP development this resulted in smooth technological developments. A large increase in the efficiency of cars (both diesel, gasoline as well as new technologies). This made it possible for the car fleet to grow while oil usage declined. An overall decline in oil consumption in transport (mainly due to less oil usage in car transport) of 0.1% was noted. The car fleet grows to 260 million in 2030 from around 205 million in 2005 as motorization takes off in Eastern Europe. The growth was filled in by new technologies, however, and my guess is although this was not shown, displacement of oil usage from Western to Eastern Europe. In total the integrated scenario shows a growth to 35 million compressed natural gas cars in 2030, a take-off of electric cars to 25 million in 2030, and the introduction of hydrogen vehicles by 2025. Also 3 million pure bio-ethanol cars would be on the road in 2030 The total number of Diesel and Gasoline cars declined from 200 million in 2008 to 190 million in 2030. And these cars (purple and purplish blue in figure 8) also run up to a certain percentage of biofuels.

Light Duty Vehicles benefit also from high oil prices by increasing efficiency, and the take-off of electric vans and light trucks by 2018 resulting in 2 million of these vehicles by 2030. In total oil driven light duty vehicles increase from 20 million in 2008 to 21 million in 2030.

Figure 8 - iTREN-2030 slide on car and light vehicle developments in the integrated scenario, Source: iTREN-2030 final workshop presentation

If these changes occur in the road sector it will lead to a significant decline in CO2 emissions in the overall European transport sector as shown in figure 9. Despite increases in total freight kilometers by 33.9% or 1700 to 2450 billion tonne kilometer from 2010 to 2030, and an increase by 25.7% or 4400 to 5500 billion passenger kilometers from 2010 to 2030 in cars. According to the iTREN-2030 team the European Union is steering towards a trend-shift in emissions against a 'business as usual' reference scenario shown in the light purple bar on top in figure 9.

Figure 9 - iTREN-2030 slide on CO2 emissions in the integrated scenario, Source: iTREN-2030 final workshop presentation

Conclusions from the iTREN-2030 team

The iTREN-2030 team concluded the workshop with several interesting conclusions here reproduced from the presentations:

About CO2 emissions:

-In the integrated scenario total CO2 emissions from transport decrease due to declining emissions from road transport.
- Rail CO2 emissions continue to increase but at a lower growth rate, and only Air transport CO2 emissions continue at relatively the same pace of growth.

About economic growth:

- Economic growth is expected to be lower than in the past (less than 2% versus more than 2% before the economic crisis),
- In a fast recovery scenario around 4 years is needed to achieve the pre-crisis economic level.
- The impact of the economic crisis provides additional time to solve problems and foster the break-in-trends.
- Dr. Wolfgang Schade the project leader however put his doubts at whether this is such a realistic scenario by saying "This assumes that the financial crisis is solved - is it solved permanently? There are signs that we are building up the next bubble."

About vehicle fleets:

- Savings achieved by increasing fuel efficiency of passenger cars compensates expenditures for road charges.
- Average CO2 emissions of the EU-27 fleet until 2030 indicate that measure of the integrated scenario are not sufficient as only a level of 140 gram of CO2 per kilometer is reached in 2030 (versus a policy goal of 105 g cO2 per kilometer in 2020.
- Despite breakthroughs of battery technology, the potential of electric cars for long distances is supposed to be limited.
- Motorisation in EU-12 (Eastern Europe) reaches the EU-15 (Western Europe) level in 2030.

Reflecting on transparency and modeling limitations

I conclude with some personal reflections on the final workshop and the models. It was great to see many people from the European Commission (DG-TREN) and knowledgeable stakeholders being closely involved and openly reflecting on the process at the final workshop. This type of approach, where models are constructed to aid policy makers, and policy makers and knowledgeable parties are involved in the process, is in my opinion a necessity to deal with the complex problems that we face. I can only hope that such an approach will be more embedded in political decision making at the national level of my country, the Netherlands. I do think that more room needs to be given in these type of workshops to limitations and uncertainties. As in the end I did leave the workshop with a feeling that the modeling exercise did not properly addressed this. Although the purpose of iTREN-2030 was not to create the best possible scenario but to integrate the four models and show the possibilities of a scenario with likely policies, the integrated scenario did show the limitations that are inherent in the current model setup. These cannot be solved by simply altering some variables of the models, hence it is relevant in light of the main goal of iTREN-2030. Specifically I here mention three areas of importance that from my point of view need to be addressed in the future.

1) POLES the energy supply part of iTREN-2030 models energy supply from a neo-classical economic point of view. Higher prices resulting in more reserves and a gradual shift from conventional to unconventional production. Looking purely at reserves from a price perspective ignoring energy costs of production, and ignoring production flows constraints due to physical (water, materials, labour force) or political (lack of market access, oil production cap policies in OPEC countries) limitations. The iTREN-2030 project team wisely has steered around this limitation by imposing a scenario where oil production does not increase up to 2030. However this is only a partial solution. Better supply modeling can be done by either creating a new model, or augmenting the power of POLES to forecast supply by integrating physical and political production factors, oil & gas industry cycles, and energy costs of production (Energy Return on Energy Invested). Also I think more feedback needs to be created in the POLES model although based on the limited information available on POLES this may be an incorrect perception.

2) Macro-economic effects of high oil prices appear to be incorporated in a limited fashion given that GDP growth continues in a smooth fashion until 2030 after the fast economic crisis recovery. We know from several studies conducted independently that the United States economy is not able to bear oil prices much above 80 to 100 dollars p

An interview with Stoneleigh - the case for deflation

Thu, 29 Oct 2009 08:32:00 GMT

At the ASPO conference in Denver, October 2009, I had the good fortune to meet Stoneleigh, former editor of The Oil Drum Canada, who left the TOD crew with colleague Ilargi to set up The Automatic Earth where they publish stories, news and analysis of the unfolding financial crisis. I spent a couple of days chatting with Stoneleigh where she recounted her rather gloomy prospects for the immediate future of the global economy. The following interview is a summary of her analysis of the unfolding situation. Note that in a departure from convention my questions are set in "blockquotes" to distinguish these from Stoneleigh's responses.

Stoneleigh, the world economy seems to be suffering from two great structural woes at present, namely stubbornly high energy prices that are linked to demand that is persistently ahead of the supply curve, and a level of debt that has destabilized the global finance and banking systems. Can you explain for us the scale and structure of this debt and to what extent write-downs and quantitative easing (QE) have solved this problem?

Firstly, I would say that the energy prices that currently seem stubbornly high should fall substantially as the speculative premium evaporates and demand falls on a resumption of the credit crunch. The sucker rally that has spawned all the talk of green shoots is essentially over in my opinion. The result should be a reversal of a number of trends that depend on the ebb and flow of liquidity - we should see stock markets and commodity prices fall, a significant resurgence in the US dollar and a large contraction of credit. The scale of the reversal should be substantial, as should its effects on energy demand. Demand is not what one wants, but what one is ready, willing and able to pay for, and in a severe credit crunch the capacity to pay for supplies of most things will be severely reduced.

Figure 1

As demand falls, and with it prices, investment in the energy sector is likely to dry up. Many projects will be uneconomic at much lower prices, meaning that the projects which might have cushioned the downslope of Hubbert’s curve (and the much steeper net energy curve), are unlikely to be developed. In this way a demand collapse sets the stage for a supply collapse that could place a hard ceiling on any prospect of economic recovery. That is a recipe for extremely high energy prices in the future.

Secondly, our vulnerability to the consequences of debt is extremely high at the moment. The scale of that debt is staggeringly large. The global credit hyper-expansion has been decades in the making and is now significantly larger than notable events of the past such as the South Sea Bubble of the 1720s and the Tulip Bubble of the 1630s. It dwarfs the excesses that led to the Great Depression.

Figure 2

Credit bubbles are inherently self-limiting, proceeding until the debt they generate can no longer be supported. We have already passed that point and we are now two years into a contraction phase that is about to accelerate. As the aftermath of a credit bubble is typically proportional to the scale of the excesses that preceded it, we should be in for the largest economic contraction for at least several hundred years, and it will be global.

Real estate, which is a major focus of the mania, should do particularly badly in the coming years (in fact the coming decades or longer). There is still so much deleveraging ahead, and so many danger signals, such as the scale of the coming interest resets on US mortgages between now and 2012 (below). While the subprime resets are ending, Alt A and Option ARMs are just beginning.

Figure 3

There will be a very significant undershoot of historically average values, as there always is following a mania (much more than the Case-Shiller projection below suggests). In my opinion, housing prices are likely to fall at least 90% on average. For those who own property on margin, this will be a disaster.

Figure 4

For evidence that this crisis is indeed global, look, for instance, at European housing bubbles, which were worse than in the US.

Figure 5

Figure 6

Unlike inflation, which divides the underlying real wealth pie into smaller and smaller pieces, credit expansion creates multiple and mutually exclusive claims to the same pieces of pie. Once a credit expansion reaches its maximum extent, and contraction begins, these excess claims begin to be extinguished. Unfortunately, the leverage is such that there are probably over a hundred claims to each piece of pie. While contraction begins slowly, as is the nature of positive feedback loops, it picks up momentum until a cascade point is reached, whereupon one can expect the excess claims to be extinguished in a rapid and chaotic process. This amounts to a rapid collapse in the supply of money and credit relative to available goods and services, which is the definition of deflation.

Figure 7

The scale of the problem has been temporarily concealed by a market rally and the shovelling of tens of trillions of dollars of taxpayer’s money into a giant black hole of credit destruction. This has done nothing to reignite lending, but the temporary (and entirely irrational) resurgence of confidence has restored a measure of liquidity. As that confidence evaporates with the end of the rally, that liquidity will also disappear

Banks hold extremely large amounts of illiquid ‘assets’ which are currently marked-to-make-believe. So long as large-scale price discovery events can be avoided, this fiction can continue. Unfortunately, a large-scale loss of confidence is exactly the kind of circumstance that is likely to result in a fire-sale of distressed assets. The structure of the credit default swap component of the derivatives market makes this very much more likely.

The CDS market allowed large bets to be placed on certain prices falling, and by entities which did not have to own those assets. This creates a perverse incentive for some parties to cause others to fail for profit (akin to me being able to take out fire insurance on your house and thereby give me an incentive to burn it down). An added complication is the extreme degree of counterparty risk that resulted from a complete lack of capital adequacy regulation. Many parties with winning bets will not be able to collect, so they may cause financial mayhem for nothing. The CDS market is worth some $62 trillion, and a meltdown is very likely in my opinion.

A large-scale mark-to-market event of banks illiquid ‘assets’ would reprice entire asset classes across the board, probably at pennies on the dollar. This would amount to a very rapid destruction of staggering amounts of putative value. This is the essence of deflation.

I have for a long time argued and believed that there are so many interests vested in protecting our current system that national governments, the IMF and institutions working together would keep the market flooded with liquidity in order to ward off the threat of deflation. In fact, it seems that a prolonged period of inflation is the only way to diminish our debts. I sensed at ASPO International in Denver that this was the majority view. Do you agree that inflation is the most likely near term outcome of current monetary policy?

Figure 8

Absolutely not. I agree that this is the consensus opinion, but I see it as fundamentally mistaken. The debt monetization that is going on has done nothing to increase the supply of money and credit relative to available goods and services, which is the definition of inflation. Credit contraction dwarfs debt monetization, leaving us in a state of net contraction, even though we have just experienced a large rally lasting months, which should have been the most favourable condition for reigniting lending if such a thing were in fact possible. I would argue that it is simply not possible and that deflation is inevitable.

Figure 9

Figure 10

Credit bubbles always end this way, with the mass extinguishing of the excess claims debt represents. They are essentially Ponzi schemes, crucially dependent on the continued buy-in of new entrants. Globalized finance brought a flood of new entrants following the liberalization of the early 1980s, but there are now no more new sources of wealth to tap. Deregulation allowed the reckless to gamble away virtually everything, including bank deposits and pension funds. Globalized finance has created a giant Enron, which while appearing robust is actually almost completely hollowed out. Such structures implode, often without much notice.

Figure 11

In my opinion, deflationary deleveraging will continue until the (small amount of) remaining debt is acceptably collateralized to the (few) remaining creditors. Until that point, there can be no lasting return of the confidence required to rebuild shattered credit markets. Deflation is ultimately psychological. Without trust we will see hoarding of the cash which will be very scarce in the absence of the credit that currently comprises the vast majority of the effective money supply. The combination of scarce cash and a very low velocity of money will be toxic.

Money is the lubricant in the economic engine and without enough of it that engine will seize up as it did in the 1930s, when farmers dumped milk they couldn’t sell into ditches while others were starving for want of the money to buy food. There was plenty of everything except money, and without money, one cannot connect buyers and sellers. Potential buyers will have no purchasing power as they will have lost access to credit and their ability to earn an income will be hit by spiking unemployment. Those who still have jobs will find that they have no bargaining power and there is therefore no wage support. Sellers and producers will have no market and will themselves lose the means to purchase supplies or raw materials for the things they would like to produce. If conditions remain frozen for any length of time, they will go out of business. The deeper the collapse, the more protracted the trough and the more difficult the eventual recovery.

Figure 12

I would argue that we have no need to fear inflation until we have reached a trough - until the deleveraging impulse is spent. We can expect to spend a long time in the liquidity trap, where real interest rates will be much higher than nominal rates, leaving central bankers “pushing on a string”.

Some would argue that faced with the unimaginable specter of deflation that governments will seize control of interest rates from the bond market. Why do you think this may not happen?

The bond market is far more powerful than governments at this point. While the international debt financing model remains, the bond market will retain its power to prevent money printing. Even though governments are not succeeding in increasing the effective money supply for reasons already discussed, they are nevertheless increasing systemic risk with their activities. This is a recipe for very much higher interest rates as a risk premium. Governments do not set interest rates, they decide what rate to defend, but if that rate is substantially different from what the bond market requires, then defending it would be ruinous.

Figure 13

I think we are headed (not imminently but eventually) for a bond market dislocation, with nominal interest rates on government debt spiking into the double digits. This will amount to hitting the emergency stop button on the economy, especially since real interest rates will be substantially higher (the nominal rate minus negative inflation). I am in fact expecting interest rates on private debt to rise before we see problems in the market for government debt, as the latter should benefit substantially in the shorter term from a flight to safety. The risk premium on private debt is already rising, which is a serious danger signal for such thoroughly indebted societies as we see in the developed world.

But stock markets are booming again, several OECD economies are emerging from recession, unemployment has stabilized, there are green shoots everywhere. Surely the current QE strategy is working?

The green shoots are gangrenous. Some of the largest market rallies on record happened during the course of the Great Depression, as depressions are associated with very high volatility. Look for instance at the great sucker rally of 1930. There are always rallies of all different sizes in any bear market, just as there are pullbacks of all sizes in bull markets. No market ever moves in only one direction.

People tend to extrapolate recent trends forward, but this amounts to stepping on the gas while looking only in the rearview mirror. This is one reason why major trend changes are so rarely anticipated. Another is that the prevailing view of markets is fundamentally wrong. There is no perfect information, perfect competition, stabilizing negative feedback, rational utility maximization or efficient markets. Markets are irrational, driven by swings of optimism and pessimism, or greed and fear, in an endless tug of war, and largely in an information vacuum. Investors chase momentum by jumping on passing bandwagons, hence demand for financial assets increases when prices are rising and falls when prices are falling, in classic positive feedback loops.

Figure 14

We have just lived through a period of several months when greed and complacency were in the ascendancy, but that trend is about to reverse in my opinion. Looking at markets as constructs of human herding behaviour allows them to be probabilistically predictable, permitting the forecasting of trend changes. For anyone who is interested in pursuing this idea further, I suggest looking into Bob Prechter’s socionomics - a fascinating subject which delves into the many effects of changes in collective mood.

For instance, as pessimism deepens, driving economic contraction, one would expect to see many manifestations of collective anger and mistrust. As this progresses it is likely to lead to xenophobia and a blame-game, with skillful manipulators (such as the fascist BNP leader Nick Griffin in the UK) poised to direct the anger of the herd towards their own chosen targets. The potential for serious social fragmentation is very high when expectations have been dashed and there is not enough to go around. Having lived through a very long period of manic optimism and increasing inclusion, we in the developed world are not used to expressions of the dark side of human nature, except for entertainment purposes in popular television programmes. It will come as a considerable shock.

Would you care to give your opinion on where the Dow Jones Industrial Average is headed in the near (1 year) and medium terms (2 to 5 years)?

I think the market will fall hard (intervening short rallies notwithstanding) for perhaps 18 months. This was the length of the first leg down (October 2007-March 2009) and so represents a reasonable first guess at how long the next leg at the same degree of trend might last. I think we will see falls of thousands of points in a series of cascades. I don’t see the markets reaching a lasting bottom until probably the middle of the next decade, and even then I don’t expect it to be a final bottom. This has been the largest credit bubble in history, and the aftermath of a major bubble always undershoots where it began before any kind of recovery begins.

Figure 15

The aftermath of the last major mania - the South Sea Bubble in the 1720s - lasted decades and culminated in a series of revolutions.

Figure 16

We are still relatively near the beginning of our own crisis, but already it compares with the Great Depression.

How do you see the US$, gold and oil trading in the same time frame?

I think almost all assets will fall as price support is knocked out from underneath them, but the dollar should rise initially on a flight to safety. Scarce cash will be king for a long time, and the value of one’s currency relative to available goods and services domestically will matter much more for most people than its value relative to other currencies internationally.

In a deflationary scenario, prices fall, but purchasing power typically falls even faster, meaning that everything becomes less affordable despite the lower nominal prices. Prices in real terms, adjusted for changes in the supply of money and credit, are what matter. In a world where almost everything is becoming rapidly less affordable, the essentials will be the least affordable of all, as a much larger percentage of a much smaller money supply will be chasing them. This will confer relative price support.

Although we could initially see a large glut in energy supply as demand falls off a cliff, this is likely to lead to supply collapse as investment dries up, hence I expect energy prices to bottom early in this depression. Both financial and physical risks to energy exploration are likely to increase substantially in a destabilized and capital constrained world, and even maintaining existing assets could become very difficult. This is a recipe for much greater state involvement in ownership and exploitation of (probably deteriorating) energy assets, with increasing conflict over those assets as supply gets dramatically tighter with lack of investment.

As for gold, I expect it to fall initially as people sell not what they would like to, but what they can, in order to raise the cash they need for living expenses and debt servicing. Owning gold is likely to become illegal again (as it did in the Great Depression) in my opinion. This wouldn’t necessarily stop you owning it, but would stop you trading it (at least without taking major risks) for other things you might need. Owning gold now therefore only makes sense if one is confident of being able to sit on it for a very long time, as it will hold its value over the long term as it has for thousands of years.

What will be the consequences for unemployment levels and services provided by government?

Figure 17

Unemployment will go through the roof as the prospects for selling most goods and services decline dramatically. In the developed world we are nations of middle men - generally service economies where we make a living figuratively taking in each other’s laundry. Most of us produce relatively little. Even those who do will find almost no market for their exports, and those who could find buyers may not be able to send shipments as credit contraction prevents shippers from getting the letters of credit they need to ship goods. A glance at what has happened to the Baltic Dry Index (below) indicates the difficulties already facing shipping companies.

Figure 18

Unfortunately middlemen are almost completely expendable, and the services of others are likely to become unaffordable for the majority very quickly. While there will be a huge surplus of labour, and the few who retain purchasing power will be able to hire anyone they want for very little, most people will have to do everything for themselves, as poor people have done throughout history and as most of the population of the world does now. Not only will we lose access to the paid labour of others, but we will lose our virtual energy slaves as well. This will represent an enormous fall in the standard of living for the vast majority.

Figure 19

Whereas inflation can conceal a fall in purchasing power, so that people may not even realize it is happening, deflation brutally exposes it. Wages would have to fall just to keep purchasing power the same, but keeping it the same will not be an option for cash-strapped employers. In addition, with a large surplus of labo

Counting All the Carbon

Thu, 29 Oct 2009 06:12:00 GMT

An editorial in this morning's Wall St. Journal reminded me that I had intended to update my readers on the latest installment in the ongoing saga concerning the global land-use impact of biofuels. The Journal's comments referred to a paper in the latest issue of Science entitled, "Fixing a Critical Climate Accounting Error", which concludes that the manner in which the greenhouse gas impacts of biofuels are currently assessed fails to account for significant emissions that occur outside the envelope normally drawn around an ethanol or biodiesel plant and the farms that supply it with feedstock. And if that omission weren't glaring enough, in the course of preparing for a meeting tomorrow I ran across another instance in which regulators appear to be turning a blind eye to the full impact of another popular option for addressing climate change, electric vehicles. As we prepare to re-orient our entire economy around the restrictions embodied in pending climate legislation, it is essential that we account for all of the emissions involved in a consistent way, and on a scale matching the global environmental problem we're trying to solve. This is crucial to making real progress on reducing emissions, rather than just making us all feel good about what we are doing.

When the emailed table of contents for the October 23 issue of Science showed up in my inbox last Friday, I spotted the name of Timothy Searchinger of Princeton University as lead author of the paper cited by the Journal today. Dr. Searchinger was also the lead author of an earlier paper in Science that I highlighted last February, when the debate concerning the global land-use implications of corn ethanol was just getting underway. Dr. Searchinger's collaborators on the new paper are an impressive bunch, including Dr. Dan Kammen, the director of the Renewable and Appropriate Energy Laboratory at U.C. Berkeley.

The report provides further evidence that it's no longer appropriate to assume that just because the carbon embodied in biofuels such as ethanol originated in green plants that absorbed it from the atmosphere, they must therefore be "carbon neutral"--other than the emissions from fossil fuels used in the cultivation, harvesting and transportation of the crops from which they are produced, along with the energy used in their processing. Additional emissions apparently result from the global displacement of the crops turned into energy here, and in some cases those emissions are on a similar order of magnitude to the direct emissions from the combustion of the biofuels--combustion that has gotten a free pass until now.

This is a highly inconvenient result for those engaged in the production of biofuels from food crops, on two levels. First, it puts the climate change justification for the subsidies and mandates responsible for the rapid ramp-up of conventional biofuel production in question. Second, the source of this doubt is no less than one of the same scientific journals in which so much of the peer-reviewed science contributing to the oft-cited scientific consensus on climate change has appeared, and subject to the same level of scientific scrutiny. Casting doubt on the source of this unwelcome message thus risks casting doubt on the entire edifice upon which the current, much-expanded biofuel endeavor rests.

Let's be clear that I don't blame the biofuel industry for promoting a product that many thought would help, but may ultimately turn out to do little or nothing to reduce the greenhouse gas emissions implicated in climate change, any more than we should blame the producers and consumers of fossil fuels for their contribution to the accumulation of those gases before the current consensus on climate change emerged. (I confess that I regard attempts to portray that consensus as having existed as long as 40 years ago as the worst kind of revisionism, since the creation of the consensus depended not on a few key insights, which might have turned out to be wrong, but on mounting evidence from the steady accumulation of peer-reviewed research during that interval.)

Having said that, I have a much harder time understanding the inclusion of an equally serious--and apparently entirely conscious--omission in the new automotive fuel economy and emissions standards jointly developed by the Environmental Protection Agency and the Department of Transportation. I had occasion to browse through the agencies' proposed text (warning: large file) yesterday and was startled to see that for purposes of calculating carmakers' fleet CO2 emission averages, it assumes that electric vehicles (EVs) and the electric usage of plug-in hybrids (PHEVs) have zero lifecycle emissions. Not only that, but the proposed regulation would count each EV as if it replaced two other emitting cars: thus, zero GHG impact not once but twice. Even the authors admit that this is false, and here I must quote,

"EPA recognizes that for each EV that is sold, in reality the total emissions off-set relative to the typical gasoline or diesel powered vehicle is not zero, as there is a corresponding increase in upstream CO2 emissions due to an increase in the requirements for electric utility generation. However, for the time frame of this proposed rule, EPA is also interested in promoting very advanced technologies such as EVs which offer the future promise of significant reductions in GHG emissions, in particular when coupled with a broader context which would include reductions from the electricity generation. For the California Paley 1 program, California assigned EVs a CO2 performance value of 130 g/mile, which was intended to represent the average CO2 emissions required to charge an EV using representative CO2 values for the California electric utility grid."

But while I appreciate the agencies' rationalization that EVs and PHEVs might be counted as having zero emissions on a purely temporary basis in order to provide incentives for carmakers to accelerate their introduction, I'm also painfully aware that other such "temporary" measures have persisted long after the original justification for them had become obsolete--and here I can't help but think of the ethanol blending credit that is now in its 41st year.

Why do these loopholes in the way we tally greenhouse gas emissions matter enough for me to hammer away at them like this? Consider the proposed vehicle rules. By ignoring emissions that occur outside these vehicles, the government is discouraging carmakers from using less exotic technologies that might actually deliver comparable savings of fuel and emissions sooner, and at a lower cost to taxpayers and consumers. A conventional Toyota Prius hybrid running on gasoline emits only 10% more grams of CO2 per mile than California claims for an EV powered by its greener-than-average state electricity mix. Since the same number of batteries could equip many more Prius-type hybrids, at a much lower cost per car than for a full EV, the benefits of rushing EVs into production seem much less compelling at this point, particularly when the government is also subsidizing the purchasers of EVs and PHEVs to the tune of many thousands of dollars per car. That will amount to billions of dollars of extra subsidies for an incremental emissions benefit that might just be negative for an EV recharged using coal-fired power.

"Start as you mean to go on," goes the old saying. We know that whatever their energy security benefits and general hi-tech niftiness, EVs are not zero-emission vehicles, just as we now understand that it is likely that burning corn ethanol releases roughly the same level of greenhouse gases as the gasoline it is intended to replace. If cap & trade bills such as Waxman-Markey and Kerry-Boxer are to have any integrity as tools for achieving genuine reductions in the global greenhouse gas emissions behind global climate change, then we must count all the emissions from all sources, no matter how politically unpalatable that may be. EPA and DOT might do well to heed this advice, too, before establishing a new, impossible-to-revoke entitlement for the manufacturers of electric vehicles.

Smart Grid Investments

Wed, 28 Oct 2009 06:32:00 GMT

As you may know, the smart grid made big news yesterday.

But you may not know that I've been covering the topic of smart grid — and all its investment angles — in these pages for years.

I'll get to yesterday's major announcement below. . .

Gold's Most Precious Secret

One little-known gold investment could make this your most profitable economic crisis ever.

Financial institutions and governments want to keep this venture under wraps. But you can find all the details on this censored gold investment right here.

First, I've compiled a fictional interview to help you get acquainted with the smart grid — and its huge investment potential. The interview answers are all taken directly from articles I've previously written on the topic.

When was the first time you told Energy & Capital readers about the smart grid?

I first wrote about the smart grid back in May 2007 — well over two years ago. It had come to my attention that venture funding — the early, smart money — for the smart grid had grown 150% between 2004 and 2006. . . so I knew public equities in the sector would be hot soon.

Here's what I had to say then:

We're now at a critical point in the short history of sustainably-produced electricity. As it stands, we have the technology to produce electricity from wind, solar, geothermal, marine, and other well-known sources. And Green Chip investors have been profiting from them for quite some time now.

But what we're lacking are solutions for storing that electricity, for converting it, and for seamlessly introducing it to local grids—all without power interruptions and failures during peak load hours.

Of course there's money to be made on the transmission side of this issue. But I think the efficiency side will bring even greater returns.

You see, one proposed solution is the development of a "smart grid", which would enable energy-draining appliances to adjust their power consumption based on the daily fluctuations of electricity prices.

And what is the simplest way to describe the smart grid?

I've often described the smart grid as "the Internet for energy." A network of smart devices — meters, appliances, thermostats — all communicating with each other and with the utility in an effort to optimize efficiency and reduce costs.

This summer I told readers it was like the future they've been waiting for. . .

. . . Home thermostats and individual appliances that adjust automatically based on the cost of power, and water heaters that can draw power from a neighbor's rooftop solar panel. They see a time when, on a scorching hot day, a plug-in hybrid electric car charges one minute and a few moments later sends electricity back into the grid to help avert a brownout.

Also coming are utilities that get instant feedback on a transformer outage or shift easily among energy sources from wind turbines to coal-burning power plants and back to the turbines when the wind begins to blow again.

And, from miles away, power companies will peer into homes and businesses, then automatically lower thermostats or adjust power use, depending on demand and prearranged agreements.

What is the investment/market potential of the smart grid?

Earlier this year I passed along an AP article that stated:

$700 billion in new electricity generation will be needed over the next 20 years.

Overall transmission modernization, including new higher capacity lines along with the communications technology, could cost as much as $1 trillion. A promise of $4.5 billion in economic recovery money for smart grid development, much of it going to help pay for installing new meters, has produced a rush by utilities and technology companies to start or accelerate projects.

And it's all starting to come together right now.

What are the latest developments?

You probably heard the big news yesterday. Here's how I described it:

Today is the day the Department of Energy announced $3.4 billion worth of federal funding to "speed deployment of advanced technology designed to cut energy use and make the electric-power grid more robust."

In laymen's terms: the Federal government is paying for about 18 million new smart meters to be installed in homes and offices around the country.

The grants are part of the stimulus. . . and will be paid out to 100 utilities across the country in spurts ranging from $400,000 to $200 million.

For investors and consumers alike, this is the equivalent of receiving free money.

Where can investors learn more about the smart grid?

First of all, there are plenty of events coming up to learn more about the smart grid.

I'm heading to GreenBeat next month, self-described as the seminal conference on the Smart Grid, bringing together leading entrepreneurs, investors, utilities, technology executives, and policymakers to accelerate the development of a leaner, more efficient electrical grid.

I've also compiled a new report detailing how investors can profit from the smart grid. . . and the billions of dollars being poured into its development by public and private entities.

Remember, just yesterday the federal government dropped $3.4 billion to buy millions of new smart meters. All that money will be paid to companies operating within the smart grid realm, which means easy profits for investors.

This new report has all the details about smart grid investing.

Of course, I'll be covering the smart grid — as I have been for years — in these pages, and in the pages of our sister publications, Wealth Daily and Green Chip Stocks.

Call it like you see it,

Nick

Missing the Point on Energy and Jobs

Tue, 27 Oct 2009 02:19:00 GMT

Two emails I received yesterday delivered press releases from two organizations with very different agendas, both emphasizing the impact of energy on jobs. With US unemployment showing little response to the economic stimulus, the rebounding stock market, or the "green shoots" appearing in some sectors, it's understandable that companies, groups and even the government would want to play up the direct employment impact of key initiatives or policies. Yet when it comes to energy, I believe much of this effort misses the mark. Our employment goal for energy should not be to have as many people working in the energy sector as we can, but to have the most efficient and cost-effective energy sector possible, in order to promote job creation and retention in the rest of the economy, where the vast majority of jobs are found. Our decisions about energy policy should not depend on the creation of a few green jobs.

I'm hardly suggesting that energy jobs are insignificant or inconsequential. I've spent my entire career in energy, and I recommend it without hesitation as a field in which one's contributions can have a measurable impact on society, often with better remuneration than in many other pursuits. The Oil & Natural Gas Industry Labor-Management Committee isn't wrong to stand up for the millions of industry-related jobs at stake in the current Congressional debate on energy industry tax benefits, any more than Wind Capital Group is to highlight the 2,500 jobs associated with the supply-chain effects of their Lost Creek Wind Project. But as important as preserving or expanding energy-related jobs appears today, it is even more essential for the long-term interests of the country that we not obsess about this one aspect of energy, to the detriment of others that will affect overall US employment and international competitiveness long after the unemployment rate has returned to its normal range.

Putting this into perspective requires recalling that by its nature energy is a capital-intensive business, rather than a labor-intensive one. One way to gauge that is to look at the labor productivity of energy companies. The latest annual report of my former employer, Chevron, reveals that on average in 2008 its 61,675 employees each accounted for $4.3 million of revenue, resulting in nearly $700,000 of pre-tax net income (after covering their own salaries and all other expenses.) In the utility sector, the comparable figures for FPL Group were $1.1 million and $137,000, respectively. Even a small, rapidly-growing renewable technology firm such as First Solar enjoyed revenue and pre-tax profit per employee in 2008 of approximately $354,000 and $132,000, respectively. With its high labor productivity, the primary employment impact of energy occurs where it is consumed, not where it's produced, because energy is such a crucial input for so many sectors and the sine qua non of more than a few.

When legislation like the Kerry-Boxer climate bill, which includes many provisions that would make energy more expensive for consumers and businesses, is marketed as a jobs bill it merits a skeptical reception. Stimulating jobs in the 6-10% of the economy devoted to energy seems unlikely to compensate for the loss of jobs that would ensue throughout the broader economy, if climate legislation caused energy costs to soar. That may, however, be a necessary evil, and the question we should really be asking is not how many green jobs such legislation will create, but whether on balance its provisions are truly justified in order to address climate change--even if they resulted in a net loss of employment, as I strongly suspect they would. Unless the answer is an unequivocal yes, we could be setting our long-term energy policy on the basis of a metric that is only a minor contributor to either energy costs or total economic activity, for reasons that seem unlikely to stand the test of time.

Insights Regarding Future Oil Production Based on ASPO Denver Presentations

Sun, 25 Oct 2009 16:27:00 GMT

"Peak oil can be a very tricky topic, the way I talk about it and deal with it at the end of the day is: We need to revolutionize the way we consume and produce energy... We need to really be the leaders in saying: the future for our children and our grandchildren as far as energy consumption and as far as production, it looks like this" with those words Colorado Governor Bill Ritter started his closing speech at the ASPO conference in Denver that took place from 17 to 19 October 2009.

Telling our children and grandchildren where they will draw their heat, electricity and liquid fuels from was not a topic of discussion in Denver. Nonetheless, much information was conveyed on the relationship between the economics crisis and the future of oil. This post is an attempt to summarize the main points on oil and the economy from the conference presentations--concluding that there are three distinct future trajectories as we go forward.

Oil - the supply side - what flow rate can we reach?

An overview of the future of oil at the conference was given by Ray Leonard of Hyperdynamics Corporation (PDF) and Chris Skrebowksi of Peak Oil Consulting (PDF). Ray Leonard who has extensive experience as former Vice President of Yukos in Russia and Kuwait Energy Company in Kuwait, showed that conceptually dividing the world of oil into 3 segments makes sense:

- OPEC controlling 73.9% of world reserves and 44.9% of worldproduction
- The Former Soviet Union (FSU) controlling 12.7% of world reserves and 15.6% of world production
- The Rest of World controlling 13.4% of reserves and 39.5% of production.

This distinction makes sense from a political perspective, as OPEC and the FSU operate under much different political and economic circumstances than the Rest of the World. Ray Leonard estimates that Russian production could theoretically increase by another 4 million b/d with new field developments but that this is unlikely to happen due to the Russian tax system and Russian firms lacking the necessary capital. OPEC is in a similar situation of not being able to expand production due to a lack of capital as International Oil Companies are barred from investing in secondary and tertiary recovery. In Ray Leonard's words: "Limitation on production level for OPEC is mostly due to politics, lack of motivation, investment level and type of crude; NOT shortage of reserves." OPEC could hence be increasing production greatly by implementing secondary and tertiary production techniques such as water injection but this possibility is nigh impossible in his view. The division Ray Leonard made between these regions was neatly depicted by Chris Skrebowski in a chart reproduced here.

Figure 1 - Overview of Reserves and Production in three different regions of the world from Peak Oil Consulting

Ray Leonard showed that production in the Rest of the World peaked in 2002 and by 2008 declined by 7%. With OPEC and Russia unable to increase production significantly due to politics and economics, we are nearing World Peak Oil Production. "Production peak of ultra deep water fields will allow 'peak' to be a 'plateau' in the coming decade, followed by a sharp fall" according to Leonard. Unconventional production is not set to change this situation, as his expectation is that the contribution of this category of oil will be less than 3 million barrels per day in the short to middle term.

The specific path of future oil production was projected by Chris Skrebowksi using the oil megaprojects approach, wherein all the large fields expected to come on-stream in the next seven years are tabulated and compared with decline rates in current fields. In this approach, only the supply side is taken into account and the demand side is ignored. From that perspective according to Chris Skrebowksi the current plateau will continue until around 2014 when the decline sets in, shown in figure 2 below.

Figure 2 - Update from Peak Oil Consulting on megaprojects flows in dark blue versus net production when offsetting an annual decline of 4.5%, from Peak Oil Consulting

A similar approach was presented by myself in the first update of a new project where I showed a continued plateau with potentially a small increase before the decline starts around 2014. This date is based upon an analysis using a database of individual projects and the assumption that the decline rate will accelerate from 4.5% to 6.5%. The difference between my analysis and Skrebowski's is that I use a more severe decline rate and also include many more projects. There are around 600 fields in my database versus around 250 in Chris Skrebowski's, because he did not include smaller fields, hence the term megaprojects. A post on this is in the works with publication due in November here at The Oil Drum.

Figure 3 - Update from Rembrandt Koppelaar on oil production to 2030 including current fields, discoveries, new fields projects, enhanced oil recovery, natural gas liquids and unconventional oil.

Interestingly another speaker at the conference, Douglas Westwood, presented a similar scenario with a plateau continuing until around 2014, after which the decline sets in:

Figure 4 - Liquid Fuels production scenario from Douglas Westwood to 2025 including onshore, offshore, oilsands, oil shales, Gas-to-liquids, coal-to-liquids and biofuels.

Such analyses however do not include demand side effects and are therefore limited in portraying an accurate picture of the future. A major factor that was discussed extensively at the conference was fortunately the interplay between supply, demand and prices.

From oil supply analysis to demand analysis - three future trajectories

Steven Kopits from Douglas-Westwood (PDF presentation not available) kicked off the discussion on the role of demand and prices in oil supply by showing that growth in the world economy did not stop despite a lack of growth in oil supply since the fourth quarter of 2004. "Oil supply stopped responding, GDP growth still went up, oil prices rose, and that put us [the United States economy] in a recession, and that's why I argue that this is the first Peak Oil recession," according to Kopits. Based on this reasoning, future oil prices will be determined by how quickly demand will again hit oil capacity limits. Kopits thinks that this could happen quite soon, as he foresees huge growth levels in China. The country is expected to overtake the US in oil consumption by 2018, at 21 million barrels of production per day. The general pattern that he presented is that emerging economies will overtake supply from the developed economies of the world. Oil consumption in the latter will be driven down by high prices resulting in increased fuel efficiency and the development of large scale alternatives. "Belt tightening is expected to happen" says Kopits. So in one future possibility a 'bullish path' emerges where the pattern we just saw happening repeats itself, emerging economies grow, prices rise and developed economies have to give way and are forced to use less oil. The big question in this future is the amount of growth in emerging economies, most notably China. Allen Stevens, of Stifel-Nicolaus (PDF) showed an interesting graph in his presentation comparing per capita consumption in various countries, showing the huge gap between oil consumption in emerging and developed economies.

Figure 5 - Per capita oil consumption in USA, Japan, South Korea, Hong Kong, China and India, chart from Stifel-Nicolaus

The view that Chinese demand will move up so quickly was contested by Michael Rodgers of PFC Energy (PDF) who gave an outlook on future oil & gas production and consumption in China (PDF). Based on their model that included eight categories of oil demand, energy efficiency, solid but slowing GDP growth patterns, and a similar car trajectory as in developed countries, Chinese oil demand was foreseen to hit 11 million b/d by 2015 and slightly more than 12 million b/d by 2020, shown in the figure below.

Figure 6 - Chinese oil demand by end use from 1990 to 2030, chart from PFC Energy

This slower growth was also portrayed in Dave Cohen of ASPO-USA (presentation found here (PDF). Cohen showed a second type of future with a more protracted economic downturn--either a very long slow recovery with many up and down patterns or a more L shaped depression similar to the great depression of the 1930s. The underlying mechanism for this pattern would be the inter-linkage between the Chinese and United States economy. It is clear that Americans must repair their balance sheets and are in deep debt trouble, but also the Chinese economy is not faring so well according to Dave Cohen. He showed that China's GDP numbers are inflated because of the way output is calculated, and that recent GDP growth in China is (almost) entirely due to a huge internal governmental stimulus which is not a sustainable economic investment pattern. "The Chinese, traditionally a nation of savers, needs to build up their domestic demand. This requires steady “organic” year-over-year growth over the next decade or longer. Otherwise, the economy overheats and you get mis-allocation of resources (capital) and bubbles (like now)," according to Cohen. He concludes that China will not provide the consumption engine the world economy needs for sustained growth as their economy and domestic demand is too small, and because of these factors, that Chinese oil demand will not grow in the future at the levels seen pre-2008. The implication of these factors is that there will be a much slower return to high oil prices and several cycles of contraction before the world's balance sheets are again at a reasonable level.

Figure 7 - China's GDP and lending, chart from Dave Cohen of ASPO USA

A third possible future which looks at the financial system as the driver of our current situation was shown by Nate Hagens of The Oil Drum (PDF1), (PDF2). Hagens disagrees with Kopits in calling this the first peakoil recession: "I do not think peak oil caused this financial crisis; peak oil is one of many symptoms of an exponential growth based system running into finite limits." Due to continued exponential growth in our financial system that was not based on accumulating sufficient resources, we have accumulated so much debt that this can no longer be paid off under any scenario. "We have an amazing overshoot of debt, by my calculations the total amount of debt, not derivatives but total debt, is between 230 and 290 trillion dollars...That's beyond the ability to pay back...Basically we have overextended the relationship between debt and real assets." according to Hagens. He showed the amount of debt accumulation in the United States shown in figure 8 below, but it isn't just the United States. "The whole world is around 300% to 400% in debt relative to GDP."

Figure 8 - Debt accumulation, chart shown by Nate Hagens made by Hannes Kunz of the IIER

As money is a claim on future resources, and these resources cannot be forthcoming due to limits of growth, a debt deflationary spiral will ensue, resulting in a downward trajectory of GDP, causing a decline in resource prices that results in further underinvestment in resource production. As the world comes out of this deflationary cycle, the physical resource basis for renewed growth will have degraded significantly, higher prices will kick-in again and GDP will be affected. There was no comment on how long this reinforcing cycle would continue or where it would end. Under this scenario we would have already reached peak prices according to Nate Hagens because the future economy can sustain only much lower prices due to the erosion of resource capital. Conceptually this trajectory is shown in figure 9.

Figure 9 - Conceptual development of GDP and energy prices, chart shown by Nate Hagens

Synopsis - uncertainty over our future path

Although supply side analyses show that oil supply can remain on a plateau until around 2014 and would decline relatively slowly afterwards, the picture may change significantly because of the current disconnect between levels of debt in most economies of the world and the physical resource base. Several future scenarios could emerge as a result of this situation. In one future scenario we will witness continued high oil prices as emerging economies are able to sustain renewed strong growth and thereby outbid developed countries with respect to future oil consumption. The resulting decline in consumption in OECD countries will be relatively smooth as high prices induce massive investment in energy efficiency and alternative fuels. This assumes that such fast growth is possible on the existing physical resource basis and that the current debt situation can be managed in some way. In a second future scenario, we see a much slower growth scenario in emerging economies as they too suffer from overhanging debt and are too interlinked with developed countries to be able to sustain high growth levels. The future will in that case be more like a U shaped or even great depression like L shaped situation; oil (and resource) price cycles will occur with high price volatility and a lack of sustained investment. We can muddle through, but at significant reduction in GDP as huge shocks ripple through the system, and also huge risk of political and geopolitical cascades. In a third scenario, the debt situation has become too big to solve globally, and we enter a deflationary self-reinforcing spiral. GDP will spiral downward, resulting in much less investment in the physical base of our economies. In this scenario, even when the economy recovers, resource scarcity kicks in due to a serious lack of investment, and GDP again declines under the pressure of very high prices.

As to which of these futures (or variants) will occur, I have not made sufficient analysis to offer an opinion, but I am sure that collectively there is sufficient knowledge to point to which direction is most probable.

Thanks to ASPO-USA

I want to expressly thank ASPO-USA for organizing this great conference in Denver which has brought me many useful insights in the relationship between oil and our economy.

European gas buyers unwilling to pay for security of supply

Sun, 25 Oct 2009 01:12:00 GMT

Even as we've been going through years of hand-wringing about security of supply, and about how Russia was an unreliable gas supplier, it comes out the European gas buyers are themselves increasingly refusing to pay the price that underpins the security of their Russian supplies, and are breaking their contractual obligations towards Gazprom, making Europe, erm, a less reliable customer... something that's likely to come and bite us in the near future:

European Energy Firms Fall Short in Gazprom Purchases

European energy companies, faced with weakening demand and plentiful lower-cost fuel supplies, have bought far less natural gas from Russia's OAO Gazprom this year than they are obliged to under long-term contracts -- setting the scene for a potentially damaging showdown with Moscow.

The reason for this is that long term gas supply contracts have their prices linked to that of oil, and the price of oil is now significantly higher than the price for the equivalent volume of gas on the spot markets, thanks mainly to currently very weak demand for gas in Europe, courtesy of the economic crash.

But the whole point of these long term contracts is to guarantee both supply for the buyers, and demand for the sellers. In fact, their very name ("take-or-pay," ie buyers have to pay even if they don't take delivery of the gas) suggests that it is security of demand which is the more important of the two. European buyers apparently unwilling that price is a major new development, and a very worrying one.

Of course, they will argue that they are in a competitive market, and cannot let their competitors undercut them with cheap gas procured on the spot market. In the goold old days, when they were domestic monopolies, the higher cost of supply could be passed on, in coordination with national authorities, to customers via regulated tariffs, but these don't exist. It is not unreasonable for the now deregulated players that entered into these contracts for national security reasons to be compensated for that effort. But of course there are no mechanisms to do so.

Take-or-pay contracts are a vestige of the early days of the gas industry when liquid spot markets didn't exist and producers needed long-term deals with stable prices to underpin vast investments in new gas fields.

The WSJ article blithely suggests that such long term contracts are no longer necessary, and that private markets and spot prices will spur the requisite upfront investment by companies like Gazprom. They might want to take a look at how ExxonMobil, Shell and others developed the Qatari gas industry: on the back of long term take-or-pay contracts for significant portions of the production. Even if Russia were somehow to authorize foreign investment in its gas fields, and exports of that gas by Western oil majors, the contracts would still look very similar to those currently signed with Gazprom.

The issue here is the short term gap between oil-based and gas-based spot prices, which make the Russian (and Algerian, and Norwegian) contracts uncompetitive today. But the European buyers did not complain too loudly when oil price increases in 2002-2008 were passed on to them only with a lag of several months, ie when the differential was in their favor.

So we bump against the intrinsic short termist behavior required of private firms in a deregulated market, which makes a joke of the supposed preoccupations of our governments with security of supply. Long term contracts ARE the best answer to security of supply worries, and they have worked in this industry for 40 years - and they are being trashed by the industry today, because it damages their profits this quarter.

It doesn't seem to matter that we get demonstration after demonstration that deregulated markets do not fulfill the most basic objectives of a sane energy policy (unless you count the profits of energy companies, traders and the banks supporting their speculative endeavors as the only such objectives) - the only lesson our pundits and propagandists "get" from such crises is to call for yet more deregulation.

Go figure.

Sequestration and Education

Fri, 23 Oct 2009 04:45:00 GMT

Yesterday afternoon I began scrutinizing the Senate climate bill, S.1733, widely referred to as the Kerry-Boxer bill. Like the Waxman-Markey bill that the House passed in June, the scope of Kerry-Boxer goes far beyond the establishment of an economy-wide cap & trade system for reducing greenhouse gas emissions, though at a comparatively skimpy 821 pages it has yet to acquire as much baggage as its counterpart accreted on its way to a floor vote. I was struck by the emphasis both bills place on carbon capture and sequestration (CCS), not just as a technology that receives significant support, but as the only viable pathway offered for new coal-fired power generation. However, as I looked through the provisions relating to permitting of sequestration sites and the innocuous-sounding section 812, "Performance Standards for New Coal-Fired Power Plants", I spotted a significant omission. There's nothing here to address what might constitute the largest non-technical barrier to implementing CCS. Public acceptance of it entails a significant educational effort on the efficacy and safety of this new technology. That will require going beyond the details of CCS to provide Americans a primer on basic geology.

The stakes are high. Despite recently losing some market share to natural gas and renewables, coal-fired power plants make up the single largest source of electricity in the US by a wide margin. In the 12 months through July, coal accounted for 46% of US power generation, compared with just 3% for non-hydro renewable energy. Short of simply shutting down every coal-fired power plant and leaving a gaping hole in our national electricity supply that the current generation of renewables can't yet fill, we need to find a way to control the emissions from coal directly. That's where CCS comes in. The coal power performance standards in Waxman-Markey and Kerry-Boxer would require that by no later than 2027 any new coal-fired power plants licensed after 1/1/09 must cut their net CO2 emissions by at least half. CCS looks like the only practical way of doing that--if you can call something that has been deployed so sparingly practical. But how can CCS be implemented if the public isn't willing to have CO2 stored underground anywhere?

CCS is new, but it's not so new that it hasn't already attracted pushback. Earlier this year Shell encountered significant opposition to injecting CO2 into a depleted gas field in the Netherlands. Meanwhile Vatenfall's project at Schwarze Pumpe in Germany is apparently venting its captured CO2 to the atmosphere, because the firm can't get a permit to inject it. "Not in My Ground", is how another article described opposition to carbon sequestration at an Ohio ethanol plant. My Google search even turned up a blog entitled, "Citizens Against CO2 Sequestration." Aside from the technical challenges associated with separating, transporting and injecting CO2 into geological storage sites, do these opponents have a scientific basis for being concerned about the health and safety risks? Perhaps, though an article on the subject cited by the Citizens Against blog that refers to the health hazards of drinking water mixed with CO2 had me rolling my eyes. Perhaps the author was unaware that hundreds of millions of us do that every day; we call it soda pop, and it's a big business.

Rather than dismissing all this as a simple case of uninformed NIMBYism (or as the Guardian newspaper in the UK referred to it, "numbyism", as in not under my back yard) I suspect it reflects a fundamental gap in the public's understanding of what lies beneath its feet. I simply cannot count the number of people I've encountered in the course of my long career in energy who were under the impression that oil was found as pools in giant underground caverns, rather than contained within tiny pores in solid rock strata. If most people so badly misunderstand the geological basis of a technology as established and commonplace as oil & gas drilling, how on earth can we expect them to have a coherent picture of what happens to CO2 when we pump it underground? Of course they're going to fear it could all come right back out and possibly asphyxiate them, in the manner of the volcanic CO2 seepage at Lake Nyos in Cameroon and elsewhere.

From my own perspective, the existence of enormous natural gas reservoirs--confusing terminology, perhaps--constitutes a sufficient proof of concept by demonstrating that gases can be stored safely underground for intervals as long as millions of years. If impermeable cap rock can seal in billions or trillions of cubic feet of methane, the molecular diameter of which is smaller than that of CO2, then once the CO2 is down there, the vast majority of it is going to stay there. But just as telling people that a flu vaccine is safe apparently leaves large numbers of them unconvinced, I conclude we need to invest a fair amount of time, attention and resources into educating the public about the science and safety of injecting CO2 under the ground, before we can base our national energy strategy on this technique.

Oilwatch Monthly October 2009

Thu, 22 Oct 2009 14:43:00 GMT

The October 2009 edition of Oilwatch Monthly can be downloaded at this weblink (PDF, 1.37 MB, 33 pp).

Figure 1 - EU-27, United States and Chinese oil consumption from January 2004 to August 2009

The Oilwatch Monthly is a newsletter that is available free of charge with the latest data on oil supply, demand, oil stocks, spare capacity and exports.

A summary and latest graphics below the fold.

Subscribe to receive Oilwatch Monthly by e-mail

Latest Developments:

1) Conventional crude production - Latest figures from the Energy Information Administration (EIA) show that crude oil production including lease condensates increased by 715,000 b/d from June to July 2009, resulting in total production of crude oil including lease condensates of 72.42 million b/d. Crude oil production in the EIA International Petroleum Monthly for June 2009 was revised downward from 71.76 to 71.71 million b/d. The all time high production record of crude oil stands at 74.75 million b/d reached in July 2008.

2) Total liquid fuels production - In September 2009, world production of all liquid fuels increased by 320,000 barrels per day from August according to the latest fgures of the International Energy Agency (IEA), resulting in total world liquid fuels production of 84.92 million b/d. Liquids production for August 2009 was revised downwards in the IEA Oil Market Report of October from 84.88 to 84.60 million b/d. Average global liquid fuels production in 2009 up to September was 84.61 versus 86.6 and 85.32 million b/d in 2008 and 2007.

3) OPEC Production - Total liquid fuels production in OPEC countries increased by 120,000 b/d from August to September to a level of 34.28 million b/d. Average liquid fuels production in 2009 through August was 33.66 million b/d, versus 36.09 and 35.02 million b/d in 2008 and 2007 respectively. All time high production of OPEC liquid fuels stands at 36.58 million b/d reached in July 2008. Total crude oil production excluding lease condensates of the OPEC cartel increased by 120,000 b/d to a level of 28.92 million b/d, from August to September 2009, according to the latest available estimate of the IEA. Average crude oil production in 2009 through September was 28.62 million b/d, versus 31.43 and 30.37 million b/d in 2008 and 2007 respectively. OPEC natural gas liquids remained stable from August to September 2009 at a level of 5.36 million b/d. Average OPEC natural gas liquids production in 2009 through September was 5.05 million b/d, versus 4.66 and 4.55 million b/d in 2008 and 2007 respectively.

4) Non-OPEC Production - Total liquid fuels production excluding biofuels in Non-OPEC countries increased by 190,000 b/d from August to September 2009, resulting in a production level of 49.00 million b/d according to the International Energy Agency. Average liquid fuels production in 2009 through September was 49.41 million b/d, versus 49.32 and 49.34 million b/d in 2008 and 2007 respectively. Total Non-OPEC crude oil production excluding lease condensates increased by 418,000 b/d to a level of 41.63 million b/d, from June to July 2009, according to the latest available estimate of the EIA. Crude oil production in the EIA International Petroleum Monthly for June 2009 was revised downward from 41.24 to 41.21 million b/d. Average crude oil production in 2009 up to July was 41.52 million b/d, versus 41.32 and 41.80 million b/d in respectively 2008 and 2007. Non-OPEC natural gas liquids production decreased by 6,000 from June to July to a level of 3.28 million b/d. Average Non-OPEC natural gas liquids production in 2009 through July was 3.39 million b/d, versus 3.65 and 3.79 million b/d in 2008 and 2007 respectively.

5) OECD Oil Consumption - Oil consumption in OECD countries increased by 413,000 b/d from June to July and decreased by 359,000 b/d from July to August, resulting in a consumption level of 43.46 million b/d in August. Average OECD oil consumption in 2009 through August was 43.83 million b/d, versus 46.10 and 47.68 million b/d in 2008 and 2007 respectively.

6) Chinese & Indian liquids demand - Oil consumption in China increased by 205,000 b/d from June to July and decreased by 115,000 b/d from July to August, resulting in a consumption level of 9.28 million b/d in August 2009. Average oil consumption in China in 2009 through August was 7.84 million b/d, versus 6.92 and 7.29 million b/d in respectively 2008 and 2007. Oil consumption in India decreased by 274,000 b/d from June to July and 52,000 b/d from July to August, resulting in a consumption level of 2.64 million b/d in August 2009. Average oil consumption in India in 2009 up to August was 2.86 million b/d, versus 2.60 and 2.43 million b/d in 2008 and 2007 respectively.

8) OPEC spare capacity - According to the International Energy Agency total effective spare capacity (excluding Iraq, Venezuela and Nigeria) increased from August to September 2009 by 190,000 b/d to a level of 6.74 million b/d. Of total August spare capacity, Saudi Arabia can produce an additional 3.45 million b/d within 90 days according to the IEA, the United Arab Emirates 0.57 million b/d, Angola 0.23 million b/d, Iran 0.22 million b/d, Libya 0.22 million b/d, Qatar 0.14 million b/d, and the other remaining countries 0.80 million b/d.

Total OPEC spare production capacity in September 2009 increased by 110,000 b/d to a level of 3.81 million b/d from 3.7 million b/d in August, according to the Energy Information Administration. Of total September spare capacity, 2.70 million b/d is estimated to come from Saudi Arabia by the EIA, 0.21 million b/d from Qatar, 0.20 million b/d from Angola, 0.30 million b/d from Kuwait, 0.30 million b/d from the United Arab Emirates, and 0.10 million b/d from Iran. Other countries contribute no spare capacity.

9) OECD oil stocks - Industrial inventories of crude oil in the OECD in August 2009 decreased to a level of 985 million from 1001 million barrels in July according to the latest IEA statistics. Current OECD crude oil stocks are 26 million barrels higher than the five year average of 959 million barrels. In IEA's August Oil Market Report, a total stock level of 1011 million barrels was tabulated for July; this has been revised downwards to 1001 million barrels in the October edition. Industrial product stocks in the OECD in August 2009 increased to 1471 million from 1452 million barrels in July according to the latest IEA Statistics. Current OECD product stocks are 72 million barrels higher than the five year average of 1399 million barrels. In the August Oil Market Report of the IEA, a total stock level of 1459 million barrels was tabulated for July which has been revised downwards to 1452 million barrels in the October edition.

Figure 2 - OECD Crude Oil Stocks from January 2002 to August 2009.

Figure 3 - OECD Oil Product Stocks from January 2002 to August 2009

Figure 4 - World Crude Oil Production from January 2002 to September 2009

Figure 5 - Non-OPEC crude oil production from January 2002 to July 2009

Figure 6 - OPEC crude oil Production from January 2002 to September 2009

Figure 7 - World liquid fuels production from January 2002 to September 2009

Figure 8 - Non-OPEC liquid fuels production from January 2002 to September 2009

Figure 9 - OPEC liquid fuels production from January 2002 to September 2009

The Weak Dollar

Wed, 21 Oct 2009 03:45:00 GMT

Oil prices have trended upward recently, spurring renewed speculation that only speculation could account for such a shift in the face of relatively weak fundamentals of supply and demand. It's certainly true that inventories of crude oil and refined products remain high, while demand is still well below the levels of just a couple of years ago, and OPEC is sitting on millions of barrels per day of spare capacity that could be deployed quickly if consumption spiked. But although it can't account for 100% of recent price movements, one factor stands out for its contribution to oil's lurch towards $80 per barrel after months of stability around $70: the further weakening of the US dollar relative to the Euro and other strong currencies. The future path of the dollar will be determined by a complex set of factors, including the relationship between US and other nations' interest rates, trade balances, current inflation, and expectations of future inflation. However, it's worth noting that the dollar's recent deterioration is hardly anomalous; it is part of pattern going back decades.

The above chart displays the price of West Texas Intermediate crude oil on the New York Mercantile Exchange since the beginning of August. I've added another line showing the same price in Euros, based on exchange rate data for the period. It's pretty clear that although oil priced in Euros has also been trending upward slightly, perhaps in response to reports that the global demand for other commodities is picking up--indicating that at least some parts of the world are recovering from the Great Recession--the recent upswing in oil prices looks much more muted than when expressed in dollars per barrel. That got me thinking about the long-term exchange rate trends, and where they might take us in the years ahead.

Having lived overseas and traveled extensively, I've been aware of exchange rates for most of my life. That's given me a clear perspective that the dollar isn't just weaker now than it was a few months ago or a couple of years ago, but has been deteriorating more-or-less steadily for a very long time. From my childhood I can recall when a dollar was worth roughly four Deutschmarks, and even my father's salary as a junior Army officer went pretty far on the local economy. As an adult I worked in Germany for a few months in the early 1980s, when a buck still bought more than 2 Marks. With the Deutschmark having been subsumed into the Euro, with its extremely short and volatile history, it's easy to lose sight of the dollar's gradual slippage, which has resulted in an equivalent Deutschmark/Dollar rate today of 1.30:1. Fully appreciating this trend requires examining the longer history of exchange rates between the dollar and more stable currencies such as the Deutschmark and the Swiss Franc, which is now trading at virtual parity with the greenback. It's not a pretty picture, and it has significant implications for a country with such large structural import requirements, not just for energy, but for so many other products.

While I'm not advocating a return to the gold standard or even necessarily dismissing the benefits that a weaker dollar has provided at times, I find the long and bumpy, but nevertheless steadily-downward slope of the dollar's value worrisome. Moreover, it's hard to see what could stem this trend in the near term, with the federal government committed out of necessity to holding short-term interest rates at essentially zero to avoid putting the economy back into a tailspin, while other countries still offer positive interest rates and some have even raised them slightly. Nor do trillion-dollar fiscal deficits seem conducive to a stronger dollar any time soon. What would dollar-denominated oil prices do if the dollar continued to fall past $1.50 per Euro toward the 2:1 level, all other things being equal? $100/bbl probably isn't a bad guess, along with everything else that goes with it.

"Feeding Frenzy"

Mon, 19 Oct 2009 02:36:00 GMT

An article in today's New York Times offers more detail on the manner in which Congressional climate legislation has fractured the energy industry into competing groups of haves and have-nots, based on how companies and sectors were treated under the Waxman-Markey bill and their hopes for receiving a better deal in the pending Kerry-Boxer bill in the Senate. Not only has it fragmented utilities along the axis of their emissions intensity, but it has also opened gaps within the oil & gas industry between companies that produce primarily natural gas and those that produce or process mainly oil. I don't know whether the authors of Waxman-Markey saw this potential in their design for allocating emission allowances, though some supporters are bound to see it as a beneficial feature. I regard it as a worrying symptom of the distortions inflicted on the basic concept of cap & trade, which remains the best option for guiding the economy toward a lower-emission future, but now seems likely to underperform its potential in a very costly way, as a result of these flaws.

As recently as a couple of years ago, few energy companies were enthusiastic about the prospect of cap & trade, because it was bound to raise their costs and reduce demand for their output, at least from energy sources with substantial emissions of CO2 and other greenhouse gases. If the bill passed by the House had treated all emissions from all sectors equally--a level playing field--we'd still see visionary companies diverging from the industry's stance, but their numbers would probably be a lot fewer for the simple reason that there wouldn't be nearly as much financial gain in it for them. When no-nonsense companies like Exelon and several of its utility peers break ranks with the US Chamber of Commerce on this issue, it's a good bet that they see a direct strategic advantage that will put money in their shareholders' pockets. Simply put, this is as good a deal as they're going to get. But while I find their support of cap and trade perfectly rational and even laudable, it should by no means be read as a sign that the Waxman-Markey approach is the best means of addressing climate change.

As I've noted in previous postings, Waxman-Markey was excessively generous in handing out emission allowances to the electricity sector, at the expense of the transportation sector. It also lavished allowances on non-emitting sectors and favored causes and groups in lieu of cash--a form of largess that fundamentally undermines the accountability of these benefits, because no one knows or can know what they will be worth when they are eventually received. Yet although this is bad policy on many levels, I see many people holding their noses and supporting the W-M approach, because they conclude that once the free allocations have phased out in 2030, we'll be left with a more or less pure cap & trade system enforcing a steadily tightening cap on emissions. The problems with this thinking lie in the enormous distortions and unnecessary economic hardship those uneven allocations will create over the next 20-plus years and the opportunity cost of the emissions reductions that could have been achieved more quickly and cheaply.

My strong preference has been for an even-handed cap & trade system that would include the broadest possible collection of emissions sources, providing great diversity of abatement costs and thus great scope for emissions trading to minimize the cost of achieving our emission reduction goals, and with most of the proceeds rebated directly from the government to taxpayers. Unfortunately, the ship has sailed on that approach--at least for now--and anyone supporting cap & trade for the elegant simplicity of its mechanism for squeezing out emissions is left hoping that the legislative excesses of one chamber of Congress will cancel out those of the other, and that somehow two bad bills will beget a good one.

Comments on Scientific American's "Squeezing more oil from the ground"

Sun, 18 Oct 2009 14:30:00 GMT

This article, put together by Jean Laherrère and edited by Colin Campbell, is a critical review of the recent article by Leonardo Maugeri published by Scientific American.

A decade ago, Scientific American published the seminal article by these two luminaries of the Peak Oil awareness movement, that relaunched the debate on M. King Hubbert's finds, Scientific American appears now as a completely different publication. Now, however, scientific content doesn't seem to be a requisite for its articles. Among other eerie details, Leonardo Maugeri goes as far as citing "Common Wisdom" to present erroneous facts.

Leonardo Maurgeri starts his Scientific American article by quoting statistics for the Kern River oil field in California, suggesting that its very favorable reserve growth is representative of what can be expected more generally throughout the world. In using this approach, Maurgeri, an economist and vice president of the Italian oil company ENI, follows the work of Professor M. Adelman. The basic statistics Maugeri quotes are shown in the following table:

Mb	1942	2007
Comulative Production	280	2000
Remaining Reserves	60	480
Ultimate Recovery	340	2480

Alderman commented that the field itself had not changed; but knowledge of it had. Maugeri follows the same argument but fails to mention that the number of producing wells had increased from 500 in 1942 to 9318 in 2007 and that as many as 16 000 wells had been drilled in total. In other words, drilling increased by a factor of twenty yet the reserves increased no more than eight-fold.

He also fails to note that published Proven Reserves in the United States are based on SEC rules such that only the developed part of the field could be reported even though its full size was known from geological maps and appraisal drilling. The field was discovered in 1899 by a hand-dug well, no more than 45 feet deep, and has been in production since then. It contains heavy oil ranging in gravity from 10º to 16º API, and steam stimulation commenced in 1963 to improve recovery.

The above illustration, taken from the USGS Bulletin 2172-H 2005 Growth History of Oil Reserves in Major California Oil Fields During the Twentieth Century, shows that Kern River reserves (in blue) were larger in 1923 than in 1937 and 1942.

The California Department of Conservation reports annually all the details of field production, and it is easy to plot annual oil production and reserves of the Kern River Field.

The following graph shows how the reported Ultimate Recovery (cumulative production + remaining reserves) of the field have grown in parallel with the number of wells, reflecting the constraints of the SEC reporting rules. Production began to increase significantly with the steam flooding in 1963, preceded by cyclic steam injection in 1958. These processes, which are well established and normal industry practices, are called technological miracles by Maugeri.

The reported Ultimate ceased to grow in 1985, reflecting the peak of production per well at 23 b/d in 1982, being now below 9 b/d. Production per well seems to have been linear since 1996 and could be extrapolated towards zero in 2020, meaning that the field will have to stop production before then.

The field covers an area of about 10 000 acres (43,5 km2), and supports 9 300 producing wells, giving a spacing of one per acre. The normal US spacing was one well per 40 to 160 acres, with 10 per acre for infill drilling,. Kern River is a good example of a field that has been over- drilled.

The ultimate recovery is reported to have grown again in 2001 and 2007 to over 2 500 Mb. But plotting annual against cumulative production shows a decline since 1999 of about 6% a year. As illustrated in the following figure, an extrapolation of the 1999-2008 data gives an ultimate of 2 530 Mb, compared with the 2 634 Mb reported by the California Department of Conservation for 2007.

It may also be noted that production per well since 1996 can also be linearly extrapolated towards 2 530 Mb. Annual oil production may be extrapolated with a decline of 5.8 % per year, which corresponds with a cumulative production 2009-2060 of 436 Mb. This is below the reported remaining reserves, which with an indicated production of less than 1 b/d are likely to be below the economic or EROI limit, that being the energy return on energy invested, which has to be positive to make sense.

The Oil-in-Place is variously estimated at 3 500 Mb by Swartz et al 2008 (Kern River Field: Framework and Future of an Old Giant AAPG Search and Discovery Article #90076), or at 4 000 Mb by McGregor (1996). It means that the recovery factor is over 70%, when Maugeri talks about a present 35% recovery factor for the world.

It is clearly ridiculous for Maugeri to take the example of this very old field of heavy oil found by a hand-dug well and subject to steam flooding, that peaked more than 80 years after discovery, and is still producing, as in any way representative of modern conventional fields. It is like comparing apples with oranges. The USGS makes the same mistake when it applies US field growth based on Proved Reserves (1P) to the world as a whole that is based on Proved & Probable (2P) reserve reports.

US field growth is due to the outdated reporting practice, based on obsolete 1977 SEC rules. These rules will be changed in 2010, to allow Proved and Probable Reserves (2P) to be reported, meaning the US reserve growth will likely disappear.

Maugeri writes:

According to common wisdom, a field’s production should follow a bell shaped trajectory known as the Hubbert curve and peak when half of the known oil has been extracted.

He confuses the pattern of individual field production with that of basin or country patterns. Hubbert was modelling US and world oil production, and not that of an individual field which normally increases rapidly in its early years before declining slowly, with the peak coming before the midpoint of depletion, as well illustrated by the Forties Field in the UK North Sea.

Maugeri, as an economist, talks only about Proven Reserves, but he should know that the development of a field, especially offshore is based on Proved and Probable Reserves. The net present value of a development is computed on the Mean Probability value and not on Proved Reserves alone, which have a 90% Probability.

Maugeri writes:

But I believe that those projections will prove wrong, just as similar « peak oil » predictions (Campbell & Laherrère, SciAm March 1998) have been mistaken in the past.

That article was entitled The End of Cheap Oil, at a time when oil was trading at $13/barrel, before sinking to $10/ barrel in the following year. It was in fact ranked by the Sonoma University as within the top 25 most important papers published in 1999. It is hard therefore to accept Maugeri’s claim that it was mistaken.

Maugeri’s graph compares the oil production forecast of Campbell and Laherrère 1998 with others, failing to note that the former referred to conventional oil only whereas the others refer to all categories.

In fact, Campbell and Laherrère submitted graphs covering all the categories, which were not in fact published. The plot for combined conventional and unconventional forecast 31 Gb/a (namely 85 Mb/d) for 2007, which is close to what was actually produced. The mistake was not in the substance of the forecast but in not having better checked the title of the graph published by the Scientific American.

The following graph, for the world’s liquid production, was published in Laherrère J.H. 1999 Assessing the oil and gas future production and the end of cheap oil?, CSEG Calgary, April 6.

Recent ASPO (Campbell &Laherrere) forecasts are compared with others (but not those from Maugeri) by the US National Petroleum Council 2007 «Hard truths».

Maugeri writes:

It is absurd to predict a peak of world production because it presupposes that one knows how much oil is in the ground.

On that basis, logic suggests that it would be equally absurd to accept Maugeri’s claim that the peak is not coming until 2030 or that more than 50 percent of the oil known at the time will be recoverable.

That said, we can agree that no one really knows the volume of oil in the ground, meaning that little reliance can be placed upon assumed recovery factors.

Maugeri believes that only one third of sedimentary basins have been explored, but out of about 600 sedimentary basins only 200 basins have the potential of generating oil or gas for well understood geological and especially geochemical reasons. He shows that for the past 25 years, the United States had more exploration drilling than any other country.

But he fails to say that the ownership of oil rights in the United States differs from that in the rest of the world. The United States supports more than 20 000 oil companies, and the economics are also quite different. For the last 25 years over 60 000 pure exploration wells (New Field Wildcats) have been drilled in the United States compared to 5000 in Canada and 40 000 for the rest of the world. The average size of oil discovery is 0.3 Mb for United States, 0.9 Mb for Canada and 740 Mb for the Middle East, 14 Mb for Africa , and 7 Mb for the world outside US & Canada. Again comparing the United States with the rest of the world is comparing apples and oranges!

Maugeri writes:

[…] by 2030 we will have consumed another 650 billion to 700 billion barrels of our reserves, for a total of around 1600 billion barrels used up from the 4500 to 5000 billion figure

This implies that today we have consumed less than 950 billion barrels, which is clearly mistaken. Cumulative production is over 1100 Gb according to the industry database produced by IHS (NAPE International Forum February 4, 2009 Where Will Tomorrow’s Oil and Gas Come From? Pillars of Oil and Gas, P.H. Stark and K. Chew).

Paolo Scaroni, the Chief Executive of ENI, the company for which Maugeri works received the Petroleum Executive of the year 2008 award. He said in the Petroleum Review of March 2006 [pdf!] in page p25 that replacing reserves is the nightmare of IOCs.

Scaroni’s words seem to be conflict with Maugeri’s statement that most of the planet’s known resources are left unexploited in the ground, and still more wait to be discovered.

Perhaps Maugeri should tell his Chief Executive where all these unexploited and undiscovered oil reserves lie to help ENI replace oil reserves. Its 2008 Annual Report shows that both its oil reserves and production have fallen compared with 2006 but that its gas has increased. It may prompt the cynic to ask if whether Maugeri can distinguish oil from gas.

Luís here again: Maugeri's article has some similarities with one penned by Peter Jackson of CERA a couple of years ago; in both cases the authors do not seem to understand what the Hubbert Method is. But while Peter Jackson definitely showed some scientific objectiveness, the same can't be said of Leonardo Maugeri.

Regulating EV Recharging

Thu, 15 Oct 2009 04:58:00 GMT

A feature on the New York Times website tipped me off to a debate that's brewing in California concerning whether and how the state's Public Utilities Commission (PUC) should regulate facilities and firms that will recharge the electric vehicles expected to dot California's roads within a few years. From my own experience in attempting to involve my former employer in the recharging infrastructure for the old GM EV-1 in the late 1990s, I knew this wouldn't be a simple matter, but I had little appreciation for the complexities that have emerged in the last decade. How this gets resolved will have enormous implications for automakers and incumbent utilities, as well as for start-ups such as Better Place that some would like to treat as regulated utilities.

The discussion with the PUC hinges on some very thorny questions: Is a company that buys electricity for resale to consumers for the purpose of recharging electric vehicles--which takes in both battery-electric vehicles and plug-in hybrids--more like a utility or a gasoline distributor or retailer? Who should pay for installing recharging facilities, and how--and from whom--should these parties recover their investment? Should a consumer who already uses large quantities of electricity at home and pays at the top rate tier, which can hit $0.40/kWh in some areas, qualify for discounted power to recharge an EV? How should a customer be billed when recharging outside the service area of the utility from which he normally buys power? The list of such questions is long, and looming behind them are larger questions about how best to gauge the effect of EV recharging on greenhouse gas emissions and air quality concerns, and to manage its impact on the regional generating mix, and on grid stability and reliability. Many EV advocates assume that EVs are inherently grid-stabilizing and renewable power-enabling, though it's not hard to construct scenarios in which the opposite could be equally true, if they're not implemented properly.

The emissions aspect becomes even more interesting in light of the views I saw expressed in a PUC filing by Tesla Motors, Inc., a Silicon Valley manufacturer of high-end electric sports cars that recently qualified for a half-billion dollars in low-interest expansion loans from the federal government. Tesla sees the generation of tradable credits under either cap & trade or the state's Low-Carbon Fuel Standard as a significant source of revenue for the owners of EV recharging facilities, and they might be right, though when I converted the federal estimates of emission allowance values under Waxman-Markey of around $15/ton of CO2 to cents per kilowatt-hour, using California's natural gas-dominated average generating mix, I came up with a value of less than a penny per kWh. I have to wonder how excited utilities will be to take on the cost and risk of putting in EV rechargers for such a small reward, if they can't also make a profit selling power to EV drivers.

The whole notion of regulating resellers of electricity to EVs as utilities also raises serious questions about the alternative business models now under consideration by companies such as Better Place. Would offering EV services on a cents-per-mile basis, rather than cents per kWh, be deemed sufficiently transparent, and would they have to negotiate their profit margins and investment recovery with the PUC? That sounds like a great way to make it harder for anyone new to the scene to compete with traditional utilities in this area.

Fairly soon the California PUC will resolve most of these questions and in the process largely define the environment in which EVs will emerge in the biggest early market for them in the US, potentially setting the standards for their use throughout the US and beyond. I don't have a horse in this race, but I will be watching the outcome with great interest.

Sadad al-Husseini on Middle East OPEC oil fields

Tue, 13 Oct 2009 05:55:00 GMT

"In the Arabian Gulf we have serious problems of maturity in many of these fields" Sadad al Husseini, ASPO USA interview, Denver CO, 12 October 2009

Steve Andrews, co-founder of ASPO USA travelled to London (on his own time and dime) to interview Sadad al-Husseini. The interview has been shown as a series of clips at the ASPO International conference in Denver this week. Sadad al-Husseini is a geologist and reservoir engineer who worked for Saudi Aramco reaching the position of vice president.

Exerpts from the interview are available on the ASPO USA web site. The single quote above was the comment that caught my attention the most.

The comment is particularly interesting in the context of how OECD governments are planning their energy futures based on IEA forecasts such as this:

Ramping Saudi production linearly to 15.6 million barrels per day by 2030 has this outcome on a Hubbert linearisation. The absence of any peak points to near-infinite reserves - in a country where there are serious issues of maturity in the reservoirs.

[Note the chart is lifted from another post discussing UK government energy strategy which for various reasons I decided not to post.]

The Necessity of "All of the Above"

Tue, 13 Oct 2009 03:19:00 GMT

I've devoted a lot of space in this blog to explaining why we need all of the energy choices currently available to us, including energy efficiency, in order for our economy to have the energy it needs to grow. Although we can't drill our way to energy independence, as some might wish, it's equally clear that the point at which renewable energy sources could enable us to dispense with fossil fuels is still a long ways off. I have no idea how many words I've written in service of this argument, but it's certainly many more than the clichéd 1,000:1 exchange rate vs. the picture that I suddenly realized I've never supplied. Today's posting is a modest attempt to rectify that omission: a simple graph showing how a significant shift in our energy consumption and production patterns might play out between now and 2020.

This picture starts with our total primary energy consumption in 2008 of 99.3 quadrillion BTUs (quads.) Nearly three-fourths of our needs, or 73.7 quads, were produced domestically by a mix of 79% coal, oil and natural gas, 11.5% nuclear power, and a bit over 3% hydropower. Non-hydro renewables--the wind, solar, geothermal and biomass power plus biofuels that constitute the primary focus of US energy policy today--made up the remaining 6.5% of domestic energy production. Now add the 26% of US energy consumption supplied by imports, mainly crude oil and petroleum products, and we have the breakdown shown at the left hand edge of the graph. The rest of the picture is the result of a highly simplified set of assumptions based on phasing out fossil fuels and replacing them with the non-hydro renewables that have been growing so rapidly. It ignores such important considerations as reliability and intermittency, compatibility with infrastructure, and turnover of vehicle fleets.

According to the Energy Information Agency's data, while wind and solar power have been growing at roughly 30% per year each, the total renewables category has been growing at a somewhat slower pace, even after separating out hydropower, which has actually declined significantly since the 1990s. While the average growth rate for all the non-hydro renewables since 2000 has been around 4%, I've more than doubled this for the purposes of my projection to 10%. Renewables would do very well to sustain that kind of pace over the next 11 years, because the bigger they get, the more capital they will require each year to add the next year's increment of growth, and the more hurdles they will face, particularly from NIMBY or "energy sprawl" concerns. 10% compound growth would see these renewables more than triple by 2020, providing plenty of room for biomass/biofuels to double and for wind and solar to double several successive times.

I've also assumed a steady improvement in energy efficiency of 1% per year. If that doesn't sound impressive, compare it against a pre-recession trend of 1% annual growth supporting population growth of around 0.7% and economic growth of 2-3%. 1%/yr. would reduce total energy consumption by almost 12% by 2020, reflecting an improvement in BTUs/$GDP over this interval on the order of around 35%. A recent study by McKinsey & Co. indicated that if the US invested $500 billion in energy efficiency, we could cut our energy consumption by 23% by 2020, so my view is only a little more conservative, reflecting my experience that such things tend to take a bit longer than we expect.

As for nuclear, I think we'll do well to maintain the output of the existing fleet without seeing retirements outweigh additions in this timeframe. Most of the new plants now being discussed would probably only affect the last couple of years of this scenario, in any case.

The biggest impact in the graph above comes from my assumption that domestic fossil fuel production would fall by 5% per year. That will probably seem extreme to some and timid to others. It certainly looks extreme in the context of the recent surge in natural gas production and the stable output of US coal mines. Even US oil production has staged a bit of a comeback recently, thanks to successes in the portions of the Gulf of Mexico where drilling is allowed. However, in the absence of strong sustained rates of oil and gas drilling--drilling that requires both access to resources and a supportive regulatory climate, neither of which appears to be forthcoming--these successes will fade and the high intrinsic decline rates of the mature US hydrocarbon basins would take over. And with new coal-fired power plants being canceled and older ones facing tough competition from gas turbines and renewable power, along with restrictions on practices such as "mountaintop mining" and the prospect of either a Congressionally-mandated or EPA-imposed cap on emissions, a decline in coal output would accompany drops in oil and gas.

All of these growth and decline rates working together produce the picture above, showing fossil fuels tailing off faster than renewables can backfill for some time. That results in net US energy imports growing through 2016, then tapering off gradually as renewables finally gather momentum, but with us arriving at 2020 even less energy independent than we are today. That outcome explains my strong conviction that it is premature for us to give up on the valuable contribution of domestic oil and gas, particularly when we take into account the form that most of those growing energy imports is likely to take: imported oil. Naturally, this is just one scenario among many--though I'd argue it's likelier than some--and it illustrates that no single solution, neither renewables, nor efficiency, nor even greatly expanded drilling, is likely to be capable of delivering the energy we will need without increasing our vulnerability to foreign energy suppliers. They must all work together, if we're to make meaningful progress toward greater energy self-reliance.

Not to put too fine a point on it..

Sun, 11 Oct 2009 00:05:00 GMT

Re: my last point about there being enough natural gas to help mitigate the most serious impacts from oil peaking. There are issues with this (see bottom), but I'm confident we won't be suffering a "die off", to quote one of the more extreme peak oil sites.

BP sees possibility of 100 more years of natural gas.

Reserve estimates are rising sharply as technology unlocks unconventional resources,” Hayward said in a Buenos Aires speech posted on the London-based company's Web site. “Estimates vary, but the U.S. may now be sitting on between 50 and 100 years worth of recoverable natural gas.”

New Way to Tap Gas May Expand Global Supplies.

Because so little drilling has been done in shale fields outside of the United States and Canada, gas analysts have made a wide array of estimates for how much shale gas could be tapped globally. Even the most conservative estimates are enormous, projecting at least a 20 percent increase in the world’s known reserves of natural gas.

ANALYSIS-Natgas giants still reeling from U.S. shale shock.

And big gas exporters noted that shale gas comes with its own problems, including massive water use and other environmental complaints, as well as the need for constant investment that could limit its impact.

"There's a lot of myths about shale production," said Gazprom Deputy Chief Executive Alexander Medvedev.

"We should not forget what the shale gas production profile looks like. If you stop drilling, production will fall by up to 80 percent in the next year."

America’s Transportation Leaders Embrace the East Coast Greenway

Fri, 09 Oct 2009 03:55:00 GMT

ECGA-US DOT Partnership Begins (From left: US DOT Assistant Secretary for Policy Polly Trottenberg, Deputy Secretary John Porcari, ECGA Mid-Atlantic Trail Coordinator Mike Oliva, and Executive Director Dennis Markatos-Soriano - photo by Jack Wells)

This week, our East Coast Greenway began to move from a solely grassroots initiative to a project backed by the most important transportation institution in the country. We have great relationships with many of the state Departments of Transportation (DOTs), but achieving federal partnership interest will effect a huge leap in our ability to make our route safe and accessible to all.

It all started last week when our Mid-Atlantic Trail Coordinator Mike Oliva emailed a note to US DOT Deputy Secretary John Porcari. The note congratulated the Deputy Secretary on his appointment by Obama and mentioned that we would love to discuss our project with him. Deputy Secretary Porcari served as Secretary of the Maryland DOT before his federal appointment, so he had familiarity with our project and even worked with our Boardmember David Dionne in the state.

Porcari emailed us back the next day with an interest to meet. He saw the potential of the DOT supporting the East Coast Greenway as a pilot for establishing an interstate trail network nationwide. This past Monday, I got a call during a work trip in Rhode Island that the meeting was set for the next day, from 2:45-3:15 in the afternoon. The meeting grew to include Assistant Secretary of Policy, Polly Trottenberg, as well as DOT Chief Economist, Jack Wells.

Mike Oliva and I raced down to Washington Tuesday morning in our suits, enjoying the East Coast Greenway signs along The Mall on our way to the DOT West Building, 1200 New Jersey Avenue, SE. Once in the building, we were escorted up to the Deputy Secretary’s conference room.

Since Porcari had familiarity with sections of the East Coast Greenway in Maryland and of our overarching vision, he asked for an update on our progress and then we jumped into a brainstorming session on how the US DOT can get involved to ensure success for the project. This was inspiring. Obama had clearly hired a great crop of transportation leaders. They understand our transportation system must play its role in reducing carbon dioxide and other emissions, lowering our expensive dependence on foreign oil, and decreasing obesity rates that are hurting our people’s health.

They want to know what stretches of the East Coast Greenway would especially benefit from federal attention. They are also interested in highlighting instances of Stimulus funds improving and extending the East Coast Greenway. While our federal designation as a Millennial Trail under Clinton was a great start (thank you Advisory Board member Jeff Olson), we are excited that current DOT leaders sound ready to step up in a more active way. A safe and accessible East Coast Greenway that enhances the livability of our eastern communities is within our grasp. By 2012, we can make our whole corridor either greenway or bike lanes and sharrow-marked route so that everyone from children to the elderly can enjoy it for daily commutes, a relaxing walk in the woods, and long-distance travel.

Porcari, Trottenberg, and Wells all agreed that we have to engage more than the DOT. We need the active partnership of our leaders in Congress and the Department of Interior as well (so look out for blog posts in the months ahead on other trips to Washington).

Together, we can build an Eisenhower Interstate System 2.0 – one that integrates safe, healthy and green transportation into America’s mix and helps drive a strong economic recovery in the years ahead.

Meme Watch: Peak Demand

Fri, 09 Oct 2009 02:20:00 GMT

To whatever degree the oil price spike of 2007-8 was driven by speculation, the latter was riding on a wave of concern about Peak Oil, which anticipates an imminent decline in maximum global oil production. For the moment, the weak global economy has eased such worries, though they have hardly vanished, as I noted two months ago. Lately, however, conventional notions of Peak Oil are increasingly being challenged by a new meme, or contagious idea, called Peak Demand, which suggests that oil consumption is reaching a plateau from which it will soon decline, mitigating the worst consequences of Peak Oil. Neither of these memes would attract much interest if they weren't supported by a welter of statistics, however selective those might seem to their critics. And just as Peak Oil was much less credible and worrisome before we saw super-giant oil fields like Mexico's Cantarell go into precipitous decline, the logic of Peak Demand would have been much less compelling before US oil demand dropped by nearly 6% last year.

Earlier this week, a friend shared a copy of a report from Deutsche Bank Global Markets Research describing their view of the future oil market shaped by coinciding--and related--peaks in global oil supply and demand. Unfortunately, the report doesn't seem to be available on DB's public website, though it was recently summarized on the Wall St. Journal's Environmental Capital blog. While I spotted several possible weak points in their analysis, they make a strong case that the combination of improved efficiency and the electrification of vehicles will result in the global demand for oil stalling and eventually falling, roughly around the same time many analysts expect global oil supplies to peak.

Perhaps I was predisposed to accept this logic. My presentation on the Alternative Energy panel of the recent IHS Herold Pacesetters Energy Conference included a graph highlighting the ongoing compression of US petroleum gasoline demand between falling motor fuel consumption and rising biofuels supplies, a topic that was subsequently reported in the Journal's "Heard on the Street" column. At that same conference I also heard the Managing Director of CERA's Global Oil Group describe his firm's rigorously researched view of an impending peak in global oil demand. Peak Demand can't easily be dismissed as a "fringe" theory, because it is based on a combination of hard data and thoughtful analysis and forecasting.

My purpose in mentioning Peak Demand now isn't to debate its merits in depth; that's a matter for another day. Rather, on the basis of my conviction that there's at least a reasonable case for such an outcome, I thought I'd spend a moment musing on the consequences of the proliferation of this meme in the marketplace of ideas related to energy. After all, the Peak Demand meme challenges two key pieces of conventional wisdom about oil, one or both of which are central to the rate at which Peak Oil (supply) might be approaching. First, it undermines the notion that once the US economy finds its way back to meaningful growth, oil demand will resume its former trajectory, which had seen gasoline demand growing by 1-2% per year and diesel demand growing at an even faster pace. With a major new emphasis on miles per gallon and the demise of the SUV fad, the fuel economy of the total US car fleet doesn't need to improve by very much each year to outpace our underlying population growth and a modest resurgence in vehicle miles traveled. Secondly, the same dynamic might even hold true for large developing markets, if electric vehicle demand grew rapidly enough, undermining the notion that whatever happens in the US and EU, oil demand from China and India constitute an unstoppable juggernaut.

With spare global oil production capacity effectively used up by 2007, the logic of Peak Oil helped to provide the narrative support for an oil market that ran up from the low $50s to $145 per barrel in the course of 18 months. How different might a future oil price spike be, if instead of a widely-shared view that oil was on the verge of becoming truly scarce--rather than merely expensive--there were an equally widely-held expectation that in the long run that scarcity might become irrelevant as a result of the demand for the commodity gradually unwinding of its own accord? Such dueling memes, together with painful memories of oil's collapse down to $33 last winter, might give some traders pause, before again buying into the notion that $100 oil would soon give way to $200, $300, or $500 per barrel.

Setting Ethanol Free

Wed, 07 Oct 2009 04:36:00 GMT

The Government Accountability Office (GAO) recently issued its report assessing the impact of the production and use of biofuels in the US. Among its recommendations was a call for the Congress to reassess whether corn ethanol still needs the support of a $0.45 per gallon blenders' credit, when its use by refiners and gasoline blenders is now mandated under the federal Renewable Fuel Standard (RFS) that was set by the Energy Independence and Security Act of 2007 (EISA). As you might imagine, this has set the cat among the pigeons and prompted a terse and dismissive response from the Renewable Fuels Association, the trade group representing the US ethanol industry. Along with several points that I interpret as making at least as good a case for dropping the subsidy as keeping it, their main defense boils down to a combination of historical precedent and envy of the industry that is its primary customer. Neither justification stands up to scrutiny.

Consider the historical argument first. There's no doubt that without the subsidies provided by the federal government and various states over the last thirty-plus years, the ethanol industry would not have grown to a sufficient scale to take on the new challenge set for it by Congress in the EISA. From the landmark establishment of a $0.40/gal. excise tax exemption for ethanol blended into gasoline under the Energy Tax Act of 1978, it took the industry 14 years to grow to the 1 billion-gallon-per-year (BGY) mark (equivalent to 43,000 barrels per day of gasoline) and another decade to reach 2 BGY. When EISA was passed at the end of 2007, the industry was already producing around 6 BGY and had built enough capacity to produce nearly 8 BGY, or around 5.5% of US gasoline demand that year, by volume. That was already more than the 7.5 BGY required under the previous RFS established by the Energy Policy Act of 2005. But as ambitious as the goals of the newly-enacted RFS seemed in 2007, the industry continued building capacity at a rapid pace, and by the start of this year had enough ethanol plants built or under construction to satisfy 97% of the 15 billion gallon target (and ceiling) that Congress set for corn ethanol.

Two things seem clear from this history: First, the combination of a generous blenders' credit, which until the start of this year paid $0.51/gal., and two successive federal biofuel standards led to over-expansion of the ethanol industry relative to demand, either mandated or economic. That harmed the industry and led to many ethanol plants being sold or mothballed in the last year, with a number of ethanol companies going bankrupt, including VeraSun, which had been an industry leader not long before its demise. Other important factors certainly contributed to these business failures, including the spike in corn and oil prices in 2007 and 2008 and the sudden collapse of the latter last fall; however, the over-extension of these companies as they went deeper and deeper into debt to build new capacity left them particularly vulnerable to volatile commodity markets and the emerging credit crisis.

In addition, the above figures make it very plain that the US corn ethanol industry doesn't need to grow further, because it is already within striking distance of the target set by the government, which also appears to represent the maximum prudent level of output for a fuel source that makes such heavy use of water and fossil energy sources in its production, and that ultimately competes with the consumption of corn as food or feed, here and abroad. In other words, the work of the subsidies and mandates for corn ethanol is complete, and the government has shifted its focus to cellulosic ethanol and other advanced biofuels, which enjoy their own distinct--and more generous--subsidies. It hopes these sources will expand from essentially zero to cover the remaining 21 BGY of the current RFS by 2022.

The argument that corn ethanol is somehow entitled to perpetual subsidies on the basis of an inaccurate comparison to the tax benefits currently enjoyed by the oil & gas industry--tax benefits that are currently under threat, themselves--is equally unpersuasive. In the posting in which I recently examined the Treasury Department's arguments for dismantling those oil & gas tax benefits, I compared the level of incentives for conventional fuels with those provided to ethanol. That $0.45/gal. ethanol blenders' credit swells to the equivalent of about $0.77/gal. after accounting for the lower energy content of ethanol. That compares to incentives of around $0.12/gal. for US oil production. And that doesn't even take into consideration the fact that producing a gallon of ethanol requires much more energy from other sources, such as natural gas, than producing a gallon of crude oil or gasoline. That means that ethanol receives at least six times the subsidy per delivered BTU that domestic oil does, even though their energy security benefits per gallon are identical.

The GAO report estimates the cost to the Treasury of the ethanol blenders' credit at $4 billion last year, growing to $6.75 billion by 2015, if not sooner. Although at a time of trillion-dollar deficits that may look no more significant than a rounding error in the government's books, continuing this outdated and unnecessary incentive sends a bad message to the developers of other, less mature alternative energy sources. It tells them that they don't need to worry so much about making their technologies competitive with conventional energy, because the government is likely to subsidize them until the end of time--or until the Treasury runs out of money, a date that will surely arrive faster, the more unnecessary subsidies it hands out. After having been extended by last year's Farm Bill, the present Volumetric Ethanol Excise Tax Credit and the tariff on imported ethanol that mirrors it are due to expire at the end of next year. After 30 of assistance--spanning my entire career in energy--it's time to find out whether this industry can survive and compete on its own.

Gasoline Stimulus Update

Mon, 05 Oct 2009 05:30:00 GMT

Although it doesn't appear among the statistics that economists and market participants routinely track to assess our recovery from what some have been calling the Great Recession, a quick check on the status of the "gasoline stimulus" I described in June seems in order. Year-to-date, the retail price of regular gasoline has averaged $1.31/gallon below it price in the same week of 2008, leaving the typical American household with roughly an extra $110 per month of disposable income to spend on other goods and services, compared with last year. However, barring another dramatic collapse of crude oil prices from their present level of just under $70/barrel, that benefit should disappear within the next few weeks. Last October gas prices fell by more than a buck a gallon and began November 2008 below their current level. Once these lines cross over, any stimulus benefit from cheaper gas will be erased, with uncertain consequences in an economy in which unemployment is still rising.

The fact that average US gas prices topped out at only $2.69/gal. this year, far below last year's peak of $4.11/gal., was mainly a reflection of the weakness of the global economy. US gasoline demand through July was running at around 1% below the same period a year earlier, on top of 2008's roughly 3% drop. Together with very weak diesel demand, that also contributed to much lower refining margins this year, compared to the last couple years. However, even if refining margins averaged zero for the rest of this year, it would take a crude oil price drop on the order of $15/bbl to send gasoline prices below $2/gal., where they were last Thanksgiving. And we'd probably have to see oil down around $40/bbl to end the year close to the $1.61/gal. reported last December 29.

As I noted early in the year, although this gasoline stimulus was helpful while the federal stimulus effort was gearing up, it was always going to be short-lived. And just like the fiscal stimulus, we'll never know how many jobs it saved or helped create, though it's clear that we'd have been much worse off had this year's gas prices reprised their 2008 levels.

No Good Choices

Fri, 02 Oct 2009 02:59:00 GMT

I find myself in a foul mood concerning climate change, after a week that has seen US choices for managing our greenhouse gas emissions narrow to a trio of unappealing options. The long-awaited draft of a Senate bill on climate change issued by the Environment and Pubic Works Committee turned out to mirror most of the bad features of the distorted Waxman-Markey bill narrowly passed by the House in June. Adding insult to injury was the announcement by the Administrator of the EPA that her agency was preparing to regulate the greenhouse gases from large emitters--power plants, refineries, and other industrial facilities--as point-sources under the Clean Air Act as soon as next year. This leaves us with three poor choices: 1) a cap & trade system harnessed to the yoke of Congressional patronage and pork, 2) command-and-control regulations likely to extract emissions reductions from the highest-cost sources and thus having the most adverse impact on the economy, and 3) a status quo that will likely result in our emissions resuming their steady climb, once the economy recovers.

With regard to the Kerry-Boxer bill, designated as the "Clean Energy Jobs and American Power Act"--no catchy "ACES" acronym there--I haven't had time to wade through its 801 pages, so I'll keep my comments brief. Contrary to the conclusion reached by the editors of the Washington Post, the bill does include a cap & trade mechanism for greenhouse gas emissions, though I can understand why they might not have looked for it under the obscure rubric of "Pollution Reduction and Investment Program". From my quick scan of that section, it strongly resembles the cap & trade aspects of Waxman-Markey, with the crucial difference that the allocation of emission allowances among various sectors has been left to other Senate committees to fill in. The only allocation clearly specified is that 25% of allowances should be auctioned, with the proceeds to go toward deficit reduction. As laudable as that sounds, I would merely note that every dollar raised by cap & trade that is not returned to taxpayers constitutes a new tax by another name and should be counted in the total tax burden on the productive economy.

Now let's turn to the EPA announcement, which has me even more concerned. Last week I received an emailed article from the Institute for Policy Integrity at NYU suggesting that under the Clean Air Act the EPA could create its own cap & trade system for greenhouse gases without requiring additional authorizing legislation. That briefly buoyed my hopes for a more pristine version of cap & trade, without the unseemly scramble to siphon off its proceeds to fund every pet project and cause of every Member or Senator whose vote was needed to pass the thing. Then I read Administrator Jackson's remarks describing the approach she has in mind, and I knew the EPA was applying its old pollution-abatement mentality to climate change, facilitiated by a Supreme Court ruling that unhelpfully labeled CO2 and other GHGs as pollutants. The new rule would impose New Source Review criteria on the greenhouse emissions from power plants, refineries and factories when they expand or modernize, and it parallels the Best Available Control Technology requirement that is at least logical for local air pollutants like SOx and NOx that result from fuel impurities and combustion byproducts, but that makes little sense when dealing with the results of the primary chemical reaction of combustion: C + O2 --> CO2.

With all due respect to Administrator Jackson, a fellow chemical engineer who I'm sure understands the technical side of this issue as well as I do, her remarks betray a deep misunderstanding of the economic consequences of regulating carbon this way. The key phrase in her comments, which focused on minimizing the impact on the small businesses she seeks to exclude from this ruling was, "...all without placing an undue burden on the businesses that make up the better part of our economy," as if that "better part" didn't consume the electricity, fuels and raw materials produced by the part she proposes to regulate--presumably the "worst part" of our economy. The reality is that the costs imposed on large emitters will inevitably fall on those same small businesses when they pay their utility bills, buy fuel and other inputs, and when they seek to sell to consumers and other businesses equally burdened by these new, higher energy costs.

There is simply no getting around the fact that regulating greenhouse gas emissions, which amounts to charging a fee for something that has been free since the discovery of fire, is going to impose a burden on the entire economy. The principle behind cap & trade is the effort to make that burden as small as possible, by encouraging those parties with the lowest costs of emissions abatement to make the biggest cuts. Industrial emissions reductions are inherently more expensive than those in many other sectors, and we need a solution that unleashes the cheapest CO2 cuts, instead of forcing the most expensive ones to be done first.

I haven't given up entirely on the hope that the final outcome from the Senate might restore some sanity to the cap & trade provisions that Messrs. Waxman and Markey so deftly used to co-opt the biggest emitters into supporters, as we've seen with the recent fracturing of the US Chamber of Commerce on this issue. Utilities like Exelon, PG&E, and PNM Resources must realize that they are unlikely to get a better deal on emissions than under Waxman-Markey, and I don't blame them for advancing their interests. But that doesn't make this the best solution for the economy, or more importantly the best way to go about reducing the emissions responsible for humanity's contribution to climate change. And if the White House needs the threat of new EPA rules to have at least one flag to wave at the global climate conference in Copenhagen in December, in case the Congress fails to pass a Waxman-Markey/Kerry-Boxer hybrid by then, I understand that, too. However, that doesn't justify actually implementing those regulations and making make the task of reducing our emissions harder and more costly.

Resolving Iran Oil-Price Risk

Wed, 30 Sep 2009 02:29:00 GMT

It hasn't been easy keeping up with all the recent developments related to Iran's nuclear program, which still looms as a large, unresolved risk embedded in the global price of oil--though you would never know it from the behavior of oil markets in the week since Iran's hidden nuclear enrichment site was revealed. It's not clear whether traders have concluded that the exposure of the Qom site strengthens the hand of the US, Britain, France and Germany sufficiently to make a diplomatic solution likelier--and conflict correspondingly less likely--or the impact of this story has been overwhelmed for the moment by weak market fundamentals. After all, this is merely the latest phase of a crisis that has been simmering for a number of years; a wait-and-see attitude looks prudent, particularly in light of the market's current capacity to adjust for the temporary loss of Iran's oil output, should that ensue. However, I believe that we are also approaching the point at which much of this uncertainty resolves, because fairly soon the US and its allies must choose either to act decisively to prevent Iran from acquiring nuclear arms, or relinquish those options and focus on containing the threat.

Our relative torpor on the subject of Iran's nuclear enrichment program and that country's ultimate nuclear ambitions has been jolted by a succession of events this month. First, President Obama announced his intention to abandon the development of land-based anti-ballistic-missile sites in Central Europe, the main purpose of which was to intercept Iranian ICBMs on their way to targets in Europe or the US, in favor of a sea-borne strategy focused on shorter-range missiles. Then came the announcement at the G-20 meeting in Pittsburgh that Iran was building a secret uranium enrichment site that could start operations as soon as next year, potentially capable of producing roughly one atomic bomb's worth of weapons-grade material a year. Neither the fact that the US and its allies have apparently known about the Qom site for several years nor the last-minute disclosure of the facility by Iran to the International Atomic Energy Agency seemed to dampen the shock effect of the announcement. After customarily glib excuses, the Iranian regime's next step was to test-fire short- and medium-range missiles. The US has demanded immediate inspections of the new facility, and the UN Security Council meets tomorrow to take up these matters.

So where does this leave us, other than with nerve-wracking reminders of the pre-war situation with Iraq? If we've been paying attention, the latest revelation shouldn't have come as much of a surprise. As I explained at length in 2005, the arguments that Iran's enrichment efforts were aimed at anything other than a nuclear weapons capability were always pretty weak. Stripping away the diplomatic language of the US and its allies and the lame obfuscations from Tehran, the uncovered Qom facility leaves scant room for doubt concerning the determination of the Iranian government to militarize its nuclear program. Whether or not it is also currently developing warheads that would use the uranium enriched at sites like the one at Qom, there is no other plausible reason for building a nuclear facility in secret under a military base. And common sense tells us that, as with mice, where there is one there are very likely others.

What I conclude from all this is that we are approaching a set of distinct decision points, after a long and intricate dance that probably served the interests of both parties. The passage of time has allowed Iran to make steady progress on enrichment and missile technology, but it has also opened up options for us. As I noted last fall, lower oil prices have created a window for a set of actions--truly crippling sanctions, a naval blockade, or air attack on the facilities in question--that would have been unthinkable when oil was marching steadily toward $100/bbl and beyond. That window will begin to close once the global economy resumes growing rapidly enough to erode the healthy cushion of spare global oil production capacity that now stands at 5.5 million barrels per day--a buffer that would also erode from the other direction if new oil projects fail to keep up with oil's intrinsic decline rates. In other words, if the situation isn't resolved one way or another within the next year or so, the strategy of containment of a nuclear-armed Iran in a new kind of Cold War could become the only viable option left to us.

Wake-Up Call

Mon, 28 Sep 2009 02:49:00 GMT

In his column in Sunday's New York Times, Tom Friedman highlighted the growth of renewable energy in China and proposed that it represented "The New Sputnik"--referring to the wake-up call this country received when the Soviet Union orbited the world's first satellite in 1957. As is so often the case when Mr. Friedman turns his attention to energy, I find his argument here to be made up of equal parts important insight and facile over-simplification. There is no doubt in my mind that the nascent renewable energy industry represents a new cornerstone for the global economy in the 21st century, and a tremendous business opportunity in the bargain. It is also a key element of any practical strategy to address the causes of climate change. At the same time, however, we must remain clear-headed about its characteristics and limitations, if we are to avoid falling into industrial-policy traps of the kind illustrated in last Friday's posting on solar power in Germany, or the creation of a green-energy equity bubble along the lines of last decade's Tech Boom/Bust.

At the core of these limitations is one so basic--and seemingly so obvious--that it constantly surprises me to hear smart people tangling themselves up in its allure. Perhaps that's because many of the venture capital folks funding new energy start-ups cut their teeth on the technology of the information/telecommunications revolution. Unfortunately, green energy is not the next Internet, at least not in the sense of a wave of technology that changes everything it touches and enables the creation of a vast array of new products and services that would have been impossible without it, and even inconceivable before its arrival. That's because however novel its means of producing it, the output of renewable energy technologies is something that is really quite mature: energy in its various forms, and mainly electricity. A "green electron" is physically and functionally indistinguishable from one generated from coal, gas, fission, or any other energy source. Nor is there an energy analog to Moore's Law, the empirical relationship describing the remarkable improvements in computing power that have put the data processing power of the entire Apollo space program into your laptop.

For developed countries, the green energy proposition is focused on replacing the energy already being supplied from other sources, including coal, oil, and natural gas. This will certainly have environmental benefits, including making our energy consumption more sustainable in the long run by linking it to the perpetual energy flows around us, rather than depleting sources of fossil fuels. However, the fact that this substitution is occurring on a still-modest scale, and only as a result of substantial subsidies and incentives from all levels of government, serves as a reminder that this is hardly a case of a better/faster/cheaper innovation sweeping its inefficient predecessors out of the way. If anything, rushing headlong to implement renewable energy before it has become fully competitive with our traditional energy sources risks embedding higher energy costs into the value chains of most of the goods and services produced across the entire economy. Governments may shift the point where that burden falls, but they can't wish it away.

The proposition for developing countries is decidedly different, and that's what Mr. Friedman has grasped with the determination of a Gila monster. There's not enough coal, oil or gas in the world to enable China and India to match the per-capita income of, say, Spain, and the climate change and local air-quality consequences of their trying to get there the old way are almost unthinkable. For them renewables, along with nuclear power, represent a necessary step in their development path. It shouldn't surprise anyone to see powerful renewable energy firms emerging in these countries in much the same way that powerful railroad and oil companies emerged during our own development. Some of them will become formidable global competitors.

Mr. Friedman sees a Sputnik moment in this, though I'm a little surprised that someone who made his name explaining globalization to the US public would choose to frame it in terms of a nationalistic competition between China and the US. I'd see it as more of a key signpost for business. Globally, wind power installations have been growing at a compound average rate of 28% since 2000, and solar has been running at about the same pace. That means that the industrial capacity to supply wind turbines and solar panels has been growing at similar rates in the background. The 27,051 MW of new wind capacity installed last year represented global sales of around $60 billion worth of hardware, ignoring the associated infrastructure. Until renewables, the US energy industry hadn't seen growth rates like this since the days of rural electrification and the take-off of the motor car in the 'teens and 1920s. Still, we can't lose sight of the fact that the driver here is not market economics or engineering superiority but a bewildering array of regulations and incentives in the form of renewables mandates, tax credits, feed-in tariffs and the like, with cap & trade waiting in the wings.

In the years ahead, the growth of renewable energy and related technologies will create huge opportunities. Someone is going to make a lot of money in these new green industries, though they also come with the potential for others to lose fortunes, as rapid technology change turns many of yesterday's brightest innovations into dead ends. The history of the high-tech industry is rife with example of this. While I agree with Mr. Friedman that the US runs the risk of being left behind if we don't embrace renewable energy, that embrace must take into account the fundamental differences in relative development levels between us and China. For the present, the real bonanza in clean energy appears to lie on the side of building it and selling it into government-supported markets, rather than implementing it wholesale here, if that means scrapping trillions of dollars worth of infrastructure, plant and equipment with decades of remaining useful life.

Misguided Incentives

Fri, 25 Sep 2009 02:51:00 GMT

Today's Wall St. Journal includes an interesting article on the emerging controversy concerning Germany's subsidies for solar power and their unintended consequences for that country's solar industry. It seems that solar incentives there have been so generous that they have discouraged German solar manufacturers from focusing on becoming competitive, rather than merely bigger. As a result, a growing share of the incentives is going to foreign firms that can sell these products cheaper. The hue and cry about this suggests that perhaps the original motivation behind the subsidy program, which not long ago was paying as much as a dollar per kilowatt-hour for power generated from solar panels, had at least as much to do with industrial policy as protecting the environment. In fact, Germany may have harmed the environment by wasting money on an impractical solution for such a cloudy place, when the same funds could have bought much greater emissions reductions in other areas of the economy. This should serve as a cautionary tale for those who are promoting similar incentives here, and for columnists--even those with a Nobel Prize in Economics--who argue that going green will be cheap. It won't be if we encourage the wrong technologies with bloated incentives.

At the heart of the solar debate in Germany is something called a "feed-in tariff" or FIT. It requires utilities to buy the output of qualifying solar power installations at a guaranteed fixed price well above the prevailing price in the power market. What's unique about the FIT compared to incentives such as the US federal renewable Production Tax Credit of 2.1 cents per kWh is that the funds to pay this green premium don't come from the government but from each utility's ratepayers. In other words, it is a mechanism for redistributing wealth from utility customers to the owners of solar installations, whether the affected ratepayers receive any solar power or not. The paradox of the FIT is that it makes the most sense when a technology is at its very earliest stages, producing so little energy that the cost to average utility customers is just pennies a month. The more solar power is produced and bought at inflated prices, the higher utility bills go and the less competitive the entire economy becomes.

So far, this just sounds like a political matter. Germany decided to nurture a large industry to build and install solar products and chose to pay for it by sending the bill to utility customers every month. That might even make a certain amount of practical sense, if not for two facts. First, the subsidy remains extravagantly generous, even after having been significantly reduced in recent years. It currently stands at a range of 34-43 €cent/kWh, depending on the kind of installation involved. At current exchange rates, that equates to $0.50-0.635/kWh. A recent study comparing levelized power costs for a variety of power technologies puts the cost of unsubsidized solar power between $0.26-.32 for the crystalline silicon photovoltaic cells that most German solar firms produce, based on an average capacity factor above 20%. After adjusting for Germany's much poorer solar intensity, the cost of solar power might rise to as much as $0.40/kWh, still well below the level of the FIT. This makes un-sunny Germany a remarkably attractive place to sell solar panels, and German companies haven't been the only ones to notice this. Suddenly the FIT looks like a means for Germans to subsidize Chinese solar firms, and that is not going down quite so well. More importantly for the success of Germany's solar industrial policy, the Journal indicates that the head of one of the country's largest solar module manufacturers is now arguing that German suppliers will not become efficient enough to compete in the global market for solar panels unless they are weaned off such generous support.

The high effective cost of the emissions reductions these subsidies are buying ought to be of equal concern to German policy makers. Even if you assume that each kWh of power generated by FIT-subsidized solar panels backs out a kWh generated from coal, the extra premium over the cost of other low-emission power sources such as wind is enormous. The difference in the average solar FIT vs. Germany's FIT for offshore wind of 13 €cent/kWh ($0.19/kWh) yields an effective cost of CO2 reduction from solar of about $400 per ton. That compares to a current price for emissions credits on the European Climate Exchange of around $19/ton CO2. The more you pay for reducing emissions, the less of them you can afford to reduce, even in a prosperous country like Germany.

At the end of the day, German politicians appear to have spent billions of Euros of German consumers' and businesses' money to build a solar industry that has thrived on the installation of high-costs solar panels in one of the least suitable countries for solar power imaginable, and that may not be able to compete internationally without drastic restructuring. This initiative has also failed dismally as climate policy, purchasing less than 5% of the emissions reductions that could have been bought had this money been spent on other, more cost-effective power technologies or on energy efficiency. The further irony is that much of the German investment in solar technology to date would have to be written off should it turn out that the current generation of technology can't be made cheaply enough under any circumstances, and crystalline silicon cells ultimately give way to cells relying on non-silicon thin-film techniques or novel nanotech-based designs. These are the perils of industrial policy masquerading as environmental policy, and it is hardly a winning case for the application of a similar FIT in the US.

Technology and Critical Thinking

Mon, 21 Sep 2009 02:00:00 GMT

The other day I read a story in my local paper concerning a new technology for converting waste plastic into synthetic oil. The prototype "Envion Oil Generator" had been temporarily deployed at a solid-waste facility in Montgomery County, MD, and its owners were touting its benefits to the Washington Post. As I read the article, I found myself considering it on two levels: whether the reported details made sense, and whether the reporter was encouraging his readers to approach new inventions such as this with sufficient skepticism. We're living through a nearly unprecedented explosion in energy-related technology, and it's vital that the public not swallow every claim they encounter, because a large fraction of these technologies will ultimately prove to be either impractical or uneconomical, while some of them are in fact impossible, because they depend on the violation of basic physical laws. We might not all have the background for making detailed judgments about this, but I can suggest a few questions to ask in these situations, even if you don't have a science or engineering degree.

The first question is whether the description of the basic process seems logical. For example, in the case of the "Oil Generator" is it reasonable to expect that plastic could be turned back into something like crude oil by means of essentially just heating it up? After all, plastic is mostly derived from crude oil and natural gas in the first place, so perhaps heating it would cause it to decompose back into its constituents. If you Google on "plastic recycling", you'll see that this normally entails separating it strictly by type--those little numbers in the triangle that usually appears somewhere on an item--and then melting it. But that doesn't give you "oil"; it gets you back to the raw plastic, which can be used to make clothing, carpets, or some other recycled product. However, if you heat them further under the right conditions, the polymer chains of the plastic break down in a process called "thermal depolymerization." The result of that is a liquid that might resemble crude oil. OK, so far.

The next aspect you might look at is the whether any obvious physical laws are broken. Do the claims for the device hint at something impossible, such as getting more energy or mass out than are put into it? For example, the article indicates that this device can turn 10,000 tons of plastic per year into up to 60,000 barrels of oil. Is that plausible? A little Googling should turn up the fact that a typical crude oil has a specific gravity of around 0.85. That means that a gallon of it would weigh just over 7 lb., and a 42-gallon barrel would come in just under 300 lb., or 0.15 short tons. So the claim here is that 10,000 tons of plastic could turn into as much as 9,000 tons of usable oil. Personally, I'd say that sounds pretty optimistic, and I'd guess that a yield under 5 barrels per ton was likelier, particularly if the gas produced as a byproduct from the process is supposed to generate most of the energy for this conversion. At a minimum, though, this gizmo doesn't appear to bend any physical laws.

If you know a bit of organic chemistry, you could delve a little further into this, looking up the chemical structure of such common plastics as Polyethylene Terephthalate (PET or Type 1), Polystyrene (Type 5), and Polyvinyl Chloride (PVC or Type 3). De-polymerizing a random mix of those is either going to yield a stew of specialized petrochemical molecules, or if you break them down further you might get back to more basic chemicals full of double bonds and benzene rings. Neither result has much in common with the typical constituents of good-quality crude oil that refineries turn into gasoline, diesel or jet fuel, so it raises a key question about the value of the product this technology produces.

That brings us to the economics. The article quotes the company as claiming that the process costs only $10 per barrel of oil produced. It's not clear whether that $10 is just the operating cost or is meant to include the capital cost of the device, which apparently totals $6-7 million. Using the "PMT" function in Excel it took about 1 minute to determine that at an 8% cost of capital--about the best a small business could hope for in the current environment--the amortized hardware cost would be at least $611,000 per year over a 20-year life. Spread that over 60,000 bbls and you're already over $10/bbl, before you've paid for the first employee or the first kWh of purchased electricity. And since a device like this is unlikely to operate around the clock every day of the year, and the realistic yield is probably lower than 6 bbls/ton, it's not hard to come up with an effective fixed cost per barrel of around $20, over and above whatever variable costs are involved.

And then we come to the environmental impact of all this, and that hinges on assessing realistic alternatives. If the plastic would otherwise be buried in a landfill, this looks like a win-win, as long as the process complies with all local pollution regulations for stationary sources. However, if the device is chewing up plastic that could otherwise be recycled, the latter seems by far the better route, in terms of energy consumption and displacement of oil byproducts that would otherwise be used to make virgin plastic. It's also clear that a significant fraction of the input plastic is converted to CO2 and emitted to the atmosphere. Whether its emissions are higher or lower than those associated with burying the waste and producing new plastic isn't obvious.

Ultimately, all we can really conclude about the Oil Generator is that if it operates as advertised--a big if for any new technology--and if there is indeed a viable market for its output at some discount to crude oil, then this might leave a reasonable profit margin for the owners. That would also depend on how much rent the operators must pay, if any, for the land it sits on, how much plastic they could really run through it, and whether they would have to pay for that plastic or might even get paid to dispose of it. This is not meant as an endorsement of the company's claims, but then that wasn't the point of this exercise, which was more about taking my readers through the application of some basic critical thinking. Although the Post reporter didn't undertake all this analysis, he at least included a suitably skeptical viewpoint, instead of giving in to the breathless enthusiasm that seems so prevalent these days in reporting on any new technology with an environmental angle.