Source: EIA

It remains to be seen whether 'paying for it' also has political implications.*

*Post election postscript: one more surprise for Pete -- it didn't.

MISC ----

President Chavez's efforts to sell Venezuelan oil to China apparently work out. q.v. Course it's not clear how much he sold ...

Have anthropogenic aerosol emissions offset the effect of greenhouse gases on global warming? q.v. Not very likely, thinks Pete.

Bill Clinton awakes to discover he didn't do anything about energy. q.v. Never too late? (See Letters)

Once again time to worry about Venezuela? q.v.

Saudi central banker on whether to price oil in euros or dollars. q.v. He thinks it doesn't matter.

OK, Pete knows, everyone knows, the US sanctions against Iran are a farce. But how big a farce? q.v. Note that Radio Free Europe thinks the Halliburton move may represent another instance of rapprochement. q.v.

Martial law and elections for Iraq. q.v. So this is democracy...

Coherent background piece on petroleum (after the intro paragraphs). q.v.  Thanks to George Mogiljansky for pointing  it out.

Another good background analysis by a Harvard professor is also available q.v.  and worth reading, with thanks to Randy Udall for suggesting it.

Alleged Saudi role in funding Al-Qaeda. q.v.

The Wall Street Journal reported that the Saudis were in negotiations with India for a large oil supply contract.

Where will the hydrogen come from, how will it be stored, etc. q.v.

Possible major increase to Saudi reserves. q.v.

Let us now celebrate the clerk at Dominion Transmission who sent EIA the wrong file and therefore seems to have caused natural gas prices to jump up by a fifth the day before Thanksgiving. qv1 qv2 Since Pete was short gas at the time, it adds to his litany of sighs...

DOE completes testing of Daimler Chrysler's new electric commuter cars. q.v.  Operating characteristics: from 37 to 44 miles per charge; payloads from 526 to 886 pounds per vehicle; each vehicle required less than seven hours to fully charge using a standard household outlet. Each went between 5.4 and 5.9 miles per kilowatt-hour (kWh), which means that the fuel costs were less than two cents per mile (assumes 10 cents per kWh).  [editorial note: Pete originally made a  mathematical error on the relative cost of the new technology with  gasoline, kindly pointed out by Stephen Richards. This makes the new question: how could it only cost a fifth what gasoline power would cost?]

Renationalization of the Russian oil sector? q.v. Nothing like a good shell game.

Greenspan On Oil Price and Supply

Rumors to the contrary having repeatedly proved unfounded, the only Washington authority with views on oil that matter remains the Federal Reserve (and perhaps Vice President Cheney, although no one is sure about the latter).  Here are selections from Fed Chairman Greenspan's recent remarks on oil:

The full speech can be found here.

What Does EIA Know About the Future Anyway?

Not much, judging from the following graphs (first natural gas, then oil):

Source: Taken from Berkley National Laboratory, Overview of Alternative Fossil
Fuel Price and Carbon Regulation Scenarios. Suggested by Randy Udall.

First off, the charts above were apparently done last year, or at least they weren't fully updated.  So make the following mental correction: go to the end of the wavy red line, jump over a notch, and then head due north until you get near the top (i.e. gas is going for about $6.80 and oil for $54). Paint that mental line very red and throw in some exclamation points just to emphasize how extreme the current situation is.

Let's face it. No one got it close to right.*

*Pete must confess that he was at least breathing the same air as many of the EIA wizards were when some of the forecasts made in the 80s and early 90s were made, and may therefore bear some of the blame for not getting it right. As we all know, he never gets it right. And as he has always maintained, a lot of those EIA analysts are very smart and are as good as analysts come.  The analysts themselves would probably point out that a few intermediate spikes for a year or two are not that damning for a long term forecast. Note that the wizards of the futures pits didn't get it right even a few months out.  Who knows why the future is so squirrelly?

On the economics of producing hydrogen from nuclear plants. q.v.

On the idiocy of US regulations concerning Iran. q.v.  Who cares, given the farce recent European and Asian deals have made with the tidy little US scheme. Perhaps the point of the changes is to permit the innocuous exchange of books by the Library of Congress with their Iranian counterparts, first mentioned here several weeks ago. If so, may the rapprochement grow. But there's no reason to have such foolish regulations in the first place.

FERC approves the largest ever LNG import facility. q.v. Why is FERC approving the monster for Louisiana, when gas demand is in the northeast?  Is FERC is trying to bailout the pipelines too? Or is it just that the south is lax about inherently dangerous projects?

Norway outdoes the rest of Europe, promising 90% renewable electricity by 2010. q.v.  The interesting part is that it produces 99% today (hydropower), according to EIA. q.v.

EIA's guide to Chad and Cameroon. q.v.

Residential energy calculator. q.v.

Samuel Bodman nominated as secretary of energy. q.v. Mr. Bodman was formerly with Commerce and Treasury.

Marc Rich rolls the US government yet again. q.v.  Sigh. How free markets really work when there's no one to regulate the game...

Rumsfeld and Wolfowitz's shameful legacy. q.v. (slow to load)

Green as you want to pay to be: EIA's take on green energy pricing. q.v. Someone is making money from it, but is net  useful green power being produced?

So Much for the Price Band

Source: EIA

Of course, Pete's a bit late in noticing that the band can't play, and he has perhaps been a tad too unctuous in continuing to thank the Saudis for their sterling work in keeping prices reasonable.  It may even be that the avalanche of votes Saudi largesse was supposed to send the president's way has gotten lost somewhere.

Pete and Paris

Pete's just back from Paris where he was exposed to the consciousness realignment characteristic of the intellectual riff raff of the 5th and 6th arrondissments: the one that transforms the former certainties learned from, say, Fox news into so much hysterical blather and idiocy. Although it was a short visit, he was even exposed to Norman Mailer's analysis of what is, was, and will be wrong with the US, thanks to the local TV, which serves up such fare on a regular basis.*  It would be fair to say that the neo-con movement and its policy progeny have yet to be fully appreciated by the Parisians (and vice versa), which everybody already knows, so he didn't learn much. 

He also had plenty of time to sit in the cafés and contemplate his own manifest errors as an energy know-it-all, while reading of oil spiking ever higher, the dollar sliding lower, and the sorry tale of his own government's further misadventures in the Middle East.  Fortunately, like most of the rest of those inside the beltway, getting it right has never been Pete's strength, so why start now? He returns determined to keep the site going a while longer...

*In fairness to Mailer, he probably also covered what shall have been wrong, but Pete isn't good at translating the more complex verb tenses.

The Cost of Natural Gas Continues to Increase

Source: EIA

The Petroleum Industry as Energy Industry

Source: EIA

The key players in the oil and gas business used to think it was a good idea to own a substantial share of all energy assets.  No longer.  Since the domestic uranium industry is essentially moribund, it's hard to compare, but the coal industry has been doing incredibly well as participation by the oil and gas industry declined.

Oil As A Political Asset

The Bush administration is preparing a series of special loans of Strategic Petroleum Reserve oil, ostensibly to compensate refiners that lost supplies because of the weather, but in all events with the intent of lowering the price of oil just before the election. q.v.  This is just what President Bush promised not to do.  On the other hand, it is just what Kerry said needed to be done, so Kerry presumably can't complain too much with out reawakening the chorus of flip-flopper epithets. 

But it sets a disgraceful precedent, reminiscent of the the bad old days when the oil entitlements program was rigged to dump cheap oil in certain congressional districts. The political class should keep its hacks away from the strategic reserve, and be content with foisting them on the formerly professional and apolitical CIA.

Natural Gas Reserves Grow Again

According to the "advance summary" of EIA's just released report on oil and gas reserves at the end of 2003 q.v.,  natural gas reserves continued to get larger.  Here is the relevant section from the report:

• "Total discoveries of dry gas reserves were 19,286 billion cubic feet in 2003. This was 36 percent more
  than the prior 10-year average and 8 percent more than in 2002. The majority of natural gas total
  discoveries in 2003 were from extensions of existing conventional and unconventional gas fields.
  Field extensions were 16,454 billion cubic feet, 11 percent more than extensions in 2002 and 66 percent
  more than the prior 10-year average of 9,941 billion cubic feet."

So why the sudden panic to import LNG? 

The reserves referred to in the report are not esoteric, hard to get at types of natural gas.  The reserves measure conventional accumulations of economically recoverable gas that are already known and just waiting to get drilled and hooked up. Pete spent a lot of time warning about the inadequacy of natural gas reserves to support 30 years of load at 35 Tcf per year, and was right about that.  But this doesn't mean the US has to introduce a far more sinister type of energy dependence just to get to the point when the pipeline from the north slope of Alaska finally gets hooked up. All that's required is to stop new gas use for electricity production at the margin.  And the market may already have done that.

Pete's Quick Guide to Why Too Much Coal Is Used to Generate Electricity

Source: EIA

When will the true costs of burning coal to generate electricity be charged?* Apparently never, if the US political class has anything to say about it, but those costs are building up year in and year out just the same.

*Several readers have expressed understandable confusion about what Pete meant by this. The real costs are what economists call the externalities of coal such as the cost to the planet from global warming, which will be very real. In other words, it may only cost a few bucks or less for an independent power producer to buy a ton of the commodity in order to produce electricity, but the real cost in terms of the long-term consequences of greater atmospheric concentrations of CO2 can be really expensive, but these costs are borne by all rather than the independent power producer. One way to resolve these concerns would be to impose a substantial carbon tax, to bring the commodity charge and the externalities charge up to a much higher level, but this is not exactly a popular political idea. It would also have the effect of encouraging nuclear power, another of Pete's politically unpopular lost causes, since nukes have little in the way of global warming costs.

Does Exxon Do Enough?

Exxon is a superb international oil company.  It is well-managed, quite efficient despite its size, full of capable personnel, and one of the largest and most profitable companies in the world. It consistently replaces the reserves it produces, and only plays in the largest, most challenging parts of the exploration business, where each bet is enormous, the risks truly daunting, and the logistical difficulties are very real. Time and again, it succeeds admirably.*

But look beneath the surface at its finances, specifically its cash flow:

*In the interests of disclosure, note that Pete has a direct or indirect holding in XOM, and while he suspects it is a bit pricey at these levels, he still thinks Exxon a core holding in almost any portfolio.  Incidentally, while Pete chides Exxon, much the same point could be made about BP, RD, and Chevron.

Prince Bandar, the Saudis, and All That

However reluctant many Americans may be to admit it, a vote of thanks is owed the Saudis for taking decisive action to bring down oil prices by increasing production yet again.  Unfortunately, the words accompanying the action reveal that Prince Bandar, the Saudi ambassador to the US, has become something of a bumpkin who has stayed on a bit too long.  He asserted that the action was intended to influence the result of the coming American election in President Bush's favor.  Americans of both political parties should quite rightly deplore any such ludicrous attempt to meddle in US internal affairs. The Kerry team, should it win, would be quite right to reevaluate future US/Saudi relations on that basis alone.*  Whichever way the election turns out, the Saudis need to consider whether another post might not be more appropriate for Prince Bandar. Yes he did a good job for a long time, but that time is now over; he needs to be taught that the Saudi supply response had the effect, and was therefore presumably intended, to prevent further damage to all industrial economies, upon whom the kingdom continues to depend for almost all its revenue.  If Saudi Arabia ever wishes to play a position in world affairs consistent with its economic importance, it would do well to find a spokesman capable of grasping how maladroit remarks of this kind seem to the rest of us.

*Pete's well-aware that US - Saudi relations are one of the big unspoken, behind the scenes issues of the current political campaign, and whether or not Prince Bandar continues to speak for the kingdom, Senator Kerry is not likely to be pro-Saudi q.v., especially in light of what he knows about BCCI and how Mr. Bush got his money q.v.  On the other hand, Prince Bandar's remarks were objectionable per se, and need to be rectified no matter who wins.

Long-Term Petroleum Supply Elasticity

You might have supposed that record oil prices would elicit a record supply response from the domestic industry trying to take advantage of higher prices, as happened back in the 1980s. But, no, pretty much the entire domestic industry seems to have given up on increasing net domestic oil supply some time ago.  From 2000 onward the domestic industry has enjoyed the benefit of vastly higher oil revenues without bothering to try to stage an oil supply response. However, the domestic industry has made, and continues to make, a major effort with natural gas.

Source: WTRG Economics

Background - Natural Gas from the Gulf

Source: EIA. For more detailed information from the MMS, click here

Note that gas reserves from the Gulf are only 13% of total natural gas reserves. Contrary to what you'd expect from recent gas prices, total US natural gas reserves haven't been dwindling in recent years; they've been growing. Still, the bulk of future reserves additions are expected from certain regions in the Rockies rather than the Gulf.

Visible Demand

The picture, a composite of dozens of shots from the defense meteorological  satellite program, shows vividly where energy is used at night all over the world. Click on the picture for an enlargement.

Source: NASA

Mr. Kerry's Energy Policy

The Kerry-Edwards energy policy has been published. q.v. Here are the main points, with a few comments:

• Establish a $20 billion Energy Security Trust Fund funded by federal oil and gas offshore royalty revenues to be used to subsidize consumer purchase more energy efficient vehicles, plus support for the auto industry retooling and research into increased energy efficiency. The fund would also be used to support a new government / industry partnership to replace 20% of automobile fuel demand with alternative auto fuels, primarily ethanol. A mandatory target of 5 billion gallons of ethanol/biodiesel would have to be sold by gasoline sellers annually by 2012, and of course the tax subsidies that keep ethanol competitive would be continued. Another objective of the partnership would be to research the required infrastructure changes needed to move to a hydrogen economy.

The US does need someone to encourage the domestic industry to produce the type of cars that will be needed as the era of cheap oil ends.  Once again the domestic industry has been caught without the right mix of reliable, cost-effective hybrids.  So the Kerry policy is on the right track in trying to change the characteristics of the auto fleet, but the transition will cost a whole lot more than $20 billion to finance. The policy is off-base in trying to change the fuel mix burned by that fleet. The reason why ethanol/biodiesel needs subsidies in the first place is largely that it is a net energy loser: more energy is used to make it than gets consumed in burning it.  Just like the marketing maven who was selling widgets for less than they cost to make, you can't make it back on volume. In any event, why rush to have food prices set by demand for gasoline? It has never made sense to support big time ethanol and it won't in the future. Hydrogen as a replacement fuel for the internal combustion engine is fraught with problems that have yet to be overcome. Methanol is another matter and could be used, but it doesn't get a mention ....

• Reduce energy prices by re-establishing American leadership abroad (which will eliminate any risk premium), by pre-empting the multiple state gasoline recipes in favor of a federal recipe adequate to meet all regional environmental concerns, by re-balancing the policies governing the strategic petroleum reserve so they "minimize the negative impact on consumers," by enacting new standards to increase energy efficiency in schools, municipalities, etc that will reduce energy bills by 25%,  and by enacting new rules requiring the federal government to save a further 20% of current consumption. In addition, the FTC should be more cautious in approving energy sector mergers.

While Pete's all in favor of federal pre-emption of fuel standards, he knows of no reason to suppose that retrofitting any mix of available energy efficiency improvements will reduce energy bills of schools and other institutions by 25%.  The easy improvements have all been done over the last quarter century. Similarly federal energy consumption has been looked at by everybody for at least the last quarter century and there is no reason to suppose it can be materially reduced at all, unless jet fighter pilots aren't going to be trained in actual planes, etc. Someone could do us all a big favor by stopping the postal service form using natural gas as truck fuel, but that's a fairly minor matter. There is also no reason to think that any of the other suggestions would make any material difference in the level of energy prices, although Pete wished the FTC had been a whole lot more proactive back when Exxon was allowed to merge with Mobil and BP with Amoco. But that's water under the bridge now.

• Diversify energy supplies. For natural gas:  by supporting drilling of deep water gas in the western and central Gulf of Mexico, by supporting LNG imports, and by building the pipeline from the Alaskan north slope/Canadian north. For coal:  spend $10 billion to refit old coal-burning plants with coal gasification facilities and other technologies. Kerry-Edwards "... reject the old view that coal cannot be part of a clean energy future and will begin to build the clean coal facilities of the future today." For electricity: establish a goal of generating 20% of domestic electricity requirements from solar and wind, etc. to be done by the trading of tax credits. For nuclear: this form of power "can play an essential role in providing affordable energy while reducing the risk of climate change;" but nuclear waste storage at Yucca mountain is out and the whole process must start over again from the beginning. For oil: try to get more from non-OPEC members like Canada, offshore Africa, and Russia.

By all means, diversify away. Unfortunately, bringing in LNG from all over is diversifying from secure sources to insecure ones. But bringing gas down from Alaska is good, as is drilling the deep gulf. But note how geographically specific the policy is -- sort of suspicious if you know that the only available large gas pools that otherwise haven't been drilled, or scheduled for drilling, are off the eastern gulf. Also keep in mind: there's no such thing as clean coal and there is absolutely no prospect of getting 20% of US electricity from solar and wind*, so anything that purports to be able to do either is hokum, especially tax credit trading schemes. Pete doesn't know whether Kerry is right about Yucca mountain, but finds the language on the merits of nuclear power surprisingly encouraging.

Ken Ainsworth of Continental Resources in Enid, Oklahoma writes, "...There probably won't be much natural gas coming from the deep water Gulf of Mexico. The geochemists who study such things tell me the pressure-temperature regime at which hydrocarbons were generated there will predominantly result in oil, as opposed to natural gas. Not that oil is necessarily a bad thing, but an energy strategy which assumes that said province will be a significant source of natural gas starts with flawed premises.  As an aside, a colleague went to a conference in Denver last week in which several industry analysts have concluded that, if access issues are resolved, the Rocky Mountain province will surpass the gulf as a source of natural gas within about five years." 

* To see how impossible it would to be to get 20%of the nation's electricity from solar and wind, consider the graph which depicts how much alternative fuel was used in 2003 out of all fuel consumption (not just electricity consumption).  All renewable energy is only 6% of total energy consumption and almost all of that is either biomass or hydroelectric. The 1% and 2% values for solar and wind refer to their percentages of renewable energy, not total energy. They are way, way too miniscule to hang your hat on if you are a sensible candidate. 

• Avoid further electricity blackouts by enacting serious reliability standards and getting the technology to understand weaknesses in the grid.

Pete totally agrees.

Overall, the Kerry-Edwards energy plan is a whole lot better than expected. There are even some very positive parts like tougher CAFE standards .... Unfortunately, it won't come close to achieving its stated objectives, but at least it is a start.

Uncle Sam's Role in Providing Fossil Fuels

Source: EIA

... grows ever larger. Oil and natural gas are trading at record prices; the oil patch is in clover.  So why is uncle so far in the hole? After all, if you owned the royalty interest in 2 of every 5 barrels of oil produced by the world's third largest energy operation, shouldn't you be sitting pretty? So why did uncle collect less than $8.5 billion in royalties  q.v. in 2001, the most recent year for which official statistics are available?  Take oil for instance. Total domestic crude production in 2001 was 2.9 billion barrels. Since the share of oil production from federal lands is actually somewhat less than shown in the chart, 34% instead of 38%, multiply the domestic oil production total by that percentage to arrive at the 1 billion barrels available for royalty interest. Since the government only received $2.4 billion in oil royalties, the per barrel amount works out to just $2.40, or only about 10% of the average domestic crude oil price for the year. Why should federal royalty income should work out at less than the one-eighth overriding royalty common in the industry is not clear. 

OPEC's View of The Future

Here is OPEC's collective thinking on what lies ahead.  The except is taken from a speech given by Dr. Maizar Rahman, Acting for the Secretary General of OPEC, in Malaysia in June of 2004:

While no one would fault Dr. Rahman for his concluding remark, one might wonder if the US could say it was abiding by that mandate or anything even close.

Europe Reports Progress on Greenhouse Emissions

Unlike the US, which promised to make progress and was then forced to take it back when emissions went the other way, Europe has actually been doing something about reducing greenhouse gas emissions. The European Environmental Agency reports that "overall emissions fell slightly in 2002 after two years of increase, taking the EU a small step closer to its target of an 8% reduction between 1990 and 2008-2012." q.v.*  Judging from the following chart, which is from the US government not the EEA, the world has a long way to go.

*Of course it would be nice if the authors of the EEA report provided some context indicating how close Europe may be to achieving the stated goal. In the US greenhouse emissions, while increasing, actually remained below 2000 levels because of the recession, but remained about 12% above 1990 levels.

No One Is Catching On: Nukes Are Getting Better and Better

Source: EIA

Time to start feeling guilty about not building a whole lot more of them, because existing nukes are maxed out.*  Too bad the capital markets put it all on natural gas just before natural gas became untenable as a long term source to fire new electricity generating capacity.  So it goes sometimes....

*but also see this.

Exxon's View of the World (4)

The more you use the richer you'll be, and vice versa (?!):

Because the richer you get the more you drive:

But eventually you reach a saturation point in per capita vehicle usage and wait while everyone else catches up:

Fortunately and for reasons not entirely clear, what constitutes vehicle saturation differs by culture and/or region. Asian saturation points seem to work out a lot lower than most of the rest of the world. But if the estimated saturation points are wrong, and China, for instance, wants the saturation point of South Korea, that difference alone works out to 12 million b/d in 2050.

As usual, Pete has done a miserable job paraphrasing what Exxon has to say and suggests you read the piece for yourself at their site. q.v. Anyone interested in energy policy will find it well worth thinking about.

Source for all figures: Exxon web site

US Coal 1973 - 2003

Source: EIA Units: Million Short Tons

Siting 'em nukes: readers may be interested in what's been going on way up north in the Sourdough Mining Co. restaurant. q.v. (Do Pete and his readers know everything, or what!)

Senator Domenici calls for ideas on how to restrain natural gas demand. (!!??!) q.v. (see letters below)

Yet another Exxon presentation on the future. q.v.

Red Cross accuses the United States of torture and prisoner abuse. q.v. (NY Times)

Random history: King Saud Meets JFK, Feb. 1962. q.v.

Who funds the  effort to convince Americans that climate change is not a problem? q.v.  Pete doubts that it could be that simple or obvious. On the other hand,  Exxon's had a weird view of the climate change problem for a long time.

"Americans can now be obligated to comply with legally-binding regulations that are unknown to them, and that indeed they are forbidden to know." q.v.

BNP and the Iraq Oil-for-Food program. q.v.

Russian natural resources minister warns of known oil reserve depletion by 2015. q.v.

Who will benefit from the impending revival of nuclear power in the US? Possibly, Areva q.v., the only complete player in the front-end of the nuclear fuel cycle.

Exxon announced that in the third quarter "...the company increased its share repurchase program by $1 billion per quarter to $2.5 billion per quarter net of any anti-dilution purchases. Dividend increases of 9 percent and 8 percent, respectively, over the last two years have continued the company's record of paying a dividend every year for more than 100 years with increases for the past 22 straight years." See, Does Exxon Do Enough? below.

If you enjoy articles that make the short hairs on the back of your neck stand up, try this. q.v.

More information on the extent of Saudi reserves (pdf files, one, a presentation on Saudi reservoir information; two, a transcript of Feb 24 conference where Simmons paper was presented). qv1, qv2.

According to GM, If the nine largest US cities replaced their transit fleets—totaling 13,000 buses—with GM's hybrid buses, the cities would save 40 million gallons of fuel each year—a greater savings than 500,000 small hybrid vehicles. q.v.  It would also be nice to get so many other city buses off natural gas, thinks Pete.  Who was the short-sighted bureaucrat who thought that would be a good idea?

How much has the war in Iraq cost? q.v.

President Chavez of Venezuela is off in China trying to sell some oil q.v., which shouldn't be too hard. The only problem is that 85% of Venezuela's output already goes to the US, so there can't be that much more to sell, can there?  Maybe President Bush can get us a good deal on some of that orimulsion if the Chinese walk off with the good stuff.

For readers interested in the state of play in climate change modeling, an interesting exchange of letters from the Industrial Physicist. q.v.

Assessment by MMS on extent of hurricane damage. q.v.

Additional detail on the extent of Saudi reserves from Saudi sources. q.v.

EIA report on new natural gas pipeline and storage capacity. q.v.

Storing hydrogen is not that easy ... q.v. 

GM's view of hybrid cars. q.v.

Is ethanol environmentally friendly? qv1 qv2 More interestingly, thinks Pete, what will happen to the MTBE phase out while ethanol producers begin to install thermal oxidizers to bring VOC emissions down 95%, aside from adding to the net energy losses.

MIT study on the future of nuclear power q.v.

Dear John Kerry

By now someone will have told you that your repeated promises to produce energy independence are ludicrous, and that your reliance on Clinton's former energy svengali is ill-advised.  There is no prospect of energy independence, nor of returning greenhouse emissions to 1990 levels. Any claim of having a policy to do either can be dismissed as snake oil, and, apart from a few Democratic staffers, the whole world knows it. The battle is elsewhere. If you are serious about doing something to control energy dependence,  take a look at what is about to happen with natural gas. 

Source: Center for LNG

Natural gas imports have so far been limited to dependence on Canada, which is not a bad thing. It is about to be opened up to all of the unsavory, unstable spots in the world that you claim are not worth spilling blood for.  Before you go much further, ask your advisors what your options would be when a few of the new LNG suppliers decide to cut off supplies, or otherwise get seriously flakey, in the dead of winter a few years down the road.  LNG is dangerous, not because of the physical dangers inherent in transporting it, although these are worth understanding, but because the dependence it creates can potentially be much more damaging to national security than dependence on imported crude oil, vaguely analogous to crack and cocaine.

The nation's industrial sector is still reeling from the ugly surprise of learning that the domestic gas industry had been misleading everyone with false claims about what it could provide in the future.  But look at the list above: that's panic made visible. The situation is not that bad, and the market needs a clear signal that it would be unwise to commit so much capital toward the wrong thing.  Instead, you need to get control over the situation by (a) investigating what was going on with natural gas reserve reporting and drilling; (b) requiring that all large users of natural gas for electricity generation have installed dual fire capability, (c) using existing natural gas storage reservoirs on federal lands as the start of a strategic natural gas reserve to be paid for by an LNG import fee; and (c) formally reexamining whether electricity decontrol is working as intended. 

"A New Grand Strategy for U.S. and Arab Relations" q.v.

Signs of the times: the head of the UN called the US war in Iraq illegal and no one in the US noticed.

Who controls US policy toward Saudi Arabia? According to the former US ambassador,  Robert Jordan q.v., the principals are Assistant Secretary of State for Near Eastern Affairs, Bill Burns,   Condoleezza Rice, and her deputy Steve Hadley. Curious, no? Especially when Pete and everyone else thought it was really James Baker, Mr. Jordan's employer.

What the Fed should do to respond to the damage caused by higher oil prices (by P.A. McCully of Pimco). q.v.

How the US economy looks from Jeddah. q.v. Funny, looks like that to Pete too.

A few EIA analysts take on Hubbert and the peak. qv1 qv2 "...Thus, if the USGS mean resource estimate proves to be correct, if 2 percent production growth continues until peak production is reached, and if production then declines at an R/P ratio of 10, world conventional crude oil production would be expected to peak in 2037 at a volume of 53.2 billion barrels per year."  So now you know. What, me worry?

BP's experience with Thunder Horse in the deep gulf. q.v.

Just in case your international radar screen has been looking a bit blank, EIA has put together a guide of international stuff to worry about. q.v.

FTC on petroleum industry competition. q.v. 

Ah, plus ça change ..., the threat of $100 oil is back q.v.

Stuff to worry about: 1) grain stocks q.v.  2) Saudi water flood techniques used to boost Ghawar production qv1, qv2 Actually, Pete doesn't worry too much about the latter because ignorance is bliss. On the other hand, and not to interrupt anyone's war on terrorism or anything, but perhaps it would be nice if the US asked the Saudi's what is really going on.  The Saudis have tried to reassure everyone (see below), but the question doesn't seem to go away and oil prices just don't seem to want to fall the way Pete thinks they should.

But ...

EIA's view of Saudi Arabia as an oil province. q.v. EIA quotes the Oil and Gas Journal figure of 260 billion bbls of proved reserves, but suggests ultimately recoverable oil may be almost 1 trillion bbls and reasserts that daily production could be as much as 22.5 million bbls per day by 2025. 

USGS's view of Saudi Arabia, Kuwait, Iraq, etc. as oil provinces. q.v.

Congressional Research Service on: weird history of congressional relations with the Palestinians (see page 8 ff); US-Israeli relations; US payments to Israel; Shias and Sunnis; & Wahhabis. What a long strange trip it's been.

Pete remembers well the night federal debt crossed $2 trillion. It just crossed $7 trillion. q.v. Pete has looked around a bit but is not quite sure where the additional $5 trillion went, since life seems pretty much the same. However, he is acutely unenthusiastic about having to pay it back. Perhaps terrorists took it.

US Greenhouse Gas Emissions Continue to Increase

It turns out that 2003 was another bad year for climate change policy. By EIA's reckoning q.v.,  CO₂ emissions increased by 0.9% while energy demand only increased 0.6%.  Decreased natural gas use brought on by higher prices resulted in greater reliance on coal and petroleum, which in turn means more CO₂ emissions than for natural gas, and a colder winter were factors in the year over year increase.

Energy Imports Keep On Growing

Note: Data are in Quads, Source: EIA

Background: Relationship Between World Oil Reserves and Production(2)

Source for both: BP

The world's not running out of oil any time soon. The chart above shows how many years it would take to use up current reserves at current rates of production. Even if another drop of oil is never discovered, there's enough to run the world for quite a while (technically, current reserves wouldn't last as long as 40 years because existing supply declines about 5% annually and replacing that loss would also have to be made up from the same reserves; nor does the ratio capture the effects of growth in demand).  Even with these qualifications, there's no need for anyone to expect the end of oil anytime soon.

The trouble is the mismatch between where the reserves are and where the demand is -- and that reduces only to a logistics problem of the kind the world oil industry is already very good at solving, so long as the oil nations in the Middle East keep the trade on an economic and not a political basis.

For purposes of comparing with part 1 below, BP includes as reserves an estimate of Canadian oil sands 'under active development' as a proxy for proved reserves.

The Labor Cost of Oil

Various correspondents have suggested other approaches to deflating the nominal cost of oil to arrive at a 'real' figure.  Among the best is the suggestion made by John Mauel of Alberta to use the labor value of oil. That is, use the number of hours of after-tax work the median worker would have to put in to buy a standard unit of oil.  Since an after-tax data series couldn't be found, a gross figure for the average US production worker's hourly compensation was used.  The values in the chart represent what percent of a barrel of WTI crude an hour of work would have bought in January of each year.

Gone are the halcyon days of yore when an hour of work could have bought a barrel of oil, but the political situation for Mr. Bush's re-election in 2004 is not as grim as it was for Jimmy Carter in 1980.

Karl Marx's analysis of Palmerston. q.v. 

Shell's Chairman: Get Scared

Which is worse: terrorism or global warming? Global warming, of course.  The chairman of Shell is starting to get scared. q.v.

Background: Relationship Between World Oil Reserves and Production(1)

In Over Our Heads?

Source: Steve Roach Weekly Commentary, Mogran Stanley

Back in the days when adults were in charge, or probity reigned, or something, US households managed to get by with debt loads equal to less than half of annual GDP. No longer. Household debt levels have grown far faster than GDP, with the ratio between the two now north of 85%, suggesting that the burden of debt service will rise quickly when interest rates start rising.  When that happens the extent to which households are over extended will become clear.  What's interesting is the return to favor of adjustable rate mortgages, which are really a bet that one's income and consequent ability to service debt will increase more rapidly than interest rates and inflation.  It may be a bet worth taking for a while when rates are falling or when starting out in a career, but it becomes a bold bet over the life of the typical mortgage for the typical person when rates are about to increase.  Nearly half of new mortgage holders were willing to make that bet when crude oil was cheap and rates were falling; interestingly, roughly the same proportion have been willing to make it with crude at record levels, rates about to rise, and real incomes more or less flat.

EIA on Short-Term Natural Gas Prices

With 95% confidence intervals looking like Bollinger bands on steroids, it's clear that the government doesn't really know what is going on with natural gas: there's a 95% chance either that the future is going to be disastrous for gas consumers or that happy days are coming back. Take your pick. Pete's opinion is that gas, like crude, is overpriced.

[Pete apologizes for displaying the wrong graph for the past two weeks. Tch, tch.]

Vehicle Sales Per Capita and Future Price Spikes

OK, the current crude oil price spike shows at least some signs of abating, and lets assume that Pete got it wrong in the bit about spikes being followed by recessions.  Now imagine the situation five years down the road, when China once again has the pedal to the metal and is growing fast.  According to the State Department, it became the second largest consumer of primary energy in the world in 2003, surpassing Japan. q.v. It needs to sprout generating stations at a flat out rate to come close to keeping even with electricity demand.  But the point is that it is mostly a coal economy. It is already the world's third largest energy producer and coal is the bulk of what it produces.

Unlike the US and many other big economies, it is not an automobile economy. That is going to change, not in the sense that the government is going to promote auto sales but in the inevitable sense that everyone in Japan, Europe, and the US understands: modern life almost requires recourse to private transportation modes and the car is the one that works best.  So it seems likely that there will be a significant spike in car sales for both China and India, which is going to get ever larger as motor vehicle sales per capita begin to approach something like their industrialized counterparts.

Source: EIA

But how can that happen if oil supplies are as tight as they are at the moment? It can't. The market mechanism has to force a lot of petroleum demand off the road in the rest of the world to even begin to give the hard-working, still-evolving middle classes of China and India a chance to do what the rest of the first world gets to do. Or someone better come up with a dozen more Saudi Arabias.

Second Warning on Oil Prices

It's basically pretty simple: they shade in the pink recession areas after an oil price spike.  So how much longer until its time to shade?

Yes, yes, you like everyone else think the economy is in fine shape: growing rapidly, jobs picking up, etc. But watch out-- there isn't enough oil available short term to support a sustained growth spurt.  As we've learned time and again, record oil prices can be very effective in slowing down aggregate growth.*

*When asked why he didn't use real instead of nominal oil prices, Pete looked vaguely alarmed and offered the following, "I can't convince you that $40 oil is expensive? Yes it is less expensive in 'real' terms than it was in 1980, say, but it is a really complex question.  It's complicated because arriving at a 'real' price measure is complicated and I no longer have much faith in the accuracy of many of the usual standard federal price deflators. For instance, suppose we use the gold price of oil to deflate nominal to real.  In 1980 gold sold for $800 / oz. Today it sells for half that. So in those terms, the real gold price of oil is twice what it was back then. Even if I grant your point, and we choose to make all of the spikes on the left side of the chart much higher than those on the right side, isn't there still reason to be concerned that my point may be correct? Also keep in mind that the spike on the far right that has me worried hasn't necessarily stopped growing ...." 

EIA's World Outlook

A few key points lifted from the preview version of the report (q.v.) :

• Petroleum demand is projected to increase from 77 million barrels per day in 2001 to 121 million barrels per day in 2025. The United States, China, and other nations of developing Asia are expected to account for nearly 60 percent of the growth in demand.
• Crude oil prices are projected to moderate after 2004 and then rise slowly to $27 per barrel (in 2002 dollars) in 2025.
• The Organization of Petroleum Exporting Countries (OPEC) will provide most of increased production, but increments are forecast in non-OPEC supply, especially from offshore resources in the Caspian Basin, Latin America, and deepwater West Africa.
• Consumption of natural gas will grow 67 percent and net electricity consumption will nearly double by 2025.
• Nuclear electricity generation is projected to increase by 20 percent between 2001 and 2020 and then decline 4 percent through 2025.

Petroleum Paradoxes

As the price of oil heads toward record levels, the cost of finding it remains relatively low.

With the physical distribution of oil reserves centered in the Arab world, the world's largest petroleum importer has gone to unparalleled lengths to outrage all Arabs.

The Chairman Speaks: Clear the Way for Natural Gas Imports

With the energy bill last seen tiptoeing off to that portion of the netherworld reserved for the unlovable and half-baked,  and Secretary Abraham off seeding the Michigan political fields with hydrogen projects q.v., it falls to Chairman Greenspan* to pronounce on energy:

• "These elevated long-term prices, if sustained, could alter the magnitude of and manner in which the United States consumes energy. Until recently, long-term expectations of oil and gas prices appeared benign.... When choosing capital projects, businesses could mostly look through short-run fluctuations in prices to moderate prices over the longer haul. The recent shift in expectations, however, has been substantial enough and persistent enough to influence business investment decisions, especially for facilities that require large quantities of natural gas. ...

• The energy intensity of the United States economy has been reduced by almost half since the early 1970s. Much of the energy displacement occurred by 1985, within a few years of the peak in the real price of oil. Progress in reducing energy intensity has continued since then, but at a lessened pace. ...

• One might expect that, as a consequence of what has been a dramatic shift from the hit-or-miss wildcat oil and gas exploration and development of the past to more-advanced technologies, the cost of developing new fields and, hence, the long-term supply price of new oil and gas would have declined. And, indeed, these costs have declined, but by less than might otherwise have been the case. Much of the innovation in oil development outside OPEC, for example, has been directed at overcoming an increasingly inhospitable and costly exploratory environment, the consequence of more than a century of draining the more immediately accessible sources of crude oil.

• Given notable cost reductions for both liquefaction and transportation of LNG, significant global trade is developing. And high natural gas prices projected by distant futures prices have made imported gas a more attractive option for us. According to the tabulations of BP, worldwide imports of natural gas in 2002 were only 23 percent of world consumption, compared with 57 percent for oil. Clearly, the gas trade has a long way to go. ...

• As the technology of LNG liquefaction and shipping has improved and as safety considerations have lessened, a major expansion of U.S. import capability appears to be under way. These movements bode well for widespread natural gas availability in North America in the next decade and beyond. The near term, however, is apt to continue to be challenging. " *

Having done so well with an unlimited oil imports policy, let's do the same with natural gas.  So what if we've already imported most of Canada's available natural gas supply; so what if it takes something like three units of gas to make one unit of delivered LNG.** The political system is broken, Exxon is willing to bring it to us, and we obviously are going to need it.  What choice do we have?

*Long time readers will recall Pete's odd conviction that the Federal Reserve is the only Washington institution with any useful authority over energy, Dick Cheney and other notable oil men notwithstanding.  **As always, the original q.v. is better than Pete's haphazard excerpts.  *** Here Pete relies on distant memories -- attempts to confirm the abysmal net energy ratio of LNG with modern sources were unavailing. As to the choice issue, must Pete belabor the obvious with a quick lesson on rhetorical questions? Or would that be too self-referentially obvious? OK, what about that one? etc.

Remaining Saudi Reserves

Have no fear, a whole lot remains:

Two Saudi Aramco experts have provided some insight about the real situation in a new report. q.v.

Our Story So Far

Plagued by inept leadership for some decades, the United States political system finds itself in a difficult situation: the leadership group has proved either unable to understand or unwilling to respond to the national security implications of diminishing domestic fossil fuel supplies, while the cost of getting through each transitory episode of energy imbalance grows ever greater in terms of the dark magic remedy the central bank must use to revive the patient.  The democratic institutions that worked so well during the first two centuries of sustained economic growth now seem to have been stymied by the electorate's unwillingness to provide either political party with the mandate required to initiate effective remedial action.  However, as neither political party has offered a program of effective remedial action, it comes as no surprise that there have been no mandates.  

The inescapable conclusion is that US energy policy has been and remains not to choose, not to act -- to let imports grow unchecked and to accept whatever consequences may follow.  Quite understandably, the people would prefer not to begin the extensive rearrangement of American society they suspect is implied by the one or two possible courses that offer some relief to the long term situation.  And, being a democracy, the political leadership dare not impose it.  

It could be argued that given the policy impasse the US political system has instead decided to fight wars of conquest where the prize is petroleum.  If the resources of the Caucuses were spoils of the Cold War, the invasion of Iraq, however tenuous legally, and the capture of the second largest oil reserves on the planet, appears to most of the world as a self-evident resource grab. The same invader army is positioned within easy reach of Saudi Arabia, the world's largest collection of oil reserves, while the American policy of the past half century calling for accommodation with the Wahabi ideology in exchange for oil, however unpleasant that accommodation may sometimes be, appears to be undergoing quick dismantlement. It thus appears that the future strategy of the world's largest industrial democracy is to insist the past be as much like the future as possible, even though the global oil balance has forever changed, and even if remaining stationary means fighting a succession of wars of conquest to get the oil required to realize that vision.

If this were true it would be ominous indeed, and the rest of the world would quite rightly begin to lose faith in the leadership provided by the United States. But it is not true. There are technically feasible, economically doable solutions to the domestic fossil fuels problem that will both work, avoid unacceptably high social costs, and side-step unacceptable geopolitical risks. The question is why these pro-nuclear policies are largely unknown to the American electorate. Democracy requires informed decision-makers, and it is obvious that the current political system has refused to reveal either the seriousness of the problem nor the feasible ways out.  Whether the problem is well-meaning charlatans or ill-informed boobs is often hard to decide, but the situation is not as bleak as it seems because either can be swept aside by resolute insistence that the truth will out.

Pete's Self-Explanatory Guide to the Zen-Like Absence of a US Energy Pol