The Problem List Grows Longer

Back in the days when there actually was a military industrial complex, and the idea that a firm like, say, Halliburton, was in any way a key part of it was laughable, many powerful people would be getting a bit nervous looking at the geopolitical state of play.  Here for instance is EIA's list of hotspots where petroleum is produced and an indication of what the problem is or will soon be. 

Source: EIA

Meanwhile the remains of the military-industrial complex are still turning out useless anachronisms like nuclear submarine missile platforms.

The Fix Is In, Or How Pete Took Over the Plunge Prevention Team

We all agree these are perilous times. A national catastrophe has occurred and the market has yet to fully digest the implications of living without an appreciable fraction of its oil and gas, let alone that fraction of supply and demand generated along the gulf coast.  Ugly rumors surface about the extent of the bankruptcies and disruption that will inevitably happen. It is said that shadowy meetings at the Federal Reserve are mapping a way out, or staunching the damage, or what? Who knows?  A group in Canada has charged that the US government has been actively intervening in the stock markets to prop them up. qv1, qv2. The charge is that an elusive, secret group inside the US government, known as the Plunge Prevention Team and established by Treasury Secretary Robert Rubin during the Clinton Administration (now with Citigroup), has played an unspoken but very significant role in maintaining our collective financial well being. You may well wonder how Pete ended up its chairman. [continued]

Estimates of Louisiana off-shore damage are in. q.v.

Jim Schlesinger on energy security. q.v.

Chinese pipeline play. q.v.

Saudi Arabia has at long last joined the World Trade Organization. q.v.

DOE solicits public comment on whatever it is that's happening to natural gas supply and demand. q.v.

Progress toward hot fusion. q.v.

The circus comes to town: the political class drags before itself the rich, hapless pirates from the oil patch. Will  some one please say they're sorry and look sort of sincere about it? Note to Congress:  force majeur is not the same thing as price gouging.

What's an oil minister here or there? Iran has gone through four of them in recent weeks.

NY Times begins to understand the dangers of natural gas this winter. q.v.

The Saudi oil minister on the need for additional  oil deliverability  q.v. That is, Exxon, BP, Shell: build some refineries with some of your loot.

On not confusing current petroleum market conditions with peak oil. q.v.

Greenspan may have whipped deflation but can Bernanke master the consequences? Grant warns. q.v.

What is the North Atlantic oscillation and who will it be keeping cold this winter? q.v.

Why the dollar didn't tank-- it seems Congress offered a one-time amnesty-like provision that allows multi-nationals to repatriate foreign profits at a special low tax rate. q.v.

Good jumping off point with links to many of the important things happening in Canadian energy. q.v. Pete's view remains that while Canadian coal seam methane can't save us this winter, it can make the next decade a lot better by reducing the need for so much LNG.

State energy officials on the need for a greater federal role in getting people through the winter. q.v.

State by state laws or proposals on price gouging. q.v.

The American Bankers Association reported that consumer credit card delinquencies reached a record high. Nearly 5% of accounts were delinquent in the second quarter. What will $3 gasoline and $14 natural gas do? Well, you can always refinance the house again, right? Yes, but be warned: Alan Greenspan appears to have decided that he was wrong all along and there really is a housing bubble.  qv1 qv2 qv3 Too bad he won't be around when it bursts.

Foreign oil firms doing business with Venezuela have a new partner who's in for a 60-80% share. q.v.  Guess who? Maybe windfall profit taxes really aren't all that bad after all.

On historical forecasts of resource exhaustion. q.v. (Pdf)

Russian government consolidation of oil and gas positions continues. q.v.

GM recently purchased to full pages of the New York Times to announce that it had nine cars available for consumers that get more than 30 m.p.g.

The Iran oil bourse, whatever that may be, will price oil in Euros. q.v.

Liquidity floods: how many know that the Bank of Japan's balance sheet is now the size of 30% of Japan's GDP? q.v.

"The average US family spends $1.22 for every dollar it earns, has 13 credit cards and $9,312 in credit card debt – twice as much as 10 years ago, according to CardWeb."

-cited by S. Schurr q.v.

"The reality is that the cost of energy in real terms is less than it was 25 years ago, even with crude prices at $40 or $50 per barrel."

-- Lee Raymond, Exxon

Now is the Winter of Our Discontent (5): Natural Gas Prices Spike to Record High

Source: Climate Prediction Center

Staying balmy.

Energy Expense as a Percent of GDP

Source: EIA

Anyone can rack-up popularity points while the ratio is declining, but who can govern when it is not?

Oil Prices: Geopolitical Spin

It has always been Pete's policy to steer clear of the political currents affecting the Arab-Israeli conflict, divisions within Islam, and so forth.  But readers in the rest of the world who wonder how the American public can support such peculiar policies in the middle east may find the PBS production, "The Road to 9/11" interesting, if only as an instance of a flawed attempt to set the mental weather. Even though most of the show is a fairly standard recital of recent history, there is a troubling overlay that purports to explain that history. (Hint: Islamic fundamentalists are nazis at heart and the Saudis are the bad guys). The trouble is that it works all too well. 

Oil Prices: How Much Is Too Much?

Leigh Yaxley, a Petroleum Engineering Manager based in Indonesia, has sent in an analysis of the issue. q.v.  He suggests that the key ratio is the percentage of GDP spent on net oil imports. Based on the economic downturn following events in the late 1970s / early 80s, he believes that a sustained period where the ratio exceeds 1.5% will bring on stagflation.*

*It is worth noting that Saudi Arabia may have a similar view, as it has taken unilateral steps to reduce the selling price of its marker crude. It also should be noted that net oil imports currently account for a smaller fraction of total imports than they did in 1980.

Oil Prices: Who Said $70 Oil Was a Good Thing?

Oil prices mckilloped up through $70 / bbl. and the economy refused to tank, just as the master* predicted.  While a few observers noticed the fed had thrown caution to the wind and had its collective foot no where near the hose, one must give credit where due.  The new oil price regime was undoubtedly helping provide some incentive to transition to whatever comes next and as far as anyone knows, the economy, if not booming, was certainly holding its own.** So McKillop had been right all along.

Regrettably, Pete, last seen cowering in the shadows with both hands protecting his head and muttering something about the sky falling, was not his usual magnanimous self and refused to acknowledge McKillop's obvious prescience. He had just bet the farm on Walmart puts (metaphorically, that is), and was too busy pondering the damage to energy infrastructure q.v. to notice.

*Andrew J. McKillop, author of Why We Need $70 / Barrel Oil q.v.,  Price Signals for Energy Transition q.v. etc. that appeared on these pages several years ago. **Second quarter 2005 GDP was growing at 3.3%.

Background - US Energy Production and Consumption

Energy Production in the US Economy	US Per Capita Energy Consumption
	Energy Use per Dollar of Real Gross Domestic Product

Source: EIA

IMF's Quick Guide to Parts of the US Economy

The juicy parts, in Pete's view. Of course, the real picture is far more complex. See the full report. q.v. (pdf)

From a Future History

"...There is no support for the idea that the First Energy War was caused by the impotent Energy Policy Act of 2005.  Whatever its obvious deficiencies as policy, the act represented the best the US political system could offer after years of trying.  The problems it failed to address were neither new nor difficult to understand technically, but they lacked a politically tenable solution. Over-reliance on fossil fuels had been ignored for a generation, and the situation was passed down from one Congress to the next with much hand wringing but without noticeable change. Quite simply, there was no constituency for the drastic revamping of American life that would be required to deal with either the coming petroleum shortages or global climate change.  The people who had fashioned a totally new way of life following World War II, based on removal of transportation constraints and cheap energy, proved incapable of adjusting to life not only without SUVs and the suburbs, but above all without secure and reasonably-priced energy supplies. When the act at last was signed, to no fanfare, the economic system shrugged and sent energy prices even higher. However clear and long-standing the warnings, Americans continued to live as they always had.

US democratic institutions retained a superficial semblance of functioning throughout, but had already failed at a deeper level, particularly the links between the economic and political systems.  The economic damage caused by the inexorable redirection of capital and savings away from the advanced elements of the American economy back into the primitive energy economy grew worse over time until little could be done to correct it, even though the domestic energy sector was incapable of providing a remedy.  The famously flexible economic system that had always managed to adjust to each new situation, and had just embarked on globalization in the fullest sense, grew less and less capable of providing what Americans had come to expect once resource constraints took hold. Levels of debt reached record proportions and continued to grow without corresponding increases in real income, external payment flows gradually hardened into structural disequilibria, the pension system started to fail, bankruptcies grew, interest rates rose, and the dollar threatened to collapse. Added to the chaos was an ineffective war undertaken in the mistaken hope that the components of Islam could be remade into democratic pluralist states.

The initial financial crisis struck toward the end of 2009, but it was the military crisis that followed two months later that caused events to spin out of control.  For more than two decades, the governments of the oil importing countries had been laying plans for just such an eventuality. Finally, for reasons still not clear but having to do with fear of inadequate future petroleum supplies, the Indian intelligence service used a false flag operation to induce Iranian terrorists to detonate a radiation device in Washington, DC. Without hesitating, the Americans moved residual troops from Afghanistan and Iraq to seize oil facilities in southern Iran and throughout the Middle East. However, the Americans were taken off guard when the Chinese quickly dropped troops into Indonesia, western sections of Kazakhstan, and portions of Siberia. The Europeans, Russia, and Japan followed these events with a general mobilization and demands that China and the US withdraw. Within days, the situation lapsed into a bitter stalemate which lasted for several months as the Americans pieced the real story together, but behind the scenes two makeshift coalitions were being formed. ... "

What Kind of Handshake Is This, Anyway? - 2

Must be one of those "We'll supply the money, you supply the oil" handshakes. Presumably that's the reason US Treasury Secretary Snow is shown with Canadian Finance Minister Ralph Goodale at the oil sands facility at Fort McMurray, Canada instead of US Energy Secretary Bodman. But who'll supply the natural gas?

Pete hopes this doesn't mean Secretary Bodman has already attained the obscurity that his recent predecessors achieved.

The Growing Capacity Dependence of the US Refining Sector

As US petroleum demand has grown, there has been a decline in the portion of petroleum products supplied to the domestic market that was refined by US based capacity. 

There are many potentially valid commercial reasons to import product refined abroad, ranging from lower labor costs to the absence of EPA regulations.  But there are also national security consequences and potential regulatory problems when the lack of adequate US capacity causes prices to spike as happened earlier this year.  The growing use of off-shore refining is in itself a form of energy dependence, but unlike crude oil dependence, is a potential source of weakness that can be readily addressed by government policy.* **

*As Jim Williams has pointed out, these numbers are probably understated.**Apparently, Sec. Bodman agrees, perhaps a bit late. q.v.

The Reality Facing Ethanol and Biodiesel

The problem with ethanol and biodiesel is not that they don't work: in the right configuration they both work well as fuels.  The problem is they consume more energy in production than they make available as fuel. q.v.  According to the referenced study,

• corn requires 29 percent more fossil energy than the ethanol produced;*
• switch grass requires 45 percent more fossil energy than the ethanol produced;
• wood biomass requires 57 percent more fossil energy than the ethanol produced;
soybean plants requires 27 percent more fossil energy than the biodiesel produced, and
• sunflower plants requires 118 percent more fossil energy than the biodiesel  produced.

There's nothing new in this; the net energy problem has been known for a long time.  But subsidies to grow plants for fuel remain wildly popular politically, however much they cost, because most other agricultural subsidies are scheduled for phase out, and people love the idea of using renewable plants to replace non-renewable fossil fuels. And so there is always a very vocal segment pushing the strategy despite it's inability to produce fossil fuel savings. Unfortunately, Congress has yet to catch on, much like the businessman who thought he could make up a unit loss per item by increasing sales volume.

Nick has written in to suggest that readers may be interested in some of the links mentioned in the article that draw different conclusions, "...In the first, we have, 'In the United States, ethanol yielded only about 10 percent more energy than was required to produce it...' which is at variance with the article you linked to. [The article] adds, ' in Brazil, where a different process is used, ethanol yielded 3.7 times more energy than was used to produce it.' Interesting. The second article is about a new process that, '..will allow ethanol to become economically competitive with fossil fuels for the first time.' Also, 'His ethanol genes served to redirect the digestive processes in these bacteria to produce ethanol at 90 to 95 percent efficiency.' "

*Pete apologizes for originally putting methanol when ethanol was meant.

Getting Deep Gas Right Instead of Getting LNG Wrong

The US energy jones is about to start getting really nasty. The petroleum industry and the government, having totally misunderstood as recently as 2000 what was going to happen to the natural gas supply beginning now, are really panicked.  Several dozen crash LNG projects are all on the fast track, being considered by good old FERC on a myopic case by case basis, and pretty soon a growing part of the natural gas 56 million American families use to cook their food and heat their residences will be brought in (at what threatens to be ungodly expense) from the same unstable regions that provide export oil.  But unlike oil, where bidding up the price can resolve any short-term supply problems, natural gas dependency is fraught with danger.  Miss a half dozen shipments through political action or terrorism or what have you in the early stages of a bad winter, and suddenly not just the region where those supplies were destined, but the system itself, that has a big, big problem. And it's not the sort of problem you can buy your way out of, or send in troops to cure.  True, there is already a small trade in LNG and it has worked out fairly well, but that doesn't mean much. LNG is not the sort of dependency a rational government would ever choose. Nor has the government set aside any natural gas in the equivalent of an emergency reserve the way it has done for oil, despite the more dire consequences.

The point is that there are alternatives. The first is to relieve some of the demand pressure on the system by getting as many electricity producers using gas year round off the system as soon as possible. This can be done by requiring all new and larger existing non-seasonal gas-fired turbines to demonstrate actual alternative fuel capability or other replacement capacity. The second is to try and figure out what, if anything, is happening to traditional proved reserves.  On the books, at least, gas supply is a non-problem over the near term, made even more of a non-problem by prices persistently higher than $5 per mmbtu over the past several years. According to the formal reserve accounts filed by petroleum companies for years, there should have been plenty of conventional proved reserves to get the US through at least the start of the new millennium, so where are they? Who's playing games?

But the most import thing to do is use available non-conventional domestic supplies including those most people know nothing about. Of the non-conventional supplies, the most important is gas trapped in tight sands in Wyoming and other parts of the west. The importance of this resource for the future is already well understood, and sufficient efforts are being made to develop it. 

This, however, is not the case with shallow-water deep gas (sometimes known as geopressurized methane; others call it deep shelf gas).  This is gas, at least 55 Tcf worth in the federal offshore, drilled from platforms located at water depths of less than 600 feet, but only accessible by drilling to 15 thousand feet or more.  The onshore amounts are not known but are also believed to be substantial.  Drilling that deep is very expensive, and the same technology that guides drilling choices in conventional geologic structures doesn't apply in quite the same way since the methane is not trapped in rock but dissolved at great pressure in the brine, so the risks are far greater. Even so, there are lots of companies that either have deep shelf projects (Anadarko’s Hickory, El Paso’s ST 204, and Shell’s Alex Discoveries) or are just starting them (McMoRan’s “JB” Mountain and Mounds Point in South Marsh Island). This resource should be given top priority.  Interior's Mineral Management Service already has special incentives, q.v., but more companies, including those fronting big LNG facilities, need to be involved. It should be possible to quickly boost production from this source and rely on it until the new pipeline from the north slope can be built.*

And while at it, why aren't restrictions removed so someone can drill that humongous amount of conventional gas lying off the gulf coast of Florida?  Once that has been done, then we can talk about the 600 Tcf of Canadian coal seam gas waiting to be developed, or the 100,000 Tcf of gas hydrates that could/might also be used.  There are many alternatives that can staunch the threat posed by LNG and they need to be brought on line as the need develops.

*Peter Hunt writes with the fascinating suggestion that readers wishing to know more about deep gas recovery should read the original oil company patents qv1, qv2 on how it can be done and what proportions will be recovered. He agrees that it's a cheap bet that should be reexamined.

Background - Expected World Natural Gas Consumption

Source: EIA

Background - World Crude Oil Production 1973-2004

End of the Line

Source: EIA

That capacity factor can't go up forever, so time to add some more capacity -- a lot more as part of an overall electrification strategy, thinks Pete.

Exxon's Quick Guide to Future Oil Demand

China Buys Into the Oil Patch?

With the US Congress busy thinking up protectionist schemes to apply against China for buying too much US treasury paper instead of converting trade surpluses back to yuan, China's national oil company offered to buy Unocal for $67 all cash per share. q.v. Chevron thought it had already bought the company with its $62 cash and stock bid the previous month.  While only 27% of Unocal's oil reserves are in Asia, 67% of its natural gas reserves are there, and they are thought to be the interesting asset for the Chinese. But who knows, it may be the oil, which may cause Congress, after the apoplexy dies down, to politely explain that this isn't what they had in mind. But it raises the question: what are trade surpluses if not a claim on US assets, and since when can't the new owners of assets sell those assets wherever found and send them to wherever they choose? Too bad for US geopolitical interests in Asia, but the disadvantages of having neither trade equilibrium nor an energy policy are becoming all too clear.

When in Doubt, Sue

Not having an inkling of what to do about $60 oil, the US Senate has threatened to direct the Justice Department to sue OPEC. q.v.  Ah, the political class strikes again. Brilliant.*

*Of course, it's deja vu all over again.  Try entering 'OPEC antitrust' in the Google search for Pete's flip-flopping opinion back in 2001 (see, Unsung Hereos).

Poor OPEC

With oil prices hitting new records, Pete was at a loss for something sympathetic to say about oil exporters.  So he turned to EIA, and discovered just how tough the cartel business can be:

O for halcyon days of yore. *

* Pat Murphy writes in with the observation, " Your chart showing oil revenues per capita in OPEC would be even more interesting if it showed the per capita total income and the per capita total income of the major oil importing nations. It would give the Arab point of view. "  To which Scott Wilkes offers, "I would like to see two charts:  One chart showing the Saudi Royal Families per capita income from crude oil exports.  The second chart showing non-royal families per capita income.  That, Pat Murphy, would give the Arab people the proper point of view. "