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Petroleum Policy and Geopolitics

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   Last updated on Oct 19, 2004  

Recent Events

If you enjoy articles that make the short hairs on 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.

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.

"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.

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.


Only three people ever understood the Schleswig-Holstein Question: the Prince Consort, who died, a clerk at the Foreign Office who went mad, and me -- and I have forgotten."We have no eternal allies, and we have no perpetual enemies. Our interests are eternal and perpetual, and those interests it is our duty to follow." 

"Die, dear doctor? That is the last thing I shall do"  

For reasons not altogether clear, it seems Pete occasionally receives diary entries from a long-dead British prime minister. We all have our problems....

Ah, the Bush Abominations...There is a standard joke well known to the schoolteacher, enlisted man and officer alike..... From Palmerston's diary  

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


If you enjoy Policy Pete, why not
to help defray the costs of producing it?
Many thanks ! !

Recent e-mail from readers: 

On Saudi Reserves:

 

Of course, till the Saudis actually open up their data for outside audit puff-pieces in forums like "Saudi-US-Relations" probably should be taken with a very large grain of salt indeed.  It would be really easy to rebut the Simmons analysis with real live data, accessible to 3rd party review.  Why haven't they done so?
 
Steve Gillett
Carson City, NV

 


For interesting coverage of world petroleum topics, Pete suggests the following unaffiliated sources: 


US Government: Energy Information Administration

Energy Information Administration


Yahoo! News


Petroleum World: Latin American Energy, Oil & Gas

Petroleum World (Venezuela)


WTRG Economics publishers of Energy Economist


USGS history of US oil drilling

Province by province, play by play


Miscellaneous quotes

There can be no prestige without mystery, for familiarity breeds contempt.... In the designs, the demeanor, and the mental operations of a leader there must be always a "something" which others cannot altogether fathom, which puzzles them, stirs them, rivets their attention.... Aloofness, character and the personality of greatness, these qualities it is that surround with prestige those who are prepared to carry a burden which is too heavy for lesser mortals.  The price they have to pay for leadership is unceasing self discipline, the constant taking of risks, and a perpetual inner struggle...whence that vague sense of melancholy which hangs about the skirts of majesty.   

Charles de Gaulle, The Edge of the Sword


Curiosities

World conflict map q.v. (requires installation of Shockwave 10)

Best dancing yield curve Pete has seen. q.v.

Not as good dancing yield curve (requires Quick Time) q.v.

A third dancing yield curve that does not require Quick Time. q.v.


Reader contributions of interesting news and analysis and money are encouraged.  Pete gratefully acknowledges suggestions and comments from many readers. Unless otherwise expressly indicated, readers who contribute stories, ideas, or comments do so as individuals and do not act on behalf of the  organizations with which they may be associated, although any such associations may be mentioned for identification purposes. Pete respects requests for anonymity.  Please note that unless readers indicate otherwise, e-mails to Policy Pete will be considered fair game for use as Pete sees fit.

From time to time, graphics depicting corporate trademarks are used for visual identification.  These remain the property of their owners and it should not be assumed that those owners agree with, or otherwise endorse, anything on this site. 

Similarly, this site provides numerous links to other web sites and the same caveat applies to those sites: they do not necessarily agree with, endorse, or even know of anything that appears here.  Whenever possible, links are selected that identify their sponsor.  If this information is missing and you need it, Pete will be glad to supply the page's home URL upon request.  If you sponsor a page that Pete links to and you wish he didn't, please get in touch and the link will be removed. Pete feels free to use stuff from government agencies, but assures those involved that his pilfering is done with great respect for the analysts who actually do all the real work. Needless to say, his claims of copyright apply only to original content.

Policy Pete is not affiliated with other energy or environmental organizations. © Grand Fanandels Trust, Chevy Chase, Maryland 1999 - 2004.  

( 301-951-0692 (US) but only if you're in a lawyer/consultant-hiring mood.


Petroleum policy and geopolitics


Q.v. is a figure of speech meaning "for which see."  It comes from the Latin quod vide.

References to the 'proverbial Belgian dentist' were started by Euromoney magazine in the 70s. The expression refers to the non-Americans who hold dollar assets.

Policy Pete used to be the fortunate recipient of articles submitted by readers. Much like the legendary state department bureaucrat who had a rubber stamp made up to read, 'Judging by your conclusions, I disagree with your premises,' Pete assumes the analysis is mostly correct but sometimes finds that he does not fully accept contributors' underlying assumptions. Even so, he publishes many contributions that seem worth reading and offer interesting ideas.   Whether or not he agrees with the substance, he is grateful to be favored with reader contributions.


Not only should you not bet the farm on what follows, you should mull it ironically, sigh, and move on to something else:

Here is Pete's absurdly precise best guess on the world daily production maximum and year:

  • 106 million barrels per day in 2017

As for ultimate recovery, he guesses:

  • 2.8 trillion barrels

These figures are provided in case you suspect Pete of ideologically questionable tendencies when it comes to the Hubbert peak. Now you can confirm your worst fears, or not, as the case may be. Keep in mind Keynes' dictum that in the long run we are all dead. 


Who Reads Policy Pete Anyway?

It has been slowly dawning on Pete that it really is a world wide web. That is nicely reflected in the readership data for June 2004. q.v.  Readers come from a very wide assortment of countries. Nevertheless Policy Pete remains a mere freckle on the soft pinkish underbelly of the Internet. 


 

 

   Please note that Policy Pete has moved to a new site: http://policypete.com.  You will be taken there shortly.

LOOK, YOU SHOULD HAVE FIGURED THIS OUT BY NOW.  

 

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:

... Between 1990 and 2000, although spot crude oil prices ranged between $11 and $40 per barrel for WTI crude, distant futures exhibited little variation around $20 per barrel. The presumption was that temporary increases in demand or shortfalls of supply would lead producers, with sufficient time to seek, discover, drill, and lift oil, or expand reservoir recovery from existing fields, to raise output by enough to eventually cause prices to fall back to the presumed long-term marginal cost of extracting oil. Even an increasingly inhospitable and costly exploratory environment--an environment that reflects more than a century of draining the more immediately accessible sources of crude oil--did not seem to weigh significantly on distant price prospects.

Such long-term price tranquility has faded dramatically over the past four years. Prices for delivery in 2010 of light, low-sulphur crude rose to more than $35 per barrel when spot prices touched near $49 per barrel in late August. Rising geopolitical concerns about insecure reserves and the lack of investment to exploit them appear to be the key sources of upward pressure on distant future prices. However, the most recent runup in spot prices to nearly $55 per barrel, attributed largely to the destructive effects of Hurricane Ivan, left the price for delivery in 2010 barely above its August high. This suggests that part of the recent rise in spot prices is expected to wash out over the longer run.

Should future balances between supply and demand remain precarious, incentives for oil consumers in developed countries to decrease the oil intensity of their economies will doubtless continue. Presumably, similar developments will emerge in the large oil-consuming developing economies.

Elevated long-term oil futures prices, if sustained at current levels or higher, would no doubt alter the extent of, and manner in which, the world consumes oil. Much of the capital infrastructure of the United States and elsewhere was built in anticipation of lower real oil prices than currently prevail or are anticipated for the future. Unless oil prices fall back, some of the more oil-intensive parts of our capital stock would lose part of their competitive edge and presumably be displaced, as was the case following the price increases of the late 1970s. Those prices reduced the subsequent oil intensity of the U.S. economy by almost half. Much of the oil displacement occurred by 1985, within a few years of the peak in the real price of oil. Progress in reducing oil intensity has continued since then, but at a lessened pace. ...

... In summary, much of world oil supplies reside in potentially volatile areas of the world. Improving technology is reducing the energy intensity of industrial countries, and presumably recent oil price increases will accelerate the pace of displacement of energy-intensive production facilities. If history is any guide, oil will eventually be overtaken by less-costly alternatives well before conventional oil reserves run out. Indeed, oil displaced coal despite still vast untapped reserves of coal, and coal displaced wood without denuding our forest lands.

Innovation is already altering the power source of motor vehicles, and much research is directed at reducing gasoline requirements. At present, gasoline consumption in the United States alone accounts for 11 percent of world oil production. Moreover, new technologies to preserve existing conventional oil reserves and to stabilize oil prices will emerge in the years ahead. We will begin the transition to the next major sources of energy perhaps before midcentury as production from conventional oil reservoirs, according to central tendency scenarios of the Energy Information Administration, is projected to peak. In fact, the development and application of new sources of energy, especially nonconventional oil, is already in train. Nonetheless, it will take time. We, and the rest of the world, doubtless will have to live with the uncertainties of the oil markets for some time to come.

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?


So Much for the Price Band

Sour note?

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:

CASH FLOW FOR PERIOD ENDING 31-Dec-03 31-Dec-02 31-Dec-01
Net Income (all data in thousands) 21,510,000   11,460,000   15,320,000  
 
Operating Activities, Cash Flows Provided By or Used In
Depreciation 9,047,000   8,310,000   7,944,000  
Adjustments To Net Income 344,000   1,053,000   1,601,000  
Changes In Accounts Receivables (1,286,000) (305,000) 3,062,000  
Changes In Liabilities 1,130,000   365,000   (5,103,000)
Changes In Inventories (100,000) 353,000   154,000  
Changes In Other Operating Activities (2,147,000) 32,000   (89,000)
Total Cash Flow From Operating Activities 28,498,000   21,268,000   22,889,000  
Investing Activities, Cash Flows Provided By or Used In
Capital Expenditures (12,859,000) (11,437,000) (9,989,000)
Investments (273,000) (1,114,000) 700,000  
Other Cashflows from Investing Activities 2,290,000   2,793,000   1,078,000  
Total Cash Flows From Investing Activities (10,842,000) (9,758,000) (8,211,000)
Financing Activities, Cash Flows Provided By or Used In
Dividends Paid (6,945,000) (6,386,000) (6,448,000)
Sale Purchase of Stock (5,694,000) (4,660,000) (5,821,000)
Net Borrowings (2,124,000) (307,000) (2,772,000)
Other Cash Flows from Financing Activities -   -   -  
Total Cash Flows From Financing Activities (14,763,000) (11,353,000) (15,041,000)
Effect Of Exchange Rate Changes 504,000   525,000   (170,000)
Change In Cash and Cash Equivalents $3,397,000   $682,000   ($533,000)
 
Source: Yahoo Finance

The problem is that Exxon is quite content, year after year, to see itself as a cash cow.  It may make what seems like very large capital expenditures ($12.8 billion in 2003), but it also gives back to shareholders almost that much ($12.6 billion in 2003) in the form of dividends and repurchases of its own stock. It could be financing double what it spends now for energy production and development from its own funds, without having to borrow anything, but it doesn't.  Of course, it has an enviable record of increasing dividends, and its stock has been a consistent winner for decades.  But it could be spending all or most of the extraordinary cash flow from operations on what it actually does best of all, producing more oil and natural gas. It would be nice if Exxon weren't satisfied with the status quo and began to really push itself to find an even larger share of the extraordinarily large amounts of oil the world will soon require.

*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

Federal Offshore Gulf of Mexico Proved Reserves  
  1998 1999 2000 2001 2002
Dry Natural Gas
(billion cubic feet)
26,422 25,451 26,172 26,456 24,689
  Depth Less Than 200 Meters
18,997 17,918 17,666 15,513 14,423
  Depth Greater Than 200 Meters
7,425 7,533 8,506 10,943 10,266
  Percentage from Depth Greater Than 200 Meters
28.1 29.6 32.5 41.4 41.6

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.

Energy demand, bigtime ...

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:

"Projections from OPEC’s World Energy Model see world oil demand rising from 77 million barrels a day in 2002 to 115 mb/d in 2025 — an annual average growth rate of 1.7 per cent.

            The fastest growth will occur in Asia (in this analysis, Asia excludes the Middle East and OECD countries). Our figures show annual average growth of 3.1 per cent in South-East Asia, 4.4 per cent in China and an exceptional 5.5 per cent in South Asia during this period.

            However, this rapid growth in Asia and China is not matched by production. On the contrary, oil production in Asia, including China, actually falls, marginally, from 5.7 mb/d in 2002 to 5.6 mb/d in 2025. Asia, therefore, will benefit increasingly from supplies from outside the region.

            Our projections show an 18 per cent rise in world oil output from non-OPEC countries in 2002–25, mainly from Russia, the Caspian and Africa. But this is still around 30 percentage points less than the projected growth in demand. Therefore, there will be a substantial rise in the call on OPEC oil in the opening decades of the 21st century. We see this doubling, from 29 mb/d in 2002 to 58 mb/d in 2025.

            Our Member Countries have sufficient reserves to cope with the rising demand. Our proven crude oil reserves total nearly 850 billion barrels, which is almost 80 per cent of the world total, and these should be sufficient to see us well into the second half of the 21st century. What is more, OPEC’s reserves are low-cost and highly accessible." ...

 

..."Let me conclude with one general comment. The world cannot afford to behave irresponsibly and squander its finite petroleum reserves. OPEC and non-OPEC producers are, in effect, custodians of these God-given minerals and we have a duty to ensure that they are exploited in a responsible manner, to the benefit of the global community, today and in the years ahead. We are doing everything we can, in OPEC, to abide by this mandate."

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.

Trends in atmospheric concentrations and anthropogenic emissions of carbon dioxide.

*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

Nuclear capacity should have doubled instead of coal and natural gas.  Once again the market has proved myopic and wasted a fortune on the wrong things.

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


Quick Guide to Japanese Energy Supply

 

Primary Energy Supply Fiscal year 1990 Fiscal year 2000 Fiscal year 2010
Base case Case I-1 Case II
Total supply 5.26 6.03 6.22 6.02 5.8
By energy source actual figure Composition ratio actual figure Composition ratio actual figure Composition ratio actual figure Composition ratio actual figure Composition ratio
Oil 3.07 58.30% 3.12 51.77% 2.8 45.00% 2.71 45.00% 2.61 45.00%
Coal 0.87 16.60% 1.08 17.94% 1.36 21.90% 1.14 19.00% 1.26 22.00%
Natural gas 0.53 10.10% 0.79 13.14% 0.82 13.20% 0.83 14.00% 0.83 14.00%
Nuclear 0.49 9.40% 0.75 12.39% 0.93 15.00% 0.93 15.00% 0.7 12.00%
Hydro 0.22 4.20% 0.2 3.45% 0.2 3.20% 0.2 3.00% 0.2 3.00%
Geothermal 0.01 0.10% 0.01 0.17% 0.01 0.20% 0.01 0.20% 0.01 0.20%
New energy 0.07 1.30% 0.07 1.14% 0.1 1.60% 0.2 3.00% 0.19 3.00%

Units: Crude oil equivalent 100 million Kl; Source: Japanese government. Note: case 1 assumes big push toward nuclear, case 2 assumes the opposite.


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. 



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