Back to the showHe may have to keep thinking it over for another month ...As you go further back in time, fewer links actually work. So it goes ... 

An Important Thing About Nuclear Power that operating costs for nuclear plants are now less than for competing fuels, given that there are no realistic prospects for significantly increasing hydroelectric capacity.

Average Operating Expenses for Major U.S. Investor-Owned Electric Utilities, 1993 through 2004 (Mills per Kilowatthour)
Plant Type
Fossil Steam
Gas Turbine and Small Scale[2]

Source: EIA See source for footnotes.

And that was back in 2004, when oil and gas cost less than they do today. So where are all the capitalists ready to start a nuke or two?  True, the chart doesn't include capital costs, and nukes have greater capital costs than their coal or natural gas competitors, but the cost of capital is about as low as its been in several generations, so there should be some good money to be made.

Background - Housing

Housing Starts Chart

Source: Census

The UK and Kyoto: How Well is the UK Doing?

UK Carbon Dioxide Emissions, 1983-2003

Source: EIA

It's not as bad as it looks, since the UK did manage to reduce carbon emissions significantly and keep them down despite significant GDP growth, which is way more than the US could say. A similar chart for the US would have shown emissions increasing over time, undoubtedly accompanied by an untoward number of assistant secretaries blowing smoke about declining energy intensity. Nevertheless, UK emission levels are still well above the agreed protocol level (as the source text explains, the actual protocol level is assigned by the European Union, since Europe is trying to comply with Kyoto as a single entity.)

EIA's Quick Guide to the Natural Gas Future

Source: EIA

Chevron hits it big very deep beneath the gulf. q.v.

Pete was thinking of flying to California to cover the new carbon trading scheme that Governor Schwarzenegger has unleashed.  He was going to rent a car and travel hundreds of miles ferreting out the nitty gritty from all over the state that hasn't made a half way decent energy policy decision in several decades. But then he decided not to.  Does this mean he can claim a tradable credit for his decision not to release all those greenhouse gases?

The day to day history of US - Iranian relations over the past decade has been documented. q.v. Try following the nuclear development issue, starting perhaps here. Keep in mind that the US government has tended to exaggerate Iran's progress toward the bomb. q.v.

More on the plunge prevention team. q.v. Even though Mr. Bernanke may not know, PP readers have known for some time who really heads it.  q.v.

BP has decided to rethink the size of its commitment to LNG.  It has announced that it is halting the development of the Pelican Bay facility: a planned $650 million LNG port off Galveston, Texas. Exxon too may be rethinking how much import capacity is needed on the gulf coast, as it is pausing work on the proposed Corpus Christi Vista del Sol LNG terminal. However, it is still going forward with its other Texas LNG facility, Golden Pass in Sabine.

John Deutch, one of the truly smart humans on the planet, goes nuclear. Actually, he has supported nuclear power as the only feasible response to global warming for some time. q.v. So where are the environmentalists?

Chronology of Iranian nuclear problem. q.v. That not all aspects of US / Iran relations are bleak. q.v.

China mulls over the Venezuelan sales offer. q.v.

EIA has reported on planned major increases in natural gas pipeline capacity. q.v. Isn't the map in figure 3 supposed to be secret these days?

How much does solar power cost? q.v.


Background - Real Gasoline Prices

Costing more and more all the time in real money

Source: EIA

On Chavez

So he likes Fidel, so what?* This is business, not personal, as the Corleones used to like to say. The US just lost half a million barrels a day forever to the Chinese.  Having managed to tick off every Muslim on the planet, it would have been expecting too much for an unsophisticated presidency to try to mend fences in the southern hemisphere. So why not anger everyone who will be supplying the marginal oil that the US will need pretty desperately in less than a decade? "We're imperious; you're the third world. We get to give you little lectures on Freedom and The Free Market, you get to ship us your crude." While it is not impossible that this may be the right strategy for a secure US, more than a few foreign offices must be watching Washington with genuine puzzlement.  Do the Americans really think that a policy aimed (unsuccessfully) at eradicating terrorists means the rest of the world will supply the US with its petroleum in gratitude?

In response, Chuck Wagner offers comments, paraphrased as follows: "The other major benefit of the current unpleasantness is that this administration has obviously come to the conclusion that business as usual in the Middle East is no longer a policy of the United States. This isn't bad, this is good. [Business as usual] got us where we are today. Well, that, and a failure to focus on really big issues (like the impact of billions of dollars flowing into the pockets of radical Islamists...) [combined with an over-focus] on a single superscale issue: Soviet nuclear capability. So, it may not be pretty, but it may not be all bad. And if you don't think all of the vested interests are doing everything they can to make this [war in Iraq] fail, you're kidding yourself. Let's start with all of Iraq's neighbors, for example... "

*In fairness, it goes way beyond that...

The Economics of Carbon Sequestration

Source: DOE

Looks damn optimistic, but then it has always seemed like a fool idea to Pete. Instead of 50 miles of pipe, it probably should be more like 500 as the regions of heavy coal use for electricity generation are not adjacent to suitable oil and gas fields ready to receive a huge dose of reinjected CO2.

Brian Salzano adds via email: "Should someone point out to someone that this is just another form of shoveling off our problems onto the future? Does anyone in their right mind believe that the CO2 can remain sequestered forever, even for the relatively short term (like a couple of generations, at least)? Maintenance on the wells and caps will be the first thing axed from future budgets once economic goings get tough."

And Randy Udall points out, "Ultimately we would ideally want--and many mainstream analysts already suggest--to capture and store billions of tons each year. But here's another reality check: 1 billion tons of CO2 per year, as a supercritical fluid, is equivalent to 20 million barrels a day. In other words, just to do "our part" we'd have to build a system to move as much CO2 as we now do petroleum. This coal dilemma is severe: there's 10x more carbon in the coal underground than in all plants above ground. CCS is a way to resolve that, but of course anything is possible on paper. I'm astounded at the tone of the Scientific American special issue on energy. So unquestioning of the notion that there must be a solution somewhere, isn't there.

Background - US Nuclear Capacity

Net Nuclear Generation vs. Capacity, 1973 - 2004. Time to start adding to capacity!!

Source: EIA

Background - Diminishing Significance of Alaskan Crude to West Coast Refineries

Graph of Crude Oil Reciepts in CA & WA Refineries

See the full EIA report

EIA sees several ways the shortfall of Prudhoe Bay crude can be made up despite the BP pipeline corrosion problem:

"The primary means is via a drawdown of crude oil or product stocks and substitution of other supplies for the Alaskan crude oil. As of August 4, 2006, crude oil stocks on the West Coast were 2.2 million barrels higher than August 5, 2005, and U.S. crude oil stocks were over 11.8 million barrels higher. Similarly, gasoline and distillate fuel product inventories are above last year's levels for the United States (4.6 and 2.5 million barrels, respectively). Gasoline inventories for Petroleum Administration for Defense District (PADD) V (PADD V includes Washington, Oregon, California, Nevada, Arizona, Alaska, and Hawaii) were 30.2 million barrels, slightly less than last year. Distillate stocks were 12 million barrels, almost 2 million barrels more than last year. The Strategic Petroleum Reserve (SPR), which currently holds about 688 million barrels of crude oil, may also serve as a source of crude oil supply. Additional imports of crude oil and petroleum products are another feasible source of replacement supply."

Distribution of Technically Recoverable Resources: The Importance of Federal Lands

A Quarter Century of Growing Demand

Turning the corner?

Source: Energy Economist

With the inflationary excesses of the 70s behind it, the US economy increased energy demand at a rapid and sustained clip in the stable, low price environment of the 80s and 90s when foreigners were glad to supply nearly all marginal growth in petroleum demand. The sharp tightening in real prices between 1999 and 2006 produced a price spike that looks as though it too should have sent demand tumbling, as happened in the early 80s.  But this time the price spike hasn't affected demand.  Or hasn't affected it yet. The issue remains open whether very high real petroleum prices may still may cause demand to fall, if for no other reason than the obvious one that that is what price increases are supposed to do.  That it remains an open issue so long after the spike should have turned demand down, suggests that other factors are at play, including the Fed's failure to prudently raise interest rates as oil prices rose, the general decline in the intensity relationship between the amount of energy required to produce a new unit of GDP, and the apparent willingness of foreigners to allow the US to float vast amounts of new debt to finance a way of life it can no longer quite afford.

Those other delaying factors will soon have played out, leaving a nagging suspicion that, although slow to arrive, the first leg of the transition away from fossil fuels is going to be a difficult one.

On Israel

In the post cold war world where crude is king, the state of Israel is more of a liability than an asset to US foreign policy. The colossal overreaction to terrorist provocations illustrates the point. True, the Bush administration has been a little slow to understand, but even they will catch on in the end.  

Bernanke on Energy

Mr. Bernanke offered a very competent, even lucid gloss of the energy situation in his first official foray on the topic.  While he didn't eclipse the understanding shown by his predecessor, his remarks were clear and carefully prepared to the point they could serve as a good introduction for anyone interested in the problem.  He omitted the difficulties inherent in specific policy prescriptions and stayed on a general but fairly comprehensive level for a first try. Assuming that what was needed was a show of competence, he provided it; and market watchers waiting for an excuse for another sharp move down were frustrated.  That may still come, as he had little to offer in the way of a policy, but his analysis was enough to carry the day.

Background: Declining Texas Oil Production

Year Crude Oil Production (Mbbl) Daily Avg. Production (Mbbl/day) Number of Producing Wells Percent Change in Production Avg. Per Well Production (bbl/day) Crude Oil Reserves as of Jan. 1 (M bbl)

Source: Texas Railroad Commission

Let's see, how high does the price of oil have to be to make profitable a well producing six barrels per day? Imagine the shut-downs if the Saudis drop the price like they did in 1998.

Let's see if it's any sunnier over on the other side ...

Mistral Mysteries

Someone must monitor energy developments on the French Riviera, and as luck would have it the job falls to Pete. He is back after an all too short time on the case and is happy to report that the most serious problem at St. Jean-Cap Ferat seems to be the shocking waste of marine bunkers as Euro multi-millionaires steam their dazzling mini-ocean liners from one azure side of the isthmus to the other. He did run across a few wind farms not too far from the coast that must have been close to full capacity as the mistral winds blew hard all across the south of France.  On the other hand, similar wind farms several hundred kilometers to the north weren't turning at all, netting out at best only marginally for alternatives.  As the French wisely went nuclear with their electricity production system many decades ago, the issue of net energy from alternatives remains largely academic.

He did confront the problem of having to pay the extraordinary prices Europeans charge each other for both fuel and tolls. However, as European car models get extraordinarily good mileage coupled with really accomplished engineering, it wasn't all that expensive provided the engine could handle diesel, which they wisely price well below gasoline.  The nasty French habit of littering their superhighways with toll booths, while politically correct and worthy of a PP policy commendation, did prove a bit annoying. But, on balance, there were no signs of the locals buckling under the pressure from either tolls or high fuel prices (keeping in mind how totally unrepresentative and removed the French Riviera is from any part of real life), and the economy, despite high official levels of unemployment, showed definite signs of strength. It remains only to note that the French love affair with the motorcycle continues apace. While the fuel consumption to weight ratio may or may not be that impressive, even so dedicated an observer as Pete forgets energy policy when driving along a narrow corniche while simultaneously dodging maniacal motos swerving in and out of the oncoming lane.

Summary of World Nuclear Power Situation



Sept 2006

Sept 2006

Sept 2006

Sept 2006


billion kWh

% e









tonnes U












Source: Uranium Miner (see original for notes and sources)

Unfortunately perhaps, the expanded use of nuclear power remains politically controversial.  Consider for instance the case of Finland.

On Why Inflation May Be Not Be Over For A Long, Long Time

Compare the no-nonsense days of Paul Volker in 1980 to the blissfully confused current policy.

Whoops. Someone forgot to tell the Fed oil prices were spiking. Better late than never? 

Bring Back the Grownups, Quick

According to Dow Jones Newswires, FERC's staff has let it be known that rolling brownouts can be expected in some regions of the country this summer because of inadequate electricity reserve capacity. Who gets to have more fun with deregulation?  Let's see, New York, Connecticut, Michigan and southern California.  Shouldn't hurt the economy too much, unless it does. Other states such as Maryland get to pay a sudden 40-70% more when schemes to disguise how much deregulation was going to add to prices finally expire.

Pete's Quick Guide to Natural Gas Demand Elasticity

It doesn't matter how high you jack up the price, the volk still have to heat their homes.  Only the industrial sector can be weaned quickly from some of its gas.  And that comes at the expense of a lot of industrial output.  There's also political elasticity (i.e., party-flipping anger) to consider and probably more than a few Republican savants are deciding maybe deregulation doesn't look that great now that the party is about to pushed over the cliff.

OK. Let's see, if the price rises another 29 %, demand remains flat but the anger level grows by 58%.

Source: EIA

[For old-timers only: where's Bill Stit's black magic elasticity box now that they really need him?]

Nice While It Lasted But Now What?

UK Oil Production and Consumption, 1985-2005

Source: EIA

So What Ever Happened to Pete?

When last seen, he was hidden somewhere beneath a stairway in the Dupont Circle area, still muttering about the sky falling, about the idiots everywhere, and raving psychotically about the importance of the Office of Plunge Prevention.  Hearing one too many pundits sing the benefits of alternate fuels had finally pushed him over the line. Or was it just another month of $3 gas?

Why Short-Term Oil Prices Are Likely To Fall

Source: EIA

Foreign Policy Association on Lebanon. q.v. "...The attacks represent a massive psychological blow to the Lebanese national consciousness, where the scars and ghosts of the civil war still linger.  After nearly 16 years since the end of the 1975-90 civil war, Lebanon is still coming to terms with the violence and bloodshed, which claimed over 200,000 lives. ..."

Been thinking a little energy independence would be good? Think again says Exxon. q.v.

Just when Pete was feeling sanguine about the amount of gas available for next winter, summer heat has started to set new electricity demand records. qv1 qv2 qv3  qv4. Isn't it nice to live under a regulatory regime where no one is required to have sufficient marginal capacity?

G8: nuclear great. q.v. But you knew that....

According to Petroleum World  Citgo, owned by the Venezuelan state oil company, is beginning to withdraw from  US operations. q.v.

More on the possible oil exporter move out of dollars. qv1, qv2, qv3, qv4 On the other hand, why is the subject not mentioned by the central bankers? q.v.

It was 50 years ago that King Hubbert issued his extraordinary analysis of US and world petroleum peaks. The US peak happened more than thirty years ago, but what happens if those curves are applied to the world's key oil provinces? q.v.  Keep in mind that not every one accepts the validity of the linearization techniques used in the article. 

Paying to play: India and China jump in big time into the Nigerian offshore. q.v.

What were they thinking this time? The house continues the prohibition on OCS drilling. q.v.

...The President's goal of reducing imports by 1.5 million barrels per day is easily achieved and could be accomplished long before 2025. An increase in the CAFE standards by a few miles per gallon would accomplish the goal. Imposing additional taxes on gasoline and diesel would also work. Taxes would need to be enough to put fuel costs to the consumer near $3.00 per gallon. Alternately, a reduction in the maximum speed limit to 55 would also work....The problem is that it is not politically feasible to do any of the above. If it were it would have been done. ...

-- Jim Williams, The Energy Economist\

"With last weeks action by Congress, we are now moving in a direction that could free America from over-dependence on foreign oil in just a few decades."

-Energy Sec. Bodman q.v.

"Doubt is not a pleasant condition, but certainty is absurd."

-- Voltaire

The first peak oil novel. q.v.  Note that the hero is also named after a viscous, oily substance just like what's his name.

Fuel cost calculator. q.v.

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

"Ignorant people in preppy clothes are more dangerous to America than oil embargoes."

-- V. S. Naipaul

"Well, the common enemy in North America is the Western consumer. The consumer has driven oil up to $50 a barrel so we have to have these wars. I think it's incumbent upon us to.

--Dan Aykroyd


Review of the performance of China's economy by the deputy of the Bank of China. q.v.

Starting in July Iran will only take payment for oil in Euros. q.v. Will Russia follow suit? q.v.  July is going to be an interesting month in the currency pits, particularly if the ruble becomes convertible.

The bite is back. q.v. But not hard enough? On the need for a gas tax. q.v.

The AP quotes Daniel Lippe of Petral Worldwide Consulting in Houston as having said, "Unless we have a repeat of last summer's hurricane season, we're going to have so much (natural) gas in storage by September that we won't have anywhere to put it."

Having divided and conquered Sunni and Shia, do the Kurds get the good stuff? q.v. If not who does?

Pete doesn't know whether to laugh or cry at the desperate interest in ethanol. q.v. Does it really make sense to ferment your food supply and burn it in your cars? And why is no one churning out methanol by the ton and making a huge profit?

Green oil companies strike again. q.v. Poor old Exxon better get with it before Shell and BP walk off with all the warm fuzzy feeling.  Still, Lee Raymond is walking off with $400 million, and Pete imagines there's much to be said for whatever sort of feelings that might produce.

Bolivia nationalizes. q.v. This is not quite as newsworthy as most assume, other than  Bolivia's choice of too ambitious a tax rake.  Indigenous petroleum resources belong to the state in almost all producing countries. The US is an exception where only a third of domestic production is owned by Uncle.

Four interesting sites suggested by Dave Mazovick: the largest solar park in the world opens in Germany q.v., the strangely different picture in2002 q.v. and the forces behind ethanol. qv1, qv2 (see Vinod Khosla most of the way down the page); and Europe is here to teach you how to do wind. q.v.

Indonesia is no longer the world's largest LNG exporter. q.v.

As everyone is slowly beginning to realize, including Osama Bin Laden, the genocide of  Darfur has an impetus rooted in oil. q.v.

Is Iran preparing to go it alone by withdrawing its gold from safekeeping by the gnomes of Zurich? q.v. Does the denial mean that the gold is still in Switzerland, or that the the story was wrong because the amount repatriated was underestimated and now all of it is back in Tehran? All this may not be good news for Iran's creditors, as it now appears Iran owes more than previously reported. q.v. On the other hand, that may be the least of anyone's worries. q.v. Bring on the the $110 oil? Has anyone told Mr. Bernanke? q.v.

Venezuela takes on Exxon. q.v.

"By 2015 up to 80 per cent of supply will come from just three areas of the world. West Africa, Russia and overwhelmingly the Middle East and from the five states around the Gulf including Iran and Iraq." So how can energy security be attained? BP's Nick Butler tiptoes through the issues. q.v. Note his good idea: expand the membership in the International Energy Agency to reflect the market realities of 2006 rather than 1975.

Where China looks for oil. q.v.

On playing a different tune on Iranian nukes. q.v. That was then, this is now? Would the Saudis be preferable? q.v. 

"...The 2005 balance sheet [for the US federal government] q.v. shows liabilities of $9,915 billion. In addition, the Governments responsibilities to make future payments for social insurance and certain other programs are not shown as liabilities according to Federal accounting standards; however, they are measured in other contexts. These programmatic commitments remain Federal responsibilities and as currently structured will have a significant claim on budgetary resources in the future. ... The net present value for all of the responsibilities (for current participants over a 75-year period) is $49,403 billion, including Medicare and Social Security payments, pensions and benefits for Federal employees and veterans, and other financial responsibilities.... " A quick bit of analysis reveals how dire the situation has become under the Bush administration. q.v.

China and Kazakhstan q.v.

The Fed view of the contribution of record energy prices to inflation. q.v. "All told, increases in energy prices over the past couple of years probably added about 1/2 percentage point to core inflation in 2005, and the lagged pass-through of past increases in energy prices appears likely to add roughly the same amount this year, provided that energy prices do not rise significantly further. "

Perhaps you've been wondering how the US continues to run deficits in nearly everything, saves nary a dime, and yet prospers. Smoke and mirrors? Gullible Belgian dentists? Nah. A much better explanation has been found. q.v.

The real story on whether there is a real estate bubble. q.v.

Utility incentives to promote conservation. q.v.

Gasoline price spikes expected this summer as the system switches away from MTBE. q.v.

Once again the Chinese beat us to the good stuff.  q.v.  It would be nice if there was some coherence between US economic sanctions and US economic interests. But maybe the Great Game is supposed to be played with one hand tied behind the back.

Breakthrough development on batteries for hybrid cars? qv1 qv2

European energy supply security strategy q.v. "The conclusion is that there is virtually unanimous agreement on the strategic axis of demand management: energy consumption must be guided and steered."  Meanwhile, at the US DOE website: "Set your thermostat as low as comfortable when home" q.v.  Demand management policy at its best for only  $23 billion a year.

Mid-winter disconnection of consumers by utilities is permitted in some places.  See, for example, the rules in Ohio. q.v.

Quick guide to Canadian energy pricing. q.v.

Venezuela sends foreign aid to the US poor. q.v. The US federal program to achieve the same end is LIHEAP q.v. and as Wade Horn, Assistant HHS Secretary puts it ". . . receipt of a LIHEAP benefit not only means a warm home (or sometimes a cool one), but also often means the difference between a family staying in their home or having to move, with all the disruption that can entail." Given that the administration plans to cut funds for LIHEAP, Mr. Chavez's help may come in handy.

EIA has estimated the impact of the provisions of the Energy Policy Act of 2005 subsidizing renewable energy for residences and small businesses. q.v.  Memo to Congress: don't bet the farm on this one.

Secretary Bodman testified before the Senate Energy Committee on the DOE budget. q.v. It was an impressive performance.

The Swedish government plans to up the oil independence ante several orders of magnitude and develop the first large modern economy not reliant on oil at all. q.v. Thanks to Dave Mazovick for pointing out the story. He's skeptical. It's a lot easier for 9 million people with almost unlimited hydro resources to contemplate this strategy than it would be for most other economies.

Bill Gross on the mysteries of the Belgian dentist and the flattening yield curve. q.v.

Depending on which definition of 'reserves' is used, BP either just did replace reserves used during the year, or nearly did.  According to the company, "...the company had replenished reserves by 100 per cent on a UK reporting basis and 95 per cent under SEC rules which take account of year-end prices, giving it a proven reserve base of over 18 billion barrels of oil and gas equivalent at end-2005."

Consumer credit started declining in Oct. 2005. q.v.

Is the US technically in default on its debt? Looks that way: the statutory debt ceiling as of 12/31/05 is $8,184,000,000,000 q.v. while the debt out-standing is, as of 1/26/06,  $8,190,567,748,779.48. q.v.  Isn't this game supposed to be played seriously? If word gets out, Pete may have to return to his job on the Plunge Prevention Team. q.v.

What's the difference between natural gas at the wellhead and natural gas flowing in the pipeline? For one thing, there's more than a Tcf used in going from one to the other. For that reason alone, the natural gas processing industry is important.  EIA has published a new study. q.v. [pdf]

Are oil futures prices actually useful to predict  future oil prices? q.v. Unfortunately not.  ".... accurately predicting the future price of oil seems as elusive as ever."  Hmm, no argument there, thinks Pete, who never gets it right.

Financial news is hard to evaluate from inside the beltway where it's always a good day for deficit spending.  GM just dropped another $4.8 billion. q.v.  Shouldn't someone start to worry?

From the BP statistical review: a quick, illustrated guide to world natural gas. q.v.  (Power point file)  

BP's view of the big picture. q.v.

The economy is cooking, right? Possibly, but 2005 set the record for bankruptcies.  Nearly 1 family in 53 went broke last year, up 31%. q.v.

Al-Jazeera on the cost of the Iraq war: Is a trillion too much, if one throws in the effect of oil price hikes? q.v.

The magic of numbers: Russia solved it's dispute with the Ukraine on gas pricing. Ukraine will pay $95 for each thousand cubic meters of natural gas, while Russia will sell it for $230. Doesn't make sense you think, but this is the East.  Fortunately, the Kazakhs and Uzbeks must not be too bright. q.v.

Who Reads Policy Pete?

Who knows? But here is where they come from:

Another Year of Doing Nothing: Greenhouse Gas Emissions

Source: EIA

Beating a Dead Horse and Other Mental Constructs

Source: EIA

OK, superimpose over the above a second mental chart showing crude oil prices. (Hint, two spikes on either side centered on 1980 and 2005 and a deep valley in the middle). Now go back to the long production slide and decide whether the dual peaks, which made a tremendous difference to lots of non-petroleum things in the world, made any difference at all to US oil production. Answer: they didn't. The market was willing to reward marginal increments in domestic production up the wazoo, but no amount of revenue and profit, big or small, made any perceptible difference in US production. It made a difference only in the size of producer and consumer wallets at the time, and you already know which wazoos got rich and which didn't. True, it was, and will remain for another week or two, a singular time for commodity speculators as inflation takes off. And it is also true, as purists will argue, that all those profits may have had some minor effect on the relative rate of production decline, which you may either accept or deny as you see fit. But however much you flog the nearly dead horse, there is no get up and go left, so why keep paying for more of what is not there and never will return?

Message to Congress: with near zero supply elasticity, it makes no sense to let the domestic oil patch capture all the oil rents. Those funds are needed elsewhere: no, not as a sop to the people to pay for a couple of fill-ups just before the election -- please take note Mr. Frisk and the rest of you congressional idlers responding to The Chant and hoping to be reelected.  They should be recaptured and redirected in a massive way toward the first phase of The Transition Away From Petroleum. [And what is that? More to come.]  But before leaving, spare a thought to poor Mr. Bernanke.  He has admitted that he was shocked by the market's misreading of his opening gambit -- they seemed to think he was a wuss on inflation and proud of it.  It will be his attempt to prove just how wrong everyone was that will end up confirming that the average American (or average anyone else) can't live that well for that long with $75 dollar oil and serious interest rates. By the normal measures, oil is overpriced anyway. Lookout below once the farce in Iran and the tragedy in Nigeria have played out.*

*Pete's had a chance to rethink this rash statement and realizes oil could trade at well over $100 if Iran succeeds in quickly stampeding others into paying for oil in something other than dollars, as may be happening at the moment or about to happen soon. (Pete favors partial non-dollar oil pricing, provided the implementation is slow and gradual and over a number of years).  The Bush faction, having once again cut taxes in the face of major deficits, with an economy overheating, the fed on pause, and commodities exploding have it coming, but it will make life in the US pretty difficult if the current stampede away from the dollar leaves it a smoldering pile of rubble. As it has fallen from about 1.20 dollars for a euro to about 1.29 in a week, the carnage has already been severe but could be just beginning.

Pete's View of the Present

Every two hours or so a new wave of hypocrisy skims in from the hinterlands, roars over the beltway, and hisses to an end somewhere near Chevy Chase Circle. The Volk are clearly upset. $3 gas has them scared and angry.  Their winter heating bills haven't yet been fully paid and now the gougers down at the local pumps want them to kiss away $60 for each fill-up. They're right to be alarmed. They're wrong to be mad - it's a democracy after all and they and the freebooters they elect have been in charge. Everyone could see it coming for a generation; no one did anything useful. It's their own damn fault. Let them suffer the consequences for being such rash fools. 

Except that's not the way democracies work. The denizens of the beltway now have to scurry around and find some lamb worth sacrificing to assuage the anger. This part of the game is well understood: it's called The Chant. The Chant tends to get started over in Virginia, somewhere near Great Falls. What'll work? Let's see: heads must roll? No, not bloody enough.  Heads of assistant secretaries on pikes along Pennsylvania Avenue might do, hard to say, but it still may not be enough.  Another pride of oil company executives forced to sit quietly and listen to Nancy Pelosi at her illogical best? No, frightening indeed but not theatrical enough. Windfall profit taxes? From Dubya? not in this life. But don't worry. Once The Chant gets going, it gets loud, really loud really quickly, and the crew on Capitol Hill will get it frighteningly well.  They'll do something, however temporary and ineffective, but it'll be enough to bring quiet for a while.

And then what? We're left with $75 oil, a planet in trouble, the fourth or fifth failed presidency in a row, leaders who are worthless, and an economy distorted by hideous pretzel-like structural problems while chugging merrily along toward the wall.

Come on, lighten up a bit. There's a whole transition away from fossil fuels to start to puzzle out. If you want to drown your tears in your beer, try ethanol instead. Works better and faster anyway, if you can get some.

EIA's View of the Future

... is never right or even particularly close when it comes to prices, but usually is not too far off on consumption, as most demand forecasting is just more of the same writ larger.  So where is all the petroleum coming from?  Apparently the trip from 40 quads to 50+ quads of oil every year will be just as easy as the trip from 30 to 40.  EIA probably keeps three or four new Saudi Arabias hidden in their computers, and must think the Chinese and Indians prefer bicycles. And either the sequestration of carbon dioxide from coal will be proceeding apace and then some, or all that stuff about climate change must have turned out to be a hoax. Nice work if you can get it....

U.S. Energy Consumption by Fuel (1980-2030)

From the Department of Straight Lines.

Source: EIA, Annual Energy Outlook

The game goes on.

The Cost of Capping Greenhouse Emissions

EIA has issued a preliminary analysis of the cost of various proposals to limit greenhouse gas emissions. q.v. Unfortunately, the proposals analyzed key off of intensity reductions as opposed to actual reductions, and include an interesting provision for a 'safety' valve, presumably in case the doyens of K street become worried whether saving the planet is really worth it.

O Exxon

Exxon has run full page ads in the Washington Post and New York Times in recent days that attempt to show how much it has been doing to promote petroleum development.

A quick review of Exxon's balance sheet, with color emphasis supplied and profits/net income shown for reference, confirms that it has been spending a lot of money in absolute terms for energy development, but 'a lot' must be understood in relative terms. It is a lot in absolute terms: who could argue that $10-20 billion is not a lot of money? But Exxon hasn't been spending a lot in percentage terms compared to a hungry company that is actually out to find a lot of oil.  Exxon has been successful for many years in replacing the petroleum it uses and then some.  It invests just enough to do that, and then spends the rest on purchasing treasury shares to keep investors* happy through higher stock prices, and by returning money to them in the form of dividends. Its actual investment in property, plant, and equipment fell in a year when it made $10 billion more in profit, as did its long-term debt.  Indeed it is so well capitalized that long-term debt is a minor annoyance that could be paid off at any time.  Although not shown above, it finances the relatively small amount it does invest looking for new oil from its internal cash flow with little need of outside finance.  However, it could afford to borrow and invest many tens of billions more if it chose to do so. In fairness, when it does decide to invest in petroleum, it chooses exciting, very large projects and executes them with unmatched competence. If only it would do more.

The problem is that it does only what it has to, and a just a little bit more. This is not the balance sheet of a company that is lean and mean and looking hard for oil and gas.  It is the balance sheet for a firm that grew rich off investments made in previous decades that is quite content to treat its shareholders very well as it continues to grow its petroleum assets at a moderate and even stately pace.  Had not the spike in energy prices showered it with (undeserved?) money, it wouldn't have the pleasant and only mildly embarrassing task of trying to explain to the public why it was so very rich in financial assets.

*Including Pete.

O Canada

With considerable fanfare, the governments of the US, Mexico, and Canada have just released a report on the energy economy of North America qv1 qv2

The point is to demonstrate the importance of North American production to the world energy picture and the decision to include Canadian oil sands makes the point very well. But is it a realistic view? A far more interesting and arguably more realistic picture of the situation has been prepared by David Hughes of the Geological Survey of Canada in a very recent presentation to the Ontario Petroleum Institute. q.v. (see page 14 et seq.) And on the issue of realism, Roger Blanchard offers a brief critique of the US government's forecasts of Canadian oil production. q.v.

*Caveat lector: Pete sometimes takes positions in the stock of Canadian energy companies.

Nostro Nostrum

Since the early 90s, when it was just getting started, the derivatives market and the zoo of risk transfer mechanisms it spawned has simultaneously managed to evolve, settle down, and explode in size. But, most importantly, it hasn't crashed. It remains untamed and unmeasured and under-regulated, but it has worked well to transfer risks, even when some unworthy counterparties such as Enron had to be thrown out on their ear. The system swallowed hard but went on working. Still, what central banker hasn't lost sleep thinking about the myriad bad things that could happen? Here are a few of the recent remarks of Timothy Geithner, head of the NY Federal Reserve Bank, at a conference of the Global Association of Risk Professionals:

As always, it is best to read the full speech. q.v.

Even though the risk transfer market has functioned effectively, isn't it kind of embarrassing for Mr. Geithner not to know a bit more specifically what is happening and not have to rely on his charges to gradually see if they can fix whatever it is for him? After all, if he doesn't know, its not as though there are lots of people in government* or lots of investors who do. Wasn't one of the lessons from Enron that you can't trust self-appointed masters of the universe to be masterful all of the time? And just how often can you transfer the risk until you and all your friends think it is no longer there?

*One who may know is Emil Henry, Assistant Treasury Secretary, who shares Mr. Geithner's concern about credit derivatives. q.v. As he explains, "While this might not be the topic du jour in DC, if things start to go wrong, then I can guarantee you that it will be."

 Petro Flows and Other Imbalances

Source: US Treasury

Since 2000 nearly a trillion dollars have flowed through OPEC's purses. What have they done with it? The US Treasury has issued a paper explaining. q.v. 

A few of its conclusions might seem, uh, interesting, such as, "If oil prices remain elevated, large oil exporters should consider the role that the choice of foreign exchange regime can play in the adjustment process." Policy Pete has long thought that it is time to price at least a portion of the oil moving in international trade in currencies other than the dollar, and is glad to note the authors' apparent concurrence.*  Even so, given recent events, it only fair to warn that the eventual public clamor to follow from choosing a 'different foreign exchange regime' will make the Dubai port management issue look pretty tame by comparison.

*The paper is more a trial balloon than an official pronouncement, coming with the warning: "These papers are not statements of U.S. Government, Department of the Treasury, or Administration policy and reflect solely the views of the authors." All very well, but, if so, then why note the paper's existence on the main web page and issue a press release?

The Rich Get Richer and the Poor Poorer


Source: Federal Reserve

The Fed's Recent Changes in U.S. Family Finances: Evidence from the 2001 and 2004 Survey of Consumer Finances provides some important insight about what has and hasn't been happening to family income in the recent past. q.v.

Background - Real Wellhead Natural Gas Prices

... are way higher than they ever have been before

Source: EIA

Background - Saudi Drilling Activity

The pace picks up ....

Source: WTRG Economics, Energy Economist

Used to be the Saudi's managed to keep up their 10 million b/d production capacity (or thereabouts) with just 20 rigs active.  But they have announced plans to put as many as 80 rigs up and working in the near future.  Keep in mind that even 80 rigs is a tiny fraction of the number required to keep US production from declining faster, but it suggests determination to have enough capacity to help avoid future price spikes. 

Going Deep

Roger Blanchard reports on developments in the deep water petroleum, with particular reference to the beginning of sharp declines in the North Sea, counterbalanced by projected growth in the other areas. q.v.

The North American Gas Situation

Source: Graphic adapted from Canadian Potential Gas Committee

Although now more than a year and a half old, David Hughes' authoritative and troubling overview of the North American gas situation should not be missed. q.v.[pdf] Not a pretty picture, especially for Pete who was counting on Canadian coal bed methane qv1 qv2 to come to the rescue.

Coal and Human Mercury Levels

One of the nastier aspects of coal combustion is that minute amounts of mercury trapped in the solid coal are also released into the atmosphere during combustion. In time the mercury particles often enter the water supply where they may be transformed by bacteria to a toxic form of organic mercury called methylmercury. If consumed by fish or shell fish that humans later consume, the mercury is concentrated as it moves up the food chain and may show up in humans in perceptible, possibly even dangerous, levels. The health risk from elevated mercury levels is thought to be greatest for fetus development in pregnant women. There are several other possible sources of mercury in humans, including the amalgams used by dentists to fill cavities and flu shots, in addition to consumption of fish.

A recent study determined that fish consumption was by far the most significant source of human mercury levels in excess of the EPA's reference level.  The study also found that more than one person in five over16 years old exceeded the reference EPA standard, with men having higher levels than women. q.v.  A second conclusion was that mercury concentration levels varied regionally, with the Midwest having the lowest levels, while a few large cities had notably high levels, such as New York, where nearly half the participants had mercury levels in excess of the EPA reference level, and Seattle, Miami, San Francisco, and Washington, DC where more than one person in four was above the level.

The study itself was not based on a random but a self-selected sample of 6,583 people who submitted hair for analysis. The basic EPA analysis of the issue was published in 1997 q.v. and a multi-year EPA research plan exists. q.v. The impetus for the latter includes the fact that "as of December 2002, 2,140 fish consumption advisories in 45 states [had been] issued in part due to mercury concentrations." The Electric Power Research Institute has also been undertaking studies of the issue. q.v.

Warmest US January Ever

Source: NOAA

How warm was it? NOAA says:

  • January 2006 ranked as the warmest January in the 1895 to present record. The preliminary nationally averaged temperature was 39.5F (4.2C), which was 8.5F (4.7C) above the long-term mean.
  • For the last 3 months temperature was much above average and ranked as the 3rd warmest such period in the 1895 to present record. The preliminary nationally averaged temperature for November-January was 39.5F (4.2C) which was 3.8F (2.1C) above the long-term mean.
  • Temperature over the past 6 months (August-January) was record warm for the nation. The preliminary nationally averaged temperature was 52.8F (11.6C) which was 2.8F (1.6C) above the long-term mean.

Pete had to summon his haruspex -- the one who kept issuing dire warnings of impending doom based on too much hurricane damage to the natural gas delivery system -- back inside the beltway for a refresher course on entrail reading. Given a half-way decent winter, he might have been right, but fortunately he wasn't. It seems the US has lucked-out once again, which is a very good thing.

Background - US Trade Balance & Per Capita Income By State

Going down slow ...

Source: Bureau of Economic Analysis

Why are income levels so static year after year?

Let's see, with a few exceptions, dark blue states are liberal, while conservative states tend to be white or gray. Deference rules?

The Dogs That Didn't Bark

Pete listened intently to the energy portions of president's speech q.v. on the state of the union, and finally heard them - the dogs that didn't bark.  He was quite content to listen to the normal blather about the importance of alternate fuels, reasonably priced energy, and so forth. Good safe stuff.  An 'advanced initiative' on alternate fuels? great, bring it on. Switch grass? what the hell is that? qv1 qv2 But if you think it's worth mentioning, Mr. President, then he does too. Hybrid automobiles? right on! OK it's a little hard to think that 'technological breakthroughs' like hybrids and switch grass are going to allow us to '...replace more than 75 percent of our oil imports from the Middle East by 2025... ,'  but no one is ever honest with numbers in Washington and there's no reason to start now. Maybe we really are on the threshold of 'incredible advances.'  Perhaps right now some uber scientist is rejiggering the first and second laws of thermodynamics in our favor.  It could happen. You never know. It never hurts to catch a few lucky breaks.

But then the dogs that didn't bark started getting a little loud. Zero emission coal? Oh you must mean the game where we pretend that carbon dioxide is not emitted by combusting 'zero emission' coal. Only the Bush administration and the Exxon boardroom believe it doesn't matter if we make progress on slowing global climate change, and yet not a word was spoken on the subject. The next dog was energy addiction. The president lamented oil dependency without mentioning that he is in the process of creating a serious and far more dangerous natural gas addiction. By 2025 future presidents will be using their state of the union speeches to lament the LNG problem created during the George W watch. And it is likely to be one of the few achievements for which he'll be remembered.

Exxon Breaks The Bank

ExxonMobil Corporation eclipsed its own past record by making more than $10 billion in profits during the final quarter of 2005. q.v. Coincidentally or not, GM, formerly a car company of some note, managed to lose $4.8 billion. q.v. Oh well, what's a car company here or there? Exxon for its part pointed out that the money didn't seem like wretched excess when measured as a percentage of total revenues. True, but as Exxon didn't manage to produce any more oil or gas, the results just show how nice it is to be around when it starts raining money. What will Exxon do with the money? The majority will be given to shareholders either as dividends or by supporting the price of Exxon shares through company repurchases. Now there's energy policy at its market-driven best.

Natural Gas Winners and Losers

The moral is either that it's an ill trio of hurricanes that blows no good, or a simple admonition to stay lucky if your assets sit in harm's way, but some petroleum firms won big in the natural gas stakes, while others lost big.  Here are a few of both:

Percent Change in US Gas Production, Third Quarter of 2005 vs. Third Quarter of 2004
Chesapeake 30.9
XTO 28.3
Williams 17.6
EOG Resources 16.2
Chevron -7.6
BP -8.5
ExxonMobil -15.8
Shell -26.7
Source: Williams Co. (slide 8) Thanks to Randy Udall for pointing it out. Note that overall top 20 producers were down 3.9%.

But the real loser has been the US industrial sector.  Not only is price sharply higher on reduced supply, the inviable priorities of the delivery system, where residential load must be protected at all costs, has meant that much of the industrial sector has had to be priced out of the market to free up supply.  [Here the editor interjects with a certain pride that astute readers such as Randy Udall, above, and Nick Nicolaisen actually read the tremendously obscure publications that have all the good stuff.  In Nick's case, it was Modern Plastics] As one would expect, for the industrial sector it really has been a winter of serious discontent. qv1 (at the bottom), qv2, qv3.

*Every so often Pete feels it only fair to remind readers that he invests in stocks, including energy stocks, and often has a direct or indirect financial interest in the movement of energy prices. While he attempts not to confuse his subjective interest with objective analysis, he isn't necessarily any better at it than anyone else.

Quick Guide to Regional Changes in US Natural Gas Reserves

 Time to move to Wyoming?

Source: EIA

The OPEC Income Constraint

Source: EIA

Leaving aside questions of mal distribution internally, even record energy price levels have not produced record per capita revenues within OPEC. However, the current situation is a reminder that internal distribution of oil revenues is always an issue, and one that foreign consumers may end up paying for, given the apparent upward reaction of world oil markets to internecine conflict in Nigeria.

The US Income Constraint

Energy bills explode as relative income contracts

Source: Morgan Stanley

As one might expect, the income constraint comes at a time when American household debt service payments and financial obligations are hitting new records as a percentage of disposable personal income. q.v.

The Ringing Energy System

A long-time PP reader, who prefers anonymity, writes as follows:

There is a noticeable characteristic of any "system" under stress. It is called ringing and it occurs when a stressed system is hit with a perturbation. A serious perturbation is an unexpected or severe disruption of the status quo. In the extreme form, the same ringing phenomenon will be observed when a normally stable system is hit with a very severe and/or unexpected shock. In the case of our world integrated energy systems the causal factor might be a war in a critical producing country, or a political shut off of normal exports or imports, such as that we saw threatened recently in Western Europe in relation to natural gas supplies from Russia, or economic disruption from unanticipated resource constraints and sustained price spikes.

Even if normally resilient, the system has difficulty accommodating the change and starts to oscillate between extremes, because it tends to be more brittle under stress.  An unusually long time is required to resettle to the norm.  The shock may be so severe that the system cannot accommodate the dimensions of the change, much like chemical systems (le Chatelier's Principal), and will seek a new point of stability.  This may require a phase change, such an one sees in an explosion where a trigger mechanism starts a self-accelerating rate of change and the system goes to basics: carbon dioxide and ash in most cases or in lesser circumstances a new realm of temporal stability without a phase change.

Now to the nut--- Man-made systems follow the same rules in politics, economics and society in general. I fear our energy systems are starting to ring and we are in for some very exciting/interesting times as much of our lives have an energy component that is growing more important as time passes. So far we have been able to adjust to the single shocks but get two at the same time and world energy system could exceed its adaptive capacity.

I wish had a clearer picture of the next phase but it is time we started to try seriously to mitigate our reliance on energy, and on oil and gas in particular. Conservation and alternative sources are two clear options, but the infrastructure and general societal momentum with its inertial mass of habits are holding us back form the radical action/reform needed. Here, our government has failed us.

Background: Iranian Gas Production

Bet they'd turn it into LNG if we asked nicely.

Source: EIA

"Having bozoed Iraq, maybe we should go for Iran." Pete worked hard on trying to learn to think like a neo-con.

Alaskan Crude Production

Roger Blanchard has sent in a report:   According to data from the Alaska Department of Revenue, Alaskan oil production in 2005 averaged 908,772 b/d compared to an average of 957,518 b/d in 2004, a 5.09% decline. The decline would have been significantly higher were it not for the fact that there were major production problems in July and August of 2004.

The decline in Alaskan oil production should be slowed a bit in 2006 by the start of oil production from satellites of the Alpine field. The satellites are located in the National Petroleum Reserve-Alaska, NPR-A.  They have a reported estimated ultimate recovery (EUR) of 330 million barrels (Mb). To place that in perspective, the Alpine field has a reported EUR of ~430 Mb, the Prudhoe Bay field has an EUR of ~12.3 billion barrels (Gb) and the Kuparak field has an EUR of ~2.4 Gb. On the other side of the ledger, it's reasonable to expect the Northstar field to start declining at a higher rate than it did in 2005.

End of An Era?

Pax Americana and the prosperity that followed World War II were largely a function of cheap oil. That time is gone. Will the peace and prosperity eventually go too?

Onwards and upwards?

The administration position is that the American dream continues. q.v. (video may require Real Player) Who's dreaming now? The oil patch had its chance, with three of the last four presidents, and has nothing to show for it, energy-policy-wise, apart from zillions of dollars diverted from the rest of the economy to no good purpose.

Now is the Winter of Our Discontent* (6): Natural Gas Storage Draw

EIA's description of the latest gas storage draw:

Working gas in storage was 2,640 Bcf as of Friday, December 23, 2005, according to EIA estimates. This represents a net decline of 162 Bcf from the previous week. Stocks were 234 Bcf less than last year at this time and 33 Bcf above the 5-year average of 2,607 Bcf. In the East Region, stocks were 1 Bcf above the 5-year average following net withdrawals of 106 Bcf. Stocks in the Producing Region were 5 Bcf above the 5-year average of 732 Bcf after a net withdrawal of 43 Bcf. Stocks in the West Region were 26 Bcf above the 5-year average after a net drawdown of 13 Bcf. At 2,640 Bcf, total working gas is within the 5-year historical range.

Working Gas in Underground Storage

The problem this winter is not the initial storage amount but the quantity of gas actually being produced, given the continuing unrepaired damage to gulf production facilities from the hurricane summer (for details, see below).  But if there is a problem later this winter meeting demand, it will show up as sharp drops in stored inventories more or less contemporaneous with prolonged cold weather.  So watch the slope of the red line as it heads down hill and hope it doesn't bottom out of the normal range. Course, this is going to get embarrassing if the winter stays this mild and it pops out the high end of the range.

*Ian Rayner points out that Pete is taking missing-the-point liberties with Shakespeare: "I know everyone uses Bill S this way, but here is the full quote:

Now is the winter of our discontent  

Made glorious summer by this sun of York (Richard III, Act I, Scene I)

It is actually about an improvement in the weather (political landscape) attendant upon the transition from winter to summer (the House of Lancaster is usurped by the House of York). ... My favorite rendering of the play on DVD is the 1995 version with Ian McKellen (Gandalf!!) in the title role, very slimy and evil...."  Pete, while loathe to admit it, is beginning to doubt there's much to feel discontent about, apart from the level of heating bills.  However, he is assured by his venerable and wise haruspex that the worst is yet to come. At the very least, it's a little early for the glorious summer of a certain favorite daughter of (New) York.

Background: Nuclear Explosions

The Swiss record of who set off bombs and where they did it

Source: Swiss Seismological Service Note: see source for key

Things That Need To Get Fixed

The list is long and this one isn't necessarily first, but it is high up on the list: stop generating electricity with natural gas unless that facility has an alternative fuel supply (i.e., is dual fired). 

Where's PIFUA when you need it? To bad those with perennial short-term and blurred vision were put in control ...

Source: EIA

Of course, anyone who was burning natural gas to generate electricity in 2004 is no doubt crying in their beer: it cost $5.96  per MMBtu to use gas and only $1.36 per MMBtu to use coal.  That indicates another problem, the lack of a good carbon tax to address climate change, but that is of secondary importance to the dismal natural gas supply situation.

The Cost of Keeping Up

No real conservation is costing more and more

Source: EIA

Let's see, if Mrs. Millions needs 350 million Btu to get through a year, and using the current well-head natural gas price as a proxy for the delivered residential price of a million Btu's of energy or the average cost of crude*, the oil/gas cost of getting Mrs. Millions through next year just popped through $5,000. Bad news if you were hoping to sell her something else.

*Of course the delivered residential price of natural gas is going to be much higher since the normal markup to get it from well to her stove or hot water heater involves a further doubling.  The same applies to crude oil. But most of the other forms of energy aren't so expensive and both crude and natural gas prices are likely to fall from current levels.  So however rough an estimate, the point is that consumers are going to be squeezed badly by the price increases.

In Which Currency Should Oil Be Priced Or Does It Matter?

Source: IMF

The table above shows how the nations of the world kept their official foreign currency reserves. By far, the US dollar continues as the currency of choice, even though its preeminence has slipped somewhat since the end of the 1990s with the rise of the Euro and the dollar's relative loss in value. The issue is how much the relative percentages would change were oil to become generally priced in some other currency aside from dollars.  The most likely candidate is not another single currency, such as the Euro, but a trade-weighted basket of currencies such as the SDR.*  The idea of non-dollar payments has been floating around for years, but there are many reasons why it has never taken root.  Now an upstart Iranian venture has proposed to price oil in Euros and many in the middle east seem to believe that it will be the beginning of the end for the dollar. q.v. However, reader Bill Dahmer has provided his explanation of why it wouldn't matter:

...I fail to see how the euro will benefit from a collapse in the dollar? Now, in my former life I used to trade grains & oilseeds, also commodities, also priced in USD regardless of where they were grown or consumed. We used to offer Japanese crushers canola,
canola oil & canola meal (similar to the soyabean complex) priced in USD and [Canadian dollars]. Now, this simply creates a matrix for the buyer. They can take the canola and process it themselves into meal and oil (i.e. crude oil versus heating oil and unleaded gasoline), and depending on the price of the US dollar versus the Canadian dollar, they can buy in either currency. As a matter of fact, my company was not very bright, so in essence we were giving the Japanese a zero cost option by offering them fixed prices in various currencies. They simply chose whatever price was best for them. So, whether some producers decide to sell oil in USD or euro, it makes very little difference. There will still be arbitrage and the buyer will buy oil in the cheapest to deliver market in the currency that gives them the lowest possible cost. Unless we are talking about [Venezuela] selling Cuba oil below the world market price, but that is a different story.

Therefore, it makes no difference whatsoever whether oil is priced in dollars or euros. What does matter is the US' record high twin deficits - c/a & budget - its trade deficit and its reliance on imported oil. Never mind it lacks enough fresh water, which are two good reasons to buy or invade Canada at some point.

This line of reasoning is about as naive as to believe a one day or a one week or a one month boycott of service stations would cause oil companies to collapse. Pent up demand simply gets pushed into another time bucket, but only using less oil will reduce demand. You won't see too many overweight Americans bicycling to work in the winter now will you? ; - ) ...An oil crisis would certainly hurt America, but to predict that Europe would benefit from a fall in the USD is not realistic. ...

Pete disagrees. On the most macro of levels, world central bank reserves, the system has been constantly stymied by having a single effective reserve currency.  In times when the dollar is sick and needs the discipline of the market to correct domestic overspending, as now, there is no incentive nor market mechanism to make it happen, because other central bankers would only be hurting their own reserve positions to force the issue.  Floating rates exist but are gamed by those amassing dollars from trade imbalances using them to buy further dollar reserves, preventing the trade correction. But US energy policy has also been hurt.  The current system allows the US to overspend and rely on credit to support a lifestyle that is way, way overextended. US savings are actually negative, while indebtedness of all forms is growing by leaps and bounds. The necessary correction will occur at some point but when it does the disruption to the entire world system will be far greater than it needs to be.  While US trade imbalances are not solely or even mostly due to oil imports, they are the single largest factor, and were the US forced to buy either some other reserve currency, such as the Euro, to pay for oil, the additional cost** of doing so would effectively increase petroleum import costs, thereby reducing oil demand. For that reason, it would not be appropriate to make the change just now with oil costing in excess of $3, since any slide in the value of the dollar added onto that would push the US economy into recession (even though it would relieve some of the pricing pressure felt by other economies.)  But as the oil price starts to come down with the end of temporary operating disruptions caused by storms, refinery outages, and so forth, it would be a good time to start, in a small way, the pricing of some of the major oil streams in other currencies, particularly those streams destined for European consumption in any event. Starting to price oil in other currencies would add to the petroleum demand suppression effect in the US, provided that the reduction was not exaggerated by too much change occurring too quickly. So the change should be implemented gradually over four or five years using the International Monetary Fund in Washington and the International Energy Agency in Paris as the arbiters of how quickly it should happen and which crude flows should be included.

*SDRs (Special Drawing Rights) are a units of account used by the International Monetary Fund: they are an accounting convention based on the relative importance of various countries to world trade. **The additional cost would result from reduced demand for dollars and greater demand for whatever currency or currencies were used as an alternative.  Since oil payments are very large, the currency valuation effect would also tend, at the margin, to be large at least initially, depending on how it was phased in.

Now is the Winter of Our Discontent (4): The Cumulative Anomaly Continues to Drop as Normal Weather Returns

The table below shows how unusually warm it has been so far this heating season (using population and gas home heating weightings for heating degree days).  Gas prices have fallen considerably in recent weeks, reflecting progress in repairing the damage to production facilities and a generally mild winter.

                 TOTAL DEV  DEV     TOTAL DEV   DEV   DEV   DEV
                       FROM FROM          FROM  FROM  FROM  FROM
                       NORM L YR          NORM  L YR  NORM  L YR
                                                      PRCT  PRCT
 NEW ENGLAND       217  -58 -130    2890  -286  -151    -9    -5
 MIDDLE ATLANTIC   202  -61 -131    2536  -425  -164   -14    -6
 E N CENTRAL       207  -91 -138    2912  -447  -121   -13    -4
 W N CENTRAL       220  -96 -109    3029  -617  -220   -17    -7
 SOUTH ATLANTIC    129  -54  -98    1737  -209    86   -11     5
 E S CENTRAL       125  -64  -91    1782  -212   199   -11    13
 W S CENTRAL        77  -63  -57    1099  -263     5   -19     0
 MOUNTAIN          216  -16   31    2622  -439  -234   -14    -8
 PACIFIC           122    2   30    1239  -270  -210   -18   -14
 UNITED STATES     169  -56  -78    2203  -369  -112   -14    -5
          ACCUMULATIONS ARE FROM JUL  1, 2005 TO JAN. 21, 2006

Source: Climate Prediction Center


Oil Industry Profits and Performance

How the Major Energy Companies Fared - 3rd Qtr 2005 Q304 Q305 Percent
Date 2004
Date 2005

Financial Information

Corporate (millions of dollars) (%) (millions of dollars) (%)
    Revenue (21)







    Net Income (21)







Worldwide Lines of Business Net Income
    Petroleum (23) c







        Oil and Natural Gas Production (19)







        Refining/Marketing (11)







    Downstream Natural Gas and Power (8)







    Chemicals (9)







Domestic Net Income by Function
    Oil and Natural Gas Production (12)







    Refining/Marketing (11)







Foreign Net Income by Function
    Oil and Natural Gas Production (5)







    Refining/Marketing (4)







Operating Information
Oil Production

(thousand barrels per day)


(thousand barrels per day)


    Domestic (18)







    Foreign (13)







Natural Gas Production

(million cubic feet per day)


(million cubic feet per day)


    Domestic (20)







    Foreign (15)







Refinery Throughput

(thousand barrels per day)


(thousand barrels per day)


    Domestic (13)  








    Foreign (4)







(Number of companies reporting given in parentheses)  For footnotes and guidance, see EIA source.

Damn right it was a good quarter. Broke the bank. But how much extra oil or gas did we get that we wouldn't otherwise have had had we not been such chumps to pay so much for the reduced amount we did get, or something, thinks Pete.

Are the Saudis Still Abetting Terrorist Financing?

From the recent testimony q.v. of Daniel L. Glaser, Deputy Assistant Treasury Secretary Office of Terrorist Financing before the Senate Judiciary Committee:

...In recent years, Saudi-U.S. cooperation against terrorist finance has increased and achieved important successes. In order for this relationship to mature, however, Saudi Arabia will need to move beyond reacting to information provided by the U.S. and to lead the effort to identify and take action against sources of terrorist financing.

The subject of charities and NGOs has been a lingering concern of ours in the context of counterterrorist financing.  As I noted above, Saudi Arabia has taken steps to bring its charities and NGOs under control.  We have, however, been repeatedly raising the issue of so-called international NGOs, namely the International Islamic Relief Organization (IIRO), the World Assembly of Muslim Youth (WAMY), and the Muslim World League (MWL).  The Saudis have responded that charitable organizations and these international NGOs are de facto prohibited from sending funds abroad.  It is not clear to us that this de facto prohibition is having true effect and we remain deeply concerned about this issue.  Furthermore, these restrictions do not apply to foreign branches of Saudi-based NGOs and charities, which can transfer money among themselves throughout the world with little accountability to the Kingdom.  It is possible, for example, for an IIRO official in Saudi Arabia to advise IIRO branches in country X and country Y to transfer money to each other, outside of Saudi regulatory reach. 

Saudi officials must concern themselves beyond the limits of restrictions within the Kingdom.  They must recognize that organizations so closely associated with Saudi Arabia, anywhere in the world, are de facto Saudi responsibility.  These organizations must become an integral part of Saudi focus and policy.  I am not suggesting that Saudi Arabia go it alone.  This type of a comprehensive strategy will require the coordination of many regional and global counterparts.  But Saudi Arabia itself must be actively engaged in ensuring that these organizations are responsive to Saudi oversight.  The Saudis must care not only what happens in IIRO Riyadh but they must also be concerned with what transpires in every other IIRO office around the world. ...

Triple Hurricane Winter: Progress Continues Slow But Steady


Shut-in Oil
% of Total
Federal GOM
Shut-in Gas
% of Total
Federal GOM

Source: EIA


Now is the Winter of Our Discontent (3): This Winter Compared With the Past

No question, none of us know the weather next week let alone next February. Even so, there have been a few very bad winters over the past 30 years, and they provide some relative basis for assessing the risks and dangers of the hurricane hole winter we're in.

The last really, really dangerous winter was the cardigan winter of 76-77, when Jimmy Carter gave a fireside chat on the benefits of conservation from the oval office dressed in his woolies. For twenty years beforehand, a political battle had ranged in Congress about the regulatory regime applying to the price of natural gas sold in the interstate market.  The producing areas could not get the regulatory structure removed, so they responded by dedicating fewer and fewer reserves to the interstate market each passing year, creating an artificial, but no less real, shortage.  The interstate areas already had mandatory allocation rules in effect, because of the shortage, before the winter began, but push came to shove when the real problem, the extraordinary cold, set in. The extreme cold was caused by an unusual ridge of high pressure that parked itself over the mid continent most of the winter and drove clipper after clipper of cold Canadian air down over the east and mid-west. 

Cody [see below] picks up the tale: "In the fall of 1976, September was a mild 6 Bcf burn over normal nationwide. Bear in mind that that sum still represents a full 29% of ADDED demand to the system, continent wide -- we just did not understand that the cardigan winter was unusual until we were half way through it. October continued to build storage loss at 21 Bcf of super-normal demand (21%), sending us into November, and the real beginning of winter with an accumulated 27 Bcf down from the standpoint of gas storage status. November drew an extraordinary 102 Bcf (37%) from storage, and built the cumulative shortfall to 129 Bcf. December added another 71 Bcf of fall back (13%), for a cumulative total extra heat demand of 200 BCF. January drew another 90 Bcf (12%) off of the rapidly deteriorating storage, cumulating by this point to a 290 Bcf overdraw. February drew down another 63 BCF of abnormal drain (10%), as the phenomenally persistent jet stream deviation played into its sixth full month of semi-stationary "blocking ridge" pattern. Finally, in mid month, it broke down, and gave us a March with [61 BCF] of relieved stress, or underdraw on the storage reservoirs. Similarly, April also gave us another [25 BCF] of untapped, but scheduled, normal storage drawdown. The percentages for the reversal, some portion of which was the Oval Office Effect (that is, jawboned conservation), were 12% and 10%, respectively.  The sudden weather reversal was enough to let the cities on the east coast squeak through. At its maximum monthly overdraw, the cardigan winter overdrew reserves by 353 BCF, or roughly one third of the natural gas deliverability shortfall we're likely to experience in the hurricane winter."

That should give you some idea of the magnitude of the problem the US faces getting out of the hurricane hole. There's no reason to think the weather is going to be anything like as bad as the cardigan winter, but the deliverability shortfall is almost certainly going to be much worse, even with normal weather. Let's hope that it'll be a warm winter.

The real issue is whether the political system should be doing some preparation and decision making in case it isn't a warm winter. Or should we all just settle in, wrap up in blankets, and enjoy the spectacle of another administration falling apart as the indictments start to fly?

Non-OPEC Oil Production

Roger Blanchard has sent in a report:

Although the price of oil has risen considerably over the last several years and the average price for West Texas Intermediate is likely to average over $50/barrel this year, that higher price has not translated into substantially higher non-OPEC oil production (crude oil + condensate).  Through the first 7 months of this year, non-OPEC oil production is up only ~126,000 b/d over the first 7 months of 2004.*  There are several reasons for this small increase.  First, production in many non-OPEC countries is declining in spite of higher oil prices.  Examples are shown below.


2004 production (b/d)**

2005 production(b/d)**

Absolute Decline(b/d)

Percent Decline

United States















United Kingdom






























Second, much of the non-OPEC production increase during the last 6 years has been due to rapidly increasing production in Russia.  It appears that the rapid production increase in Russia  is starting to slow.

Year Increment

Russian Oil Production Increase (b/d)













The small non-OPEC oil production increase in 2005 is also in spite of a large number of non-OPEC mega-projects (projects with peak production >=100,000 b/d) coming on-line in 2004-2005.  In 2004, 8 non-OPEC mega-projects were scheduled to come on-line with a summed peak production of 1,700,000 b/d.  In 2005, 12 non-OPEC mega-projects were scheduled to come on-line with a summed peak production of 2,700,000 b/d.  The start-up of several fields in the Gulf of Mexico, Thunderhorse, Holstein and Mad Dog, will probably be delayed until 2006.  Some projects, such as the ACG Megastructure project (Caspian Sea), will probably take many years to reach peak production but most of the 20 projects are offshore developments that will probably reach peak production within a few years. 

Its possible that the non-OPEC production increase in the second half of the year will be greater than the first half but the increase will have to overcome the loss of U.S. Gulf of Mexico (GOM) production.  Since the GOM fields were shut down for Hurricane Rita, about 1 mb/d of production remains off-line (as of Oct. 24) versus 1.5 mb/d of total production.

 Through July, global oil production was up 1.52 mb/d compared to the first 7 months of last year, so OPEC has been responsible for ~92% of this years global oil production increase.

*Data is from the U.S. DOE/EIA **Through July. [editors note: Blanchard's new book on oil production will be available soon. q.v.]

Now is the Winter of Our Discontent (2): How Big Will the Natural Gas Shortfall Be?

As a long-time Policy Pete reader who understands the major components of the natural gas delivery system, you may be thinking that because we started the winter heating season off with 3 Tcf (approximately) of working gas in storage, we'll be OK for the winter. Not necessarily so, because so much production capacity from the gulf is still offline thanks to two or three hurricanes.  Since demand is satisfied from both continuing production and storage drawdown, it follows that with less of the former there must be more of the latter. So the first issue is how much production was knocked out and for how long?

It's a complex issue because data is spotty. Most of the federal data seems pretty good q.v. but what about all those platforms producing in the area controlled by the state of Louisiana that still haven't reported in? So any analysis is likely to be of back-of-the-envelope quality. But when Pete wants the absolute best in chicken scrawl on envelopes, he goes to the venerable Cody McHubart, having to wake him from retirement somewhere in the greater Cincinnati area. Here's how Cody sees it:

This is for the record. The second chop @ forwarding my thinking that Kat + Rita took out ~ 8 - to -10 % of overall U.S. gas production, September 1, 2005, thru March 31, 2006.

A) Assume 20 Quads of gas that is not used as lease fuel or pipeline fuel.

    20 TCF = 20,000 BCF

    Critical period is one half year, thus 1,000

    365 /2 = 182.5 days.

B) Gulf of Mexico = 1/4th of US.

    10,000 BCF / 4 = 2,500 BCF

    2,500 / 182.5 = 13.698 = 13.7 GOM BCF/day.

C) You quoted me a figure of 293 BCF down, from the Minerals Management Survey, @ DOI. That was on Tuesday night, the 12th, and I assume two days stale. On Monday, CNN reported GOM off by 60%, on the gas side. On your day, you quoted 50%.

    Interpolating, @ 55% down for those tow days: 0.55 x 2 x 13.7 = 15.07

    = 15 BCF.

D) I assume a one-sixth permanent loss of GOM, thru 3/31/06.

    183.5 - 40 days elapsed = 143.5 days to go, @ 0.1667 loss of normal per day.

    143.5 x 0.1667 x 13.7 = 327.7 BCF

E) We get for these components:

    327.7 + 15 + 293 = ~636

F) We assume that the production from GOM falls from today's 50% on, & fifty percent OFF, by linear extrapolation thru the end of this month, or by Halloween. Twenty days times half of the sum of 16.67 + 50 = 33.3%.

    20 x 13.7 = 274; & 33.3% of that is: 0.333 x 274 = 91.2 BCF

G) 91.2 BCF + 636 BCF = 727 BCF.

H) We are 70 BCF short for the Winter, due to abnormal heat and electric demand for the SW, during July & August.

   727 + 70 = ~800 BCF

I) 800 BCF + eight percent. Got to go.

G) My estimate for long term outage is below the midpoint of the range of two points in AGA's presentation, on C-SPAN, on Monday. Theirs was "1 to 3.5 BCF per day loss, for the duration of the Winter. The difference between what I used and their midpoint is another 40 or 50 BCF.

In simplest terms, all this means that all bets are off if it is a very cold winter. We didn't start the heating season with the amount of gas in storage needed to get us through a bad winter, given the production outages. The amount of the combined storage/production shortfall is huge, nearly a Tcf. The market price for natural gas at $13.30 per MMBtu has knocked out most of the industrial and commercial customers who can be knocked out, but that still leaves all the gas turbines baseloading natural gas to generate electricity, and residential load. And one of them (or some part thereof) may have to go...

Now is the Winter of Our Discontent (1): How Expensive?

EIA has had a look at how much it is going to cost to get through the winter.  The answer is sort of frightening:

That'd be 'bout double what it cost before George Bush

Source: EIA

Increasing Petroleum Supplies: Squeezing Oil from Rocks

But can baked potatoes power the SUV?

By any reckoning, oil shale is a hard way to go.  But the issue of whether to develop this resource, which is common in Colorado, Wyoming, and Utah, remains alive since it is plentiful. Randy Udall and Steve Andrews have prepared an analysis on whether developing oil shale makes sense. q.v. (pdf)  But see also this report from DOE for a different point of view, including the assessment that there is as much as 2 trillion barrels of oil trapped in these shales. q.v. (pdf)  Despite this alluring size, one of the more important issues with all possible alternatives to conventional oil and gas production is to look at their net energy content.

An Alternative to Windfall Profits Taxes: Shotgun Weddings

There are times such as now when capitalism doesn't work very well.  All the money ends up with A, the fat and unproductive overseer of an unresponsive market, when it should be with B, C, and D who are lean and hungry and nearly ready to go with separate versions of the next big thing. In the long run, the market will figure it out and allocate the capital toward the highest return. But sometimes the long run is a bit too long and the dirigistes among us, such as Pete, want to make it happen faster by a little regulatory slight of hand. For A substitute the oil companies, who not only have record profits, they have profits so large the descriptively-challenged among us start dredging up words like 'obscene.'  It's not the oil companies' fault, the real problem is excess demand both here and everywhere else, a supply cartel they don't belong to but do benefit from, and inelastic marginal supplies that can't quickly be brought on line. Also throw in a couple of hurricanes that went right through the middle of the oil patch. For B, C, and D substitute, respectively, the useless domestic automaker managerial class who haven't made a good decision in 25 years, the witheringly shy nuclear power industry who couldn't give it away on 2nd Avenue, and, for D, everyone who doesn't want to be dragged kicking and screaming out of the 21st century and returned to the 19th. The last category includes just about everyone else that doesn't like being squeezed when there is no choice but to drive cars, heat homes, cook food, and so forth while having to pay for all the nonsense going down.

One way out is to impose windfall profit taxes. While they can be done many ways, they are simple to do.  Average taxable income for the previous five years before the price spike, subtract that figure from current year taxable profits and apply a special energy defense surcharge equal to 90% of the remainder.  To the inevitable argument that the reduced incentive will reduce future production from what it would otherwise have been, allow a full credit to each firm whose addition to current year oil and gas reserves exceeds the average five year net addition to reserves by more that 120%. Then use the only magic Washington is good at, income redistribution, to ensure that the car makers get enough to retool toward hybrids, the nuclear industry actually starts building a few new nukes, and then return the rest to everyone else who buys the new hybrids, or electrifies they home power system, and so forth.

Simple enough but it won't happen. Money buys way too much influence in Washington, and you'd have to be blind not to notice the American Petroleum Institute, Exxon, BP and the rest starting to circle the wagons ready to wait out the clamor. So let capitalism work: let the oil companies who are the winners buy the car companies who are losers, let the oil companies also sprout nuclear construction companies as deregulated independent power producers, and let them fight hard with coal companies to get the price of electricity and everything else down to affordable levels.  Exxon may be rich and fat, but it is also gifted with really competent and sensible managers. Maybe they'll do a better job running the auto industry than the group that have run GM and Ford into the ground; they couldn't do worse. It's really only vertical integration writ large. And in case Exxon and the boys start to get reluctant about their matrimonial responsibilities, there's always Uncle Sam and his windfall profit shotgun to keep their minds right.

Background - Change in US Petroleum Reserves


Source: EIA

It's worth noting that most of the increase in natural gas reserves was accounted for by extensions to existing on-shore fields. Discoveries of new gas fields were the lowest in 12 years. Reserves in off-shore Gulf of Mexico dropped substantially. Finally, while natural gas proved reserves have increased in ten of the past eleven years, production has not. In 2004 total U.S. dry gas production declined 1%. The damage to production facilities occurring in 2005 almost assures another year of reduced production.  [Pete has been holding off on his dire-warnings-of-immanent-winter-natural-gas-danger speech (a) because others have been making it for him, (b) while the situation looks very bad, there is still not enough hard evidence to be sure; and (c) he did get a little jumpy a few years back only to have the mild weather prove him wrong.]

Reducing Petroleum Consumption: Working At Home

Why drive to work to sit in front of a computer screen when there is one at home?

Source: BLS

According to the government, the total number of persons who worked at home in 2004 as part of their primary job, regardless of how often they engaged in home-based work activity, was 25.4 million.  Increasing this number is an obvious candidate for federal and state energy policy.