As you go further back in time (newest stuff on top, older below), fewer links actually work. So it goes ...
Pete is back from a brief trip to an island a thousand miles to the east, where the men drive scooters and wear knee socks. He is happy to report the energy situation there seems ok despite the eccentricity. The trouble with interludes on islands to the east is too much time for rumination. Pete used his to decide to leave the policy punditry business.
This makes his second such departure in recent weeks. Pete left the plunge prevention business( on 7/16/2007, see below) with the market closing just north of 14,000, or, to put it even more clearly, just as Wile E. Coyote skidded past the cliff edge and was relaxing in mid-air, awaiting the fate he and everyone else knew would not be long in coming. In the limited circles familiar with the arcane glories of plunge prevention, this counted. The plunge hadn't happened during his watch, therefore Pete's status shot up to golden, there being no other former directors of plunge prevention still walking the streets. Even so, the staff he'd left behind had grown troubled by random 150 point up moves up or down followed by similar moves the other way, and often called him for counsel. He would have given it to them too, and for a pretty penny, had he been so inclined. But he wasn't. Once out the office door he had shorted the whole shooting gallery and upon his return from islands to the east could be found on all fours beside the foundations of the Connecticut Avenue bridge, feverishly trying to dislodge a few stones large enough to hide his anticipated stash of what used to be everyone's favorite Treasury Department product.
By way of explanation for abandoning petroleum policy, Pete offered that he had gotten his web site up and running with oil mispriced at $10 per barrel, and knew he could safely leave the web drudge business now that the oil price had, in the recent past, reached an all time high of $78.77 per barrel, still mispriced but now only comically over priced instead of dangerously under priced. He knew that the record price couldn't possibly hold, and was about to decline for what was likely to be a few years. It seemed the American middle class was fast wearing out its welcome abroad by the reckless extravagance of paying energy bills by home refinancing without much caring what the mortgage terms might be or whether there was any equity left to milk. Even the naive bank clerks in Germany, France, and China who had failed to recognize the 'pass-the-toxic-trash' nature of the game, and had stocked up on misrated subprime asset-backed commercial paper, collateralized debt obligations, and all the other wonderful junk Wall Street had dreamed up and packaged, would catch on soon. And when they did, and the cost of money again reflected real risks, Pete expected petroleum demand to decline, at least for a while. Furthermore, just as oil prices were now closer to where they should be (not counting the hefty but Zen-like carbon tax conspicuous by its absence), Pete noted that every US school child could now give a fairly clear explanation of why it was important to stop using fossil fuels, even though neither their parents nor their parents' representatives had any intention of doing so. The prospect of watching for another decade while the American political class paid lip service to the importance of doing something without actually doing anything was too depressing to contemplate. On the other hand Pete took small comfort in the fact that they were now at least beginning to feel guilty, and, with the loss of yet another minor energy war, perhaps even a bit worried. Perhaps there was a Wile E. Coyote aspect there too.
Source: Congressional Research Service
Pete gets lots of email from the public affairs departments of government agencies. It comes with the territory, someone's got to wade through all that junk and come up with a few pithy bits for PP readers. The interesting part is that not all government agencies are alike: most are standoffish, boorishly competent, matter of fact, issuing news releases that are always just the sort of dry thing you'd expect. But there are a few agencies that are frighteningly alone, determined, gritting their teeth, doing whatever they can to at least try to execute difficult responsibilities. And then there's OFHEO. OFHEO is a sad case. Nearly every press release, issued with minimal clutter, even austerity, is a sad cry for help: "...won't somebody please look at this frightening report we're sending to you. Yes, we know it is scary and we know we can't do a damn thing about it even though you probably think we are trying to do something, only we can't because our hands are tied."
By now you're probably wondering what OFHEO does, sweep up superfund sites or clean the dog fighting pits of NFL quarterbacks, or some such? No, much worse, it regulates two petulant and arguably incompetent government corporations that oversee a $4.5 trillion empire, of which $170 billion is in subprime paper they've bought for their own portfolio, for which you may soon be responsible if the sun doesn't start shining in OFHEO's back door pretty soon. More generally, OFHEO says that $1.5 trillion in subprime mortgages were issued (see page 4 and 5) and if 8.3% are in default nationwide, that is a lot of paper that is going to get marked to market sometime soon, even before considering what is going to happen to the CDOs and other related products. Try the OFHEO director's most recent speech to get a feeling for the situation. q.v. For a readable guide to subprime mortgages and why you should worry, try this.
By anyone's reckoning, after an initial blip, Pete's stint in the plunge prevention business qv1, qv2 had been pretty successful. Not only did the markets not crash, despite myriad reasons they might have done so, almost all of the major market indices continued to hit historic highs month after month. The few insiders important enough to know of the existence of the plunge prevention team were quietly impressed by how well it had gone. It was embarrassing really: the whole idea of keeping a squad financial lizards on retainer to prevent calamity only made sense in a world where calamity was a possibility. Clearly, that wasn't the case in Washington, DC in the first half of '07. The masters of the universe, who had come down to Washington and fiefdoms in the Treasury from Goldman Sachs, ruled the world of federal finance effortlessly and without real opposition. All the calamity was reserved for the incompetent small-town boys on the other side of the White House who were helping Iraq disintegrate. The financial markets, in their perverse way, took no notice of another lost war nor a botched presidency, and concentrated instead on the money still to be made from the tsunamis of liquidity let loose after 9/11.
Pete had long since mastered the tools of his trade: it was he who dropped hints to large players to reduce the supply of shares available to be traded, and his friends were glad to call their friends who obliged, dropping the total supply of shares outstanding more than 6%. The same procedure worked whenever he needed to fire up a few share buyback programs, or, or rare occasions, intervene directly through offshore petrodollar accounts. Whenever he needed something, he called up and the masters of the universe did what had to be done. The fed kept interest rates and reported inflation rates absurdly low, creditor nations kept coming up with more and more money to lend, and America kept on borrowing and consuming. It was a wonderful system. True, Pete knew it wouldn't last; he was under no illusions about what had to happen soon to whomever might replace him, but he milked his triumph in his small, secretive corner of the world for all it was worth, and even felt a little smug about how well he had timed his exit when the door swung shut for the final time.
Asian Oil Production
Source: Cost and Performance Baseline for Fossil Energy Plants (May 2007)
Coal-based plants using today’s technology are capable of producing electricity at relatively high efficiencies of about 39%, HHV (without capture) on bituminous coal and at the same time meet or exceed current environmental requirements for criteria pollutants.
Capital cost (total plant cost) for the non-capture plants are as follows: NGCC, $554/kW; PC, $1,562/kW (average); IGCC, $1,841/kW (average). With capture, capital costs are: NGCC, $1,172/kW; PC, $2,883/kW (average); IGCC, $2,496/kW (average).
At fuel costs of $1.80/MMBtu of coal and $6.75/MMBtu of natural gas (HHV), the 20-year levelized costs of electricity for the non-capture plants are: 64 mills/kWh (average) for PC, 68 mills/kWh for NGCC, and 78 mills/kWh (average) for IGCC.
When today’s technology for carbon capture and sequestration is integrated into these new power plants, the resultant 20-year levelized COE including the cost of CO2 transport, storage and monitoring is: 97 mills/kWh for NGCC; 106 mills/kWh (average) for IGCC; and 117 mills/kWh (average) for PC. The cost of transporting CO2 50 miles for storage in a geologic formation with over 30 years of monitoring is estimated to be about 4 mills/kWh. This represents only about 10 percent of the total carbon capture and sequestration costs.
A sensitivity study on natural gas price reveals that for CO2 capture cases the levelized COE for NGCC is equal to that of IGCC at $7.73/MMBtu, and is equal to that of PC at $8.87/MMBtu. In terms of capacity factor, when the NGCC drops below 60 percent, such as in a peaking application, the resulting COE is higher than that of an IGCC operating at baseload (80 percent capacity factor).
Fossil Energy RD&D is aimed at improving the performance and cost of clean coal power systems including the development of new approaches to capture and sequester greenhouse gases. Improved efficiencies and reduced costs are required to improve the competitiveness of these systems in today’s market and regulatory environment as well as in a carbon constrained scenario. The results of this analysis provide a starting point from which to measure the progress of RD&D achievements.
Pete's conclusion: this key component of current US energy policy looks untenable. Huge amounts of money are at stake and are likely to be wasted pursuing a goal that doesn't make sense. The system cannot afford to go down both the coal sequestration route and the nuclear revival route. It's time to decide while captial costs remain reasonable...
As near as Pete is able to figure it out, Exxon's policy on regulation of greenhouse gas emissions has changed. The company used to make do with a "yes it is a problem but one that must be studied in greater detail" policy, meaning no regulation in this lifetime. It now appears that while Exxon does not accept general carbon emissions trading, as the European Union has attempted to implement, it is willing to consider other regulatory approaches beyond studying it to death. Pete reads Mr. Tillerson's remarks q.v. to the Royal Institute for International Affairs as a change in policy. Exxon's chairman indicates that Exxon now favors an upstream cap and trade scheme (as opposed to a general demand-related or downstream cap and trade scheme)*, and even agrees that Exxon also could support a carbon tax, with the idea of giving the market a long-term, stable price for carbon-based fuels.** Pete agrees on the need for a carbon tax.
However, Exxon maintains that nothing said by Mr. Tillerson in his London speech represents a change in policy. "Our position has not changed and we are absolutely not advocating one policy over another one. We are advocating a set of principles that we would use to evaluate any policy proposal. Any of the 4 forms of emission reduction policies (downstream cap and trade, upstream cap and trade, tax, product standards) could be formulated to meet these principles. Therefore, that is why we say the devil is in the details. [You should] read the entire speech that our chairman gave at Chatham House....you will better understand our position after that." Pete agrees that the entire speech is well worth reading, and won't quibble on where the devil may lurk.
* "... For example, an upstream cap-and-trade system -- that is, a system placing a limit on carbon at the point where the fuel enters the commercial world rather than at the point of emission -- offers potential advantages in terms of efficiency and simplicity. It reduces the number of regulated entities and provides a cost of carbon to the entire economy."
** "... Similarly, a carbon tax could enable the cost of carbon to be spread across the economy as a whole in a uniform and predictable way. Of course, all these policy options carry significant challenges as well as potential benefits, and the devil is very much in the details."
Source: Oak Ridge National Laboratory
Oil: Proved reserves (billion barrels)
|Share of total||R/P ratio|
|at end 1986||at end 1996||at end 2006|
|S. & Cent. America||64.6||
|Europe & Eurasia||76.8||
Include Canadian oil sands
World total and total Canadian oil sands
Source: BP Statistical Review of World Energy 2007; Note: R/P ratio = reserves divided by annual production
Except for North America (and then only if you exclude Canadian oil sands), a review of the resource situation at ten year intervals shows that proved world oil reserves are increasing, not declining, as most suppose. That doesn't mean that there won't be extremely tight conditions further down the road as world demand skyrockets, but it suggests that there are no true, non-political supply restraints at present.
These observations drew a
comment from Jim Williams, the director of WTRG Economics and publisher
of the Energy Economist: "Part of your
surprise [that reserves are growing and not declining] may be related to
major oil company reserves, which have not performed that well.* Often
this is due to very harsh terms for drilling in many countries. For
example, all of the Venezuelan takeovers have lowered the reserves held
by the majors. But if Chavez adds, and he will, their very heavy stuff
to Venezuelan reserves you will see another big jump [in regional
reserves] larger than the addition of Canadian tar sands.
Also, reserves are an economic concept as well as a geologic concept. It is not a measure of oil in place but oil economically recoverable at the current price. An extreme example would be the tar sands if oil prices fell to $10 per barrel. Since it costs more than that to produce the oil the reserves would go to zero.
Remember the BP report estimates is probably using government estimates as well. BP certainly would not have access to sufficient data to estimate Saudi reserves.
I don't pay too much attention to reserve estimates as they are fuzzy under the best of circumstances, but high prices have created reserves that would not exist in a low price environment. The oil is still there it just wouldn't be a developed or undeveloped reserve."
*Jim suggests that PP readers may want to review the report showing that most privately held majors have not been able to replace their reserves. He also suggests a recent commentary on the BP statistical review that appeared in Dar Al-Hyat.
Natural gas may be a somewhat more benign source of greenhouse gas emissions than coal, but it is still a major contributing factor to rising CO2 concentrations.
Source: Bureau of Economic Analysis
The Times has pronounced q.v. [may require signup] on the energy bill: yes to café (fuel economy) standards; yes to mandatory utility use of wind and solar because it 'does not seem insanely onerous'; no to coal-to-liquids gasoline substitutes because they don't reduce CO2 emissions; yes to ethanol provided the new land use demand does not destroy valuable forest and conservation lands; yes to tax breaks for non-nuclear alternate fuels.
Pete scores the Times: right on fuel economy standards, wrong on everything else. You can command that electricity be generated by alternative fuels, but you can't avoid the cost of backup production capacity which will make the total cost of 20% of electricity production insanely onerous, since most locations where solar and wind will work well are no where near the centers of electricity demand. You can tweak coal-to-liquids as doing nothing for greenhouse emissions, which is true, but the issue is how to reduce dependence on foreign oil in the medium and long term. If you continue importing crude at these levels rather than rely on domestic coal, there will be no saving in greenhouse emissions either way and there will be less national security. You can keep ethanol off mountain sides (it's not even an issue), but you can't keep it from exploding food prices. You can treat new players to tax windfalls but the misallocation of capital caused by tax subsidies will continue to damage the economy, as it continues to do with oil, gas, ethanol, and coal.
But the main problem is that the Times' energy policy will do next to nothing about what is going to happen to CO2 emissions, which are growing dangerously fast (see next chart), since the Times does not call for an expansion of nuclear power, nor will the policy do anything material to improve US national security.
Future Carbon Dioxide Emissions
Source: IEA presentation
Source: Exxon presentation at IEA [note log scale]
Everyone else worries about the Chinese and what it would take to force them to float their currency. However, Pete thinks the real problem is the Saudis who officially peg their currency to the dollar and, unlike the Chinese, don't even make token concessions to letting market forces correct the resulting trade imbalances. The following excerpt from the US Treasury's official report q.v. shows the extent of the problem.
High and rising oil prices over the last few years are the main cause of the country's high growth, large current account surplus, and rapidly accumulating net foreign assets, but the government’s fiscal policy has also played some role. The Saudi Riyal has been unofficially pegged to the dollar since 1986 (officially since 2003), so interest rates largely follow recent increases in the United States. The Gulf Cooperation Council has set a goal of establishing a formal monetary union by 2010, but it is still unclear how this will affect Saudi Arabia’s exchange rate regime. On a real trade-weighted basis, the Riyal depreciated 5.7 percent y/y to December 2006, which was largely due to U.S. dollar depreciation and relatively low inflation in Saudi Arabia.
Saudi Arabia is one of the most oil-dependent economies in the world, with oil accounting for around 50 percent of GDP, almost 90 percent of export earnings, and over 80 percent of government revenue. With high and rising oil prices over the past few years, real GDP growth has averaged close to six percent, with average nominal GDP growth around 12 percent. Despite strong economic growth, official CPI inflation was contained to less than one percent y/y on average over 2002-2005, but did increase modestly to 2.9 percent y/y in December 2006 on the back of strong food price inflation, which posted a 6.6 percent y/y increase to December 2006.
Saudi Arabia’s current account surplus has soared over the past few years, but strong import growth of 26 percent y/y in 2006 caused the overall current account surplus to fall as a percent of GDP to 27.4 percent in 2006 compared to 29.3 percent in 2005. While oil export revenues increased to $188.6 billion in 2006 from $161 billion in 2005 due largely to higher oil prices, imports of goods and services increased by more, rising to $120.2 billion in 2006 from $88.2 billion in 2005. The bilateral trade surplus with the United States reached $23.9 billion in 2006, compared with $20.4 billion in 2005, due largely to higher oil prices.
The government’s financial position continued to improve as oil revenue caused the budget surplus to increase slightly to 20.3 percent of GDP in 2006 from 18.4 percent in 2005. The government used much of that surplus to reduce total government debt, which fell to 28 percent of GDP in 2006 and is down from 86 percent in 2003. If oil prices are stable, implementing the government’s plans to increase expenditure on social and infrastructure projects would reduce these surpluses over time.
Due to the large current account surplus and fixed exchange rate, the net foreign assets of the Saudi Arabian Monetary Agency rose to $255 billion in March 2007, providing over two years of import cover, from $182 billion in March 2006. However, SAMA official reserves minus gold actually fell over the same period from about $28 billion to about $27 billion.
This is a tough one. The rest of the press thinks US policy on climate change has been rethought. White House web pages confirm that something happened. q.v. But it is hard to say what, or how the new policy is supposed to work. The fact sheet proclaims, "On May 31, 2007, President Bush Announced U.S. Support For An Effort To Develop A New Post-2012 Framework On Climate Change By The End Of 2008." So the US is in favor of someone ginning up a post-2012 framework. Frameworks are good. This one will do something, probably, just so long as we can keep burning coal, waiting for technology fixes, and growing the economy. But that's OK: u-turns are hard to do gracefully, particularly when lots of spin is involved.
|Emissions Rise ...||...But It Could Have Been Worse|
Source: ExxonMobil, 2006 Corporate Citizenship Report
Exxon has just released its Corporate Citizenship Report q.v. which shows the effect of its own attempts to reduce greenhouse gas emissions. The overall message is that it has not been able to reduce greenhouse gases, but it is willing to claim credit for making the situation better than it otherwise would have been, primarily because of cogeneration savings and reduced gas flaring savings made a number of years ago. Chutzpah? Not at all. Exxon used to claim it had reduced/avoided emissions more than the entire annual output of the UK economy, so it is a return to distinct reasonableness to only claim avoided emissions equal to removing 3.5 million cars from US roads. But for anyone designing a greenhouse gas emissions trading scheme, please note that it will be difficult not to get taken to the cleaners if any credit at all is given for avoided emissions. On the other hand, as everyone has known about the existence of the global warming problem since at least 1980 and known too what actions remediate it, the many responsible firms who began to change their operations early on deserve credit of some kind.
From a recent IEA report on the natural gas situation q.v.: "A return to more normal winter conditions in consuming countries will put strong pressure on gas supplies. Colder-than-normal weather in the winter (or indeed hotter weather in the summer) could quickly see supply difficulties reemerge in some areas. There are very real concerns that upstream investments and long distance pipelines will not develop quickly enough to meet growing demand, especially if power generation investment continues to favour gas."
Coal-to-liquids is back from the dead. q.v. It's about time. And the government's latest scheme even promises to sequester the CO2. Ha! In case that wasn't enough comic relief, the authors of the report suggest it will generate a 30 percent rate of return. There are two schools of thought on that one: skeptics maintain that synthetics will be economic at $10 more than the current price of oil no matter what, i.e., it will never be economic. But Pete thinks that as Fischer-Tropsch technology was more or less economic in South Africa when oil was a sixth what it is today, the projected returns could be on the low side. If the US petroleum refining industry is as terminally dysfunctional as it appears to be, why not let in some competition?
Silly you, you thought the Energy Department was in charge of energy policy. Not even close. It's Treasury's baby now. But with becoming modesty no one in Treasury likes to let on who's in charge or what that new policy consists of, aside from the president's [improbable] "twenty in ten" thing. (Twenty percent reduction in gasoline use in ten years). The prime suspect: former Goldman Sachs west coast IT guy, Neel Kashkari, who's now a counselor to Treasury Secretary Paulson. Here's his spiel and here are his slides (pictures of them, actually, all as originally presented by a site called Autoblog Green). He's off to Houston to explain it to the oil companies soon.
So much for Cheneyesque energy policy, bring on government command alternate fuel guaranty demand risk reduction, etc.
What is the best way to handle sustained price increases in an essential commodity such as oil or natural gas? When the problem first presented itself in the mid 1970s, the US [Republican!] political system responded by allowing imported oil prices to increase while maintaining price controls on domestic oil and gas. This plus a highly accommodative monetary policy produced both serious market distortions and dangerous inflation levels. To some extent the damage caused by the price controls was ameliorated by an "entitlements program" that socialized rents in the oil industry, and by removal or relaxation of gas price controls using a vintaging scheme keyed to the number of years a particular natural gas property had been producing. But none of these measures was sufficient to stop a still further doubling of oil prices when Iraq invaded Iran at the end of the 1970s. The economy lapsed into the second serious recession in a five year period, and it took both several years and draconian action from the federal reserve (18 percent interest rates) to wrestle prices down and begin the long period of recovery.
The price deflation that started in 1980 was still largely in place until nearly the end of the 1990s. It had taken nearly twenty years to get an hour of worker pay back to buying a barrel of oil.* But those halcyon days didn't last. Oil prices again tripled the following year, which in turn sent the economy off into recession. This time the policy response was to slash taxes and again run an extremely accommodative monetary policy. And again, these measures either were not enough to prevent, or caused, depending on your point of view, the oil price increases. But the policy measures were successful in pulling the economy out of recession and limited the effects of the bursting internet bubble to only diehard investors. Interestingly, this time the new policy did not produce much price inflation, even though many observers suspect behind the scenes changes in the way inflation is measured may partly explain the moderation. Interest rates were kept very low and wages were allowed to grow at an acceptably rapid rate so the real effect of energy price increases was minimized, at least for a time. Corporate earnings grew rapidly and the lower interest rates produced sustained recovery in the stock and bond markets, and even boosted housing prices to unusually high levels, which allowed the middle class to finance more expensive energy consumption by regularly cashing in increases in home equity. Consumer debt continued to grow throughout the period. And toward the end the dollar began to decline.
The only problem is that oil and gas prices have not decreased in real terms as they did shortly after the price spikes of the 1970s. After a small retreat, they have returned to near record levels and held there. Recall that in the 1980s oil prices stumbled and then crashed over several years, bringing down the labor cost of oil to acceptable, even desirable, levels. However, this time, because of continuing economic recovery, an oil price above $60 per barrel has proved to be pretty stable. The reason may well be a combination of resource constraints, geopolitical concerns, and dysfunction in the refining sector, but there is no reason just at the moment to expect a price collapse anytime soon.
So the impact upon wages from higher energy prices has not diminished, but remains a potent recessionary force. For this reason, the disintegration in US influence in many traditional areas where once it was strong, particularly those areas where energy resources can be found, is a matter of serious concern. While the mistaken decision to go to war in the Middle East has not yet resulted in denial of access to oil resources, there are some signs that US companies are being treated less well now than in the past, as the recent nationalizations in Venezuela and Russia illustrate. There are also signs that other competitor countries are enjoying greater success at the margin on being cut in when new resources are made available. The US is not likely to be able to resume its leadership role until both the labor cost of oil has declined somewhat and Washington has returned to the mainstream. If you accept the premise that it is in the long term interest of both OPEC and the US production worker to keep the labor cost of oil ratio at preferably less than two, because that is when the good times roll, then at the moment either oil prices must decline or wages must rise considerably. If the US no longer controls the former, it must either accommodate the latter, or deal with the domestic political consequences. This is one of the lessons of the last election, yet to be fully understood. OPEC would be wise to pay attention too.
*There are some important caveats about the data used for the chart. The wages used were the hourly average wage for all production workers for the month of January, as measured by the Bureau of Labor Statistics, rather than an annual average wage for production workers. (q.v.) Even though not optimal, the data still fairly present the relative impact of energy price increases in relation to pay. The oil price used was EIA's composite annual average .(q.v.)
Jim Jubak has written a particularly interesting explanation of why parts of the utility sector are either in trouble or going to be. q.v. But Jubak deals with only one aspect of the problem, where specific market distortions exist. The more general damage caused by deregulation has yet to be fully felt either in terms of higher rates, or in the losses caused by abandonment of the cost-recovery principles used in utility regulation ever since the 1930s. While ratepayers may not have owned utility assets, they were protected from paying for the same thing multiple times. Once an asset was used and useful and in the ratebase, the costs associated with getting it there were gradually recovered via depreciation over time, with rates set accordingly, meaning that, once recovered, the same costs weren't recovered again. Now with the masters of the universe out flipping utility production assets, all of the accumulated depreciation is out the window and the process begins again at much higher starting levels, except this time it is unregulated.
Too bad the oil sands need so much water and natural gas. Looks like Canada's going to import LNG to get enough gas. q.v. But won't it cut back on gas exports to the US first?
Share of Electric Power Sector
Net Generation by Energy Source, 2005 vs. 2006 (percent)
Two interesting points, lifted from the report:
Alternate Fuels and Greenhouse Gas Emissions
According to the US Environmental Protection Agency, the chart estimates the percent change in lifecycle greenhouse gas emissions from using a particular alternate fuel relative to the displaced petroleum fuel. The fuels are compared on an energy equivalent, BTU basis. So for every BTU of gasoline which is replaced by corn ethanol, for instance, the total lifecycle greenhouse gas emissions that would otherwise have been produced from that BTU of gasoline would be reduced by 21.8 percent. Covered greenhouse gas emissions include CO2, methane, and nitrous oxide.
California Crude Oil Product Yields
Source: California Energy Commission
Thirty Years of World Crude Oil Production
Larson Thane's Optimistic Future Energy Scenario
In the last energy report, we looked at the past and present of energy consumption in the United States. For a short recap, we saw that Petroleum is still the most important energy source in the United States. Natural gas and coal tie for second in importance, although coal does just squeak by ahead of natural gas. Nuclear energy comes in fourth, biomass is fifth, and hydroelectric is sixth. Geothermal is barely worth mentioning, while wind and solar are so insignificant as to not show op on the chart; combined, wind and solar make up 0.2% of U.S. energy consumption.
The future is impossible to predict accurately. In the analysis business, one is quickly humbled when it becomes apparent that even the best thought out prediction never truly hits the mark. However, some predictions are better than others and the way to be better than all the others is to understand the present very well and have a good idea of which way trends are moving. We will look at each energy source and talk about where the trends are taking us. Today, we will look at an optimistic prediction of the future.
The U.S. government’s Energy Information Administration (EIA) is an organization that collects some of the most accurate and complete energy data in the world for the American public and releases it in various formats. They also make predictions of where they believe energy supply and demand will be in the future. While as individuals, some of the analysts at the EIA are very intelligent, as a whole their predictions have been somewhat dismal. Hopefully, this issue of the energy report will make better predictions.
In Figure 1, we see Total U.S. energy consumption from 1949 to 2030 with the y-axis being percentage of total energy consumption. As in the last energy report, we are looking at all energy that is used by the United States for all purposes. This is all of the energy that powers our trucks, cars, planes, trains, ships, armies, provides all of our electricity, and runs all of our factories. It is worth noting that some of this energy (especially oil) is imported from other countries. We should also note that all data points from 1949 to 2006 are actual historic data while the data points from 2007 to 2030 reflect this particular forecast.
All forecasts have assumptions, and the first assumption of this forecast is what makes it so optimistic. The same assumption is made that are included in all EIA forecasts, which is that energy will somehow be found to keep the economy healthy. Prolonged recessions are simply not an option and in addition, there will be sufficient energy to maintain economic growth. To ensure that we have an EIA type forecast, the total energy in this forecast for the year 2030 is 133 quads just as it is in the EIA forecast released this year. 133 quads (quadrillion BTUs) is enough energy to maintain growth and the American lifestyle, as we know it.
Let us look at each energy source individually:
One of the readers of this energy report asked what the difference is between petroleum and oil, and the answer is that there is no difference; oil and petroleum are the same thing. It can be seen that petroleum consumption increases up until 2010 and then decreases. This forecast assumes that peak oil is a real phenomenon. The Association for the Study of Peak Oil (ASPO) is an organization dedicated to the study of how oil production behaves. They believe that world oil consumption (actually all petroleum-like liquids) will increase until 2010 and will then decrease. This forecast assumes that U.S. oil consumption will decrease at the exact same rate as world oil production. This makes the somewhat unrealistic assumption that even as oil grows scarce, the U.S. will still be able to import the majority of the oil that it consumes. The forecasts in the next energy report will be a little bit more realistic. While the decline in oil consumption in the chart above looks steep, it should be compared with the oil decline in the late 1970s and early 1980s along with the decline in coal in the 1950s. The forecast oil decline is very much in line with what has been observed in the past.
As with petroleum, this forecast assumes that gas consumption will decline. There is now no doubt that North American gas is declining, so the remaining two questions are how quickly it will decline and how much gas can be imported to make up the difference. It is also known that the North Sea gas fields of Great Britain and Norway are declining by just about 10% each year. This fact can tell us two things: first that our gas fields may experience a similar decline and that the demand for liquefied natural gas (LNG) on the international market will be fierce as Britain and Europe bid against the U.S. for this soon to be scarce resource. The U.S. government in its energy forecasts assumes that we will be able to import large quantities LNG so this optimistic forecast makes the assumption that gas consumption will decline by only 1% each year which has been the average for the past five years. Even though we have observed that in other gas producing regions, production declines accelerate over time, and even though LNG imports have been below government expectations, we will make the optimistic assumption that gas production will experience the gentle declines that we have seen since 2001.
Wind and Solar
Wind and solar have grown at an average annual rate of 8.8% for the past ten years. It is assumed that they will continue to grow at this rate until 2010 when oil will likely peak. It is again assumed that the U.S. will then become very serious about alternate sources of energy but it is also assumed that it will take three years for the ramping up to take effect. Thus from 2014 onward, it is assumed that wind and solar will grow at the amazing rate of 10% per year. In reality, the electrical grid can only tolerate so much solar and wind power because they are so unpredictable, but for this optimistic forecast, it is assumed that electricity storage technology will advance enough to handle the additions.
Coal and nuclear are the two energy sources that show the greatest capacity to grow easily as far as resources and technology are concerned. While growth in coal is now constrained due to environmental concerns, it currently shows the most growth potential since the technology to utilize it is well developed and it is quite plentiful. This forecast assumes that coal will continue the annual growth of 1.1% that it has shown over the past ten years. It is also assumed that after 2010, energy will become more scare so that enthusiasm for still abundant coal will grow. However, it will take five years for new plants to be built, so from 2016 onward, coal will grow at a rate of 5% per year.
Nuclear power has grown an average of 1.6% for the past ten years. No new plants have been built in the past decade since Americans are currently afraid of nuclear energy, but the plants that do exist have been quietly driven harder to bring about this increase. Americans worry about nuclear waste but they also want reliable energy so nuclear energy has grown without most people being aware of it. It is assumed that this growth will continue until 2010 when oil will peak and energy will become more scarce. Like coal, it will take five years for new plants to be built so then nuclear will grow at a rate of 5% from 2016 onward.
This forecast optimistically assumes that nearly every energy source grows except oil and natural gas, and that natural gas declines much less than other countries such as Britain and Norway have experienced. In addition, wind and solar grow twice as fast as any other energy source. The result is that until 2030, the U.S. is able to maintain its current economic growth and lifestyle. The results may surprise those who expect wind and solar to take over. Figure 2 shows our current energy mix and Figure 3 shows the energy mix in 2030 according to this forecast.
For the past ten years, there has been an average decline of 1.5% per year in hydroelectric power. In this forecast, the assumption is made that this trend will continue until 2010. However, after 2010, it is assumed that oil will peak and great efforts will be made to increase energy production wherever possible. Thus after 2010, hydroelectric power remains flat until 2030. It is assumed that hydroelectric power cannot increase because the energy source is near capacity. Even though consumption will be flat until 2030, it appears to decline in the chart above because this is a percentage on total energy usage and many of the other energy sources are increasing.
As explained in the last energy report, biomass is a word that describes any living thing but for energy purposes, it mostly describes wood and plants that can be either fermented or burned to make energy. Waste wood and ethanol are both included in biomass. Biomass for energy may no be able to increase too much more because the United States is already doing a good job of using farm and paper waste. How many more acres of land can be planted to produce either food to make ethanol or woody plant material to burn? It is controversial how much more biomass can be produced to make energy, but the rapidly rising price of corn that we have seen in recent months due to ethanol production gives us an idea that there may be limits to biomass growth. In addition, there are many indications that planting, harvesting, and processing of biomass may be rather energy intensive so that the net energy produced may be less than many people believe. However, this forecast is meant to be optimistic so let us assume that from now until 2010, biomass will grow at 1.4% per year, which is the average growth for the past five years. Then, after 2010 when oil peaks, let us assume that the nation will put real effort into increasing biomass as an energy source, and it will grow at the amazing rate of 5% per year.
Geothermal energy has grown at the average annual rate of 1.4% for the past ten years. Let us assume that this trend will continue until 2010 when oil will likely peak and then serious effort will be given to increase geothermal production. However, geothermal plants cannot be built overnight so it will be assumed that it will take three years for the efforts to bear fruit. Thus from 2014 onward, geothermal energy will grow a rapid rate of 5% per year. This growth is not plotted on the chart above so that it does not become too cluttered, but it is taken into account and is included in the two pie charts below.
It is not surprising that coal becomes the most important energy source in 2030 given that the U.S. is sometimes called the Saudi Arabia of coal. It is our most abundant energy resource and when oil and gas become scarce, we will lean more upon it. What may be more surprising is that even with oil decline rates predicted by the best-known proponent of peak oil, Colin Campbell, oil is still the second most import energy source in the U.S. twenty years after the peak in 2010. There are those who believe that oil will quickly disappear after the peak but this forecast should illustrate that in nearly any scenario, oil will be important for decades after the peak.
Finally, it may disappoint the people who expect solar and wind power to save us, that even with growth twice as large as any other energy source, they will still only make up 1.6% of the national energy mix in 2030.
In the next energy report, we will look at less optimistic forecasts that assume that some of the energy sources which grew easily in this forecast will experience limits to their growth.
Real Estate Loan Perspective
African Natural Gas
On The Return of $3 Gasoline
Source: US Census Bureau
With 37 million people living in poverty in the US, the return of $3 gas is going to be extremely unwelcome. The meltdown in the subprime lending market suggests that credit availability will be constrained for some years, effectively ending the practice of financing consumption by drawing down home equity for the relatively small segment of the poor who own their homes. The absurd damage done to world food markets by the spike in corn prices caused by ethanol demand has yet to filter through the system, but that too will add to the pressure. While the chart above shows the general extent of officially-measured poverty in the US, there are indications that the number of extremely poor Americans is at all time record levels. q.v.
Background - Latin American Oil Producers
The Saudis have graded themselves on human rights, and found need for improvement. q.v.
The oil industry, through the National Petroleum Council, offers its view of what is happening and what needs to happen in a new report, "Facing the Hard Truths About Energy" q.v. The report contains many surprising recommendations (such as a clarion call for more mandatory regulations favoring energy efficiency in say building codes p.27) but few new ones.
The good looking economics of coal to liquids via Fischer-Tropsch. q.v.
China's first gas hydrate expedition has been successful. q.v.
Venezuelan state energy sector continues to grow. q.v. But will its oil production?
Electric cars for the well to do. q.v. (Be sure to read a few of the blogs.) If you want to find out what may be the key to getting electric cars for the rest of us, a long time PP reader suggests you google 'EEStor."
Congressional Research Service on Venezuela. q.v.
Possible breakthrough for the storage of hydrogen. q.v.
Honda's new diesel qv1 qv2 and the role of the oil industry. q.v.
Peace in Iraq and the oil law. q.v.
Some countries are smarter than others. q.v.
For thirty years nearly everyone has been promoting more wind and solar, but to little avail. What if they did it by fiat? q.v.
Given how high natural gas prices are, proved natural gas reserves must be declining, right? q.v.
Which US state emits the most carbon dioxide? Texas. The least? DC.
OK it's not the tightest analysis in the world, but it is a better video than most on the sources of growth in world liquidity and it's on the right track. q.v. But while Mr. Gordon correctly identifies the two most significant causes, he reverses their relative importance, and like nearly all US analysts, congress people, and Treasury sectretaries, he forgets that the Saudis maintain a much tighter currency peg with the dollar than do the Chinese. But it is always hard to pass up a 96% R-squared correlation, especially when any similar analysis for OPEC foreign currency reserves would look a lot different ...
"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 clear, Pete occasionally receives diary entries from a long-dead British prime minister. We all have our problems....
Humpty Dumpty lies shattered and the old man's mandarins will never have him together...... From Palmerston's diary
For interesting coverage of world petroleum topics, try one of the following unaffiliated sources:
Energy Information Administration
Petroleum World (Venezuela)
WTRG Economics publishers of Energy Economist
Global Oil Watch
Scandinavian Oil Magazine
USGS history of US oil drilling
Province by province, play by play
"We are stripped bare by the curse of plenty."
- Winston Churchill
"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way - in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only."
- Charles Dickens
"I quite agree with you," said the Duchess; "and the moral of that is -- `Be what you would seem to be' -- or, if you'd like it put more simply -- `Never imagine yourself not to be otherwise than what it might appear to others that what you were or might have been was not otherwise than what you had been would have appeared to them to be otherwise.'"
"The future you shall know when it has come; before then, forget it."
Oil as an aspect of American pop culture. q.v.
Collecting oil company maps q.v.
Best dancing yield curve Pete has seen. q.v.
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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. Other arcane phrases you may or may not need to know: dirigiste, as in 'Policy Pete, dirigiste to a fault;' ceteris paribus; Pareto optimality.
Policy Pete is often 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. PP is grateful to be favored with reader contributions. While Pete respects requests for anonymity, he sometimes forgets who you really are and must wait for you to contact him again....
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:
As for ultimate recovery, he guesses:
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.
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Q.v. is a figure of speech meaning "for which see." It comes from the Latin quod vide.