wpe5.jpg (1421 bytes)[as you get further and further back in time, fewer and fewer links actually work...So it goes]


Will California Go Down?

OK. There's a lot of posturing going on, and the answer is probably that it won't. But look at the mess: the commercial paper of fine old companies has been reduced to junk status.  Default looms large.  Stage 3 alerts, which are really quite dangerous, have become commonplace. The nightmare of rolling blackouts is a reality.  For reasons explained several articles below, the real problem may come if and when gas gets cut off, which has been threatened.  q.v.   California hopes to be bailed out, but realizes that isn't going to happen, so it embarks on schemes of buying electricity long-term for its own account and selling it at cost to the utilities that have been humbled. Pete, who watches these developments from afar, has been told it's not uncommon to visit stores in California and find an eerie half light, as so many lights have been turned off to conserve what remains.  Even though California electricity demand is not that heat sensitive, the current forecasts call for unusually cold weather in the west.  So anything can still happen. 

Perhaps Enron, Duke, Williams, and the other representatives of the free market should reread the old area rates cases from the 50s (that first imposed price restraints on wellhead natural gas) and contemplate the phrase used to justify truly comprehensive price controls, as opposed to partial controls: that to do otherwise would be nonsense walking on stilts.   What better phrase could be found to describe the west coast situation?  It is too early to assess the impact on deregulation efforts for the rest of the country, but any rational federal or state legislator should have no trouble concluding that this is a dangerous farce that must not be repeated.

They should remember also the irony that it has been Republican administrations (Eisenhower, Nixon, Ford) that have established or used energy price controls, even though Republicans talk a different game.  This is not to say that controls are a good idea.  It is merely to point out that 'disgorgement' may soon be the least of gas supplier worries if too many lives are put at risk.


OPEC Defends Lower End of Price Band

As it warned months ago, OPEC  is preparing a production cut to ensure that crude prices stay in the $22-30 dollar per barrel range. q.v. The only question remains whether the subsequent increase in prices will further slow the economies of the industrial countries.


EIA's Summary of the Heating Oil and Natural Gas Problems

A quick snapshot of what's wrong with the national energy supply situation and the effect of extraordinary weather.  The full presentation is even more interesting. q.v.   First, heating oil:

Next, natural gas  Not only is the average family going to have to pay about $400 more for natural gas this year than last, forecast storage levels are going to be dangerously low.  Note that the forecast assumes normal weather for January and later months, but if it's colder than normal, as November and December were, industrial customers may have to be curtailed in order to maintain service to residential customers in some areas.


Natural Gas Prospects

Read an interesting analysis of the current natural gas storage situation q.v. and the source of the problem q.v.


Rethinking Gas

One year after the best thinkers in the natural gas industry issued their landmark study on the future of North American gas, it has become starkly apparent that they had no idea what they were talking about. One of those thinkers was M. Simmons, who at least acknowledges that he underestimated demand, particularly electricity demand, and the magnitude of depletion problems, and overestimated supply.  Read his recent contribution to a DOE gas conference. q.v.   You may also be interested in his analysis of why IEA misreported world oil supply and demand during the period of $10 oil. q.v.


What is Happening With the Weather?

Why did record heat become record cold?  Jim Baker and other NOAA experts explain what's been happening with the weather. q.v. (video, may require Real Player)


Chinese Oil Imports Up 97% in 11 Months

China continues to import larger and larger amounts of crude. q.v.   Meanwhile, Chinese production was declining. q.v.


Canadian Gas Prospects

Canada's National Energy Board issued an assessment of the prospect of increasing natural gas production in the western region in the near term.  q.v. The report calls for the drilling of 25,000 new wells by 2002 in order to boost production by 1.1 Bcf.   Canada has experienced high decline rates where a new well can lose 40 percent of production after the first year, although the average is on the order of 20 percent.


Danger Ahead

As of mid December, the US was close to having used its mid-January stored gas draw.  If January and February turn out to be abnormally cold in the east and midwest,* there could be problems serving residential load.

On gas storage, EIA q.v. reports that as of Dec. 26:  "For the second consecutive week, 158 Bcf of working gas was withdrawn from underground storage according to American Gas Association (AGA) estimates. A continuation of this rate through the end of the month will leave end-of-December inventories below 2 Tcf for the first time since 1976. Not until mid-January, when the rate of withdrawals dramatically increases, do stocks typically plunge through the 2 Tcf level. As a result of last week’s 158 Bcf draw, which was almost 50 percent more than EIA’s 5-year (1995- 1999) average December weekly rate, U.S. stocks were left at 2,098 Bcf on December 15, or 19.1 percent below the 5-year average as calculated by EIA. The East Region had a 100 Bcf withdrawal, the equivalent of almost 7 percent of its stocks in underground storage, which left stocks at 1,379 Bcf–12.9 percent below the 5-year average. The Producing Region had 484 Bcf in storage, 27.6 percent below the 5-year average, following a draw of 46 Bcf, which, like the East Region, was the second highest amount for the week since the inception of the AGA data 6 years ago. Continued high demand reported for electricity may have been a contributing factor to a 12 Bcf draw on stocks in the West Region. The West Region was 31.4 percent below the 5-year average at 235 Bcf."

Pete's no better at forecasting the weather than anyone else.  Instead of being normal as NOAA forecast, December proved to be very cold.  No one knows what lies ahead, but it's time for the political system to begin planning for, or at least considering, the unpleasant possibilities inherent in the situation.  Certainly, one issue is whether the system can afford to keep all industrial gas demand satisfied without taking considerable risks (see Now is the Winter of Our Discontent -4 below).  A second issue is whether the system can afford to let natural gas be burned to satisfy summer air-conditioning load again next summer in view of the likely impacts on next winter's gas storage deficiencies.

*As of mid-January temperatures haven't been particularly cold.  But there's more to come.


Trade Deficit Fails to Set Record

Since Pete has so dutifully warned you of each deterioration in the trade balance, it seems only fair to report that the situation actually improved a little bit last month. q.v.   OK, records were set with Canada, China, and Japan, but not overall.


Moving the Gas Cap South - 2

Unlike what everyone was told a few years ago, the US will not be self-sufficient in gas.  We're going to rely on imports until we can bring the motherlode of gas now beneath the Alaskan North Slope down south. But that won't happen for many, many years.  If EIA Administrator M. Mazur is correct, it might not happen at all.  He thinks the gas won't be economic unless the market can support $4/Mcf at the Canadian border, and EIA's long term forecasts still don't think the market will support that, once the current jam has ended.  He also thinks too much Canadian gas would be displaced by Alaskan gas for Canada to be enthusiastic about the project.   But EIA has certainly been way wrong on gas prices more than once.  Read his remarks and decide for yourself. q.v. (pdf)


Now Is the Winter of Our Discontent - 4

Pete warned you last May that it was going to be bad (that is, that the energy delivery system couldn't handle a normal weather winter if too much gas was used to generate electricity in the summer), but he didn't realize how bad the situation might become, even after a record hot summer mid-continent.  He only warned of $7 natural gas, back when it was in the $2's, but gas seems to have hit $10 last week while Pete was away.  He warned you that deregulation in California wasn't working out because of structural flaws, but he didn't foresee that December blackouts and the bankruptcy of two of the largest utilities in the country were possibilities.  So it has become worse than he thought.  The question is how much worse will it get?

The first part of the answer is financial.  President-elect Bush will take over right in the middle of a truly large* redistribution of wealth.   Money will quite literally be pouring out of the cities of the east coast, mid-west and west coasts and pouring into Texas, Louisiana and the other gas producing regions. This is what elections are all about, you may suppose.  But you'd be wrong.   No matter how much oil interests may have supported his election, the new president will be facing awesome deflationary forces, and he'll certainly wish to avoid the possible economic consequences of sharp declines in consumer demand.  Consumer demand will be adversely affected, but the real threat is to the rest of the industrial sector for reasons to be explained in a minute.  The Fed, slow to recognize the magnitude of what has taken place, has yet to ease up on interest rates, but it will have to do so soon.

Selling natural gas for prices above $9/mmBtu is not unprecedented, but past precedents have little relevance.  The incremental cost of gas might have exceeded $9 very briefly in the early 1980's, but that was only for a very tiny fraction -- less than 5% -- of the total volume of gas being sold.  Most of the gas was locked up in long-term contracts subject to obscure but very potent "market out" clauses, which basically said that the buyers could pull the plug if they couldn't sell the gas. They did pull the plug, and it took the domestic gas production industry a decade to recover, it having turned out that a contract is not always a contract and that otherwise legal prices may constitute fraud and abuse in retrospect. 

But the year 2000 problem is that almost the entire winter's gas requirement is moving at these extremely high prices.  There are few long-term contracts these days, and there are no price controls except, curiously, where electricity has been deregulated.  We've learned in California that the "market" price for incremental supply can go to $60 mmBtu under the LaLaLand rules where consumers are temporarily protected by price controls but their utilities are not.  So everyone plays games for a few months until the price controls are scrapped and consumers are made to pay for the sins of the regulators.  Once again, it will be FERC out of Washington, DC that imposes this, and Bush will take the blame even though he won't deserve it.

The reason why the rest of the industrial sector is at risk, at least until the spring, is that natural gas service to satisfy residential and small commercial load is not a luxury but a necessity.  Prices can go to $80 and consumers will still need to heat their homes.  True, they can use less gas, but not that much less.  The driving force is the severity of the winter, not price sensitivity.  To indulge for a moment in thinking the unthinkable, what happens if the local distributor can't satisfy residential load?  The answer is that, unlike losses of either electric or heating oil load, you can't just fix the problem and throw the switch (or start making more heating oil deliveries), you have to send a qualified technician to each house and turn on the gas on properly.  If homeowners try to do it and do it wrong, air bleeds back into the supply lines and explosions may occur.  So each time a local distributor goes down (and that's only happened once or twice in 50 years), an army of technicians from every gas utility for 200 miles is needed to reestablish service.  In the meanwhile, if it's cold, you suffer the consequences of having the urban/suburban population without heat.  For these reasons, when supplies become low enough, you have to cut off all non-essential uses, which means industrial uses.  This used to happen regularly in the late 1970's when interstate gas supplies were low.  There were voluminous FERC regulations explaining how it was done. Industrial customers had alternative sources of supply, usually No. 2 (i.e. heating/diesel oil) or No. 6 (residual) fuel oil, and just switched to that.

So, if this winter doesn't start getting a lot warmer soon, the new president may well have to consider reimposing some form of controls to protect residential and commercial customers.  This is probably not what he thought he was coming to Washington to do.  But he may have to get going on it pretty soon, or take a really huge gamble with the heath and safety of literally tens of millions of people.  And, either way, he'll discover that there's not exactly a lot of No. 2 oil available for industry right now.  This means that the industrial sector may face operating disruptions later this winter, no matter what happens to monetary or fiscal policy.

*On the order of $350 per household for 56 million residential gas users.  This, of course, does not cover the transfer caused by oil price increases.


Failure At The Hague

Not surprisingly, the nations of the world were unable to agree on a program to mitigate global warming.  What if the threat turned out to be real?


Faking It At The Hague

An unusually large amount of dissonance seems to be escaping from the negotiating sessions going on in Holland as the world tries to decide what to do about global warming.  It seems that the rest of the world is accusing the US of substituting snake oil for real action. q.v. Pete was curious so he thought it might be worth while trying to find out what the US was actually saying.  So here are the "actions" for the electricity sector the State Department is telling the world are being implemented in the US and the associated reduction in emissions that each will achieve:

The full list will give you an even better idea of just what a joke the US is trying to pull. q.v. No legislation has been put forward for most of the measures, certainly there is no prospect that any such bills would even get out of committee had they been offered. Nor is there any reason to suppose that if any of the measures were to be actually adopted that they would achieve reductions in carbon emissions of anything even approaching the numbers given. Of course, most of the measures require no legislation because they are only "national goals," decreed by the White House and quickly ignored by the nation. Here is the real story on US emissions:

U.S. Emissions of Greenhouse Gases, Based on Global Warming Potential, 1990-1999
(Million Metric Tons Carbon Equivalent)

Gas

1990

1991

1992

1993

1994

1995

1996

1997

1998

P1999

Carbon Dioxide

1,351

1,338

1,365

1,397

1,422

1,435

1,484

1,505

1,507

1,527

Methane

182

183

183

178

179

179

173

172

168

165

Nitrous Oxide

99

101

103

103

111

106

105

104

103

103

HFCs, PFCs, and SF6

24

22

24

24

25

29

33

35

40

38

  Total

1,655

1,644

1,675

1,702

1,737

1,748

1,796

1,816

1,818

1,833

Source: EIA

The real cost of implementing true reductions back to 1990 levels has been calculated and it isn't pretty. q.v. Smoke and mirrors are always more fun.  If Pete had to pretend that the American people were eager to restrict their current lifestyle, he'd be shucking and jiving too.  But he certainly hopes he could do it more convincingly.


Initiative Favoring Human Rights

A number of large oil and mining companies have announced that they will support a joint US / UK government initiative aimed at curbing human rights abuses at company facilities in the third world. q.v.   Exxon Mobil conspicuously refused to play along.


Duty to Hedge?

The average household is going to pay an extra three or four hundred dollars this winter for natural gas in a crisis that was easily foreseeable since the summer.  Didn't their local natural gas distribution companies have a duty to hedge this exposure?  If they did hedge, can they still pass the higher cost through to ratepayers and pocket the difference?  If they didn't hedge, shouldn't they be penalized for needlessly overcharging their customers?  If the federal government runs short of LIHEAP funding, couldn't it have vastly increased program coverage by hedging?  Why didn't it? 

 


Who Should Bail Out Calilfornia?

The stock market seems to have been spooked by the thought that the Bank of America may be holding lots of PG & E paper that has just been reduced to junk bond status by the failure of the California legislature to remove price controls.   So why not just send the bill to Washington and make the rest of us pay?  This is the apparent line of thought behind several official visits to the east by state officials.  Hope springs eternal ...


The First Steps for Rebirth of the Nuclear Industry

Even though Pete's nine months late on this one, note that in the first major nuclear relicensing case, the NRC approved the Calvert Cliffs nuke for continued operations. q.v.   Note also the NRC's analysis of the generic situation with aging nuclear plants. q.v.  Since approving Calvert Cliffs the NRC has relicensed a second plant and more are on the way.  OK, being allowed to continue operating is not quite the same thing as renaissance, but it is a small step in the right direction.*

For that matter, Pete believes that the current $9 MMBtu price of natural gas signals the demise or indefinite delay of the much heralded hydrogen economy.   Too bad, as the hydrogen economy was to have been the next major step forward for US energy policy.  Back to the drawing boards ...

*Note: not all readers agree with Pete about this, and are concerned about the effects of low levels of ionizing radiation.  It is a very complex issue, but to try and present a bit of the other side, you might want to read the analyses of Dr. John Gofman's book Radiation and Human Health from http://www.ratical.com/radiation/.   For other in depth information Mark Rabinowitz suggests, "...reading the works of Drs. Rosalie Bertell ("No Immediate Danger: Prognosis for a Radioactive Earth"), Karl Z. Morgan (health physicist at Oak Ridge during Manhattan Project), Ernest Sternglass ("Secret Fallout"). The book "Killing our Own" is a good summary, too. All should be on the internet via search engines. These scientists state that radiation at "low" levels is more damaging to genetic material than industrial regulations assume. For nuclear power to be anything other than a crime against future generations, they have to be wrong. I hope that they are wrong, but there's a lot of evidence suggesting that they are right."  Pete disputes the idea that nuclear power increases the general radiation level significantly, and reminds readers that there are about 18 orders of magnitude involved when discussing radiation.


PG & E Nearly Out of Cash

The once mighty Pacific Gas and Electric announced today that it would run out of cash by Jan. 21, unless the state commission approved 26 percent rate increases (on top of already doubled residential bills). q.v.   PG & E's management, having lost in several months what it took many decades to build, can only be faulted for acting like a utility instead of like a free market player.  Had it been playing the latter role, as it was cast, it would have stopped producing electricity at a loss and would have closed down until revenues improved or costs fell.  That would have been real deregulation, but is it anything anybody wanted?


US Petroleum Reserves Grow With Rising Prices

Even though no more oil or gas was found, US reserves of both crude oil and natural gas grew considerably last year through revisions to previous estimates, as rising prices made more and more prospects economically viable. q.v. (pdf)


US Sanctions: The State of Play

The US government maintains economic sanctions against many oil producing regions.  Most sanctions seem to be political chips that the US is ready to trade off for the right deal, but many have an element of moral fervor about them too.   Read EIA's assessment of where matters stand. q.v.


California Governor to Meet With Fed

For reasons that are not entirely clear, California Gov. G. Davis has arranged to meet with Alan Greenspan of the Federal Reserve, presumably to warn him of the impending bankruptcy of two of the nation's largest utilities and discuss a bail-out. q.v.   Perhaps he should be meeting with the Federal Energy Regulatory Commission to get them to reverse the damage caused by his state's electricity deregulation plan.


Will Sanctions Against Iran End If Bush Wins?

Apparently many US oil firms think so.  It turns out that an unspecified number of US firms are short-listed as possible participants in the development of Iran's largest gas field, South Pars, which alone holds 7 percent of world reserves. The only problem is that it would be illegal for them to play under current US rules. q.v. Pete has long maintained that this type of economic sanction is harmful to US interests and should be ended.  After all, competitors such as Royal Dutch Shell have been eager participants in Iranian development for some months, despite the sanctions that arguably apply to them too.


Trade Balance Sinks to a Dangerous New Lowwpe6.jpg (7351 bytes)

The rest of the world continued to carry their favorite uncle with unprecedented amounts of credit, allowing him to buy as much as he wanted of anything he wanted.  The September trade deficit, the worst ever, grew an extraordinary 15% from month earlier levels.  How long can this go on?  Shouldn't the proverbial Belgian dentist, who keeps sending the US all her stock market money (and thereby offsetting some of the flow), have noticed that the NASDAQ, which once topped 5,000, is now trading at less than 2,900?

 


Wind v. Nukes

Not everyone was delighted with Pete's remarks about the relative advantages of nuclear power and wind power in the Charlie Checks In piece that follows. Ruedi Rechsteiner, who is a member of the Swiss Parliament's energy committee, was good enough to point out that there is reason to think that most European electricity demand could be satisfied by huge offshore wind farms set up in the North Sea.  He supplied an interesting PDF in support of the idea (note that large parts, but not all, are in German). q.v.   He also supplied some numbers showing that wind turbine prices have come down considerably and in some cases appear to be competitive with conventional supplies.

Pete, who used to be a consultant to the then fledgling American Wind Energy Association a great many years ago, is perfectly willing to let anyone who wants to build a wind farm and sell power into the grid.  There is a little problem with wind, however, that needs to be costed correctly.  Since it is intermittent, and electricity demand is relatively constant, the real cost of wind must include the cost of backup capacity, which often makes it far more expensive than most alternatives (not always, if pumped water storage is an option). True, every time Pete has been anywhere near the North Sea, it has been very windy, so it is conceivable that there could be projects where backup capacity would be superfluous.  But not many.

It is a very complex issue, and there are certainly horrendously large costs associated with nuclear power that are also not costed correctly by many regulatory authorities.* Pete welcomes reader comments on the relative advantages and disadvantages of both technologies.

*Graham Cowan, the champion of boron-based energy technology, writes in to say: "I suppose it is true, as you say, that there are "horrendously large costs associated with nuclear power that are ... not costed correctly by many regulatory authorities". But if it is the cost of disposing of fission waste you had in mind, then correct costing would not be horrendous at all. (Which I notice is entirely consistent with what you said.)  I think the difficulty is that authorities are large-scale beneficiaries of hydrocarbon taxes, and when they go to regulate nuclear energy, are thus in the happy position of regulating their competition. They do this in the name of a whimpering, pale-eyed public, a public that was away visiting a maiden aunt when NEI pollsters came calling.   http://www.nei.org/documents/publicop0004.pdf .

A couple of points of evidence persuade me that nuclear waste is not one of nuclear power's horrendous problems. (1) Geologically tiny quantities of radioactivity. Accumulated American power reactor spent fuel has a few hundred megawatts of radiation power. Radioactive materials in the Earth do tens of millions of megawatts worth of radiating. (http://newton.ex.ac.uk/aip/physnews.354.html#3 ) (2) Tiny fraction of the radiation to which we are exposed. Both these data concern rate of radiation emission, not how much matter is doing the radiating, but that too is, as you'll often hear, tiny. The concrete base of a 2.5-megawatt windmill could contain and muffle beyond detectability all the nuclear waste from many megawatts of nuclear plant.


Charlie Checks In

Pete's not quite sure why Charlie Mac Arthur keeps checking in from increasingly remote locales, but he does.  Here's the Prius escaping from some God-forsaken Canadian wind farm.  In Pete's view, Toyota will do well with the dual powered gasoline/electric Prius only if it can persuade suburbanites to use it for commuting to work, running it off electricity during the week and off gasoline on the weekends.  Anyway, the sort of fellows who inhabit Canadian wind farms drive pickups and certainly aren't going to fork out $20k for something that won't haul grandmother and the groceries and several bales of hay.

Where's the gridlock? I need gridlock.The problem with the Prius is that, through no fault of Toyota, America is going though another of those myopic phases.  At the margin, almost every new electric generating facility for the next twenty years is going to be powered by natural gas (not wind) because advances in gas turbine technology have made it formidably efficient, however nearsighted, to do so.  So the Prius, were it to succeed, will mostly just be substituting natural gas demand for gasoline demand, which isn't worth that much in the long run because there isn't enough natural gas in North America to take us too far down that road.  In the short run, however, it may be very useful, buying the time needed to solve the underlying political problem of how to power the electricity grid.* Keep in mind that whether or not the Prius solves long-term problems, it does get incredibly good mileage, which reduces gasoline demand considerably, and it reduces criteria air pollutants (i.e. Clean Air Act pollutants, not greenhouse gases) to very low levels.

Now if Charlie would just check-in with a picture of the Prius resting before some enormous new nuke, we'd be getting somewhere. Then we'd have done something useful about over-reliance on fossil fuels and global warming at the same time. Too bad there are no new nukes available for the picture.

* The Prius is based on complex technology that these comments do not fully credit.  For instance, part of the electrical charge process comes during braking while using the gasoline engine.  In addition, the Prius seats five unlike Honda's hybrid which only seats two.  The federal government has analyzed these factors in greater detail. q.v.


Are the Saudis At It Again?

Which is it to be, $25 oil or $35 oil?  OPEC has denied that it will be raising production anytime soon.  If anything production may be restricted. Mr. Ali Naimi, Saudi Oil Minister, has indicated his acceptance of oil above $30.  And yet a "senior Saudi source" quoted by BridgeNews says that despite the oil minister's remarks, the Kingdom wants $22-28 oil. q.v. Meanwhile, Secretary Richardson, having relied on past Saudi assurances to his detriment, and having already forgotten the humiliation from the last time he did it, has launched into another of his famous 'we'll open the taps on the strategic reserve' rants. Admittedly, the US has a weak hand to play, but couldn't someone be found capable of playing it a bit more convincingly?   Natural gas hit a frightening all time high in excess of $6/mmbtu. Could be a long, cold winter. q.v. Not that Pete hasn't warned you.


State Department on US Negotiating Position at The Hague

The next important round of talks on what to do about global warming is just beginning at the Hague.  Review what the US negotiating position will be. q.v. There is a strong case to be made for the idea that, in the absence of a clear electoral result, the lame duck administration shouldn't be making commitments to the rest of the world on a subject this important, particularly not the administration that brought us the original embarrassment of the Kyoto treaty, which the US as a nation can't and won't accept. Still, the lead US negotiator, Mr. Loy, believes he knows what both American political parties will support. Good luck, Mr. Loy.


Syrians Call for Politicization of the Role of Oil

The Syrian hosts of the Organization of the Islamic Conference have asked the 56 member countries to resume the use of the 'oil weapon' in order to help persuade the US and Europe to provide greater support for the Palestinian cause. q.v. Meanwhile, Amnesty International issued a report condemning Israeli treatment of Palestinian youth. q.v. Despite reports of widespread abuse, the Israeli government continues to refuse to cooperate with the UN Commission on Human Rights.


More on Chinese Oil Demand

Consider this point made by a recent article in The Globalist: "Six barrels per capita, multiplied by 1.2 billion people, means that China is already consuming a quarter of the world's annual demand of 28 billion barrels. At its current rate of growth, China should be consuming half of the world's current output within twelve years. And once it reaches Taiwan's current consumption levels, it will consume two-thirds of the current world output." q.v.

Now consider Steve Andrews' advice to Pete: don't believe everything you read on the internet. It can't be that much. Steve's right. It isn't. Here are EIA's projections:

Region/Country

History

Projections

Average Annual Percent Change, 1997-2020

1990

1996

1997

2005

2010

2015

2020

China

2.3

3.5

3.8

5.4

7.1

8.8

9.5

4.1

Total World

66.0

71.3

73.0

83.9

93.5

103.4

112.8

1.9

Reference case world oil consumption in million barrels per day. q.v.

Still, even EIA agrees that China's petroleum demand will be growing faster than anywhere else in the world over the period. Pete got confused by that giant sucking sound coming from the East. Apologies...


Quiet Business With Iraq

No wonder Secretary Albright got confused about who's doing business with Iraq.   It's more complicated than you thought. q.v.


British Fuel Tax Wars

The activists who brought Britain to a halt by blocking gasoline deliveries appear ready to do it all again, as the government hasn't relented sufficiently on energy taxes. q.v. Pete, ever the spoiler, is rooting for 10 Downing Street.


US Greenhouse Gas Emissions Continue to Increase

EIA reports that, once again, the US made no progress reducing emissions of greenhouse gases.  Emission levels in 1999 remained more than 10 percent above 1990 levels, the benchmark used by the Kyoto protocol to measure compliance. q.v. Since the compliance provisions never entered into force and, while signed by the US in 1998, have never been ratified by the Senate, the US regards the protocol as a "work in progress" rather than a binding commitment. What sort of progress is not clear.


Iraq Likes the Euro

Pete thinks that Iraq's decision to price crude in euros makes a lot of sense. OK, the euro has been falling in its dollar value since introduction, but the world desperately needs a second reserve currency, and it will only be a matter of time until a much larger share of international trade is priced in euros.  More importantly, the market forces that should have produced a semblance of equilibrium in the US trade accounts have been stifled by the sudden dollar demand that comes with the runup in world oil prices.  Even though Iraq's move looks like risky speculation, other members of OPEC should consider pricing at least a trade-weighted portion of their sales in euros. This might hurt the dollar in the short run, since the dollar looks vastly overvalued, but will ultimately promote stability and growth in trade.


Japan Moves Closer to A Deal With Iran

After twice being dissed by the Saudis and cut off from new incremental supplies, the government of Japan appears to be closer to a deal with Iran for a major role in the development of the Azadegan oil field, Iran's largest, despite US sanctions. q.v. Meanwhile, in retaliation for the actions of the US congress in permitting suits against frozen Iranian government assets by those asserting harm from Lebanese terrorist organizations, the Iranian parliament is preparing a measure that would allow claims against the US for anyone hurt by CIA activities from the Aug. 1953 coup d'état against Mossadeq onwards. q.v. Could be quite a bill.


Why You Should Want DOE as Your Banker Too - 2

Jim Williams has recalculated why the SPR drawdown was such a nice deal to be in on. He writes, "The DOE released new numbers on the SPR swap. These numbers revise downward the percentage of additional oil to be received next year from the oil companies that borrowed the oil in the first round. This is because some of the original companies were disqualified. The oil is valued in each case at the price for which it could be sold in the nearest month on the futures market on the day of the announcement. The companies receive two benefits from the oil received in the swap. The first is that the have the use of the dollar equivalent of the crude for 12 months in the first swap and 11 months in the second. This benefit is computed at the rate for T-bills (6.65625 percent). Paul Horsnell of the Oxford Institute for Energy Studies q.v. suggested using T-bills over prime rate and a 0.74 discount of the SPR crude from WTI. The second benefit is the difference in the value of the crude received at the near month futures price and the value of the crude to be returned at the futures price for the month of return (November 2001)."

      Round 1  Round 2  Total 
Interest Rate 

(a)=6.65625

  

  

  

Discount of SPR from WTI 

(b)=0.74

  

  

  

Volume received (barrels)

(1) 

23,000,000

7,000,000

30,000,000

Volume to be repaid (barrels) 

(2) 

23,780,000

7,570,000

31,350,000

Near month price 

(3) 

31.43

33.37

   

November 2001 price 

(4) 

28.21

27.88

  

Value Received 

(5)=(1)X(3-b)

$705,870,000

$228,410,000

$934,280,000

Interest (11 months 2nd round) 

(6)=(5)*a/100

$46,984,472

$13,936,579

$60,921,051

Value to be repaid 

(7)=(2)X(4-b) 

$653,236,600

$205,449,800

$858,686,400

Gain on value 

(8)=(7)-(5) 

$52,633,400

$22,960,200

$75,593,600

Total Benefit 

(9)=(6)+(8) 

$99,617,872

$36,896,779

$136,514,651

Effective Discount

(10)=(9)/(1)

$4.33

$5.27

$4.55

As Mr. Horsnell points out in the piece referenced above:

"The absurdity of giving away so much to achieve so little is illustrated by the following. For the amount of the transfer given to traders in the SPR auction, the DOE could have gone to Europe, bought 2 million barrels of heating oil, transported it across the Atlantic and then given it away to consumers absolutely for free."

With astute managers like these looking after our interests, perhaps we can finally get a good deal on that bridge in Brooklyn that Pete hears is still for sale.


Latest on Natural Gas Stocks from EIA

All volumes in Bcf Current Stocks (Fri, 12/8) Estimated 5-Year Average Percent Difference from 5-Year Average Net Change From Last Week One-Week Prior Stocks
(Fri, 12/1)
East Region 1,479 1,649 -10.3% -110 1,589
West Region 247 355 -30.5% -7 254
Producing Region 530 697 -23.9% -41 571
Total Lower 48 2,256 2,701 -16.5% -158 2,414
Note: Net change data are estimates published by AGA on Wednesday of each week. All stock-level figures are EIA estimates based on EIA monthly survey data and weekly AGA net-change estimates. Column sums may differ from Totals because of independent rounding.

OPEC Continues to Look for a Better Benchmark

Arguing that production of both Brent crude or West Texas Intermediate crude is too small be representative of the world market, OPEC continued its quest for a better marker. q.v. It is not clear what effect a different benchmark would have on the derivatives market which is now twice the size of the physicals.


Pete's Intrepid Hybrid Tester Reports Inwpe4.jpg (49556 bytes)

Here is Charlie Mac Arthur, the peripatetic, ever-resourceful hybrid car tester, standing with the gas/electric Toyota Prius beside a plant that generates power from the tides. The Prius has been getting up to 72 mpg on the highway.  While this figure can't be sustained, the overall mileage is still impressive.

Even Pete, who applies a huge discount factor to alternative energy schemes, is entranced by the idea of filling up on moonpower, although moonpower is one thing beside the Bay of Fundy and quite another on the banks of the barely-tidal Potomac. But tidal energy is not the point. The point is that cars like the Prius may well become commonplace over the next decade.  With thanks to Charlie.


Le Monde Diplomatique's guide to the Middle East q.v.

Endless war against Iraq: the French view q.v.

Who owns Caspian oil? q.v.

Recent anti-Palmerston diatribe q.v.


On the Jones Act and the Heating Oil Shortage

Many, many years ago, Pete was a junior munchkin in the government's energy policy office. The problem of the day was Philadelphia. Although the people in the city of brotherly love didn't know it, they were about to lose natural gas service in the midst of one of the coldest spells on record, following years of stupid energy policy concerning interstate gas prices. There just wasn't any more gas available and disaster was hours away. Except there was the Methane Princess rolling in the swells somewhere off Delaware Bay. The problem was the Jones Act, which the domestic shipping industry uses to reserve to itself the right of cabotage, or intercoastal trade. Foreign ships can't play the game, and the Methane Princess was foreign.  But the Jones Act can be waived and the Methane Princess would go on to save the day.

The point is that some supply problems actually have fairly simple solutions. The Jones Act has again raised its head as a possible impediment to getting enough heating oil to where it will be needed this winter. There's still plenty of time to plan a rational policy even though there are indications that the problem may be worse than thought. q.v.


Quick Guide to the Running on Empty School of Thought

One page, with numerous interesting links, from those who believe the end of the oil era is nigh. q.v. Pete is also glad to have learned about a good page devoted to tracking when various energy analysts have predicted the Hubbert peak would be reached. q.v.


Who Should Pay for the California Electricity Price Spike?

Not me, said PG & E. q.v. Why not pass the bill on to the energy analysts who advised that a deregulated electricity market would work in California? says Pete. For two decades the California energy commission has been wrong on most of the major decisions it has attempted. Perhaps it's time for someone else to pay. Any energy analysts ready to fess up and kick in the billions that were lost due to faulty analysis?


European Commission Finally Gets It

The EC has finally realized that the only way to deal with global warming is through use of nuclear power. q.v.  Now if only someone in the American political class would pay attention.  As far as Pete can tell, there isn't a single pol, spin doctor, spear carrier, or inside the beltway guru that has the slightest clue. Of course, the Texas contingent hasn't even realized that there is a problem, but they will as soon as they make it into town (assuming they do). But the others have no excuse, particularly the author of Earth in the Balance.


The Real Majors - 1

The world's second largest integrated oil company is PDVSA, the Venezuelan state oil company.  It operates in the US through Citgo and other affiliates. Production is on the order of 3.8 million b/d, with expansion to 6.3 million b/d planned. Sixty percent of production goes to the US, and of this amount about 640,000 b/d are refined in the US by company affiliates. q.v.


Who Should Be Blamed for the Midwestern Price Spike?

According to a new study, neither the EPA's attempt to introduce Phase II reformulated gasoline, nor OPEC, was to blame for the intensity of the spike that affected the Chicago area last summer. The problem seems to have been caused by industry inventory balancing operations. q.v.


And Then There Were Four

The most recent round of sisterly cannibalism presumably ends with Chevron's purchase of Texaco.  While ever-larger majors may command higher earnings multiples from the stock markets, it's not clear that they represent a stronger oil sector.  Pete understands the difficulty of being a major in a world of $10 oil, but imagines even he could run one with $35 oil.  Pete also assumes the ever accommodating anti-trust division will continue to avert its gaze.  After all, it didn't notice that Exxon had swallowed Mobil, or BP, Amoco, so there's no reason to suppose it will shed any tears over Texaco.  Read EIA's analysis (by Neal Davis) of the situation. q.v.


The Majors Aren't That Major Anymore

Big Oil has a special sinister magic in the US imagination.  Al Gore runs against 'em, Dubya's said to be their friend. The cold truth is that while the US-based majors make a lot of money, and are astonishingly efficient compared to some of their rivals, they are not that big a deal in the total scheme of world oil production.   EIA has published an interesting series of figures that show the story. qv1 qv2 qv3 (Note that the FRS is the Financial Reporting System in which the US-based majors participate.   It permits the government to monitor revenues and profits at the business segment level.)


BP Elaborates on Alaskan Gas Strategy

BP is already the largest US producer of natural gas and has bet its future on being able to deliver much more, mostly from recently acquired holdings in Alaska.   Read the speech where D. Olver, BP's head of E&P, explains how it will be done. q.v. You can just see the newly green and flowery firm's PR types wanting to call it renewable, but they stuck with the title, Renewed Energy For Alaska, which is about as close as BP is ever going to get to being green.


OPEC Update

EIA has published another quick guide to OPEC, showing latest quotas, production, and production capacity. q.v.


Anti-Iraq Sanctions Policy Continues to Unravel

Fewer and fewer countries are willing to play along with the UN's sanctions against Iraq.  The most recent refusal comes from the Gulf Cooperation Council, the countries most immediately threatened by the prospect of Iraqi aggression. q.v.


Spiriting It Out of the Formerly Evil Empire

No one can fault the US's Caspian policy for lack of boldness.  Put succinctly, that policy is to take the spoils of the cold war -- the oil in the former components of the Soviet Union that are now broke but independent -- and get it to market without having it transit Russia. q.v. Leaving aside the chutzpah, the trouble with the policy has been that progress has been painfully slow or nonexistent.  Pipelines that should have been well on their way to completion aren't even financed yet.  No matter.  Architects of the strategy, such as US ambassador for Caspian energy policy John Wolf, have now decided how to move the biggest prize of all, the at least two mighty pools of oil found along the northern border of the Caspian in Kazakhstan.  They'll just tack on an underwater pipeline across the Caspian and take it to Ceyhan,Turkey from Baku in Azerbaijan.  It's certainly thinking big.  But does it make sense?  Kazakhstan was already well integrated into the Russian pipeline system.  Iran, the other state bordering the Caspian, also offers pipeline opportunities to the Persian Gulf.  By ignoring/slighting Russia and Iran, the US is forced to accept considerably more delay in getting the oil to market, angering two important potential allies, and probably undercutting efforts to stabilize a particularly volatile region of the world.  Perhaps the new administration will see fit to revisit this one.


Sending the Alaskan Gas Cap South

It has been agreed by the principals, following BP's purchase of Arco, that Exxon, BP, and Phillips each own a third of the Prudoe Bay gas cap.  The reserves in question are enormous -- more than 35 tcf -- but, even though known about since 1970, they have been kept off the books as their was no economic way to get the gas to market.   Now the trio have announced apparent agreement that it is time to start bringing the gas south. q.v.  No doubt recent record prices helped in the decision.  High prices will be needed to cover the $10 billion cost of a 1,200 mile pipeline, in part transiting Canada.   Possible completion date: 2007.  This could be a large part of the missing quads Pete has been trying to find.


Saudi Production Capacity

In a fairly wide-ranging interview in Platt's, Saudi oil minister Ali Naimi said the kingdom could produce a further 2 million b/d from current levels without having to install additonal production facilities.  And in the event they were required to bring on production from new fields, they could add a further half million b/d within 18 months.


The Relative Real Price of Oil

It is common these days to run into the argument that the current oil and gas price level is not that high because a time series that discounts from nominal to real prices will show that prices in the late 70s were much higher.  But these arguments, while literally correct depending on which deflator is used, can be misleading because so many of the relative indicators of the price level have changed so much.  In 1980 the price of gold was more than three times the current price, so measured as a percent of the price of gold, current oil prices are high indeed, especially after years of fighting inflation instead of promoting it.  Here is a quote, written just after oil prices first achieved unprecedented highs, to give you perspective when thinking about the real oil price and the prospects for inflation:

          At the time of the first OPEC price increase, in 1973, the United States had tangible capital assets with a value of about $3.5 trillion -- more than two and a half times that years gross national product and more than fifteen that year's very high level of expenditure for new physical assets.  These capital goods ... had all been built, designed and located on the assumption that, regardless of overall price inflation, a barrel of oil would be worth one or two bushels of wheat, or one hundredth of a ton of steel, or less than half an hour of skilled labor.  However, a barrel of oil today is worth eight or nine bushels of wheat, one fifteenth of a ton of steel, and more than two hours of skilled labor.   These changes have made it uneconomical to operate much of 1973's physical plant the way it was intended to be, or, in some cases, to operate it at all; much capital and labor goes unemployed or malemployed.  OPEC's price increase is thus a principal explanation for the high levels of unemployment that we have experienced since 1973.   And unemployment leads to more inflation.  Government policy becomes more expansive to combat unemployment, and succeeds, in part, by inflating the prices of everything else, so that the 1,000% increase in the dollar price of oil becomes "only" a 500% increase relative to the price of steel or labor.  Another inflationary impulse comes from the interruption of productivity growth caused by sudden shifts in the relative price of oil....  When the anticipated increases in output per worker do not materialize, employers can maintain profitability only by increasing prices.

Robert Zevin, "A Plan for Controlling Inflation"  1981.   (Then Senior VP, US Trust Co. of Boston)


OPEC's Situation

The Middle East Economic Survey has published an interesting analysis of OPEC's current situation. q.v. Of course, Pete's a soft touch for anything that explains the inventory problem with reference to backwardating toward contango.


US Oil and Gas Reserves Increase

Read the advance from EIA. q.v. It wasn't that anyone found any more oil or did more drilling, it was just that better prices made more areas economic to produce.


China's Imports of Crude Nearly Double

According to China Online, Chinese imports of petroleum nearly doubled in the first half over year earlier levels. q.v. Oil exports also fell 11.7%, suggesting that internal demand is growing particularly rapidly.  The cost of imports was 90% above year earlier levels. The Great Thirst continues ... q.v.


Britain and BP in the First Oil Crisis

BP, formerly British Petroleum, now owns a huge share of American energy assets.   The relationship between the company and its former major shareholder, the UK government, has often been close indeed.  A new official BP history apparently details how the company abandoned commercial neutrality and obligations under the special international regime that waived anti-trust laws so to permit the majors to redistribute available supplies prorata during the 1973/4 oil embargo, in favor of special preference for extra supplies being sent quietly to the UK. The revelations were published by Britain's Daily Telegraph. q.v.


China May Opt for a Strategic Oil Reserve

Rising oil prices and inadequate refinery storage are two reasons prompting Chinese officials to consider implementing a full-fledged petroleum reserve. q.v.


Japan Looks to Iran For More Future Petroleum

After twice being dissed and cutoff by the Saudis, Japan appears to be preparing for an overture to Iran, despite the US Iran-Libya Sanctions Act.  Read the story from the Financial Times. q.v.


Current Account Continues to Fall

The US current account continued to drop even farther into uncharted territory. q.v.   A major source of the problem continues to be petroleum imports.  No nation on earth has ever owed this much to the rest of the world in absolute terms and been allowed to keep playing.  Perhaps none of the mice can afford to bell the cat.  The Congressional Budget Office has prepared an interesting analysis of the causes of the imbalance. q.v.


Even more old stuff

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