Michael Specter of the New Yorker, as he tends to do, files a brilliant article on a subject that you would think has been beaten to death: climate change and carbon footprints. It's a must read. (I still recommend his 2006 article on water scarcity to anyone remotely interested in development.)
Even though the article isn't just a fact barrage, there are some salient factoids worth pulling out:
Over the last few weeks, there's been a lot to digest in the oil world, particularly as presidential candidates traveled through cold New Hampshire with heating oil futures pushing $2.70 per gallon. And, of course, the infamous $100/barrel crude oil price.
The debate over the role of trading will not go away, particularly because it appears that a trader overpaid slightly to push the price into the triple digits and claim to be the first to buy $100 oil. With that in a mind, here are a few threads to think about.
While oil prices have fallen from their highs, the supply outlook in two key producers doesn't look so hot. Russia looks to stay roughly flat this year. And it appears that Mexico's production is unlikely to pick up to the say the least, as the state-run Pemex appears to be in dire straits. Pemex General Director Jesus Reyes Heroles says: "The situation of Petróleos Mexicanos is critical and merits immediate attention."
The upstream (getting it out of the ground) segment of the oil industry today is shaped by resource nationalism, high prices, and supply constraints. These three things together mean that oil rich countries want the latest in upstream oil technology but would rather not deal with the western oil majors. BusinessWeek has an excellent story on Schlumberger, a high-tech oil services firm that is thriving in this new environment.
Just to keep you on your toes, John Cassidy argues in Portfolio that the dynamics of supply and demand will push oil prices down to $50 within the next three years. That's not an extreme position, as I'm sure some would argue that a recession in the United States could make $60 a reality this year.
But if prices continue to stay in this general high-ish area, keep an eye on the budgets of developing countries with fuel subsidies. India is running up a huge subsidy bill already, and Indonesia and Malaysia feeling the pain as well.
On Tuesday, CNBC's popular stock-picker Jim Cramer discussed oil supply constraints at length, explaining why he likes ConocoPhillips because it's one of the few firms that really thinks oil prices are staying high and is investing accordingly. Most companies tend to evaluate projects for viability at around $40 per barrel of crude. That's mainly because the rise in oil prices has been moving higher than the supply-demand fundamentals suggest they should, which we have discussed recently (here and here). Cramer thinks ConocoPhillips is "ahead of the curve" and is well-positioned to take advantage of the current market.
In making his case, Cramer read a quote from a recent presentation by ConocoPhillips CEO Jim Mulva that I think is significant coming from an industry leader, given that is sounds a lot like a measured endorsement of peak-oil theory:
Talking a little bit about the supply challenge. This is a slide that's been prepared by International Energy Agency and it just shows if you take all of the oil production around the world today, say, 86 million barrels a day, the natural decline on average is about 8% a year.
"So, if we're going to stay with 86 million barrels a day, we've got to be out there adding 6 or 7 million just to stay flat. So the question is, where is that all going to come from when you see Saudi, Arabia saying they're going to go to 12 million to 12.5 million and maybe up to 15 million barrels a day? How is this going to happen? It's not so important just what I think or say, but I know we've been saying for the better part of nearly 12 months. Personally, I don't think we're going to see --- for three reasons, I don't think we're going to see the supply go over 100 million barrels a day. The reason for that is, where is it all going to come from?
"Second, it's going to be from a climate change greenhouse gas emission? I'm not so sure that the world, even if you could get up to those levels, would allow us it be done. So we have -- Demand maybe going up, but it's going to be constrained by supply."
The transcript of the presentation is unfortunately not available online, as it comes from the November 2007 Merrill Lynch Global Energy Conference.
An Indian official telling a New York Times reporter he'd like to see the trade in crude oil banned from the New York Mercantile Exchange is kind of extreme, but not surprising given the context.
One of the unique features of this period of high oil prices is that oil derivatives (basically contracts such as futures and options) are now being traded on a massive scale. Like never before, paper oil is changing hands, to the point where crude oil has become an asset class. You've got to have it in your portfolio the way you have to own gold, stocks, and bonds. Back in the 1970s, there was no IntercontinentalExchange (ICE) where oil was traded globally. Nor were there as many different ways for investors, such as exchange-traded funds, to play crude. Around 85 million barrels were actually consumed in the world Wednesday. But on the same day, over 600 million barrels worth of crude futures were traded via ICE (adding up the contracts for two kinds of crude traded, West Texas Intermediate and Brent).
With so many factors affecting prices—not least the fact that oil is a commodity denominated in the declining dollar—there's a big debate among energy analysts about whether and to what extent all this trading is responsible for the high prices we've been seeing. Many people in developing country behemoths such as China and India certainly think it is. On a recent visit to China, I met with several energy analysts and policymakers who perceived the massive trading volumes as distorting prices upward. Same in India. They look at the supply and demand fundamentals and don't believe that they justify nearly $100 per barrel.
Most market analysts would probably concede that at least some of the upward pressure is due to derivatives trading. What really captured this were comments Wednesday by Addison Armstrong, a leading energy-market watcher. He said that although he thinks oil should be around $60 on the supply-demand fundamentals, he thinks it's going to $109 before it cools off. Why $109? Because it's a "technical level" (derived from market data) that would signals traders to sell. It'll be interesting to see if he's right.
The coal market isn't as sexy or as global as oil, so it often works outside the media spotlight. But when it comes to understanding how the U.S. energy-security-enviro challenge is shaping up, coal is an excellent place to look because, in America, coal is cheap, plentiful within the country, a huge provider of jobs and megawatts, and a tremendous source of greenhouse gases.
The global outlook for demand is strong, as Asia's appetite for electricity grows. This year, China became a net importer of coal. As for the United States, part of its energy challenge is improving security of supply — reducing dependence on the understandably dreaded "foreign oil." Making liquid fuels using our own American coal sounds appealing. And perhaps no consumer is more interested in coal-to-liquid (CTL a.k.a. "Fischer-Tropsch") than the U.S. military, which has huge transportation fuel needs and few alternatives to oil (it's kind of hard to build a jet that runs on electricity).
For the coal industry, getting access to the American gas tank would be a tremendous boost, giving it a whole new market outside of power generation and heavy industries like steel. The WSJ filed a must-read report last week, "Coal Industry Hopes Pentagon Will Kindle a Market," that really gets at the key issues. CTL is a huge emitter of carbon dioxide, and the process uses between 5 to 7 gallons of water for every gallon of fuel it produces. But those inconvenient facts aren't dissuading some folks:
The effort nevertheless has some backers at the Pentagon. The Air Force, which consumes the most fuel of the military services, supports using coal-to-liquids fuel. It recently certified the B-52 bomber to run on a blend of Fischer-Tropsch fuel and normal fuel. The Air Force plans to do the same for its entire fleet by 2011. The Air Force intends to buy about 400 million gallons annually by 2016. The service supports legislation that would allow it to sign 25 year contracts for supply, even at historically high prices above $50 per barrel, said William Anderson, assistant secretary of the Air Force for installations, environment and logistics.
"If the legislation helps spur on a market that is necessary, we believe, to ensure our long term national security, we believe it's something that has a lot of merit," Mr. Anderson said.
According to Jeff Goodell, the author of Big Coal, the rise of Wyoming coal is one of the key industry dynamics fueling the CTL push. At 18:05 minutes into this excellent June interview with NPR's Terry Gross, Goodell explains how Wyoming coal, in comparison to Appalachian coal, is easier to mine, makes less of an environmental impact, contains less sulfur, burns cleaner, and requires utilities to spend less on scrubbers at coal fired power plants (but it has a lower heat content, so you have to burn more of it). You can practically "dig [it] out with a spoon" in Wyoming, Goodell says.
In contrast, Appalachian coal has been mined for over a century, and because much of the easy-to-mine coal has been extracted, the coal remaining is in thinner seams and is more expensive to extract. So part of the push for CTL, Goodell says, comes from eastern coal states, for which CTL could be a huge boost. Sen. Byrd of West Virginia has likened American coal to "acres of diamonds under our feet." A large federal backing of CTL hasn't come yet, but keep your eye on it. China, like the U.S. Air Force, is in the process of building CTL capacity. And we know how much U.S. legislators like to keep up with China.
It never hurts to check up on what T. Boone Pickens is saying and doing. The Texas oilman, corporate raider, and philanthropist has serious cred, and it's unlikely that he's giving interviews in order to pump up his investments. His portfolio is well known, and, as he says, "There isn't anybody who can talk a commodity market up more than three or four minutes. The fundamentals will take over at some point."
In a recent interview with the Houston Business Journal, he reiterated his view that global oil production has already peaked:
PICKENS: I think you'll see $80 oil before the end of the year. There's no question in my mind that oil has peaked. If you've already peaked, you'll start to decline. Can you replace it? Probably not.
There's obviously a lot of disagreement on this, but Boone's position is worth noting. Moving on to electrical power generation, he voiced concern on natural gas:
Q: Here in Texas we're struggling with our long-term power-plant needs, trying to pick among coal or nuclear or natural gas. I guess you'd pick nuclear to fuel the Texas plants?
PICKENS: Yes. You've got to get nuclear in because you don't have the other fuel to supply it, unless it's coal. You're not going to have enough natural gas.
You would think that Texas would have access to plenty of natural gas, but Pickens's calculations must show that it won't be enough for a serious ramp-up of gas-fired power plants. Pickens, a stalwart Republican and big fundraiser for presidential contender Rudy Giuliani, has recently endeared himself to greens with plans to build the nation's largest wind farm near Amarillo in west Texas, a burgeoning center for wind energy.
Pickens summed up his emerging ethos to the WSJ recently:
I'm an environmentalist because caring for what we have is a reality that is going to be on page one a long time. We have got to pay for that, and I think we can do that without damaging our economy."
I think that's a sentiment that will resonate on both ends of the political spectrum.
With announcements of new energy technologies coming out constantly, it's sometimes difficult to figure out which ones are actually worth getting excited about.
A power-plant scrubber highlighted in Tuesday's Financial Times is a case in point. The Sugarland, TX-based WOW Energies has developed a device that reduces CO2 emissions in a big way, the company claims:
Daniel Stinger, Wow chairman and inventor of the technology, says standard scrubbers can remove 50-60 per cent of mercury from emissions, while third party testing has shown his technology removes 85 to 95 per cent of heavy metals pollutants, including mercury. In addition, its pilot projects demonstrated carbon dioxide reductions of up to 85 per cent - not even the original aim.
85 percent CO2 reduction? Wow (no pun intended). Although it hasn't been proven on a large scale, this is impressive. Oddly, the WOWClean results (pdf) have been out since December, yet we're only reading about it now. There has to be a catch. The FT reports that WOW energy hasn't found much interest from utilities:
In the six months since Wow began marketing the technology, [WOW's CFO Martin] Brau has found utility groups have little interest in spending money to reduce emissions unless forced by legislation, preferring instead to "chip away" at emissions as new requirements gradually come into effect."A lot of them simply don't want to know," says Mr Brau. "Unless they are forced to, they won't stop. They have a grandfathered right to pollute."
Could the catch be that WOWClean captures the CO2 so that it can be stored somewhere or sequestered underground (boring) rather than eliminate CO2 emissions through some chemical process (potentially very exciting)?
I emailed Brau to get clarification on this. Brau responded:
What we mean is that the CO2 is converted into a stable bicarbonate, such as baking powder, it is not sequestered as a liquid gas.
This is awesome ... but it's probably unwise to get too excited until more work is done to test the large-scale performance and viability of this technology. In energy, there's always a catch. But definitely keep an eye on this. Power plants account for 40 percent of CO2 emissions in the United States, so progress in this area is crucial to major emissions reductions.
It's no secret that ramping up (pdf) corn ethanol production has been rife with problems. The net energy gain from corn-based ethanol is pretty small at best—its corrosive impact on most pipelines usually requires you to truck it to market. And, of course, the use of corn for fuel has been driving up food and feed prices.
But I think it's best to think of corn as the beginning of the ethanol journey, not the destination. There is a furious R&D effort to develop enzymes—the bug or bugs—that can be used to break down cellulosic materials cheaply.
Now, Craig Venter, the man best known for his controversial for-profit contribution to the human genome mapping race, claims to be on the brink of producing a synthetic bug that can do just that, and more. BusinessWeek reported last week that Venter "believes he is within weeks or months of creating the world's first free-living artificial organism in his laboratory." His bug could potentially clean up dirty fossil fuels and help make ethanol.
In his typical down-to-earth fashion, Venter jokes that he's "going from the gene king to the oil king." It's unlikely, though, that any concrete application for his new bug will emerge for quite some time.
But this is about much more than any particular technology, or even the energy business as a whole. Some say Venter is out to become the "Bill Gates" of artificial life, which has huge ethical and legal implications. Arthur L. Caplan, director of the Center for Bioethics at the University of Pennsylvania, tells BusinessWeek that synthetic biologists may be "manipulating nature without knowing where they are going.... There are arrogant scientists, and our friend Venter may be one of them." Time will tell if Caplan's fears are vindicated.
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