Thursday, March 01, 2007

How much will energy cost?

This topic is very hot right now. It invariably is, when prices have made spectacular up moves, as they have in the past year or two. Most bloggers and the man on the street seem to assume that prices will continue to go spectacularly up. The stock market seems to say otherwise, with energy stocks priced for $40/bbl oil. And, the topic is a bit dangerous, since the short term peaks and valleys associated with oil prices seem to be outside even the experts ability to predict. For discussion about why this happens, see a previous post.

Even so, I believe long term trends have a logic to them which seem to escape the notice of most. Let me be bold and make my projection clear right up front. Barring some short term variability and/or geopolitical events, the long term price of oil will trade in a range of $50-75 per barrel, adjusted for inflation.

One one hand, this seems like a safe bet, since the price has been in this range for the past couple of years, but as I mentioned, this seems to be outside the range of what most would project. Let me explain my logic.

First, the demand side. As energy prices move to the upper end of this range, it begins to provoke actions which restrict demand. Folks begin to carpool a bit more, drive less. They start to think about downsizing their car when they trade, and begin demanding more efficient cars or trucks. They begin to take public transportation a bit more. They turn down (or up in the case of a/c) the thermostat. Energy efficiency becomes an issue with appliances and insulation. Investments in industrial plant efficiency improvements begins to ramp up. Compact flourescent lights take on a new chic. Low grade geothermal heat and a/c become attractive.

Second, the supply side. Solar heat, a/c and wind energy become viable around $50/bbl and are very attractive at $70. Nuclear becomes very attractive in this range. Development of all sorts of energy sources and efficiency improvements begin attracting significant funding. There is a huge supply of coal which becomes attractive at these prices. Drilling smaller and more difficult oil and gas reservoirs suddenly takes off at $50+, and there is an enormous amount of these resources waiting for attractive economics. Ultra deepwater drilling and development becomes attractive, with unknown, but likely large amounts of hydrocarbons to be discovered. And huge reserves of heavy oil and oil sands and oil shale become economic at $50/bbl, wildly so at $75. The known reserves of these resources are huge. Those known in North America dwarf the oil reserves of Saudi Arabia today.

The result is that, outside of short term peaks and valleys, energy prices will remain for the foreseeable future inside the $50-75/bbl range, adjusted for inflation. Perhaps they would be pushed above the rate of inflation a bit by gradually increasing scarcity, but this will be offset by improvements in technology. Notice, no mention of conspiracy by energy companies, auto companies, OPEC, politicos, treaties. these forces may be able to establish some short term control, but in the long term they are powerless against the forces of market supply and demand.

So, what does this mean? It means secure energy sources, on average, at something close to current prices. It probably means increased diversity of supply and a relatively constant percentage of our budget going for energy. It likely means that energy companies are somewhat under priced.

There, I'm on the line with my opinion. Judging by what I hear and read, most will think I'm crazy. So, what's your opinion? Here's your chance to be heard.

Monday, February 26, 2007

Computer Control and Optimization

I see that one of my advertisers is AspenTech. This is an interesting development, since AspenTech is one of the companies I worked with at BP. In fact, if you dig deep enough into the white papers on their website you'll find reference to their working together with BP on developing and applying software for olefins processes. I was involved to some small extent with this work when I was at BP's Chocolate Bayou plant.

This is apparently in response to a casual mention in a previous post that computer control was one of the main tools for energy conservation, and the AspenTech work is an example of the cutting edge of this trend, and serves as a good example of the potential in this area.

Olefins, as with many industrial processes, has a large number of variables which effect the overall efficiency and economics of the process. In particular, several different feedstocks, varying heat input flux and temperatures and pressures at numerous points of the process, as well as heat and power sources work together in an almost infinite number of possibilities with dramatically different outcomes. The inability to handle optimization of all these variables manually can result in the plant running in a generic condition which may well be inefficient for the given conditions, and on feedstocks that are not optimal for today's price environment. By generating a computer model that simulates the process, it is possible to determine the optimal conditions and either manually or automatically control these conditions as required for best economics. By doing so, it is possible to input the optimum feedstocks and fuels based on real time prices and optimize the process for maximum yield for real time conditions. Doing so can result in millions of dollars in feedstock and fuel savings, as well as top quality products for a typical olefins plant.

The above is just one example of the potential of computer control and optimization. It is becoming more widely used in industrial processes, and has also been widely used in automobiles. A large part of the efficiency and performance gains in automobiles in the past 20 years has been a result of this computer control and optimization. With the low fuel costs prevailing for most of the past two decades, the optimization has been primarily on the performance side, but with the higher recent fuel prices I expect more focus on efficiency.

Obviously, viability of this type optimization is largely related to scale, but if fuel prices continue to move up the potential moves down the scale to smaller applications. Did you know your furnace would operate more efficiently with a variable, rather than an on/off control, or that your refrigerator would be more efficient with a power factor correction? That a significant part of the power consumption of your electronic equipment is consumed when you are not using it? That your air conditioner could operate considerably more efficiently if could detect and optimize both humidity and temperature, or that it would be more efficient with variable speeds rather that on/off controls? Come to think of it, why are you air conditioning rooms you are not occupying today? All these efficiencies could be captured with better controls. And, indeed they will when economics and the market demand it.