Wednesday, December 17, 2008

Higher Energy Prices, Dr. Chu?

As I've indicated in previous posts, energy prices may well drop further in the short term. The drop of almost 8% in oil prices after the announcement of substantial OPEC production cuts is testament to the downward bias of the market, worries about the economy and the ineffectiveness of the cartel. Even so, as I've also noted previously, I believe prices in the longer term will be somewhat higher, in the $50-75 range.

None of the several developments over the past few days in the energy world change that. However, one event stands out as far and away the most influential in driving the future of energy...the nomination of Dr. Steven Chu as the Energy Secretary. This development will change the energy future in significant ways, of which you should be aware.

Dr. Chu marks a departure from the old ways. Previous appointments have been from the more traditional hydrocarbon side of the energy world. Dr. Chu is from the alternative energy side, and he has made clear very strong beliefs which could redirect and clarify the direction of energy in the US for the next several years. Further, it is pretty clear his agenda is supported by Obama and the Congress. I believe his new direction will have support from the general public as well, at least until the bills come due. As a result, I believe he will be successful in implementing many of his concepts. So, let's take a look at some of his beliefs, and then explore the likely results:
  • He has stated repeatedly that coal is his biggest nightmare.
  • He has voiced support for a cap and trade system.
  • He has advocated promoting conservation by imposing motor fuel taxes similar to those in Europe, raising gasoline prices to levels similar to Europe (and most other developed countries).
  • His career has focused on alternative fuel sources, particularly cellulosic ethanol.
  • He believes strongly in improved efficiency and conservation as the way forward.

Given the assumption that many of these concepts will be implemented, what are the impacts? Let's start with coal. Coal is used to produce about half of the electricity in the US. Under a cap and trade system, coal will be under a signficant disadvantage. While in time other alternatives will replace coal, this process will take several years. As a result, the only way to utilize coal would be with carbon sequestration. My analysis (explained in a previous post) is that sequestration would approximately double the cost of power generation using coal. So, it is reasonable to assume a 50% increase in electricity cost over the next few years based on this factor alone.

The story for motor fuels is similar. Raising motor fuel taxes to levels similar to the rest of the world would increase gasoline cost to about $5 per gallon. Again, in this scenario, alternatives would begin to replace gasoline, but this process would take several years to replace a significant portion of the gasoline and diesel now being used. In the mean time, transportation cost increases would be on the order of 100-200%. Biofuels obviously are one alternative, but for the foreseeable future, they will be substantially more costly than current prices. Electricity is an alternative, but battery technology is still a problem, and increased electricity use would exacerbate the electricity issue mentioned above. Hydrogen? For the foreseeable future, it is generated only by using electricity or hydrocarbons.

On the positive side, these measures, if maintained over the long term, are likely to result in improvements in alternatives that most Americans would say they want. power, wind power, biofuels.

On the down side, it will result in several years of higher personal, as well as, business costs. The economy will be weakened relative to the rest of the world. More jobs will leave for lower cost locations.

The worst, and most likely result, is that a lot of money gets wasted before everyone realizes this will be more onerous than they thought and the whole thing comes down like a house of cards.

For the record, I too believe efficiency and conservation are a key to our energy future. But I believe this process will happen most effectively automatically, as a result of normal supply and demand. Imposing artificial factors such as cap and trade and significant new taxes to speed up the process just make it more inefficient and ultimately results in wasted resources and a reduced standard of living.

So, there you have my projection of the future. Debate. Resist. Promote. But, whatever you do, be ready. See previous posts for ideas.

Friday, November 21, 2008

Energy Markets Explained

Yesterday, the price of oil hit the low end of the price range I’ve predicted would likely be the envelope for long term energy prices. That range, predicted about a year ago, was
$50-75 per barrel, in constant dollars, and yesterday oil closed at about $50. Consequently, perhaps it makes sense to review where we’ve been, where we are headed and what to do about it.

Let’s deal with the most obvious question first-since we are at the bottom of the range, does this mean we should expect a bounce soon? Not necessarily. The events of this past summer illustrate the possibility (likelihood?) that, in the short term, prices can move well outside the long term range. In July, prices spiked about 100% above the top of my projected range. It is quite possible that prices will now oscillate below the bottom of the range by a similar magnitude. I don’t think $25-30 is outside the realm of possibility, although I wouldn’t expect those prices to last long. The point here is that short term pricing can vary widely without affecting the long term trend. In fact, this wild gyration is more typical than exceptional in the history of energy prices.

But, why is this true? Energy prices, like pretty much everything else, are controlled by supply and demand. When prices go up, both conventional and unconventional supplies increase, while demand decreases. High prices promote drilling. They promote development of alternatives. At the same time, they lead to investments in conservation methods such as more fuel efficient cars, homes and factories. And, over time, they lead to attitude adjustments which result in behavioral changes. In severe cases that even leads to recession. An analysis of the viability and break even point of dozens of such factors is what led me to the $50-75 projection.

However, in the short term, both supply and demand in the energy field are very inelastic. Major energy projects typically take 5-10 years to develop. Development timelines for alternatives is long. If you own an inefficient car, it makes little sense to junk it, far short of its expected 10 year life, for a more efficient one. And, it may take ridiculously high prices to quickly change the mentality leading to conservation. Meanwhile, the commodities market, in the short term, may tend to significantly increase price swings-when an investor sees prices moving dramatically up, many will attempt to profit from the trend by buying the commodity, thereby increasing the price. All the same logic applies on the down side. The result is very high volatility in the short term, but relatively straightforward predictions for the longer term.

So, are low energy prices good or bad? Yes…good or bad depending on how you see them. Lower prices, over the long term, are certainly good for the American economy, and for those who consume more energy than they produce. The high prices of last summer removed several hundred billion dollars from our economy, acting as a giant tax which dwarfed any government tax rebates. And the damage did not stop there. Efforts to increase energy production caused inflation in other commodities such as steel, copper, and corn directly. These caused even more generalized inflation. This money didn’t just disappear, of course. It went to OPEC nations and other oil producers such as Russia. There, the greatly reduced revenue could lead to big problems, which could spill over into international events.

Even in the U.S., dropping energy prices can cause temporary problems and disruptions. As oil prices drop, a range of other products decrease in price. Deflation can begin to take hold, leading to a slowdown in the economy. No one wants to buy something today that they expect to be able to buy cheaper tomorrow. As sales slow, profits are reduced. As profits are reduced, stocks fall. Over time, though, this will work its way through the system and result in a better economy.

But, what about alternative energy and conservation investments…do they no longer make sense? Obviously, in general, lower energy prices mean reduced alternative energy and conservation viability, but keep in mind that the high prices of last summer never got built into most energy investments. And a short term drop in prices won’t either. Because of the long term nature of most energy investments, only a perception that either high or low prices are here to stay have a significant effect on these investments.

Incidentally, remember the grilling of big oil executives just a few months ago because they weren’t investing madly to increase production justified by the outrageous prices? At this point, they look a bit brighter than they did then. Then, as now, their investment decisions reflected oil at or below the current price. Perhaps some have learned to resist the urge to invest based on short term price trends, leading to a more stable industry. Meanwhile, the hoarded cash will keep them from having to line up with the rest of the world for a handout. A few smaller companies that looked brilliant at the time, borrowing and investing billions based on the sky high prices, are now in big trouble.

And, what about the investments around the house I’m always talking about? Compact fluorescents? Added insulation? Caulking and better weather stripping? The programmable thermostat? The solar hot water or space heater? The ground source heat pump? Keep investing! Over the lifetime of these investments, the supply/demand curve will continue to, on average, price energy such that these investments are very attractive. Making those investments will be good for both your personal bottom line and the country, not to mention the environment.

Monday, September 15, 2008

Energy Markets in Chaos?

Anyone who follows this blog should not be terribly surprised by the recent fall in the energy markets. After all, I've been writing for quite some time that oil prices (in 2007 dollars) should be in the $50-75 range in the long haul. And, despite the wild ride in the short term, I believe the logic still applies. That is, that investment in alternative sources, efficiency improvements and conservation become attractive in this price range and therefore will result in actions that control long term prices.

I will have to admit that I underestimated the short term impact of factors like leverage, speculation and the herd instinct. But, unlike many others, I don't begrudge the effect of these factors. Ultimately, they have little effect on long term trends, but tend to bring about needed adjustments more quickly. Energy markets are much more balanced today as a result of the speculative prices of a few months ago. And, don't be surprised if prices tend to overshoot on the down side in the near future.

In fact, some markets may already be seeing this effect. The investors who bid oil up to $147 are now unwinding their positions, or even shorting oil. And some investments already seem to reflect much lower oil prices.

Take BP ADRs. One year ago, BP stock was at $70, while oil prices were $80/bbl. Today, BP stock is at $54, despite much higher oil prices. Two years ago, BP was at $67, while oil was at $65. In fact, you have to go all the way back to 2004, when oil prices were below $50 to find BP stock below the current price. (Full disclosure: I own BP stock and have recently been buying more). I suspect speculation and the herd instinct are now driving prices down below what can be expected for the long term. There seems, in fact, to be a double effect. Everyone expects oil prices to drop, and they are selling oil stocks based on that expectation. But, in fact, the stock prices never represented even current oil prices, let alone the peak oil prices seen a few months ago.

Just to balance things out, my son says I shouldn't be buying oil stocks, since it is clear prices are headed down. And, I'll admit that BP has had more than their share of screwups in their operation. Maybe it does make more sense to keep investing in energy conservation and efficiency around your house, which offer an almost certain return. Unless you have a house already well insulated, adding some insulation will be a more solid investment, while insulating you from worrying about energy prices as well as heat and cold. And, for other ideas on conservation, you may want to look back through my archives, or at the Energy Boomer link to the right.

Whatever you do, the oil markets make for some interesting thinking these days.

Monday, September 01, 2008

Energy in your Attic

As those who read this column regularly know, I have a bit of an obsession with attics, and with the energy available in our attics. So it will be no surprise that, while here at the farm in central Texas, I’ve been doing some investigation above the ceiling.

Previously, of course, I build a solar heat collector in the conventional way-an insulated box with clear polycarbonate sheeting on top. The collector did a credible job as a solar heat collector, generating temperatures inside the box over 80 degrees F above ambient. Though I wasn’t able to generate the desiccant or absorbent cooling I was hoping for, and didn’t get around to quantifying the amount of energy gathered, it is clear that given enough area and storage volume and no worries about aesthetics, it was practical to supply essentially all the heat required by a typical house very cost effectively with this type device. And I’m still convinced it could generate most of the cooling required as well.

But, what if you could generate these benefits in your attic? Without the clear sheeting? Without the additional box/framing? Without the aesthetic issues? Obviously, without the clear sheeting you would collect less of the energy hitting the surface and collect heat at lower temperatures, but might you be able to improve economics and aesthetics by reducing cost and making the collector invisible from outside the attic?

The first step to finding out was to take some temperature measurements. Obviously, the best attics are built with good ventilation. This preserves the integrity of the insulation and minimizes heat transfer into the house, reducing your utility bills. But, it also reduces the temperature in the attic. So, to effectively collect heat from the attic, especially in winter, you would need to insulate below the roof decking and collect heat from the space in between.

To get a feel for whether the temperature would be high enough to make collection worthwhile, I stuck a small patch of fiberglass insulation under the roof decking and inserted a thermometer in the space between. On clear days, the temperature measured was about 150-160 degrees F, or about 50-60 degrees above ambient. Even on partly to mostly cloudy days, the temperatures were about 40-50 degrees above ambient.

This means that it is quite possible to obtain all the heat needed for hot water heating during the summer. And, south of the Mason-Dixon, where high temperatures in the winter average around 60 degrees, it is possible to collect the heat needed for space heat, and much of what is needed for water heating.

Of course, possible is far different from practical. It remains to be seen how much this type collector would cost, and the amount of heat which would be generated from each square foot of collection area. The answers to these questions will have to wait, as I’m moving on to new adventures, but with collector costs a fraction of those for conventional collectors, it seems a good bet that this could be practical as well.

Tuesday, August 05, 2008

Carbon Sequestration

I was asked recently to give a rundown on the viability of carbon sequestration. This is a fancy term for separation and storage of carbon, generally in the form of carbon dioxide. Carbon dioxide is the result of burning nearly any kind of hydrocarbon, and is widely cited as a greenhouse gas which would contribute to global warming when released into the atmosphere. There is considerable uncertainty and disagreement on the issue, but let’s put that aside for now.

This issue is particularly pertinent at this time in history. If you believe, as I do, that peak oil is close, then carbon dioxide related to oil will naturally decline. However, unless we are to take a big cut in our standard of living driven by even higher energy costs, this energy source will need to be replaced. While natural gas, nuclear energy or renewables such as solar or wind are relatively low carbon, the cheapest, easiest and most capable current replacement for oil is coal. Coal could easily play a major role in replacing oil, but it has the highest carbon content of any fuel. For coal to play this part we must either be willing to accept higher carbon dioxide emissions into the atmosphere or store the carbon dioxide created by use of coal. Let’s be clear…while many pollutants from coal can be cleaned up, production of carbon dioxide is inevitable in the use of coal. I frequently hear the term “clean coal technology” thrown around, but if carbon is considered, only sequestration can result in clean use of coal.

Carbon dioxide can be stored in one of three places:
In vegetation
In/under water
In/under earth

At first glance, the idea that we can store enough carbon dioxide to make a difference seems ridiculous. After all, carbon dioxide is a gas, and humans pump about 25 billion metric tons annually into the atmosphere, and that number increases each year. And, a ton of carbon in the form of carbon dioxide at atmospheric temperature and pressure occupies hundreds of times the volume of a ton of carbon in the form of say, oil or coal.

On review, though, the idea may not be as absurd as it first seems. After all, the carbon entering the atmosphere today is essentially being taken out of storage in one of the three locations listed above and put into storage in the atmosphere. Carbon is an element, so that essentially means that no new carbon is created…it is just moved about and changed in form. All the carbon we now have has always existed, and been stored somewhere. So, let’s talk briefly about storage in each of the three locations listed above and see where it leads.

Storage in vegetation. Plants, as they grow, breathe carbon dioxide and use it, along with other elements and compounds, to build their structure. Essentially, carbon dioxide is removed from the atmosphere and stored in the plant and oxygen and water are returned to the atmosphere. This sequence naturally occurs, and it is one of the processes than nature uses to keep things in balance. Unfortunately, this process is generally short lived. When the plant dies, it immediately begins to decompose, returning the carbon dioxide to the atmosphere. Generally, only trees have a reasonably longer term effect, since they store the carbon in wood, which may last for several hundred years. But, even with trees, a significant portion may be returned by decomposing leaves, or by forest fires and general disease and decomposition of the wood. And generally, arable land is largely balanced between forests and food production of one type or another. So, substantially increasing forest land would detract from land available for food production. As a result, a significant boost to carbon storage by this method is unlikely. Even so, many firms which sell carbon offsets purport to do it by planting trees. A better choice would be to plant trees in your yard, where you not only put carbon in storage, but decrease your cooling load-keeping some carbon in storage in the form of hydrocarbons, and in the process saving some money on utilities.

Storage in/under water. Water in contact with carbon dioxide in the atmosphere naturally absorbs some of the carbon dioxide, maintaining a state of equilibrium. As carbon dioxide increases in the atmosphere, more of it will automatically be absorbed in water to maintain the equilibrium. Again, this is one of the ways nature maintains its balance. Unfortunately, as carbon dioxide increases in the water, it makes the water more acidic, effecting reefs, crustaceans and other aquatic life adversely. Also, as temperature increases, the water has less ability to absorb carbon dioxide, so increasing temperatures will have the effect of forcing carbon dioxide from water into the atmosphere. In fact, this is one of the possible explanations for rises of carbon dioxide in the atmosphere after the earth warms, as is usually observed in past warming trends. Besides these complications, we have little ability to affect this natural process in a way that increases carbon storage in the sea.

However, there is one possibility that had been suggested for dramatically increasing carbon dioxide storage under the sea. When carbon dioxide is compressed to pressures higher than those below 5000 feet of seawater, or about 2000 pounds per square inch (psi), it becomes heavier than seawater. The theory goes that, if carbon dioxide is compressed to over 2000 psi and injected into the ocean below 5000 feet, it will pool at the bottom of the ocean and remain there permanently. Unfortunately, the theory is largely unproven and the cost would be high. With such a scheme, the probability of unknown, unintended negative consequences could be high.

Storage in/under earth. Again, some storage of carbon in the earth is a naturally occurring process. As vegetation dies, it gets worked into the top few inches of soil. This increases fertility of the soil and, in the process, stores carbon in the earth. But, again, this process is relatively short term and difficult to change in a large scale way.

However, storage of carbon dioxide under the earth in reservoirs and traps is possible. Generally the hydrocarbons which are burned to produce the carbon dioxide have come from these traps. In effect, we would be returning the carbon to the location from which it came. And, it turns out, this has been done enough to gain considerable expertise in the process because it has substantial benefits. Commercially produced carbon dioxide has been purchased and injected into oil reservoirs because it very effectively sweeps oil toward producing wells, increasing oil production from the reservoir. It also has been used to replace natural gas from coal beds.

As a result, this method of storing carbon dioxide is relatively well proven. In fact, this is usually the method assumed when carbon sequestration is discussed. But is it economically viable enough to make coal a reasonable low carbon alternative energy source? The bad news is that it is expensive. The exact numbers vary widely depending on the pressure and permeability of the reservoir, distances between the source and sequestration sites, etc. But, my rough look at reasonable averages results in costs of about $25-30 per metric ton for sequestration of carbon dioxide. And, since carbon is only about one quarter of the mass of carbon dioxide (carbon has a molecular weight of 12, while carbon dioxide has a molecular weight of 44), the cost for sequestering the carbon from one ton of coal is on the order of $100, approximately equal to the current cost of coal. That means that carbon sequestration would approximately double the cost of coal. Worse, most of the cost of sequestration is energy cost for compressing and transporting the carbon dioxide, meaning about twice as much coal would need to be used to generate the same net energy with sequestration as would be required without it. Even so, since coal costs only about 25% as much per unit of energy as oil, coal including sequestration would still cost about half as much as oil.

Keep in mind, these numbers are very rough, but I believe they give a reasonably useful first estimate on which to judge the viability of coal and carbon sequestration. So, is carbon sequestration viable? That depends on how you look at it. It appears it probably is a viable alternative for the short term if oil must be replaced and carbon dioxide emissions must be lowered. But, it would substantially increase the current costs of energy from coal. Arguably, conservation is probably a better alternative for the short term. Substantial conservation is more viable economically, would be better for the general health of the economy, and results in the same net effect in the short term. And, over the longer term, I’m convinced low carbon alternatives such as wind, solar, nuclear or perhaps another, as yet unknown, source will be the way of the future, eventually making carbon sequestration a version of the buggy whip.script src="" type="text/javascript">

Wednesday, April 09, 2008

Solar Heat Underutilized and Underappreciated

A few weeks ago, events transpired which again brought to light the potential of solar heat. This potential is often overlooked, underutilized and underappreciated.

The events began with myself checking the thermostat in my little rental cottage in North Carolina. It read 56 degrees F, the point where my typical strategy of adding a sweater or vest in cold weather begins to reach its limits. After all, I believe the overnight temperature was in the 30's and I'd noticed that the cottage had a minimum of insulation. But, before I could convince myselt to turn on the heat and start the string of events that leads to higher utility bills and increased carbon dioxide in the air, I noticed the sun was shining outside and looked quite pleasant.

I decided to check out the lawn rather than turning the heat on. Sure enough the sun was shining brightly and with a little activity, I was quite comfortable. Then, I had a need to jump in my car, where the temperature was uncomfortably warm.

That turned me to thinking about solar collectors and then the attic.... I wondered what this sunshine was doing in the attic. I grabbed my trusty thermometer and made a visit. Sure enough, the temperature near the peak of the attic was 95 degrees.

Think about it...Here I was, about to turn up the heat, when it was 95 degrees just 4 feet from my ceiling! There has got to be a way to harness the heat in the attic and take advantage of the free solar heat so close by. For those who have followed my blog, you'll know I have lots of ideas. Unfortunately, they'll have to wait until I have a place of my own. Then, let the fun begin!!!

Tuesday, April 01, 2008

Dynamics of the Energy Market Force an International Perspective

Oil prices continue to fluctuate wildly around the $100/bbl mark, but an interesting dynamic has developed. Prices no longer revolve simply around the supply/demand curves. The falling dollar has largely turned oil pricing into a function of the dollar.

Oil has become a hedge against the falling dollar. And, the weak dollar means that prices for oil in most economies around the world have seen significantly smaller increases than a simple quote in dollars would suggest.

Of course, the law of supply/demand has not been repealed, it has just been complicated by economic conditions. Demand is up, not because of usage, but as a result of the hedge. And, in many other countries, the offset of currency fluctuations has reduced the effective price, and thereby increased the demand.

All the above will make oil prices even less predictable and more volatile. Recently the hedge demand has driven big increases in price, but a reversal of this demand could cause a big drop. And so, enter the effect of the Fed into the oil market. The news today is increased control of banks by the Fed, but their effect on the oil market could dwarf their banking responsibility.

Wednesday, February 06, 2008

Energy May have Turned the Corner at $100 Per Bbl

There is fresh, new evidence that energy may have turned a corner within the past few months. As oil companies reported their 2007 results, and while the spotlight was on record profits, other, more interesting, results were below the surface.

First, many reported production increases on a year-on-year basis for the first time in a few years. It seems as if oil has been hovering close to $100/bbl forever, but in reality, only a year ago prices were closer to $50, and the average price for 2007 was about $70. As a consequence, these are the first results that reflect anything approaching the recent price.

Interestingly, many companies did not see record earnings, for the second year in a row, as a result of operating problems, rising costs and gasoline and natural gas prices that have not risen to match the price of oil. This is causing a somewhat ironic hunt for cost savings while admitting for the first time that somewhat higher prices are here to stay. The BP CEO is quoted as saying prices above $60/bbl are probably here to stay, in contrast to previous forecasts of much lower prices, which led to more conservativism in investments. Meanwhile, facilities are stretched to the limit as a result of decisions made in an environment of much lower prices just a few years ago.

And, alternative energy investments have skyrocketed. Solar Photovoltaic IPOs have skyrocketed, and the price of the resulting new companies has skyrocketed as well. (I wouldn't touch them with a 10 foot pole at current valuations, but that is another story. It reflects the public perception that higher prices and global warming issues are here to stay, and there is money to be made in alternative energy.) Even the major energy companies are increasingly jumping into the fray. Many are investing heavily in both solar and wind. BP, for example, just announced another 150 MegaWatt wind plant in west Texas. And, they have a large and rapidly growing investment in the manufacture of solar cells. I'm even starting to see solar hot water and heat being mentioned more frequently.

Meanwhile, the higher prices seem to be beginning to have a significant effect on demand. The world economy is slowing and suddenly conservation is sexy (Not as sexy as alternative energy, but the more practical solutions never seem quite as exotic as the new and exciting.).

All this means to me that energy has turned the corner. Oil and gas are squeezing their last increases in production from the recently high prices. Research into alternatives is at a fever pitch. Alternative technologies are appearing regularly on the front pages. Money is flowing to every alternative with reasonable potential, and is beginning to have a significant impact.

These same high prices are beginning to damp demand. Small cars are in, big SUVs are out. Just yesterday a friend was touting the gas mileage of his new Cadillac crossover. Insulation and more efficient appliances and systems are in. Even the dream home is becoming a bit smaller.

Time will tell, and I'll admit I've thought we might have arrived here before. But now, the signs are becoming clearer. Peak oil is near, and the world has accepted it, starting the path toward a post peak-oil future.