First, let me wish all my loyal followers a very happy and healthy new year! So what exactly does 2014 have in store for us on the energy and environment front? Below is a list of things that I am watching, please comment and bring any topics of interest to my attention.
Keystone XL Pipeline – Just today the State Department announced in their report that the Keystone XL Pipeline would have a minimal impact on the environment. This report was greeted with calls for Obama to approve the project by Republicans and even some Democratic lawmakers much to the chagrin of environmentalists. Critics of the report said it did not pay enough attention to the harmful practice of extracting the oil from the tar sands in the first place. The proposed $7B project would carry 830,000 bpd of crude oil from the Western Canadian Sedimentary Basin and the Bakken Shale formation to Steele City, NE before moving on to refineries on the Gulf Coast. Issuance of this report now begins a 30-day comment period for the public and a 90-day comment period for government agencies, as well as puts the heat on President Obama to take action. As recently as June 2013 Obama stated, “Our national interest will be served only if this project does not significantly exacerbate the problem of carbon pollution. The net effects of the pipeline’s impact on our climate will be absolutely critical to determining whether this project is allowed to go forward.” Environmentalists have called approval of the pipeline “game over” for the planet.
California Drought – 9% of California is now in a state of “exceptional drought”. While this might not sound like news to anyone who has seen the images of the forest fires in the Bear Republic, this is an extremely concerning issue. In fact, “Thanks to the magic of science (and tree rings), we can now safely say that California hasn’t been this dry since around the time of Columbus, more than 500 years ago. What’s more, much of the state’s development over the last 150 years came during an abnormally wet era, which scientists say could come to a quick end with the help of human-induced climate change.” Lack of rain combined with abnormally low snowpack could leave much of the state virtually dry within 60 – 120 days. If you think this is just a left coast problem, think again – California is responsible for almost 12% of the country’s agriculture.
Emerging markets – If you have been watching the markets lately you have seen a dramatic reaction to perceived threats from emerging markets. I’ll make it quick: Fed removes the free money punchbowl from the party; possible slowdown in China; currency trouble from Brazil, Turkey, South Africa and Argentina. So what does this all mean? Stay tuned and I will keep you posted.
Plus we have Super Bowl XLVIII, the winter Olympics and the World Cup all coming up. What a great year this is going to be.
I read a quick article in Bloomberg Businessweek last week that detailed an unlikely alliance between tar sands producers and environmentalists to put a pollution tax on the dirty, heavy crude coming out of Alberta. Yes, that is correct. Tar sands producers are actually lobbying for a carbon tax or cap-and-trade system that would help to clean up their operations. In British Columbia, a province that enacted a carbon tax, families are paying an average annual premium of $376 and have reduced their per capita emissions 10%. The producer’s biggest fears are to be viewed as “too polluting” by other nations, resulting in no market for their exports. America’s opposition to the Keystone XL pipeline highlights this fear. Unless the tar sands can change their appearance, it seems that the world would be okay without the product. An oil industry spokesman even said that “If your country looks at Canada and says your energy exports are too carbon intensive, then it becomes and economic competitiveness issue.”
Standing in the way of this unlikely alliance and subsequent carbon pricing is the Prime Minister Stephen Harper. Harper has traditionally emphasized business and job creation over environmental issues and is responsible for pulling Canada out of the Kyoto Protocol, the only nation to do so. Failure to embrace cleaner regulations on the tar sands may soon become an environmental and economic problem for The Great White North.
The winds of change are blowing, and nations are figuring out how to monetize carbon. If Canada can enact sensible regulation that appeases both oil producers and environmentalists, then it can be a leader in the carbon markets. If it fights the winds of change, then it risks being left behind by the rest of the world. The simple answer is to put a price on carbon and use the proceeds to invest in clean technology developments.
If you have ever wondered how much energy is wasted in the United States, then look no further than this chart from the Lawrence Livermore National Laboratory. What your are looking at here shows how many Quads (Quadrillion BTU’s) of energy is produced from each source of energy . . . and how much is wasted through inefficient processes or simply lost as heat energy. In 2011 more than half (57%) of the energy produced was rejected. In terms of electricity generation, almost 2/3 of the potential energy is lost. Cogeneration plants achieve a much higher efficiency level than conventional coal or natural gas plants. In the transportation sector the efficiency ratio is even worse with only 25% of the energy produced actually being used. If there are any entrepreneurs out there, I see many opportunities for improvements here. In fact, I think this chart could show the next trillion dollar opportunity!
First, let me start off by saying Happy New Year to all the Greenbacker’s out there. I apologize for the wait in between posts but it has been a crazy couple of weeks. Anyway, a few months back BP published their annual BP Review of World Energy 2012. Below are some key charts created by Jeff Tollefson & Richard Monastersky and published in Nature.com.
This chart shows the largest energy users as well as the relative breakdown of their energy supply. Two spikes are clearly noticeable – the US and China. Notice that the US is reliant on coal, oil, and natural gas for a majority of its energy needs while China is heavily dependent on coal, with oil coming in second. The recent boom (no pun intended) of natural gas supply in the US has not only dropped the price of natural gas domestically, but also explains the price decrease of coal. Economics proves if the price of x falls, the price of a substitute of x will also fall in order to keep demand steady. In effect, the benefits of cleaner burning natural gas are offset by increased use of coal in other countries.
The above graph simply illustrates world energy use in million tons of oil equivalent. The final scenario shows what energy consumption would look like if we were to keep the 450ppm limit on carbon emissions.
This last graph shows several interesting figures – the most interesting in my opinion is that China alone accounts for 49% of global coal consumption. However, China’s rise these past three decades has been simply amazing. Already there are more than 170 cities in China with populations over a million. Fueling this rapid expansion will require significant increases in coal, oil, natural gas, and renewable energy. By leveraging the power of new technologies and global markets, renewable energy can compete with fossil fuels. Lets hope that renewable energy plays an even greater role in mankind’s future than current trends predict.
The International Energy Agency released their 2012 version of World Energy Outlook today and it featured some interesting highlights. Here are some of the points that peaked my interest:
In 2011, fossil fuel subsidies grew 30% to $523 billion while renewable energy received just $88 billion.
Fossil fuels according to the New Policies Scenario:
The US will become the largest oil producer by 2017, a net exporter of natural gas by 2020, and will be almost energy-self-sufficient (in net terms) by 2035.
Global oil demand increases by 7mb/d to 99mb/d in 2035 at which time price reach $125/ barrel (real terms) = (over $215/ barrel nominal terms).
The gas boom in North America will reverse the direction of the international oil trade, with almost 90% of Middle Eastern exports destined for Asia.
Natural gas demand increase by 50% in 2035, with most of the production coming from the US, Australia, and China.
By 2035 we can achieve efficiency savings equivalent to 20% of global demand in 2010.
By 2015 renewables become the world’s second-largest source of power generation, closing in on coal as the primary source by 2035.
In the Efficient World Scenario, greater efforts are placed on energy efficiency measures that would cut the global demand by half. Other benefits realized in this scenario include:
Global oil demand would peak by 2020 and be 13mb/d lower by 2035.
“The accrued resources would facilitate a gradual reorientation of the global economy, boosting cumulative economic output to 2035 by $18 trillion, with the biggest gains in India, China, the United States and Europe.”
This is all well and good, but there are a few things to note about the conclusions:
Energy sufficiency does not mean that we will be insulated from the price spikes on the global market.
Approximately 55% of America’s energy self-sufficiency is from increased production – the remaining 45% is from increased energy efficiency measures such as better gas mileage in cars and trucks, more efficient buildings, and smarter appliances.
Electricity prices in the US will be about half that of Europe as power plants switch to cheap natural gas. This will be a huge boom for the economy as heavy industry repopulate parts of the mid-west. However, in terms of climate change, increased use of natural gas will be offset by increased coal usage in the developing world.
Finally, and very sobering, the report concluded that the unless a global emissions agreement is implemented by 2017, the planet will not remain within the 2 degree Celsius range that most scientists agree is the upper safe limit on warming.
“Fortunately, we are not doomed to eternal punishment, as Prometheus was for stealing fire for humankind. Nor does the dwindling of the old fire of fossil fuels mean a return to the Dark Ages. Instead, we can create a safer, stronger, fossil-free world by tapping into a far greater resource than fossil hydrocarbons. The real underlying fuel of America and of modern civilization is innovation and ingenuity.”
Mrs. Greenbacks asked me an interesting question this morning, “Do you think the recent drop in gas prices has anything to do with the election this year?” The short answer is – No. It is probably a dream of every President to be able to control gas prices in an election year, but the simple truth is that they do not have that ability. The oil market is a worldwide phenomena driven by consumption, much of it coming from emerging economies. I explained some of the reasons in an earlier post – What goes up. The only thing POTUS can do to ease pain at the pump is to open the Strategic Petroleum Reserve, but even that wouldn’t make much difference. As of 6/8/12 the SPR had approximately 695 million bbls in the quiver – about 36.5 days worth at current usage rates. Even if President Obama ordered a full drawdown of the SPR we could only withdraw 4 mil bbls per day for up to 90 days when the rate would slow. However, tapping into the SPR to ease high gas prices defeats the purpose of the reserve in the first place. Energy efficient cars and smarter cities would have a much bigger impact on the price of gas. However, as less consumption forces the price of oil to go down, we must not fall into the trap where we increase usage again.
Few things effect international relations more than the balance of power. Whether it be water or oil, the first societies to harness the potential of these commodities enjoy the creation of wealth and goods such as cropland in the case of water and industry in the case of oil. Eventually each sector is going to grow and the demand for the input will outgrow the supply, leading to price hikes that make that commodity even more desired. Problems exist when the source of these commodities are located outside of that nations borders. The balance of power is then transferred from the first-mover user to the upstream producer of that commodity. This is where it gets interesting. The choice then becomes whether to use soft power (such as diplomacy, aid, or economic development) to gain influence over the producer or hard power (military action, sanctions) to force them to act. Only by reducing demand for the commodity in question can the consumer nation wrestle back control from the producer nation. This could include finding a substitute, developing new technology, or learning to use that resource more efficiently. In the case of water, there is no substitute. Downstream nations must learn to make the most out of every drop that they have. This includes studying what crops to plant domestically and supplementing others through trade. New technology such as desalination plants could also help secure access to clean water, but it will take an economic toll. In the case of oil, there are several substitutes such as biofuel, natural gas, and plug-in hybrid cars, but while we further explore these technologies, squeezing the most out of every drop seems to make the most financial sense.
“Mr. Greenbacks, Back in March you said oil prices are on the rise and we could see $5 gas by summer. What happened?”
Well, Europe happened. . . and China happened. So basically, fear has taken over. When I posted Pain at the Pump back in March, Europe was but an afterthought for the world’s markets. After years of worrying about Greece, people began to forget about it and concentrated more on the good news rather than the risks that lay ahead. Then all of a sudden Greece became a very real and imminent problem. Spain and Italy also contributed to this fear and finally it appeared that China was going to come in for a ‘Hard Landing’ – meaning that their rapid growth rates of >10% a year may not continue. China in fact has been the engine that has been driving most of the worlds consumption, whether it be oil from the Mid-East or Africa, iron ore from Brazil, or coal from Australia. So now fears of a new global turn-down seem very real, hence the drop in crude prices. As of 6/6/12, the spot price of BRENT and WTI have come in to $100 and $84 respectively. This drop will soon reflect in lower prices at the pump, but lets not forget what $4/gal of gas felt like. Lets use this opportunity to continue our push for more efficient usage of our resources. After all, this too shall pass, and the economy will begin to grow again. When demand kicks up you will see an increase in prices yet again, and we will be back to square one.
Like Method Man, I came to bring the pain hard-core from the brain, but I’m talking about gas for your car, bus, and plane. Unless you walk to work and don’t have a TV or radio, you are probably aware of the rising price of gas the past few weeks. In fact, since January 2012 the average monthly price of gas has increased almost 14% from $3.380 in January to $3.852 per gallon in March. The price per gallon normally goes up during the spring as people drive more, but according to the U.S. Energy Information Administration, this is the highest price level we have seen this early into the driving season. Many commentators have already predicted $5 per gallon by the summer. That would be just the beginning of our troubles as higher gas prices force consumers to cut back on spending thereby jeopardizing our budding recovery. Point the Finger
So who is to blame? Blame Obama? Blame Bush? Blame Iran? Blame the Democrats? Blame the Republicans? Blame the oil companies? Actually, we can only blame ourselves because we continue to choose to pay $4 a gallon. . . and we haven’t learned anything from our mistakes over the last 10 years. As long as there is demand, companies will charge whatever price the market dictates. So while we are quick to say “drill baby drill” every time the price per gallon nears $4, we have simply not changed our behavior. What we should be doing is purchasing higher mpg cars, utilizing public transportation systems, and simply driving less. We should be investing in and researching natural gas engines. These steps would diversify our transportation sector away from its reliance on oil as well as free up demand. It is simple economics – reduce demand and the price will fall. Demand from Emerging Markets
The reality is that we live in a truly global marketplace where one country is no longer a market in itself. This means that even if the US did start drilling everywhere for oil, it would actually only have a small impact on the world markets. China, India, and Brazil are all energy hungry and have enough clout to move prices ever higher. A major contributor to the recent spike in oil prices is the tension between Iran, the US, and Israel. However, Saudi Arabia said it would offset any decrease in Iranian supplies that result from sanctions. This still creates uncertainty, and therefore a risk premium. The Real Reason for Higher Prices Actually, there are a combination of reasons for higher gas prices. 1) Increased demand from emerging markets; 2) Tensions in Middle East; 3) Lower production levels worldwide and 4) Price spread between Brent and WTI. The first three reasons listed here are pretty self-explanatory: it is becoming harder and harder to find the black gold at the same time that global demand is rising. The oil rich region of the Mid East underwent an upheaval with the Arab Spring and production has yet to come back to prior levels. Basically, the lowest hanging fruit has been picked from the tree and now we must take on ever riskier (i.e. expensive) projects to access our bounty such as deep water drilling, tar sands, etc. As long as the price per barrel stays high, these projects make financial sense and encourage exploration and production. Refinery Problems
Several major refineries in the northeast have shut their doors in the last few months exacerbating the pain at the pump. The reasoning behind the closings has to do with the price difference between the benchmark for the different grades of crude. As of 3/30/12, the spot price for Brent is $123 per barrel and the spot price for WTI is $103 per barrel. Historically, these two benchmarks have traded within a few dollars of each other. With the spread over $20 per barrel, the refineries outside Philadelphia that process the Brent are simply not profitable. These refineries were set up years ago when Brent was the standard benchmark. Now there has been a shift to WTI as the standard, but the refineries in the northeast can not process that type of crude which is typically refined in the midwest or gulf coast. This means that a lot of refining capability has come off-line and does not look like it is coming back. Conclusion
Until we come up with abundant, renewable energy and scale it to meet our needs, we will fall victim to price shocks for our natural resources. The US has been doing a great job of decreasing its energy usage through efficiency measures, but there is still plenty of room to improve. Behavior affects markets, and the law of supply and demand always produces equilibrium. If we want to avoid being in the same predicament next year, 5 years from now, or 20 years from now, we must realize that we need to end our dependence on the same resources that put us here in the first place. After all, $5 per gallon won’t hurt so bad when you car runs 100 miles per gallon.