The Geopolitics of Energy

“The Geopolitics of Energy”:  that was the title of a talk given at the Opportunity Crudes conference in Houston last week by Guy Caruso of the Center for Strategic and International Studies.  It’s an endlessly fascinating and urgent topic, as very few sectors of the economy shape the world in which we live as much as energy — and particularly, oil — does.

Highlights of Caruso’s presentation — many of which are not novel or unique, but are worth restating:

Oil is currently inseparable with transportation:  virtually 100% of mobility — whether by car, truck, rail, boat or plane — is fueled by petroleum-based products.  Demand is flat or even shrinking in the U.S. and Europe, but this is more than offset by explosive demand growth in the developing world — especially China, but also India, and the Middle East.  “The center of gravity of the oil industry is moving East.”

Most of the lowest-cost endowment of oil resources on the planet are concentrated in the Middle East, subject to great political instability.  A scary thought:  many leaders, especially in the lynchpin Saudi Arabia, are over 80 years old — what happens when they die?

Reliability of delivery is threatened by geogrpahic chokepoints.  For instance, over 15 million barrels per day — nearly 20% of world oil supply — passes through the Strait of Hormuz.  Although most of the oil passing through goes to Asia, the U.S. military remains the key protector of this vital trade route.

Meeting global demand growth in the face of declining conventional resources means two things:  a shift towards unconventional resources (which are more expensive to produce, and face significant environmental/technical challenges) and an almost insatiable need for ongoing additional capital investment.

Although technological leadership may remain with the “supermajors”,15 of the 20 biggest oil companies in the world (i.e., the ones with the most reserves/resources) are now state-owned enterprises, such as Saudi Aramco and PDVSA.  While some of these companies like Lukoil (LSE:  LKOD), PetroChina (NYSE: PTR) and Petrobras (NYSE: PBR) do have minority stakes that float on stock exchanges, make no mistake:  they are not being managed for the purposes of shareholder value maximization.  These companies trade on stock exchanges solely to access global capital markets so as to finance immense expansion programs.  Otherwise, their motivations are far different than profit-maximization as expressed so effectively by the supermajors:  these organizations are arms of nationalistic pursuits.  In other words, the oil game of the future will be driven less by money and more by geopolitical moves on the global chessboard.

There are more upward pressures on oil prices than downward pressures.  Note that the oil industry is running at over 95% of capacity — there’s almost no spare or excess capacity to cope with any perturbations.  Even so, most companies are using $60-80/bbl as the reference price in determining long-term capital investments:  big bets require conservative assumptions. 

Shale gas is a game-changer — not just in the U.S., but in many parts of the world.  More gas will be used for power generation, which will displace coal.  Indeed, without carbon capture and sequestration, coal will be under threat for both economic and environmental reasons in most places of the world.  (Exception:  China, which is growing so fast that it will build as much as possible in a true “all-of-the-above” energy strategy.)

Caruso closed by noting, humbly, that in his 40 years in forecasting the energy sector, there was a consistent tendency to underestimate the impact of technological advancement, which in turn renders long-term predictions subject to big errors.  Not only will the finer points of his analysis be inaccurate, but some of the overarching conclusions — which seem so obvious today — will no doubt be wildly off a few decades from now.  The key is figuring out which ones will be right and which ones will be wrong.  Black swans are hard to see when they haven’t yet flown to the horizon.

Oil: Releasing Reserves Means Increasing Market Pressures

On June 23, the head of the International Energy Agency (IEA) announced that IEA’s 28 member countries had agreed to release 60 million barrels of oil in the next month from their reserves “in response to the ongoing disruption of oil supplies from Libya.”

These extraordinary powers had been exercised only twice previously:  after Iraq’s invasion of Kuwait in 1990, and in the wake of Katrina in 2005.

What is odd, though, is that the prior two cases were invoked as oil prices spiked in the face of immediate unforecasted supply curtailments.  However, in this instance, the Libyan supplies have been off the market for months, and oil prices had been falling for several weeks in a row.  So, what gives?

I would like to think that there is a good reason for this action, but I can’t find it yet.  And, neither apparently can a lot of petroleum market analysts.  See, for instance, this blog.

Among others, a June 24 research report by Deutsche Bank (NYSE: DB) entitled “Emergency? What Emergency?” concludes that the move is politically-motivated primarily by the Obama Administration to drive down gasoline prices and improve voter sentiment as the peak summer driving season approaches.  Others have opined that the Obama Adminstration was targeting oil speculators as “bad guys”, and wanted to hurt them the most — in their wallets — by causing their trading positions to suddenly and dramatically turn negative.

Now, I don’t understand the way the IEA works.  I wouldn’t think that the U.S. would be particularly influential in a multi-lateral NGO based in Paris.  

And, if they powers-that-be are going to the well this summer to support political needs of the Obama Administration, won’t they have to do the same next summer too — right in the middle of the 2012 Presidential campaign?  Are they that stupid to think they’ll only have to shoot this bullet just once?

While it doesn’t seem that the “emergency” release of oil stocks is warranted by market conditions on their own merit, what we don’t know is what really happened at the last meeting of the Organization of Petroleum Exporting Countries (OPEC) on June 8, just two weeks in advance of the IEA’s surprise move.  By all accounts, the meeting was a debacle, with Saudi Arabia (long OPEC’s main player) seemingly losing control of the cartel.  Given that there was apparently a lot of communication between the IEA and Saudi Arabia and that Saudi Arabia was supportive of IEA’s move, the political aim of the oil release may be more to buttress the Saudi government than the U.S. government. 

Because, if the Saudi government falls, as others in this Arab Spring have, it is generally assumed that power will be assumed by Wahabbi forces that won’t have much reservations about shutting off the oil spigots — and the world economy will be in a world of hurt when Saudi oil supplies are withdrawn.

To the extent there’s any consensus among energy pundits, it’s that the release of strategic oil reserves is yet another indicator of a future of increasing oil prices.  With increased government meddling in the oil markets, producers will be reluctant to make major investments in marginal fields or breakthrough technologies to enable opening new production horizons.  This can only put upward pressures on oil prices and oil market volatility.

All in all, it seems to me that this release has little good long-term effect or benefit on the energy industry, with some considerable harm to it.  And, it may well be a harbinger of tougher times ahead. 

As Gregor Macdonald puts so well in his posting “The Dark Side of the OECD Oil Inventory Release”, the “release of inventory is confirmation that the era of permanently constrained supply is now very much with us. Because industrial economies are simply machines that convert energy inputs into useful work and services, [the] action is also a reminder that the dream of higher growth in conjunction with lower oil prices is now a backward looking view, a nostaglia for a past that’s no longer possible.”

To Boldly Go Where No-One Wants To Go

I am appalled at the state of the public discourse on oil and gasoline prices.

Between the newspapers and the talking heads, there is an increasing cacophony that the government should do something, just about anything, to halt the increase in oil and gasoline prices.

From the lefties:  Release stocks from the Strategic Petroleum Reserve!  Stop Big Oil from gouging customers!

From the wingnuts on the right:  Get the enviros out of the way and drill, baby, drill!  Cut gasoline taxes!

All of these steps are just re-arranging deck chairs on the Titanic.  The facts are simple, but they are discouraging, and they won’t be changed by wishful thinking or loudly-shouted populist mantras.  (It’s useful to remember, but often forgotten in today’s world, that just because the volume of your voice is higher doesn’t mean you’re more correct.)

In its territory, the U.S. possesses about 2% of the world’s proven oil reserves.  Yet, the U.S. economy consumes about 25% of the world’s annual oil production.  This blog post depicts the situation succinctly.

True, the U.S. share of global oil consumption will likely decline in the coming years — but that’s probably not because our demands for oil will decline.  Rather, it’s because China, India and the rest of the developing world are ravenously ramping up their demands for oil, with relatively little concern for the price.

With 727 million barrels according to the DOE, the Strategic Petroleum Reserve is only big enough to support U.S. consumption for a little over a month, so releasing even all of it doesn’t chnage the fundamental dynamics. 

There are balderdash claims floating across the Internet that there are hundreds of billions of barrels of oil resources in the U.S. (referring primarily to the Bakken Formation in the Dakotas) waiting to be tapped, if the bloody environmentalists would simply get out of the way.  Alas, as this blogger does so nicely, just a little bit of fact-checking easily exposes these claims as wildly-exaggerated

While there are about a trillion barrels of hydrocarbons in the Green River Formation in Colorado, Wyoming and Utah, this is not petroleum but rather oil shale  — which are not to be confused with the shale gas deposits that have yielded natural gas bonanzas in such places around the U.S. as the Barnett and the Marcellus.  Technologies in use today can’t produce the Green River oil shale resource, and while new technologies are being developed to pursue this compelling opportunity, they are being thwarted less by environmental constraints than by economic ones — more investment capital is required, and greater certainty of higher oil prices is required to attract that capital. 

Meanwhile, the biggest slug of known petroleum reserves on Earth lies in the Middle East.  Much of this is in Saudi Arabia — and as a set of cables released by Wikileaks a few weeks ago hints, it’s hardly certain that those reserves are as vast as have been widely-assumed.  If production starts to decline from Saudi Arabia — either because it’s become geologically over-tapped or due to internal political strife of the type we’ve seen of late in the Middle East — it’s hard to know where oil prices will crest.

Even so, at least currently, Saudi Arabia and the rest of OPEC continue to set the world price for oil — and while the privately-held oil majors profit handsomely when the price rises, it’s not like these guys have much of a say in the price of oil.  They’re the minority players in world oil production:  they merely go along for the ride, and take the money to the bank.

Moreover, the size of the planet’s endowment of fossil fuels is not increasing.  Old fossils aren’t being compressed into hydrocarbons at anywhere near the rate they’re being extracted from the ground.

Exploration and drilling technologies have improved dramatically over the past thirty years, and the oil industry has poked holes all over the planet — and in large swaths of the waters too.  We’ve explored most of the easy places, and we’ve sucked dry most of the cheap resources from the easy places.  What’s left is harder stuff to extract.  It’s more expensive.  Any as-yet-undiscovered reserves are generally going to be in harder places, or in smaller quantities.  There will be sizable finds here and there now and then — and they will be worth pursuing and utilizing in a responsible manner, but they won’t change the overall picture materially.

It’s damn-near impossible to consider this set of facts and conclude something other than oil prices — and therefore gasoline prices — are on an inexorable path upwards.  Perhaps with some downward blips along the way, but the upward trend seems inescapable.

And, yet, the vox populi is whining insistently that some miracle be performed by some mystical force to push the price trajectory downward!

Do something, anything!  These are the rants of a desperate society living paycheck-to-paycheck.  These are the cries of those who live in denial that we’ve painted ourselves into a corner with no clear escape. 

We Americans need to come to grips that we cannot continue to be held hostage to a damn-it-all mentality that continued economic well-being can only be achieved with permanently unfettered access to cheap oil and gasoline.  If we can’t ensure unlimited low-cost energy supplies — and I hope it’s becoming clearer to more people that we surely can’t — then the house of cards on which we’ve built our economy will fall.

Rather than turning the world on its head to keep alive a false promise that can scarcely any longer be extended, we need to turn our commitments towards building a more robust economic system that isn’t precariously dependent on one non-replenishable commodity.

This is not a popular line of thinking.  As the title of this post suggests, this is boldly going where no-one wants to go. 

I don’t want to argue whether or not it’s good for oil to be cheap or expensive.  I want a reasoned debate about what do we do when oil is expensive and we can’t do anything about it.

In his 2011 State of the Union speech, President Obama offered the theme that, as Americans, “We do big things.”  Moving our economy off of oil is a very big thing.  Alas, I’m not as sanguine as the President that we relish the challenge and have the appetite to do it proactively.  However, I am more hopeful about our future after considering Winston Churchill’s (hopefully timeless) observation:  “Americans can always be counted on to do the right thing…after they’ve exhausted all other possibilities.”

What Goes Down, Must Go Up?

by Richard T. Stuebi

as posted to Huffington Post

About 60 miles west of Cleveland, Cedar Point is world-renowned for its scary roller-coasters. However, Cedar Point has nothing on the oil markets.

At the turn of 2007/2008, oil was at the cusp of $100/barrel — a price that was considered a kind of mythical barrier, due to its three-digit numerology. Well, it took just a day or two into 2008 to broach that level, and by July, oil was approaching $150/barrrel — an increase of 50% in 6 months, and fully 6 times the levels that prevailed just 5 years previously in 2003.

Then, the bubble burst, violently: in just the six months since the summer, oil prices have collapsed, falling by about 75%, to below $40/barrel.

I am reminded of the classic Vince Lombardi film clip, in which he yells out incredulously from the sideline, “What the hell’s going on out here?” People ask me, as if I should know, because I’ve been involved in the energy industry for over two decades, but alas: I can’t figure it out. And, I’m not alone.

For instance, consider the December 10 presentation given by Matt Simmons in Houston. Simmons has impeccable credentials, having served as an analyst of the oil industry for nearly 40 years — and it seems as though he’s incredulous as to what he’s seeing.

Simmons laments (like many others of us) that the recent collapse in oil prices — as inexplicable as it’s been — is not a good thing. For Simmons and others in the oil industry, low oil prices have caused major investment projects to be deferred. For those of us more on the cleantech side of things, low oil prices cause the alternatives to oil to become less economically or financially attractive.

To Simmons, it is especially frustrating that the decline in oil prices have nothing to do with fundamental realities. Simmons notes that plummeting prices haven’t been driven by any material declines in global demand, backing this with the comment that “all signs still say [the oil market is] ‘very tight'” — admittedly cryptic, but Simmons has access to all sorts of data from innumerable sources in the oil industry worldwide.

After asking plaintively “why do we know so little about an issue so critical to our well-being?”, he pulls no punches with his stark conclusions: “Crude oil has peaked” and “Its future decline could be swift,” giving credence to his warning that “What goes down can come right back!”

The logic of his analysis suggests that oil prices cannot sustain for long at $40/barrel. Simmons has often said that oil at even $150/barrel is still incredibly cheap — 22 cents/cup — and that Americans really need to get a grip on how valuable the stuff is, and thus how expensive by all rights it really ought to be.

In an October 2008 report entitled “Ratcheting Down: Oil and the Global Credit Crisis”, Cambridge Energy Research Associates recently developed an estimated supply curve for the various sources of oil worldwide, and to achieve production rates at current levels of about 85 million barrels per day, CERA’s work indicates that prices of at least $100/barrel are eminently justifiable.

For you investors out there, all of this is good justification for making a bet on oil prices going up from current levels. Maybe you can make a killing.

At the societal level, though, the implications of peaking oil production are troubling. A really negative take on the prospects is offered by an open letter written by Nate Hagens to President Obama, posted on The Oil Drum, one of the most comprehensive resources concerning peak oil issues on the Web.

As for Simmons, he’s less hyperbolic than Mr. Hagens, but not a whole lot more optimistic. He invokes the perspectives of the new leadership at the International Energy Agency — “Current energy supply trends are patently unsustainable,” “Future of human prosperity depends on how we tackle our energy issues”, Consequences of policy/investment inaction are shocking”, “Massive investment required”, and “Time is running out and time to act is NOW!” — and closes his presentation by declaring that “‘Yes We Can’ solve this bleak energy future, but we now need to sprint into hasty retreat from our addiction to oil and gas.”

How comfortable are you in ignoring such well-substantiated warnings from an oil patch veteran like Simmons?

So, for those of you clamoring for low oil prices, at current levels or even lower, don’t bet on it. $40/barrel is likely to be an aberration.

Richard T. Stuebi is the BP Fellow for Energy and Environmental Advancement at The Cleveland Foundation, and is also the Founder and President of NextWave Energy, Inc. Later in 2009, he will also become a Managing Director at Early Stage Partners.

Cleantech Venture Capitalists Beware – What You Don’t Know About Energy Can Kill You

Oil prices quietly (at least in the cleantech world), slipped below $80 last week, off some 50% from its highs a few months ago. Did I say 50%? Yes 50%. And gas has slipped, too, as with some variations, natural gas historically trades at a roughly 10:1 price ratio of Barrels to MCF.

It’s easy to get caught up in the cleantech hype and forget that only 10 years ago this year oil prices fell two thirds caught between rising supply from a decade of drilling and nasty Asian flu, triggered in part by, wait, a financial debt crisis, that time in emerging markets. Sound familiar? And oil hit less than $11 per barrel, less than 1/13th of its recent high, with people talking $6.

And it’s easy to forget that the half decade following 1998 the not yet named as such cleantech investment sector hyped fuel cells, microturbines and distributed generation on the back of clean cheap natural gas, which was the fuel of the future.

And it’s easy to forget that rising commodity prices wiped 99% of those business cases (only a few billion in value, though!) off the map until not a single cleantech venture investor today discusses distributed generation at all. But after a short hiatus, solar and ethanol exits on the back of some huge subsidies came through and cleantech was boomed.

And it’s easy to forget that only a couple of years ago we as an industry debated the viability of hybrids and biofuels – because of a breakeven at $40-50/barrel or higher (the oilman’s breakeven in Saudi Arabia is maybe $5/bbl)? Breakeven at $40 in biofuels? Corn ethanol maybe, cellulosic, dream on. But the switch from MTBE to ethanol came through on the policy side and unforeseen Chinese demand growth pushed oil prices stratospheric. And the corn ethanol plant owners built hundreds of plants at 5% of the size of average refinery, made hay and traded at tech multiples. Only to get crushed when corn prices, driven up by (gasp!) demand and higher natural gas and oil drove up their feedstock, fertilizer and transport costs and margins down. Welcome to refining, freshman.

And it’s easy to forget that the core economic value proposition for solar has the ever present cost escalation analysis – “lock in your power costs, energy prices have risen x% per year, if they continue to do so you’ll be paying 2.5x your current power prices in 30 years”. And that the solar industry quietly ignores that energy prices will decline not rise with economic turmoil. But the ITC and feed in tariffs came through paying more than half the cost and so the party goes on.

It’s easy to forget that energy is about commodity prices. And commodity prices are about cycles, supply AND demand. And that demand is GDP growth driven in energy. And that in our global markets GDP growth is more interlinked than ever, making it more, not less subject to cycles.

And that alternative energy is called alternative because it’s the most expensive form of energy, meaning it’s the swing producer, the type of guys who get killed in cycles (subsidies aside, of course).

And that the big fortunes made in cleantech investing todate have not been made on high risk early stage technology bets, but on 10 or 20 year old technologies who were in the right place at the right time when the policies came in. Or the low cost manufacturers of mature known technologies (think corn ethanol or wind developers and Chinese solar manufacturers) who moved fast when policies moved, making hordes of “that’s not a venture” bets. Disruptive technology has never been the winner.

In energy, there is no disruptive technology, only disruptive policy that makes some technologies look disruptive after the fact. In energy, the risk is in the scale up, not the R&D, and the end application is so massive, so capital intensive, and so utterly dependent on commodity prices, that you can’t invest in it like you invest in IT. It takes longer, 10x as much money, and the ante up to play the game for one project is the size of your largest fund. At scale, there is no capital efficient strategy in energy.

But we are Silicon Valley and we smash open gates with technology, and we know better than those energy dinosaurs in Houston, London, and Abu Dhabi, right? They just don’t get it, right? One game changing technology can force the oil companies and power companies to their knees. The one I’ve found really is new and different. This entrepreneur has discovered something new. And it can be *cheaper* than oil (if you define cheaper right).

Beware Silicon Valley, the great fortunes, wars, and economic crises of the world for 100 years are not technology ones, they were energy made. Half the schools you went to were built by oil money. And the entreprenuerial spirit in this industry was born in the hardscrabble oilfields of Pensylvania and Texas, and grew up in the far reaches of the globe. And the oil companies those entrepreneurs founded have forgotten more about technology in energy than you even know existed.

Be forewarned, you do not have a comparative advantage here. The oil men invented risk taking, AND risk management. The oil men are bigger, faster, smarter, richer, have more scientists and more entreprenuerial spirit than you, AND they know energy.

So while you fight the good fight to develop technology to change the world, don’t forget, be humble, learn what can be learned, build what can be built, and walk softly, because the elephant in this room floats like a butterfly and stings like a bee, and he has yet to take the field.

. . .

The little guys whose pension funds are paying you a cushy 10 year guaranteed contract are counting on you to put aside your hubris.

Neal Dikeman is a partner at Jane Capital Partners and the CEO of Carbonflow. He is the Chairman of and edits Cleantech Blog. He is from Houston, is a Texas Aggie, and believes in both energy and the power of technology to change the world.

Thirty Billion Fewer Miles

By John Addison (7/18/08). Faced with record gas prices, American fuel use is at a five-year low. Americans drove 30 billion fewer miles since November than during the same period a year earlier.

Americans joined their employers’ flexwork and commute programs. Families and friends linked trips together and rarely drove solo. Everyday heroes kept their gas guzzler parked most of the time and put miles on their other car which gets forty miles per gallon.

Although public transportation is effective in a compact city, it is a challenge in suburban sprawl such as Southern California, home to nearly 24 million people stretched from Los Angeles to Orange County to San Diego to San Bernardino and Riverside Counties.

When I grew up in Pasadena, a suburb of Los Angeles that is famous for its Rose Parade, my father had one choice to reach his L.A. job; he crawled the stop-and-go freeways to work and came home exhausted from the stressful traffic. While attending recent conferences in Los Angeles, I was able to take a more pleasant journey from Pasadena. Each morning, I walked two blocks, waited an average of five minutes, and then boarded the Metro Rail Gold Line, a modern light-rail that took me to Union Station in the heart of L.A. From there, I took L.A.’s modern and efficient subway to the conference hotel, a half-block walk. All for $1.50 (and system-wide day passes are just $5.00).

Later in the week, I added one transfer to the Blue Line, and then walked two blocks to the L.A. Convention Center. Although a car trip would have been somewhat faster at 5 a.m., I got door to door faster than cars in rush hour gridlock. L.A.’s light-rail and subway form the backbone for effective intermodal travel.

The L.A. Union Station is also the connecting point to train service from all over the U.S., servicing Amtrak and efficient local trains such as Metrolink. L.A. Union Station also offers express bus service to L.A. Airport. In the past, I have used Metrolink to travel from Irvine and from Claremont. Metrolink is seeing a 15% increase in ridership this year.

In a few years, L.A. Union Station may also be the hub for the type of high-speed rail now enjoyed in Europe and Japan. Southern California travel time will be cut in half. Travel from L.A. to San Francisco will be two hours and forty minutes. High-Speed Rail Report

1.7 million times per day, people travel on Los Angeles Metropolitan Transit Authority (Metro). Although light-rail is at the heart of the system, 90% of the rides are on buses, not light-rail. Much of the bus riding is similar to light-rail, using pleasant stations, pre-paid tickets for fast boarding, electronic signs that announce when the next bus will arrive, buses that seat 84 to 100 people, and some dedicated busways. Metro is using bus rapid transit that once only succeeded in South America. The Secrets of Curitiba

Although Southern California is highly dependent on foreign oil, Metro is not. Its fleet of over 2,550 buses represent the largest alt-fuel public transit fleet in the nation. Over 2,500 buses run on CNG. The natural gas is pipeline delivered to 10 Metro locations.

Last year, when I met with Metro’s General Manager Richard Hunt, and he discussed ways that more people would be served with clean transportation. He shared how Metro will move more riders at 4-minute intervals at the busiest stations. Like other major operators, Metro is under a California ARB mandate to start making 15% of its replacement fleet zero emission buses (ZEB). Metro has evaluated all of these potentially zero-emission alternatives:

• Battery electric
• Underground-electrified trolley
• Hydrogen fuel cell
• Hydrogen-blended with CNG

Currently, the most promising path to meet the ZEB requirement will be battery-electric buses. Under consideration are lithium-ion batteries operating with an electric drive train. The configuration could be similar to the six 40-foot New Flyer ISE gasoline hybrids currently on order. Metro is working with CalStart, a non-profit leader in clean transportation, and a consortium of Southern California transit operators.

Diesel and CNG buses normally need a range of at least 300 miles to cover routes for 16-plus hours daily; battery electric buses would be better suited for six to 8 hours of daily use during peak service periods (morning and evening rush hours). Ranges of 100 to 150 miles daily would be appropriate for peak battery electric use. Theoretically, with a bigger investment in batteries, advanced drive system maker ISE could actually build electric buses that meet a full 300 mile range by putting a remarkable 600kW of lithium batteries on the roof of each bus.

Critics of electric vehicles claim that oil is merely being replaced with dirty coal power plants. This is not true. There is excess grid-electricity at night. Metro already uses several MW of solar roofing with plans to expand. Coal is less than 30% of California’s electric grid mix, with megawatts of wind and concentrated solar power being added to the grid. Vehicles with electric motors and regenerative braking have reported fuel economy figures that are 300% more efficient than diesel and CNG internal combustion engine alternatives.

Yes, even in the sprawling 1,400 square mile region that Metro must service, transit is growing in use while total emissions are declining. Riders are freed from their oil dependent cars, save money riding transit, and can now enjoy the ride and breathe the air. A dollar spent on public transportation is going farther than spending ten bucks on more oil.

Copyright © 2008 John Addison. Some of this content may appear in John’s upcoming book, Save Gas, Save the Planet.

General Motors Looks Beyond Oil

By John Addison. “One of the most serious business issues currently facing General Motors is our product’s near total dependence on petroleum as a source of energy. To address this issue, we have been implementing a strategy to displace petroleum through energy diversity and efficiency,” explained Dr. Larry Burns, Vice-President of Research and Development for General Motors, during his keynote speech on April 2 at the National Hydrogen Association (NHA) Conference.

When Dr. Burns speaks, the industry listens because he directly influences the future of General Motors and of the auto industry. March was one of the worst in years for all vehicle makers. GM and Chrysler saw a 19% drop in sales; Honda a more modest 3% drop. There was a direct correlation in sales loss and fuel efficiency. GM and Chrysler fleets gulp oil refined fuels; Honda’s takes large sips.

Make no mistake, GM is determined to be less dependent on oil as Larry Burns clearly stated, “We view renewable biofuels, electricity, and hydrogen as the most promising alternative energy carriers for automobiles. We are working very hard and fast on all three fronts to develop and implement meaningful technology solutions that provide our customers with a range of choices from “gas-friendly to gas-free” vehicles.” Next generation biofuels, however, will likely take years to get from labs to large scale production. When available, they will primarily be blended with gasoline and diesel, rather than requiring new stations. GM, and other auto makers, is frustrated to see hydrogen in only a few dozen stations globally.

Electricity is the most promising alternative fuel for GM and most auto makers. Electric motors are far more efficient than gasoline engines. Electric motors are used in hybrids, plug-in hybrids, battery electric vehicles, and hydrogen fuel cell electric vehicles. In late 2010, General Motors will start selling the Chevrolet Volt, a plug-in hybrid that will give many drivers 100 miles per gallon of gasoline, because it will primarily run on electricity. In three years, consumers may have multiple plug-in choices including Toyota’s planned offering.

The Volt is an implementation of E-Flex. GM’s E-Flex is an electric drive system centered on advanced batteries delivering power to an electric motor. Additional electricity can be delivered by a small engine coupled to a generator, or by a hydrogen fuel cell. In the future GM could elect to implement E-Flex in a pure battery-electric vehicle.

Over two million vehicles now use electric motors and advanced batteries, thanks to the early success of hybrids. Electric drive systems will continue their strong growth as they are implemented in battery electric vehicles, hybrids, plug-in hybrids and hydrogen fuel cell vehicles.

The plug-in hybrids’ big competition will be battery electric vehicles (EV). London’s congestion tax is cascading into a growing number of cities that will require zero-emission vehicles. Announced EV offerings are coming by 2010 from Nissan, Renault, Mitsubishi, Subaru, and emerging players such as Smart, Think, Tesla, Miles, and a host of Asian companies that will display at the upcoming China Auto Show. With the average U.S. household having two vehicles, these EVs would be perfect for the 80% of U.S. driving requires far less than 100 miles per day.

Where does this leave hydrogen? Fleets. Hydrogen’s fleet use continues to grow, especially in public transportation. Three factors are contributing to the growth of hydrogen vehicles: energy security, success of natural gas vehicles, and the growth of electric vehicles.

Hydrogen delivers energy security by being available from a wide range of sources including waste hydrogen from industrial processes, electrolysis of water, biosources, and steam reformation of natural gas. Where truck delivery is avoided, all of these approaches significantly reduce greenhouse gases, source-to-wheels, in comparison to diesel, gasoline, and current biofuel alternatives. Emission Comparisons from LCFS

In transportation, hydrogen may be the long-term successor to natural gas. There are about five million natural gas vehicles in operation globally. Over 90% of the natural gas used in the USA is from North America. Transportation use of natural gas has doubled in only five years. Natural gas vehicles are popular in fleets that carry lots of people: buses, shuttles, and taxis.

Natural gas is primarily hydrogen. The molecule is four hydrogen atoms and one carbon. Steam reformation makes hydrogen from CH4 and H2O. Hydrogen is used in fuel cell electric vehicles with far better fuel economy than the natural gas engine vehicles that they replace. For example, at Sunline Transit, their hydrogen fuel cell bus is achieving 2.5 times the fuel economy of a similar CNG bus on the same route. Specifically 7.37GGE to the CNG vehicle’s 2.95GGE. Sunline has a new fuel cell bus on order with even great expected gains. NREL Report

Most early adapters of hydrogen vehicles are natural gas fleet owners with vehicles that use compressed natural gas. Some fleets are mixing hydrogen with natural gas and running it in the existing CNG vehicles. A common approach is a 20% blend with minor changes such as timing in existing engines.

Public transportation is hydrogen’s biggest success. The San Francisco Bay Area is now upgrading from six hydrogen fuel cell buses to twelve. The area will grow from carrying two thousand passengers a day on hydrogen, to five thousand, using lighter next generation drive systems with fuel cells whose warranties have expanded from 1,000 hours to 12,000 hours.

For the 2010 Winter Olympics, Whistler will use twenty hydrogen fuel cell buses which will transport over 100,000 visitors during the games, then continue as the majority of Whistler’s fleet.

Although hydrogen will grow in fleets that can install the fueling and the vehicles, it will be many years before average consumers consider hydrogen vehicles. Outside of Southern California there is a lack of public infrastructure. To achieve a range of 300 miles, most auto makers want high pressure (700 bar). In California, only Irvine offers the higher pressure. GM is putting nine temporary 700 bar fuelers in Southern California. GM is also putting another 100 hydrogen vehicles on the road. Project Driveway Article

Honda is ahead of all other hydrogen vehicle makers in offering its acclaimed FCX Clarity for $600 per month. It does fine with the 350 bar pressure offered at California’s 24 hydrogen stations and delivers a 270 mile range. The vehicle will probably only be offered to select individuals in California communities where public stations are available such as Irvine, Torrance and Santa Monica. Even for Honda, Fuel Cell Marketing Manager Steve Ellis observes that “Success with hydrogen is more like a marathon than a sprint.”

To succeed, all businesses must monitor their industry, looking for points of inflection that lead to a new paradigm. In talking with Larry Burns at the NHA conference he told me that he has seen the signs since 2001. 9/11, Katrina, and oil prices have signaled major changes. All the world’s major economies from the USA to China are highly dependent on imported oil. Dr. Burns now concludes that in 2008 we are at a tipping point.

He stated, “We truly are at a defining point in the development of the technology. What and how we execute over the next 5 years will shape the next 50 years!…Together, we must act rather than debate, create the future rather than try to predict it, and solve the challenges we face now rather than handing these challenges off to future generations.”

John Addison publishes the Clean Fleet Report. He will be leading a panel about PHEV and EV at the FRA Renewable Energy Conference and presenting “The Great Fuel Race” at Fuel Cell 2008.

Oil Prices: How High is Up?

by Richard T. Stuebi

In the last week of 2007, I predicted that oil prices would finally top $100/barrel. Well, it didn’t take long, two days in fact. Ironically, it appears that the first time a barrel of oil changed hands for more than $100 was solely because a trader wanted to own that distinction forever.

Nevertheless, those who espouse the so-called “peak-oil” theory will no doubt use the recent climb through $100 as additional evidence that oil production is nearing a crest and will soon move into irreversible decline. Indeed, recent analyses by Energy Watch Group and Earth Policy Institute claim that the peak is imminent or perhaps already past us.

Now that the psychological threshold of $100 has been broached, and with peak oil production a possibility worth serious consideration, the question is: how high will oil prices go?

One provocative view is presented by Jim Kingsdale in the blog Seeking Alpha. His is the first work I’ve seen that projects oil prices over $200/barrel, with the staggering forecast of $275-500 by 2012.

My back-of-the-envelope work suggests that each $10 in oil price increase translates to about $0.40 per gallon more at the pump. If that’s about right, then $500 oil means gasoline at about $16/gallon more expensive than today, or close to $20/gallon.

When asked what will happen to stock prices, J.P. Morgan was once quoted as replying, “They will fluctuate.” That is my sentiment about oil prices; they will go up and they will go down.

I suspect that the long-term trend for oil prices is upward, even beyond today’s $100, but it’s hard for me to subscribe to anything approaching $500. Before prices reach that high, there will be so much demand-curtailment, and so many economic alternatives emerging from the woodwork, that the price-setters in the oil markets — yes, OPEC — will adjust production to maintain equilibrium.

Unfortunately, oil is not a market that lends itself well to rational economic analysis: either fundamental analysis of supply/demand basics, or technical analysis of price movements. The optimization calculus of the oligopolists, who control most of the remaining reserves (and the lowest-cost reserves to boot), is not always to maximize profits but to maximize geopolitical power.

Even worse, if radical forces gain control of the key supplies (e.g., a coup in Saudi Arabia), they won’t be afraid to turn off the spigots, because they’re perfectly happy living in the 12th Century and they want to see the developed Western powers fall back into the Dark Ages.

If the Middle East shuts off the oil tap, the sky’s the limit for oil prices, and maybe Mr. Kingsdale’s forecast will turn out to be too low.

Richard T. Stuebi is the BP Fellow for Energy and Environmental Advancement at The Cleveland Foundation, and is also the Founder and President of NextWave Energy, Inc.

2007 Roundup

by Richard T. Stuebi

As has become my custom, with the year drawing to a close, I now look in the rear-view mirror and try to distill what I see. In no particular order, here are my top ten reflections on 2007:

1. Popping of the ethanol bubble. Not long ago, it seemed like anyone could get an ethanol plant financed. Now, no-one will touch them. Why? Corn prices have roughly doubled, and producers can’t make money selling ethanol into the fuel markets when having to pay so much for feedstock. Along with the increasing realization that public policies so far to build ethanol markets has largely been for the financial benefit of big agri-businesses such as Arthur Daniels Midland (NYSE: ADM), ethanol has now become a dirty word to many. Progress on cellulosic ethanol technologies may not happen fast enough to redeem seriously diminished public perceptions about ethanol generally.

2. Continuing photovoltaics bubble. For illustration of this phenomenon, let’s take a look at First Solar (NASDAQ: FSLR). Nothing whatsoever against the company; indeed, they make a very fine product. It’s just that their share price has increased by a factor of 10 — from $27 to nearly $280 — in one year. At current levels, the company’s market cap is $20 billion, at a P/E ratio of over 200. I know the solar market is hot, but geez, c’mon. A 10x return in one year on a publicly-traded stock is simply not supposed to happen.

3. Increasing costs for wind energy. For many years, wind energy has become more competitive, as the industry matured and production efficiencies were tained. However, with increasing prices for virtually all commodities (e.g., steel, copper, plastics) and a weakening dollar against the Euro (note that most turbines are made in Europe), the economics of wind are unfortunately moving in the wrong direction right now.

4. Gore as rock star. First, an Oscar for An Inconvenient Truth. Then, the Nobel Peace Prize. To top it off, becoming a partner at top-notch venture capital firm Kleiner Perkins. What next for the what-could-have-been 43rd President? Whatever it is, at least the cleantech sector now has its iconic poster-child.

5. Cheers to Google. Google (NASDAQ: GOOG) has gotten into the cleantech game in a big way by creating an initiative with the mission to develop and launch renewable energy technologies that produce electricity more cheaply than coal. Once that aim is achieved, renewable energy will rapidly become ubiquitous, and we really will start getting on a path of serious carbon emission reductions.

6. Death of the incandescent lightbulb. Early in 2007, Australia led the way to ban incandescents, to force a shift to more energy efficient lighting technologies (fluorescents for now, perhaps eventually LEDs). Amazingly quickly, the U.S. followed suit, passing an energy bill by year-end that effectively phases out incandescents by 2014. This should have a major energy efficiency impact, and yield a big cut in greenhouse gas emissions, in a relatively short amount of time.

7. Tightening CAFE — finally! After decades without change, the U.S. Congress finally acted to impose more stringent corporate average fuel economy (CAFE) standards for auto/truck manufacturers. The main milestone is a 35 mpg combined car/light-truck standard by 2020. For the first time, trucks are now part of the CAFE equation, closing the loophole that helped propel SUVs to prominence. Strengthening CAFE is probably the most important thing that American politicians could do to actually make a meaningful dent in reducing dependence on Middle Eastern oil.

8. Uncertain future for coal. On the one hand, MIT released a major study entitled “The Future of Coal” that compels a radical R&D push to commercialize technologies for carbon capture and sequestration (CCS), underscoring the reality that coal-fired electricity generation is going to be a major factor for a long time. On the other hand, I don’t see any such coal R&D push actually happening, nor even that much progress on CCS. A recent statement by the U.S. Department of Energy concerning its oft-touted FutureGen program for piloting CCS technology indicates a possible retrenchment. Meanwhile, Pacificorp — which is owned by Warren Buffett’s legendary holding company Berkshire Hathaway (NYSE: BRKA and BRKB) — recently cancelled a coal CCS project in Wyoming, with a spokesman quoted as saying that “coal projects are no longer viable.” Ouch.

9. Oil at $100/barrel. Starting the year at about $60/barrel and then promptly falling to near $50, oil prices increased steadily from February to November, reaching the high-90’s. I suspect we’ll see $100/barrel sometime in 2008; I don’t suspect we’ll see oil below $40/barrel very much anymore. Even at prices not long ago considered absolutely stratospheric, it appears that there’s been very little customer/political backlash so far: the world doesn’t seem to be ending for most Americans.

10. Serious dollars betting on energy technology. There’s been a lot written about the big surge in venture capital invested in new energy deals. I find even more intriguing the increasing amount of corporate and public sector investment in new energy R&D. As perhaps the most prominent example, in the U.K., the government has pledged up to $1 billion over the next 10 years in matching support to private investments in the Energy Technologies Institute, which includes the participation of such leading corporate lights as BP (NYSE: BP), Shell (NYSE: RDS.A and RDS.B), Caterpillar (NYSE: CAT), Electricite de France (Euronext: EDF), E.ON (Frankfurt: E.ON), and Rolls-Royce (London: RR.L). That’s a lot of money and corporate weight in the mix. I can’t imagine that such an initiative will produce nothing of use.

Best wishes to you and yours for 2008. Let’s hope it’s a good year, even better than the one wrapping up.

Richard T. Stuebi is the BP Fellow for Energy and Environmental Advancement at The Cleveland Foundation, and is also the Founder and President of NextWave Energy, Inc.

Triple-Digit Oil Prices Ahead?

by Richard T. Stuebi

Last week, as reported on Yahoo!, the chief economist of the investment bank CIBC went on record that “We’re in a world of triple digit oil prices for the foreseeable future,” beginning by the end of 2008.

Increasingly, I’ve been hearing through the grapevine prognostications of $100/barrel oil. I put a lot more weight on CIBC’s view than on Hugo Chavez’s. Why? Based in Canada, CIBC prides itself on being a banker of note to the huge Canadian oil and natural resources industry. Besides, Canadians in general seem less prone to hyperbole than we Americans (or Venezuelans). As a result, I expect that a firm such as CIBC doesn’t put out such statements very lightly.

What does $100 oil mean? By my calculations, each additional $10/barrel increase in oil prices, translates to about $0.40/gallon in gasoline prices — assuming no changes in oil transportation costs, oil refinery economics and oil taxation. So, if we’re seeing gasoline close to $3.00/gallon today with oil at $80/barrel, I would expect almost $4.00/gallon at $100 oil.

Higher prices for motor fuels should provide further support for the emergence of biofuels markets (both ethanol and biodiesel). Although biofuels continues to receive lots of public sector push and mass-market discussion, the economics of biofuels have suffered recently, as feedstock prices (for corn and soybeans, respectively) have been bid up by surging demand for biofuel production. The price spreads between feedstock and fuel have become so narrow that biofuels producers now have little opportunity for profit. With higher prices in motor fuels markets, there is more prospect for investments in new biofuel production to be profitable, and for existing biofuel producers to return to reasonable profitability.

Perhaps more interestingly, higher oil prices will provide greater impetus — both from the government and from private sector investments — for the development of next-generation biofuel technologies (e.g., cellulosic ethanol, algae-based diesel), coal-to-liquids and gas-to-liquids projects, oil shale retorting approaches, and the hydrogen infrastructure. These are very capital-intensive and long-term opportunities that many parties are leery of pursuing, in the fear that oil prices will fall back to lower levels and render the efforts uncompetitive and therefore wasted.

If we are truly going to wean ourselves off of oil, we really need high oil prices for a long duration, in order to provide ongoing economic sustenance and continuing urgency for the development of these new energy technologies. The forecast of triple-digit oil prices should therefore not be something to dread, but rather something for economic opportunists to seize.

Richard T. Stuebi is the BP Fellow for Energy and Environmental Advancement at The Cleveland Foundation, and is also the Founder and President of NextWave Energy, Inc.