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Applicable how? Applicable in the sense that one of the cardinal rules of physics has traditionally been that the introduction of new concepts was not more important than abandoning some of the mistaken notions that often find their way into widespread circulation. This is why I offer the present update, instead of upgrading one of my earlier contributions, or for that matter reworking a portion of the chapters on oil in my forthcoming energy economics textbook (2007). Those materials are not yesterday’s news, but things move fast in the great world of oil, and unfortunately new events do not always receive what I regard as an appropriate interpretation.
For instance, in the section below titled ‘The Logic of Peak Oil’, I am essentially inquiring how a new author, Mr Duncan Clarke (2007), could possibly come to the conclusion that the flaw in the peak oil argument is that it ignores the basic rules of economic theory, which to his way of thinking stipulates that when the price of something goes up, it is always the case that either supply increases or demand falls or both. When a student of economics makes this claim about a non-renewable resource, I usually call it a misunderstanding. Originating with someone who enjoys a background in economics as well as three decades of rubbing elbows with oil company executives and experts, it shows a disturbing lack of perception.
As Professor Julie Urban pointed out (2006), economists are wrong by continuing to believe that price increases can locate resources that do not exist in the quantities required. As for a fall in the demand for oil, this is an issue that might have some traumatic macroeconomic overtones, as will be noted later in this introductory section. A slender bundle of pseudo-scientific hand-me-downs has also been served up by two authors under the sponsorship of a Washington DC ‘think tank’, the Cato Institute, whose energy and climate delusions are financed to a certain extent by the largest oil company in the world, ExxonMobil. The gentlemen in question are not in the oil business, nor are they economists, but are respectively professors of government and public affairs, which means where this topic is concerned that they have little more to provide than rappers or do-ah choristers.
It has now become clear to a large number of concerned observers that October, 1973, was a turning point in modern economic history. Aside from the near panic that accompanied the first oil price escalation (or ‘shock’ as it is sometimes called), my most vivid recollection of that dramatic period was the general failure by economists and politicians to comprehend the character and significance of OPEC, and what the logical and legitimate ambitions of certain key OPEC countries could or would eventually mean for the politics, philosophy and economics of virtually every country in the world, regardless of their access to oil or other energy resources.
Somewhat earlier, Enrico Mattei had coined the phrase “the Seven Sisters” to describe the petroleum world’s movers and shakers. The Seven have now morphed into Four – ExxonMobile and Chevron of the US, and Europe’s British Petroleum (BP) and Royal Dutch Shell. According to a recent article in the Financial Times (March 12, 2007), there is a new Seven that deserves at least a modicum of attention: Saudi Aramco, Russia’s Gazprom, CNPC of China, NIOC of Iran, Venezuela’s PDVSA, Brazil’s Petrobras and Petronas of Malaysia. These are important enterprises, and CNPC and Petronas are particularly aggressive, but with the exception of Aramco and Gazprom, not yet in the ‘class’ with the above four. For instance, Iran has 11% of world oil reserves, and after Russia is the most important natural gas nation, but unfortunately there is some evidence that it will not be able to make the kind of contribution to the global energy supply that will be necessary to keep the oil wolf away from the door.
According to Roger Stern (2006), Iran could stop exporting oil as early as 2014 – presumably because of a greatly increased demand for transportation fuels in that country and adjacent regions. This does not sound completely right to me, even if it is possible to accept the suggestion that Iranian export capacity may develop in a manner that will be well under that predicted by e.g. the International Energy Agency (IEA). Professor A.F.Alhajii, for instance, contends that Iran can increase production to 4.8 mb/d, and maintain it at that level for than 20 years if they desire (2007). Regardless of Iran’s capabilities however, one thing deserves emphasis: if Iran’s contribution to global supplies turns out to be less than desired, it is not because of any technical or managerial shortcomings on the part of Iranians that would be ameliorated by inviting foreigners to explore for and extract oil and gas in their country.
According to the IEA, ninety percent of new oil supplies in the next 40 years will come from developing countries. Ordinarily this could be regarded as a cheerful piece of news, however I am so accustomed to flawed IEA prognoses that I am unable to take it as a given. For example, it appears that Saudi Arabia (with 22% of world reserves) has convinced that organization and a few others that they will boost production capacity to 15 mb/d, or thereabouts, in the not too distant future. This will almost certainly not happen, however if it did it would not make the forecasts of the IEA and the United States Department of Energy (USDOE) more palatable. For that Saudi production must eventually rise to 20 mb/d of the predicted 121 mb/d that has been forecast by those two organizations for 2030, and this is completely out of the question. In the executive suites of Big Oil, a sustainable output of 121 mb/d at any time in the future is generally regarded as being without any economic or geological feasibility, regardless of what the directors of the ‘Big Four’ say when the TV cameras are turned in their direction.
I utilize a small portion of my new textbook to examine the above predictions, and also to argue that more attention should be paid the macroeconomic and political situations that could unfold in the event of explosive price rises that could accompany or even precede a peaking of the world oil output. The price of oil determines the price of most energy resources, and definitely the other fossil fuels – gas and coal. An abrupt energy price escalation could therefore have a sharp impact on productivity, which in turn would have a negative effect on employment and the remuneration of employees. It might also lead to a decision by large numbers of voters in the energy importing world that military action launched to obtain energy supplies is preferable to even a mild decline in their living standards that has the possibility of being irreversible.
Something else that it could mean is an additional resort to coal that would cancel out all the fine theories and intentions expressed in the Kyoto Protocol and its spinoffs. The USDOE has estimated that electricity demand in the US will increase by 45% between now and 2030. Coal usage is scheduled to grow from 51% to 57% because of its availability and price, but a sustained escalation of the oil price would be certain to boost the price of gas, which according to a study by Sanford C. Bernstein & Co., already costs 30% more than coal on the US electricity generation front, even if a very high price for the suppression of carbon emissions is assumed. Coal might then attain more than 60% of the energy mix, with ‘clean coal’ playing only a minor role. As for the kind of coal-burning plant called FutureGen, which would trap carbon dioxide before it reaches the atmosphere and bury it below ground, if it corresponds to the efforts in that direction by the large Swedish firm Vattenfall, it is strictly a play for the gallery.
The principal theme in what follows has to do with the return of OPEC to the oil market driver’s seat, the genuine shortage of energy materials in terms of the amounts that are desired, and the growing ability of formerly monolithic state oil companies to alter the competitive landscape in oil, oil products, and petrochemicals.
GAME THEORY AND UNCONVENTIONAL OIL
This exposition is essentially the final lecture that I gave in the Spring course on oil and gas economics at the Asian Institute of Technology (Bangkok). For years, in one form or another, colleagues and conference acquaintances have tried to convince me of the mistakes being made by oil producers in e.g. OPEC in regard to their export policies, and in particular a hypothesis was passed around seminar rooms and conference locales that Gulf producers should recognize that a long stretch of oil at $25/b is preferable to the discomfort that would eventually be imposed on them if they immediately increased the price of their oil to $30/b or higher. One of the persons taking this position was a former Saudi oil minister and OPEC chief, Ahmed Yamani, who insisted that there were still stones in plentiful supply when the Stone Age came to an end. Exactly what this charming reality had to do with oil is uncertain, because given the realities of global population growth, oil is going to be more valuable than ever in a future where huge quantities of transportation fuels and petrochemicals are going to be essential. With this in mind, the Saudi oil minister, Mr Ali Naimi, has said that his country would increasingly use its natural gas and growing petrochemical output to form clusters of industries, which implies modifying – and perhaps to a considerable extent – its traditional roll as an exporter of crude oil.
Before continuing, it might be a good idea to introduce the word ‘game’ into the present discussion. In the Hollywood travesty of the book A Beautiful Mind (1997), game theory was presented as an authentic scientific pursuit rather than the description applied to it by Professor Erich Röpke, which was “Viennese coffee-house gossip”. Actually it is a combination of both, in the ratio of about one-in-five, and this is despite its prominence in esteemed (though largely unread) journals of quantitative economics, as well as the widely circulated opinion that “it is impossible to understand modern economic thought without a grounding in game theory.” On the whole game theory has failed to deliver, although it was introduced into the modern economics literature by a man often credited with the best brain of the 20th century, John von Neumann.
At the same time it can be admitted that there are certain things that game theory has spotlighted that are of considerable value in analyses of the present type. People sometimes act irrationally but are also capable of thinking strategically, and skilled players more often than not consider all possible outcomes, and constantly attempt to evaluate the meaning and possible evolution of alternative payoffs. What John Nash – the proud owner of A Beautiful Mind – ostensibly did was to carefully formulate a theory in which equilibrium means that each player cannot improve his or her position by making an alternative choice. What actually happened was that Nash took a few minutes to recast a notion that had been published at least a hundred years earlier by Antoine Cournot, and for which he was eventually awarded a Nobel Prize in economics.
In my lectures I have used game theoretical concepts to discuss unconventional oil, and also oil found in unfamiliar locales, such as the Caspian region. The basic issue here is not an ‘equilibrium’, but the astounding quantity of misinformation and misunderstandings put into circulation by ‘players’ with interests in these locales, as well as their official and unofficial propagandists. For instance, one of the best introductions to oil from Canadian tar sands, and heavy oil (from Venezuela) can be found a recent OPEC Bulletin (March, 2007). It happens though that oil from these two sources is a growing competitor of conventional oil (from e.g. OPEC countries), and so a question must be asked about the enthusiasm shown unconventional oil by an OPEC publication. The reason quite simply is to give the impression that despite the warnings circulated by persons like myself, both governments (and perhaps consumers) in the oil importing countries should come to accept that there will be plenty of oil available in the distant as well as the near future, and very likely at prices that they find reasonable.
Saudi Arabia enjoys a special position where conventional oil resources and production are concerned, but now we often hear that Saudi reserves may not be in the same class as those found in Northern Alberta (Canada). Furthermore, the latter might be overshadowed by the resources of the Orinoco Oil Belt in Venezuela: the OPEC discussion cites estimates of Petroleos de Venezuelas, which puts the present estimated content of the Belt at 235 billion barrels of heavy crude, which with likely additions should eventually be sufficient to cause it to be labelled the largest petroleum reserve in existence.
The question must then be put as to the cost of exploiting tar sands and heavy oil. Forty dollars per barrel is the highest figure that I have ever seen, which would suggest that with an oil price unlikely to fall below fifty dollars per barrel ($50/b), an oil shortage during the present century is a physical impossibility, and the Schwartzenegger/California type of initiative featuring ethanol and/or hydrogen is unnecessary. Actually, as an ‘insurance’ against oil price spikes, it is essential, although there is no need to launch an undertaking of Manhattan Project size until the technology for these departures is further developed.
Furthermore, according to the Toronto Star (Wednesday, 25 April, 2007), the supplies of easily exploitable Canadian oil have almost run out, and so conventional oil royalties are only one-third of those obtained two years ago. Oil sands royalties are also declining, apparently because of a lower rate of growth of tar-sand output: perhaps only 3 mb/d in 2020 as compared to 1 mb/d at present. If this figure is anywhere near the truth, tar sands are not going to save the day for North American consumers, regardless of the huge reserve figures that we constantly hear so much about. For example, when Shell Oil states that they might have access to an impressive slice of the 2 trillion barrels of oil reserves that they believe could eventually be located in Canada, they are sending a message to present and potential investors in their shares that great things are ahead, despite any disappointments or negative press that they might have been exposed to over the past few years.
As for heavy-oil in Venezuela, Major Chavez obviously intends to make sure that if he has the option, its output will be such that it does not spoil the market. Although it may appear that he has even less respect for Adam Smith’s “invisible hand” than his famous friend in Cuba, the simple fact of the matter is that like Mr Smith and his disciples in the executive suites of Big Oil, he prefers more money to less. The last foreign controlled oil field in his country – in the Orinoco Belt – has been nominally nationalised, which means that the Venezuelan government will assume majority control of four heavy oil projects, and thus reduce the stakes of ConocoPhillips, Chevron, Exxon Mobil, Total, BP and Statoil by a few billions of dollars, but as far as I can tell there will still be a foreign presence in the Venezuelan energy industry.
Given that Canada and Venezuela are the flagships of tar-sand and heavy oil hopes and dreams, the future of non-conventional resources may not be as bright as many persons in the main oil importing countries have come to believe, in that these resources will not be available in the near future in sufficient amounts to relieve some of the demand pressure on conventional resources. Of course there is still shale oil, in which the US appears to be the world leader, however in my opinion the touting of shale oil is perhaps the biggest scam yet.
Now we see what game theory is largely about outside the seminar room and learned journals. Not “beautiful mind games” that provides academics and policy makers with an important new analytical means to study human behaviour, but to an embarrassing extent a refined and overpraised outlet for the presentation of untruths and misunderstandings.
THE LOGIC OF PEAK OIL
Oil has been discovered in many countries, and in a substantial majority of those countries its output has already peaked or levelled off, resulting in a plateau instead of a distinct summit. Here I am talking about both huge deposits – or ‘elephants’ as they are sometimes called – and back-yard deposits of the kind that once were said to be common in California. The question then becomes how oil production could peak in large regions like the US and North Sea, as well as enormous deposits like Burgan (in Kuwait) and Cantarell (in the Gulf of Mexico) – the second and third largest deposits in the world – and not peak globally, by which I do not mean about the middle of the present century or later. The thing to note here is that oil production peaked in the two regions mentioned above about 40 years after discoveries peaked, and globally the discovery of conventional oil peaked in l965. As for Burgan and Cantarell, they have not only peaked but Cantarell is apparently in rapid decline.
One often exploited origin of non-peak arguments turns on assuming that unconventional oil of the kind discussed in the previous section is in reality conventional. On the basis of the discussion in that section however, this would not change very much. Unconventional oil at the present time is about reserves and not production! The presence of hundreds of billions or even trillions of barrels of reserves of unconventional oil in Canada and South America may not have a sizable effect on the date of the global peaking of production, even though a great deal of unconventional oil is going to be produced in the years to come, and under certain circumstances could push the peaking of conventional oil into the future by a few years. It is not peaking but the effect of actual or putative peaking on the price of oil that is the main issue here.
For what it is worth, drawing on the contributions of others, I estimate that a peak for all oil (i.e. conventional and unconventional) will take place between 2015 and 2020. Most independent observers and energy professionals with a deep interest in oil would probably be able to go along with this, although the estimated time to the peak appears – on the average – to decrease every year, and there are even claims that the peak for conventional oil has already taken place. On the other hand, Shell sees a peak coming after 2025, while the United States Energy Information Administration (USEIA) and United States Department of Energy (USDOE) think that a peaking can be delayed until after 2030. The important consultancy Cambridge Energy Research Associates (CERA) thinks that there will be an undulating peak instead of a distinct peak. In my course at the Asian Institute of Technology I described this prediction as a touch looney, although it might make sense in an elementary economics class at some storefront university in Boston or New York.
ExxonMobil sees no peak at any time, and the often quoted Michael Lynch is also unable to discern a peak: his clients have been duly informed that they should find something else to be concerned about than an explosive oil price escalation. Before the recent price run-up, Doctor Lynch argued that the price of oil would decline to about $25/b. OPEC also denies the presence of a peak, but like Big Oil they find it sensible to try to convince the persons and firms on the buy side of the oil market that any apprehensions they may have about the future availability of oil are ill-considered. The energy director of the European Union has called the discussion about peak oil just another theory among many. He has a similar belief about the obvious failure of electric deregulation, which leads me to believe that the extent of his knowledge about these (and probably many other) topics is best not discussed in a public forum.
In my lectures I always deal with this problem in terms of the history of oil in the US, viewed in the light of a variant of (Albert) Einstein’s equivalence theorem (which is explained in some detail in my international finance book). What I do with this subject is to start with the equivalence of the laws of oil production in the US and elsewhere, and argue that the peaking of oil output in the US is a microcosm – or was a preview – of global peaking. Once I have the bottom line, I explore some of the details.
Oil was discovered in Pennsylvania just before the US Civil war, and later was produced in appreciable amounts in that state and a dozen others. It was the discoveries in Oklahoma and California, and in particular East Texas that made the US an oil superpower. Oil discovery peaked in 1930, while in late l970, to the surprise of oil scholars everywhere, production peaked in the ‘lower 48’. The oil output story for the entire country (i.e. 50 states) changed however when the huge Prudhoe field in Alaska came on stream, which meant that the oil production curve for the US turned up. But even given the magnitude of that field, production never achieved the l970 level.
What about technology riding to the rescue, as President George W. Bush has predicted that it will. No country in human history has had the access to scientific and engineering knowledge that is enjoyed by the United States of America, but all attempts to reverse the ongoing depletion of oil, whether onshore or offshore, have been in vain.
As things now stand the US consumption is approaching 22 mb/d of oil, of which about 60% is imported, according to the important and reliable Oil Depletion Analysis Centre (ODAC), whose publications and bulletins can be examined via GOOGLE. Nobody really expects a change for the better in this situation, although for the time being the depreciation of the US dollar has taken some of the stress off the US financial system. But in the long run this depreciation could lead to inflationary pressures that raise US interest rates, which would exacerbate the present unfavourable development that seems to be taking place in the housing market. My macroeconomic knowledge is not as up-to-date as I would like for it to be, but unless I am very mistaken, the housing market could be the weakest link in the US economy at the present time. But even if the housing market does not go sour, something will have to give. It cannot be so that the US can import hundreds of millions of dollars of oil every day of the year, as well as fight an expensive war, and the welfare of its citizens is not influenced in a negative manner.
An even more bleak story is available for the UK. The first exploration licences for North Sea oil were awarded in l964, and oil production peaked at 2.7 million barrels in l999 (or 2.9 mb/d if natural gas liquids are included). The interesting thing here is that in l991 there were 100 fields in production, while in l997 there were 186 offshore fields in production. Moreover, although in the early years of this century the UK government talked of 300 discoveries awaiting development, exploration levels in e.g. 2002 were the lowest since 1970 (according to Dan Roberts and Carola Hoyos of the Financial Times). Several insiders have claimed that oil prices were not high enough to go after the oil remaining in the UK North Sea, but this situation has not changed to any great extent as a result of the oil price moving to record levels. Like many regions in the world, the North Sea no longer contains any easily exploitable reserves. This should have been obvious when Sir John Browne announced that in the future BP would concentrate on profitability rather than property.
Optimists are not particularly concerned with the way things have gone in North America and the North Sea because of the access that they believe the oil importing nations will soon have to unconventional oil and/or motor fuels, and they are also enthusiastic about the Caspian region. According to Professor Maureen Crandall of the US National Defence University, however, most of the talk about the Caspian is “hype”. I believe this too, however perhaps it does not make a great deal of difference, because given the macroeconomic growth of China and India, and perhaps elsewhere in Asia and South America, every additional barrel of oil is going to be valuable. There is also a great deal of talk about the relief that will be brought to the global oil market by new developments in Africa and increased output in Saudi Arabia.
The opinion here is that much of the talk about the increase in output in Saudi Arabia is self delusion: the government of that country has finally discovered that the correct development strategy is to minimize the increase in oil production, taking into consideration certain political constraints, while the national oil company Saudi Aramco has said that increasing production too fast could run down reserves faster than the country would like. This can be put another way. According to Jim Mulva, CEO of ConocoPhillips, the national oil companies of countries like Saudi Arabia “may have other strategic objectives, which may limit the speed by which they develop their resources”. It so happens that the chief other strategic objective is development! The director of the important consultancy PFC Energy, Robin West, has brilliantly summed up this situation by saying that “the full impact of the nationalisations that took place in the l960s and l970s are taking effect now.”
Analysts at PFC have also stated that the scale of increases in output in Kazakhstan, Angola, Nigeria and Brazil are limited, and that production in these countries will also peak in the not too distant future. If this turns out to be the case for Nigeria and Angola, then all of Africa south of the Sahara can soon be written off where oil is concerned.
Five years ago a theory was offered by the chief oil analyst of a major financial company that oil prices would drop as low as $18/b by the following year, and they would stay there. He argued that the only time in the previous 60 years that the oil price was above $17/b was when there was a war involving at least one OPEC country, or a member facing political difficulties or embargoes. The possibility that OPEC had or would become more sophisticated in that it examined global demand and supply trends and possibilities and reacted accordingly was dismissed. Perhaps one of the reasons for this ‘optimism’ was that the futures market predicted lower prices the following year, and recently even the new director of the US Federal Reserve System referred to the futures market in such a way as to suggest that it had something to offer when it came to forecasting future oil prices. In point of truth the futures market has been a very poor predictor of the actual price of oil since the beginning of the present century, and most of the time in the 20th century.. On this topic I think it best to pay attention to something that Matthew Simmons of Simmons & Co – a Houston-based investment firm specializing in oil – once said: “Too many people are looking at OPEC through the rear-view mirror. There’s a resolve in their eyes never to go back to the days of cheap oil”. Not just in OPEC’s eyes but in their investment policies, which make it clear that they feel that it is in their best interests to refrain from bringing too much additional oil to market. This is a good place to ask one of my favourite questions: would you if you were in their place?
Accordingly, the optimal development strategy for a country like Saudi Arabia is to pay more attention to the refining of oil, and the production of petrochemicals. There are not only enormous economic possibilities here, but they have finally been understood and are very likely to be exploited. It is for this reason that I am positive to a rapid but limited increase in the capability to produce larger quantities of e.g. ethanol and biodiesel, because even if much larger quantities are not needed, they are a valuable insurance in the event of a sudden decline in the supply of conventional fuels. Here it should be remembered that on the basis of some misunderstanding with Iran about a month ago, the price of oil suddenly spiked by 5 dollars a barrel.
CONCLUSION: THE OIL PRICE AND THE WISDOM OF BILL O’REILLY
Bill O’Reilly is an important political and social commentator in the United States. He is not important to me of course, even if I agree with a certain amount of what he says.
I have a serious set of issues however with his beliefs about the oil price. To his way of thinking the increase in and volatility of the oil price is due to the machinations of speculators in e.g. Las Vegas. Without these “little guys”, to use his terminology, or “masters of the universe”, as Tom Wolfe called them – and occasionally they call themselves – we would have no problem obtaining the oil that we need, and at prices that we would feel comfortable paying.
What Mr O’Reilly is alluding to are hedge funds, which are also mentioned quite often in the financial press. I say a few things about hedge funds in my finance book and my lectures, and I was even given a lecture on these establishments by a hedge fund hustler just before taking up a visiting professorship in Hong Kong. The truth of hedge funds is similar to the truth of operations like the Nordic Electricity Exchange (NORDPOOL). Their strength is in the laziness of their clients. There are approximately 8500 hedge funds in the world, and every year about l000 either go out of business or are close to shutting their doors. It also happens to be the case that the yield on a large majority of those remaining does not come up to the yield on imaginable unmanaged funds of one type or another, assuming that it was possible to buy these unmanaged assets. There are superstars in the ranks of hedge fund managers, but mostly they busy themselves with the likes of the wealthy Mr O’Reilly, and as the Efficient Market Hypothesis tells us, most of these superstars are brought down to earth sooner or later, although when that happens they still have their condos in Aspen or Monte Carlo.
Despite what O’Reilly and others may think, the long run (or trend) oil price is determined by supply and demand, and the short run price can be described by a stock-flow model of the type explained at considerable length in my forthcoming energy economics textbook. Do hedge funds or “little guys in Las Vegas” have anything to do with this price? Not much, but probably some if we consider the following diagram.
Hedge funds and futures markets may influence the expected price, and as a result the desired stocks (i.e. inventories). If, for example DI > AI because it is expected that price will increase, then price will increase as an attempt is made to increase stocks. Readers who are interested in the real world oil market would do well to examine this diagram and the explanation of its functioning in my textbook. Nowhere in economics is there a greater discrepancy between fact and fiction than in the attempt to explain the mechanics of natural resource markets by esoteric models without the slightest virtue except that the people who use them find them easier to understand than the real deal.
At the present time I am working on a paper called ‘The architecture of world oil’, in which some items that could have been included in this paper will be taken up. Among these will be a more extensive discussion of OPEC, and oil products and petrochemicals. Hopefully readers will find it interesting and useful, and it would certainly be nice if other persons – to include students – would take a more intense interest in oil products and petrochemicals, because the economics literature on these is very inadequate.
REFERENCES
Alhajii, A.F. (2007). ‘The impact of Iran’s nuclear standoff on world energy security’.
Energy and Environment (Forthcoming).
Banks, Ferdinand E. (2007). The Political Economy of Energy: An Introductory
Textbook. London, New York and Singapore: World Scientific.
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economic theory and the supply of oil’. The OPEC Review (March).
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London, New York and Singapore: World Scientific.
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Kluwer Academic.
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Clarke, Duncan (2007). The Battle for Barrels: Peak Oil and World Oil Futures.
London: Profile Books.
Nasar, Sylvia (1997). A Beautiful Mind. New York: Simon and Schuster
Stern, Roger (2006). ‘The Iranian petroleum crisis and United States national security.
Proceedings of the National Academy of Sciences.
Urban, Julie A. (2006). ‘New age natural gas pricing’. Journal of Energy
and Devopment. Volume 31(1).
Yamaguchi, Nancy (2007). ‘Middle East petroleum sector growing in all directions.
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Behavior. Princeton, New Jersey: Princeton University Press.
For information on purchasing reprints of this article, contact sales. Copyright 2013 CyberTech, Inc.
An excellent article Ferdinand. Most interesting and informative. I am no economist but supply and demand would seem to me to be the determinants of oil price - as they are with any commodity. Rhodium now at thousands of dollars an ounce has got to that price because there is not much of it and the demand for it has gone up. How any one can argue that the economics of oil are any different is surely misguided.
Regarding the Canadian Tar Sands - while the actual quantities available vary from pundit to pundit - the amount of natural gas being burned to produce this low grade oil is staggering and this, more than anything else is the real limit to growth and availability of the resource. There is not enough gas available to burn to get it all out.
The oil companies involved are being encouraged to install nuclear power plants to produce the volumes of steam necessary to extract the oil. Once the cheap gas supply is exhausted this source of oil will be rapidly curtailed I think, which supports your proposition that the world is placing too much reliance on these sources. I agree. While a boon to the Canadian and Albertan economies, unless alternatives to natural gas are in place the amount of oil available will depend on the price and availability of natural gas to this region.
I enjoyed reading this. The application of good reasoning and common sense seems to be so rare these days it is refreshing to read such well written work. Thank you. Malcolm
Len Gould 6.1.07
Excellent article. The only hope for non-conventional production in any significant volume given existing limits on natral gas and resistance to nuclear, eg. tar sands, is coke gassification, as is now being demonstrated at one medium-size project. However it is unlikely that these can be manufactured and installed in sufficient volumes to make a great difference, esp. given present limits on skilled construction labour in Alberta, and the difficulty of attracting more to this remote high-living-cost area. Also CO2 emissions limits may become a factor.
Malcolm Rawlingson 6.4.07
Good points Len.
I am not so sure there is that much resistance to nuclear power. In my community new nuclear power development is being welcomed with open arms. Apparently it is only journalists/politicians who don't live anywhere near a nuclear power plant and have never even been in one who promote the fear and trepidation based on misleading and (in many cases) completely false data.
Once all the facts are assessed nuclear power is by far the best choice - in fact the only long term choice. While many may misguidedly think otherwise, in the long term there is no real practical alternative unless you want to live without electrical power.
Tidal power is the only method that comes close in terms of scale and availability and of course these plants would be located in or under the sea making very long distance power transmission across the continents necessary. But maintenance of sea based installations is a risky business so the designs would need to be maintenance free for many years....a difficult design task but probably not impossible.
What Ferdinand is telling us (and I believe he is dead right) is that the days of oil are numbered and we are either already at peak oil or we already passed it. Kidding ourselves that there is some kind of limitless supply is short sighted in the extreme. Tar sands are nothing more than a stop gap of limted duration. And the notion that Middle Eastern Countries are going to let us have unfettered access to their only natural resource - well that has to be pure baloney. They are going to leave it in the ground and get the highest price they can for every ounce of it....wouldn't you if you were they?
Either way we had better be looking at alternate methods to produce all the things that we derive from oil. An that is not just an energy issue. Fuels and lubricants derived from oil are of course very important but an often overlooked fact is that the majority of our plastics are derived from oil. If we have none or limited oil supplies then those products are going to get very expensive or simply disappear from the market. I am not sure what our world would look like with zero plastics usage...let alone the energy void it will create.
The other question of course is what do we do when all the coal is exhausted....for sure that is a way off but you have to ask the question What then?
The long term solution is nuclear energy whether you like it or whether you don't.
Malcolm
Ferdinand E. Banks 6.4.07
Hello Malcolm. I'm not sure I said that the days of oil are "numbered", but I definitely claimed that we could find ourselves looking at a global oil peak much earlier than many observers believe. I consider it healthy to think in those terms, regardless of how things turn out 'ex post'..
I have similar feelings about nuclear. There were two giant flaws in the Kyoto 'Protocol'. The failure to consider nuclear and the emphasis on (or interest in) emissions trading. The only sensible attitude at the present time is to bet on nuclear, which is why Finland is constructing the largest nuclear plant in the world. If there was a more sensible option they would take it, but they are smart enough to understand that there isn't.
"The Middle East, for example, is vastly underexplored. Tidbit: There are only 7000 wells in the entire region, comparable to the number of wells in a single U.S. oil basin."
That sounds to me like an extremely small number. Any references?
The reporter also notes that as recently as 2002 Germany has re-confirmed shutting down all nuclear reactors. What's going on there, anyone have any idea? Once Ms. Merkel's next round of Kyoto kicks in, where's Germany going to get it's electricity?
Malcolm Rawlingson 6.5.07
I must admit to reading between the lines a little there Ferdinand. My sincere apologies if I read too much into what you said.
We agree of course that nuclear power remains the only real option for large scale energy production. There remain a few politically minded dim wits who seem to have the decimal points in their calculators off by a couple of places.
Apart from them the majority of sensible people realize that they are facing a stark choice between significant reductions in standards of living or deriving energy from completely non polluting nuclear power with a bit of wind and tidal thrown in to satisfy the "greens".
The Fins of course are smart people and they know very well what the choices are. The Swedes (also smart people....well with some notable exceptions) will also reverse their position and build more nuclear plants.
The real advantage industrially of course is that, when combined with hydrogen synthesis technologies, nuclear generated electricity can replace the oil used to make plastics and other hydrocarbon products we presently derive from it. That is the oft untold part of the "hydrogen economy". You don't want vehicles that run on hydrogen you want to produce fuels by synthesis of hydrogen with carbon.
That subject might be an interesting area of economics to study. I wonder at what oil price this might be viable? Most certainly a job for an economist not a nuclear engineer.
I heard today that Texas utilities operating the South Texas Project are negotiating with the Japanese firm of Hitachi to build more BWR's at the site.
Even Mr. Blair is changing his tune - realizing that he has to replace all the 18 or so ageing reactors that have been supporting the UK grid system reliably for year after year. Without them he will need to import billions of cubic feet of natural gas from his friend Mr. Putin in Russia. I guess he doesn't like that idea much....at least he likes it alot less than he does the idea of building more nuclear plants.
And I was planning to retire.....ah well.
Regards, Malcolm
Paul Stevens 6.5.07
Len, Germany has for years imported large amounts of it's electricity from the country with the greatest % of nuclear produced power in the world - France. Areva is currently planning on expanding it's nuclear fleet based on current discussions that will ensure a significant percentage of the power produced goes to Germany. Such is the hypocrisy of the German policy against nuclear power.
The poster children of European anti-nuke groups, like Sweden etc. have mostly dropped their moratoriums on new nuclear plants.
Malcolm Rawlingson 6.5.07
Len - good observation about Germany. Here is how they do it.
Germany will get its electricity from the French nuclear power program. The French have strategically been building plants on the Franco-German border for years and been exporting power to Germany via the European electricity grid. Germany has been buying nuclear generated electricity from the French for years....they just don't like to tell anybody.
They can meet Kyoto, keep France happy and get all the electricity they need without building a single nuclear power plant - on German soil of course. They just pay the French to do it.
The German public of course has no say in what is built in France - even though the plants are just across the border rivers.
Smart folks these German politicians. They have gone nuclear without building a single nuclear plant...brilliant .... until the French up the price of course....then they will have the whole German economy at the mercy of French electricity prices.
Maybe not so brilliant after all is said and done.
Also that is how it appears that they are running a successful wind program. They are using the French plants to back them up when the wind doesn't blow. Clever eh!
Malcolm
Ferdinand E. Banks 6.5.07
Len, as you probably know, oil can be found almost anywhere - maybe even in the center of Montreal or Toronto; but everybody I talk to says that the new prize might be Iraq. Outside of that don't get your hopes up. Of course, regardless of how much oil they locate in the Middle East, those countries are not going to flood the world market with the stuff. Why should they? They are rolling in long green now, and presumably they want to keep things that way.
About Germany and nuclear, Malcolm is right. German electricity was almost certainly the most expensive in Europe until they could start tapping supplies from France and Sweden, and maybe elsewhere. Funny, but the Swedish academic economists thought that those cables across the Baltic would decrease the cost of electricity in Sweden. How dumb can you be?
And Paul Stevens, they are not going to build or plan any nuclear facilities in Sweden for a long time. Eventually of course these things are certain to be constructed unless the Swedes develop an uncontrollable craving for the kind of life in the stone age countries that they admire so much.
Malcolm Rawlingson 6.5.07
Ferdinand,
If it is any consolation (and I think it is not) we have similar lunatic economists in Canada who believe that importing electricicy from the USA (produced by peaking natural gas plants) is better and cheaper than building nuclear plants. As a result of their outstanding contribution to economics the price of electricicy seems to be going up by leaps and bounds. Maybe they received their brilliance from Sweden.
You can be sure that your Swedish politicians will have no desire to achieve the stone age standard of living alluded to as a consequence of their stupidity....just everybody else. I guess driving a new Saab or Volvo will soon be against the law there....except for politicians. I call it green communism.
Malcolm
Arvid Hallén 6.5.07
We call them water melons. Green outside, red inside.
Len Gould 6.5.07
I love that. Watermellons!! Green on the outside, .. Brilliant!
Malcolm Rawlingson 6.6.07
I agree with Len - watermelons - what an excellent term. I am going to use that one if you have no objections Arvid. In fact I heard one speak on the radio this morning describing Uranium mine tailings as .....and I quote "the most toxic substance every produced by man".
Well I guess that puts cyanide and chlorine in their place.
What baloney these people speak....and he was introduced as a "professor" - but of what they did not say.
Sounds like a watermelon to me. Thankyou for sharing that one Arvid - it is much appreciated.
Malcolm
Warren Reynolds 6.6.07
Ferdinand. I agree with your article about "peak oil" but you did not go far enough. You have left out the most important and controlling basic geophysical data about "peak oil". I will cover this in my next ENERGY PULSE article. However, all the "hot air" from the politicians, beauracrats, economists, and other oil advocates does not produce one drop of oil. In another comments section, you stated that Sweden was going to build the world's largest nuclear power plant. Now you say Finland is. Which is it ? I do not think they will be built. Len: Over the past 15 years, eighteen of the EU countries have either voted down, opposed or have stopped nuclear power plants. Poland stopped construction of its nuclear power plant. Germany is shutting down its nuclear plants by 2020 and replacing them with solar power. Germany has started construction of the world's largest solar PV array of 40 MWe. These same 18 nation's have installed wind power and PV systems of over 8,250 MWe to the grid. This is equal to 8 each 1,000 MWe nuclear power plants at ONE-FIFTH THE COST ! Since 1987, the cost for construction of a nuclear power plant has risen from $1 billion to $9 billion for the same sized plant. According to the IAEC, nuclear power has the highest power generating cost. No, nuclear is no longer economically competitive besides its health risks. I will cover this in my next ENERGY PULSE article. Malcolm Yes, uranium mine tailings are very toxic. RE: the Russian agent that was murdered with a trace of radioactive polonium even less than the required amount of cyanide. A number of the trans-uranium metals are toxic, e.g., plutonium in addition to their radioactivity. I just thought you would like to know. Warren
Arvid Hallén 6.6.07
Please do use it, it's a not very unusual Swedish term which I didn't invent. Actually, if you google "vattenmelon" (water melon in Swedish) and check the images, the first picture is posted in an article describing the Swedish "environment" party as water melons.
And the professor, might I guess his subject was sociology, or maybe literature? ;)
Ferdinand E. Banks 6.7.07
Warren, I might have said that Sweden was going to build that large nuclear facility, but if I did that was one of those slips that I unfortunately make from time to time. It is Finland, and I discuss this briefly in a paper that I am circulating now on global warming. Also, it IS being built at the present time. I give the main reason why in that paper, which is that the Finns are smarterin the conventional sense than other people - for what that is worth.
I was also informed by Jerry Taylor that Exxon-Mobil provides only a very small fraction of the Cato Institute's budget, and so I retract what I said. Of course EM has a different opinion than my good self about a possible peaking of the global oil supply and also global warming - which now means different from President Bush - and so I dont need to write any letters of apology.
Let me also mention that this nuclear thing is very complicated, and I am very sure that I don't have all the answers, but if we leave out certain more exotic and abstract externalities, nobody is ever going to convince me that nuclear is more expensive than alternatives. But I'm going to leave it to the other contributors to this forum to explain to you why you shouldn't wire Frau Merkel and congradulate her on turning to solar and wind to keep the wheels of German industry turning.
Geoffrey Styles 6.7.07
Ferdinand, Insightful article, as usual. Your stock/flow diagram for oil looks good, though the arrow connecting flow and inventory should go both ways.
As to the comment above about renewables coming in cheaper than nuclear, make sure you're comparing apples to apples: 8 GW of wind and solar with a capacity factor between 10 and 30% doesn't generate nearly as much energy as 8 GW of nuclear with a capacity factor of 80-90%. If renewables were so cheap, Germany wouldn't need a feed-in tariff of 60 Euro-cents/kWh to incentivize PV. The beauty of renewables is that the financial risks are so much more manageable than nuclear or fossil power, coming as they do in much smaller bites and with shorter development lags.
Ferdinand E. Banks 6.7.07
Nice comment Geoffrey. Yes, those arrows are a problem. In my lectures I had them going both ways, but for some reason I was too tired or dumb to make the change in my book or this (and other) articles.
This business about wind and solar in Germany just doesn't go over with poor me. I know/knew a lot about Germany and I just cant see it happening.
Fred Banks
Arvid Hallén 6.8.07
The nuclear business in Finland is like this. They have four small and mid-size reactors, two Swedish BWR's at Olkiluoto and two "Eastinghouse" VVER's at Lovisa, all smaller than 1000 MW. They are currently building a 1600 MW EPR, Olkiluoto 3. Industrial comsumers and power companies have signed memorandums of understanding and filed environmental reports on building both Lovisa 3 and Olkiluoto 4. They are likely to be big reactors, in the 1000-1800 MW range.
So it seems Finland is actually the only country in the world that has a sound energy policy.
Todd McKissick 6.8.07
Not to be nit-picky but the Oldiluoto site lost 860 MW of capacity this morning when one of its reactors went offline in "an emergency" because of a "one square centimeter fire" occurred from a bearing catching fire. Thirty two percent of Finnish nuclear capacity relying on any single part worth few hundred dollars is not a situation that defines reliability. How is this situation bettered by using 1800 MW reactors?
90% "capacity" doesn't mean much if it's less predictable that 30% that is. However, the 10% or 30% numbers offered above are irrelevant. They refer to the availability of the sun which can easily be engineered to be independant of the availability of the system's output. Most groups either use this fact or ignore it as it suits their argument.
Anybody know the grid's 'reliability' of an area with nothing but 50,000 distributed generators equally supplying at 90%?
Todd McKissick 6.8.07
My appologies. Make that Olkiluoto and "..less predictable than the 30% capacity source is."
Len Gould 6.8.07
To extend Todd, we should assume he meant to include "with storage" in his statement of "50,000 distributed generators"
Murray Duffin 6.8.07
Good article Ferdinand. Two additional points though. Oil exports from oil producing countries will drop earlier and faster than total oil production, almost certainly by late 2008, if not already in 2007. The supply of light sweet crude has surely peaked already, and about 70% of world refining capacity is geared to light sweet crude. This is especially a problem in LDCs that lack the resources to upgrade to the more complex and expensive refineries needed for heavy sour crude. Supply/demand of refined products is the first collision as evidenced by USA gasoline prices this spring. Someone above asked about the paucity of wells in the middle-east. The main reason is that extensive exploration has not revealed additional structures worth drilling. USA oil tended to be trappeed in many many small pockets. SA oil is much more concemtrated in large fields. Now modern technology permits tapping several pockets from one well as Shell is doing in Brunei. Murray
James Hopf 6.8.07
Todd,
And yet, no blackouts resulted. This is what reserve margin is for. In a large, well-connected service area or region, reserve margins can easily handle a ~1000 MW loss. IMPO, the reliability issue is overrated in general, as blackouts are extremely rare. There are many arguments for DG, but I don't think that system reliability is a very compelling one. Wasn't it on EnergyPulse where we heard from utility guys that it's a hassle to deal with connected residential generating systems (e.g., PV) and their negative impact on grid stability was one of the reasons? Are you SURE that having thousands/millions of little power plants, generating power at unpredictable times will result in higher grid reliability? There's more to it than just the maximum percent of grid capacity that could "go out" at any point in time.
Also, a distinction needs to be made between planned and unplanned downtime. Most of nuclear's ~10% downtime is in the form of planned outages that can be taken during periods of minimum demand (e.g., spring and fall). With respect to both meeting peak system demand, and system reliability (vs. blackout), such planned outages essentially don't count. Nuclear's unplanned outage rate is at most ~1-2%.
James Hopf 6.8.07
BTW, this reliability issue (discussed above) was brought up by Amory Lovins at a nuclear energy panel discussion on Wed. at Standford. He focused entirely on economic arguments at the forum. Same old radical cost estimates; 2-3 cents for wind and ~10 cents for nuclear; and conservation, renewable, and DG options soon becoming cheaper than even the operating cost of existing coal and nuclear plants. Yeah, whatever! Why is traditional energy demand going up so much? Why are energy costs going up so much? Why are so many utilities/govts. planning on so many new coal and nuclear plants? Is everyone that stupid or is it all some huge conspiracy?
At least I got to stand up and ask my question. I asked, if conservation, DG and renewables are so much cheaper than nuclear, then why are "environmentalists" apparently so scared of having a free, fair and open competition with nuclear? Why do they continue to support renewable portfolio standards, and state laws banning nuclear construction? Why not just tax or limit CO2 emissions, air pollution, energy imports, etc.., and let the larket decide? Surely, if Amory was even close to right, none of these things would be necessary. They wouldn't even need to campaign against nuclear, on safety issues or anything else, since it simply would not be a threat (as nobody would even consider building them). Choosing to spend ~10 cents when simple ~2 cent options are available that can meet all projected demand??? Amory gives the nuclear lobby too much credit!
James Hopf 6.8.07
Oops, I forgot to mention Amory's answer to my question. He gave a simple, one sentence answer. He said that he supports letting all sources freely and openly compete. I replied that we (apparently) agree on policy then. He said something similar in response to another question, i.e., that he would abide by the result if nuclear came in cheaper than renewables (i.e., if the market chose it). I found this mildly surprising. Is it possible that Amory is leading his followers into a trap? Could he be lulling them into such complacency that they don't bother to try and block nuclear, and then are surpised by the result? One can only hope.
Ferdinand E. Banks 6.9.07
The discussion in these comments seems to have moved from oil to nuclear, and that's good. I could be wrong, but I think that just about everybody interested in oil has come to see the fix that we COULD find ourselves in. Why, it wouldn't surprise me to hear 'Peak oil' has practically become a dinner table topic, and maybe even Oprah has been or will get into the act. If I remember correctly there were a few very photogenic people at the big conferences who might fit into one of Ms Winfrey's gigs, although I'm not going to say who they are.
Accordingly, it's time to put more effort into straightening certain people out about nuclear. Something to keep in mind though is that a large part of the opposition to nuclear has nothing to do with things like cost, but is based on a deep and immutable hatred of science and technology, the people who practice it, are interested in and know about it and especially know a lot about it, and very definitely those gentlemen who have practiced it successfully. Another factor might be some aspects of nuclear security, which is an issue that many years ago in e.g. Germany often led to the appearance of the expression 'electricity fascism'.
Murray Duffin 6.9.07
James, Amory is one of the best informed people in the USA on the subject of energy. I have worked with him enough to know that he is formidably intelligent and well informed. Having said that, I do feel that he has a bias against nuclear that goes way beyond relative economics. However he is worth listening to.
As for why energy efficiencies don't get implemented, there are several reasons. First and foremost is that most regularity regimes reward utilities only for selling more energy. In the few instances when regulations were changed to encourage efficiency/conservation the results have been very encouraging During their last crisis Southern California cut peak demand 10% in just a few weeks, mainly by painting a lot of factory and warehouse roofs white. The second reason is lack of incentive. Historically the cost of energy has been less than 2% of sales for most industries, and therefore never got management attention. Facilities managers almost never have a voice in top management, and are tasked with producing a dependable supply of energy where and when it is needed, not with doing so efficiently. Similarly energy is usually a small part of household budgets. Third is ignorance. Most people, including those who directly supply and/or use energy, are simply unaware of the potential for efficiencies. In industry, when presented with inefficiency examples, managers often get very defensive, feeling that their competence is being questioned. Architects are almost never taught about energy efficient design, although that is changing now. Rules of thumb are used in sizing heating and a/c systems that are simply wrong or outmoded, even though good analytic software is available and easy to use. Fourth is sunk cost. People are reluctant to retrofit older homes because of the up front cost, and are rarely motivated by, or understand, payback times. Same with building owners. Fifth is who pays. Landlords rarely have unit metering, and simply allocate building energy costs to the units, so have no motivation to lower costs. Renters can get no benefit from acting individually. The list goes on, but these examples give the idea. Now your assignment is to come up with policy changes to overcome these barriers. I have fairly extensive experience in realizing energy efficiencies, and my experience is that the low hanging fruit costs from 1/2 cent to 3 cents per kWh, and can easily be 50% of the energy being used. In my last job we lowered corporate energy use per unit manufactured by 30% over 5 years, with payback times under 2 years. I am very confident that the USA could maintain its present living standard on 1/4th of the energy now used by widely applying best available technology along with non burdensome conservation. Murray
Ferdinand E. Banks 6.10.07
Murray
I really hate to disagree with you, but it doesn't make any difference how smart Dr Lovins is if he insists on coming to the wrong conclusions, and then defending them with all his heart and soul, year after year. That's why the faculties of economics in Sweden are going into the can, and I'm sure that the same thing is true elsewhere. There might be good political and psychological reasons for being against nuclear, and it's possible that I might be willing to listen to Lovins as he spells these out, but never where economics is concerned.
Murray Duffin 6.10.07
Ferdinand, in fact the cost of nuke generated power in the USA today is far higher than coal, NG, or renewables, mainly because of amortization and provisions for waste storeage and decommissioning so Amory is right on economic grounds based on present reality. Projections for future nuke plants are much more competitive, but they haven't been proven yet. While I think Amory is wrong on the future for nukes I have found that even in his seemingly most outrageous energy comments, he is usually right. Just because we may disagree on one point is no reason to reject his wisdom overall. Believe me he rarely comes to the wrong conclusions, certainly less often than me, maybe less often than you. Murray
Len Gould 6.10.07
Murray: How much cost of nuclear needs to ba assigned to line items like "responding to anit-nuclear lobbies" and "assuaging vague irrational fears among the uninformed" in order for the cost of nuclear generation to ever exceed the cost of gas-fired generation in any rational projection of the future?
Ferdinand E. Banks 6.10.07
Murray, this is the point at which I repeat the line that I have been trying to sell since I joined this forum. Almost half of the electricity in Sweden was generated by nuclear, and almost half by water. In Norway it was almost all by water. Until deregulation came along, Sweden and Norway had the lowest cost electricity in the world.
Finland is building the largest nuclear facility in the world, while in Sweden at the present time the intention is to use more gas. Closing nuclear plants in order to use gas is one of the craziest ideas to ever come down the pike. At the same time I admit that a certain logic is present at some level in these matters. As Lieutenant Kiefer intimated in 'The Caine Mutiny', things like nuclear reactors are designed by geniuses, while at the other end all sorts of looney-tunes can get their crank ideas heard and tolerated. As an example consider the former prime minister of Sweden calling nuclear energy "obsolete". The thing to focus on here is that Mr Persson is not stupid, but his desire to be reelected logically required him to label nuclear energy "obsolete". He would have declared plutonium edible if the parasites in Brussels had given that as the price of a 'commissioner-ship'.
Incidentally, what they have done in this country cost-wise, they could have done in the US. This is the kind of economics I teach, and in fact the kind found in the economics textbooks at your favorite university.
James Hopf 6.10.07
Murray (your 6/9 post),
I agree with everything you said about the reasons why conservation measures haven’t been implemented, as well their large theoretical potential (heck, my typical total utility bill – gas plus electric – is ~$40/month). I also acknowledge that Mr. Lovins is definitely very sharp and articulate. It’s those very points you made about the real-life barriers to conservation, however, that Amory seems to miss in his analyses. Everything he says is probably right, on paper. It’s just not credible, however, to base energy policy on the assumption that all the sudden everybody is going to get enlightened and do the right (or most economic) thing. The nation, and utilities, must plan for what will happen; not what theoretically should happen.
Just because a conservation measure makes economic sense doesn’t mean it will be implemented. It is relatively straightforward to make policies that will guide/affect supply options, as supply choices are made by relatively few large players (utilities, etc..) that make well-analyzed, rational economic decisions. Energy conservation decisions, however, are largely made by “the public”, i.e., by huge numbers of various entities that can not be directly or easily controlled, and whose decisions are not guided by rational economic analysis. Having everybody do the right/optimum thing is not a policy option that we can choose.
Experience seems to show that it takes relatively high energy prices (as a fraction of people’s incomes) before people even take the time to think about (or implement) conservation options, no matter how economical they are. IOW, high energy costs have been the only thing that has seemed to work. High energy costs are the main reason why per-capita energy use in CA has been flat (for example). The thing is, at the energy prices necessary to spur conservation, supply options (including nuclear) would be able to compete. Other than high prices, one policy option that we can actually take is energy conservation programs. As Chris Neil pointed out in the discussion thread of his recent article, however, the best conservation programs yet seen have only managed to cut the growth in power demand in half (i.e., from ~2%/yr. to ~1%/yr.).
I’m willing to believe that we might be able to do even better, and I’m generally supportive of (or at least open to) other conservation policy options such as much stricter appliance efficiency standards. I’m even inclined to support the incandescent bulb ban being proposed in CA!! I do not believe, however, that conservation policies will result in a significant fall in energy prices, or that they will make future supply options unnecessary.
James Hopf 6.10.07
Nuclear waste management/disposal and plant decommissioning costs amount to only ~0.33 cents/kW-hr. These costs are fully paid for, and included in nuclear's ~1.5-2.0 cent/kW-hr operating cost. High overall costs are entirely due to upfront capital costs, and the various construction delays that occurred. My understanding was that the average cost for out current LWRs was ~6-7 cents (although this may be in older dollars). Amory's 9-11 cent quotes only fit for the very last few (i.e., most delayed) plants to come on line.
And yes, for a large number of the plants, a lot of the cost was due to regulatory/legal delays, as well as (perhaps) deliberate delays by the utility because the capacity turned out to not be needed yet. While these factors certainly added to the cost for these projects, it is not really right to say that this is the technology's "fault", or that these projects are a real reflection of the inherent cost of the technology. It is hoped that most of these factors will be reduced the next time around.
Yes, nuclear was, and is, more expensive than dirty, conventional coal (my understanding is that IGCC coal is not much less expensive, if any). But this is only because coal was not held to any significant standards, and does not have to pay for its massive external costs (estimated at ~4-8 cents, by studies like ExternE, etc..). If it did, it would be more expensive. Also, air pollution resitrictions are (albeit slowly) tightening to a point where coal's cost advantage is being significantly reduced. Finally, if one assumes that we really should (or are going to) try to reduce CO2 emissions, then coal's relative cost is irrelevent, as increasing it will not be an option. And no, I do not believe that coal w/ sequestration will even come close to competing w/ nuclear.
As for gas, the brief gas glut of the '90s is over, North American gas is going into (perhaps rapid) decline, and most remaining reserves are in Russia or the Middle East. It's not even true, any longer, that gas is cheaper than nuclear. And this will remain true in the future, as gas supplies decline and demand for gas grows. And this does not even count the large external costs of using gas, such as speeding the decline of an important resource, and the geopoltical/economic costs of being dependent on the Middle East for our electricity as well as our transport. Even if gas were a little bit cheaper than nuclear on purely economic grounds, I stand by my position that it should not be used for baseload power production anyway, given the reasons above. Also, any CO2 penalty would clearly push gas ahead of nuclear in terms of cost.
As for nuclear's cost vs. renewables, this is just one area where we (Murray) will have to agree to disagree. Most renewables (other than wind and perhaps geothermal) are significantly more expensive than nuclear. Even for wind, cost estimates are all over the map. Today's San Jose news article quoted wind's cost at ~6.8 cents/kW-hr (they must have spoken to EPRI..). And, of course, there is the intermittentcy issue, which many believe will limit renewables share (wind's certainly) of generation to ~15-20% at most (another area where we disagree).
We may never agree on these cost esimtates/projections, or about whether nuclear will succeed in the future. The beauty of it is that we don't have to come to agreement on these points in order to agree on the best energy policy. Good policy does not rely on prognostications, projections of future costs, or bets on future breakthoughs. Good policy sets requirements and lets the market figure out the rest.
As I've said before, and as I said to Amory at the conference, the only way to sort this out is to just tax or limit CO2 emissions, air pollution, and oil/gas imports, and let the market decide what happens. He said that he agrees with this policy. Perhaps we all can. (He also said (apparently) that he'd accept not having any policies that block or hamper nuclear.) Once the correct policies (and market ground rules) are set, personal views on the economic costs or the future potential of various energy sources are completely irrelevent. With the correct policies, the best (deserving) sources will win out. I'm willing to abide by the result.
James Hopf 6.10.07
As for Amory's projections, IMO he's been rather profoundly wrong on some very important points, and not only ones related to nuclear power.
I've read that Amory predicted that oil and gas prices would spiral ever downwards in the future, as people continually implement all those conservation, DG and renewables options that make "so much" economic sense and are "so cheap" (e.g., < 1-2 cents). Thus, as energy demand decreases, supply always would exceed demand, resulting in lower and lower prices. Suffice it to say that he's been wrong on this issue. Traditional energy demand is increasing steadily, and the price of oil and gas has gone way up. Even the recent high gas/oil prices have not caused demand to drop measurably (despite how cheap those alternative options supposedly are).
Even with all this recent contradictory evidence, Amory repeated as much at the Wed. conference. In reference to low-hanging fruit, he referred to "being waste deep in fruit with fruit falling on top of our heads". He even predicted that as people implemented huge amounts of conservation, renewable and DG options that cost less than 2 cents/kW-hr, even our existing coal and nuclear plants would close down as even their operating costs would be undercut by these other options. I KNOW that this isn't going to happen (and don't even need to wait to find out)!
As I stated in my earlier (6/8) post, if any of what he was saying were close to true, the actions of a whole lot of people/institutions are very hard to figure out. Why is everyone (in all nations) planning on building so may coal and nuclear plants? No govts. or utility executives are predicting that power demand will decrease. None are saying that renewable options will be able to make up more than a small fraction of future demand (despite the fact that they can make as much money from renewable projects as anything else).
Anyway, once again, let's see who's right. Require reductions in CO2 and let the market decide...
Murray Duffin 6.10.07
James, I agree with everything you said. Amory's optimism is unrealistic, but his knowledge of the energy field and the ways of realizing efficiencies is amazing and creative. the points I made about barriers mostly came from Amory's writings. He may not have used them in his talk, but if he neglected them he did so consciously. He never speaks without an agenda, and at least his idea of how best to forward it. When we do finally get to efficiency, and we will eventually when forced to by scarcity, almost everything we do will be things that Amory has been pushing for upwards of 30 years. I agree with all of you quantifications with the exception of wind. See my article on wind here at Energypulse. Murray
Ferdinand E. Banks 6.11.07
Murray, you say that 'eventually' we will have to do the things that Amory wants us to do now. When is eventually: 10 years, 20, 50, 100? The point is that if eventually is not tomorrow, or next week, or... , but is well into the future, you could be absolutely correct. But as for doing these things NOW, or in the near future, my economics tells me that somebody is very wrong.
Sir Nicholas Stern will give a talk in Stockholm this week. I gave serious thought to going there and putting on a show for the birdbrains in that great city who believe in his approach to our environmental miseries; but this morning I looked in his book - which will be required reading for numbskulls now that President Bush has second thoughts about warming - and if the index to that volume gives any indication of what it contains, nothing was mentioned about e.g. nuclear. I forthwith changed my plans, because if I had attended that burlesque and asked Stern why nuclear was omitted from his famous contribution, and he could not provided an acceptable answer, he would have heard certain things about that project and the people who invited him here that would not have made him happy.
In an ideal world the comments above by James Hopf and others - excluding my good self for the time being - would be recorded somewhere, edited, and passed out to those persons who are interested in this topic, but who lack the gusto to do the necessary research.
Kenneth Kok 6.11.07
Ferdinand, your 6/9 comment relating to the opposition to nuclear having nothing to do with cost is right on. I do not have the links but two recent papers give rise to that conclusion. the first is a paper by Robert Alvarez entitled "Radio Active Wastes and the Global Nuclear Energy Partnership". Alvarez is at the Institute for Policy Studies in Washington, DC. The second paper is edited by Frank Barnaby and James Kemp and is entitled "Secure Energy? Civil Nuclear Power, Security and Global Warming". This paper is published by the Oxford Research Group in London. Both make very interesting reading even though I personnaly do not agree with their conclusions.
Joseph Rosenthal 6.11.07
The problem with the Amory Lovins approach is it assumes that only the best, most useful, conservation/efficiency/distributed generation/renewable measures will be implemented. Based on my experience in CT, that won't happen. Instead, we'll subsidize everybody's crony in the ethanol, fuel cell or smart metering business, etc. When you break open the electric system in a place like Connecticut, a lot of bugs hire a lobbyist and crawl in for a handout.
It is better to just do one big thing, in my view, like build a nuclear plant, and then do your best to regulate the cost using traditional rate principles. If you try to do 10 good small things, you'll wind up doing 90 bad small things for campaign contributors. That's the reality check.
Murray Duffin 6.12.07
Ferdinand, I added a comment about export peak above, because I have been trying to track exports for over a year now. Seems like someone with more time has done a much better job, but with the same conclusion. Peak seems to be now. I don't believe that SA is voluntarily holding any significant capacity back. See: http://www.theoildrum.com/node/2651#more . Murray
Todd McKissick 6.12.07
I have thought for a long time that energy prices, both mobile and stationary, would eventually take a dive. However, I always thought this would only happen if the alternatives took the market by a higher percentage than the combined shortage of growth plus post peak production decline. If Murray is correct, and I see no contrary evidence, then it looks instead like the alternatives may endlessly trail that shortfall. Could be in for tougher times.
Ferdinand E. Banks 6.13.07
Murray, you get no argument from me about SA's production plans. 35 years ago the king of that country made it clear where he wanted to go, and it wasn't where Big Oil wanted him to go then, nor where the IEA or USDEA think that SA will go now. As for exports of crude decreasing, that makes economic sense too, considering the petrochemical capacity being constructed in that part of the world.
I have another oil paper that I will try to publish in this forum, but on the basis of the comments above I think that it's time for me to start thinking about the 'economics' of nuclear energy, and why people insist on being so irrational about it. I saw something in a French paper about doubling the present global inventory of nuclear plants. That makes sense to me, even though that might be a tadd too few, but I suppose Amory and his friends have reservations on this point.
Roger Arnold 6.13.07
I am very confident that the USA could maintain its present living standard on 1/4th of the energy now used by widely applying best available technology along with non burdensome conservation. Murray
That's a fairly radical statement. I happen to agree with it, but with a big caveat: to live on one fourth of our per current capita energy income, we will have to adopt significant lifestyle changes. I doubt that efficiency improvements alone can get us there.
For the most part, I think the necessary lifestyle changes would enhance our "standard of living" (quality of life), but they will involve considerable disruption to the economy as it currently operates. We'll have to move away from "planned obsolescence" and drastically reduce consumption of expendable goods.
In another current article on this site, Gary Hoffman has a couple of pie charts on energy usage in the U.S. I haven't cross-checked his data, but he shows "heating and cooling" accounting for 33% or our energy consumption, "food" a surprising 25%, and "transportation" a mere 7% (in one chart) or 9% in another. (Don't know why the discrepency.)
I'd wager that the high energy consumption for food is not in the fertilizers, pesticides, and cultivating that people might think of; it's almost certainly for packaging and processing. (I.e., manufacturing of cans, bottles, and plastic containers; cooking and freezing and refrigeration.) To reach 25% of current energy consumption there, we'll have to follow patterns closer to those prevailing in most of the rest of the world--daily shopping for mostly unpackaged fresh produce at local farmers markets. Bye, bye, supermarkets.
Murray Duffin 6.14.07
Roger, it is not really radical. the big element is the difference between primary energy and useful energy. We use less than 1/3rd of the primary energy in coal for example, but all of the electrictity generated by PV is primary. Replacing fossil fuels with renewables automatically cuts energy consumption by more than 1/2 except for hydro and nukes. Nukes can be made much more efficient by using the waste heat. The rest of the cut is efficiency and conservation, and 50% is a piece of cake. Will check Hoffman, but 28 quads of our current near 100 quads is transportation fuel. I don't think the containers are much of the food energy. Cooking, freezing and transportation are biggies. Murray
Murray Duffin 6.14.07
On our discussion on another thread check this out: http://rutledge.caltech.edu/ . 0.8 degrees further warming, in exact agreement with me. Note the credit to Laherrere for first publishing the IPCC scenarios impossibility. I sent Laherrere the original analysis I had done, but he got published, being much better known. Murray
Len Gould 6.14.07
Murray: I see nothing in your reference document to change my opinion regarding future actions. I consider the climate change issue is "done discussion" by 2050, eg. whatever happens from now to 2050 will determine earth's future, and humankind's place in it. The graph near the end which shows a "producer limited profile" a bit below IPCC projections is shown on an adjusted scale, eg. not zero at the bottom. At 2050, it appears that the "producer limited profile" and the median of the IPCC predictions are not differing by more than perhaps 10% or less. Also, the assumptions made on why the author chooses to use lower than official numbers for coal reserves ("no minimg within xx feet of another shaft", "no mining with less than xx feet overburden" etc etc.) are very likely to be breached if shortages develop and eg. inground gasification becomes popular (it's already proven to work). I know for a fact that given inground gassification, there are huge areas of western Canada underlain with deep seams of low-value coal which can easily be exploited, but don't show up in the author's figures.
I think this track is a waste of time.
Malcolm Rawlingson 6.14.07
Well, I can't comment on the costs of US nuclear energy but in Canada we can produce electricicty for 4.2 cents Cdn per KwH all costs including monies set aside for used fuel storage and handling. So by all accounts we are doing better than our American counterparts.
I am not sure how Murray would use the waste heat from a nuclear plant to improve efficiency. We use a thermodynamic steam cycle which is only about 38% efficient. Therefore 62% of the nuclear heat generated is wasted as low grade heat content of cooling water.
i would appreciate some amplification of the concept you had in mind Murray.
malcolm
Don Giegler 6.14.07
Is the Murray Duffin commenting in the string above the same unbiased arbiter who, 3 odd years ago, ventured that: "Fully costed, nuclear generated electricity today costs from 6 to 10 cents/kWh, not competitive with coal or natural gas. However the main component of that cost is plant amortization at 5 to 7 cents/kWh. Most of our fleet of nuclear plants was built in the 1970s and is now approaching the end of the 30-year initial amortization period. About 7 plants have already been re-licensed for a longer useful life (now 50 years), and several more have applied for re-licensing. After amortization, the cost of electricity for these plants will drop to about 2 cents/kWh, a cost that makes electricity almost free, and that no other source of electricity can compete with. Experts feel that with sound maintenance, the lifetime of a nuclear plant can be near “forever”. Of course, this means that nuclear energy consumers, over the last 30 years have paid for very cheap energy for their progeny, an unusual and certainly unintentional act of altruism." ?
Don Giegler 6.14.07
Malcom,
Here are some folks who claim close to 50%:
"THE SIMPLICITY OF THE GAS TURBINE AND THE HELIUM REACTOR PROVIDE THE NEXT GREAT STEP IN NUCLEAR POWER PLANT DESCRIPTION The entire GT-MHR power plant is essentially contained in two interconnected pressure vessels enclosed within a below-ground concrete containment structure. One vessel contains the reactor system and is based on the steam-cycle MHR which was developed as part of the U.S. Department of Energy's Modular High Temperature Gas-cooled Reactor program.
The second vessel contains the entire power conversion system. The turbo-machine consists of a generator, turbine and two compressor sections mounted on a single shaft rotating on magnetic bearings. The active magnetic bearings control shaft stability while eliminating the need for lubricants within the primary system. The vessel also contains three compact heat exchangers. The most important of these is a 95% effective recuperator, which recovers turbine exhaust heat and boosts plant efficiency from 34% to 48%.
As an added benefit, the GT-MHR also has the potential to consume weapons-grade or reactor-grade plutonium as fuel to provide electrical energy.
HIGH TEMPERATURES MEAN HIGH THERMAL EFFICIENCY
SCHEMATIC FLOW DIAGRAM
• Background • Plant Description • Benefits • Safety • Power Conversion Unit Technology • GCR • Graphites • Summary
• Home • GA Home Page • Russian GT-MHR Project • Contact Us • Webmaster@ga.com
General Atomics • 3550 General Atomics Court • San Diego, CA 92121-1122"
Unfortunately, their colorful diagrams didn't copy to the comment box and the pitch above will probably get warped beyond recognition by the format used here. Give www.gat.com and the power reactors option a try for the full treatment.
Arvid Hallén 6.16.07
Sure, the GA nuclear gas turbine is a fascinating idea. But the economics?
With the exception of big hydro, the tried and true way to get cheap power is to build nuclear power plants (with state loan guarantees or credits to minimize the effect on power prices due to the massive capital costs), and generally, the bigger the reactor the cheaper the power.
Why change a winning formula?
Just build lots of big reactors and have the state involved in the financing.
Malcolm Rawlingson 6.21.07
Don, Thank you. I thought Murray was referring to increased energy usage (efficiency) from existing steam cycle plants where the heat is at such low temperature and high volume in the cooling water that the notion of utilising it seemed a bit off the wall wrt thermodynamics. If the HTR is what he was referring to then I understand. I have been following this pebble bed design for a few years.
For Arvid, the HTR has some advantages over large scale steam cycle nuclear in that it can be built in smaller modular units closer to loads. Big blocks of power designed to dreduce construction costs per megawatt are great and should certainly make up the bulk of the power system to replace coal and other fossil fuels but if the power lines to these big power blocks are lost a sizeable chunk of power goes off line in one go and can instigated grid instabilities. But I understand what you are saying - mass production of electricity is the key to lowering price.
I don't dislike the idea of DG but integrating millions of small systems onto the grid without some sort of concurrent energy storage system is going to be troublesome - or we do away with grids altogether which will force everyone to be a generator....and I cannot see that happening. Energy security is a big plus for it but I doubt the reliability of millions of microsystems is going to be better than the reliability of a nuclear plant....many of which operate in the 95 - 100% capacity factor range.
Probably the outcome of persuing DG options is two parallel systems being built and a doubling of societies costs of producing electricity. I don't think DG will ever replace big plants - but that does not make it wrong.
Malcolm Rawlingson 6.21.07
Ferdinand, My apologies for kinda hijacking this oil thread. It seems to have ended up in a nuclear discussion and I had not intended to do that.
I would welcome a paper from you that discusses the economics of nuclear power with the insight of an economist. There is much misinformation on this subject (from both sided of the debate) that a clear discussion of its true cost relative to other methods of energy production would be helpful.
Malcolm
Richard Vesel 8.14.07
Professor Banks,
To first quote you...
"I gave serious thought to going there and putting on a show for the birdbrains in that great city who believe in his approach to our environmental miseries; but this morning I looked in his book - which will be required reading for numbskulls now that President Bush has second thoughts about warming - and if the index to that volume gives any indication of what it contains, nothing was mentioned about e.g. nuclear. I forthwith changed my plans, because if I had attended that burlesque"
While this may be what you consider amusing drawing room conversational style, I respectfully submit that the inherently arrogant nature of your wording serves only to alienate those who might marginally be in accordance with your views.
The solutions to our energy issues is only part technical, and in larger part, political, as you have already recognized. As you may openly criticize and disdain the political participants in such ways as above, I submit that you are most likely pushing away necessary potential allies in your struggle to promote the nuclear option. I know that if I were on the receiving end of a single "birdbrain" or "burlesque"-like comment, that I would be likely to shut down any further consideration of anything you had to say, no matter what its merits.
Now to matters of the economics of oil - the only situation that I see in operation over the past ten years is the simple "supply and demand" rule of macroeconomics. In the not so distant past, we had oil (for a short while) in the $9-10 per bbl range. Why was it so cheap? A slight overproduction, creating a plentiful surplus in the spot market, which sold dirt cheap, and prevented people from bidding up the price of futures contracts in the commodities markets, where the REAL price of oil is set.
This was ruinous to many uncoordinated economies that depended on the production side. They FINALLY did the simple math that told them to dial back a few percent on production, and gain many multiples of that percentage on the price side. Meanwhile, on the demand side, that cheap oil promoted further demand escalation, and just in time, the oversupply began to disappear. Prices have escalated almost continuously since then due to a combined coordinated management on the production side, and a sudden fear of the "future issues" we (almost surely) will eventually face both on the supply and demand sides, which were INVOKED by the price ramp.
Right now, tho, in my humble opinion, the futures markets are pricing 2008-2009 oil based on problems we may be facing in 2025-2040. This is a dark-side phenomenon of "irrational exuberance" which may or may not crack soon, but will surely do so at some point. Oil is not "rare" by any means, and won't become so for decades at least. I see the current pricing of fossil energy in general, to be caught up in the maelstrom of dynamics when the dominant technology begins to be supplanted by better options. As such, we can be expected to endure a stomach-wrenching ride on the price curve rollercoaster for quite a while, while energy technologies roll over one another to move from the 19th century to the 21st.
In excess of 70% of oil production goes towards combustible fuels: oil, diesel, jet fuel, and gasoline. If we are to put a dent in consumption and price, the transportation industry needs to have an economic alternative to the internal combustion engine. Automobile PIHV technology can make a small dent in the problem (and will plug-in to your nuclear driven grid), but what of trucks, planes, and ships? Nuclear is not an option, except for perhaps government operated ships of sufficient size (generally not a palatable solution tho, eh?).
I am green, but no watermelons in this patch...
RWVesel
Ferdinand E. Banks 8.20.07
No, Mr Vesel, you have simply got it completely wrong. There is not adequate liquidity in the oil futures market for maturities over 6 months, and often not over 3 months. As a result, even at the alpine heights of pure theory , that market has only a limited ability to price future oil. But even if there was adequate liquidity, you have still got it wrong. This is because of the particular types of uncertainties in the oil market.
And by the way, this is FRED BANKS that you are lecturing to now, and on this particular topic he makes very few mistakes I am glad to say. If you were ever to find yourself in a seminar room with Fred, I think that you would get the message.
