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In a recent edition of his ‘blog’, one of the authors of Freakonomics (2005) – Stephen Levitt – made a few comments about his short stay in the United Arab Emirates (UAE) state of Dubai. As most viewers of CNN are aware, luxury is the order of the day in that lucky nation, however in mulling over the details of this condition, Professor Levitt failed to emphasize the key economic element behind Dubai’s rise from a fishing village to a middle eastern version of Monaco. The ingredient to which I am referring is systematic diversification, which in this case means that emphasis is unambiguously put on the conservation rather than the production/export of crude oil – where crude oil is oil as it is found underground, i.e. unprocessed. This approach means that less than 10% of Dubai’s GNP is now directly attributable to oil, and as trade and the provision of services increases, measures may be taken reduce the output of crude even further.
Unfortunately, I probably know less about the behaviour and intention of Dubai’s government than most of the persons who generously commented on and extended Professor Levitt’s observations, however unlike many of them I understand that in the Gulf (and perhaps elsewhere), policies derived from the laws of mainstream economics have finally superseded ad-hoc or knee-jerk response to shifts in oil supply and demand, and consequently could have a profound effect on the future (global) availability of that indispensable commodity. To get some idea of what we are dealing with, I would like to sketch the argument that I imposed on students in my course on oil and gas economics at the Asian Institute of Economics (AIT) during the spring term of 2007.
THE MAIN ARGUMENT
One of the prerequisites for successfully completing any course in energy economics that I teach is to understand perfectly the situation in the key oil exporting country, Saudi Arabia, in the early 1970s – specifically, just before and just after the nationalization of oil production facilities that were owned or controlled by foreigners.
The intention by foreign managers was to raise production (in phase with increasing demand) to a peak of about twenty million barrels per day (= 20mb/d), and to keep it at or close to that level for as long as possible. Eventually, for economic reasons, it would decline. Once it is understood that the most important variable is cost, the relevant algebra is straightforward: cost is a function of present and past production, with the latter a determinant of what is known as natural depletion(or natural decline) due to its effect on deposit pressure. As explained in my new textbook (2007), and also in Henderson and Quant (1995), what we are dealing with is inter-temporal profit maximization in the presence of a constraint. The constraint is the (estimated) total amount of reserves to be exploited, with these being parcelled out over a certain number of periods (e.g. years) on the basis of expected future prices and costs. The costs are of course opportunity costs, one component of which involves comparing the profit from exporting crude oil to the profit from exporting oil products and petrochemicals.
The thing that made (or should have made) this exercise exceptional is that oil is an exhaustible resource: oil that is removed from a deposit in the present period is unavailable later. The major producers (e.g. ‘Seven Sisters’) recognized this, but initially they believed that when oil began showing signs of exhaustion in one locality, it should be possible to begin or expand operations elsewhere. For this and other reasons, until recently, several influential researchers found some of my lectures highly objectionable, since they preferred to assume that the global output of oil in a given year would always be a trivial or uninteresting fraction of the total in the earth’s crust. The way they sometimes put it was that we were running into rather than running out of oil! But the appearance of an oil price above $90/b concentrated many prestigious minds, and so now it takes a brave scholar to disregard the misfortunes that depletion might eventually bring to those of us on the buy side of the market.
Conceptually, things were not so easy for the new owners of oil in places like Saudi Arabia. Their aim was to maximize ‘welfare’. Expressing welfare in a serviceable mathematical form would probably overtax the ingenuity of Albert Einstein, but it definitely means more than profits and ‘transfers’. Probably the best description is sustainable prosperity in the widest possible sense – i.e. not just for the oil sector. The rigors of maximizing welfare have undoubtedly been brought to the attention of Major Chavez, and I gained a small insight into these matters when I was attempting to teach development economics in Dakar (Senegal) as an offshoot of my course in mathematical economics; however, as I surmised for many years, the oil states in the Gulf possess the wherewithal to ultimately provide a commendable example. A display of this capacity is sometimes labelled ‘resource nationalism’, and as Edward Morse pointed out (2005), it could entail “much lower oil supplies than would otherwise be available.”
FURTHER ADO ABOUT SOMETHING
In the termination of a not so friendly discussion, I was presumptuously informed by a well-known academic that Saudi Arabia now has 4 large deposits in the initial phase of exploitation. If that were true, which it isn’t, then the present discussion would be uncalled-for. Saudi Arabia is still regarded as the primary exporter of oil to the main oil importing countries, and my contention both here and elsewhere is that a demonstrable willingness on their part to steadily increase output over the foreseeable future is perhaps the most bizarre fantasy ever put into circulation by the International Energy Agency (IEA). Arguably, the most provocative writer on this topic is Matthew Simmons, an investment banker and former advisor to President Bush, whose work implies that the forecasts of the IEA cannot possibly be taken seriously. He maintains that Saudi Arabia (and probably other Gulf states) are either incapable or unwilling to produce and export an amount of oil that could turn the pipe-dreams of the IEA into reality. Best to think of a sustainable output in the vicinity of 9-10 mb/d for that country.
Similarly, in both my lectures and written work, I have claimed that important exporters like Saudi Arabia and Russia will do everything possible to reduce their export of unprocessed oil. In line with the teachings of orthodox development economics, ‘value will be added’ by using much of the crude they lift as inputs for refinery products, and thus petrochemicals. In addition, with continued economic growth in exporting countries, additional oil will be required for domestic consumption activities. A good example is Tartarstan, which is in the Russian Federation. Their output of oil will be held constant, but much of it is destined for a new petrochemical installation. Simple arithmetic then suggests that exports (of crude) from this district will decline.
Here it is interesting to cite an important contribution of Professor Morris Adelman and his colleague Martin B Zimmerman, who more than 30 years ago perceived the handwriting on the wall. They wrote: “…. in the production of petrochemicals, most LDCs are at a severe and permanent disadvantage for lack of know-how, and the high opportunity cost of capital and feedstocks. Other countries, particularly OPEC members, who do not face these obstacles are expanding their petrochemical capacities. This too will drive prices down, lower the profitability of all plants built today, and force losses on many investors. Few can compete with those that get their feedstocks at a fraction of world prices, and are willing to earn low or negative rates of return.”
Facing “low or negative rates of return” is not (and probably never was) an outcome that the new OPEC petrochemical giants anticipate experiencing: they not only will obtain their feedstocks at a low price, but their new plants are state-of-the-art in regard to cost and flexibility. It can also be appreciated that what is said above or elsewhere about petrochemicals applies to refining. Returning to Saudi Arabia, one of the indicators of their confidence is not just a rapid expansion in oil products and petrochemicals investment, but other enterprises specifically designed to provide employment for an expanding population. These plans include four new ‘economic’ cities, power stations, smelters and facilities for exporting large amounts of various of industrial products. Furthermore, as Neil King of the Wall Street Journal pointed out (December 12, 2007), the Saudi industrial “drive” will strain their oil export role.
FINAL STATEMENT
I never tire of reminding my students how Professor Milton Friedman predicted the downfall of OPEC, and the collapse of the oil price. He convinced a number of his fans that he knew what he was talking about, but as things stand at the present time, we will be extremely lucky not to confront a sustainable oil price in the vicinity of $100/b before the end of 2008, which could mean a magnifying of the macroeconomic and share market discomforts that many are already experiencing. Think about it: an oil price of $100/b or perhaps more! This is the kind of phenomenon that starts people talking about the end of the world.
I also suspect that it might be wise to correct those persons who insist that things are different from the way they are described in this presentation because the real value of the dollar has greatly decreased due to inflation and exchange rate changes. For instance, although a declining dollar is annoying for oil exporters in general, their situation is actually not so unfavourable as often alleged. As clarified in my forthcoming paper ‘Economic Theory and the Price of Oil’ (2008), the present (and future) physical transformation of the Gulf states alluded to above would be impossible if the dollar decline was as malicious for oil exporters as often maintained in academia and the business press. The reason is simple: comparing the oil price in l980 with the oil price today – as the pompous Josh in The West Wing attempted to do – is as scientifically meaningless as comparing a rap standard to a Beatles rendition of ‘Hail to the Chief’. The base year for calculating the real price of oil should probably be in the early l990s instead of about the (journalistically convenient) time of the first ‘oil price shock’. Students of the oil market should never doubt that the real price has definitely increased, although supplying an analytical proof might take a little effort.
Last but not least, a short mention of PEAK OIL seems in order. (And here, an important analysis is provided by Mamdouh Salameh (2007).) Peak oil is not about the future – it’s about the past!. It’s about the (generally unspoken) intention – formulated many years ago by the most important countries in OPEC – to reduce the ‘RATE’ at which their oil (and probably also gas) is produced when they get the opportunity. The present high oil price has given them the opportunity. It’s about more money rather than less – that is to say common-garden profit maximization; and for students of financial economics, increasing the value of an option whose underlying is the asset called oil, by extending the exercise date. As might be shown by your favourite teacher of Economics 101, it’s about controlling the left hand side of the global supply curve, which could also mean control of the entire curve. Basically, it’s not about geology but about economics.
REFERENCES
Banks, Ferdinand E. (2007). The Political Economy of World Energy: An Introductory
Textbook. London, New York and Singapore: World Scientific.
_____. (1980) The Political Economy of Oil. Lexington and Toronto: D.C. Heath.
Henderson, James M. and Richard Quandt (1995). Microeconomic Theory: A
Mathematical Approach. New York: McGraw-Hill.
Levitt, Stephen D. and Stephen T. Dubner (2005). Freakonomics. London: Penguin
Books.
Morse, Edward L. (2005) ‘Oil prices and new resource nationalism’. Geopolitics of
Energy’. (April).
Salameh, Mamdouh G. (2007) ‘Peak Oil: myth or reality’. Dialogue (November).
For information on purchasing reprints of this article, contact sales. Copyright 2013 CyberTech, Inc.
More excellent work. Further on "peak oil" and the good points you've made, i'd add that I've begun to ignore any discussion of an absolute peak volume production and started to look for what I consider the more important peak, which is "peak dollars paid per yr to oil producers as a percentage of world annual GDP". I suspect that or something like it may be a more important number/date (though i couldn't argue why yet) and is likely already past.
Ferdinand E. Banks 2.13.08
Strangely enough, I now have the feeling that the 'oil' message has been received and understood by the right people. I was especially glad to see the contribution by our colleague Tam Hunt, and I hope that he (or someone else) takes a close look at the gas markets.
As for dollars/year going to producers, they must be very very happy, because at long last they are in the drivers' seat, and they are probably looking forward to a long and pleasant ride. There is a lot of talk now in the business press about sovereign funds, by which they mean funds controled by governments, which in some cases will used for substantial physical investment and not just wheeling-and-dealing. This could change a great deal in the world in the years to come.
Fred
Bob Amorosi 2.13.08
Dr. Fred, the producers are certainly in line to becoming much much richer as the crisis grows. As a concerned consumer I would also want and expect all levels of governments to do everything in their power to foster new physical investment to ultimately make us less dependent on these producers. If this means coughing up tax dollars now to insulate us from future economic shocks, that's alright with me.
I know there are other past authors on this website that are loathe to the whole idea of government intervention in free markets. I wonder what their tune will be if oil hits $200 per barrel or more, and potential shortages lead to gas station line-ups like we saw in the Arab oil embargo 35 years ago.
Len Gould 2.13.08
correction: I didn't mean " and is likely already past. ", I meant to say that though peak production is probably already past, the "peak dollars paid per yr to oil producers as a percentage of world annual GDP" is still to come for certain, and that's the peak which worries me.
Ferdinand E. Banks 2.14.08
I wouldn't worry about oil at $200/b and gas station line-ups if I were you, Bob. That price would mean another war. As for governments doing something about the bad oil news, I expect this to happen. Some people are laughing at President Bush for saying that the U.S. is addicted to oil, but I don't get the joke. This sub-prime (mortgage) thing apparently isn't over, and an oil price in the 90s which can't be pressed down because of that addiction (and a few other things) just adds to and prolongs the misery, and not just for the U.S.
Bob Amorosi 2.14.08
If OPEC were a group of companies within a single country, correct me if I'm wrong but wouldn't their meetings be regarded as equivalent to competitor collusion to fix prices by controlling market supply. If so they would be subject to litigation in the courts under our fair competition laws, both in Canada and in the US. If this is the case, then there is no chance of implementing any "free market" for oil because OPEC is free to manipulate prices upwards to their advantage without the fear of litigation. Dr Fred, is this view too simplistic or am I correct ?
I share Len's concern that we have yet to see the peak dollars paid to producers per year as a function of world GDP, because OPEC will grasp the opportunity to push it higher as you say now in your article.
Ferdinand E. Banks 2.14.08
Mr Bob, of course it's collusion, and in theory, because it's collusion on an international scale, involving the most important commodity in the world, there is little or no chance of the market or the courts dealing with it the way that we would like for it to be dealt with - at least in the short run.
But, if oil were not so important, it's hard to be sympathetic with our side. For years OPEC offered to cooperate with the large consuming countries in the matter of price, but they were turned down because a few important academics and quite a few corporate and streetcorner economists were able to convince the movers and shakers that the consuming countries had and would always have the upper hand. For example, a certain very important professor of finance at Harvard preached that derivatives markets could save our bacon. I remember attending a conference in Washington where they were talking about futures contracts with maturities of 3 years, and when I informed them in that delicate manner of mine that they didn't know what the ____ they were talking about, almost being turned over to security.
As they say, nothing succeeds like success. OPEC has finally got its act together, and they now understand that they do not have to sell their precious oil for bargain basement prices. Of course, this has been true for a couple of decades, but there is no need to go into that. Instead, research should go ahead at a Manhattan Project pace with the intention of obtaining something to use in our 'rides' that won't eventually bankrupt us or cause us to act in a manner that we will come to regret.
Todd McKissick 2.14.08
So exactly how does Chavez shutting off (just threatening?) the US and Iran planning to trade oil in local currency on Monday play into this game? Seems to me it will raise the US price of oil and devalue the dollar even more which will further raise the price. What happens if the rest of OPEC follows suit? The news today seems like the worlds' central banks are buying up US dollars today to sort of bail us out already.
Ferdinand E. Banks 2.15.08
Only a couple of years ago OPEC was trying to keep the oil price between $22/b and $28/b. Exactly what they have in mind for the limits now I don't know, but I have a feeling that they are interested in a price of around $90/b. That's the number I would be thinking of if I were in their place, although I might be convinced that up to ten dollars less is OK until the present or forthcoming bad macroeconomic spell blows over.
This thing with Major Chavez and the Iranians also makes a lot of economic sense. Even if the OPEC countries don't cooperate with one another, the market is so sensitive that anything it interprets as bad news lifts the oil price somewhat - as you point out. As for the world's central banks buying US dollars, I wonder how long that can continue. On the basis of what I read in e.g. Business Week, I get the feeling that the US economy is in such bad shape that the optimal move for those institutions is just to say the hell with the whole thing, and let nature (i.e. the market) take its course. Needless to say, a comment like that doesn't mean much until the US election takes place, or at least until it is decided who will compete for the presidency.
Fred
Jeff Presley 2.15.08
Fred, Excellent article as usual. In a different forum, I posted something from oildrum where the author talks about the tight coupling between industrial economies and energy. My guess is the correlation factor is on the order of .999
Clearly fuel is the fuel that drives our modern economies. The producer nations have to concern themselves with killing not the golden goose, but the golden egg eaters, ie us. The kingdoms of Saudi and elsewhere, regardless of their animosity towards their customers have an in depth understanding of the consequences of causing a recession.
Sure, they can convert their petrodollars to gold at a frenetic pace, but gold isn't going to feed their restless populations, so your points above about trying to move up the value curve are spot on. Unfortunately, as they are discovering, competing with German and American petrochemical concerns who have had 100 + yrs to refine (literally and figuratively) their art is not something to be undertaken overnight. Even when they manage to place their production closer to the source, they STILL have the problem of the customers being over HERE, and if they've economically crippled their customers, they don't have any. Their populations alone aren't going to provide sufficient consumption, and leaving the oil in the ground isn't going to feed their idle citizenry. So we have the snake eating its own tail.
Or are you a fan of Debraj Ray? Here's an easily approachable article on Development Economics that has applicability if you look at the bigger picture of the problems facing producer nations, what with their antipathy towards property rights and rule of law. Makes it a bit tough to be an entrepreneur there, you're either a toady of the ruling princes or you're an unemployed bomb maker, or an itinerant imam. Yes they are swimming in money, but they are also swimming with crocodiles... :)
Jim Beyer 2.15.08
Assuming Jeff is right, and oil is the fuel that drives our modern economies, I can't help but think using gasoline for moving passenger vehicles is a piss-poor use of this valuable resource. And more than half of the oil used by the United States is used for this.
It seems a bit discordant to (correctly) speak up the value of oil and then use it for such an insubstantial purpose. (I suppose using valuable oil for cheap plastic toys that break and are thrown away almost immediately is not wise either, but I don't think the total barrels devoted to this are as substantial compared with oil used for gasoline production.)
Ferdinand E. Banks 2.16.08
Well, Jeff, the thing that has changed the situation for the good people you are discussing is the appetite for oil of customers and potential customers in Asia. Frankly, I don't see any (short-run) down side for the sellers of oil. They are finally where I thought that they would be, and in a sense deserve to be, and we will have to accept that...for the time being anyway. Of course, as you say, they dont want to damage the goose that lays the golden eggs, but with the kind of money that is rolling in at the present time, I'm not sure that that's a big worry for them.
BUT, I'm convinced that technology will eventually get us out of this, although it will take more time than it should. After it gets us out, however, what are we going to do about the population problem?
Jeff Presley 2.17.08
Fred, I agree mostly with your point, but those Asian customers still have US as THEIR customers. We go away, they go away. That darn globalization thing again.
As to technology getting us out of this, I agree also, but am always worried about politicos and other nosy parties sticking their uninvited selves into the process and throwing a monkey wrench into things. You only have to look at the debacle surrounding nuclear to see where I'm going with this.
Jim Beyer 2.18.08
I dunno Fred.
Technology is not going to scare up new sources of energy. Other than wind, sun, biomass and nuclear, I don't see much else out there that is carbon-neutral. (I think carbon sequestration is a joke and will never work, but I guess I could be surprised -- not holding my breath though...)
And technology is not going to change the thermodynamic realities of synthetic fuel creation; it is what it is, namely a 20-30% hit in terms of energy loss to create a storable form of energy, and then another 20-30% hit when it is used. Using batteries to try to avoid this, except in certain special circumstances, is even more expensive.
If we are burning through 1 million years of fossil-fuel production ('stored fuel' by natural forces) per year, I don't see us easily bypassing that with a bit of technical cleverness anytime soon. We'd be lucky if we can keep a billion souls from starving in the next 20 years due to the high cost of natural gas.
Bob Amorosi 2.18.08
Dr. Fred et al,
Jose Antonio posted an Energy Central News quote from FERC Chairman Joseph Kelliher in the other EnergyCentral article on What $100 per barrel oil means to us, as follows.
Excerpt from Eneregy Central News "Deregulation is here to stay, FERC chief says." Feb 16 - McClatchy-Tribune Regional News - Elizabeth Souder The Dallas Morning News. Folks in Texas and other states who are sick of rising electricity prices and want to return to the days of regulators setting rates can forget it.
The U.S. isn't going to change its policy of allowing competitive markets to determine prices, the chairman of the Federal Energy Regulatory Commission said Friday at the Cambridge Energy Research Associates annual conference.
"Our goal at FERC is perfect competition, textbook competition. Competition that is so perfect and beautiful it would make an economist weep," said Chairman Joseph Kelliher.
Further, competition isn't driving prices higher; rising fuel costs are driving utility bills up, he said.
That doesn't mean Mr. Kelliher wants to step out of the electricity markets entirely. He doesn't want to deregulate but to create a balance between rules and competition.
FERC doesn't regulate the Texas grid, which is operated by the Electric Reliability Council of Texas. Still, Mr. Kelliher's speech addressed calls from Texas power executives to preserve competition here, despite some public exasperation with higher prices. .... "They did what policy and lawmakers are supposed to do: create the environment ... to allow the private sector to do what it does so well," he said. .... Mr. Kelliher said it isn't about price, anyhow.
He said calls to re-regulate the market are actually calls to cut fuel prices. And regulators can't do that.
The country, including Texas, has become more dependent on expensive natural gas for power generation fuel. Texas gets most of its power from natural gas-fired plants. -------------------------------------------------------------------------------------------- This was my comment on it.....
It's kind of nice to see officials finally waking up to the looming energy crisis. If cheap fuel prices are a thing of the past, energy price deregulation is bound to expose the US economy to huge pressures if energy costs continue to climb. While Joseph Kelliher is correct in that they cannot regulate fuel prices, the cries for energy price regulation are in reality cries for subsidies to cushion the looming pressures on the economy.
Here in Canada we have had for many years a huge tax on gasoline at the fuel pump, by both the federal and provincial governments. Consumers in Canada are accustomed to paying a much higher price per gallon than in the US over the last decade or two, until our dollar value took off just recently. In theory if the price of oil skyrockets the governments can reduce the pump tax rate and ease the price shock at the pumps. Indeed there have been calls for them to do this already as oil has climbed to $100 over the past couple of years.
However this is not the case for electricity, there are no heavy taxes on our electricity bills. When electricity prices jump, consumers will often just bite the bullet and absorb it at the expense of other spending, but there are many energy-intensive businesses operating on razor thin profits that cannot.
If fuel prices soar for electricity generation, I wonder then what the tune of FERC will be to the cries for energy price regulation if businesses start going under, and the public demands governments do something to stop the tide of pain. Start another war perhaps ?
Ferdinand E. Banks 2.19.08
Well, Jim, I'm afraid...I'm afraid that you are right. Of course, behind my vote of confidence in technology, I have a few other things in mind that can't always be discussed in an open forum. For instance, the first 'job' assigned technology under my agenda would be to minimize the amount of drugs and porn - or adult entertainment as it's sometimes called - in this old world of ours. I don't know why, but for some reason - call it crazy if you want - I've come to the conclusion that those items are the root cause of the bad news up ahead. Please note though that I said minimize, not liquidate.
Continuing electric deregulation is a perfect example of the bad news, Bob. A nutty politician stands in front of a major conference and talks about creating "textbook competition" in the electric industry, and nobody stands to inform him that his suggestion is completely and totally ignorant. But frankly, I doubt whether another war would straighten out the circuits in that person's brain. I think that instead he should be sent down to the department of economics in Tam Hunt's home town to get some advice from the residing Nobel Laureate and his colleagues. A short conversation with those ladies and gentleman might make him question his belief in the quality of the wisdom found in many economics textbooks.
Fred
Len Gould 2.19.08
Jeff: An interesting reference, but seems (to me) to make a rather long directed leap without basis, then assume global agreement and proceed from there, specifically :
"Perhaps there are systematic reasons to believe that individuals “under-enter” the entrepreneurial category in developing countries. That is why theories of entrepreneurship have the potential to tell us something about underdevelopment."
It's almost like the author's got a pre-defined solution (entrepreneurship) looking for a proof. I've personally concluded from my limited travel in developing countries that most local residents have more entrepreneurship in one finger than most residents of the developed world have in total. They have to, just to survive. I'd more likely ascribe the problems to bad government. (education / free information / unfair ernforcement of property rights / etc.)
Len Gould 2.19.08
(and especially inequalities among citizens, eg. class, ref. property laws, corruption)
Michael Keller 2.19.08
I believe it’s been stated by the Feds that the high electric rates in Texas are due to increased fuel prices.
Maybe not.
The old line utilities in Texas have been bought and sold by a series of leverage buyouts masterminded by the wizards of Wall Street. Leveraging means massive amounts of debt that someone (as in the “raped” payer) has to cover. The old line Texas utilities also wandered off-shore (aided and abetted once again by the financial wizards) and invested heavily in foreign power operations that turned into complete debacles – more debts.
“Deregulation” appears to be nothing more than turning a blind eye to financial shenanigans that massively increase debt so a few can make staggering profits at the expense of the common man. This includes the industry of buying & selling ...selling & buying…selling & buying ... power companies.
Seems to me that utilities (which are semi-monopolies) should be regulated to “stick to-their-knitting”; namely generating and distributing electrical power.
Bob Amorosi 2.19.08
Michael,
You are right, rising fuel prices are not always the whole story. You have touched on a nerve here in Ontario's electricity industry too. For decades the Ontario government ran our publicly owned generation and transmission system known as Ontario Hydro. It ran up huge bloated budgets and debts (including bloated salaries) with no competition. Our artificially low electricity prices were sanctioned and subsidized with our taxes by the Ontario government.
When the government finally woke up and spit up the old Ontario Hydro in the late '90s, Ontario Hydro left Ontarians with a massive debt load in the billions of dollars, which we are now paying for with a "debt retirement" charge on our electricity bills.
The sobering issue now is having to deal with the prospect of rising fuel prices in the looming energy crisis in parallel with paying down crippling debts.
Michael Keller 2.19.08
Neglected to mention another great catastrophe brought to utilities by the financial wizards – futures & trading markets for electrical power. That particular fiasco sank a number of utilities.
Bob Amorosi 2.19.08
..."split up" the old Ontario Hydro - into competing generation companies but still one large transmission company Hydro One.
Len Gould 2.19.08
Bob: "The sobering issue now is having to deal with the prospect of rising fuel prices in the looming energy crisis in parallel with paying down crippling debts. "
Perhaps also worth considering is the PRICE at which the sold Ontario generation assets were valued at the time of sale. Presumeably the sell price was some straight multiple of the wholesale price of electricity at that time (1990's). Too bad the "public" didn't have the "foresight" to hold onto those assets for another ten (or even 5) years, eh? Not likely any "stranded debts" if the plants had been valued at current natural gas prices. Perhaps that might be an explanation for some of the ridiculously optimistic fossil fuel price/availability statistics published arounf that time?
Len Gould 2.19.08
(For those not familiar, most of the "stranded debt" in Ontario was for nuclear generation assets, now highly valuable.)
Bob Amorosi 2.19.08
Len: indeed our Ontario government habitually unloads some of our big assets for bargain basement prices (Our cash cow toll highway 407 was another example).
Ontario's electricity sector is in for a rough ride I'm afraid. The Ontario Power Authority (OPA) is awarding 150 or so contracts for new solar and wind generators to be built but no plans exist for the "smart grid" or extra transmission and distribution lines needed to manage all these new distributed renewables. Also there's the recently announced 300-million dollar cost overrun to refurbish the Bruce nuclear plant that taxpayers must absorb according to the deal the OPA brokered with Bruce's new owners, with more cost overruns to come yet perhaps. I wonder if it's a coincidence or not that the OPA's CEO Jan Carr has announced his resignation for this June.
Ferdinand E. Banks 2.19.08
I think that we should be careful where futures are concerned, Michael. They have an important roll to play in the financial world, to include that part of it having to do with oil. But not with electricity. The Nordic exchange (NORDPOOL) should never have been allowed to assume its present form, although I can understand why arguments would appear that once the electric deregulation scam was introduced, it was only natural to round up some academic phonies to explain the (so-called) logic of doing away with long term contracts and working only with spot transactions, as was the case in California. Once the electric deregulation craziness became acceptable, then the increase in risk for buyers and sellers led naturally to the establishment or expansion of derivatives markets, and especially futures.
Jeff Presley 2.19.08
Len, We aren't disagreeing here, your points about why developing countries REMAIN developing countries in spite of (oftentimes) tremendous natural resources are exactly correct. The author was primarily doing a survey of his contemporaries' work in the field, without blowing his own horn too much in the process. I strongly recommend his own book. Of course when we talk about India for example the corruption is rampant and the bureaucracy bloated and in cahoots with the corruption. i don't consider taking bribes to do your job a component of entrepreneurship but you can bet your bottom dollar it IS in developing countries.
I went to a Robertson Stephens investment conference in San Francisco, where I was helping to pitch a company to the assorted VC's in attendance. We presented to a group of Indian investors, most of them billionaires who had recently gotten into the game. Afterwards one of them told me, "We love your idea, but have chosen only to invest with Indians". A bit miffed I asked him why he didn't go back to India to invest. Later, he bought me a drink and apologized for how things had sounded. He proceeded to tell his own story of success in THIS country.
He and his partners had a great idea for a business and decided to begin the necessary steps to begin, including getting a business license. Now in San Jose at the time a business license cost something like 50 bucks. Not knowing how things worked here, he had $3000 cash in his pocket, because that's how things worked back home.
He went to the counter, told the person what he needed and was given the bill for $50. He then said, "What more do I need to do?", making a point to show the woman the cash in his pocket. She said, "Go out and make a million dollars, and good luck to you". THAT was the most astonishing thing in this man's life to that point. He then proceeded to do just that, and then some, because in THIS country (so far) there are opportunities to build a company and succeed and not have to carry cash around in your pocket to grease the palms of a whole herd of functionaries whose only purpose is to put another stamp on your application and act as gatekeepers to the process.
The rest of the world thinks the U.S. is so rich and it is so unfair, but the FACT is this country gets rich because it doesn't establish artificial barriers to entrepreneurship. As an entrepreneur who has had some measure of success, I can state that laissez fair is the only way to go. If we go through another depression (a not impossible scenario) you'll see LOTS of so-called entrepreneurship like people selling pencils and apples on street corners. That isn't my book for entrepreneurship, it's just trying to make a living the best way you can.
Ferdinand E. Banks 2.19.08
Well, oil 'closed' above $100/b in New York for the first time in history - according to CNN. Anybody out there got any ideas, because obviously this isn't going to help the home team.
And Jim, could you clarify your remark about natural gas and a billion souls.
Fred
Len Gould 2.20.08
Jeff: Completely agree your last. One minor re-direct might be that the "reasons for success" attributes you ascribe correctly to the US also apply quite equally to ALL highly developed N American and European countries. The concept of justice in all things developed gradually largly in Britain and France and is not in any way unique to the US.
Jim Beyer 2.20.08
Fred:
Cheap natural gas means cheap fertilizer, via the Haber process. About 1/5 of the world's population depends on fertilizer for their food. If ethanol production in the U.S. is already leading to corn shortages in Mexico (it is), then high-priced natural gas will adversely affect fertilizer supplies as well.
Bob Amorosi 2.20.08
Jim and Fred,
Since oil prices have hit new highs, is it fair to say we'll never see them stay far below $100 for any length of time in the foreseable future if on average they continue to climb. Natural gas demand and hence prices should also sooner or later follow oil's footsteps too if the stars are lining up as suggested.
Ferdinand E. Banks 2.20.08
Thanks Jim
Yes, a Nobel prize winner in physics or chemistry mentioned the fertilizer thing about ten years ago, only he cited oil instead of gas.
Fred
Graham Cowan 2.20.08
Not sure if I've said this here, and I may not the only person allowed to do so, but the quarter of the atmosphere's CO2 that is due to our recent fossil fuel-burning can be removed without too much trouble, even if Jim Beyer exhales.
Not at emitter sites, of course. I go into more detail here.
This 'blog' has a lot of thought provoking comments. I wonder aloud if I may just how much of our transportation paradigm will change in the face of sustained $100/bbl oil. Some here have mentioned that most technologies that try to take advantage of economic profit here have CO2 and efficiency issues. Will solar and other renewables have a bigger stage? Will people live closer to work?
The economist in me says that if oil price stays this high we should see innovation creep in that would develop cheaper alternatives to earn economic rents. Is this what OPEC has figured out or betting on - that at this price there still is no cheaper alternative? Yet coming up with the these 'cheaper' alternatives in this environmentally sensitive era could be difficult at best.
Len Gould 2.20.08
Graham: Hmmmm.... "Complete carbonation of serpentinite results in a mass gain of 35 +/- 7%. Most of this mass change results from dehydration of serpentinite and CO2 consumption during formation of magnesite." -- So, what, 27 gigaTons / yr CO2 requires mining and reacting only 54 gigaTons / yr serpentine. That's like 50 billion cu meters, a hole in the mine 50 cu km / yr. Big, but not beyond the possible.... Neat! Though by quick inspection of those maps, we'll need to go exploring for more very soon after starting mining in N BC. Kimberlite also, eh? Diamond mines in NW Territiries. .... Lets just make sure we keep track of the location(s) so in future after we've done the atmospheric science, we might get it back if necessary to stop the coming ice age.
Len Gould 2.20.08
Though is does seem strange (to me) to set up a fleet on N Reactors to power a mining / crushing / processing site in northern Canada, and to power the CO2 capture / liquifaction / pumping processes from coal-burners all over N America, just to keep the coal miners happy. Wouldn't it be smarter to just use the reactor power instead of the coal?
Len Gould 2.20.08
And keep the coal in the ground as an easily exploitable future source of CO2 in case needed to moderate an ice age. Much smarter than trying to get the CO2 back from a rock reaction or whatever.
Jim Beyer 2.20.08
If I remember right, the cost of getting CO2 out of the air (even ambient air away from a source) is not too bad (see Lackner) but the problem is what to do with it. Whatever you do, it seems to require a lot of energy resources.
Graham Cowan 2.20.08
CO2 capture / liquifaction / pumping processes from coal-burners all over N America
What?!
Magnesium silicate minerals pick CO2 out of air. If they could get to thermodynamic equilibrium, it would be with, I guess, parts per trillion of CO2 left up. That's why they don't need to be at the emitter sites.
... just to keep the coal miners happy. Wouldn't it be smarter to just use the reactor power instead of the coal?
Yes. But in case we share the same atmosphere with some people who aren't smart.
Donald Hourican. you used the right word in your comment. That word was "creep". In the economics books it usually takes us a fraction of a second to move those curves, but in real life it could take a very long time.
Fred
Len Gould 2.21.08
Graham: In reading an article from MIT referenced by the article you reference, the authors state "The IEA Greenhouse Gas R&D Programme (Newall et al., 2000) estimates the cost of the current mineral sequestration processes at $60-100 per tonne of CO2 sequestered, which matches well with the proponents’ estimates. By comparison, the IEA GHG R&D Programme reports values for ocean and geologic sequestration at $1-5 per tonne of CO2 sequestered. All the above numbers are exclusive of any capture and transport costs.
The following points will give the above numbers some perspective:
1. Capture and transport costs need to be added to all the above sequestration costs. A rough estimate of capture and transport costs is $50-60 per tonne of CO2 avoided."
Coal is what? about $50 per ton? And each ton produces 1.83 tons of CO2 (I figured that one out some time ago....) so at $60 per ton sequestered CO2, the cost of using coal would rise by about $110 per ton.
So if you are spending $160 to use a ton of coal, you might be better off instead going with some alternative, like nuclear power or whatever. This cost for sequestration is a total non-starter.
James Hopf 2.21.08
Jim,
I get ~3.7 tons of CO2 per ton of coal burned. This assumes that coal is pure carbon. A carbon atom weighs 12 AMU, and an oxygen atom weighs 16. Thus, CO2 has a molecular weight of 44 (12 + 2*16). Thus, 12 units of carbon mass produces 44 units of CO2 mass, or a factor of 3.7 increase. How wrong is the pure carbon assumption?
I'm not sure what a ton of coal costs, but I have heard (from many sources) that generating one MW-hour of electricity creates about one ton of CO2. Thus, each dollar per ton of CO2 cost (be it a CO2 tax, a CO2 credit price, or the cost to capture and store) adds $1 per MW-hr (i.e., 0.1 cents/kW-hr) to the cost of coal-generated electricity. Thus, a CO2 cost of $60 per ton results in adding 6 cents/kW-hr to the cost of coal power. I'm pretty sure that nuclear (or anything else, except solar PV) can compete with that.
Jim Beyer 2.21.08
James:
"Assume a cow is a leather sphere 6 feet in diameter, filled with milk." (Sorry, I had to say that....)
Anthracite is 86-98 percent carbon (rest hydrogen)
Bituminous is 45 to 86 percent carbon (rest hydrogen)
In the U.S. we mostly burn bituminous for electricity generation. So I assumed something in that range. I did give it some thought and effort, though the '3' is a bit much. Maybe assume 1.8 tons of CO2 per ton of coal. About. Approximately.
Len Gould 2.28.08
"The latest in NYMEX product chic: $200 oil options Posted Jan 7th 2008 10:22AM by Joseph Lazzaro Filed under: Other issues, China, Commodities, Oil
The fastest-growing position -- or calculation -- in the oil market is that oil prices will double, reaching $200 by the end of 2008, Bloomberg News reported Monday.
Options to buy oil for $200 on the NYMEX rose ten-fold in the past 60 days to 5,553 contracts, a record increase for any period."
Fred, do you still think another war is likely if we reach $200 ? If so, and you believe the predictions on the market, another war would be imminent this year.
Len Gould 2.29.08
Sheesh, Jim: Even methane is already 77% carbon (rest hydrogen, by weight). 1x14)/(1x14 + 4x1) Are you saying it's better for our climate to burn bituminous than N Gas?
Jim Beyer 3.3.08
Len,
No, cuz methane has about 47 Million BTUs/ton (though few people think of it in terms of weight -- most use volume) and Bit. Coal is about 25-30 Million BTUs per ton. I think there is some oxygen in coal, which does not increase emissions, per se, but lowers the BTU value per given weight.
Also, there's not so much methane left to be a problem anyway -- at least in terms of emissions.
Xuguang Leng 3.4.08
Carbon sequestration needs energy. The carbon, to generated the energy to sequest previous carbon, itself needs to be sequested. Therefore, if it takes 0.5 unit of carbon to generate enough energy to sequest 1 unit of carbon, because the 0.5 unit of carbon also needs to be sequested, the total carbon need for sequestration is 0.5+0.5*0.5+0.5*0.5*0.5+........ At some point, it is better not to use the first unit of carbon. If it takes 1 unit of carbon to sequest 1 unit of carbon, then there will never be any carbon sequested. Given sequestration will about double the coal price, it is probably better not to use the coal at the first place.
