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Let’s start this short paper by getting the peak oil issue off the table. Peak oil is not about the future – it’s about the past! It’s about the (generally unspoken) strategy formulated many years ago by the most important countries in OPEC, which features a decrease in the production of their invaluable oil (and probably also gas) 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 run-of-the-mill Economics 101 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 (i.e. the date on which that oil will be harvested). As might be shown by serious teachers with a serious interest in the so-called dismal science, it’s about controlling certain elements of the global oil supply curve, which is equivalent to controlling the entire curve. Basically, it’s not about geology but about microeconomics, and as a result the oil price reaching a level that even I thought was impossible. It’s also about macroeconomics.
Perhaps another jolt to the delicate sensibilities of readers might be appropriate at the present time. Neither the OPEC countries nor ‘Big Oil’ have the ability nor intentions of producing the EXTRA tens of millions of barrels of oil that will be necessary to make the half-baked dreams of the International Energy Agency (IEA) and the United States Department of Energy (USDOE) come true, by which I mean the extra tens of millions of barrels that will be required to fill the global demand-supply ‘gap’ in their target year of 2030. And if the major producers do not gradually work their way up to that level, then it will never be produced, and the oil price will continue to ascend unless ‘demand is destroyed’ by an international macroeconomic meltdown. Readers can ponder what this means at their leisure, however the information provided in an important paper of James D. Hamilton (2008) does not leave much room for optimism.
THE OIL PRICE AND MACROECONOMICS
Several years ago, in a discussion in the Journal of Economic Perspectives (Fall, 2006), it was claimed that “disturbances in the oil market are likely to matter less for the U.S. macroeconomic performance than has commonly been thought”. Exactly what this was all about is difficult to say, because macroeconomic downturns which featured real growth falling and inflation rising (i.e. stagflation) immediately followed the oil price increases of 1973, 1980, 1981, and 1990, although a cheerful note was that in the macroeconomic sense recovery took a comparatively short time. There were of course individuals and firms for whom recovery never really arrived, and needless to say recessionary tendencies in the U.S. impacted on the rest of the world to one extent or another, but as to be expected, there were more than a few academic and business economists who claimed that the correlation between oil price rises and macroeconomic downturns had finally been broken.
It would certainly be wonderful if this were the case, because the manner in which the oil price is presently increasing is not reassuring at all according to the economics and finance that I teach. The previous oil price rises were ‘spikes’, but even so economic growth declined in several regions. By way of contrast, at the present time we are facing a sustained price rise, and the possible development of a situation that in some respects contains elements of the scare-scenario posited by the leading investment bank in the U.S. – Goldman Sachs – in its Global Economics Weekly of April 10, 2002.
Two academics who have elected to evaluate the oil price-macroeconomic interconnection mentioned above, and who were (and perhaps still are) not worried about any damage that could be inflicted on the U.S. (and global) economy by high oil prices, are Robert B. Barsky and Lutz Kilian (2004). In one of those many unread journals gathering dust in our academic libraries, they told us that “disturbances in the oil market are likely to matter less for U.S. performance than had commonly been thought”.
Noting that this conclusion follows an econometric analysis – where emphasis should be put on the syllable ‘con’ – I reminded myself once again that despite some lopsided opinions to the contrary, empirical work in economics can never take the place of theory. But even so, of the thousands of papers that in one form or another originate every year in academia, this is one of the few that makes a systematic attempt to judge the impact of oil price movements on the macroeconomic price level, employment, productivity and economic growth. I am also generous enough to believe that the reason those two authors concluded that in general the effect of oil price increases tends to be exaggerated, is because over the period of their investigations (1970-2003), with the exception of the first and possibly the second oil price shocks, they were dealing with narrow ‘spikes’ instead of sustained escalations. Of course, a spike from the present oil price (which touched $138.54/b on June 6) could be devastating for many persons in every part of the world, since changes in the oil price – and particularly upward movements – influences all energy prices.
And when I say “all” energy prices, I do not mean just natural gas. I also mean coal, and that is not something to look forward to, given the amount of coal that is and will continue to be consumed.
There is “no support for the notion that increased uncertainty leads to a sharp fall in investment that in turn contributes to a recession”, the two authors tell us. What they mean by that is no econometric evidence, although it might be suggested that intelligent readers of the business press would be wise not attach any merit to a remark of this nature in the near and possibly distant future. Thus I suggest that we amend their observation to read ‘increased uncertainty can lead to a sharp fall in investment that – if sufficiently sharp – can lead to or deepen a recession, and possible help to generate a depression’.
The economics here is really very simple, and receives an extensive review in my energy economics textbooks (2000, 2007). Uncertainty functions in such a way as to boost discount factors, which as we all know from Economics 102 has a negative effect on physical investment because it means a large reduction in the (expected) present value of distant revenues. It is no more than common sense that investors who could accept a certain (or nearly certain) return of 8%, desire e.g. 11% when confronted with uncertainty because they feel that something might go drastically wrong.
Barsky and Kilian take a cavalier view about physical investment, citing among other things their disbelief in Professor Ben Bernanke’s ‘bad news principle’, which the future Federal Reserve boss applied to oil price shocks (1983). What this comes down to is firms postponing investment “as they attempt to find out whether the increase in the price of oil is transitory or permanent”.
Although Barsky and Kilian say that evidence exists that Bernanke’s “waiting” effect is small relative to the magnitudes that need to be explained, I doubt whether this contention deserves to be treated with excessive respect when the oil price reaches its present level. For what it is worth – which isn’t much any longer – the real (inflation adjusted) price of oil (as compared to the money or nominal price) has been constant or falling for the last 30 years, and until recently the great majority of energy professionals interested in oil have preached from every soapbox between the Bay of Fundy and the Capetown Navy Yard that real prices of oil would continue to decline. As a result many firms were quick to take advantage of what they judged to be decent investment opportunities. In the light of both nominal and real oil price increases over the past two years, however, many or most of these firms are going to be much more careful, which will tend to give extra weight to expected bad news about energy prices.
Incidentally, Bernanke actually said that “of possible future outcomes, only the unfavourable ones have a bearing on the current propensity to undertake a given project”. This kind of thinking ties in with a key postulate of real options theory: when waiting is possible, downside risk is always the major factor.
THE OIL PRICE AND THE WISDOM OF BILL O’REILLY
I hope to wake up some beautiful morning and find that everybody believes in the peak oil theory, even if it turns out to be false. Of course, the boss of the European Union’s Energy Directorate once called it a theory that is no different from any other, but in truth it is somewhat different from the dozens or perhaps hundreds that he encounters every day in the corridors and restaurants of the EU office building in Brussels, most of which have to do with pay increases, the renewals of contracts, and various indoor welfare schemes. If governments do not believe in this (peak oil) theory, then they may fail to do what has to be done to keep an energy catastrophe at bay, where such a catastrophe can be generated merely by demand outrunning supply, without supply actually turning down. Incidentally, this is an application of (Albert) Einstein’s equivalence theory.
Perhaps the most provocative information offered on this topic recently originated with the Cambridge Energy Research Associates (CERA), whose director – Daniel Yergin – is a winner of the Pulitzer Prize (for a book about oil titled ‘The Prize’). Apparently CERA doesn’t believe in a global peaking of the oil production, but instead claims to have theoretical and/or statistical proof that we will eventually experience an undulating plateau. (Let me note though that as a veteran teacher of game theory, I recognize the likelihood that in reality they may believe in a distinct peaking of the world oil production even more than I do, but for reasons of a monetary nature find it expedient to devise a cock-and-bull story about an undulating peak.)
Another person who has forwarded an offbeat hypothesis about the oil price is Mr Bill O’Reilly, who is an important political and social commentator in the United States. Let me make it clear however that he is considerably less than important to me, even if I agree with a few things that he says.
To O’Reilly’s way of thinking, a large portion of the increase in the oil price is due to the machinations of speculators in – according to him – Las Vegas. I think that we would all be better off if we completely ignored that gentleman’s opinions and pronouncements on this subject, to include his famous statement “supply and demand my carburator”. It very definitely is supply and demand that explains all except a few dollars of the oil price, Bill, regardless of your opinions and the opinions of certain researchers in some of the largest financial institutions in the world.
What Mr O’Reilly was alluding to are the activities of hedge funds, which are also mentioned quite often in the financial press. I once knew quite a bit about hedge funds, but lost interest in them after being given a boring lecture on the beauty of those assets by a hedge fund hustler just before I departed for a visiting professorship in Hong Kong. The truth of hedge funds is similar to the truth of operations like the Nordic Electricity Exchange (NORDPOOL), whose strength is in the laziness of their clients. There are approximately 8500 hedge funds in the world, and every year about 1000 either go out of business or are close to shutting their doors, but even so they are treated with a respect that bears no correlation to their performance.
Before concluding I note that Professor Martin Feldstein (of Harvard University) recently made some Cassandra-like statements about oil. Specifically, he said that this is the worst possible time for an oil price escalation. (In case you forgot, Cassandra really did have the gift of prophesy, but it was her fate not to be believed.) Memories are short, and so it might be useful to call attention to what happened in l982, following the Iranian Revolution: unemployment in the U.S. reached 10%, employment actually fell for a few months, and some interest rates came close to 20%. Incidentally, a question that should have been asked is why didn’t the ‘Fed’ reduce the discount rate? Answer, because despite what your Economics 101 teacher tried to drum into your head, Central Bank discount rates hardly matter when really bad news arrives! I seldom make heavy weather of this unfortunate reality, because if the directors of the Swedish Central Bank did not have discount-rate posturing and game-playing to occupy their precious time, they could just as well stay at home and enjoy some unemployment compensation.
In the Economist (May 29, 2004), there was a long discussion that focussed on the so-called “spare-capacity crunch”. In l985 OPEC apparently had about 15 mb/d of spare capacity. Five years later there were down to 5.5 mb/d, and today they may have only 2 mb/d, with most or even all of the latter located in Saudi Arabia. This kind of arrangement should make it clear that the price forecasts of four or five years ago – when the oil price was pictured as falling to $21/b – were not only inaccurate but foolish. At the same time though the Economist still peddles the song-and-dance that “the rise of energy futures markets over the past two decades also offers some scope for the world to deal with short-term price shocks.”
“Short term” could mean anything, but regardless, the oil futures markets are some of the best functioning in the world, and I am sure that there are many transactors who are grateful for the facilities that are available for hedging price risk. But even so, it needs to be appreciated every minute of every day that the most efficient and best functioning futures markets (and other derivatives markets) cannot ameliorate the miseries that could be caused by a long stretch of tight physical supplies. As far as I am concerned, this can only be done by imaginative economic policies, designed and implemented by intelligent governments that accept the seriousness of the present situation and are capable of thinking in terms of both long and short-term realities
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Barsky, Robert B. and Lutz Kilian (2004). ‘Oil and the Macroeconomy since the l970s’.
Journal of Economic Perspectives (Fall).
Bernanke, Ben S. (1983). ‘Irreversibility, Uncertainty, and cyclical investment’.
Quarterly Journal of Economics. (February).
Erdman, Paul (1988). What’s Next? New York: Bantam Books.
Feldstein, Martin (2006). ‘America will fall harder if oil prices rise again’. Financial
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Hamilton, James D. (2008). ‘Understanding crude oil prices’. Stencil (revised),
Department of Economics, University of California (San Diego).
Silverstein, Ken (2006). ‘Peak oil: real or not?’. EnergyBiz Insider. (February)
For information on purchasing reprints of this article, contact sales. Copyright 2013 CyberTech, Inc.
A masterful composition again on your part, and is as sobering if not more so than your recent past articles on this website.
I believe its key message is two-fold. The first is current oil price hikes are not temporary as before but sustained, with potentially much different and brutal economic consequences moving forward. The second is the rising price will ultimately affect all energy source prices, which could also drive even more brutal economic consequences.
It's not a great time to be an energy glutton consumer.
There are many business people that recognize what you are saying. Our historically largest car maker General Motors announced earlier this month they are permanently closing one their most productive and efficient assembly plants in North America, the Oshawa Ontario truck assembly plant. It makes fuel guzzling pick-up trucks that consumers are abandoning in droves, all stemming from a "permanent market restructuring", read permanent oil price hikes. They are also planning to market their first Plug-in-Hybrid-Electric-Vehicle shortly, which along with regular gas hybrids are leading a wave to switch autos over to electrical energy. But this very trend will place HUGE additional power demands on the electricity grid over time, which will undoubtedly lead to an emerging crisis in electricity systems that already face HUGE investments needed to replace aging generation and transmission infrastructures in North America.
Yes indeed the rising price of oil will ultimately affect all other energy sources.
Governments have a habit of intentionally downplaying the bad news because they know the public will curtail their spending even more so if they keep hearing economic times are getting worse. It doesn't surprise me that the think tanks you describe in your article have been publishing good news bunk about oil for some time now, since that is exactly what governments and many other intelligent people want to hear.
Keep up the great writing Fred.
Ferdinand E. Banks 6.24.08
Actually I have a better article coming soon, on this speculation vs fundamentals thing. Of course, if you look closely at my work, it turns out to always be approximately the same thing. There really is and has always been only one oil story: the oil producers are in the drivers seat, only they know it, and they are not going to make life easy for the motoring public in North America and Europe by pushing the oil price down - as they said they were going to do at the Jeddah Summit last weekend. Why should they? I certainly don't blame them for making the most of a good situation. After all the OPEC countries once offered to cooperate with the oil importers, but their offer was ignored because our political masters listened to people like Milton Friedman, who convinced them that the price of oil would more likely collapse rather than go up.
And you are right to mention plug-in hybrids! They make a lot of sense if, as you point out, the power is there for them. I am certain that the engineers can figure out the optimal power supply arrangement, but will they be allowed to in e.g. North America A few months ago I was watching CNN, and the ignorant Richard Quest dismissed nuclear. No explanation of course, just a flat statement that it didn't have anything to offer.
Bob Amorosi 6.24.08
For those interested in just how much economic upheaval oil prices are creating in Canada, check out the link below to the Toronto Star newspaper editorial article published today, written by political science professor Dr. James Laxer of the University of Toronto. It's a history of the 100-year auto manufacturing industry in Canada, mostly located in Ontario, and the radical changes facing it in large part due to oil prices skyrocketing along with our dollar's value relative to the US dollar.
He concludes by ridiculing the “market simplicities” approach of our Prime Minister Stephen Harper, and his finance minister Jim Flaherty who happens to be the parliamentarian member from Oshawa, Ontario.
Note "NAFTA" refers to the North American Free Trade agreement that the US, Canada, and Mexico signed in the late 1980's.
Joseph Somsel 6.24.08
I would expect you to agree that oil prices will not be monotonically rising forever. There may well be some price fall back to respond to economic cycles, revised Chinese and Indian subsidy policies, new discoveries, currency fluctuations, etc.
What really irritates me in the current public debate is how much hope is held out for some miracle discovery of a "new energy source." While the possibility is not zero, my reading of current physics knowledge suggests that we have no clue as where or how this new energy source would manifest itself. We don't even know where to look! Of course, it also allows many to overlook the clear, Irrevocable shortcomings of the politically correct energy darlings, wind and solar.
This tendency allows too many to avoid the hard decisions of playing the cards God dealt us in the physical world. That means, of course, learning to love nuclear fission and to make the best of it.
Bob Amorosi 6.24.08
You only need look in your backyard for the new energy source - the sun. When direct and perpendicular to the earth's surface, it shines nearly 1500 Watts of incident thermal power per square meter. If only most or much of this was available as electrical energy.
Nuclear is probably the best bet for the large central generating stations our grids will need for the future. But they are very expensive to build, and this has in part led to a huge wave of investment into researching improving the conversion efficiencies of solar PV and solar thermal electricity generation, both on large and small distributed generation scales.
I admit it’s a pipe dream unless researchers and engineers can get solar conversion efficiencies up and system costs down. But the US has a history of unparalleled ingenuity in high-technologies, so I wouldn’t underestimate what they are capable of given the investment money, and the free market potential to make lots of money in an energy hungry world – read innovation and motivation.
Bob Amorosi 6.24.08
An example of the money already invested in new solar PV ventures.
It should be pointed out that the reason the speculators can drive up the price of oil is because the supply-demand gap is so small. If it were larger, then they couldn't play their trading games so vigorously. At present, I think oil futures are still in contango, which does not bode well for future pricing.
I will make a cautiously optimistic statement that there may be enough frivolous oil use that demand destruction could be significant enough to drive open the supply-demand gap and give us some lower oil prices. If that happens, we need to work quickly to get other low hanging fruit technologies going (like PHEVs) to drive demand down further. With luck, maybe oil can get down to $80 per barrel, before resuming its inexorable rise.
The government should seize the NiMH patents from Chevron, claiming eminent domain, if they continue to refuse to make large format cells available to consumers. If Chevron thinks they can't sell them profitably, I'm sure there are many factories in China that could. Could this have been one of the reasons that China, Inc. tried to buy Chevron?
Bob Amorosi 6.24.08
correction to earlier post above... Dr. James Laxer is a professor at York University in Toronto, not UofT.
Joseph Somsel 6.24.08
Sorry, Bob, but your post is a perfect example of my point. Guess the dream never dies.
I'll go along, enthusiatically, about solar domestic hot water, but little technological improvement is needed or expected in that application. Solar electric is still a strong mismatch between market demand and production capacity. Even if your dreams come true about PV, you'll still need storage.
I'm about half way through a piece for EP on energy storage economics that might clarify some points.
Bob Amorosi 6.25.08
I won't dispute the current economic facts you are stating, but it's the market demand and soaring conventional generation costs that are driving solar R&D and production in all its forms more than ever before. Solar PV silicon production is growing so much it is on track to surpass total worldwide production for electronics semiconductors very soon, the latter of which is a multibillion dollar global industry. And there are conversion efficiency breakthroughs in labs being reported for solar electric using nanotechnology.
Similar efforts are happening in battery R&D.
I admit pouring more R&D into anything doesn't guarantee innovations or revolutionary change, but there are many deep pockets out there who are also dreaming about displacing conventional generation, or at least co-existing with it.
Richard Vesel 6.25.08
Dr. Banks, et al:
I am of the opinion that there is a lot more in the price of oil due to speculation and dollar hedging than just a few bucks. For this lifeblood commodity, I suggest that the access to the futures market be limited to large scale producers and consumers of the various varieties of crude oil, and the rest of the world (us) be relegated to a) taking our chances with that closed system and b) being responsible for the development of fossil-fuel-eliminating alternatives.
Next, if I were at the helm of the US, I would at least make an attempt to pop the current speculative bubble in oil by literally dumping some of the 1B bbl US strategic reserve back into the market...I "speculate" that the topping off of that reserve, which has been accumulated recently at great expense to ALL of us, will take 500k bbl out of daily demand very soon, and will add as much to the overall production "reserve capacity". Now if we were to dump 50M bbl back into the market, a mere 5% of the reserve, over the course of a few weeks, this would knock the speculating and hedging for a loop, cause short selling of oil futures, and initiate an absolutely necessary "correction" in the price of oil. $80-90 per bbl is tolerable at this point, and with a now palpable threat of additional dumping from our strategic reserve, this should give pause to those who think they might rehedge/respeculate at the bottom of the correction. When prices stabilize below $100 per bbl, we can then "slowly" retop the strategic reserve, at a rate well below 500k bbl/day.
What better use of a "strategic reserve" than to implement a "strategy", eh?
And if this strategy were to fail, what have we, or anyone, lost? Essentially nothing, as the oil will have been sold (on a FIFO accouting basis) at a profit, and we stand to lose a bit (net) on the cost of replacement...
Regards to all, RWVesel
Len Gould 6.25.08
Richard: Why do you suppose that the politicians who are friends with / influenced by oil industry and hedge fund managers would want to take any action to damage their interests? I do tend to agree that the "real" price of oil currently is likely around $100 / bbl, but even there it is cause for some dramatic shifts in BAU.
Len Gould 6.25.08
Joseph: "Solar electric is still a strong mismatch between market demand and production capacity. " -- I hesitatingly point out you (and most others here) MAY be suffering a bit of good old US myopia. The CURRENT price of retail electricity in UK now is at $0.32 / kwh and imminent Nat. Gas shortages are about to dramatically increase that. Most continental markets likey similar if a bit lower. it's probable that give those incentives, by the time US investors figure out that solar (especially current concentrating solar-thermal generation, coming Optical Rectenna) makes a lot of sense (and cents) the entire technology will be locked up by foreign corporations. I'd like to see you address "realistic near-future development expectations" and world prices in your promised article.
Joseph Somsel 6.25.08
Solar PV and electrochemical batteries are still squeezing out inefficiencies and reducing overhead. This type of R&D approachs the best possible performance asymptotically and slowly. We've been working on solid state photovoltaics for 100 years and batteries for 200 years. The chances of a deal changing "breakthrough" are slim to none.
Sorry to be so gloomy but that's the track record and it makes me skeptical of dreamers and marketers.
BTW, what's the annual solar insolation for the UK or Germany? The sun don't shine there like the Mojave Desert, does it?
Bob Amorosi 6.25.08
The difference today is R&D and new discoveries happen at a much more rapid pace than even 30 years ago, all thanks to computers and automation. It does however also need some radically new ideas to achieve breakthroughs that get us off the slow asymptote curves and onto steeper ones. Nanotechnology applied to solar PV is one example that recently jumped the curve, but it has a long way to go yet to become practical and commercial.
Here in Canada too the sun doesn't shine for weeks, sometimes months during the winter, but when it does the other 9 months it's very useable. Only needs a larger collection area for the same incident power than you get in California.
Jim Beyer 6.25.08
I would argue that the PHEVs may be a breakthrough, perhaps not in technology, but in understanding how to put electric powertrains into practical practice. PHEVs could have been pursued in the 90's, when GM was building the EV1, but they simply didn't understand the benefit of a hybrid fueling strategy that the PHEV affords. Now many automakers do.
The good news of our situation is that there is still quite a bit of inefficiency in the way we do things that can be changed without horribly inconveniencing the consumer.
Jeff Presley 6.25.08
Fred, Another gold-star article! And thank you for the sneak peak of the next one, I can't wait to see it in "print". I had meant to email this link to you, but can do so here instead. Oil Price History and Analysis
As everyone can see if they read this link, there are a LOT of things that go into the price of oil, including economic and political factors, and the current price has as much to do with the lead and lag indicators as current events. For instance, when the price of oil bottomed at $11/bbl back in '98, all the oilco executives were in shutdown mode, laying off tens of thousands of highly skilled workers. As the price began to creep back up, those workers were not so inclined to return to such a volatile (and dangerous) profession, and weren't pursuing those "useless" degrees. Even now, the industry rags like World Oil and Oil and Gas Journal are bemoaning the lack of talent, from geologists to roughnecks.
The current insanity from the US political leaders (and wanna be president) about dunning oilcos for not drilling on currently leased lands exacerbates that point. Even if drilling rigs were available (they aren't), there aren't experienced crews to man them, aren't geologists to examine the seismic data (if there were even crews available to RUN the seismic tests) and on and on. Another typical example of pols killing the messenger just because the news is bad. Other countries have available labor, but not available skilled labor, which is why they often steal them from the US and UK. Add in kidnappers from Venezuela to Nigeria, Jihadists in the middle east and the usual dysentery, malaria and other common maladies and collecting those Swedish unemployment checks looks better and better. :)
Jeff Presley 6.25.08
Richard, Hopefully, you were aware the strategic reserve hasn't been getting filled for awhile yet, with no affect whatsoever on prices? I recommend the following link: Keep Stockpiling Oil . Hopefully this will alleviate you of some of your misunderstandings of the issue. Your heart is in the right place, but the facts don't help the hypothesis as a prof of mine liked to say.
Bob, thanks for agreeing with me about PHEV's overloading an already shaky grid. Personally I think the US (and parts of Canada) would do well to emulate the pictures we all used to see of thousands of cyclists on the road in China. Those bicycles have now been replaced by cars, and the pollution and gridlock the obvious result. Perhaps if we were to switch to bikes, we could destroy some demand AND get rid of those excess pounds... :)
Ferdinand E. Banks 6.25.08
Thank you, Jeff.
And, as Isaac Newton said after losing a bundle in the South Seas swindle: 'I can calculate the motion of heavenly bodies, but not the madness of crowds '- or something like that.
Well, I can understand everything in the economics books, but I am absolutely unable to understand how the U.S. - of all countries - cannot produce the people needed to obtain the oil and to build the nuclear plants that are needed - in fact more than that. Haven't the decision makers looked at the production figures for the last year of the second world war.
Len Gould 6.26.08
Jeff: Perhaps it's not Sweden's employment insurance but rich-quick stock trading / house flipping etc. etc. which is distracting the workers? Might do well to reign that in a bit.
Bob Amorosi 6.26.08
Coming from the electronics industry that has historically been quite separate from the energy business, I have learned a lot from reading and posting comments on this website, especially from Len Gould, Fred Banks, Todd McKissick, Jim Beyer, and yourself, in just a few short months.
In my industry among THE biggest trends in microelectronics since the new millennium started has been to lower-power silicon chips of all kinds, and more energy-efficient circuit design. Improved power efficiency is intimately required in many new product R&D because the proliferation of electronics is partly to blame for the continuous demand growth in our electricity system.
Fred’s oil article here is not only a wake-up call to the oil and energy industries, it will also profoundly increasingly affect mine over time because electronics will be key to enabling intelligent management of alternative energy sources and the electricity system.
If I were looking for employment with a bright future, or if I were an investor with deep pockets (too bad I'm not), I would put my money into companies that are developing CONSUMER products to address these things. Examples are Poulsen Hybrid in Connecticut offering that new retrofit kit for ANY car that converts it to a PHEV, or those developing concentrated solar thermal generation and solar PV systems, or more efficient heat pump technologies for residential applications especially for cold climates that we have up here in Canada.
Bob Amorosi 6.26.08
Seems like many prominent economists are waking up to the oil message in your article Fred, and particularly the impacts to the auto industry, see breaking news article below.
In it Canadian Imperial Bank of Commerce (CIBC) economist Jeff Rubin predicts $US 7.00 a gallon for gasoline in the summer of 2010, almost double today's $4.00 price. And, more importatly...
"the next four years we're likely to see "the greatest mass exodus of vehicles off America's highways in history," with some 10 million fewer cars on the road by 2012."
That's a lot of used gas-guzzler vehicles to get rid of in junkyards, or alternatively in backyards when nobody will buy them.
Bob Amorosi 6.26.08
correction.. "more importantly..."
Intelligent consumers, yes there are some, will likely hold off buying new vehicles at least until they realize and accept the increased prices of oil and gasoline are on average permanent. And this will only exacerbate the current pain in the auto industry.
If I were a CEO of a major American, Japanese, Korean, or European auto producer, I would be losing sleep over planning future car designs to re-invent my product line-up. Maybe a career in automotive (re)design engineering will be soon become a career in high demand too.
Bob Amorosi 6.26.08
Fred, the message in your article over time could be viewed as almost prophetic.
Another long-past futuristic dream is telecommuting, i.e. working from home, becoming widespread for office professionals. I can say from personal experience I would save thousands of dollars a year in auto expenses and save weeks of traveling time driving for work if I was enabled to practice it much more. There just might be a resurgence in this old idea, which the providers in the electronics industry for high-bandwidth internet technology will be drooling over I'm sure.
Heavens, I might even consider manufacturing or selling bicycles. Who knows, perhaps the Chinese love affair with them was a future omen of things to come.
Ferdinand E. Banks 6.27.08
Yes, Bob, I've definitely got it right this time - or perhaps I should say I've got it right so far. But, really, it's no big deal. WHAT WOULD YOU DO IF YOU WERE IN THE PLACE OF THESE OIL EXPORTERS? Wouldn't your vote go for more money instead of less.
And lets face the facts of life. The TV audiences have put some of the dumbest people in the world at the head of their governments. Here I'm thinking about my country (the U.S. this time) and its foreign minister, who yesterday presented what is no less than a slap in the face to the North Korean government. Almost makes me want to use some street language, although what was once street language is prime-time servings these days.
Bill Corbin 6.27.08
For me, Fred's articles are the ones of interest, my constitution doesn't allow me to engage voluntary annoyances of interent litter and TV. It is indeed another good atricle. When I look at the total revenue curves inflection points, I kinda think of the Wile E' Coyote cartoon and the oil bidness, even though I may know there migh be a speculator or two out there who've been long since Y2J, where is the upper inflection point ? Will it really go quadratic ?
In regards to the people question, I think slavery was the orginal energy policy. It had its day and is history to the living, but then it was replaced by eugenics, which was supposed finally outlawed in the US in 1979, and recevied a small reversal by the US Supreme Court around Jun. 19,2008; but its too little and too late for the US. The SALT, non-profileration agreements and education reforms in the late 80's and early 90's encapsulated many ignorances, and combine that with the ever present Peter-principle, and here we are $142 a barrell oil. My deepest sympathy for pHd's, after all, they're first duty is be teachers; it must be intolerable; taxes, ill concevied trade agreements, and criminalized sciences are too much for any to bear in the long run.
This brings us back to Rickover's orginal spot-on observations, and GDP and GNP matters, especially for populations that grow.
Here's how, I think US can start to bail out : First, drop the income tax up to the limits for the current social security tax. Then, suspend fuel surcharges. After-all, if labor input cost can managed, so can energy. I think that will surface enough changes in the energy mix to change the trajectory towards optimally. Might take 50 years. The kicker of all this, is everything about this has, including global warming (thermal pollution), air pollution plant choice (etc), since the 1960s. So really, I tend think there's really been a 50 year embargo in place, and the instutional barriers it has spawned are in the way. Did anyone see about the news about young man who build a fissioning nuclear reactor in backyard in Dallas a few weeks ago and got arrested ? The message is 'experiment = jail", Wait until frensel lenses goes main street, it will get hot.
In regards to China, they really don't have a history of paying for technologies that are highly desired, do they ? Can they really afford too, especially for something which is nothing more than just a small relief valve, plus the internet has wiped out much of value of patents. Why should they pay for what can download.
I expect a correction in the getting a patent in the future, and suggest to all to hold you're fire on the good stuff until they're begging This will be indicated when the surviving specialized 'news' shows no longer ridicule, and send out 'S-O-S' everyday. Prizes, everyone knows about cracker-jacks and honey-pots. Go to the forest, or a cave in Norway, trust no one over 20, give everything you know to your children, correction grandchildren ).
Another good article, I expect 150 by July 4th.
Ferdinand E. Banks 6.27.08
Sorry Richard Vesel, but I missed your post until a couple of minutes ago.
The kind of futures market that you want to see would lack liquidity, and this is exactly what would cause this kind of arrangement to fail. Of course you could argue that a swaps market is a futures market without speculators, and perhaps it would suffice to allow most producers and consumers to hedge price risk, but 'masters of the universe' in New York and London say that a futures market - with a lot of speculation to give it liquidity - is the best arrangement. For what it is worth, I think that the best arrangement is the presence of futures, options and swaps markets.
But, as I found out when I taught in France, some people are offended by futures and options markets, however I cant picture myself becoming one of them. I accept the argument that if it is impossible or difficult to hedge risk, investment will be reduced. And the losers in all this - well, it's the speculators who made the wrong bet. Tough ___ for them, as we used to say in Uncle Sam's army.
Jeff Presley 6.27.08
Len, Rein in greed? Good luck with THAT ;)
Actually greed can be a good thing, because it de-randomizes behavior of the kind economists like to monitor. Fred can easily predict producer nations' behavior because he understands the greedy basis, otherwise known as self-interest. Because of TV and other medium (including friends, family and rumor), kids these days believe they're going to make scads of money as investment bankers because they can read the WSJ and see what those guys are pulling down a year. Meantime, that nerd in class who became an EE or worse, a petroleum engineer was virtually unemployed for 5 yrs, or had to take jobs in godforsaken lands because that was all that was available. So naturally the kids opt for the NY banker lifestyle and aren't available to engineer us out of this predicament.
We ARE in a predicament, moreso than the public realizes and it is going to take engineers to get us out of it, pure and simple. Any of you know any engineers? ;)
James Hopf 6.27.08
I think CERA may actually be close to right about the undulating plateau, at least over the near-to-mid term.
I agree with Fred that oil producers will not increase production like the EIA dreams they will, since that would involve a huge capital investment that would only result in a reduction of their eventual income. They've realized that they only have a finite amount of oil, and that they will eventually sell it all. They cannot increase total eventual (ultimate) sales volume. Thus, the only issue is what price that fixed block of oil will sell for.
Increasing production rates will reduce the price, and simply make the oil run out sooner. In fact, a higher production rate results in lower ultimate recovery. One could actually curtail production, but that may drive prices up so much that world depression (and resource wars?) would result, and may cause alternatives to be developed before much of the oil is sold.
So the question is, what is the ideal rate of production, from the producers point of view? My arguments above suggest that it may be something close to keeping the current rate. There are other reasons to just keep the current rate. I may be wrong, but my thinking is that whereas it takes a large capital infrastructure investment to increase the production rate, a much lower level of investment is required to simply maintain the current rate. Reducing the production rate does not save or avoid much equipment investment, as the cost of keeping the existing infrastructure running (i.e., maintencence, etc..) is not very high. Some investment is still required to maintain production rates (such as drilling new wells to make up for depletion of others), but much of the infrastructure (such as the processing, handling and shipping infrastructure) scales with the production rate, and does not have to be built (only maintained) as long as the production rate does not rise.
Based on the above, there will be a strong tendency for them to just stand pat with current production levels. They won't increase them much (to meet our needs), because that would cost them a lot and only reduce their profits. On the other hand, they probably won't reduce production levels either, as there is little economic savings in doing so. Thus, I believe that the most likely scenario is that the oil producers will settle on this "compromise" policy, of maintaining current levels. Thus, there is a good chance that CERA is right, as far as the next 10-15 years are concerned.
Ferdinand E. Banks 6.28.08
James, nobody ridicules CERA's undulating plateau more than I do, but I do it because I know that that and similar ideas surfaced late at night after the cognac bottle had gone around the table a couple of times. That was where/when they got their 'model'. I say this because I remember some people constructing a model of the copper market in the bar of an up-market London hotel late at night.
But yes, for what it's worth, an undulating plateau is possible, But it ain't worth much except a lot of trouble for those of us on the buy side of the market. What difference does it make if oil goes to X dollars/barrel because of an undulating plateau or a distinct peak? And let's get the bottom line straight here: those people are not going to raise production the way they said they would at Jeddah or someplace else because they either cant or dont want to or both, and the same is true of the Russians. What do they have to win?
According to somebody I don't like - Martin Wolf of the Financial Times - the financial transfer from oil consumers to oil producers is more than 2 trillion dollars per year at present oil prices. But that's not all of it, is it. What about the decline in value of our shares and the unemployment that is due or going to be due to higher energy prices. Not long ago I made the absurd observation somewhere that the price of natural gas would probably stabilize around seven dollars per million BTU. That price at present is around $12/MBtu. When the 'wealth effect' of higher energy prices is taken in consideration, then Jeff's statement that we are in a "predicament" can be multiplied by something.
Bob Amorosi 6.28.08
I'm an electrical (design) engineer if you're looking for one, but I can tell you from personal experience it's very tough trying to get us out of our energy predicaments.
There are many egineers around with bright ideas and technology already developed in many cases for many aspects of the energy world including in mine the electronics industry. The real problem in getting any of these things commercialized is raising the necessary investment to do it. Our energy industries are so rife in political involvement that tend to be dominated by large existing corporations and regulatory bodies that few in the private sector are willimg to take the huge risks of sinking large amounts of capital into new ventures. Here in Canada and probably in the US too the majority of new ventures and technology investments are only forging ahead only with public funding or incentives from governments. The exceptions are those ventures whose product or service can be marketed DIRECTLY TO CONSUMERS because at least consumers are far easier to predict and represent true free markets.
Bob Amorosi, M.Eng., Resident of Ontario Canada
Bob Amorosi 6.28.08
Here in Ontario Canada our provincial government is acutely aware of the unwillingness of private interests to invest heavily in our energy problems, so they offer government funds in many areas to stimulate R&D and commercialization of new technologies. But there are catches to the funding. In all cases lab research and engineering support from direct government funds must be funded by an equal or larger amount of money from the company or individual receiving the help.
These requirements tend to cater more to existing large companies and wealthy individuals with deep pockets, and makes it more difficult for start-up ventures to get the help unless someone or some company with deep pockets is backing it.
Actually, I find some plausibility with this wiggling plateau idea. However, what would seem to happen would be high prices depress economic activity and hence oil demand. That lower demand lowers prices a while until demand is once again stimulated by lower energy prices.
In other words, an upper limit in production causes volitility in world economic activity as it hunts to find an equilibrium.
This is not a pretty picture! Of course, it will hurt developing countries like China and India more but everyone suffers.
Ferdinand E. Banks 6.29.08
Joseph, I find some plausibility in it too, but it is such a simple idea that I don't like being told (by the CERA people) that it is complicated, and derives from a very sophisticated model.. Besides, the devil is in the details. Better a clear-cut peak so that our political masters comprehend the score and put together an efficient response, than a situation where production (and the growth in GDP) moves up and down (and whenever things get better you see articles in the business journals about it only being a matter of time utntil oil sells for ten dollars a barrel).
Bill Corbin 6.29.08
Correction, news of 'sustinance' :
China wants 100 Westinghouse reactors Pittsburgh Tribune-Review, PA - Jun 27, 2008
Smart move. That's about 170,000 MW with a life cycle of probably 75 years of rock solid gold-plated reliability. This investment would not be made if 'oil was going down'. Personally, I still think they're in start-up mode, and has decades before an S-curve plateau. Plenty of transmission could be build into N. Korea. Now, if game theory has predictive value, then the current supply chain will be sold out. Those lacking leadership, need to start negioating emmigration treaties.
Ferdinand E. Banks 6.30.08
100 reactors with about 1700 MW per reactor. Makes me think that those people are playing for keeps. Maybe it's a good idea to send some of the green colleagues there to reason with them - that is, explain that in reality they would be better of if they didn't become the 'workshop of the world', with all the stress and higher incomes that will ential.
Richard Vesel 6.30.08
Jeff - The LA Times article is "Opinion"
Here are the facts, from the DOE: http://www.fossil.energy.gov/programs/reserves/spr/spr-facts.html
The expanded reserve is indeed only about 3/4 full. We allowed a drawdown of 11M barrels due to hurricane Katrina. I offer to all that gas at $4 per gallon is going to hurt us a lot more than Katrina did, just spread over the entire population more or less equally, and in a long protracted fashion ... I propose a 50M bbl drawdown, over a period of 21 days, or about 2.4M bbl/day, just over half of the delivery capability. This can start 13 days after a presidential order, so there would be almost two weeks for the marketplace to respond to the "imminent threat" of the 50M bbl "dump". It may not even be necessary to execute the entire dump, if the intended bubble-bursting effect is acheived...
Think of this as a "free market" counterforce to speculative excess, much the same way as the Federal Reserve uses interest rates and money supply to throttle the economic activity. This organization was created to introduce a sense of order and stability into the US financial system, which was fairly chaotic prior to then. Supply and Demand are free market concepts, and no one should say "unfair" if a representative government does what it can to curb excesses through supply-side management....
Dr. Banks - I agree that, in general, the more liquidity there is in a particular market, the "more functional" it is. However, I am not "taking the word of" those whose vested interest is in providing (and charging for) all those instruments and commissions on every transaction ...
It should be obvious to everyone that the size of the forces at work in global markets, without any regulation, can literally crush entire populations with expenses which change to rapidly to react to - witness the what the prices of grain have done to people and industries dependent upon those grains as food or input...
I suggest some further thinking on "risk v. reward" of such systems, in such cases where a particular commodity is lifeblood for most of the civilized world. I hope to god that no financial wizard comes up with a futures trading scheme for Gigawatt hours of electricity, for example. While we could do with short supplies of almost any other particular commodity, due to suitable alternatives, I suggest that energy fall under some more strict regulation so as to prevent a relatively small handful of completely disinterested opportunists from profitting on the misery of the masses.
There will be enough misery to go around, as it is, even without the speculative spikes tossed into the picture...
Ferdinand E. Banks 7.1.08
Richard, nobody is being crushed by the oil futures markets...yet. Remember, that market is dealing in paper and not physical oil, and if you don't remember I can suggest Chapter 8 of my new textbook. As you might recall, somebody in the US Congress suggested bringing the oil exporters to court and charging them with monopolistic behavior, or something like that, only it cant be done because - unlike NYMEX - their producers' organization (OPEC) happens to be headquartered on the other side of the world instead of New York. Moreover, in an ideal organization of the OPEC type, for every barrel of oil released by the official inventory holders, they would cut back or consider cutting back a barrel of oil from some producer.
Put another way, I don't buy the speculation/bubble approach. The bottome line is physical demand outrunning supply - although it is likely that there is some small-scale destructive speculation somewhere in or near the picture, and it could get worse.
Turner Hunt 7.1.08
A long sustained noose-tightening supply decline is a matter of physics from here on out. We'll be at 60M barrels per day in 2020 and declining at about 7% per year through 2040.
When do we all realize that the Emporer has no clothes on ?
Ted Galpin 7.1.08
Gentlemen with all respect - how about a practical solution rather than arguing the problem.
You want a good Energy / Fuel economincs argument for solutions to the energy crisis?
Energy Victory: Winning the War on Terror by Breaking Free of Oil, 2007 book by Robert Zubrin.
I listened to him lecture the subject at Colorado School of Mines, innovative idea.
The War on Terror spin he was trying to make when writing the book is basically irrelevant when you look at today's oil economics.
It's a simple solution - Automotive internal combustion engines may be converted to run of any mixture of gasoline, methanol, and ethanol for a few hundred dollars price difference in a new car. Federally mandate manufactured automobiles to be able to burn ethanol and methanol in addition to gasoline - and the oil monoply would have to compete with other fuels that would be burnable in all new cars.
Sir, you wrote about the limits of supply and demand. Well this is a simple solution. Create a flexible demand that can accept supply from different fuel sources. Supply of ethanol + methanol + gasoline will increase avavilable fuel supply to meet increasing demand, and let market forrces compete to noramlize fuel prices.
This is not switching to alchohol fuel, merely creating the option to use alchol fuels, and let the market decide.
That is an example of a potential innovative ecnomic solution that would be implmented by a proactive government. If you can find the flaws, by all means pick it apart or find a better way to increase supply to meet increasing demand for fuel. But the test case was Brazil, they have their own precursor version of an alchohol fuel economy. The affordable technology exists, the economics are simple. Can anybody argue against an increase in fuel supply? It just needs a legilation to create the demand to be filled.
So does anyone know a way to get the media and politians pursuing solutions? Or are we going to do the lazy american thing and look for scapegoats ?
bill payne 7.1.08
What do you think will happen to the price of oil if Iran is attacked?
Let's all hope for peaceful settlement of these unfortunate matters.
I have in laws in China and they LOVE their new car. BTW they shifted from taxis and an occasional bus ride to a private car. Bicycles are long gone and some large Chinese cities are banning motorcycles. My in laws also moved to a suburb with less convenient public transport. Sound familiar? Sustained oil prices at current levels may slow down growth of automobile use in China, but the power of personal transport is enthralling. So how do we expect people to answer the question of the day in China: "Honey, when are WE going to get a car?"
As for myself, I am perfectly willing to buy a plug in hybrid, but will not ride public transport. Gas is no where near expensive enough ($4.69 for premium today) to offset the opportunity cost of the extra hour + per day it would take to use public transit. Perhaps a 45 mpg diesel would suffice for a while. Expect that to be a common response.
Barring discovery of more oil or gas than is generally expected, it seems inevitable that economies that delay adaption of nuclear power are going to fall behind. If the Chinese move aggressively while Americans dither our grand children may ask why we were so stupid. And if some nations do move aggressively to nuclear power then some of its downsides, such as nuclear proliferation, become largely sunk to whether the US (and Europe) embrace nuclear.
Ferdinand E. Banks 7.2.08
I don't think that we are in the same game here, Ted. I'm not arguing about anything. Oil is scarce, and it was scarce 10 years ago when its price was almost down to ten dollars a barrel - given future requirements. My positions are strictly non-negotiable where this particular subject is concerned. Oil is scarce, and the producers in the Middle East - who have the balance of power in this market - are through selling it for lunch money. Please pass that information to your congressman, and tell him to stop dreaming about shale and deep ocean oil.
What are our political masters supposed to do about it. Well, I've been writing about and publishing on this subject for yea years, and the only remedy that I have come up with is to put more emphasis on nuclear, because this is probably the most flexible energy or quasi-energy resource. Let me put this another way: the regular commentators in this forum - excluding my good self - probably have the answer to that dilemma, and if they dont, maybe they know someone who does.
Chris DeLise 7.2.08
Thank you Prof. Banks for an excellent article.
If nothing less, this last few years (months?) has provided a textbook case of price elasticity of demand. Ted, your call for flexibly fueled vehicles makes sense in a "bursty" supply case in which different fuels are in vogue for periods of time much less than a car's lifetime. But thus far nobody seems to have an alternate fuel that comes in sufficient quantities and without side effects such as impacting the food supply. Even now after a few years of production, ethanol represents no more than a few percent of our domestic liquid fuel supply. If there's a black swan here, it is that most of the world seems to have forgotten that fossil fuels are finite and not renewable.
Engineers can increase our infrastructure efficiency, sure, and that may be the best source of medium-term "supply". But engineers cannot make energy where there is none. We need alchemists, perhaps. The sun is our best source; we'd better get good at using it.
Ted Galpin 7.3.08
Prof Banks - By the way - excellent article. I was commenting to the argument in the Comments section. I agree with you completely, and was merely trying to suggest one of many potential solutions to the problem of fuel supply. Zubrin's effort being one of the more technologically practical and economically elegant.
About Solar power. I burn a few tons of coal and a few barrels of oil to get a photo voltaic cell or steam solar plant that produces a fraction of the net energy used to manufacture the solar power gadget in it's lifetime before it becomes weathered and broken. Net energy is we burn several times more fossil fuels creating the solar power gadgets than they ever give back to us. Net energy it's currently a lose/lose situation.
Solar is an abundant supply that we cannot effectively harness. But I'm and engineer, I use solutions that work today, hoping for something better tomorrow.
About Alcohol fuels:
Demand of a commodity dictates the supply.
Most of the existing world wide demand for ethanol is for food grade ethanol. Only a few regional areas (like Brazil) use it as fuel. Keep in mind FUEL grade ethanol can be made made from non food sources, e.i. weeds, grasses, algae, etc; need not automatically effect the food supply or price. In fact, if you study your agricultural economics closely, you'll see that the price of food is dictated by transport and fuel prices, much more than the price of corn. Literally a $3 box of corn flakes represents a few cents of corn, some labor, several more cents of electricity for processing, and over a dollar of gasoline to transport it to the store.
That is why I suggest - read the book. The economics are explained very well. If you create a potential demand for alcohol fuels, the technology exists to create a supply. And the existing oil infrastructure works for transport and distribution. The Gas station can pump alcohol same as unleaded.
But nobody will sink billions into developing a large scale alcohol fuel refinery without an EXISTING demand.
I'll say again, read the book, and some others on the subject. We don't use all our arable land for agriculture, because lower yield land is not profitable for food crops that sell cheap. But farmers may profit from currently underutilized lower yield arable land with biomass crops that will sell for a profit as a renewable energy source.
And best of all, it's a regional supply of biomass. Anything with sugar or grain in it can be made into an alcohol fuel. And with modern agriculture, there is plenty of available land. You can have local renewable fuel sources and local scale fuel refining. No need to buy from OPEC.
And again, look at the information sources. Zubrin's numbers based on government and university studies showed a domestic US untapped economically viable agricultural capacity to provide adequate alcohol fuel feedstock to permanently supplant more than half of our current domestic gasoline consumption. Because Oil is more more expensive than food, and fuel crops will be much more profitable. The current limit is the manpower for working the land, not the amount of land. Food shortages are from changing the destination of existing supply. This is about increasing agricultural supply by using currently unused land because there is no existing profitable demand for use.
More candidly - look at the developing world - more land than they know what to do with, and cannot afford oil. With readily available vehicles that would run off alcohol fuels, they could grow their own fuel stocks, develop small, local alcohol fuel refineries with investment capital, and establish regional fuel independence in less than a generation. That in turn effects global supply and demand for combustion fuels as a whole.
No alchemy involved. Existing technology requiring different circumstances for free market economics to drive development of new supply of alternative fuels.
I guarantee, if all cars were capable of burning methanol or ethanol; there can be profit to make at selling raw alcohol at $4 per gallon. It sells for about a tenth that at Walmart as rubbing alcohol now. All they need is a market demand for it.
But I'll digress. Read the book (which I don't have handy to quote), with a few hundred pages of referenced scientific and economic explanation. Then judge. If you'd rather be a lemming and believe a couple pop culture media reports that say bio diesel and ethanol are unreasonably effecting world food prices - without checking the source or researching the economics yourself. That's your choice. Don't believe the media blindly, don't believe me - find out for yourself.
Len Gould 7.3.08
Ted Galpin: "we burn several times more fossil fuels creating the solar power gadgets than they ever give back to us." -- "I'm and engineer, I use solutions that work today" --
First point: If you really are an engineer, you might open a reference work to correct that first statement. Or try to formulate the calculation yourself ... Nooooo, forget that. As indicated in the second statement, as an engineer you only do what you know has already long been done by others.
No creativity allowed.
Len Gould 7.3.08
Or you might just read this to get the EROEI of solar thermal at 27:1 to 74:1 with 1990's technology. Other sources I noticed clearly show net postives for at least thin-film PV.
http://www.ases.org/divisions/electric/newsletters/2006-04.html#roi "The primary reference for this work is an article entitled “Solar thermal electricity: an environmentally benign and viable alternative”, by Vant-Hull in Perspectives in Energy, 1992-3, vol. 2, pp157-166 published by Pion Press, Great Britain."
"My 1990 analysis of a central receiver system showed an EROI of 27 for energy in to electricity out is more appropriate. If put on the same basis as PV or Wind (run-of-the-sun (or wind)), the number is 44. If recycling is assumed the EROI is 45 or 74, respectively. "
Jim Beyer 7.3.08
Zubrin's book is interesting, but he makes a few mistakes.
There isn't enough biomass to make enough of a difference to do it all with biofuels. I think he looks into coal->methanol to supplant that. But that means more carbon emissions.
Methanol is not a very popular fuel. The automakers (to date) have stayed away from it because it's so poisonous. That may change in the future.
Zubrin made no effort to add PHEVs to his solution, which at the very least (simple HEVs) can do something to increase fuel efficiency in automobiles.
Methanol is so bulky that simple conversions may not suffice as additional tankage is needed to provide desired range.
Malcolm Rawlingson 7.3.08
Another gem of an article Fred...I really enjoy reading your work.
I don't know much about the oil business Fred - splitting atoms is what I do - but what you say makes absolute sense to me. Any one who considers that oil producing countries whether Middle Eastern, Nigeria, Venezuala are going to produce lots more oil to keep the price down for Western countries is out of their mind. They are going to keep it in the ground and sell less of it for the same money...what would encourage them to do anything other than that defies logic. But as you say the IEA and the like are not logical...they are political and will say what is politically correct...not what is right.
IF PHEV's become economical and their use is widespread the effect on the grid system will not be as great as some imagine. Since the majority will be recharged overnight when the grid is lightly loaded it will have the effect of load flattening which is a good thing. It also of course will encourage more base load plants and (the reason why I like them) is that will make the economics of nuclear power even more attractive than they already are. Basically PHEV's increase the base load requirement and base load is best filled by nuclear.
The discussion on solar power is (of course) missing the one fact I have often repeated that the Sun does not shine at night. So you an build all the capacity you want - its output at night will be zero. I know this for a fact as it is quite dark here in Ontario as I write this and I think it is because the Sun is not on this side of the Earth. Therefore to make solar work one MUST have storage and the cost of that storage MUST be added to the total cost of solar and THAT is why it's economics put it out of practical consideration for anything other than running a few low wattage gadgets.
I have not seen any calculations with storage included and I suspect that cost will be sky high. Can anyone here send me that data so I can take a look at it. Exactly how one proposes to charge PHEV's overnight (Sun not shining remember = zero kW) with solar panels and no storage capacity defies logic. It would make much MORE sense to place the solar panels right into the car body....which would make ones car rather pricey. There may be technological advances but I see nothing on the horizon for the large scale storage of electricity that is needed. If it were available nuclear plants would already be using it.
I remember the promises of low cost solar in the 1970's and that utopia never arrived so I doubt if the current bevvy of promises will make much of a difference either. I wouldn't bet the farm on it.
And methanol...I guess if you don't drink the stuff its fine...and I don't drink gasoline so should be OK.
I plan on buying a Chevvy Volt when it comes out so I can use nuclear power to charge it up and not use gas. Kinda like that idea.
Malcolm Rawlingson 7.3.08
You are correct. Energy cannot be created or destroyed just converted from one form to another. However massive amounts of energy are locked up in the nucleii of atoms and every day nuclear plants liberate this vast and unlimited energy supply. The alchemists are alive and well creating energy from useless lumps of rock - they are just called nuclear engineers.
Two hundred nuclear plants across North America and all energy concerns disappear. China understands, India understands....North America slowly getting there but too late I think to salvage our present standard of living.
As for ethanol - anyone with a heartbeat could have figured out what was going to happen....and it did. A food crop is now an energy crop. Enjoy your box of cornflakes it may soon be your last.
Malcolm Rawlingson 7.3.08
Dick, Some good points in your note above. Why indeed will people in China NOT want a car. There is a very good reason why people buy cars and it is because car = freedom to go where you want when you want any time you want. It is powerful - we all succumbed to it didn't we? Why would the Chinese or Indian populations not do the same....of course they will.
I would disagree with you on the proliferation aspects of nuclear power. You do not need a nuclear power plant to make atomic weapons. Just an enrichment plant. In fact nuclear fuel from a commercial nuclear electricity generating plant is the worst material for bomb making. So nuclear power plants do not cause the proliferation of nuclear weapons. It is often used by anti nuclear activists but they are totally wrong (as they are about anything nuclear) - but it makes for great fearmongering...which they are very good at.
Malcolm Rawlingson 7.3.08
Len, The reason electricity costs are going through the roof in the UK is that much of the nuclear baseload capacity that has been suppressing pricesfor the last 30-40 years is coming off line due to old age. I operated Bradwell Power Station in the late 70's early 80's and it was at the end of it's predicted design life then...it went on producing power until it was 40 years old - double its original lifespan. That plant was bought and paid for many times over and the cost of electricity it produced was a few cents a kWh. It went off line in 2002 and most of the Magnox plants that have been the backbone of the UK grid for the last 40 years are done....when the rest come off line soon well - you ain't seen nothing yet.
The UK Government decided to build gas plants not nuclear - not much good when you have no gas left...and when the price of THAT commodity starts to skyrocket maybe just maybe you will understand that nuclear power is the ONLY option left unless you want electricity rationing and prices in the dollars per kWH. Sooner or later the penny will drop.
Malcolm Rawlingson 7.3.08
Ted Galpin, To make the crystals required for PV cells one has to melt sand with a high power electric arc furnace. Seems energy intensive to me.
Whatever the economics of Len Gould and Co the fact is that to make 1 MW of 24 hour electricity at the equator (12 hours sunlight + 12 hours darkness) with a solar panel requires 2 MW of installed capacity running at maximum capacity for the 12 hours of sunlight. I MW goes to supply the 1 MW demand and 1 MW goes to the storage device for night time use when the whole output of the panel (all 2 MW) is zero.....and a storage device of exactly 1MW to supply the 1MW of demand at night.
So one must build TWICE the capacity PLUS a storage device for solar power to be equivalent to other sources of electricity such as nuclear power. A nuclear plant supplying 1MW requires just 1MW of installed capacity and no storage device and is independent of cloud cover or other phenomena that detract from its rated capacity and over which we humans have no control.
I think that makes solar power uneconomic except for perhaps peak lopping during the day. Any claims that it could ever replace nuclear or coal on a large scale are bogus nonsense.
Len Gould 7.4.08
Malcolm: You appear for some unfathomable reason to be deliberately misunderstanding. The following corrections to your above posts are not refutable, to my knowledge. If disagree, please reference reliable documentation.
a) I have never opposed nuclear power, in fact am a huge booster.
b) solar generation makes a perfect daytime peaking source to compliment nuclear baseload. We can deploy solar thermal economically now at max capability for a long time before overnite storage becomes an issue. Overnote storage is available, proven and economical.
c) I support research into Optical Rectenna PV which has the lab-proven capability (with a LOT more R&D) to be manufactured cheaply with common materials. I do NOT support spending vast amounts to deploy present common PV systems.
d) I support immediate large-scale deployment of solar thermal, esp. if CHP can be a part of the installations. This is an economical competitor to natural gas peakers NOW, is predictable based on simple cloud-cover forecasts, and should be deployed NOW.
e) several others.
As a nuclear engineer, you of all people should be a huge fan of solar generation a the only logically useful renewable resource to compliment nuclear. The field is large enough for both to play a huge part. Or do you need to wait for France to show you the way on that as well?
Chris DeLise 7.4.08
Ted, thanks for your thoughts. I'll check out the Zubrim book; I haven't run across it before. By the way, I too am an engineer, and I agree, we need to use what solutions we have today, in any creative way possible.
But I wouldn't ignore solar as a medium-term solution.
Malcolm, I too agree nuclear is a part of the solution, especially medium-term. But I'm not sure 200 reactors is enough to replace oil. I guess my concern is that PHEV charging alone would swamp our base load supply. Bear with me through a few figures below.
First some assumptions: All gas/diesel/nuclear figures are from 2007 EIA data. I assume the same number of vehicle miles driven and that PHEVs are essentially as efficient as existing ICE in terms of raw energy required per mile driven. Most likely the PHEVs will be more efficient but we can muddle through that later.
That said, U.S. 2007 product delivered (and generally consumed) was 9290 k barrels/day gasoline and 4220 kbd off diesel. Let's just work the gasoline part. If gas provides 125K BTU/gallon and 1KWH=3413 BTU we get 36.6 kWh/gallon or 1538 kWh/barrel of gasoline. So 2007 gasoline usage is equivalent to about 14,290 GWH/day or (dividing by 24) a rate of about 595 GW continuously. That's just the gasoline.
In 2007 the US nuclear industry produced 806 TWH worth of electricity out of 879 TWH possible (100.33 GWh nameplate x 365 x 24) or about 92% utilitization, pretty good.
So to replace gasoline with nuclear, assuming perfect batteries, no transmission line losses, etc. I believe we would need 648 GW capacity to supply 595 GW at 92% utilitization. or about 650 reactors. To replace diesel fuel adds another 330 reactors or about 1000 total.
I've repeated these calculations with solar PV and natural gas as a replacement for gasoline and diesel. Each time the existing capacity is swamped by the energy requirements for car/truck transportation alone. Maybe its time to review the assumptions, but the only one I've arrived at is that our way of life is going to have to change dramatically, starting soon.
Jim Beyer 7.4.08
It think PV (crystal) manufacturing is simply electricity intense. So you could use nuclear power to mint PV panels. I think a lot of the EROEI talk is confusing because, practically, at this point, the issue is EROOI (Energy return on OIL invested). In this case, the issue is more problematic with our agriculture than with wind turbines, PV, or other renewable energy systems, because they can be largely developed with electricity, which is mostly NOT oil-based.
Contrast this with all the oil and NG input to fertilizers, weed killers, and diesel fuel needed to run our farms. Perhaps its time for a PHEV combine.....
I think the EROEI is pretty favorable for batteries too, especially if the materials can be recycled when the batteries wear out. Since liquid fuel is getting scarce, 8-10 kw-hr of batteries in a PHEV displace 1 gallon of fuel every time they are used. Assuming 2000 charges, that's 2000 gallons not used. So, the net EROOI is huge in this case. We should be building these things yesterday....
Chris DeLise 7.4.08
I agree - semi manufacturing uses electricity to heat plasmas and other gaseous environments for processing. I suspect the initial "mining" of silicon would use some oil. We can make PV arrays using nuclear, no question.
And to you and Len, conventional silicon PV isn't the only solution. Solar thermal, CSP, and other PV technologies all play a part in this. And nuclear. We need to get going!
Todd McKissick 7.4.08
Once again, we've received the gift of a very insightful and clear article from my favorite world's greated economics professor. Great work, Fred. "Nail on the head" comes to mind. However, as with most gifts, we continue to squander it's potential benefit. In this case, we should heed it's underlying advice and begin a rapid switch from oil dependence to another energy source that will not simply shift the crisis to another fuel (coal, NG, bio-anything) in the coming times. This point is well accepted in this forum but seems unable to break out to the masses of the apathetic. That's ok, because it is groups such as this which will present those underinformed masses with the choices as long as we can bear the transition. Here's where the problem comes in. The only logical choice seems to be one of cooperation, coordination and inclusion. Instead, we're wasting time promoting single solutions.
Malcolm is a perfect example of someone stuck on one solution and refusing to accept the alternatives and their potential. This is the same attitude that's killing off the physical accomplishment in the newer alternatives. I don't know if the Malcolm's of the world are influencing the politicians or the reverse, but it's a big problem that's affecting all of society.
Chris has laid out some of the realities that show nuclear cannot possibly be the only solution. Another reality is that it's simply not possible to put 1000 nuke plants all over the countryside (helping just the US). The NIMBY may be irrational but it is real. The logistics of supplying everything needed for this gigantic new industry are flat out impossible. The manpower needed at the skill level and security level is not and will not be available. The massive transmission grid is also not feasable. Malcolm should know this, but chooses to ignore it.
As Len has clearly laid out, nuclear is a perfect match for solar thermal. Together, the capacity is there and they do match each other's shortcomings. As I've pointed out before, incoming solar energy can be viewed as fuel delivery, allowing it to be used for generation at a later time. (Is nuclear's capacity 0.13% just because it's only receiving fuel for 12 hours per year? Rediculous.) One confusion comes from the muddy waters between solar thermal and PV. PV needs instant storage of electricity to shift delivery times away from generation times by even a minute. This storage is more problematic than other forms. Nuclear storage costs more than coal or NG, but is still cheaper. Solar thermal storage falls somewhere inbetween those three. This is why PV and CSP need to be considered as seperate technologies. While PV is making impressive progress on both the cells and the battery technologies, it will always be behind CSP because of the 'fuel' storage issue and the CHP benefits it lacks.
Down the road, the biggest player in our future energy sources may be to use CSP in a distributed manner where the 60%-70% losses can be used at up to 90% utilization (CHP). This tripples the 30% capacity (calculated from raw energy) of these systems while directly reducing transmission capacity and new land use by the same amount. When considering the dual use of many of its materials, it can push the EROEI beyond the 200 mark. That trippling of efficiency (unrivaled from any other source) plus transmission reduction will become very significant when everything is tied to grid health in the same way as it is to oil now.
I firmly believe that most popular commuting types of transportation today will go the way of the dinosaurs within a decade or two. Public transportation is beginning to offer substitutes that give us those freedoms that we want (see PRT, Personal Maglevs, tube highways and even high speed rails), but they shift oil use to the electrical side. In the meantime, we have BEVs, PHEVs and HEVs for the transition and longer term specific needs. All biofuels can and should do long-term is address more of those specific needs. Either way, the grid is where our energy future is at. This seems indisputable. I see this as why all energy discussions migrate to grid supply and smart grid technologies to use it's full capacity.
As Fred has informed us, those with power will disperse it for the most profitable gain. It's time to give the masses that power.
Ferdinand E. Banks 7.4.08
Aw, you're too kind Todd. But thanks anyway, because the first version of a short paper about futures by your favorite econ teacher recently appeared on another site, and the general opinion of my work on that occasion was garbage, stupidity and a few other choice words of that nature. I was also told that "those who cant teach, and those who cant teach teach teachers" plus some other things that I don't remember. You know, blog type inputs and insults - nothing sophisticated. And not only that, I was informed that I was wrong about this speculation thing, and...blah, blah.....with some examples which indicated that my critics had been exposed to financial economics somewhere. I really hope that it wasn't Harvard or West Point or someplace like that, where the future masters of the universe are being prepared to lead all of us to glory.
Len Gould 7.4.08
"where the future masters of the universe are being prepared to lead all of us to glory." -- lovely turn of phrase, worthy of your record, Fred.
And (I believe) I saw that other article and the comments, they wern't near as critical as you make out and were obviously the unfair (lack of) thoughts of some thwarted smalltime investors who just recently figured out how to sell oil short. Keep up the excellent work.
Malcolm Rawlingson 7.5.08
Len, I am delighted you are a supporter of nuclear power....that is good news. Some of your comments appear not to support that view but if I have miconstrued your words you have my apology.
I am not a particular fan of any form of generation...just the ones that work at a price people can afford. Item b on your list indicates to me that price appears of no concern. Deploying any generating system with a capacity factor of just 50% at the very best and likely very much less than that is a poor use of money and resources. What it means is that for every installed megawatt you must have some other form of generation in place. With solar you have very little choice over its operation. Sure it can provide some load clipping in the summertime but not very much for the investment you make.
Ontario is constructing a 40 MW plant in Southwestern Ontario. Government subsidised to pay 42c/kWh when it operates. The efforts are laudible but paying 10 times the price from a solar PV array when nuclear provides it at 4c per kWh seems an uneconomic proposition to me. Nuclear is available 24 hours a day Solar is only available during the day. So it really isn't that perfect when one has to pay 10 times the price for it. I guess it depends on ones definition of perfect. But as you said you do not support these types of systems...unfortunately our politicians have a hard time telling the difference. Not their fault really. I think large scale systems made of common materials are a long way off...but you are clearly the expert on that not me. All I know is the ones I can buy now at the hardware store are horrendously expensive per kilowatt.
CHP systems are OK but who is going to spend the money to build that infrastructure into every building in the country. Seems like a very expensive proposition to me. I would favour ground source heat pumps operated by electrically driven compressors. One does not hear much about these systems on this forum.
France produces almost all of its electricity from two sources and I would be delighted if North America followed the lead of France. Nuclear power (74%) and hydro dams (14%). Newer generations of reactors can be designed to load follow which eliminates the need for peaking sources but makes the nuclear electricity a little more expensive since it lowers capacity factors.
So my view is that the correct blend of reactor types in the current grid system can meet all the electricity needs of society for hundreds of years into the future. To me it clearly makes much more sense to build a system that is known to work with technology we already have rather than deploy a whole new infrastructure of wind or solar or whatever and find that we still need nuclear as well.
Todd accuses me of being stuck on one solution....perhaps....my solution works but I am very unsure that the alternatives proposed here will.
By way of example - the flaws in the ethanol solution were pointed out on this site many times. It is being implemented and as every one with half a brain predicted food prices have shot up as a direct consequence of that flawed solution. And the price of gas hasn't gone down as a result has it?
I like the French solution - 56 large scale plants producing 74% of the required power with no emissions. Sure they could throw on a few solar panels to lop off the peaks - they can afford it theya could care less about the price of coal or oil or natural gas for their electrical generation.
As a nuclear engineer, you of all people should be a huge fan of solar generation a the only logically useful renewable resource to compliment nuclear. The field is large enough for both to play a huge part. Or do you need to wait for France to show you the way on that as well?
Ferdinand E. Banks 7.6.08
Malcolm, I'm on your side, but the truth of the matter is that a lot of voters arn't, and their wishes need to be respected...up to a point. A little windpower and a little sunpower won't do any harm. After all, when you check the statistics in 50 years, there will probably - probably - only be a 'smidgin' of those two departures. And if there is more, then good - it means that they have found some way to make them fit into a rational economic framework. But I wouldn't be optimistic: nobody wants them to work more than the Swedes, but they haven't gotten anywhere yet.
Todd McKissick 7.6.08
Malcolm: "...my solution works..."
Given the only published reports on new nuclear plant proposals put the minimum cost as high as $14B/gw (FPL - last week), can someone cite the actual costs & formula for figuring the capital cost (in $/kWh) for that plant if amitorized over 40 years and a more likely 20/30 years?
Also informative would be how many souls are employed per plant and at what average pay. Given the current shortage of those engineers, please include the salary inflation that's inevitable.
Then to find that viability of nuclear as the single major supply for the future grid which will include most transportation, we need to know how many plants and transmission lines that will take?
We so often hear numbers thrown out, like $0.04/kWh total or $0.012/kWh for capital costs only, but let's see how the hard numbers really break down for the hundreds of new plants proposed here. My guess is some assumptions are about as old as our operating plants.
Len Gould 7.7.08
Malcolm: I suggest you go for it, but keep yourself a backup energy source of some useful sort for use in the possible event of a serious meltdown..... I know, odds are low, but you ARE betting the life of myself and family.
James Hopf 7.7.08
Chris D writes:
"I assume the same number of vehicle miles driven and that PHEVs are essentially as efficient as existing ICE in terms of raw energy required per mile driven. Most likely the PHEVs will be more efficient but we can muddle through that later."
This assumption is not a minor point (that can be discussed later). It is a major error in the analysis that totally changes the conclusion. This is especially true given that he compared gasoline's thermal energy content with the kW-hr output from reactors, as opposed to the thermal energy of the (uranium) fuel.
The overall well-to-wheel efficiency of electric cars is about double that of ICE cars, even after accounting for the (33%-50%) thermal efficiency of electricity generation. If you compare gasoline thermal energy to electric kW-hrs directly, the difference is almost a factor of four. ICE engines are ~20-25% efficient (at converting gasoline thermal energy to work). Electric cars are over 80% efficient, even after accounting for transmission, battery and electric motor losses. Thus, there is a factor of 3 to 4 difference.
So, if you take Chris' figure of 648 GW and divide by, say, 3.5, you get a total reactor rated power level of ~185 GW, which can be supplied by ~150 new reactors with an average power rating of ~1.2-1.25 GW. Even if you add trucking (diesel), the number is less than 250.
Most or all of these new reactors could be built at existing sites (that already have operating reactors). Most sites in the US have been analyzed and qualified to accommodate 2 or more times as many reactors as they actually have.
As for NIMBY, polls consistently show that the support for new reactors is very high (~75% or more) in the local communities around existing plants. These folks are used to the plants; they know that they do not have any significant deleterious effects (e.g., pollution), and they are very familiar with their impact on local employment and the local tax base. In fact, many of these towns are now engaging in bidding wars; offering financial (tax) incentives to host new plants.
There was a recent study by Pacific Northwest Lab which showed that a significant penetration of PHEVs could be accommodated by our existing power infrastructure, w/o having to build new power plants or transmission lines, as long as they are recharged at night. Of course, we would wind up running gas/oil peaker plants as baseload plants, which would result in our wanting to replace them with renewable or baseload (nuclear/coal) plants. But we wouldn't need much in the way of new power lines.....
Bob Amorosi 7.8.08
On recharging electric cars at night, anyone who has seen typical grid power demand curves can easily figure out that we have huge spare capacity for widespread night charging, everywhere. But guaranteeing that many PHEVs will not be recharged during the daytime is a pipe dream without draconian style controls on the vehicles that prevents daytime recharging. Someone who commutes to work after consuming a full charge to get there in the morning for example would not be permitted to recharge during the day to get back home again.
Malcolm; I also support much more nuclear together with solar and wind for daytime peak lopping. Our Ontario government is paying the steep premium for solar power into the grid to spur investment to build them. If solar did not get this premium at least for a temporary period, which type of plant as an investor would you rather spend your money on ? A super-high-volume output nuclear plant that makes a relatively huge rate of income, or solar that has a fraction of its output and only works 50% of the time at best.
I am not down on solar for small-scale private use rather I like to dream of having my rooftop covered, and yes battery storage in the house for night use. Even better, use a rooftop system to charge up batteries in the basement during the day, and then transfer the electrical energy from the basement batteries to my PHEV's batteries overnight. I kind of like the idea of free vehicle fuel. But sadly I'll have to keep dreaming until the cost to build such a system comes down enough to become affordable... or maybe I should just move into a new house and have the builder put in the system, and simply add the cost to my new mortgage. It wouldn’t take rocket science to figure out the payback period of less reliance on the grid's supply.
Todd McKissick 7.8.08
James, While many of your assumptions are true, that doesn't mean you should exploit them because there are others that you make.
Granted BEV's are up to 4 times more efficient, but that is not for comparable automobiles. Today's 'efficient' cars that are comparable in features and size to an electric are double the norm in efficiency. Say 30-40 mpg (see Europe, Asia) instead of our 18-24 for the gas efficiency you quoted. In addition to that, where is the power needed to support the return of the demand destruction caused by today's high prices? We've reduced our total miles in recent years, but that bucks a trend of miles driven equating to economic growth. In other words, conservation is elastic where efficiency is less so. There are other benefits, like pollution and extended lifespan, that support the electric side but I'll stick with the energy discussion.
Granted "a significant" penetration of PHEVs could be charged at night, but does that include a mandate that they will be? How can the grid accomodate some unforseen national event that alters public habits and causes them all to go charge up during peak? Any central system has to accomodate an individual desiring to do so, but can't discriminate against others for wanting to do it too.
Can you be more specific than "most" sites can accommodate 2 or more times the reactors they presently have? Does this mean our current sites can go from 107 to 200 or 400 or the 500 that we'll most likely need? What does that do to the projected cost of those reactors? How does that impact the transmission lines in those areas? How much will redundancy cost on those now ultra-high capacity transmission lines?
Is there some proposal to change the rate structure to a more deregulated, smart one where these cheap nuclear plants won't charge the ever-increasing going rate? We never did receive our "too cheap to meter" promise and in fact got stuck with incalculable hidden tax based, 50-year subsidies. Will we get it this time?
Is the FPL study anywhere close to the correct cost for new nuclear plants today? As I remember, they got 3 different proposals which ranged from $10B to $14B/GW. That's over $8k/kW which can be beat by nearly any other technology including PV.
Bob Amorosi 7.8.08
Ground source heat pumps operated by electrically driven compressors have been around for years but their efficiency in Canada has never competed well with NG furnaces for winter heating. Things are changing however, one company has developed a new much higher efficiency design, has govenment support, and may be an option soon for new home builders in Canada to offer. Gotta like those creative engineering types.
Bob Amorosi 7.8.08
The new heat pump design I mentioned is called the "Acadia" made by Hallowell International in Maine, founded by former US navy cryogenics engineer Duane Hallowell. It reportedly works in -30C, great for Canadians. www.gotohallowell.com
Jim Beyer 7.8.08
I don't really understand the push-back on PHEVs. Granted, they aren't on the road yet, and the economics are unproven, but they definitely seem feasible. Given that HEVs are already here, PHEVs will be here at some point. Within a few years.
So what is the alternative to Let's check them:
1. Drill more oil. That won't work. We are running out of oil. And 70% of oil use is for transportation.
2. Ethanol/biofuels. Not enough of that to make a difference.
3. BEVs. Possible, but even more of a technical challenge.
4. Mass transit. Large infrastructure and cultural changes.
5. Coal to liquids. Also a big infrastructure change. Also dirty. It would probably be better to burn the coal for electricity than make liquid fuel out of it. (It looks like we don't have oodles of coal either...)
6. More efficient ICE. As Todd points out, there are limits to what this can buy us.
So, I say quite griping about the infrastructure problems of PHEVs. If peak charging is a problem, then put the chargers on brown-out switches. Start building that smart grid stuff we all know we need.
It should pointed out that even $0.20 per kw-hr electricity (the cost of PV electric) equates to $1.60-$2.00 equivalent in gas. There's plenty of margin to make these things work.
Kent Wright 7.8.08
Todd, In response to your statement: "Is the FPL study anywhere close to the correct cost for new nuclear plants today? As I remember, they got 3 different proposals which ranged from $10B to $14B/GW. That's over $8k/kW which can be beat by nearly any other technology including PV."...... Quoting the cost of one nuclear plant or the cost of nuclear per kw of capacity and ignoring its value relative to other sources, especially PV, is a false comparison. The value of nuclear lies in economy of scale (large size), low land use, low emissions, low fuel costs, and high capacity factors, which yield low costs per kw-hr of reliable, abundant and clean baseload electricity. In other words, each kw of nuclear is capable of producing over 8000 kw-hrs of electricity year after year for 60 or more years at a reasonable cost….. value that is totally unapproachable by PV, or just about anything else for that matter.
As for capital costs of T&D and other infrastructure in support of nuclear, any improvements of the grid would benefit virtually all other sources in the mix as well. The costs for improvements are rising for any type of infrastructure change at the same time that vast infrastructure changes are needed. We need a better grid for any and all new generation, regardless of type so it is fruitless to try to pin extra T&D costs on nuclear as though it would be the only culprit in driving up the price of deliverable electricity.
Still, as you say, we need to know the full cost of nuclear, but we also need to know the full cost of every plan for an honest comparison.
Todd McKissick 7.8.08
Kent, My $8k/kW estimate was from taking the low estimate ($10B) and dividing by a generous 1.2 gW per plant. It is standard practice to compare various proposals on a $/kW basis for capital cost only. It is not a full value comparison, which is what I've asked for twice now, but leads there. If I amitorize the low bid (generous again) over 30 years (are you really going to find someone to finance for 40 without using my tax dollars?) at a fair 5%, and you figure 92% capacity, that comes to $0.062/kWh for capital cost only. When using the high side numbers, it's more like 10.7 cents.
Granted there are other benefits like longevity, but how can you monetize them to get one plant built? Ok, now can you repeat that 399 more times?
Economies of scale can work both ways. You save on redundancy yet compromise on it at the same time. How many people lose power when a single plant is supplying 4-7 GW from a single line? For a comparison to distributed generation, what is "the system capacity" of residential refrigeration if 4% of them fail each year?
Regarding low land use, please quote a source on this which includes cradle to grave activities. The only sources I've found including all activities (which advocating site rarely do) show it pretty equal to CSP.
Regarding emissions, fuel costs, emissions... same argument. And this bit about 60 years is also misleading. I can say that about anything that I can replace individual components on. Ask me sometime what my rates did 2 years ago when our "cheap" nuclear needed an overhaul in a state that's completely coal and nuke. But you are correct in that PV is probably the only system incapable of being maintained for a full 60 years.
The transmission costs I referred to were the added cost of making transmission not single-point-failure succeptible. Being so highly concentrated as it is, it can't justify any transmission redundancy. Compare this to any distributed generation or distributed storage (especially PHEV charging) use. These all increase redundancy at a negative cost due to reducing the line load. How is increased nuclear capacity comparable? The only extra cost incurred may be for grid intelligence which we have no idea where it will lead.
I'm completely in agreement that we need the full cost of all sources. I have done this for many of them, and even published some here, but have yet to receive an answer relating to nuclear. I would just like everyone to put their apples on the table so we can all compare them.
Todd McKissick 7.8.08
"but their efficiency in Canada has never competed well with NG furnaces for winter heating" &
"The new heat pump design I mentioned is called the "Acadia" made by Hallowell International in Maine, founded by former US navy cryogenics engineer Duane Hallowell. It reportedly works in -30C, great for Canadians."
Is it possible that you are thinking of air sourced heat pumps? As I understood them, the ground sourced ones don't have such issues. (Maybe your ground temp is getting under -30C?) Still, 200% is great for an ASHP at that temp.
Bob Amorosi 7.8.08
I believe you're correct, it is the air sourced heat pumps with the problem. Ground sourced pumps can and do work up here (the ground doesn't get to -30C very deeply very often) but these have historically been far more expensive for a new home builder to use than simply dropping in a NG central furnace. The only exceptions are where there is no NG feed line nearby like in many rural areas, but then home builders generally stay away from building in rural areas until all the services are in place.
James Hopf 7.8.08
Let me start by saying that I was not making any philosophical statements in my post, about what the best energy options/plans are, etc... I was just pointing out what I believe is a flaw in a specific analysis that sought to answer a specific question, i.e., how many reactors would it take to power US transportation.
In reference to some of the other discussions, I enthusiastically support solar energy, and believe that it would be rational for other nuclear supporters to do so as well, given the synergy between the two sources. Nuclear and solar are natural allies, since they supplement each other very well (as others have pointed out). Wind on the other hand...... (it would be more of an ally of gas). Solar does not compete with, or displace nuclear. It displaces (and competes with) gas, and reducing gas use wherever possible is very much desired. In fact, solar displaces gas whether its used for power generation or space heating.
The analysis given in my post is completely independent of issues related to the size or efficiency of the cars in question. The discussion was strictly based on the efficiency of converting thermal or electrical energy into mechanical (shaft) work. The only potential issue is whether my assumption of 20-25% ICE engine efficiency is too conservative (low). Does anyone know of significantly higher efficiencies (in hybrds, etc...)?
On the other hand, it must be noted that Chris referenced current US consumption figures for gasoline and diesel. Thus, the correct ICE engine efficiency to apply for my analysis would be the CURRENT average efficiency for US vehicles. Basically, I calculated the number of reactors required to deliver (using electric motors) the same total amount of shaft work being used by US cars today. The fact that future PHEV or EV cars in the future will probably also be more efficient (i.e., require less shaft work per mile) only makes my analysis that much more conservative.
BTW, I never claimed that the analysis accounts for increases in number of cars or number of annual miles driven. Any increase in overall vehicle miles will scale my answer up accordingly.
James Hopf 7.8.08
Todd (other questions):
As for other needs (for reactors), replacing coal would require another 250 GW of capacity, or ~200 more reactors (for a total of 350 new plants). Of course, if we did that, nuclear will have single-handedly removed the majority of US CO2 emissions by replacing both coal (power) and oil (transport). I'm not sure any of us are planning on doing that much with nuclear alone. The point, however, is that it would be feasible.
I can't be much more specific on the spare reactor space issue. My impression is that most sites can handle about twice as many reactors as are already there. My guess is that if we build 100, the great majority of them can be at existing sites. At 150, still most at existing sites but a significant number of new sites would be required. As you go beyond that, my guess is that most further plants would be at new sites.
I would encourage PHEV users to recharge at night using discounted rates. The whole thing would also require some intelligent meter/charging system (nothing very expensive). It's true that PHEVs would not always be charged at off-peak times, but I believe they would be in the great majority of cases, which is good enough. Even if we had to build a gas plant or two to provide peak-time charging for a few PHEVs, it would still be more efficient than burning the gas (or equivalent oil) directly in an ICE. And with smart rates, the few daytime chargers would pay the full cost.
Once again, the PNL report suggests that no new power lines would be needed, even for a significant number of PHEVs. Off peak hours would simply start to resemble peak hours, in terms of both generating resources and grid flows. I did assume that if we started running peakers most of the time, we'd start replacing them with cheaper, baselod plants (like nuclear). You may have a point that building a nuke (at an existing nuke site) to replace a gas peaker plant (that is now running flat out) may not be as simple as it appears, because the new capacity is not in the same grid location as the capacity it replaced. It's possible that some grid investments would be required. As with everything, it will all come down to the economics. The cost of any grid modifications would have to be added to the total cost of the proposed nuclear alternative. It's possible this may result in a slightly reduced number of such replacements. More generally, however, other that the specific issue I discuss above, nuclear shouldn't require much more in the way of grid investments than any other option (wind would require more).
As for market structures, if the deregulated ("free") market applies, utilities will charge the going market price for power, which will be based on the operating cost of the most expensive marginal supplier (which will be a relatively low efficiency gas plant). They will keep the difference in generation cost (between that plant and the low cost nuke) as profit, as a reward for making spending the upfront capital (and taking the "huge" risk, etc..?). Under a rate based system, they will charge something like what it really cost, plus some set profit. I am confident that, in the future, for baseload, nuclear will be a cheaper option than gas or coal with sequestration. Thus, under the market system, it will make little difference, and under the rate base system, you would want nuclear (as a ratepayer).
Finally, the industry NEVER promised electricity that is too cheap to meter, in any remotely official capacity. In fact, they have always (from the 1950's on) maintained that nuclear would be at least somewhat more expensive than coal. The issue was posed as a question as to whether nuclear's lack of air pollution was worth the extra cost. Interestingly, after 50 years, the basic issue/question really hasn't changed much.
Jim Beyer 7.8.08
Current HEVs (Prius, Ford Escape) use the Atkinson cycle, which is about 28% efficient, once they are warmed up, etc.
Like HEVs, PHEVs would also enjoy regenerative braking. With the bigger battery pack of PHEVs, they may recover even more energy than HEVs do today. It would be reasonable to say that HEVs are about 50% more fuel efficient than comparable cars. A regular Ford Escape gets about 22 mpg. The hybrid gets 33.
But I don't think you can replace ALL of the oil use in transportation. An optimistic estimate is 80% (albeit at the higher efficiency). So if we are using 1.0 units of oil now, if we changeover completely to PHEVs we might need 0.13 units afterward [(100%-80%)x66% ]. Just an estimate.
It would seem to me you'd need much fewer than 100 new reactors. Maybe as few as 50. As others have pointed out, the devil is in the added infrastructure, not to mention the 10s of millions of automotive storage battery packs needed.
Malcolm Rawlingson 7.8.08
Bob, I agree with your comments about daytime charging of plug in vehicles. I doubt if any Government would be able to regulate it (except the Chinese perhaps) but I think for the most part charging would be done overnight. Also if load-following nuclear is introduced it becomes relatively easy to do during the peak periods too. I could also see thin film solar playing a roles here but not on house roof tops...on car roof tops. But costs would have to decrease alot. The depolyment of electric vehicles would of course take a gigantic chunk out of Government revenues that they get from gasoline sales so no doubt they would need to rake in the cash from taxing electricity more. Malcolm
Malcolm Rawlingson 7.8.08
Thanks Len for your comments. Risks must be place in perspective. I do value your life and that of your family and it is the fundamental reason why I am in the nuclear business. You bet the life of your family every time you drive your car on the highway and the risks are thousands of times greater than living near a nuclear plant. Apparently the risks of driving to the store is acceptable as risky as it is.
The problem is people perceive the risks of nuclear power to be much higher than they are and they perceive the risks of driving a car as much less than they actually are.
The safest place I am every day is at work. Our operators know their business and as an ex-operator myself I have no doubt that having my office next to a nuclear reactor is the very safest place I could be in North America. Much safer than a coal oil or gas plant by far. And since I don't have to climb onto my roof top to clear snow off my non-existent solar panels - much safer than PV I think.
Len rest assured I and all of my colleagues will keep your family very safe it is the only job we have.
James Hopf 7.8.08
Finally, on nuclear cost estimates:
I would start by noting that we have to be careful to compare apples to apples. Cost quotes are often for overnight capital costs for the power plant only, whereas the FPL quotes include both interest costs and the cost of associated grid investments. That said, my basic answer to you is that, no, I don't find any of the recent (very high) nuclear cost estimates to be believable at all.
The highest (overnight) capital cost that I am willing to believe is ~$4,000/kW, even for a first of a kind plant. Breakdowns of plant costs show that the recent rise in commodities prices (steel, concrete, etc...) could only explain an increase of ~30-40% in plant capital costs. Meanwhile, nuclear plant cost estimates have literally risen by a factor of 3 or 4 over just a few years. I believe that the industry is high-balling (padding) their cost estimates right now. Why would anyone do that? I can think of a few reasons (which follow):
The main reason (I believe) is that they are simply charging the absolute most the market will bear. In a carbon constrained world, the nearest competitor for large-scale baseload is gas (as coal w/ sequestration will cost a lot more). As shown in the FPL analysis, nuclear is cheaper than gas even with a very high nuclear capital cost. Their analysis convinced the PUC, anyway....
I don't believe that this is due to a single "conspirator/profiteer". What's really happening is that every entity involved in the whole project, down the entire supply chain, knows that it is in a position of advantage (due to the high cost of all other alternatives, and therefore the ability of the utility to "afford it"), and therefore, each one raises their cost (and increases their profit) a little bit. This effect then cascades and multiplies down the whole chain, resulting in a dramatic increase in final cost. In other words, the additional profit is being split among a large number of entities.
The point is that, in a free market, if you bid out a task among several intelligent suppliers, the winning bid will not equate to the cost for the lowest-cost supplier, it will be just below the cost for the second-lowest-cost supplier. The lowest-cost supplier has no incentive to charge less than the lowest possible bid for the 2nd guy, and he will therefore take the rest as profit.
In our case, this means that, amazingly, nuclear plant cost estimates will always be just low enough to barely beat gas (given expected carbon constraints). I firmly believe that the best way to predict nuclear plant cost estimates for future years (or any recent past years) would be to look at the cost of the natural gas alternative, as opposed to looking at anything directly related to the cost of building a nuclear plant. My observation is that nuclear plant cost estimates have tracked the cost of natural gas to an uncanny degree. Looking at the record, it seems clear that they are charging exactly what the market will bear, whether they admit it or not (even to themselves).
James Hopf 7.8.08
Given that the market can bear it, there are other reasons to high-ball the cost estimates. One is managing expectations. A new phrase heard at industry conferences is that "we have to under-promise and over-deliver". It is very important to the industry that the first wave of construction projects not be viewed as a failure. Specifically, the record cannot show that there were "cost overruns". One way to do this is to make a very high initial cost projection (i.e., set the expectations low), so you can either come in under budget or at least be very sure that you will meet budget. If the price of alternatives is so high that you can do this, why wouldn't you? Thus, they are doing precisely that, to the extent that the market will allow.
One final reason to err on the high side with the cost estimates is that it allows you to argue for more govt. subsidies. A higher level of govt. support goes straight to the bottom line (increased profit). They know that there is a strong desire in this country to build new reactors, and they sense that govt. is willing to provide a significant amount of help, if necessary, to make this happen. Govt. would not offer more help, however, if they thought that the plants would be built anyway. These high cost estimates help them make the case that more help is needed.
To you nuclear supporters, sorry for the level of cynicism in this post, but it's a little much to ask to have cost estimates suddenly (and for the most part, inexplicably) increase by literally a factor of 3-4 in just a few years, and not have people like myself (who want to believe in the technology) get just a little bit upset. As I said earlier, I simply don't believe these cost estimates, and am searching for an explanation. Either the industry was lying to us then (just a few years ago), or they are lying to us now. I'm maintaining hope that the truth is somewhere in the middle, at least.
Malcolm Rawlingson 7.8.08
Fred - thanks for your comments and I am sure that good sense will prevail...although on my bad days I think otherwise. Voters are a fickle bunch. Voters in France seem to like the idea of nuclear power very much with consistently very high levels of public support. Similarly in Ontario voters in favour of nuclear power are in the majority despite the constant negative barrage from the left leaning media who dislike anything technological (except their Blackberries of course). In Italy the Government has done a complete about turn and will be building new nuclear in 5 years or less despite the fact that voters voted to shut down all of Italy's reactors.
Fact is I am sure that no-one really LIKES any power station of any sort. I wouldn't vote for an oil refinery in my town but I really do like driving my convertible so I have to make a compromise.
Sweden will be builidng new nuclear plants before very long it is just a matter of time.
I do agree with Todd that a major difficulty for nuclear is hiring and training qualified staff but it is not that hard to operate a nuclear plant really so I don't think that will be an impossible task. Trades and skilled staff to construct them will be a challenge as it is for most major industries as we seem to value law degrees more than we do skilled trades and engineers......but that is rapidly changing....ask any welder in the tar sands in Alberta.....they just name their price.
Despite what many say here nuclear power is booming as people and Governments realise that their standard of living will decline rapidly if they do not develop a long term sustainable energy supply that is reliable.
And maybe your right Fred that throwing a little bit of solar and wind is a political ploy to appease those who believe those technologies can actually meet the electrical demand while they develop nuclear programs that will be the backbone of the grid system - as it has been for many years. As usual Fred you are right - I think that is precisely what is going on.
I would be interested in reading your papers on nuclear power Fred. Having been in this business for nearly 40 years I think I can add at least 10 cents worth.
Malcolm Rawlingson 7.8.08
James, I think I can offer a little insight into what has happened to increase nuclear costs. First it is not just nuclear costs that have gone up - it is the cost of all generation. Most of the infrastructure to construct power plants has been allowed to wither and die. Major power output transformers have only one source of supply in North America and it takes time to build that construction expertise up. Large Steam Turbines - we are down to about two major suppliers world wide. Pressure vessels for PWR plants - only one or two suppliers left - and that is in Japan. Bottom line is that these companies have a monopoly on the market - and they know it.... and who can blame them really. They managed to stay in business and they are going to reap the rewards of doing so.
Labour costs are also much higher. There is a dearth of every trade and those that can do the work just name their price. We have actively discouraged our youth from entering the skilled trades and technology and we are about to pay a heavy price for that stupidity. As my generation retires there is a shortage of people to replace us and they will not work for the wages we were paid at their age. They know their worth...and they don't come cheap any more.
The cost of raw materials has gone up into the stratosphere. Copper, aluminium steel, concrete just about everything is many times the price it was when I joined the industry.
These are the key reasons why nuclear power capital costs have gone up. But as I said earlier the key to lowering nuclear costs is mass production. Once the skilled workforce is rebuilt and designs are standardised then we will see costs fall...unfortunately it is going to take time....and probably mean that us old guys are going to be working into our 70's. But I don't think most of us mind that.
Malcolm Rawlingson 7.8.08
James, Sorry I lost my train of thought there and forgot to answer your post properly. I don't think it is at all cynical to question these costs and I do believe you that cost estimates are going to reflect the cost of the nearest available alternative. But as I said the companies that can do this work know that for the time being they are the only game in town. I also agree that nuclear does not want to be branded with the cost overrun label any more so there is a tendency to high ball the costs. However having said that recent plants built by AECL (Atomic Energy of Canada Limited) have all been built on time or ahead of schedule and on budget so there is at least one company out there that can do it.
Part of it also is contingency padding. Especially in the USA plant constructors and operators do not want a repeat of the Shoreham fiasco so they are putting in place sufficient financial margin to allow for that possibility.
But both industry and Governmen must understand that the key to inexpensive electricity is to lower the capital costs of nuclear and that requires mass production and a long term committment. Not one off designs and wishy washy go - no go politics.
Malcolm Rawlingson 7.8.08
Just a note on ground source heat pumps. Efficiency of a system if I recall my thermodynamics is energy out divided by energy in. Ground source heat pumps are more than 100% efficient since more energy is extracted from the ground than the electrical energy that is put in. About 5 feet down the temperature of the earth is approximatrly constant year round even in Canada and ground source heat pumps work as a heater in winter and provide cooling in summer. So I could envisage a system that used solar PV arrays on the roof to power the electric pump and compressor (about 2 HP) to both heat and cool, ones house without gas or other forms of heating
But the cost is astronomical though. Probably in the range 40 - 50 thousand dollars. The interest on that alone pays for my electricity and gas for ever so although I quite like the thought of it and I could probaly afford it my financial brain tells my technological brain that I would be stupid to do that.
And my wife would prefer a nice holiday instead of a bunch of PV panels and pipes underground and she tells both my technological brain and financial brain that they are both out to lunch - and of course - she is quite right.
Bob Amorosi 7.9.08
"But the cost is astronomical though". Exactly why home builders don't implement them and go for above ground ACs and NG or electric furnaces. The Hallowell Acadia air-source design is above-ground and has some potential to compete.
(A friend of mine built his own house on a rural farm property in the Niagara region in the late 1980s where the nearest NG line was almost a kilometer away. The gas company Union Gas wanted to charge him tens of thousands of dollars to run a pipe to his house, so he opted instead to put in a ground-source heat pump system for the AC, and an electric heating furnace.)
Len Gould 7.9.08
Malcolm: "The problem is people perceive the risks of nuclear power to be much higher than they are and they perceive the risks of driving a car as much less than they actually are. " -- You misunderstood my statement. I should have made it clearer. When I said "keep a backup (to nuclear) because you are betting the lives of all of us." I was referring to what WOULD happen to any resurgence in building of nuclear generation IF another TMI happened, esp. IF any radioactive release. It WOULD be game over for nuclear power (because of the vocal minority and vote-counting politicians), and with natural gas gone and no coal plants built, society WOULD collapse back to the horse-drawn era or in chaos, apparently the dream of many posters to e.g. TheOilDrum.com etc.
It makes sense to me to put at least a significant proportion of our eggs into an alternative very long-term sustainable resource, and the one that makes sense to me is solar thermal, especially as Todd above has requested a clear statement of the cost TODAY of new nuclear, even proposed some very provocative estimates, and gotten no response. What, is the industry keeping that a secret now? Forget talking cost of solar generation until you can put a non-guesswork cost of nuclear out.
Bob Amorosi 7.9.08
It is very likely that the support solar and wind is getting from governments is indeed merely to appease voters, with the REAL plan behind the scenes to build much more nuclear. I think however it may also be a way to create more theoretical competition for nuclear to reign in construction costs, or at least keep profit taking from skyrocketing, as James points out is there for the taking.
An interesting phenomena though is that companies literally line up to build solar and wind generators, and invest in their technologies' R&D. I suppose the prospect of getting into the electrical generation business is generally viewed as stable, lucrative, and virtually guarantees a decent return on investment. I mean what other business can you think of that has a guaranteed and growing demand for your product, and lots of R&D investment continuously going on to improve your plant technology, with limited alternatives for competition to emerge.
david miller 7.9.08
i live in toronto. whenever the spot price of oil goes down, the local gas stations all lower the price of oil immediately. why does this activity in the paper market have such an immediate impact on the price of oil at the pump. thanks.
James Hopf 7.9.08
"IF any radioactive release. It WOULD be game over for nuclear power........society WOULD collapse back to the horse-drawn era"
I dunno Len, I'm not that pessimistic. Look at Ukraine. Despite suffering a nuclear event far more serious than the worst that could ever happen for a Western plant, they show as much enthusiasm for nuclear as anyone:
They shut down the other reactors at Chernobyl, but have kept all their other plants. Since then, they've brought several more one line and are planning to build even more in the future. I know they don't have quite the same political system, but still......
Also, I doubt that the public (even in the West) will choose to go back to a pre-industrial existence to avoid nuclear, even after a severe accident (or several). There have been many signs, recently, that people's attitude changes quite a lot when their pocketbooks are tangibly affected. Look how many (most?) people are willing to blow off the global warming issue over the potential loss of a small (~1%) amount of material wealth. Poll results on how much people are willing to pay to solve what they're being told is the greatest environmental concern ever are thoroughly depressing (~0.25%, if anything at all). And going back to non-industrial society represents a material standard of living reduction that is orders of magnitude larger than what would be required to solve global warming, or what we're facing now due to gasoline costs, etc...
During the Industrial Revolution (and Guilded Age), we tolerated huge numbers of deaths and huge environmental impacts, from very unsafe industries/practices and massive pollution, because we considered the economic/material gains to be well worth it. The Chinese are making the same choice today. The same judgement will apply in the reverse direction (perhaps even more so, because now we've gotten used to this standard of living, i.e., are "spoiled"). Hypothetical health impacts from occasional releases would fall to the bottom of everyone's priority list. Indeed, those "issues" are the sort of things that only very rich, effete societies (with no real problems to worry about) have the luxury of spending mental attention on. I know those voices you mention will be out there, but if people are faced with a large reduction in their standard of living, these voices will not be listened to.
People have shown no willingness to accept even minor economic losses over "environmental issues". They certainly will not voluntarily opt for very large ones.
James Hopf 7.9.08
Here is one more data point on the issue of new nuclear plant costs:
Apparently, the builders of the new nuclear plants at Vogtle (Southern Co.?) are offering some of the new plant's output to this minor utility at a cost of 8 cents/kW-hr, for 2016 onwards. The offer is for 8 cents/kW-hr in 2016 dollars, which the small utility representatives said was equal to 5 cents/kW-hr in 2008 dollars (6% inflation?). Since the small utility is simply getting a block of (guaranteed) electricity for this fixed price, this 8 (or 5?) cent/kW-hr offer price represents the full cost of electricity from the plant, including capital, etc..
Anyway, draw your own conclusions from this....... It seems (to me) that Southern Co. thinks that the total nuclear power cost will be ~8 cents/kW-hr, in 2016 dollars. They seem confident, in fact.
BTW, this article brings up another point that I failed to mention earlier with respect to making apples-to-apples cost comparisons. In addition to financing (interest) and transmission charges, I believe estimates like the one's given by FPL include "escalation". That is, they account for inflation that will occur over the course of the project. I think what they're calculating is the total amount of (absolute) dollars that will be spent, regardless of the year that they were spent. This may be to make the accounting simple. Or, their calculations may be predicting what the kW-hr cost will be for the plant's output, in the year that it starts up. I'm not sure.
In any event, as this article shows, this effect can be very significant. Thus, one should be careful not to compare cost estimates like these to overnight capital cost estimates (for other sources) that are given in 2008 dollars. This may be one of the reasons that FPL's analysis showed that gas would be more than nuclear, even with these "absurdly high" nuclear capital cost numbers. What will gas cost in 2016, in 2016 dollars (not 2008 dollars). It's already clear (based on futures markets if nothing else) that gas will be well over $10/MBTU, even in 2008 dollars.
Malcolm Rawlingson 7.9.08
Sorry Len - I did get hold of the wrong end if the stick.
I take your point over nuclear incidents. The public appear to accept frequent deaths of coal miners here and overseas as a cost of doing business but appears not to be able to accept TMI which did not kill or injure anybody...a gigantic and costly screw up to be sure but not in the same league as Bhopal for example. I puzzle over why that is so...I think it is the perceived risk. Interested in any thoughts on that subject.
The good side of TMI is that the nuclear industry learned a hard lesson and the quality of our operations is vastly improved from those days. If the industry repeats anything like TMI - well we will deserve all we get. But I doubt that it will cause the immediate shutdown of the industry - people will still want their lights to go on when they flick the switch.
But your point is well understood by the industry and organisations like WANO (World Association of Nuclear Operators and INPO (Institue of Nuclear Power Operators) do a very thorough job of making sure nuclear power operators keep safety standards high.
Malcolm Rawlingson 7.9.08
Bob, I don't really think solar or wind are any competition for nuclear. Even at the amounts proposed it is still small potatoes compared to the total electrical demand. The PV cell plant planned for Sarnia is only 40MW...and it takes up a vast tract of land by the way...the whole facility at max output is only about the size of a standby power supply for a nuclear plant. So not very big. To replace a large 4-unit plant in Ontario would require for example about 90 PV plants of that size. But assuming a 50% capacity factor you need double that installed capacity to replace the nuclear capcity plus a very very big battery to store the power during the day so you can use it at night. So To replace the nuclear capacity 180 PV facilities of 40MW each plus a 3600MW overnight storage system are needed. I don't know how to store that amount of electricity. I am not sure how big the 40 MW plant is but if it takes up about a square mile of property you will need 180 square miles covered in solar panels and someplace to put the storage system. Somehow I do not think that is going to be cheap and of course solar enthusiasts forget to consider costs of the storage aspect using the existing grid to get over the shortcomings of PV arrays. Of course if there is no nuclear no coal and no gas there is no grid any more and somehow solar and wind energy will need to be stored on a massive scale. I think such storage is now and will be in the future - very very expensive.
That is why solar and wind energy do not appear viable to me. On a small scale perhaps but on the scale I am used to even the largest of these plants is small.
Malcolm Rawlingson 7.9.08
A very good point about gas prices - perhaps our fabulous oil economist Professor Fred can answer that one.
I am always surprised at how instantly prices can change at the pumps. It is almost as if there is not production process involved. The gasoline delivered to the pumps was made from oil purchased some time before so how prices can change that quickly defeats any logic I can offer you.
Len Gould 7.10.08
Malcolm: "solar enthusiasts forget to consider costs of the storage aspect " -- For about the tenth time, none of us are promoting current PV solar, but solar thermal. Thermal storage of solar energy is obvious, easy and cheap. Only reason it is rarely done on the big 400 MW production plants now being built in Nevada and California is that there's no requirement for it.
Todd McKissick 7.10.08
Malcolm and David, A former gas station owner - friend gave me one good insight on that one. They set prices to profit after the cost of buying the next load of fuel. If they speculate (bad word today) that the next load will suddenly cost 10% more, they need to act fast (competition be damned) to be sure he gets there before he runs out of product to raise the price on. The corrolary to that is that there's profit vs. competition to weigh for the decision to lower prices if oil prices were to fall.
Bob Amorosi 7.10.08
Solar PV and wind was never really viewed to wholesale replace nuclear although (some) Californians and Texans might think it can. As Len says most of us on this forum don't believe so. But smaller scale solar on rooftops, PV and thermal, if distributed to large numbers of consumers has the potential to put a sizable dent in how much nuclear is needed for the future.
My point was our Ontario government (and others perhaps) probably don’t want nuclear to have a monopoly for all new future generators built, and will rig the tax incentives to promote diversification from nuclear. This assumes fossil sources are bound to become extinct over time, and hydro has already exploited all the easy cherries to pick and will not be viable for any large new sites in most places. And as Fred says, any significant government support for solar and wind appeases many voters, ignorant as they may be of the scales of numbers you point out.
Todd McKissick 7.10.08
One thing that really strikes me as a form of blind promotion is the constant inequality of lattitude given to non-nuclear by the nuclear advocates.
James, Thank you for the information. It's a start, but still lacks some of the info I would require to make any sort of fair judgement on nuclear. I hate to press on these so much, but we're still using apples and oranges.
Every factor mentioned as a reason for highballing nuclear is valid for CSP. (Thanks to Malcolm, I'm going to try to stop saying solar so he doesn't picture toy PV cells). These guys are playing the same 'get everything the market can bear' game as is suggested for nuclear. A major difference comes in the way those prices will react to future shortages.
On the labor side, nuclear labor requires much higher education levels and will migrate to 'elite' status, thusly commanding a higher inflation rate. One treveling pipeline welder with some specialized talent currently working in my town is now at $20,000 per month salary because of all the new pipelines going in lately.
CSP, among a few other technologies, will migrate to stamping out higher volume per person hour. This implies automation and assembly line which leads to lower education levels and increases the labor pool competing for the position.
On the materials side, nuclear has no alternatives for many of it's piece parts. They have strict requirements of strength, longevity and basic trust. As plant sizes grow and as weight is added to the safety record of the industry, these parts will migrate toward more specialized status. This will offset some or all of the price reduction from making numerous identical plants. The monopoly factor of those part suppliers may actually increase the price.
CSP, by comparison, is such a new industry that the only projects being undertaken are the well proven low hanging fruit. Thermal storage is not of benefit yet, so it can't be justified. Dual land use is the same way. There's no reason why the entire plant can't be placed over a department store, parking lot, highway or even a cornfield. It's a matter of the desire to deal with a few other issues and that desire doesn't cost much beyond motive. Once people learn of these alternatives, they can begin to take advantage of the as yet unused CHP feature which doubles it's output. Lastly, the materials used can begin to migrate to others being tested now such as plastics, ceramics, films, carbon fibers and concrete for even more dual uses in the materials category. All of these factors push the prices down, opposing inflation. These arguments are even stronger for residential scale systems.
The main point here is that while there are many factors pointing toward nuclear prices declining in the future, there are quite a few forces opposing that. For most renewables, especially CSP, almost all forces are aligned toward price reductions. With the two technologies pretty price competitive today (at around 0.08/kWh), interest will inevitably shift toward renewables. The only possible counter argument is land use, which I can't compare until someone posts nuclear's well-to-plus numbers, but even that comparison ignores dual use potential.
We earned two steak dinners a while back by listening to a guy explain how much money we could save by paying him $2,200 plus labor to place 95% relfective film under all our rafters in the attic. AFTER he handed over the gift cards, I asked him how efficient $42 worth of aluminum foil was. He looked at the gift cards with a sense of loss and replied, "94%". Every technology today is handing out way too many gift cards, but the newer the technology is, the more tin foil tech jumps are lurking.
George Moore 7.11.08
I have scanned through the comments and have not seen a discussion concerning the falling value of the dollar vs other major currencies. It seems to me a change in the relative value of the dollar has more of an effect on price in dollars than has been explained.
Jeff Presley 7.11.08
I beat that to death in a different forum on this site previously. However, in the E&P Investor, I read an intriguing quote wherein a Kuwaiti oil minister opined that for every 1% drop in the value of the dollar, oil went up $4. It was just a quick blurb so I don't have the metrics on where he was starting the countdown. Clearly given the appreciation of the euro vs the dollar for the past 9 years, in relative terms the "pain" of the current oil price hasn't been as bad to the Europeans using same. Given the lack of fundamentals in the Euro zone however, I don't see much further opportunity there, in fact some 20-30% of the current appreciation seems to be more of a bet against the dollar than "for" the euro.
Ferdinand E. Banks 7.12.08
On the gas thing, this is the answer I gave David,
In Sweden, if the price of physical oil goes up, the price of motor fuel OFTEN goes up the next day. If the price of physical oil goes down, the price of motor fuel OFTEN goes down the following day. In other words,for all practical purposes the price of motor fuel is being set by the oil exporters and not by the gas station managers, who therefore cannot be accused of being price gougers.Of course, this is an ideal arrangement for the station managers as long as the trend price is up, as has been the case the last few years. Moreover, it must work for them otherwise they would adopt another strategy.
I also wonder if the spot price being referred to in Toronto is the paper or the physical price, although it may not make much difference if there is sufficient correlation between the futures price and the (physical) price in the future. Naturally, there could be other (and better) reasons for adjusting the price in the manner suggested above, but this simple explanation makes sense to me.
Bob Amorosi 7.13.08
Toronto gas stations behave exactly the same as in Sweden. Most are owned by large oil companies and the station managers are TOLD what to set their prices to every day, sometimes multiple times a day. The small minority of independently owned stations in Canada usually just follow the others, often with a marginally small price difference below the others in the spirit of competition. The number of independents has declined over the years because unless they also carry convenience store goods for sale on site, they cannot make a living off the slim gasoline profits alone.