You have no future in politics.

Ed

an excellent article. May I have your permission to copy it and circulate it to some of my colleagues (as opposed to simply sending them the link to Energy Pulse)

Adrian

The current US constraints on production do have the unspoken rationale as speculation on future, higher value to the country. In that sense, the US Democratic Party can be considered speculators even though they are the ones railing against speculation!

Adrian, circulate it far and wide, with my compliments.

Joseph, this business of in-ground storage is something I have always stayed away from because it has a taste of the Hotelling model of exhaustible resources about it. BUT, obviously you are correct, and obviously I was correct too, because what I had against the Hotelling model was the emphasis on the interest rate, while ignoring deposit pressure. Incidentally, I once met a couple of gentlemen from Norway who made the same point as you did. Obviously, Norway should have reduced their output by X barrels/day instead of allowing the oil price to fall as far as it did. I also want to emphasize that the only purpose of this 'model' is to discuss short-term pricing, only to do it in a more sophisticated manner than it is done in the Financial Times or on Bloomberg.

Another super writing from you, very well done. I love the math model in it, reminds me exactly of my electrical engineering control theory diagrams that I haven't seen much of in years (almost brought tears to my eyes).

There are regular stories appearing every week lately in various news media from "amateurs and conspiracy theorists" claiming speculation is the evil behind oil prices, so it's refreshing to hear your article's valid arguments debunking them.

The economic pain has begun and is growing like a tidal wave here. With inflation threatening on the horizon too, the falling stock markets are finally showing their traditional predictive signs of what's to come. Ontario's large number of auto parts companies that supply GM, Ford, and Chrylser are dropping like flies almost daily now. Two Ontario companies making plastic dashboards and trim, Polywheels and Progressive Mouldings are the latest casualties, the latter one a half-billion-dollar-a-year sales American-owned company that was founded from a local Ontario garage tool shop 41 years ago, is throwing another 2000 plus out of work.

Of course, the TV audience refuses to get the message, and so maybe it doesn't make any difference.

Now, global economic gloom and doom is making nuclear a hot career field again.

A little guilty, yes, but I'll cry all the way to the bank.

As to in-ground storage, part of the problem is that governments use economics as only one input to their decision-making and most of the remaining reserves are under government control.

Oil prices may be low on our worry list if an attack occurs.

While oil appears to be a current problem, electric generation capacity may be a problem in about 2012.

PNM is making demand and supply predictions for the next 20 years. http://www.prosefights.org/pnmelectric/pnmelectric.htm

Let's all hope matters work-out positively

Enjoy eid-e- shomah mubarak! email.

http://www.prosefights.org/thecanadian/thecanadian.htm#frasche

Glad to see this article in print and thanks again for the sneak preview. I never have had the chance to talk to T. again, but have your name in mind for that conversation. A certain Mr. Feldstein from Harvard posted this which aligns largely with most of your thoughts above. However, you of all people should be scared when the folks at Harvard start agreeing with you eh?

He does of course blow an otherwise cogent article with his last sentence. See if you can spot the flaw: Any steps that can be taken now to increase the future supply of oil, or reduce the future demand for oil in the U.S. or elsewhere, can therefore lead both to lower prices and increased consumption today.

Bill, you say that oil prices might be low on your worry list if an attack on Iran takes place. Well, if the oil price jumps to $200/b the day after an attack you might reassess your priorities.

Alok, the techological improvements that you are talking about, and/or others, will definitely come about. The question is will they be in time for a few hundred million of us. As for the oil price collapsing, I am a humble teacher of economics and finance, and my position on this topic is non-negotiable: it might fall to the $5/b that Milton Friedman said would happen, but not unless the OPEC countries fall asleep at the switch - which of course could happen.

Jeff, of course Mr Feldstein's thoughts align with mine, and yours too, and almost all of the persons who contribute to this forum in one form or another. Of course, a few of his colleagues at Harvard may have a problem adding 2 + 2, but this is hardly the place to offer names.

Fred

Fred

Many thanks

Yasser Al-Saleh

With the House P.U.M.P. Act and the Senate Commerce Transportation & Science committee's attention now focused on regulating the ICE, do you think that (potentially) three democrat branches of the government will bring about an oil market crash or will international supply and demand still prevail as the market drivers?

I believe that Obama will cave to the House and Senate and ratify legislation that would close the Dubai and London loopholes on the ICE. Whereas McCain, strongly advised by former Senator Phil Gramm, will most likely veto any legislation that regulates the ICE- an action that will place more emphasis on increasing domestic oil production, which is a familiar but ill-fated initiative given our current political climate.

You most undoubtedly covered some of my discussion below in earlier articles, but I would appreciate hearing your comments. What differences are there now compared to the the early 1980's oil price bubble that eventually led to prices falling from about $40/bbl to around $10/bbl in the mid 1980s? Is it simply that the demand is higher and more globally spread? Why didn't OPEC cut back production to a point of supporting $40/bbl oil then? As I recall Saudi was producing upwards of 10+M bbl/day back then and now they are in the 9M range with about 2M in reserve capacity. I suppose the US going into a deep recession in the early 80's helped to reduce demand. It appears that this is in the works now, which will also help to feed a world wide recession. Hard for me to see oil plunging by 75% this time around, though. Before I even read your article, I was arguing the same basic point with one of my friends; why would any oil producer domestic or foreign want to increase production dramatically and suffer what happened in the mid 80's. Also if I was a large producer and I had a large reserve of oil that the public did not know anything about, what would prompt me to advertise that and possibly dampen current prices?

As one of my fellow engineers noted above, the model you draw is reminiscent of electrical models we have encountered in past lives.

What is missing from it, I feel, is the influence of market "emotion", which can tend to drive such systems into "thermal runaway" (an electrical engineering term!). The only tangential reference to this emotional content, which goes unquantified, is "desired stocks", yes? What influences this "desire", and causes its actual quantity to increase? I offer you the economic fundamental terms "greed" and "fear" as the influences...

At this time, supply flow and demand flow are within about 0.1% of each other, at about 86 mbbl/day, with supply being 100k bbl over demand. Meanwhile, on the NYMEX, three times that amount of "paper oil" is being traded daily. So this is not just your ordinary futures market, with suppliers and consumers hedging their positions.

http://money.cnn.com/2008/07/07/news/economy/oil_prins.fortune/index.htm

As I commented regarding your previous (excellent) article, I personally would be a lot happier if there could be no speculation in "lifeblood" commodities, in this case, petroleum. Others I would pre-emptively add to the list would be: water, grid-delivered electric power, and possibly natural gas as well.

I would be interested in a model, which when applied to historical data, can reflect past bubble growth and bursting behaviors, using hard input data, as well as historically-derived coefficients that would not require event by event tuning. Is there such a thing, by any chance?

Regards, RWVesel

I think it is entirely possible that high prices will decrease demand in developed nations and that such decreased demand will increase price for the entire world. Thus, gasoline could skyrocket to $11.50/gal in the U.S. (the rumoured price in Turkey), and the oil majors could still break profit records on greatly reduced world demand. There was a "boss talk" with David O'Reilly (CEO Chevron) in the WSJ awhile back. In response to the question of whether reduced demand in the U.S. would reduce price, he talked about Turkey having $11/gallon gas and selling a record number of automobiles!

I haven't bothered looking for , because I already know what it is going to say. Bottom line, our perception of markets causes us to (incorrectly) deduce that they are acting irrationally or randomly or manipulatively, but in reality they are following "the invisible hand", which may or may not be a mandelbrot fractal.

From Gleik's book on Chaos: Indeed when Mandelbrot sifted the cotton-price data through IBM's Computers, he found the astonishing results he was seeking. The numbers that produced aberrations from the point of view of normal distribution produced symmetry from the point of view of scaling. Each particular price change was random and unpredictable. But the sequence of changes was independent of scale: Curves for daily price changes and monthly price changes matched perfectly. Incredibly, analyzed Mandelbrot's way, the degree of variation had remained constant over a tumultuous sixty-year period that saw two World Wars and a depression.

Are oil prices really stratospheric, or are we merely singing the song in a new scale?

Anyway, kindness aside, there are a number of questions above to answer, and I will take them one at at time, though not today. Just now however the one by Richard Vesel deserves a reply.

Yes, the model I constructed looks like the kind we studied in electrical engineering, and as I have noted many times one of the circuits takes on the appearance of a first degree servomechanism. My comment here is that this set-up helps to explain the instability of the oil price. I have a differential equation for this system, but I don't deal in differential equations any longer unless snot-nosed students get above themselves. The point of this model is to show the influence of inventories on the SHORT-RUN pricing of oil, and if you look at it very closely you will see tht it is a very simple construction. Even so, you unfortunately don't get this in economics 101, or 901 either for that matter. HOWEVER, the basic idea for this model came from some other people, even though the diagram is mine all mine.

Long run pricing is something else. This is explained by the relation of flow supply to flow demand, where flow supply has an economic explanation that you will find in my textbook and various articles, while flow demand is largely a function of economic growth in the large oil using/importing countries. At the present time, and in the forseeable future, flow demand is outrunning flow supply, and as far as I can tell, the oil suppliers like that arrangement, hope that it will continue, and if the world economy doesn't crash, will do what is necessary to make sure that it continues...I think. WOULDN'T YOU IF YOU WERE IN THEIR PLACE, and I'm sure that you and most of the other people contributing to this forum know how.

You say that on NYMEX three times as much paper oil as physical oil is traded. Thank you, because I thought it was much more. However, that situation is necessary in order to supply the liquidity needed for suppliers and demanders of physical oil to hedge price risk. THIS IS A GOOD THING, because it is a good thing that transactors in physical oil can hedge price risk. Good in the sense that if they couldn't, the oil price MIGHT be even higher. Despite what you said, this is very definately an "ordinary" futures market, where speculation is as important as hedging price risk.

I don't know if there is a model of the kind you asked about at the end of your article, however, personally, I would not be interested in it. What is happening now is something that I predicted 25 years ago, because it was obvious to me - as well as many other persons - that technology could only do so much where finding and producing (conventional) oil is concerned. Of couse, some of the colleagues thought (and still think) that technology can find oil even where none existed, but I didn't buy that concept.

What about speculation DETERMINING price? Speculation might 'influence' price as shown in my diagram, but I won't say how much or how little, even though I have some ideas on that subject. But where the determination of price is concerned that is brought about by flow supply and flow demand.

Fred

Just outlaw and remove the speculators from the price loop and let "supply and demand" curve take over. Then oil would drop to around $100/barrel.

I am glad to see oil price gouging and price increases; it will drive us quickly to the Solar-Hydrogen Economy. Then, a kg. of hydrogen would sell for $2.78/gallon-equivalent and get you 24 miles. There would be no difference between Shell hydrogen and Chevron hydrogen; it is all the same. Supply would be generated locally at each station via solar power and the speculators would be out of work.

Warren Reynolds

For the sake of fellow naif's like myself, I think it's worth stating the mechanism that links futures prices and spot prices. It's a form of arbitrage, conditioned on the availability of physical storage capacity. Specifically, if the futures price is "too high" relative to the current spot market price, traders can make a risk-free profit by buying on the spot market and holding for future delivery. That has the effect of increasing actual inventories -- your 'AI' parameter. Conversely, if the futures price is "too low", those who hold actual inventories can profit by selling into the spot market from inventories, and buying on a low-priced futures market to rebuild inventories later.

I'm sure all that is obvious to you as well as many other readers here. It wasn't obvious to me, however, until I did a little research on the futures market. I was trying to get some grip on exactly the question you addressed here, of the effect of speculation on oil prices.

There's still a great deal of devil in the details that I've yet to comprehend. One is the value of "lamda" in your equation (and the factors that influence it), another is the nature of "f" in your "P* = f(p)". The "DI" parameter plays a crucial role in determination of price movement, but it seems to be a very "soft" parameter.

What I'm concerned about is the potential for manipulation. It's obvious that long term prices are determined -- as you say -- by the flow variables 's' and 'h', and that speculative activity has limited power to move prices away from the values determined by "fundamentals". But how limited is "limited"?

Given the natural linkage between futures prices and spot market prices, it's obvious that an institution with sufficient funds behind it can create a great deal of price movement in the sort term. All it has to do is switch its betting from the short side to the long side of futures contracts, or vs. vs.. Since futures prices have a strong tendency toward self-fulfilling prophecy, it doesn't actually cost the institution all that much to drive prices one way or the other. The question is, can it arrange to make more from pumping the market than it costs it to do the pumping?

Even if the answer is no, that the positions that would be required to profit from the pumping would themselves nullify the pumping attempt, there remains the question: how honest are the fund managers? The money they are playing with is predominantly "other people's money". If the managers leak word to silent confederates of what moves they are going to induce in the market (and when), those confederates can profit enormously. They just have to be clever enough to keep their roles in driving the moves somewhat hidden, and the ties to their silent confederates (and the kickback channels) well concealed. (Say, in offshore numbered back accounts.)

That type of deliberate manipulation and passing of inside information is strictly illegal. But with the current regulatory atmosphere in Washington and the preference to cover up white collar crime by wealthy political donors, how confident can we be that it's not rampant? It's not just the Bush administration, either. Clinton's blatent farewell pardon of financier Marc Rich has never -- AFAIK -- been adequately explained.

I considered going into politics in the late 70's....for about thirty seconds..after which I dismissed the idea on the grounds that I would not be able to tell the truth ever again.

And for Joseph Somsel - a great onservation my friend - I just delight in telling all those folks who informed me earnestly that the nuclear industry is dead - that they were wrong - plain wrong. US has plans for 34 new nuclear plants, 100 in China, and the list goes on and on and grows daily. As you say with a dearth of nuclear engineers we are laughing all the way to the bank.

Professor DC Leslie (sadly now deceased) former Head of Nuclear Engineering at Queen Mary College, University of London, a man respected and admired for his nuclear engineering vision one told a young graduate who could not find a job that things would be mediochre to bad until about the turn of the century and then there would be a huge expansion as the world struggled to meet its energy needs - nuclear energy he said would surge and engineers would just name their price.

That graduate was me and he was exactly right. I only wish he was alive to see it.

Malcolm

Not sure how one runs an aeroplane on hydrogen or make polyethylene or polypropylene or lubricants. The problem is much bigger than simply motor fuels. Oil is the petrochemical feedstock for the economy not just a fuel.

Not sure how you generate that much hydrogen using solar power either. Presumable one would no longer to be able to fill up at night unless some kind of large capacity cryogenic hydrogen plant was located at each filling station. The solar panels for the gas station would take up a few city blocks.

Producing the hydrogen with nuclear generated electricity would work but suggest it's better to convert that to methane at the nuclear site and then feed it into the existing gas mains. Use the methane to fill up your car directly out of the gas main. That is practical.

I like the idea of using hydrogen as the energy transporter but doing it from just solar is a bit of a stretch. Nice thought but numbers are off by a couple of orders of magnitude.

Malcolm

Captainjohann above greatly misstates the capacity of the SPR. It's a bit over 700 million barrels, not 350 billion, and while increases in the SPR's capacity are indeed planned, it's nothing close to a doubling. Not from anything I found in a quick search. But the SPR apparently does represent more than twice the total amount of private capacity within the US for oil inventories. It's also very cheap storage capacity.

There have been proposals that the government should convert the SPR from a "dead resource" to a "live resource" that is actively used to stabilize and moderate oil prices. It would operate in a similar manner to how a central bank operates to stabilize a national currency. There's an article here, on the Cato Institute's web site, advancing that idea. I don't agree with many positions that the Cato Institute takes, but this one seems to make a lot of sense.

I'm interested in what Fred or others here have to say about the proposal, pro or con. It would certainly be an easy policy change for one of the presidential candidates to propose, and should bring quick results--if, that is, there's anything to the claim that current oil prices are caused by speculation.

The high prices are pinching pocketbooks, but also doing their job in demand destruction. If this continues, I'd expect US consumption to drop to something like 17-18M bbls/day. Unfortunately, I'm convinced the Chinese are FILLING their strategic reserve at this moment, so they are grabbing the bbls that the US doesn't consume, with ~$1.7 trillion American greenbacks they've been saving for a rainy day, like today.

The OPEC nations are dancing a merry dance, they enjoy the revenues, but are concerned about the tipping point into worldwide recession, which will create a whole new level of demand destruction. Should that happen, the BRIC nations (except Russia) will stop consuming at the rates they've been, G8 consumption might drop by 30-40% and OPEC will be forced to dump oil on the market just to keep paying the bills and keep their malcontent populations reasonably satisfied. Since many of them have no GDP per se, oil revenues are almost the only thing filling the government coffers.

Jeff, For one, UAE is definitely ramping up national growth. They have, by far, the most ambitious infrastructure projects which include skyscrapers, 100% self sustainable cities, entertainment mega-complexes and quiet RPS goals that would make a California Democrat ashamed. Either they don't trust putting their money in the bank or they know something.

Malcolm, "Not sure..." just means your research is incomplete.

And Todd, thanks for pointing out what they are doing in the UAE. Saudi Arabia also has big plans in that direction. And what it comes down to is that the export of crude oil is going to be less important. I hope that our political masters understand this, and if they don't I would like to see the good Jeff explain it to them using his mode of expression.

Fred

Lamda makes the relation between the change in price and the difference between desired and actual inventories linear. This choice is of course arbitrary, because in reality it might be something else. But linear is good enough for me, considering what I want my students to learn. Above all, in teaching economics and finance, I do not want my students to get the wrong idea about what math can do. It is enought for me that they understand the importance of inventories, because their Econ 101 books did not provide them with this information

Also, the link between futures prices and 'spot' prices is not as clear to me as it should be, if by spot prices you mean the price of physical oil. When I hear for example that the price of oil is $139/b, I dont have the slightest idea where and how that price was formed, other than it had something to do with supply and demand, and there is a market somewhere on which a contract was generated for oil that moved from seller to buyer for $130/b. For futures prices, however, I know that the price was formed in an auction market - an exchange - but I dont see an obvious connection between that market and the physical market, although there might be an obvious connection. In any event, I will have to do more on this subject, unfortunately.

Maybe one day I can produce the right paper to explain all this.

Everybody , Can anyone comment the S2P that Sandia is working on. I have heard other project going on where CO2 is captured from the air and putting together with water by solar energy to form methanol. The hydrogen economy seams litte far fetched ? Why not add carbon to the hydrogen and get a energy carrier that is possible to handle ? I am not a chemist but when I am asking chemist it seams that no one looking at that because everybody is busy with hydrogen. It seams that all strive for hydrogen is caused by the fuel cell. Why not use a steam engine that can use all kind of energy carrier and burn the fuel with very low harmful exhaust gas emissions

Fred , No comment on peak uranium or peak coal ?

Peter Platell

The number is not there at night! Not everyone lives in a single family house. Almost everyone drives a car. What runs the compressor to store the hydrogen when the Sun is not out?

Malcolm

I live in the real world where I ensure that people get their electrcity 24 hours a day 7 days a week at prices they can afford and at the flick of a switch. I know that what I propose works and works very reliably all day long all night long. I do my research walking around 885Mw turbines each day. One of our reactors has been operating at 100% full power for over 500 days non-stop and the rest not far behind....no storage required. It would do you good to visit a large generating station to see the scale of what you propose to replace. Then you will understand.

Here is your research assignment. Go to a big city at midnight and ask yourself how could all of this be run using windmills and PV cells. No Coal, No oil, No nuclear, No gas...... just renewables.

You'll also observe that most people do not live on farms in the middle of Nebraska. They live in cities and cities consume large amounts of electricity.

Malcolm

I don't worry about uranium. The French have solved that problem. When 'fresh' uranium gets scarce they will recycle the used stuff. Depending on how they recycle it, that should last them a few thousand years.

This morning there was something in Svenska Dagbladet by a genius (with an advanced degree) who claimed that the Swedish pulp and paper industry do not need electricity supplied by nuclear plants. He thinks that wind is capable of supplying the electricity needed by that industry.

People in this country will say and do anything to get a little popularity, wont they. I had the same attitude when I was in infantry leadership school in the US Army, but it didn't do me any good. Although I was first in my class, I still got expelled on the last day of the course, and was put to work on a garbage truck. That was a sweet experience that caused me to do a lot of reflecting about saying and thinking the wrong things.

Fred

One reason is that OPEC was not as strong as they are now: NOTHING SUCCEEDS LIKE SUCCESS. Despite appearances, OPEC was a weak cartel then, while they are a strong cartel now. What I can't understand is why Norway and Russia didn't cut production. Maybe they prefer less money to more.

Something else to understand here is that these countries REALLY AND TRULY believed that if they allowed the price to exceed 30 or 40 dollars, huge new deposits would be discovered. You probably remember Yamani's statement that there were still stones left when the stone age ended, which meant that if the oil producers went forward like gangbusters, they would end up having to use the stuff to fill swimming pools. (The question of saving oil for chemicals - which was raised by the Shah of Iran - was completely overlooked.) What has happened is that even if huge deposits are discovered it will not be enough, GIVEN THE INCREASE AND EXPECTED INCREASE IN DEMAND, GIVEN THE AMOUNT AND LOCATION OF RESERVES, AND GIVEN THE GOALS AND INTELLIGENCE OF THE EXPORTERS, OIL IS IN SHORT SUPPLY REGARDLESS OF THE AMOUNT IN THE CRUST OF THE EARTH!

Something that everyone ignores is that OPEC warned the oil exporters about all this, and suggested that importers and exporters should cooperate for the benefit of both. But NO: Milton Friedman and some of the other geniuses had said that OPEC would fall apart, and eventually technology and the price system would get the importers out of the corner. Technology will eventually get us out of the corner, but I am afraid that that operation will be far from optimal.

Yes, now that I have finished this song and dance, I appreciate your pointing out - as many contributors to this forum have - that it wouldn't make any sense at all for the oil exporters to search for and/or produce the amount of oil that President Bush asked them to produce, regardless of the assurances they gave or didn't give him.

Fred

At the present time though the important thing is the movement in trend (flow) demand and trend (flow) supply, i.e. pure Econ l01. It is gratifying to me as a teacher of energy economics that you have taken an interest in this issue, and obviously know something about it, but the bottom line is that - for the time being at least - the oil exporters are in the drivers seat. The politics that mean something now is whether the OPEC producers agree with each other about the way ahead, which apparently they do, and which means THAT THEY ARE GOING TO DO WHAT YOU WOULD DO IF YOU WERE IN THEIR PLACE, which is look out for number one.

Fred

And CaptainJohann, I have not thought as much about the strategic reserve as I should have, but everything considered, I'm afraid that Jeff Presley is right on that point. As for the holding of American dollars by other countries, I leave that topic strictly alone, because I cant understand it despite having taught finance for about 15 years.

Fred

Fred yes but this recycle ? aren't that stuff something bad from proliferation point of view. I have read several article the last year that new nucler power will cost a lot, about 8000 USD /kW to built ? If that is true it seams that much cheaper to implement large solar thernal power in the dessert and distribute the electricty to populated places ?

Peter Platell

As for this cost of nuclear power that you cite, that sounds very wrong to me. Of course, reardless of what the actual cost is, the nuclear plants that will be constructed in the future should have commenced construction six or seven years ago when the interest rate was lower than it has been for decades. I tell you what, let's trade: Sweden leaves the EU and I become the biggest propagandist in this country for renewable energy.

Fred

Professor Banks, to his credit, leaves the options open for renewables to prove their economics and technical viability before passing judgement. When we finally get these systems up and running, I believe he will reconsider them on their own merit because he realizes that the magnitude of the coming crisis warrants the benefits and competition that all technologies can offer.

Malcolm may not respond to specific questions and rule out all other forms of generation because he like many others many only like to hear want they want to hear. Put another way it's easier to tune out or not discuss what you don't want to hear or discuss.

I am probably being a little too harsh on Malcolm though, he is probably more in tune and informed on renewables than he would like to have us think. But being in the nuclear world where he earns his living, he may in fact be very much like our political leaders where the latter prefer to either say nothing or simply ridicule suggested change to the status quo when questions on sensitive issues are directed at them. It is better to be all ears that to say something that is potentially against vested interests.

I believe Fred Banks and you are right on in recognizing that all options for renewables should be left open, AS LONG AS substantial R&D is being poured into them with the goals of proving economic and technical viability through their commercial implementation. I have learned myself witnessing over 25 years of massive technological that is actually safer to be an optimist EXPECTING dreams to come true instead of being a pessimist thinking the status quo only will survive.

It's clear to me, and to just about everybody in this forum, that a lot of new items are going to be necessary in the optimal energy package of the future. But the important thing now is for goverenments to assist in financing pilot versions of these new items, and to educate the 'broad masses' - to use a Marxian term - in the optimality of nuclear as the reliable and (comparatively) inexpensive base on which those other things will rest. For instance, the unteachables in this country - by whom I mean the politicians and a large slice of the university educated bureaucrats - still can't understand the role that electricity and a superior educational system played in providing their worldly goods.

Where is the money going to come from for all this. Well, NUCLEAR PAYS FOR ITSELF, so you don't need to worry about that. As for the 'start-up money, seed capital, or whatever they call it, there is more than enough of that around, although I prefer not to open that can of worms just yet.

Fred

I agree that a new renewable generation must show what it is capable of first before letting them fend for themselves without government financial incentives. My point was as long as R&D and incentives are being thrown at them, don’t count them totally out.

I do believe some governments recognize nuclear will be the base that others will rest on, Ontario does anyway and so do I. But until others can prove themselves commercially on a large scale, nuclear will gradually become another monopoly for new plants that need to be built, especially if you believe conventional fossil sources will eventually go extinct either due to taxes on carbon emissions or because we will run out of their fuel sources. Without SOME competition for future plants, there will be few if any restraints on nuclear’s capital costs which are their biggest nemesis. The higher they go, the harder it is to raise the money as the longer it stretches out the payback times.

Thank you for your responses regarding the reasons that OPEC may not have been able to keep the level of oil at $40/bbl back in the early 80's and how that set of exact circumstances may not replicate itself this time around for the world economy. I agree with you that regardless of the merits of global warming, its providing a wave of interest and passion around energy independence, which I believe will lead to more global political stability.

Todd, you are spot on with what is happening in the UAE. My company is building an aluminum smelter/gas fired power plant there. They are looking to create added value to their vast gas reserves by producing aluminum. That means ultimately the rest of the world gets less LNG and also does not get to produce as much aluminum. We see that with the huge cash inflows they are attempting to develop all aspects of their economy from heavy industry to entertainment/travel.

Besides the renewable energy initiative they are pursuing, they are looking to capture CO2 on natural gas combined cycle plants. Of course they can actually use the CO2 for oil reservoir enhancement.....but capturing CO2 off a natural gas power plant??? Here's a wacky idea for them burn coal and they would get even more CO2 for enhanced oil recovery projects. Actually I believe they have consisdered this.

What we may find is that with the large amount of money that the UAE is putting into renewables it may actually accelerate their development, reliability and cost competitiveness. They are building a 50,000 resident "green city", which will act as a large application laboratory for renewables and conservation, that the rest of the world may benefit from. So in effect we (oil consumers) are funding alternative energy research and application.

The inflation and monopolistic tendencies are very real. In my state, we are exclusively coal and nuclear but our prices are rising just like everywhere else. If nuclear was the cheaper of the two, then our next plant would go that way but we're getting more coal. Since we have fully regulated, state owned utilities, and they run the power authority, there are almost no roadblocks to either one. I guess, however, I should also concede to wait until one is built before I discount them.

Mark, In Parkent, Uzbekistan, they are using concentrated solar to power their aluminum smelter with lots of gas savings. Look for "Physics-Sun".

The UAE green city, Masdar, is quite impressive but what most people miss is that it will cost $15B to build BEFORE the 50,000 residents and 15,000 businesses take out mortgages to buy one of these sustainable homesteads. Then the inhabitants won't even have power bills.

Todd, I just can't see the relevance of what is happening in Uzbekistan and Masdar for yours truly. As I keep saying, the Swedes have the desire and - in theory - the technical ability to make this country a solar-wind paradise, but they haven't and can't and shouldn't waste any more time and money and gusto trying.

There are many facets of this issue that I haven't understood, but there is a big 'thing' in Sweden today about the government increasing its ability to monitor 'private' communications. I have no problem with this at all, but in thinking about it I remember a conference in Germany where someone used the expression "electricity facism" . What that meant - I guess - was that nuclear involved a larger government commitment in one way or another because of the security issue. Amory Lovins has also addressed this matter, suggesting that sun and windpower under local control was better than large centralized installations, which I thought was fruitcake when I heard/read it, and hold even stronger to that opinion now.

No, I'm very sorry, but as Bill Tilden said, "never change a winning game, and always change a losing game". France is safe for nuclear, and for this country (Sweden) initiating a nuclear retreat and renewable advance is the wrong way to go, and that applies to a lot of elsewheres - though perhaps not to Uzbekistan and Masdar.

Fred

It is the characteristics of the "free" SMD market which has turned me, simply as a logical customer, from a bandwagon proponent of the technological excellence i can see in nuclear generation into the now dissapointed and increasingly frustrated "potential" opponent of nuclear development, both fission and fusion. The change is very recent and i am becomming increasing adamant.

Todd ; yes sometimes I got too tired to fight against the establishment but after some hours work with technology development I regain my energy

I read recently a book "Innovators dilemma". I was about sustain development and disruptive technology , Schumpeters would call it creative destruction. Sustain development ( Suboptimizing existing technology and structures) is something that really is characterising energy business so far but when renewable that is spread over all roofs is getting harnessed , then we will se something really disruptive happend in the energyworld

Len . I think I agree but what does SMD means ? Peter Platell

I will offer that $15B for Masdar City is equal to 120 days of UAE oil production. My assumption is that they are making an excess or unforcasted margin of $50/bbl at today's current market prices and they are producing 2.5Mbbl/day. So what if we had started taxing every bbl of crude oil that came into the US over the past 20 years to the tune of $5/bbl. And invested that in nuclear and alternative energy development. Wonder where we would be now. I am not a proponent of excessive taxation and if we had taxed oil that heavily we may not have had the economic growth that we have experience in the past 20 years, but what if we had had that kind of energy policy foresight?

Then came the EU. The government control of the electric sector was loosened, and the top brass of the largest utility - and probably the others - decided to spend most of their time in Germany. I don't have to tell you I hope what happened to their salaries, and I remember someone telling me that they spent money down there as if it was going out of fashion. They pushed through deregulation here in order to get more cash to invest, only they forgot to say that a big slice of that investment would take place in Germany. Naturally they didn't give a damn when two reactors were shut off here, because although they dont know much economics, they understand that when supply does down, price goes up.

Reminds me of what a friend said when I lived in Geneva and suggested that his colleagues at the university were peculiar: "they're not peculiar," he said, "they're just criminals." That's what we are dealing with here, along with a toxic combination of know-nothings in the Swedish government and Brussels: not since the German people turned their future over to Hitler has anything so crazy taken place in a highly civilized country. By the way Peter, they probably will eventually get around to building more nuclear here in Sweden, but in the US it is a CERTAINTY. Even Mr Bush understands how stupid it is to dismantle a nuclear sector that is gradually increasing in efficiency, and whose problems can be easily solved in time. And I would forget about a carte blanche for competition if I were you. Ask the people of e.g. California and Illinois what competition meant for them when they deregulated electricity.

Fred

If your solar gadget could undercut nuclear, then by the rules of SMD, you could underbid them, and thus be first in line for the payoffs. If more solar stuff was built, they could continue to push under the nuclear price point and eventually push them out of profitability. I do think SMD is a little odd, but it is a market.

The SMD market (and "de-regulation" in general) is primarily a means to transfer another $5 billion / yr unnecessarily by economic fundamentals (eg. existing Bruce Nuclear is showing a profit on all sales above $0.036/kwh) from ratepayers to owners of existing generation.

BTW, SMD is also the main reason only N Gas generation can be built in any "de-regulated" market. Here, even simple cycle N Gas peakers, esp. those who've had longer-term fuel contracts in place, can presently underbid new nuclear (or clean coal, renewables, etc.), which is a stupid market incentive system to have in place for the long term.

Fred I think we always end up to the same conclusion when we dicuss. For me energy business ( activity) a business that is to large extent is build up during plan economic conditions. Everybody was going to have the right to electricity and the society couldn't leave that vision to the free market. Further more , energy supply as fossil fuel and uranium with high energy density and terrific storage qualities makes it easy to implement large centralised energy system where energy commodity was distributed to the costumer in monoply lines. Now when climate change starts to make impression on people and also some peope starst to reflect over what finite recources might implicate the free market players will start to invest in new disruptive technology that harnessed the only energy source we can rely on, Solar energy.

The problem that California faced will every society sooner or later face and there will a lot of oligarks running the old utilities and raising big bonus before they change business model or going down. There will be a tough ride before the human being has learned to harness solar energy and some countries will take lead and be the next century wealth fare state. They will be independet on other countries energy supply , create a lot of new innovative jobs and have attractive exports products. This is my conviction Peter Platell

Malcolm Rawlings: 70% of the oil pumped out of the ground is used to produce gasoline, jet fuel, and fuel oils. The next largest chunk, about 20%, is used for lubricants, and only 3% goes for plastics. These are figures directly from the oil refining industry. On the nuclear front, yes there are lots of plans, but still no construction - so we are ten years from nuclear adding to the solution, and as we have seen, a lot of havoc can be wrought in far less than a decade.

Dr. Banks: When oil fell to $10 a barrel, it was due to overproduction, but just a few percent. The spot market was flooded with oil no one wanted, and the OPEC nations could not agree on who should or would slow down production. They were all trying to keep their meager income streams from drying up, and no one was willing to, in a coordinated fashion, cut production by the necessary few percent, to dry up the spot market. That all ended when, naturally, the long term demand increases caught up with the rates of production, the spot market went back to normal inventory levels, and we entered the current bull market in oil, as the world economy reheated after the Y2K and 911 induced recessions were over. What *I* think will happen when this oil bubble will burst, is a somewhat more enlightened (from a self-interest standpoint) on the part of the OPECers, to manage production levels such that the spot market does not get flooded again, or at least not nearly as severely as in the past oil-depression.

I am not saying that 90% of the price of oil is due to speculation, I am saying about 1/3 of the current price is due to speculation. Speculation is in play whenever any commodity price chart takes on the telltale "hockey stick" appearance, and prices are rising in a seemingly exponential fashion - on a logarithmic chart, no less.

It seems that the entire airline industries association thinks speculation is a serious issue too, and I am sure they have their own reference group of economists from which they seek advice, before getting together en masse, to ask the public to pressure the political and regulatory institutions to curb oil price speculation. I received such a letter last week, and I am sure many of you "frequent fliers" have, too. If there is any industry that is going to be completely ruined by $200/bbl oil, it will be the airline industry. Business fliers will still fly, but the common tourist, will have to find other alternatives besides an airline flight to get them to their vacation spots, or off visiting relatives. From my recent flights (I am writing from an airport at this moment), I would say that at least half are not business travelers.

I was also at the first Intersolar US show, this week, and was pleased to see that the cost of producing electricity from PV and thermal solar is finally within true striking distance of fossil fueled production, and that we can expect much of the peak demand for electricity to be taken over, in suitable locations, by distributed solar energy systems. The first few gigawatts of solar generating stations are moving from planning to construction and operational phases in the next 24-36 months. Even better news ... and please, no one needs to rehash some tired arguments about the non-cost effectiveness of PV generation. Panels which will generate 1kw peak of power, will produce 30,000 - 60,000 kilowatt-hours over their expected useful lifetime, at a value of $0.12 to $0.30 per hour (the cost of afternoon power typically sold in an ISO. The 1kw of panels will very soon (within one year) cost $3k or less, and the fuel (but not the O&M) is free. The price of power is going up, and the price of the panels is now steadily declining, so the math is now in favor of solar distributed generation as a viable part of the generation mix.

Regards, RWVesel

You'll note the current price of oil seems to be dropping, and the reason for that is obvious. The traders are listening to President Bush dropping the ban on offshore drilling and asking for oil shale to open up. The traders aren't looking at the present, but the future. They recognize that the Democrats aren't going to stand up and be counted voting against more drilling while their constituents are "suffering" under $4/gal gas. Those traders are seeing a future SUPPLY coming on line of about 20 billion bbls, and they obviously recognize ceteris parabus demand might not keep up, so they hedge their bets and take some money off the table. Things aren't truly equal though, and they can also see demand destruction occurring around the world, meaning they can see higher supply (IN THE FUTURE) coupled with lower demand (IN THE FUTURE).

As to airlines, I find it interesting that Southwest was the beneficiary of that "speculation" the other airlines are so concerned about. Perhaps that's why they aren't complaining so much, what with their $49/bbl oil contracts they bought on the futures markets (speculatively) several years ago. Of course Southwest started locking in low oil prices back in '98 when it was $10.70 / bbl, while United was stupidly wasting money fighting with their (equally stupid) unions.

Anyway, Richard Vesel, I'm with Jeff now that he's with me. Moreover, as for one-third of the oil price being due to speculation, I wouldn't believe that even if it was true, because as a certified teacher of economics I would say that that was a disequilibrium situation.

As usual, I start at the bottom line, which in this case imeans that a unified, textbook OPEC can get any oil price they want. As Richard Vesel pointed out, OPEC couldn't agree on something or other, and so the oil price dipped to $10/b. (Somebody else who didn't have their heads screwed on right were Russia and Norway, but there is no point in going into that now.) Anyway, OPEC today is very different from OPEC ten years ago where this agreeing business is concerned, and while they can't get ANY price that they want, they can do pretty well, thanks to certain aspects of their composition and general competence. As for this price-fixing thing, what they (theoretically) want is a price that will do more than maximize today's profits. What they (in theory)have to think about is a price that will maximize their profits over a long time horizon, which means that they should take into consideration the effect of their price strategy on future demand. Let me add something to that contention: they want a price that will maximize their diversification out of oil.

The question then comes up as to what is the optimal price of oil for OPEC in the NEAR future. That price of course is constrained by the bad news in the international macroeconomy, which means that downward movements probably make more sense than upward, although I'd have to think about that when the sun is not out. Of course, the ideal OPEC will have no difficulty figuring this out, because the price rises over the past few years have given them options AND confidence that they never dreamed of only a few years ago. That's one of the advantages of being in the driver's seat.

On this speculation versus fundamentals bit, a former student recently informed me of some work by several Oxford types in which they have assured the rest of us that we are completely and totally wrong. My reaction here was as follows: if you want to believe that speculation and the futures market determines the price of physical oil, then they can give you some nice reasons if I am not present, but if I were in the front row of the seminar room, I'm afraid that I would have to point out that their history of the oil price is for the birds. Today's oil price is due to depletion in many large deposits, bad news on the exploration front, Saudi Arabia's decision to keep the output of sustainable oil about 10mb/d or less, and China and India finally getting getting their act together. No amount of shouting, screaming, cursing, pressing computer keys and listening to the wisdom of economics reference groups in all this wide world's trading rooms and brokerages can offset that.

Fred

the economy is still on a downward slope leading Ontario's auto parts companies like ford and chrylser are having a hard time coping up with the situation. and their shops in california ( see: http://www.automd.com/shops/CA/ ) are obviously experiencing difficulties nowadays.