Entries in oil (4)


Driving with Putin

Right now a lot of us are in reactive mode. Trump, Kim Jong Un, Harvey, and Assad keep throwing sand in our faces and we spend all our time trying to wipe it off and move forward. Even with all this political chaos we should pause, stop reacting for a minute, and make proposals. The persuasive power of “not that” diminishes with repetition.

U.S. intelligence services have established within a reasonable doubt that the Russians interfered in our last election. The details of the extent and Russia’s success are yet to be completely uncovered, but we know our political parties were hacked, our voting records were hacked, and our social media were clogged by a deliberate propaganda campaign. It is probable that the Trump family/campaign and the Republican Party were both involved in Russian money laundering.

This raises an important and tricky question: How do we retaliate against a nuclear armed nation that is also the world’s largest oil exporter? The answer is in the question. They are the world’s largest oil exporter. We are the world’s largest oil importer. The imbalance in this relationship seems to give them an advantage, but it is exactly the opposite. They can’t afford to export less oil. If we do it right, it is no problem for us to import less. The price of oil and the state of the Russian economy hang in the balance. A fine balance it is.

Right now the international oil cartel OPEC is trying to restrict the output of its member states in order to bring the price per barrel above $50. Last November, OPEC and its allies agreed to cut output by 1.2 million barrels per day (mbpd) as of January 2017. That compares to world production of 98 mbpd and OPEC production of 33 mbpd.

The U.S. consumes about 19.6 mbpd, and 43% of that, 8.5 mbpd, gets refined into gasoline for cars, SUVs, and light trucks.

An average car in the U.S. gets around 25 mpg. However, that mileage goes down as driving speed goes up. The U.S. Department of Energy, on its fuel efficiency page, notes, “Aggressive driving (speeding, rapid acceleration and braking) wastes gas. It can lower your gas mileage by roughly 15% to 30% at highway speeds and 10% to 40% in stop-and-go traffic.” Slowing down from 75 mph to 65 mph would raise mpg by about 10%.

And we do go 75 mph. A study by the Insurance Institute for highway safety showed that on rural interstates anywhere from 7% to 49% of drivers were going at least 75 mph.  In some places over 10% of drivers were going over 80 mph.

I’m going to make a wild ass estimate and say that if, as a nation, we just chilled out and slowed down, we could raise our overall gas mileage by 15%. Our fleet gas mileage would go from 25 mpg to 28.75 mpg. We’d use 13% less oil for gasoline production. That’s 1.1 mbpd. (See the hard won 1.2 mbpd reduction, above) That’s a nightmare for OPEC and a nightmare for Russia.

In February 2016, before the OPEC reduction agreement, the price per barrel touched $30. It could go there again without much more of a glut. That would cut Russian government revenues by 25%, their exports by 25%, and knock about 10% off their GDP. Ouchski.

Now, I’m not expecting Americans to suddenly become Prozac nation behind the wheel. I did this thought experiment to point out what a close run thing the world oil market is. Slight wobbles in supply or demand cause dramatic price swings. Even the prospect of such changes makes the commodity markets jump. It wouldn’t take a lot for us to use the power of our demand to rock the world. I mean, I’m not asking people to donate a kidney. Actually, I’ll bet some people would donate a kidney in exchange for the right to speed.

I have another idea, more pragmatic, although politically a stretch, that would do this and more. I’ll get to that one next time.


The Saudis Hold the Line

The big news in the oil world last week was a do-nothing policy by OPEC, and especially by the Saudis, the swing producer of oil. By swing producer I mean that Saudi Arabia has the physical, political and financial capacity to adjust its oil output to suit its policy goals. OPEC met this last week and decided to leave its output at 30 million barrels a day, despite the abrupt drop in world oil prices. Crude oil closed Friday at $66, down from $110 not long ago.

You’d think that the Saudis would want to cut production to tighten supply and bring the price back up. By some accounts, they can’t meet their national fiscal goals unless the price of oil is above $90 a barrel. They aren’t losing money, even at $66, as their cost of production is the lowest in the world at $3-6 a barrel. However, oil being essentially their only source of income, their national budget is in deficit at present prices.

My guess, along with some other observers, is that they are playing the long game.

The rising production of shale oil in the U.S. is a big part of the problem for the Saudis. Although temporary, our production increase has pushed down our demand for oil on the international market. It’s an expensive process, though. A shale exploration company has to drill multiple boreholes that turn horizontally and follow the thin layer of oil containing shale. Then they have to force fluid and sand into the holes in order to fracture the shale and let the oil out. This is hydrofracturing, popularly known as fracking. The nature of these wells is that they produce large amounts of oil initially and then rapidly decline, sometimes within months. Then the driller has to pack up the equipment and repeat the process elsewhere.

There are a number of oil producing shale formations in the U.S., but only a small percentage of the total shale area is highly productive. Some of the shale exploration and production industry was losing money even at higher prices. The business plan for a number of companies seemed to consist of outlasting competitors and reaping the benefits of future high prices.

The expensive production cycle and money-burning nature of the industry requires a constant influx of money, both as investment and credit. That is what the Saudis are after.

By maintaining the world supply of oil at present levels OPEC can keep the price of oil below the breakeven price for many shale oil companies. Beyond that, a lower oil price means that drillers lose access to credit. Just as the resale value of your house backs your low-interest mortgage, the estimated value of a drilling company’s oil reserves serves as security for loans. When the price of oil drops they have to resort to higher interest unsecured loans and divert present income to exploration, all of which discourages both banks and investors.

 OPEC doesn’t have to drive all of them out of business. They can pick off the stragglers, the companies most overextended and possessing the least productive oil field leases. A string of bankruptcies in the shale oil industry would not only lower production, but also choke off investment and credit. That would hamper present production and slow the return of the shale oil industry when prices recover. The threat of repeated Saudi intervention would keep banks and investors at a distance.

The Saudis are willing to spend some sovereign wealth to clear the field of competition. With currency reserves over $700 billion, they can endure $66 oil for a while longer. Much longer, I’ll bet, than the U.S. shale industry.


The Oil Ceiling

The expression “glass ceiling” is probably familiar to most of my readers. It refers to that invisible barrier of unwritten rules that prevents women and minorities from being promoted past a certain level. Being an energy wonk, I am interested in an analogous concept I’ll call the oil ceiling.

I recently read an interview on a site called Energy Bulletin with Steve Kopits. Kopits is an energy analyst with a well-respected international consulting firm. He came to the study of peak oil almost accidentally while preparing documents for an investor prospectus. The interview is well worth a few minutes, but here is a major point for me:

Question: Could you tell us about your views on the US oil price threshold for recessions?

Kopits: The US has experienced six recessions since 1972. At least five of these were associated with oil prices. In every case, when oil consumption in the US reached 4% percent of GDP, the US went into recession. Right now, 4% of GDP is $80 oil. So that’s my current view: If the oil price exceeds $80, then expect the US to fall back into recession.

Right now the price of oil is bumping along in the mid 70 dollar range, with occasional excursions into the red zone. As the economies of China and India continue to expand, expect their oil demand to increase proportionally, even as world oil production stagnates. $80 per barrel oil plus some speculative overshoot is predictable.

It seems that our economy is hitting the oil ceiling. The U.S. being such a profligate consumer of oil, sucking up 25% of the world supply, we can’t get around this barrier. The situation seems set up for an endless cycle of recession, partial recovery, a resulting run up in oil prices, and recession again.

I looked around for numbers on the Vermont economy and found that our State GDP is around 25 billion dollars. Our energy expenditures are just over a billion, much of that being oil products, and 90% of that going out of state almost instantly. That puts Vermont right at the 4% limit. Could we be bumping our heads on the oil ceiling as well?

What this tells me is that in order to avoid a perpetual sawtooth graph of economic performance we need to gear up for energy efficiency. In chemistry and economics a process is limited by the scarcest necessary element. That element will be energy. The economic winners of the future will be localities with the lowest energy inputs per unit of productivity. The most prosperous populations will be those with the lowest energy use per capita. Parallel to this, the economic winners will be the places that make the fastest and most coordinated switch to renewable energy sources.

Part of this process will be the simple, usual efficiency practices such as weatherization and industrial efficiency programs. The promotion of public transportation will be important. All this is commonplace.
The real differentiator, however, will be the rethinking of mobility and community itself. Some of this is in the realm of municipal, regional, and state land-use planning. People will need to work, shop, and entertain themselves near to where they live. For many people this is presently impossible. In the future it will be a necessity. This requires the rezoning of towns and cities and a coordinated long-term plan for localized economic development. It would help to strengthen our communication network so that people can telecommute – it may become the default for information workers. We will have to reverse the long-term trend of emphasis on increasing mobility in favor of a focus on access. We’ll have to stop thinking in terms of how to move ourselves to something or move that something to us. We’ll need to have what we need on a day-to-day basis close at hand.

Vermont is already one of the least energy intensive states, but we’ll need to do more. The less oil we need per capita and per dollar of GDP, the higher the price of oil (and coal and natural gas) can go before it starts to drag down our economy. If we manage this well enough, oil price at which Vermont suffers can be higher than the price at which other economies go into recession and bring the price of oil back down. I suppose it is selfish, but my thought is that an energy efficient Vermont economy could be prospering while the rest of the world bangs its head on the oil ceiling.


On Dealing With Uncertainty, and a Threshold

My crystal ball is out being repaired. It’s been in the shop for most of my life – starter problems, I think, or maybe the bearings. I share this problem with most of the people who analyze the fossil fuel industry. There are so many factors, so many hands on the steering wheel, that it is essentially impossible to predict price and supply except in long term generalities. Nobody can time the market.

We have been on an undulating production plateau for oil since roughly 2005. World production for all oil-like liquids has been hovering around 84 million barrels a day. Price volatility has stalled the development of new oil fields, resulting in what some commentators refer to as the “practical peak” in oil production. What they mean is that while the world economy wallows in depression, the production of our aging oil fields will continue to decline. This won’t affect prices because of lowered demand, so the new, more expensive to develop oil fields won’t get tapped. When the world economy starts to crawl out of its present collapse, oil demand will increase, bumping up against declining supply. Steeply increasing oil prices will kill the recovery, oil demand, and oil development. Repeat until Amish.

Similar problems afflict natural gas production. Coal energy production has been flat since 2001.

There is a similar problem with global heating due to the combustion of these same fossil fuels. The scientific consensus is that it is upon us and that it is dangerous, but nobody can say with absolute certainty how soon or how abruptly it will happen. Will it be a slow evolution or will it hit a threshold and accelerate wildly? Experts differ.

I have been pondering these dual and balancing uncertainties, fossil fuel depletion and global heating, and I’d like to advocate for immediate, accelerated action.

I like skydiving as an analogy. It has both the elements of risk and inevitability. Imagine that you are a careless skydiver. You jump out of a plane at some undetermined altitude, right into a bank of clouds. You have neglected to wear your altimeter, so you have no way of knowing your distance to the ground. You haven’t checked the weather, so you don’t know how close to the ground the cloud cover goes. There you are, falling blindly through the gray mist. You know the ground is down there, and that you will inevitably be making contact with it at some speed at some time. When do you pull your ripcord? You can’t wait till you break out of the clouds and see the ground. The clouds might be too low, and your chute wouldn’t have time to open. When faced with utter uncertainty and when delay may result in death, the only answer is immediate action. You may spend some time inconveniently floating down through the clouds, but no matter.

Some, especially those who work for fossil fuel companies, advocate a go-slow approach on energy and climate issues. Further study is needed before we act, they say. When you are falling and have no idea when you might go splat, that is no time to convene a committee to study the issue. It is time to pull the ripcord.

There is one strand of that ripcord I’d like to discuss. As a renewable energy consultant and installer, I am always doing calculations, including calculations about the economics of renewable energy installations. This morning I was working up a price quote for a potential customer. I subtracted the Vermont incentive and the federal tax credit, did an idle mental rule of thumb calculation, and had a sudden start.

Due to the economic slump and increased production there is a worldwide glut of photovoltaic (solar electric) modules. The price has dropped by about two dollars per watt over the past couple of years. $8.50 per installed watt used to be the off-the-cuff number for a residential scale solar. Now it is down to around $6.50 per installed watt. Subtract the Vermont incentive of $1.75/watt and the 30% federal tax credit and it comes to $3.33/watt. Now, consider that in Vermont this watt of solar will generate about 1.2 kilowatt-hours per year, or about 30 kilowatt-hours in its module’s 25 year warranted life span. $3.33 divided by 30 equals a levelized cost of 11 cents per kilowatt-hour, almost exactly what I would pay today. (What I would pay, but I don’t, because my solar array feeds more back to the utility than I use.) The economics are more complicated than that, but as of now, in Vermont, residential solar electricity is roughly at parity with the electrons we buy at retail. We have reached a long sought threshold.

25 years may seem like a long payback, but that is a 4% return, rising with the cost of electricity, guaranteed as long as the sun rises, and covered under your homeowners insurance. It is a half a percent better for business owners, who can depreciate their solar assets.

H.446, now called Act 45, offers even more with a feed-in tariff that will probably land between 25 and 30 cents per kilowatt-hour. The Public Service Board, the utility lawyers, and the renewable energy and consumer advocates are still making the sausage on how that will play out. Still, the absolute baseline cost for net-metered customers is viable. It can only get better as retail electricity costs go up.

Solar hot water offers a better return than solar electricity, and energy efficiency better than that. Interest rates are low. So what are you waiting for? Pull the fossil fuel ripcord.