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Book Review: Big Coal

Big Coal: The Dirty Secret Behind America's Energy Future by Jeff Goodell

One of the triumphs of modern life is our ability to distance ourselves from the simple facts of our own existence. – Jeff Goodell

Big Coal by Jeff Goodell is a book I have had on my reading list for a long time, but I only got around to reading it during my recent trip to Europe. It has taken me a very long time to finish this review for a number of reasons, but one is that I had a hard time deciding what to write. Normally, when I read a book I will dog-ear the pages that I want to revisit either because 1). There was something significant that I did not know; or 2). I want to reference a particular point in the book review. By the time I finished reading this book, I probably had 50 pages dog-eared.

My introduction to Jeff Goodell came a couple of years ago when he was writing an article for Rolling Stone about ethanol. He contacted me and we talked a few times, I got to know him a bit, and he published a pretty scathing article during the early days of the ethanol euphoria. For more on that episode, see Rolling Stone Article, Jeff Goodell Debates the Rolling Stone Article on CNBC, or Bob Dinneen Responds to Rolling Stone.

I wish I could write like Goodell. I really enjoy his writing style. I sometimes disagree with particular points, but in Big Coal he makes a very compelling argument that we don’t come close to paying the societal costs of coal usage when we pay our electric bill.

Even though we don’t often see it, coal is a part of daily life for most of us. It produces a great deal of our electricity. But we don’t spend a lot of time thinking about the implications. As Goodell notes on the first page, “We love our hamburgers, but we’ve never seen the inside of a slaughterhouse.” Isn’t that the truth? I have always imagined the number of people who would become vegetarians if they ever saw the inner workings of a slaughterhouse.

When we fuel up our cars, we don’t think (much) about the ramifications of our oil dependence. When we flip a light switch, we do not associate that with the coal-driven mountaintop removals in West Virginia. In this book, Goodell thrusts those associations right in your face.

The book is divided into three parts: Extraction, conversion to power, and the resulting emissions. He covers the history of the industry, tells the stories of the people in and around the business, and while most of the book is based on U.S.-happenings, he does spend a chapter on China.

I would imagine the coal industry was none too pleased with Big Coal, because it paints a really ugly picture of the industry.  Goodell contrasts the coal industry with the individuals whose lives have been negatively impacted by coal in one way or another. He details corruption and politics that allowed the industry to delay implementation of pollution control equipment. And on a big picture level, he argues that continued usage of coal poses a serious threat to the earth’s climate.

This book will leave you shaking your head, wondering why we use coal at all if the overall picture is as troublesome as Goodell suggests. I found myself wondering as well, which was actually what led to my post on the cost of various energy sources. There at the top of the list for the cheapest source of energy was Powder River Basin coal, which is why we continue to heavily use coal despite the issues Goodell spells out.

We humans aren’t very good at willingly making sacrifices today in order to potentially improve the situation a few years down the line. We want instant gratification and coal fits the bill. (I would argue this is also why the U.S. is so deeply in debt and our personal savings rate is so low.)

I noted in my book review of Crude World that Peter Maass didn’t present a balanced picture of the oil industry; it was all bad. His book was intended to highlight the negative aspect of our oil dependency. Big Coal is the same in that respect. It is hard to argue that coal hasn’t improved the lives of a great many people around the world, and I know a number of people who would argue that these improvements outweigh the negatives. Further, it is fair to say that the coal industry has come a long way in cleaning up their emission profile over the past few decades.

But it is clear which side of that argument Goodell would come down on. To be honest, I come down on that side as well. I would like to see us limit our coal consumption and boost electricity generation from other resources. I know a great number of people who feel this way, but coal is like oil in that replacing it will likely entail economic sacrifices that individuals don’t like to make. Coal produces half of the electricity in the U.S., and I would have a hard time arguing that anything – outside of nuclear power – can scale up and take on the role that coal currently plays.

The realist in me thinks that we will eventually use up all of our coal, as will China, Australia, India, and all of the other major coal producers. This is primarily why I sit out the debates on climate change; I can’t realistically envision anything that will get the world to collectively NOT burn up all the coal. In an energy-constrained future, prices will rise and people who feel morally opposed to coal will suddenly find their moral fiber weakening as high energy prices bite into their budgets.

I don’t discount that renewable energy can eventually make a bigger impact (I hope so, because that’s what I am doing for a living), but it is starting from a very small basis compared to electricity generated from coal. While coal produces about half of the electricity in the U.S., renewables other than hydropower account for only about 3.5% (per the EIA).

So I think Big Coal will continue to be a very big part of our lives for many years to come – although with a strong political commitment the nuclear option could put a dent in our coal dependence.

March 9, 2010 Posted by | book review, coal, Jeff Goodell, nuclear energy | 142 Comments

Book Review: Oil on the Brain

Oil on the Brain: Petroleum's Long, Strange Trip to Your Tank by Lisa Margonelli

Oil on the Brain by Lisa Margonelli was recommended by Paul Sankey at the 2009 Energy Information Administration Conference as a book that provided great insight into the oil industry. I have had it on my list of books to read, and recently picked it up to read during my travels. I have been traveling a lot lately, and I like to read while I travel, so I knocked it out over the past couple of trips I have taken.

The premise of the book is that a person who doesn’t know much about the oil industry sets out to find out what it is really like on the inside. It reminded me in some ways of Crude World by Peter Maass (which I reviewed here). The biggest difference is that Margonelli was approaching the subject from a pretty basic starting point, and Maass had written quite a bit about the industry when he tackled Crude World.

I guess I never cease to be amazed by what people think the oil industry is like, and what it is really like. People seem to think that the oil industry is a bunch of guys in a smoke-filled room who conspire to set prices. To be honest, that’s probably the way I viewed the industry when I was growing up. And still, my first reaction to my cable bill going up is “Those greedy cable companies are ripping me off.” The big difference with the cable companies, though, is that their profits aren’t thrust in everyone’s faces at the end of every quarter. Every time oil prices do spike up and oil companies show nice profits, people do feel like they have been taken advantage of. But I digress a bit.

For this book, Margonelli embedded herself within various sectors of the oil industry. She spent time throughout the supply chain, hanging out at a gas station in California where she found that the owners made more money on candy and soda than they did on gasoline. She spent a day with a tanker truck driver and his dispatcher, and spent time in a refinery and on an oil rig. She even got inside the Strategic Petroleum Reserve, which is typically off limits to visitors. She traveled abroad to Chad, Venezuela, Nigeria, and even Iran to understand the world of oil and what is has meant to these regions.

Here were what I thought were some of Margonelli’s more interesting observations. She spoke a lot about the indirect costs of using oil. In talking about oil spills, she mentioned that her view of an oil spill had always been dominated by the Exxon Valdez. She had never connected these spills to her own fuel usage, but learned that drivers and boaters spill more oil every year than did the Exxon Valdez. The number she cited was 19 million gallons of oil products spilled each year in our waterways by boaters and auto drivers.

She wrote about the notion that oil companies are in a conspiracy to set prices. A jobber she spoke with – someone who has to buy fuel from the oil companies – said “There are eleven studies which show there isn’t a conspiracy. Chevron, Shell, Exxon – they hate each other. It’s like war daily. For them to collude is insanity, but people believe what they want to believe.”

On that topic, she noted an episode of hypocrisy displayed by Nancy Pelosi. One day in 2006 Pelosi told a group of school children that we hadn’t done enough to reduce our dependence on gasoline, and so demand was high and that’s why the price was high. Then she got in front of the cameras and she cited the conspiracy of big oil and the Republicans working for their interests. But as Margonelli noted, “the myth of conspiracy overwhelms reason, particularly when pump prices and oil company profits are high.” I think the lesson there is “If the talking point is working, keep pushing it.”

She met an old-time wildcatter named Michel Halbouty (now deceased) who complained that the country has not had a coherent energy policy in 30 years. He advocated more promotion of domestic energy exploration, and fears a slow slide into deindustrialization. He noted that the main problem is that “People. Don’t. Care.” As long as they can pull in and fill up, they just don’t care about energy policy.

In China, she met with someone within the government who was involved with energy policy. He noted that it would be a disaster for China to move toward an American way of life, but he says that cars are clearly there to stay in China. On GDP, Margonelli wrote that China requires 4 or 5 times as much energy as Japan per point of GDP. Finally, the minister commented that China needs “a bigger space to survive under U.S. hegemony.” On that point, she also spoke with a European analyst who said that U.S. hegemony is a part of China’s strategy; that if they can get the U.S. to bear the expense of maintaining the energy status quo, they will have the time and resources to retool their economy.

In the epilogue, Margonelli comments that there is no such thing as cheap gas; that there are hidden costs throughout the supply chain. But the population has come to expect cheap gas as a “grand bargain” with the government and the oil companies. When the price goes high, they look to the government to punish the oil companies so prices will come back down.

One weakness in the book is that it really didn’t address the question of depletion. It seemed to take at face value that oil will continue to be available and business will continue as normal for decades. However, I note that Margonelli was at the ASPO Conference this year (along with Peter Maas; I am sorry I missed that) so she got a heavy dose of peak oil information. Some very interesting comments by her can be found at this story covering the conference.

As one might expect, Margonelli emerged from her experience with a radically different view of how the oil industry works. I have to agree with Paul Sankey’s assessment that it does provide great insight into the industry, from a very basic starting point and with a balanced view. As one reviewer pointed out, it could have been titled “The Petro-economy for Dummies”, which is to say it is a book that is easily understood by those with zero knowledge of the industry. This book would be on my short list of books to recommend to people who want to know what the industry is really like.

November 13, 2009 Posted by | book review, China, energy policy, ExxonMobil, Lisa Margonelli, peter maass, Shell | 31 Comments

Book Review – Power of the People

I will finish up my long-promised concluding post in the recent series on ethanol and oil imports. I have been traveling for ten days, and inadvertently left all of my graphics for that post on another computer. I am back home now, and will try to tidy it up and post it in the next few days.

On the long plane ride back to Hawaii, I read Power of the People: America’s New Electricity Choices. I picked this book up at the 2009 Solar Tour – Pikes Peak Region, which I visited on my trip to Colorado. My new job has me getting more involved in the electricity sector, and I thought this would be a book that would help push me up the learning curve. A short description of the book:

America is as addicted to electricity as it is to oil. Our electricity usage increases every year, yet we still use the same transmission grid that was constructed in the middle of the last century. The grid is stretched to the limit, creating the potential of future black-outs like the one that brought the Northeast to its knees in 2003. Meanwhile, some of our most abundant and affordable generating fuels have become major culprits in global warming.

Power of the People explores in a nontechnical, conversational way some of the clean, green, 21st-century technologies that are available and how and why we should plug them into our national grid. This important essay explores our failure as a country to adopt these “no regrets” technologies and policies as swiftly as the rest of the world, and why it matters for the future of every American.

The author, Carol Sue Tombari, works for the National Renewable Energy Lab (NREL). Despite trying, I can’t find out what her exact position or qualifications are. Here biography says:

Carol Sue Tombari has specialized in energy and environmental policy and programs for more than 25 years. She directed the State of Texas’s energy efficiency and renewable energy programs, served as natural resources advisor to the lieutenant governor, and helped found the National Association of State Energy Officials.

In addition, she was appointed to federal advisory posts by two Federal Secretaries of Energy, chairing a Congressional advisory committee on the subject of renewable energy joint ventures and serving on the U.S. Department of Energy’s (USDOE) State Energy Advisory Board. Tombari is employed at the USDOE’s National Renewable Energy Laboratory, where she works on local and rural economic development. Ultimately, it is her love for the next generation that continues to drive her work to protect the future of our planet and the lives of those yet to come.

While I found myself learning more about the sector, many things she said left me puzzled. For instance, she claimed that the U.S. uses more energy per GDP than anyone else in the world. This is exactly the opposite of Jeff Rubin’s claim in Why Your World Is About to Get a Whole Lot Smaller. Rubin claimed that countries like China use a lot more energy per GDP, which was the basis of his argument that carbon tariffs could work in favor of countries like the U.S., who are more energy efficient at producing GDP. In fact, if you look at the EIA data on energy usage per dollar of GDP, you can see that the U.S. is on the low end of the scale. According to the EIA data, China, compared to the U.S., uses about four times the amount of energy per dollar of GDP. (Thanks to reader Clee for that reference).

The book is pretty anti-nuclear, and makes the claim that renewables are “considerably more affordable” than nuclear power. She seems to rely on Amory Lovins and Tom Friedman for these sorts of claims. The book is pretty realistic about coal, however, concluding that we will be relying on coal for a good many years. She did claim, though, that there have been no major technological innovations in coal-fired central station power plants since the 1950’s. I don’t consider that accurate, as Integrated Gasification Combined Cycle (IGCC) seems like a dramatic improvement in the efficiency of the usage of coal for power production. Several of these IGCC plants will be coming online in the U.S. over the next decade, and a number have already been built in China. (You can see some of the plants that have been completed or are in progress around the world here).

There were some things I found annoying about the book. For instance, it had no graphs. However, on a number of occasions the author said “picture a graph in which the Y axis represents one variable, and the X axis another variable.” Why not just show a graph? Or if for some reason you are limited to no graphics, find another way to make the point.

There were some calculations that just didn’t make sense to me. For instance, she once calculated the required size of a PV system to run a household in Phoenix “if PV cells were 100% efficient.” Why not just do the actual calculation with typical PV efficiencies? She also commented that NREL had done a calculation in which they concluded that “100 square miles that constitute the Nevada Test Site” covered in PV arrays could meet the needs of the entire U.S. (without addressing storage). I did a similar calculation in which I tentatively came up with an area of about 100 miles by 100 miles. So I wonder if she didn’t mean that the NREL calculation concluded that a 100 mile square (10,000 square miles) would suffice.

She also spent a good deal of time talking about how a terrorist could bring down the transportation system or the electrical grid. I don’t think those are the kinds of ideas we want to plant in people’s heads.

One thing that isn’t clear to me is just how utilities benefit from efficiency improvements of their customers. She spent some time discussing various utility programs to improve the efficiency of the end user so they don’t have to construct new power plants. But utilities make their money selling electricity, don’t they? If customers improve efficiency, they just means they are selling less electricity to that customer. But there is apparently something to this model that I don’t fully understand, because I know that utilities are always pushing for – and even subsidizing – these sorts of programs. In Hawaii, the utility will pay for part of a solar hot water installation. So how do they benefit? Perhaps the utilities are compensated by various governments for pushing these efficiency programs. Otherwise, it seems that as consumers become more efficient, the utilities would have to charge more money for the electricity.

One other thing that was discussed – but that has always puzzled me – is the economic multiplier theory. She gave one example about how the benefits of a local Midwestern project ended up contributing three times the income generation to the local economy. Now I can see how a multiplier should work in theory. Pay a guy $100 in salary, and then he pays his taxes and turns around and spends that $100 in the local economy. That merchant then pays his taxes and spends some of it in the local economy, such that the initial $100 supports more than $100 in taxes and spending. In practice, it seems like if it really worked that way, we would subsidize everything. Why would we want to get any autos from Japan? Subsidize U.S. consumers for 50% of the cost of a domestic car, and then let the local multiplier give back 3-4 times that amount to the local community. But in reality, I don’t quite think it works out that way.

In summary, while it seems like I found a lot to nit-pick in the book, I did find a lot of useful information in there. Even the things I found puzzling caused me to think and to do additional research, which was helpful. The author spends a lot of time laying out the present situation with respect to electricity, and talking about the changes that need to happen. The author is peak oil aware, citing Matt Simmons and Tom Whipple (among others) with respect to a projected future energy crunch. I think the anti-nuclear stance was misguided, and I think she overestimates the ability of renewables to fill in for growing demand and the phase-out of older coal-fired power plants. In my view, it is hard to imagine how we are going to get by without building more nukes in the next few decades.

October 11, 2009 Posted by | book review, electricity, electricity usage, nuclear energy, solar power | 86 Comments

Book Review: Crude World

Crude World: The Violent Twilight of Oil by Peter Maass

Introduction

It succors and drowns human life. And for the last eight years, oil — and the people and places that make it — was my obsession. – Peter Maass

Today a new book by Peter Maass was released. The book is called Crude World: The Violent Twilight of Oil. Peter Maass is a name you may know from a 2005 article that he wrote for the New York Times called The Breaking Point. The story was a comprehensive look at where he thought oil production/prices were headed – and what the implications might be. Maass focused on Saudi Arabia in the article, and spent a lot of time covering Matt Simmons’ viewpoints. It was after reading this story that New York Times columnist John Tierney offered to bet Simmons on the future direction of oil prices. Thus arose the Simmons-Tierney bet.

I thought Maass’ 2005 article was well-researched, and it was a captivating read. So when Mr. Maass e-mailed and asked if I would like a copy of his new book, I thought it would probably be a book I would enjoy. I still have a stack of books that have been sent to me to review, but I jumped this one to the front of the queue. I hadn’t really intended to, as I am working on two other books right now*, and would normally finish those before starting another. But once I picked this book up and started thumbing through it, I couldn’t put it down.

The subtitle of the book is The Violent Twilight of Oil. The book talks about the twilight of oil, but as the chapter titles imply the focus is less on the twilight and more on the seedy side of the business. The book notes that there are some countries like Norway, Canada, United Arab Emirates, Kuwait and Brunei to which oil appears to have generally benefited the population as a whole. But then there are also many cases in which the discovery of oil seems to have brought many problems to the population. (The book suggests that countries with established democracies and strong self identities are less likely to suffer following the discovery of oil).

The Chapters

The chapters read like the Seven Deadly Sins: “Plunder”, “Rot”, “Fear”, “Greed”, and “Desire” are a few of the ‘sins’ covered in various chapters. Within each chapter, Maass then takes a look at an example that embodies that particular “sin.” That sort of style reminded me of a really good book I read a few years ago written by Matt Ridley. It was called Genome: The Autobiography of a Species in 23 Chapters. Each chapter of that book tells the tale of one gene from each chromosome. In Crude World, Peter Maass tells the story of oil one dysfunctional example at a time.

The book picked up where the New York Times story left off. In fact, Chapter 1 – Scarcity – was mostly about Saudi Arabia and incorporates much of that 2005 story. And if you liked his New York Times story, you will probably enjoy the book as the same style is evident. But I use the word “enjoy” loosely, as it is a sober read. You will find yourself shaking your head at some of the things that have been carried out as a result of the world’s desire for oil.

In Chapter 2 – Plunder – the book covers the case of Equatorial Guinea. The oil wealth was plundered, with the help of international oil companies, banks that looked the other way as government officials brought suitcases of money in for deposit, and governments eager for access to the resource. While he was investigating the oil story in Equatorial Guinea, Maass was accused of being a spy and kicked out of the country.

Chapter 3 – Rot – was all about Nigeria. I won’t tell you how that one turns out, but I am amazed at the (dangerous) lengths Maass went to for the story. Rot describes his journey deep into the Niger Delta in a leaky canoe, courtesy of one of the local warlords. It is well known in the oil industry that Nigeria is a dangerous place to operate. Oil companies generally pay very big premiums to get workers to agree to an assignment in Nigeria. Oil workers are kidnapped in Nigeria regularly (but rarely harmed) and held for ransom from the oil companies operating there. Warlords are constantly doing battle there, and Maass described his visit to one village that had been attacked. Shell also featured prominently in this chapter.

Chapter 4 – Contamination – tells the story of Ecuador, with special focus on the Chevron lawsuit. Maass notes the irony that California – one of the most environmentally conscious states – receives the largest portion of Ecuador’s exports.

The rest of the book’s ten chapters covers a litany of oil-induced miseries. Iraq, Russia, and Venezuela are all profiled. Former ExxonMobil CEO Lee Raymond is presented as the face of “Greed” (albeit it in the “Fear” chapter). There is an interesting explanation in “Greed” on why companies function as they do. Maass discusses a court case between Henry Ford and the Dodge brothers, in which the court ruled that a company’s mission “is organized and carried on primarily for the profit of its shareholders.” Thus, Maass argues that if Mr. Raymond had decided to run ExxonMobil in a more altruistic manner, the board would have removed him for not operating in the best interests of the shareholders.

The complaint that some will have about the book is that it isn’t balanced. There are a number of villains portrayed, but the oil companies really stand out. It seems that those who are telling the tales of misdeeds are generally trusted in the book, but those who are interviewed for balance are treated with suspicion. For instance, in the chapter on Nigeria, the author interviewed the director of Shell’s operations in Nigeria. The interview appears to proceed like a cross-examination. A Nigerian warlord’s words, on the other hand, seem to be taken mostly at face value.

But this is not intended to be a balanced book. It is a book designed to highlight the downside of our oil dependence. We can all think about ways in which oil has made our life better, but in the Western world we are generally spared from the nasty side of the business. In this book, Maass brings that message home loud and clear.

Conclusion

Crude World was released today, September 22, 2009. The general theme of the book is that the world’s dependence on oil has come at a very high price. This is not a book on peak oil, climate change, or renewable energy. It is not a technical book on the oil industry (for that see Morgan Downey’s Oil 101). The book covers the misery – the wars, the corruption, and the ruined lives – brought about primarily by greed from the lure of black gold. The book highlights the irony that oil could be used to improve the lives of a country’s citizens, but in far too many cases a country’s citizens end up being worse off after oil is discovered. The book was a fascinating read, and I couldn’t put it down once I started it. Now I can get back to my regularly scheduled reading.

Footnote

* The other books I am working on right now are Axis by Robert Charles Wilson and Outsourcing Energy Management by Steven Fawkes. The former is a science fiction book that I picked up because I really enjoyed Wilson’s previous book Spin. The latter has been a difficult read; I have been working on the book for six months. I met the author earlier in the year when he visited the Titan Wood plant in the Netherlands. We had quite a lot in common, and he sent me a copy of his book. But it is really a textbook, and so I have been reading it in small doses.

September 22, 2009 Posted by | book review, Matt Simmons, oil companies, oil consumption, oil exploration, oil production, peter maass | 55 Comments

Answering Reader Questions 2009: Part 3

This was supposed to be the final installment of answers to the questions recently submitted by readers, but the answer to the first question went a little long. Here are the links to the previous installments:

Answering Reader Questions 2009: Part 1

Answering Reader Questions 2009: Part 2

This installment covers advice to prospective engineering students, but I was also asked about books. If you get me started on books, then I may end up writing more than intended and that’s what I did here. So I only got the one question answered, and then listed 20 books that I have really enjoyed over the past few years.

The Questions

Anonymous wrote:Your advice to engineering students or students to be?

For your broad experience and unique perspective, what is your advice to young students undertaking engineering coursework – what subjects and courses should they pay particular attention to, what electives should they take, what counseling from academic engineers can they forget, what activities outside of coursework will set them up well for a productive, rewarding engineering career?

Any particular schools serving their students notably well and any that are notably not?

What are the top ten engineering, business or life related books that they absolutely must read on their own?

What are the emerging career opportunities to shoot for and what are the dead ends to avoid? Answer

The Answers

Answer

First, you may have seen the recent CNN story on Most Lucrative College Majors. While engineering dominated the list, even the non-engineering entries like computer science are heavily dependent upon math. So my first piece of advice is to make sure you have a good grounding in math, as it is the foundation for so many of the top-paying degrees. Beyond math, of course the hard sciences like chemistry and physics are key.

I would suggest that more important than getting a good grounding in math and science is to be sure this is the sort of thing you enjoy. I have seen too many people get into the field because that’s what their parents wanted, or because that was a dream since they were a child. But in reality, math and science wasn’t their passion. Sticking with something when it isn’t the right fit isn’t something I would advise. You should do something you enjoy if you possibly can, even if it means you aren’t maximizing your earning potential. If you love what you do, the work day will fly by quickly. If you hate it, then time will creep by.

Regarding schools, I would try to stick with a good, Tier 1 school if you can afford it. It’s not that the lower tier schools don’t have plenty of good graduates, but a lot of the major employers won’t recruit at the lower tier schools. US News and World Report currently had their 2009 Best Engineering Schools list out, and if you want to tilt the odds in your favor, make good grades at a highly ranked school. Just scanning the Top 50, I don’t think you would go wrong with any of them. Tilt the odds further in your favor by doing a coop or internship.

With respect to emerging career opportunities, it will initially be important for you to just get some experience. Personally, I would try to get in with an established company so you can get some good career development early on. After 5 years or so, you may want to survey the horizon and see what’s out there. There are certainly a lot of good jobs at small firms, but this can be hit and miss. You could end up at a small firm without the infrastructure in place to support your career development. If you decide to go with a small company, just be sure that they are well-capitalized and there are people in place to develop you. No matter where you are, if you aren’t being developed, don’t stay.

The question on which books to read is a tough one, because there are so many that I have enjoyed. You may know that I love to read, and in fact have kept a reading blog for the past few years. I read all sorts of stuff, and I generally make it through 20 or more books a year. It is hard to pin it down to a few, but I scanned the list from my reading blog and pasted some in below that I really liked for one reason or another.

This list is not limited to engineering or business books. They cover a broad range. I really like books that are capable of shifting paradigms, or otherwise making me feel like my mind had been expanded (even in cases where I disagree with a lot of the book, as was the case with Singularity). But here are some of the books that I thoroughly enjoyed, that taught me something important, and/or that caused me to look at things in a different light. The list is in no particular order.

1. The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb

2. Collapse: How Societies Choose to Fail or Succeed by Jared Diamond

3. The Third Chimpanzee by Jared Diamond

4. 1491: New Revelations of the Americas Before Columbus by Charles C. Mann

5. The Singularity is Near by Ray Kurzweil

6. Oil 101by Morgan Downey

7. Planet India: The Turbulent Rise of the Largest Democracy and the Future of Our World by Mira Kamdar

8. Gusher of Lies: The Dangerous Delusions of Energy Independence by Robert Bryce

9. Big Cotton: How A Humble Fiber Created Fortunes, Wrecked Civilizations, and Put America on the Map by Stephen Yafa

10. How to Grow More Vegetables and Fruits (and Fruits, Nuts, Berries, Grains, and Other Crops) Than You Ever Thought Possible by John Jeavons

11. First, Break All the Rules: What the World’s Greatest Managers Do Differently by Marcus Buckingham and Curt Coffman

12. A Beautiful Mind : A Biography of John Forbes Nash, Jr. by Sylvia Nassar

13. Isaac Newton by James Gleick

14. Churchill: A Biography by Roy Jenkins

15. DNA: The Secret of Life by Andrew Berry and James Watson

16. The Time Traveler’s Wife by Audrey Niffenegger

17. Cryptonomicon by Neal Stephenson

18. Spin by Robert Charles Wilson

19. The Meaning Of It All by Richard Feynman

20. Nanofuture: What’s Next for Nanotechnology by J. Storrs Hall

Incidentally, if you like science fiction (and I do because good science fiction can really open up the mind), some of the greatest books in that genre are Hyperion and the sequels, A Fire Upon The Deep and A Deepness in the Sky by Vernor Vinge, and almost anything by Alastair Reynolds. I would also like to open the list up to reader suggestions. What are some really great books that you recommend that I am missing here?

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OK, looks like I probably need to get to the rest of the questions in another essay.

August 7, 2009 Posted by | book review, reader submission | 7 Comments

Book Review: Why Your World Is About to Get a Whole Lot Smaller

Oil 101 by Morgan Downey

Jeff Rubin – the former chief economist at CIBC World Markets – has always struck me as someone who “gets it.” I have seen him do a number of interviews, both on television and in print – and he consistently sounds the alarm on peak oil. He understands very well that cheap oil is the lifeblood of the global economy, yet this is an era that will soon come to an end. His new book – Why Your World Is About to Get a Whole Lot Smaller: Oil and the End of Globalization – goes through the peak oil story in a way that I initially thought of as “Kunstleresque“, but I changed my mind as I got deeper into the book.

Some will certainly describe Rubin as a ‘doomer.’ However, by the end of the book I had concluded that there are some significant distinctions between the overall message that Rubin is trying to convey and the message Jim Kunstler conveys in The Long Emergency. Maybe it’s because The Long Emergency really slapped me out of complacency, but I recall being mildly shocked after reading Kunstler. I did not experience that same sense of shock while reading Rubin – but those who are only mildly familiar with peak oil may be.

Rubin covers many familiar themes, such as the domestic cannibalization of exports by energy producers, the need to produce and consume more goods locally, corn ethanol (which he describes as a ‘head fake’), and the overall impact of high oil prices on the global economy. For regular readers, you will find that much of the book is familiar territory, and for a while I was thinking “There is nothing here that I haven’t seen before.” But the book ultimately grew on me, partly because there are two themes that distinguish it from other books I have read about peak oil.

The first involves a discussion of carbon dioxide emissions. In a chapter called “The Other Problem with Fossil Fuels”, Rubin started to make a argument that I have often made: Ultimately it is futile to attempt to regulate carbon emissions, because China is literally bringing several coal-fired power plants online every week. Rubin wrote that between now and 2012, over 500 new coal-fired plants are scheduled to come online – just in China. This was the theme of my essay Why We Will Never Address Global Warming. My belief has been that there really isn’t much that will convince China and other developing countries to cut back on their emissions. While I still think carbon dioxide emissions will continue to rise until we simply run out of fossil fuels, Rubin provided an interesting argument that caused me to think that a different approach might work.

Rubin argues that if we put a price on carbon emissions in the U.S., Canada, Europe, and other developed countries – we can apply a carbon tariff on imports to level the playing field. Rubin states that energy usage per GDP in China is four times that of the U.S. economy. By putting a carbon tariff on Chinese steel, for instance, two things are accomplished. First, the Chinese then have a much greater incentive to become more efficient. Second, domestic energy intensive industries (like steel production) suddenly become much more competitive. The flip-side of course is that it makes energy-intensive products more expensive.

The second theme that distinguishes Rubin’s book is that it is ultimately a hopeful book. About half way through the book, you won’t have that impression. Sometimes when I read books on peak oil, the message is essentially “Abandon all hope; all exits are closed.” I was 116 pages into the book and still thinking that this was standard peak oil fare. But then it started to become apparent that although Rubin sees and understands that this is a very serious and unprecedented challenge, he sees a world emerging with some distinct advantages. He also expects that there will be some technical breakthroughs that we simply can’t anticipate that will likely make our landing into this unfamiliar territory bumpy, but survivable.

Make no mistake, Rubin’s overall message will be sobering to the uninformed. The world Rubin foresees will contain less convenience than today’s world. Gone are fresh fruits and vegetables out of season, cheap Brazilian coffee, and New Zealand mutton. Replacing them will be more expensive, but more locally produced goods. There will be new opportunities and benefits in this changing world. Because of that, I think this book will be important for scaring people into action without causing them to simply abandon hope.

Conclusion

A couple of years ago, I took a road trip from Montana to Texas (described in My Last Long-Distance Car Trip). In that essay – described by some readers as gloomy – I mused about a world in transition. In the concluding chapter of his book, Rubin does the same. He is on a fishing trip in Canada, and he discusses what higher oil prices will mean for 1). The ability of people to fly to remote locations for holidays; 2). The impact on those who depend on those tourist dollars; 3). The future of entire populations in remote areas (much like I did when I drove through Wyoming). While fishing trips to Canada aren’t something most of us can relate to, we can certainly all relate to the idea that expensive energy is going to fundamentally change our lives – and that is the message he conveys.

The last chapter is a melancholy chapter in which Rubin sees an era coming to an end – with huge global implications. He admits that he doesn’t know how this is going to play out, but he thinks that our world is once again going to become a whole lot smaller. And that’s not all bad.

May 24, 2009 Posted by | book review, carbon tax, global warming, Jeff Rubin | 46 Comments

Book Review: Why Your World Is About to Get a Whole Lot Smaller

Oil 101 by Morgan Downey

Jeff Rubin – the former chief economist at CIBC World Markets – has always struck me as someone who “gets it.” I have seen him do a number of interviews, both on television and in print – and he consistently sounds the alarm on peak oil. He understands very well that cheap oil is the lifeblood of the global economy, yet this is an era that will soon come to an end. His new book – Why Your World Is About to Get a Whole Lot Smaller: Oil and the End of Globalization – goes through the peak oil story in a way that I initially thought of as “Kunstleresque“, but I changed my mind as I got deeper into the book.

Some will certainly describe Rubin as a ‘doomer.’ However, by the end of the book I had concluded that there are some significant distinctions between the overall message that Rubin is trying to convey and the message Jim Kunstler conveys in The Long Emergency. Maybe it’s because The Long Emergency really slapped me out of complacency, but I recall being mildly shocked after reading Kunstler. I did not experience that same sense of shock while reading Rubin – but those who are only mildly familiar with peak oil may be.

Rubin covers many familiar themes, such as the domestic cannibalization of exports by energy producers, the need to produce and consume more goods locally, corn ethanol (which he describes as a ‘head fake’), and the overall impact of high oil prices on the global economy. For regular readers, you will find that much of the book is familiar territory, and for a while I was thinking “There is nothing here that I haven’t seen before.” But the book ultimately grew on me, partly because there are two themes that distinguish it from other books I have read about peak oil.

The first involves a discussion of carbon dioxide emissions. In a chapter called “The Other Problem with Fossil Fuels”, Rubin started to make a argument that I have often made: Ultimately it is futile to attempt to regulate carbon emissions, because China is literally bringing several coal-fired power plants online every week. Rubin wrote that between now and 2012, over 500 new coal-fired plants are scheduled to come online. This was the theme of my essay Why We Will Never Address Global Warming. My belief has been that there really isn’t much that will convince China and other developing countries to cut back on their emissions. While I still think carbon dioxide emissions will continue to rise until we simply run out of fossil fuels, Rubin provided an interesting argument that caused me to think that a different approach might work.

Rubin argues that if we put a price on carbon emissions in the U.S., Canada, Europe, and other developed countries – we can apply a carbon tariff on imports to level the playing field. Rubin states that energy usage per GDP in China is four times that of the U.S. economy. By putting a carbon tariff on Chinese steel, for instance, two things are accomplished. First, the Chinese then have a much greater incentive to become more efficient. Second, domestic energy intensive industries (like steel production) suddenly become much more competitive. The flip-side of course is that it makes energy-intensive products more expensive.

The second theme that distinguishes Rubin’s book is that it is ultimately a hopeful book. About half way through the book, you won’t have that impression. Sometimes when I read books on peak oil, the message is essentially “Abandon all hope; all exits are closed.” I was 116 pages into the book and still thinking that this was standard peak oil fare. But then it started to become apparent that although Rubin sees and understands that this is a very serious and unprecedented challenge, he sees a world emerging with some distinct advantages. He also expects that there will be some technical breakthroughs that we simply can’t anticipate that will likely make our landing into this unfamiliar territory bumpy, but survivable.

Make no mistake, Rubin’s overall message will be sobering to the uninformed. The world Rubin foresees will contain less convenience than today’s world. Gone are fresh fruits and vegetables out of season, cheap Brazilian coffee, and New Zealand mutton. Replacing them will be more expensive, but more locally produced goods. There will be new opportunities and benefits in this changing world. Because of that, I think this book will be important for scaring people into action without causing them to simply abandon hope.

Conclusion

A couple of years ago, I took a road trip from Montana to Texas (described in My Last Long-Distance Car Trip). In that essay – described by some readers as gloomy – I mused about a world in transition. In the concluding chapter of his book, Rubin does the same. He is on a fishing trip in Canada, and he discusses what higher oil prices will mean for 1). The ability of people to fly to remote locations for holidays; 2). The impact on those who depend on those tourist dollars; 3). The future of entire populations in remote areas (much like I did when I drove through Wyoming). While fishing trips to Canada aren’t something most of us can relate to, we can certainly all relate to the idea that expensive energy is going to fundamentally change our lives – and that is the message he conveys.

The last chapter is a melancholy chapter in which Rubin sees an era coming to an end – with huge global implications. He admits that he doesn’t know how this is going to play out, but he thinks that our world is once again going to become a whole lot smaller. And that’s not all bad.

May 24, 2009 Posted by | book review, carbon tax, global warming, Jeff Rubin | 18 Comments

Book Review: Oil 101

Oil 101 by Morgan Downey

Oil 101, by Morgan Downey, is without a doubt the most detailed and comprehensive book I have ever read on the oil industry. In fact, I am not aware that another book like this even exists. This is not an opinion piece, nor is it a peak oil book. It is a collection of factual information covering all aspects of the industry. From oil in the ground to product in the tanks (and everything in between) – this book contains everything you could ever want to know about the industry. I like to think I know quite a bit about different areas of the industry, but I still managed to learn a lot from this book.

It doesn’t matter if you are a complete novice or already know quite a bit about the industry; there is something for everyone in this book. Downey displays a deep understanding across all sectors of the industry. For instance, if I didn’t know better I would have guessed that the refining chapter was written by someone who had spent an entire career in the refining industry. The only books on refining that I have read that were more comprehensive were those written specifically as technical guides for running a refinery. Other areas are covered in similar detail.

There is no aspect of the industry left uncovered. The book starts with a brief history of oil, and then dives into fundamentals like assays, chemistry, exploration and production, refining, transport, storage, and reserves. There is a separate section on the oil markets that really gets into layers of the onion that I didn’t even know existed. One thing this section did for me was disabuse me of any notion that I ever want to trade oil futures (unless of course I have someone like Morgan Downey advising me).

The material in the book has already generated a number of essay ideas for me, as I learned a lot of new information. A few examples:

  • There are 500,000 producing oil wells in the U.S., 80% of which produce 10 bpd or less. Still, this accounts for 20% of U.S. production.
  • There are 1600 retail stations selling compressed natural gas (CNG) in the U.S., which is in the same range as the number of stations selling E85.
  • 20% of new transit buses in the U.S. run on CNG.
  • There is an actively traded freight forward market, in which you can purchase tanker routes (e.g., Ras Tanura to Yokohama)
  • Valero, the largest U.S. refiner, is not a member of the API.

One of the things that surprised me is that I didn’t spot more factual errors in the book. After all, this book is primarily a collection of a great many facts. With so many facts listed, I expected to find quite a few errors. I did not, although I did find a couple.

On page 194, Downey writes that the RVP of ethanol is 19 psi and is much more volatile than conventional gasoline. Actually, the RVP of ethanol is 2.3 psi. However, when blended with gasoline, ethanol behaves as if it had a much higher RVP. The reason for this is that ethanol is slightly polar, and doesn’t mix ideally with nonpolar gasoline. This means that ethanol does raise the RVP of gasoline when it is blended, contrary to what would be expected for a nonpolar blending component with a 2.3 psi RVP. So one could argue that when you are doing blending calculations the “effective RVP” of ethanol in gasoline is much higher than gasoline – but the true RVP is quite a bit lower.

In that same section Downey shows a table (Table 9-10) that states that the nationwide RVP for winter gasoline is 11.5 psi. However, in places where winter temperatures are quite cold, the allowed winter RVP is as high as 15 psi. (Since atmospheric pressure is about 14.7 psi, that means that your winter gasoline can boil if kept until summer). I covered some of these issues in Refining 101: Winter Gasoline.

There are a couple of other items to note. First, the book is not referenced, which meant I was often left wondering about the source of a specific fact. (Presently, this involves me e-mailing Morgan and asking for a source). Second, while the book is almost exclusively just factual information, there were a couple of occasions in which Downey injected his opinion. One instance occurs on page 277, where he is discussing oil shale, and writes that it is “a clear net waste of energy.” Another case occurs on page 317 where he writes “the so called hydrogen economy is mere hype…” While I happen to agree with him on both counts (at least the way things presently stand), these were instances where he departed from the agnostic style employed throughout the rest of the book.

Others Agree

As I write this, there are 17 reader reviews of this book at Amazon. All 17 gave the book 5 Stars, which is pretty impressive. These reviews are a testament to the wealth of information in the book. Dave Summers (Heading Out) reviewed the book at The Oil Drum a couple of months ago, and wrote that this book would be one of the select few to occupy a spot on his desk “because it has a vast reservoir of the small, but invaluable, snippets that provide that useful addenda that help in understanding a story.”

Last month David Henson, President of Choren USA, came to visit me in Dallas and I happened to have the book sitting on my kitchen table. David picked it up several times, and finally said in his charming Australian accent “This is really great stuff! I have to pick up a copy.” I told him that I hadn’t read it yet, but in the three weeks since then I managed to finish it (I read when I fly, and over the 3 weeks I have flown a lot). To this date I have never known of David to be wrong on an issue pertaining to energy, and found his assessment of the book to be spot on as usual.

Conclusion

To conclude, if you want to understand the oil industry, Oil 101 will tell you what you need to know. In fact, “Oil 101” will be my stock answer from now on for anyone who wants to learn more – whether you know nothing or already feel like you are well-informed. Likewise if you want a very good reference book that deals with even the most esoteric information (e.g., like the differences in various grades of asphalt, or the differences between hydraulic fracturing and thermal recovery). In fact, I would even strongly recommend the book to anyone who had just gone to work for the oil industry and wanted a detailed understanding of how the entire oil supply chain works.

April 27, 2009 Posted by | book review, Morgan Downey | 4 Comments

Book Review: Oil 101

Oil 101 by Morgan Downey

Oil 101, by Morgan Downey, is without a doubt the most detailed and comprehensive book I have ever read on the oil industry. In fact, I am not aware that another book like this even exists. This is not an opinion piece, nor is it a peak oil book. It is a collection of factual information covering all aspects of the industry. From oil in the ground to product in the tanks (and everything in between) – this book contains everything you could ever want to know about the industry. I like to think I know quite a bit about different areas of the industry, but I still managed to learn a lot from this book.

It doesn’t matter if you are a complete novice or already know quite a bit about the industry; there is something for everyone in this book. Downey displays a deep understanding across all sectors of the industry. For instance, if I didn’t know better I would have guessed that the refining chapter was written by someone who had spent an entire career in the refining industry. The only books on refining that I have read that were more comprehensive were those written specifically as technical guides for running a refinery. Other areas are covered in similar detail.

There is no aspect of the industry left uncovered. The book starts with a brief history of oil, and then dives into fundamentals like assays, chemistry, exploration and production, refining, transport, storage, and reserves. There is a separate section on the oil markets that really gets into layers of the onion that I didn’t even know existed. One thing this section did for me was disabuse me of any notion that I ever want to trade oil futures (unless of course I have someone like Morgan Downey advising me).

The material in the book has already generated a number of essay ideas for me, as I learned a lot of new information. A few examples:

  • There are 500,000 producing oil wells in the U.S., 80% of which produce 10 bpd or less. Still, this accounts for 20% of U.S. production.
  • There are 1600 retail stations selling compressed natural gas (CNG) in the U.S., which is in the same range as the number of stations selling E85.
  • 20% of new transit buses in the U.S. run on CNG.
  • There is an actively traded freight forward market, in which you can purchase tanker routes (e.g., Ras Tanura to Yokohama)
  • Valero, the largest U.S. refiner, is not a member of the API.

One of the things that surprised me is that I didn’t spot more factual errors in the book. After all, this book is primarily a collection of a great many facts. With so many facts listed, I expected to find quite a few errors. I did not, although I did find a couple.

On page 194, Downey writes that the RVP of ethanol is 19 psi and is much more volatile than conventional gasoline. Actually, the RVP of ethanol is 2.3 psi. However, when blended with gasoline, ethanol behaves as if it had a much higher RVP. The reason for this is that ethanol is slightly polar, and doesn’t mix ideally with nonpolar gasoline. This means that ethanol does raise the RVP of gasoline when it is blended, contrary to what would be expected for a nonpolar blending component with a 2.3 psi RVP. So one could argue that when you are doing blending calculations the “effective RVP” of ethanol in gasoline is much higher than gasoline – but the true RVP is quite a bit lower.

In that same section Downey shows a table (Table 9-10) that states that the nationwide RVP for winter gasoline is 11.5 psi. However, in places where winter temperatures are quite cold, the allowed winter RVP is as high as 15 psi. (Since atmospheric pressure is about 14.7 psi, that means that your winter gasoline can boil if kept until summer). I covered some of these issues in Refining 101: Winter Gasoline.

There are a couple of other items to note. First, the book is not referenced, which meant I was often left wondering about the source of a specific fact. (Presently, this involves me e-mailing Morgan and asking for a source). Second, while the book is almost exclusively just factual information, there were a couple of occasions in which Downey injected his opinion. One instance occurs on page 277, where he is discussing oil shale, and writes that it is “a clear net waste of energy.” Another case occurs on page 317 where he writes “the so called hydrogen economy is mere hype…” While I happen to agree with him on both counts (at least the way things presently stand), these were instances where he departed from the agnostic style employed throughout the rest of the book.

Others Agree

As I write this, there are 17 reader reviews of this book at Amazon. All 17 gave the book 5 Stars, which is pretty impressive. These reviews are a testament to the wealth of information in the book. Dave Summers (Heading Out) reviewed the book at The Oil Drum a couple of months ago, and wrote that this book would be one of the select few to occupy a spot on his desk “because it has a vast reservoir of the small, but invaluable, snippets that provide that useful addenda that help in understanding a story.”

Last month David Henson, President of Choren USA, came to visit me in Dallas and I happened to have the book sitting on my kitchen table. David picked it up several times, and finally said in his charming Australian accent “This is really great stuff! I have to pick up a copy.” I told him that I hadn’t read it yet, but in the three weeks since then I managed to finish it (I read when I fly, and over the 3 weeks I have flown a lot). To this date I have never known of David to be wrong on an issue pertaining to energy, and found his assessment of the book to be spot on as usual.

Conclusion

To conclude, if you want to understand the oil industry, Oil 101 will tell you what you need to know. In fact, “Oil 101” will be my stock answer from now on for anyone who wants to learn more – whether you know nothing or already feel like you are well-informed. Likewise if you want a very good reference book that deals with even the most esoteric information (e.g., like the differences in various grades of asphalt, or the differences between hydraulic fracturing and thermal recovery). In fact, I would even strongly recommend the book to anyone who had just gone to work for the oil industry and wanted a detailed understanding of how the entire oil supply chain works.

April 27, 2009 Posted by | book review, Morgan Downey | 7 Comments

Book Review: Profit from the Peak

Profit from the Peak by Brian Hicks and Chris Nelder

One of the threats from peak oil is the potential for financial ruin as oil prices run up. If you were invested in airline or automotive stocks through the recent run up in oil prices, you have probably seen those investments lose a lot of value. If, on the other hand, you were invested in oil futures, oil companies, or oil field service companies – you have probably seen those investments gain ground even as the overall stock market slumped. The idea of profiting from the peak – an event that is likely to cause misery for those who are least prepared – may seem an odd combination. It almost feels like “Profit from Homelessness.” But the reality is that unless you understand how energy prices affect the prospects of various sectors, you are placing yourself at a financial disadvantage.

Thus Profit from the Peak – the new book co-authored by my friend Chris Nelder – was destined to spark a lot of interest. Chris and I agree on most things energy-related, but we do also have some areas of sharp disagreement. In this review, I will explain what I liked about the book, but I will also detail my differences. Consider this a partial review, and a partial commentary on some of the particular topics in the book. Do not consider my comments as investment advice.

First off, The Oil Drum was referenced a great many times in the book. The work from many of the regular contributors was featured in the book. The first chapter was an introduction to peak oil, and it argued that peak oil is upon us. The information in the first chapter will bring a person up to speed on the potential problems we are going to experience from peak oil, but it also provides background information such as how oil is formed and subsequently refined.

Moving on to Chapter 2, the book gives a good explanation of oil depletion, and provides a nice overview of the major oil producing countries. But it also brings up the first area of disagreement that I had with the book – and that is valuation of oil companies. As the book states when talking about investing in blue chip oil companies, “we wouldn’t touch most of them with a five-mile drilling rod.” I have a different opinion.

Theirs is not an unusual argument: Oil companies are seeing their reserves and production rates decrease, and therefore their stock values are bound to follow. But let’s consider the case in which a company sees a 5% drop in their oil production rate, and yet the price of the remaining oil they are producing increases by 50%. This is not too far off the mark from what we have seen happen. What has been happening – and what I think will continue to happen – is that prices will rise faster than production rates will drop. That means that the value of an oil company’s reserves will increase year after year, even as their production rates decline. The argument that oil companies won’t weather peak oil very well discounts (or ignores) this.

Consider the case of ConocoPhillips (COP). Full disclosure, ConocoPhillips was my previous employer, and I am still a stockholder. Here’s why I still own COP, and will for the long haul. According to the 2007 annual report for COP (you can download it here), proved reserves at year-end 2007 were 10.6 billion barrels of oil equivalent (BOE), down 5.4% from 11.2 billion BOE at year end 2006 (this, primarily a result of the exit from Venezuela). At the end of 2006, the world average crude oil price was $55.95. At the end of 2007, the world average crude price was $89.76 – up 60% over year end 2006. Today, the world average crude price is $126.06 – up 125% over year end 2006.

Thus the value of COP’s oil reserves has more than doubled in the past year and a half, even though production has fallen by a little over 5%. (Note that this comparison is approximate, as the majority, but not all, of the BOEs are from oil). Further, the total value of COP reserves at today’s average crude price is $1.3 trillion – and I think prices are going higher in the long-term. The market cap for COP is about 1/10th of that at $142 billion. The market is seriously discounting the run-up in prices when evaluating oil companies like COP. Each $1 gain in crude prices increases the underlying value of COP’s reserves by $10 billion. Yet you could buy COP a year ago – with oil trading at $60/bbl, for only 20% less than the current price. Investors must expect that oil prices will fall back to the $80 range.

However, there are two caveats to consider when evaluating oil companies. One is that governments are bound to intervene as oil company profits continue to rise. If oil goes to $200 and then keeps rising – Big Oil is going to make a ton of money. Government are going to be under pressure from upset citizens to do something about this, and they will likely put various sorts of windfall profits taxes into effect. There will also be calls to nationalize, but the oil companies would likely just move to friendlier countries.

The second caveat is that the trend of falling production can’t continue forever. At some point, the oil companies are going to have to make some strategic decisions and become much more diverse in their energy offerings. But since prices have been rising faster than production is falling, they are likely to have loads of cash for getting into other energy businesses. It is admittedly an atypical investing situation – negative production growth combined with sharply higher revenue growth. But unless you think production is going to fall faster than prices will rise, I think oil companies are a pretty safe bet.

The other area that Chapter 2 missed on was the situation with refiners. While negative on Big Oil, the book was very bullish on refiners such as Tesoro (TSO) and Valero (VLO). Quoting from the book “Valero and Tesoro are going to make a pretty penny every hour they operate their refineries.” Of course that depends on one very important issue: The ability to maintain decent crack spreads. Unfortunately for pure refiners, softening demand has prevented them from increasing gasoline prices at the same rate that oil prices have gone up. As a result, refining margins have been crushed. Big Oil has the advantage of being able to absorb soft refining margins. After all, they are currently producing and selling oil for $130 a barrel. Valero, on the other hand, is buying oil for $130/bbl. As a result, in the past 12 months Valero has seen their stock fall by 40%. Over the same time period COP has seen share prices rise by 21% (and in the past 5 years, COP shares have increased by 240% – not bad for a Blue Chip).

Chapter 4 makes the case that the true cost of oil – when the negative externalities are factored in – is $480/bbl. I have only minor quibbles there, and in general agree with the overall point. I found Chapter 5 – The Pentagon Prepares for Peak Oil – to be a very interesting read. I had never really thought about it, but the book points out that the U.S. Department of Defense is consuming well over 100 million barrels of oil a year – the most of any government agency in the world. Imagine what $130 oil is doing to defense budgets. This chapter also makes the pertinent point that we have outsourced a lot of our manufacturing – and therefore our CO2 emissions – to China. Thus, it is hypocritical of us to blame the Chinese for their fast-growing carbon emissions.

Part II of the book is “Making Money from the Fossil Fuels that are Left.” This section was generally a good, fact-filled read. The information on methane hydrates was quite interesting. The book stated that the U.S. possesses methane hydrate reserves equivalent to 56 trillion barrels of oil. Of course it will be a difficult prospect to extract them commercially. This section also put oil shale claims into perspective, pointing out something that has long been apparent: Break even is a moving target, and it tends to move up along with oil prices. I have noted this for years, but I never defined it with a catchy name like the Law of Receding Horizons. Oil shale always seems to be economical at the current price plus $10-$20/bbl.

I did find inaccuracies in this section. For the layperson, most of these are trivial. But if you think about energy most of your waking hours, some of the inaccuracies will feel like an itch that needs to be scratched. For instance, on Page 96, natural gas is described as a mix of methane and propane. Propane was probably a typo, as natural gas is primarily methane and ethane. Page 109 states that ExxonMobil shelved their $15 billion LNG plant in Qatar. That was actually a proposed GTL plant. And on Page 117, the book states that diesel produced from CTL emits twice the volume of greenhouse gases as normal diesel when you burn it – and another ton of CO2 per barrel when you make it. That’s a misstatement. CTL diesel produces exactly the same CO2 emissions as normal diesel (after all, it is chemically the same as regular diesel) when you burn it. It is the production process of CTL that causes the overall carbon footprint to be so high.

There were two comments on tar sands that I disagreed with. One is on Page 127, and states that the total net energy gain is only 5 or 10%. That would make it worse than corn ethanol. Yet on Page 122, the EROI for tar sands was stated to be “as low as 5.” An EROI of 5 indicates a net energy gain of 400% (invest 1 unit, get 5 back, the net is 4 and the net gain is 400%). The second disputed argument is that tar sands must be totally dependent upon natural gas, or the construction of dozens of new nuclear plants. Thus the conclusion is that tar sands can’t scale up much. But if in fact the net energy return is 400%, the solution is easy. If you don’t have natural gas, you cannibalize and burn part of your production to drive the process. That will be an economic decision, but will become more attractive as natural gas supplies deplete and drive prices up. (Note that this isn’t an endorsement of tar sands production, as I agree with the book that there are many environmental concerns surrounding the process).

The last and final section of the book, Part III, was Energy after Oil. I particularly enjoyed the section on geothermal power, as I think this alternative option doesn’t get enough coverage. The book did a good job of clearly explaining how geothermal works, and identified some potential investments in the sector. This section also does a good job on wave and tidal energy, takes on the hydrogen economy, makes strong arguments in favor of carbon taxes, and argues that the future will be electric.

Again I found some nits to pick about the biofuels coverage. On Page 142, it is stated that biodiesel can be used as a 100% blend. However, there are no warnings about the cloud and pour point issues surrounding straight biodiesel. Try running straight biodiesel in very cold weather, and you could end up with a frozen tank of fuel. I had a few minor quibbles around the ethanol section (Despite the hype, Brazil does not get 40% of their motor fuel from ethanol!), but overall I thought Section III was the strongest section of the book.

Conclusion

While I found some areas of disagreement, I found the book to be enjoyable to read, and I learned a few new things that I didn’t know. Anytime I can do that, I am happy with a book. Those new to peak oil will especially get a lot of value out of the first section; those who know about peak oil will enjoy the latter parts of the book. Finally, each person will probably find that they disagree with one or more of the investment recommendations. That’s bound to any time financial advice is being offered. But you will also find lots of little companies you never heard of – but are worth investigating.

Note: I don’t consider myself to be an expert in investing. While I haven’t done too badly, my style works for me, but it may not suit you. I am a buy and hold, long-term investor. So please don’t write and ask for investment advice. I will not give it, and if you invest in a company that I mentioned in a favorable light, you are on your own.

June 9, 2008 Posted by | book review, investing, Peak Oil | 16 Comments