As we continue to develop biomass as a renewable source of energy, it is important to keep the cost of energy in mind, because this has a very strong influence on the choices governments and individuals will make. I sometimes hear people ask “Why are we still using dirty coal?” You will see why in this post.
Last year I saw a presentation that projected very strong growth in wood pellet shipments from Canada and the U.S. into Europe. My first thought was “That doesn’t sound very efficient. Why don’t we just use those here in North America?”
It didn’t take very long for me to find out the answer to that. It is because wood pellets are much more expensive than natural gas in North America. On top of that it takes more effort to use wood for energy than it does natural gas. That combination means that wood has a tough time competing with natural gas in North America.
When I was looking into that issue, I compiled a list of the price for various energy types on an energy equivalent basis. The price is as current as possible unless noted. I have converted everything into $/million BTU (MMBTU), and the sources are listed below.
My preference is to use EIA data over NYMEX data because the former is an archived, fixed number. I have included energy for heating and for various transportation options. For comparison I also included the cost of electricity and the cost of the ethanol subsidy/MMBTU of ethanol produced.
Current Energy Prices per Million BTU
Powder River Basin Coal – $0.56
Northern Appalachia Coal – $2.08
Natural gas – $5.67
Ethanol subsidy – $5.92
Petroleum – $13.56
Propane – $13.92
#2 Heating Oil – $15.33
Jet fuel – $16.01
Diesel – $16.21
Gasoline – $18.16
Wood pellets – $18.57
Ethanol – $24.74
Electricity – $34.03
It isn’t difficult then to see why wood pellets have a difficult market in the U.S. For people with access to natural gas, they are going to prefer the lower price and convenience of natural gas over wood. For Europe, their natural gas supplies aren’t nearly as secure, so they have more incentive to favor wood as an option.
The cost of the ethanol subsidy is interesting. We pay more for the ethanol subsidy than natural gas costs. However, if you consider that we are paying a subsidy on a per gallon basis – and a large fraction of that gallon of ethanol is fossil fuel-derived, the subsidy for the renewable component is really high.
For instance, if we consider a generous energy return on ethanol of 1.5 BTUs out per BTU in, that means the renewable component per gallon is only 1/3rd of a gallon. (An energy return of 1.5 indicates that it took 1 BTU of fossil fuel to produce 1.5 BTU of ethanol; hence the renewable component in that case is 1/3rd). That means that the subsidy on simply the renewable component is actually three times as high – $17.76/MMBTU. Bear in mind that this is only the subsidy; the consumer then has to pay $24.74/MMBTU for the ethanol itself.
Sources for Data
Petroleum – $13.56 (EIA World Average Price for 1/08/2010)
Northern Appalachia Coal – $2.08 (EIA Average Weekly Spot for 1/08/10)
Powder River Basin Coal – $0.56 (EIA Average Weekly Spot for 1/08/10)
Propane – $13.92 (EIA Mont Belvieu, TX Spot Price for 1/12/2010)
Natural gas – $5.67 (NYMEX contract for February 2010)
#2 Heating Oil – $15.33 (EIA New York Harbor Price for 1/12/2010)
Gasoline – $18.16 (EIA New York Harbor Price for 1/12/2010)
Diesel – $16.21 (EIA #2 Low Sulfur New York Harbor for 1/08/2010)
Jet fuel – (EIA New York Harbor for 1/12/2010)
Ethanol – $24.74 (NYMEX Spot for February 2010)
Wood pellets – $18.57 (Typical Wood Pellet Price for 1/12/2010)
Electricity – $34.03 (EIA Average Retail Price to Consumers for 2009)
Petroleum – 138,000 BTU/gal
Gasoline – 115,000 BTU/gal
Diesel – 131,000 BTU/gal
Ethanol – 76,000 BTU/gal
Heating oil 138,000 BTU/gal
Jet fuel – 135,000 BTU/gal
Propane – 91,500 BTU/gal
Northern Appalachia Coal – 13,000 BTU/lb
Powder River Basin Coal – 8,800 BTU/lb
Wood pellets – 7,000 BTU/lb
Electricity – 3,412 BTU/kWh
In this, my last posting of the decade, I thought I would write something profound. Then I realized I don’t really have anything profound to say today, so at the risk of violating Point 9 below, I thought I would summarize some of the things I have learned since starting this blog.
I am closing in on the 4th anniversary of R-Squared. This essay is my 895th. Based on recent trends, 2010 should bring the one millionth viewer here as well as the one thousandth essay.
I had no high hopes for the blog when I started it. As I told a friend at the time, I looked at it as more like a place to archive some of the research I was doing. My thinking was that there are a million blogs out there, and it would be hard to differentiate mine from the others.
On the other hand, there weren’t a lot of energy-themed blogs covering the specific issues I was looking at. I knew because I was trying to do research on some topics, and ran into a wall of misinformation. So, I would write the stories, mainly for my own reference, until I ran out of things to write about. But on the topic of energy, I would soon find that it is hard to run out of things to write about.
I remember in the beginning that I would get 1 or 2 viewers a day. That changed pretty quickly after Andrew Leonard at Salon linked to one of my ethanol essays. From then on, the number of viewers increased. Shortly after that, one of my essays ended up in the #1 slot on the first page of Reddit. That was only a few months in, and 5,000 viewers linked in from Reddit in a single day.
Of course I have learned a lot since starting the blog. My breadth of knowledge across the energy sector is much greater now than in the beginning. Even so, energy is a huge field, and if I tried to cover all of it the coverage would necessarily be superficial. This is one reason you don’t see more stories here on wind and solar; they are not my core area of expertise so they don’t get a great deal of coverage.
In no particular order, here are some of the other lessons I have learned since starting the blog.
1. Choose my words carefully
I remember this lesson well. The blog readership had grown quite a bit, but I did not really appreciate the diversity of the audience. At that time I was still prone to write blistering, no holds barred critiques of energy companies making outrageous claims. I had written a bit about Coskata, and I felt like their claims were dubious. But then I finally looked a bit deeper, and I wrote Coskata: Dead Man Walking.
Of course I was being flippant with the title, but hey, it’s only my blog. It’s not like I am writing a news story. People know it is my opinion, and thus I can say pretty much what I think. Right?
Then the floodgates opened. I got contacted by the media. I got contacted by investors. I got contacted by the DOE. I even got contacted by Coskata. With the exception of the last one, the others all wanted to know “Are their claims really invalid?” Of course Coskata wanted to let me know that their claims were valid.
But the episode was a turning point in the way I write. I can remember at the time doing a media interview on the story, thinking “Holy Cow! I have to be more careful with my phrasing in the future. That was unnecessarily antagonistic and there are apparently a lot of people reading this stuff.”
Since then, I have tried to exercise more caution. I still maintain that there is no way that Coskata can make ethanol for $1/gallon, but I have to keep in mind that if I write an overly critical story of a company it could influence some investors which could influence the fortunes of the company. (A long shot, but something I have to keep in mind). Thus, I am potentially impacting people’s livelihood with what I write, and as such I have a duty to be very sure about my statements before I make them. No more flippancy or unnecessary antagonism.
2. Don’t make it personal
A friend once said that it is OK to disagree, but you don’t have to be disagreeable. I try to keep this in mind as I debate and engage people. Check the personal stuff and the ad homs at the door. Let’s debate the data, and if the data dictate that my position should move, then it shall move.
3. Not everyone cares about the data
I have learned a lot about how people behave. I have learned that not everyone is interested in objectivity; some are only interested in a very specific viewpoint. In these cases, inconvenient data are either to be rejected outright (That’s absurd!) or discredited (the guy who did the research has a cousin who works for ExxonMobil; thus the study is no good).
Dealing with people like this is never a fair fight, because I am interested in looking at their data. They are only interested in looking at mine if it supports their point of view. Otherwise, they go into the mode of defense attorney attempting to exonerate their client.
4. I love to write
That should be obvious, given that for the past 4 years I have averaged 4.5 essays per week. People often ask “Where do you find the time?” I find the time the same place people find the time to watch TV or play video games (and I do some of that as well, but not so much TV). The fact is that I can type out what’s in my head very quickly. My routine is that I wake up early, read through the latest energy headlines, and write if I see something that I want to comment on. I spend less than an hour on the average essay, so it is not a major time commitment each week. Answering e-mails is a different story, which is why my e-mail address disappeared from the front page.
5. I don’t write well to deadlines
I am prolific when the subject is wide open and there is no schedule involved. When I am writing an article for a website or a publisher, and there is a specific deadline involved, I find that it is much harder to get motivated. There is a different dynamic involved in waking up, seeing a story of interest, and making a post on it than there is if the subject is defined and I have a week to fill in the details.
I have been asked twice about my interest in writing a book, but it would take me 10 times as long to do a book as it would to do enough essays to fill a book. So right now I do a book chapter now and then (I have three that are either published or in process, with another two due next year) and in the back of my mind I hope eventually to pull those chapters together as the basis of a book. But to just sit down and start writing a book? Not at this point in my life.
6. Trying to predict which essays will get a lot of hits is futile
I found out early on that I could spend 3 hours on an essay, pepper it with references and links, and yet another that I spent 10 minutes on may get 5 times as many hits. The essay that ended up on the front page of Reddit was a puzzle to me. I had under 20 essays under my belt at that time, and in fact it was well after I published it that it claimed the top spot on Reddit. But I thought I had written essays that would have been much more deserving. To this day I am puzzled as to why that one made it to the top, and not some others that I think are much better. Here it is: Fuel Efficiency and Lessons from Europe. (Another one claimed the top spot a year or so later, but I don’t even remember which one it was).
In fact, probably the most read essay in the history of this blog is one that I wrote just a couple of months ago. I buried it on the 2nd page of my blog and locked the comments on it. It was off-topic and I didn’t want regular readers to be distracted by it, but I wanted to document something. It was again picked up by Reddit and a number of media outlets, and was read almost 20,000 times in under two weeks. It hasn’t fallen out of the Top 10 since I published it. For the curious, here is that one: Exposing a Two-Bit Scammer. I must warn you that it has zero to do with energy, and should only be read if you are bored and have nothing else to do.
7. Keep an open mind
I pride myself on my objectivity. I consider it a critical aspect of my job and my writing. But I have to constantly guard against slipping into a bunker with a particular ideology, defending against all outsiders. I recognized early on in my blog that most of my essays were anti-ethanol, and that I was starting to come across as an ethanol foe. But that is not a universal truth. I am against aspects of our ethanol policy, and in speaking out against those I sometimes appear to be anti-ethanol without qualification.
But that certainly isn’t the case. I see ethanol as I see other fuels. There are trade-offs. There are vested interests. Some will gain and others will lose. But with this, as with any position, the question I try to keep in mind is “What would cause you to shift your viewpoint?” If the answer to that is “Nothing” then you are truly in the realm of dogma and there is no point discussing data. As I stated earlier, it wouldn’t be a fair debate. But I try to always have an answer to that question in mind. For ethanol, I attempted to answer that question very early on: Improving the Prospects for Grain Ethanol
8. Sometimes you are going to make enemies
I don’t like to make enemies, but when you are speaking out against vested interests you are going to make them. Reasonable people sometimes disagree, but vested interests aren’t necessarily reasonable and their disagreements can quickly become personal. A corn farmer in Iowa isn’t necessarily interested in data that argues against more corn production. (In fact, I got a death ‘wish’ from a corn farmer once; one of maybe half a dozen threats/wishes I have received).
So if you have convictions, even if they are data-based, you are going to make some enemies if you speak out on them. This is especially true when dealing with vested interests. It is simply impossible to please everyone.
9. Don’t force content
While I have written a lot of essays over the past four years, I have had some periods of time in which I didn’t really have anything topical to put out there for a week or more. That has led me at times to post guest essays or 3rd party content that really weren’t up to the standards I have set for this blog. Worse, I have been occasionally guilty of that myself by quickly throwing something together and publishing it. I can avoid this by refusing to listen to the inner voice that says “It’s been a week. You really need to publish something.” If I maintain discipline, then I will only post when there is something worth posting, even if that means I don’t put anything up for a month.
10. The spam bots are getting much better
It won’t be long before I have to start locking comments on the essays that scroll off of the first page. The spam bots – those that write something like “Great blog” with a link to some off-topic business – have gotten much better at breaking through the word verification than they were even a year ago. I get an e-mail of every single comment posted, so I am able to catch and delete all spam, but it is taking more of my time every day.
11. I learn a lot from the comments
The blog would not have continued had it not been for so much good feedback that I received. I find myself learning an awful lot from reading comments. Often, it is through the comments that I first learn of a new development or a new research paper. The comments also frequently force me to reevaluate my positions, which is something I value greatly.
12. Self-link to my previous essays
Some people may have noticed that I almost always link each essay back to a previous essay. That isn’t so much about self-promotion as it is about maintaining a connection when others pick up and republish an essay. I have given permission to many other websites to republish content as long as there is a note that indicates the origin of the essay. Still, some websites will grab essays and republish content as their own. By putting links in, readers can be linked back here, and since I have a StatCounter that indicates where visitors came from, I can spot the websites that are republishing content as their own.
13. There is no money in this
If I was trying to make a living at this, I would have to move to one of those countries where you can live on $2 a day. Of course I am not doing this for money, nor have I ever tried to write in a way that would maximize ad revenue. If I was trying to write for a living, I would have picked a different topic, like Hollywood Gossip. Of course then I would have to start watching TV, and who has time for that?
On the other hand, there have been a lot of opportunities that have arisen as a result of the blog. I have had numerous job offers/inquiries since I started this, I have been asked to write for books and magazines, and I have given media interviews and made presentations. This increases the audience that I can reach.
14. People’s interest in energy goes up and down with the price of oil
It is really hard to get people engaged on energy unless prices are climbing. To this day, the query that most frequently brings readers in for the first time is “Why are oil/gas prices rising?” If prices aren’t rising, people don’t care and there isn’t much interest in energy policy. But we have lived through interesting times since I started the blog; prices steadily climbing for the most part. When they level off, the number of readers falls.
So that’s a bit of what I have learned, and hopefully those lessons have improved the quality of the essays over the past four years. May we continue to live during interesting times, so there will be lots of new stories to report on.
Happy New Year to everyone.
I only recently became aware that the 2009 Energy Conference put on by the Energy Information Administration has posted the audio and transcripts of all of the sessions. You can hear the audio or download the transcript from my session – Energy and the Media – here. I summarized the overall conference in two posts right after the conference:
My fellow panelists were Steven Mufson from the Washington Post; Eric Pooley from Harvard, (and the former managing editor of Fortune); and Barbara Hagenbaugh from USA Today. The panel was moderated by John Anderson of Resources for the Future (and a long-time reporter and editorial writer for the Washington Post).
There were questions on the oil price run-up of 2008 (and how the media handled the coverage), false balance in reporting, scale of biofuels versus petroleum usage, peak oil, and the role bloggers are playing now with respect to reporting news.
I will extract portions of my comments below, correcting the transcription as needed for clarity. (For instance, when I said I also write for The Oil Drum, it was transcribed as “aldrum.”)
Mr. Anderson: …subject of energy of the media, a rich subject if ever there was one. My name is John Anderson. I’m joined here by four people who are in the midst of that subject. From my left, Steve Mufson, who writes on this for the Washington Post, and incidentally was also a Beijing Bureau Chief of the Post for several years which turns out to have relevance to our subject. Eric Pooley, who had a long career at Time Incorporated. He was national political correspondent among other things, and managing editor of Time, and has recently been at the Kennedy School at Harvard. Robert Rapier, who resides over the R-SQUARED Energy blog which I and I suspect many of you pay attention to, and Barbara Hagenbaugh who covers economics and energy for USA Today.
I would like to start off by going around the table and asking about a piece of recent history clear in everybody’s minds — four dollar gasoline last summer, $147 oil. That was a huge story for several months. In retrospect, how did we do? Did we get it roughly right? Did we have the causes and consequences roughly right? And in retrospect, what could we have done differently?
My response to that one:
Mr. Rapier: I’ve got a stat counter on my blog, and it tells me what brought people in there and where they came from. “Why are oil and gas prices rising?” is probably the number one keyword search that brings people in. Sometimes ironically from the media, they want to know why oil and gas prices are rising.
I’m an inventory watcher, and I use the EIA data religiously every week when they put out the statistics. On Wednesday I go in and I look to see what oil inventories are doing, what gasoline inventories are doing because we have a pretty good idea of what the gasoline inventory situation is.
So in 2007 we had, I think it was ten or eleven weeks in a row, that gasoline inventories fell, and they fell well below the average range just as we were going into summer driving season. And I got in a little bit of a friendly banter back and forth with Doug McIntyre who wrote This Week in Petroleum at that time, he works for the EIA, and I said I think we’re heading for record gas prices by Memorial Day. He said that generally prices pull off before then and level off. And I said, “Yes, but look at the trend here. The gasoline inventory trend was like this.” I said, “Something has got to give here because demand is just about to pick up.” And sure enough, that’s when we hit $3.00 gasoline by Memorial Day.
In the world oil markets it’s a little bit more murky because we don’t always have good inventory data. Again, we do in the U.S. We’ve got pretty good data in the U.S., but gasoline — if you want to know what gasoline prices are going to do, pay attention to inventories, and the time of year. I mean, if gasoline inventories are low in the fall; it’s not such a big deal. Gasoline inventories low going into summer driving season, that’s something you better watch out for.
Hurricane season. Going into hurricane season you better have good inventories. And we didn’t last year, and that’s again — when the hurricanes started to come in, I warned people we’re going to see some gasoline shortages. And we did because the refineries went down. We didn’t have enough inventories on hand, and suddenly spot shortages.
I was then asked about peak oil:
Mr. Anderson: I hope the EIA is listening. There may be someone from the EIA here for all I know. Robert, you have dealt recently in your blog with the interesting question are we running out of oil? This is one that all reporters constantly have to deal with. How do you deal with that?
Mr. Rapier: It’s obviously a very controversial subject. And often I see very frequently media stories dealing with peak oil as we’re actually not running out of oil. We’ve still got a trillion barrels in the ground. So the issue is not running out of oil. We will never be running out of oil. We will have oil for one hundred more years. It’s can we get it out of the ground fast enough to keep up with demand growth? And that’s where the problem is going to lie in my opinion and forward.
We may see an oil production peak in the next three to five years. There are a lot of very authoritative people who believe that that’s the case. There are some people that would believe that renewables are going to come in and fill that void. I’m not one of those people. I believe it will — there will be a contribution, but if we have a world oil production peak in the next three to five years we’ve got a serious problem.
But again, it’s not about running out of oil. And that’s the most common misconception I see about peak oil when people write about peak oil. They want to debunk that by showing how much oil is left in the ground, and that’s what we’re talking about, issues like one trillion barrels of shale in Utah. The trillion barrels doesn’t help if it takes more than one trillion barrels worth of energy to get it out. In that case it’s useless. It takes a tremendous amount of energy to get that oil out. So we don’t have a trillion barrels of recoverable reserves, maybe a very small fraction of that because the energy balance on that is very marginal.
On the issue of there not always being black and white answers to some of the questions:
Mr. Anderson: Barbara, how does a reporter working from day to day deal with the problem of editors and readers who want sharp clear answers to questions like this that are very much in controversy and very often as Robert suggests aren’t even quite the right questions?
Ms. Hagenbaugh: It’s complicated, and you know, USA Today a lot of times, I’ve got this much space to do all that. So I mean, the most important thing is like Robert just said, there’s two sides to this story and this is always to try to bring that out. I sometimes — editors get frustrated with me because I don’t come out and say this is how it is and this is what the answer is.
On the question of false balance:
Mr. Rapier: I put the question to my readers on my blog and also at The Oil Drum where I write—I said, “Energy in the media, what do we need to talk about?” False balance, probably the most popular answer. One reader gave the example: “scientists discover that the earth is round: flat earth society disagrees.”
The problem is it’s not always clear who the flat earth society is especially in the new biofuels technologies. Algae into biodiesel, is that flat earth thinking that we’re going to be doing that on a grand scale within five years? I can’t even tell for sure early on. I have to really dig and dig.
Steve (Mufson) interviewed me about three or four years ago. It was very early on whenever I was writing about ethanol. He interviewed me for about an hour and one tiny snippet showed up in that story. And I thought, boy, that was a lot of work, but I understand why he did it now. Steve is one of the best writers out there on energy. He does his homework. It really takes a lot of discussion to determine whether I’m credible or a complete nut, and that’s what you have to do. And not everybody does that. And so you get some of this false balance reporting; lazy reporters who simply want quotes from both sides. It’s important for the reporters to really do research. And the good ones do, and the good ones don’t take the false balance approach.
Then came an exchange that was longer than I remembered it being:
Mr. Anderson: Robert speaks with some authority. He’s the one person on the panel, and one of the few people writing on this subject who has a technical background. He’s a chemical engineer, unlike most reporters. Steve, did you want to add anything to that?
Mr. Rapier: That means I can get away without wearing a tie, though, and people forgive me for that.
Mr. Anderson: What about ethanol? How should a reporter approach the future of ethanol? What are the questions he should ask?
Mr. Rapier: Energy in and energy out is very important, but it’s not the only important thing. And I give an example. Some people say that if it takes more than a BTU of a fuel to make a BTU of ethanol that’s a no go. It’s not really because coal, for instance, is quite cheap. So if you took two BTUs of coal to make a BTU of liquid fuel ethanol, from an economic standpoint maybe that’s doable. So the energy in and energy out is not the complete story.
Unintended consequences — I don’t think we spend enough time thinking about what can happen here. What are the things that can happen? Cellulosic ethanol -we turn all this biomass into cellulosic ethanol. What are the implications?
There was a story a while back. Michigan, they figured out they might not have enough trees to fuel this cellulosic ethanol plant because cellulosic biomass in general has a very low energy density. And that’s what I call the logistical problems of cellulosic ethanol. You have to go out farther and farther to fuel this plant. Do the calculations of a mid-size cellulosic ethanol plant; it is going to consume the equivalent of about one million mature trees a year. So think about a 20-year lifetime, 20 million trees, that’s a lot of biomass. And as you get out to the edges of that you’re burning up all your energy getting it back into the plant.
So, those are the kind of things I would question. Your logistics. How are you going to logistically pull this off? How many trucks in and out of days is that? And how in the future are you going to fuel this? A lot of the biofuel options we have are really recycled fossil fuel because they’re entirely dependent on fossil fuel. If fossil fuel prices go up —they have to go up because that’s what they are. They’re fossil fuel. And we really need to go to something — and I talk about the Brazilian ethanol example.
I’m a fan of Brazilian ethanol. I was in India last year, and they do the same thing. I went through a plant. They end up with a waste material at the plant that they have to dispose of bagasse It’s free fuel. Now we don’t have something — in Louisiana and Florida they could potentially do something like that, but the economics of selling molasses and sugar are better than turning it into ethanol, but they do the same thing. They’ve got all the bagasse, and they use it to fuel their plant. A model like that will work. And people sometimes say — and this is some of the false balance that we discussed earlier. Dan Rather, Frank Sesno out there saying, “I was in Brazil. I saw what they did. We can do the same thing.” The problem is we’ve got a higher population than Brazil. We use six times the per capita energy of Brazil. It’s completely apples and oranges.
So, no way can we emulate Brazil, but I see person after person saying the ethanol miracle in Brazil was done because the government set the mandates and they set the standards. What they don’t tell you is that the ethanol miracle really is about 90-percent oil. Ninety percent of their energy comes from oil, and Brazil makes a lot of oil per capita, and they’ve got a lot of oil reserves. That’s how the ethanol miracle in Brazil happened.
On the question of trying to sort what is and isn’t credible:
Mr. Rapier: It’s like Eric said, there’s a lot of garbage out there. And the thing is you can find an argument for any position you wish to make. I can support the flat earth position by things I find on the internet. I can go edit Wikipedia and then use that to support the point that I’m trying to make. So you really have to be careful and you have to know what’s credible, what’s not credible. It’s like drinking from a fire hose. There’s just so much information.
When I’m researching a story, I could take either side and I can support it.
It then went into Q&A from the audience:
Mr. Hall: Yes, Chris Hall, independent oil and gas producer from California. I enjoyed the discussion on ethanol because I think as an industry we spent $135 million to fight Proposition 87 which would have imposed a severance tax, but EIA and the country is focused on reducing our dependence on foreign oil by increasing investment in green energy. And yet the forecasts show the need as you referred to for large supplies of oil and gas and coal during the next 20 years. Meanwhile, the domestic fossil fuels are under attack in Washington, as well as state and local governments, to punish them for last year’s high prices, for polluting the environment, to raise funds to offset deficits, to pay for development of renewable resources, all of which appeal to the public. For example, the Administration 2010 budget would result in the elimination of most of the R&D budget from Department of Energy for the oil and gas industry, would increase 150 percent in oil and gas taxes and a 40 percent reduction in drilling by one account. This will only lead to less domestic oil supply for our needs. How can the media help explain the problem so that we just don’t make matters worse?
Mr. Rapier: I spend a lot of time writing about that kind of issue, and make no mistake I’m a big fan of alternative energy. I would like to see us produce all our energy domestically, but I’m a realist as well. I submitted a question to Secretary Chu yesterday. He did not take it, but it was along the lines of I find it very ironic that he is calling on OPEC to continue producing and at the same time domestic oil and gas has essentially no part in the Administration. So I agree with that. I think the reality is we’re heading down a path here where we’re likely to increase our imports because we’re going to disincentivize our domestic production.
And I know the administration is counting on renewable to fill that gap. I don’t believe that’s going to happen. I believe they will play a part. I believe we should continue to fund that, but I’d also like to see the Administration take a more realistic view of some of these forecasts. Seventy-nine percent oil and gas, maybe that’s not desirable, but that’s what it looks like it’s going to be. So we prefer to get that domestically, I think, as much to the extent possible, but I think we’re just going to be importing it more from OPEC when biofuel targets fall short. We’re going to be counting on Venezuela, and you’ll hear future energy secretaries continue to call on OPEC: “Please don’t cut us off.”
My friend Morgan Downey then asked which books I recommend:
Mr. Downey: Morgan Downey. Just written the book Oil 101. And Robert, I read in your blog this morning that a survey came out earlier this week that said that more than half of Americans could not name one alternative fuel. And is there a role for books and other slow media in improving the average person’s energy IQ and what books in oil would you recommend?
Mr. Rapier: Well, Morgan knows that I’m 250 pages into his book, which is a fantastic book, by the way. The survey you refer to, that was pretty disheartening to read that. I think 51 percent of people surveyed couldn’t name an alternative fuel. Thirty-nine percent couldn’t name a fossil fuel. Nineteen percent said I couldn’t care less. I think you’ll find and I see the same thing, interests waxes and wanes with oil prices. Oil prices are high. Gasoline prices are high. People want to know what’s going on. So the best thing for your book would be for gas prices to start setting new records this year. People will pick up the book and they want to know what’s happening? Why is this happening?
Mr. Downey: Any other books in oil you recommend, or what do you read?
Mr. Rapier: I read a lot of different view points. One of the first ones I ever read was Twilight in the Desert which I think is a good book. It has some faults, but it kind of brings attention to the potential issue with Saudi Arabia. So that was one of the early books that influenced me.
Within the industry, I’m reading technical books on refining. And this is what I told Morgan, that his refining section is incredibly detailed. I don’t think there is a popular book that exists like that with that kind of information. Within the refining industry I’ve got technical refining books, and those are the things that I read to — how do we troubleshoot the cat cracker – and you don’t go into that sort of detail, but for a lay person who really wants to be informed about energy, I can’t give your book a high enough endorsement. I think it’s a fantastic book.
Mr. Rapier: Gusher of Lies by Robert Bryce, I really like that one, too.
There was a question about fact-checking, which was the last thing I responded to:
Mr. Rapier: I have a big issue with fact checking myself. I saw that with the SPR, Strategic Petroleum Reserve. The rate of fill that was reported and picked up and reported and reported was wrong. I showed the actual numbers from the SPR. It was about half what the reported fill rate was. And those kinds of things annoy me. And I wonder why more people don’t. Somebody, somewhere calculated a number based on some monthly fill rate and extrapolated it for a year, and it was just wrong. And then everybody picked it up and just ran with it. So I sympathize.
Anyway, my contribution was only a small part of the whole, which I think went on for about an hour. I would have published this sooner, but only became aware of the transcript about a week ago.
I have seen a flurry of recent predictions on oil and gas prices going forward, so I thought I would share some. Most of them support the thesis I recently put forward that we are setting the stage for another run on prices over the next 3-5 years. But with predictions all over the map, it’s no wonder that people are confused.
“For retail prices, I expect we’ll see the national average for regular grade gasoline near $2.25 gallon by the May-June period, and about $2.25 to $2.35 a gallon for the July-August period,” said Brian Milne, refined fuels editor at DTN, an Omaha, Neb.-based commodity tracker.
In his press conference last week, Obama said the country can’t afford to wait to tackle its oil addiction “until the next time that gas gets to $4 a gallon.” But noted consulting firm McKinsey & Co., Saudi oil minister Ali Al-Naimi, and “dean” of oil analysts Charles Maxwell of Weeden & Co. all say that an oil price shock that hits between 2010 and 2013 now appears all-but-inevitable.
So how high does Maxwell see prices going? By the “mid-teen years,” as he put it, the price of a barrel of oil could hit $200 to $300.
March 31 (Bloomberg) — Crude oil is set to drop to $28 a barrel in New York in the second quarter, according to technical analysis by Societe Generale SA.
Prices may rally until meeting resistance at $71 a barrel and then plunge to their lowest since 2003, Societe Generale analyst Stephanie Aymes said, using charts that make use of Elliott Wave theory.
“We are three, six, maybe nine months away from a price shock. We are not talking about three to five years away — it will be much sooner,” Simmons told Reuters in London.
“These prices now are dangerously low. The lower prices fall, the less oil will be produced and the greater the chance of an oil spike,” he said.
Energy Minister Rafael Ramirez in recent weeks said he expected oil prices to stabilize at $70 a barrel, describing that price as the minimum necessary to maintain investments in oil production.
March 31 (Bloomberg) — Crude oil is likely to be $50 in 2009 before falling supply causes prices to increase to $80 next year, Sanford C. Bernstein & Co. analysts said.
“The combination of reduced OPEC volumes and non-OPEC production shut-ins and declines will result in a larger than anticipated reduction in global supply,” Bernstein analysts including Ben Dell said in a report today. That “should help to tighten the oil market in late 2009 and early 2010.”
Qatar’s Deputy Premier and Energy Minister HE Abdullah bin Hamad Al-Attiyah said the global economic downturn, its impact on a drop in demand and a slide in the price of oil and gas “represent the main challenges facing the oil and gas industry.”
“The slide in oil price for a prolonged period while the cost of projects is not dropping fast enough, will (negatively) affect the volume of investments and threaten stability of the markets in the long-term,” al-Attiyah said.
“The absence of investments in the oil sector and not being optimistic about the future will create a gap between demand and supply,” he added. Al-Attiyah has said that a price above $70 was necessary to encourage investment, a view shared by several other OPEC members.
LUANDA (Reuters) – Oil prices could reach $75 per barrel in 2009 despite a the economic crisis, OPEC president Angola said on Monday, adding that compliance by the 12-member group with the agreed cuts remained at around 80 percent.
Personally, I think the Elliot Wave guy is way off the mark with his $28 prediction (and I don’t rate technical analyses very highly anyway relative to fundamental analyses). OPEC is showing a fairly high level of compliance with respect to the announced cuts. When members have visions of $100+ oil prices dancing in their heads, it is probably a bit easier to get them to comply while oil is bouncing around $50. Combine that with lots of project cancellations, and higher prices are in the cards.
I think the Bernstein analyst hit closest to the mark. OPEC is likely to overshoot with their cuts (just as they did last time) and not react until prices are much higher. By the time they do start to react, project cancellations will start to become a factor, and supply will once again be pinched. I would personally put the odds of higher prices in 3 years at 90%, with a better than 50% chance that they will be back over $100.
Implicit in the previous post on the recovery of gasoline demand is that the conditions are setting up for a gasoline supply crunch – and the price rise that goes along with that. As I pointed out, refiners are cut back, but they can turn that around pretty quickly. The low utilization numbers could lead to a short-term supply crunch, but as prices recover refiners can bring capacity up quickly.
What they can’t do quickly is implement new capacity additions. Due to the collapse in oil and gas prices, projects are being delayed, both in upstream oil production and in downstream refining. This is setting up for another run on prices as demand begins to recover. More on this from Reuters:
NEW YORK (Reuters) – The stage is being set for a fuel supply crunch in the United States once the economy rebounds now that refiners have pushed back more than $10 billion worth of upgrades they had on the drawing board.
Pressured by the oil price collapse and the economic malaise, companies have also either slowed or scrapped expansions which could threaten 340,000 barrels per day of new capacity, spelling a return to lagging processing capability that helped push pump prices higher until last year.
“If the economy comes back faster than expected, we are going to be caught flat-footed and we’re going to see a big spike in prices,” said Phil Flynn, an analyst at Alaron Trading in Chicago.
This isn’t something that will play out short term, but if your strategy for investing is more long term (as mine is), these project postponements will come home to roost in the next 2-3 years. Gasoline prices in the next few years should be higher, and maybe much higher than they are right now.
Think back to Hurricane Katrina. We got a big price spike in the wake of Katrina. That was the short term impact. But longer term, a lot of refinery capacity was offline for a very long time, and that helped lead to two straight years of record-breaking gasoline prices.
It’s been taking place slowly, week after week, but low gas prices have brought gasoline demand back up. There has been anecdotal evidence that suggested demand might be heading higher, such as recovering sales of gas guzzling cars. But for watchers of This Week in Petroleum, the data confirm the anecdotes: Gasoline demand has recovered to the point that it is now higher in the U.S. than it was a year ago. This week’s Summary of Weekly Petroleum Data (off of which This Week in Petroleum is based) shows that the 4-week rolling average has for the first time in recent memory increased above (albeit slightly) the level of a year ago.
Another factor to keep an eye on as demand recovers is that refinery utilization is still quite low relative to what’s normal for this time of year. Percent utilization relative to the past 3 years is 3-5% lower for comparable weeks. This is starting to impact gasoline inventories. A typical January will see a healthy build of gasoline across the month, as refiners build stocks ahead of spring turarounds. This year, however, gasoline inventories have been flat across January, and this week in fact saw a drop of 2.6 million barrels. Inventories are still in decent shape, but they bear watching as we move toward spring.
Gasoline imports are also down marginally relative to the past two years, primarily a result of low gas prices. But the present trends of increasing demand, falling inventories, and low refinery utilization, suggest that prices will continue heading north.
The online version of the Wall Street Journal has a new section devoted entirely to energy:
It contains numerous energy-themed articles ranging from ‘going green’ to changes in the refining industry to investing in natural gas to thin film solar panels. Excellent stuff.
Here are some snapshots of the wealth of information featured there:
Countries with the highest per capita energy consumption in 2005* (in kilograms of oil equivalent per person)
Based on International Energy Agency data for 2005, the most recent year for which IEA has data. Note: Numbers have been rounded off
Source: World Resources Institute
United Arab Emirates 10,354
Trinidad and Tobago 9,736
Netherlands Antilles 9,057
Countries with the lowest per capita energy consumption
Congo, Dem Rep 295
Countries with the most nuclear power generation in 2007, in billions of kilowatt hours
Source: International Atomic Energy Agency and U.S. Energy Information Administration
South Korea 137
Countries with lowest super gasoline* prices as of mid-November 2008 (U.S. dollars/gallon)
United States super gasoline price: $2.12
*Super gasoline has a higher octane rating than regular gasoline. The higher octane rating helps
prevent a vehicle’s engine from igniting before the optimal time.
Source: German Technical Cooperation
Saudi Arabia 0.61
Countries with highest super gasoline prices
China (including Hong Kong) 7.38
Cape Verde 6.96
Every time gas prices start to go up, my essay “Why Are Gas Prices Rising?” gets a lot of hits from Google searches by people looking for an explanation. Because the supply/demand dynamics have changed, that essay needs dusting off, especially in light of stories like this:
Fuel industry pundits have been left scratching their heads at the recent jump in gas prices, which have increased despite plummeting crude prices.
“The nationwide average retail price of self-serve regular gasoline seems to be defying gravity this month,” according to American Automobile Association (AAA) Director of Public Relations, Geoff Sundtrom, “as it continued to rise in the face of sharply lower prices for crude oil and wholesale gasoline.”
Oil prices closed out at $34.78 per barrel last Friday, according to AAA, the lowest they’ve been since April 5, 2005, when the nationwide average retail gasoline price was $1.76 per gallon compared to Monday’s nationwide average of $1.842. Average nationwide prices jumped slightly to $1.848 on Wednesday. The statewide average is slightly higher at $1.851 per gallon. By this Friday, prices had risen to $46.47, according to The Associated Press.
First things first. Checking the EIA data, their numbers/trends don’t match up. Per the EIA, in April 2005 retail gas prices were $2.28 a gallon (Source) when West Texas Intermediate was trading at $52.98. In early 2009, retail gas prices (per the EIA) are at $1.84 with WTI hovering around $40. AAA is obviously using their own metrics, but a scan of the various EIA gas prices show a pretty consistent trend: Gas and oil prices both sharply down from 2005.
But, it shouldn’t surprise anyone that gas prices would be headed back up – even if oil prices are stagnant. Gasoline had over-corrected to the downside in relation to oil prices. In fact, crack spreads – a measure of the difference between the price of oil and the price of the products – did go negative in late 2008. That is unsustainable, and an indication that gas prices must correct to the upside (or refiners will start to cut production since they are losing money on every barrel). So why are gas prices rising? Because they fell too far. (Nobody ever seems to ask why gas prices fell so much in relation to crude oil; they only get excited when the opposite occurs).
There is another key factor to consider when comparing the behavior of gasoline and oil prices. I have seen them move in opposite directions on numerous occasions. Here is an example of when they might do that. Let’s presume that we have a glut of oil, but a refining bottleneck. In such a case, you would see little demand for oil, keeping the price low. But if refiners are having trouble keeping the gasoline market supplied, then gasoline prices will rise in relation to oil prices. This has taken place multiple times over the past few years, and can usually be understood if you watch the crude and finished product inventories reported each week in This Week in Petroleum.
Other factors that impact the price of gasoline include the strength of gasoline imports (primarily from Europe), and refinery utilization (both of which are reported weekly at the EIA). If gasoline demand is strong, and something happens to reduce the utilization number (e.g., hurricane), prices spike. If demand starts to slacken, you will see refiners start to dial back their utilization.
Retail gasoline prices in the U.S. peaked back in July at $4.17 a gallon. (Source: EIA). At the end of 2008, gasoline had fallen to $1.67. We typically use about 140 billion gallons of gasoline each year, so that $2.50 drop amounts to an annualized difference of $350 billion in the pockets of consumers – and into the U.S. economy instead of the economies of Saudi Arabia and Venezuela. Add in the drop in diesel, home heating oil, and jet fuel and you are looking at half a trillion dollars. And while I am strongly in favor of raising gasoline taxes to reduce our fossil fuel consumption (and demand has been sharply down as a result of high prices), the economy can certainly use this sort of stimulus right now.
But in the long run it is very important how people use that money. And we seem to be reverting to bad habits. How quickly we forget $4 gasoline:
NEWPORT NEWS – It looks like the Highlander is in and the Prius is out — for now at least.
Trucks and sport utility vehicles will outsell cars for the first time since February, according to a December report by Edmunds.com, which tracks industry statistics.
“Despite all the public discussion of fuel efficiency, SUVs and trucks are the industry’s biggest sellers right now as a remarkable number of buyers seem to be compelled by three factors: great deals, low gas prices and winter weather,” said Michelle Krebs of AutoObserver.com, a division of Edmunds.com, in a prepared statement.
And the punch line:
The surge in SUV and truck sales suggests that the issue of fuel efficiency has faded in the minds of many consumers.
Toyota has already slowed production of the industry’s flagship hybrid vehicle, the Prius, due to lack of interest and a growing inventory of the once best-selling model, Edmunds.com reported.
All this might mean a setback for fuel-efficient models that were heralded as a remedy for the country’s addiction to oil.
If people are going to flock back to gas guzzlers instead of using their extra pocket money to pay down their debt, then I would rather gas prices go ahead and recover. Based on the trends in vehicle sales, I am sure I will see that wish fulfilled before too long.
I never thought I would see this again:
Dan Ronan, a Texas AAA spokesman, said falling crude oil prices, the slumping economy and steady gas inventories have helped reduce prices.
“They are dropping pretty quickly,” he said. “Enjoy it while it’s here.”
In Harlingen, in the Rio Grande Valley area, a gallon of unleaded gas is selling for $1.98 today at Stripes convenience store, sparking a price war with a nearby H-E-B station that was selling for $1.99.
Wow! As I said a couple of posts back, plunging prices pose a big risk for inventories. Keep a close eye on demand at these prices. If demand picks up and inventories can’t recover, we will go into spring in position for gas prices to reverse in a hurry.
Now, I think I will go out for a drive.
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