Sunday, February 21, 2010

More Musings on the Grand Game

This post is a little different from what I usually write. Different, in that this touches a bit on politics. I have read many things from many places over the years, as have we all, I suspect. Sometimes things fall into place, and a pattern emerges, then a clear conclusion. This is one of those times, for me.

The core issue is "going green," and whether that is a good thing. As some of you will note, having read my other blog EnergyGuysMusings, I am all for renewable energy (a form of green energy), but only when that renewable energy can be made as cost-effective, and as reliable, as that provided by natural gas. So far, nothing comes even close.

Let us dial back the clock about a decade or so, and remember the world situation from this perspective: is the world about to run out of oil? Is peak oil real, and if it is real, is it about to happen soon? In the 1990s, the United Nations passed some sanctions on the rogue nation of Iraq, one of which led to curtailing the oil flow from Iraq. A little oil was allowed, but only enough to buy humanitarian needs such as food and medical supplies. In a world with a growing appetite for oil, and economies growing, especially emerging economies of India and China, taking Iraqi oil off the world market meant other exporting countries increased production. So they did, and Saudi Arabia opened up the spigot, so to speak.

It became very clear, very soon, though, that without Iraqi oil, demand would equal supply, and the price of oil would rise. And it did. The higher oil prices gave a boost to renewable technologies, especially hybrid cars with their much lower fuel consumed per mile. We heard and read much about wind-power and solar power, with idiots stating (in public, over the airwaves) that renewable energy equates to importing less oil. That, of course, would only be true if we did one, or both, of two things: 1) burn oil to make electricity, and 2) drive electric cars that are recharged from electricity. As it turns out, we do neither in the U.S. First, a quick look at the Energy Information Administration (EIA) website shows just how little of our electricity is produced from burning oil: almost zero. It is an emergency fuel, not the mainstay. Second, electric cars are a very, very small fraction of the total cars on the road. Such cars are being developed by various manufacturers, with a very few available for sale. Hence, it requires an idiot to state that renewable energy equates to importing less oil. It does not.

As I have written, because this IS true, when vehicles burn natural gas instead of petroleum, THEN renewable energy will help reduce imported oil. But the U.S.A., in its vast wisdom handed down from the various federal and state legislatures, does not view natural gas as a true alternative to petroleum fuels. To illustrate this, just try to convert an engine from gasoline to natural gas in California.

Fast-forward a few years, and thanks to a multi-national coalition, now the Iraqi government is different, without a dictator, but with a representative democracy. Western oil companies now work in Iraq to bring the oil fields back into production, and very soon the oil will flow again into the world market. That oil will flow in sufficient volumes to cause great concern in OPEC, as the price of oil will drop if the supply exceeds the demand by very much. To maintain a supply and demand balance, and thus prop up the oil price, some existing oil producing nations must reduce their production by the amount of the new Iraqi oil flow. This will not be an easy task, nor will it be done willingly. It could very well be the case that the oil price will drop yet again to the $20 per barrel level. Or, it could be that the emerging economies of India and China will take up all the oil the Iraqis can supply, and the price of oil will remain in the $70 to $80 range.

Which brings me to the green aspect. There are at least three groups of geeks at work, by which I refer to engineers and technicians who find ways to advance their particular product. One group is those who work in the oil and gas industry, finding oil and gas, producing oil and gas, refining the oil, liquefying and shipping the natural gas, and making these products available as needed and at very low prices. A second group of geeks works in the automotive industry, making cars that use less gasoline and trucks that use less diesel fuel. The third group of geeks works in the renewable energy field, finding ways to provide electric power from wind, solar, waves, geothermal, bio-mass, and in the bio-fuels field making ethanol and bio-diesel. By the way, when I use the word "geeks" it is not a disparaging term. As an engineer, I am a geek. I have great admiration for what geeks can do, and have done.

Then, which group of geeks is winning? Right now, the automotive geeks are doing pretty well, with cars that achieve miles per gallon in the low to mid 30's. Some hybrids do even better, with mpg in the high 40s and low 50s. Plug-in hybrids are expected to do much better, as the vehicles use only electricity until the battery is depleted and the gasoline engine is started up. However, the renewable energy geeks are also doing pretty well, with large windmills having economies of scale to provide electric power. Solar cells are also doing much better, with greater efficiencies than ever. Yet, there remain huge problems with electricity storage, the true weakness of wind and solar power systems. It appears to me that the oil and gas geeks are the true winners, as shale gas is being developed all around the world. Oil is now found in places where oil is not supposed to exist, deep beneath the salt layer and in very deep offshore waters. The situation is interesting, as governments intervene to assist the automotive and renewable geeks, but hinder the oil and gas geeks. Assistance comes in the form of mpg mandates (35 mpg in the US, with 42 mpg in California), plus minimum renewable energy quotas in many states (see, e.g. AB 32 in California that mandates 20 percent renewables by 2010, then 33 percent by 2020), plus government subsidies for renewable energy projects. Those are huge assists to the automotive and renewable geeks.

Meanwhile, the oil and gas geeks are hindered by governments. Many oil fields are not available to market-based oil companies to drill and produce them, as state-run oil companies own and control those fields, or they are off-limits by government decree (see Alaska North Slope, and offshore California, offshore the U.S. East Coast, and parts of the Gulf of Mexico). Also, the U.S. government is threatening to remove tax incentives for oil companies, which have long existed and have not given oil companies a huge return on investment. Indeed, if their tax status is changed, oil companies will slip further down the list of profitable industries (see profitability of cosmetics companies (40 % return on equity), and liquor companies for high-profitability (29 % return on equity), much more than the oil industry (20 % return on equity). Yet nobody complains about the exorbitant profits of cosmetics companies). Capital will not flow into oil and gas companies, and we will see a shortage of oil and gas. But, not because of Peak Oil or running out of oil, but simply because of government-imposed dis-incentives to produce oil and gas.

And then there is the legal side of the green energy. As I wrote elsewhere on SLB, there are legal challenges to several laws, both at the federal and state level. The Low Carbon Fuel Standard (California state law that mandates ethanol in gasoline, among other things) is the subject of a lawsuit in US District Court in Fresno, California. The US EPA has been challenged by more than a dozen lawsuits, each seeking to have the Determination that CO2 is a hazardous and dangerous pollutant reconsidered based on the Bad Science (BS) that was used in the Determination. There are also the traditional legal challenges to the environmental impact of renewable energy projects, and the long transmission lines that are required to bring the power to the consumers.

The question resolves to a political one. The choice is this: is it better to penalize oil and natural gas by restricting production, increasing the oil and gas price as a consequence, thus giving incentives to renewable energy? The higher price of energy hinders economic growth, and hurts consumers by taking more of their hard-earned paychecks. Or, is it better to topple a brutal dictator of an oil-rich nation, whose policies resulted in economic sanctions such that very little oil was produced? The new regime allows the oil to flow again into the world market, bringing down the price of energy world-wide, and encouraging economic growth and prosperity for billions of people world-wide.

The question remains, even though the Iraqi situation has been resolved, at least for now. Their neighboring country, Iran, is now likely to have oil-export sanctions applied by the United Nations due to Iran's increasingly belligerent attitude and nuclear arms prospects. Perhaps the Iranian government does not see this clearly, but removal of Iranian oil from the world market will only accelerate the automotive and renewable energy geeks as the price of oil increases.

It is inevitable that the technology for cars and renewable energy will be discovered and developed. The only question is one of economics: will the oil price be so high that the higher-priced cars and higher-priced electricity are justified in the eyes of the consumer? Or, will the oil price drop so that only government mandates force the expensive cars and high-priced electricity on the consumer?

And thus ends this installment of musings on the Grand Game, the battle for energy markets around the world.

Roger E. Sowell, Esq.
Marina del Rey, California


Anonymous said...

From what I understand, the remaining oil is costing more and requires more energy to extract. I read the modern off-drilling costs more than the well drilling. For example, it is difficult for us to get oil out of North Dakota without the use of fracking (which appears to have some environmental concerns as well). Will we reach a point where the energy used to extract will equal or exceed the energy produced by drilling oil?

Roger Sowell said...

Anonymous, not all remaining oil costs more and requires more energy to extract. For example, the Sakhalin Island discovery is expected to yield approximately 3 billion barrels, and capital cost to obtain the oil is approximately $10 to 12 billion. That works out to approximately $4 per barrel.

The concept of energy expended to obain oil is highly misleading. It is not the energy expended that is important, it is the cost. For example, if one considers a steam-power plant that burns natural gas, approximately 3 units of gas energy are consumed for each unit of electricity produced. The economics is what is important, not the energy flow.

Another example is a diesel engine that powers a large truck. At best, the engine is only about 20 percent efficient, meaning 5 units of energy as diesel is consumed for every unit of mechanical horsepower produced at the drive shaft. We don't care one bit. The economics of large trucks is favorable even when the ratio of energy input to energy output is 5 to 1.

In an oil field, the fuel consumed is typically diesel or natural gas. In many cases, the natural gas is essentially free because there is no easy means to transport the gas to a market. In that case, one could consume as much gas as necessary to produce the oil. We would not care one bit, because the oil has value and the natural gas does not.

Another way to look at this is to consider a marginal oil well. It costs more to produce the oil than can be made by selling the oil. The well's owner stops production in that well. As the price of oil declines, some wells will reach that point of marginality and stop producing.