Thursday, December 25, 2014

Odd Ends

So Eli has been accumulating a bunch of stuff over the last few days and needs to get at least some of it off his tab bar.  Without further ado, let the Rabett start with a something from Goldman Sachs via Bloomberg that explains quite a lot about what is going on with oil prices

How Profitable is $70 Oil

Obviously, the boys from Alberta are up against it with oil where it is, and if oil goes up, then they are up against it from renewables.   The Keystone demos were/are basically a holding action until the market woke up.  Bloomberg figures there is something like a trillion in stranded investments.

Somewhere back in the past, Eli pointed out that the play was a lot like the late 1970s, where OPEC shut down renewables by dropping the price, except now, even in Saudi Arabia, the price of lifting the oil is a lot higher than then.  So as China and India grow, and demand increases, if the demand for energy has to be met by oil, the price has to move up considerably.  As Al Gore says (red flag warning)
“Investors who haven’t yet come to grips with the stranding problem are like the classic scene in the Road Runner cartoons where the coyote runs off the edge of the cliff, and his legs keep moving for quite a long time before gravity takes hold,” Gore said by phone from Nashville, Tennessee. “There are investors out there whose legs are moving in mid-air.”
Next something from Wikipedia which shows the US inflation rate as a function of time

as the observant might note, positive inflation has only been a given since about 1950.  Before that inflation only really was significant during wartime.  A better view of this is available at Visualizing Economics with the wars labelled.  Given that inflation is running today and for previous years at ~ 1.5% the arguments for a discount rate about a percent or less when discussing the costs of climate change and how to deal with it appear ahistorical.  Nick Stern was righter than many give him credit for.

OTOH, if you think about the cold war, that might explain 1950 -  .  Keeping a large standing army and munitions industry going puts a lot of pressure on the economy.  Just sayin

Next, something interesting from the Great Orange Satin.  Markos Moulitsas Zúniga aka kos has built a webempire that makes about all of the others look tiny.  Doing so required a fair amount of smarts and obsession.  He has become obsessed with energy efficiency and is writing an excruciatingly detailed account of how to do so, and how doing so not only saves energy, but also money.
Hi, my name is Markos, and I am an energy efficiency junky. I am obsessed with it. I'm downright OCD about it. It consumes a huge part of my life. I bored my wife talking about it, I bored my co-workers talking about it, I bored my friends talking about it, and I might even bore you talking about it. 
But if I'm going to go all crazy over something, what could be better than focusing on eliminating my carbon footprint? Heck, I don't want to eliminate it, I want to go carbon negative—generating more energy than I consume, at home and in the supply chain of the goods and services I use.
Kos has three principles for his energy diet
1. I do what I do to protect my world. The decisions I make, the actions I take, all have an impact on the world around me. I consider it a duty to minimize the impact I make. THAT is my primary motivation. That said, there's no way I would be doing all I'm doing if my efforts weren't essentially paying for themselves, so ...
2.  Saving money is important.  Even if you're like "fuck baby seals," who doesn't want to save money? Maybe the guy still driving the Hummer. But if we want to motivate the general public to lower consumption and make environmentally friendly consumer and lifestyle choices, it has to be financially beneficial to them.
3. Don't sacrifice comfort. Sure, I can reduce my energy expenditures a great deal if I lowered my thermostat to 63 during the day, made everyone wear sweaters and hats at home. But that's not going to happen. Not only do I personally like a toasty house, but more importantly, so does my family. And if I want to have carte blanche to make efficiency gains around the house, I need to keep the family that lives in that house happy. In online forums, it's called the WAF (wife-acceptance factor), and it's a real thing. Thus, I won't be line-drying the laundry anytime soon, or eating only raw foods, or buying a smaller TV. Sure I could make major efficiency gains by doing certain things, but I'm well on the way toward a negative-carbon lifestyle without sacrificing comfort. It's not an either-or proposition.
Part II is about reducing electrical consumption by optimizing lighting.  No real surprises except the amount of money that can be saved by careful evaluation of current energy use and choice of LED bulbs (they are all not the same).

Part III is about killing the standby kilowatt vampires which eat your wallet while waiting for you to turn something on.  Smart toasters burn money.

Not yet posted are how to minimize the costs of big electrical power draws, home renewable energy (solar in his case), cutting the cord, reducing natural gas usage and water consumption.  Worth reading even if you don't or cannot go the whole way.



Everett F Sargent said...

Been there, done that.

Smug Alert!!

Hank Roberts said...

What's 'negative carbon' about his approach? Does he just mean 'using less'?

Better definition for negative carbon: capturing more carbon out of the atmosphere than the fossil carbon I burn.

Buy wasteland. Grow topsoil and trees. Everyone needs a 200-year project of some sort.

Everett F Sargent said...

"back in late 2011 I was burning about 9.3 kWh per day in lightning alone, about a third of my overall usage"


Back in 2011, my total electricity was 9.3kWh/day (no natural gas, 100% electric), or under $30/month.

Someone should tell that taint to maybe, just maybe, keep the doors and windows closed in the wintertime and enough with the 247 12 months of ornamental Christmas lighting.

Oh, and SF is a particularly bad example given it's rather mild climate, if I lived there, my utility bill would be like > $20/month.

NOTE: No, I'm certainly not doing my part to "save the planet" as the bottom line will always be the bottom line (more money in my pocket, less money in their pockets). D'oh!

Hank Roberts said...

Well, remember that cold wet air steals heat a lot faster than cold dry air:
"... anywhere is better than Paris. Paris the cold, Paris the drizzly, Paris the rainy, Paris the damnable. More than a hundred years ago somebody asked Quin, "Did you ever see such a winter in all your life before?" "Yes," said he, "Last summer." I judge he spent his summer in Paris. Let us change the proverb; Let us say all bad Americans go to Paris when they die. No, let us not say it for this adds a new horror to Immortality."
- letter to Lucius Fairchild, 28 April 1880, reprinted in Mark Twain, The Letter Writer
The Bay Area has a Parisian climate, then and now.

I used to burn more carbon and keep the house warmer, until I started wising up about climate change. Sweaters, hoodies, and wooly hats indoors are not a huge inconvenience, this season. I splurge on heat to deter mildew.

Hank Roberts said...

p.s., yes, he is defining carbon negative as generating more energy than he consumes, accounting for all the fossil carbon burned in the supply chain.

Tough accounting problem.

So is trying to be carbon negative as I'd define it.

A few pointers, though, on turning CO2 into topsoil and plants, which you can do on any barren or junk-filled bit of ground that gets some sunlight:

Or buy something big enough to camp on to restore, and try to account for the gasoline spent getting there, of course. Nothing's perfect.

On home nighttime lighting, indoors and out, I'm increasingly fond of the little passive-infrared battery lights, suitably covered with theatrical color filters to make them amber-yellow instead of blue-white. They work OK with rechargeable NiMH batteries -- bit of nuisance to swap and recharge. is a fairly reliable source.

Aaron said...

The Islamic State in theory has taken over oil fields with very low production costs, and hence very large profit margins even at current oil prices. However, keeping a modern oil field at peak efficiency, requires good science and technology. The IS has not retained those skills. Nor, have they established the infrastructure to buy such skills on the global market.

We can expect the oil revenue of the Islamic State to decline rather rapidly, regardless of the price of oil.

I suggest that the drop in the price of oil is an unintended consequence of IPCC AR5 warning that the world must stop using fossil fuels, so that oil in the ground would lose value as the deadline approached. Some oil producers realized that the oil they had intended to pump over a period of 80 years had to be pumped in a period of only 30 years if they were to recover value on the oil under their feet. They decided that it is better to get $40/bbl than leave it in the ground and get nothing for it.

Dan Riley said...

In a simplistic equilibrium model, 0% inflation means the money supply is growing at the same rate as the economy. If the money supply is pegged to precious metals, that means mining has to keep up with economic growth; if it doesn't, the result is deflation, which in turn tends to discourage investment and lower the growth rate.

Since abandoning the gold standard, central banks tend to target around 2% inflation as "pro-growth", hence the lack of significant deflation in the last 80 years. Advocates of a gold standard, OTOH, want to sacrifice growth in order to protect the value of accumulated capital.

However, I don't understand how you connect inflation to the social discount rate. The social discount rate is calculated in constant dollars, so inflation is already factored out.

It is more appropriate to link the social discount rate to the real rate of growth, and that's exactly what Stern does; following expected utility theory, he sets the social discount rate to the real rate of consumption growth (times an elasticity factor) plus a very small inherent discount rate.

Stern's models give social discount rates around 1.6 to 2.1%; most of his critics argue for much larger inherent discount rates. How is inflation any sort of a factor in that?

Fernando Leanme said...

Eli, your oil industry and price analysis is too simplistic. in the business it's important to differentiate the upstream sectors into established production, ongoing developments with a short project life, and ongoing developments with a long project life.

It's also useful to understand their leveraging and/or financing costs, their operating costs, tax regime, oil prices they get at the delivery point, oil quality, and committed expenditures.

The chart you showed is a very simplistic cartoon. So let me help you: the world is running out of oil, what we see at this time is a short hiccup, there's no such thing as stranded oil if it can be produced at $150 per barrel (the price in 20 to 30 years in today's dollars).

The nation which seems ready to keel over first is Venezuela, a combination of mismanagement, communism, corruption, their high costs and low oil prices is deadly.

Bakken oil producers in North Dakota will cut back and we will see the bakken production drop by next year. Besides Venezuela, Russia, other USA, Argentina, Brazil, Colombia, and others will reduce production. This will raise prices. The Canadian heavy oil producers will see a slowdown in projects (this is good), but as far as the extra heavy oil is concerned the Venezuelan fields will be the ones which take the hardest hits.

The USA left has a tendency to ignore Venezuela's heavy oil, which happens to be the same as Canadian, but ships in oil tankers (it's difficult to understand why anybody would think super heavy oil from a nation with serious human rights abuses is just fine, but the identical oil from Canada is hellish, unless it's just simple politics...the environmental movement is loaded with "progressives" who can't sneeze at the torturers in Caracas).

The key takeaway is that you can't count on a short lived oil price oscillation do much to the irresistible force called demand for oil. You GOT to focus on making renewables more viable. Right now they don't compete.

And please spare me the dreamy fog you guys like to use on yourselves. We are in deep trouble and it has little to do with global warming, we just can't find cheap energy for 8 billion people.

Steve Koch said...

Interesting discussion. I believe that Obama cut a deal with the Saudis to drive the oil price down to pressure the Russians for invading the Ukraine.

Long term the price of electricity will come down, partly thru solar but also thru fission (that burns it's own waste) and fusion. Batteries will continue to get better and cars will get much lighter using carbon nanotubes as a much lighter, stronger construction material. Using sensors and car to car computer communications in computer controlled cars, the risk of collision will plummet, further reducing the need to build strong, heavy cars. These muuuch lighter cars will much less energy to propel them.

My guess is that hydrocarbons get primarily replaced as energy sources in the next 50 years.

Fernando Leanme said...

Steve, that's very optimistic. I love to read positive comments at a time when I feel like I'm sitting on the Titanic's bow.

I don't think Obama cut a deal with the Saudis any more than financial wizards orchestrated low cost financing for oil companies going nuts drilling marginal rocks in Texas and North Dakota. Who knows, maybe that cheap money driving marginal USA producers is Saudi?

The low oil prices are VERY short lived because horizontal wells drilled in tight rocks decline at high rates, and the low price environment discourages production everywhere. And production is already dropping in some OPEC members, the dictatorship ruling Venezuela is facing total economic collapse, is unable to invest to offset decline, and I expect riots and a flood of refugees heading out by early next year.

Dano said...

Speaking of energy efficiency, something in my RSS feed from RMI: US building efficiency taken as a country: Just buildings in the USA makes up the third largest country in the world in energy use.

And I have some slightly different charts about break-even dollars, not sure about that one in your post.



Paul Klemencic said...

I have worked in and around the energy industry for decades, and I just want to cry at the amount of misinformation and confusion. The report by Goldman Sachs is both wrong, and misleading. The reporters for Bloomberg don't understand what they are talking about.
Then, I read the comments by Fernando Leanme, and although he got some of it right, he blew the bottomline conclusion. And Eli reached the same wrong conclusion; the price of oil will not climb higher due to constrained supply caused by passing "peak oil supply". This error results in missing the most important and effective strategy for mitigating GHG emissions and addressing climate change.

Lets start with some basic errors in economic comparison and analysis. First, never use a snapshot analysis for decisions, especially to compare an existing conventional product with a new product using rapidly developing technology and production methods. You will get the wrong results.
Shale field methods are rapidly improving, so the costs are falling.

Second, be very careful at working with both marginal supply and marginal demand, but consider the full supply and demand picture. And understand the real marginal costs for both supply and demand. Marginal production costs less than the Goldman Sachs estimates (for oil industry decisions), especially if shutting down is the alternative to producing. Ignoring sunk costs, about 95% of current global production costs less than $40.

Marginal demand costs much more (10x) than most estimates, a huge error, because marginal demand pushes prices higher on the entire supply of oil. The monopsony oil premium on the last 4-5 million barrels of global demand increases the costs of OECD countries (oil customers) enough to make the effective price on these last 5 million barrels to about $1400 per barrel. This price (about $35 per gallon) is roughly 10x the cost of substitutes such as green vehicles, biofuels, and alternative transportation.

Third, don't ignore market dynamics and momentum. Once a significant portion of the capital investment is expended and sunk (lease and land acquisition, infrastructure such as pipelines, roads, processing plants, water supply and disposal facilities, exploratory drilling, etc.), it is cheaper to finish the project and generate production to pay back some infrastructure costs, than discontinue the project.

Lets start with supply/demand curves for global oil, with actual equilibrium pricing points shown for 2008/2009 demand drop (followed by later demand recovery in 2009/2010.
The current oversupply is less than one million BPD, and has caused the price to fall about $40-50 per barrel; this is consistent with the SD curves shown.

I am not alone using SD curves like these. A "peak oil" guy used similar curves, but didn't understand what the steeply sloping curves were telling him:

So he reached the wrong conclusion. Oil supply will keep increasing as price increases, and won't reach peak supply in a very long time; and hopefully, not ever, if we deploy substitutes rapidly.

Paul Klemencic said...

OK, so lets take each incorrect analysis, and tear them apart. The Goldman Sachs analysis shows the Bakken core, and the Permian, costing between $70-80 to develop. These are important fields because each currently produces over one million BPD. North Dakota's Bakken and Three Forks are at 1.1 million, and with 160 acre spacing (from current 320 acres) should exceed 2.0 million within six years. The Bakken shale rapidly developed when oil prices rose into the $60-80 range, so the GS estimate was reasonable for that time.

But no more. The land and leases have been acquired, the necessary infrastructure built; so now, excluding sunk costs, the Bakken oil costs less than $40. The rig count has fallen somewhat, because operators now can drill 3-4 wells in the time it took to drill one well in 2008.

Tapping the Permian fields in W.Texas, required the use of carbon dioxide floods, and the pipelines are in place to bring CO2 from Wyoming. Again huge infrastructure in place, and marginal cost less than $40 will keep the production up.

Marlowe Johnson said...

only way to be carbon negative is to do all the usual (EE+RE) and then include things like white roofs and biochar in your garden plot. might need a pretty big garden tho.

Paul Klemencic said...

Obvious next question: What is OPEC (essentially Saudi Arabia) doing and why?

Which brings us to the next piece of bad reporting by Bloomberg. (i)(Watch the first 2:30 minutes. Why didn't they focus on their personal experience? One of the reporters doesn't even own a car, and so they miss the declining demand of oil per capita in the US.)(/i)

The Bloomberg reporter in the red dress (Lisa Abramowicz) states that we knew Saudi Arabia had this kind of power, and they ask "Why didn't they do this years ago?" They seem to think that oil fields are like big tanks of oil in the ground, and all you have to do is switch on a few more pumps. They don't realize that there are capacity constraints, as well as production limitations used to maximize eventual reserve recovery, that limit Saudi production level at any given point in time.

OPEC ran out of curtailed production in 2005, and except for a brief period in 2009 after the financial system collapse, has run at close to capacity since then, until August of this year.

Here is a clip from a comment I placed on the Krugman NYT blog recent post "A Note on Oil Prices and the Economy":
The comments discuss IMF estimated price elasticity of demand -0.019 for short term (< 20 years). Invert the elasticity, and realize that the oil price would drop 50% for a one percent decline in demand! This estimate predicts the recent fall in oil price caused by the Saudi decision to produce an additional 0.5 million barrels daily into the global market demand of 90 million barrels. Rising demand from 78 million barrels daily in 2002 to 90 million barrels this summer, drove the price from $20 to $100. - permid=13501858

OPEC knows that oil prices at $60 won't stop shale oil, but reduces the flow of investment capital to producers to slow the ramp in global oil production. In spite of this, the dynamics of the oil market with projects already in the pipeline will push global oil supply to 93-95 million barrels daily within five years. If prices fall below $40, then we may get flat production; and if prices fall to $30, then supply will contract in a meaningful way.

Paul Klemencic said...

The oil market price action gives the Obama administration a terrific opportunity to introduce a substitution/efficiency program paid for by a tax on crude oil. Ex-governor Ed Rendell recently suggested a hike in the federal gasoline tax to pay for highways and transportation infrastructure.

I sent Gov. Rendell this email several weeks ago:

The opening paragraphs to the email:

Governor Ed Rendell:
You recently proposed to raise the gas tax to fund highway repair and infrastructure development.
You're trying to sell the idea that a period of falling oil prices is a good time to raise the gas tax; this is correct, but most listeners only hear the word "tax". Many respond: “We've paid high gasoline prices and taxes for a long time now… Why not let us enjoy the low prices for a change?”
I suggest a better proposal, with a more effective sales pitch:

The temporary fall in prices gives Americans a chance to fix the broken oil market that overcharged customers over the last decade. We should increase substitution now, to permanently reduce oil prices and save customers money. If America recaptures a portion of the cost savings using a tax that funds more substitution to reduce demand, this lowers customer costs now and in the future. Highway repairs and improvements, along with transportation infrastructure improvements are funded using a portion of the cost savings caused by the oil substitution programs.

Americans have paid a high price for gasoline and diesel for too long; the crude oil market price climbed above $50 in 2004. There is no rational reason for the high prices of the last decade.

Although the gas tax proposal has merit, the proposal falls short of what is needed to correct serious problems in the vehicle fuels and transportation sector. Oil substitution saves customers money on vehicle fuels and transportation, and address key concerns regarding national security and environment, while increasing American economic growth.

Understanding oil market supply/demand curves and global oil price movement is the critical analysis, to improve performance of markets for oil products.

A set of comments recently submitted to the DOE using the Quadrennial Energy Review system discusses this proposal. The comments also cover each major energy market, discuss customer needs including environmental concerns, national security issues associated with energy markets, the impact on our economic growth, and customers’ total loaded cost for energy and energy systems. The comments include an analysis of future cost for customers.

Summary of the key points from the review of energy markets:

The crude oil market is highly dysfunctional with customers over paying several trillion dollars over the course of the last decade. The monopsony oil premium paid on the last 4-5 million barrels of global demand costs over $1000 per barrel , or over 25 dollars a gallon for gasoline and diesel. Alternatives such as electric vehicles and biofuels have effective costs below $4 per gallon. Clearly increased substitution to replace the last 4-5 million barrels of global demand reduces customer costs by OECD countries; US customer would save several hundreds of $Billion annually. The United States needs to ramp substitutes as rapidly as possible to eventually deploy eight million green vehicles per year; or equivalent oil substitution alternatives. Each year of delay results in almost a trillion dollars of mis-allocated investment and higher costs for customers over the lifespan of the conventional vehicles deployed instead.

Paul Klemencic said...

I submitted comments on the energy markets to the DOE in mid-October, after raising this issue at a DOE QER meeting in Pittsburgh in July. (I have a link to the full set of comments below.)

Part 2 of the comments covers the oil market.

I suggest readers at least read the FAQs on a oil substitution program. The first two questions:

1. Don’t we want to push fossil fuel prices up, to encourage substitution and conservation and energy efficiency?

Crude oil prices are sufficiently high enough, to make green vehicles much less costly than incremental oil demand, at least through the first eight years of an aggressive ramp.

Encouraging permanently high oil prices makes unconventional oil and frontier oil projects feasible. These sources will release far too much carbon into the atmosphere. Low oil prices keeps these oil sources from being exploited; and allows this capital to be redirected to efforts more likely to please our customers over the long haul. If the green vehicle ramp is really aggressive, these oil sources should never be developed, unless carbon capture and sequestration becomes commonplace.

2. What about OPEC? Won’t they curtail production to keep oil prices up?

OPEC is caught in a dilemma if we form Green Vehicle Groups globally. If OPEC begins curtailing production to offset the reduction in oil demand and attempt to maintain oil prices over $100 per barrel; then additional oil supply will continue being developed, while at the same time the annual deployment of GVs increases. Within five years, oil production capacity will hit 95 million BPD, and oil demand will have dropped to about 85 million BPD. OPEC would have to idle 10 million BPD of their 36 million capacity, something they won’t be able to maintain. The fleet penetration by GVs will continue, and eventually OPEC won’t be able to continue curtailing ever-increasing amount of production capacity, and the oil price will collapse. This outcome doesn’t work or end well for either OPEC or customers.

A better, but still less than optimal, strategy for OPEC to respond to declining demand caused by substitution: Gradually pull back to about 2 million BPD in curtailed production capacity, then keep production up until oil prices fall to about $60 per barrel, and attempt to hold that price for as long as possible. With luck, that price might hold past eight years. Chances are, that the $60 price won’t hold.

Here is the link on the comments I submitted to the DOE:

Hank Roberts said...

> Low oil prices keeps these oil
> sources from being exploited

Like low gas prices keeps more coal from being burned.

But in both cases you'd also want to look at how much this generates new infrastructure dedicated to burning the fossil fuel.

Especially gas -- where pipes lead to individual households -- and managing leak control on those systems factors right back into climate change.

Keep the price low enough and there will be profit to be made in extending the infrastructure, upping the demand and extending the timeline for using fossil fuel.

How does this compute?

Russell Seitz said...

Fernando, why don't you pop back to Watts Up With Taht and correct the several several order of magnitude errors in the omments on Tony's Tiny Bubbles post?

EliRabett said...

Paul, given the short time that fracked wells produce, capital for drilling is always going to be needed. Second, capital investments are strongly constrained by the current situation whatever it is.

Otherwise general agreement

Hank Roberts said...

Short answer: buy less stuff.

" Biologically rational decisions may not be politically possible once investment has occurred."

Paul Klemencic said...

Hank Roberts: "Keep the price low enough and there will be profit to be made in extending the infrastructure, upping the demand and extending the timeline for using fossil fuel.
How does this compute?"

It doesn't compute, really. Think of about this like a project manager. Lets say you were given the task of replacing existing fossil fuel energy sources with green energy sources, but you must do this while keeping your customers happy. What would you do?

A skillful project manager would do a complete assessment of customer needs ("needs tree") covering a full suite of energy/energy systems customer needs including total cost (NOT price!), environmental impacts, economic impacts, and national security concerns, and increase customer choices. Then she would select a broad array of likely green energy sources, develop a deployment schedule for each, project the cost of deploying each (cost of green energy sources declines over time as they are deployed, and the supply chain is optimized), estimate the investment requirements and set up a cashflow projection; and then compare with the BAU case, or alternative cases that increases energy prices like carbon tax and dividend. Then the project manager would need to anticipate limiting conditions and sabotaging actions, and include countermeasures in the project plan to identify and remove these impediments to a successful project completion.

If you do that, you find out some very interesting results. A fast deployment of crude oil substitutes rapidly reduces customer energy costs. Within eight years, we need to reduce oil demand by at least 5 million barrels daily, and preferably 8 million. This demand drop drives down prices, and keep demand dropping faster than supply. In fact, as long as prices remain above $40-50 per barrel, supply would keep rising to 93-95 million barrels daily, even as demand falls to 85 million barrels. An aggressive, speedy, deployment of oil substitutes can reduce demand faster than supply levels off.

Paul Klemencic said...

Part II of answer to Hank Roberts:
Almost all substitutes to crude oil, including BEVs, PHEVs, biodiesel, cellulosic ethanol, algae based fuels, mass transit investments, high speed rail, jet biofuels, ride/vehicle sharing, dedicated bicycle transit paths, electric motorcycles, on-demand mass transit, hydrogen fueled vehicles... virtually every alternative technology under development can compete for your project management funding. Even CNG, propane, and IC engine fuel efficiency technology is worth funding; with all of these sources at least getting partial funding to green energy/systems suppliers and customers. As the project manager, you can initiate all of the above, assess results, project improvements, and adjust funding and the deployment ramp appropriately.

If the project manager completes these tasks, they will find that the estimated cost of incentive driving substitution for crude oil (the largest carbon emissions source of all fossil fuels in America), adds up to less than 30% of the cost savings from lower oil prices. The direct oil cost savings that a buyer of a BEV gets over purchasing a CV amounts to only $10k, but the indirect oil cost savings due to deploying the BEV exceeds $90k (that goes to gasoline/diesel/jet fuel/heating oil customers).

To get the desired reduction in North America, we need to rapidly ramp to 8M GVs annually, and get to over 50M deployed in our fleet of about 250M quickly. Once we are selling this many GVs, the supply chain will reduce the cost premium over CV costs substantially. The fleet will be headed to over half GVs within another ten years. The demand for oil will be into a permanent decline.

I suggest capturing 50% of the reduction in oil cost savings to not only deploy GVs, but also provide a subsidy of 30% of the investment costs of green power projects. The cashflow would drive rapid deployment of green power.

You should read the comments I sent to the DOE (linked above).
Part 2 is the oil market, part 3 is the electricity market, part 4 is the natural gas market, and part 5 pulls in altogether. The FAQs answer questions about a Green Vehicle Group driving GV and biofuel deployment. "Options to Address AGW" compares this proposal compared to other options suggested to mitigate GHGs.

Paul Klemencic said...

EliRabett: Yes, investment flows will slow down the Bakken development, but production levels won't fall.

Looking at the forecast, production won't increase from 1.1 million BPD to 2 million as fast as projected, but the Three Forks development will continue, and the infill drilling in the Bakken will continue. This forecast used the rapid depletion rates for Bakken wells, and still showed production increasing.

The infill drilling uses the existing well pads, with existing pipelines and infrastructure. The infill drilling capital investment will be a fraction of the cost (much less than half) the cost of the original wells.

Do not expect shale oil production declines in the Bakken for years, unless oil prices drop well below $40. Overall, shale oil production in the US will be higher than current levels ten years from now, and total US production will also be higher, if oil prices remain above $50.

Paul Klemencic said...

Hank Roberts: "buy less stuff"

For my family, air travel is the biggest carbon source by far; so I don't agree with your prescription. I want to travel occasionally; and I want to visit my family, and have my son visit me.

You seem to be pushing the "Bring On the Pain" approach. Five years ago, I got frustrated by the lack of knowledgeable solutions being suggested to address climate change, and the problems in the energy market. I classified the various groups as follows:

Series: Ramping the Green Energy Industry- A Path to Grow America
Post 5: Different Approaches to Change Energy Markets

Everyone seems to have a different view of the energy markets and a different energy forecast. In this post I will begin addressing some of these different views and forecasts, comparing and contrasting each, and looking for the basic forces driving the energy markets. Some forces “push” changes in the energy markets, some forces attempt to “maintain” current status, and some forces act to “remove barriers or limiting conditions” and create new options. In order to evaluate different courses of action and assess energy forecasts, it helps to understand the underlying forces acting on the supply and demand for the various sources of energy.

Approaches and Different views of where the energy markets are headed
Current energy market forecasts generally differ due to the different views of the forecasters, and the approaches they prefer to drive changes in the market. The biggest forces driving changes include concerns about energy supply capability and global climate change. In general, forecasters use, or combine, several of the following approaches:

• Free Market driven Business As Usual (BAU) “Take It and Like It” Approach (Use oil, coal, and natural gas to supply 80% of energy use throughout the next 30-40 years)

• Politically and Energy Industry driven Big Money “Take It and Like It, … And Give Us More Money” Approach (promotes Nuclear/ Clean Coal/ Shale Gas/ Deepwater, Offshore, and Arctic Oil and Gas)

• Environmental group and venture capital driven strategy of Invent and Deploy Green Energy & Energy Efficient Technologies, a.k.a. “Let’s Invent Our Way Out of the Dilemma” Approach (subsidize and give money to emerging energy technology companies)

• Environmental group driven “Bring on the Pain” Approach (rapid move to sustainability by driving energy costs up or restricting energy use)

• Politically driven “Tiptoe Through the Tulips” Approach (using a slow gradual move to ramp green energy with natural gas playing the key interim role in replacing coal)

These approaches drive most of the energy forecasts that I have examined, and have some obvious contradictions and inconsistencies. The one area they do seem to agree on: generally they all forecast higher energy prices than extrapolated from current pricing trends (and declare each other’s approaches exorbitantly expensive). I have an approach to changing the energy markets that looks at the process somewhat differently:

• Free enterprise and community driven “Give Customers More Choices” Approach (assess customer needs, and develop a plan and policies to provide more choices that best meet customer needs).

Customers have different sets of needs and use energy differently, with very different regional or neighborhood use patterns; they also have different views regarding sustainability and environmental risks; therefore customers prefer a choice of different energy products and services.

Paul Klemencic said...

Part II of Approaches to Change Energy Markets

What do customers want, and expect?

• Many (most) customers want a long-term sustainable energy supply at reasonable prices.
• Many customers are willing to take the risk to “Do the Right Thing” and build CapEx intensive energy projects that are costly initially, but over the long run will cap energy prices. They inherently understand the benefits of investing in America’s green energy infrastructure.
• Customers want to support critical industries and derive the economic benefits accruing to societies that are more self-sufficient; they especially want critical products and services produced domestically.
• Many customers want to substantially reduce the amount of money America sends overseas to pay for high priced crude oil imports.
• There are large numbers of customers who want more and better choices of energy and energy consuming products and services, and are willing to pay a higher price initially to lead the way to a better future.
• Many customers don’t want to take the risk of permanently damaging our home planet’s climate; and even more don’t want to take the risk, if the cost of avoiding the damage is relatively minimal. These concerns influence their choice of products or services.
• Customers don’t want to pay higher taxes or see higher government subsidies, without seeing a relatively direct benefit as a result; particularly they want to see benefit to their community, or alternatively see a relatively rapid transition to sustainable energy sources.
• Customers don’t want big swings in energy prices.
• Customers don’t want to feel guilty about living comfortably.
• Customers don’t want to be forced to sacrifice lifestyle, with no other options.
• Many customers expect that energy costs as a fraction of household income should fall over time.

Nigel Franks said...

Looks a lot like Germany to me. Making it easy for the average citizen to invest in renewables either individually or via cooperatives worked well over there.

Paul Klemencic said...

Nigel Franks: Yes, Germany and some European countries are using energy policies much closer to what serves customers optimally, than North America or China. Yet even they, only go half-way.

Everyone needs to recognize that all the energy markets are NOT performing well addressing customer needs. A lot of Americans have been brainwashed into believe that free market capitalism works better than any other system; but free markets with supplier incentives have never worked well in any energy market in America. Prior to 1980, the oil, natural gas, and electricity markets were highly regulated and controlled. In the last 34 years we have experimented with a mostly "hands-off" approach, with no one responsible for monitoring and improving the effectiveness of the energy markets.

For example, the price of oil should have never exceeded $40-50; reluctance by governments to intervene in the market and adequately subsidize substitutes created the environment for the last ten years of irrationally high prices. Inaction allowed hundreds of $B annually to flow into oil investments.

I worked for a major oil through the OPEC catalyzed boom in 1980, and the price collapse in 1986, after fuel efficiency standards instituted under Carter finally penetrated the vehicle fleet sufficiently. US gasoline/diesel consumption peaked in 1979, and didn't get back to peak levels until the 1990s. Other countries deployed fuel efficient vehicles, resulting in the price collapse to $10. This price was too low, well below replacement costs. At that time, market intervention was necessary to keep prices up in the $18-$20 range. But Reagan believed in "free markets", allowed the industry disruption, opposed alternatives, slashed R&D, and allowed the era of big vehicles to develop. Prior to 1973, Texas Railroad Commission regs, copied by other states, essentially controlled world oil price. Since 1981, we have experimented with a hands-off market for oil; with bad results. We had exacerbated inflation/interest rate swings, foreign wars, crazy swings in demand for rigs, steel, infrastructure, state tax/royalty revenues, and left portions of the US economy decimated or suffering from boom/busts.

Free unregulated markets never worked for oil. Or any of the energy markets. We need customer focused energy markets that promote free enterprise; and the best way to get this market system in place assigns an experienced and skilled "market manager" the responsibility to monitor and improve the energy markets.

If you read the email I sent former Pennsylvania Gov. Ed Rendell, you will see I think that Siemens would be an excellent candidate to participate in a business coalition organization designate this responsibility; copy the link in my comment above into your browser, and read the letter.

Paul Klemencic said...

New analysis contradicts Goldmans Sachs oil cost study

Finally, some knowledgeable people are beginning to ask the right questions. The Goldman Sachs study referenced in this post is being challenged by recent studies. Please note the recent study confirms the analysis I posted in a comment above: i.e. that the shale drillers are learning and reducing oil production costs. From the NYTimes article today:

"Signs suggest that oil and oil product supplies will soon be increasing. The ramping up of several refineries in Saudi Arabia and the United Arab Emirates is likely to increase exports of products like gasoline and diesel by 500,000 barrels a day in the coming months. Even without the Keystone XL pipeline, other Canadian pipelines coming online will bring as much as 350,000 more barrels onto the market.

Citi has projected that global investments in oil exploration and production will decline up to 15 percent this year, but American companies continue to produce more efficiently. Rystad Energy, a Norwegian global consulting firm, issued a report on Monday saying that the average break-even price for the principal shale fields in the United States had dropped to $58 a barrel, with the core areas of some fields remaining economical to produce at $50."

Please note that this is entire development costs, and doesn't consider sunk costs of capital; like land/lease acquisition, pipelines, gas plants etc. The existing infrastructure can support production of at least 1.1 million BPD in the Bakken. Infill drilling from existing well pads should maintain (and likely increase) Bakken production.

But the big capital flows into the oil industry has fallen significantly, so the expected rise in production should be less than expected. I still project 93-95 million BPD of global supply within five years (most forecasters had expected 93 million BPD by the end of 2015).

And the drop in oil prices will stall projects we don't want (to address AGW).
"With a projected $3.5 billion budget deficit, Alaska has already announced a delay in six important infrastructure projects, including a gas pipeline from the North Slope."

This demonstrates the importance of taking actions to keep oil price below $40. Most of the policy wonks suggesting solutions to mitigate GHG emissions, reached the wrong conclusions of how to do this effectively; especially in the oil market.