Oil Volatility Will Keep Killing the Economy in Waves

What a relief! Shai Agassi understands oil. In this regard, he stands apart from many global CEOs and even many who work in the oil industry. Better still, his company, Better Place, is actually very well positioned to do something about our energy problem. Agassi has come up with a brilliant model for Electric Vehicles (EV). It’s not a surprise, frankly, that the same intellectual curiosity which led him to his EV solution would also lead him to understand oil.

Readers should watch the entire video of Shai’s presentation at the TED conference, from earlier this year. It’s only twenty minutes. However, pay very close attention to his remarks on oil starting at the 10.00 minute mark.

Although I originally heard and read about Agassi’s presentation during the TED conference, this video is getting a lot more play now that it’s been released to the public. What you’ll find is that Agassi understands two, key concepts about oil. First, he understands that the structure of North American oil demand is different than most other countries in the world. This is an idea that I have harped on for some time. The North American user, and in particular the US user, is much more leveraged to oil via the distances and infrastructure of this country, than most other users in the world. Pay attention to the way Agassi describes “coming up to the US” with his company, and how that means crossing a big threshold. Watch the way he uses the following phrase: “but when the aggregate comes up, you’re dead.”

The second insight which Agassi shares, is his lucid understanding that the volatility of oil prices is tracing out a depletion pattern. Pay close attention to his slides and the chart he uses, and his broad understanding that oil volatility will keep killing the economy in waves. And, killing it over and over again each time the economy tries to get back off the floor. Why can’t we hear such versatile, conversant perspectives from Congress, other CEOs, or even our new Energy Secretary? Why is current energy policy being launched from a platform that cedes the oil depletion problem to a time 10 to 15 years from now?

While I don’t necessarily see the EV as a total replacement vehicle for all of North America, if Better Place was only able to make good penetration into North American cities–along with new Light Rail, Commuter Rail, and Bus Rapid Transit (BRT)–the introduction of EV on such a scale would make an enormous difference.

It’s time to stick a fork into biofuels as a matter of public policy. Beans, Corn, Sticks, Algae, Switchgrass. There simply isn’t enough meaningful quantity of energy to unlock from young, organic material. And there never will be.

Update: there is actually a third nugget of oil understanding, also in this video. Perhaps readers will spot it. And, discuss.

Comments

[BxCapricorn]

Unbelievable. A post on seeking alpha whose focus is infrastructure logistics over "market dynamics". The laws of physics, project management, and mathematics are in the house. There was not one "talking point" in the post that re-blathered something a senior trader once said. I'd love someone to eventually post on the "smart grid" and explain WHY it is necessary, and then, why it isn't needed at all.

2009 Apr 14 07:43 PM

[Prudent Man CFA]

The countervailing factors of economic growth running up against higher interest rates and oil prices is incontrovertible.

This is the conundrum that is going to cause headwinds; and, if and when growth comes it will probably be saw toothed. This is the "why". To be sustaining the "what" has to be predicated on the "why" otherwise it is merely a trading numbers game based up the "Greater Fool Theory" which is often the case in markets. It takes a lot of losers to make a winner.

2009 Apr 14 08:56 PM

[Bruce Vanderveen]

It has always struck me as strange how stock market indexes track the price of oil. Although, I do see a correlation - improving stocks mean improving economy which means greater oil demand and higher prices - it seems even minor, almost minute by minute, ups and downs of oil pull the market indexes with it (or vice versa) in the same direction.

2009 Apr 14 09:24 PM

[doginyourcoffee]

I do not think the EV solves much. There will likely be less than 1% of the required renewable energy on line by the time its needed. The solution I see is to localize esential products and services. Information exchange can (and should) remain global but it will become impossibe to keep moving people and goods long distances without sufficient energy. All planning for infrastructure construction must consider this.

2009 Apr 14 10:23 PM

[mac.barron]

The main idea Agassi is pushing has been kicking around in various shapes for twenty year at a minimum. The substantial difference is that he seems to have secured some buy-in from a major car manufacturer and a few countries are now willing to mandate a sane transportation policy. Perhaps with Ford, GM & Chrysler on the ropes there will be some room for progress here in the U.S. too. "Rising up from the ashes . . ." and all that crap. Nevertheless, my inner cynic cautions me that logic and common sense do not stand a chance.

The video is worth the twenty minutes if only as a lesson in salesmanship.

2009 Apr 14 10:24 PM

[Alan Young]

On the idea of battery swaps--I'm skeptical. First, every car would have to have the same battery pack configuration. That's a lot more complicated than, say, standardizing fuel-tank openings; more like standardizing engine configurations. It's going to be a struggle to implement such a radical change in how we design cars if we want everyone to be able to use such a system.

But when he talks about oil, he is making some very cogent points. Reinforce this point with the supply constraints implied in this article:
seekingalpha.com/artic...
.... and it looks like we are driving toward a big cliff at 65 mph.
I concur with Mr. MacDonald here--these points are really worth some attention.

2009 Apr 14 11:17 PM

[dondon]

Certain countries, states and cities may accept and demand the EV solution. Other countries, states and cities will not. As for wind and solar recharging these vehicles, it will be a huge effort in the USA. Perhaps nuclear power in the USA would be a better alternative for the size and scope of the conversion from gas power to electric power. I also doubt seriously if Israel wants to convert to electric due to CO2. They are more worried that access to oil will be shut off by the Arabs. A missile defense shield would also have to be developed to protect the solar array in the Israeli desert to prevent the entire shut down of the transportation system during an attack. As for the Better Place solution it appears that it will require more government mandates and taxes to make it happen. Government deciding what is best for the people has been proven to be a losing proposition.

Disclosure: I drive a diesel that runs on used restaurant oil.

2009 Apr 14 11:43 PM

[Dave Wrixon]

Just blame it on the Arabs.

2009 Apr 15 05:14 AM

[User 353732]

The issue is not volatility but the responses of individuals, businesses, institutions and governments to volatility. All globaly traded commodities are volatile, the cost of capital is volatile;investor moods are volatile. Volatility is part of the fabric of the economy, of nature ,of life itself. Without volatility how could there be anything but complete stagnation, total inertia; indeed no vibrancy or life. To be dynamic involves being volatile. It is the price of change and growth.
The response to volatility depends on attitude. If one believes volatility is inherently bad, the the public policy response will be to legislate volatility out of existence. This cannot be done so we will get very bad resource allocation and deeply disappointing outcomes. The private response will be paralysis caused by indecision.
If, however, one believes volatlity is another fact of life, then one engages in risk management and prudent behavior. No large energy company or strategic investor makes resource allocation decisions based on either the low or the high price of oil because both are highly transient and convey very little information.
Oil can range from $20/bbl to $200/bbl but neither price is stable; indeed neither price will persist for more than a few days. Extend the time horizon and oil prices look less volatile so decision making is based on an effective price band, for example, of $75 to $125/bbl . The shorter the time horizon the more volatile prices seem. Elongate the horizon to 10 to 20 years and prices are not nearly as volatile. This is what major E&P companies and patient investors do.
Depletion, too is another fact of life, of nature itself; but depletion has a twin: replenishment or renewal . Resources of all kinds( including your checking account) are being depleted every day but they are also being refreshed or renewed or replaced by natural or human activity.
Depletion is a local phenomenon in both space and time. It is an error to extraploate local information onto the entire planet for all time. We cannot predict the oil resource base(and hence reserves) even 5 years out much less 50 years out because there are too many unknowns and ,therefore, too many surprises.
The improper response to oil depletion is public policy or private investmentaction based on a linear extrapolation of a decline curve valid only for a given time and place.A better response might be to encourage innovation , replacement and the free, fair and transparent working of energy, capital and transportation markets. Markets , when allowed to do their job, deliver better results for consumers and investors than government mandates and central decison making.

2009 Apr 15 08:06 AM

[john s. gordon]

yes let's have more light rail, commuter rail.
> jack

2009 Apr 15 08:39 AM

[Saildog]

The most sensible comment I have yet seen from outside the Peak Oil community. This man "gets it", he clearly understand the thermodynamic and scalability issues we face.

Where it is perhaps weak is on the political and economic fronts. The fossil fuel lobby will kill this and the economy will never recover because the oil trap has sprung and we can't get out. Lower prices mean less investment, a better economy means higher prices, but that kills the economy and we revert to lower prices. The last sentence implies a cyclical economic pattern, but I doubt we will even get that.

We need both an energy and a financial surplus to achieve this. Now we have neither and we never will. Maybe it can be done. I will not be holding my breath. On the other hand if a major new oil province is found in a friendly place maybe we will be clever enough to use it wisely. Again, I am not going to hold my breath.

2009 Apr 15 09:05 AM

[billp37]

"There simply isn’t enough meaningful quantity of energy to unlock from young, organic material. And there never will be."

"There are no near-term alternatives to oil, natural gas, and coal. Like it or not, the world runs on fossil fuels, and it will for decades to come. The U.S. government's own forecast shows that fossil fuels will supply about 85% of total world energy demand in 2030 - roughly the same as today. Yes, someday we'll find alternatives. But that day is still a long way off. It's not about will. It's not about who's in the White House. It's about thermodynamics and economics.

Now, I was told back in the 1970s the same that you're being told today: that wind and solar power are 'alternatives' to fossil fuels. A more honest description would be 'supplements'. Taken together, wind and solar power today account for just one-sixth of 1% of America's annual energy consumption today. Let me repeat that statistic - one-sixth of one percent -- .0016. "

"For those of you who aren't that familiar with Questar, Keith Rattie is the Kahuna (CEO) of the company. Open the attachment to read what he had to say at UVU and BTU.

This is a speech Keith gave today at UVU. It's one of the best speeches on energy I've ever heard and I recommend it to you. Feel free to share it with friends, family and anyone else who may be interested in energy policy and climate change. "

home.comcast.net/~bpayne37/pnmelectric...

2009 Apr 15 09:08 AM

[Dr. O]

"Oil killing the economy in waves." I like that. Makes perfect sense. "A depletion pattern." Makes sense. Higher highs and higher lows for oil as a function of world wide consumption.

Doesn't help oil prices that exploration decreases to a degree when prices fall and the credit crisis may impair the ability of capital intensive companies like oil service companies to ramp up their businesses.

Natural gas seems like the logical transition fuel from oil, given that there's a lot of it available in North America and it's relatively cheap. Cannot for the life of me understand the lack of a "Manhattan Project" to convert cars from gasoline to nat. gas.

2009 Apr 15 09:28 AM

[Jason Rines (iThinkBig)]

Or an sweeping Manhatten Project that includes nuclear power plants including domestic uranium production. The reasons these things do not occur are control and greed.


On Apr 15 09:28 AM Dr. O wrote:

> "Oil killing the economy in waves." I like that. Makes perfect sense.
> "A depletion pattern." Makes sense. Higher highs and higher lows
> for oil as a function of world wide consumption.
>
> Doesn't help oil prices that exploration decreases to a degree when
> prices fall and the credit crisis may impair the ability of capital
> intensive companies like oil service companies to ramp up their businesses.
>
>
> Natural gas seems like the logical transition fuel from oil, given
> that there's a lot of it available in North America and it's relatively
> cheap. Cannot for the life of me understand the lack of a "Manhattan
> Project" to convert cars from gasoline to nat. gas.

2009 Apr 15 06:39 AM

[Jason Rines (iThinkBig)]

Or an sweeping Manhatten Project that includes nuclear power plants including domestic uranium production. The reasons these things do not occur are control and greed.


On Apr 15 09:28 AM Dr. O wrote:

> "Oil killing the economy in waves." I like that. Makes perfect sense.
> "A depletion pattern." Makes sense. Higher highs and higher lows
> for oil as a function of world wide consumption.
>
> Doesn't help oil prices that exploration decreases to a degree when
> prices fall and the credit crisis may impair the ability of capital
> intensive companies like oil service companies to ramp up their businesses.
>
>
> Natural gas seems like the logical transition fuel from oil, given
> that there's a lot of it available in North America and it's relatively
> cheap. Cannot for the life of me understand the lack of a "Manhattan
> Project" to convert cars from gasoline to nat. gas.

2009 Apr 15 06:39 AM

[Jason Rines (iThinkBig)]

Or an sweeping Manhatten Project that includes nuclear power plants including domestic uranium production. The reasons these things do not occur are control and greed.


On Apr 15 09:28 AM Dr. O wrote:

> "Oil killing the economy in waves." I like that. Makes perfect sense.
> "A depletion pattern." Makes sense. Higher highs and higher lows
> for oil as a function of world wide consumption.
>
> Doesn't help oil prices that exploration decreases to a degree when
> prices fall and the credit crisis may impair the ability of capital
> intensive companies like oil service companies to ramp up their businesses.
>
>
> Natural gas seems like the logical transition fuel from oil, given
> that there's a lot of it available in North America and it's relatively
> cheap. Cannot for the life of me understand the lack of a "Manhattan
> Project" to convert cars from gasoline to nat. gas.

2009 Apr 15 06:41 AM

[Jason Rines (iThinkBig)]

Or an sweeping Manhatten Project that includes nuclear power plants including domestic uranium production. The reasons these things do not occur are control and greed.


On Apr 15 09:28 AM Dr. O wrote:

> "Oil killing the economy in waves." I like that. Makes perfect sense.
> "A depletion pattern." Makes sense. Higher highs and higher lows
> for oil as a function of world wide consumption.
>
> Doesn't help oil prices that exploration decreases to a degree when
> prices fall and the credit crisis may impair the ability of capital
> intensive companies like oil service companies to ramp up their businesses.
>
>
> Natural gas seems like the logical transition fuel from oil, given
> that there's a lot of it available in North America and it's relatively
> cheap. Cannot for the life of me understand the lack of a "Manhattan
> Project" to convert cars from gasoline to nat. gas.

2009 Apr 15 06:39 AM

[Jason Rines (iThinkBig)]

Or an sweeping Manhatten Project that includes nuclear power plants including domestic uranium production. The reasons these things do not occur are control and greed.


On Apr 15 09:28 AM Dr. O wrote:

> "Oil killing the economy in waves." I like that. Makes perfect sense.
> "A depletion pattern." Makes sense. Higher highs and higher lows
> for oil as a function of world wide consumption.
>
> Doesn't help oil prices that exploration decreases to a degree when
> prices fall and the credit crisis may impair the ability of capital
> intensive companies like oil service companies to ramp up their businesses.
>
>
> Natural gas seems like the logical transition fuel from oil, given
> that there's a lot of it available in North America and it's relatively
> cheap. Cannot for the life of me understand the lack of a "Manhattan
> Project" to convert cars from gasoline to nat. gas.

2009 Apr 15 06:41 AM

[Jason Rines (iThinkBig)]

Or an sweeping Manhatten Project that includes nuclear power plants including domestic uranium production. The reasons these things do not occur are control and greed.


On Apr 15 09:28 AM Dr. O wrote:

> "Oil killing the economy in waves." I like that. Makes perfect sense.
> "A depletion pattern." Makes sense. Higher highs and higher lows
> for oil as a function of world wide consumption.
>
> Doesn't help oil prices that exploration decreases to a degree when
> prices fall and the credit crisis may impair the ability of capital
> intensive companies like oil service companies to ramp up their businesses.
>
>
> Natural gas seems like the logical transition fuel from oil, given
> that there's a lot of it available in North America and it's relatively
> cheap. Cannot for the life of me understand the lack of a "Manhattan
> Project" to convert cars from gasoline to nat. gas.

2009 Apr 15 06:41 AM

[Jason Rines (iThinkBig)]

Sorry for the duplicate posts -

2009 Apr 15 06:42 AM