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Energy Investing: Scenarios for a Turnaround

The widening contango in crude in perhaps not reflective of anticipated higher future spot prices, but rather the fact that cost-to-carry has risen dramatically as finding storage has become harder. The cost differential between on-shore and using a tanker as storage is substantial, and there are also credit issues in securing storage. This is preventing traders from arb'ing the spot against the futures and putting the physical in storage; either the contango is too wide or they can't get the credit for their storage contract. Same story on the Baltic Dry.

But overall I have to agree with JK in terms of ultimate long-term bullishness simply on resource theory. Certainly any stimulus packages we see shall be bullish many commodities, including crude. As for the demand destruction in the US, it remains a question as to how this magnitude of demand was destroyed in such a short time, and if/when consumers will maintain this level or revert to higher consumption in light of drastically lower price signals.

Where Will Oil Go From Here?

Unless you think my definition a progressive tax system, that is the bracket system we have had for basically 100 years, is ardently "socialist", I don't see how you can call reversing some tax cuts on two brackets "socialist".

There is an argument that the progressive tax is a form of wealth redistribution, but let's put this in perspective here. Real socialism is state ownership of production, and that's not something either candidate has proposed, although it has indeed suddenly happened in this crisis.

The only real Socialist states left are Cuba and the resurgence in South America, but these states have nothing enviable about them. Only China, with its essentially market-socialism, where-by only the macro-factors of the economy are controlled and small-scale transactions occur in essentially a free market place.

This is not land redistribution. This is not taking someone's company and nationalizing it (well....except when they are 'too big to fail'). Consider this: even after the GW.Bush tax cuts, the top rate was still higher than it was in 1991. Does that make W. a socialist? Consider from 1988 to 1991 the top rate increased under HW.Bush. Did that make him a socialist?

Arguing that relatively small adjustments upward to the progressive tax system applied in a non-uniform way is equivalent to socialism is a position that's hardly tenable given that virtually every administration had done this in some way, shape, or form in the various complexities of the tax code.

U.S. Oil Production Today Same as in 1948

All the oil is in the Gulf (which is already allowed for unlimited drilling) and in Alaska. See here: www.mms.gov/revaldiv/C...

An Oil-Driven Paradigm Shift?

Conventional geothermal and hydro are all utilized where they are available, and some new projects are going on like Hydro-Quebec's big one, but there's only so much you can do. EG has been a hard sell, because it tends to cause geological problems... like mini-earthquakes.

Getting Excited About PHEVs

"Anyone know if the current Hybrids can be put on battery chargers, overnight, right now? "

Yes, the Tesla has a fast-charge mode off a small generator that I think is around 3-5 hours. The EV1, way back in the 90's using NiMH batteries could get 80% charge in 2-3 hours, plugged into its special charging station.

Getting Excited About PHEVs

Jumper: "And, there is no off peak in warm months when air conditining is running 24/7."

Completely wrong. Go look at an hour-by-hour load graph of an ISO like PJM from any day last week (it was really hot). In that region, a 20GW difference between peak and off-peak is COMMON.

Who Ends Up With the Oil? We Do.

If the auto-makers today wanted to let their petrol cars keep playing, they could do a few things. Scrap all the glass and get Lexan or composites, composite plastics/fiberglass for the bodies, and carbon fiber monocoques instead of steel unibodies/chassis. Yes, CF is expensive, but like they say, 'economies of scale.'

I'd bet that just making those changes to an F150, along with some aero tweaks to get its CD down, would double the MPG of that beast, while only adding maybe 10k to the cost. That would pay for itself in 5 years of $4 gas at 12kmi per year.

Who Ends Up With the Oil? We Do.

If you think about it, most people really have about 2 or 3 uses for their cars. First is the commute, basically a reasonably short round-trip. This is well-within the range of batteries for EV vehicles. In fact, the EV1 from GM back in 1996 could do 160mi. on a single charge, and the Tesla roadster is doing something like 200-250mi.

Second is the day-trip, the long drive. Call this around 500mi. This gets beyond the range of batteries we have now, and I don't see that fact changing with any 'breakthru'. Batteries just don't have break-thru's. So you could either have fast-charge technology, say a 15 or 30 min charge while you eat lunch; that's reasonable. Or swappable battery packs, but that might not be. Or you have a tiny ICE engine to help out on the long trip.

As for what to run the ICE on, I'm not a huge fan of biofuels, but given the choice, I like them more than petrol. The ICE can switch fuels relatively easily. Look at IRL; they run racing engines on pure methanol (previously) and now on pure ethanol. Less power density, but it still works. You just have to use a good process to get your biofuel; ie. not corn. The benefit of the biofuels though? You can run a turbo and very high compression ratios to really boost the efficiency of the engine without detonation.

Hydrogen, and NG cars, they've both been running around in limited scales. In fact, Mazda has duel fuel RX-8's that can directly burn hydrogen in Japan; a special property of the rotary engine. But ultimately, you need massive infrastructure, and that's more and more energy in transporting things.

That natural gas, instead that's going to be increasingly important to the power grid as coal goes away. There are TON's of nukes in the NRC pipeline right now, but its at least 2015 in the best case for the first one, more like 2020.

France manages to get 80% of their grid as nuke. Germany manages to generate more solar power than anyone else in the world, despite having an average 'sunniness' equivalent to Seattle.

A utility recently tested 90 miles of superconducting transmission lines. These lines are thin, and have virtually no losses, wrapped in a jacket of liquid nitrogen and insulation. If we upgraded our 1950's transmission grid, we would probably get another 15% free power just by cutting losses.

Natural gas isn't an inexhaustible resource either, we just have a ton of it right now. Someday, it too will indeed run out, and peak natural gas actually is worse than peak oil, due to the way gas fields are depleted; they crash.

EV's are close to market right now. The EV1 was out in 1996 and I'd bet if GM could put one in the showroom right now, they'd be selling them. Toyota has hit the 1 million mark on the Prius. The high-end Tesla roadster is sold-out through 2009, and their hoping to bring a lower cost high-end sedan at around 75k to market with similar range.

Who Ends Up With the Oil? We Do.

The way to go is EV, not NG-fueled cars or liquifaction. EV or mostly EV with a tiny ICE engine running on biofuel would be ideal as we already have an infrastructure for electricity distribution, and we continue to develop new ways to generate it.

Who Ends Up With the Oil? We Do.

Oil is useful for more than just moving cars. Its also important for moving ships, jets, and making chemicals. In fact, those things are arguably better economic uses for oil, particularly when we are close to having good alternatives to petrol-fueled cars.

It seems to me that it would be much better to reserve oil for the most crucial petrol needs, aka not refinement into gasoline, particularly if you hold the view that crude will continue to increase in value.

Ultimately, yes, those domestic reserves will have to be tapped, but the focus needs to be on getting out of the petrol-->gasoline cycle for our personal transportation.

Finally, if you have an oil spill off say, Panama Beach, do the economic consequences out-weigh the economic benefits of the relatively small amount of oil there? Florida's economy is primarily driven by tourism, and I doubt very much that oil-slick sands will be a great attraction.

Who Ends Up With the Oil? We Do.

"Thank you. Please tell me more about last week's "CAIR ruling," and why coal liquification and gasification couldn't work again in the U.S. as well as they once did."

We indeed did coal gasification quite well, way before electricity, and called it 'town gas'. As for liquification, the Nazi's made the Fischer-Tropsch process actually work quite well for them, but ultimately, its net energy is not so good, and it has the carbon problem.

There are really no practical problems with gasification. There was one very forward-looking CEO of a major midwest utility that owned much coal-fired generation. He decided that instead of being regulated into changes, it would be better to lead the way, and spend some R&D on a commercial-sized IGCC, which is still running 13 years later, and is still the ONLY IGCC in the US. Of course, that same utility was merged with a larger and much more conservative utility and has since abandoned any sort of forward-looking coal strategies.

Right now, utilities LOVE wind. Its cheap to plop down, its quick to site and build, and its got very low running costs. And they love peakers (jet engines + generator in a box), and NG-fired combined cycles. Most of our coal plants are old designs that are 30+ years old. Besides just being inefficient (only a few are super-critical designs), only about 25% have emissions controls on them.

CAIR was an EPA regulation that was widely agreed upon by both the Bush administration and environmentalists, to help reduce NOx and SOx emissions further. After appeals from numerous utilities, it was struck down in its entirety by the Appellate court (using logic that was rather spurious). So the net effect is that if this is not appealed, a number of utilities will continue to defer putting emissions controls on their units, and continue to burn high-sulfur coal.

Who Ends Up With the Oil? We Do.

Psh, conventional coal is going to be dead, and the so-called 'clean coal' that Big Coal likes to say they are committed to? We have only 1 functioning commercial sized IGCC in the US, and no coal plant with CCS. The supposed icon of clean coal, FutureGen, was canceled. Also, those 200 years of coal -- the estimates are way off, and haven't been revised for nearly 70 years.

Wind is cheaper than IGCC w/ CCS, by far. Solar is close already. Both suffer from being non-firm. Nuclear is cheaper than all of them, but the initial outlay in capital, along with the process of construction is intensive. The power utilities haven't build any nukes or coal plants of any significance since ~1990. Instead, they've built all peakers and combined cycle NG units which are less capital intensive, and less polluting than coal units.

Coal generates 50% of the power in the US, but more than 85% of the emissions. If Big Coal is serious about their future (and they are probably so happy given Friday's DC ruling on CAIR), you'd think they'd be building IGCC and CSS. Instead on Friday they managed to basically nullify the limits on SO2 emissions, which everyone can agree are bad (aside from the carbon debate). How pathetic.

Who Ends Up With the Oil? We Do.

Ok, so those countries get greenbacks, and then they slowly watch the value of those greenbacks decline against all other world assets. So they have incentives to convert the USD into something else, which further erodes the USD, meaning more of them must be paid for that same barrel of oil.

Meanwhile the expenditures in the US just to sustain the current energy usage are increasing, which necessarily decreases the available capital for other things; like making GDP.

Dr. Perry, I really wish you could explain how you don't see this as a problem. You have stated that our "energy efficient economy can handle $1XX oil", and I hope that it can. However, we have not made the efficiency gains you claim, particularly in the automotive sector, where the market share of SUV/light trucks has continually decreased the fleet MPG from its peak in 1988. Yup, we've been in 20 years of decline in total automotive efficiency. Its going to take time to change that, and we've just now received that magic 'price signal'.

One major part of T-boone's proposal that is good is that wind farms represent infrastructure. Even without the tax breaks, they make economic sense. Yes, they can't provide firm power, so wind alone won't meet the energy needs, but it could provide a substantial boost that after an initial expenditure, generates energy for essentially free.

Simple economics suggests that if I can get say 30% of my power for free after an initial investment, versus say having to pay an initial investment for a coal plant PLUS continual fuel costs, its a good idea. And T-boone ain't the only one who thinks so: go take a drive through west TX and see the 4GW of wind farms that are already up and running out there. Of check out Germany, who despite being only about the size of Montana, managed to generate twice as much wind power as the US last year.

In the energy business, your hydro units are your holy grails. Wind units are basically like mini-hydro, and now they are cost-effective. Soon solar will be the next 'mini-hydro'. Its all power that's there for the taking, if we figure out the right ways to get it, and distribute it appropriately.

Introduction to a Long Lecture on Oil

"The apparent intentions of the confiscating governments, and especially Saudi Arabia, also turned on maximizing profits, although over a much longer time horizon. In addition, when the opportunity arrived, these profits were to be used to diversify their economies in such a way that the main source of prosperity would be reproducible capital – i.e. structures and machines – rather than exhaustible natural resources such as oil and gas."

You nailed it. This is, for the most part, one of the best oil articles on SA that I have seen.

Why $140/Barrel Crude is Unsustainable

"Oil occurs naturally in the earth's mantle, which is why oil slicks are visible throughout the oceans from satellites."

I can't wait for when a 'scientist' can prove that some of our other great commodities are also made in the mantle. I'm sure that there's some corn and hog bellies down there besides all that 'naturally replenishing' crude. This despite the fact that all the geologists that actually work on extracting the stuff from the earth think Gold and the abiogenic theory is a loon.