Although it would be assumed Japan’s economy would suffer whenever oil prices spike, the opposite seems to be occuring. According to Asia Times Online, Japan, despite being resource poor and having to import a majority of it’s oil, profits from price of oil increases.

Part of that benefit comes from it’s automotive exports from companies like Toyota, which saw it’s sales of cars increase once again in the US. As US fuel efficiency awareness increase, Toyota’s sales increase. Especially in their sales of hybrid vehicles such as the Toyota Prius. “Of the approximately 5.47 million autos Japanese makers sold in the US in 2005, roughly a third were shipped from Japan.”

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More Hybrid Car information can be found at http://hybridreview.blogspot.com
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Update: Oil smashes $86 for the first time

This week’s inventory report will be very interesting. If there is a significant build, the price could unravel quickly. If there is another surprise on the downside, we may crack $90 by the end of the week. But as long as oil prices stay at these levels, Saudi is going to be under pressure to increase production by more than the already announced 500,000 bbl/day. If they truly have spare capacity, they have been playing Russian roulette with the economy. They may have let it go a little too far.

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The price of oil continues to climb:

Oil tops $85 for the first time

SINGAPORE (AP) — Oil prices kept rising Monday after closing at a new record in the previous session on worries that supplies are insufficient to meet coming winter demand and concerns over the conflict between Turkey and Kurds in northern Iraq.

Recent reports have indicated that crude inventories are falling. Last week, the U.S. Energy Department reported that U.S. oil supplies declined in the week ended Oct. 5, while the International Energy Agency said that oil inventories held by the world’s largest industrialized countries have fallen below a five-year average.

Some analysts think the supply shortfall in last week’s U.S. Energy Department inventory report is an anomaly. They doubt demand is as strong as recent forecasts by the department and the IEA suggest. These analysts expect oil prices will soon begin a seasonal decline to $70 a barrel, or lower.

Count me among those in the anomaly camp. No way would I be a buyer at these prices; I think your downside risk is great, and your upside potential is small. Longer term I think oil prices are going to stay high, and I won’t be surprised to see it crack $100 next year, but I think prices have gotten a bit ahead of themselves at the moment.

I was doing some research over the weekend on predictions that have been made by oil industry analysts. I thought this one was interesting. From September 2006:

$1.15 a Gallon? Leading Oil Industry Analyst Says Prices Could Plummet

A leading oil industry analyst, Philip Verleger, believes we are going to see continued reductions in the price of oil and at the pump, perhaps to as low as $1.15 per gallon for regular gasoline.

Philip Verleger was one of the few oil industry analysts to predict dramatic price increases in the cost of oil a few years ago, but his estimates proved accurate as the price per barrel soared to nearly $80 this year. With the increase came significant upward pressure on transportation costs, heavy fuel surcharges by carriers, rising costs for petroleum-based raw materials.

But Verleger is now predicting the current reduction in oil prices is no temporary aberration. According to a story in The Seattle Times, Verleger believes a combination of financial market twists and fundamental supply and demand forces will keep driving oil lower – much lower. Verleger said it’s not unthinkable that oil prices could return to $15 or less a barrel, at least temporarily. That could mean gasoline prices as low as $1.15 per gallon.

Oops. A year later oil prices are over 400% higher than his prediction.

From the Detroit Free Press:

Oil prices go sky-high, but don’t fear $5 gas

If oil prices reach $100 a barrel for the first time, does that mean gasoline will be $5 a gallon?

Analysts say no — gas won’t even hit $4, because oil supplies are good.

“This is 100% manipulation by the financial players … and the price of oil at this level isn’t justified by the fundamentals,” said Fadel Gheit, a veteran oil analyst with Oppenheimer & Co. in New York.

Fadel Gheit is probably the most quoted oil analyst in the world, and yet has been consistently wrong on the direction of oil prices for 5 years. It reminds me of Daniel Yergin, who wrote The Prize: The Epic Quest for Oil, Money and Power. Despite a track record of being wrong on the direction of oil prices, he is still the “go to guy” when someone wants to know where oil prices are headed. One wonders if their clients have been asking for refunds lately.

In answer to the essay title, no, it isn’t 100% manipulation as Gheit claimed, but I think he is correct that $90 crude isn’t justified by the fundamentals. The long interest is certainly high and growing, and that alone will drive prices higher as a self-fulfilling prophecy. But there are legitimate supply concerns that OPEC hasn’t yet answered, and it is the expectation of what this could mean that is putting the pressure on prices. If OPEC doesn’t respond soon, $100 will just be a speed bump. If they do, prices will probably drift back down to the $70’s.

But if oil prices hang around at this level for long, come spring you will see gasoline prices again setting record highs. $4 is not out of the question. After all, the price of gasoline is not entirely dictated by the price of oil. Last spring we saw a disconnect as refinery capacity couldn’t keep pace. So even if oil supplies are adequate in the spring, but gasoline inventories are still this low, yes, we will probably see $4 gasoline.

I received a story today from U. S. Newswire that goes to show that some Democrats also don’t “get it”.

House Democratic Leader Nancy Pelosi released the following statement today on news reports that the price of oil has skyrocketed to more than $70 a barrel:

“The Republican Rubber Stamp Congress has passed two energy bills, costing taxpayers $12 billion for giveaways to big oil companies. But the Republican bills clearly have done nothing to lower gas prices, as the price of a barrel of oil has settled above $70 a barrel – the highest price in our history. Even the Chairman of the Federal Reserve agrees that gas prices are decreasing the purchasing power of American families and depressing the U.S. economy.

I almost hate to point out that the biggest giveaway was to the ethanol industry, by mandating an increase in the inefficient production of grain ethanol. But that’s not the reason for my ire. This is:

“Democrats have a plan to lower gas prices, taking America in a new direction that works for everyone, not just the few. Our plan would empower the Federal Trade Commission to crack down on price gouging to help bring down skyrocketing gas prices, increase production of alternative fuels, and rescind the billions of dollars in taxpayer subsidies, tax breaks, and royalty relief given to big oil and gas companies.”

You see, Nancy, lowering gas prices is not a solution. If America is “addicted to oil”, how exactly is lowering the price going to help us end that addiction? Higher prices will have the effect of slowing down our use of oil, especially if prices stay high for an extended period of time. I can understand your concern for American families, but you are not helping matters by calling for lower prices. Have you ever heard of Global Warming? Didn’t you recently issue a press statement condemning the Bush administration for failing to take action on Global Warming? Do you think lower gas prices will improve the situation? Given that we have had falling gasoline inventories in this country for several weeks, do you think lowering prices will help us build those inventories back up? Or will they make inventories fall at an ever faster pace? That is why gasoline prices are high, Representative Pelosi. The sooner Democrats learn that lowering prices is going to do nothing but make the problem worse, the better.

Politicians. Sheesh. Don’t we deserve something better than constant pandering to people? Can someone have the guts to look into the camera and say “Gasoline prices are high because of YOU, the consumer”? Can someone have a frank talk with the American public and explain that cheap gasoline is not an entitlement? We need some real leadership here. Europe has learned to deal with high prices by learning to conserve. It is time we learned the same lesson, but lower gasoline prices won’t encourage anyone to conserve.

I consider the level of dependence of the U.S. on imported petroleum to be a very large financial risk endangering the country’s future. There are certainly other import-related risks as well, but here I want to talk about the financial risk.

I consider it similar to having a mortgage upon which you pay interest each month – but in which the interest rate can fluctuate wildly. If you typically pay 7% interest on your mortgage, but your rates quickly climb to 12%, a lot of people would find themselves in a deep financial hole. Come to think of it, a lot of people did when they found themselves in a similar situation. They gambled on the future and lost.

With respect to oil prices, we are also gambling on the future. We import a bit over 9 million barrels per day of crude oil (we also import gasoline, diesel, etc.) Each $10/bbl increase in the price of oil means that consumers pay $33 billion more each year for oil. We are now paying $100 billion more each year for oil than we were just a few short years ago, and that money comes out of all of our pockets. This acts as a tax upon the U.S. economy, albeit one that doesn’t primarily benefit U.S. citizens.

The drain on the U.S. economy is one thing, but the risk is quite another. Why do we tolerate that sort of price risk? In my opinion, it is because tolerating the status quo is viewed by politicians as the cheapest, most politically safe option. And even if they are concerned about the risks, when economists say that oil might be going back down to $30, politicians are paralyzed from taking action. The uncertainty is a killer.

A story I read this morning highlights that uncertainty, and points to some of the consequences:

Low Gas Prices Threaten Green Car Revolution

The single biggest factor determining the success or failure of high-tech fuel-efficient cars is not battery technology, legislation, tax incentives, new model introductions, or infrastructure. It’s gas prices. The price at the pumps is the elephant in the room when it comes to green cars.

I would imagine that there is general agreement on that. When gas prices raced ahead, the Toyota Prius began to outsell the Ford Explorer. When gas prices fell back to $2/gal, SUV sales surged and Prius sales plunged.

The fundamental problem is that many people don’t make long-range plans with energy prices in mind. When gasoline goes to $2/gal, some expect it to stay there and so that SUV purchase doesn’t look bad – until gasoline is back to $4/gal. And the inability to plan is compounded by analysts who give mixed messages on which way oil prices are going:

Japanese broker Ryoma Furumi said oil prices will stay rangebound at $70-$75 a barrel; analysts at Mirae Asset Securities said prices are likely to consolidate between $65 and $75; and Jim Ritterbusch, president of Ritterbusch & Associates, said crude could be pushed toward the $75 mark.

Verleger, the energy consulting firm, predicts a drop in oil this year—all the way down into the $30s. The firm bases this prediction on crude stockpiles in the US being 14 percent higher than a year ago, and gasoline supplies up by 2.2 percent. Also, OPEC is currently pumping 600,000 barrels a day more than the world needs.

Meanwhile, Christophe de Margerie, chief executive of French oil giant Total, this week said he sees a risk of oil rebounding to $100 a barrel unless there’s greater investment in exploration. He warned of a possible oil shortage between now and 2015 if immediate action is not taken to invest in exploration. “The reserves of oil are there but if you don’t invest they don’t come on the market,” de Margeries said.

Would we plan differently if we knew that oil prices were going to be $100/bbl? Of course we would. We have already seen consumers respond as oil prices went over $100/bbl. But while consumers were responding, a lot of damage was done to the U.S. economy. The airline industry and the auto industry took a beating, as did many personal budgets that suddenly had to cope with much higher weekly fuel outlays.

Enough gambling on oil prices! Let’s raise the price of petroleum via taxes so that people can make energy plans that incentivize them to become more fuel efficient. As I have argued before, you can direct that back at people in the form of a tax credit. The idea would be to trade energy taxes for income taxes.

The benefit would be that we would start moving toward a higher level of fuel efficiency without having to legislate CAFE mandates that end up being gamed. With increased fuel prices, people will demand more efficient vehicles. Automakers will know which cars they need to build. Renewable energy – particularly those varieties that aren’t heavily reliant on fossil fuels – would also see a boost. Not only would they be competing against higher priced fossil fuels, but project developers could have more assurance that oil prices aren’t going to fall to $30 and destroy their project economics.

The benefits would be substantial. Most importantly, our consumption would fall. I consider it very important to stretch our remaining fossil fuel endowment as far as we can, and we can do a better job of that if we manage it. We need to buy time, because renewables are not ready to fill the supply gap that will result if we burn through our remaining oil too quickly.

I don’t think there is any question our oil imports would fall as people started to change their transportation arrangements. Following the high prices of mid-2008, total petroleum imports over the following 12 months fell by 700,000 barrels/day over the previous 12 months (although it is hard to say how much of that was recession-induced).

I have long complained that government energy policies that vacillate every time a different political party comes into power have long been an impediment for companies trying to do long-range project planning, both for fossil fuel and renewable energy projects. Volatile prices have much the same impact. I have had my disagreements with Vinod Khosla in the past, but his call to put a floor underneath oil prices has merit (see Point 14 here).

Having a price floor would would allow companies – especially energy companies and auto makers – to do a better job of long range planning. I don’t fault automakers for getting caught with an oversupply of SUVs as oil prices skyrocketed. They were just making cars that people in a low-oil-price scenario had long demanded. With the certainty of higher prices, the auto companies needn’t gamble that SUV sales are going to come back strong. They would know that they need to shift to the more efficient vehicles that consumers will demand.

I have no problem with taking calculated risks, but I do not gamble. Living on the Gulf Coast of Texas without hurricane insurance is gambling, because the hurricane probability is too high. I don’t see that as much different than the risk we place on the economy by not taking more proactive steps to insulate the economy against price spikes. But we didn’t learn that lesson in 1973, nor in the 1974-75 recession that followed. I don’t expect we are much wiser today.

This morning, I read an interesting editorial in the Wall Street Journal:

Obama Has a Plan To Manage Our Oil Reserve

The editorial was written by John Shages, a former deputy assistant secretary for petroleum reserves at the Department of Energy. The editorial essentially argues that the composition of the Strategic Petroleum Reserve (SPR) is lighter than the composition of oil that most refineries run. Since lighter crude is also more expensive than heavier crude, Shages is suggesting that we sell some of the light crude and buy back some of the heavy crude. His argument – echoing the argument from Obama and various other government officials – is that this would generate cash and help drive down oil prices.

Some excerpts from the editorial:

Sen. Barack Obama is proposing a simple maneuver — called an exchange, or swap — that will help lower the price of oil for consumers, increase the amount of oil in the SPR, increase energy security, and leave taxpayers better off by about $1 billion. His proposal deserves to be adopted.

Today, with historically high oil prices, it is time to debate using the SPR. Some argue that the reserve should only be used in emergencies. Others say that we should use all the tools at our disposal to help consumers.

OK, let’s debate. Regular readers know that I strongly object to using the SPR in an attempt to influence prices. That is not what it is for. High prices – which are incidentally well off of their highs – do not constitute an emergency. Further, that line about taxpayers being better off by $1 billion misses a very large point. I could also trade in my house for a mobile home, and be better off by a few hundred thousand dollars. But that few hundred thousand has costs associated with it: Less home, a home that isn’t as safe in bad weather conditions, and a home that has less value when I wish to sell it. Likewise, there are costs associated with downgrading the quality of the SPR.

Mr. Shages continues:

The oil in the reserve now is all light crude, which is easier and cheaper to refine into gasoline, a reflection of refining capability at the time the SPR was created. Over the past three decades, however, U.S. refining capacity has become increasingly sophisticated and complex, because the world’s oil is increasingly heavy and harder to refine. Today, about 40% of our refining capacity is configured to handle heavier crude oil.

We now confront a mismatch between U.S. refining capacity and the oil mix in the SPR. In a 2007 report, the Government Accountability Office (GAO) found that in an emergency this mismatch could reduce U.S. refinery capacity by 5% or over 735,000 barrels per day in total as some refineries scale back production to accommodate the SPR oil. The GAO recommended that the Energy Department change the reserve’s oil mix to at least 10% heavy oil, roughly 70 million barrels.

It struck me as very odd that having oil that is too light could reduce refinery capacity. After all, light oil is much simpler to process – as is alluded to above. Yields are also higher. Yet the claim is that we would be better off with heavier oil in the SPR? This didn’t add up, so I dug up that GAO report that was referenced:

Improving the Cost-Effectiveness of Filling the Reserve

Some excerpts from that report:

Our analysis of DOE’s Energy Information Administration (EIA) data shows that, of the approximately 5.6 billion barrels of oil that U.S. refiners accepted in 2006, approximately 40 percent was heavier than that stored in the SPR.10 Refineries that process heavy oil cannot operate at normal capacity if they run lighter oils. For instance, DOE’s December 2005 found that the types of oil currently stored in the SPR would not be fully compatible with 36 of the 74 refineries considered vulnerable to supply disruptions. DOE estimated that if these 36 refineries had to use SPR oil, U.S. refining throughput would decrease by 735,000 barrels per day, or 5 percent, substantially reducing the effectiveness of the SPR during an oil disruption, especially if the disruption involved heavy oil.

If you know what the assays look like for heavy oil versus light oil (See The Assay Essay), this looks like a very improbable claim. I suppose if you didn’t try to optimize your refinery for light oil, then that might be a true statement. But refiners optimize their refineries on a daily basis. I used to work in a heavy oil refinery. We could run heavy oil through, or we could run light oil through. If we don’t change the refinery settings at all, and run light oil through, then the above argument may be correct. But we would never do that. The overall yields are in fact higher with the lighter crudes, but you have to make the necessary adjustments. You may end up shutting down some units – like cokers – that are designed to handle heavy crudes.

But there is a more significant factor that seems to be overlooked. Refiners are configured to run heavy crudes because they are cheaper. Why are they cheaper? One, because they are more readily available. What does that suggest? That it is much less likely that there would be a disruption of heavy crude supplies. Thus, Mr. Shages (and Obama’s) argument is based solely on what refiners typically run, and ignores the question of typical availability of supply.

In conclusion, a heavy oil refinery can run light crudes with some adjustments. A light oil refinery can’t run heavy oils without severely impacting yields. Further, a light oil refinery is much more likely to see supply disruptions because there is simply less light oil available. This is why swapping heavy oil for light oil is a bad idea. It is a misguided attempt to influence oil prices, and that is not the purpose of the SPR. If it is allowed to be used for this purpose, then all we are doing is speculating with the reserve.

Footnote: Headed back to Europe today; offline for a couple of days.

I will have a new post up in a day or so (working with Vinod Khosla on something, and then I will finish that bio-butanol post), but until I get that finished, I will recycle this one (from 5/4/06) that details my views on Peak Oil.

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Perhaps like many of you, I spend a lot of time trying to predict what the future holds with respect to Peak Oil. I want to know what the effects will be to the U.S., the world, the economy, my employer, but first and foremost I want to know how it will affect my immediate family and me.

I am not a “doomer”, but I do think we are facing a very serious challenge. I think the affects of Peak Oil will be unprecedented, but I don’t think it is going to throw us back into a pre-industrial existence. If the peak happened suddenly and with little warning, followed by a rapid oil depletion rate, then the scenario would be disastrous.

One of the things that I believe is going to “save us”, so to speak, is the supply/demand imbalance that is currently opening up ahead of Peak Oil. China and India are both increasing their consumption of oil, and it is providing steady upward pressure on the price of oil and gas. This is causing gasoline to become quite expensive, and over time should cause people to start making the necessary adjustments. If you are a “doomer”, you should embrace higher gasoline prices as something that will give us more time to prepare for the aftermath of the peak.

I view the aftermath of Hurricane Katrina as a preview of things to come. Around 25% of the refining capacity in the U.S. was knocked offline. Prices immediately reacted to this to prevent consumers from draining gasoline inventories. Gasoline became very expensive, and suddenly people started to cut back on unnecessary travel. I personally cut out unnecessary driving, as I am sure did most people. Demand for gasoline dropped, and is still down somewhat from historical levels.

Over a longer time frame, if gasoline remains expensive, people will start buying automobiles with higher fuel efficiency. People will begin to base their housing decisions on proximity to work. People who have never considered car pooling or public transportation will do so. Granted, changes in auto and housing markets will take time before the cumulative effects make a dent. But a prolonged period of very expensive gasoline prior to the peak, which is the scenario I expect, will help spur these changes.

Now, that is what I think will happen. But I have to consider the possibility that price will not stem demand as much as is necessary. I am making the implicit assumption that we can merely raise gasoline prices until supply and demand are balanced. But that is probably not a realistic option. Why? Because who will benefit from those higher prices? Oil companies. If you think the public is outraged now, wait until gas is $10 a gallon, people are suffering as a result, the economy is tanking, and ExxonMobil posts the first ever $100 billion annual profit. I will probably have to wade through protesters to get to work in the morning.

The vast majority of the country will blame Big Oil for their woes, and they will resent that Big Oil is profiting from it. How will the public react? How will the government react? No doubt there will be legislation designed to combat the problem, but of what form? Will the government institute rationing? Will they attempt to nationalize the oil companies? If they did, would it mitigate the problem in any way? Should I buy farmland so I can grow my own food if necessary? Should I store a few thousand MREs in my garage?

When Will We Peak?

I know a lot of people believe the peak is on top of us. Some are suggesting that it occurred in the 4th quarter of last year. At one time I had compiled a dozen different peak predictions based on rigorous studies. Nine of the twelve predicted a peak between now and 2016. Another (Shell, I believe) predicted a peak around 2025. The Energy Information Administration (EIA) predicted a peak around 2037, and one study essentially predicted we will never peak.

I monitor oil inventories and production pretty closely. I know that some of the curves look as if oil production is topping out. However, consider that we still have 300,000 barrels per day shut-in in the Gulf of Mexico as a result of last year’s hurricanes. Nigeria has taken more than 500,000 barrels per day off the market due to the unrest there. The war in Iraq has taken over a million of barrels off the market. Those are the factors driving the current flattening of the oil production curve. As one very knowledgeable insider recently told me “I believe that the peak oil theorists have been mistaking resource access and geopolitical issues for peak oil”.

I believe this person was largely correct. The oil is there for us to continue ramping up production for several years, provided the access issues can be negotiated. I see a decent probability that we will peak by 2016, as was predicted by 75% of the studies I had collected. I just don’t see it happening this year or next year. I see near zero probability that the peak will happen as late as 2037, as the EIA suggests.

A peak in the next year or so would be disastrous. A peak in 10 years will give us a fighting chance, provided gasoline costs stay high until it is clear that a peak has occurred. I view fear of a peak in the next year or two as largely a good thing, because it should mobilize some people to take the steps needed well in advance of the peak.

A significant challenge right now is education. I was in Walmart yesterday, and as I am apt to do I watched the faces of the people shopping. I wondered how many of them are aware of the problem facing us. How many of them know that their lives will be profoundly impacted by their ability (or inability) to acquire energy in the near future? Sadly, most of them were probably blissfully unaware, attributing high gasoline prices to the current political climate and just waiting for the relief they are sure is coming. These people are unaware that a storm is coming. Ten years of storm warnings may give some of them time to make the necessary changes to their lifestyles. If the peak hits in the next year or so, they may very well be like Galveston residents in 1900 who were unaware of the severity of the hurricane that was coming until it was on top of them. And if the vast majority of the population is unprepared, it really won’t matter that some of us saw this coming. We will all be in trouble together.

So, I am running through some of my daily news searches – things like “gas prices”, “gas gouging”, “alternative energy”, etc. I ran across this gem:

Gas price gouging becomes even more obvious

It is basically just another ignorant screed from someone who apparently thinks oil companies can just raise and lower prices at a whim:

As long as no significant gasoline retailer breaks ranks and the price at the pump remains fairly constant from one street corner to the next within a region, there is no reason for any oil company not to raise prices. So they do.

An absolutely abysmal understanding of the issues. It is funny that people seem to understand that when the price of gold rises, gold mining companies make more money. And there doesn’t seem to be this widespread belief that the reason they are making more money is that they just decided to raise the price of gold. People understand that they can’t do this. But these same people seem to think that oil companies can just go out and raise prices when they want.

And then this:

Oil companies last fall did all they could to keep Republicans in the majority in Congress because no matter how high prices went during its reign, the GOP never did a thing to rein them in. No hearings questioning oil company executives about their pricing practices. No anti-gouging bills. Nothing.

Prices drop every fall, for reasons I have explained several times. Last year was no different, it just happened to be an election year so it gave the conspiracy theorists something to get worked up over.

As I worked my way through the article, I thought “Boy, this sounds just like the FTCR’s hysterics.” Then I reached the end:

“These figures show that gasoline prices are not about the price of oil, but about maximizing the already obscene profits of oil companies and their refiners,” said Judy Dugan, research director for the consumer advocate Foundation for Taxpayer and Consumer Rights.

LOL!

So, what is the connection between record gas prices and record profits? Absolutely yes, there is a connection. I expect oil companies to once again turn in huge profits (keeping in mind that the profit margins are in line with other industries) and there will be a new round of political grandstanding. Eventually congress is going to be pressured into passing some sort of legislation, but almost everything that will be politically palatable to them will make matters worse for consumers in the long run.

Right now the money is being made in the refining sector. When oil prices stay constant, and gas prices skyrocket, most of that is going to the refiner. Refining margins are certainly very healthy right now. But too many people – including most of the politicians – have their cause and effect backwards. High refining margins do not cause high gas prices. The high gas prices are not a result of the desire of the oil companies to make more profits. (They do desire to make more profits, but they can’t just raise gas prices as a result). The high profits are a result of the fact that gas prices have risen. (And of course some of those high profits are going to pay for things like compulsory ULSD and ULSG requirements, the phasing out of benzene, etc.)

Why have gas prices risen? Is it as the article above suggested – just companies raising prices with nobody breaking ranks? Anyone who takes a bit of time to watch the utilization numbers, imports, demand, and inventories will understand why price moves as it does. I know that takes a bit more effort, and that the lazy way out is to just argue – as Judy Dugan says like a broken record – that the price rise is “about maximizing the already obscene profits of oil companies and their refiners.” And it is obvious that many are ignorant of the basics and too lazy to do the research. The scary thing is that many (most?) of our political leaders fall into that same category.

A fundamental problem, which the Judy Dugans of the world never seem willing to address, is that Americans like to drive whenever and wherever they want. Now that the price of this habit is coming home to roost, they demand that politicians protect them so they don’t have to change their consumptive ways. Tell a European or an Australian about the pain of $3 gasoline and they will laugh in your face.

The best thing for all parties would be to come to terms with the fact that the days of cheap oil and gasoline are over. That era is finished. Start planning for the next one.

I am still traveling for a few days, and will be back in Scotland on January 13th. One of the e-mails I received while I was traveling was a guest submission. The author wrote:

Mr. Rapier

After reading a bit of your blog, I am sending this to you in the spirit of promoting a lively debate.

Please find attached a practical approach to achieving energy independence. It is a construction project rather than a research project. It does require some tinkering with the market; however, the energy market is not a free market today and the governments setting the price of oil are either overtly or covertly hostile to our interests.

The plan is simple and for the most part economic. It can not compete with $10 per barrel oil but OPEC is more likely to present us with $200 per barrel oil.

Use nuclear to produce electricity; use electricity rather than natural gas for heating; convert the saved natural gas to methanol, an excellent transportation fuel. 200 nuclear plants and 200 natural gas to methanol plants at a capital cost of about $400 billion can increase the supply of US transportation fuel on an energy equivalent basis by 40%.

Our first objective in the War on Terror should be to break OPEC’s control of oil prices. The West is transferring $1 trillion dollars per year to OPEC at $90 per barrel. This will not be as easy as in the 80’s. Significant increases in demand from China and India are almost certain to overwhelm US conservation efforts and Saudi Arabia appears opposed to the US role in Iraq (higher oil prices) just as they were opposed to the Russian presence in Afghanistan (lower oil prices).

Recent publications on this approach include “The Methanol Economy” by Dr. Olah, a Nobel prize winner, and “Energy Victory” by Dr. Zubrin.

Please feel free to make any use of this material that you deem appropriate. I am trying to put it into general circulation.

Stephen DuVal

I have read the essay a couple of times, and it touches on a lot of the issues that are discussed here frequently. There is a lot of it that I agree with, but some I disagree with. I also think some of the introduction is unnecessarily inflammatory. Nevertheless, I present the entire essay from Stephen DuVal unedited.

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WW2 didn’t have to turn out the way it did. Suppose Germany and Japan had the oil and we didn’t; suppose Germany and Japan held $3 trillion in US government debt at the start of the war and the US needed $500 billion per year in capital inflows to pay for its imports. Suppose the war started with them raising the price of oil at the rate of $30 per year and starting to insist upon payment in marks and yen. Suppose they started to sell their dollar holdings. Suppose they sold oil to China at $50 per barrel under long term contracts while they charged the West $200 per barrel.

Suppose instead of attacking Pearl Harbor, they built churches in the US, they sent religious leaders to recruit and train Special Forces, and the religious leaders said that they shouldn’t be blamed for the acts of terrorists who may have attended their church in the past. (reference 1, 2, 3). Suppose Hollywood didn’t make Casablanca and Why We Fight; but movies about Marines raping women and killing children. Suppose our journalists recruited sources (spies) within our government; and newspapers, and citing the public’s right to know, printed stories about how radar worked to detect enemy aircraft and how we had broken the German encryption codes.

The Saudi Wahabis have spent $45 billion around the world building mosques and 20,000 Madrasahs to teach young men their religion of hate and violence. They have built, staff, and fund the operation of 10% of the mosques in the US. During the Russian war in Afghanistan, Saudi overproduction of oil hurt the USSR financially since oil exports were its major source of foreign exchange (see reference 4). Since the US invaded Iraq, the price of oil has risen from $30 to $90 per barrel. This hurts the US financially and transfers $1 trillion (80 mbd * 40% OPEC share * $90 per barrel) from the West to OPEC every year.

Energy independence is not a pipe dream. The first step is a construction project rather than a research project; and the second step is based upon an engineer’s view of the Hydrogen Economy.

If we use nuclear to increase the supply of electricity, we could use electricity rather than natural gas for heating. The freed up natural gas can be easily converted to methanol which is an excellent transportation fuel. With minor modifications, cars can run on flexfuel which is a combination of gasoline, ethanol, and methanol. With minor modifications, the current gasoline distribution and storage system can be modified to support methanol/ethanol/gasoline mixes.

Natural gas supplies almost the same amount of energy to our economy as oil; if natural gas was converted to transportation fuel, our supply of transportation fuel would double. Almost all of our natural gas is used for heating; a need which can be satisfied with electricity, and the electricity produced by natural gas can be produced using nuclear power. Currently, there is no substitute for oil in the transportation sector; natural gas can break this monopoly.

France has a very successful nuclear program producing 80% of its low cost electricity. Brazil has implemented the other half of this program. In the last 3 years, Brazil went from 0% market share for flexfuel cars to 100% flexfuel cars. Three years after the US mandated production and importation of flexfuel vehicles, there would be 45 million flexfuel vehicles on the road in the US. This solves the chicken and egg problem: who wants a flexfuel car if you can’t purchase flexfuel, and who wants to build a flexfuel gas station if there are no flexfuel cars.

This entire program is economic. Nuclear electricity is competitive with coal and natural gas. Given today’s price of natural gas, nuclear electricity is competitive with natural gas for heating applications. Methanol costs 10 cents per gallon plus the cost of the natural gas; at $3 per thousand cubic feet (the price in 2000), methanol costs about 60 cents per gallon. Since methanol has 50% of the energy of gasoline, on an energy equivalent basis, methanol costs $1.20 per gallon plus 20 cents in taxes. An existing gas station pump can be converted to flexfuel for about $20,000. An extra $100 per automobile allows a car to run on flexfuel.

The Brazilian flexfuel program is for a mix of ethanol and gasoline; it does not include methanol. A sensor measures the oxygen content in the vehicle exhaust to determine whether the engine is running lean or rich. An engine management system adjusts the air/fuel ratio to balance performance, fuel efficiency, and emissions. This system does not need to know what the fuel is; it can run on a mix of methanol, ethanol, and gasoline.

The Brazilian approach is based upon an earlier effort by Ford to develop a methanol/gasoline flexfuel car for the California Energy Commission. The program involved 14,000 cars over 10 years in the 1990s. A summary report concluded “seamless vehicle operation using any combination of methanol and gasoline … engine durability can be expected to match gasoline vehicles … an incremental improvement in vehicle emissions … Health and safety related issues that had undergone long examination and debate with respect to methanol proved largely insignificant”.

Unlike gasoline, both methanol and ethanol are soluble in water and biodegradable by common bacteria. A methanol spill in the ocean would disperse quickly and not pose any long term environmental risk. Similarly a land spill or seepage does not pose any risk to groundwater. While methanol in quantity is toxic, the FDA allows a daily dose of 500mg. Since aspartame is converted to methanol via the digestive process; drinking a can of diet soda results in 10 times as much methanol intake as from potential inhalation while refueling.

Nuclear electricity combined with natural gas to methanol is the way to implement the first phase of the Hydrogen Economy. Methanol is the elusive Hydrogen Carrier. There is more hydrogen in a gallon of methanol at room temperature than in a gallon of liquid hydrogen at -400 degrees Fahrenheit.

The problem with the conventional view of the Hydrogen Economy is not the engine or even the fuel cell technology. The fundamental issue is hydrogen distribution and storage and secondarily the production of hydrogen economically.

The Distribution and Storage issue centers around the search for a Hydrogen Carrier. Methanol is an excellent hydrogen carrier which exceeds the 2015 research target of the DOE by a wide margin. The existing gasoline distribution and storage infrastructure can be utilized for methanol storage and distribution with minor modifications.

Trouble is brewing. Trouble I have been warning about since I started writing this blog. Trouble that was a big factor in me starting to write this blog:

Energy leader sees clouds

“An oil crisis is coming in the next 10 years,” John Hess said at the annual Cambridge Energy Research Associates CERAWeek conference in Houston. “It is not only a matter of demand. It is not only a matter of supply. It is both.”

That’s what I have been mostly concerned about. Despite the fact that I think supply can still grow a little from here, I see no easing in demand. And if we do actually peak in the near future – which I think we will – we are not close to being prepared for that.

The number of vehicles in China and India is projected to grow exponentially by 2050. So demand for fuels derived from oil shows no slack despite relatively flat U.S. demand amid the nation’s economic slowdown, he said.

Not gonna happen. The energy won’t be there for them to grow exponentially. And as they try to grow, they will drive the price of oil up exponentially.

The world is consuming about 86 million barrels a day, and analysts expect demand to grow by about 1.5 million barrels a day each year, the International Energy Agency said.

“Recessions may interrupt this growth, but only temporarily,” Hess said.

Where’s the growth going to come from? Not only do we have to find and develop new fields to match that projection, but we also have to find and develop new fields to counter depletion. I have forecast before that I think we get to 90 million barrels a day. But we may not. And I definitely don’t think we will go much beyond that.

Hess also noted that increased investment is crucial because the Organization of the Petroleum Exporting Countries doesn’t have the cushion it once had to protect against supply disruptions. OPEC pumps 40 percent of the world’s oil.

In 1985, he said, OPEC had 10 million barrels of spare capacity. Today the cartel has an estimated spare capacity of 2.5 million barrels.

And that’s the underpinning on the Peak Lite concept, described in some detail here.

The Dallas Morning News also reported on this story:

Oil Execs: Crisis Coming, but Not Because of Scarcity

Mr. Hess’ colleagues sounded more reassuring about their ability to meet demand, but they also said people will have to pay more money and exert more effort to get the energy they need in the future.

“The supply challenge is really not one of scarcity as some believe,” said Exxon Mobil Corp. senior vice president Mark Albers.

It’s not scarcity. That’s a strawman. There is lots of oil left. But getting it out of the ground fast enough to meet growing demand is the problem, and a big reason that oil prices have run up so much in the past 5 years.

Exxon predicts global demand for crude oil will rise around 40 percent by 2030.

I predict that global supply in 2030 is lower than it is today.

Mr. Hess said individuals and governments must address rising demand by conserving energy. The leaders of some of the world’s largest energy companies were responding to the theory that people have used most of the oil that’s easy to recover, and shortages will soon follow.

“We cannot afford to abandon fossil fuels and still deliver the volume of energy needed to sustain the world’s economic and social level, to alleviate global poverty,” he said. “Alternatives are simply not ready to shoulder the load. Nor will they be in a position to do so any time soon.”

Yet we are being promised that alternatives will be ready to shoulder that load. We just have to mandate them – or so the theory goes.

The men didn’t predict future oil prices. Mr. Hess spoke of “healthy” oil prices – that is, price levels to support enough production to meet demand.

Many of the presenters at the conference said oil prices could drop as low as $60 a barrel, but they aren’t likely to go as low as the levels of the late 1990s, when crude traded around $10.

$60? Maybe. But that’s quite a change from what many of those guys were suggesting just a couple of years ago: A return to $30 oil.

Am I concerned about this situation? Yes, I am. I think we have economic hardship already upon us as a result of high oil prices, and I can’t see an end to it. I have been asking myself a lot lately if the end of growth in oil production means an end to economic growth. It is really hard for me to see how we can have robust growth if oil production is dropping each year and prices are escalating. And economic hardship is only part of the problem. That’s what the Western world will see. Some of the world will start to do without while we outbid them for oil.