Sunday, December 28, 2014

Five energy surprises for 2015: The possible and the improbable

The coming year is likely to be as full of surprises in the field of energy as 2014 was. We just don't know which surprises! I am not predicting that any of the following will happen, and they will be surprises to most people if they do. But, I think there is an outside chance that one or more will occur, and this would move markets and policy debates in unexpected directions.

1. U.S. crude oil and natural gas production decline for the first time since 2008 and 2005, respectively. The colossal markdown in world oil prices has belatedly been followed by a slightly smaller, but nevertheless dramatic markdown in U.S. natural gas prices. The drop in prices has already resulted in announcements from U.S. drillers that they will curtail their drilling operations significantly next year.

But drilling that is already contracted for will likely go forward, and wells waiting for completion will be completed. It can be costly to pull out of drilling contracts. And, failing to complete already successful wells and bring them into production is downright foolish since the costs incurred in drilling the wells including future debt payments remain. In those circumstances, some revenue at lower prices is preferable to no revenue at all.

Having said all that, scaled-down drilling plans when combined with what's left in drillers' immediate inventory both to drill and complete may not be enough to overcome the prodigious production decline rates from existing wells in deep shale deposits of oil and gas which have provided almost all the recent growth in U.S. production. The decline rates are 60 to 91 over three years for tight oil plays and 74 to 88 percent over three years for shale natural gas plays.

If low prices continue for a second year, the cheers for "Saudi" America will disappear. It was never to be anyway. What America has left is high-cost oil and natural gas. And, even at high prices both were likely to peak and decline in the next 5 years. Now, low prices may bring peak production rates in the coming year for both U.S. oil and natural gas--peaks that may never be seen again.

2. World crude oil closes below $30 per barrel. I think that such a price would only last a short time unless the world is in the throes of the next Great Depression. But since OPEC has reaffirmed that it will continue to pump oil at current rates until non-OPEC production declines, look for this game of chicken to create increasing inventories of oil worldwide for several months. The underlying cause for rising oil inventories is slowing economic growth in much of Asia, especially China, and economic stagnation in Europe and Japan. Any pickup in worldwide growth would send oil significantly higher than where it is today as oil demand increases.

3. Developments in solar thermal energy show that it can solve the storage problem for electricity from renewable energy. The difficulty with renewable energy supplying electricity is that electricity is very expensive to store (and so we do very little of this). Storage is important because renewable energy production comes when the wind blows and the sun shines, but not always when we need it. A breakthrough in solar thermal may be in the offing that would overcome previous limits on temperatures generated by solar thermal capture devices and make it possible to store heat cheaply enough to run solar electric generating plants around the clock at high output.

4. A climate agreement in Paris calls for binding greenhouse gas emissions limits. Expectations are exceedingly low for next summer's international climate conference to be held in Paris. The aim is to agree on binding limits for carbon emissions for the world's nations. Few people think that will happen no matter what the urgency of the matter.

But we cannot know what climate events might occur between now and the Paris conference that would change the outcome. It would have to be big, on the order of an ice shelf plopping into the ocean and raising sea-level enough to notice. Nevertheless, I would say that such a disturbing event becomes more likely with time and might be necessary to move the world's nations to a binding emissions agreement.

Even some progress in the direction of a binding agreement will have the world's energy analysts talking about stranded assets, a reference to the oil, natural gas and coal that would have to be left in the ground in order to avoid breaching agreed limits on carbon emissions. That would have significant consequences for the companies whose work is extracting and refining hydrocarbons.

5. Oil prices reach $100 per barrel before December 31, 2015. This is the other extreme from surprise No. 3. Almost all analysts expect oil prices to remain low, and many believe we are now entering a new era of cheap oil. (I, of course, don't buy it.) An earlier and more dramatic drop in production than anticipated and a greater rise in demand than anticipated could easily bring prices back above $100. I think this is more likely to happen later in 2016. But the timetable for a return to prices above $100 could be accelerated by many factors not now apparent.

I regard none of these events as likely which is why they would be surprises. But even one of these surprises would result in large financial gains or losses for many. And, either of two of them--binding greenhouse gas emissions limits or a breakthrough in renewable energy storage--would have giant consequences for the entire world.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, December 21, 2014

Greed explained: J. Paul Getty, Aristotle and the Maximum Power Principle

Regular readers know I often write about energy, and while this piece may not at first blush seem like an energy story, you'll soon see that the quest for an ample supply of energy is, in fact, at the heart of human greed.

Greed is often said to be a central cause of our ecological and social ills. It motivates excessive and injurious exploitation of the planet and thus threatens the existence of many species including humans themselves. It leads to excessive economic inequality and the social ills presumed to be associated with that inequality. And, of course, greed is regarded as not just bad for the biosphere or society; it's bad for the soul and therefore earns a place on the list of the seven deadly sins.

Many people are convinced that greed is learned and therefore can be unlearned or not taught in the first place. Others believe that greed is simply an inherent evil in humans, part of the human condition.

Someone once asked oil tycoon J. Paul Getty how much money is enough. He replied, "A little bit more." The fictional financier Gordon Gekko in Oliver Stone's film "Wall Street"--who is best known for the phrase "greed is good"--gives a different answer: "It's not a question of enough, pal. It's a zero-sum game – somebody wins, somebody loses. Money itself isn't lost or made, it's simply transferred – from one perception to another." Finally, I offer the words of Noah Cross, a character played by John Huston in the film "Chinatown." Cross is asked what else such an enormously wealthy man as himself could possibly want, and he replies: "The future."

In these three quotes we have the essence of Howard Odum's Maximum Power Principle. (See, I told you we would come back to energy!) Essentially, what Odum observed is that living systems--humans, for example--seek to maximize their energy gain. Now, in modern society, the way humans primarily gain access to energy is through money. Money, it turns out, is merely what allows us to command energy--in the form of humans, machines, or even animal power--to do what we want it to do. Money is essentially a method of assigning "energy credits." And, energy, of course, can used be to make us a product, render us a service, or provide either of these to someone else as a gift or in fulfillment of a contractual obligation. Without energy, nothing gets done.

Many people believe as J. Paul Getty did--that one can never have enough money (read: energy). But, Gordon Gekko enunciates an important implication of the Maximum Power Principle: People will compete with one another for the available energy supplies (in the form of money or other types of wealth). And, Noah Cross, in ways both literal and figurative, shows us just how far people are willing to go to have an impact on the future, to insure the continuation of their genetic line and their vision for their community.

Despite our modern pretensions, we humans are still all part of an evolutionary process that pushes us to compete for survival and for the propagation of our genes. Access to energy (and all of its products and services) confers advantages in this contest. And, energy in the form of wealth provides a special intangible advantage: increased social status which can be an asset when pursuing sexual partners. Wealth attracts members of the opposite sex because it implies the ability to care for a spouse and for any offspring and provide many advantages such as ongoing access to better health care, nutrition, education and social opportunities.

Aristotle noted that the desires of men are unlimited. He also claimed that "the amount of household property which suffices for a good life is not unlimited." Aristotle is most often associated with the notion of the golden mean. Simply stated, it signifies not too much and not too little in all things.

Thus, Aristotle's vision seems contrary to the Maximum Power Principle. Why would anyone intentionally limit the amount of energy available to oneself? There is probably a theoretical limit to the amount of energy that might be useful to any one human being. The entire energy output of the Sun, for instance, would likely be beyond the capability of one human to manage and use to gain advantage. But, the world has many billionaires who find no end of ways to spend their accumulated energy credits and who often populate the world with many heirs from many marriages.

What possible force could counteract the drive for dominance and self-propagation and thus the desire to maximize one's energy gain to facilitate that dominance? There is research which suggests that beyond a certain point of energy consumption (around 100 gigajoules per year per person), quality of life measures for modern societies barely improve. But that's for society as a whole, not the individual.

As it turns out, we humans have a long history of contemplative traditions, both religious and secular, traditions that preach simplicity and often poverty as a way of life. These traditions eschew worldly goods or at least maintain that each person should have just what he or she needs for a good life and no more. How do such traditions square with the Maximum Power Principle? The people who adhere to these traditions, after all, voluntarily and consciously choose to consume less energy than they might otherwise be able to.

There may be a clue in that. Our default instinctual response is to seek advantage over others. Yes, we may cooperate where that seems the wisest course or where it is apparent that we cannot dominate the situation. But, even within one group or nation, there is simultaneous cooperation AND competition. But, we do not ordinarily cooperate to REDUCE our access to resources.

So, we might say that such voluntary and conscious choosing is the next step in evolution. But, how can it be? Such a way of life has been a feature of many civilizations throughout history. It is already a feature of evolution in that those who choose such a way of life have not died out. It may be that such a path is an adaptive response which optimizes human survival over time. This is merely speculation. But it would explain why self-abnegation is so persistent across cultures and across time. When humans need the gene that tells them to reduce their resource use, it is there.

But there is another claim made for the simple life, for a life which seeks only what is sufficient to thrive rather than to dominate. Quite often those following this path say they are happier than they were when following the path of continual acquisition of wealth and status. That claim, however, would seem to make millions of years of human evolutionary development appear pathological--unless you realize that natural selection optimizes life for survival and propagation, not happiness. Therefore, our default behaviors are tuned to help us survive and pass on our genes, not necessarily bring us contentment (as is evidenced, in part, by the modern divorce rate).

That is not to say that there isn't some happiness in mere survival and certainly some in the process of creating and rearing new life. But, this is not the kind of happiness that those preaching simplicity mean. They mean an enduring, deeply felt and persistent sense of satisfaction in an entire way of life.

A friend who used to serve very wealthy clients for a Wall Street brokerage firm once remarked that even as clients doubled or tripled their wealth, they seemed no happier. Such is the drive for dominance that many people continually seek invidious comparisons with others. Even though such comparisons may bring about enhanced social status, they do not seem to result in any deeper contentment.

Whether that part of us which allows us to find happiness with less, which allows us to loosen the chains of our drive for dominance and replace them with cords that bind us to others for mutual benefit--whether such an outlook will be awakened among more than a small sliver of the population is an open question. The evidence is not promising. The ruthless tend to get ahead and are often held up as examples of how to live.

But the story isn't over. With the challenges that humans now face in climate change, resource depletion, soil degradation, water scarcity and myriad other issues impinging on human survival--all of which have their origins in excessive energy use--we may find that the cooperative and abstemious strains within us may be called to the fore. Or we may find that these problems simply lead to a Hobbesian war of all against all.

So, the question is: Do we--meaning the human species as a whole--have any choice in the matter? Or are we as a species destined to live by the Maximum Power Principle to its seemingly inevitable and calamitous conclusion--a story in which the drive for maximum energy gain is no longer adaptive, but rather dangerous to the continued existence of humankind?

Our actions will be our answer.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, December 14, 2014

The high cost of low-priced oil

As a consumer of oil, you may regard recent sharp declines in the world oil price as a blessing. But...

If you work in the oil industry, you will not.

If you work in the renewable energy industry, you will not.

If you work in the energy efficiency business, you will not.

If you work to address climate change, you will not.

If you have investments in the oil industry (and nearly everyone does through pensions or 401k plans), you will not.

If you live in a country that exports a lot of oil (not just Saudi Arabia, but Mexico, Canada and Norway, too), you will not.

The declining price of oil is supposed to have a balanced ledger of winners and losers. But we may be on our way to finding out that in the long run we will have a much larger list of losers than winners.

And, the list will lengthen if the price continues to fall, and especially if it stays down for a long time. (Low prices are not necessarily an indication of future abundance. Remember that oil reached $35 a barrel at the end of 2008 before returning to record average daily prices in 2011, 2012 and 2013.)

Now here is something to contemplate. Is the price of oil falling because we can no longer afford it? This is not an idle question. Record high average daily prices for oil in the last three years have been an unrecognized cause of sluggish overall worldwide economic growth. That subpar growth appears to be exhausting itself now, particularly in Asia and Europe. In dampening growth, high oil prices sewed the seeds of their own demise by ultimately dampening demand.

But, low oil prices will make it even harder to secure future oil supplies. The oil industry was already cutting back its exploration budgets before the price plunge. The industry said that there were not enough profitable prospects available even at $100 per barrel. What happens to industry exploration and development budgets with oil prices now around $60? Without exploration there can be no new production; and without new production, oil supply falls automatically.

Now, exploration and development are not being cut to zero. But they are being cut substantially. And, as with any mineral exploration, there is no guarantee of success--even less so with cutbacks. With existing oil production worldwide declining around 4 to 5 percent per year, the industry already had a huge task keeping production growth just barely positive. Now, that will be almost impossible if oil prices remain low.

What that means is supply will likely stagnate or even shrink. Barring a deep and prolonged economic slump now (which would send oil prices even lower and keep them there for some time), as demand for oil reignites, we're setting up for another big price spike later that might then send the economy off a cliff into a serious slide.

For now, those in the renewable energy business are finding it more difficult to be competitive with lower-cost oil. Energy efficiency business owners must tell their clients that many efficiency measures will have a longer payback period while oil prices stay low. Both these outcomes send us in the wrong direction.

And, there is climate change. When petroleum products are cheap, there is less incentive to use them parsimoniously. All things being equal, that means more oil products are burned which produces additional greenhouse gas emissions.

Now, regarding the financial consequences of low oil prices, one could say, "Well, if you've chosen to work in the oil industry or if you've staked your whole country's future on the price of oil, then that's just your tough luck. Some of the wealth that flowed to you is now going to start to flow back to me."

And therein lies a problem. If that money flows too quickly away from the oil industry and the major oil exporters, it could create a financial cascade in the debt markets, in the world's stock markets, in the currency markets--oh wait, it already has. The question is how far will these disruptions carry, and will they cascade in a way that leads to a recession or depression.

One can be passive in the face of such events. But, a smarter plan would be to implement something along the lines I proposed last week--an oil tariff that keeps prices high and so keeps renewables and energy efficiency attractive. In fact, a system that keeps all carbon-based fuels high-priced would do more to move the world toward a sustainable energy system than all the current renewable energy subsidies combined. And, it would prevent the kind of price manipulation now engaged in by OPEC from wrecking havoc on any plan to move toward a renewable energy society.

It is just such disruptions in the fossil fuel markets that make us believe things that aren't good for us--that we can somehow burn cheap oil and forget about climate change. That cheap oil will go on forever. That cheap oil is a sign that the marketplace solves all problems (rather than creating new problems that it can't solve by itself).

We can celebrate lower gasoline, diesel and heating oil prices now. But like any overindulgence, we will pay for it later. When a pusher offers a junkie a discount on his drugs, we shouldn't take it as an act of kindness.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, December 07, 2014

How the U.S. could fight OPEC and win (and why it won't)

OPEC has declared war on American oil production with the intention of making the country more dependent on imported oil and on oil in general. By refusing to cut production in the face of weakening world demand, the cartel has allowed oil prices to fall more than 35 percent since mid-year to levels that are likely to make most new oil production in America's large shale deposits unprofitable. That could not only halt growth in U.S. production, but may lead to an actual drop because production from already operating deep shale wells declines about 40 percent per year.

The United States could chose to fight back and possibly win this war with OPEC by employing one simple, big move. But, I can confidently predict that the country will not do it. Why? Because it involves a tax, a tariff actually.

Back in 1975 then-Secretary of State Henry Kissinger proposed that the world's oil importers adopt a floor price for oil. The purpose was threefold: 1) encourage domestic oil production, 2) accelerate the development of alternative energy sources by making their price more competitive with oil and 3) encourage conservation of oil and oil-derived products such as gasoline and diesel fuel.

The easiest way to achieve the floor price, of course, would be to slap a sliding tariff on imported oil. The formula for such a tariff would be simple: The floor price minus the price of imported oil unless the price of imported oil equals or exceeds the floor price, in which case, the tariff would be zero. Imposing a tariff that keeps U.S. oil prices above, say, $100 per barrel would only return the domestic price of gasoline and other refined products to their level of just six months ago. Presumably, that wouldn't be much of a shock to consumers.

I suspect, however, that Kissinger's proposal would be about as popular today as it was when he proposed it. Back in 1975, it never got off the ground. This was, in part, because the Europeans and the Japanese objected that, unlike Americans, the two had few oil resources that might be exploited as a result of such a price guarantee. In the end, America was unwilling to go it alone.

Ironically, since that time the Europeans and the Japanese have opted for high taxes on energy including motor fuels--taxes that have had the effect of achieving Kissinger's objectives two and three, alternative energy development and energy conservation. Americans have maintained low energy taxes which in part are responsible for the fact that the average American uses twice as much energy as the average European.

An oil tariff could actually garner considerable well-heeled, heavyweight political support from two unlikely bedfellows: the domestic oil industry and the renewable energy industry. The domestic oil industry, of course, would love a tariff because it protects the industry's high-cost deep shale deposits from the competition of cheap OPEC oil imports. The cartel's price suppression strategy specifically targets the high-cost hydraulic fracturing or fracking in deep shale deposits that has been largely responsible for the rise in U.S. oil production from a low of 5 million barrels per day (mbpd) in 2008 to 8.8 mbpd as of September this year.

The renewable energy industry might well join the oil industry in supporting such a tariff because a high oil price makes alternatives to oil more attractive.

But individual, commercial and industrial consumers of oil and oil products would object to higher prices. Industrial users, in particular, would complain that they must compete against other industries abroad that pay less for their petroleum products (though this might not be true in such high-tax places as Europe).

Another group would almost certainly object to such a tariff: those concerned about the environmental damage associated with fracking for oil. High domestic oil prices would only encourage exploitation of more deep shale deposits across America, and that would necessarily result in broader environmental effects. These activists might well argue that a hefty carbon tax which would tax oil and all other carbon energy sources would be better targeted for reducing energy consumption and spurring alternatives to fossil fuels--with no need for an import tariff that encourages domestic oil production. But, recent history suggests that such a tax remains politically implausible. So, the question is: If the tariff were to be adopted, would the support provided to alternative energy be an acceptable trade for the damage done to the landscape?

Of course, anti-fracking activists will retort that they'd like to ban fracking altogether while the country speeds up deployment of alternative energy. But, the chances for such a ban, either federal or state, while not zero, are probably smaller than the chances that the United States will enact an oil tariff.

The beauty of the oil tariff is threefold: 1) The mechanism for collecting it is already in place. 2) It doesn't mandate exactly how people should go about reducing their petroleum use; it only incentivizes them to do so. And, 3) it makes significant headway in addressing one of America's greatest vulnerabilities, our dependence on foreign oil and on fossil fuels in general. We'd get all this with one tax.

Getting agreement for an oil tariff would be a grand bargain of the first order. It would require a sort of Alice-through-the-looking-glass transformation across the United States. Oil industry captains--who tend to have libertarian leanings and who have consistently and publicly denounced excessive government regulation and taxes--would have to champion a new tax. The renewable energy industry would have to embrace its new partnership with the oil industry.

Environmentalists might have to be appeased with new, much stricter environmental standards for fracking and with assurances that enforcement would be vigorous. (The oil industry would look foolish opposing such standards when it is being given such a big financial gift--one that would enable it easily to pay for better environmental practices.) And, the oil-consuming industries and the public would have to take the attitude that the tariff is the right thing for the country because it will force all of us to do the right thing: conserve and seek alternatives to oil and oil products.

The most likely course, however, is that no such tariff will be adopted. As a result America's oil industry will slip into a slump. The country will become more dependent on imports and oil in general. And, when oil prices rise again--as they surely will--the industry will go right back to fracking America's deep shale deposits at full speed without any additional environmental safeguards.

Where is Lewis Carroll when you need him?

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.