The Oil Drum | Weekend Open Thread...

112 comments on Weekend Open Thread...

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Dave Cohen on October 2, 2005 - 2:56am

Thanks for the open thread, PG. I do have a few things to say.

I think we (the US) are in deep shit right now. First off, I am thinking about NG prices this winter. I believe we are looking at a big tragedy there for people who can't pay their bills just to stay warm. Second, oil prices are going to sooner or later (this will be sooner - by 12/05) hit the roof (over $100/barrel) given the GOMEX shut-ins and the world-wide tight demand/supply situation. I think it is time for people to accept these realities. I think it is time to get really creative about how this (the US) society is going to go forward without major recession (also called depression). I think that people on this website (TOD) should address the issues in these terms - there is a (perhaps) small crash coming, we can't avoid it and what the HELL are we going to do about it?

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Rick on October 2, 2005 - 3:39am

Dave--
NG prices are frightening, but there is at least one feasible approach if there is the political will: federal or state govts can subsidize heating fuel costs, as has been done in various programmes for a long time. In an unregulated market you can't control the price, but you can control what at least some vulnerable people pay. Most folks will just have to get by somehow. Don't forget, NG also fuels all of the peak capacity electric generation capacity, so it will bite there as well.

As for getting creative on how to avoid recession or worse: no flash ideas here. I think all the usual tools have already been used, and I'm not sure there is much ammunition left. There is an extraordinary amount of fiscal stimulus around: low interest rates (still), tax cuts in place, huge government spending, hurricane reconstruction efforts starting that will help offset the blows the storms dealt, even a war or two. If a downturn comes (and there has been a recession every time there has been a sharp run-up in oil prices), I'm not sure there is a lot of real action that can be taken except to hunker down.

To make it all worse, both the federal budget deficit and the trade deficit are totally out of control. In essence, both the government and the economy are borrowing enormous sums just to keep going. If this gets worse, and it looks like it will, the US dollar will have to fall, making the cost of all imports (both oil and Wal-mart varieties) rise, thereby fueling larger deficits. It could become a self-sustaining meltdown, like the Arctic.

I don't want the US economy to tank, but the fundamentals have been grossly mismanaged for a long time. I think 70's style stagflation may well reoccur, and I can't see a quick, easy, or creative way around it.

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Dave Cohen on October 2, 2005 - 3:50am

So, reading your remarks, Rick, I think you agree with me.

Ora Pro Nobis -- from the Latin meaning "pray for us".

cheers, Dave

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mw on October 2, 2005 - 4:34am

A recession is neccessary, sorry.

A growing economy by definition requires more energy - its really that simple.

Therefore, unless the energy supply situation 2005 - 2006 improves dramatically, a recession will occur due to high energy prices, or will be forced to happen using high prices. There really is no other alternative.

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step back on October 2, 2005 - 8:29am

Depending on how nit picky one gets about measuring small amounts of energy, in general, "energy" is not a necessary part of "The Economy"

One could have an economy where folks trade jokes and folk stories with one another.

Take a look at:
http://en.wikipedia.org/wiki/Economics

There are sectors of economic life where energy consumption decreases with growth. Take for example, the transition in the electronics industry from vacuum tubes to highly integrated transistor circuits. Vacuum tubes wasted great amounts of energy in heating their electrodes.

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mw on October 2, 2005 - 12:03pm

Yes, all that you say is true, but humankind can not live off of the transitino from vacumn tubes to silicon wafers. They don't taste good, with or without mustard.

The point I am making is that the overall economy, and certainly the U.S. economy and all similar 'western' economies, are inextricably tied to the availability of increasing amoungs of energy. Less energy = less potential growth.

That's today's picture and has been the picture since the industrial revolution. The picture is not going to change overnight, no matter how many jokes we tell.

Can we substitute energy and reduce dependence? Sure, but it will take time, much time, and time we may not have.

Extend this problem to less developed countries - those transitional economies are actually in a worse pickle, particularly those that are importers of oil. They use more energy (oil) per GDP $ than we do, although one might argue that its use is concentrated more on basic needs than our use is, except to the extent where developing economies energy use is directed towards fueling the west's insatiable desire for replacable coloured covers for our cell phones, et al.

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Engineer-Poet on October 2, 2005 - 2:34pm

That's a poor definition.

A growing economy needs to produce more. If it can squeeze greater production out of less energy, that's still growth.

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mw on October 2, 2005 - 2:58pm

A growing economy needs to produce more. If it can squeeze greater production out of less energy, that's still growth.

You can twist the figures around and make it seem like we live in a golden age where more GDP output occurs with less energy, and that would be true.

But more GDP output with less energy is not the same thing as using less energy. There has not been a single case in my lifetime where the economy has expanded without energy consumption expanding. I expect this is a truism dating back to the dawn of time... some laws simply can not be refuted. It takes energy to produce; the more you produce, the more energy you utilize.

It doesn't matter how efficient we become - at least not in the short term, because we can't become highly efficient overnight - increased economic growth will require more energy.

Now... off what baseline are we measuring? I suggest we've nothing to pick from, except when we reach peak production world wide, we'll then have a convenient measuring post i.e. when world wide economies next start growing, post-peak, we'll have been successful in the transition.

Clearly if the peak is tomorrow, this will be a long time coming. If the peak is a decade or two away, we've got a chance to mitigate potential world wide disaster.

There's no point in putting a fine point on definitions when we have decades of economic output to look at and in every case where economic expansion ruled, energy use went up. Turning that ship around will not happen over night; I question if it can even happen in a decade.

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Engineer-Poet on October 2, 2005 - 11:18pm

But more GDP output with less energy is not the same thing as using less energy.

True. However, energy/$GNP has been on a downward slide for many decades. If the efficiency curve rises at the same or greater rate while economic growth slows, we could easily have absolute energy consumption decline during (slow) growth.

Note that only some kinds of energy are in short supply at the moment, and we can raise efficiency of some things easily. We can boost the amount of e.g. wind power with a relatively short lead time, freeing coal and gas for other uses. We can insulate and cut heating energy with no loss in utility. We can stop buying Explorers and Tacomas and buy Focuses and Civics instead; at a 17-year vehicle lifespan and a bias of miles driven toward newer vehicles, doubling fleet MPG means cutting motor fuel use by perhaps 4% per year.

There has not been a single case in my lifetime where the economy has expanded without energy consumption expanding.

Oil is the biggie here; consider the amount of low-hanging fruit in transportation.

It doesn't matter how efficient we become - at least not in the short term, because we can't become highly efficient overnight - increased economic growth will require more energy.

Consider my concept, then: instead of burning gasoline in engines at 17% efficiency, build cars as plug-in hybrids. Efficiency under engine power goes up by a third, and 80% of their driving is done on grid power; direct fuel consumption falls by 85%. The remaining energy (about the same 80%, due to losses) is met by burning oil in 70% combined-cycle powerplants at 55% efficiency and 30% simple-cycle gas turbine powerplants at 40% efficiency. Total relative oil consumption is:

15% of baseline used directly.
17.3% in the CC plants.
10.6% in the simple-cycle plants.

Total: 42.9% of baseline. If you get 30% of the additional grid power from non-petroleum sources like coal, wind or solar, this falls to 34.5%.

Things look almost absurdly rosy if you postulate cogenerating furnaces to generate electricity during the heating season. There are a lot of things we could do that we are not. Yet.

Embarking on a plan like this would lead directly to economic growth because the money that would have gone to the oil-producing countries would go instead to the battery makers, gas-turbine manufacturers, and other uses inside the industrialized countries (including our own).

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mw on October 3, 2005 - 12:53pm

EP, there are plenty of potential solutions out there, but, so far, seemingly, no potential leaders to get the ball running.

Solutions will only be worked on if a problem is perceived to be there, and I'm not convinced that the political leadership around the world is convinced that we face now, or in the next X years, anything more than a speed bump.

People need to feel more pain before they will really demand action; after all, most everyone dumped their Mazda's for Ford Explorers and big vans over the past 30 years... ;-)

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markincalgary on October 2, 2005 - 6:20pm

The right way to subsidize high heating fuel costs is to give every citizen a check to cover the extra cost. That way those who have conserved get some incentive (ie. they get to keep some of the cash).

Contrast this with the government paying a piece of every natural gas or heating oil bill. This punishes folk that conserve (because they might not have a bill, but still pay taxes).

If tax heating fuel like crazy, but handout money (ie. cash) to everyone to offset the tax, we encourage conservation without punishing the poor.

There might be some market distortion is such a scheme, but I'll leave that to someone more expert than myself to explain. It certainly isn't obvious to me.

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mw on October 2, 2005 - 5:46am

Speaking of PG&E:

The economic impact of Hurricanes Katrina and Rita will be felt on natural gas bills in October, as PG&E's residential customers can expect to pay $17.45 more for the fuel in October, compared to October of 2004 - an increase of 70.8%.

But then they go on to reassure:

In the immediate aftermath of the hurricanes, natural gas prices have surged nation-wide, but the level of the increase in cost seen in October is expected to fall in the coming months. PG&E is currently estimating that natural gas bills for December and January will be 40-50% higher compared with last year.

And, stop yer whining, others have it worse, and hey, California is, for the most part, warmer than most other places in the country:

While the price of natural gas in California is high, costs in the other parts of the country have surged even more, with some utilities reporting bill increases in the triple digits.

Comment: One can only hope there are reasons for NG to come down from 14, or at least not rise further. Do they have more info than we do? One supposes, but I think they'd say this stuff even if it were flat out false... just to stave off panic.

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Nate Hagens on October 2, 2005 - 9:03am

Dave, as a former commodities trader (well, are we ever 'former'?), I would like to THINK that the thousands of executives in the oil industry understand how much GOM production is offline and if it was going to be over 50% for an extended time, whispers of such would send next years oil/products significantly higher. These prices are about the same as 2 months ago, before either hurricane. SO that tells me a)damage either is less or will be fixed b)market is certain it can get increased supply from elsewhere c) people are truly unaware of the problem and TOD has scoop or d)something else is moving the market that we are as yet unaware (this is often the case).

The market she is a fickle beast - if I had to guess-whats holding oil down (relatively), we are still so close to Peak production (meaning we are still increasing on a global level) that any meaningful demand destruction or energy switching (Im heating with wood this winter FYI), will cause near term contracts to drop, possibly sharply. Since the mkt is priced at the marginal barrel - we really could see Mike Lynchs prediction of $30, at any time, at least in the front months. IMHO, the next few months will be a race between measuring how much supply we have lost vs how much demand we are losing. This FIRST oil crisis will be a fire-drill because we are still on the Hubbert upslope - lets hope its a wake up call for stark policy changes- Id rather have to eat a nasty pill than get a nasty disease.

But of course I need to see a different doctor for natural gas....

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louGrinzo on October 2, 2005 - 10:09am

TLS (great handle, by the way): I'm not and never was a trader, but I think you've broken it down accurately. My hunch is that the current price level is caused by your option (A), and that traders have been told (or believe for some other reason) that while the shut-in capacity is high right now, it will be restored before it influences markets enough or for long enough to move the price.

My only "inside" information is what I read on TOD, but if my guess is correct, it seems to me that the traders (or the people feeding them information) are overly optimistic. I think it's still possible that enough of the damaged infrastructure can be repaired in time to avoid outages or very high prices (meaning at least 50% higher than they are today) this winter. But the odds are looking worse by the day that the energy companies can pull off that miracle.

My fear in the very short run is what happens if the conventional wisdom toggles from "everything will be fine" to "we're in a crisis". That's when markets go nuts, to use a technical term.

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Engineer-Poet on October 2, 2005 - 2:44pm

Lou, do you have any idea how expensive gas will have to get before it starts paying to take manure-digester gas and landfill gas and clean it to pipeline quality? Those are sources that aren't likely to have the sliding production and would tend to change the decline curve.

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NC on October 2, 2005 - 4:54pm

I am looking for conformation but was told Midamerica energy is doing this now in the midwest, particularly Iowa.

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Jerry Van Polen on October 2, 2005 - 5:56pm

Engineer, your question is about direct substitution in NG supply, but in general could there be a sea-change associated with present NG prices with more consequence for infrastructure than $70/barrel oil?

At $14 per million BTU, and 3412 BTU/kWh, even a (generous) 70% efficient peaking plant implies 6.8 cents/kWh. Shouldn't that be enough to tip many scales toward growth in reliance on wind, for example, with or without subsidies, with or without successful green marketing, with or without top-level political will?

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Engineer-Poet on October 2, 2005 - 10:37pm

Try 35-40% efficiency for a simple-cycle peaking plant, 55-60% for a combined-cycle plant (which I understand cannot be throttled fast enough for peaking). You're looking at a minimum fuel cost in the 8¢ range for combined cycle, 12¢ to 13.6¢ for simple-cycle.

Yes, I expect wind to be driven very strongly over the next few years where generation previously relied on gas (though solar follows the A/C load peaks a lot better). If coal winds up in demand for Fischer-Tropsch synthesis of motor fuel and it becomes hard to increase production, wind will wind up being valued where generation is coal-fired too.

It may still be a good idea to have production credits for the next few years (perhaps 5). It pays to think of the future even if utility accounting rules won't let them, and a tax credit is probably easier than un-screwing the screwy system in time for next year. When conditions suddenly switch over to wind, solar or cogeneration being a REALLY good idea due to whatever event, I'd much rather that installation had begun 5 years before than 18 months after the crisis.

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NC on October 2, 2005 - 11:44pm

My mistake. Alliant Energy not Midamerica has methane capture up and running commercially. http://www.alliantenergy.com/stellent/groups/public/documents/pub/012042.pdf

A quick search shows that the midwestern electric and energy companies are investing heavily in alternative sources. Very large windfarms, ethanol, biodiesel and methane are on line in Il, IA, MN, SD, and Ne.

For those interested, Midamerica is owned by Warren Buffet's Berkshire Hathaway. http://www.mindfully.org/Energy/2005/Buffet-Berkshire-PacifiCorp24may05.htm

Berkshire has been buying lots of electric/energy companies recently and investing in alternatives.

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Engineer-Poet on October 2, 2005 - 11:53pm

That Alliant PDF claims bio-methane to electricity, not to the pipeline. If the local generation is coal-fired the net cost reduction is quite a bit less than would otherwise be possible.

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NC on October 3, 2005 - 3:31pm

Alliant is the natural gas distributer in central Iowa as well as electricity. I believe they control at least one main pipeline so they can feed their electric generating plants. Alliant and Midamerica have built NG electric generating plants recently because they come on line faster than coal and have a tax advantage due to lower total emissions. You have a valid point per onsite production if that is the case. I was told and am trying to confirm that Alliant has a methane pressurizing station feeding a main east-west pipeline.

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mw on October 2, 2005 - 2:14pm

Next up in line for tropical storm activity: Gulf of Mexico - Mexican Cantarell Oil Field

Path track:
http://euler.atmos.colostate.edu/~vigh/guidance/atlantic/early1.png

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mw on October 2, 2005 - 10:00pm

No smaller cars, despite gas costs
SAN FRANCISCO (MarketWatch) - Despite high gas prices, 56 percent of Americans refuse to downsize and plan to stick with the cars and trucks they have, according to a report published Sunday.

By 2010, the number of SUVs on the market will increase 24% to 109 models, the magazine said, citing auto researcher J.D. Power and Associates. Meanwhile, just 44 different hybrids will be offered by then.

By the end of the decade, J.D. Power predicts hybrids will account for less than 4 percent of total auto sales. At the same time, SUVs will grow from 24.6% to 26.6%.
http://www.marketwatch.com/news/story.asp?guid=%7B62F85C82%2D592F%2D45A7%2D83F4%2D89D3D8A003C8%7D&am p;;siteid=mktw

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Ben on October 3, 2005 - 12:14am

FWIW, if they were to survey me (and they did not), I would have to say I'm not planning on buying a new car soon.

I have two hondas, with combined mileage of over a quarter million miles, and the newest one was built in 99 model year. But there just isn't any money to invest in another car (trading one in wouldn't change the equation much)

Looking around my college town, I'm very aware of the very high number of late model trucks - a wide range of SUV's, lots of Suburbans and Excursions, lots and lots of half ton or 3/4 ton trucks (near ranch country). Of cars, one of the popular new ones is the Mustang remodel this year (same idea that VW had of coming out with a "new" beetle, but these are the "new" mustangs styled to look like the late 60's models)

And yes, on Saturday the wholesale club was out of gas. Hmm.

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mw on October 3, 2005 - 12:59pm

We have a 1996 Volvo wagon - we've been saying NO to SUV's and Vans, although no doubt our wagon uses as much fuel as some smaller, efficient, vans, but I digress. We are not planning on selling the beast. For one, it wouldn't net us what we'd need to buy a more fuel efficient vehicle; two its long since paid for; three, we are rather hoping it may be the last car we ever buy.

Even if gas goes to 2, 3, 4$ a litre, we'll still find it more cost effective to drive the family over to the next province over than to fly, in the future, and crossing the Canadian Rockies also brings us to areas where we enjoy our leisure time.

In-city driving we've already reduced as much as possible; for a while it was near zero but my wife's office is in a difficult and dangerous to cycle to location that is not served by mass transit. One day this ought to change... so we fill up a couple of times a month, somewhat more in the winter, less in the summer.

I sold our second car over a year ago on concerns about what we are facing here... me and the kids get around fine on our single bikes or on the family tandems.

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