Big Oil and Alternative Energy
Posted by Robert Rapier on May 3, 2006 - 7:11pm
Topic: Alternative energy
Tags: alternative energy, oil companies, politics [list all tags]
First of all, a disclaimer for those who don't know: I work for Big Oil, but my opinions should never be misconstrued as the opinions of my employer or of Big Oil.
I ran across the following editorial in The Bellingham Herald: Drilling is No Answer to U.S. Oil Dependence
It's not as if the money we are all spending is just disappearing into the ether. Exxon's latest quarterly report showed $8 billion in profits. Other oil companies are enjoying record profits as well. If you are a stockholder in these companies, congratulations. But we hope you recognize your increased nest egg is coming at the cost of every American citizen, business and the economy. Anyone with stock in these companies should be pushing the board of directors and executives to reinvest a large part of the profits in research for new alternative energy sources.This is a good editorial, and worth your time to read. But I want to focus on the last sentence above. The idea of reinvesting profits into alternative energy is something that has been repeated in the media, by politicians, and by ordinary citizens. However, this is just wishful thinking.
Even BP, who has generated a lot of publicity from their alternative energy investments, is still investing far more into the core oil business. BP's CEO John Browne admitted as much recently on CNN's We Were Warned:
John Browne: We are investing $15 billion in the oil and gas business because it is up and running.Frank Sesno: So alternatives are still a drop in the bucket.
John Browne: At the moment, of course they are.
When Big Oil decides that there is money to be made from alternative energy, they will start moving in that direction. Concerns about Global Warming will be unlikely to accelerate this move, unless it clearly and directly affects profits. There is no guarantee that oil companies won't miscalculate and make their move too late. But the investment decisions will be based on enhancing shareholder return, and right now the general belief is that the best way to achieve this is by investments geared toward bringing more fossil fuels to market.
I am not making judgments about the wisdom of this course of action. I am just stating the way it is. To stimulate a serious move away from fossil fuels, the market is going to have to drive prices up much higher, or the government is going to have to intervene. Government intervention can take several different forms. One, they can subsidize alternative energy technologies that they believe have the best opportunity to compete against fossil fuels. I don't particularly favor this option, because I don't believe the government will necessarily fund the best long term options.
The second way government can intervene is to substantially raise taxes on fossil fuels, while leaving the (renewable) alternatives untaxed and unsubsidized. This would allow the alternatives to compete against one another on a level playing field. I also believe that government should intervene in a BIG way to encourage conservation and prepare us for what's to come, but that is a subject worthy of its own essay.
If it ever looks like Congress is really going to nationalize them, I'd advise you to get a bicycle and make sure you're fit enough to use it. 'Cause Congress would be doing it in order to loot them.
In short order they'd work in the same dilatory and/or dysfunctional manner as public toilets, public freeways, public busses, Amtrak, the Postal Service, air traffic control, and almost everything else that's ultimately run by government. Heck, somehow government has even made our numerically trivial commitment in Iraq - a whole 140,000 troops, a massive, overwhelming 0.05% of our population - into an insupportable burden.
Of course, if it's wartime, we could impose wartime income taxes, and make the Lee Raymonds of the world pay 98% at the margin. But then again, that might disincentify football players and Hollywood "stars". If that happened, what would the Great Shiftless Moron Mass do for entertainment, except maybe to shoot even more holes in highway signs?
The reason why public transportation and such are in bad shape is because not enough is invested in them (in some countries, particularly European and Asian, public transportation is quite decent). I'm sure that mistake wouldn't be make with oil since it's such a big cash cow (and public transportation isn't).
Breaking up ICE is a major goal of CAFTA, called TLC down here, and is one of the reasons the treaty is still opposed. It faces a tough fight in the coming legislature, but it will probably pass.
At least for now, any frustrations incurred dealing with the ICE bureaucracy is more than made up by the quality and efficiency of the service. My bill for electric, water, sewer, garbage, phone, and internet run less than $100/mo.
Arizona Public Service, which was "privitized," raised theirs something like 35 percent.
We have a good co-op with lots of citizen participation. It really pushes conservation programs.
It's a great thing, in my opinion.
There are only two ways to allocate a scarce resource--through market forces (price) or through force. We either pay the higher price, or we do without, or we seize foreign oil fields, which I suppose is what we may be doing in the Middle East.
We have an economy where the majority of Americans live off the discretionary income of other Americans. This is not in any way sustainable. Whether we like large homes and large SUV's or not, we are going to be forced to become a country focused on providing essential goods and services.
My opinion for quite some time is that oil exporters are going to seriously begin to question whether they should continue to give us oil in exchange for dollars, and to question their rate of production.
You, and perhaps others, have made this point before. I think it's a very important one, in that it makes clear the lack of sustainability in a world where it is likely to become impossible to provide necessities for most. So why are we providing frills, when we can't provide necessities? The market will change this, though perhaps tortuously.
I may know of an exception to this, however. Last year I had a client briefly (paid speech on calculating ROI of intangibles-speaking of non-essentials!) whose business is to provide sophisticated computer systems (software plus hardware) to 4* resorts, hotels and casinos to enable them to provide extraordinary levels of pampering to their extraordinarily rich customers. Since there will (probably) continue to be a very rich class for some time (a few decades? until control breaks down), this niche may survive for quite a while.
It's the $3 latte that is vulnerable to $4 gas. BTW, gasoline here in my California suburb is now $3.599 for a gallon of regular.
At some point, it will, but by that time there won't be anything left. One of the points that has stuck with me from reading Orwell's The Road to Wigan Pier is that people routinely cut solid necessities to the bone in order to afford cheap luxuries. It happens over and over, in every economic circumstance. And he wrote that book in 1934, before the advent of modern marketing.
Human beings aren't rational; we see this demonstrated over and over every single day. Basing the future survival of our civilization on an economic theory which presupposes that we are is a recipe for disaster.
Looked at in another way, its not "Big Oil" that is making these decisions, but our financial structure which rewards current performance and extrapolates it forward via discount rates or other financial models. What we really need is an overhaul of how wall street values companies shares - this would require an ubiquitous understanding of net energy. Its also counter to human nature, which is to focus on the present -the future is discounted heavily.
Also, oil is very high quality energy, so as it gets scarcer, it will still be higher quality than wind or solar, so the companies that can pull it out, will be getting multiples of what they get now.
Ive said for a long time that the market only prices at the marginal barrel and was not designed to properly value a scarce resource that has a very large fixed usage in society.
That's pretty bold classification of Human Nature. Even those posts that make this claim of short-sightedness as the basic 'American Human Nature' are being extremely general. Sure, there are countless examples of it, as there are also examples of people building well-designed infrastructure meant to last for generations, just as these Renewables that we should be installing ought to be. NYC water tunnels, Brooklyn Bridge, Holland's great Dikes, Terraced Irrigation systems.. etc..
What you might have said was that this is counter to the 'prevailing business-models' that we have since allowed to run some (most) of the systems that we rely upon to survive, without also retaining a limber mechanism (Government?) for looking any farther ahead to our developing needs than these businesses do, so that someone can step in in a timely way and say 'some new preparations have to be made now'.. As it stands, business leaders can 'legitimately' say that they cannot let their love of Humankind force them to make 'Irresponsible' business decisions.
Jokuhl wrote: "That's pretty bold classification of Human Nature."
Actually, IMHO it isn't too bold. This is the way the entire rest of the animal kingdom works. AFAIK, humans are the only species that gives any thought whatsoever to the future. So I would adjust the original statement to say, "It's also counter to all nature, which is to focus on the present."
It's a real credit to humanity that we give any weight to the future at all. It's strong evidence that we really are smarter than yeast. The next question is, are we smart enough to avoid the outcome of all yeast? So far, we have several thousands of years of track record in our favor :-) Of course I've never heard of yeast going to war :-(
What some Americans now claim to be human nature is no more than what they've been taught to believe by the propagandists of consumption. The conduct they claim to be universal is actually no more than a relatively recent materialist ideology.
regards,
Backstop
Of course it's also true that bees don't "think" about putting honey aside for the future. Bees just do what bees do.
The Swiss voted in 1998 to do a twenty year, 31 billion Swiss franc (= to $1 trillion for US) upgrade of their rail system. The keystone of the entire project will take 17 years to complete (from memory).
Miami wants to build a 103 mile elevated "subway" over 25 years. 90% of the population will be within 3 miles of a station, over half within 2 miles. They are taking themselves a 1/2 ¢ sales tax to pay for it.
Large dams, etc.
and i think behavioral economics does document a discounting of the future ("intertemporal choice," etc.). such discounting may be an advantage because it is statistically correct ... but that's the whole point of the "black swan" argument, that we are less prepared (by nature) for the statistically infrequent.
... and peak oil is a classic black swan
http://www.fooledbyrandomness.com/blackswan.pdf
If you want an example - in times of negative interest (when money was not a good store of value for instance due to taxes upon money levied by local lords) long term thinking was order of the day. Hence the construction of cathedrals in mediaeval England. Building a cathedral took generations but guaranteed income (via pilgrims) for even longer ...
The fact that oil companies are not investing much in alternative energy doesn't mean that their profits are in any sense going to waste.
Money is a flow, and it doesn't get created or destroyed by commerce. When oil goes up in price, more money flows to oil companies. But it would be more correct to say that money flows through oil companies. It doesn't just pile up there.
Oil companies invest some of it on more oil - and that's a sensible investment! That's the business they have expertise in, the one they know. Readers here are well aware of the problems posed by production declines. We are approaching the situation where we have to "run as hard as we can just to stay in one place". Oil is tremendously valuable, and society benefits when we spend more money to make more oil available. What the oil companies are doing makes good economic sense.
At the same time, much of those oil company profits flow on into the rest of society, into the pockets of individuals and other businesses. And yes, into the pockets of oil sheiks. What happens then? They spend and invest that money.
Ultimately, investment money flows to where it is expected to provide the highest returns. These days energy investments are highly profitable. That includes both conventional and alternative energy. More and more money will be going to alternative energy investments as those technologies become cost competitive.
The point is that even money spent on oil circulates around through the economy and can eventually go to support alternative energy investments. Money goes to where it is most productive, and even though oil companies don't spend it on wind turbines (any more than Microsoft spends its profits on gold mining), the money will ultimately get there, along with everywhere else that a profit can be made.
While the corporate profits do flow back into society, at the same time this results in shifts of ownership and control of money. One of the biggest problems of capitalism is that it results in consolidation of power and I think one can see by it's nature returns to an equivalent of dictatorship under a different name. Again practically by definition, fascism.
I personally don't see how we're going to solve problems related to peak oil without money reform. We have a system in the process of breaking down and money reform will eventually be an outcome. Debt based money will have to change or go altogether as we enter a world without growth.
I'm an independent landman, and feel that the problem with the major companies is that they are in denial about the real situation. The problem is not that all the oil is exhuasted-in Texas over 80% of the oil discovered is still- in the ground-but rather that the cheaply produced oil is mostly gone. With their huge overhead costs for exploration and production they can't make a profit on a ten barrel per day well, while an independent can make a great profit on small production. With these prices a barrel a day well can be operated and make a profit.
The real problem is that the world population has tripled since I was born in 1951 and all the Asians, Latin Americans and Africans want to live the same profligate life style that we enjoy, thanks to TV and the internet. The earth can't support it and production of cheap energy is declining rapidly.
The morons all want a single cheap solution, and it ain't gonna come. As a society we need to adopt many partial solutions including conservation, wind, solar, nuclear, and tertiary production methods and be willing to help the developing world as much as possible in getting a decent life style. But mostly we need to limit births whether it is religeously palatable or not.
I believe in watching what people do, not what the say. The majors are building about 30 Liquified Natural Gas terminals in Texas alone. Almost any gasoline engine can be modified to use gas for less than a couple of grand. This seems to be their solution to the transportation mess, because there is still a large world gas supply. Note that Exxon is developing Qatar's gas, about 25% of the world reserves.
But none of the integrated oil companies are going to tout this solution while they can still get enough fuel stock for their refineries. Too big a capital investment to abandon.
"Quantifying gas, oil, and brine migration in a 125 x 200 km area of the offshore Louisiana Gulf of Mexico: A modeling analysis of hydrocarbon chemistry and gas washing, hydrocarbon fluxes, and reservoir filling. Department of Earth and Atmospheric Sciences, Cornell University, Ithaca, New York, 14883"
http://www.geo.cornell.edu/eas/research/GeoModeling/BasinLAB/Gri2002_Modeling_Report.pdf
They carefully stick to the scientific analysis of the data and how to get better data. They avoid stating how the data could show something like - new oil fields. However, in Table 8 they state that the "Expulsion Potential" of the area is many times greater than the "Produced + Reserves." Hmmm.....
What happens is that oil is denser than gas and lighter than water. So as the kerogen is cracked to oil and gas, most of the oil is pushed up through any cracks in the formation by water, and most of the rest of the oil is pushed down below the lip of the formation by gas.
Then it seeps to the surface. That's how people originally decided where to drill, before seismic and modern geological formation mapping and other techniques.
Vestas Wind Systems: 2May05 US$12.67, 3May06 US$29.00 +129%
SolarWorld Ag: 24May05 47.75EUR, 3May06 252.18EUR +428%
SolarWorld is an FT600 company and is growing like the early days of IBM, Xerox, Intel, Apple, etc. Yet it is almost unknown to US investors. I am baffled as to why anyone with cash on hand would not want a piece of this action.
A list of US wind developers cna be developed from the project list (sorted by state) at http://www.awea.org/projects/
A bit of work to find the name sof the developers/operators, but some good small plays can be found that way.
This company increased about 3500% in the last years. The interessting point here is what happened early this year.
Shell solar obviously had problems with its silicon grade supply, therefore the factories in California and Germany where running out of material. Somehow in the end solarworld took over the silicon pv business from Shell and became number 3 in the world.
If Shell really takes alternatives seriously, so why do they leave this market, which is grwoing worldwide with more than 30% p.a.? Probably the leaders are not yet convinced about this.
A couple of weeks ago, in the FAZ (Frankfurter Allgemeine Zeitung) newspaper, there were two advertisments on one page. One investments fonds with alternative energy stocks (which has been really a bullish market the last two years here in Germany), the other from BP, describing its planned investments in renewable energy.
Maybe there is paradigm change going on. However I think this will happen in large parts without the big energy companies. The formerly small companies are now capable to get enough money from banks and other investors and don't need to sell shares to students. ;-)
matthias, berlin
yes, this was the official explaination. Would you sell a factory which already produces products which can be sold on a booming market? A lot of profit can be made with solar cells right now and very likely in the ongoing years. Their problem was the supply of solar grade.
Any company which sells factories which can run profitable to start research in a future technology would become bancrupt in a short time.
The CIGIS-film technolgy is a serious technology. However as you write potentially 1/30 thickness and therefore cheaper.
I personally have my doubts putting something on a roof which contains cadmium.
Interessting about this deal is the possibility which was provided to solarworld to become partner with shell in future, producing these CIGIS cells. Another point is, Shell has sold the distribution offices in South Africa and Singapore as well to Solarworld. There is obviously no product which can be distributed right now from Shell.
matthias, berlin
When
But the ground glass would give you indigestion...