The Oil Drum

Below is 4th in a series of installments by Professor Charles Hall of the SUNY College of Environmental Science and Forestry and his students attempting to update the 'balloon graph' of EROI x Scale for fossil and renewable energy sources with help from theoildrum.com readership. Todays post deals with solar energy, specifically: Hydropower, Passive Solar, Photovoltaic, and Wind energy. Next will be Geothermal and Wave energy systems.

Global oil depletion is not immune to the Law of Receding Horizons, the Law of Diminishing Marginal Returns, nor it seems to the Law of Unintended Consequences. The Grangemouth refinery shutdown has apparently caused work on a new wind farm in Scotland to shut down for lack of diesel fuel. Though at this stage this is a short-term snafu, it's a real time example of how lack of systems analysis of our energy problem will lead to unanticipated problems.

Tomorrow we will highlight another in a series of analysis on Energy Return on (Energy) Investment. Though measuring an energy projects profit and cost in terms of energy is very important, all energy sources are not the same, and the word 'alternative' does not connote 'equality'. In effect, quality matters. Despite some attractive substitutes to oil and gas from an energy return perspective, ALL fuel sources are now heavily subsidized by an infrastructure built and maintained by cheap and constantly available liquid fuels.

all photos by author

(And yes, in case there is any doubt, I work in the industry, finance it and spoke at the conference)

The Guardian reports this morning on a private report to Gordon Brown that suggests that Britain should oppose binding target for renewable energies in Europe (20% of all energy by 2020, as agreed earlier this year at this spring's EU Summit). The Guardian flags the juicy political bits ("work with Poland and other governments sceptical about climate change to "help persuade" German chancellor Angela Merkel and others to set lower renewable targets", "a potentially significant cost in terms of reduced climate change leadership"), but also provides some of the apparent underlying reasons provided, which are worth commenting upon:

• it undermines the carbon-trading scheme which "allows wealthy governments to pay others to reduce emissions";
• it costs too much money (£4 billion a year to get to 9% by 2020);
• it does not help push for new nuclear plants as it "reduces the incentives to invest in other carbon technologies like nuclear power";

Let's say it plainly: each of these arguments is stupid, short-sighted and, quite simply, false. Let me take you through them in turn (under the fold).

RECENTLY, I spent eight days in the Nevada desert with 47,000-some-odd other folks at the utterly unique annual event called Burning Man. This was my third time there, and it was more than a third larger, and quite a bit more taxing, than I remembered from my last attendance in 2000. For those who haven't heard of Burning Man, it's . . . well, it's hard to describe. In fact there are probably as many descriptions as there are attendees.

Canada's economy is moving and shaking. The loonie reached parity with the US dollar for the first time since the Gerald Ford presidency. But don't be fooled: it's not the Canadian economy that does so great, it's the US that sinks ever further ever faster, and the rest of the world is sinking with it, including Canada.

The long-awaited report on the royalty rates for the Alberta tar sands was published, and it recommends raising the royalties significantly. Both the industry and the business-friendly media in Canada cry foul, and worse. Just a few months ago, Shell said their tar sands operation was immensely profitable, but now the tune has changed.

Some voices say raising the royalties reeks of too-big government, and comparisons with Hugo Chavez fly everywhere. But those same voices do want the government to pay for the Mackenzie Valley pipeline.

Go here for the full report.

Caracas on the Bow River

Tim Hearn, chief executive officer of top oil sands producer Imperial Oil, said any additional royalties would harm companies already facing sky-high labour and construction costs for their projects.

“I'm not in a position today to say whether we've reached a tipping point or not because I can't tell you,” Mr. Hearn said. “But there's enough things working against us that if all this stays in place as is, there will be an effect in the industry, clearly.”

A former oil executive who was on the review panel lashed back at energy executives, saying they should concentrate on better managing their own businesses and contain cost increases rather than “whining” about higher royalties.

“I don't have any sympathies,” said Sam Spanglet, who ran Shell Canada Ltd.'s oil sands operation before retiring several years ago. “[Alberta is] still going to be very competitive. I feel very confident.”

Some Calgarians were angry, with one broker e-mailing his clients with the subject line: “Caracas on the Bow River,” comparing Alberta with Venezuela and its socialist President Hugo Chavez, who expropriated oil assets this year.

“If [the report is] enacted, investment decisions will be impacted … [the report] reads a bit like a Chavez-style manifesto,” Steve Larke, a Peters & Co. Ltd. broker, said in the e-mail.

The situation in the credit markets continues to worsen as a sudden attack of risk aversion rapidly dries up liquidity. And this is before the resetting of adjustable rate mortgages (ARMs) begins in earnest - to the tune of $50 billion - in October. Watch this space.

On the Canadian energy scene, Shell pumps $27 billion into the oil sands, even as oil patch profitability falls. Abu Dhabi wants to invest in Canadian power plants, and there are plans for BC to host an LNG terminal. Wind power grows rapidly in Ontario and Quebec, making a few enemies along the way. In BC they ask: should public transit be free?

On the climate front, water is the issue - too little and too much. Finally, in the tug-of-war between efficiency and resilience, efficiency has the upper hand, but what price will we pay for allowing our life support system to become brittle?

Going With The Flow?

You may remember that our definition of household cash is as broad as can be. We include all household "banking products", per se, but also include all household holdings of bonds, inclusive of Treasuries, Agencies, corporates, muni's and mortgage backed paper. Implicitly, we are assuming bond holdings could be converted to cash at a moments notice. So what follows is simply total household cash less total household liabilities over the last six decades.

Subprime coming home to roost?

A rash of bankruptcies at subprime lenders prompted a market wobble in February and March but traders swiftly decided the problem was contained. Equity markets across the world continued to rally, while the credit market remained phenomenally high in historical terms, thanks in large part to the growth of credit derivatives. These prompted optimism that it had become easier to spread risk and so it was justifiable that even the riskiest companies could obtain credit cheaply.

That mood of optimism is over. Fear now rules the credit markets, where the effective cost of ensuring against a default, in both Europe and the US, has increased by more than half in barely a month. A steady drip of bad news has prompted fears that the subprime debacle could trigger a credit crunch, raising the cost of financing worldwide as investors are forced to sell healthy investments to make good their losses....

....Rather than an orderly correction, they confront a situation where the market for riskier forms of credit seems to have come to a complete halt. US issuance of high-yield, or low-quality, debt stayed below $1bn for the third successive week, according to Thomson Financial. The last week of June brought $9.7bn of high-yield issuance; by last week that had fallen to $322m. This financing is crucial for private equity deals.

"The cancellation of high-yield deals and the inability of the large banks to syndicate their leveraged loans is causing the credit markets to shut down," says T. J. Marta, strategist at RBC Capital Markets. "Something has to give here: either equities have to give it up or credit is going to implode".