Hedge Funds, Hurricanes and Energy Markets
Posted by nate hagens on September 3, 2008 - 10:14am
In the past week, the energy markets have sold off steeply, even in the face of as-still-unknown damage from (a weaker than expected) Hurricane Gustav. If you were reading theoildrum.com of late, you have seen Kinetic Analysis Corp periodic updates on modeled damage/shut in production to Americas oil and gas facilities. We are also continuing to accumulate stories, data, and observations about the effects of Gustav on oil, natural gas, and gasoline production in another thread below.
Tonight another hurricane (of sorts) was announced in the financial press when CNBC reported that Ospraie, a $4 billion hedge fund partially owned by Lehman Brothers (and a major energy player), is closing it's doors after being down nearly 40% in 2008 following a -26% August. While this example is possibly unrelated to the current energy market meltdown, it serves as a good example of what may be a continued theme in natural resource markets - their small size in relation to the nominal amount of dollars seeking financial returns.
BACKGROUND:
2006 Natural Gas Futures daily prices (black arrow - announcement of Amaranth failure)
When Amaranth blew up in September of 2006, the world learned about a swashbuckling trader named Brian Hunter. In the Summer of 2006, Brian was reported to be massively short near dated NG futures, and long spring futures in NG for the following year. (I wrote about this and analyzed the crash in the winter/summer NG strips in "A Tale of Two Markets"). There is some indication that his position was so enormous, that when it went slightly against him, the information leaked out to the street, and then other funds and speculators ran in front of him. This revealed a rather Darwinian and carnivorous aspect of Hedge Funds: they all have prime brokers--i.e. access to capital from large banks--in order to put on their trades using leverage. When the trader runs into trouble, he has to call his prime broker. Having worked in this business, I can assure you that invariably, information migrates from the prime broker to other market participants (via mini tribal-cliques), who then take you out by putting on large trades against the direction of your position ala Soros vs Bank of England. If you read stories of trading in the traditonal pits, alot of this used to happen by seeing who looked scared. The other traders in the pit knew where everyone stood and were good at smelling blood (same as good poker players).
From the above chart, AFTER the Amaranth blowup was announced (the black arrow), futures made a slight new low and then continued to rally the rest of the year (even with another mild winter).
FAST FORWARD 24 MONTHS....
October 2008 Natural Gas futures - new yearly low today
I believe that based on fundamental deterioration in oil and gas fundamentals (e.g. hard to find, costlier to procure, etc.) that we are in a long term higher high, higher low, environment for energy prices, one not caused by speculators but by more people wanting something that is less available. However, speculators have a great deal of impact in very short time horizons. (If we had more, better, smarter speculators, then volatility would probably be reduced!!**)
I have no idea what Ospraie's specific positions were other than the CNBC mention of bad bets in natural gas and copper, but in the letter to shareholders tonight, manager Dwight Anderson said this:
"The losses were primarily caused by a substantial sell-off in a number of our energy, mining and resource equity holdings during a six-week period characterized by some of the sharpest declines in these sectors in the past ten to twenty years."
Holdings in natural gas-related companies made up almost a fifth of Ospraie's investments at the end of June, before the commodity's price dropped 41 percent.
We can surmise they were doing well along with everyone else until the end of June, which means they were likely very long everything, from energy futures to energy equities. Funds like Ospraie are usually levered at least 3 to 1. Peter Thiel's Clarium Capital, one of the largest similar funds, has routinely had about 3 billion under management but is often reported to be carrying positions worth 9-12 billion. In general it's nigh impossible to measure or quantify how these funds move price around when they start liquidating. What's certain is that other players are sucked/forced into the moves, and the entire event gets magnified. (REFCO was another relevant example). Usually, it's not until weeks or sometimes months later that the people not in the know that have been scratching their heads finally get an explanation other than 'the hurricane was a Cat 3 not a Cat 5' or some such....
Bottom line: hedge funds pull alot of weight with their capital, and added leverage via credit, and when their shark brethren get a whiff of pending trouble, a positive blood-in-the-water feedback mechanism ensues, which exaggerates moves, first in one direction, then in the other. (This was discussed in Peak Oil, Reflexivity and Peak Oil)We as yet don't know how the trillions of dollars of hedge fund capital is collectively distributed, but history suggests there are often very crowded trades, so any future forced liquidations will likely be especially disruptive given the past decade of easy credit since the LTCM debacle.
OSPRAIE>GUSTAV?
Though we are told that we import 60% of our oil, the truth is somewhat less benign. The US pumps about 5,100,000 barrels of crude oil a day. The figure the US government likes to quote is total liquids, which totalled 8,457,000 barrels a day in 2007; (8,703,000 barrels per day so far in 2008). This total liquids includes a lot of stuff, including "refinery gain" on oil we import. Once we refine it, using other energy and non-energy inputs, the volume increases, and it magically transforms into higher domestic production. Total liquids also includes natural gas liquids (NGPL), which only have about 60% of the energy as WTI oil. Total liquids also includes ethanol, now amounting to about 600,000 barrels a day (also of lower energy density). So of our total annual consumption of petroleum (including ethanol) of about 20,700,000 barrels a day (2007), 8,457,000 or 40% of total liquids were 'produced' domestically, but if we look at the good stuff alone, we only produce 5,100,000 bpd, implying 15,600,000/20,700,000=75% imports. (This post points out the dangers from confusion of defining 'what is oil').
But I digress from my main point.
The news is still trickling out about damages in the Gulf oil and gas platforms and rigs. The amount of shut-in production from Hurricane Gustav won't be fully known for a while. The latest estimates from Chuck Watson's analysis for the next 30 days is 13 million barrels (or 40% of normal GOM production lost) and 70 billion cubic feet (or 29.3% of normal GOM production lost). There are longer expected outages and damage but let's just use the 30 day numbers for a calculation.
With between $10,175 and $12,000 in margin (depending on member, or non-member), an investor, end-user or speculator can control 1,000 barrels of crude oil on the NYMEX. So, to "control" the same amount of oil shortfall expected by Gustav, ceteris paribis, one would need 13,000,000/1,000=13,000 contracts, which would require margin of $132,275,000, (a tidy sum for you and I, but for one (or several) of the behemoth hedge funds, not so much). On the natural gas side, the margin requirement for 1 mmcf contract is also about 10% - (higher than it used to be for sure), or $8,150. With 70 billion cubic feet as the latest 30 day shut-in production estimate, this equates to 70,000,000,000/10,000,000 =7,000 contracts - a notional value of $495,000,000 but requiring around $50 million in margin to control. So with $182 mil, someone could 'offset' the expected oil and natural gas production loss for the next month from this hurricane (i.e. sell via the futures market the same amount of production that users might need to buy)...Money is a powerful thing. It's like Cat 10.
This real life example shows that when energy competes with money, it is liable to get run over in the short run. As I have written about frequently during the past few years, the amount of paper currency (and related credit) circulating the planet seeking a 'return' dwarfs the amount of underlying physical resources. Here is the conclusion in my post on Amaranth, 2 years ago:
"In addition to position limits for non-users or hedgers of energy, we should create a floor price for oil and gas, so that financial market-led volatility or intermittent gluts of product do not derail the development of alternative forms of electricity and liquid fuels. The achilles heel of the big two fossil fuels in their use in our world, is the time it takes to replace them. The natural gas market, in its current price dichotomy, is a prime example of the high standard deviation potential in our current system. Heads everything is rosy. Tails there are power outages.
I have no idea whether it will be cold this winter."
DAVID (energy) VS GOLIATH (hedge funds)
The accumulation of financial capital accretes incremental social power in modern society. Everything else being equal, more money gives one more access to information, resources, flexibility, energy and leisure. As high quality fossil fuel abundance morphs into a fervent scraping for all things energy, 'money' may increasingly represent a poor proxy for the real wealth embodied in natural, built, social and human capital. Until that time, large concentrated digital accounts around the world (e.g. hedge funds) will likely continue to toss commodity futures prices around like my dog shakes a chicken - up down and all around, at least in the short run. To the chagrin and confusion of energy policymakers these same commodities form the foundation of the basic necessities used in our interconnected global economy, and volatile prices cannot send consistent long term signals to our leaders. The urgency of diverting our quality, remaining cheap fuels towards high energy surplus, long duration renewable infrastructure is lost when prices drop. Indeed, natural gas used for electricity is up 34% in the past 5 years. Each time we have price dumps influenced by financial fence-swingers closing their doors, we retreat from any momentum for action that had built up during high price regimes. Then, when prices rocket again based on fundamental supply/demand gaps, the price hikes are too steep and are not well adjusted to by consumers and businesses, who then conveniently blame speculators.
CONCLUSION
We now have 4 named storms in the US/Atlantic: Gustav, Hannah, IKE and Josephine (also a large wave off Africa which may be Kyle). I wonder between today and quarter end how many financial 'hurricanes' we will witness due to the recent, (and coming) volatility in energy. It is possible the financial markets themselves (particularly credit markets) will accelerate (or cement) the date of peak oil due to fewer approved projects and lack of funding. Furthermore, an important longer term question is how many corporate/industrial executives are adding long range natural gas electricity plans based on an (in my view) unsustainably low price per mcf....Energy fundamentals win out in the end, and the marginal costs of both oil and gas are rising rapidly. But I fear the intervening steep roller coasters in price will act as policy camouflage until our time window for change is too short. Time is a critical commodity too. (Maybe we could trade that as well, using leverage...;-)
(thanks to Gail the Actuary and Gregor for help with this post)
**Of course, if we had more, better and smarter speculators, by definition they would eventually ascertain the true nature of our energy situation- prices would rise, volatility would diminish, and the speculators would move to greener pastures.
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The fundamentals for an inventory crisis remain active. The current string of storms, Mexico's field depletion, Russia's pride, etc... continue to pressure the crisis.
Forcasting the moment of crisis is similar to earthquakes; the more the tectonic plates move, you more certain you are of the crisis while remaining relatively uncertain as to when it will trigger.
There is a trigger.
Duration of efforts required to mitigate the consequences are measured in years. Crisis can trigger in moments. Self-reliance can change the lifeblood of our economy from oil to ingenuity:
Timely post Nate. When you say:
I pretty much agree with you, with a small catch: while 1 barrel of oil will always equate to something about 1.7 Mwh a green ticket has no fixed relation with any physical entity whatsoever.
Currency paper supply has been growing in excess of 10% per annum in the US, the EU and many other places; reserve paper currency has been growing around 20% per annum. There are several years of world oil supply just in the dollars and euros accumulated by central banks as reserve currency. But who guarantees them that all that paper will have the same return it has today?
There has been nothing short of a monumental flood of money bet in the oil and gas industry over the last two years, and almost all of it has been bet in one direction: LONG.
How do we know this? Simply look at the price. Oil production has indeed been a bit flat for the couple of years, but guess what? It's been flat many times before. What we saw was a 1970's style panic driven spike, but in the 1970's oil production was not flat, it was down by an amount and for a duration unseen in history. Such massive price spikes could be justified by "supply and demand". What we have seen in the last few years can in NO WAY be justified by supply and demand alone.
There is now great danger that banks and hedge funds and their investors, already weakened by the housing bubble collapse could be hit again, perhaps even harder, by the potential collapse in oil and gas prices. Those who bet long and stayed too long could be wiped out. This is a dangerous time for the heavy commodities gamblers, and many folks do not know that they may be one of those by virtue of their bank, mutual fund, 401K, etc. Betting commodities is very speculative, always has been, always will be. Many investors had come to believe that betting on ever increasing oil, gas and other commodities prices was a "done deal", no where but up.
By the way, this price decline does NOT change one thing about the potential for "peak oil" in the near future. I have made the case over and over and over here on TOD until my fingertips are sore from typing: Price is not an accurate indicator of "peak oil", never has been, and won't be until perhaps right at the very last second when peak is fully proven to have hit (perhaps not even then, for a variety of complicated reasons).
For many of the same complex reasons, declining oil price is NOT proof that peak oil in the near future is not still a real possibility. Using price as the guide is simply a fallacy. Price neither proves nor disproves near term peak oil. There are simply too many other factors than just "supply and demand" deciding price.
Crude oil prices below a floor of about $95 dollars can be viewed as bad for the world economy for a whole host of reasons. Let's hope we can hold at least that floor to encourage some of the absolutely revolutionary technical developments we have seen in the last 3 years. We simply cannot afford to give up the gains we have made and will continue to make in oil conservation technology and oil alternatives IF the price of oil holds at least a minimum sane level.
RC
So very well put. Thank you for this.
Price is most likely a necessary, but definitely not a sufficient condition by itself for declaring the arrival of peak oil.
How could you possibly know that? Your "gut" tells you?
Since at least 2005 (and actually starting before then), demand has been increasing exponentially, while net energy/net exports has been decreasing exponentially. During this time oil prices have been increasing exponentially, and yet you know that there is NOW WAY it can be justified by supply and demand alone? Nonsense.
You make the same analytical mistakes the talking heads on TV make. You focus on production, not net exports and net energy. You ignore demand growth, particularly in the third world. You believe that "almost all of [the money] has been bet in one direction: LONG", whereas in fact every long bet must be balanced by someone going short.
Nate has pointed out that the futures markets can swing wildly and become uncoupled from fundamentals in the short run. They do not become uncoupled in the long run, i.e. more than a few weeks or (maybe) months, but certainly not years.
This is absolutely incorrect. In natural gas, the spec money has been short.
If you're going to blame speculators for expensive oil, you have to also write speculators a thank you note for cheap natural gas.
Also, the fact that the price went up to $148 and then down to $105 doesn't mean that the high price was due to a flood of money from speculators. The real reasons for the high price were the factors that triggered the flood of money from speculators. In my opinion, there were several triggers. One important trigger was that the market is getting information about supply and demand a lot more slowly, probably due to the increase in the length of the effective pipeline to the U.S. markets, due to the decrease in exports from VenMex. The market's also missing a lot of information, or getting it later than it used to, because a lot of the new big players in these markets have no transparency whatsoever. The market is in the position of constantly guessing about China's inventory, the intentions of China's top bureaucrats, the question of whether India is ever going to deal with its power shortages, etc. It's going to take market participants some time to adjust for these factors, and prices will probably never get set as efficiently as they used to.
So, very small changes in the timing of supply and demand make for huge changes in price, and these huge changes are amplified further by the lack of transparency in the markets and the delay in getting info about supply and demand. Even if you take speculators completely out of the picture, we're still going to be seeing really scary volatility in these markets.
A couple of points about Nate's interesting article. First, why don't these hedge funds hire someone who knows how to trade? They need to read up on Kelly betting principles as well. A first-year card counter understands more about bankroll management than these guys. In.ex.cus.a.ble.
Second, although a hedge fund might have enough money to control an amount of oil equal to lost production from Gustav, they're not gonna buy it just for the thrill of owning it. They're buying it because they have some signal that others are going to bid it up, not because they think they can profit by driving up the price themselves. And you don't want the others bidding it up to be ma and pa speculators, because by the time the squares are buying, an entity as large as a hedge fund has to be getting out, otherwise they will get caught without anyone to sell to and lose all their money, a la Ospraie. This is Trading 101.
That essentially means you're buying because you think commercials will be buying. I know Nate knows this, but I want to emphasize the point. There is nothing that any sensible hedge fund manager should fear more than the possibility that money is manhandling energy, rather than following energy.
I completely understand why speculators drive everyone crazy, because they drive me crazy too (even though I'm a speculator). But I'm strongly against position limits because I think they're unenforceable and I think transparency is more important. If we really want prices to be set more efficiently, what it will take is some real diplomatic pressure on China. The last thing I want is masses of spec money running around controlling supply where I can't see it--that would be even worse than what we're dealing with now.
Also, just because the markets drove the oil price up to $148, doesn't mean society was paying $148 for oil. Society never paid anywhere near that much. If you own a royalty trust like Permian Basin Trust (PBT) for example, you frequently see months where the prices you got for your oil or natural gas were pretty far from the headline prices. The June price for Permian Basin Trust oil was $127, even though WTI futures were in the $130s. A month earlier, when the price for natural gas was below $12, Permian Basin shareholders were getting over $14.
So, there are markets and there are markets.
Moe, thanks for posting the buy signals. Speaking to your point about these funds hiring experienced traders, I was just thinking that maybe most of these funds really have a structural incentive problem more than an issue of talent. The may know how to trade well enough, but the traders don't get paid to manage their risk (unless they're one of the top guys). If they bet it all and win, they get a massive payout and if they bet it all and lose, they move on to the next fund. One the funds high water mark is breached, the incentives become even more skewed. You want to keep betting till you're back in the green cause you're not getting paid if you're not.
If they were trading with their own money, like we are, bankruptcy risk has real consequences. I don't think anyone blows up their fund deliberately, but where's their downside? Not sure if traders at Ospraie had any of their own money in the till....do you know if they did? I heard some of the newer funds require that traders drop some cash in to keep them there and keep their trading reasonable. Anyway, thanks again for the informative posts.
In every half-decent hedge fund senior traders have own money in the fund.
I doubt very much that it's enough money to make it hurt. I was referring more to the rank and file (guys running their own books but not the entire fund). The head guys usually are pretty well established and filthy rich. Putting in 1 or 5 or 10 million if you have 200 million in the bank still doesn't mean you're putting yourself on the line. One of the lessons that most of the intelligent guys at the top learned (since LTCM) was to not bet their net worths on their fund's performance. Dwight Anderson, for example, has another 3 funds that he's currently running. I'm sure he's utterly heartbroken over losing this one. I like your point about us only hearing about the bad ones, and Amaranth certainly fits that mold, but the shocking thing about this fund was the fact that it was run by a guy with a fairly clean reputation and a respectable pedigree (as far as hedge funds go anyway). He doesn't seem to be the one who would take outsized risks, so it's surprising to see a blowup there. Nobody will know for sure what really happened for months (years?), so this is all just speculation at this point. Whatever happened, I'm sure there will be tons of stories about what went wrong this time.
Then again, no investor will bet his own net worth on one hedge fund. You might have confidence in your employer, enough to buy some stock but would you really invest all your savings in it?
Imagine you're looking to invest in a high-risk-high-return fund, would trust one where everybody handling your money is in, all-or-nothing? That's not an investment vehicle, that's a sect.
Good point, but if I was the CEO or the third guy from the top, I don't think it would be unreasonable for equity holders to expect that my firm's bankruptcy should be mine as well. Only real way to align incentives. Given the size of most of the large hedge funds, I can see how your argument makes sense if you're a small fish in a big pond, but if you're running a book at a mid-sized or small fund, you're what...3-5 guys away from the top (maybe even less). If you're the head trader of a major strategy, you're probably one guy away and have an incredible amount of leeway to do whatever you like. You should be held accountable personally for the results. The fact that you're not is what leads to reckless betting and bad risk management. In any case, if I had enough to invest in these funds, I would only go in if the head guys were putting a MASSIVE amount of their own net worths into the fund. That's the only way to make sure they're properly motivated to manage the bankroll and to take measured risks. This isn't always 100% effective (see LTCM), but at least I know that they'll be obsessing over the markets the way I do when my own money is on the line. The other strategy is, as you suggested, to diversify your hedge funds and have a little in each...a blowup here or there could be offset by a star performer elsewhere.
why don't these hedge funds hire someone who knows how to trade?
They do - just ask anyone trading at a bank, refiner, producer or utility. Their best traders are invariably lured to the funds, and they don't suddenly lose their skills when they get there - they are just given more freedom to take bigger positions. You have to realise that there are many hedge funds around and the only ones you hear about are those that blow up spectacularly.
You will not gain any insight if you only study hedge fund failures - or only listen to the success stories. Hedge fund blow ups are part of the industry in any part of the cycle because their mandate is to take big positions in every possible direction. Banks blowing up, now there's cause for concern.
You point out the exaggeration present in government-issued liquids production figures which are by inference supposed to represent total US internal crude oil production. Ie. US crude oil production is in fact much lower that the figures usually quoted. This nicely points out the dilemma of developing "biofuels" based on ethanol from food grains to "replace" crude oil dependency. I suspected from the beginning that the supposed benefits in terms of EROI were probably non-existent or very small at best but did not have access to data to support my suspicions. Now it is clear that the benefits are very small indeed.
Switching to grain-produced ethanol is a great mistake similar to entering into a war based on false premises. Once you start such a war extraction from the situation is extremely difficult. Suggestions of quitting the unjustified war are met with screams of "Cut and Run" and quitting would mean that all of the war dead have "died in vain" (which they have). Those who scream loudest are often those who have vested interest in the war. In the meantime, instead of increasing security, the war creates resentment and hate in large portions of the world (especially in major crude oil portions of the world) decreasing security and increasing instability. Others who continue to support food for fuel may do so because they hold out hope that it may eventually be possible to replace grain with cellulose as feedstock for ethanol production.
The production of grain-based ethanol creates many of the same undesired side-effects spinning off from an unjustified war.
Firstly, when political proponents of food for ethanol finally realize that it is inefficient (energy-wise) they find it difficult to back off of their positions. Why - because we are drifting from crude oil dependency to energy from grain dependency. Backing off and stopping this use for grain would cause further energy problems and expose the governments misleading domestic "crude oil production" for what it really is. That is the US is far more dependent on imported crude oil than suggested by government figures. As with an unjustified war, many of the strongest advocates of food for fuel have vested interests in the "war against foreign oil dependency". These include connections to companies and States that produce the grain. Also, an infrastructure has build up around processing of the grain and conversion into ethanol which helps the economy?
Secondly like the other war, this war against foriegn oil dependency, using grain to replace oil, generates massive insecurity and destabilization in the world. Hungry people will do desperate things. Poor people are not stupid or totally uninformed. They know about food for fuel and if they do not there are always folks who will point it out to them for political or religious gain. These poor people only have to look at pictures or films showing the West driving over-sized, gas guzzling cars to make the connection that rising food prices are connected to food being used to fill the fuel tanks of the cars of the rich nations.
The use of food for fuel is one more example of a path being taken that narrows even more the window of opportunity for taking needed measures in conservation and changes in infrastructure to prepare for the crunch that is coming.
Talk about a false analogy, comparing ethanol to war takes the cake!
Total silly nonsense. They are not at all alike and can not be compared.
Things that are different can not be compared, added, subtracted, multiplied or divided. I have railed against comparing apples and oranges many times but it continues unabated.
Part of the problem is that the government and esteemed universities do it and no one calls bullshit. It is especially discouraging to see respected posters at TOD doing it.
The total liquids figure that Nate points out is really an apples and oranges false comparison by adding different things to come up with total liquids. Can't do that! Things that are different can not be added.
If they are anyway, the figures are silly nonsense. This is the same problem that is the root fallacy of EROEI when applied across different forms of energy. While the numbers add up as in total liquids, they are meaningless because the forms of energy in total liquids are no all the same. Each has a different price, different characteristics and differing utility.
When this kind of thing permeates the discussion of Peak Oil, there is no end to the confusion. And there is no possibility of a arriving at a consensus mitigation solution.
The discussion gets bogged down in minutia arguments because the slight of hand of comparing apples and oranges befuddles clear thinking.
I will rail against this silly nonsense when ever I see it, so be forewarned.
While the numbers add up as in total liquids, they are meaningless because the forms of energy in total liquids are no all the same. Each has a different price, different characteristics and differing utility.
But your glaring, perpetual blind spot is being unable to see that when the various forms can be used in the same service - as is the case with natural gas and ethanol as transportation fuels - then you are comparing apples to apples.
It is a perfectly legitimate question to ask: If I use natural gas to produce a very small energy return in the form of ethanol - why wouldn't I be better off just using the natural gas directly? Why must we create these negative externalities by going through a convoluted conversion process? Why are we indirectly subsidizing the usage of natural gas by subsidizing ethanol?
R^2,
Your objection that natural gas in cars is more efficient than dry milled ethanol in cars has been debunked before.
A gallon of ethanol(including coproduct) takes 45802 Btus of energy
(including fertilizers) which is roughly 46 SCF.
http://www.ethanol-gec.org/netenergy/NEYShapouri.htm
A 127.77 SCF of natural gas is 1 GGE. So 36% of a GGE(45.802/127.77=35.8%).
1.53 gallons of ethanol is equal to 1 GGE or 1 gallon of ethanol is .65 GGE.
So if you put in .36 GGE and get out .65GGE, that is the same as putting in 1 GGE of NG and getting out 1.8 GGE of ethanol, whereas with a CNG car you just use 1 GGE of natural gas.
http://en.wikipedia.org/wiki/GGE
Even forgetting the co-product you get 72052 BTU or 72 SCF or .56%
or .65/.56=1.16GGE.
So you put in 1 GGE of natural gas and get 1.16 GGE which is superior to burning 1GGE of natural gas in a CNG car.
Robert I agree 100% the world has two primary sources of energy that are easily converted to transportation fuels Natural Gas and Light sweet crude. A distant third is biodiesel below that sugar cane ethanol.
The last two are viable and will work in a world where they are used in places that liquid fuel cannot be replaced. This is my viewpoint.
From a completely different direction if you have ample electricity from renewable resources or fission/fusion in my opinion hydrogen + carbon => liquid fuel is also probably viable.
But this and the biofuel approach only mean that we probably can reasonably generate a supply of liquid fuels with a volume like 5% of todays usage. Add in direct Natural gas and you have say 15-20% of todays energy levels available for fuel cell or internal combustion. Air transport would probably be the primary use case representing like 50% of the total liquid fuels usage in a post peak world. Farm machinery would also represent a big share but probably using internally produced fuels.
The point is we probably will have enough liquid fuels for critical use cases even if the EROI is negative as long as liquid fuels are themselves not a primary input.
The above is doable and fairly easy for most people to agree on if we cut our fuel usage by 85% then we can live in a low energy world. Widespread use of electric rail would ensure that ability to transport people and goods would be cut a lot less than the total energy. I'd say that going to electric rail we would lose and this is debatable about 50% of our mobility if you will. But the important routes would continue to have 100% service so its better to view it as different. The way I define mobility is the ability to move basically anywhere in a region. Cars have high mobility and planes coupled with cars gives us tremendous mobility.
Basically today you can be anywhere in the world within 2 days. In a electric train world this would probably extend to more like 4 days so thats why I say you have lost 50% of mobility. The greatest use of mobility is in the suburbs and this is where you would have the greatest losses. But once you remove suburbia then you get pretty much exactly this 85% reduction in usage.
So long range trips may take twice as long and anything like suburbia today would exist only for the upper middle class or higher.
Certainly you could have higher mobility in the future but with constrained energy supplies what people are missing is past the core transport requirements converting energy to mobility is negative for GDP your better off using that energy to create products not driving a SUV to the McMansion.
At its core the problem is that as energy gets expensive the EROEI for Suburbia drops to 1:1 i.e the typical suburbanite cannot produce more than they consume and are not productive. You get this huge divide between the overall productivity of someone living in town using electric transport to do a job vs someone living in the burbs with a SUV driving to work. I'd not be surprised if the suburbanite is not a net drain and has been for some time cheap energy hid this situation since it did not matter. Balance of trade indicates we have consumed more than we have produced for a long time. When the pie is finite and getting smaller you see this EROEI cliff develop rapidly. We can no longer afford to have used house sales people do marginal productive transaction work and use kWh's of electricity and thousands of gallons of gasoline just to facilitate a transaction. The job they do is just not worth it in the energy they consume. Same for suburban houses themselves the additional costs of supporting expensive homes that use a lot of energy and the transport to and from those homes simply is not a net gain from most jobs descriptions.
memmel, I don't think that you can make your case through an EROI POV.
From such a viewpoint the EROI of electric vehicles is just fine, and electric bikes, scooters and delivery vans even more so.
If combined with railways they could do the job with relatively small loss of mobility.
It is also a lot cheaper to knock down a few houses and build some shops locally, and distribute more of the offices and industry than it is to abandon vast swathes of excellent housing, as it is to insulate them to an acceptable degree rather than move.
I don't know if we will have the time to make such a transition, particularly with the dire financial position we have, and I take Gail's prognosis in this respect very seriously, but as far as the technology and EROI is concerned there would seem no good reason why a very substantial degree of mobility should not be retained.
The amortised costs of an EV or hybrid with petrol at $4 gal would actually be less than a petrol driven car, and if that could not be afforded an electric scooter still cheaper. Most would put up with the inconvenience of two wheeled transport to work rather than abandon their house and live in a hovel in the city centre.
Dave your missing the real point. We have limits and choices if your job does not cause you to earn enough money to justify the energy usage level implied by suburban living EV or no EV then you will not be able to live in suburbia.
Are we better off building trains or personal EV's and who gets the personal EV's ?
I'm a pretty talented person in my domain and have a broad educational background and I'm in the top 15% income level. I think assuming I manage to keep something close to the same income level I have now I'd barely be able to afford and electric suburban lifestyle. And I'm pretty conservative so I'd have to have a LOT of faith in my future earning power to commit to the debt load that would entail.
Bottom line if you don't have a very secure position earning over 100k your probably not going to be able to join this fantasy land of electric suburbia.
I get the feeling your fairly well off financially so you don't realize how few people will have their own EV. I've never said we probably won't have these sorts of suburban enclaves but they will be for the wealthy.
I just don't see them as important on any time scale or productive for that matter.
Also as with my EROEI argument approach the overall productivity of supporting workers with that lifestyle stinks. Its effectively exactly the same as having your entire economy based on constructing houses and stores does not take long for it to implode.
I could really care less what the wealthiest people in America can or will do its has little relevance in the big picture. Sure a lot of them will hole up in guarded walled estates and drive electric SUV's to the companies they own but so what ?
Btw I'm assuming that post peak my own earning power would drop to 30k a year which is a LOT lower then I make now. And thats doing the same job I do today. Earning that I'm riding a bicycle to the train not driving a EV. And I fear I'm overestimating what I could make but thats very competitive with wages in India and China today so not a bad bet I could make Indian/Chinese wages in the future. My bottom estimate is 15k a year as a professional. I'm assuming that some belated protectionism could help limit the number of people with my skill set.
Can I afford a 200k suburban house and a 30k EV on 30k a year ?
Nope. Even if I'm wrong about my personal future plenty of other people with lesser skill sets will see steep drops in wages as unemployment rises so if I do better than I've outlined I assure I'll realize I'm lucky. And no way in hell would I go into debt even if I did decide I could and wanted to live the Suburban/EV lifestyle I'll pay cash.
Thats just me but I'd love to see how the hell all these middle class people that do incredibly useless jobs are going to maintain their income levels in the future and who can afford them and what they nominally produce. So before we ever get to this concept of EV's and abandoning suburbia lets figure out how all these people are going to make all this money effectively doing nothing.
My point was the narrower one that it does not look as though EROI is the reason why personal transport should cease, or the suburbs be totally depopulated.
You seem to be going with the top case of people switching seamlessly to EV cars, which seems unlikely to me anyway, but I can't really see why most of them shouldn't use some sort of electric scooter, or why they should be unable to finance it, and given that they would probably prefer to hang on in their houses.
The situation in the States may be a bit confused by non-recourse mortgages, but when a really large number of people get hit, the alleged price of their house is likely to be inflated away to a realistic level.
The biggest stock of available houses for rent for those who don't hang on would be in the suburbs anyway, so whoever owns them they are more profitable rented than empty.
Sure there will be contraction and some abandonment of suburbia, particularly the most far-flung, but overall, especially if times are hard, it makes sense to continue using the housing you have.
In most areas of the world, the issue does not even arise, as mortgages are non-recourse, so you hang on as long as you possibly can, and for instance in the UK the local authority has an obligation to re-house families, and often do so in regions which are inconveniently far from the city centre, so ownership may change but most of the houses would still be lived in.
The point is, a Prius is cheaper to buy than the average light vehicle, and a plug-in Prius won't be more expensive, so why should the economics of driving from the suburbs change?
Actually, the overall cost per mile will go down substantially from current costs, given the electricity is much cheaper per mile.
Nick this get completely wrapped up in the financial mess we are in throughout the world.
My contention is that most people will be unable to finance long term debts and those that are able will be unwilling. You cannot make assumptions that the future availability of consumer debt will be like it is today.
I won't use Brazil but I will use Mexico as a better example of conservative lending when defaults increase.
Understand that at its heart Housing/New Cars or WT Iron triangle is a ponzi scheme built on expectation of future earnings these expectations rest on assumptions of a cheap oil supply. Once the directions of these vectors change course you start spiraling downwards. In your post your making the assumption that most people can afford to finance a new car. I'm not making this assumption.
In my opinion you have to assume that from now on out we will be in a deep recession to depression that should be your basic economic assumption. Any "solutions" would have to be workable in this context implicitly assuming that a large number of people are willing and able to take on 20k of long term debt much less more is in my opinion a mistake.
For the most part the vast majority of white collar jobs in the US are irrelevant and not needed once discretionary spending collapses walk around your neighborhood and ask people what they do for a living and think about the viability of the hair stylists and insurance analysts positions in the near future.
At best and feel free to show me different as near as I can figure only about 30% of the work force in the US is involved in reasonably needed work 70% is fluff that could be massively cut. Think about EV's under these conditions and at least you can see why I'm saying they will be the toys of the wealthy and are not important. Just look at home and car sales through the last great depression to understand. This is all well known and its also well known how our economy differs from the 1930's.
I'll repeat I make over 100k now I'm hopeful to make 30k a year in 2011 I'm confident I'll earn 15k.
I have zero plans to buy a EV and will only buy a house if I can pay cash. If I do get a good deal on a suburban house I can pay cash for then I'll be riding a 150 cc motor bike or bicycle to work or to the train till I get enough cash to buy a used EV in a few years and I'll consider myself very lucky. And to be honest I probably won't buy th EV but save to send my kids to college.
" most people will be unable to finance long term debts and those that are able will be unwilling"..."from now on out we will be in a deep recession to depression that should be your basic economic assumption"..."once discretionary spending collapses "..."70% is fluff that could be massively cut"
But why do you think this will happen? On what basis? World GDP has grown 40% in the last 5 years on flat oil consumption. US GDP grew about 20%, with flat oil consumption. US oil consumption fell almost 20% from 78-82, while GDP grew a little. Why do you believe oil is magically essential to our economy? Heck, we could reduce consumption by 25% in 6 months just by wartime type requirements for carpooling, and lose no jobs at all.
"expectation of future earnings these expectations rest on assumptions of a cheap oil supply"
ah, no, they don't. We didn't need oil 100 years ago to run an industrial economy, and we won't 50 years from now.
Nick I'll let someone else respond to this one or you can educate yourself on our situation.
I'd suggest starting with Mish Shedlock.
http://globaleconomicanalysis.blogspot.com/
He has some really good links off of his page. For a more direct on the street type viewpoint I'd suggest
http://www.thehousingbubbleblog.com/index.html
You really should educate yourself if you want to come up with realistic post peak solutions.
Your certainly free to not do anything but I'm very interested in real solutions post peak.
I fully and 100% endorse Alans electric rail proposals and WT ELP concepts. I agree 100% with Roberts views on ethanol etc.
You should also look at the wedge concepts that have presented here on the TOD and consider trying to execute a wedge under depression like conditions.
http://www.theoildrum.com/story/2006/12/17/1377/0132
If you do read and understand the problem then I suspect you will come to the same conclusion I have the only viable solution is a rapid expansion of electric rail service nothing else will work.
People simply won't have the cash to finance the transition it will have to be done via public works.
All you've said here is "if you don't agree with me you must not understand the problem", which is both patronizing and reflective of a very closed mind. You haven't actually provided any information; all you've done is dodge answering his questions.
As a general rule of thumb, if somebody asks a question you can't answer, that probably means you've got a flaw in your own understanding somewhere. If it was a basic question that anyone who understood the situation could answer, then you'd be able to quickly and definitively answer it, rather than having to wave your hands and mutter "you just don't understand..."
Check down the page, the general discussion continues there. Memmel was quite forthcoming with the reasoning behind his opinions as he has been in previous threads.
Back to the topic of the value of houses, here's a place in Detroit selling for a buck if anyone's interested:
$1 house
"Memmel was quite forthcoming with the reasoning behind his opinions"
I don't see any evidence for a depression there, either. Do you see any?
Well, I reviewed Mish's blog, but I didn't really see something that supports the idea that we're facing a deep depression. Could you point me to a particular article of his?
I would note that he has a serious conflict of interest in that he's a salesman for commodity investments with a strong "goldbug" emphasis, there's no sign of energy or economics related training or experience (the only background given is photography), and he's building a home in a far suburb of Chicago that fits the profile of the kind of exurban community that you've suggested is going to be a terrible place to live in coming years.
I would echo Pitt's comments on the tone of your comment. I've reviewed all of the other sources you mentioned (Alan Drake, Jeffrey Brown, Robert Hirsch) in great detail, and there's really nothing there to support the notion of a great depression. Oil is simply not a magical elixir for economic growth (though applied energy certainly is), and it's decline is not a disaster.
You might want to look at www.econbrowser.com for authoritative analysis by a PO-aware economist. You could also look at my analysis on my blog ( www.energyfaq.blogspot.com ), especially the section on Robert Hirsch's recent prognostications.
Read my reply to Chris if your solution is not viable in a depression then its not viable and probably not a solution. The only reason I even care is we are not doing electric rail but stupid stuff like EV's and trying to save suburbia.
Well, I still see no evidence for a coming depression.
Sure, SUV and pickup sales have crashed, but isn't that what we would want? Car sales are stable, and manufacturers can't make enough fuel-efficient vehicles to satisfy demand at the moment.
PHEVs and EVs won't cost any more to buy than the average vehicle (a Prius costs rather less) and will have much lower operating costs, so unless we have a major depression PHEV/EVs will naturally replace ICE's.
Re suburbia: unless the housing market picks up, the housing stock we have now is pretty much going to be the housing stock we'll live with. Why is Mish (the blog you referred me to) planning his future in the suburbs?
Have you looked at www.econbrowser.com ?
"My contention is that most people will be unable to finance long term debts and those that are able will be unwilling."
Memmel, I see what you're driving at (and yes I've read Mish and the rest) but I still say 'taint necessarily so.
For example were I live there is a small operation with three principals who are wealthy enough to invest their money in hedge funds or what have you (and for all I know, they do). They have started a third-party financing company that's making it possible for any small commercial operation to install solar without being one dollar out of pocket on the deal. It's a no-brainer for the customer, a good deal for the financiers, and they're doing some good sized systems. They just financed a deal worth over $500K for a school district.
The same thing could be done in next-gen vehicles, in doing "green ups" on homes, etc.
With all that hedge fund money at risk and in flight mode right now, such a business model starts to look pretty attractive. There is very little risk in it and if you subscribe to the peak oil/energy thesis, it's a virtually guaranteed gain. It wouldn't surprise me at all to see hundreds of billions in private equity exit the hedge fund world and move into the energy/efficiency world.
Chris this is a completely different sort of way to move money around. Actually its the way the US got rich in the first place the Banker was local and the rich guy was local and they invested locally.
From the super big picture the problem is wealth concentration at the top with no way to reinject the money back into the bottom if you will globaliization and even nationalization warps the cycling of money locally.
What your describing is the right way to do things.
Next time the conversation drifts this way on the drumbeat I'll bring up concepts like what your saying.
I think this thread is buried. I'm by all means not a doomer actually I just think that we have to face the facts that some approaches will work post peak and some won't ELP which is what your describing more from the financial side and Alans electric rail pass with flying colors and work even if the financial system deteriorates.
I'm intrested in solutions which work when a lot of people are flat broke I could care less about people opinion of if we are going are not going to be flat broke or suffer financial crises. The base of our new economy should be something that works well without a lot of money or assumptions. And its not just for us which almost no one recognizes but also for the third world.
Every night when the cars are being charged has anyone guessed at the huge extra demand on the power grid ?
Yep. Extensive studies have been done.
http://www.pnl.gov/news/release.asp?id=204
PNNL: Newsroom - Mileage from megawatts: Study finds enough electric capacity to �fill up� plug-in vehicles across much of the nation
http://www.chiefengineer.org/content/content_display.cfm/seqnumber_conte...
Grid Will Handle Rechargeable Cars
Some main points to bear in mind:
We won't instantly be producing as many electric cars as ICE cars at present.
Electric cars are far more efficient and use a fraction of the energy of petrol cars - check out the comment that charging one overnight would use a quarter of the energy a plasma screen uses.
Only part of the capacity of the grid is used most of the time, so the Californian system of charging different rates for different times would mean that the grid was not under too much strain.
Thanks DaveMart,
Here in Australia there has been a lot of talk on the subject without true facts.
Hello Davemart,
I wonder if it has occurred to anybody that PHEVs will be essentially useless in an regional emergency? A vehicle with only a thirty mile range won't get you very far from an incoming hurricane, or if a big quake hits Cali, a PHEV won't get you across the desert to Phoenix or Vegas to recharge the batteries. :(
Just another reason we need to expand the RRs. Even if your PHEV can be recharged periodically along your chosen escape route by evacuating extra early, your overall progress will be slow. Then, you won't be able to get back to your house till the grid is essentially fully restored.
My 'Wild & Crazy' idea to help restore a Hurricane failed grid more quickly by proactive unloading of high voltage wiring:
http://www.theoildrum.com/node/4487/402885
Bob Shaw in Phx,Az Are Humans Smarter than Yeast?
I hadn't thought about it - it's a long time since we have had a hurricane in Bristol!
More seriously, we seem to have two problems with the EV and PHEV alternative - either they are discounted because everyone will be destitute and not able to afford an electric bicycle, or because they may not provide 100% of the performance of an ICC car for a few years.
You are also confounding two technologies, Bob - the GM Volt PHEV will do around 40 miles on electric before needing recharging, but will carry on just fine if you put some petrol (gas!) in, whereas a pure EV will likely do around 80 miles or so before they need recharging, which should be good enough.
In any case, there is a world of difference between a situation where people can't get to work or the shops from their current homes, and so have to abandon their homes, and one where they don't have a perfect emergency escape vehicle - if they are that worried, they could keep an old ICC, 4 wheel drive of course, and some cans of petrol in the garage!
Hello Davemart,
Oops! Thxs for correcting my wrong info on PHEVs vs pure EVs--so many acronyms and differing tech ideas nowadays, it is easy for me to get them mixed up & confused.
Memmel, I see no reason why the fact that we are at some slight variance on this particular issue should preclude me from picking your brain, so perhaps you would use your mathematical talents on my behalf to substantiate that many of the suburbs should be perfectly inhabitable even if people do not continue to run private cars! :-)
Have a look at this:
http://www.taxibus.org.uk/
That does not seem to be working on my computer - here is the Google cache of it:
http://64.233.183.104/search?q=cache:gHPOoJkl0-EJ:www.taxibus.org.uk/+taxibus&hl=en&ct=clnk&cd=3&gl=uk&lr=lang_en|lang_fr&client=firefox-a
Anyway, if this doesn't get through the basic idea is that you give a bell on a mobile, and 3 minutes later a 8-10 seater vehicle picks you up, which has other passengers who are going in the same general direction.
To work to those specs for London you need around 50 taxibuses per square mile.
It should be cheaper than buses as the smaller size gives more flexibility, and so it doesn't spend so much time running around half empty.
Capital costs and fuel costs are also far lower, in spite of the door to door swift service.
So if you used a hub and spoke system, perhaps dropping most who were going a longer distance off at a bus or rail terminal, at what population density does it become unviable?
Would this be sufficient for most American suburbs?
Superficially it would seem that if instead of a 3 minute delay you accepted a 30 minute delay, then you might be able to run it at 100 times less density than London, but I am sure I have dropped some of those pesky decimal places or something somewhere.
This certainly has the potential to be a powerful mobility tool, at least.
Well your leaving out the delay for a train so 30 min commuting from the suburb to a rail coupled with train travel times probably puts you at the 2 hour limit for travel thats pretty constant.
I'd think that bringing back trolley cars is probably going to have a bigger impact. Also believe it or not simply walking a few blocks to a mile or riding a bike a mile helps transportation issues a lot.
Lets look at it a completely different way your main contention is to maintain the value of the suburban housing however its trivial to look at cities such as Detroit or any rustbelt city in the US to see that housing value can readily drop to zero they have no intrinsic worth. You have no a priori reason to assume housing values cannot decline to zero. Next construction of higher density housing and condo's or even English style row houses is well understood and provides a nice density vs lifestyle pattern. The terrace house if you will is a really good solution.
http://en.wikipedia.org/wiki/Terraced_house
Certainly higher density living is possible but these row houses result in very reasonable walkability with balanced density.
We have no intrinsic reason to not move to them also they make great rental or owned homes while your typical suburban home is a poor rental prospect.
So now back to the current housing stock in the US the obvious probable result is that houses resonably close to a main street for trolley or bust access will probably either be converted to apts or replaced with apts or row houses. Also some will be converted to businesses such as walkable grocery stores. As the potential for rentals climbs in parts of the suburbs these will become new small town centers.
Best guess is that at least 20% of the current suburban land/houses will be refocused to this suburban converted to small town. Outside of this I honestly don't know as far as the other homes go I'd guess many will be torn down some will become slums etc. Basically every single scenario you could think of will probably come to play and it will be dependent on the details of the conversion. The amount of suburban housing that goes to your electric suburban scenario is probably small say 10% and only probable in the top suburban neighborhoods say areas with current incomes over 100k as I've said.
So just like with what I said about overall economics being depression like the basic assumption is suburban housing values go to zero unless they can be re-purposed or its high end houses. I suspect a lot will be knocked down and scavenged for the creation of row houses.
Surely this does not address the substantial comments I have made?
Both new technology such as Taxibus making a more retail public transport available and the possibility of using relatively cheap electric bikes and scooters should mean that for many they are better off staying put.
Your comments on the devaluation of many suburbs happened in the very different context of an expanding economy and relatively small areas of decline.
It seems to be something of a Strawman to assume electric transport merely means the continuance of present patterns, when what we are probably looking at is a fairly messy process of a lot of inconvenience being traded for some reasonable standard of accomodation.
A trolly bus system costs many times what a taxibus system does to install, so why in a cash strapped environment that should be preferred outside of the main routes I can't understand.
Dave their are no strawmans here I already stated that I'll only talk about solutions in the context of economic conditions I expect to occur if you don't agree with that then it makes no sense to talk about solutions.
Your correct about trolleys only on the main routes and I said I expect the only housing that will retain value to be on the main routes or in walkable distance of the main routes. This is effectively your trolley car suburb of the past.
Even with the dire economic conditions I envision public socialistic style programs can and do work and can be used to build out a public rail network and furthermore they can be used to build out apt flats if needed. Look at postwar USSR for and example or postwar Asia. Even with limited energy supplies we can do this.
We end up in the same point we do on all our conversations other means of transport are secondary.
The addition here is that you believe that homes have some sort of intrinsic value yet we have ample historical evidence and even contemporary evidence that without a robust economy and jobs the values of homes goes to zero.
http://www.trulia.com/for_sale/Detroit,MI/price;a_sort/#for_sale/Detroit...
http://www.trulia.com/foreclosure/2002309048--Spencer-St-Detroit-MI-48234
http://www.trulia.com/OH/Cleveland/#for_sale/Cleveland,OH/price;a_sort/2_p/
And example for California.
http://www.trulia.com/CA/Manteca/#for_sale/Manteca,CA/price;a_sort/12_p/
I'm sorry your making basic assumptions of some intrinsic value in suburban real estate thats simply not true.
These are cities in the US that have experience economic contraction today.
So your basic argument that somehow there is something to "save" in Suburbia is false. The fate of suburbia itself has nothing to do directly with oil and everything to do with the economy.
The future economy will be negatively influenced by high oil prices.
The electric rail proposals are the only solutions that are robust agianst economic dislocation.
Every single other solution I've seen makes assumptions about some sort of Business As Usual.
In your case its the assumption that building in places that have no local economy have some sort
of intrinsic significant worth. Why on earth does a house 20 miles from the town center have any intrinsic value ? A whole huge pyramid of assumptions underlie this and they are not robust against stress.
Feel free to look at links like I've posted your assumptions are already failing dramatically.
And we have not even started to have serious problems. I'd actually be surprised to see suburbia even
make it much past peak oil right now much less be worth saving. The way things are going suburbia will be dead before we even get worldwide acceptance of peak oil.
Dave you don't have to believe me.
http://globaleconomicanalysis.blogspot.com/2008/09/gm-ford-chrysler-sale...
So I'll happily wait till these same people snap up your EV's.
Good luck.
Or the problem is obsolete automobile manufactures producing overpriced vehicles loaded with unnecessary options. All the extra junk, such as computer controls, navigation systems, antilock breaks, air bags and crash safety designs, will be discarded if a large portion of the U.S. population can not afford automobiles. Look at Tata's vehicles to see what can be done on the cheap. Last I read, GM's Volt will be loaded with options making it pricey and perhaps dooming it to failure. Ford and GM need to go bankrupt to sweep away those dinosauric corporations clearing the way for new, innovative ones. They had their chance with California's zero emissions mandate but instead of complying, joined a lawsuit.
Memmel, when it comes to buying a used PHEV, the longevity of the expensive batteries will be of prime importance. The seller will try to sell just before the batteries fail dumping the expense of replacement onto the buyer. Without a decade of experience, their longevity will be a huge unknown. In this respect compressed air or hydraulic drive trains have an advantage because they should be durable.
I agree the major car manufacturers will have to go bankrupt before the paradigm shift can happen. In Europe too.
They have been adding technology and gadgets to keep the price and profits up, but faced with a new economic setup where people can perhaps afford a 5000 euro car, but certainly not a 15000 euro car, I suspect they will die rather than give in to what the market actually demands (the US auto makers certainly are!)
An interesting example : Renault bought the Rumanian auto maker, Dacia, and makes cheapish family cars for Eastern Europe there, with a level of equipment equivalent to those of Western europe 20 years ago.
People started parallel-importing them back to France... it's EU after all... so now Renault sells them in France, but rations them. There are long waiting lists. And they are not even especially cheap!
In the electrical era, will a bunch of start-ups fill the void / accelerate the implosion of the big makers?
Most business models lease the batteries, not sell them.
Costs for the purchase of an EV and leasing the batteries look lower than running an ICE car if you assume petrol at $4/gal.
How much money will be available to buy cars though is the big issue, as we have managed to drive the economy into a wall just as we need to radically alter the technological base.
The last time automobile manufacturers leased electric vehicles, they refused to renew the leases and destroyed the vehicles. I do not want to be in a situation where they refuse to continue the lease on the batteries leaving me with a inoperable vehicle and a shipping bill for the return of the batteries. If I can not own it, I would not buy it.
I think the cost of purchasing an EV and leasing the batteries would assume high annual mileage. I have had the same compact pickup for 20 years and have drove it 50,000 miles for an average of 2,500 mi/yr. The vehicle is absolutely necessary because I must go to town for supplies. It can not be replaced with an electric bike or electric car because they can not transport enough cargo. I need a pair of horses and a wagon :) I have spent a total of under $20,000 on this vehicle, including the purchase price, fuel, maintenance, insurance... and, in short, everything. Unless the batteries are much more durable or inexpensive than I suspect, a PHEV will not achieve this level of economy. My analysis makes me conclude that a compressed air or hydraulic drive train, even though less efficient than a battery, would be superior for my application and anyone trying to minimize costs by driving infrequently. A lease creates a constant cost per unit time, not a cost based on usage.
I do not think start-ups have a chance until Ford and GM are gone because they protect their turf religiously. I also suspect the U.S. government will bail them out preserving their decay and suppressing the needed innovation. Toyota is on the right track with the Prius and may thrive. Congress must change laws to allow vehicles to be manufactured more economically. Will the right decisions be made in time?
Since I have already stated many times that I feel that there will be no instant change-over to electric vehicles, but this will initially be mainly in things like delivery vehicles, and most people will use electric scooters, assisted bikes and trikes and so on, I have no idea who you imagine you are rebutting.
Considerable personal mobility seems likely to remain though.
A range of options are surely possible, although obviously there are deep problems in both finance and technology.
It makes no sense to me to be too deterministic about what the outcome 'will' be.
Some contraction of the suburbs is already taking place, and further contraction will surely take place.
It makes a difference though if the contraction ends up as being 80% or 20%, and it is not realistically possible to fully determine that.
In arguing your case for massive contraction you basically ignore options which might reduce this, by re-writing critiques, and refer to arguments for considerable personal mobility remaining as BAU, when so far as I know no-one is arguing that.
However, you do not substantially address why electric scooters, more clever taxis etc are not possible, at least to some extent, or simply some re-location of offices and other work places.
Where you get the idea that 'my assumptions are failing dramatically' I really don't know, as I hold no deterministic position on how successful outcomes will be, and that is the sort of Strawman I was referring to - I simply have no attempted to make some of the arguments you seek to rebut.
As for 'houses having no intrinsic value', sure they have - they give you somewhere to live, at a far higher standard than some of the slums you suggest, and it is surely reasonable that instead of throwing away all that sunk effort, whatever it's nominal current market value, many will put up with considerable inconvenience to stay there.
How it plays out depends on a lot of decisions which have not yet been taken, and any result is possible, at least in the US, from the suburbs being virtually abandoned to their being substantially intact, although doubtless gradually being re-zoned and infilled.
Your models do not appear to be robust, as they depend heavily on a series of assumptions, and flatly ignore any forces which might mitigate the results you project.
Maybe everyone will make very silly decisions, and maybe no attempts will be made to alter the financial and legal framework to address them , for instance much of the abandonment which occurs in America is due to a peculiarity of the legal system, non-recourse mortgages, and seemingly small differences, say a relaxation of zoning so that work and home can be closer together, can make real differences to the outcome.
My EV will be an electric bike. But mostly I figure on using pedal power or just not going places as often. Besides, if the roads fall into more and more unmaintained conditions and I start breaking wheels, that will only work so long. Road conditions - not traffic - turns out to be the most difficult aspect of biking at night.
I was at my son's soccer game yesterday and had to listen to other parents talk about how they were hanging on and busy enough that they never ate at home. Some sort of finance/insurance work. Pretty soon the talk changed to how big the police department was. Useless jobs supporting bloated suburban cops - probably most of them stricken to have missed playing at the RNC.
cfm in Gray, ME
I think there are two answers to that, infrastructure and vehicle cost. Ethanol can be pushed through the same infrastructure used for gasoline and can be burned in the same vehicles.
For natural gas there is not much fueling infrastructure, although maybe this should be government subsidized. A NG powered Civic costs about $7000 more than the gasoline model. That might come down with higher volumes but a high pressure tank is always going to be more expensive.
I like natural gas as an alternative fuel but I'm not sure wether it should be used for cars replacing gasoline or for trucks replacing diesel.
Your point is well taken. One possible way around it is to use a like quantity of natural gas prsently used to produce ethanol for fleets powered by natural gas.
This way the distribution of the fuel is concentrated to a much smaller number of locations. The specialized maintenance of the vehicles is also concentrated. Another silver bullet for the time being (life of the fleet).
David
x,
you can rail all you want, but I personally think it would do your position more good, if you tried:
- give us a title of a book, paper or anything that properly and scientifically explains how it should be done. I promise to get it on my hands and read it.
- when attacking a proposition: attack the real weaknesses point by point. Don't throw the baby out with the bathwater. Quality adjusted EROEI comparisons have many sane uses, if one is aware of the limitations. Trying to deny that is not going to get you anywhere.
I don't mind you posting, but if you can, please provide more references and be as specific as you can be.
This way the discussion can move forward from the typical children's sandbox shouting match of "it's good! no it's not! yes it is!" etc.
I wonder why:
Per the EIA June ethanol production was down 13 thousand barrels per day compared to May, or 1 million Brl's for the month, or 42 millon gallons.
The largest monthly drop ever. Is the market saturated, or is the margin to small.
If the July numbers don't exceed the May numbers it can't be blamed on the floods.
MIght have to do with $10 Nat gas and $8 corn in May-Jun. Some ethanol producers went out of business (very low energy gain could have predicted this (and did). Nat gas and corn prices have since dropped quite a bit, so with the 50 cent subsidy from Uncle Sam, ethanol producers should be cranking it up. There still IS an ethanol mandate, and a growing one at that...
SamuM,
It's difficult.
Nobody in the realworld seems to be interested in EROEI. We can't even get reliable figures here at 'the home or EROEI' on ethanol for example.
The fact that a BTU of gasoline is twice as expensive as a BTU of natural gas and 6 times as expensive as a BTU of coal doesn't seem to register (out in the real world), because EROEI folks KNOW that a BTU is a BTU is a BTU.
IOW, the whole thing just don't add up, son.
Other than this part,
I disagree with the rest. MOST people who understand EROEI know that quality plays a huge role. I wrote about that in my first post here on Sasquatches and have mentioned it in every post since. We basically have two 'essential' forms of energy in modern society - electricity and liquid fuels. Electricity (currently) costs more because it is more versatile. But the extreme dependence on liquid fuels for transport can only very slowly be diminished - minimum 10 years - probably much longer. So energy QUALITY of liquid fuels is going to be very important, perhaps trumping EROEI of higher, non-liquid sources.
But all that is a red herring. The biggest issue we face is not whether this or that has a higher or lower EROEI, but that global commerce has been built on a significantly higher aggregate energy gain (or surplus) than we are going to be able to produce in the future. Even oil now, at the margin, costs in the neighborhood of $100 per barrel. Nat gas between $6 and $7 per mcf. So a great deal of the liquid fuels that we are using right now to run our daily lives (as well as experiment, succeed, fail, etc. on alternative energy schemes) is stuff we found decades ago - the largest costs associated with it have long ago been spent, but we are still reaping the benefits of its cheapness. As the % of new oil overtakes the % of old high energy gain oil, that is when we will see that things like corn ethanol are for all intents and purposes, energy sinks. We need high energy gain sources that match up to our uses OR offset the difference with conservation/efficiency OR we are in deep deep trouble
And no one in the real world seems too concerned about population, biodiversity, habituation to higher energy use, species extinction, etc. either....so EROEI is in good company
Nate,
A small quibble. When you say "global commerce has been built on a significantly higher aggregate energy gain (or surplus) than we are going to be able to produce in the future." I think you are referring to oil and gas.
I think we agree that renewable electricity has a high energy gain. Also, for better or worse, it should be noted that we have plenty of coal available at fairly high E-ROI, and that nuclear is reasonably high as well.
So, your comments really refer to liquid fuels.
Yes. But we need high EROI liquid fuels in order for the high EROI electrical fuels to be important (and it is also easier to define boundaries of an EROI analysis on liquid fuels - because with wind and other renewables resulting in electricity we need to include the transmission lines, storage etc. something than many of the e.g. wind life cycle analyses don't include.
Fyi - it looks like most everything from Gustav is reasonably OK with the exception that 13 of the 14 transmission lines into the area are down - this may take quite some time to repair (and lots of vehicles, helicopters, extraneous trips around the area are gonna be using gasoline and diesel)
"we need high EROI liquid fuels in order for the high EROI electrical fuels to be important "
I'm not sure what you mean. Certainly we'll need some liquid fuel as long as we have infrastructure that uses it, but in the long-term there's very little transportation that really needs liquid fuels beyond aviation.
"with wind and other renewables resulting in electricity we need to include the transmission lines, storage "
Transmission only adds about 15% to the cost of wind, even with very long distances. That's not going to significantly change E-ROI. Storage is a long discussion, but let me note that in the short term it isn't needed, and in the long-term I don't see it as a dominating cost - I'd estimate that a 100% renewable grid might cost 10%-40% more than a FF grid (due to transmission, storage, overbuilding of generation), which in the larger picture really isn't much. Keep in mind that most storage and balancing is likely to be provided by PHEVs and EVs, which will grow in parallel with renewable power.
"transmission lines ...may take quite some time to repair ...using gasoline and diesel"
Utilities are moving to hybrids, plug-ins (PHEVs) and EVs as quickly as they can. Utility equipment is perfect for hybrid applications, as they often sit in one spot powering a bucket, and they have the advantage of small service areas which reduce the importance of range. They love the idea of using their own power.
I suppose an emergency like this is a good argument for a PHEV for backup (as opposed to a pure EV), but the amount of fuel that this kind of widespread and prolonged emergency will need for utility repair is really insignificant as a % of overall US utility internal transportation needs.
Nick
Good points
As usual this EROI debate starts with quality. The quality debate gets down to replacing kiquid fuels with electricity. The 'substitution' debate gets down to timing. And timing debate gets down to depletion rates. And depletion rates get down to existing EROI trends for oil. And the debate kind of stops there for lack of data...
E.g. in theory I can follow your reasoning. But we need at least a decade of reasonably high cheap liquid fuels for it to happen AND a dedication to the project - right now its only happening around the edges (yes, I know you can give me lots of examples, but I can give you examples of natural gas electricity expansion growing in absolute numbers faster than wind is, etc....)
Best hopes for you to be right and me flat-ass wrong,
Nate
"we need at least a decade of reasonably high cheap liquid fuels for it to happen "
Well, the scarcer liquid fuels are, the faster it will happen. It would accelerate even with oil production at 50% of current levels (and no one is predicting that in 10 years) - the US, at least, could run the essentials of it's economy with 50% of current oil consumption. It wouldn't be easy or comfortable, but it could be done very straight forwardly - envision every highway 100% HOV. Don't forget, the world economy has grown more than 40% in the last 5 years on essentially flat oil consumption - it's not btu's that's the problem for the US, it's the current account deficit.
" a dedication to the project - right now its only happening around the edges"
Not just examples: the two largest car companies in the world, Toyota and GM, have built their business plans around hybrids and plugins - Toyota plans to hybridize every vehicle they sell in 10 years, and GM is literally betting its future on the Volt.
"I can give you examples of natural gas electricity expansion growing in absolute numbers faster than wind is"
That's true, but I'm not following you - why is that important? Just because we're overbuilding NG generation (or, more precisely, not growing other forms of generation as quickly as we should) doesn't affect the pace of conversion of transportation to electricity, or the fact that the US isn't faced with a realistic prospect of inadequate electrical generation overall. Sure, we could have serious short-term problems in areas which have become overdependent on NG, like California, but the US still only gets 20% of it's power from NG overall, so that's not a fundamental long-term problem.
Now, one might object that this is likely to cause non-linear, hard to predict problems, and that's true. OTOH, I'm trying to address one question: "is a scarcity of high E-ROI energy (for transport or otherwise) likely in the long-term?". I don't see it, especially for the US.
"Best hopes for you to be right"
Thanks - I appreciate the thought. I'm enjoying thinking this through with you.
Gasoline is just 46% of US oil consumption.
How much oil would electric cars save? While the $92000 Tesla two seat roadster has an alleged 225 mile range, the somewhat more practical $40000 Chevy Volt has a 40 mile electric range and when the battery runs down a small gasoline engine turns on to recharge it on the go. If we assume you drive 40 mile every day, that amounts to 14600 miles per year or 663 gallons of fuel on average saved reducing the average 1000 gallons to ~336 gallons to be burnt in the Volt's gas engine.
Overall the best you could hope for would be a 30% reduction in oil consumption. (.46 x .33 +.54=.691)
Of course you would get almost as a good result if you just bought a $22000 Toyota Prius with no range restriction; 22000 mpy/50 mpg = 440 gallons per year for a fuel difference of 100 gallons per year, $400(?). (.46 x .44 + .54 =.742--a 25% reduction)
You seem to be assuming that no alterations are made to driving habits at all, and also have left out a lot of the figures which give the basis to your calculations.
It also seems that the way you are treating the figures does not maintain clear distinctions between hybrid cars, which use the gasoline motor to charge the battery, plug in hybrids, which would use the grid power for a few miles and then switch to the petrol motor, and pure electric motors ( for those wishing for precision, I have elided the difference between series and parallel hybrids, and am assuming that they are all series hybrids)
To be clear, if you use the Volt (which is a series hybrid)for 40 miles a day and no more, you will use no gasoline at all.
When you go on holiday you would have to fill up.
Your 46% figure for gasoline as a percentage of oil consumption further confuses the debate, since most of the difference is made up of things like long-distance freight, which could be switched to rail, agricultural machinery which could use biodiesel, and sundry other items which are not relevant to the discussion on private vehicle fuel economy.
All electric vehicles would likely do around 80 miles a day, depending on the batteries fitted, and if those were leased as is currently planned the total costs would be less than running a petrol car.
When you go on holiday you would hire a petrol car. for long distances.
The Volt is a real car which can officially do 40 miles per day with a gas engine to recharge the battery when the car goes over 40 miles. I assume the energy for the 40 miles will come from the grid because that is your intention. People drive on average 22000 miles per year--60 miles per day. They can do that with the Volt and don't
need to buy a second car.
A $40000 plug-in Volt is a direct competitor to a $22000 Prius, but
the savings in oil is just not significant.
You simply state that all cars will do 80 miles so at least post some car that justifies for that claim. Since the battery is the most expensive part of these plug-in cars I would assume that the cost will be much higher, possibly $55k?.
Your idea is that plug-in battery cars can get us off oil and that's just not true. The whole plug-in hybrid concept is untried and the prices are too high for average people, while real hybrids can help us now. Where the plug-in battery car concept fails you fall back on biodiesel, massive rail, livestyle changes, etc.
You should forget Plug-in hybrids, go to real hybrid cars and look into fuel substitutes for gasoline and diesel fuel such as ethanol, methanol, tar sands, heavy oil, etc. (while being careful to excess CO2).
Majorian,
You are making a few basic mistakes calculating the fuel use of series PHEV's. Firstly most trips are much less than 40 miles, even if average daily VMT is 60 miles. PHEVs can be plugged in between trips, and at work locations. So a commuter living 30 miles from work, and perhaps using the vehicle for shopping trips, dropping off children to evening activities or some of the other non-work commuting activities that account for 75% of driving time, may only use gasoline when on vacation and only for part of that drive if motels, restaurants also provide plug-ins as they do now in Canada during winter to keep engine oil warm.
Secondly the Chevy Volt will have 16 kWh storage, but only use 8kWh. This is probably over cautious approach by GM until more is known about the long term behavior of Lithium batteries. Many drivers will probably find that they only need 20miles trip range, so smaller less expensive batteries could be used, or only one 8kWh battery may be able to get 30-35 miles range. In comparison, the Toyota HEV with a plug in feature will only have 7-10 mile battery(4kWh?) only range, and only at low speeds. For some drivers this will be all they need, but even if this is 50% of the average trip the plug-in battery only feature could double the economy of a HEV to 100mpg.
As the Chevy Volt is expected to achieve >50mpg economy on ICE power, I would expect these vehicles will use perhaps 50-100 gallons per year( ie 5-10% of the average vehicle),and 3,000 kWh of electricity($450-600 retail), while saving 900 gallons of gasoline, and having a gasoline fuel economy of 200-500mpg.
This is only speculation until these vehicles are on sale, and you can be sure that some drivers will find PHEV's unsuitable(for example coastal fishermen who want to drive on the beach and in salt water), and some will love them. I wonder who will be the first motorist to drive 10,000 miles on one tank of gas. Is gasoline stable for one year?, perhaps they will have a 10,000 mile service, gasoline and oil change.
No they don't. Even in the US, the average is about 12,000 miles per vehicle per year.
A Prius gets about 47mpg, so 12,000 miles of driving would require 255gal of gas, or the equivalent of 4.3bbl of oil.
A PHEV could use no oil to drive that distance, but is likely to engage the gasoline engine sometimes; GM chose a 40-mile range due to estimates that that would cover 95-98% of all trips, so let's say it's electric-only 90% of the time, and so uses around 35gal of gas, or about 0.8bbl.
The difference, then, is about 3.5bbl/car/year. To give an idea of what that means, 100M cars - about half the US fleet - being PHEV instead of Prius-style parallel hybrids would lower US oil consumption by 1Mb/d. (That being said, a Prius is twice as efficient as the current fleet, meaning you'd save 2Mb/d with 100M Prius vs. 3Mb/d with 100M PHEVs.)
This one is supposed to get 120 miles and be highway-legal, for an estimated price of $30-35k.
Serial (plug-in) and parallel (Prius) hybrids aren't enemies; indeed, the research that's done for one is likely to improve the other as well.
This isn't an either/or issue, except down at the level of individual cars: both serial and parallel hybrids can do enormous amounts to reduce oil consumption. Parallel hybrids are currently more developed and serial hybrids are a better long-term solution, but there's no reason they can't coexist for quite some time.
I'm using 22000 miles per year per household(21252 miles in 2001). It was 24,800 miles for households with children.
http://nhts.ornl.gov/2001/presentations/vehicleMiles/index.shtml
http://www.eia.doe.gov/emeu/rtecs/chapter1.html
Should I assume that a household will have multiple plug-in battery cars?
Why not 3 or 4 plug-in hybrid cars cars per household (don't forget the Segway)? I mean so you can increase your battery usage.
Be reasonable. So at 21252 miles/47 mpg you get 452 gallons per household. Okay 440 gallons is a bit little lower(I assume properly inflated tires).
On the rather undefined Miles XS500 car with an 120 mile range...
Miles Electric Vehicles was founded in 2004 by entrepreneur/philanthropist Miles Rubin with a mission to rapidly develop advanced all electric vehicles to meet the needs of organizations and everyday drivers, while using no gas and producing zero tailpipe emissions.
The current MILES line includes low speed all electric vehicles that produce zero tailpipe emissions and deliver strikingly low operating costs, making them a great fit for “greening” fleets nationwide. Current MILES fleet customers include Stanford and Yale universities, California State Polytechnic University, Queens College, UC Irvine, UC Davis and UCLA, as well as NASA, the US Navy, the National Park Service, and the Sacramento Municipal Utility District.
The MILES XS500 prototype sedan currently under development will top 80mph and travel over 120 miles on a single charge -- for about the cost of a gallon of gas.
http://www.treehugger.com/files/2008/02/xs500_electric_car_miles_ev.php
Miles is a custom electric car start up. They don't actually make production cars while GM has a lot of experience in that. (I think plug-in EVs make more sense in short range Europe than the US or Canada.)
Bravo! That's fine! By all means.
But we still need liquid fuels for the masses.
As an owner of a hybrid car(Honda Insight) I wonder if the plug-in EV enthusiasts actually have a clear notion of what these cars are like and how widely they will be deployed.
The point is that plug-in battery cars are a boutique solution to the liquid fuels problem. Let's deal with that reality.
And if they want to reduce energy consumption they should buy a hybrid car NOW.
The debate on EV, hybrid and plug in cars always seems to swing wildly between the extremes of no-one having personal transport, abandoning the suburbs etc, and a view where American patterns of use are maintained without a break, and not sacrifices of convenience or mobility are made at all.
Battery technology is just not up to providing exactly the same usage as at present with no loss of convenience, and compromises will need to be made.
So in the real world what is likely to happen is a messy compromise, with a bit of this an a bit of that, with the overall financial position as important as the technology.
Some of the more far-flung suburbs are even now emptying. Others are looking at re-zoning to allow offices and industry to be closer to people's houses, and pedestrianisation.
Personally I think that Toyota have called it right for America, with their plans for a PHEV with relatively limited all electric range of around 10 miles and so much lower costs than the Volt - that would have flown well in a booming economy, but not in the likely economy we will face, in my view.
That is not going to suit everyone, but at will do a lot of people just fine, especially if it is also re-charged at work.
Poorer people are likely to have to stick to electric scooters, and I can see a lot of people buying those who at the moment use a second car.
As long as you are happy to hire an ICC or hybrid on the relatively rare times that a long journey is undertaken, an EV would do most American's fine too, and the leasing pattern for batteries and the very low maintenance costs for pure electric vehicles mean that the ownership cost should be lower than for an ICC.
So it looks like a very varied future to me.
Hate to keep on pressing the point but...do you own a high mpg hybrid as I do?
These cars represent an extreme in economy and most people won't love them althought it could sharply cut the amount of oil the USA needs.
My argument is that you CAN'T do it with batteries.
I've previously shown that there is only enough lithium on planet Earth for 336 million Tesla cars.
http://www.theoildrum.com/node/4442#comment-398324
That means you HAVE to look at liquid fuel substitutes or maybe hydrogen in the distant future(+30 years).
IOW, can we forget about electric cars and start looking at substitutes for petroleum per the Hirsch Report with effective
methods of capturing GHG(carbon capture and sequestration).
Ethanol and methanol are the easiest ways forward for the next few decades.
Nope, I own a little VW Polo, which is smaller than the Rabbit or whatever you call it.
But then my essential mileage is maybe a mile a week, so petrol economy is not really vital, and I get around 10miles a litre anyway!
So what I am saying is that the amount of mileage that is needed varies a lot across the population, and that America can certainly reduce it's mileage.
With respect, you did not conclusively demonstrate that lithium resources were as limited as you say, you gave your opinion.
Here is a different take on it:
http://www.evworld.com/article.cfm?storyid=1434
EVWORLD FEATURE: Lithium in Abundance: Battery | Lithium | Evans | Tahil
There is also this comment by meme (check down the page) that lithium carbonate can be extracted from seawater for around $22-32/Kg, and the lithium is a relatively minor component of lithium batteries anyway, with cobalt being the most expensive part, and that is being replace.
Your statement that we HAVE to go to hydrogen in 30 years is entirely unsubstantiated, as you have also entirely ignored the links I gave in the previous discussion showing the potential of zinc, which is the next material chosen by Toyota to take over in around 2020 from lithium -0 and I reckon Toyota may have a better idea of what is do-able than you or I.
For cheap, very low mileage run-arounds or for scooters, Nickel-Zinc looks good:
http://venturebeat.com/2008/09/02/alt-chemistry-battery-maker-powergenix...
Alt-chemistry battery maker PowerGenix lands a deal for electric scooters and bikes » VentureBeat
Advanced lead-acid could also power more modest users:
http://www.fireflyenergy.com/
Home - fireflyenergy.com
For those with the money and who will not or cannot modify their driving habits at all, then hybrids are a good choice, but for many battery options and plug-ins will work very well
By 2012 thee will be umpteen choices on offer for EV's, plug-ins and hybrids, and what is most successful depends more than anything on how much money is available and how readily available petrol is, in my opinion.
I managed to find the paper of R. Keith Evans on the availability of lithium. The USGS says 11 million tons and Evans says 28.5 million tons with 14 million tons from Lithium carbonate.
http://www.worldlithium.com/An_Abundance_of_Lithium_1_files/An%20Abundan...
He offers some guesses about big new finds in Chile, 6.9 million tons and China and Tibet, 2.9 million tons and counts a lot of non-traditional sources.
He's entitled to his opinion of course but it seems terribly speculative and even 28.5 million tons is not a lot of lithium metal. Much of the 'resource' seems to be locked up in low purity brines (30-60 ppm) which means it's probably less economic to extract than seawater uranium--which experts consider wacko at least for the next few decades.
I'll stick with the USGS reserve base.
http://minerals.usgs.gov/minerals/pubs/commodity/lithium/mcs-2008-lithi.pdf
Well, to be honest we just have slight difference in emphasis anyway, and as far as I can see it will take ages to reach the 300 million cars or whatever you think we can provide lithium batteries for.
Do have a look at the link I gave which discussed zinc batteries, as they are darn powerful and have no resource constraints as a all the batteries that would be needed could be provided with a fraction of yearly production.
Toyota seem to be looking to have them by about 2020, which is in plenty of time to take over should any resource constraints in lithium kick in.
I'll give you the link again, to save you looking back for it:
http://www.meridian-int-res.com/Projects/The_Zinc_Air_Solution.pdf
The_Zinc_Air_Solution.pdf
This is by the guy who raised the issue of lithium availability, so if you don't like the rebuttal to his comments on resource constraints in lithium, perhaps you attach enough credibility to him to accept his re-assurances that zinc is just fine! :-)
This guy Tahill raises the issues I do but let's be clear about these zinc-air 'batteries'--they are not what most people think of as batteries. They are more like fuel.
You drive to the 'zinc station',
drain out the used zinc and electrolyte solution, fill up with regenerated zinc-electrolyte for 10 minutes and drive on.
But no plug-in for this system. I like it for dedicated electric buses and maybe short range dedicated trucks.
Its inventor, John Cooper says it's 10 times more efficient than hydrogen fuel cells which I find hard to believe because he also says that zinc-air are less efficient than lead acid batteries .
A hydrogen fuel cell is really a 'kind' of battery, so it is POSSIBLE that zinc-air 'batteries'/fuel cells are more efficient than hydrogen.
https://www.llnl.gov/str/pdfs/10_95.1.pdf
http://en.wikipedia.org/wiki/Zn-air_batteries
At any rate it has very good energy density(about the same as 700 bar hydrogen gas) the Zinc-Air battery at 12 cu ft=60 kwh, 4.7 MJ/l versus 1.9 MJ/l for Li-ion.
Hi x,
As a physicist I feel compelled to add a note. I don't know if you're just an inflamed troll, but anyway:
Energy is very precisely defined around the concept of energy transformation. And it is a tool for the physicist to compare apples and oranges (in the arena of Work and Thermodynamics). If you think apples and oranges should not be mixed, what do you think the engineers that designed your car where doing? They had to compare chemical energy, heat, torque, etc... and see how the transfer operated.
That's why EROEI is meaningful, because you can convert certain types of energy into other types of energy, and to unlock some types of energy you have to invest energy in another form. I hope that helps you clarify your ideas.
So... What did people do before money?
So,another small cog in the Ponzi machine has self-destructed.Good!
I am looking forward with an anticipation of intense pleasure to when the whole rotten "market" construction falls flat on it's ugly face.And I hope that the practitioners therein,the ones who don't jump out of high windows,get well deserved bullets in the back of their miserable heads.
Schadenfreude -- not a true joy.
A lot of innocent people are going to be taken down when this Ponzi machine runs out of gas.
It will be worse than Katrina, maybe worse than the Cretaceous-Tertiary bolide -- but it's cause will have been human, and therefore potentially preventable. That it will not be is a cause for sadness, not joy.
I understand your feelings but in throwing the Ponzi machine out of the window let's not throw out the baby with the machine. Used properly debt is a form of cooperation for the common good. I agree used, as it is presently used, it becomes a means for wealth accumulation and beggaring ones neighbours.
Richard Heinberg at Post Carbon Institute
He is mistaking "The Stock Market" for "The Market". They are not the same.
I am the market, you are the market. Every time you take the bicycle rather than the car, or combine 3 trips into a single journey you are making a market decision. You are choosing not to spend money on oil, instead to do something else with it.
The traders on the stock exchanges can get as bent out of shape as they like, it's you, I and billions like us who really make the market decisions. We are the market.
For most the the people following TheOilDrum, including me, the rapid rise in oil and gas prices over the last year was interpreted as Peak Oil arriving. We discounted that speculators were responsible, but that it was due to the failure of KSA to replace other declining fields.
Nate's arguments and the price declines over last 2 months, are a refreshing slap in the face. Those demon speculators did have a role! Oil at $100 is still high and if it stays around this level for a while it will give developed economies time to make some longer term adjustments. If we ignore this warning again, and go back to buying SUVs rather than HEV's and fuel efficient ICE's, we deserve $10-20 gasoline when oil production really starts to decline. I'm just hoping that BEV's and PHEV's will be readily available before then, and that I can afford to buy one.
Thank you, Neil.
You expressed my sentiments perfectly.
I too remember the admonishments that it's 100% fundamentals, that speculation plays absolutely no role. It's good to have people like yourself to remind us of our own fallibility.
Minimally, we should learn from this that the markets are a treacherous ally in making the case for peak oil.
But beyond that, hopefully this will help us to temper our arrogance and move forward with a little bit more humility.
This tempering process, something that one often gains only through experience, should make us better advocates in the future, not worse.
Well I think its always a mix of fundamentals and speculation in the true sense where speculators provide liquidity.
Why not and assumption that significant quantities of light sweet crude where withheld from the market then later dumped on the market. Assuming this fundamental change perfectly explains what happened this summer.
Light sweet exports where artificially lowered then artificially raised. The market correctly responded to this seeming shortage of light sweet then it got dumped on. Any financial games which I think took place happened above and beyond this fundamental move and simply would have not worked without it.
This mixed solution explains every single thing that happened this year including the pressure on NG.
Its important because if/when/now that Ghawar is in decline for real without my above assumption of and artificial shortage we can expect price projections that treat all barrels the same to fail.
Bottom line when Ghawar really declines the world is going to get verrry interesting.
Well, the first reason not to do that is that there's no evidence it actually happened.
If somebody pulled a bunch of light sweet off the market, that should show up in production, export, or inventory numbers; similarly, it should show up when they dumped it back on the market. So the evidence for your theory shouldn't be that hard to search for; have you looked?
Here is the weekly price for WTI; as you can see, the price rise has been fairly regular since mid-February. However, the EIA doesn't show a fall in available oil or C+C; indeed, they show it rising from Feb to May. Similarly, the IEA shows July production at its highest ever, and slightly higher OECD stocks than in February.
If you're claiming that enough light sweet was withheld to jack the price of oil up by 40%, where's the evidence of that? If oil production was at an all-time high during the highest prices - and all the evidence we have says it was - then who was hiding that oil and where? This level of manipulation must add up to tens of millions of barrels; why doesn't this massive amount show up in any data?
How on earth is "there was a big conspiracy involving 100M barrels of withheld oil that nobody noticed except me" a more reasonable explanation than "there was a bit of a bubble; these things happen"?
Flights of fancy might be fun, but they don't help explain the real world.
I've seen no evidence that production in 2008 came anywhere close to matching what the EIA published.
At best all I can find hard evidence for is production close to 2006 levels. Show me proof that the numbers the EIA published are backed up by tanker traffic and storage levels etc etc. Any credible support for the claimed production numbers from the EIA is acceptable.
I've been saying since Feb or March that the production claims are not matching what we are seeing in either North American NG supplies or in oil exports.
Certainly we had a surge in supply starting in July and my contention is it was primarily light sweet but this surge just barely resulted in tanker traffic higher than 2006 and in June west bound tanker traffic was lower then both 2006 and 2007.
I suggest you subscribe to oil movements its worth its weight in gold if you want to know what really happening with the oil supply.
Finally the surge starting in June and ending sharply so far in September put world oil supply for a few month slightly above or the same as 2006 since Non-OPEC shipments have fallen all year.
The only real issue I have is its really hard to determine how much of the worlds real export supply and also the quality of the oil is impacted by export land effects vs geologic decline. At the moment these two cannot be easily split.
Pitt all I do is put together all the facts I can find and have access to and present a scenario that explains everything I know and is self consistent and reasonable.
Prices moved correctly with market conditions that have have postulated the only market manipulation that I can see that was not supported by real underlying oil supplies even if they where manipulated has been in the last few weeks. We have had in my opinion only about two weeks so far where the market did not match up well with real oil supplies. Before this although it was being moved around it was because the supply side was being jacked around not speculation. And even though I think the market is being manipulated a bit now we still have the SPR opening announcements which represent real oil to keep the market depressed. So a credible source of real oil is still needed financial manipulation alone is not enough and has never been enough to move the oil markets.
And finally I said a few times I expect another mini-surge and I'd not be surprised see oil prices pushed down to the 70-80 dollar a barrel range over the next few weeks. Why would a doomer scare monger propose this possibility I just don't see it fitting with the persona your trying to insinuate I have.
Outside of the manipulation of the real oil supply getting us down to 70-80 only requires a few more weeks of financial manipulation and promises to open the SPR its readily doable.
The doomer part is WHY ?
Then perhaps you'd like to explain why the EIA, and the IEA, and OPEC, and, well, every major organization which tracks oil production is saying there was a large production increase?
If you're going to say they're all wrong, but you - some random guy on the internet - knows the truth about oil production levels this year, you've got a hell of a burden of proof resting on you.
And your "evidence" is?
You're the one making the claim, namely that the EIA (and IEA, and...) data is wrong; the burden of providing evidence is squarely on you.
I assume by "west bound tanker traffic" you mean oil tankers travelling to Europe and North America?
If so, how is this surprising? Most members of the OECD have lowered their demand for oil in the face of high prices; US demand is down 800kb/d from last year, so it's hardly surprising there'd be fewer tankers going towards it.
Perhaps, but you seem to be utterly ignoring Occam's Razor, which is the notion that explanations which require the fewest assumptions are more likely to be correct.
Your scenario assumes there's either gross incompetence or conspiratorial collusion among all the world's oil-production trackers, and that you are one of the brave and insightful few souls who have pierced this veil. Pleasing, but unlikely.
A much simpler explanation is just that you don't have all the data.
For example, if you're basing your theories on tanker traffic, one very simple explanation is that more oil is moving by pipeline or other means (such as rail, which is how Russia sends oil to China). That fully explains the tanker data, but requires no additional assumptions about the competency or motivations of the EIA/IEA/etc.
As a general rule of thumb, if you think everyone else in the world is wrong, you should be suspicious of your conclusions. It happens sometimes, but not that often.
Barclays report today points out that Saudi oil production is up 1 MMBbl/day Y-on-Y, US demand is down 1 MMBbl/day Y/Y. 2 million excess barrels a day and no other regions with enough demand growth to take it, there's your smoking gun.
Memmel:
This is all pretty new to me, but I see it as very wild ride. Regardless of whether it is peak oil, speculation, or reduced KSA production, the net result is high volatility. We are attached to a bungee cord which is going to really hamper any PO mitigation, whenever PO arrives. When prices are up, the economy sags, money is scarce so investing in insulation or a Prius is much less likely. Discretionary spending takes a hit, personal and industrial oil demand drops, oil prices drop and the economy recovers. With lower oil prices, no need for a Prius or solar panels, ad nauseum.
With little or no serious alternatives being implemented, we are going to bounce until peak oil hits and the society as a whole will not be prepared.
The only solution is a concerted and consistent plan regardless of energy prices and frankly, I just don't see that happening.
"verrry interesting" is an understatement.
As one of those who has consistently argued that the price of oil was mostly about fundamentals and not speculation, even I am reconsidering my position on it. Speculation clearly has had a bigger role than most thought, and not just in oil. Consider the 14% waxing that Arch Coal (ACI) got yesterday, and then 5% more today; what was that about? In retrospect, it appears to have much to do with the large position in it held by Osprarie.
I am basically on the same page as Nate here though, I think. My article for this week was on the same subject, with a similar conclusion: the commodity and energy boom is temporarily out of favor, but it's definitely not over. See Rumors of the Demise of the Commodity Boom
Whats wrong with the market following fundamentals and the fundamentals changed ?
I agree that the market was manipulated but it was manipulate with real oil not financial moves.
Certainly we have a lot of financial moves around oil and right now as in the last two weeks it looks like the market is being repressed via financial moves alone.
My point is that outside of two weeks I see no indication that the market was not responding to fundamentals.
KSA certainly did a number on the market but it was done using real light sweet crude.
Nate mentioned large positions in the market I'm sure that some people knew what KSA was up to and some did not.
The trick played this summer will result in long term damage and is effectively a moral hazard.
I wish I could post the tanker traffic info from Oil movements what happened is obvious in retrospect.
Can you give us some rough figures?
Send them to me - I will post them anonymously.
I don't even know what you're talking about so would like to see them-you mean the oil in the VLCCs circling Iran at some huge daily opportunity cost?
Exactly.
Memmel, my point is that it wasn't just crude. Tuesday morning opened up with corn, soybeans, base metals, fertilizer, and all the fossil fuels getting whacked by 5% or more, as I detailed in my article. That's a massive sector move (primarily by hedge funds, I am guessing) out of the whole commmodity/gold/energy thesis, and really has little to do with oil, per se. In fact the fundamentals of oil supply & demand are irrelevant on days like that. My money says that whatever amount of crude Iran had in floating storage doesn't even figure into the stock market right now.
The potential for a fund operation like Osprarie to take the legs out of perfectly good companies like Peabody and Arch in a mere day or two should not be underestimated. I am seeing moves in other areas of the commodity & energy sectors that smell similar.
A continuing reminder--IMO, the monthly average oil price is a far better indicator of fundamental supply/demand factors. And we have seen about a 13% decline in August from the June/July peak of $134. Last year, we saw a price decline in August, followed by 10% plus increase in September.
As I said yesterday, I think that September/October will tell us a lot about supply/demand equation, especially in regard to net oil exports worldwide.
In any case, consider five of the (2005) top 10 net oil exporter (accounting for half of world net oil exports in 2005):
Saudi Arabia is showing a year over year increase in production, that will result in net oil exports probably being at about 8.4 mbpd for 2008, versus their 2005 rate of 9.1 mbpd (our middle case has them approaching zero in about 23 years).
Russia is showing lower production, with a sizable decline in oil exports (our middle case has them approaching zero in about 17 years).
Norway is in terminal decline. Our middle case has them approaching zero net oil exports in about 17 years.
Venezuela has shown an average decline of 100,000 bpd per year in net exports for 10 straight years. Extrapolating this out would have them approaching zero in about 20 years.
Mexico's net exports are crashing, in tandem with the collapse of what was the world's second largest producing field. They will probably approach zero net oil exports in two to four years.
For SA, did you mean to say "decrease in production"?
No. They are showing a year over year increase in production (and net oil exports), but I estimate that their 2008 average annual net exports will be about 700,000 bpd below their 2005 rate. If Saudi Arabia is going to exceed their 2005 average annual production rate, I believe that it will be in 2009, or later.
Here are the actual EIA numbers for 2005 for Saudi Arabia and my estimate for 2008:
2005:
Total Liquids: 11.1 mbpd
Consumption: 2.0
Net Exports: 9.1
2008 Estimate:
Total Liquids: 10.9 mbpd
Consumption: 2.5
Net Exports: 8.4
BTW, if Saudi net oil exports in 2009 are below their 2005 rate (which IMO is highly likely) at some point in 2009 the cumulative shortfall between what they would have exported at their 2005 rate and what they have actually exported will be in excess of a billion barrels of oil.
Holy Moly, SA's rate of consumption has gone up 25% in three years. At that rate they will be using 5 mbpd in about 9 yrs. That is not a very rosy picture for their future exports. BTY what is the main driver for this rapid increase in consumption besides increasing population and therefore usual household demand. Is it the building boom(hotels, etc.) and massive use of air conditioning in one of the hottest miserable places in the world or an industrial build up? Would some one please shed some light on this for me.
Welcome to Net Export Math.
Note that the 2008 number is my estimate, but I believe that it will be approximately correct. The EIA showed a +7.2%/year rate of increase in consumption from 2005 to 2007, which makes extrapolating the consumption number pretty easy--at this rate, their consumption doubles every 10 years:
2 mbpd in 2005, 4 mbpd in 2015, 8 mbpd in 2025
Several factors in Saudi Arabia pushing up liquids consumption: large families, something like six kids per family; subsidized energy prices; a shortfall in natural gas production and a big push for energy intensive domestic industrialization.
At the Saudi's current rate of increase in consumption, if they wanted (and were able), in 2010, to match their 2005 net export rate, they would have to be producing about 14 mbpd, versus their 2005 total liquids production rate of 11.1 mbpd.
Thank you for your response which answers my question very clearly. The problem of population growth of course will overwhelm any conservation measures unless growth is drastically decreased world-wide. I wonder if Sarah Palin ever spent time in Saudi Arabia - she would be right at home there. LOL
I had a mistake in my "What if" number. If the Saudis wanted, in 2010, to match their 2005 net export rate they would have to be producing about 12 mbpd total liquids, versus the 2005 rate of 11.1 (at the current rate of increase in consumption).
I'd like to add that I don't believe KSA's total production figures for a minute. Obviously increasing internal consumption is a huge issue and can readily be used to hide real declines. The real answer is probably some combination of real production declines and internal consumption increases. It could be 5% consumption and 2% decline with KSA quite free to report any number they want as overall production. We don't have good ways to check exports much less any way to know if the internal numbers are real.
Export land will if you wish hide real production declines for some time. But at some point you get different math if you have say accelerating internal consumption coupled with declines since the overall pie is getting smaller. KSA would have to claim internal consumption increased at say 10% or so next year to keep the overall production number the same even as exports decline year after 12% etc. So the ability to mask real declines with any sort of reasonable increase in internal consumption will not last forever. My best guess and this is a pure guess is that real internal consumption is probably increasing at a rate closer to 5% and 2% is real production declines. Thats why I used those numbers.
The only proof I have for this is that like most places KSA's oil usage is weighted towards transportation fuels and they do have secondary products like bunker fuels that would be entering the export market from internal refineries or even external refineries shipping gasoline and diesel back. The extreme tightness of these secondary fuel markets says to me that flat production and only increased internal consumption is not the real picture and to some extent total production numbers are being exaggerated. We get reports from time to time of product delivery problems inside of KSA that seem to indicate that they don't have ample production allocated to the internal markets.
http://www.saudigazette.com.sa/index.cfm?method=home.regcon&contentID=20...
I've already sent a letter to WT asking him to recant his export land model like Galileo.
The problem is that growing internal consumption along with our inability to get accurate numbers effectively completely hides the reason why exports are dropping. It could be as long as 2-3 years before it becomes clear that real declines are taking place and claims of increased internal usage are simply physically impossible based on population growth etc. At some point you would reach the point that everyone in Saudi Arabia drives SUV's around in circles to match the population with reported fuel usage.
But I freely admit we have no real way to question this and unless someone can come up with a metric I'm not sure we can. Like I said the only way I can see to differentiate the two is looking into alternative oil product markets to see if they are well supplied since they should be independent of the location of the refinery.
Although this article is old.
http://findarticles.com/p/articles/mi_hb6465/is_200211/ai_n25814261
Its about and Asphalt shortage in KSA when and official has to proclaim no shortage exists then you can be sure it does :)
http://www.bunkerworld.com/news/2008/06/71910
But even getting brief reports on real fuel usages in KSA is rare much less any consumption numbers for various products to quantify usage outside of what KSA reports.
One would expect that if internal consumption is going up availability of Asphalt and Bunker fuel inside KSA would be ample and they would be growing supplies of these products to the export market.
This is not going on so although you can prove it a combination of decline and rapid internal growth is probably the truth.
Found this late so I'll add it.
http://www.fastfinancepro.com/index.php/2008/07/02/bitumen-supply-and-de...
Whats really happening inside the Kingdom is in my opinion not whats being publicly presented.
While your take away message is important and imho, easy to agree with - I will quibble a bit about the rest.
I think several posters here wisely noted that price alone does not guarantee peak oil, not last year, not this year, not in the future.
Further, the production numbers for C+C alone indicated an undulating plateau (which may be now broken, or perhaps not, we'll have to wait and see to be 100% certain).
However, what is still unclear, unproven and up for debate is:
Why exactly did the price of oil fall so rapidly from c. 150USD/barrel to now c. 110USD/barrel level?
IMHO, any attempts to put a single monolithic and specific cause behind this drop are doomed to fail.
As always with price of such an important commodity, many things drive the daily fluctuation and somewhat different things the overall trend.
I for one am not willing to accept with current information available, that the price from last year's c. $70/barrel up to c. $150/barrel this year was 100% down to speculation (or manipulation or a combination of the two).
As explained earlier, market sentiment and speculation may have played a significant part, esp. at above $100-$110 level, but also tightness of supply and temporal demand surge and various other issues probably played into the situation.
I'm sure many economic papers will be written about this price period and many of them will end up disagreeing about the split between the causes.
So, just like you said, we debate the marginalities while believing rises are anomalies and drops are 'return to normality' - all the while we wait for the inevitable: the peaking.
Crude oil price is falling simply because gdps of usa, germany, uk etc are falling. Falling gdp means less energy usage which means low demand for crude oil which means low price of crude oil.
WFP
I agree with you. However, the official statistics as yet do not.
When accounting for headline CPI the S&P 500 equity valuations are at historical extremes - even higher than August 1987 or early 2000 (actually according to Merrill Lynch the worst reading in the 44 year history of their data)..... While inflation expectations are dropping, earnings estimates haven't come down. So, just like lower net energy will require offets in efficiency, the SP500 will require a miraculous increase in productivity (unlikely) otherwise the SP500 multiple will drop substantially because of the already witnessed inflation and future (nominal) growth and earnings are gonna be a disaster because of disinflation/deflation
If the calculations from the Wikipedia are correct, the GDP per barrel of oil was $1605 for the US in 2007. My trusty calculator says that at 110$ per barrel of crude, the cost of crude would represent 6.9% of the 2007 US GDP. At 140$ per barrel this proportion is 8.7%. These figures do not count refining, taxes as well as cost of transportation, storing and sales of the refined products. This is just the cost of purchasing crude.
Note also that these numbers do not factor the proportion of oil over the total energy usage.
I think it is quite possible that a raise in the price of crude would bring an increase of the GDP due to the increase of oil related expenses while non-oil economic activity reduces. We get a paradoxical situation where the GDP numbers show prosperity when real life is the opposite.
These numbers are also supportive of the idea that there is a maximum price for oil beyond which economic activity will be destroyed until the oil proportion of GDP returns to sane levels. High oil costs acts like a tax siphoning the profitability out of other sectors.
It would be interesting to see what these figures were back at the end of 1970s early 80s. I remember seeing a report that said oil would need to be around $190/barrel to match that period.
What I keep seeing ignored around here is the fact that world top 3rd oil consumer with more than 5.5 million barrels daily imports, Japan, must be having a good sized effect on the market value of oil. I mean, even the US is only importing 8 million barrels a day, so anyone have any information about the Japanese economy and it's effect on recent price drops?
Gdps of usa, uk, germany etc are falling because of two reasons:
(1) The previously high price ($147/barrel) of crude oil
(2) Subprime mortgage crisis
Remember that its not only usa banks that invested in subprime of usa, it was also uk banks, german banks etc.
And right down to many Australian Local Councils of whom many are in litigation with Lehman Brothers.
Thats how far this S/Prime mess has spread. My local Council with a population of approx 60000 has an Aud 45 million exposure. A big worry.
Hey folks, oil (and the other commodities) are falling in price because the dollar is increasing in value. This is because they are being destroyed at a rapid rate because of the credit crunch. I think the word is deflation.
Hello HankF,
I don't see any evidence yet of massive price decreases in I-NPK such as we have been seeing in crude and natgas. In fact, most experts still predict further I-NPK price increases. My guess is the Overshoot will sell off everything they own [for mere pennies on the dollar] so that they can stave off starvation for one more day.
This is, I think, a well put and useful observation, and Nate's piece is excellent. It is always tempting for all of us to see evidence that seems to support our conclusions as useful and conclusive evidence - I'm mentally going back and wishing some of my own statements could be rendered slightly less certain - and they will be next time.
And we all should know better, IMHO. Heinberg and Simmons have been reminding us for a long time that the greatest danger to all of us is not rising oil prices but *oil price volatility* - that makes it impossible to plan or adapt to changing circumstances. And all of us are vulnerable to that volatility in making our choices.
Excellent post, and excellent commentary.
Sharon
Suppose that we had some means preventing oil price volatility and replacing it with a steady rise in price (some kind of global rationing system would be required). What kind of plans do you think the global economy would make in these circumstances? The current economic system has one and only one goal: to increase the total volume of economic transactions as rapidly as possible in the short term. Private finance capitalism is incapable of thinking about economic 'health' in any other way. The problem is not that we will be unable to carry out the intelligent plans that we formulate because of price volatility. The problem is that economic orthodoxy forbids intelligent thinking about macroeconomic problems. Ecological modesty and long term wealth preservation must be the principles that inform a sustainable system of economic production. In order for these principles to replace out atomized 'every nuclear family for itself, strive to get richer forever paradigm', wholesale changes to our economic and political institutions will be required. I do not see how a political climate for such changes can be created until after a large portion of the middle class has been destroyed and the idea of financial independence is perceived as an impossible dream by a large portion of the population. I am not sure that getting to this point through a long slow price squeeze would result in more intelligent macroscale decisions than getting to the same point via a financial roller coaster.
I know that many people maintain that once things have gone so far it will be impossible to take effective action because we will be too energy poor. I am not completely convinced by this argument. The wastefulness of our current economy is tremendous. I think that the leverage that could be obtained by concentrating on providing essential goods and services (food, clothing, shelter, sanitation, health care, education) as efficiently as possible, rather than on selling as much stuff as we possibly can to whoever has the most spare cash or the greatest willingness to go into debt, is quite large. Whether or not we can form the political will to organize economic production in this manner remains to be seen.
Roger, I think that some relief could by found by the minimization of waste, but I also think new forms of waste will be created and old one's reinvoked by the coming crisis. My own take would be that much of our inability to take effective action will not come from lack of energy per se, or even lack of money per se (although both are factors) but because for every refinement we make, we will also see loss of refinement - for example, while we could, for example, reduce our wastage of food we buy and don't eat, our increasing inability to import cheap labor for harvest means that more food is going to waste in the fields in many areas. It isn't just the political problems, but the practical problems - many of which rely on cheap energy. I hope, of course, you are right and that reducing waste can do more for us. The book I've found most useful in this regard is Thomas Princen's _The Logic of Sufficiency_.
I can't swear you aren't right about the dangers of steady impoverishment, but the last time in the US that we had the political will to concentrate on the just allocation of resources, and institute large scale programs that actually did something to remediate a major crisis that also didn't further concentrate wealth and waste was precisely during the last time the middle class was heavily squeezed and impoverished - ie, the New Deal and many of the War-era programs, most of which were heavily influenced by the new power of labor, consumers groups and the poor - which grew out of more people being poor during the Depression. I'm not sure that forcing the middle class to abandon its fantasies of comfortable wealth might not actually be the only thing that could make it politically possible to bring about steady change.
At a minimum, however, I think the danger of people saying "Well, I'm not going to spend that money on reinsulation, because, after all, the last time that heating oil hit $5 gallon, it came down" does set us back - I agree that remediation of the scale we really need requires all the things you suggest, but in the absence of the ideal remediation, individual and community level partial remediations are all we have - and this kind of volatility derails that.
Sharon
I think the biggest impediment to people investing in insulation is the upfront cost coupled with the uncertainty of where people think they will be 1 or 3 years hence, not so much heating price volatility. Might get laid off, might move for commuting reason, might move for any number of reasons. And probably plan to buy a better insulated home, but throwing that money at insulating their present dwelling doesn't seem cost effective.
Insulation costs are high. Retrofitting insulation is verrry high. A strict National standard for all new housing is needed.
Retrofitting insulation in walls is expensive, but not so for adding into roof and basement walls or under floor if no basement. Reducing air leakage around windows, doors can be very valuable as most houses leak air like a sieve. This is easy to check. The thing about insulation is that any additional amount is an improvement and it is lasting. Start with rooms that are used the most and are likely to be the warmest.
Sharon,
I agree that in the presence of rational, long term economic thinking steady price increases are preferable to price volatility. Unfortunately our current economic institutions are designed to discourage rational long term thinking. Well built, energy efficient housing, which is designed to last for a century or more will still be serving the community long after its current residents have passed on. Currently strong incentives exist encouraging both developers and temporary owners to take shortcuts in the design and construction of housing in the name of short term private convenience. Housing should be a public good rather than a private good. We should have proprietors of land and housing but not 'owners' in the current sense. The right of proprietorship would be absolute as long as the relevant taxes and rent (which would be less that the current cost of home ownership) are paid. Houses should be constructed with public funds with the idea of minimizing the long term costs to the community. These funds would be recovered in the long therm by rent/taxes from the occupants. For new housing proprietors could be designated ahead of time and they would have substantial input into the design of the house, but strict standards with respect to long term costs would be enforced. Subsidies should be provided for upgrading existing housing, especially in cases where the quality of the housing is such that we believe they will be providing shelter for a long time into the future. It is our atomized, every nuclear family for itself, short term, economic thinking which presents the greatest barrier to the creation of an intelligently designed, low energy infrastructure.
I also want to point out that my conception of waste is more radical than what is usually meant by that word. Our economic system is deeply, fundamentally, structurally committed to the creation of waste. The larger and more luxuriously appointed our homes, the larger and more luxurious our cars, the more jet airplane tourism, the larger the size of our pile of toys, etc. the 'healthier' our economy is. Every Christmas season our media conduct the holiday ritual of anxiously measuring 'consumer confidence', meaning our willingness to buy lots of stuff we do not really need, confident that the cornucopia of increasing material wealth will never be exhausted:
"Don't worry about depleting stores of fossil fuel, high quality metal ores, phosphorous or top soil. Don't worry about air, water, and soil pollution. Don't worry about habitat destruction, or the increasing level of species extinctions. People are shopping and this year's bottom line is looking good. Oh, wait a second. People aren't shopping enough and we are about to enter a recession? We need to fix that right away. After all any person with half a brain knows that the faster we consume natural resources the richer we are going get."
Our economic system is functionally insane. A culture in which the lawn, the multicar family, the 'starter home', the 'starter car' (It's good enough for a new graduate like you, but if you do not eventually own a 'nice' car your life will have been a failure), jet airplane tourism, fruit from halfway around the world, mountains of toys (for both children and adults), etc. are normal and necessary parts economic life has an enormous amount of fat to cut. Of course, because of huge income inequality, a strata of very lean poor people exist even amidst our fantastic excesses, and if we are going to preserve the holy right of money to make money, then the only way to save these people from destruction is through more growth. What a racket. Just make sure that there are people living squalid miserable lives, and the right of rich people to get richer with doing constructive work becomes a virtuous necessity, and anyone who suggests that we should be preserving wealth rather than consuming it as fast as possible is dismissed as a tree hugging, commie moron who wants to starve people to death.
But Nate has been agnostic about the potential affect of speculators in the market, just a couple of days ago he commented to this affect. I interpret this piece to suggest that speculators could potentially move the market in the short term, not that they have done so. We need the potential and a motive. There has to be away to quantify the affect of speculation on price movement separately from from fundamentals.
No there is not.
You can make estimates, like the CFTC did, as well as other agencies, but there is NO way you can ever 'prove' the impetus for short term price movements. If there is 'news' out there that suggests huge demand for oil in coming 6 months, that may affect hedgers, producers and users decisions. Hedgers won't hedge yet. Producers will wait a little to go full throttle and users will buy NOW before prices go up. None of those entities are speculators, yet they are all changing their trading decision based on information.
What I reported in "CFTC Report-Speculation My A$$" is that speculation is not why we are up over 1000% in last 9 years - the marginal costs (IMO due to depletion trumping technology manifesting in lower energy gain) keep increasing as has demand. We are now at an inflection point where marginal costs are still increasing, but demand is dropping, and if we have larger credit crisis on horizon demand will drop still further - this is one of those 'higher low' periods. But speculators in the intermediate term and longer term don't impact the underlying trend, because the oil is eventually used, or inventoried. Plus OPEC will have something to say about this next Monday, I would surmise...
This too is another example of how semantics can get one in trouble. If 2 people are arguing about impact of 'speculators' on market - they need to also define the timeline of their debate. I am quite sure that natural gas will be significantly higher than here in 5 years, due to a)higher costs and b)more wells needed and c)more nat gas/electricity needed for refining oil. But I don't have a clue where NG will go in the next month, because I don't know how the large investors are positioned or if they HAVE to sell for various reasons. (though the COT report shows lots of shorts)
The consensus here seems to be that we can expect greater volatility in energy prices going forward due solely to fundamentals. If we can't separate the impact of fundamentals and speculation on price, what about changes in their relative importance? Do you forsee more speculators entering the market as volatility increases and the opportunities to make a quick buck on this volatility increase? Or will their importance decline because as energy prices increase, they will swamp out any speculative affect?
I am not an energy investor (or speculator), I'm just trying to understand the nature of speculation. It seems to be a thorn in the side of any productive energy discussion.
Yes, we will see more speculators, and they will be otherwise known as hoarders. They will charge cash in local spot markets. Laws will be enforced or passed which will in effect attempt to protect the professional speculators. Rue the day when the law breaks down at the local level en masse.
http://www.energybulletin.net/node/46483
Rogers says bull market in oil has `years to go' (transcript) Betty Liu, Bloomberg
Note that this interview was on June 6, 2008.
Oil is going down in price because it seems most of the world's economies are in a recession, chinese manufacturing has contracted for two months running according to bloomberg and we could be in a deflation scenario if mish over at global economic analysis is to be believed. So the price of oil and commodities in general is going down due to the deflation and the great global unwinding of leverage taking place. Another sign is that stocks are down in virtually all countries, while house prices are down in many as well. What we're witnessing is a credit contraction. So even though the price of oil is going down, it will still remain expensive due to deflation as not many people will be able to afford it as the value of their assets decline, unless they hold cash.
If Boone Pickens is still talking about floor prices in oil I would say that the market for crude has not yet been flushed enough. He was late to the party on the way up and has apparently missed the exit point. Unlikely that he gets bailed out.
On the other hand it is quite possible that Ospraie's exit from the equity side of the game might market a bottom in the relative price of the energy and other commodity equities to the underlying.
I don't think that a pullback in crude to the 75$ number will derail the move towards the electrification of transport. There is too much momentum in terms of technology and engineering and that will inevitably drive the economics. Throw in climate change and the political/emotional/economic pain that has been effected with $4.50 gas in the US and you can be pretty certain that we are not going back to business as usual even if someone taps into a field 10x the size of Ghawar tomorrow.
The main producers of oil are not friends of western style democracies and the people in the west have seen enough to know that that's just the way it's going to be.
I've known for over a month that oil was heading down hard. Possibly down to under $50. I have many good reasons for believing this, and I've pointed them out many times here. Now if some poor schmuck like me knows that the downward momentum is that strong, then pretty much everyone knows by now. That is why it didnt even matter what Gustav did. Gustav could have been a Cat 5. It could have knocked the Gulf offline, and all of Texas too! The market still would have pushed energy down, after maybe a 5 day rally.
What I'm trying to figure out is if we are looking at a major deflationary event unfolding. The VIX is up, and October is only a month away...
Question for those who rated down that post: You guys long on oil or something? You losing money on this?
I downrated because it had no content aside from you fluffing your feathers and crowing.
The point of my "crowing" is that monetary policy is what primarily drives the price of oil. Inflation was barely discussed here and deflation is mentioned even less. Through deflation, it is possible to maintain a low price of oil even in a post peak environment. If the deflation hammer does indeed fall, it has to be something that was discussed here in detail beforehand. Lack of understanding of these two mechanisms (inflation & deflation) is going to have a catastrophic effect on the long term credibility of the peak oil movement. We need to be able to visualize how $20 a barrel oil is just as possible as $200 oil. Whichever way it goes is only a matter of monetary policy.
It would be very difficult to get anyone to look into peak oil if gasoline is only costing $0.99 a gallon. Even if unemployment is high and no one can afford to buy gas... none of that will matter because the media will not report the cost of gasoline in terms of percent of real income. Nor will they report how many barrels a day the world is producing. All they will report is how a bunch of whackjobs were saying that peak oil means shortages and $10 a gallon gas...
I think your point is correct. Students of economic history will note that his has happened a great many times during modern history. For instance, during the Great Depression and the Panic of 1907. Another example is from October '89 to August '94. Oil priced in USD was essentially flat, while priced in Yen, oil declined by 30% as Japan entered a deflationary spiral following their own credit and housing collapse.
Icono - in my comments here over the past year, as well as my Global Public Media radio interviews, I have pointed out this exact risk. In the end our government was specifically designed to solve its social problems via economic growth, so its likely they will err on the side of inflation with their policy moves, though the credit contraction may be greater than even their ability to bail out/print.
The Peak Oil issue to me has never been defined by price, but rather by a pricing out of larger and larger pieces of heretofore 'productive society'. It ultimately will be measured by a decline in % of population working outside food and energy sectors and not via prices of nominal dollars. But for the forseeable future, we will not see those type of price declines, as we are still near the plateau (albeit with increasingly expensive oil), and producers can still maximize profits by taking a bit of production off the table and managing price.
And you are right - we have internally discussed what a 50% drop in nominal oil would do to readers attention to the energy discussion here. Finance and energy are from here forward inextricably linked.
Nate, I think a large part of your concern would be eased if you had a deeper intuitive feeling for PHEV/EV's and renewable power (wind and solar).
I suggest haunting www.gm-volt.com and some of the other EV/plugin websites to get a feeling for the practicality and cost-effectiveness of electric transport.
The fact is, oil could be replaced very quickly and surprisingly cheaply if we just put our mind to it. If we come under sufficient economic stress that there is really a prospect of significant shift in the economy towards food and energy production, that really would be an emergency that would focus people's attention and make it happen.
Insulating houses and so greatly reducing energy use would also cost a fraction of the money that is likely to be wasted on the Fannie Mae bail out.
Technically, most of the problems are by no means overwhelming - it is getting it together politically that is causing the problems.
Nick, using a wide boundary analysis, including materials, employees, marketing via dealerships, and spending of profits, how much oil is used 'per GM-Vol' (not in driving it, but in making it)?
"using a wide boundary analysis, including materials, employees, marketing via dealerships, and spending of profits, how much oil is used 'per GM-Vol' (not in driving it, but in making it)?"
Not a lot.
First, an ErEV (extended range EV, aka plugin/PHEV) like the Volt won't cost any more than an ICE vehicle, or require more energy to manufacture. The high initial prices you hear about are a combination of R&D (which is very low energy - think high paid engineers in front of LCD displays - their biggest energy consumption is the junk food they eat as they work 18 hours per day) and GM exaggerating costs to justify an initial early-adopter premium, and lobbying for tax credits (or possibly they're just being very conservative - they're now saying that they're figuring in the cost of a replacement battery under warranty, which is pretty silly given the over-engineering already in the battery design - only 50% depth of discharge for a li-ion chemistry which can handle 100%, unlike, say, the NIMH being used by the Prius).
2nd most manufacturing (with the main exception of smelting, like PV silicon or aluminum) takes relatively little energy, and very little oil - what energy is consumed is primarily electricity, making irrelevant the claims one hears about BOE's (barrels of "oil equivalent") consumed by car manufacturing.
Employees don't take much oil: I suppose it would mostly be commuting gasoline. 1st, there aren't as many hours as one would expect in cars, as they're pretty high-wage jobs even now - perhaps 100 hours of assembly time, for instance, which is only 12.5 shifts of work. 2nd, they could drive a Volt...
Materials: Steel is the biggy. It's mostly recycled: more than 50% of inputs, and 95% of scrapped cars are recycled, so that energy isn't wasted. Even so, the energy input isn't enormous, and finally, it doesn't come from oil: it's a combo of electricity and coking coal (I have a steel mill a mile from my home: it operates at night when electricity is cheap).
Marketing is high paid labor and TV, which is powered electrically.
Profits? What profits?? Don't forget, this is GM we're talking about - the external costs of the spending of profits are the very least of their problems...
Does that help? Any particular points need more info, or references?
That would be a logical guess..they perceive your comment as schadenfreude...(relative fitness and all...;-)
I thought that at NYMEX one has a limit of 1,000 open contracts for any given future month and a total of 12,000 contracts overall distributed across the months. Otherwise NYMEX will immediately ask you to reduce your open positions. Do you mean collaborative positions? Or if what you mean is the capability of someone affecting the price through open positions in the ICE exchange, then I agree with you, there are no open contract limits on the ICE exchange.
I might be wrong but can someone confirm this for me? Thanks.
I meant in conjunction with subsidiary entities as well as possible exposure on ICE - forgot to put that in - still have hurricane circles in the brain....;-)
You can't fight the trend. Even if crude drops below $100.00 we are still trending up. And Nat Gas has fell out even further but we are still trending up. All still prove of Peak Oil and the U.S. move towards Nat Gas. Watch as the Exxons and BP's continue to shift towards being more diversified producers.
http://oilenergystockvideos.blogspot.com
OIL, POLITICAL CONVENTIONS and ELECTIONS.....
The recent drop in the price of oil and gas is most likely linked to politics
of the upcoming election. The Republicans know that they must get it down to win.
They also had to look good on the hurricane response in NOLA.
We don't know how long the oil system will be down yet....
Just because price is down, does not mean that peak oil is not true.
Prediction..... After November is over, oil will go back up with a vengence.
Nowhere's comment captures my sentiment exactly. Price can too easily be manipulated with political contacts to make it worthwhile to track down the hedgers, much as I think that getting them out of the game would be a worthwhile endeavour. How much of the hedge money is likely to be sovereign funds from large OPEC producers? In that case, whats the point of contract volume limits? They have, in their ground, sufficient "contracts" to make the market do anything they want.
If the price of oil, from now, goes significantly below $100, then I conclude that it is evidence of my worst fear, that OPEC will "employ volatility" to keep enough uncertainty in the auto manufacturing industry to make bets on alternatives (PHEV, CNG, fuel cells, even Hybrids) financially impossible.
this has been my concern as well, though I don't think it will be due to any conscious plot by OPEC (or anyone else) to confuse GM - that would just be an externality of OPEC trying to maximize monetary returns....
I you were a Saudi or Kuwaiti prince or a senior government official in one of the other gulf states, would you prefer more money or less?
most definitely more!!!
I was noticing what WSJ has to say:
can anyone produce a liquidity adjusted oil price curve?
you could
go to Nymex and graph prices re open interest
this would only be part of story because it wouldn't include options or ICE trades, or off balance sheet
The vast majority (IIRC 90%) of liquidity is in next 12 months
how about liquidity as credit+money supply?
An interesting and ongoing issue with our public markets is that NYSE, NYMEX, CME and all the rest while charged with filling a public role, they are companies that collect and sell highly sophisticated information and data on trading activity at their respective exchanges. What this means is that behind the veneer of "free markets" and "information made available to the public" lies a great deal of privately held knowledge about how everyone is positioned. On the other side of the ledger, I think the SEC is broken and has been broken for years. Underfunded, and rife with political appointments. For example, ask your average equity investor to go find the latest SEC filings from IBM or a hedge fund. They'll soon find themselves in arcane spider-holes, even on the internet.
You can be sure that certain participants can see the entire structure of NYMEX oil positions in both the contracts and the options, like a beautiful flow chart--as long as they are willing to pay for that info. And that doesn't include the people who get to see it without paying.
My ongoing complaint is that we don't, imo, have transparent markets. Further, I think alot of the perceived problems associated with "speculation" are in fact sourced with the way the markets are regulated (not so much) and how the desire for insider information is a thirst that can never be quenched. I'd like to remind folks that there is not enough talent to go around, so most market participants through time cannot rely on and edge they can call upon within themselves. They have to get the edge by some other method, and insider info is the enduring means.
I'd love to see a new Futures market set up in a different country, say Canada, where the exchange collects and sells no data on the participants. In fact, I think the formation of new Futures markets are coming, outside the US.
G
This is a problem which potentially affects all prices (energy and otherwise) as well as related economic activity. When there is more money than "stuff," the classic scenario for inflation is in place. But in the past 25 years, because wages have been kept artificially low and the paper assets of wealthy people and organizations have been artificially pumped up, inflation makes its appearance mostly in the prices of a variety of investment vehicles, loosely defined, rather than in the price of milk and eggs.
The existence of large quantities of currency and credit, not connected to like quantities of corresponding real resources, seems like it would be hazardous to the smooth functioning of a complex money-based economy.
Recently, in this time of "peak everything," the surplus cash is moving ever more rapidly through various investment sectors, causing artificial booms and busts everywhere it touches down.
I am wondering what we can expect in the future from this high-velocity search for a haven for what I would call "fake wealth." The stability of the credit system certainly seems to be threatened.
Is there a useful historical precedent?
I can't see any historical precedent for what we face. Whether we consider peak oil or the growth of hedge funds--nothing like it. I expect increasing volatility in the short run. In the past, nations have fought over resources and we are already well into "the great oil conflict" that many have described as 'unending' and which I take to mean "increasing scarcity, still plenty of weapons."
I'm looking for sand, a safe place to bury my head.
We have seen the fallout in residential real estate, and I think the big hammer is coming on rural land. As Illinois and Indiana farmland go, the rest will follow. Presently the asking price is 5K+ per ac for 175+ bu corn ground, but those I've spoken with think it will sell in the 4 range on large parcels. The gloss is off etoh, fertilizer and costs way up, it doesn't pencil. But then land never did, yet it always does rise and fall around the productive value.
Marginal and timber land are even more precarious, for even with good timber, the logging and transport costs have skyrocketed, to say little of declining demand for dimensional lumber. Add to this that the big mover of marginal and timber land has been the secondary home market and expanding suburbia/exurbia, both of which are evaporating. I foresee a replay of the eighties in rural land prices, with a much slower, if any, rebound.
I wish all the people currently living in our world of developed Futures Markets, could go back in time and meet people in history who lived without developed Futures Markets.
Futures Markets are an ingenious invention of humankind. Think about the world that existed before supply of goods were rationed by Price, and, even better, over Time. That human beings long ago figured out a way to game "some" control over Time is amazing.
As Oscar Wilde might say, there's only one thing worse than living in a world with a futures market to handle Wheat, Oil, and Sugar....(you know the rest).
Analysis therefore of the effect of speculators is not interesting, if it falls into either/or constructions. It's more complex than all that. James Hamilton, imo, and also Paul Krugman have done very good work in this area. Many people offer varying descriptions of price discovery and price formation, that are good. Soros's notion of Reflexivity, in which price trends are amplified by speculation and where speculation also supports the fundamentals--all on top of a fundamental base that is rational--is as good an explanation as any.
My personal, and current concern is that there are not enough speculators in the oil market. Open Interest in NYMEX oil has been dropping over one year. It has dropped, at times, by nearly 45% on a YOY basis. That's bad, not good. You want speculators in the front of the curve getting ahead of news items (like war) and you want investor-speculators in the back of the curve making thematic bets on the future of supply.
Society only understands the price signal. Society can't devote all its human resources to becoming oil experts, who have found a way to spend the day reading and writing on The Oil Drum. :-) We have to have some specialists and those specialists are imperfect. But, much better than having none at all. Personally, I would much rather have passionate speculators who have devoted 1000's of hours on the global oil supply situation making bets in the futures market, sending Society the price signal.
Just look at Society's reacton: "Hey, we don't want or need your stinkin' price signal, OK?"
G
Nate:
"(via mini tribal-cliques)"
Watch it there fella!....just kidding. The word "tribal" could have been used as code for the word (CABAL) and then everyone would have recieved an actual visual of the people refered to. The word (mini) also lends towards the many chosen few.
Ive gotta stop reading into your stuff things that arent there..just kidding again...aint gonna happen.
Nate, I get the feeling you are very aware. You cover all the bases and do it well.
(*NOTE: Straying way beyond my expertise with this comment):
Last week, realizing that LOOP and other oil and gas facilities might be at risk with Gustav, PG and I spent quite a bit of time with Chuck Watson and others determining what different paths might imply for our oil/gas infrastructure. The reason this is important of course, is the tenuous balance between supply and demand in the bigger picture.
While doing this I spent about 40+ hours reading about meteorology and what forms/impacts hurricanes etc. So from what I've been reading (and of course even for the pro mets its guesswork this far out), I predict Hurricane Ike will be strongest cane of 2008 -perhaps Cat 5. It is unlikely that it gets into GOM, but certainly possible. It depends on how strong Hannah gets to pull Ike along northward, before westward. More likely is up FL coast or a 'fish' storm recurving into Atlantic. We shall see..
But come this weekend, all eyes may be on Cuba/Florida strait again (though I doubt that PG and I will have the energy to cover it) - fortunately all the maps and infrastructure in GOM are in old threads)
There - I'm now an amateur weather forecaster....;-)
Back to the real world..
Aw...
I was kinda pulling for a killer Hurricane Kyle.
:-)
Chances are that Hurricane Kyle will be nothing but a lot of hot air, form briefly, and wash away into nothingness. :)
Looks like a good time to buy oil futures!
I suspect this is going whip right back to $150-170/bbl within 1-6 months. But then again, maybe it will drop for a few more days without any reason but shear momentum.
Plenty of money to be made playing whiplash.
Good points, Nate. It's an antidote to the notion too often promoted by us peakers that the price rises are proof of peaking (or near peaking).
The bell curve of production (and there are good reasons to think it might be much less bellish on the downslope than for individual regions or fields) combines with the squiggly demand curve to produce a squiggly difference curve. But beyond that, there is the sloshing of huge blocs of money trying to exploit the squiggly difference curve, and doing so quite competitively. This adds its own additional (possibly big) squiggles to the curve. But I don't believe this last set of squiggles can be very wide (duration), whereas those produced by a world-wide economic meltdown could.
And again, I agree that the financial aspect takes our eyes off what it truly important, which are the underlying physical realities. I often think of Dr. Stranglove, with, who was it? Slim Pickens?, riding the bomb down -- I picture us going down hugging our portfolios (which in most cases will be an empty folder). It has always been the most spectacular failure of the market: to properly price oil and natural resources. It is our failure that we continue allowing the market to even try to price things that are priceless.
Nate's informative piece contains a gem that may explain why politicians, even those who should know better, universally support corn ethanol production even though we know that the EROI is approximately zero. The fossil fuel inputs to ethanol production may be imported, but the resulting ethanol counts as domestic production. Thus ethanol is a way to convert imported fossil fuel to domestic renewable fuel. It doesn't matter that the total amount of energy available hasn't changed, because the statistics on domestic production look better. Small positive or negative energy balances from ethanol production don't change the argument.
It's this sort of voodoo bookkeeping that has to change if we are going to have a realistic energy policy.
very insightful! I hadn't thought of that....
While that 'might' be true--that ethanol boosts GDP for bogus reasons, it has been calculated by some as a net energy LOSER of 6:1--
http://www.sciencedaily.com/releases/2005/03/050329132436.htm
Stiv quotes a particularly pessimistic calculation of ethanol's EROI. Others calculate that producing corn ethanol consumes as much energy as burning it releases, while still others are more optimistic. Which side is right? Until now, cost and benefit calculations were largely theoretical. Now the data are in: these are for 2006, before the recent price spikes and decreases in driving. As production ramps up, gasoline use should ramp down if ethanol is a net benefit. Since ethanol is about 3% of vehicle fuel (1), gasoline use should decrease correspondingly. But U. S. gasoline consumption has increased by 1.4% annually for the past five years. If ethanol had substituted for gasoline, gasoline use should have decreased 1.6%. The discrepancy might be explained if fuel demand had spiked upward, but total miles driven increased only 1.2% from 2005 to 2006 (2). The only explanation is that the critics were right – there is no measurable gain from ethanol.
Why is this? One reason is that most of the energy that goes into corn comes not from sunlight, but from fossil fuels. Tractors run on oil, fertilizer is made mostly from natural gas and moved around on oil-consuming trucks, and the list goes on. Small changes in the statistics won’t change the conclusion – ethanol production is a disaster. It will get worse as new distilleries come on line in the Midwest. More and more corn will be distilled, leaving less and less for food and feed. Already we see substantially higher prices for milk, chicken and other corn-based products. High corn prices hurt us, and cause real suffering in the third world. It is time to end this failed experiment before it does even more damage without producing any benefit. Corn-based ethanol as a substitute for gasoline is a tragic illusion.
The major obstacle to a rational policy is not engineering, but politics. The corn lobby is well-entrenched. But other lobbies, and the interests of the country as a whole, demand that we change course.
Grass-based ethanol does not yet exist, because of the difficulty of breaking down cellulose. Maybe it will work, but we can’t count on it.
1. Lester Brown, 2007, Earth Policy Institute.
2. Federal Highway Administration, U. S. Dept. of Transportation www.fhwa.dot.gov/ohim/tvtw/07martvt/page2.htm, year-to-date.
PS: There's another bit of statistical skulduggery with ethanol. The fuel is counted twice, once as the fossil fuel used to produce ethanol and again as the resulting product.
Bruceb -
Very astute observation re ethanol being a means of converting a portion of imported oil to a component of 'domestic' total liquids!
As pointed out by someone else above, conflating natural gas liquids plus ethanol in with the actual crude pumped out of the ground is a deliberate way of making the overall picture look somewhat less dire. This is particularly true due to the fact that a large fraction of those natural gas liquids,e.g., ethane, butane, etc., do not contribute to those liquids that are normally used for transportation fuels.
Then of course we have the discrepancies in energy content, because ot all of these liquids have different heating values. So, I would think that if we were to somehow put the data in the form of total BTUs of 'transportation-usable fuels' produced, then the ratio of imported to domestically produced would look even worse.
I've learned that one can't go too far wrong if one assumes that any aggregated US government economic statistic represents an optimistic best case that puts the government in the most favorable light.
I've mentioned this often in the past. That TOD, (or anyone) should start to calculate and publicize a 'shadow EIA' release that puts all these things on even footing.
-reduce NGPL by 40% lower joules
-reduce ethanol by 39% lower joules
in a 'second tier' of analysis:
-reduce tar sands by lower EROI
-reduce ethanol and other biofuels by lower EROI
in a 'third tier' of analysis (toughest to quantify):
-reduce different oil categoric production by environmental externalities
The first tier of this 'shadow EIA report' might look something like this:
The bottom graphic shows that when adjusted for BTU content, the additional 'oil' on top of crude and tar sands goes from 11.57mbd down to 7.33mbd - ergo there is 4.22mbpd of 'air' in our EIA stats. To track how this 'air' increases over time will be important. We've talked about it here but we are all pretty stretched, so someone HAVE AT IT. (thanks Khebab for help with graphics)
DAVID (energy) VS GOLIATH (hedge funds)?
energy and hedge funds are what humanity controls
Godzilla=nature...nature is gonna stomp on humanity in this century.
The Sun has an eleven year cycle of minimum heat output to maximum; the next maximum will be 2011-2012. So in three years expect water shortages & heat waves to be WORSE than the last two years. The suns cycle is totally beyond human influence unlike Global Warming from atmospheric FF effects which humanity has a CHOICE of what to do.
Good to see market fundamentals being covered more on TOD lately. Sure the markets are an imperfect predictor, but they are the best thing we have. Interestingly, onions are the one commodity in the US that have no futures market by law. Later study showed this actually added to price volatility.
I agree with Nate that what we actually need are more intelligent speculators to cut down on the volatility. Look at shallow markets like lumber and pork bellies if you really want to see crazy/illogical volatility. Anyway, IMO the current drop in oil is due mostly to: 1. credit and monetary contraction from the current recession/subprime crisis 2. a long squeeze against many speculators who were overleveraged.
Personally I track the beginning of PO to the late 1990s when you first saw the price rise due to supply constraints. If I remember right it approached $40 then dropped under $20 in 2001? during a recession. People underestimate the temporary potential for significant drops during recessions.
It's evident for some of us that we now are very close to a situation where oil supply will dictate future oil price rather than the oil demand. Almost everybody on chat stites as this one as well as proffessional analysts still focus on the demand side and many argue there now is demand destruction for oil and thus we can expect lower prices.
First of all if that where to be true woulden't possibly future lower prices then make demand increase at some point of time? Thus making the case for higher oil prices going forward even stronger? Secondly, if we look at actual demand as well as the predictions for 2008 and 2009 according to EIA this is now what it looks like:
Oil consumtion from 2005 EIA:
2005: 83,65 mbpd
2006: 84,70
2007: 85,53
2008: 86,31
2009: 87,30 (expected)
To me at least is seems ww demand is not slowing down and that it in fact seems to progress in quite a steady pace.
Then according to (IEA) we are now losing some 5,2%/annually (or some 3,5 mb per day) from existing oil fields.
2007: 4%/year
2008: 5,2%/year = 3,5 mb per day
http://www.iea.org/Textbase/press/pressdetail.asp?PRESS_REL_ID=267
However citing people like Boone Pickens and Matt Simmons they indicate it could be more:
"World oil production, I believe, has peaked, and the world’s current oil fields are declining at the rate of 8 percent a year." (Boone Pickens 17 june, 2008)
"Mr. Simmons thinks a more realistic rate of decline is 8% to 10% a year. The decline rate is probably going to end up averaging 10-15% over the next decade Mr. Simmons said."
According to CERA "Individual offshore fields are declining at a 10 percent annual rate compared with six percent for onshore fields, and deepwater fields decline at 18 percent annually."
"Simmons said in some deep-water fields, the decline rates have been above 30 percent."
A resent study made by ASPO in Uppsala, Sweden and Robert Hirsch indicated production decline from oil fields starting it's decline today is higher (annual average 12%) compared to oil fields that entered in to decline in between 1960-1990 (average (5-6%) as well as fields entering in to decline before 1960 (4% annual decline on average).
Given the fact that peak discovery occured 1964 and new oil discoverys has declined ever since and that we since 1990 have consumed mor oil than what we have found new per year, we do not have new recovery per yer necessary to compensate even for the now occuring annual and possibly from now on ever increasing supply decline, not mentioning then the the demand increase.
Now the impication of oil fields peaking are quite severe as as only 507, or 1 % of the total number of fields, are giants. But their contribution is striking: over 60 % of the 2005 production and about 65 % of the global ultimate recoverable reserve (URR).
A majority of the largest giant fields are over 50 years old and the discovery trend of less giant fields with smaller volumes is clear.
Clear is that when a giant field peaks and starts to decline the implication on world oil production may be quite significant. As an example Cantarell in Mexico, once the worlds third largest oil field discovered 1974, currenty is falling out of a cliff having lost some 50% by now of it's production capacity.
Bottom line: still we see oil demand increase, decreases in OECD for sure but increases basically everywhere else. This as basically the only oil consumers at the moment paying full market price for oil are consumers in the OECD countries, that is the once without any oil. Oil field decline rates seems to be increasing and as larger and larger filds now risk to enter in to decline the implications on world wide production may be quite severe.
There has been some decrease in the ww oil demand increase rate but we still ww have a clear total increase of demand.
The question is whether ww demand for oil will start to decline in the future and if so if that decline to any extent can match the at least 5.2% annual supply destruction (possibly even higher) in the future?
What really will happen is that oil price will not be dictated as it used to, by demand but in fact by the availability of supply. Ever srinking and most likely escalating supply declines from now on indicates ever increasing future oil prices.
Expect this insight to "enlighten " the broader investor community as the new IEA supply report will be presented November the 12th this very year. From then on it is very probable valuations of oil companies with possible future increases of reserves will be rewarded. Especially if they are activ in geopolitical "safe" regions of the world.
http://www.worldenergyoutlook.org/2008.asp
Nate,
Excellent and educational post, especially for one who is not so familiar with hedge funds like myself.
Well put and very true, lets hope that when it comes to time that we soon can borrow lots of it from the future.
Well, as one of the dumb-asses that actually works growing food, and the son of a man that actually goes out, finds and develops oil fields and sells oil, this pisses me off.
Bunch of fat cats pulling strings--playing us like puppets.
Someday there's likely to be a for whom the bell tolls event in this country.
You won't see me shed a tear for these folks if and when it happens.
HURRICANE IKE DISCUSSION NUMBER 12
NWS TPC/NATIONAL HURRICANE CENTER MIAMI FL AL092008
1100 PM EDT WED SEP 03 2008
IKE HAS RAPIDLY INTENSIFIED THIS EVENING. AN EYE BECAME APPARENT IN CONVENTIONAL SATELLITE IMAGERY SHORTLY AFTER 2100 UTC. SINCE THAT
TIME THE EYE HAS BECOME MORE DISTINCT WITH A RING OF VERY COLD CLOUDS TOPS SURROUNDING IT. THE LATEST DVORAK DATA T-NUMBERS WERE
T6.0 AND RAW ADT ESTIMATES FROM UW-CIMSS HAVE AVERAGED T6.2 SINCE 2045 UTC. BASED ON THESE ESTIMATES THE INITIAL INTENSITY IS SET
AT 115 KT...MAKING IKE A CATEGORY FOUR HURRICANE. SOME ADDITIONAL STRENGTHENING IS POSSIBLE DURING THE NEXT 12 HOURS OR SO...THIS
WILL LARGELY BE CONTROLLED BY EYE-WALL REPLACEMENT CYCLES. HOWEVER BOTH THE GLOBAL MODELS AND SHIPS GUIDANCE INDICATE INCREASING
NORTHEASTERLY SHEAR IN ABOUT 24 HOURS AND IT IS DIFFICULT TO PREDICT HOW AN INTENSE HURRICANE LIKE IKE WILL BE AFFECTED BY THIS
SHEAR. THE NHC INTENSITY FORECAST INDICATES SOME WEAKENING BETWEEN 24-72 HOURS DUE TO THE SHEAR...BUT NOT AS MUCH AS INDICATED BY THE
SHIPS GUIDANCE. AT DAYS 4 AND 5...IT APPEARS THAT THE SHEAR WILL DECREASE SO RE-STRENGTHENING IS PREDICTED AT THAT TIME.
THE INITIAL MOTION ESTIMATE IS 295/15. THE TRACK GUIDANCE AGREES ON A CONTINUED WEST-NORTHWESTWARD MOTION DURING THE NEXT 24 HOURS.
DURING THE MIDDLE PORTION OF THE FORECAST PERIOD...A MID-LEVEL RIDGE IS EXPECTED TO BUILD TO THE NORTH OF THE CYCLONE...AND THE
MODELS UNANIMOUSLY RESPOND BY TURNING IKE WEST-SOUTHWESTWARD. THE LINGERING QUESTION THAT REMAINS AT THE LONGER RANGE IS WHEN IKE
WILL MOVE AROUND THE WESTERN PERIPHERY OF THE RIDGE. THE MODEL SPREAD REMAINS QUITE LARGE AT DAYS 4 AND 5. THE GFDL IS ON
THE LEFT SIDE OF THE GUIDANCE WITH A TRACK NEAR HISPANIOLA AND EASTERN CUBA...WHILE THE GFS AND UKMET SHOW A POSITION TO THE
NORTHEAST OF THE BAHAMAS. FOR NOW...THE OFFICIAL TRACK IS BETWEEN THESE POSSIBLE SOLUTIONS AND IS IN BEST AGREEMENT WITH THE
HWRF...THE 12Z ECMWF...AND THE MODEL CONSENSUS.
http://www.nhc.noaa.gov/refresh/graphics_at4+shtml/025413.shtml?table#co...
Wow! What else can I say?
And this is OT because........em....ah....emmmmm...the fund magagers regularly bet on the movements of hurricanes. I wonder if they are going LONG on this one!
Marco.
I am late to the table, again, with comments, but that happens when you have to work.
I would offer another possibility contributing to the drop in price. A lot of smallish producers are in a position where they have borrowed to the hilt to cover drilling and development costs, and have a heavy cost to carry that debt. I think that the price volatility has their bankers, already shaky from the rest of the financial problems I see written about here daily, are getting nervous about those loans they "wouldn't have to worry about." Having hedged before each of the last two Pres elections, I think everybody has a reason to be nervous about the outcome, no matter which idiot wins. Plus, if McCain gets in and all of the new leases which can be in production in twelve months are signed up, that would cause a quick drop in the price of both oil and gas - never mind the reality.
Plus, couple this scenario with the reluctance of big users to hedge with the uncertainty of falling prices, and you have the appearance of collapsing demand. Why would Southwest Airlines want to hedge right now with prices trending down, for instance? Reality looks different depending upon the angle you are viewing it from.
I would think that the contribution of these hedgers would not be serious long term, but all of these things are happening at the margins - Supply/Demand, Recession, Electicification of Transportation, China's Olympic shutdowns, etc.
The impact of ELM will cause the price of oil to increase, if not now, soon. And, if no speculators are in the market to cushion the price moves, those moves will become increasingly dramatic.
That's not what I'm seeing. Airlines have been buying lately, partly because jet feels cheap now that the both crude and the crack have come off a lot, and because they have some explaining to do in their quarterly reports. The previous round of hedging was done at >1300 $/MT when their stops were blown. Buying now will take their average hedged price down, more in line with the year average.
Besides, most airlines are on a fairly mechanistic hedging scheme which does not allow for much speculation anyway. Simply matching seats sold with volumes of fuel hedged locks in their margins on the bulk of their flights.
It would surprise me if the ever optimistic airlines are all that active, since they would still be operting at a loss at today's prices. It not only feels cheap, it is cheap, at least compared to what it will be doing in a few months. I see the price turning around no later than Dec 1, since the pressure of what will happen if one of the candidates wins will then be decided, unless it is like the 2000 election. Those fearing what the then-loser would do will come back into the maarket.
With respect to the prices of contracts they are holding, remember that crude was trading below $100 before the first of the year.