 | Nate Hagens : Natural Gas Cliff and Credit Situation on Global Public Media | The Oil Drum | DrumBeat: December 30, 2008 |  |
My Top 10 Energy Stories of 2008
Posted by Robert Rapier on December 29, 2008 - 10:52am
Tis the season for Top 10 stories, and here are what I think were the Top 10 energy stories of the year.
1. Unprecedented volatility in the energy markets
Oil prices raced to nearly $150 a barrel, and then fell to the $30's by year end. This marks the highest ever prices for oil, followed by the lowest prices in four years. Gasoline, diesel, and natural gas prices demonstrated the same kind of volatility. There are multiple factors behind the volatility. The role of speculation was hotly debated, and the economic collapse - fueled by cash-strapped consumers who had overextended themselves - resulted in a sharp drop in demand. Some even argued that the real reason behind the plunge in prices was closure of the so-called "Enron loophole."
2. Oil price volatility fallout
A consequence of the incredibly volatility was the economic damage done at both ends of the price spectrum. At the upper end, airlines were going bankrupt and car companies were in deep financial trouble as consumers stopped buying the higher profit margin SUVs. After oil prices plunged, some non-integrated oil companies found themselves in financial trouble, including Flying J who declared bankruptcy.
3. Barack Obama elected
In a normal year, this would have been my #1 story, considering that the new administration has put such a major focus on energy and is likely to attempt a major shift away from fossil fuels. My prediction is that reality is going to collide with enthusiasm, and while gains are likely to be made along several fronts, aggressive renewable energy targets will not be met.
4. Ethanol producers struggle
Despite production mandates and generous federal subsidies, ethanol producers struggled to make a profit. A combination of high corn prices followed by falling fuel prices pushed even some of the largest ethanol producers to bankruptcy. Corn growers fared much better, as higher prices and mandated demand from the ethanol industry provided them with the same sort of windfall seen recently by the oil industry (prompting some to ask whether a windfall profits tax on corn would be good for consumers). Xethanol finally ceased operations, as I had predicted in early 2007.
5. Somali pirates hijack supertanker
Somali pirates, emboldened by recent multi-million dollar ransom payments, hijacked a Saudi supertanker carrying $100 million worth of oil. At the time of this writing, the situation remains unresolved, although the value of the oil at current market prices is now considerably less than $100 million.
6. 2nd generation ethanol is delayed
The story this year was supposed to be "2nd generation ethanol production begins", but alas the over-promise, under-deliver meme that I have been critical of continues. Range Fuels had initially intended to start producing in 2008, but that was delayed to 2009 and now production isn't forecast to begin until 2010. Meanwhile, other 2nd generation ethanol companies continue to promise the world, including Coskata who claims they can make ethanol for "under US $1.00 a gallon anywhere in the world." (I took a good look at those claims here.) Finally, according to this source (another here), of the six cellulosic ethanol projects selected to receive $385 million in federal funding in February 2007, almost two years later only one plant is actually under construction (Range Fuels).
7. Peak oil becomes fashionable, then unfashionable again
High oil prices demanded an explanation, and peak oil was ready to provide that explanation. 2008 was probably the year that the mainstream began to seriously discuss and debate peak oil. However, when prices began to plunge, the peak oil skeptics began to say "I told you so." Others suggested that this was just a continuation of the normal cycles.
8. Gas stations in the southeast run out of gasoline in the wake of Hurricanes Gustav and Ike
Some major oil refineries that shut down in the face of Hurricane Gustav had to remain shut down with Hurricane Ike following closely behind. Gasoline inventories heading into the hurricanes were low, so it wasn't long before spot outages began to show up across the southeast. As I predicted during a panel session at this year's ASPO conference, the outages were likely to be short-lived, and inventories would recover as refineries came back online. This was in response to wide-spread concern, partially fueled by Matt Simmons' presentation, that the outages were the beginning of something much more widespread. (I think my answer was literally "This situation is temporary. I expect inventories a month from now to be substantially higher.")
9. "Drill here, drill now"
Momentum for more exploration and production in U.S. waters increased along with oil prices. This became a campaign theme for Republicans, who adopted the slogan "Drill here, drill now." President Bush lifted a moratorium on offshore drilling. Democrats initially responded with calls for oil companies to be forced to drill on current leases before opening up new ones. However, Congress - facing constituents unhappy with high gas prices - ultimately followed suit and allowed the 25-year moratorium to expire. The response from then candidate Obama was that he wasn't happy to see the moratorium expire, and that he favored "responsible" drilling as part of a broader energy package. My own proposal was to allow drilling and funnel the lease proceeds to alternative energy, mass transit, and other initiatives designed to reduce oil consumption. This proposal later received quite a lot of attention when Paris Hilton proposed the same thing.
10. Record profits by US energy companies
On the back of high oil prices, the integrated oil companies (those who produce both oil and refined products like gasoline and diesel) once again saw record profits. There was an interesting dichotomy, however, as downstream profits in the refining sector vanished as gasoline consumption fell. Pure refiners like Valero saw their profits crash.
That's more or less what I think were the Top 10 stories of 2008. There were quite a few in the honorable mention category, such as T. Boone Pickens energy plan, the decision by OPEC to reverse direction and propose big production cuts, falling oil production in Russia and Mexico, and postponed investments in the wake of lower prices.
So, what did I miss? Which stories do you think should be ranked in a significantly different order?
In closing, Happy Holidays to all readers. I am going to be offline for a while to spend some good family time. Here's hoping that you all have the same opportunity.
Contact
- Content: editors at theoildrum dot com
- Tech support: support at theoildrum dot com
License
This work is licensed under a Creative Commons Attribution-Share Alike 3.0 United States License.
I'd think you'd have to explicitly add the IEA acknowledging PO, with Birol actually calling it for 2020, and decline rates well above what had been officially stated before.
Heck, Drill here, drill now, was just campaign BS, nothing more.
Cheers
I guess a related point is that the credit crunch has created problems for any number of energy related projects, that will ultimately lead to delays or cancellation. I suspect that this will end up virtually guaranteeing that we have a near-term peak.
Robert, this also tends to be the season for prognostication...upon watching the plunging price of oil, I have proclaimed "Ah s&*t...we're really f*#&ed now." I'm sure the lower prices will have given producers reason for pause. Do you think this drop in prices has locked in a much lower and less robust production future because the producers have less incentive, and less capital, to invest in infrastructure?
Regarding oil price volatility fallout (point 2 above), I think the fallout has been even more widespread than is commonly acknowledged. While Robert lists airlines and car companies on the edge of bankruptcy, and even oil companies going bankrupt, the oil price volatility on the upside was instrumental in bursting the huge credit bubble that had been building.
Now that oil consumption will likely be flat to declining in the years ahead, economic growth will be flat to declining, making debt repayment much more problematic (since economic growth is required to consistently replay principal plus interest). This situation is likely to lead to many more defaults in the years ahead--even more than the list Robert notes. A few others at risk include refineries (crack spread negative), hospitals, retailers, and trucking companies.
Gail, not to be picky, I just want to clarify my understanding.
By the extension: energy=work=money, and money requires growth, if oil consumption is flat, does this not mean that economic growth must be negative?
The only caveat is if efficiency is increased, more energy is extracted from the same oil.
Or is there something else I'm missing?
TIA
You're pretty much seeing it correctly with regards to less energy means lower economic output. This a defining moment because our monetary system cannot be healthy without growth. This means that we're in for a change to our monetary system whether we want it or not.
I'm not sure that any efficiencies that are introduced will be enough to offset the depetion rates. Someone with more hard facts could probably show you exactly what sort of efficiencies would be needed to keep economic growth flat.
Perhaps someone can (or probably already has) calculated the efficiency increases that are necessarly to keep economic output at a flat rate in spite of the declining supply of FF's.
TS
My opinion is the strong tie between money and energy is with the velocity of money. As the velocity increases the GDP/BTU increases and thus the economy gets wealthier with less energy. And obvious way to pull this off is via serial bubble blowing but a number of other reasons for real velocity increases are possible.
Thus as the velocity slows GDP/BTU increases even as both GDP and BTU's decrease
since its the ratio that matters. Thus further economic growth or simply treading water requires a increase in BTU's or energy usage to bootstrap another economic bubble. Basically as the velocity falls it simply takes more energy to earn a buck.
This is the nasty problem with deflation and declining energy. Energy prices themselves can fall as long as GDP contracts faster than BTU production. We had a particularly fast crash if you will second half of 2008 that certainly helped in temporarily ensuring that BTU supply exceeded BTU demand.
However once the velocity of money approaches 1 i.e no new real cash is being created the hard money economy is basically at its bottom from then on it takes a serious and widespread recession to actually slow cash transactions needed for daily living.
I posted about this recently based on a graph from Denniger about the velocity of money going to 1.
http://www.theoildrum.com/node/4916#comment-453980
And Denningers link from the original post.
http://market-ticker.denninger.net/archives/703-Uh-Oh.....-Monetary-Flat...
If you think about it M1 makes a lot of sense as the tie between oil and the economy since energy is paid for either with cash or very short term loans which effectively show in the cash supply side. I.e letters of credit.
Now with the velocity factor at one for M1 it becomes effectively impossible for further economic declines to really influence energy usage. This is not to say that we won't see further changes in M2 and M3 but they will have less and less and effect on the velocity of money and thus the GDP/BTU ratio.
From here you get this graph.
http://www.wtrg.com/prices.htm
You can see that as the velocity of money fell oil consumption increased.
Eventually of course the price started increasing because of peak oil but for a long time falling velocity was hidden by increasing GDP via increasing oil consumption.
So the tango between the economy and oil has been going on ever since the US peaked. We have used long term debt to create a decades long housing boom that hid the underlying problem that the slowing velocity of money was being subsidized by increasing energy usage with suburban sprawl as the engine of growth.
As M1 slowed real wealth was replaced with ever growing debt in the form of the M2 and M3 money supply.
Well the party is over. We can't increase oil usage without increasing prices.
We can't increase the velocity without a real transfer of wealth back to the middle class and poor. Note this entire time wealth has become ever more concentrated again papered over by increased energy usage.
Several nice graphs and good papers here.
http://www.faculty.fairfield.edu/faculty/hodgson/Courses/so11/stratifica...
So what might happen going forward ?
Well increasing oil usage is probably not possible without causing another price spike.
From the peak oil/ELM type models we stand a very high probability that OPEC may succeed in restricting oil supply to cause supply to be constrained.
Peak oil itself esp when coupled with the price collapse and financial crisis pretty much assures that future production will decline.
So a reasonable guess is that we will see the velocity of money remain flat and also for oil supplies to fall. At some point this will result in a return to high prices when is unknown it could literally be any day to a few years the timing of the return is difficult to predict but the probability of a return to increasing prices has existed for several months as the oil futures market has stayed in persistent contango. But when is not a big issue outside it seems reasonable that a few years at most is very probable even with the exact timing very fuzzy.
To me at least it looks like the US is in a checkmate situation it cannot escape from. Just to keep from further economic collapse seems to require and extensive transfusion of wealth from the top to the bottom classes the chances of this happening or zero.
If oil prices increase from here on out then the only outcome seems to be real demand destruction or basically more and more people are going to become permanently poorer. Further impoverishment from financial problems alone don't seem that likely since the velocity of money is at a standstill thus the economy has baselined if you will. To go gown further requires a real Depression i.e falling M1. Given we have a fiat currency this outcome can readily be stopped via outright printing.
Now this does not mean people won't keep losing high paying jobs and defaulting on debt it does mean that barring a real M1 style deflation like 1929 we should see most people continue daily life albeit with cheaper housing and cars and loss of longer term debt access and probably revolving credit.
I actually don't see any intrinsic reason the "real" economy cannot simply sit here moribund as housing prices fall and car sales tank. As far as I can tell through 2009 we will simply see housing prices fall and cars sales remain anemic and the workforce shift to lower and lower paying jobs and people get laid off and take any employment offered at lower wages. Unemployment will slowly rise. Real energy usage should go flat to slowly declining.
Maybe flatlined is a more apt description then baselined :)
The point is it seems to me that the next leg down will pretty much have to come from rising energy and commodities prices.
My best guess is that frantic attempts to reinflate that result in ensuring flattened demand remains possible aka no real shrinkage in M1 and probably even
some growth with velocity remaining 1 coupled with increased OPEC cuts should get us back on the increasing energy price bandwagon.
To a large extent at least for the short term I'm asserting that changes in M2 and M3 are now largly decoupled simply since longer term debt is rapidly shrinking via either falling housing prices or consumer default.
Technically they might grow but they are simply staving off more defaults.
Eventually of course if I'm right then rising energy prices relentlessly collapsing the real economy will force real defaults regardless of what the government does i.e the debt bubble they have moved on the government balance sheet will cause it to effectively default. In the interim 2008 is worse then 2007 2009 will be worse then 2008. 2009 looks like its shaping up to almost be 2008 in reverse with oil prices probably rising relentlessly through the year.
Regardless of exactly what happens it really looks like the game of increasing oil usage to offset falling velocity is dead so from now on out its a new game and not the one we played from the 1980's till now.
Regarding oil available for use, we really have three issues:
1. The trend in the amount of oil coming out of the ground. With low prices, this will soon approach the natural decline rate (perhaps 7% for oil, much more for natural gas) because it will not make economic sense to drill more wells. If prices increase, there may be some mitigation, but we are still likely on the downside of the slope. A best-case example of what might happen is the US decline rate. In the US, with infill drilling, new discoveries, and EOR, the decline rate is still around 2% per year.
2. The increase in energy efficiency. In the US, the figures I have seen have been about 2% per year. It is difficult to see how this can be increased dramatically, especially with the current lack of capital for investment.
3. The decrease in net supply, due to declining EROEI. Years ago, this was negligible, but with oil being found in more and more difficult locations, more oil is required simply to get the oil out of the ground.
Given this combination of factors, energy from oil is likely flat to decreasing, even considering the growth in energy efficiency.
On the other side of the equation is the amount of growth required to continue to fund debt. It seems to me that in order to pay back loans with interest, the economy needs enough growth to fund the "real" interest rate. Normally, I would expect this to be on the order of 2% to 3% a year.
Comparing needed economic growth to what we are likely to generate with available oil and gas, it seems like we are facing a continuing problem.
And the generation of that capital - whether money or resources - itself depends on energy.
cfm - loving it when a plan comes together - in Gray, ME
How many wedges would it take to hit 7% decrease in demand per year?
35 MPG average for the new-model fleet: maybe 2.2%/year.
Increase to 20% ride-sharing over 10 years: 2%/year.
Organizing and trip-optimizing shopping and other errands: ??
Building or repurposing stores/offices in residential areas, and vice versa: ??
Even at a mere 10 million vehicles/year, the USA replaces about 5% of its fleet every year. If a substantial fraction of the replacements were electric, they'd account for a pretty good wedge themselves. We can certainly get electricity: coal and natural gas in the next few year, nuclear for the next 50 while wind and solar are built out, then wind and solar until the sun's brightening makes life impossible on Earth. That's well beyond my personal horizon.
Gail, T-S.
Thanks, I think :-). I was hoping for a late Christmas prezzie. Seriously though, I appreciate the confirmation.
The worrying thing is that all three factors trend to become asymptotic about the X axis (time) and converge on much different scenario than we have today.
Even on it's own, that seems like an optimistic statement. When I consider all the other issues, a "continuing problem", looks more like a brick wall.
To be forewarned is to be forearmed I guess.
CERA's 4.5% study. (Sounds like a Sherlock Holmes yarn...) USGS Bakken assessment. Heard Byron Dorgan on the radio blathering on about how we've achieved energy independence after that came out. Actually, the stunningly irrelevant and shortsided verbage from Beltway politicos throughout the summer held my attention far more than the woes of ethanol operators.
Speaking of delusion, that Daily Kos piece (Some even argued) is amazing - what some people will believe. Commentators are helping the author to understand that this is a situation a bit more complex than a script from the 1960s Batman TV show, I see.
I maintain that a good portion of the real estate collapse can be pegged on rising gas prices- there is an inverse relationship between value of exurban residential land and commuting costs. For a very long time, gasoline was a negligible component of those costs and they actually declined courtesy of highway improvements, making exurban land more valuable (a sure thing!). When land appreciation disappeared as commuting costs rose, resales and refinances went off a cliff, demand dropped off further, and people began to walk away from mortgages in negative equity. If in that whole period (2001-2008) gasoline maintained at $1.20/gallon, the game may have continued a few more rounds.
I seem to remember that the top price reported for oil was actually a future contract. Do we know what was the highest price actually paid to take delivery of oil?
Close to that, as oil price is usually reported in front month future contract, which is usually very close to spot price. Here is the link to spot price history:
http://tonto.eia.doe.gov/dnav/pet/hist/rwtcd.htm
Hello R-squared,
Continuing in the Top Ten vein:
http://www.theindependent.com/news/x1060489505/Top-10-agriculture-storie...
------------------
Top 10 agriculture stories of 2008
------------------
I found it interesting that there was No Discussion of potential postPeak effects in FFs and/or I/O-NPK and/or continuing water and topsoil depletion plus the future needed paradigm changes for agriculture.
Thus, we have a long way to go to achieve successful Peak Outreach and Optimal Overshoot Decline...you would think the MSM would consider it very important to provide some necessary overall background context to these Top Ten.
What was the total cost of Hurricane Ike to the oil and gas industry?
I have searched for the solution, but I cannot find the amount. I know the answer will not be easy when one considers all factors (e.g., direct, indirect, insured, uninsured, primary, ancillary, etc.)
Thank you for any insight, sources, or comments.
Cheers,
Joseph
This doesn't answer your question.. but follows a story we in the north rarely hear.. maybe one of the year's 10- LEAST reported issues..
http://galvestondailynews.com/story.lasso?ewcd=e42de8d5106cba1f&-session...
Bob
Number 8 should have been the biggest story of 2008 and it was barely covered in the media. I had friends in Atlanta at the time who know nothing of the Peak Oil theory and all that they could say was "we are screwed".
Great post and discussion!
Airlines have been going bankrupt since the Wright brothers. Collectively, they've never made a dime.
I've been pondering something along those lines for a while. Looking at economics from a thermodynamic POV, I've been wondering what business - fully costed - has ever made a dime? [Stolen a dime, sure.] Is it really that bleak, that no human endeavor is worthwhile? Or is it only that human endeavors must be small and puny to be meaningful and worthwhile? To pick a middling example, is something the scale of the Panama Canal a win or a loss? What about Monsanto?
cfm in Gray, ME
"fully costed?"
where are the boundaries? If one is to be so all inclusive as your question implies to me, then the whole of the Earth-Sun system is just re-arranging deck chairs-- it becomes an amusing variation on simply radiating the Sun's heat out into the universe. That is clearly a meaningless calculation for any given short-lived human being.
Economics seems to about "who profits and who pays" -- in very restricted, carefully bounded ways. The Panama Canal and Monsanto have both been extremely profitable to some, and utterly devastating to others. But in economics, you just don't bother counting those that got devastated.
The top story was that oil industry heads, politicians, beauracrats, and those that make a hobby out of studying the oil industry were all in complete agreement that population growth is not only not the biggest problem to fix, but it is not even something to worry about.
I think population growth has been discussed here in depth at least. Poulation growth has accelerated fossil fuel consumption and which in turn has promoted higher population growth. Vicious cycle I'm afraid until the fossil fuel supply growth peaks and declines.
The critical questions we have to ask is "how do we, as a supposedly intelligent species, manage to safely stabilise and then reduce the human population to to match the solar carrying capacity of the earth?"
I have been a reader here for several years and I don't agree with the statement that population growth has been discussed in depth. In fact, I don't recall a single subject heading having population or immigration in it. One of the few posters who engaged in a discussion regarding it ultimately protested its discussion saying that it was not worth discussing given that "it was so hard to change".
As far as population growth being accelerated by fossil fuel consumption increasing - that statement appears to be contradicted by the data. If people are richer they have fewer children. The population pollyannas will frequently quote that fact when assuring others that population will stabilize around 2050 as the world gets richer (in the face of a fossil fuel decline).
I don't understand your emphasis on the word safely. What do you see as unsafe about population stabilization and/or population decline?
I don't know if these are the top headlines but they all show major trends:
Ford Fusion Hybrid is given an EPA rating of 41 mpg (city) and 36 mpg (highway). The car companies are competing on fuel efficiency and making big progress.
Natural gas glut in North America. Technology does matter and all of the drilling in gas shales shows this.
I still think that the top energy story of the year is the ongoing and largely unacknowledged resource war for petroleum.
The USA has invaded and occupied strategic countries -- Afghanistan and Iraq -- in the global game for control of oil resources, and is poised to do two things at once: to consolidate the occupation and to expand the war for control of petroleum in the Middle East and also in South America.
Meanwhile China and India, Russia and Europe continue to compete for dominance against one another and especially against the USA for control of petroleum. The US Empire --with an unprecedented global spread of "full spectrum dominance" asserts significant direct and overt military control over oil while other nations still cloak some of their efforts in polital and economic arrangements.
The top energy stories of 2008 are also intertwined with the story of American Christo-fascism. Even though the Bush-Cheney administration largely despised these Zealots as nuisances who must be appeased, the Obama administration coming continues to play to this dominant meta-narrative of Manifest Destiny which drives the continuing and expanding "Indian Wars" on a global scale.
There is a powerful blend of religious justification, military aggression, and corporatist lust for "Lebensraum" that gets no coverage in the mainstream press, and little coverage on TOD.
Both seem to rely on the same streams of income and information and analysis to develop themes for the dominant "energy stories" of the year.
The self-selection process for the mainstream media or politics must necessarily exclude the central story of war for too few resources amoung too many -- and increasingly even amoung the over-consuming -- people. This lie about the violence we have chosen as the heart of our existence enables the continuation of violence while we chatter meaninglessly about "renewable energy" and stories whose very language is shaped by Corrupt Crony Capitalism.
Ponzi schemes in the collapsing world of finance mirror the absurd seductive posturing in commerce, which in turn mirror the suicidal fantasies of the collapsing political and cultural institutions that feed off the leavings of war and pillage.
Energy has nothing to do with the companies scrambling to dominate the market. These companies have to do with sucking up as much energy as possible and turning it into more weapons of war and more commercial seductions which will result in the destruction of the very ecosystem that supports our fragile species.
Note that the environment is increasingly off the screen in terms of "energy stories." It is all about corporations and economic competition and nationalism with no concern for the obvious havoc this process of competition -- for too little by too many -- has upon the environment which supports us.
My guess is that we will die off with some bangs and some whimpers, but mostly with Fascists fighting about energy and security policies and about such things aswho gets "The Prize" in Iraq. Will it be Americans, Chinese, Indians, Europeans, or Russians?
And do not forget: we will argue about Communism and Socialism in Central and South America, military dominance in resource-rich Africa, and also the very profitable conflict between Israel and Iran.
War continues to be the central energy story in 2008, as unpopular as it is to make note of this fact in the mainstream media or here on TOD.