Δευτέρα, Μαΐου 29, 2006

Economist's View: Krugman: Nuclear Energy Should Not Be the Main Answer to Our Energy Problems

Economist's View: Krugman: Nuclear Energy Should Not Be the Main Answer to Our Energy Problems: "Krugman: Nuclear Energy Should Not Be the Main Answer to Our Energy Problems

Paul Krugman responds to comments on his latest column and gives sources for his estimates of the cost of policies to offset global warming:

Krugman's Money Talks: Al Gore and the Future of Energy, Commentary, NY Times: Readers respond to Paul Krugman's May 26 column, "A Test of Our Character "

...William R. Mosby, Salt Lake City: Does nuclear energy have a part to play in mitigating global warming in the long term? ... [T]hose who see an urgent need to do something about global warming generally don't talk about nuclear energy as a prominent part of the solution. Do they think that nuclear energy would be a bigger problem than global warming?

Paul Krugman: I was at a reception for Al Gore after a screening of his movie, and he was asked that very question. I thought his answer was very good. He said that yes, nuclear should be part of the mix, but it can't be the main answer. And there are problems with nuclear we need to resolve: not just disposal of radioactive waste, but vulnerability to terrorist attack. In fact, as nuclear power becomes more common around the world, the possible misuse for weapons, terrorist or otherwise, will be a big problem. So unless there are some breakthroughs, nuclear power is only a piece, and maybe not a big one, of the solution.

Mark Neely, Santa Monica, Calif.: ...Is there a way to calculate the profit oil companies make relative to the price of a barrel of crude? ... I ask because it seems to me that all administration energy policies seem to encourage diminishing the availability of crude outside the Arctic Circle and U.S. coastlines at any rate. This only makes sense to me if profitability increases for the oil companies when the price of crude goes up and if, as seems obvious, the administration is facilitating the profitability of oil companies at the expense of the public good.

Paul Krugman: It's not that simple. It depends on what the oil company does. To some extent, oil companies own crude production, and in that case they make more money when the price of crude rises. But a lot of what they do is refining, and the profits on refining depend on the "crack spread" — the difference between the price of a barrel of crude and the price of the gasoline, fuel oil, and other stuff you make from that barrel. Right now both the price of crude and the crack spread are very high, so oil companies are making huge profits.

Michael Papenfus, Milwaukee, Wisc.: ...If you have them available, can you recommend a few citations of serious economic studies exploring the costs of reducing CO2 emissions?

Paul Krugman: Some correspondents have asked for sources on the costs of policies against global warming. It's all pretty technical stuff, but here are two things I looked at. (An awful lot of work goes into things that never make it into the column!) First, in 1998, the Energy Information Agency (a part of the Energy Department) did a survey on the costs of complying with the Kyoto treaty, back before Bush rejected the whole thing. The executive summary is at http://www.eia.doe.gov/oiaf/kyoto/execsum.html. Basically, EIA found that trying to meet the Kyoto target on emissions by 2010 might be fairly expensive, but that meeting the target by 2020 wasn't. The report also compared a number of other estimates: http://www.eia.doe.gov/oiaf/kyoto/cost.html.

Second, William Cline of the Institute for International Economics did a study of climate change policy, which can be found here (pdf), and gives very long-run analyses. I'd focus on Figure 7, on page 21: the costs of an aggressive anti-warming policy eventually reduce Gross World Product by about two percent, compared with what it would otherwise be, but only over a very long period.

Posted by Mark Thoma on May 26,

Economist's View: Paul Krugman: A Test of Our Character

Economist's View: Paul Krugman: A Test of Our Character: "Paul Krugman: A Test of Our Character

Paul Krugman wonders if we are ready for politicians who tell the truth about difficult issues:

A Test of Our Character, by Paul Krugman, Gore's Movie Commentary, NY Times: In his new movie, 'An Inconvenient Truth,' Al Gore suggests that there are three reasons it's hard to get action on global warming. The first is boiled-frog syndrome: because the effects of greenhouse gases build up gradually, at any given moment it's easier to do nothing. The second is the perception, nurtured by a careful disinformation campaign, that there's still a lot of uncertainty about whether man-made global warming is a serious problem. The third is the belief, again fostered by disinformation, that trying to curb global warming would have devastating economic effects.

I'd add a fourth reason... But first, ... Mr. Gore couldn't have asked for a better illustration of disinformation campaigns than the reaction of energy-industry lobbyists and right-wing media organizations to his film. ...

As evidence that global warming isn't really happening, [the National Review] offers the fact that some Antarctic ice sheets are getting thicker ... Curt Davis, ... whose work is cited ... has already protested. ... He points out that an initial increase in the thickness of Antarctica's interior ice sheets is a predicted consequence of a warming planet, so that his results actually support global warming...

[T]hey [also] issue hysterical warnings about the economic consequences of environmentalism. 'Al Gore's global warming movie: could it destroy the economy?' Fox News asked. Well, no, it couldn't. There's ... broad consensus that even a very strong program to reduce emissions would have only modest effects on economic growth. At worst, G.D.P. growth might be, say, one-tenth or two-tenths of a percentage point lower over the next 20 years. ....

But "An Inconvenient Truth" isn't just about global warming... It's also ..., implicitly, a cautionary tale about what's been wrong with our politics.

Why, after all, was Mr. Gore's popular-vote margin in the 2000 election narrow enough that he could be denied the White House? Any account that neglects the determination of some journalists to make him a figure of ridicule misses a key part of the story. Why were those journalists so determined to jeer Mr. Gore? Because of the very qualities that allowed him to realize the importance of global warming, many years before any other major political figure: his earnestness, and his genuine interest in facts, numbers and serious analysis.

And so the 2000 campaign ended up being about the candidates' clothing, their mannerisms, anything but the issues, on which Mr. Gore had a clear advantage...

I won't join the sudden surge of speculation about whether "An Inconvenient Truth" will make Mr. Gore a presidential contender. But the film does make a powerful case that Mr. Gore is the sort of person who ought to be running the country.

Since 2000, we've seen what happens when people who aren't interested in the facts, who believe what they want to believe, sit in the White House. Osama bin Laden is still at large, Iraq is a mess, New Orleans is a wreck. And, of course, we've done nothing about global warming.

But can the sort of person who would act on global warming get elected? Are we — by which I mean both the public and the press — ready for political leaders who don't pander, who are willing to talk about complicated issues and call for responsible policies? That's a test of national character. I wonder whether we'll pass.


"

Economist's View: Paul Krugman: Swift Boating the Planet

Economist's View: Paul Krugman: Swift Boating the Planet

In response to a recent post about John Kerry and the Swift Boat crowd, many of you called for Democrats to get tougher. Paul Krugman agrees:

Swift Boating the Planet, by Paul Krugman, Climate Lies Commentary, NY Times: A brief segment in "An Inconvenient Truth" shows Senator Al Gore questioning James Hansen, a climatologist at NASA, during a 1989 hearing. But the movie doesn't ... tell you what happened to Dr. Hansen later.

And that's a story worth telling, for two reasons. It's a good illustration of the way interest groups can create the appearance of doubt even when the facts are clear and cloud the reputations of people who should be regarded as heroes. And it's a warning for Mr. Gore and others...: you're going to have to get tougher, because the other side doesn't play by any known rules.

Dr. Hansen was one of the first climate scientists to say publicly that global warming was underway. In 1988, he made headlines with Senate testimony in which he declared that "the greenhouse effect has been detected, and it is changing our climate now."...

By rights, Dr. Hansen should have been universally acclaimed... But soon after Dr. Hansen's 1988 testimony, energy companies began a campaign to create doubt about global warming... And in the late 1990's, climate skeptics began a smear campaign against Dr. Hansen himself.

Leading the charge was Patrick Michaels, a professor at the University of Virginia who has received substantial financial support from the energy industry. In Senate testimony, and then in numerous presentations, Dr. Michaels claimed that the actual pace of global warming was falling far short of Dr. Hansen's predictions. As evidence, he presented a chart supposedly taken from a 1988 paper written by Dr. Hansen and others, which showed a curve of rising temperatures considerably steeper than the trend that has actually taken place.

In fact, the chart Dr. Michaels showed was a fraud... The original paper showed a range of possibilities, and the actual rise in temperature has fallen squarely in the middle of that range. So how did Dr. Michaels make it seem as if Dr. Hansen's prediction was wildly off? Why, he erased all the lower curves, leaving only the curve that the original paper described as being "on the high side of reality." ...

Dr. Hansen has been trying to correct the record for years. Yet the claim ... has remained in circulation, and has become a staple of climate change skeptics, from Michael Crichton to Robert Novak. There's a concise way to describe what happened to Dr. Hansen: he was Swift-boated.

John Kerry, a genuine war hero, didn't realize that he could successfully be portrayed as a coward. And it seems to me that Dr. Hansen ... didn't believe that he could successfully be portrayed as an unreliable exaggerator. His first response to Dr. Michaels, in January 1999, was astonishingly diffident. ... rather than denouncing the fraud involved, he offered a rather plaintive appeal for better behavior.

Even now, Dr. Hansen seems reluctant to say the obvious. "Is this treading close to scientific fraud?" he recently asked about Dr. Michaels' smear. The answer is no: it isn't "treading close," it's fraud pure and simple.

Now, Dr. Hansen isn't running for office. But Mr. Gore might be, and even if he isn't, he hopes to promote global warming as a political issue. And if he wants to do that, he and those on his side will have to learn to call liars what they are.

Πέμπτη, Μαΐου 25, 2006

Econbrowser: Energy futures as predictors

Econbrowser: Energy futures as predictors: "Energy futures as predictors

Energy futures as predictors

Many publications use energy futures as proxy measures for market expectations of future energy prices. Does this procedure make sense?

Consider the IMF's recent World Economic Outlook, which included a figure with futures a year ago, and in March. While futures a year ago indicated some decline, the most recent reading indicate persistently high prices.

weooilfut.jpg
Figure 1.20 from IMF WEO, April 2006.

A relevant question is whether futures are actually good predictors of future spot oil prices. The answer is not obvious -- for instance, for currencies futures aren't good predictors. In a paper assessing energy futures, coauthored with Olivier Coibion and Michael LeBlanc, I assessed whether the gap between the futures rate and current spot rate predicts the actual change in the spot oil price. Over the 1990-2004 period, we find that at 3 month, 6 month and one year horizons, regression of actual change on predicted yields coefficients of 1.2, 0.8 and 0.9, respectively. In no case can the null hypothesis of unbiasedness be rejected.

Econbrowser: Natural gas and crude oil prices

Econbrowser: Natural gas and crude oil prices

Natural gas and crude oil prices

Can natural gas fall this far without oil prices moving more?

A barrel of oil has about six times the energy content of a thousand cubic feet of natural gas. Although they're far from perfect substitutes, some firms can switch between oil and natural gas depending on price and availability. Longer term, consumers or firms making a fixed commitment to oil or natural gas will of course look at the relative prices. Thus one's first guess might be that, over the long run, a barrel of oil should sell for something around six times the price of a thousand cubic feet of natural gas.

The graph below shows that this has been a pretty fair description over the past six years. Up until the last few months, that is, which have left natural gas selling for about half its value from December, while oil is little changed.


nat_gas_crude_price.gif

If the historical correlation holds up, something's got to give here. Strikes me as another reason to wonder about oil above $70 a barrel.

Δευτέρα, Μαΐου 22, 2006

Case Closed: The Debate about Global Warming is Over

The Brookings Institution, May 17, 2006

Gregg Easterbrook, Visiting Fellow, Governance Studies



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Gregg Easterbrook
Gregg Easterbrook

Executive Summary

Here's the short version of everything you need to know about global warming. First, the consensus of the scientific community has shifted from skepticism to near-unanimous acceptance of the evidence of an artificial greenhouse effect. Second, while artificial climate change may have some beneficial effects, the odds are we're not going to like it. Third, reducing emissions of greenhouse gases may turn out to be much more practical and affordable than currently assumed.

This briefing will address the three points above and, in an appendix, offer non-jargon explanations of the most important recent findings of greenhouse science. But the pressing point of this briefing is not so much scientific as it is practical—that action against artificial global warming may not prove nearly as expensive or daunting as commonly believed. Greenhouse gases are an air pollution problem, and all air pollution problems of the past have cost significantly less to fix than projected, while declining faster than expected. This gives cause to hope that artificial greenhouse gases can be controlled reasonably cheaply and without wrenching sacrifices to the global economy. And if there is a chance of an economical approach to greenhouse-gas reduction, then what are we waiting for? Let's start now.

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Note: The views expressed in this piece are those of the author and

Case Closed: The Debate about Global Warming is Over

Case Closed: The Debate about Global Warming is Over

The Brookings Institution, May 17, 2006

Gregg Easterbrook, Visiting Fellow, Governance Studies

View Full Paper (PDF—163kb). Get Adobe Acrobat Reader

print
email
feedback


Gregg Easterbrook
Gregg Easterbrook

Executive Summary

Here's the short version of everything you need to know about global warming. First, the consensus of the scientific community has shifted from skepticism to near-unanimous acceptance of the evidence of an artificial greenhouse effect. Second, while artificial climate change may have some beneficial effects, the odds are we're not going to like it. Third, reducing emissions of greenhouse gases may turn out to be much more practical and affordable than currently assumed.

This briefing will address the three points above and, in an appendix, offer non-jargon explanations of the most important recent findings of greenhouse science. But the pressing point of this briefing is not so much scientific as it is practical—that action against artificial global warming may not prove nearly as expensive or daunting as commonly believed. Greenhouse gases are an air pollution problem, and all air pollution problems of the past have cost significantly less to fix than projected, while declining faster than expected. This gives cause to hope that artificial greenhouse gases can be controlled reasonably cheaply and without wrenching sacrifices to the global economy. And if there is a chance of an economical approach to greenhouse-gas reduction, then what are we waiting for? Let's start now.

View Full Paper(PDF—163kb)

Τρίτη, Μαΐου 16, 2006

Nuclear power will drive the future - Editorials & Commentary - International Herald Tribune

Nuclear power will drive the future - Editorials & Commentary - International Herald Tribune

From the minute the alarm clock goes off in the morning, our lives are fueled by electricity. We are amazed at the seemingly endless parade of new, life-improving and life-saving technologies. But too little attention is paid to the looming shortage of energy needed to power them. We take for granted that the lights will come on at the flip of a switch.
The Department of Energy projects that the United States will need 45 percent more electricity by 2030. Where is this going to come from? Energy conservation, greater efficiencies in the production of natural gas, oil, coal and hydro power, and a genuine commitment to renewables such as wind, solar, and geothermal power will be needed.
Across America today, companies are reducing their demands for power without slowing their growth, but those efforts won't be enough in and of themselves. We will continue to need a mix of power sources, and nuclear energy must play an increased role in supplying America's growing demand for electricity.
Nuclear energy offers numerous benefits and advantages over other sources.
It's cleaner. Nuclear energy has the lowest impact on the environment - air, land, water and wildlife - of any major energy source. It produces no harmful greenhouse gases or controlled air pollutants, its waste byproducts are isolated from the environment, and it requires less land to produce the same amount of electricity as other electricity sources....

Europe set bar low on greenhouse gas targets - Business - International Herald Tribune

Europe set bar low on greenhouse gas targets - Business - International Herald Tribune

The European Commission admitted Monday that member states had given companies far too generous targets for greenhouse gas emissions last year, raising questions about the Continent's ability to meet its obligations under the Kyoto Protocol and triggering chaos in Europe's embryonic market in trading emissions credits.
The revelations, some of which had been leaked earlier in the month, prompted Germany and Britain to call for stricter European quotas for greenhouse gas emissions in the years ahead.
Although companies polluted less than expected, the move by Germany and Britain indicated that the level of Europe's carbon dioxide emissions was still too high to meet the goals set out by the Kyoto agreement among countries to fight global warming.
Europe's market to trade carbon dioxide credits was shaken Friday when the news was leaked in a posting on the commission's Web site. Governments use the market, which opened in January 2005, to curb industrial pollution by allocating permits limiting the amount of carbon dioxide countries can release into the atmosphere. Companies can trade the permits, selling credits they do not need or buying extra ones if they exceed their quotas. On Monday, Germany said it would cut the number of credits it had handed out, a controversial move that is being opposed in court by the European Union.
Europe's market for trading these credits was worth $10 billion in 2005, and may grow to as much as $30 billion in 2006, the World Bank estimates. Its success, analysts say, is crucial to reaching the Kyoto Protocol goals. "Trading is the only way to reduce emissions economically and efficiently," said Louis Redshaw, head of environmental products at Barclays Capital.
In recent weeks, though, the market has attracted calls for a swift overhaul from participants, environmentalists and governments alike. At the heart of the complaints: Information that filtered out to the market beginning with the Netherlands on April 25 showed that countries had far lower carbon emissions than the market had budgeted for. The European Commission's official figures, released Monday, showed that 21 of the 25 member states produced 44.1 million tons less carbon dioxide, or 2.5 percent less, in 2005 than expected.
Taken at face value, this should be good news: After all, lowering carbon dioxide is the goal. But many in the market say the reverse is true: Governments, under pressure from industry, have overestimated the amount of carbon dioxide credits their companies need, making it possible for companies to sell them at a profit.
So far, the permit market appears to have done more for the balance sheets of power companies than for pollution control. The permits, which started trading at about €9, or $11, in January 2005, peaked at €30 last month and have raised the revenues of power companies in the EU 15 percent to 25 percent, according to Point Carbon, a consulting firm specializing in energy markets and emissions trading based in Oslo.
"The electricity sector has had a very good year," said Kristian Tanger, research director at Point Carbon, adding that most improvements in energy efficiency in the past year were unrelated to the trading system.
If several countries emitted fewer gases than expected it was because governments had handed out 1 percent to 4 percent more permits than industry had required, Tanger said. One explanation is that the emissions market is unique in terms of the sway governments hold over it. They determine how much their countries get to pollute and which industries get how many permits.
So the fact that European countries have hit, or even come in under, their targets is by no means an indication that they will meet the obligations for emission cuts set in the Kyoto Protocol, he said. "Most countries are off track when it comes to Kyoto," Tanger said.
Environmental activists and agencies argue that the recently released year-end figures show that most European governments are more interested in protecting their companies than in reducing carbon emissions. "Governments have been cheated by the big industries, which gave them the wrong assumptions for their emissions," said Stephen Singer, head of the European climate and energy policy unit of the World Wildlife Fund.
Fran?ois Loos, France's industry minister, disputed this, but said that he and his counterparts from Germany, Belgium, the Netherlands and Luxembourg were working on a proposal for the commission that would avoid carbon prices driving electricity prices - and profits of power companies - higher. The proposal will be submitted in June, he said.
Meanwhile, the banks, brokers, hedge funds and traders that jumped into the rapidly growing market for trading carbon emission credits complain that the big difference between what countries estimated they would use and what they actually used unfairly skews the market.

Κυριακή, Μαΐου 14, 2006

First fry, then drive!

Is it possible to fry your potatoes and then fill up your reservoir and go for a newspaper? In fact not so easily yet. I have heard some things about bio-fuels but never had the chance to read a relevant detailed article. Today, at "Βήμα" I read an article that described what are bio-fuels and what is the current situation in Greece and the rest of the world. I found it quite interesting and worths a look (it is in greek...)

Link: http://tovima.dolnet.gr/print_article.php?e=B&f=14761&m=D14&aa=1

Τετάρτη, Μαΐου 10, 2006

Economic Growth and the Environment

During the last semester I prepared an assignment focused on the connection between economic growth and the environment. Specifically, I attempted to make a short survey on the existing literature of the Environmental Kuznets Curve (EKC) Hypothesis. I must admit that I did not expect to find the field so interesting. Nevertheless, not only I finished the assignment, but also decided to devote my Master thesis on this field.

So all through the last months I am browsing in various journals in order to find articles upon this subject. Completely by luck I found a Literature Survey of Panayotou T. (2000), which I think that consists the most concise survey I have yet found for the EKC hypothesis. In fact one cannot find many surveys on EKCs (Dinda, Borghesi, etc.).

Panayotou's survey lacks though in the analysis of the macro-theoretical connection of economic growth and environment. For such analysis, one might better turn to more seminal papers of the field. In any case, the paper was a revelation for me. For this exact reason I decided to post a link to it.

Link: http://www2.cid.harvard.edu/cidwp/056.pdf

(Tip: Great Appendix!!!!)

Τρίτη, Μαΐου 09, 2006

The Oil Drum | Discussions about Energy and Our Future

The Oil Drum | Discussions about Energy and Our Future

Ah! Do we really need six pages of comment? Thank you at the back, we'll gladly cut it short. Suffice it to say I had the chance to split part of a bottle of wine with Ken Deffeyes (we talked a little about Abu Sa'fah the first indication of Saudi depletion, since the combined 800 kbd from it and Qatif were designated purely to match declines in existing fields at the time they came on stream.) There were a couple of short chats with Governor Schweitzer of Montana about 5-micron coal and a recognition, as the talks went on through the afternoon, that maybe the ground is changing. But first an admission - they caught me out. Since Dr James Hansen had to be recognized as one of the Time 100 Folk of the Year, later this afternoon, they moved his talk up, and so sadly I missed the first bit. So this is where I put in another plug for the web site (URL corrected here and earlier), to get the Powerpoints. His message, as I caught it, was largely that we can only afford to raise the temperature of the planet one single degree Centigrade, and beyond that the historic record suggests catastrophe. One part of this is the melting of the polar ice caps, and, in this regard he showed the melt pictures and the latest measurements of the weight of Greenland (from one of the satellites). What is interesting in that, is that the last couple of years seemed to have created more of a trend out of the data. He commented (perhaps in response to Dr Crichton) that this may provided more reliable data than models. ...

The Limits of Biofuels

The Limits of Biofuels

[editor's note, by Stuart Staniford] With this post, we welcome Kyle as a contributor to the blog. You may recall his excellent guest post on the potential of cellulosic ethanol.

One question that always arises with biofuels is "How much can we really produce?" For most fuels, this depends upon the feedstock, i.e., corn versus cellulose for ethanol. However, there are definite limits, and as time progresses, my guess is that we will see more and more proposals like the one below the fold:

There's more... (428 words) | Comments (19) | Permalink | Trackback: Google Technorati

Dynoil to Build 1.5 bgy Biodiesel Refinery in Houston

To help lessen the U.S. dependency on foreign oil, Dynoil's commitment to producing an alternative diesel fuel is under way with its plan to build a 1.5 billion gallon per year (bgy) refinery that will process vegetable oil feedstock into environmentally friendly biodiesel. The intention was announced by A. Vernon Wright, Chief Executive Officer of Dynoil LLC, a Delaware Limited Liability Company.

The company concluded from its market studies that the current market for biodiesel in the U.S. Gulf Coast is at least 100,000 barrels per day, and it identified markets on the U.S. East, West Coasts and on the Great Lakes where it intends to expand its production of biodiesel. A site for the refinery has been selected near Houston, Texas, and the U.S. Gulf Coast. The plant will process conventional vegetable oil into biodiesel fuel that will contain zero sulphur and nearly zero nitrogen oxide (NOx) emissions. Dynoil's biodiesel can be blended into various grades of diesel fuel that can contain anywhere from five percent (B5) to 20 percent (B20) biodiesel to meet market demand requirements.

The refinery will process approximately 100,000 barrels per day of vegetable oil into fuel that can be used as a blending stock with petroleum diesel. The company plans to use state-of-the-art technology to convert vegetable oil into consumable fuel oil. Biodiesel can also be used for home heating or electric power generation.

The company concluded from its market studies that the current market for biodiesel in the U.S. Gulf Coast is at least 100,000 barrels per day, and it identified markets on the U.S. East and West Coasts and on the Great Lakes where Dynoil will expand biodiesel production.

In normal business speak, there clearly is a market for that much biodiesel, so full speed ahead! However, the detail that is missing is that the entire US production of soybean oil (the main kind produced here, as our climate is too cold for palm oil and too warm for rapeseed) is 2.5 billion gallons per year. In other words, this single "bio-refinery" will consume roughly 60% of the soybean oil produced annually in the US! It seems that at some point we may need a "third party" to keep ourselves from burning all of our food just to keep those vehicles on the road...

Just for reference, world production of all vegatable oils is about 600 million barrels annually (1.65 million barrels/day), about 1 weeks worth of oil usage.

The Nationalization of Energy Resources and Investment Incentives

The Nationalization of Energy Resources and Investment Incentives

As the price of oil and other energy inputs has risen, countries have attempted to capture a larger share of the profits, often through nationalization of energy resources. However, this undermines the incentive for foreign countries to invest and has led to large losses in production over time since many countries are not capable of duplicating the investment efforts of foreign companies.

These countries could, perhaps, do much better at capturing a share of the profits of oil companies without substantially reducing their incentives to invest by using lessons from incentive compatible utility regulation. A good resource on these issues is "Designing Incentive Regulation for the Telecommunications Industry," by Sappington and Weisman. This regulation is designed to replace older markup over cost regulation that left firms with no incentive to control costs or to increase productivity through new investment and has considerable advantages in that regard. Here's the article on nationalization and falling investment:

Nationalist politics muscle back into world energy, by Carola Hoyos, Financial Times: More than a decade after founding the Organisation of the Petroleum Exporting Countries, Juan Pablo Perez Alfonzo fell out of love with oil. Deeply disappointed by the destructive impact high oil prices had had on petroleum-producing nations such as his native Venezuela, in 1976 he branded it the “devil’s excrement”.

Thirty years on, the price of oil is soaring again and oil-rich countries are following the same route of aggressive nationalism... In the latest manifestation, Bolivia last Sunday nationalised its energy industry, sending in the army to seize gas fields and threatening to expel international oil companies in 180 days if they did not agree to new – and far less favourable – contracts...

As energy-rich countries have become wealthier and less dependent on foreign investors, they have also grown increasingly assertive. Russia has threatened to cut off supplies to its biggest customers unless they agree to higher prices while others, such as Venezuela, have jeopardised investment by imposing onerous new contracts on international companies...

When national governments strengthen their grip, the outcome is more often than not a deterioration in the country’s industry and a drop in output... William Ramsay, deputy director of the International Energy Agency... is in no doubt that the surge in nationalism in Latin America and elsewhere is self-defeating. ... “Look at the production capacity of Venezuela – it has fallen dramatically. ... If you don’t get the balance right between the companies’ interest and the country’s interest, the country ultimately will lose.”...

Julian Lee, of the Centre for Global Energy Studies in London, estimates that factors involving geopolitical crisis and nationalism in Iran, Iraq, Nigeria, Russia, Kuwait and Venezuela have reduced oil supply since 2000 by as much as 7.8m barrels a day – equivalent to the combined consumption of Germany, France, Italy and Spain.

Chart

Frederic Lasserre, chief energy analyst at Soci?t? G?n?rale in Paris, adds: “Latin America is the perfect region to witness the impact of nationalism on production. Mexico and Venezuela have stated for the last 10 years that they should be able to increase their oil production. In both cases, the production has not really increased and is even showing some signs of decline.”...

Even where governments remain friendly to international investors, the demands on oil companies sometimes come from rebel groups. In Nigeria, for example, militants have sought direct payments for local communities from oil giants such as Shell.

In Venezuela, the consultancy Wood Mackenzie calculates, the state has seized back $5.4bn from international oil companies by changing contract terms. ... Now the oil ministry is going after contracts in the expensive, heavy oilfield of the Orinoco belt, prompting some foreign executives to assume the worst – the full nationalisation of Latin America’s second biggest oil industry.

Why would that be such bad news for production levels? International energy executives argue that when a national oil company takes over, it does not have access to the technology needed to maximise oil recovery. Meanwhile, other potential fields – such as heavy oilsands – or transport routes, like a project to send Bolivian gas to the US, may not see the light of day because investors are unwilling to commit the amounts needed while the threat of nationalisation hangs over them....

As the oil price rises, and countries become even warier of taking on foreign partners, the balance of power is shifting between international oil companies and the countries in which they are based... No longer can companies get away with asserting their right to exploit oil riches simply on the grounds that they are the best at what they do. “You can’t just say. I am good.... The host country expects more,” ... This could include sharing know-how on building desalination plants and other industrial complexes not necessarily directly connected with the exploitation of oil and gas. ...

Malcolm Brinded, head of exploration and production at Shell, says international oil companies must now ask themselves: “How are we going to make this marriage work?” ... There remains the ultimate prize: Saudi Arabia, which holds the world’s largest oil reserves. But with every dollar rise in the oil price, Riyadh has grown less interested in an alliance with foreign oil companies. Ali Naimi, energy minister, argues ... forcefully ... that Saudi Aramco ... has all the money and expertise it needs to develop the country’s oilfields. But Saudi Arabia may be one of just a handful of oil producers that can make this argument convincingly.

Δευτέρα, Μαΐου 08, 2006

Have oil prices peaked?

Oil prices can go down as well as up.

Green: average of EIA and IEA estimates of daily oil production. Purple: 9-month centered moving average. Blue: 13-month centered moving average . Source: The Oil Drum
world_production.jpg

Last week Secretary of Energy Samuel Bodman warned that high gasoline prices might be here for some time, stating "we are going to have a number of years, two or three years, before suppliers are going to be in a position to meet the demands." Other analysts have renewed their forecasts of $100/barrel oil by next winter. Given how volatile oil prices have been historically, that is certainly a possibility, though the same volatility means that a big price decrease is also conceivable. Since concerns about a further move up in price have been well represented, I thought there might be some value in trying to provide some balance by calling attention to a few of the possibilities on the downside.

First let's review how we got to where we are right now. Global oil production has failed to increase over the last year, in part due to what is now looking like a permanent loss of over 300,000 barrels per day from the Gulf of Mexico and shut-in production from Nigeria. Given the current limited excess production capacity, fears about the possibility of additional supply disruptions from places such as Iran and Nigeria translate into a higher current price for crude oil. As prospects for continued global economic growth appear strong, oil prices have been bid up.

So how's any of that going to change? There remain a number of big new projects that will be coming into production over the next several years (counterargument here). And obviously if the worries about production cutbacks from Iran and elsewhere fail to be borne out, that could bring prices down. A third factor that I think deserves more attention is the effect that $70 oil and $3 gasoline will have on quantity demanded.

Gasoline demand can be difficult to predict, in part because many of the adjustments that consumers and firms make can take a long time to have their full effect. For example, the lower mix of SUVs being sold in the American market today will influence the quantity of gasoline demanded for many years to come. Given the long-run nature of such commitments, it's hard to predict the point at which people start to make those kinds of adjustments. But at current prices, I certainly expect to see some significant moves in those directions.

Data source: EIA
gas_demand.gif

The graph at the right displays the quantity of gasoline supplied to U.S. wholesalers. One needs to be a little careful interpreting this series as demand, since we don't observe changes in wholesale and retail inventories, and since large week-to-week fluctuations are common. I have reduced the influence of the latter somewhat by using a 4-week moving average. These data seem to suggest that the April gasoline price increases may have been sufficient to reverse the usual tendency for the U.S. public to use more gasoline each year than the previous year. Certainly that's what we observed last fall when gas prices were around their current values, and I see no reason not to expect to see the same thing to be repeated now.

Stuart Staniford (figure below) argues that the free-market economies such as the U.S., Canada, and Europe, in which consumers have not been protected from the price increases, are the places we have seen reductions in the quantity of oil consumed so far, whereas the growth in demand is strongest where the price remains subsidized.

That is a very interesting observation, and I agree that the oil producing countries with their growing incomes may make an important contribution to global petroleum demand in the years to come. But I would hesitate to dismiss the role of the incentive to conserve even in those consuming countries where the governments currently appear inclined to pretend none of this is really happening. Even if consumers don't have an incentive to respond, the governments themselves, however unenlightened as they may be, are surely going to notice the effect of trying to maintain a subsidy on their own budgets, and eventually will find themselves without the resources to keep their fingers in the dike.

If rats and pigeons can respond to price incentives, don't assume we won't see the same thing from homo sapiens.


Percentage change in oil consumption over prior year. Source: The Oil Drum
countries.jpg

Κυριακή, Μαΐου 07, 2006

Ozone Layer Shows Signs of Recovery, Scientists Claim

I was browsing the web-site of the "Environmental News Network" and I spotted a very interesting article (Patricia Reaney, Reuters). I quote a small part of it and I appose the link for further reading.

"The ozone layer is showing signs of recovering, thanks to a drop in ozone-depleting chemicals, but it is unlikely to stabilise at pre-1980 levels, researchers said on Wednesday. Depletion of the earth's protective ozone layer is caused by the chemical action of chlorine and bromine released by man-made chlorofluorocarbons (CFCs), which are used in aerosol sprays and cooling equipment [...] They found that ozone levels have stabilised or increased slightly in the past 10 years. But full recovery is still decades away."

Link: http://www.enn.com/today.html?id=10394

Global Warming: Want to see if your house will be flooded?

Global Warming: Want to see if your house will be flooded?

by ManfromMiddletown
Fri May 5th, 2006 at 08:09:11 AM EDT

For most people, climate change is an abstract concept.

Reports earlier this year that the Greenland ice cap is losing its ice cap brought a brief frenzy of concern that we had reached a tipping point in which the cataclysmic consequnces of global warming were to be revealed a la Apocolypse to the world. The facts are less dramatic but not much less disturbing. Greendland's ice cap losing much larger amounts of area during the summer melt.

In February 2006 researchers discovered glaciers in Greenland were moving much faster than before, meaning that more of its ice was entering the sea.

In 1996, Greenland was losing about 100 cubic km per year in mass from its ice sheet; by 2005, this had increased to about 220 cubic km.

A complete melt of the ice sheet would cause a global sea level rise of about 7m; but the current picture indicates that while some regions are thinning, others are apparently getting thicker.

Image Hosted by ImageShack.us

From the diaries ~ whataboutbob


While there's still much debate as to how much of the Greenland ice cap will be lost to global warming, one thing is certain. The broad trend in the region over the greater part of the last century is towards warming.

Talking about climate change solely in terms of global warming is misleading though, because there are a multitude of factors contributing to climate changes. Some like greenhouse gases will raise temperatures, others like particulate matter in the atmosphere which leads to global dimming that tend to lower global temperatures (ironically, potentially leading to a masking of the full extent of global warming.)

Remember that by itself the loss of the Greenland ice shelf would raise sea levels by 7M (roughly 21 ft), and while this is the worst case scenario in Greenland, this number does not include potential sea rises resulting from loss of sea ice in the Arctic, which is at risk of melting, leading to a loss of sea ice.

Projections suggest that the Arctic ice cap will be much smaller as sea ice is loss to warming, and as the loss of permafrost could release water into the ocean, and potentially release massive amounts of methane, itself a greenhouse gas, into the atmosphere creating an runaway train effect far greater than the impact created by human impacts alone....


Read the whole article

Who has to conserve how much?

Who has to conserve how much?

Percentage change in oil consumption over prior year, for various countries and grouping of countries. Click to enlarge. Believed to be all liquids. Source: Table 2.4 of EIA Internation Petroleum Monthly..

Παρασκευή, Μαΐου 05, 2006

Η τιμή του διοξειδίου του άνθρακα

Environmental Economics: Carbon prices in Europe

Environmental Economics: Carbon prices in Europe: "Carbon prices in Europe

Mark Thoma at Economist's View (and Env-Econ) posts an article from The Economist that dicussses the recent drop in carbon prices (click the thumbnail) and the problems with the carbon market in Europe (Carbon Trading):

How well was the European Union carbon-emission permit system designed and who has benefited the most? The Economist looks into this question and concludes that a poorly designed system has allowed power companies rather than the environment to be the the main beneficiaries:

Cleaning up, The Economist: Markets are naturally volatile; but when they are new, thin and involve governments, they are especially capricious. So it is with the market for carbon-emission permits created by the establishment of the European Union Emissions Trading Scheme (ETS) in January 2005. The price of permits, which had tripled since the scheme's launch, dropped by more than half in the last week of April.

The ETS is designed to cut greenhouse-gas emissions so that European countries meet the targets set for them by the Kyoto climate-change agreement. Some 13,000 factories and power stations in five different industries may emit carbon only if they have a permit. At the start of the scheme, they were given permits worth around 2.2 billion tonnes of carbon dioxide per year. Those permits may be used up as fuel is burned and carbon generated, or they may be traded. Around €10 billion-worth ($12.4 billion-worth) of permits were traded last year. This year the figure will probably be three times that.

When the scheme was originally established, politicians expected the permit price to hover around €10 a tonne. Instead, it rose to a peak of €30. “The gas-coal spread is mostly responsible,” explains Anthony White of Climate Change Capital... The power-generation business dominates the carbon market, because it emits so much pollution. In Europe, gas and coal are the main fuels used. When the gas price rises, power companies tend to switch to coal. Coal is dirtier than gas; so, as power companies switch to coal, they need more permits, and the price rises.

Then, in late April, several countries, including France and Spain, announced how much carbon they had emitted last year. The numbers were surprisingly small. Suddenly, the future demand for permits looked lower than expected—and the price crashed. Unfortunately, the numbers reflect not the scheme's success in cutting pollution, but industry's success in getting itself allocated more permits than actual emissions warranted when the scheme was launched. ...

So far, the ETS has done more for power-generating companies than it has for curbing pollution. Because carbon permits were handed out free, rather than auctioned (as most economists said they should be); and because the carbon price has been unexpectedly high, permit-holders found they were sitting on unexpectedly valuable property rights. IPA Energy Consulting, in a report for the British government on the scheme, says it reckons that the British power-generation sector has profited to the tune of £800m ($1.5 billion) a year.

Meanwhile, there's no sign that the permit regime has brought about a switch to cleaner fuel—indeed, the reverse has been happening. That's not just because gas has been so much more expensive than coal, but also because the first phase of the ETS lasts only three years. Beyond that, nobody has any idea how many permits will be issued, and therefore what the price might be. And since investments to reduce emissions have pay-back periods of five or more years, nobody is going to start investing on a three-year view.

The ETS's troubles do not mean markets are no use in curbing emissions—but they do mean that markets need to be part of a scheme that has been well designed. The ETS hasn't.

Surprise, the utilities overstated their emissions right before regulation. This is like understating your income on your tax return. The real surprise that really isn't a surprise is that the utilities got away with it.

So, what is the solution here? I'm thinking the EU needs to sell a reduced number of permits each year until they hit their carbon target. Plus, extend the regulatory time period to decrease the uncertainty about the future value of permits.

Am I missing anything?

Peak Oil Resources

Resources

Press releases:

April 17 press release

April 20 press release

April 25 press release

May 3 press release


Bill Clinton on Peak Oil and Global Warming, London Business School, speech March 28, 2006.

John Galvin, "
Oil Spiel." Ouside magazine, May 2006.

CJ Campbell & Jean Laherrere, "
The End of Cheap Oil." Scientific American, March 1998.

Herman Daly, "
Economics in a Full World." Scientific American, September 2005.

R. Hirsch, R. Bezdek, R. Wendling, "
Peaking of World Oil Production: Impacts, Mitigation & Risk
Management." U.S. Dept of Energy requested assessment, February 2005.

Leter Brown, "
Beyond the Oil Peak". Chapter 2 of Plan B 2.0, 2006. Download the book FREE at the
Earth Policy Institute website.

Peter Maas, "
The Breaking Point: Saudi Arabia, soaring demand and the theory of peak oil." The New
York Times Magazine, August 21, 2005.

Richard Manning, "
The Oil We Eat: Following the food chain back to Iraq." Harpers, February 2004

Elizabeth Bravo & Mae-Wan Ho, "
The New Biofuel Republics." Institute of Science in Society, online
March 7, 2006.

Joseph Tainter, et al., "
Resource Transistions and Energy Gain: Contexts of Organization."
Conservation Ecology 7(3): 4, 2003.

Tim Appenzeller, "
The End of Cheap Oil." National Geographic, June 2004.

William Rees, "
A Sunshine Limit to Growth." From The Ecologist, Vol 20 No 1, at Energy Bulletin, online
January 1, 2002.

M. King Hubbert,
Testimony, Hearing on the National Energy Conservation Policy Act of 1974, before
the Subcommittee on the Environment of the Committee on Interior and Insular Affairs, U.S. House of
Representatives, June 6, 1974.

Lester Brown, "
Saudi's Have US Over a Barrel." Earth Policy Institute, online April 14, 2004.

David Holmgren, "
Energy and Permaculture." The Permaculture Activist, at Energy Bulletin, online May

Ecological Economics: Peak Oil: Problem Overblown?

Ecological Economics: Peak Oil: Problem Overblown?: "Peak Oil: Problem Overblown?

Peak Oil: Problem Overblown?

The Economist recently ran a story airing Peak Oil concerns from "pessimists" and counters from "optimists." NPR ran a similar spot May 2.

FINANCE & ECONOMICS
The oil industry
Steady as she goes [$]
Apr 20th 2006 | BAKERSFIELD, CALIFORNIA, AND CALGARY, ALBERTA
From The Economist print edition

Why the world is not about to run out of oil
…For years a small group of geologists has been claiming that the world has started to grow short of oil, that alternatives cannot possibly replace it and that an imminent peak in production will lead to economic disaster. In recent months this view has gained wider acceptance on Wall Street and in the media. Recent books on oil have bewailed the threat. Every few weeks, it seems, “Out of Gas”, “The Empty Tank” and “The Coming Economic Collapse: How You Can Thrive When Oil Costs $200 a Barrel”, are joined by yet more gloomy titles. Oil companies, which once dismissed the depletion argument out of hand, are now part of the debate. Chevron's splashy advertisements strike an ominous tone: “It took us 125 years to use the first trillion barrels of oil. We'll use the next trillion in 30.” Jeroen van der Veer, chief executive of Royal Dutch Shell, believes “the debate has changed in the last two years from 'Can we afford oil?' to 'Is the oil there?'”

But is the world really starting to run out of oil? And would hitting a global peak of production necessarily spell economic ruin? Both questions are arguable. Despite today's obsession with the idea of “peak oil”, what really matters to the world economy is not when conventional oil production peaks, but whether we have enough affordable and convenient fuel from any source to power our current fleet of cars, buses and aeroplanes. With that in mind, the global oil industry is on the verge of a dramatic transformation from a risky exploration business into a technology-intensive manufacturing business. And the product that big oil companies will soon be manufacturing, argues Shell's Mr Van der Veer, is “greener fossil fuels”.

The race is on to manufacture such fuels for blending into petrol and diesel today, thus extending the useful life of the world's remaining oil reserves. This shift in emphasis from discovery to manufacturing opens the door to firms outside the oil industry (such as America's General Electric, Britain's Virgin Fuels and South Africa's Sasol) that are keen on alternative energy. It may even result in a breakthrough that replaces oil altogether.

To see how that might happen, consider the first question: is the world really running out of oil? Colin Campbell, an Irish geologist, has been saying since the 1990s that the peak of global oil production is imminent. Kenneth Deffeyes, a respected geologist at Princeton, thought that the peak would arrive late last year.

It did not. In fact, oil production capacity might actually grow sharply over the next few years (see chart 1). Cambridge Energy Research Associates (CERA), an energy consultancy, has scrutinised all of the oil projects now under way around the world. Though noting rising costs, the firm concludes that the world's oil-production capacity could increase by as much as 15m barrels per day (bpd) between 2005 and 2010—equivalent to almost 18% of today's output and the biggest surge in history. Since most of these projects are already budgeted and in development, there is no geological reason why this wave of supply will not become available (though politics or civil strife can always disrupt output).




Peak-oil advocates remain unconvinced. A sign of depletion, they argue, is that big Western oil firms are finding it increasingly difficult to replace the oil they produce, let alone build their reserves. Art Smith of Herold, a consultancy, points to rising “finding and development” costs at the big firms, and argues that the world is consuming two to three barrels of oil for every barrel of new oil found. Michael Rodgers of PFC Energy, another consultancy, says that the peak of new discoveries was long ago. “We're living off a lottery we won 30 years ago,” he argues.

It is true that the big firms are struggling to replace reserves. But that does not mean the world is running out of oil, just that they do not have access to the vast deposits of cheap and easy oil that are left in Russia and members of the Organisation of Petroleum Exporting Countries (OPEC). And as the great fields of the North Sea and Alaska mature, non-OPEC oil production will probably peak by 2010 or 2015. That is soon—but it says nothing of what really matters, which is the global picture.

When the United States Geological Survey (USGS) studied the matter closely, it concluded that the world had around 3 trillion barrels of recoverable conventional oil in the ground. Of that, only one-third has been produced. That, argued the USGS, puts the global peak beyond 2025. And if “unconventional” hydrocarbons such as tar sands and shale oil (which can be converted with greater effort to petrol) are included, the resource base grows dramatically—and the peak recedes much further into the future. {emphasis added}

After Ghawar
It is also true that oilmen will probably discover no more “super-giant” fields like Saudi Arabia's Ghawar (which alone produces 5m bpd). But there are even bigger resources available right under their noses. Technological breakthroughs such as multi-lateral drilling helped defy predictions of decline in Britain's North Sea that have been made since the 1980s: the region is only now peaking.

Globally, the oil industry recovers only about one-third of the oil that is known to exist in any given reservoir. New technologies like 4-D seismic analysis and electromagnetic “direct detection” of hydrocarbons are lifting that “recovery rate”, and even a rise of a few percentage points would provide more oil to the market than another discovery on the scale of those in the Caspian or North Sea.

Further, just because there are no more Ghawars does not mean an end to discovery altogether. Using ever fancier technologies, the oil business is drilling in deeper waters, more difficult terrain and even in the Arctic (which, as global warming melts the polar ice cap, will perversely become the next great prize in oil). Large parts of Siberia, Iraq and Saudi Arabia have not even been explored with modern kit.

The petro-pessimists' most forceful argument is that the Persian Gulf, officially home to most of the world's oil reserves, is overrated. Matthew Simmons, an American energy investment banker, argues in his book, “Twilight in the Desert”, that Saudi Arabia's oil fields are in trouble. In recent weeks a scandal has engulfed Kuwait, too. Petroleum Intelligence Weekly (PIW), a respected industry newsletter, got hold of government documents suggesting that Kuwait might have only half of the nearly 100 billion barrels in oil reserves that it claims (Saudi Arabia claims 260 billion barrels).

Tom Wallin, publisher of PIW, warns that “the lesson from Kuwait is that the reserves figures of national governments must be viewed with caution.” But that still need not mean that a global peak is imminent. So vast are the remaining reserves, and so well distributed are today's producing areas, that a radical revision downwards—even in an OPEC country—does not mean a global peak is here.
For one thing, Kuwait's official numbers always looked dodgy. IHS Energy, an industry research outfit that constructs its reserve estimates from the bottom up rather than relying on official proclamations, had long been using a figure of 50 billion barrels for Kuwait. Ron Mobed, boss of IHS, sees no crisis today: “Even using our smaller number, Kuwait still has 50 years of production left at current rates.” As for Saudi Arabia, most independent contractors and oil majors that have first-hand knowledge of its fields are convinced that the Saudis have all the oil they claim—and that more remains to be found.
Pessimists worry that Saudi Arabia's giant fields could decline rapidly before any new supply is brought online. In Jeremy Leggett's thoughtful, but gloomy, book, “The Empty Tank”, Mr Simmons laments that “the only alternative right now is to shrink our economies.” That poses a second big question: whenever the production peak comes, will it inevitably prompt a global economic crisis?

The baleful thesis arises from concerns both that a cliff lies beyond any peak in production and that alternatives to oil will not be available. If the world oil supply peaked one day and then fell away sharply, prices would indeed rocket, shortages and panic buying would wreak havoc and a global recession would ensue. But there are good reasons to think that a global peak, whenever it comes, need not lead to a collapse in output.

For one thing, the nightmare scenario of Ghawar suddenly peaking is not as grim as it first seems. When it peaks, the whole “super-giant” will not drop from 5m bpd to zero, because it is actually a network of inter-linked fields, some old and some newer. Experts say a decline would probably be gentler and prolonged. That would allow, indeed encourage, the Saudis to develop new fields to replace lost output. Saudi Arabia's oil minister, Ali Naimi, points to an unexplored area on the Iraqi-Saudi border the size of California, and argues that such untapped resources could add 200 billion barrels to his country's tally. This contains worries of its own—Saudi Arabia's market share will grow dramatically as non-OPEC oil peaks, and with it the potential for mischief. But it helps to debunk claims of a sudden change.

The notion of a sharp global peak in production does not withstand scrutiny, either. CERA's Peter Jackson points out that the price signals that would surely foreshadow any “peak” would encourage efficiency, promote new oil discoveries and speed investments in alternatives to oil. That, he reckons, means the metaphor of a peak is misleading: “The right picture is of an undulating plateau.”

What of the notion that oil scarcity will lead to economic disaster? Jerry Taylor and Peter Van Doren of the Cato Institute, an American think-tank, insist the key is to avoid the price controls and monetary-policy blunders of the sort that turned the 1970s oil shocks into economic disasters. Kenneth Rogoff, a Harvard professor and the former chief economist of the IMF, thinks concerns about peak oil are greatly overblown: “The oil market is highly developed, with worldwide trading and long-dated futures going out five to seven years. As oil production slows, prices will rise up and down the futures curve, stimulating new technology and conservation. We might be running low on $20 oil, but for $60 we have adequate oil supplies for decades to come.”

The other worry of pessimists is that alternatives to oil simply cannot be brought online fast enough to compensate for oil's imminent decline. If the peak were a cliff or if it arrived soon, this would certainly be true, since alternative fuels have only a tiny global market share today (though they are quite big in markets, such as ethanol-mad Brazil, that have favourable policies). But if the peak were to come after 2020 or 2030, as the International Energy Agency and other mainstream forecasters predict, then the rising tide of alternative fuels will help transform it into a plateau and ease the transition to life after oil.

The best reason to think so comes from the radical transformation now taking place among big oil firms. The global oil industry, argues Chevron, is changing from “an exploration business to a manufacturing business”. To see what that means, consider the surprising outcome of another great motorcar race. In March, at the Sebring test track in Florida, a sleek Audi prototype R-10 became the first diesel-powered car to win an endurance race, pipping a field of petrol-powered rivals to the post. What makes this tale extraordinary is that the diesel used by the Audi was not made in the normal way, exclusively from petroleum. Instead, Shell blended conventional diesel with a super-clean and super-powerful new form of diesel made from natural gas (with the clunky name of gas-to-liquids, or GTL).

Several big GTL projects are under way in Qatar, where the North gas field is perhaps twice the size of even Ghawar when measured in terms of the energy it contains. Nigeria and others are also pursuing GTL. Since the world has far more natural gas left than oil—much of it outside the Middle East—making fuel in this way would greatly increase the world's remaining supplies of oil.

So, too, would blending petrol or diesel with ethanol and biodiesel made from agricultural crops, or with fuel made from Canada's “tar sands” or America's shale oil. Using technology invented in Nazi Germany and perfected by South Africa's Sasol when those countries were under oil embargoes, companies are now also investing furiously to convert not only natural gas but also coal into a liquid fuel. Daniel Yergin of CERA says “the very definition of oil is changing, since non-conventional oil becomes conventional over time.”

Alternative fuels will not become common overnight, as one veteran oilman acknowledges: “Given the capital-intensity of manufacturing alternatives, it's now a race between hydrocarbon depletion and making fuel.” But the recent rise in oil prices has given investors confidence. As Peter Robertson, vice-chairman of Chevron, puts it, “Price is our friend here, because it has encouraged investment in new hydrocarbons and also the alternatives.” Unless the world sees another OPEC-engineered price collapse as it did in 1985 and 1998, GTL, tar sands, ethanol and other alternatives will become more economic by the day (see chart 2).



This is not to suggest that the big firms are retreating from their core business. They are pushing ahead with these investments mainly because they cannot get access to new oil in the Middle East: “We need all the molecules we can get our hands on,” says one oilman. It cannot have escaped the attention of oilmen that blending alternative fuels into petrol and diesel will conveniently reinforce oil's grip on transport. But their work contains the risk that one of the upstart fuels could yet provide a radical breakthrough that sidelines oil altogether.

If you doubt the power of technology or the potential of unconventional fuels, visit the Kern River oil field near Bakersfield, California. This super-giant field is part of a cluster that has been pumping out oil for more than 100 years. It has already produced 2 billion barrels of oil, but has perhaps as much again left. The trouble is that it contains extremely heavy oil, which is very difficult and costly to extract. After other companies despaired of the field, Chevron brought Kern back from the brink. Applying a sophisticated steam-injection process, the firm has increased its output beyond the anticipated peak. Using a great deal of automation (each engineer looks after 1,000 small wells drilled into the reservoir), the firm has transformed a process of “flying blind” into one where wells “practically monitor themselves and call when they need help”.

The good news is that this is not unique. China also has deposits of heavy oil that would benefit from such an advanced approach. America, Canada and Venezuela have deposits of heavy hydrocarbons that surpass even the Saudi oil reserves in size. The Saudis have invited Chevron to apply its steam-injection techniques to recover heavy oil in the neutral zone that the country shares with Kuwait. Mr Naimi, the oil minister, recently estimated that this new technology would lift the share of the reserve that could be recovered as useful oil from a pitiful 6% to above 40%.

All this explains why, in the words of Exxon Mobil, the oil production peak is unlikely “for decades to come”. Governments may decide to shift away from petroleum because of its nasty geopolitics or its contribution to global warming. But it is wrong to imagine the world's addiction to oil will end soon, as a result of genuine scarcity. As Western oil companies seek to cope with being locked out of the Middle East, the new era of manufactured fuel will further delay the onset of peak production. The irony would be if manufactured fuel also did something far more dramatic—if it served as a bridge to whatever comes beyond the nexus of petrol and the internal combustion engine that for a century has held the world in its grip.

"

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