Cascading Economic Slowdown to Affect Energy Markets

Yesterday we looked at how economic problems in advanced nations might adversely affect the economies of the emerging and third worlds. It was asserted that such a cascading economic slowdown would likely lead to lowered demand for energy and commodities on the part of both emerging and third world nations.

Since recent demand growth for energy and commodities has arisen primarily from the emerging and third worlds, such a top-down cascading economic slowdown would be likely to suppress global energy and commodities markets -- possibly over a matter of decades, unless the anti-energy & anti-private sector biases of the US and EU governments were reversed.

Today we will look more specifically at how BRIC economies may already be suffering as a result of the significant and ongoing stagnation in EU and US economies, with reduced EU and US demand for BRIC and third world products.

China has already exhibited multiple signs of economic slowdown, which will ultimately lead to cascading reductions in demands for commodities by the middle kingdom. China can overproduce into a declining demand for only so long.

Russia is drowning in corruption, making it difficult for the wounded bear to acquire the foreign partnership and technical expertise it will need to maintain its high level of oil & gas output over the coming decade.

Russia is also suffering from an ongoing demographic tragedy affecting its core ethnic Russian population. A heavy influx of Muslim immigrants into Russia has tended to obscure this building tragedy, and many wide-eyed innocents are reporting that all is well with the Russian people. But sadly, since they do not stratify their analysis by ethnicity, their numbers and graphs are just so much garbage. The Al Fin blog has provided extensive coverage of this ongoing demographic catastrophe.

Brasil is, along with neighbor Venezuela, one of China's important suppliers, and will be hard hit by any sustained decline of Chinese demand for commodities.

And as the slowdown cascades down the supply line, other nations of South America, several nations of Africa, and many nations of South and Southeast Asia will likewise be affected.

Many economic analysts assume that if populations continue to grow, that meaningful market demand for commodities will grow apace. But that is naive. Many nations that are experiencing rapid population growth at this time, will not be able to pay for growing consumption in the face of a cascading economic slowdown.

Iron Ore and Coking Coal Price Collapse, and China

China Exhibiting "Zero Growth" or worse

China and Russia decline in global competitiveness

Six Signs of China's Deteriorating Economy

China's coming leadership of the world in doubt

Guest Article: The Unlevel Playing Field for Energy

The following article is re-published from Geoffrey Style's Energy Outlook blog. It shines a penetrating light behind the facade that green energy activists have built to try to influence public and political opinion about the intermittent unreliable forms of green energy. Well worth reading.

An editorial in last weekend's Wall St. Journal led me to a recent analysis by the US Energy Information Agency (EIA) summarizing the costs of the federal government's various "subsidies" for energy from different sources.  This is both useful and timely, since discussions of specific subsidies such as the expiring wind production tax credit inevitably lead to questions about how incentives for renewable energy compare to those for oil, gas, nuclear, and other more traditional sources.  As the Journal noted, the EIA stopped short of comparing these incentives on the basis of the relative productivity of different energy sources, but even without that it's still apparent that the category of new renewable electricity--excluding hydropower--received 21% of the federal energy benefits for 2010, while accounting for less than 3% of domestic energy production that year, when oil and gas, which provided 49% of US energy production, received less than 8% of these benefits.  Whether on an absolute or relative basis, renewables receive much more generous federal support than oil and gas.

Before digging further into the EIA's analysis, I should point out an important distinction between the federal expenses and incentives covered in the report and the externalities that are frequently conflated with them.  It is certainly true that many of these energy technologies involve significant impacts that aren't reflected in their market prices, and that the production and especially the consumption of fossil fuels create serious environmental and security externalities. However, to whatever extent federal subsidies address externalities they do so indirectly, at best, and in many cases inefficiently.  The focus of this posting, just like the EIA report's, is on the federal government's cash outlays and "tax expenditures"--deductions, credits, etc.--that have a direct bearing on the federal deficit and debt burden that are the subject of intense debate in this election cycle.

The tables in the report's executive summary reveal several key facts.  Between 2007 and 2010 federal energy subsidies in constant dollars more than doubled to $37.2 B, with most of the increase going to renewables and energy efficiency, except for a sizable bump in low-income energy assistance payments.   $14.8 B of the increase originated with the 2009 stimulus bill, none of which was directed at oil and gas, but which appropriated nearly $8 B to conservation and efficiency.  Overall, renewables received $14.7 B, split 55/45 between electricity and biofuels, while nuclear received $2.5 B and oil and gas $2.8 B.  The latter figure is lower than you'll see elsewhere, because among other incentives that the EIA chose to exclude from its analysis was the Section 199 deduction for manufacturers, which is budgeted at around $1 B/yr for oil and gas firms.  The logic behind that exclusion seems sound, because US manufacturers of biofuels, wind turbines, solar panels and other renewable energy equipment qualify for the same tax credit, and at a higher rate than oil companies.

I was also struck by the fact that oil and gas received just $70 million out of the more than $4 B spent on R&D. If there's one category in which federal expenditures on renewables should be expected to dwarf those for conventional energy, this is it, and they did so by a factor of more than 20 times.  (Coal R&D received more than $0.6 B, presumably for clean coal technologies.)

It's also the case that while the growth of renewable energy output from 2000-10 was dramatic, the relatively smaller net changes in oil and gas output in that period masked the substantial replacement of depleting resources that would have otherwise resulted in a large drop in output, especially for natural gas.  This is precisely the aspect of the mature oil and gas industry at which these federal incentives are aimed, to enable US projects to compete with the international opportunities to which many of these companies have access.

The authors of the report suggested caution in comparing the allocations of incentives to the energy produced by each technology, because some of these incentives were paid for projects still under construction and in some cases represented the front-loading of what would otherwise have been a 10-year stream of tax credits.  Fair enough.  Yet even with the conservative assumption that the entire $4.9 B of non-R&D subsidies for wind power in 2010 came in the form of cash grants in lieu of the 30% investment tax credit for new wind turbines that would produce for 20 years at a 30% capacity factor, that still equates to a subsidy of more than 16% of the average present wholesale value of all the electricity those turbines will produce, using prevailing industrial sector electricity prices as a proxy for wholesale prices.  By comparison, the $2.7 B of oil and gas tax incentives for 2010 represented just 1% of the wholesale value of US production of these fuels, before refining.

A serious debate about the appropriate level of US energy subsidies should begin with the facts, rather than with misperceptions. It should also focus first on the goals of such incentives, before jumping to the details of this tax credit vs. that one.  What do we want these measures to achieve?  If it's simply the promotion of energy production, then the current incentive system looks too heavily skewed in favor of renewables.  If it's jobs, then we should be realistic about how many can be added by such a capital-intensive sector.  If it's the promotion of both energy security and innovation, then at least parts of the current system look directionally right, though I'd argue that we'd benefit from spending more on renewable energy R&D and less on the deployment of mature-but-expensive technologies like wind.  However, if emissions and climate change are our primary concerns, then these incentives are not a terribly effective way to address them.  My own expectation is that regardless of whether the wind tax credit is extended for another year, most of the tax incentives that the EIA assessed here will eventually be swept away by tax reform focused on reducing corporate tax rates to improve US competitiveness, while eliminating loopholes to make the changes revenue-neutral.
_Geoffrey Styles in Energy Outlook

Geoffrey Styles is one of the better energy analysts, willing to look at the larger picture from multiple perspectives. His article above clearly illustrates the falseness of the claims about subsidies to the fossil fuels and nuclear industries so often made by green activists and special interests.

Out of curiosity, I visited some peak oil and green sites to gauge their reaction to Geoffrey Style's piece. Predictably, the groupthink circular jerkulars were outraged to think that anyone might be willing or able to think beyond the constrained limits of their own indoctrination.

But such places are populated by people with nothing important to do. As for the rest of us, we all have problems to solve, so we may as well get to it.

Can Germany Avoid a Spain-Style Meltdown and Indian-Style Blackouts?

Germany's government is treading a fine line between economic catastrophe and widespread power outages, on the one hand, and barely squeaking by with high unemployment and low growth, on the other hand.

If the quality and reliability of Germany's power supply continues to decline under the controversial Energiewende policy, Germany's industry may have no choice but to re-locate in more energy-friendly territories.

...private consumers and especially small and medium-sized businesses are heavily burdened by rising energy prices. Especially the medium-sized companies suffer doubly: first, from the higher energy costs in production and secondly because customers have less money in their wallets because of the rising electricity prices

It should also be remembered that the absolute level of wholesale prices is not really important for the competitiveness of the industry. The comparison with the electricity prices of other countries is much more important for the decisions regarding relocation or outsourcing.

And this comparison does not look good. Germany has the highest industrial electricity prices in Europe. With increasing costs of the green energy policy, relocating abroad is becoming increasingly attractive for companies, especially for energy-intensive businesses. _DieWelt_via_The GWPF

If Germany loses its energy-intensive industries, it will be the beginning of a long, slow slide into deep economic stagnation for the most powerful economy in Europe. And the underlying cause -- the failure of the nation's power grid to maintain high levels of reliability and quality, even while electricity prices are shooting through the roof -- will only get worse as Germany's economy fails.

The loss of such industries would have potentially disastrous consequences for Germany, however. The strength of Germany’s economy – compared to international standards - is mainly due to unusually intact and tightly knit supply chains. Basic industries are not the dinosaurs of "old economy” - already condemned to extinction. They are rather at the beginning of the value chains; with their quality and price level they set the starting point for all subsequent stages of industrial production.

German machine producers, car manufacturers and electrical industry are world leaders, because their engineers and skilled workers have an exceptional knowledge of the characteristics and abilities of their materials.

This expertise also stems from the geographical proximity and close ties of primary industry and processing companies in the manufacturing sector. This proximity should not be put at risk through negligence, allowing value chains to break because companies are driven abroad by unilateral cost burdens due to the green energy transition. _Translation of DieWelt article via The GWPF

Real Clear Energy

James Stafford Interviews Jim Rogers on Oil Etc.

Jim Stafford of Oilprice.com has conducted some very interesting and useful interviews with a number of energy-knowledgeable persons. Today we are presenting excerpts from a Stafford interview with global investor Jim Rogers, focusing on oil:

Oilprice.com: It’s been an interesting period in the energy world as we’ve seen oil prices steadily decline over the past few months and with the problems in Europe and slowdowns in India and China do you expect this trend to continue?

Jim Rogers: Well, there is certainly a correction going on for various reasons. I think Saudi Arabia's trying to help re-elect Mr. Obama. There are also stories that JP Morgan has problems in its London office with a lot of unauthorized positions they're having to liquidate. I don't know what's going on, but I do know that corrections are normal in the industrial world. There's nothing unusual about it. If it continues, there’s an opportunity to buy more.

Oilprice.com: I read a report by the Economist Phil Verleger who thinks that the Saudi’s massive increase in oil production along with other economic problems could cause oil prices crash to $40 a barrel oil and $2 a gallon gasoline by November. Do you think this is a reasonable forecast and we could see oil at these levels?

Jim Rogers: We could see anything. We certainly saw lower prices than that back in 2008 when there was a collapse. When things are collapsing, all sorts of strange things happen. We found that out in 2008 and we will probably find out in the future, as well. If oil does go to $40, that means it'll just be setting up an even more bullish scenario for the duration of the bull market.

Oilprice.com: How do you see the energy markets reacting to the Iranian sanctions, which are going to be coming into effect on the first of July?

Jim Rogers: Oh, I don't see that having much effect at all. Everybody already knows about that - nothing new to the markets. They have long since adjusted to this news, whether it be stock markets, smuggling, etc. The Iranian sanctions are a non-event as far as I'm concerned.

...Oilprice.com: The Middle East Petocracy’s, along with Venezuela and Russia must be nervously watching the price of oil. Can you see potential problems developing in these countries and other oil producing nations if prices continue to fall?

Jim Rogers: That's part of what I was saying before. The lower prices go for the fundamentals, the price of fundamentals improve, but for these countries the money they have available to buy peace is running out and there are going to be problems, because a lot of people have been lead to believe that the government can solve their problems and if the government runs out of money, it makes people upset.

...Oilprice.com: Do you believe natural gas prices are near to a bottom, or do you think they have further to fall?

Jim Rogers: U.S. natural gas is somewhere near its bottom, in my view. The problem is I expect to see serious economic problems in 2013 and 2014 in the U.S. If and when that happens, we're going to see a final panic in the markets and the economy and everything will have a crescendo and a selling climax.

We're certainly a lot closer than we were. Although, when you have a selling climax in markets, you go to levels much lower than most people believe possible and that may happen. Whatever that bottom is, it's not too far from the recent lows in natural gas.

...Oilprice.com: The media has gotten behind shale gas and it’s being promoted as a worldwide energy saviour. What are your thoughts on shale gas? Do you think it’s been oversold or it really is the cheap and plentiful oil extender we have been hoping for?

Jim Rogers: I don't know how cheap it is. The technology's getting better, apparently. The cost too because the environmentalists and politicians are getting worried about it. But I don't know enough about the technology to know for sure. I do have confidence in mankind and someday we will have the technology and expertise to fully exploit these resources.

...Oilprice.com: Moving away from fossil fuels – I was hoping to get your opinion on renewable energy. Do you see this as a sector investors should be avoiding – or are there opportunities here in the future?

Jim Rogers: That is your premise, if oil stays high alternatives become more competitive. Most alternative energy is not competitive at this moment in time but that could change. If oil prices go down and stay down the subsidies for alternatives are going to have to be pretty massive to make it even viable.

...Oilprice.com: What are your thoughts on nuclear energy? Is there a future for this power source or due to public safety perceptions is it something politicians will feel forced to abandon or sideline?

Jim Rogers: I don't think people will abandon atomic energy. It is competitive, it is economic, it is very clean if controlled. If it's not controlled it's a disaster of course. I suspect you're going to see another revival of atomic energy. The French, the Koreans, the Chinese, many countries are going forward with their nuclear power development plans.

Oilprice.com: I've seen in other interviews that you've predicted that 2013 and 2014 will be bad years for the economy. What is an investor to do? Are there any commodities, stock or instrument people can go to for safety and capital preservation?

Jim Rogers: No such thing as safe when you talk about it. Even if you put your money in cash, if you put your money in the wrong cash, you lose a lot of money. As the people in Iceland have found out, as the people in Europe on the Euro have found out. So, no such thing as safe.

What I have done is I own commodities on the theory that if the world economy gets better, I'll make money because of shortages. If the world economy does not get better, people will print money. The best way to save yourself when money printing is going on is to own commodities. _James Stafford Interviews Jim Rogers

A large number of today's investors have grown up in an era of bubble economics, when just about any stock on the board would earn them profits.

That we are now in an era of green government engineered energy starvation, demographic decline in Europe and the Anglosphere, and huge debt levels across the developed world. Government policies are growing more dysfunctional rather than less. In today's economic and political climate it becomes very difficult to prosper.

That may explain Jim Rogers' trend toward asset protection and preservation. Think it over.

Electric Power Costs by Source and Country

These images come via "Neutron Economy"'s article: Deconstructing anti-nuclear economic myths - a response to Veronique de Rugy. (h/t 111th Carnival of Nuclear Bloggers at Yes, Vermont Yankee)

This image looks at EU countries by residential costs of electricity. It can be seen that nations which depend upon big wind and big solar -- such as Germany and Denmark -- pay a high price for power. And their costs are just beginning to build, as they double down on stupid.

The above image looks at levelised costs of electricity by source. Solar and offshore wind score particularly badly by this metric. But regular onshore wind would score almost as badly if the costs of intermittency were included in overall costs. That is one of many deficiencies in the "levelised cost" metric, failing to account for all the costs of intermittency -- which over the long run is the largest cost of big wind power besides the short lifespan of the powerplant.

RCE Summary of James Conca at Forbes

James Conca Energy Cost Comparisons in Forbes suggesting natural gas as the current frontrunner. Full set of references included.

Conca differentiates between lifetime costs and other ways of comparing costs, specifically overnight costs and levelized costs:

"By life-cycle costs, I mean the total costs of building, operating, maintaining, fueling and decommissioning a thermal power plant, a solar array, a wind farm or hydroelectric dam over its life, that is, 15 years for a wind turbine, 40 years for a fossil fuel plant, 60 years for a nuclear plant, or 80 years for a large hydroelectric dam. Dividing those total costs by the amount of energy actually produced, not theoretically possible or installed capacity but actually produced, gives a life-cycle cost in ¢/kWhr. How we finance this cost is a totally different issue, one at which we generally fail as a society."

As the graph shows, hydro has the lowest costs at 3.3 cents per kWhr. This is due mainly to almost zero fuel costs and the 80-year life cycle of hydroelectric dams. Nuclear is second lowest with 3.5 cents, largely because of low fuel costs and the 60-year life expectancy of nuclear reactors. Coal is 4.1 cents, wind 4.3 cents, natural gas 5.2 cents and solar is the most expensive at 7.7 cents per kWhr.

Although fuel costs are free for wind and solar, their intensive capital costs, aggravated by the enormous amount of collection facilities that must be built, drive up their lifetime costs. It takes 9,500 windmills, for instance, to equal the life-cycle output of one AP1000 nuclear reactors, which is not the biggest reactor being built. Wind requires ten times the steel, concrete and copper per kWhr than any other energy source.

Natural gas plants are relatively cheap to built but are entirely dependent on future prices of natural gas, since fuel supplies make up 90 percent of the cost. _RCE Summary of James Conca at Forbes

A comprehensive analysis would have to include several other factors which are rarely included in a cost comparison. But it is good to have more people working on this problem.

Cost effectiveness of nuclear power for surface ships

The above study looks at US navy ships, but the cost comparisons should hold across the board for all long voyage, ocean going vessels.

More: Japan restarts Ohi reactor No. 3

Despite irrational green-fueled public protest, Japan carried through with the re-start of one nuclear reactor over the weekend. This should be only the first of many re-starts, as it is uneconomical to allow expensive power plants to sit unused in the midst of a power shortage. Particularly when the cost of nuclear fuel is extremely low in comparison to other forms of fuel.

Japan's political challenge of re-starting its nuclear facilities points out the global challenge of combating lefty-Luddite dieoff.orgiast anti-nuclear greens -- whether in Japan, Germany, Australia, the UK, or the US. Greens are leading Germany down a treacherous slope which will result in energy catastrophe unless a wiser leadership steps in.

Clashing Viewpoints: Natural Gas Glut vs. Natural Gas Shock! You Be the Judge

For the past few years, a deluge of unconventional natural gas has been driving prices down across North America. But there is a good deal of disagreement between mainstream energy analysts and analysts of the, shall we say, doomer persuasion, as to whether we are seeing a true and lasting glut of natural gas supplies -- or whether we are seeing a mere "flash in the pan" of fools' gas.

Here is mainstream point of view, pointing out the multiple factors which are leading to a sustained natural gas glut -- at least in North America:

Natural gas producers are cutting production in hopes of bringing down supplies and therefore increasing prices. The industrywide gas rig count fell by 23 last week, to 624, the lowest in 10 years, according to driller Baker Hughes (BHI). Yet production keeps growing. It is projected to average 69.2 billion cubic feet per day in 2012, up from an average 66.2 billion cubic feet per day last year, according to the Energy Information Administration. And supplies keep growing. The EIA predicts natural gas in storage will reach a record 4.1 trillion cubic feet by October, compared with 2.5 trillion cubic feet now.

One reason: Oil drillers produce gas as a byproduct, and with oil prices high, oil drilling is in gear. “It’s very attractive to drill for oil, so that will continue,” says Grubert. “Associated gas from oil wells will offset reduced drilling specifically for natural gas.” The warm winter, which reduced demand for natural gas used for heating, also helped keep supplies high. Gas pumped as a byproduct of oil and other liquids will represent 75 percent of the increase in natural gas production this year and as much as 90 percent next year, according to Barclays (BCS) research. Such byproducted output, as it is called, will probably keep rising as long as oil remains above $75 a barrel, the bank says.

The gas glut comes as the industry is banking on the future of hydraulic fracturing, or fracking. The American Natural Gas Alliance reckons that the boom in the exploitation of shale natural gas could represent 60 percent of U.S. natural gas production by 2035, compared with 27 percent in 2010. _BW

The author is explaining why production of natural gas in North America continues to spike ever higher, at the same time that prices are at record lows. He explains that even as many unconventional gas producers are cutting back on production, overall gas production continues to rise. And he tells us why.

Doomer analysts, on the other hand, see the cutback in unconventional gas production as a sign that the wells are being quickly depleted. Doomers have long predicted that the unconventional oil & gas bonanza would not last more than a few years, and they can hardly wait to pop the corks on their champagne bottles:

Money has been thrown at the industry, but the notion is dawning that the game is up and that returns will never materialize. The ponzi scheme has reached its natural limit, and investors are waking up to the realization that they have been chasing a fantasy. Ironically, just as the washout begins, natural gas prices may have bottomed.

Conventional natural gas in North America peaked in 2001. Coal bed methane and now shale gas have been revealed to be massively overblown as an energy source. Producers are reaping the consequences of malinvestment and will be going out of business. Demand has been building with the transition from coal to natural gas for power generation. This is an ideal set up for a supply collapse and subsequent price spike.

North America is poised for a huge natural gas shock. Far from being an exporter, North America is going to experience a natural gas supply crunch. Prices will be rising at the same time as peoples purchasing power falls precipitously, thanks to deflation. The structural dependency on natural gas that has been cemented in recent years is going to guarantee maximum pain as prices reconnect with reality. _BI

Those who are interested in contrasting the two viewpoints, should visit both websites linked above, and follow the links.

Economic cycles help to dictate which forms of energy will be economical to produce at any given time. Political regulations will likewise affect which resources can be tapped and which must be left in the ground.

North America has been the beneficiary of massive energy deposits, which were made available for production by improved technologies, private property laws, and a private sector that has not yet been destroyed by a bloated central government.

Prices of natural gas are higher in other parts of the world which have not had such advantages. But such high natural gas prices are unlikely to remain so high as they are, once the North American production technologies (and North American gas) begin to sweep around the world.

Meanwhile, in North America, multiple new uses for natural gas are springing up, which will eventually reverse the abrupt downward trend in prices. Natural gas prices will gain support from several technologies of substitution for crude oil -- including GTL (gas to liquids), ethylene cracking, propane dehydrogenation, LNG production, CNG use for multiple internal combustion engine applications, etc. etc.

You might say that this game is still in the opening stage.

As Many Views on Oil Prices as There Are Analysts

There is a wide range of opinion available from "expert analysts" regarding the determinants of oil prices on world oil markets -- almost all of which are contradictory.

Analyst Matt Badiali thinks that oil prices are due to crash soon, due to increasing oil inventories.

Economics professor Robert Pollin thinks that no matter how much oil is in hand, oil prices will continue to go up due to speculation.

Both analysts think that there is plenty of oil around. Batt Badiali thinks that "supply and demand" still controls market prices, whereas Robert Pollin thinks that oil speculation magnifies and distorts the real and imagined effects of supply and demand fluctuations so badly that practically all the rules of "supply and demand" have changed.

And despite the fact that world oil proved reserves continue to grow -- and are at the highest level ever -- there are also plenty of "peak oil" analysts who are predicting huge near-term price spikes up to $200 a barrel and much higher. These are the same analysts who helped to deplete pension funds, hedge funds, university endowments, and ordinary investor's savings during the 2008/2009 oil price debacle.

If the oil markets are as easily manipulated -- in spite of supply and demand -- as many economists believe, small investors need to be particularly careful when investing in oil, no matter how strongly they feel about supply gluts or constraints.

This caveat is especially applicable when so many of the world's large oil and chemical companies are investing many billions of dollars in the development of substitutes for conventional crude oil. It may take a decade or two for the economics of CTL, GTL, KTL, BTL, BitTL, etc. to accommodate large scale substitution for crude oil, but markets have been known to look ahead, once a trend seems inevitable, or even highly likely.

Top 10 US States in Oil Reserves and Unemployment

There is a relationship between energy abundance, industrial viability, and productive employment. Energy abundance is necessary but not sufficient for the other two. The list from ibtimes below, allows you to compare oil reserves and employment. US unemployment is roughly 9%.

A better comparison would be between oil production and employment, rather than oil reserves and employment. Proved reserves are estimates that are always subject to rapid upward revision and interpretation. Oil production, on the other hand, is relatively accessible data.

1. Texas

Proved reserves of Crude Oil: 5,006-M bbls

Oil refineries: 23

Unemployment rate, Jan. 2012: 7.3%

Share of jobs supported by Oil and Gas: 14.3%

2. Alaska

Proved reserves of crude oil: 3,566-M bbls

Oil refineries: 6

Unemployment rate, January 2012: 7.2%

Share of jobs supported by Oil and Gas: 10.3%

3. California

Proved reserves of Crude Oil: 2,835-M bbls

Oil refineries: 19

Unemployment rate, January 2012: 10.9%

Share of jobs supported by Oil and Gas: 4.6%

4. North Dakota

Proved reserves of Crude Oil: 1,046-M bbls

Oil refineries: 1

Unemployment rate, January 2012: 3.2%

Share of jobs supported by Oil and Gas: 7.5%

5. New Mexico

Proved reserves of crude oil: 700-M bbls

Oil refineries: 3

Unemployment rate, January 2012: 7.0%

Share of jobs supported by Oil and Gas: 7.5%

6. Oklahoma

Proved reserves of Crude Oil: 622-M bbls

Oil refineries: 6

Unemployment rate, January 2012: 6.1%

Share of jobs supported by Oil and Gas: 14.1%

7. Wyoming

Proved reserves of Crude Oil: 583-M bbls

Oil refineries: 6

Unemployment rate, January 2012: 5.5%

Share of jobs supported by Oil and Gas: 15.8%

8. Utah

Proved reserves of Crude Oil: 398-M bbls

Oil refineries: 5

Unemployment rate, January 2012: 5.7%

Share of jobs supported by Oil and Gas: 4.9%

9. Louisiana

Proved reserves of Crude Oil: 370- bbls

Oil refineries: 17

Unemployment rate, January 2012: 6.9%

Share of jobs supported by Oil and Gas: 15.1%

10. Montana

Proved reserves of Crude Oil: 343-M bbls

Oil refineries: 4

Unemployment rate, January 2012: 6.5%

Share of jobs supported by Oil and Gas: 6.4%

www.livetradingnews.com

Paul A. Ebeling, Jnr. writes and publishes The Red Roadmaster's Technical Report on the US Major Market Indices, a weekly, highly-regarded financial market letter, read by opinion makers, business leaders and organizations around the world.

_ibtimes

How Long Before Half of Global Energy Comes from Non-Fossil Fuels?

Daniel Yergin thinks it will take about 40 years to half-wean the world off fossil fuels. Vinod Khosla thinks it will take only 25 years for a global half-wean. Khosla is very optimistic about the future of biomass to liquids (BTL).

Up until the past year or two -- with the explosion of shale gas discoveries world-wide -- Al Fin energy consultants would have been closer to Mr. Khosla's estimate. But as the technologies of CTL and GTL begin to utilise nuclear process heat as an energy source, it grows more likely that synthetic fuels from natural gas, coal, and a combination of gas & coal will give fossil fuels liquids a big multi-decadal boost, beginning in the 2020s.

WSJ

MS. STRASSEL: How many years do you think it will be before half of our global energy production comes from non-fossil fuels?

MR. YERGIN: World energy probably is going to grow by 25% or as much as 35% over the next 20 years. I think the shift in the composition won't be too significant until after 2030, so maybe by 2050.

MR. KHOSLA: I guess 25 years. I'm definitely more optimistic.

...MS. STRASSEL: Vinod, in the past, you've talked about black-swan technologies—the idea of some innovative idea coming out and turning everything on its head.

MR. KHOSLA: Shale gas was a black swan. And my point is black-swan technologies will show up again. Shale gas was some combination of fracking, which we already knew how to do, and horizontal drilling that changed the assumptions around natural gas from "we need to import $100 billion worth" to "we can export it." The same thing will happen if an oil equivalent can be produced in country at $60 to $70 a barrel.

As soon as liquid-fuel technologies from things like wood chips, which are scalable, start to reach that level, our assumptions will change. _WSJ

MIT Report: Managing Large Scale Penetration of Intermittent Renewables

In April of 2011, the MIT Energy Initiative held a symposium on the challenges of integrating green intermittent power sources into power grids. Today, the PDF report from that symposium was released for public download.

The images below were taken from the MIT report. The full report is downloadable at the link above.

Large electrical power grids are complex systems which help make modern affluent societies possible. Common tells us that we should not put undue stress on systems which are that important.

Intermittent power sources such as big wind and big solar cannot be controlled, because the wind and the sunshine cannot be controlled. This means that if power grids attempt to integrate these unreliable power sources, they will be forced to pay a number of costs on several levels. The cost of maintaining grid stability and reliability will rise. The cost of maintaining existing power plants will rise appreciably. The cost of supporting structures -- such as backup power sources, large-scale energy storage facilities, new grid infrastructures, new power management technologies, etc. is likely to prove enormous.

Environmentalists would like to shut down hydrocarbon and nuclear based power plants and replace them with wind and solar. Making an attempt to do so would prove an unmitigated catastrophe. But even the partial replacement of coal, gas, and nuclear by wind and solar could easily prove disastrous, if the integration of wind and solar were pushed too far, and too fast.

Frequent shut downs and startups of power plants is costly -- both short-term and long-term. Keeping personnel and machine systems on a hair-trigger, just in case wind and solar should pick up or slow down unexpectedly, is ludicrous.

As intermittency takes its toll on machinery and economies, wise and prudent observers should begin to question the rationale for pushing intermittency onto the power grid in the first place.

The "cure" for intermittency is thought to be new energy storage technologies at utility scales. But how long before such technologies become economically feasible?

Again, wise persons are forced to question the underlying rationale behind forcing destructive intermittencies onto the power grid.

You may think that only politicians could be so stupid as to quickly push ahead with intermittent sources long before the problems associated with intermittency have been solved. But that is not quite right. Academics and journalists are every bit as stupid as politicians, on that score, as are government bureaucrats -- and especially environmentalists. There has never been a shortage of stupidity.

There has always been a relative shortage of workable human ingenuity paired with wisdom.

Cross-posted from Al Fin Potpourri

Oil Dictatorships Require High Oil Prices: Can They Hold?

Oil dictatorships from Saudi Arabia to Iran to Venezuela to Russia have grown dependent upon $100 a barrel oil, in order to placate their people with handouts, social welfare programs, and Potemkin Village styles of "prosperity and power." But there is a very real question as to whether these heretofore "masters of the oil universe" will be able to hold the line on oil prices over the long term.

Only three years ago, it was thought that Saudi Arabia – the largest oil exporter and second largest producer in the world – could generate large budget surpluses with oil at $70/barrel. In recent weeks, new estimates state that the country would need oil at $75/barrel just to balance the budget – never mind trying to post a budget surplus. The country’s oil minister has stated that the nation would work to stabilize prices at the $100/barrel level – which is a first. Saudi Arabia has traditionally held the role of OPEC moderate while Iran and Venezuela have been hawks who favor higher oil prices. Saudi Arabia has always balanced its need for oil revenues with the knowledge that if left unchecked, high oil prices have tended to precede recessions.

The reason for this change in policy would most likely be due to the country’s response to the uprisings across the Middle East last year. Fearing unrest, the government of Saudi Arabia has unveiled a huge increase to public spending that totals almost $130 billion. The Saudi commitment to stabilizing oil in the $100/barrel range should serve as a wakeup call for consumers and investors alike.

...it is not just Saudi Arabia that needs high oil prices to meet its spending commitments. Russia needs prices of over $100/barrel to balance its budget. Together, Saudi Arabia and Russia account for a little over 20% of the world’s oil production. It would be hard to argue therefore that these two major oil producers would be willing to bring down prices. _Financial Post

Of course, the higher the oil price, the more incentive for wildcatters and other entrepreneurs to come up with new sources of crude, and new substitutes for crude oil in all of its wide and various application markets.

One of the sources for new oil is shale oil -- a source with massive potential for new oil supply. Another source is the arctic.

“The race is on for positions in the new oil provinces.” That starting-gun quote was fired last week by Tim Dodson, executive vice-president of the Norwegian oil and gas company Statoil. The ‘new oil provinces’ are in the Arctic, which brims with untapped resources amounting to 90 billion barrels of oil, up to 50 trillion cubic metres of natural gas and 44 billion barrels of natural gas liquids, according to a 2008 estimate by the US Geological Survey. That’s about 13% of the world’s technically recoverable oil, and up to 30% of its gas — and most of it is offshore.

...On 17 January, Moe awarded 26 production licences for developed offshore oil areas in the Norwegian and Barents Sea to companies including Statoil, Total, ExxonMobil and ConocoPhillips. And the settlement in 2010 of a long-running row between Norway and Russia over their Arctic maritime boundary will allow more exploration in formerly disputed parts of the Barents Sea (see ‘Frozen fuels’). “There’s an ocean of new opportunities that we will grasp with both hands,” says Moe. _Nature

Of course, no matter how much oil & gas the USGS thinks is in the Arctic, there is certain to be much more. As long as prospectors are looking mainly "under the streetlights," they will find only a small portion of the world's oil.

Of course the oil and gas resource shrinks in relative magnitude next to the massive global methane hydrate resource, which is merely waiting for smart and wise humans to find safe and efficient ways to scoop it up.

More on the desperate need of oil dictatorships to maintain high oil prices.

It is quite easy for peak oil doomers to misapprehend the reasons for high oil prices and "stalled" oil production levels. That is because their brains can only hold one idea: peak oil doom. To consider the dozens of other more important factors involved, would entail a massive and intolerable cognitive dissonance, which must be avoided at all costs.

Downside Risk in Global Oil Markets -- How Likely?

Recent articles on The Oil Drum and Financial Times are warning of the risk for an oil price decline within the next several months. Veteran energy blogger Brian Westenhaus and even one of our own energy analysts have also warned of the possibility for a near-term downward trend in oil pricing. Here's more:

...my forecast is that the crude oil price will fall dramatically during the first half of 2012, possibly as low as $45 to $55 per barrel...As the price collapses we will see producer nations generally and OPEC in particular once again going into panic mode, and genuinely cutting production. _More from Chris Cook in The Oil Drum

Here is a Financial Times blogpost looking at the effect of a downward plunge in global oil prices on oil producers that are dependent upon energy exports to finance national budgets:

A drop in oil prices from the current level of around $113 a barrel to, say, below $85 (Brent pricing) would likely shift policy-making in these countries in more unpredictable directions, both positive and negative, as governments would be forced to turn to other sources of revenue.

Markets are shifting their focus from this year’s decline in OPEC production due to the Libyan conflict – to increases in output as Libya comes back on stream and Iraqi production grows in 2012.

Countries including Russia, Nigeria, Venezuela, and most importantly, Saudi Arabia, have recently ratcheted up the oil price assumptions that are used in national budgets. The shift toward higher assumptions has been driven by recent high prices, but more importantly, by growing spending needs.
_Eurasia Group in Financial Post

If these higher-price assumptions prove faulty, Russia, Venezuela and Iran in particular will be hard-pressed to provide enough social spending to contain popular and political discontent.

Meanwhile, the shale oil & gas revolution is spreading to China, and will soon be pushing up production in a wide array of locations on multiple continents. Such a runup in hydrocarbon production in nations that are traditionally seen as consumers rather than producers, will shift the global energy picture noticeably -- and alarmingly, for many energy exporters who are playing it too close to the edge in terms of spending.

Trends in coal to liquids (CTL) and how CTL will help reduce demand for crude oil

Significant risk of economic downturn in China, reducing global demand for commodities including crude oil.

Global Energy Markets Slow Responding to China Slump

China's problems are piling up, just when the celestial kingdom is attempting an orderly handover of power. Since China's wild grab for commodities over the past 2 years has been a powerful driver of global energy markets, it will be interesting to watch global commodities markets as the China bubble begins to deflate. In economics, "cycles are forever." But China's insular government and its massive population are unfamiliar with economic concepts such as "what goes up, must come down." Watch and learn.

Chinese stocks are flashing warning signs. The Shanghai index has fallen 30pc since May. It is off 60pc from its peak in 2008, almost as much in real terms as Wall Street from 1929 to 1933.
"Investors are massively underestimating the risk of a hard-landing in China, and indeed other BRICS (Brazil, Russia, India, China)... a 'Bloody Ridiculous Investment Concept' in my view," said Albert Edwards at Societe Generale.

...China's $3.2 trillion foreign reserves have been falling for three months despite the trade surplus. Hot money is flowing out of the country. "One-way capital inflow or one-way bets on a yuan rise have become history. Our foreign reserves are basically falling every day," said Li Yang, a former central bank rate-setter.

...Fitch Ratings said China is hooked on credit, but deriving ever less punch from each dose. An extra dollar in loans increased GDP by $0.77 in 2007. It is $0.44 in 2011. "The reality is that China's economy today requires significantly more financing to achieve the same level of growth as in the past," said China analyst Charlene Chu.
Ms Chu warned that there had been a "massive build-up in leverage" and fears a "fundamental, structural erosion" in the banking system that differs from past downturns. "For the first time, a large number of Chinese banks are beginning to face cash pressures. The forthcoming wave of asset quality issues has the potential to become uglier than in previous episodes".

...A fire-sale is under way in coastal cities, with Shanghai developers slashing prices 25pc in November – much to the fury of earlier buyers, who expect refunds. This is spreading. Property sales have fallen 70pc in the inland city of Changsa. Prices have reportedly dropped 70pc in the "ghost city" of Ordos in Inner Mongolia. China Real Estate Index reports that prices dropped by just 0.3pc in the top 100 cities last month, but this looks like a lagging indicator. Meanwhile, the slowdown is creeping into core industries. Steel output has buckled. _Telegraph_via_Mish

If you cannot see a direct connection between the ongoing dynamic economic phenomena in Europe and China -- and the global energy markets -- perhaps you should look a bit more closely.

Emerging markets such as the BRICs have helped prop up energy markets through both artificial and natural economic means, over the past several years. But a lot of things could happen to reverse that trend, and make an artificial propping up of energy prices much more difficult.

A Casual Walk Down EROEI Lane

Wikipedia EROEI
EROEI -- or energy return on energy investment -- is an interesting concept. A simple equation for calculating EROEI is provided by Wikipedia:
EROEI = Usable Acquired Energy / Energy Expended

But beware of the false simplicity of equations and charts. The denominator for the equation above: "Energy Expended," can be devilishly difficult to quantify in simple terms.

EROEI is never quite well-defined because you don't know how "deeply" you should go in your energy audit. If Joe Sixpack works for a hydroelectric power plant, should you include the energy expenses that his grandfather had to make to get laid with his grandmother? What about the projector in the cinema in 1934 before they had the first intercourse? :-) These things were needed for the power plant to work. My example is meant to be amusing but the essence is very serious. _Lubos

When it comes to EROEI, only a range of values is acceptable. If you are given a point estimate of EROEI without error bars or a range -- as in the Wiki chart above -- you are being lied to.

Robert Rapier is going to delve into the treacherous topic of EROEI in a talk at the ASPO-USA Conference. Robert discusses various ways in which an investment with a low EROEI can be superior to one with a higher EROEI. For example:

... it is possible for a lower EROEI process to be more attractive than a higher EROEI process if the former returns the energy over a shorter time interval. Think of it in terms of interest. Consider an investment that returns 3% on a daily basis versus one that returns 50% on an annual basis. If you invested $1 in each, the 3% daily return will earn you more than $47,000 at the end of one year (assuming you reinvest the returns) while the 50% annual return will earn you 50 cents. But EROEI would simply say that one return is 1.03 to 1 and the other is 1.5 to 1. So, if someone says that a process has an EROEI of 1.5, the first question needs to be “Over what time interval?” _RobertRapier

In fact there are many situations where other factors will trump the narrow EROEI consideration. Environmentalists, for example, may disqualify hydroelectric, coal, nuclear, oil sands, and oil shale, simply on environmental concerns -- regardless of EROEI. Utility manager may wish to disqualify wind and solar, based upon their intermittency, expense, requirement for expensive backup facilities, and the fascist way that green governments are forcing such unreliable forms of power production down their throats.

EROEI and Cents per kilowatt-hour

Energy mechanism	EROEI	Cents/kWh
Hydro	11:1 to 267:1	1
Coal	50:1	2 to 4
Oil (Ghawar supergiant field)	100:1
Oil (global average)	19:1
Natural gas	10:1	4 to 7
Wind	18:1	4.5 to 10
Wave	15:1	12
Solar Photovoltaic	3.75:1 to 10:1	21 to 83
Geothermal	2:1 to 13:1	10
Tidal	~ 6:1	10
Tar sands	5.2:1 to 5.8:1
Oil shale	1.5:1 to 4:1
Nuclear	1.1:1 to 15:1	2 to 9
Biodiesel	1.9:1 to 9:1
Solar thermal	1.6:1	6 to 15
Ethanol	0.5:1 to 8:1

Table Source
Imagine you are driving through downtown Santa Fe, running low on fuel, and you see two gasoline stations on opposite sides of the street. One sells fuel for $3.85 a gallon, and the other for $10.99 a gallon. The higher priced fuel boasts an EROEI of 10:1, whereas the lower priced fuel can only claim an EROEI of 3:1. Which fuel will you buy, and on what basis?

In fact, we base our energy decisions on price, not EROEI. The fact that prices can change erratically, while EROEI may stay the same, is not a black mark against economics. It is rather a commentary on how simplistic the concept of EROEI is compared to the complexity of life. Pricing in markets reflects far more dimensions of reality than the deceptively simple calculation of EROEI.

Biodiesel- 3:1
Coal- 1:1 to 10:1
Ethanol- 1.2:1
Natural Gas- 1:1 to 10:1
Hydropower- 10:1
Hydrogen- 0.5:1
Nuclear- 4:1
Oil- 1:1 to 100:1
Oil Sands- 2:1
Solar PV (2) - 1:1 to 10:1
Wind (2) - 3:1 to 20:1 _Energy Bulletin

If you can produce and sell power reliably and profitably over a long period of time using a relatively low cost method of production -- but the EROEI was only 1.5 to 1 -- would you do it? It depends on a lot of things, the EROEI being one of the least important.

EROEI can be important in some contexts, irrelevant in others, and downright misleading in most. I have included three different charts or tables comparing EROEI for various forms of energy production or energy source. Notice that the range of estimates for EROEI is quite wide -- where ranges are provided. These ranges are more honest than a simple point estimate, but even such wide ranges can be made obsolete.

As technologies change, EROEIs necessarily change as well. What was once not economically viable suddenly becomes viable, with the introduction of new technologies. 20 year old EROEIs given for deep sea oil, oil sands, shale oil & gas, methane clathrates are less than meaningless today, and will be even less worth considering in 20 years time.

The EROEIs given for wind energy are particularly misleading, given that wind is not dispatchable, has a capacity factor between 20% and 30% at best, and produces most of its power at non-peak demand times. Wind is not present in sufficient quantities for large areas of the globe. Throw away the EROEI for wind, or fool yourself, as you please.

Other forms of energy suffer from the same problem of EROEI irrelevancy. Solar, for example, is also intermittent, non-dispatchable, not suitable for most parts of the world due to issues of weather and latitude. Despite what solar advocates may say, solar energy is not a good match to peak loads most of the year, for most of the planet. Throw away EROEI for solar.

EROEI is a broad and deceptively simplistic measure of energy efficiency, is perhaps best thought of in connection with the broader concept of entropy in a closed system. In open systems, such as those which humans deal in, EROEI has only limited utility, and is most frequently misused and abused when used.

Cost of Energy Generation per Kilowatt Hour

Generation cost per kilowatt hour:

Natural gas: 3.5-4.5 cents
Coal: 4-5 cents
Hydro: 4 cents
Nuclear: 8 cents
Wind: 7-9 cents*
Solar: 15-50 cents

Question: Why as a country are we investing billions of dollars in the most expensive option (solar) and ignoring the cheapest (natural gas), especially when the U.S. is the "Saudi Arabia of natural gas"? _MJPerry

* Of course wind is not available on demand, and the capacity factor is only between 20% and 30% at best. Most wind occurs at other than peak demand times, making wind less than worthless. In other words, the 7-9 cents per kwh quoted for wind above is horse shit in terms of relevance.

Facts on the cost of generating electricity (per kilowatt hour):

video via CarpeDiem
Of course nuclear would be much less expensive to build and operate without government obstruction in new development, licensing, and permitting.
Carpe DiemAs we see that US import requirements for oil are declining, we should note that US natural gas imports have crashed much faster. If the US government would wake up and remove the impediments to oil drilling in the Gulf of Mexico and open up GTL, CTL, KTL, and other unconventional sources of liquid fuels, the oil import curve would drop even more quickly than it is already.

It is rather obvious that any improvements that occur in the energy picture, will occur in spite of Obama's policies, rather than because of them.

Profits from Canadian Oil Sands Paying for Next-Gen Fusion Research

It is only fitting that old wealth pay for the transformative technologies which will make society better, and create new wealth at the same time. That is what seems to be happening in the advanced biofuels sector -- where old wealth chemical and oil companies are paying for the amazing new technologies of renewable fuels. And it also seems to be happening in the next-generation fusion sector, where wealth being made in Canadian oilsands is supporting avant-garde energy research by General Fusion Inc., of Burnaby, B.C.

General Fusion Inc. of Burnaby, B.C., may look like a sophisticated nuclear research company. It’s also the manifestation of a mid-life crisis. A decade ago, physicist Michel Laberge and engineer-executive Doug Richardson were working together at another B.C. firm making software for print designers. When Laberge turned 40 he came to a realization, says Richardson: “[Michel] didn’t want to help cut down forests anymore.”

Today Laberge is the president and chief technology officer—with Richardson as CEO—of a small company that hopes to become the first to get more energy out of a man-made experimental nuclear fusion reaction than it puts in. General Fusion has raised more than $33 million to date from a mix of government eco-research programs and private investors, including Amazon.com CEO-founder Jeff Bezos.

Among the partners, one stands out as especially counterintuitive: this summer the company received funding from Calgary-based oil sands company Cenovus. In backing fusion research, Cenovus is supporting what could become an alternative to its own business, if fusion generation can ever shed its long-standing pie-in-the-sky status. “For us, the investment isn’t a large amount,” says Dave Hassan, who oversees the Cenovus eco- fund. “For a small research company with cash requirements it’s big.” Fusion is a long shot, Hassan concedes, “but it’s a game changer if it works—carbon-free energy, essentially, forever.” __Macleans

The smarter people among the "old money" are risking at least some of that wealth on the long-shot gambles that threaten to change everything. Of course, these days, the "old money" doesn't have to be very old. Bill Gates, Jeff Bezos, Elon Musk, and Peter Thiel, for example, are generally considered to be "old money" these days. And each of them is pushing world-changing technologies which could change everything.

But even older money -- such as Exxon Mobil, Dow Chemical, Shell Oil, Monsanto, etc -- are investing inways to push the envelope of technology in order to invent and innovate ways out of current and near-term quagmires. That is the way markets and capital are supposed to work, as long as greedy governments and layabout special interests do not destroy the normal mechanisms of capital markets.

If any institution is threatening to destroy the future, it would be big statism in conjunction with its many enablers. If any protest movement actually wanted to make a difference, in terms of making the world better, that would be the place to start.

Russia's Arctic Oil Rush May Run Into Asia's Coming Econ-Crash

Within the next year, the Kremlin is expected to make its claim to the United Nations in a bold move to annex about 380,000 square miles of the internationally owned Arctic to Russian control. At stake is an estimated one-quarter of all the world's untapped hydrocarbon reserves, abundant fisheries, and a freshly opened route that will cut nearly a third off the shipping time from Asia to Europe.

The global Arctic scramble kicked off in 2007 when Russian explorer Artur Chilingarov planted his country's flag beneath the North Pole. "The Arctic is Russian," he said. "Now we must prove the North Pole is an extension of the Russian landmass."

In July, the Russian ship Akademik Fyodorov set off, accompanied by the giant nuclear-powered icebreaker, to complete undersea mapping to show that the Siberian continental shelf connects to underwater Arctic ridges, making Russia eligible to stake a claim. Around the same time, Defense Minister Anatoly Serdyukov announced the creation of an Arctic military force tasked with backing up Moscow's bid. _CSMonitor

Russia certainly sounds serious about this Arctic seafloor grab. But will there be enough global demand for oil remaining -- once these expensive arctic wells come in -- to pay back the huge investment which will be required to hold and develop this territory?

The future of the great Chindian economic boom may not be as exalted as conventional forecasters have thought. North American and European economies have been cutting back on oil demand, and a lot of analysts are beginning to think that the emerging economies may follow suit -- at least until they can work out the troubling bugs in their systems.

There is bleaker demand outlook for next year, according to recent reports by Opec and the International Energy Association, the organisation based in Paris that represents 28 major consuming nations.

Some fear oil prices could to sink as far as during the 2008 downturn, when Brent, the European benchmark, dipped to $36 a barrel from a high of $147.

"The prices could very easily go into free fall," says Jason Schenker, the president of Prestige Economics in Texas. "A lot of oil producers are going to feel a lot of pain." _thenational

If conventional oil producers are due to feel a lot of pain in the not-so-distant-future, imagine the pain which Russia will feel -- if it overextends itself by trying to develop the deep energy resources of an ice-bound Arctic? Russia already needs oil prices of $125 a barrel just to balance the budget. If the nation goes all-out to seize and develop Arctic energy resources, the budgetary requirement for oil price could go up to $200 a barrel.

Russia is a sick and dying nation, with sky-high rates of suicide, alcoholism, HIV, Tuberculosis, depression, crime, poverty, child abuse etc. and quite low birthrates among the core Russian population. The core Russian population is shrinking and being slowly replaced by outsiders with no loyalty to the Russian nation.

Russia will not be able to hold onto Siberia for many more decades. How much less will Russia be able to keep Arctic developments profitable and keep Arctic shipping lanes open -- in the face of a coming global cooling?

Putin is playing a fool's game, a Potemkin game of one - upmanship. As long as he is playing against Obama, his bluffs are likely to succeed. But if he ever plays against a real opponent, Russia and Russians will suffer badly.

High Oil Prices are Not as High as Predicted

A number of reputable analysts predicted that oil would be over $150 a barrel this year or early next, including Jim Rogers, Barrons, etc etc etc. And yet oil prices seem reluctant to go too far above $100 a barrel despite severe production cutbacks in Yemen and Libya. Perhaps someone learned a lesson from the great demand destruction of 2008?

Geoffrey Styles takes a penetrating look at the recent decision to release oil from strategic reserves. Worth a look:

The market's tepid response to the SPR release suggests that oil prices have been driven up by more than just speculators. Speculation may be playing a role, but it's more like the head on a glass of beer. [Al Fin comment: The froth on a glass of beer can occupy as much or more than 1/3 the total volume depending on how the beer is poured...] Beneath that froth lies the robust demand growth in the developing world, which has pushed global oil consumption to a record level of 89 million bbl/day this year. On the supply side, some point to incipient Peak Oil, but characterizing the crisis we're in doesn't require a grand theory. In addition to the curtailment of production from places like Libya and Yemen, and OPEC's desire to keep a lid on output to preserve their revenues, there's a fundamental mismatch between the companies that have the capital and the desire to invest in new production, and the willingness of some governments to grant access to the resources, whether in the Middle East or the US. All of this is compounded by the inherent time lags in resource development, which can range from 5-10 years, depending on the technology and permits required.

As different as the causes and symptoms of this crisis are from those of the 1970s, the broad outline of solutions remains quite similar: Reduce demand, increase supplies, and diversify our sources of energy. We have more and better options than in 1979, but still no miracle cures. _GS

Styles makes some important points in this short article. It takes from 5-10 years for the production side to respond to rapid runups in prices. The 2007-2008 runup in oil prices would have brought a much stronger response by now if the floor hadn't dropped out from under prices at the end of 2008. For a sustained response, you need a sustained price plateau.

Styles also points out that it is demand for oil which is in the price driver's seat. A lot of things can happen to alter demand for oil.

OPEC is greedy and needy, as is Russia. It is not beyond Saudi Arabia to drag its heels on expensive upgrades in production capacity, in order to enjoy higher oil prices today. Russia is certainly dragging its heels on production upgrades and oil field maintenance, but that is due as much to malignant Oblomovism and corruption as it is out of a need for higher oil prices to balance the budget.

Political corruption and greed are causing oil prices to be higher, as is political turmoil in Yemen and Libya. But lefty-Luddite Green dieoff.orgiasm in the US and Europe are likewise causing a political hike in oil and energy prices. Obama's ill-advised moratorium and slowdown of Gulf of Mexico exploration and drilling, is just one of many examples of an overall policy of energy starvation coming from the US and European governments. Anti nuclear policies are another example of the destructive influence of faux environmental politics on energy supplies.

MJPerry provides a couple of quotations which are apropos to the current situation.

The only peak oil you will likely see is political peak oil caused by government policy, greed, corruption, and war. The only true scarcity that exists in the human world is the scarcity of human intelligence, creativity, inventiveness, ingenuity, and vision.

Malthusian Illiteracy and Peak Oil

Global economy optimists however say that "Malthusian illiteracy" lurks behind remaining adherents of Peak Oil theory - which basically says conventional oil production will stagnate and fall but demand will go on growing. _MarketOracle

As knowledgeable analysts come to understand that oil demand, rather than oil supply, is currently in the driver's seat, some of the impetus behind the peak oil panic has subsided. And yet the "Malthusian Impulse" continues to drive many observers, against their more rational proclivities. Still, global hydrocarban reserves continue to grow, year after year, and oil demand is slated to decrease in time.

New sources for transport fuels are likely to come from many directions, including new gas-to-liquids (GTL) technologies. Oxford Catalyst's microchannel GTL technology is very much in demand, as are other new varieties of GTL technologies. The market for GTL fuels may be more than 20 million barrels per day! Imagine the impact of that huge new supply on the global oil market. (Note that approximately between 5 and 10 million barrels per day could be produced via GTL from currently flared gas alone. Stranded gas could double that number.) More information at this PDF white paper download from Velocys, creator of the Oxford Catalysts microchannel technology.

A more conventional source for GTL transport fuels is the large scale technology championed by Shell.

In 2011, Shell began shipments from its Pearl GTL project in Qatar...The project is able to produce 140,000 b/d of fuel and 120,000 b/d of ethane and condensates... _Petroleum Economist

And that is just the beginning. As long as the huge price spread between the cost of natural gas and the cost of crude oil remains, more and more projects will kick in to take advantage of this "easy money."

Second and third generation biofuels from biomass technologies are beginning to come on line, slowly. Advanced biofuels and microbial fuels technologies are not likely to take an appreciable bite out of crude oil demand for another 5 or 10 years. As long as natural gas prices stay low, only the most efficient biofuels projects will be able to compete in the liquid fuels markets without government subsidies. But by the year 2030 if the technology continues to develop, the writing will be on the wall. This is a biological world, after all.

Advanced nuclear power technologies are likely to aid the development of new fuels technologies of all kinds, supplying safe and abundant power and heat for a multitude of energy development projects from oil sands to oil shales to biomass and aquaculture projects in cold climates, irrigation and desalination of saltwater in arid climates etc etc.

Other factors leading to a decreased demand for crude oil includes the increasing use of both natural gas and biomass as feedstock for the vast chemicals industry -- an industrial sector previously dependent upon petroleum for feedstock. (see Al Fin Energy blog for much more)

The ongoing global economic downturn and demand destruction extends from Europe to Japan to the US, and is beginning to put stress on the Chinese and Indian economies -- despite all the rah! rah! hype about the coming age of the Chindian global economy. Many nations which have maintained hefty consumer subsidies for transport fuels are being forced to reduce the subisidies. More downward pressure on demand.

Malthusian theories are appealing in their simplicity, and for their false sense of predictive power. And yet the never-ending and never-fulfilled Malthusian predictions of doom ignore the most salient and disruptive human technology of all -- the goal-oriented innovativeness of the human mind.

Despite the best efforts of energy-starvationists in the Obama administration, in the EU bureaucracy, in national bureaucracies of EU nations and advanced nations around the globe -- the prospects for abundant energy and fuels in the future are quite good, as long as the clowns in power do not destroy the economies they oversee.

If you have abundant clean energy and fuels, everything else is doable.

Cross-posted from Al Fin blog

Large, Lucrative Markets for n-Butanol and iso-Butanol from Biomass

Cobalt and others [ed: including Gevo and OPX] are hedging their bets. In addition to fuels, companies are also developing other products, such as biochemicals. Those products have higher price points that could create economic stability for the companies long before any big investments in biofuel production take place, Wilson said.

"This is a little company. Why take a molecule and turn it into $2 for fuels when you can turn it into a $5 chemical?" he said. _PaloAltoOnline

Gevo SEC Filing
Gevo Inc. is powering ahead with its renewable isobutanol product. Gevo's latest effort is a partnership with Mustang Engineering, LP, to produce jet fuel using isobutanol as feedstock.

Gevo, Inc., a renewable chemicals and advanced biofuels company, signed an engineering and consulting agreement with Mustang Engineering, LP for the conversion of Gevo’s renewable isobutanol to biojet fuel. This effort will focus on the downstream processing of isobutanol to paraffinic kerosene (jet fuel) for jet engine testing, airline suitability flights and advancing commercial deployment. (Earlier post.)

Gevo also announced that its “fit for purpose” testing at the Air Force Research Laboratory continues with a final report expected in June. Once completed successfully, the company will initiate jet engine testing with engine manufacturers. _GCC

Gevo competitor Cobalt Biofuels produces bio n-butanol (normal butanol), which is a straight chain 4 carbon alcohol, rather than the branched chain alcohol isobutanol, made by Gevo. Cobalt claims that its n-butanol product has access to even larger markets than does Gevo's isobutanol (see image at top).

The advantage of normal butanol is that you can take normal and isomerize it, but you can’t take an isomer and normalize it. So, with n-butanol, you have advantages as a platform for a wider variety of chemicals.

"For us, we like wood, bagasse and glycerol as feedstocks. We see costs there in the $60 per ton for wood biomass, $40 for bagasse and $20 for glycerol. Those change, but there's a significant enduring advantage compared to the cost of sugarcane or corn, which are well over $200 per ton. That’s lower than the cost of crude oil, but when you take into account the amount of energy you can access in corn or cane, the cost advantage can be minimal unless you have very high oil prices sustained for a very long time.


"The markets, for us," said Wilson, "are the $7 billion n-butanol market, for acetates, acrylates, and glycerol esters, where the current pricing is $2300 per metric ton. Compare that to diesel or gasoline, both under $1000 per ton. Also, we have the OXO derivatives, such as butyric acid or 2-ethyl hexanol. That's a $9 billion market trading at $2600 per ton. There are also the butene derivatives, such as isobutene, a $17 billion markt trading at between $1200 and $1500 per metric ton. There are paints, solvents, plasticizers, paint dyes, stabilizers, preservatives and more in those markets.

"The markets are very small, compared to the fuels markets, where you have $250 billion in jet fuel, $980 billion for gasoline and $1040 for diesel. Those are a great story, but its hard to make money, and the first goal of any company should be to make money. The cost of making petroleum-based butanol is around $1230 per metric ton. We can make it from corn at $1200 per ton, cane at $1170 per ton. But when we look at wood, our cost drops to $800 per ton; or $650 per ton from bagasse, or $380 from glycerol. _LowCarbonEconomy

OPX Biotechnologies has partnered with Dow Chemicals to produce specialty chemical products from biomass, locating their facility at the Dow plant to facilitate cost savings.

Over at OPX Bio, the market is acrylic acid, which is now at $8 billion and growing 3 to 4 percent per year. Acrylic acid is a key chemical building block used in a wide range of consumer goods including paints, adhesives, diapers and detergents. Later on, the company hopes to commercialize a new technology, converting syngas to fatty acid esters, in work funded by ARPA-E. Other partners will be signed by OPX to work that technology up to scale.

. Earlier this week, Dow Chemical and OPXBIO announced that the two companies are collaborating to develop an industrial scale process for the production of bio-based acrylic acid from renewable feedstocks.

Both CEOs agree that the path to cost competitive advanced biofuels runs first through the garden of renewable chemicals. Not only because they are sold at higher prices. They are made in smaller volumes. That means smaller commercial scale plants, lower capital costs, and faster returns for investors for who, time is money. Where fuel-centric companies are raising hundreds of millions for their commercial-scale plants, OPX, for example, is raising just $35 million in its series C round, which takes the company through completion of its demonstration-scale plant.

But there's one other advantage. That's the breadth of technical collaboration and opportunities to share cost on critical technologies. "That's where the Dow partnership comes in, said Eggert. "They are the largest acrylic acid producer from propylene, and have very strong chemical foundational knowledge, and the relationships in place for market development. Here's a benefit to us: neither Dow nor we feel that we need to raise and invest for the consuruction of a demon plant. Instead, we'll use standard contract fermenters to make hydroxypropionic acid, (3-HP), then Dow already has the bioacrylic conversion from 3-HP at pilot and demo scale."

Scale? For OPX, their 100 million pounds (equivalent of 14 million gallons) biorefinery is expected to be cost-competitive with 350 million pound propylene-based systems. The market price? 70 cents per pound, or right on $5 per gallon. _LowCarbonEconomy

You can see that the market for fuels is much larger than the market for chemicals, but that the profit potential for chemicals is much higher. A biofuels company can become profitable more quickly and at smaller scale -- with less debt -- by exploiting the renewable chemicals market first. This allows the company to develop more efficient, streamlined, and economical approaches to the higher-volume fuels markets without bleeding capital in the process.