Jun

17

John Tierney, in another great article in Science Times. "The Future is Now? Pretty Soon, at Least", includes energy predictions from scientist Ray Kurzweil, "Solar power may look terribly uneconomical at the moment, but with the exponential progress being made in nanoengineering, Dr. Kurzweil calculates that it'll be cost-competitive with fossil fuels in just five years, and that within 20 years all our energy will come from clean sources."

We have heard similar predictions before, but now oil over $100 a barrel is deploying billions of smart investment dollars into both alternative energy and new oil exploration and drilling. Billions of dumb investment dollars are flowing too, with government subsidies and tax credits pushing wind power, ethanol, and other projects that distort markets and wasting scarce resources.

Solar and hydro power are another matter. Some solar installations spend millions to physically move solar panels to follow the sun across the sky. But new solar membranes will grab all solar radiation from all angles and wavelengths, transforming them to electricity. The race along dozens of separate solar technology pathways will decentralize and localize solar power. Just as computing innovations brought low-cost, high-power computers into the home (and five into my home), low-cost, high-efficiency solar technologies will feed better, cleaner power into home electronics and soon, into plug-in hybrids and all-electric cars.

Just five years? Well, five years for solar energy to be cost competitive. Another five to ten for wide distribution of local and home-based solar technologies and significant percentages of plug-in cars. I live in Seattle, and if the climate here keeps cooling, solar for us will be further in the future. (It snowed here last week!)

Bloomberg reports yet another large oil discovery in Brazil. With the Saudi's agreement to increase output, new output due soon from Iraq, and increases from many other sources, the question is whether deep and expensive oil from Brazil will come on-stream in time to sell at high prices. The answer may be yes, since expensive and sophisticated solar, hydro, and nuclear installations that will be widespread in the U.S., Japan, and Western Europe may stay out-of-reach for most of China, India, and Latin America.

But once the billions of dollars have been spent on deep sea drilling and build-out of infrastructure, well, these sunk costs will be twice sunk. Just as billions spent to build homes now empty, or billions spent earlier on fiber-optic cables long dark, this boom-time infrastructure can serve future consumers, if not current investors.

My short-term prediction is half-price oil within six months. I figure the current President or the next is likely to release Strategic Oil Reserves after announcing we have an extra supply, thanks to major foreign policy successes. The current President can claim stability in Iraq makes the world safer and less in need or extra-large U.S. oil reserves. The next President can claim that vast reserves of high-quality oil available free to the military would encourages foreign adventures. Plus pundits can claim the reserve was a plot by a President too-friendly with oil companies, to help his oil buddies. Whatever cover is offered, releasing a hundred million barrels would push prices down and make politicians popular. The strategy may be to wait until new drilling is approved in the U.S. and off-shore, before releasing reserves that in a few years, with higher domestic supplies, will seem as necessary.

As for hydro power, the key insight is that water is a lot heavier than air, and flows downhill all the time while wind blows only some of the time. Unfortunately, private property rights don't exist for U.S. rivers and streams. State and Federal government claim authority to mismanage these resources, so private firms are both unable to restore salmon runs and habitats, and unable to generate safe and clean power from fish-friendly, in-stream turbines.

HydroVolts, a "Micro-Hydropower" company, offers "Hydrokinetic Turbines" for generating energy from modest stream and irrigation flows (the only flows sometimes privately managed). The turbines float from anchors and generate power from river or tidal flows. A proposed 16 MW tidal power project for Tacoma Narrows was not approved, but the technology works well for smaller rivers and streams. Right now though, lack of property rights frustrate most efforts to deploy this technology.

At least with solar power, government are less able to regulate or block the sun (much to the the dismay of candle makers both in France and the U.S.).


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9 Comments so far

  1. Greg Rehmke on June 17, 2008 9:50 pm

    I meant to write “less necessary” here: “The strategy may be to wait until new drilling is approved in the U.S. and off-shore, before releasing reserves that in a few years, with higher domestic supplies, will seem less necessary.”

    The point is that once new drilling is allowed offshore and in Alaska, these addition reserves and flows can substitute for some of the SPR.

  2. Andrew McCauley on June 18, 2008 1:06 am

    An article in the May 31st 2008 edition of The Economist titled “Recoil” also highlights the potential for change with respect to the use of oil. The last two sentences from the article are interesting.

    “The first two oil shocks banished oil from power generation. How fitting if the third finished the job and began to free transport from oil’s century long monopoly.”

  3. Lon Evans on June 18, 2008 6:28 am

    Dear Mr. Rehmke,

    My take on Mr. Bush’s fixation with stockpiling the Strategic Oil Reserves (he’s looking to double them) is one requiring that the man, for once, is exhibiting some inkling of history. Recall that the oil embargo of ‘73′ resulted due to our support for Israel during the Yom Kippur War.

    Apparently, the Nixon administration eventually found itself prostrated before the Saudis as jet fuel was becoming a bit scarce in Vietnam.

    Imagine the inconvenience should a bombing (nuking?) of Iranian territory (either by the U.S. or our ‘allies,’ the Israelis) realize a similarly led Arab deprivation. Iraq just might be that much more a mess with U.S. fighter jets grounded for lack of fuel.

    Thus stockpiling oil (sweet and light) seems to make sense given our Commander In Chief’s chicken s**t bellicosity.

    lon

  4. Vangel Vesovski on June 18, 2008 7:51 am

    There is no doubt that over the short term we could see a contraction in the price of oil for a few days or weeks but the problem is depletion of existing fields. These fields require billions in new investment each year to keep their production from falling by more than 5% per year. That means that we will need hundreds of billions of investment just to replace the 4.2 mbpd of production that will be lost this year alone.

    The new discoveries are much smaller fields that will take many years to bring on line at the cost of hundreds of billions of more investment. They certainly won’t come on line if your line of thinking above is correct, which means that they will not be a new source of supply that helps to drive prices lower.

    If we take that line of reasoning further, why would any producer spend money to keep pushing older fields by using water drives and other expensive methods when it makes more sense to let supply decline and use the cash elsewhere? If we were to stop investing in secondary and tertiary recovery methods we would see declines of around 20% per year, which would mean 17 mbpd less production.

    From what I see your assumptions are flawed. The problem is supply and there has been nothing to suggest that it is about to go away any time soon. Instead of talking about a 50% decline in prices I suggest that a 50% increase may be a better bet.

  5. Anatoly Veltman on June 18, 2008 9:51 am

    Noticing MF below 9 (from 13 Tue!), all banks, GM, etc. on new lows - my take is that good old economics are finally taking hold… There will be plenty done vs. near-$140 oil

  6. Gregory Rehmke on June 18, 2008 10:29 am

    Regarding potential supply constraints, someone noted that China’s oil consumption increases had been, until recently, matched barrel for barrel by Russia’s increased production. In the last few years Russia ran out of economic freedom rather than new technology. The government clamped down on western and westernized firms and apparently raised taxes. Production then flatlined.

    Had Iraq gone better, which it could have, political stability five years ago would have allowed significant oil production increases, plus major exploration and drilling for future increases. If Iran had a less-crazy leader and less-corrupt military, I assume oil would increase there. Nigeria and Angola are deeply corrupt and dangerous places, slowing new exploration and production. And government-owned oil production and exploration in Mexico and Venezuela are hobbled.

    Each of these major producers is, I think, outside the realm of requiring enormous capital infusions just to keep production from declining. Modest capital deployment with market-driven exploration would, in each country, boost production significantly.

    Maybe it is true that even if any or all of these countries had allowed more freedom, markets, and technology, their fields would have declined as fast, and no new fields would have been discovered or developed. But that seems unlikely. We have Brazil as a counter-example. A partially-privatized national oil company, and some competition in exploration, and we have three stunningly large discoveries…so far.

    And the point of my post was that, regardless of future supply, demand for oil in developed countries will likely fall rapidly over the next decade. The recent run-up in prices, along with claims prices will stay up, has attracted thousands of minds and billions of investment dollars to alternative energy sources, and into automotive technology that will plug future cars into the non-oil powered grid.

  7. George Parkanyi on June 19, 2008 12:20 pm

    Well Greg,

    Since 10% of my portfolio is now short oil and natural gas through 2x ETFs, I like YOUR story the best. :)

    Cheers,
    George

  8. Cole Walton on June 19, 2008 12:46 pm

    Why are you so against wind energy? You do not give any support to your dissmissive posture. Also, one of the key problems with wind and hydroelectrics is transportation of the energy once it is produced. Do you forsee a solution to this problem?

  9. Gregory Rehmke on June 19, 2008 10:27 pm

    Why so down on wind…?

    Well it was a short post… I have been invited to do more research on my water energy claim for a magazine article. My general theme is that subsidies disrupt and distort technology development. Government disrupted and distorted Colorado oil shale development in the 1970s with both subsidies and restrictive regulations (I remember reading about these regulations is an old issue of the Journal of Libertarian Studies on the shelf in the guest bedroom I was staying in at Victor’s house some years ago).

    Similarly subsidies for wind power mean most wind farms are in part farming the subsidies. I ask if wind power would prosper without subsidies, as in-stream turbines could if they could be legally deployed, and if the generated electricity could be legally sold.

    A potential selling point for both wind power and solar power are the direct benefits they can offer people. A recent NYT article told of a couple in Maine whose beautiful home in a beautiful setting is made mostly miserable by fierce and steady winds. So they put up a windmill in hopes of gathering both monetary and psychological benefit from the irksome wind. In a windmill market without subsidies, perhaps more investment dollars would flow into wind technologies that significantly reduced unpleasant winds in scenic locations. (I went to college at Central Washington Univ. in Ellensburg, WA, a place made miserable by steady winds.)

    For future solar technology, we have whole cities made miserable each summer by too much sunlight (Houston, for example). Solar coating across city and suburban roofs, windows, lawns and roads could absorb a significant percentage of summer heat and generate energy while they cool the air. Maybe a bubble floated over an entire subdivision could both power all the homes and make the neighborhood livable in the summer (in Houston parents keep their kids inside in the summer, and let them play outside outside only in other times). Now, these may be half-baked ideas, but they look at technologies that search for direct benefits to people and generate energy as a side benefit.

    But, as I say, I haven’t done enough research. The starting point might be to compare the potential energy in a 10-20 mile per hour breeze to the energy in a 5-10 mph flow of water downstream.

    I agree with the energy transportation issue. It is expensive to transmit power, and much is lost. And I don’t know how widespread locations are that offer either steady breezes for wind power or steady flows for in-stream hydro.

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