This has been an interesting week on the energy front.
The price of energy has jumped due to a confluence of temporary events including:
- unusually cold weather including the week's major storm across the US which left only one state untouched by snow;
- record flooding in Australia which has crimped its coal production and jeopardized its major customer, China;
- a leak and temporary shut-down of the Alaska Pipeline;
- an unseasonal persistent increase in the price of gasoline, and the impact of energy costs in general on the consumer price index.
These were the 'tactical' issues on the energy front. Some of the subtler ones are more strategic, and of greater long term concern.
Take, for example, the Alaska pipeline. CNBC's Scott Cohn reported that this week's shutdown presages a far larger issue of an aging infrastructure that may face escalating maintenance in the face of declining volumes that may reach the point of negative economics and the need to decommission the pipleline, unless....new fields are opened off shore and in the northern federally resricted preserves. The pipeline is estimated to have seven years of engineering and economic useful life at the current rate of declining flow. Coincidentally, it would take six to eight years to bring on new reserves to pump into it. So the decision to proceed in order to preserve the pipeline from decommissioning needs to be made, like....Monday morning?!
A decision to proceed would of course immensely please the Drill-Baby-Drill crowd, not least of whom would be resident Alaskans who would face a substantial hit to the State's economy with a shut-down of the pipeline in seven or eight years. But expanded drilling would be at best an intermediate term salvation, and doesn't address the ultimate problem that transcends Alaska: we're running out of oil...
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...Although the oil and gas markets would appear not to share that perspective. There are muddled expectations about the trajectories of oil and gas prices. Some believe that oil and gas should be tracking together. Others believe that gas will remain depressed for the next five to ten years due to a glut of gas in the US, and a tightening of oil supplies in the face of growing demand worldwide, if not in the US where the projected rise of gas to $3.75 a gallon by spring conjures flash-backs to $4/gallon gas in July 2008 and its impact on the economy.
Two interesting insights emanate from following the various discussions on oil and gas. There is one camp that seems to look simplistically at oil and natural gas as if they are interchangeable commodities, when in fact they are two aggregate commodities that comprise multiple product classes for which there is not one-for-one equivalence. The other camp understands this distinction, and the profound effect that oil has on the infrastructure and resource profile of our economy. It also recognizes that, if natural gas is to substitute to some degree for oil over the intermediate term, the energy infrastructure is going to have to evolve to accomodate the transition. But there appears to be no concern about how that will happen in an ordely way without 'breaking the china'. No doubt the "Invisible Hand" of Free Enterprise will make it all good, at a premium appropriate to the risks involved, which will no doubt have escalated by virtue of communal procrastination.
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Speaking of China brings to mind the report in the New York Times of Evergreen Solar's move to China. It seems that Evergreen Solar is abandoning its Massachussetts operation in order to produce solar panels in cost-competitive China, which has provided financial inducements in addition to everyday-low-priced labor; inducements that have made it similarly successful in the wind turbin business. Of course, there are wimperings on this side of the Pacific about possibilities of World Trade Organization infractions, and acknowledgments that other countries 'fear' the same manipulation of the renewables market and all its ancilliaries (rare earths, etc.) by the Chinese government. But somehow, we never seem to coalesce into a sufficiently powerful international community to convince China that such actions on its part can and will have decidedly negative consequences for China in the near term.
Why can't we play the game by China's rules and beat them at it. For example, if we apply the concept of National Security, and the logic of Gabby Giffords' question to General Petreus regarding renewable energy supplies in Afghanistan to energy demands in federal military and civilian facilities in the US, surely we could underwrite the renewables industry in a reliable long term manner. Then expand the concept to state and local governments where fleets of first responder vehicles and facilities provide another critical mass (retrofits for police and fire stations, town hall command centers, public works garages, schools serving as emergency shelters) for market deployment. And, let us not forget our utilities and municipal and regional transportation services as critical components in the National Security / emergency preparedness grid. Once we have pushed the technology down through this grid structure, it should be able to achieve critical mass and traction in private applications.
Since these elements are vital to National Security, be it in response to man-made or natural disasters, we must also consider the reliability of supply. Since China's vulnerablility to civil unrest as a result of its human rights posture, its lack of transparency in its financial structure and soundness (and we certainly understand the consequences of that from our experience much closer to home), and its vulnerability to energy shortfalls elevate its risk profile as a supplier, we must look closer to home to assure reliable supply of critical infrastructure. Sorry, Mate!
Of course, there is one glaring flaw in this scenario, other than China throwing one of its adolescent temper tantrums. Our own Republican Patriots in Congress would immediately blast it as a socialistic industrial policy power grab, even as they huddle with lobbyists to add all the candy of a military procurement appropriation.
The bottom line being that as we enter this critical long term transitional stage in the energy paradigm, there is no evidence of equally critical long term planning and communication by national leadership--private sector or public.
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Fortunately(?) we are not alone in the practice of magical thinking. Across the Pond, David Cameron is petitioning Santa Claus at his OPEC winter office to increase production in order to offset recent price rises which have crimped the British style of living. Britain, more vulnerable than the US to energy supply shortages and in production decline since 1999, still is reluctant at official levels to address the subject of Peak Oil head-on and propose credible strategies. His plea to OPEC rings as pitifully as Alaskans' clamour for more drilling to keep the good times rolling just a little bit longer, without any evidence of understanding that the planning for the follow-on act must begin....now.
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Then there's BP, Beyond Plausibility. Proving that it will sleep with just about anybody, BP has announced that it's climbing into bed with Rosneft, doing a stock swap and sharing the joys of exploration in the Arctic. Then again, so have most of the other majors. Obviously this was low hanging fruit for BP in a world of infinite exploration opportunities. However, it might want to consult with colleagues at Shell for insights from their joint venture with the Russians in the Sakalin Island project. BP may also want to contact Mr. Khodorkovsky for further intelligence on the business environment.
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And now, a word from our sponsors at Cimate Change. Having survived two major snow storms in Northeast, the last of which we had the pleasure of sharing with the rest of the US, I anticipate the usual drivle from Climate Change agnostics about how the cold snap and heavy snows down to Atlanta disprove the hypothesis of Climate Change. They will conveniently ignore the observation I share with persons more professionally atuned than myself that over the past two years the weather patterns over North America and Europe seem to have taken more of a north/south orientation than the more traditional west/east prevailing wind paradigm. Cold air from the North mixing with warmer, super moist air from the south does indeed make a potent winter combination, but not a refutation of Climate Change.
And three simultaneous flooding disasters in Australia, Brazil and Sri Lanka, following previous flooding in Germany, Britain, Pakistan, California, ...but let's not rush to judgement. Oh, and those wildfires in Russia this summer? Just a one-off!
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And to tie this blog with a nice, all encompassing bow, the interplay between climate and energy is worth noting. The changing weather patterns and the flooding in Australia have impacted coal prices. The changing weather patterns and the extreme cold in northern hemisphere have upped demand and energy prices. Energy constraints will hit us harder and faster than climate change, but climate change will mutiply the impacts in the long term, and both will have cascading impacts throughout our civilized existence in ways that we have not begun to contemplate at the community level, much less address at the public sector planning level.
Everything is connected. We need to understand those connections.
Onward.
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