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Religion, structural changes in the oil Industry and the price of oil and gasoline

Oil barrelAmericans — in light of the decline in oil and gas prices — don’t take happy selfies just yet! Clearly, the recent movement of oil prices per barrel below $80 and the cost of gasoline at the pump below $3 a gallon lend cause for, at least strategically, repressed joy among particularly low-income consumers, many of whose budgets for holiday shopping have been expanded near 10 percent. Retail stores are expressing their commitment to the holiday by beginning Christmas sales pre-Thanksgiving. Sure, sales profits were involved in their decisions, once it appeared to them that lower gas prices were here to stay, at least for a while. But don’t be cynical; I am sure the spirit moved them to play carols as background music and to see if in-store decorations made it easier for shoppers to get by headlines of war, climate change and other negative stuff and into, well yes, a buying mood. If retail sales exceed last year’s and GNP is positively affected, it will provide testimony and reaffirm belief that God is on America and the free market’s side, or at least the side of shopping malls and maybe even downtowns. Religious conversions might be up this year…all because of lower costs of gasoline at the pump. The power of the pump!

But, holy Moses (I am ecumenical), we really haven’t been taken across the newly replenished figurative Red Sea yet. There are road signs suggesting we won’t get there, partly because of the historical and current behavior of the oil industry. Why do I say this?

If history is prologue, EIA’s recent projections related to the continued decline of oil and gasoline prices will undergo revisions relatively soon, maybe in 6 months to a year or so. I suspect they will reflect the agency’s long-held view that prices will escalate higher during this and the next decade. Tension in the Middle East, a Saudi/OPEC change of heart on keeping oil prices low, a healthier U.S. economy, continued demand from Asia (particularly China), slower U.S. oil shale well development as well as higher drilling costs and the relatively short productive life span of tight oil wells, and more rigorous state environmental as well as fracking policies, will likely generate a hike in oil and gasoline prices. Owners, who were recently motivated to buy gas-guzzling vehicles because of low gas prices, once again, may soon find it increasingly expensive to travel on highways built by earthlings.

Forget the alternative; that is, like Moses, going to the Promised Land on a highway created by a power greater than your friendly contractor and with access to cheap gas to boot. Moses was lucky he got through in time and his costs were marginal. He was probably pushed by favorable tides and friendly winds. The wonderful Godly thing! He and his colleagues secured low costs and quick trips through the parting waters.

Added to the by-now conventional litany concerning variables affecting the short- and long-term cost and price of gasoline and oil (described in the preceding paragraph), will likely be the possible structural changes that might take place in the oil industry. If they occur, it will lead to higher costs and prices. Indeed, some are already occurring. Halliburton, one of the sinners in Iraq concerning overpricing services and other borderline practices (motivated by the fear of lower gas prices), has succeeded in taking over Baker Hughes for near $35 billion. If approved by U.S. regulators, the combined company will control approximately 30 percent of the oil and gas services market. According to experts, the new entity could capture near 40 percent relatively quickly. Sounds like a perfect case for anti-trust folks or, if not, higher oil and gas costs for consumers.

Several experts believe that if low gas prices continue, oil companies will examine other profit-making, competition-limiting and price-raising activities, including further mergers and acquisitions. Some bright iconoclasts among them even suggest that companies may try to develop and produce alternative fuels.

Amen! Nirvana! Perhaps someday oil companies will push for an Open Fuels Law, conversion of cars to flex-fuel vehicles and competition at the pump…if they can make a buck or two. Maybe they will repent for past monopolistic practices. But don’t hold your breath! Opportunity costing for oil companies is complex and unlikely to quickly breed such public-interest related decisions. Happy Thanksgiving!

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Bipolar, manic depressive and natural gas

Although a bit bipolar concerning the data, the editors of Real Clear Energy published a useful graph and narrative on Tuesday. It showed the slow, steady increase of natural gas use in the U.S. over the past few years. The graph and narrative noted a 33% increase in vehicle fuel consumption since 2007. More good news for those who support natural gas, given its ability to reduce GHG emissions: the editors reported that the T. Boone Pickens’ “Natural Gas Highway” appears to offer hope that the trend will continue upward. Indeed, the EIA indicates that natural gas will increasingly substitute for gasoline in the truck, bus and rail freight sectors. So much good news! However, don’t open the champagne yet!

Now the bad news! Despite the increasing popularity of natural gas, over the next 25 years, the editors suggest it will only replace or displace 3% of the nation’s oil budget. What a bummer! But, paraphrasing Frank Sinatra (the noted oil man turned singer), when you have “your chin on the ground, there’s a lot to be learned, so look around… [we’ve] got high hopes…all problems just a toy balloon, they’ll be bursted soon, they’re just bound to go pop”…cause we’ve got high hopes.

Thanks Frank. Now, back to the editors. They correctly advised their readers that we, as a nation, will “never make any real progress until we start using liquid methanol and ethanol in regular passenger cars.” I assume the editors mean that we should increase the amount of ethanol in our cars. All of us now use at least 10% ethanol when we fill-er-up. Some of us, if we are lucky and have a flex-fuel vehicle (over 17 million of us do, but likely don’t know it), can use E15 and E85, assuming we can find a station with the necessary pumps. With the exception of a few states, such pumps are relatively few and far between. Sales of E15 and E85 constitute only a small share of the fuel market.

Why? Neither ethanol not methanol is a perfect fuel. Yet, study after study indicates that, on most dimensions, they are better than gasoline. Both are cheaper, both are generally environmentally superior and both emit less GHG emissions. Competition with gasoline from both would allow the U.S. to become less dependent on oil imports and add to our nation’s security. Over time, opening fuel markets to consumers by adding choice would likely help stabilize, and even reduce, the price of gasoline and limit its frequent nonstructural cycles.

As a former dean of a major School of Public Policy, I would gladly supervise a Ph.D. thesis or an “independent” student study concerning consumer decisions relative to the purchase of gasoline vs. replacement fuels, particularly ethanol and the acquisition of new or the conversion of existing cars to FFV status. The student could start off with some reasonable, contextual assumptions and/or hypotheses. For example:

1. Consumer decisions about alternative fuels often must be speculative, given the fact that oil companies, most times, prohibit their franchises from adding a replacement fuel pump or require them to put the pump in a hidden sidebar location.

2. There are sufficient anecdotes that price management is also a barrier to the development of competitive fuel markets. Data descriptive of the life cycle of ethanol suggests that costs for production, distribution and sales would permit ethanol to compete well, price-wise, with gas. However, anecdotes suggest that producers, distributors, blenders and retail stations — including independent stations — often raise or lower the price of gasoline relative to replacement fuels, which often impedes real consumer choice. There are no angels here. Retail stations carrying E85 have been known to raise its price to capture extra revenue.

3. Although the gap is narrowing in light of technological improvements, replacement fuels, including ethanol, get less mileage per gallon than gasoline. But, as noted earlier, the costs at the pump, if recognized in the price per gallon, generally work out in favor of ethanol. However, consumers find the calculations difficult to make without the addition of simple signs at the pump, a willing and patient station attendant, or an app in your hand. As a rule of thumb, replacement fuels should be at least 22% cheaper than gasoline to cement the deal for a knowledgeable consumer.

4. Despite EPA studies and approvals to the contrary, groups mainly associated with, supported by or historically favorable to the oil industry have planted the worry seed in car owners’ minds. E15 and, likely E85, they say, will damage engines that are actually built to use both. Saying it often enough has likely made many consumers consciously or subconsciously avoid replacement fuels like ethanol. The best answer to bad speech — whether written or oral — is good speech. Yet, only a handful of writers, editors, TV and cable anchors have responded to negative stories and rumors about replacement fuel safety.

I could go on. But I am over my word limit. Thank you, Real Clear Energy, for making me manic depressive — my friends would say it’s a rather normal state. I hope the brief comments by your editors will be discussed over and over again by others and stimulate strategies to increase the use of natural gas based ethanol, and someday soon, the legalization of methanol.

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What the world needs now is land (and honesty) to get to replacement fuels

I had the good fortune to meet and work a bit with Dr. Edwin Land, the inventor of the Polaroid camera. We were both on an informal poverty task force created by President Kennedy. I always admired Land. Throughout his life, his comments were always thought-provoking. His suggestion that “politeness is the poison of collaboration” really challenged, and continues to challenge, many of the facilitation and leadership gurus and practitioners who sometimes seem to have invented linguistic anti-depressants. Translated: don’t get angry, hold your tongue, mind your manners, mute some of your views or make them sound less critical, try to be nice and likeable, move toward a win-win situation, compromise and, if you get intense, take a break and go out for a while. Have a beer?

Times have changed, but only a bit, since Land died in the early nineties. Many participants still go into a collaborative and/or facilitative policy process with squeamishness about being direct and honest about their concerns. Because of this fact, it takes many sessions, rather than a few, to get real, difficult issues on the table and achieve a real meaningful and honest dialogue. Bonding and game playing (real and surreal) are often seen as more important than advocacy as well as early substantive dialogue. There is often little chance to compromise because the people at the table compromise their own views before they speak. They want to be polite. We don’t really know what they really think. Building collaboration in the hands of a facilitherapist (my own word), is regrettably, at times, using everyone’s favorite term, an existential threat. It makes collaborative victories, frequently short-term ones, in light of the fact that underlying disputes and tension were not given an airing.

With this as context, let’s look at key policy and behavioral issues now confronting the nation, concerning the harmful link between gasoline, the economy and social welfare, and the environment, particularly greenhouse gas (GHG) emissions and other pollutants. As relevant, let’s also think about why it’s been so tough to move toward replacement fuels for gasoline, even though such options would benefit consumers and the nation.

Gasoline now fuels approximately 250,000,000 vehicles in the U.S. While GHG emissions from gasoline are down because of improved technology in vehicles, gas still generally spews more GHG than alternative fuels such as ethanol, methanol, electricity or fuel cells. Gasoline also fails health and well- being tests when measured against a range of other pollutants, including NOx and VOCs (volatile organic compounds). Gasoline prices, while seemingly low (only) compared to the recent past, in some cases remain higher than alternative fuels, by a significant amount, whether based on renewables or fossil fuel. In this context, most of you reading this column are neither poor nor near poor. Imagine though, that you are, and in order to work, you need find housing at a reasonable cost relatively close to your job, see a doctor or take your family to see an aunt or uncle. But if you secure these and other basics, you have fewer choices since you have to spend from between 10-15 percent of your meager income on fuel. This is a verity now for most low- and moderate-income households. Indeed, based on EIA projections of gas prices and conservative as well as liberal economists conclusions concerning job growth and income, the percentages, likely, will increase in the future. If you were a person of very limited means, what would you limit first: travel to and from work, decent housing, health care or food, etc.?

Now, none of the replacement fuels are perfect. Most, including those based on or derived from fossil fuels such as natural gas, do emit some measurable GHG and other pollutants. This includes electric cars, particularly those that do secure their power from coal-fired electric utilities. But all are better than gasoline on environmental, economic and social welfare indices.

Why then is there not a clear movement toward transitional replacement fuels? Sure, electric car sales and CNG sales are up and hydro fuels will soon be on the market. Hopefully, they all will succeed in attracting consumers. But right now, all three together constitute from 1.5 to 3 percent of sales of new cars.

Why? Well, electric cars, CNG and hydrogen fuel cars are expensive and out of reach for many American households. For some, particularly those who purchase lower-end electric cars, the miles per charge often create road fear on the part of drivers. “What if I get stuck on the L.A. freeway?” Fuel stations are few and often far between for both electric, CNG and hydrogen fuel.

New electric, CNG or hydrogen fueled cars, at least for the near future, will illustrate for us all the comparative purchasing power of the haves, the have nots and the almost haves. Hopefully someday soon, most Americans will be able to compete — price, technology and design wise — for larger shares of the automobile market. But even if they become competitive, they will not be able to generate a major dent in the number of existing vehicles that rely on the internal combustion engine for a long time. Look at the data yourselves! Given their predicted annual sales, how many years would it take before the fleet of privately owned vehicles contained a very large percentage of electric, CNG, or hydrogen fueled vehicles (perhaps as much as 50 to 75 percent or more)? I have seen figures ranging up to almost several decades from respected analysts . Clearly, if sales of hybrid and plug-in vehicles are counted in the totals, the amount of time, it takes will be lower. However, achievement of a proportionately large share of the total number of cars will still extend out a many many years.

What can we do to achieve legitimate important national objectives concerning the environment, the economy and consumer costs for vehicles and fuel almost immediately? We can move to expand the number of FFVs (flex-fuel vehicles) in the country, first, by encouraging Detroit to build more each year and second, by asking public, nonprofit and private sectors to work together with the EPA to certify more conversion kits as well as existing in-use cars for conversion to FFV status. The net results would be vehicles able to use much higher percentages of ethanol (E85) derived from natural gas or from corn cobs, husks and stalks as well as other biofuels.

The proposed strategy is a transitional one. Clearly, electric, CNG and hydro fueled cars, when able to meet market tests concerning consumer needs, should join the mix of choices at the pump. I am optimistic. For example, twenty two states led by Colorado and Oklahoma have agreed to use CNG fueled cars to replace older cars retired from their state’s fleets. Detroit with the pool of CNG cars purchased by the states has agreed make best efforts to develop a lower cost CNG vehicle. Electric cars are coming down in costs. Hydro fueled cars will likely be produced in larger numbers soon and technology over time will reduce vehicle prices.

Now back to Edwin Land. I believe his comments about politeness, perhaps a bit too absolute, reflect his and my own views that the ground rules for collaborative efforts and consensus building may impede honesty concerning discussions of difficult topics. Being polite sometimes circumscribes and weakens important strategic dialogue. Involved participants fear being direct and sometimes avoid linking their intense feelings to their commentary. They try to avoid criticism or be seen as breaking the mythology of togetherness concerning long-term objectives and initiatives. Indeed, both objectives and initiatives are often so long term, that they are vague and don’t really matter to folks at the table. So why not go along? Individuals either avoid saying things that might lead to even temporary policy, program or behavior conflict and debate.

Politeness, certainly, is generally a virtue in most circumstances. Perhaps Land went too far in his choice of words. But the term, if used to guide collaborative efforts, often serves to mask real disagreements and necessarily blunt conversation. I have done lots of facilitative sessions on policy issues between senior officials of different nations and the U.S., as well as between community leaders on education, growth, environmental, race and poverty issues. Maybe the difference is miniscule, but I like the term being “civil” rather than being “polite;” the former presumes disagreement and allows for willingness to entertain tough dialogue and the possibility that the dialogue might step, at times, on intellectual toes; the latter, when translated into behavior, often suggests a willingness to skirt conflicts regarding ideas, if it temporarily reduces the ambience at the table.

Leaders from all sectors need to help build a collaborative “coalition of the willing” among environmental, public interest, government, private sector, nonprofit and academic leaders to push for flex fuel cars and replacement fuels. The criteria for coalition selection should be relevance to the policy and political issues related to gaining the public’s access to multiple fuel choices at the pump and to secure a much larger number of new FFVs as well as existing vehicles converted to FFV status. Identification and selection should not be limited to leaders who think exactly like us. But both should be limited to individuals who care about the environment, the economic and job growth of this nation, the well-being of consumers, particularly low- and moderate-income consumers and, although not discussed above, the security of this nation and the world. Claims of absolute wisdom should be a non starter for membership.

I suspect if the leadership group is diverse enough and if reasonable ground rules concerning structure and processes are set at the outset (ones that encourage substantive dialogue and debate ), disagreements can be bridged based on the data and agreements reached on transitional replacement fuel strategies that would influence public and private sector decision makers. A good facilitator would be needed, one weaned on policy and strategy more than psychology. A nationally respected foundation, or possibly even EPA, could either support or indeed facilitate the proposed serious exercise in collaboration and democracy. Civility, not politeness, should be a principle governing the dialogue.

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Will Pittsburgh be the center of a CNG revolution?

The EQT compressed natural gas (CNG) fueling station in the Strip District of Pittsburgh may one day be remembered as the place where the CNG revolution began.

Located just north of downtown, The Strip is a gritty combination of commercial warehouses and aging factories being converted by gentrifying young professionals into housing. Somehow, that’s turned out to be the perfect combination for pioneering a market for CNG vehicles.

In 2011, EQT, a $14 billion gas company operating in the Marcellus Shale formation, opened up the first public-access CNG station in the Pittsburgh area. To date, more than half of the nation’s CNG stations have been private affairs designed to service fleet vehicles. UPS, FedEx, and Ryder Trucks have been in the lead.

But EQT saw a wider opportunity. Right away the company suggested that the many small companies in The Strip start converting to natural gas. Then it started targeting the growing number of local nonprofits. EQT also counted on the fact that some young professionals would be adventurous enough to experiment with a new fuel source. Finally, it set an example by converting 15% of its own fleet to CNG.

It worked. Two years later, EQT has been forced to add four new nozzles and is now planning a further expansion. The company is also working with various Pittsburgh organizations, public and private, to expand the reach of CNG throughout the region.

EQT is not the only competitor in the field. Chesapeake Energy Corporation, the nation’s second largest gas producer, plans to commit $1 billion by 2021 to encourage CNG adoption in western Pennsylvania. Southwestern Energy, the nation’s fourth largest gas producer, is also planning a similar initiative.

If all this is happening in Pittsburgh, it’s no accident. The city has a long tradition of developing fossil fuels, stretching back to the coalmines of the 19th century and Col. Drake’s oil well in nearby Titusville. But in this latest development, the mighty Marcellus is playing the leading role.

Last month, the output in the Marcellus surpassed 15 billion cubic feet per day, an increase of 400% over the last four years, according to figures released by the Energy Information Administration.

Moreover, production does not show any signs of slowing down. As the EIA reported last week:

The rig count in the Marcellus Region has remained steady at around 100 rigs over the past 10 months. Given the continued improvement in drilling productivity, which EIA measures as new-well production per rig, EIA expects natural gas production in the Marcellus Region to continue to grow. With 100 rigs in operation and with each rig supporting more than 6 million cubic feet per day in new-well production each month, new Marcellus Region wells coming online in August are expected to deliver over 600 million cubic feet per day (MMcf/d) of additional production. This production from new wells is more than enough to offset the anticipated drop in production that results from existing well decline rates, increasing the production rate by 247 MMcf/d.

In addition, the EIA recently projected that consumption of natural gas in the transport sector will rise by a factor of 20 over the next 25 years.

Natural Gas Consumption

Yet even the EIA’s optimistic predictions do not envision a very big role for natural gas in automobiles. Rail freight plays a bigger part than that envisioned for automobiles, which are grouped under the category of “light-duty vehicles.”

All this shows that natural gas is never going to make any real headway in substituting for foreign oil unless we start converting it to liquid fuel – methanol, ethanol, or butanol – that can be easily slotted into our current gasoline infrastructure.

But the potential is there. Last month Yuhuang Chemical, a subsidiary of the $5 billion Shandong Yuhuang Chemical Co., Ltd., of Shandong Province, China, announced plans to invest $1.85 billion in a methanol plant in St. James Parish, Louisiana that will produce 2 million tons of methanol annually by 2018. Right now, 80% of that methanol is targeted for export to a world market that currently consumes 65 million tons per year.

But if we keep working on methanol and ethanol conversion, more than a small portion of that might end up making it to that gas station in Pittsburgh. Or maybe someone will be inspired to build a methanol conversion plant right in the heart of the Marcellus itself.

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USA, USA, USA…The search for competitive fuel choices

“USA, USA, USA, USA.” No, I didn’t just come from watching the U.S. playing in the 2014 FIFA World Cup. But after reading the glowing, cheerleading, overly enthusiastic, often-nationalistic media accounts of the U.S. overtaking the Saudis in oil production, the win-lose aspects of the soccer chant somehow became embedded in my persona (like counting sheep or gas pumps at night when I can’t sleep). We beat the Saudis at their own game — oil. We’re number one…wow! Next, will we emulate the Saudis and place onerous and discriminatory restrictions on women drivers and, unlike the Saudis, argue that it’s a conservation measure? Of course not! We don’t have to be number one in everything. But oil does make strange bedfellows, and equally strange behavior, as well as policies.

Unfortunately, most of the media stories avoid analysis of what the new oil prominence of the U.S. means to the nation and world. Yes, increased production likely means less dependence on the Middle East, particularly Saudi oil. Indeed, we now import about 33% of oil needs, the lowest percentage in years.

But oil independence remains a myth. Oil interests are pushing for a reduction of regulations concerning exports of U.S. crude oil and have always exported considerable refined oil products allowed by the law. Their motives, despite frequent public comments to the contrary, are generally to sell to the price, which means to the buyer who offers the most return. He, she or it frequently is a global purchaser. Independence is a slogan that often blurs motive and reflects good politics but bad substance and contrary to reality.

The U.S., as the most powerful western nation, irrespective of any mathematical domestic surplus, will continue to extend its role as defender of the global supply chain from the Middle East or elsewhere. While we may be less dependent on foreign oil, U.S. leaders have, in the past, and likely will in the future, use a combination of diplomacy and military threats and action to defend and sustain the flow of foreign oil to allies or assumed allies. In this context, the role we play in the world extends our dependency. Unfortunately, wars will be fought and U.S. soldiers will die because of this felt dependency.

Most of the “USA, USA, USA” chants in the media coverage of our new oil prowess, implicitly neglects the difficult juxtaposition between increased oil production and supplies and higher gas prices. Less dependence hasn’t brought the reduction, or even stabilization, of gas prices promised by the oil industry. Gasoline in California is now generally well over $4 a gallon for regular, and averages over $3.60 a gallon across the nation. Why? We have a surplus, don’t we? Oil companies want to export more, and it appears that they will be able to do just that, soon. As Dr. Pangloss asked in “Candide,” is this the “best of all possible worlds” (let me add, for the U.S.)?

Clearly, the cost of oil at the pump is not strongly linked (at the present time) to the amount of U.S. oil that shows up on EIA calculations and projections. Both price and supply are going up simultaneously. Yes, there is uncertainty, given events in the Middle East and yes, uneven growth around the world has increased demand in some areas and suppressed it in others. The link between high prices and the Middle East is difficult to measure precisely. Consumer costs per gallon are likely affected more by investors, as well as speculation on Wall Street, than the actual numbers concerning increased production of U.S. oil.

So, apart from prayer and penitence, what can we do to get a better deal for consumers, and to prevent gasoline from becoming a negative factor concerning U.S. GDP growth and the environment? How can we help assure that being number one means robust economic growth, more income in the wallets of Americans (particularly low-income Americans), increased security and fewer dirty emissions?

These are not easy questions, and they do not lend themselves to simple ideological responses. Clearly, as renewable fuels and vehicles that meet the incomes and desires of most Americans become available, both will play a vital role in America’s future. But reliance on coal-fired utilities for power in some areas of the nation, battery costs, mileage limitations from single battery charges, and lack of infrastructure impede their ability to have a significant positive impact at the present. The market for renewable fuels and vehicles is relatively small and will remain so until technological advances catch up with potential demand.

Where is the Greek philosopher Diogenes when we need him? We have a path in front of us that would buy time toward a better American future, one that could offer competition to gasoline — competition that would be good for the economy, the consumer and the environment. Increased availability of replacement fuels, particularly natural gas-based ethanol, combined with large-scale conversion of older cars to flex-fuel vehicles (FFVs) and increased production of new FFVs by Detroit, would give gasoline a run for the money, if gas-only stations become fuel stations and provide consumers with a choice. According to the Renewable Fuels Association, less than one percent of all gas stations in the U.S. that are branded by the big oil companies offer E15 or E85.

I remain an optimist that more freedom will reign soon at the pump. The noted people’s philosopher, Charles M. Schulz, creator of “Peanuts” comic strips, lessened my fears about the future when he said, “Stop worrying about the world ending today. It’s already tomorrow in Australia.” USA, USA, USA. Fuel choice, fuel choice, fuel choice!

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An oil-drilling sing along, to the tune of “Politics and Polka”

Correlation or causation, correlation or causation
Misleading numbers, mistaken assumptions. Who will be the joker?

Okay, I am neither poet nor composer. I can’t even sing. But Fiorello Laguardia was an early hero from the time I met him in my sixth grade history books, and the musical Fiorello! was good fun.

Mayor Laguardia would be amused and bemused by recent articles suggesting that the Monterey Shale isn’t what it was cracked up to be a year or two ago. The story lends itself to his famous encounters with comic books. Despite earlier media hype, its development will not lead to economic nirvana for California and could well lead to real environmental problems.

Why were the numbers that were put out by the oil industry just a couple of years ago wrong? Maybe because of a bit of politics and polka! The articulated slogan concerning oil independence from foreign countries mesmerized many who should have known better.

Similarly, why, while once accepted by relevant federal agencies, have the production numbers concerning the Monterey Shale been recently discounted by the same agencies (EIA) and independent non-partisan analysts? Quite simply, they now know more. Succinctly, it’s too expensive to get the oil out and the oil wells, once completed, will have a comparatively short production life.

Drilling an oil field that is located under flat land is easier than drilling for very tight oil — oil that lies underwater or under a combination of flat as well as hilly, rolling, developed, partially developed or undeveloped areas known for their pervasive, pristine, beautiful environment. Further, the geological formations in the Monterey Shale area are a victim of their youth. They are older than Mel Brooks, but at 6-16 million years, the Monterey Shale is significantly younger than The Bakken. Shale deposits, as a result, are much thicker and “more complex.” According to David Hughes (Post Carbon Institute, 2013), existing Monterey Shale fields are restricted to relatively small geographic areas. “The widespread regions of mature Monterey Shale source rock amendable to high tight oil production from dense drilling…likely do not exist…” “… While many oil and gas operators and energy analysts suggest that it is only a matter of time and technology before ‘the code is cracked’ and the Monterey produces at rates comparable to Bakken and Eagle Ford,” this result is likely is not in cards…the joker is not wild. “Owing to the fundamental geological differences between the Monterey and other tight oil plays and in light of actual Monterey oil production data,” valid comparisons with other tight oil areas are…wishful thinking. Apart from environmental opposition and the costs of related delays, the oil underwater or underground in the Monterey Shale is just not amenable to the opportunity costing dreams of oil company CEOs, unless the price of oil exceeds $150 a barrel. According to new studies from the EIA, the recoverable reserves, instead of being as it projected earlier from 13.7 to 15.4 barrels, will be closer to 0.6 barrels.

If you believe in “drill, baby, drill” as a policy and practice, the cost/price conundrums are real. Low costs per barrel for oil appear at least marginally helpful to consumers and increases in oil costs seem correlated with recessions. Increased production of tight oil depends on much higher per barrel prices and, in many instances, increased debt., Neither in the long term is s good for the economic health of the nation or its residents.

Breaking the strong link between transportation and oil (and its derivative, gasoline) would make it easier to weave wise policy and private-sector behavior through the perils of extended periods of high gasoline prices and oil-related debt. Expanding the number of flex-fuel vehicles (FFVs) through inexpensive conversion of older cars and extended production of flex-fuel vehicles by Detroit would provide a strong market for alternative transition fuels and put pressure on oil companies to open up their franchises and contracts with stations to a supposedly key element of the American creed-competition and free markets. The result, while we encourage and wait for renewable fuels to reach prime time status, would be good for America, good for the environment and good for consumers.

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From lab to market, it’s a long haul

The Energy Information Administration has done us an enormous favor by producing a simple chart to make sense of where the development of energy storage technology is going. Energy storage, as the EIA defines it, includes heat storage, and a quick look at the chart reveals that those forms that involve sheer physical mechanisms – pumped storage, compressed air and heat reservoirs – are much further along than chemical means of storage, particularly batteries.

The EIA divides the development of technologies into three phases – “research and development,” “demonstration and deployment” and “commercialization.” It also ranks them according to a factor that might be called “chances for success,” which is calculated by a multiple of capital requirements times “technological risk.”

As it turns out, only two technologies that could contribute to transportation are in the deployment stage while three more are in early development. The two frontrunners are sodium-sulfur and lithium-based batteries while the three in early stages are flow batteries, supercapacitors and hydrogen. The EIA refers to hydrogen as one of the ways of storing other forms of energy generation, particularly wind and solar. But hydrogen is also being deployed in hydrogen in hydrogen-fuel-cell vehicles that have already been commercialized.

Other than building huge pumped-storage reservoirs or storing compressed air in underground caverns, the chemistry of batteries is the most attractive means of storing electricity, which is the most useful form of energy. Batteries have always had three basic components, the anode, which stores the positive charge, the cathode, which stores the negative charge, and the electrolyte, which carries the charge between them. Alexander Volta designed the first “Voltaic pile” in 1800 by submerging zinc and silver in brine. Since then, battery improvements have involved finding better materials for all three components.

Lead-acid batteries have become the elements of choice in conventional batteries because the elements are cheap and plentiful. But lead is one of the heaviest common elements and becomes impractical when it comes to loading them aboard a vehicle.

The great advantage of lithium-ion batteries has been their light weight. The lithium substitutes for metal in both anode and cathode, mixing with carbon and iron phosphate to create the two charges. Li-ion, of course, is the basis of nearly all consumer electronics and has proved light and powerful enough to power golf carts. The question being posed by Elon Musk is whether they can be ramped up to power a Tesla Model S that can do zero-to-60 with a range of 300 miles.

Tesla is not planning any technological breakthrough, but will use brute force to try to scale up. Enlarging li-ion batteries tends to shorten their life so the Tesla will pack together thousands of small ones no bigger than a AA that will be linked by a management system that coordinates their charge and discharge. Musk is betting that economies of scale at his “Gigafactory” will lower costs so that the Model X can sell for $35,000. According to current plants, the Gigafactory will be producing more lithium-ion batteries than are now produced in the entire world.

In the sodium-sulfur battery, molten sodium serves as the anode while liquid sodium serves as the cathode. An aluminum membrane serves as the electrolyte. This creates a very high energy density and high discharge rate of about 90 percent. The problem is that the battery must be kept at a very high temperature, around 300 degrees Celsius, in order to liquefy its contents. A sodium-sulfur battery was tried in the Ford “Ecostar” demonstration vehicle as far back as 1991, but it proved too difficult to maintain the temperature.

Flow batteries represent a new approach where both the anode and cathode are liquids instead of solids. Recharging takes place by replacing the electrolyte. In this way, flow batteries are often compared to fuel cells, where a steady flow of hydrogen or methane is used to generate a current. The great advantage of flow batteries is that they can be recharged quickly by replacing the electrolyte, rather than taking up to 10 hours to recharge, as with, say, the Chevy Volt. So far flow batteries have relatively low energy density, however, and their use may be limited to stationary sources. A German-made vanadium-flow battery called CellCube was just installed by Con Edison as a grid-enhancement feature in New York City this month.

Supercapacitors use various materials to expand on the storage capacity devices in ordinary electric circuits. They have much shorter charge-and-discharge cycles but only achieve one-tenth of the energy density of conventional batteries. As a result, they cannot yet power vehicles on a stand-alone basis. However, supercapacitors are being used to capture braking energy in electric trams in Europe, in forklifts and hybrid automobiles. The Mazda6 has a supercapacitor that uses braking energy to reduce fuel consumption by 10 percent.

The concept of “storage” can be also be expanded to include hydrogen, since free hydrogen is not a naturally occurring element but can store energy from other sources such as wind and solar. That has always been the dream of renewable energy enthusiasts. The Japanese and Europeans are actually betting that hydrogen will prove to be a better alternative than the electric car. Despite the success of the Prius hybrid, Toyota, Honda and Hyundai (which is Korean) are putting more emphasis on their fuel cell models.

Finally, methanol can be regarded as an “energy storage” mechanism, since it too is not a naturally occurring resource but is a way to transmit the potential of our vast reserves of natural gas. Methanol proved itself as a gasoline substitute in an extensive experiment in California in the 1990s and currently powers a million cars in China. But it has not yet achieved the recognition of EVs and hydrogen – or even compressed natural gas – and still faces regulatory hurdles.

All these technologies offer the potential of severely reducing our dependence on foreign oil. All are making technical advances and all have promise. Let the competition begin.

Oil well in Desert

What Happened to Saudization? Bipolar Fuel Projections!

Just a few short months ago, newspapers, led by the WSJ, trumpeted, many on their front pages, the Saudization of America and the end of America’s and OECD’s reliance on Middle East oil. Do you remember?   Well maybe you don’t have to– at least after 2025. The IEA’s World Energy Outlook for 2013, published Nov 12, indicates that the “Middle East, the only large source of low-cost oil, remains at the center of the longer-term oil outlook.” Within about 10 years or so, it will provide the largest share of the world’s expanded oil supply.

I realize the fragility of projections and have in the past criticized the IEA and the EIA and other makers of global energy projections. At times, projection makers are more artists than scientists. The good artists, sometimes, come close to what actually happens. The not so good ones either get lucky or appear to mute their “over or under” reality numbers. They either provide ranges, permitting them to say they were right in the future, or they complain, perhaps over a good bottle of wine, about the complexity of the variables.

I believe it is important to read the IEA report because it lends a bit of skepticism to the idea that America and its friends are entering the golden era of energy abundance. Indeed, The New York Times on Nov 13 ran the IEA story under the headline, “Shale’s Effect on Oil Supply Is Forecast to Be Brief.”

Here is what the IEA said in their Executive Summary:

“The role of OPEC countries in quenching the world’s thirst for oil is reduced temporarily over the next 10 years by rising output from the U.S., from oil sands in Canada, from deep water production in Brazil and from natural gas liquids from all around the world.  However, by mid-2020, non-OPEC production starts to fall back and countries in the Middle East provide most of the increase in global supply. Overall national oil companies and their host governments control some 80 percent of the world’s proven-plus-probable oil reserves.”

America’s likely surplus combined with a slowdown in the increase of demand will not affect costs of oil and gasoline in a major way.  Escalating demand for both will be reflected in Asia and will place a floor under prices. America’s oil companies function in a global market and are not governed to a great extent by the laws of supply and demand in this country.  They will sell to the highest bidder worldwide.

IEA indicates that “the need to compensate for declining output from existing oil fields is the major driver for upstream oil investment to 2035…conventional crude output from existing fields is set to fall by more than 40 mb/d by 2035.Of the 790 billion barrels of total production required to meet our projections for demand to 2035, more than half is needed just to offset declining production. According to the NY Times, IEA conclusions are generally shared by the EIA; that is, today’s rapid oil production from shale will continue for a relatively short time and then slow rapidly. IEA indicated the slowdown will occur in the mid-twenties, EIA by the late teens.

IEA’s and EIA’s analysis should not generate a bipolar response or create a need for a regimen of pills to cure projection related manic depression. It’s only a projection. Take a deep breath and count to ten.  Next year it will likely change because of “complex variables ” including but not limited to changing world demand, Middle East tension, new technology and the use of alternative fuels.

Until we get better at projection, let’s applaud IEA and EIA’s professionals.  At a minimum, they are honestly and artistically responding to lots of unknowns.  Paraphrasing the comedian Ilka Chase (and changing a word or two) projectionist’s minds are cleaner because they change them so often…

Just kidding!

Their efforts should at least reinforce the need to think through transportation fuel strategies and act with all reasonable speed on what I would consider, at least, low hanging fruit. For example, a coordinated campaign by the public, nonprofit and private sector to encourage the federal government to approve methanol as a fuel would be a good first step.  Federal acquiescence, if combined with simultaneous certification of low cost kits to convert existing vehicles to flex fuel cars could provide the framework for an effective transitional fuel strategy.

It, likely, will take from five to ten years before electric and or hydrogen powered vehicles will be able to reach the budgets and driving needs of most low, and moderate income Americans.  Even when renewable fuel powered new vehicles reach a mass market, the technology will not be able to change the gasoline dependent older vehicles. In this context, alternative transitional fuels could, with the addition of an increased number of conveniently located fuel stations and stimulated by new demand, offer competition to oil company restricted gas-only stations and consumers a choice of fuels.  America would be better off economically and environmentally.  Consumers would secure a more predictable, probably lower price for fuel at competitive pumps and charging stations.  The nation would be less dependent on imported oil.

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And that’s the way it is or isn’t — stable oil and gas markets

“And that’s the way it is” was used by my favorite news anchor, Walter Cronkite, to sign off on his highly respected network news show. And that’s the way the content he generally delivered generally was — clear, factual, helpful. I have tried to apply Cronkitism to today’s media analyses and commentary on oil production and oil prices. The new assumed “way it is” regrettably sometimes seems like the way the journalist or his boss — whether print, TV or cable — wants it to be or hopes it will be. Frequently, partial sets of facts are marshaled to ostensibly determine clear cause and effect relationships but end up confusing issues and generating questions as to the author or speakers mastery of content and conclusions.

What’s a Cronkitist to do? I often look to The New York Times for the wisdom grail. Generally, it works. But, I must confess that a recent piece in the Times by outstanding journalist, Clifford Kraus, titled “Is Stability the New Normal?” Oct. 9 bothered me. I found its thesis that a new stability has arrived with respect to oil prices and by implication gas prices at the pump a bit too simple.

The author indicates that “predictions about oil and gas prices are precarious when there are so many political and security hazards. But it is likely that the world has already entered a period of relatively predictable crude prices…there are reasons to believe the inevitable tensions in oil-producing countries will be manageable over at least the next few years, because the world now has sturdier shock absorbers than at any time over at least the past decade.”

What are these absorbers? First, more oil production in the U.S., Canada, Iraq and Saudi Arabia, to balance the loss of exports from countries like Iran, Libya and, I assume, Venezuela and possibly Nigeria. Second, the continued spread of oil shale development throughout the world, including many non-Middle East or OPEC countries. Third, increased auto efficiency, conservation and lower demand for gas in the U.S. Finally, near the end of the article and not really seemingly central to the author’s stability argument natural gas becomes in part a hypothetical “if.” He notes that American demand for gasoline could drop below a half a billion barrels a day from already below peak consumption, if natural cheap gas replaces more oil as a transportation fuel. (At least he mentioned natural gas as a transportation fuel. Most media reports fail to tie natural gas to transportation) break open the champagne! Nirvana is near! Michael Lynch, a senior official at Strategic Energy & Economic Research Inc., is quoted in the article, saying, “Stable oil prices could reduce future inflation rates and particularly curb transportation costs, helping to steady prices of food and construction materials that travel long distances…Lower inflation can also help reduce interest rates. By reducing uncertainty, investor and consumer confidence should both be increased, boosting higher spending and investment and thus economic growth.”

In the words of Oscar Hammerstein II, I want to be a cockeyed optimist…but something tells me to be at least a bit wary of a too-good-to-be-true scenario, one premised on a historically new relatively high price of oil per barrel (bbl.), just under $100 (the price is now about $105) and gas prices likely only modestly lower than they are now (the U.S. average is close to $3.50 a gallon)

So why be wary and worry?

1. The Times accepts the rapid significant growth in oil shale development and production too easily. Maybe they are right! Perhaps the oil shale train has left the station. But the growth of environmental opposition, particularly opposition to fracking, will likely slow it down until regulations perceived as reasonable by the industry and environmentalists are put in the books. Further, the often very early large expectations with respect to new pools of oil in places like the Monterey Shale, featured in media releases, have not panned out after later sophisticated analyses. Finally, the price of hard to get at oil may come in so high as to limit producer enthusiasm for new drilling.

2. The Times correctly suggests that the relationship between oil prices and gasoline costs may be less than thought conventionally. Lower oil costs in the U.S. do not necessarily trigger lower gasoline costs, and higher gasoline costs are not necessarily the result of higher oil costs per barrel

The Times credits the recent visible break in the relationship primarily to an abundance of oil linked to oil shale production in the U.S. and in many other countries and to falling demand for oil throughout the world, including China, to the lack of economic growth and higher efficiency of vehicles.

It’s more complicated. For example, price setting is affected in a major way by speculation in the financial community, and by oil producers and refiners who govern production and distribution availability. Respected analysts and political leaders suggest that companies base their decisions concerning price at least in part on market and profit assumptions. Fair. But, oil’s major derivative gasoline does not function in a free market, rather, it is a market controlled by oil companies. There is little competition from alternative fuels. Unfair and inefficient.

3. The quest for oil independence and the related justification for drilling lead the media to suggest and the public to believe that there is an equivalency between increased production of oil and closing the gap between what we consume and produce as a nation. Yes, we have reduced the gap — both demands have fallen and production has increased. But it is still around 6.0 to 6.5 million barrels per day. Yet, we continue to export nearly half of what we produce every day or nearly 4 million barrels. Our good friends, China and Venezuela, get 4% and 3% respectively. Companies may sing “God Bless America” while extracting, refining, exporting and importing oil, but theologically based patriotism doesn’t govern the oil market. Sorry, but global prices and profits have precedence. Remember the adage — “the business of business is business.”

4. A recently released Fuel Freedom Foundation paper suggests that energy independence is a misnomer. Based on its review of EIA data and projections through 2035, negative energy balances exist that never drop below a $300 billion deficit. If EIA data is to be believed, energy independence, Saudi America and control of our energy future are developments that will not occur anytime soon.

I am disappointed that natural gas as an alternative fuel seems more like an afterthought coming at the end of Kraus’s long piece. I am glad the author mentioned it but it seems at least a bit forced. The commentary was limited to natural gas and not its derivatives, ethanol and methanol, or, for that matter, other alternative fuels. Put another way, it seemed to assume a still very restricted fuel market. Opening up consumer choices at the pump is a key factor in stabilizing oil and gas markets. It also is a key factor achieving reduced prices at the pump for low and moderate income families; the former spending from 14-17% of their limited income on gasoline.