With Nearly 3.5 Million Barrels of Oil Per Day Offline, Why Aren’t Oil Prices Surging?

Since 2009, oil prices have enjoyed a prolonged period of remarkable stability characterized by annualized volatility significantly below its long-term average. And though volatility has ticked up markedly in recent months due to the escalating conflicts in Russia and Iraq, oil prices haven’t risen much above $115 a barrel and have actually declined sharply in recent weeks.

Here Comes Cheaper Oil: Why Prices Are Set to Fall

I learned from Art Laffer that government is the 800lb gorilla in the economy and that investors can profit from changes in government policies. But a practitioner has to accept the framework – that government policies drive incentives as much or more than any other single driver. The charts that follow should prove that out. They show how a proposed change to the RFS ethanol mandate drove corn prices down 30% almost instantaneously. Similarly, in 2008, oil prices plunged at the mere suggestion that a moratorium against drilling on the outer continental shelf (OCS) might end.

Is Elon Musk the next Henry Ford?

Elon Musk doesn’t mind making comparisons between himself and Henry Ford. Others are doing it as well.

In announcing his plans for a “Gigafactory” to manufacture batteries for a fleet of 500,000 Teslas, Musk said it would be like Ford opening his famous River Rouge plant, the move that signaled the birth of mass production.

The founder of PayPal and current titular leader of Silicon Valley (now that Steve Jobs is gone), Musk is not one for small measures. The factory he is now dangling before four western states would produce more lithium-ion batteries than are now being produced in the entire world. And that’s not all. He’s designing his new operation to mesh with another cutting-edge, non-fossil-fuel energy technology – solar storage. His partner will be SolarCity (where Musk sits on the board), run by his cousin Lyndon Rive. Together they are looking beyond mere automobile propulsion and are envisioning a world where all this solar and wind energy stuff comes true.

So, is Musk a modern-day Prometheus, bringing the fire to propel an entirely new transportation system? Or, as many critics charge, is he just conning investors onto a leaky vessel that is eventually going to crash upon the shores of reality? As the saying goes, we report, you decide.

One investor that is already showing some qualms is Panasonic, which already supplies Tesla with all its batteries and would presumably help the company fill the gap between the $2 billion it just raised from a convertible-bond offering and the $5 billion needed to build the plant. “Our approach is to make investments step by step,” Panasonic President Kazuhiro Tsuga told reporters at a briefing in Tokyo last week. “Elon plans to produce more affordable models besides [the] Model S, and I understand his thinking and would like to cooperate as much as we can. But the investment risk is definitely larger.” Of course, this is Japan, where “the nail that sticks out gets hammered down.” Corporate executives are not known for sticking their necks out.

Another possible investor is Apple, which has mountains of cash and, at least under Steve Jobs, was always willing to jump into some new field – music, cell phones – to try to set it straight. This is a little more ambitious than the Lisa or the iPod and Jobs is no longer around to steer the ship, but Apple and Musk officials held a meeting last spring that stirred a lot of talk about a possible merger. A much more likely scenario, according to several commentators, is that Apple would become a major player in the Gigafactory.

And a Gigafactory it will be. Consider this. The three largest battery factories in the country right now are:

1)    The LG Chem factory in Holland, Mich. is 600,000 square feet, employs 125 people and produces 1 gigawatt hour (GWH) of battery output per year.

2)    The Nissan factory in Smyrna, Tenn. is a 475,000 square-foot facility with 300 employees puts out 4.8 GWH per year.

3)    A123 Systems’ battery factory in Livonia, Mich. is 291,000 square feet, employs 400 people and produces 0.6 GWH per year.

Both LG and Nissan received stimulus grants from the Department of Energy, built to overcapacity and are now operating part-time.

Now here’s what Musk is proposing. His Gigafactory would cover 10 million square feet, employ 6,500 people and produce 35 GWH per year of battery power. Basically, Musk’s operation is going to be ten times better anything ever built before, at a time that most of what exists isn’t even running fulltime. Does that sound like something of Henry-Ford proportions? Similar to Ford’s $5 a day wages, perhaps?

There are, of course, people who think all of this is crazy. In the Wall Street Journal blog, “Will Tesla’s $5 Billion Gigafactory Make a Battery Nobody Else Wants?,” columnist Mike Ramsey expresses skepticism over whether Tesla’s strategy of using larger numbers of smaller lithium-ion is the right approach. “Every other carmaker is using far fewer, much larger batteries,” he wrote. “Tesla’s methodology – incorrectly derided in its early days as simply using laptop batteries — has allowed it to get consumer electronics prices for batteries while companies like General Motors Co. and Nissan Motor Co. work to drive down costs without the full benefits of scale. Despite this ability to lower costs, no other company is following Tesla’s lead. Indeed, in speaking with numerous battery experts at the International Battery Seminar and Exhibit in Ft. Lauderdale a few weeks ago, they said that the larger cells would eventually prove to be as cost effective, and have better safety and durability. This offers a reason why other automakers haven’t gone down the same path.

But Musk has managed to produce a car that has a range of 200 miles, while the Leaf has a range of 85 miles and the Chevy Spark barely makes 82. Musk must be doing something right. And with Texas, Arizona, Nevada and New Mexico all vying to be the site of the Gigafactory, it’s more than likely that the winning state will be kicking in something as well. So, the factory seems likely to get built, even on the scheduled 2017 rollout that Tesla has projected.

At that point, Musk will have the capacity to produce batteries to go in 500,000 editions of the Tesla Model E, which he says will sell for $35,000. Sales of the $100,000 Model S were 22,000 last year. Does this guy think big or what?

To date, Silicon Valley doesn’t have a terribly good record on energy projects. Since Kleiner Perkins Caufield & Byers fell under Al Gore’s spell in 2006, its earnings have been virtually flat and the firm is now edging away from solar and wind investments. Venture capitalist Vinod Khosla’s spotty record in renewables was also the subject of a recent 60 Minutes segment. But, as venture capitalists say, it only takes one big success to make up for all the failures.

Will Tesla’s Model E be the revolutionary technology that, at last, starts making a dent in oil’s grip on the transportation sector? At least one investor has faith. “I’d rather leave all my money to Elon Musk that give it to charity,” was the recent evaluation of multi-billionaire Google founder Larry Page.

Progress on Fuel Efficiency: More is needed

Every now and then I will read a White House Blog.  They’re sort of a fun read when you’re depressed about the state of the world and the country.  The content always somehow reminds me of  Gene Kelly dancing in the street in the middle of the rain, or that old (possibly New Yorker) cartoon where the patient tells the psychiatrist that he is not doing well and the good doctor says ‘no you’re just fine, you’re happy and healthy.’  Probably neither is the proper analog to the politically necessary positive nature of the White House blurbs.  I marvel at times at the President’s ability to seek a better America, especially given the politics of the present.  While his optimism and tenacity don’t always come through as “Morning in America,” I believe that his attitude is based on a reasonable outlook about what the nation can do, if it can engage in an honest dialogue about key environmental and alternative fuel issues.

Last week’s blog focused on the White House’s effort to increase fuel efficiency standards.  It notes correctly that the President’s legislative approach to the environment has resulted in the toughest fuel economy standards in history:

“Under the first ever national program, average fuel efficiency for cars and trucks will nearly  double, reaching an average performance equivalent to about 54.5 miles per gallon by 2025….In 2011, the President also established the first-ever fuel efficiency and greenhouse gas standards for medium and heavy duty vehicles, covering model years 2014 through 2018.”

More is to come! Increased fuel efficiency standards are currently being addressed by the Administration, and the EPA is hard at work developing Tier 3 rules.

The Administration’s record is a decent one and has benefited the environment, lessened ghg emissions, and strengthened the economy. Regrettably though, fuel efficiency regulations primarily apply to new cars.  They should be matched by a cost efficient and comprehensive federal effort to encourage the conversion of older non flex fuel vehicles; they also should encourage Detroit to continue producing larger numbers of flex fuel cars.

In this context, EPA and Detroit automakers need to reach a consensus concerning effective engine recalibration alternatives, as well as an extension of consumer warranties and related financial coverage of recalibrated vehicles.  Without permitting older cars to achieve the fuel efficiency and environmental advantages of flex fuel vehicles, we will not be able to respond to Pogo’s admonition and Commodore Oliver Perry’s initial statement (paraphrased): that we, as a nation, have met the enemy, and he is us!

To grant primacy to new or relatively new flex fuel cars would increase the nation’s ability to reduce ghg emissions and other environmental pollutants (e.g. NOx and SOx). There are well over 200,000,000 non flex fuel cars in the U.S. that cannot readily use available fuel blends higher than E-15 and will not be able to use natural gas based ethanol that hopefully relatively soon will come on the market.

Lowering the certification costs of conversion kits by the EPA and increasing the number of manufacturers of those kits would bring down their price from around 1,000 dollars to the near 300 dollar level that is common in the “underground” market.  Simplifying legal conversion could  —and indeed would —-make an important environmental difference.  Such action would also open up the fuel market to competition, and likely lower the price of gas at the pump for consumers. Finally, such actions would also support the President’s objective to wean the nation off of oil and gasoline.  Oh Happy Day!  Go for it Gene Kelly and the American Association of Psychiatrists!  It might be time to show some real love for environmentally and efficiency neglected and needy older vehicles.

Can Ethylene Replace Gasoline?

The effort to replace oil-based gasoline in our cars with similar fuels derived from natural gas took a big step forward last week with the announcement that Siluria, a promising start-up, will build a $15-million demonstration plant in Texas

The plant will produce ethylene, the most commonly produced industrial chemical in the world and the feedstock for a whole raft of products in the chemicals and plastics industry. But Siluria, which is not yet a public company, is also planning demonstration plants that will produce gasoline. Initial estimates are that the product could sell at half the price of gasoline derived from oil. If these projections prove to be anywhere close to reality, we could be on a path to a fuel economy that is finally able to cut its dependence on oil.

The idea of producing ethylene from natural gas has been around since the 1980s but achieved little success. Several major oil companies invested millions of dollars in the process but finally gave up on it. Jay Labinger, a Caltech chemist who did much of the initial research, finally wrote a paper in the 1980s warning other researchers that it was a waste of time. He may have given up too soon.

Siluria is a California-based startup that has received much of its funding from Silicon Valley investors who tried to move from computers and the Internet into the energy space over the last decade. So far their success hasn’t been great. In fact Vinod Khosla and other Silicon Valley energy entrepreneurs were the subject of an embarrassing critique on “60 Minutes” only two weeks ago. The Siluria venture, however, may be the gusher that makes up for all the other dry holes.

The 1980s efforts concentrated on heat-activated processes whereby methane is split into carbon and hydrogen and then recombined into the more complex ethylene, which has two double-bonded carbons and four hydrogens. All these efforts proved far too energy-intensive, however, and never became economical.

Siluria has been trying a different approach, seeking catalysts that would facilitate the process at much lower energy levels. Moreover, the company has spurned the more recent approach of trying to design molecules that fit the chemicals just right and gone back to the old shotgun approach where thousands of candidates are tried on a catch-as-catch-can basis.

Defying all expectations, the process seems to have worked. Siluria has come up with a catalyst that it says promotes the breakdown and subsequent reassembly of methane at very low energy levels. It has built pilot plants in San Francisco, Menlo Park and Hayward, California and last week announced plans for building a full-scale demonstration plant in La Porte, Texas in conjunction with Braskem, the largest petrochemical manufacturer in South America. If that isn’t proof that Siluria is on to something, what is

The implications of this development are enormous. Natural gas is two to six times more abundant than oil in the world and is now selling at 1/5th the price for an equivalent amount of energy. The traditional tandem pricing of oil and natural gas prices has now been broken and gas is functioning as a completely different commodity, much cheaper.

The difficulty all along has been that natural gas is hard to put into your gas tank. So far efforts have involved compressing natural gas, which means storing it at 3600 pounds per square inch, or liquefying it, which requires temperatures to be lowered to – 260 degrees F. Neither is very practical and would require a whole new auto engine and delivery infrastructure.

Efforts to convert gas into a liquid have concentrated around methanol, which is the simplest alcohol and has been used to power the Indianapolis 500 racing cars since the 1960s. But methanol is the deadly “wood alcohol” of the Prohibition Era and raises fears about poisoning – although gasoline is poisonous, too. The Environmental Protection Agency has never certified methanol for use in auto engines, although an M85 standard has been permitted in California.

Synthesizing gasoline through Siluria’s ethylene-based pathway could solve all these problems. Ed Dineen, CEO of Siluria, says that the gasoline product could sell at half the price of today’s gasoline. With more natural gas being found all the time – and with $1 billion being flared off uselessly around the world each year – any success in turning natural gas into a readily accessible automobile fuel could have a revolutionary impact on our entire economy.

Are Hydrogen Cars the Future – Again?

The hydrogen car may be on the road to another comeback – again.  At the annual auto show in Los Angeles last week, both Honda and Hyundai unveiled “concept cars” of hydrogen models they expect to be available by 2015.  As a result, the automobile press has been filled with stories its revived prospects.

“For a long time, hydrogen fuel-cell vehicles were seen as a tantalizing technology to help reduce society’s reliance on oil,” Brad Plumer wrote in the Washington Post. “But the vehicles themselves were seen as forbiddingly expensive. Not the pendulum may be swinging back.”

“Toyota made a decagon – the fuel-cell car is going to be a big part of our future,” wrote Bradley Berman in The New York Times, quoting Toyota spokesman John Hanson.  “Today Toyota is not alone,” he continued. “Four other carmakers – General Motors, Hyundai, Honda and Mercedes-Benz – are also promising fuel-cell cars in the next few years.”

The prospect of an automobile running on hydrogen is indeed perpetually attractive.  Hydrogen is the most common element in the universe.  When combined with free oxygen in the atmosphere it “combusts” to produce H2O – water.  There are no other “exhausts”. Thus hydrogen promises transportation absolutely clean of any air pollution.  No global warming, either.

But it isn’t quite that simple.  The question that always presents itself is, “Where do you get the hydrogen?” Although hydrogen may be the most common element on earth, all of it is tied up in chemical compounds, mostly methane and water.  Accessing this hydrogen means freeing it up, which requires energy.

Most of our commercial hydrogen is made by “reforming” natural gas, which splits the carbon and hydrogen in methane to produce carbon dioxide and free hydrogen. That doesn’t help much with global warming.  Another method is to split water through electrolysis. That is a much cleaner process but requires a considerable amount of electricity. Depending on what power source is used, this can produce zero or ample emissions. If it’s coal, the problem is made much worse. If it’s clean sources such as solar or nuclear, then there can be a strong advantage. In the 1930s, John Haldane proposed giant wind and solar farms that would generate hydrogen that could fuel all of society. Such facilities generating hydrogen for transportation would be a step toward such a utopia.

Even then, however, there are problems.  Hydrogen is the smallest molecule and leaks out of everything.  It is very difficult to transport.  Joseph Romm, a disciple of alternative energy guru Amory Lovins, was appointed head of hydrogen car development program under President Bill Clinton and worked for two years on its development.  In the end, he became very disillusioned and wrote a book entitled The Hype About Hydrogen, in which he argued that the idea really wasn’t practical. Romm is now one of the country’s premier global warming alarmists on

What has apparently brought hyfrohgen cars back to the forefront has been the substitution for platinum as the principal catalyst in the fuel cell process.

A fuel cell produces an electric current by stripping the electron off a hydrogen atom and running it around a barrier that is otherwise permeable to a naked proton.  The proton and electron are reunited on the other side of the barrier, where they combine with free oxygen to form water.  Until recently, platinum was the only substance that could fill this barrier function. This made fuel cells very expensive and raised the question of whether there was enough platinum in the world to manufacture fuel cells in mass production.  But several platinum substitutes have now been found, making fuel cells considerably cheaper and more accessible.

Estimates are now that next year’s Hyundai and Honda FCVs will sell for about $34,000, which puts them in the range of electric vehicles such as the Nissan Leaf and the Toyota Prius.  (The Tesla, a luxury car, is  priced in a much higher range,)  The problem then becomes fueling.  The FCV offers considerable advantages over the EV in that it has a range of 300 miles, comparing favorable to gasoline vehicles.  It can also be refilled in a matter of minutes, like gasoline cars, whereas recharging  an EVs can take anywhere from  20 minutes to three hours. But hydrogen refueling stations have not materialized, despite former governor Arnold Schwarzenegger’s promise of a “hydrogen highway.” At last count there were 1,350 EV recharging stations around the country but only ten hydrogen stations, eight of them In Southern California.

All this suggests that neither hydrogen cars or electric vehicles will be sweeping the country any time soon.  Neither the Chevy Volt nor the Nissan Leaf have sold well and are not expected to do much better next year.  If you read the press stories carefully, you soon realize that the reason the automakers are constantly cycling back and forth between electric and hydrogen cars is that they are trying to meet California’s requirements for low-emissions vehicles that will allow them to continue selling in the state. The problem, as always, is consumer resistance..  The automakers can manufacture all the hydrogen and electric cars they want but consumers are not always going to buy them, especially at their elevated price.  So the manufacturers will end up dumping them on car rental agencies where they will sit on the back lots, as did the first generation of EVs.

There is, however, one type of alternative that succeeded handsomely in California and had widespread consumer acceptance, although it is completely forgotten today.  That is methanol.  In 2003, California had 15,000 cars running on blends of up to 85 percent methanol.  Consumers were extremely happy and did not have to be dragooned into buying them.  Refueling was easy since liquid methanol slots right into our current gas stations. Cars that run on methanol can be manufactured for the same price as cars that run on gasoline.

The experiment only ended because natural gas, the main feedstock for methanol, had become too expensive.  In 2003, natural gas was selling as high as $11 per mBTU, making it more expensive than gasoline.  That was before the fracking revolution.  Today natural gas sells for less than $4 per mBTU and the industry is coping with a glut.  Methanol, which is already produced in industrial quantities, could sell for $1 less than motorists are now paying for energy equivalent in gasoline.  Moreover, methanol can be made from garbage and crop wastes and a variety of other sources that would reduce it’s carbon footprint.

Hydrogen and electric cars each have a future and it is good to see the auto companies keep experimenting with them.  But each has impediments that are going to be difficult to overcome. Methanol, on the other hand, is a technology that could be implemented today at a price that not require subsidies.  Even if it is only perceived as a “bridge” to some more favorable, low-carbon future, it is worth pursuing now.