Sunday, December 27, 2015

Five energy surprises for 2016: The possible and the improbable

Many energy analysts like to make predictions at the end of the year for the coming year. Instead, I'll point to five possible surprises in energy--surprises because few people expect them to happen. I am not predicting that any of the following will happen, only that there is an outside chance that one or more will occur. Naturally, these surprises would move markets and policy debates in unexpected directions.

1. Crude oil ends 2016 below $30 per barrel. With oil hovering in the mid-$30 range it doesn't seem implausible that at some point in the not-to-distant future, crude oil will dip below $30 per barrel, if only briefly. What would surprise most people is if the crude oil price finished next year below $30 per barrel. The conventional wisdom is that cheap oil is giving a boost to the economy that will lift worldwide economic growth and thus demand for oil. There is also a belief that high-cost producers will simply have to stop drilling new money-losing wells after more than a year of financial Armageddon in the oil markets. This will bring down supply just as economic growth is rising, sending prices much higher as the year progresses.

The alternate view is that oil in the mid-$30 range is a reflection of an economy that has been weakening since the middle of 2014 and foreshadows a worldwide recession which should hit in full force by the end of 2016. In addition, with Iran almost certain to add to the current oversupply as sanctions are lifted and with the continued determination of OPEC to destroy the viability of tight oil deposits in the United States, the oil price could surprise on the downside, even testing $20 per barrel.

2. U.S. natural gas production declines. Despite persistent low U.S. natural gas prices, U.S. production has continued to grow. Most of the growth has been coming from two places: the Marcellus Shale where ample deposits continued to be economical in the range of $3 to $4 per thousand cubic feet (mcf) and Texas where furious fracking for oil locked in deep shale deposits also produced associated natural gas without concern for the price of that gas.

With oil drilling across the United States in precipitous decline because of low oil prices, we won't see nearly as much new natural gas associated with oil drilling as we saw in 2014 and 2015. With natural gas now hovering around $2, even the very sweetest of the sweet spots in the Marcellus are unlikely to be profitable to exploit.

Having said all this, U.S. natural gas production growth has continually defied predictions that it would dip in the face of low prices. Part of this had to do with desperate drillers carrying heavy debt loads who had to produce gas at any price in order to pay interest on that debt.

Sunday, December 20, 2015

Who's right, commodities or the Fed?

As the U.S. Federal Reserve Bank raised interest rates last week for the first time in 10 years in response to what it said was strength in the U.S. economy, economically sensitive commodities such as industrial metals and crude oil continued to plumb new cycle lows.

Either these commodities are about the turn the corner as renewed strength in the United States--the biggest buyer of commodities next to China--revives industrial metal and crude oil demand--or the Federal Reserve is misreading the tea leaves and crashing commodity prices signal a world and U.S. economy in distress.

Market analysts like to say that copper is the metal with a Ph.D. in economics. Because of copper's central role in the modern economy, it often reliably forecasts the direction of the economy. Since copper reached its peak at the beginning of 2011 above $4.50 per pound, it has swooned to near $3 in 2011 coinciding with a crisis in Europe, bounced back to near $4 once the crisis passed and then settled above $3 by the middle of 2013 where it essentially traded sideways until this year. After trending down since May copper hit $2.05 a pound last week, only three cents above the low for the year registered on November 23.

And, it wasn't just copper. Nickel started the year above $7 a pound and finished last week at $3.90 a pound. Aluminum began the year above 90 cents a pound and settled last week at 67 cents. Zinc peaked near $1.10 a pound in May and now sells for 66 cents. Iron ore prices, which dropped almost 50 percent last year, this year dropped from $68 per ton to $47 as of last week, another 31 percent decline.

Sunday, December 13, 2015

The zombie apocalypse in oil: Why it's a bad sign for all of us

The dramatic drop in oil prices has created what are called "zombie" companies, oil companies which can still afford to pay interest on huge debts, but little else. If oil prices stay low, the problem is likely to spread and become an economic zombie apocalypse for much of the industry and the communities and countries that depend on it.

Meanwhile, consumers have rejoiced as cheap oil prices have led to cheap gasoline, diesel, heating oil and jet fuel. Both households and businesses are finally getting their revenge on the oil companies after a decade of high and rising prices.

But should those consumers be so sanguine? Can the low prices we are experiencing today be extrapolated far into the future? The conventional wisdom says yes. It claims that the American fracking boom of recent years has unleashed a flood of oil that will keep prices down for many years to come. Combine that with an undisciplined OPEC that pumps flat out and you get not a temporary dip in prices, but a new era of low-cost oil and oil products.

Sunday, December 06, 2015

Sunday, November 29, 2015

Climate change is our grand narrative now

There is the story of our personal lives: our family, our friends, our jobs, our hobbies. There is the story of our communities: our civic, religious, business, artistic and recreational lives. There is the story of our nations: their internal political struggles and their struggles with each other.

But now, there is one grand narrative which ties us all together, whether we want to be connected or not, whether we are preoccupied with our personal, community or national narratives or not. That is the narrative of our changing climate and the resulting threat to the continuity of our world civilization. The climate talks in Paris are but one expression of this new reality.

Even people who oppose doing anything about climate change are forced to talk about it. Even people who somehow have convinced themselves that climate change is not happening and oddly, in the same breath, claim that humans have nothing to do with this thing that is not happening--even those people confirm by their very framing of the issue that they are firmly situated inside this narrative.

Sunday, November 22, 2015

Genetically engineered salmon: What could possibly go wrong?

As U.S. regulators cleared genetically engineered salmon for sale in the United States last week, they opened the door to what many scientists already feel is inevitable: The escape and reproduction of GE salmon in the wild and the possible destruction of competing wild species.

Under the U.S. Food and Drug Administration-approved application, the company behind the so-called AquAdvantage Salmon, Aqua Bounty, can only raise such salmon in land-based tanks with "multiple and redundant levels of physical barriers to prevent eggs and fish from escaping." These barriers are described in detail and suggest that it will be very difficult for any eggs or fish to escape into waterways.

The FDA said it considered four interrelated questions about confinement of the fish:

  1. What is the likelihood that AquAdvantage Salmon will escape the conditions of confinement?
  2. What is the likelihood that AquAdvantage Salmon will survive and disperse if they escape the conditions of confinement?
  3. What is the likelihood that AquAdvantage Salmon will reproduce and establish if they escape the conditions of confinement?
  4. What are the likely consequences to, or effects on, the environment of the United States should AquAdvantage Salmon escape the conditions of confinement?

Sunday, November 15, 2015

Syria, climate change and the horror in Paris

As the world mourns those who died in Paris last week in a killing spree for which the Islamic State in Iraq and Syria (ISIS) has claimed responsibility, reporters and commentators have been discussing the motivations behind the attacks. I'm not sure that any so far has considered whether one can draw a straight line from a severe drought in Syria to these mass killings. My own answer is that if the line is there--and I think it is--then it has taken many twists and turns before arriving in Paris.

Even so, it might be worthwhile for those who will soon be gathering in this bereaved city in order to negotiate a new worldwide climate treaty to understand any such connection. For in the background behind these events, there is a Syria starved of water almost surely because of climate change.

A study released earlier this year suggested that the first link in the causal chain that led to the current conflict in Syria was a severe drought lasting from 2006 through 2009, a drought that yielded some of the strongest evidence yet for the link between climate change and increasingly extreme droughts.

Sunday, November 08, 2015

Getting it wrong on recycling

Let's see what those disparaging America's rate of recycling as "too high" either get completely wrong or fail to understand. You can read recent commentary suggesting that the recycling rate is too high here, here and here.

The number one complaint is that it costs more to recycle some categories of waste than to put them into a landfill. What the critics fail to comprehend is that unlike a couple of generations ago when most landfills were owned and run by local governments, today most are run by profit-making enterprises such as Waste Management Inc. and Republic Services Inc. which haul some 80 percent of the nation's refuse. Those enterprises developed their large centralized landfills for the purpose of keeping down their disposal costs.

Since the private waste disposal industry has organized its infrastructure around cheap landfill disposal, it's no wonder that landfilling seems like the most cost-effective option. It follows that if we Americans had built a waste infrastructure with the goal of zero waste as Germany did, our infrastructure would naturally have delivered lower costs for recycling than it does.

Sunday, November 01, 2015

Exxon: We knew climate change was a real threat (but we didn't want you to)

One of the big complaints about climate change deniers is that they don't fund any genuine primary scientific research into climate change.

We are used to deniers extracting out-of-context passages from existing legitimate climate research and pretending those passages support the denialist position. But wait...we now know, thanks to recent coverage by Inside Climate News and the Los Angeles Times, that at least one climate change denier did fund a great deal of legitimate climate research.

And, what did that research show? It showed that climate change is real, is caused in great measure by human activities and has the potential to disrupt human society significantly. To be fair, when Exxon Corp. (now Exxon Mobil Corp., the world's largest publicly traded oil company) engaged in this research in the 1970s and 1980s, it was genuinely trying to understand the relationship between carbon dioxide emissions and climate change. During that time Exxon scientists collaborated openly with prominent academic and government researchers and were even praised for their commitment and professionalism.

Sunday, October 25, 2015

Public health, endocrine disruption and the precautionary principle

Several years ago over lunch a medical researcher I know told me that industrial chemicals were disrupting the human endocrine system leading to widespread obesity and diabetes. He said his research had revealed an important cause--the decline in the production of testosterone in both men and women (yes, women produce a little testosterone) due to this disruption. When this deficiency was reversed, patients experienced significant improvement in both obesity and diabetes.

That's not all. He explained that most people believe that poor diet and little exercise are the central cause of obesity and diabetes. No doubt poor diet and exercise are important contributing factors. But when the body's signaling system fails to indicate when it has had enough to eat, it's hard for most people to recognize that they need to stop eating. How many of us know people who say that they are hungry all the time? A normal human being with a normal endocrine system should not feel "hungry all the time."

The link between what has become a sweeping twin epidemic and man-made chemicals is getting wider notice these days. But the link between endocrine disruption, obesity and diabetes is still absent from popular medical accounts such as those found on WebMD for obesity or on official sites such as that of the World Health Organization.

Sunday, October 18, 2015

Goldilocks and the three prices of oil

We all know Goldilocks from the story of Goldilocks and the Three Bears in which the young maiden wanders into the home of the bears and samples some porridge that happens to be sitting on the dinner table. The first bowl is too hot, the second is too cold and the third is just right.

Like a corporate version of Goldilocks, the oil industry has been wandering into the world marketplace in recent years often finding an oil price that is either too high such as in 2008 and therefore puts the brakes on economic growth undermining demand and ultimately crashing the price as it did in 2009. Or it finds the price too low as it is today therefore making it impossible to earn profits necessary for exploiting the high-cost oil that remains to be extracted from the Earth's crust. Oil that hovered around $100 per barrel from 2011 through much of 2014 seemed to be just right. But those prices are now long gone.

Violent swings in the price of oil in the last decade have made it difficult for the industry to plan long term to produce consistent supplies at moderate prices. This has important implications for future supplies which I will discuss later.

Sunday, October 11, 2015

Unstable world: Is it time to buy volatility?

On Wall Street buying options--options on stocks, on commodities, on currencies, on almost anything--has been seen as a sucker's bet (unless you are doing it to hedge an existing investment).

For the uninitiated, options are the right to buy or to sell something--practically anything really--at a set price over an agreed period of time. I can call my broker and buy the right to purchase Yahoo at $35 a share between now and April 15 next year for $2.32 a share. I can also buy the right to sell Yahoo at $25 a share for $1 a share. I might do this if I owned the stock and wanted to protect my investment in case of a decline. With Yahoo trading at about $32 a share, neither option would make me any money right now. But either one could make me money, and possibly lots of it, if there were to be a major move in Yahoo either up or down between now and April 15. In essence, I would be buying volatility.

Yahoo dropping to $2 a share or zooming upward to $200 in the period before the options described above expire would surely destroy a significant chunk of the wealth of those who sold options to others that allow them to sell at $25 in the former case or to buy at $35 in the latter case.

Sunday, October 04, 2015

'Blood & Oil', North Dakota, and dreams not exactly fulfilled

Last week a new television series set amidst the North Dakota oil boom debuted. Blood & Oil tells the story of locals and newcomers striking it rich in The Bakken, an oil formation that has been heralded as containing more oil than Saudi Arabia--a wildly misleading* but understandably alluring slogan.

Based on the first episode we can conclude that this program is not actually a contemporary drama, but rather a period piece--specifically the period when North Dakota was booming from about, say, 2009 to sometime in mid-2014. And, therein lies the story. For Blood & Oil, above all, must be a tragedy of broken dreams if it is to live up to its realism credentials.

We must look beyond the fact that the show is shot in Utah to the substance of the series. When we do, we see the ever-present gambler's mentality that dominates the American mind. It did not go unnoticed that America was a land of plenty from the very beginning of European settlement. One of the first European explorers and founder of the first permanent English settlement, Capt. John Smith, observed:

And in diverse places that abundance, of fish lying so thick with their heads above the water [that] as for want of nets (our barge driving among them) we attempted to catch them with a frying pan, but we found it a bad instrument to catch fish with. Neither better fish, more plenty, nor more variety for small fish had any of us ever seen in any place so swimming in the water...

Sunday, September 27, 2015

Will declines in U.S. and Canadian oil production lead to a global decline?

At the beginning of this year I noted that all of the growth in world oil production* since 2005 has come from two countries: the United States and Canada. And, I suggested that since the growth in production in those two countries came from high-cost deposits--tight oil in the United States and tar sands in Canada--that the precipitous drop in oil prices would lead to declines in production in both countries.

I concluded that unless another area of the world suddenly started growing its oil production significantly that those declines would probably result in a worldwide decline in oil production.

Well, declines in both the United States and Canada have arrived. It will be several months before we can know with any certainty whether those declines will translate into a persistent global decline. But this much we do know:

The International Energy Agency, a consortium of 29 countries tasked with tracking worldwide energy trends, said in its latest report that global oil production fell 600,000 barrels per day in July--and here's the important part--"mainly on lower non-OPEC output." That's a reference to falling U.S. and Canadian production. One month does not make a trend. But the report notes that non-OPEC supply is expected to contract in 2016.

Sunday, September 20, 2015

Will Washington state have the nation's first carbon tax?

Yoram Bauman is the world's only "stand-up economist." He makes his living poking fun at his own profession. But he's dead serious about fighting climate change, and he's the intellectual force behind a climate-related initiative that seems likely to appear on Washington state's November 2016 ballot, an initiative that would implement the first carbon tax in the nation.

The purpose of the measure, dubbed Initiative 732, would be to motivate households and businesses to cut down on the burning of fossil fuels, the major source of man-made emissions of carbon dioxide, the main greenhouse gas. By raising the price of fossil fuels it would encourage conservation and efficiency and the substitution of low-carbon and carbon-free sources of energy by making these energy sources more cost-competitive.

The organization pushing the initiative is Carbon Washington. The principle behind the proposal is simple: Raise taxes on what you want less of and lower taxes on what you want more of.

Sunday, September 13, 2015

Truth takes a hit in the battle over U.S. oil export ban

They say that the first casualty of war is truth. And, on both sides of the fight over lifting the ban on exports of U.S. crude oil, the truth has already fallen into a coma. The ban was instituted in 1975 in order to make America less subject to swings in international oil supply after suffering the price shock associated with the Arab oil embargo in 1973.

Last week a committee in the U.S. House of Representatives voted to end the ban after a Senate committee voted in July to do the same. A vote by the full House and Senate could be near.

The proponents are careful NOT to say that the United States is energy-independent and so has oil to spare. Such claims made in the past backfired because it is too easy to look this up. Net U.S. imports of crude oil were almost 7 million barrels per day (mbpd) in the week ending September 4. That's out of about 15.8 mbpd of petroleum-based fuels consumed domestically.*

Sunday, September 06, 2015

Stock market confessions, chaos, complexity and the illusion of control

In the old days of the Chinese Cultural Revolution those who said or did something perceived by the Chinese authorities to be counter-revolutionary were forced into public confessions--and then humiliated, imprisoned or even put to death.

It seems that old ways die hard. Last week the new China--the one that had thrown off the yoke of the Cultural Revolution--televised forced confessions by people who had dared to say that the Chinese stock market may not be a great place to put your money these days.

In addition, Chinese government officials are cracking down on short sellers--those who borrow stock to sell, hoping to buy it back at a lower price. Officials are prohibiting large holders of stock from selling for six months, and they are flooding brokerages with easy credit to encourage those brokerages and their clients to buy stocks with borrowed money. Who would have guessed that still nominally communist China would go to such great lengths to protect the most prominent symbol of out-of-control capitalism, a stock market bubble?

Sunday, August 30, 2015

Anxiety turns to fear: Markets, energy, Pan and the Zeitgeist

The characteristic feeling of the post-2008 world has been one of anxiety. Occasionally, that anxiety breaks out into fear as it did in the last two weeks when stock markets around the world swooned and middle class and wealthy investors had a sudden visitation from Pan, the god from whose name we get the word "panic." Pan's appearance is yet another reminder that the relative stability of the globe from the end of World War II right up until 2008 is over. We are in uncharted waters.

Here is the crux of the matter as expressed in a piece which I wrote last year:

The relentless, if zigzag, rise in financial markets for the past 150 years has been sustained by cheap fossil fuels and a benign climate. We cannot count on either from here on out....
Another thing we cannot necessarily count on is the remarkable geopolitical stability that the world experienced for two long stretches during the fossil fuel age. The first one lasted from the end of the Napoleonic Wars in 1815 to the beginning of World War I in 1914 (interrupted only by the brief Franco-Prussian War). The second lasted from the end of World War II in 1945 until now.
Following the withdrawal of U.S. military forces from Iraq, the Middle East has experienced increasing chaos devolving into a civil war in Syria; the rapid success of forces calling themselves the Islamic State of Iraq and Syria which are busily reshaping the borders of those two countries; and now the renewed chaos in Libya. We must add to this the Russian-Ukranian conflict. It is no accident that all of these conflicts are related to oil and natural gas.

As I view the current world landscape, I am reminded of two movies (which I've written about before) that I think capture the Zeitgeist: Melancholia and Take Shelter. In both the protagonists increasingly sense that something is terribly wrong, but can't quite put their finger on it. Everyone around them thinks they are ill or crazy. But for both protagonists, their anxiety comes from an inner vision that stems not from mere psychic disturbances, but rather from alarming real-world circumstances that are about to break into the open.

Sunday, August 23, 2015

Counterintuitive: (Some) volatility is good for you, stability not so much

With stock markets around the world plunging and commodity prices in free fall, it seems appropriate to return to a theme which I've taken up previously: That a certain amount of volatility is good for humans and the systems they build, and that attempts to stifle the natural and healthy volatility of a system can lead to greater and even catastrophic volatility in the end.

All of this runs counter to the propaganda with which we are regaled on a daily basis. For example, investors are told that the lower the volatility of their portfolios, the lower the risk. But, in 2008 that turned out not to be true. More recently, as volatility in the widely watched S&P 500 settled down to historic lows this year, investors believed that the magic of low volatility was here to stay. Central banks--through their periodic interventions when markets began to fall--had somehow engineered a no-lose situation for investors. It was going to be clear sailing ahead for...well, forever if you listen to Wall Street.

The history of volatility in markets and in life suggests that high volatility lies just around the bend after a prolonged period of low volatility. It is impossible to say what would trigger the kind of crash we saw in 2008. For now, the Chinese stock market crash and recent negative economic news in China and the United States have unnerved many investors. The Chinese stock market is now more than halfway to a 2008-style meltdown. Stocks in Europe and the United States have finally started to fall in earnest after holding up and even advancing in the face of major declines in emerging markets such as Brazil, Indonesia, Malaysia, and Turkey. Money rushed from the emerging markets to major developed economies looking for--you guessed it--stability.

Sunday, August 16, 2015

What is the price of oil telling us?

Market fundamentalists tell us that prices convey information. Yet, while our barbers and hairdressers might be able to give us an extended account of why their prices have changed in the last few years, commodities such as oil--which reached a six-year low last week--stand mute. To fill that silence, many people are only too eager to speak for oil. And, they have been speaking volumes. So much information in that one price!

First, as prices fell last year when OPEC refused to cut its oil production in the face of slowing world demand, the industry kept saying that it could continue to produce from American tight oil fields at around $80 a barrel and be profitable. Then, as prices fell further, the industry and its consultants assured everyone that while growth in tight oil production would slow, it would still be profitable for the vast majority of wells planned.

Petroleum geologist and consultant Art Berman is probably the best representative from the skeptical camp. For many years Berman has been pointing to the high cost of getting fracked oil out of the ground. And, those costs led to negative free cash flow for most tight oil operators for several years in a row--that is, they spent considerably more cash than they took in, making up the balance with debt and stock issuance. Not surprisingly, the operators took that money and kept drilling as fast as they could.

Sunday, August 09, 2015

The future isn't what it used to be

Two recent films couldn't be more at odds in their vision of the future. Mad Max: Fury Road is the long-awaited continuation of the Mad Max movie series. The movie is essentially a relentless chase scene set in a world burned to desert by climate change and bereft of civilization which has long since vanished in a haze of war and resource shortages.

(Spoiler alert: In this piece I discuss many events at the end of each film. For Mad Max fans this should make no difference in their enjoyment of the long and injurious chase scenes that are the meat of the film. I do not see how the confusing concatenation of nonsequiters that make up Tomorrowland could be ruined by my commentary. But, those who want to see the film without knowing the end should read no further--until they return from a showing.)

In Disney's Tomorrowland something's gone wrong in the mysterious Platonic dimension of forms called Tomorrowland which communicates with and influences the real world of today. Hugh Laurie plays the ruler of Tomorrowland. He laments that he has been sending messages to the real world for years about all the stupid things people are doing: wasting resources, changing the climate, polluting the planet, engaging in senseless wars. But almost no one seems to be listening. For those few who are, all they do is talk about the negative without offering any solutions.

Sunday, August 02, 2015

Energy, the repressed: Paging Dr. Freud

Jeremy Rifkin announced the end of work in a book by that title in 1995. Today, we are once again being told that the end of work is nigh. The Atlantic Monthly tells us so in a piece entitled, "A World Without Work." Automation and computer technology will bring unimaginable change and prosperity--and result in the loss of millions of jobs that will not be replaced.

I heard this before when I was young. In the 1960s there was talk of a three-day workweek for similar reasons. Obviously, it didn't work out.

My purpose here is not to provide a detailed critique of such prognostications. Rather, I ask the same question I ask when I see a science-fiction film depicting widespread space travel and planetary colonization. Where are they getting all the energy to do these things?

Sunday, July 26, 2015

Nonlinear: New York, London, Shanghai underwater in 50 years?

Those under the impression that climate change is advancing at a constant and predictable rate don't understand the true dynamics of the issue. The rate of increase of the carbon dioxide concentration in the atmosphere, the main driver of climate change, went from 0.75 parts per million (ppm) per year in 1959 to about 1.5 ppm each year through the 1990s, to 2.1 ppm each year from 2002 to 2012, and finally to 2.9 ppm in 2013.

The fear is that the ability of the oceans and plants to continue to absorb half the carbon dioxide human civilization expels into the atmosphere each year may have become impaired. That means more carbon dioxide is remaining in the atmosphere where concentrations are building at the fastest rate ever recorded in the modern era.

Permafrost across the most northern reaches of land on the globe wasn't expected the start melting until well into this century. Scientists were shocked to find gaping craters in Siberia where permafrost apparently is no longer permanent. It means carbon dioxide and methane--which absorbs about 80 times as much heat as carbon dioxide during its first 20 years in the atmosphere--will be unleashed from the melting permafrost much sooner than anticipated after being trapped for thousands of years. The release has the potential to speed up warming considerably.

Sunday, July 19, 2015

Has U.S. oil production started to turn down?

The plunge in oil prices last year led many to say that a decline in U.S. oil production wouldn't be far behind. This was because almost all the growth in U.S. production in recent years had come from high-cost tight oil deposits which could not be profitable at these new lower oil prices. These wells were also known to have production declines that averaged 40 percent per year. Overall U.S. production, however, confounded the conventional logic and continued to rise--until early June when it stalled and then dropped slightly.

Anyone who understood that U.S. drillers in shale plays had large inventories of drilled, but not yet completed wells, knew that production would probably rise for some time into 2015--even as the number of rigs operating plummeted. Shale drillers who are in debt--and most of the independents are heavily in debt--simply must get some revenue out of wells already drilled to maintain interest payments. Some oil production even at these low prices is better than none. Only large international oil companies--who don't have huge debt loads related to their tight oil wells--have the luxury of waiting for higher prices before completing those wells.

The drop in overall U.S. oil production (defined as crude including lease condensate) is based on estimates made by the U.S. Energy Information Administration (EIA). Still months away are revised numbers based on more complete data. But, the EIA had already said that it expects U.S. production to decline in the second half of this year.

Sunday, July 12, 2015

Chinese stocks: When mispricing becomes more important than pricing

Defenders of the free market faith tell us that price conveys a great deal of information, enough that you can base an entire economic system on it without any central planning or coordination whatsoever. Whether extreme devotion to this principle is wise may not be so important to determine this week as whether free market prices are actually available in many markets. Recent events surrounding the precipitous decline of the Chinese stock market are illustrative of this problem, but I'll come back to this a little later.

Years of suppressing the cost of credit through central-bank imposed near zero interest rates has led to the mispricing of anything that depends on credit. The list is long and includes real estate because mortgages are central to its purchase; oil because cheap bank loans and low bond rates financed otherwise uneconomic deposits of tight oil from deep shale deposits in the United States; natural gas in the United States for similar reasons; stocks and bonds because large investors often borrow to buy them; and cheap Chinese consumer goods made more and more available by cheap finance to build the factories that produce them.

The effect is not uniform, that is, cheap credit tends to make some things go up by stimulating demand for them such as real estate, stocks and bonds--while making some things go down such as the price of oil and natural gas because U.S. drillers got cheap financing which encouraged overproduction.

Sunday, July 05, 2015

Lab rats and the corruption of how we count

There's an old joke about lab rats in which the teller says he or she secretly suspects that all lab rats are prone to cancer and so all research about the risk of cancer in humans based on tests in rats is likely useless.

The Committee for Independent Research and Information on Genetic Engineering, a European-based research group, thought it would look into such a possibility.

Last week the group released its findings and that joke became a reality. The diet fed to most lab rats is so laced with pesticides, heavy metals, genetically engineered feed and other man-made contaminants that lab rats worldwide are indeed at much higher risk of developing cancer and other diseases and disabilities just from the food they are reared on.

Sunday, June 28, 2015

Sunday, June 21, 2015

Radio Interview: Nuclear and other alternative energy sources

In lieu of my weekly post, I'm posting a link to a radio interview I did recently. Doug Goldstein, host of the personal finance show "Goldstein on Gelt," brought me back for a return engagement to discuss the future of alternative energy including molten salt reactors. The show was broadcast on Israel's English-language radio network, Israeli National Radio. Click here to go to the page containing the podcast.

To hear my previous interview on the swoon in oil prices, click here.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, June 14, 2015

No, BP, the U. S. did NOT surpass Saudi Arabia in oil production

Even the paper of record for the oil industry, Oil & Gas Journal, got it wrong. With the release of the latest BP Statistical Review of World Energy, media outlets appeared to be taking dictation rather than asking questions about which countries produced the most oil in 2014.

If they had asked questions, they would have ended up with a ho-hum headline announcing that last year Russia at 10.1 million barrels per day (mbpd) and Saudi Arabia at 9.7 mbpd were once again the number one and number two producers of crude oil including lease condensate (which is the definition of oil). The United States at 8.7 mbpd remained in third place.

The most important question they could have asked is this: How is BP defining oil? It turns out that oil according to the BP definition includes something called natural gas liquids which includes lease condensate--very light hydrocarbons that come from actual oil wells and are included in the oil refinery stream--and natural gas plant liquids which come from natural gas wells and include such things as ethane, propane, butane and pentanes. Only a small portion of natural gas plant liquids are suitable substitutes for oil.

Sunday, June 07, 2015

Delayed gratification for OPEC, more pain for investors

Delayed gratification is said to be a sign of maturity. By that standard OPEC at age 55 demonstrated its maturity this week as it left oil production quotas for its members unchanged. It did so in the face of oil prices that are about 40 percent lower than they were at this time last year, delaying once again a return to the $100-per-barrel prices seen during the past four years.

Why OPEC members chose to leave their oil output unchanged is no mystery. The explicit purpose for keeping oil prices depressed is to close down U.S. oil production from deep shale deposits--production that soared when oil hovered around $100 a barrel, but which is largely uneconomic at current prices. That production was starting to threaten OPEC's market share.

If OPEC were to cut its oil production now and drive prices back up, it would only lead to increased drilling in the United States and loss of market share. In fact, even as spot oil prices sank below $45 per barrel in the United States earlier in the year, investors continued pumping money into U.S. oil drilling. According to The Wall Street Journal U.S. oil companies sold almost $17 billion in new shares in the first quarter of 2015, more than they sold in any quarter last year when prices were much higher.

Sunday, May 31, 2015

The energy revolution will not be televised

Three recent news items remind us that energy transitions take time, a lot of time--far too much time to be shrunk down into a television special, a few talking points, or the next big energy idea.

For example, the complex management task of putting together the international fusion research project called the International Thermonuclear Experimental Reactor (ITER) has resulted in estimated final costs that have tripled since the 2006 launch. Fusion could theoretically offer clean and abundant energy almost indefinitely because it uses ubiquitous hydrogen* as fuel and creates helium in the process. (Water you'll recall is two hydrogen atoms and one oxygen atom and is therefore the most abundant source of hydrogen.)

Despite nine years of effort, ITER has yet to carry out a single experiment; and, the project is not expected to do so for another four years. The idea for such an international project was hatched in 1985 during a summit between U.S. President Ronald Reagan and Mikhail Gorbachev, the leader of what was then still called the Soviet Union. Thirty years later fusion is still receding into the horizon of our energy future.

Sunday, May 24, 2015

Is the slowdown in productivity growth a result of energy costs?

Slowing productivity growth in the United States has been in the news in recent months. It has become a concern to policymakers because they believe it is one of the primary contributors to a middle-class economic squeeze according to the annual report of the White House Council of Economic Advisors.

Simply put, productivity growth refers to the growth in economic output per worker or more precisely, per hour of work. When this growth slows, the potential for real wage increases diminishes since the growth in wages typically reflects the ability of workers to create more output per unit of time.

To the obstensibly naive observer the following idea may seem a plausible explanation: Higher-cost energy inputs into the production of goods and services reduce productivity growth because the economic output per dollar of energy consumed declines. And, though energy inputs aren't the only thing to consider, they are important. The high energy prices of the last decade or so may be, in part, responsible for low productivity growth. (Conversely, low energy costs would imply more output per dollar of energy consumed.)

Sunday, May 17, 2015

Stephen Toulmin welcomes you to the end of modernity

Historian and philosopher of science Stephen Toulmin welcomes you to the end of modernity, at least modernity as we've imagined it. By modernity, he does not mean modern gadgets. By end he does not mean an end to progress in the natural sciences, nor in human affairs in general. Instead, he is talking about a way of thinking which has held us in thrall since the 17th century, for good and for ill, and is now giving way fitfully to a new (he would say "old"), more flexible worldview.

Toulmin's book Cosmopolis: The Hidden Agenda of Modernity is not new. It was published in 1990. Its argument will be of interest to anyone concerned with issues of sustainability including climate change and resource depletion.

Toulmin offers an historical account of how this view we call modern arose, and he catalogues its tenets. The ones that are of particular interest to me are as follows:

  • Nature is governed by fixed laws set up at the Creation.
  • The material substance of physical nature is essentially inert.
  • Physical objects and processes cannot think.
  • At the Creation, God combined natural objects into stable systems.
  • The essence of humanity is rational thought and action.

Sunday, May 10, 2015

Terms of debate: Destroying vs altering nature, the fragile vs the resilient Earth

Last week's piece drew responses that throw into relief how much the language we use depends on our most basic assumptions about how the world works. If left unexamined, that language leads to further conclusions that go unchallenged because the underlying assumptions are never scrutinized.

I challenged the Breakthrough Institute's notion that humans are in one category and nature in another. If one views humans as merely a part of nature or the universe or the web of existence--however one chooses to name that which includes everything--then our role becomes distinctly different.

Under my assumption humans are embedded in the natural world. They are not the sole actors or agents in it, only one of countless actors, most of which we probably know nothing about. We cannot get one up on nature. We can only cooperate with its workings.

Sunday, May 03, 2015

'An Ecomodernist Manifesto': Truth and confusion in the same breath

I really do want to applaud the Breakthrough Institute's recently released paper called "An Ecomodernist Manifesto." It speaks with candor about the possible catastrophic consequences of unchecked climate change. It recognizes the large footprint of humankind in the biosphere. It wants to address both, and it wants to do so in a way that offers a positive vision for the human future that will attract support and, above all, action.

But, I can't applaud it because of its underlying assumption: that humans are in one category and nature in another. The key paragraph starts with the key sentence:

Humans will always materially depend on nature to some degree. Even if a fully synthetic world were possible, many of us might still choose to continue to live more coupled with nature than human sustenance and technologies require. What decoupling offers is the possibility that humanity’s material dependence upon nature might be less destructive.

"Humans will always materially depend on nature to some degree." This statement seems reasonable only if humans and nature are in different categories. But, they aren't--a concept that is distressingly NOT clear to most everyone who styles himself or herself as an environmentalist. Humans and their creations are as much a part of nature as everything else. Humans don't "materially depend on nature to some degree." Humans are entirely and completely dependent on nature (of which they are a part) for EVERYTHING. Even every synthetic substance uses feedstocks and energy from the natural world.

Sunday, April 26, 2015

Chinese energy figures suggest much slower growth than advertised

Last year China reported the slowest economic growth in 24 years, about 7.4 percent. But the true figure may actually be much lower, and the evidence is buried in electricity figures which show just 3.8 percent growth in electricity consumption.

David Fridley, a staff scientist in the China Energy Group at the Lawrence Berkeley National Laboratory, has been a longtime collaborator with the Chinese on energy management, efficiency and policy. Fridley, who has held Chinese energy-related jobs for 35 years, believes that electricity consumption in China is a better indicator of its economic growth.

Historically, electricity consumption and economic growth in China have been very closely linked. "From 2005 to 2013, the average elasticity of electricity demand was 1.09, meaning electricity demand was up about 1.09 percent for every percent rise in GDP," Fridley wrote in an email. "In 2014, that number fell to 0.51, the lowest in this 10-year period. During the economic crisis of 2008, it did fall below the average, to 0.60, but quickly rebounded to above 1."

Sunday, April 19, 2015

Sunday, April 12, 2015

How the climate change debate got hijacked by the wrong standard of proof

Everyone loves a courtroom drama--especially one that pits a feisty, but a determined criminal defense attorney against the awesome power of a prosecutor who has the resources of the state behind him or her. We see such David and Goliath stories every week on television.

We cheer as the defense attorney pokes one hole after another in the case of the prosecutor, raising what the audience now perceives as reasonable doubt. But will the jury see it that way? We'll return after these messages....

This is just the sort of metaphorical setting into which the climate change denial lobby is trying to place the debate over climate change without the public or even most policymakers realizing it. The deniers in the fossil fuel industry and elsewhere are attempting by sleight-of-hand to get both the public and policymakers to abandon the preponderance of evidence standard used primarily in civil trials--and which is similar to evidence-based public policymaking--in favor of another judicial standard designed for criminal trials, namely, beyond a reasonable doubt.

Sunday, April 05, 2015

The hidden reasons behind slow economic growth: Declining EROI, constrained net energy

It should seem obvious that it takes energy to get energy. And, when it takes more energy to get the energy we want, this usually spells higher prices since the energy inputs used cost more. Under such circumstances there is less energy left over for the rest of society to use, that is, for the non-energy gathering parts--the industrial, commercial and residential consumers of energy--than would otherwise be the case.

It shouldn't be surprising then that as fossil fuels, which provide more than 80 percent of the power modern society uses, become more energy intensive to extract and refine, there is a growing drag on economic activity as more and more of the economy's resources are devoted simply to getting the energy we want.

A more formal way of talking about this is Energy Return on Investment or EROI. The "energy return" is the energy we get for a particular "investment" of a unit of energy. The higher the EROI of an energy source, the cheaper it will be in both energy and financial terms--and the more energy that will be left over for the rest of society to use.

Sunday, March 29, 2015

The puzzling flattening of carbon emissions and the problem of global growth

Last week we learned that maybe, just maybe, global carbon emissions were flat in 2014 even though the global economy supposedly grew by 3 percent. As Brad Plumer of Vox (whose work I greatly respect) points out, carbon emissions have moved up almost in lockstep with economic growth for the entire industrial age except during recessions and one year of growth 40 years ago.

This is why I use "supposedly" when referring to the global economic growth number. It's because there is another obvious and plausible explanation for the flat carbon emissions, namely, that the global economy did not grow by the stated percentage, that it may have grown only a fraction of that amount or not at all.

Economic measures are constantly being revised, and I think it is very likely that the global economic growth number for 2014 will be revised downward. Probably not to zero, but downward nonetheless. It's also possible that estimates of carbon emissions are too low. Plumer cites "notoriously unreliable" Chinese emission numbers as one reason to be skeptical.

Thursday, March 26, 2015

Recent radio interview on Israeli National Radio

I was recently interviewed by Doug Goldstein on his personal finance show, "Goldstein on Gelt," which plays on Israeli National Radio, the English-language radio network in Israel. Goldstein saw a piece of mine and asked me on the show to discuss the recent sharp decline in oil prices. A podcast of the interview is now available. Goldstein is a good interviewer with an eclectic mind and brought out the best in me with his conversational approach. The interview starts at about 2:30. Click here to go to the page containing the podcast.

Sunday, March 22, 2015

Cheap oil, complexity and counterintuitive conclusions

It is a staple of oil industry apologists to say that the recent swift decline in the price of oil is indicative of long-term abundance. This kind of logic is leading American car buyers to turn once again to less fuel efficient automobiles--trading efficiency for size essentially--as short-term developments are extrapolated far into the future.

The success of such argumentation depends on a disability in the audience reading it. The audience must have amnesia about the dramatic developments in the oil markets in the last 15 years which saw prices reach all-times highs in 2008 and then after recovering from post-crash lows linger at the highest average daily price ever from 2011 through most of 2014. And, that audience must have myopia about the future. It is an audience whose attention has narrowed to the present which becomes the only reference point for decision-making. History is bunk, and what is, always will be.

The alternative narrative is much more subtle and complex. As I've written before, the chief intellectual challenge of our age is that we live in complex systems, but we do not understand complexity. How can cheap oil be a harbinger of future supply problems in the oil market? Here's where complexity, history and subtle thinking all have to combine at just the right intellectual temperature to reveal the answer.

Sunday, March 15, 2015

Lipstick on a pig: America as the world's swing producer of oil

Most people have heard the old saying: "You can put lipstick on a pig. But it's still a pig." That's sort of what is happening in the American oil patch as producers try to put a positive gloss on the devastation that low oil prices are visiting on the industry.

Perhaps the most inventive redefinition is as follows: The part of the U.S. oil industry devoted to extracting tight oil from deep shale reservoirs in places such as North Dakota and Texas has made the United States the world's "swing producer." A swing producer is a country or territory that has large production in relation to the total market, substantial excess capacity and the ability to turn its capacity on and off quickly in response to market conditions.

The term makes the U.S. oil industry sound powerful and important. And, while the U.S. industry remains an important player in the world--third in production behind Russia and Saudi Arabia--it is most definitely not powerful in the sense that the moniker "swing producer" would imply.

Sunday, March 01, 2015

Taking a short break--no post this week

I'm taking a short break this week and next and expect to post again on Sunday, March 15.

Sunday, February 22, 2015

What is Saudi Arabia not telling us about its oil future?

It is popular these days to speculate about why Saudi Arabia cajoled its OPEC allies into maintaining oil production in the face of flagging world demand. As the price the world pays for oil and oil products has plummeted, the price OPEC members are paying in terms of lower revenues is high, even unbearable for those who didn't save up for just such a rainy day.

Was the real reason for the decision to maintain production the desire to undermine rising U.S. tight oil production--which has now proven embarrassingly vulnerable to low prices after years of triumphalist talk from the industry about America's "energy renaissance"? Were the Saudis also thinking of crippling Canada's high-cost tar sands production? Was it Sunni Saudi Arabia's wish to undermine its chief adversary in the region, Shiite Iran? Was the Saudi kingdom doing Washington's bidding by weakening Russia, a country that relies so heavily on its oil export revenue?

The Saudis say explicitly that they believe non-OPEC producers must now balance world oil supply by cutting back production rather than relying on OPEC--meaning mostly Saudi Arabia--to do so. And, those cutbacks in the form of drastically reduced investment are already taking place in the United States, Canada and around the world as low prices are forcing drillers to scale back their drilling plans dramatically. It is not well understood, however, that almost all of the growth in world oil production since 2005 has come from high-cost deposits in the United States and Canada which has made the two countries easy and tempting targets for the Saudis' low-price strategy.

Sunday, February 15, 2015

William Catton's warning

William Catton Jr., author of the seminal volume about our human destiny, Overshoot: The Ecological Basis of Revolutionary Change, died last month at age 88.

Catton believed that industrial civilization has sown the seeds of its own demise and that humanity's seeming dominance of the biosphere is only a prelude to decline. His work foreshadowed later works such as Joseph Tainter's The Collapse of Complex Societies, Richard Heinberg's The Party's Over: Oil, War and the Fate of Industrial Societies, and Jared Diamond's Collapse: How Societies Choose to Fail or Survive.

In Overshoot Catton wrote: "We must learn to relate personally to what may be called 'the ecological facts of life.' We must see that those facts are affecting our lives far more importantly and permanently than the events that make the headlines."

Sunday, February 08, 2015

Alternate opinions: The world's energy information duopoly comes to an end

Recent developments are beginning to undermine the supremacy of the world's long-running energy information duopoly and its perennially optimistic narrative. Policymakers, investors and the public should take heed.

Until now most energy price and supply forecasts and analyses were based predominately on information from the globe's two leading energy information agencies: the U.S. Energy Information Administration (EIA), the statistical arm of the U.S. Department of Energy, and the International Energy Agency (IEA), a consortium of 29 countries originally formed in response to the 1973-74 Arab oil embargo to provide better information on world energy supplies to its members.

Both agencies provide forecasts that are publicly available and widely covered in the media. What's not apparent is how dependent private forecasts issued by the energy industry and financial firms are on the work done by these agencies.

Sunday, February 01, 2015

Commodities crash: Bad news for the world economy, but is anyone listening?

Reading the general run of financial headlines might lead one to believe that price declines in those commodities which are highly sensitive to economic conditions such as iron ore, copper, oil, natural gas, coal, and lumber are good on their face.

Obviously, the declines aren't good for those who sell these commodities. But, those of us who buy these commodities in the form of cars, houses, utility bills and other products and services ought to be helping the world economy as we buy more stuff with the freed up income.

As true as that may be, these commodity price declines also signal something else: exceptional weakness in the world economy. It is no secret that economic growth in Europe has been stalled for some time and is now receding. The European Union's confrontation with Russia over the Ukraine conflict and the resulting tit-for-tat economic sanctions levied by both sides are only worsening the economic climate.

Sunday, January 25, 2015

The most important thing to understand about the coming oil production cutbacks

What the current oil price slump means for world oil supply is starting to emerge. "Layoffs," "cutbacks," "delays," and "cancellations" are words one sees in headlines concerning the oil industry every day. That can only mean one thing in the long run: less supply later on than would otherwise have been the case.

But perhaps the most important thing you need to understand about the coming oil production cutbacks is where they are going to come from, namely Canada and the United States.

Why is this important? For one very simple reason. Without growth in production from these two countries, world oil production (crude oil plus lease condensate which is the definition of oil) from the first quarter of 2005 through the third quarter of 2014 would have declined 513,000 barrels per day. That's right, declined. Including Canada and the United States, oil production rose just under 4 million barrels per day.

Sunday, January 18, 2015

U.S. Department of Energy: Our forecasts aren't really forecasts (or are they?)

Put this in the category of things that can't be true, but that are nevertheless affirmed with a straight face: The U.S. Energy Information Administration (EIA), the statistical arm of the U.S. Department of Energy, does not issue forecasts, at least not long run forecasts.

So says Howard Gruenspecht, deputy administrator of the EIA, in a letter to Nature, the respected science journal. Gruenspecht was responding to recent coverage of an alleged EIA forecast which paints a rosy picture of U.S. domestic oil and natural gas production through 2040, a view challenged by the article in question.

Here is the bureaucratese from the letter: "Contrary to the presentation in the Nature article, EIA does not characterize any of its long run projection scenarios as a forecast." Long run projection scenarios....huh. What could those actually be if not forecasts? And, why is the deputy administrator making such a big deal of this? We'll come back to the second question later.

Sunday, January 11, 2015

The central contradiction in the modern outlook: 'Planet of the Apes' vs '2001: A Space Odyssey'

When talking about the perils of climate change or resource depletion, soil degradation or fisheries collapse, water pollution or nuclear waste--how annoying it is to have one listener respond dismissively, "They'll figure something out. They always have."

It's a nonsense rejoinder and yet, it often gains the assent of many--as if this assertion were a self-evident truth that only an enemy of progress would question. And, that's where we'll start examining the central contradiction in the modern outlook--with a statement that is offered as if it were a scientific fact, when, in truth, it is nothing more than a piece of dogma enunciated by the religion we call modernism.

At first glance, the statement seems backward-looking because it asserts that we humans have always averted catastrophe through our ingenuity. But, of course, this is complete hogwash. History is replete with civilizations that have risen and then fallen, crumbling for myriad reasons eerily similar to ones said to threaten our own: climate change, resource depletion, soil degradation, water pollution, plagues, war, and political disintegration. The listener's statement above can't really be backward-looking for it would fall to pieces with only a cursory review of history.

Sunday, January 04, 2015

Taking a short break--no post this week

I'm taking a short break this week and expect to post again on Sunday, January 11.