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Steven F. Hayward

Energy fact of the week: The shale whale

By Steven F. Hayward

May 14, 2012, 5:09 pm

One of the most tired talking points of the “hydrocarbon deniers” (as I am going to call them) is that the U.S. must move beyond oil because we have less than 2 percent of the world’s proved reserves, though we consume about 20 percent of global oil production. After last week’s testimony from Anu Mittal, the director of natural resources and environment for the Government Accountability Office, to the House Committee on Science, Space, and Technology, anyone who persists in using this talking point again (that would include the president) deserves to be labeled an anti-science ignoramus.

Mittal reviewed the geological survey data of oil shale in the western United States that show we have about 3 trillion barrels of oil equivalent. This represents about two-thirds or more of the total shale oil estimated to exist worldwide. About half of it, according to Mittal’s testimony, is thought by public and private analysts to be recoverable. With droll understatement, Mittal offered the following conclusion, which should be read slowly: “This is an amount about equal to the entire world’s proven oil reserves.”

So let’s look at what this means graphically. Figure 1 shows the estimated proven reserves of conventional oil. But add in “unconventional” shale oil (though this distinction is increasingly meaningless with the advance of extraction technology), and you get Figure 2, which shows that instead of having only 2 percent of global oil reserves, the U.S. actually has 82 percent as much oil as the rest of the world, and almost twice as much as the Middle East. Maybe we should start exporting oil to China and join OPEC?

Sources: EIA and IEA.

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Steven F. Hayward

Energy fact of the week: Don’t mess with Texas

By Steven F. Hayward

April 26, 2012, 1:48 pm

Both Mark Perry, on his invaluable Carpe Diem blog, and I have been tracking the oil boom in North Dakota, occasionally predicting that North Dakota could come to displace Texas as the top oil producing state in the U.S. (It’s already number 2.) But not so fast. Looks like Texas isn’t going to give up its crown without a fight.

New figures from the Texas State Railroad Commission show how rapidly oil production is growing in the Eagle Ford shale region. Figure 1 below shows a nearly 600 percent increase in just one year, and a 9,700 percent increase since 2009.

One overlooked aspect of the current technology-driven fossil fuel energy boom going on in the U.S. right now is that if Washington had any premonition it was going to happen, they would surely have done something to stop it. Sure enough, ELIC (the Enviro-Lawsuit Industrial Complex) is stepping up with endangered species lawsuits to slow down oil production in Eagle Ford and elsewhere in Texas.

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Steven F. Hayward

Energy fact of the week: The gold price-oil price nexus

By Steven F. Hayward

April 19, 2012, 4:34 pm

A recent conversation with John Tamny of Forbes.com turned to an old, favorite issue of Ronald Reagan and Robert Bartley, among other great figures; namely, that some of the volatility in the price of oil represents the weakness of the dollar (since oil is priced and traded in dollars) and as such the relation between the price of oil and the price of gold is one possible proxy for understanding important aspects of the oil market. The clear implication here is that a strong dollar policy might do more to relieve pain at the pump than drilling for more oil.

Here’s how the Gipper put it in his very second press conference in 1981:

One economist pointed out a couple of years ago—he didn’t state this as a theory, but he just said it’s something to look at—when we started buying the oil over there, the OPEC nations, 10 barrels of oil were sold for the price of an ounce of gold. And the price was pegged to the American dollar. And we were about the only country left that still were on a gold standard. And then a few years went by, and we left the gold standard. And as this man suggested, if you looked at the recurrent price rises, were the OPEC nations raising the price of oil or were they simply following the same pattern of an ounce of gold, that as gold in this inflationary age kept going up, they weren’t going to follow our paper money downhill? They stayed with the gold price. Of course, now, if we followed that, why, they should be coming down, because the price of gold’s coming down. But I think that that’s like the inflation-contributing factor that you’ll have sometimes simply because of a poor crop. That is not based on the economy, that’s simply supply and demand. And if there’s a crop failure and you’ve got a bigger demand than you have supply, the price goes up.

Of course, the price of oil did come down—a lot—in the 1980s, as the dollar strengthened. Cause and effect? While there is likely some relationship here, it would seem on the surface that there are other, larger factors at work. The chart below shows the ratio of the nominal price of gold to the nominal price of oil, and this ratio shows that between 1973 and today the ratio has ranged from a high of 27.3 barrels (that is, one ounce of gold would buy 27.3 barrels of oil) in 1988 (the peak) to a low of 7.8 in 2005, with a lot of variation. Today, it stands at about 14.5 barrels—a better ratio than throughout most of the George W. Bush years. But the thing to note about the chart back in the 1980s is that the ratio strengthened during precisely the period when the U.S. was pushing down the value of the dollar (1986-1988) for trade-related reasons. I think the gold bugs will need to refine this a bit further.

Sources: Inflationdata.com, National Mining Association

P.S. It is worth recalling that one of Reagan’s first acts upon entering office was to complete the decontrol of oil prices begun tentatively by Jimmy Carter. Liberal interest groups seemed to compete with each other for the most fulsome expression of economic illiteracy in response. In the annals of public policy prognostication it is difficult to find such a wide assembly of wrongheadedness. Senator Howard Metzenbaum of Ohio took to the Senate floor the day after to predict that “we will see $1.50 gas this spring, and maybe before. And it is just a matter of time until the oil companies and their associates, the OPEC nations, will be driving gasoline pump prices up to $2 a gallon.” Senator Don Riegle of Michigan said that “It will hurt our people within a matter of days.” Senator Dale Bumpers of Arkansas had previously predicted that “without rationing, gasoline will soon go to $3 a gallon,” and added that “Decontrol is designed to see how much we can squeeze out of the American people before they take to the streets.” Maine’s Senator George Mitchell said “Every citizen and every family will find their living standards reduced by this decision.” Democratic Congressman Ed Markey said “I believe that decontrol as a cure will prove to be worse than the disease of oil addiction.” A Naderite advocacy group predicted that oil prices might go as high as $870 a barrel “under assumptions which many experts believe are realistic.” Instead, oil prices started falling almost immediately; from an average high of $1.41 in February 1981, pump prices fell steadily to a national average of 89 cents a gallon in the spring of 1986.

Worth keeping in mind when liberals today say increased domestic production will make little difference to oil markets, as well as prattling on about “speculators.”

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Steven F. Hayward

Energy Fact of the Week: Why Obama deserves little credit for U.S. oil and gas boom

By Steven F. Hayward

April 9, 2012, 11:04 am

President Obama and Vice President Biden are taking victory laps for the unforeseen (by government, that is) increase in domestic oil and gas production over the last three years, dodging and weaving as best they can to disguise the Administration’s relentless hostility to fossil fuel production and use.

If you need any more confirmation that this energy story is overwhelmingly a tale of private sector innovation taking place mostly on private land, check out a report from the Energy Information Administration released late last month entitled Sales of Fossil Fuels Produced from Federal and Indian Lands, FY 2003 through FY 2011. The data tables in the report make clear that oil production on federal lands has been more or less flat for most of the last decade, though with a slight bump in 2010 that disappeared in 2011, mostly because of falling offshore production in the wake of the Deepwater Horizon disaster.  The red line in Figure 1 shows that oil production on federal lands as a proportion of total U.S. production has remained flat at around 30 to 35 percent.  Most of the increase seen between 2008 and 2010 is likely attributable to leases finalized during the Bush Administration.

The story of natural gas is more interesting. While the gas sector is booming, total production on federal land has fallen more than 30 percent over the last decade, and as the red line in Figure 2 shows, the proportion of gas produced on federal land has fallen from 35 percent in 2003 to just above 20 percent today.  Anyone think the gas deposits being unlocked with directional drilling and fracking somehow stop at the federal property line?

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Steven F. Hayward

Energy Fact of the Week: Will gas triumph over coal?

By Steven F. Hayward

April 3, 2012, 1:35 pm

This week the EPA released its long-promised new source performance standards for coal-fired power plants. They appear aimed to effectively ban the construction of any new coal power plants, unless they can implement carbon capture and sequestration—an extremely expensive proposition.  But right now the conventional wisdom is that the EPA rules are redundant as a practical matter, because natural gas has gotten so cheap that it looks much preferable to coal even without the EPA putting its lead-free foot on the scales.

But perhaps not.  In a terrific piece of reporting in today’s Wall Street Journal, Liam Denning notes some counter-intuitive aspects of the scene that might actually turn what we think on its head.  Denning notes that natural gas is now cheaper than coal on an energy-content basis (as shown in the figure below), and also that new gas-fired plants are about two-thirds cheaper than coal to build. But we shouldn’t assume that coal prices won’t also fall, or that gas price volatility is a thing of the past:

The twist, as BofA points out, is that while gas-fired power is very competitive against the coal-fired variety based on near-term prices, it is less so based on futures prices beyond the end of this year. That is because measures like the EPA proposals point to tighter gas markets further down the road. For utilities, that reduces the incentive to switch to gas. Perversely, the latest headlines trumpeting the revival of gas and the death of coal may serve to discourage this very outcome.

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Steven F. Hayward

Energy fact of the week: Not much renewable energy for the buck

By Steven F. Hayward

March 20, 2012, 3:16 pm

Last week’s energy fact looked at a new CBO report which showed that non-hydro renewable energy now receives two-thirds of all federal government tax preferences, while fossil fuels only receive about 15 percent. But the situation is really much worse than it looks if you calculate how much energy is produced per dollar of tax subsidy. While the CBO report didn’t make this calculation, we did, and the results are in the chart below, which displays how much energy is produced for every dollar of tax preference. Every dollar of tax preference for non-hydro renewables produces 407,000 BTUs of energy, while every dollar of tax preference for fossil fuel delivers 66 times as much, 27 million BTUs of energy. Nuclear power subsidies—only 4 percent of total tax preferences—produce almost 26 times more energy per dollar than renewables. This is the reason renewable subsidies are both necessary to the industry, and unsustainable, at least at any scale that the taxpayer would be willing to pay. For renewables to match the output of fossil fuels at the current tax preference rate, the total tax preference would need to be $897 billion. That’s probably real money even to Obama.

Figure 1: Thousand BTUs per Dollar of Tax Preference

Source: EIA, CBO, and author’s calculations

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Steven F. Hayward

Energy fact of the week: Who gets the most subsidies?

By Steven F. Hayward

March 14, 2012, 4:14 pm

On Tuesday, the U.S. Senate voted down reviving the production tax credit for wind power, but also voted down Senator Jim DeMint’s sweeping proposal to do away with all energy subsidies for everybody—fossil fuels, wind power, solar power, biomass–the whole smash. Too bad. Of course, wind and solar would collapse overnight without taxpayer support, while oil, gas, and coal production would continue with little impact, except, ironically, on smaller firms that require the tax treatment for their business model to work in some cases. That’s why these subsidies are so politically popular in Congress. Exxon-Mobil and Chevron would barely notice if you took their subsidies away. Most greenies don’t know that, and it would ruin their day to find out.

However, a new report just out from the Congressional Budget Office shows that over the last few years energy subsidies have started skewing heavily toward “renewable” energy and away from fossil fuels. Here’s part of the CBO’s summary:

Tax preferences for energy production were first established in 1916, and until 2005, they were primarily intended to stimulate domestic production of oil and natural gas. With the enactment of the Energy Policy Act of 2005, energy-related tax preferences grew substantially, and an increasing share of them were aimed at encouraging energy efficiency and energy produced from renewable sources, such as wind and the sun. Although tax preferences for fossil fuels continued to make up the bulk of all energy-related tax incentives through 2007, by the end of 2008, fossil fuels accounted for only a third of the total cost of energy-related tax incentives.

Have a close look at the chart below from the CBO study, and notice one feature not discussed much: fossil fuel energy subsidies went almost completely away in the 1986 tax reform act, but crept back when we started raising income tax rates under Bush I and Clinton.

Source: CBO, How Much Does The Federal Government Support The Development And Production Of Fuels And Energy Technologies?

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Steven F. Hayward

Energy fact of the week: Renewable stupidity needs no mandate

By Steven F. Hayward

March 6, 2012, 10:33 am

Renewable Portfolio Standards (RPS) are all the rage in pro-green energy circles these days; they’ve become the chief fallback position since the collapse of cap and trade—a back door way to regulate carbon. Twenty-nine states and the District of Columbia (and Puerto Rico!) have adopted mandates calling for a certain portion of electricity to come from renewable sources (chiefly wind, solar, and biomass; some RPS standards do not count hydro power, since dams are environmentally incorrect). California has the most ambitious target, with a new law calling for 33 percent of its electricity to come from renewable sources by the year 2020. Most state RPS goals are around 20 percent. And proposals for a national RPS are a hardy perennial; New Mexico Senator Jeff Bingaman is out right now with another national RPS proposal (though he calls it a “Clean Energy Standard,” or CES). Senator Bingaman claims that “a properly designed CES would have almost zero impact on GDP growth, and little to no impact on national electricity rates for the first decade of the program.” Well maybe, but what about the second decade?

Naturally, RPS boosters all claim, and can point to forecasts, that RPS standards won’t significantly increase electricity prices to consumers, even though every study shows renewable electricity sources are significantly more expensive than conventional fossil fuel sources. But never let the belief in the possibility of free lunches get in the way of reality: think of it as renewable stupidity, which really is abundant and cheap.

The Manhattan Institute’s Robert Bryce is out with a new report, “The High Cost of Renewable Energy Mandates,” that sheds considerable light on the subject. The whole thing is worth reading, but I’m particularly struck by his Table 1, which shows that of the ten states with the cheapest electricity rates, only two (Oregon and Washington) have RPSs, while of the ten most expensive states, eight have RPSs. And Oregon and Washington deserve asterisks to go with their RPS asterisks: both of those northwestern states enjoy a high amount of cheap hydro power, built by the federal government about 80 years ago. Washington state also gets a lot of its power from cheap nuclear power, heavily subsidized by the federal government 50 years ago. In both cases, the capital cost of their current electricity infrastructure is pretty cheap.

These old, non-carbon sources of energy enable Oregon and Washington more easily to absorb RPS sources like wind power, though, as Forbes magazine explained a few months ago, when the dams have too much water to manage through the dams, they shut off wind power, which is rather telling about the limitations of renewable sources.

Source: Energy Information Administration.

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Steven F. Hayward

Energy fact of the week: The cost of Eurozone green energy mania

By Steven F. Hayward

February 27, 2012, 10:24 am

The chart below pretty much speaks for itself. It displays the retail price of electricity against the proportion of non-hydro renewable electricity (chiefly wind and solar, but some biomass) in European nations. Coming soon to a state near you—at least if it’s a state with an aggressive renewable portfolio standard mandating the use of expensive renewable electricity sources.

Source: Energy Information Administration, Europe’s Energy Portal (www.energy.eu)

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Steven F. Hayward

Energy fact of the week: What’s up with gasoline prices?

By Steven F. Hayward

February 16, 2012, 2:22 pm

The network TV news broadcasts this week are in a lather about the rising pump price of gasoline, which has been creeping up steadily for the last few weeks ahead of the usual seasonal surge. Already it appears we’re heading for record pump prices this summer—maybe reaching $5 a gallon in some high cost states. All of the usual reasons are in play: the price of oil stuck stubbornly around $100 a barrel or higher, uncertainty in the Middle East, sustained demand from China, and the recovering U.S. economy. But there is one aspect of this story that is still incongruous: gasoline consumption in the United States appears to be sharply lower over the last few months—at least if you go by the Energy Department figures on retail gasoline deliveries (a close proxy for overall gasoline consumption) shown in Figure 1. In fact, the trend of the last couple of years shows a sharp break with the relatively stable trend of the last 25 years. What’s going on?

You might think if demand is dropping the price would be flat or falling. Or perhaps the falling deliveries of gas is why prices are rising, except there’s no indication that gasoline supplies are tight right now, unless you buy one of the always-discredited conspiracy theories that the fossil fuel industry is manipulating the market. Higher fuel economy of the surface fleet (hybrids, Chevy Volts, etc) probably can’t explain the magnitude of this trend. A number of observers think it is possible that this sharply declining trend is another indicator that the economy is heading down again. (Charles Hugh Smith offers still more interesting analysis here.)

Figure 1: Retail Gasoline Deliveries, 1983 – Nov. 2011

Source: Energy Information Administration

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Steven F. Hayward

Energy fact of the week: Comparing royalty rates

By Steven F. Hayward

February 7, 2012, 4:00 pm

The Government Accountability Office (GAO) roiled the waters of the oil and gas world back in 2008 with a report that concluded that the U.S. government was not collecting as much in royalties from oil and gas production on public lands and waters as it should. The implication was that the government was being a patsy to the oil industry, as several studies have found the industry to enjoy a rate of profitability higher than the average for other industries (at least in good times). When oil prices spiked to $147 a barrel in 2008, many nations rushed to grab a share of the windfall by raising royalties or nationalizing leases. The United States was an outlier in not joining the stampede. Hence, there have been frequent calls for the United States to increase its royalty rates.

The GAO calculated that the U.S. government ranked 93rd lowest out of 104 fiscal systems surveyed around the world, losing out between $21 and $53 billion in potential revenue, depending on oil and gas prices. In 2007, for example, oil and gas companies received $75 billion in revenue from production in the Gulf of Mexico; the U.S. government received $9 billion in royalties—about 12 percent of revenues. The nominal royalty rate for Gulf of Mexico production is 18.75 percent of revenues, but in the mid-1990s, when oil prices were low, Congress enacted a royalty relief system, as the 18.75 percent rate rendered some leases unprofitable in periods of low oil and gas prices.

The “lack of flexibility” in the U.S. royalty system results in a low “government take” (the phrase actually used) from oil and gas. The “flexibility” the GAO recommended was thought necessary because of the high volatility of oil prices over the last decade. When the price swings up, oil companies tend to enjoy surging profits, but the government’s “take” from royalties don’t rise commensurately. However, the government does increase its “take” from higher corporate income taxes, which are separate and on top of lease royalties. And here’s where the story starts to get even more complicated: if the government raises the royalty rate, its take from corporate income taxes will go down, especially from marginally profitable leases.

The Department of the Interior vigorously disagreed with the GAO’s 40-page analysis, and has just recently released a 300-page study of the subject it commissioned from IHS-CERA. It becomes quickly apparent from the IHS-CERA report that the GAO’s analysis of this extremely complicated arena was superficial and inadequate, and that the government makes out quite well, no matter how you define the “fair share” that is supposed to be the guide of fiscal policy. In fact, if you consider the government take as a proportion of the cash flow from oil and gas projects, the government typically nets more than the oil or gas-producing company does. The IHS-CERA study finds that on average the federal government captures 64 percent of the cash flow from Gulf of Mexico deepwater oil leases. Large differences from field to field, both onshore and offshore, produce a wide variance, but in no case does the government receive less than half of the cash flow. Figure 2 from the report below shows how it works with gas leases in Wyoming, with the “government take” ranging from a low of 50 percent to a high of 73 percent.

Moreover, when oil prices do spike as they did in 2008, the government typically sees a huge spike in “signature bonuses,” in which companies buy the rights to a lease in advance. Figure 3 from the IHS-CERA report shows how federal government revenue soared in 2008.

IHS-CERA’s conclusion is that, when compared properly with the royalty and tax systems of 29 other nations, only Venezuela extracts a higher take from oil and gas production than the United States.

This study ought to be a blockbuster, but surely won’t be on account of its complexity, and because it runs counter to the narrative. There’s been no media mention of it at all. To the contrary, about the only news story that bears on the subject at all is from Bloomberg: “Oil Royalty Raise on U.S. Lands ‘Not Imminent,’ Agency Says.”

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Steven F. Hayward

Energy fact of the week: German solar subsidies top 100 billion euro mark

By Steven F. Hayward

January 24, 2012, 2:06 pm

I thought it would be a tall order to have a greater energy folly than our ethanol scam, which has cost taxpayers billions in direct and indirect subsidies over the last decade or two, but it turns out the Germans have figured out how to do it—through solar power. Der Spiegel online has a devastating article out last week on Germany’s manic obsession with solar power, whose price tag has now topped $100 billion (see the figure below). For this massive amount of money, solar power only provides about 3 percent of Germany’s total electricity. That is the equivalent of the power output of about two of Germany’s nuclear power plants (which they want to shut down), and even expensive nuclear plants are a bargain compared to the power yield of 100 billion euros’ worth of solar.

Some of Der Spiegel’s story could have come straight from Monty Python:

The only thing that’s missing at the moment is sunshine. For weeks now, the 1.1 million solar power systems in Germany have generated almost no electricity. The days are short, the weather is bad and the sky is overcast.

Germany has announced that it is going to have to scale back its lavish solar subsidies, and guess what? Share prices for solar power companies are collapsing. As one knowledgeable blogger on the scene put it:

The scale of the [solar subsidies] is of unprecedented stupidity, a folly that will certainly go down in German history textbooks. The backpedaling away from solar subsidies in Germany is now happening so fast that it’s making people’s heads spin. Call it the reverse energy supply transition – one from fantasy back to reality.

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Steven F. Hayward

Energy fact of the week: Gas shakeout coming?

By Steven F. Hayward

January 13, 2012, 2:38 pm

The Wall Street Journal reported yesterday that natural gas prices keep falling amidst the growing glut of shale gas, down 5.7 percent just on Wednesday of this week, and 32 percent over the last year. (See Figure 1 below for the long-term trend.) At $2.77 per million BTU, this is great news for gas consumers, but perhaps not so much for gas producers. While business models for gas producers are proprietary, the scuttlebutt I hear is that the sweet spot for most gas producers is closer to $5 or $6, which, if stable for the long term, would be a reasonable price for consumers and gas-heavy industries such as chemicals and fertilizer. Production costs are similarly confidential and can vary widely by geology, but my sources tell me that many Marcellus plays can be produced for about 50 cents per million BTU, which makes that region still profitable at the current depressed price, but that many Texas formations are much more expensive to produce, which is one reason why Texas is seeing a rapid shift away from gas drilling in favor of oil drilling.

However, the market isn’t quite as simple as this. The Journal points out that a lot of gas is produced as a byproduct of oil drilling, and that many gas wells produce liquids such as ethane, which is very profitable to produce even if gas prices remain low. Hence, while some are predicting that the price of gas will rebound for the conventional reasons of supply and demand coming back into balance, perhaps it might not work out that way. A greater fear is that there might be a repeat of what happened in the oil patch in the mid-1980s, when the collapse of oil prices devastated a lot of independent oil producers in Oklahoma and Texas.

Meanwhile, we reported in this space several months ago about how the falling price of gas was prompting a massive shift to oil drilling in the United States. This trend continues, as seen in the latest Baker-Hughes rig count, shown in Figure 2 below. As can be seen in Figure 2, as recently as five years ago over 80 percent of all drilling rigs operating in the United States were gas rigs; today, gas rigs are down to 40 percent. The sharp drop in total drilling activity in the chart shows the effect of the financial crisis in 2009, and also how fossil fuel drilling has rebounded.

Figure 1: Natural Gas Wellhead Price, Jan 2000 – Oct. 2011

Source: Energy Information Administration.

Figure 2: U.S. Oil and Gas Rig Count, 2000 – 2011

Source: Baker-Hughes.

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Steven F. Hayward

Energy fact of the week: Rising U.S. coal exports

By Steven F. Hayward

January 4, 2012, 1:33 pm

Last week, the Energy Fact looked at the surprising export figures for ethanol. This week: coal. With the double play of cheap natural gas and the environmental regulatory crusade squeezing coal-fired power, it might seem like tough times for coal. However, exports of U.S. coal have been steadily increasing the last few years, after having declined almost 50 percent between the late 1980s and the late 1990s. Figure 1 shows the trend of coal exports from 2000 – 2010; data through September 2011 indicate the full year will easily top 2010. Exports in 2010 amounted to 7.5 percent of total U.S. production, up from 4.4 percent of total production in 2005. Overall coal production in the United States has been flat over the last decade.

Figure 1: U.S. Coal Exports, 2000 – 2010

Source: Energy Information Administration.

More interesting is where we are exporting our coal. Off the top of your head you’d probably guess China or India, where coal consumption is soaring. U.S. exports to those nations have risen a little, but both India and China have plenty of their own coal. Our leading Asian customer is South Korea.

But the largest customer by far is Europe, which imports twice as much coal as all of Asia. More than a third of our coal exports through September of 2011 went to Europe, up 34 percent from the first nine months of 2010. Figure 2 below shows that U.S. coal exports to Europe declined precipitously in the 1990s, largely as a result of Britain’s rapid transition to natural gas from coal, German reunification that saw the shutdown of a large number of coal-fired plants in the former East Germany, and the continued expansion of nuclear power in France, which imported nearly 10 million tons of U.S. coal in 1990, but only about 3 million per year recently. Figure 2 shows the rebound in U.S. coal exports to Europe over the last decade. One reason for this trend is that American coal tends to be cheaper than European coal, but a second reason receives little attention—Europe has reached the point of diminishing returns on its program to reduce greenhouse gas emissions from fossil fuels, and is continuing to use coal for the same reason the United States does: it’s cheaper.

Figure 2: U.S. Coal Exports to Europe, 1990 – 2010

Source: EIA.

In case you’re wondering, our leading export market for coal in 2010 (excluding Canada) was Brazil. Number two was the Netherlands, up sharply over the last few years, as shown in Figure 3.

Figure 3: U.S. Coal Exports to the Netherlands, 1990 – 2010

Source: EIA.

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Steven F. Hayward

Energy fact of the week: Exporting ethanol?

By Steven F. Hayward

December 27, 2011, 9:33 am

There’s at least one place where government subsidies and mandates are delivering: ethanol. Production of ethanol in the United States increased 719 percent between 2000 and 2010, from 1.6 billion gallons to 13.2 billion gallons. (See Figure 1.) Since ethanol receives a 45 cents per gallon tax credit, you can see how the tax subsidies have soared to about $6 billion a year.

Figure 1: U.S. Ethanol Production

Source: Energy Information Administration.

That’s not the only interesting feature of ethanol. It also benefits from a 54 cents per gallon tariff against imports, which was chiefly designed to protect this “infant” industry from cheaper sugar cane-based ethanol from Brazil. So it may come as a surprise that instead of fighting off Brazilian imports, we have so much surplus ethanol now that we’re exporting it to Brazil (among other nations). So far through September of this year, the United States exported 7.2 percent of its total ethanol production to Brazil, which, incredibly, is our highest export market for ethanol. Overall, the United States exported 8.2 percent of its total ethanol production so far this year, up from 3 percent in 2010. (See Figure 2.)

Figure 2: U.S. Ethanol Exports

Source: Energy Information Administration.

The reason ethanol is in surplus is that we can’t use much more of it in the gasoline supply. Right now ethanol is blended with gasoline at a 10 percent concentration. No wonder the ethanol lobby wants to mandate that the blend be increased to 15 percent, even though there is evidence this amount of ethanol will be damaging to many older engines. Regardless of this controversy, is there any reason American taxpayers should be shelling out multiple billions for another farm export industry?

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Steven F. Hayward

Energy fact of the week: Who got the money?

By Steven F. Hayward

December 22, 2011, 11:40 am

Courtesy of the Washington Post, we can produce the chart below showing which sector got how much of the $36 billion Department of Energy loan guarantee program, which began under the Bush administration chiefly as a fillip for reviving nuclear power, but was expanded under Obama to support a broad range of “green” energy sources. As the chart shows, nuclear got its share, but the big winner was autos (for electric cars), $9.1 billion, and solar generation installation, $12 billion (the Solyndra loan was part of the smaller solar bar, “Solar [Manufacturing]”).

Sources: Energy Department, Environmental Protection Agency, Bonnie Berkowitz and Todd Lindeman/The Washington Post.

So how’s this all working out? Solyndra turns out to be just the tip of the #GreenEnergyFail iceberg. We can hardly do better than to refer to the Washington Post’s grim summary:

Obama predicted in 2008 that green cars would create thousands of new U.S. jobs as demand soared. But in recent months, production lines and sales expectations have been dramatically scaled back.

A123 Systems, a battery maker that received $380 million in government support, announced recently that declining orders had forced layoffs. Instead of up to 3,000 new Michigan jobs as Obama and the company had predicted, it now has 690 employees.

Battery maker EnerDel, recipient of a a $118 million federal grant, took a hit when its key customer, electric-car maker Think, declared bankruptcy this year. Johnson Controls, which received a $299 million stimulus grant, opted to build one factory instead of two because of lower-than-projected demand, a company official said, and that one is now operating at half capacity.

California electric-car maker Aptera announced it was shutting its doors because of problems raising capital. And General Motors — whose moderately priced Volt was supposed to drive Obama’s push for 1 million alternative vehicles by 2015 — revealed last week that it would fall roughly 38 percent shy of its goal of selling 10,000 Volts this year.

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Steven F. Hayward

Energy fact of the week: North Dakota oil boom update

By Steven F. Hayward

December 12, 2011, 1:39 pm

We noted here back in January in the very first installment of “Energy fact of the week” that North Dakota’s oil production had increased 138 percent in the three-year period from January 2008 to January 2011, to 342,000 barrels a day, making it the fourth-largest oil producing state, ahead of historic oil giants Oklahoma and Louisiana. Someone should have said, “You ain’t seen nothin’ yet,” because … we hadn’t seen nothin’ yet.

The most recent figures from the North Dakota Department of Mineral Resources, complete through October, show that in the first ten months of this year daily oil production rose 42 percent, to 488,000 barrels per day, and up 441 percent since January 2005. (See Figure 1.) At this rate, North Dakota will pass California and Alaska to become the second-largest oil producing state within a year. (Alaska currently produces about 530,000 barrels per day; California produces about 560,000 barrels per day.)

Source: North Dakota Department of Mineral Resources.

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Steven F. Hayward

Energy Fact of the Week: Energy intensity and GDP growth

By Steven F. Hayward

November 23, 2011, 11:51 am

This week, a guest post of sorts. Over on the Oil Drum or OurFiniteWorld.com, Gail Tverberg, an actual actuary, has compiled a terrific overview of the question of energy use and GDP growth, all in service of debunking the idea popular with some environmentalists that economic growth can be decoupled from energy use, or at least from cheap energy (which means fossil fuel energy). Gail writes:

In recent years, we have heard statements indicating that it is possible to decouple GDP growth from energy growth. I have been looking at the relationship between world GDP and world energy use and am becoming increasingly skeptical that such a decoupling is really possible.

She offers several charts of the energy-GDP trends in different countries and regions, but I include here only her global chart:

Her conclusion tracks closely with mine:

If GDP growth and energy use are closely tied, it will be even more difficult to meet CO2 emission goals than most have expected. Without huge efficiency savings, a reduction in emissions (say, 80 percent by 2050) is likely to require a similar percentage reduction in world GDP. Because of the huge disparity in real GDP between the developed nations and the developing nations, the majority of this GDP reduction would likely need to come from developed nations. It is difficult to see this happening without economic collapse.

Only an actuary could make the droll understatement of the last sentence here. Her entire post on this is well worth reading.

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Steven F. Hayward

Energy Fact of the Week: Public souring on energy subsidies

By Steven F. Hayward

November 15, 2011, 1:19 pm

As Gomer Pyle used to say to Sargent Carter: Surprise, surprise, surprise!—in the wake of the still-unfolding Solyndra scandal, public support for government spending on alternative energy is ebbing pretty fast. The Pew Research Center came out with a new survey last week showing public support for government funding of renewable energy to be sliding sharply. The chart below from the Pew report shows that overall public support for alternative energy subsidies has fallen from 82 to 68 percent. That’s still a pretty large majority in favor of this nonsense, but the right hand cross-tab that shows the trend by partisan breakdown is more interesting, as it shows that among Republicans support for government energy subsidies has fallen by 30 percent, while support among Democrats is virtually unchanged. In other words, virtually the entire decline in public support came from Republicans. When sharply partisan divisions over an issue start to open up like this, it’s usually a formula for policy gridlock.

All of this is starting to have an effect on the media, which is showing signs of turning to a different narrative on energy—a narrative more skeptical of the whole renewable energy domain. Exhibit 1 is the lead story on green energy in the New York Times last Saturday. The print hed and sub-hed told it better than the online version: “Rich Subsidies Powering Solar and Wind Projects: Big Rise in Government Aid—Companies Are Virtually Assured of Profits.” It’s worth reading the whole thing to soak in the outrageous scene, but this paragraph gives a worthy summary:

The government support—which includes loan guarantees, cash grants, and contracts that require electric customers to pay higher rates—largely eliminated the risk to the private investors and almost guaranteed them large profits for years to come. The beneficiaries include financial firms like Goldman Sachs and Morgan Stanley, conglomerates like General Electric, utilities like Exelon and NRG—even Google.

This “banquet of government subsidies,” as the Times describes the “cornucopia” of federal largesse, sounds like another fillip to the 1 percent doesn’t it? And don’t forget a key phrase here—“contracts that require electric customers to pay higher rates”—which means we get it at both ends: we shell out tax money for the subsidies, and then have to pay higher utility rates, all to ensure that energy companies get a “guaranteed” profit.

Then the very next day Steven Mufson of the Washington Post filed a very tough story entitled “Before Solyndra, a long history of failed government energy projects”:

Solyndra, the solar-panel maker that received more than half a billion dollars in federal loans from the Obama administration only to go bankrupt this fall, isn’t the first dud for U.S. government officials trying to play venture capitalist in the energy industry.

The Clinch River Breeder Reactor. The Synthetic Fuels Corporation. The hydrogen car. Clean coal. These are but a few examples spanning several decades—a graveyard of costly and failed projects.

Not a single one of these much-ballyhooed initiatives is producing or saving a drop or a watt or a whiff of energy, but they have managed to burn through far more taxpayer money than the ill-fated Solyndra. An Energy Department report in 2008 estimated that the federal government had spent $172 billion since 1961 on basic research and the development of advanced energy technologies.

What does Washington have to show for these investments? And should the government even be in the business of promoting particular energy technologies?

Finally we’re starting to ask the right questions.

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Steven F. Hayward

Energy Fact of the Week: State-owned oil reserves dwarf private companies

By Steven F. Hayward

November 2, 2011, 9:38 am

The oil giants (or “supermajors” as they are often called)—ExxonMobil, Royal Dutch Shell, and BP—reported their quarterly profits last week, and they had a very good quarter indeed on account of current relatively high oil prices. ExxonMobil clocked in with $10.3 billion for the third quarter, BP notched $5.1 billion, and Shell banked $7 billion. These are the kind of numbers that often set off criticism of “oil giants” dominating and perhaps manipulating the oil market, even though successive government investigations over the years have consistently debunked this popular meme.

Maybe that’s because private oil company control of oil reserves, and profits therefrom, are small change compared to the revenues that state-owned oil giants reap in the global oil marketplace today. State-owned oil companies don’t report their profits on a quarterly basis (and many don’t report their profits according to GAAP rules anyway), but one way of appreciating just how relatively tiny our oil giants are compared to state-owned oil and gas reserves can be gleaned in the figure below, which was assembled by Oliver Wyman and The Economist.

The point is, of the 20 largest oil and gas entities in the world, about 96 percent of reserves are held by state-owned oil companies. ExxonMobil, the world’s largest private-sector oil company, holds only about 1.5 percent of the reserves of the top 20, and an even smaller share of total oil and gas reserves. (The Economist estimates that state-owned oil companies control 80 percent of the world’s total oil reserves). We’ve noted previously in Energy Fact of the Week that OPEC member revenues are expected to be in the neighborhood of about $850 billion this year. With OPEC’s generally low production costs, the margins from this revenue are likely eye-popping.

For the most part, state-owned oil companies respond to the same marketplace incentives as private-sector oil companies, but the fact that they are state-owned means that politics will sometimes trump markets. The Economist concludes:

Life is getting harder for the supermajors. Their edge over their rivals—the ability to extract oil from difficult places—is terrifically useful while prices are high. But since it is terrifically costly to extract oil from difficult places, their competitive advantage fizzles if oil prices fall. If it does, their bumper profits could vanish like a pool of petrol into which a lighted match has been carelessly dropped.

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Steven F. Hayward

Energy Fact of the Week: Debunking the Rosenfeld Curve

By Steven F. Hayward

October 27, 2011, 10:13 am

I have no idea if the data in Figure 1, purporting to display the correlation between the quality of rock and roll music and domestic oil production, is accurate or not. I didn’t even sleep in a Holiday Inn last night to get this chart; I merely found it on Facebook. Therefore, it must be true.

Figure 1: A Typically Spurious Correlation
Source: Journal of Irreproducible Results Facebook

But Figure 1 is no more misleading than a superficial reading of the famous “Rosenfeld Curve,” shown in Figure 2, which displays the long-term trend of per capita electricity consumption in California and the United States. Energy conservation advocates have long pointed to flatness of the California curve (named for Arthur Rosenfeld, a long-time member of the California Energy Commission) as proof of the success and enlightenment of California’s energy policies set in motion the last time Jerry Brown was in the governor’s mansion (oh, wait—he sold the governor’s mansion and slept on the floor of an apartment—never mind). Today, Californians consume 40 percent less electricity than the national average. Therefore, energy conservationists insist that California’s approach will produce similar results if adopted elsewhere.

Figure 2: California v. U.S. Per Capita Electricity Consumption, 1960 – 2004
Source: California Energy Commission

However, a 2008 study by Anant Sudarshan and James Sweeney of Stanford University, Deconstructing the Rosenfeld Curve, carefully dissects California’s energy consumption and concludes that only about 23 percent of the difference between California and national per capital electricity consumption can be attributed to California’s energy conservation measures. Differences in climate (such as less winter heating and summer air conditioning in California because of its mild climate) and changes in its industrial structure (that is, a significant decline in energy intensive industry) account for most of the difference.

In other words, it is doubtful that California’s specific conservation policies would deliver similar results in other states without either raising prices to suppress consumption, or lowering economic activity by suppressing energy intensive industries.

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Steven F. Hayward

Energy Fact of the Week: We spend how much on climate research?

By Steven F. Hayward

October 19, 2011, 10:33 am

Back in the late 1970s, when opinion polls found that acid rain was the most significant environmental problem on the mind of Americans, the federal government set out to find out exactly how extensive the problem was. Over the next decade, the feds spent close to $600 million on something called NAPAP, which sounds like the machine I use to suppress sleep apnea, but in fact stands for the National Acid Precipitation Assessment Project. The NAPAP study was widely said to have been the most expensive single scientific study the federal government had ever undertaken to date. (NAPAP found, by the way, that the problem of acid rain had been wildly overestimated.)

Well, move over NAPAP: we’ve been spending more on climate science research and energy technology development in just the first six months of any given budget than we spent in an entire decade on acid rain science. According to a Government Accountability Office report last spring, between 1993 and 2010 the federal government spent $31.3 billion on climate science research (an average of $1.8 billion a year), and another $42.9 billion on energy technology research. The GAO identified a third category, international assistance, which showed a huge jump of 190 percent between 2009 and 2010. (See Figure 1.) This spending was spread across 17 federal agencies and bureaus, including the Smithsonian Institution. Any self-respecting government agency worth its appropriations lobbying office got in on the climate change action.

This was just direct spending, and it’s only the tip of the fiscal iceberg. The GAO went on to identify energy tax provisions aimed at reducing greenhouse gas emissions starting in 2003—what the government quaintly calls “tax expenditures.” Since 2003 GHG-related tax expenditures come to $16.1 billion, but really jump with the passage of the stimulus bill in 2009.  (See Figure 2.)

Source: GAO.

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Steven F. Hayward

Energy Fact of the Week: The gloomy outlook for electric cars

By Steven F. Hayward

October 13, 2011, 11:29 am

Perhaps someday someone will make battery technology breakthroughs that will enable us to develop fast-charging, high-energy-density batteries that can compete cost-effectively with liquid fuels, but the present generation of technology doesn’t look very promising, even on the grounds of reducing pollution. A new study of electric cars in China prepared for the UN’s Commission on Sustainable Development concludes that China’s plan to put one million electric cars a year on the road will have little or no effect on reducing greenhouse gas emissions. As the co-author of the report told the New York Times’s Andy Revkin: “Electric vehicles are often propped up as the key technological innovation to solve the global climate crisis. But in coal-dependent China, electric vehicles can actually have a larger carbon footprint than their traditional internal combustion engine counterparts.”

What about the United States, especially since we generate a smaller proportion of our electricity from coal than China? Turns out it doesn’t look very good here either. A blockbuster study in last week’s early edition of the Proceedings of the National Academy of Sciences concludes that all-electric vehicles will have a total lifetime cost about one-third more than a conventional gasoline-powered car, even with the savings of not having to buy any gasoline. (See Figure 1.) Even more discouraging is the study’s finding that, when a complete life-cycle analysis (including the emissions from battery manufacturing and electricity generation) is conducted, all-electric vehicles produce about 20 percent higher emissions than gasoline powered cars. (See Figure 2.) (Figure 2 calculates emissions impact in dollar cost terms rather than actual emissions. The figure would look the same if it estimated emissions directly. It should be noted that the findings displayed in Figure 2 are calculated for the U.S. average grid mix—that is, with only about 45 percent of electricity coming from coal. The study’s sensitivity analysis also calculates the emissions impact of all-battery cars using predominantly coal-fired electricity—think Indiana and Ohio—and found the emissions consequences are even more highly negative. See the complete study for an extensive sensitivity analysis.)

[Key to Figure 1 & 2: CV-conventional gasoline car; HEV-hybrid electric vehicle (think Prius); PHEV20-plug-in hybrid electric vehicle with 20 km range (think new Prius); PHEV60-plug-in hybrid electric vehicle with 60 km range (think Chevy Volt); BEV-battery electric vehicle with 240 km range (think Nissan Leaf).]

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Steven F. Hayward

Energy Fact of the Week: Why Wind Power Blows

By Steven F. Hayward

October 5, 2011, 10:17 am

Wind energy manufacturers and advocates must be enjoying the meltdown of solar power at the moment, as wind power has always been more competitive than solar with conventional fossil fuel electricity generation. Among other things, wind power doesn’t necessarily stop generating when the sun goes down.

However, the intermittency of wind power creates significant problems for grid operators that increase as the amount of installed wind power grows. The Department of Energy has noted this problem, writing last March on their website: “Often, wind generation does not coincide with the demand for electric power; wind resources are generally more prevalent overnight, when demand for electric power is at a minimum. In most areas, summer peak demand for electricity coincides with hot afternoons when consumers have turned up their air conditioners—but in many areas, such times are calm and wind resources may be quite low.”

The problem with any intermittent electricity source connected to the grid is that it requires a reliable backup source of power—usually natural gas these days—to ensure that the power reserves are adequate, especially for periods of peak demand such as summer heat waves, but also, as Texas found last winter, when unusually cold weather creates a spike in electricity demand. Last January, Texas experienced rolling blackouts because the grid was caught short. And wind production during that period was negligible.

The chart below from the Department of Energy, showing projections of the rated capacity of wind power by NERC (North American Electricity Reliability Corporation) region for the year 2019, cuts to the bottom line. While the installed capacity of wind power on paper—that is, assuming the wind is blowing at the right speed—looks impressive, in the real world grid operators can count on only about 8 to 13 percent of that capacity being available during peak times. (The table below shows the percentage of wind capacity available at peak times by NERC region). The Department of Energy’s headline for this release tells the story succinctly: “Electricity Resource Planners Credit Only a Fraction of Potential Wind Capacity.” This is one reason why the greenhouse gas emissions savings from wind power will diminish with the further spread of wind power.

Source: Energy Information Administration.

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Steven F. Hayward

Energy Fact of the Week: Solar Subsidies Are Off the Charts

By Steven F. Hayward

September 28, 2011, 10:30 am

Back in February I reviewed the Department of Energy’s data on energy subsidies here, noting that “renewables” (wind, solar, biomass, Gilligan’s bicycle, etc) received vastly larger subsidies per unit of energy produced than fossil fuels. A few critics threw a penalty flag because I was using the DOE’s 2007 data, and by golly things have changed since then. Why yes, they have: the subsidies have doubled, according to a brand new report from DOE that looks at energy subsidies in 2010.

Total energy subsidies increased from $17.9 billion to $37.2 billion, an increase of 108 percent over the three-year period. Of the increase, 77 percent was due to the infamous stimulus. And the lion’s share of the increase went to renewables, from $5.1 billion to $14.7 billion.

For some strange reason, though, this DOE report does not break out the amount of subsidy per unit of energy created, as the report on the 2007 data did. DOE does acknowledge that “Relative to their share of total electricity generation, renewables received a large share of direct federal subsidies and support in FY 2010. For example, renewable fuels accounted for 10.3 percent of total generation, while they received 55.3 percent of federal subsidies and support.” (This actually understates the amount of subsidy for wind and solar, as the largest output of “renewable” electricity is from hydropower, which receives negligible subsidy; if hydropower is stripped out, the renewable subsidies will appear even more out of whack.)

Our friends at the Institute for Energy Research decided to reconstruct the subsidy-per-unit of energy relationship using data from the DOE’s Month Energy Review, and the results are displayed in the figure below. As you can see, the subsidy for solar electricity ($775 per megawatt-hour) is so large it can’t be displayed on the chart in the same scale as other sources, or the others would disappear to near oblivion. Keep this in mind the next time you hear someone say that Solyndra failed because we don’t subsidize solar power enough.

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