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On ...and Two Steps Back for Cleantech
Poliltical risk is always an issue in situations like this, though it's also hard to gauge to what extent significant renewable energy development might have been stabilizing in the region.
On Climate Change and Keystone XL: The Numbers Behind the Debate
John,
I'm with you that what we're seeing on WTI/Brent at the moment is probably more weakness of the latter than strength of the former. However, I also know there are numerous projects that could eventually unburden Cushing from both directions and restore something more like normality. These are by definition fully equivalent crude streams, and if the bottlenecks can be opened up sufficiently, they should price close to parity.
On Climate Change and Keystone XL: The Numbers Behind the Debate
Jesse,
You've done a terrific job of clarifying the enormous complexity of the assumptions underlying the conflicting views on Keystone XL, without dumbing it down. I'd like to offer a few additional factors for consideration, along with a question and suggestion to clarify the context.
The first factor to consider is the relationship between WTI, which underpins the pricing of most North American crude production, including oil sands, and global oil prices benchmarked to UK Brent. That differential has been extraordinarily wide for most of the last two years but is currently narrowing. Historically it was within $1-2/bbl from either direction (WTI often a premium to Brent) but lately the WTI discount has been as wide as $20/bbl. Today it's under $10. There are good reasons to think that as more Bakken-type crude finds its way onto rail, and as new pipelines and pipeline reversals in the US mid-continent alleviate congestion at the big Cushing, OK hub of WTI, the differential will narrow even further. The closer WTI gets to Brent, the bigger the incentive becomes to find alternative ways for Canada's production to reach market, and the less effective rejection of Keystone XL would be.
I'd also like to put the rail issue into perspective, having spent a fair amount of time looking at and talking about this recently. At a conservative 600 barrels per tank car load (limited by weight for heavy crude, vs. a full 750 bbl for lighter oil) the entire volume of Keystone would equate to 500,000 tank car loads per year. That sounds monumental until you notice that US rail car loads of coal declined by more than that volume from 2011 to 2012. It would roughly double 2012 rail shipments of "petroleum", which includes LPG and other products as well as crude oil.
Finally, I think it's worth asking who is accountable for whatever increase in emissions Keystone might facilitate, and what constitutes the proper basis for comparison. Concerning the former, Canada, as a Kyoto signatory, would be responsible for all "upstream" emissions associated with extraction and upgrading in Alberta. That's more than 20% of the total. The remaining 80% would fall on the US, China or whichever country's refiners ultimately bought and processed the oil for sale as products. In the case of the US, a modest % of those products would be exported, since we're now a net exporter of refined petroleum products, thanks to the convergence of improved fuel efficiency, reduced vehicle miles traveled, and improved refining economics due to the shale or "tight oil" upsurge. You don't have to trace the barrels very far before it becomes clear that this is an international, rather than a US issue. So shouldn't the comparison be on the basis of global emissions, not US emissions? As such, on the worst-case in your analysis, we're talking about at most 0.4% of global emissions of 36 bn tonnes.
On Busting Big Oil Myths on the RFS and Ethanol, Part II: Food Prices
I appreciate your response. Having followed this issue every step of the way, I don't consider it revisionist to observe that the enhanced RFS that originated in EISA 2007 was predicated on E85 providing the necessary "higher blend" outlet beyond E10, and that sales of the former have stalled at a low level. Nor do we see a groundswell of either consumers or retailers towards the E15 that is now being held out as an alternative safety valve for the RFS. From where I sit, a rethink of the policy is overdue.
On Busting Big Oil Myths on the RFS and Ethanol, Part II: Food Prices
Mr. Cooper,
I wonder how carefully you've read the ICTSD study to which you linked. For example, in its discussion of the supply and demand curves for corn on page 4, it states, "This framework shows why it is necessarily true that expansion of ethanol can only come about through higher maize prices." Meanwhile the diagram clarifies that as corn prices rise with increasing demand from ethanol production, non-ethanol corn demand must also fall.
Then on page 19 in the discussion of the impact of the RFS mandate under different scenarios of corn yield and gasoline prices, we read, "It is apparent that the effects of US ethanol policy are not constant across scenarios. As expected, elimination of the blender tax credit when supplies are tight has almost no impact because the mandate keeps ethanol production high. But elimination of the tax credit and the mandate under tight conditions dramatically lowers maize prices, from about $8.06 per bushel to $5.46 per bushel or by 32 percent. This means that current US ethanol policy exacerbates tight market conditions by forcing all demand adjustment to tight supplies on non-ethanol users of maize, which disproportionately impacts the livestock sector."
In other words, in a drought such as we saw last summer that reduces corn yield, corn prices rise much faster with the mandate than without, and the impact falls disproportionately on non-ethanol consumers of corn, such as livestock (and presumably poultry and other sectors, including exports.)
It appears that exhibit 1 for your case that the RFS has no impact on food markets is at least much more nuanced than that.
I would also point out that the ICTSD analysis only covered the period through 2010, when ethanol blending in gasoline still had significant headroom before reaching the blend wall at 10%. The analysis--and the reality--of RIN pricing as the mandate nears the blend wall and physical blending opportunities dry up, forcing refiners to bid for more RINs, looks rather different than it did just a few years ago. This supports the view that the RFS policy is broken, because it was not designed for the circumstances of falling gasoline demand and minimal E85 demand in which we find ourselves. It may even create a feedback loop, by driving gasoline prices even higher (via high RIN prices) and depressing demand further, putting additional pressure on the RIN market.
On Can Energy Storage Make Wind and Solar Energy as Reliable as Coal?
Willem,
The IEA issued a press release this morning announcing a study of Germany's energy policies. Once you get past the obligatory laudatory remarks in the first paragraph, it seems clear that the agency's analysts conclude that Germany has paid insufficient attention to managing the cost of renewables and how it is allocated across its economy. Could be read as a carefully couched critique of a system that has been widely held up as a model.
On How Is Expanding Oil and Gas Production Consistent with Addressing Climate Change?
Thank you for your careful reading of my analysis and linked references, and your well-reasoned response. Seriously, did you read more than the title?
On How Is Expanding Oil and Gas Production Consistent with Addressing Climate Change?
IK
Recall that less than 1% of US electricity is generated from oil, mainly in remote locations or backup power, while globally, oil-generated electricity has become uneconomical in most locations outside the Middle East.
The comparisons are complex and best done using integrated well-to-wheels methods. Published WTW figures indicate EVs can beat ICE hybrids given the right generating mix. The big change in our thinking here must be the recognition that there's no globally or nationally valid equivalent mpg figure for an EV. Its energy and emissions performance depends entirely on where and when it's recharged.
On How Is Expanding Oil and Gas Production Consistent with Addressing Climate Change?
IK,
You raise an essential point re the appropriate competitive benchmark for EVs, not just from a technical standpoint but from a market perspective. Are owners of mid- and full-size sedans and SUVs lining up to buy range-limited compact EVs? If instead EV buyers are trading in 45 mpg hybrids, the energy, emissions and even petroleum savings provided by today's EVs would be smaller than commonly assumed. And since vehicle fuel economy in mpg is on a diminishing-return curve, an 80 mpg diesel hybrid leaves little fuel for an EV to save--perhaps only about $200 of annual fuel savings vs. electricity costs.
EPA contributes to some of the confusion with its MPGe calculation on US new-car "stickers". The MPGe concept, to compare energy from all sources, is sound. However, with the US grid still averaging 65% fossil electricity generation, the heat rate used in their formula shouldn't be 3412 BTU/kWh, but more like twice that figure. So a 100 MPGe EV comes in much closer to a Prius in terms of real-world performance on the average grid,
On How Is Expanding Oil and Gas Production Consistent with Addressing Climate Change?
"Planet from hell" doesn't seem quite consistent with IPCC projections. In fact, the 450 ppm scenario--the lowest one that seems remotely achievable at this point--of the IEA is the one designed to be consistent with limiting temperature increases to 2°C, resulting in an average global temp of 60.8°F. I always envisioned hell a little warmer than that.
On How Is Expanding Oil and Gas Production Consistent with Addressing Climate Change?
Rajat,
When you see a P/E ratio such as the one implicit in Tesla's current market capitalization, it usually reverts to the mean in one of two ways. How many EVs must be sold in 2020, and what share of that market must Tesla capture, with what kind of margin, for it to end up on the "next Apple" fork of the road? I wish them well.
On Energy Risk: The Forgotten Half of America's Carbon Cuts
Lindsay,
Nifty charts, there, and some good insights on the under-reported importance of reduced oil consumption for emissions. If you wanted to deepen this analysis, you might consider a "step-chart" format starting with 2005, ending with 2012, and showing the step changes in between that got us there. For example, EIA stats on generation show that natgas generation added 3.5x more MWh than "other renewables" (wind, solar, geothermal, etc but not hydro) in that interval.
It's also worth thinking about the economic interactions behind these shifts. The displacement of coal by gas was largely positive: cheaper gas drove out coal and reduced electricity prices. That's good for everyone but coal suppliers. However, much of the oil reduction in that interval wasn't the result of displacement by efficiency gains (coming into the fleet gradually) or biofuels (themselves pretty fossil-intensive) or by renewable electricity (little oil used for power and most of that for backup and remote applications) but by demand destruction, as you note. That means that we've lost the economic activity associated with that consumption, which was likely worth much more, e.g. unemployed workers not commuting. All of this has implications for the sustainability of different segments of improvement as the economy recovers.