| Alternative Energy - Challenges and Opportunities |
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| Written by Matt Blackman | |
| Saturday, 09 August 2008 | |
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Solving the Energy Puzzle - Challenges and Opportunities
Part 1 – The Transportation ChallengeTo say the world has gone through an energy sea change is the understatement of the decade. Since early 2002, a barrel of crude oil soared from just $18.90 to more than $145 in the short span of six and a half years, a crippling increase of nearly 700 percent. Oil prices have dropped since hitting their high a month ago, but have we seen the worst or is this correction just a temporary reprieve? And even if the worst is over, is relying on oil for our major source of energy a wise policy going forward?
Figure 1 – Cost of a barrel of crude trading on the NYMEX between 2002 when it traded below $19 and 2008 when it traded above $145. Chart by www.GenesisFT.com In part one of this series, we plumb the energy challenges that faces our nation and the globe, with an examination of the scope of the problem and why a strategy to find alternative sources of energy is crucial to our economic survival and security. The Slippery Slope Oil production in the U.S. is a double-edged sword. Even though the U.S. is still the third largest oil producer, production peaked around 1970 at nearly 10 million barrels per day (bbl/d) and has been falling since. By 2005 U.S. production had fallen to half of what it was at the peak and the U.S. was importing two-thirds of its oil. In 2008, total U.S. domestic crude oil output is projected to average 5.14 million barrels per day (bbl/d) up fractionally from 2007 but this incremental increase has fallen far short of increasing demand. Unfortunately, we as a nation will consume an average 20.29 million bbl/d this year which means we must currently import nearly 75% of our oil. During the last energy crisis in the early 1970s we imported a little more than 20%. But the problem doesn’t stop there.
Figure 2 – U.S. oil production peaked in 1970 and has been falling ever since. According to renowned oil expert T. Boone Pickens, America now sends $700 billion to foreigners every year for oil. More disturbing is that much of this money goes to nations that are either our enemies, are not democracies, have significant roadblocks to foreign investment or at the very least risk being destabilized by radical hostile elements. Here is a quote from a February 2007 GAO Congressional Report entitled Crude Oil – Uncertainty about Future Oil Supply, “four countries – Iran, Iraq, Nigeria and Venezuela – possess proven oil reserves greater than 10 billion barrels, or nearly one-third of global oil reserves, and represent extreme levels of political risk.” Furthermore, the report said, “three countries with large oil reserves—Saudi Arabia, Kuwait, and Mexico—prohibit foreign investment in the oil sector, and most major oil-producing countries have some type of restrictions on foreign investment. Some nations that previously allowed foreign investment, such Russia and Venezuela are currently reasserting state control over the oil sector, according to U.S. Department of Energy (DOE).” According to the report, foreign direct investment in Venezuela for example, was strongly correlated with oil production in that country and when foreign direct investment declined between 2001 and 2004, oil production also declined. The Venezuela national oil company, PDVSA, lost key technical expertise when it fired thousands of employees following a strike in 2002-3 that led to a drop in Venezuelan oil in exports to the U.S. of 1.2 million barrels according to the GAO. Thanks to our growing dependency on foreigners for oil, the risks to our continued supply are significant and growing. They include but are not limited to war, civil war, trade war, revolution, coup, military aggression, political disagreement, oil industry nationalization, changing allegiances, changes in foreign policy, labor strife, changes in government, and increasing domestic demand in one or a number of oil exporting nations that currently send us oil. In other words, our growing reliance on foreign oil is a recipe for catastrophe. It’s not a matter of if, but when.
Figure 3 – TSG weekly subscribers will recognize this chart from our July 28 weekly newsletter showing the shortfall between oil supply and increasing demand. Equally as serious if not more so, is the growing deficit between global supply and demand. Oil production has peaked in most countries outside the Middle East according to the International Energy Agency (IEA). According to most studies referenced by the IEA, oil production is expected to peak between now and 2040 and the ultimate peak will depend on a number of factors. Today oil accounts for approximately one-third of all energy used in the world but despite seven years of rising prices and the fact that a barrel of crude now costs about seven times what it did in 2002, demand continues to swell. Until very recently, demand from the 30 industrialized nations of the Organization for Economic Cooperation and Development (OECD) accounted for nearly two-thirds of worldwide oil consumption. As the global economy has slowed, OECD demand has fallen by 760,000 b/d. But this has been more than offset by the 1.3 million bbl/d demand increase in non-OECD countries like China and India. As of the latest IEA estimates, global oil consumption is projected to rise by nearly 1.2 million bbl/d. In 2008, global consumption is expected to be nearly 2 million bbl/d greater than global production and in lieu of some major global economic disaster, this shortfall will rise. So even as demand from the U.S. and the rest of the OECD falls, emerging nations continue to increase overall global oil consumption. Perhaps more troubling is the fact that our national policies on oil are having a diminishing impact on both our oil supply and the price we pay for it. Transportation Troubles
Figure 4 – Chart showing oil demand by sector between 1950 and 2004 with transportation using the lion’s share. Where does all the oil we consume go? As we see from the next chart, the largest share of our oil, approximately 65%, is used for transportation by truck, rail, car, aircraft, ship and use in other vehicles. In other words by far the single biggest use of oil in the U.S. today is to power internal combustion gasoline and diesel engines. According to the reports we examined for this report, the internal combustion gasoline engine is somewhere between 20 and 32 percent efficient. Because they operate at lower revolutions per minute (RPMs) efficiency for the diesel engine ranges between 40 and 52 percent. This means that the majority of fuel is lost to heat, friction and transition inefficiencies between burning the fuel and driving the vehicle. It is in changing the type of engines we use to transport ourselves and our goods where our greatest hope for energy sustainability for the future lies. What are the most viable, clean alternatives? One choice that has gained a lot of attention is the hybrid electric engine but it can cost anywhere from $2,000 to $3,500 more to purchase and currently represents only about one percent of new vehicle registrations in the U.S. Hydrogen fuel cells are another obvious solution. However, a hydrogen fuel cell stack needed to power a passenger vehicle currently costs about $35,000 to produce compared to just $2,000 to $3,000 for the conventional combustion gasoline engine in 2007 dollars. Ethanol, the most popular short-term alternative requires more energy to produce that it generates making it a costly and unfriendly environmental alternative. As well, it is far more costly to produce than gasoline. It has also been responsible for driving up the cost for corn and other feed stocks used in ethanol production. But even if ethanol were to become more cost effective, there remains the challenge of developing sufficient supply, pipelines and outlets to sell ethanol to make it readily available nationwide. Finally, a gallon of ethanol only puts out two-thirds of the energy produced by a gallon of gasoline so that it takes 1.5 times the amount of ethanol to drive an ethanol-powered vehicle the same distance. This makes ethanol engines even less efficient than the gasoline engine. Electric engines are another viable alternative but the major hurdle to widespread us is battery technology. With current technology, batteries that are able to store sufficient charge for daily use are heavy and cumbersome making electric power only practical at relatively low speeds in an urban environment. Another big positive for electric engines is that because they have fewer moving parts than an internal combustion engine, with far less lost to heat and friction making them 85 to 95 percent efficient. But according to the GAO report, “even under optimistic scenarios, by 2015 these technologies could displace only the equivalent of 4 percent of projected U.S. annual consumption.” Let’s hope the GAO report is wrong because that would mean that we would continue ship trillions of dollars out of the country for decades and continue to pay through the nose for our oil and gas. One huge positive is that oil was trading below $60/bbl when the report was written and every dollar it trades above that level provides increased incentive, ingenuity and capital to deliver viable energy alternatives. Technology to the Rescue In the late nineteenth century, experts worried that with population growth and the increasing number of horse-driven wagons being used, that we’d be up to our necks in horse manure by the mid-twentieth century. They failed to see the major technological breakthrough that would make the horse and buggy obsolete in a few short years. Are we again making the same mistake? Who could have guessed how significantly the Internet would change the way we communicated and the profound impact it would have on our civilization, just a decade before its invention? For example, experts have said that the major drawback to widespread electric vehicle use is battery technology. At a recent auto show in Tokyo, Nissan showed off its new electric car and hybrid, the Cube. Critics were only too quick to point out that the new lithium-ion batteries weighed 1,000 pounds and made the back seat under which they sat too high and uncomfortable. Critics have also charged that current batteries including lithium-ion, are inefficient and take too long to charge. On long trips this means that drivers would be forced to either switch vehicles are rely on small gas engines once the batteries were depleted since replacing the batteries would be out of the question without a major amount of work. What critics fail to take into account is what impact a paradigm shift in battery technology would have. It has often been said that the greatest technological inventions are borne out of war. Examples include the jet and rocket engines that were first used by the Germans during World War II in the ME 262 jet fighter and ME 163 Komet rocket powered fighter, the latter being the first aircraft to fly at more than 600 miles per hour in 1941, a speed not be matched by allied aircraft for nearly six years. And whether we like it or not, we are engaged in an energy war. As long as the cost of oil remains high, there is great economic incentive to find viable solutions. But no matter what happens to the price of crude, U.S. dependency on foreign oil provides our greatest incentive, especially given the stakes and supply uncertainties. In the next part of this series, we’ll take a closer look at some of those alternatives and how they have the potential to revolutionize energy use providing the opportunity to make those who discover them enviable profits in the process. References and Suggested Reading GAO Report – Uncertainty about Future Oil Supply U.S. Government Accounting Office - February 2007 Nissan Shows Off Its Electric Car – Business Week http://www.businessweek.com/globalbiz/content/aug2008/gb2008086_804752.htm?campaign_id=rss_daily ---------------------------------------------------------------------------------------------------------------------- If you find this newsletter insightful, please feel free to forward this newsletter and share it with a friend (or simply have them opt-in free from our home page http://www.tradesystemguru.com to be added). DisclaimerTradeSystemGuru.com obtains information from sources deemed to be reliable; |
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