Friday, May 29, 2009

Choices in Large-scale Electricity Production

Do you agree with this statement: “The working of the nation depends upon a reliable supply of electricity, day and night, winter and summer, quiet days and stormy days”? If you do, you will want to read on. This posting was sent exclusively to CARE from the members Los Alamos Education Group in Los Alamos, NM. Remember Los Alamos is where the atom bomb was developed and where the high school students have the highest IQ in the country (their parents are literally “rocket scientists"). So when scientists and engineers from Los Alamos speak up, we should listen!

This piece is authored specifically by Donald Peterson and William Stratton, who have served CARE with written commentaries in the past and were guests on the radio program CARE organized last fall on uranium mining and nuclear power. Their biographical information can be found below. From their professional and scientific background, here--through the lens of history--they analyze America’s electricity needs for the future and the possible solutions.

This is a through look that is based on in depth study. It is a bit longer than many of the postings here so you may want to print it out for reading later. We at CARE are confident that our Blog readers will find this information to be insight and an important piece in your ongoing energy education. Please let us know what you think!

Powering the National Grid
A few years ago, the National Academy of Sciences polled its members to determine the premier engineering development of the 20th century. Although the candidates are numerous, including the automobile, radio and television, and the airplane, the Academy determined that the most significant engineering accomplishment was the electrification of the nation, essentially providing electricity to nearly every home, business, and industry. The importance of this development is evident from the innumerable applications of electricity, and also from news reports showing the impact of electric interruptions due to disasters of one kind or another. Indeed, it is difficult to imagine being without electric power for an extended period. The working of the nation depends upon a reliable supply of electricity, day and night, winter and summer, quiet days and stormy days. In spite of this accolade for the electrification of the nation, critics exist--voiceing complaints about design, age, reliability, etc. More on this later.

Until the early 1970s, the time of the first oil supply crisis, most of the country’s electrical power was provided by burning coal, with a fraction provided by burning oil because it was cheap at the time. Between about 1905 and 1975, electrical power demand and the production in the U.S. rose at the phenomenal rate of 7% per year, or doubling every decade. This rate only declined for a year or two in the depression, and then accelerated a bit during World War II. Otherwise remained steady at 7% per year. The United States was not unique in experiencing a steady growth in the use of electricity.

However, in the mid-1970s, the annual increase in demand for electricity dropped from 7% a year to one or two percent, even dropping to zero percent for a year or two. A saturation effect had taken place. This reduced growth rate led to the cancellation of plans for new power stations--both coal and nuclear--in large numbers.

During the 1950s the creation of new ideas and development of designs for nuclear power stations had progressed to the point that a dozen or more small (by modern standards) nuclear power reactors were built in the late 1950s and early 1960s. Some of these were experimental in nature and were short lived, but some provided power for several years. However, the experience convinced companies, such as General Electric, Westinghouse, and Babcock and Wilcox that nuclear power could be a competitor to the coal-fired power plants. They were so convinced, they offered bargain rates to build the early large nuclear power stations to get the business started, and the utility industry responded with many orders.

The first large commercial power plant, Oyster Creek in New Jersey, produced 650 megawatts, and was licensed and began operating in 1969. It is now about to receive a license extension of another 20 years, along with most of the other operating nuclear power stations.

By 1980, 60 nuclear power stations were in operation. Between roughly 1965 and 1995, some 112 plants were built, of which 104 are still in operation. These plants provide nearly 20% of all electrical power in the United States. For the electric utilities, the initial burst of enthusiasm was economics--the nuclear plants were less expensive to build and operate than new coal fired plants.

However, shortly after this initial enthusiastic beginning, a number of factors combined to slow this introduction of nuclear power. The operation and maintenance of these new power plants was much more difficult than had been expected and an anti-nuclear movement emerged. Various organizations were created, motivated somewhat by the association of nuclear power with nuclear weapons, but also by some fears predating that time, which can be related back to the discovery of x-rays, radioactivity and the spooky pictures of a hand showing clearly bones inside the flesh. Bad experiences with radium (unregulated) contributed to the unease. (The extensive and accepted use of x-rays for medical and dental diagnostics had no apparent effect on the anti-nuclear movement, perhaps because these uses were not associated with the radiation from the fission process.) Most of the early so-called reactor safety studies were badly done with frightening results. Simultaneously, licensing, financing, and construction time and costs were rising. The expense of new nuclear plants became more than coal plants, and neither was needed because of the lack of demand for more power.

About the same time, President Carter issued an executive order halting nuclear fuel reprocessing due to concerns regarding control of plutonium and proliferation of nuclear weapons. This killed a developing industry (reprocessing of spent fuel), and, more importantly, research and development work to find a better fuel cycle than the Purex process, which was developed and used during and after World War II. (The Purex process was designed to produce pure plutonium, quite unsuited to commercial power applications.)

In the late 1980s and 1990s, when the demand for electrical power began to rise again (at a lower rate), nuclear plants were in disfavor due to expense, regulation, as well as the accidents at Three Mile Island and Chernoble. The fuel of choice became natural gas. These gas plants were inexpensive to build and natural gas was relatively cheap. Natural gas fired power grew to be about 20% of the total U.S. electrical supply, along with 20% for nuclear and 50% for coal.
We are now in the first decade of the 21st century. Fossil fuels, especially coal, have fallen into disfavor because of emission of carbon dioxide--allegedly leading to global warming. Additionally, pollutants are calimed to be responsible for thousands of deaths per year (spread over the whole population and therefore not generally observed like deaths from auto accidents). The demand for electricity is now rising 1½% to 2% per year. Nuclear power is more generally accepted, since it does not suffer from the same pollution problems, and it has compiled a record of decades of reliable, safe service at a relatively low cost. In fact, we believe that some nuclear plants produce the least expensive electricity.

Concomitantly, due primarily to the same concerns about global warming and emissions from coal fired power plants, a so-called “green” movement has emerged and is literally wildly enthusiastic about "renewable" power, such as electric power from sunshine and wind. (There are a few other options, such as power from ocean waves, or the burning of trash, but these are even less proven than wind or solar.)

The total electrical demand of the United States is a mind-boggling 600,000 to 700,000 megawatts (each megawatt is one million watts, or 1000 kilowatts [kw]. To those of us accustomed to thinking in household terms [watts or kilowatts], this is an incomprehensively large amount of power.) We expect the electric industry to provide this power reliably, at a steady, constant voltage and at a price we can afford. If one power station fails, we expect another to be available to take up the load nearly instantaneously. (The system is not perfect and large blackouts do occur, as in the northeast some years ago.)

At an annual rate of increase of 2% per year, demand for electricity will double in 22 years; if only 1.5% per year, the demand will double in 46 years. Considering that our total demand for energy of all kinds and forms is steadily increasing, population is increasing, and the fraction of energy provided by electricity is also increasing, we must plan for the higher rate of growth. We must plan for significantly greater demand for electrical power in the years to come.

Our electricity is produced by coal (50%), natural gas (20%). nuclear (20%) and most of the remaining is water power with very small amounts from solar and wind. These (especially coal) will carry the load for some time to come, but because of problems mentioned above, coal is out of favor and nuclear, wind and solar are candidates. While we have enough coal to last for at least a couple of centuries, the objections to burning more coal are numerous, so we will consider the remaining three sources--nuclear, wind, and solar--quantitatively, as well as we can. We will consider what is required to replace the electricity currently provided by coal--in the US, approximately 300,000 megawatts--with cleaner sources.

We will start with wind power. T. Boone Pickens has proposed to build wind turbines of 1.5 megawatts. More powerful wind turbines have been built, but his proposal is the first one to be considered seriously. In order to produce 300,000 megawatts, 200,000 turbines would be required. However, the operational history of wind turbines has not been good. Operational power is obtained on average only about 1/3 or less of the time, so this means that 600,000 or more would be required in differing locations to replace the electricity now produced by burning coal. The area required for each turbine is about 4 acres, indicating that the turbines would take up 2.4 million acres (3700 square miles). These numbers are enormous. At an estimated cost per turbine of 4 million dollars, the total cost is very large. This cost does not even address costs of revising the gigantic and costly electric power distribution grid to collect power from remote locations and transmit it to population centers one to two thousand miles away, or to maintain backup sources for periods of time with little or no wind. This eventuality is a failure for which we see no solution if we wish to depend on wind. Some of the criticisms of the power grid may derive from problems of this sort.

The wind option is impractical for these, as well as other, reasons.

Solar power has some obvious advantages. Enthusiasts point out that the distributed power over the entire area of the earth is enormous, the intensity is constant, it never fails, and will last for the indefinite future. It seems to be perfect, except for several weaknesses: the power is small per unit area, the earth rotates with nights as well as days, and the seasonal effect must be considered. Further, concepts for storing energy for periods when the sun is not shining are inadequate, very expensive, and do not exist for large arrays.

We will quantify, at least in part, by estimating the area required with the sun directly overhead as occurs on the equator or between the Tropic of Capricorn and the Tropic of Cancer. The Handbook of Chemistry and Physics states that the solar intensity, all frequencies, at the spot facing the sun, vertically overhead is 2 calories per square centimeter per minute. Translated into units more familiar to most of us, the intensity is 1.17 kilowatts per square yard. This energy density is reduced when passing through the atmosphere by molecular absorption, dust, and clouds. The best estimates we’ve found suggest half or a little less reaches the ground. Solar cells, at their current best, convert only 15% of the solar energy to electrical energy. Further, a solar array must include space for maintenance workers and equipment, frames to hold and secure the solar panels, and for equipment to collect and convert the direct current to alternating current. Allowing for all these factors reduces the 1.17 kw per square yard to about 0. 055 kw per square yard for the array of solar cells. (For a rooftop installation of, say 50 square yards, the power output could be up to nearly three kilowatts, enough to power the home comfortably at the middle of the day, but with little for late in the day and nothing, of course, at night without storage). An array of a square mile could produce about 170 megawatts. To replace the power generated by coal (300,000 megawatts) would require 1765 square miles, an impossibly large area. Further, this number is calculated with the sun directly overhead. Allowing for other times of day, and for winter as well as summer, as in the US, would increase the area required by a factor of five to ten or more--and this still does not consider periods of darkness. In short, solar power is completely impractical for large-scale power production, and should be reserved for special applications or for remote sites for which connection to the grid is too expensive. (A quantitative evaluation of costs for solar installation in a home was published in the Albuquerque Journal, January 15, 2009. The cost was prohibitive.)

This leaves nuclear power: We will assume that each new power plant will provide about 1500 electric megawatts. (The French and the Finns are each building pressurized water reactors of 1600 megawatts, and two similar plants are planned for China. The economies of scale keep driving the unit power level higher). In order to replace 300,000 megawatts from coal, construction of 200 such new nuclear power stations would be required. The record of the last century (and recent history) clearly demonstrates that this is feasible. For example, the French built 50-55 nuclear power plants in 20-25 years starting in the mid-1970s, all of which operate steadily and safely, and provide about 80% of their total electrical power supply. The US constructed 112 in about the same time; 104 are still operating. Since the turn of the century more than 30 new nuclear power stations have been completed worldwide and more are planned.

Some problems must be resolved in order to make such an expansion possible in the U.S. A problem (really a perceived and artificial problem) is that of spent fuel. Two possible solutions have evolved. The first and operative solution is to store the fuel, first in fuel storage pools for a few years until air-cooling is adequate, then move the spent fuel to concrete pads and place it in concrete and/or steel containers. The containers are too heavy to move without the heavy equipment, and the fuel is too hot, both thermally and radioactively, to work with without special equipment. This reduces the concerns regarding security. The area required for such a system is miniscule and the cost cannot be large. This is the current solution.

The second solution is to bury the fuel, suitably contained, in sites such as the one under construction at Yucca Mountain in Nevada. This project has been underway for years at a cost of billions of dollars, and is still incomplete. It is not a workable solution. No fuel has been stored here, nor will any be for years to come--especially now that Obama has killed the project. The authors regard Yucca Mountain as a complete waste and a mistake.

The best solution is to store fuel at the site of creation (the power station) or at a central storage facility, placed where a recycle or reprocess plant will someday be constructed. This process has been satisfactory for decades (certainly since the 1960s) and will continue to be satisfactory for decades and decades more. Ultimately, the fissionable materials remaining in the fuel (primarily uranium and transuranics) will be used in fast neutron reactors after recycle to remove the fission products. The country can not afford to throw away the 90+ % of the energy from the original fuel which remains in the "spent” fuel.

During the presidential campaign, Senator McCain presented a proposal for 45 new nuclear power stations. In this light, his proposal was far too modest. By the time 200 nuclear power stations are built to phase out coal-fired power, more will be needed, but that can be faced when the time comes. The first few plants will be expensive as, essentially, a specialized, new construction industry must be recreated. Welders, pipefitters, electricians, etc must become accustomed to the rigorous inspections conductedby the nuclear regulatory industry. A forging plant for pressure vessels must be built.

The conclusion of this brief study is that humanity has only two choices for the large scale production of electricity. These two are coal-fired or nuclear power. It should be obvious that our national choice should be the same as the one made by France about 35 years ago. We should build nuclear power stations as fast as practicable. The first few plants will be expensive and will require time. Creating a power system that is pollution free and emits no carbon dioxide will require at least a half century. We can start no sooner than now. We can do it; we must do it.

Bill Stratton has a PhD from the University of Minnesota. He is a retired reactor safety expert with extensive advisory service to the Nuclear Regulatory Commision. As a consultant to the President's Kemeny Commission, he was instrumental in explaining the minimal radiation release from Three Mile Island.

Don Petersen has a PhD from the University of Chicago. He is a retired radiation biologist involved with health effects of radiation, neutron dosimetry and effects of neutrons and alpha particles. He has had first hand experience with investigation, description and reporting of radiation accidents involving injury and fatality.

Wednesday, May 27, 2009

America: More Dependant on Foreign Oil

For those of us who spend the better part of everyday focused on energy issue--and especially what our elected officials are doing to thwart energy development, we tend think we have it all figured out. While it is true that we know more than the average person on the street (who still thinks CAFE Standards are about quality control at Starbucks), we do need each other. We thinkers and analysts sharpen each other’s expertise. Such is the case with Diana Furchtgott-Roth. Just when we at CARE think we have a good grasp on a particular issue, she sends us one of her articles that sheds new light on the topic. Such is the case with today’s posting.

Most of us who work in the energy arena are frustrated with the policies coming out of Washington, however Diana Furchtgott-Roth brings fresh insight to the policy issue. One of the fresh thoughts she presents here is this sentence: “Rather than leading towards energy independence, Mr. Obama’s proposals would drive oil and gas production abroad and make American oil and gas uncompetitive in a global market.” There are others too. Please give this a good read and comment on any new ideas you glean. If you think she is totally off-base, we’d love your comments on that too.

Watch for the next posting from Diana Furchtgott-Roth on CAFE Standard--especially if you think they are about Starbucks.

Obama's Upside-Down Energy Logic
Although President Obama has repeatedly called for America to achieve "energy independence," his proposals to raise taxes on domestic oil and gas producers would have precisely the opposite effect. They would, if approved by Congress, make the country more dependent, not less, on imported oil.

Prudently, the president might also acknowledge that achieving “independence” is both unlikely and undesirable, and that America’s economy benefits from all imports, including imported oil.
Days after Mr. Obama’s inauguration, the new president declared, “It will be the policy of my administration to reverse our dependence on foreign oil while building a new energy economy that will create millions of jobs.”

Yet in the 2010 Budget that he sent to Congress earlier this month, Mr. Obama specifically seeks to raise taxes on domestic oil exploration by $31 billion over 10 years, a larger tax increase than on any other industry. In addition, oil and gas producers would bear a disproportionately heavy share of other tax increases on business, more than $320 billion.

The ostensible rationale for these tax hikes is that the current tax system “distorts markets by encouraging more investment in the oil and gas industry than would occur under a neutral system. To the extent expensing encourages overproduction of oil and gas, it is detrimental to long-term energy security…” This reasoning is repeated eight times in the Treasury Department’s Green Book, a description of proposed spending and revenue changes in the budget.

No mention anywhere in the Budget of the distortion of the $60 billion in expenditures in the stimulus bill to “reduce dependence on foreign oil and create long-term, sustainable economic growth in the green industries of the future.” Subsidies for renewable energy, only four percent of America’s energy supply, and more than would occur under a neutral system, are acceptable to President Obama. But a tax structure that encourages the production of oil, 39 percent of America’s energy share, is termed “detrimental.”

Mr. Obama’s proposals include increasing effective income tax rates on oil and gas to levels higher than for other manufacturing industries; disallowing “write-offs” for certain types of extraction equipment and exploration methods; levying a new excise tax on Gulf of Mexico oil and gas; and taxing carbon emissions through a “cap and trade” program.

If America is to reduce use of imported fuels, it needs to raise domestic production as well as to conserve. This increases our long-term energy security, rather than harming it. Every single additional barrel of oil produced in America is one barrel fewer that we need to import—and as we produce more at home, we employ American workers and produce revenues for all Americans.

No one knows the full extent of American oil and natural gas reserves, and to move towards energy independence, it pays to be looking. In 2007 200 trillion cubic feet of natural gas, equivalent to 33 billion barrels of oil, about 18 years of U.S. oil production, were found in the Haynesville Shale rock formation in northern Louisiana. Texas, Arkansas, and Pennsylvania are also home to new gas fields. New optimism about gas reserves and production has been pushing prices down. With the fuel there, why discourage production with new taxes?

Rather than leading towards energy independence, Mr. Obama’s proposals would drive oil and gas production abroad and make American oil and gas uncompetitive in a global market. The levies would punish domestic American companies and benefit countries with large reserves such as Venezuela, Saudi Arabia, Iran and Russia. Does Mr. Obama really want these countries, all under fire for their neglect of human rights, to get richer at our expense?

Until America has technology to operate its 250 million motor vehicles without gasoline and natural gas, we need more domestic exploration, not less. At some point, maybe later this year, maybe in 2010, our economy is going to shift to post-recession recovery, and oil and gas consumption are going to rise. We want to avoid $5 gasoline and sky-high home heating bills.

Although Congress is spending billions of dollars to create jobs and promote energy independence, President Obama wants to deny access to development of our own oil and gas resources in some of the most geologically promising areas available, and to increase the tax costs of developing these resources.

This is upside down logic. If enacted by Congress, it would make us less secure. Congress might succeed in imposing draconian efficiency standards on automobiles and appliances; requiring electric utility output that comes from renewable sources—wind, solar, geothermal, biomass—to rise from 4 percent now to 25 percent in 2025; and mandating greenhouse gas emissions in 2050 that are 17 percent of 2005 levels. (Whether Congress could enforce such wildly optimistic goals is a question.)

Americans might become greater conservationists, prodded by guilt or by higher energy taxes. But even if they do, they will still need oil and natural gas for driving, home heating, and electricity generation for many years to come. If Mr. Obama is serious about pursuing energy independence, he should withdraw his proposals to increase taxes on domestic oil and gas production.

Diana Furchtgott-Roth is a senior fellow at the Hudson Institute and a frequent contributor to CARE’s Comments About Responsible Energy.

Tuesday, May 26, 2009

Technology and the Peak Oil Myth

What a treat it was to read this piece by Byron King. His comments about the advancements in technology echo some of those made by CARE’s Executive Director Marita Noon at the Mount Taylor hearing May 15th in Santa Fe. But Byron’s comments are based on his fresh experience examining the new technology at the Offshore Technology Conference. It is exciting to hear about the new technology that is available to add hydrocarbon resources to the ever-increasing demand. That, too, is something we’ve been saying here at CARE regarding those who argue that we are going to run out of oil. Yes, the low hanging fruit has been picked. But through advances in technology, more and more keeps be found and being more easily recoverable.

Additionally, Byron artfully addresses America’s political climate and how old fears are allowing other countries to take the lead that used to be America’s.

As Robert Bradley addressed in his CARE Conference Call in December, the more of us that draw attention to these issues, the higher the likelihood of being heard. He called it the echo effect. Thanks to Byron King for shouting from a different roof-top, the roof-top of energy investments. Maybe he will reach a different audience.

Don’t forget, Byron is the CARE Conference Call guest this week: May 27, 2009--11:00 AM ET, 10:00 AM CT, 9:00 AM MT, 8:00 AM PT. E-mail to participate.

Oil Don’t Come Easy
I was in Houston this month, attending the Offshore Technology Conference. I have to confess that I’m humbled. Really, for as much as I think I know about the energy biz after a mere 30-plus years… a walk (a LONG walk, to be sure) around the packed floor of the immense Reliant Center AND the massive Reliant Stadium reveals how much I have left to learn.

In previous years, I’ve attended the OTC on my own, or as a representative of Agora Financial. This year, the American Petroleum Institute paid for my trip to Houston and to the OTC. I extend my thanks to the API. I am, of course, free to report on anything that I believe is of interest. API has NO editorial control over what I report to you. As always, I observe, follow the facts and draw my own conclusions.

Wrapping Your Brain Around the OTC
Sometimes when 70,000 people head to Reliant Stadium, it’s to watch the Houston Texans play football. The spectators understand what’s going on down on the field. In true Texas fashion, they know the rules of football. There are 22 players moving back and forth, with the rest of the two teams and coaching staffs on the sidelines. It’s something around which you can wrap your brain.

But the OTC? How do you wrap your brain around the OTC, its several thousand exhibitors and many dozens of speakers?

Do you want to know how to do seismic work on the other side of the world? How to build work ships the size of aircraft carriers? How to anchor a 75,000-ton rig in swift-moving water, while dangling a 20,000-ton riser-string that’s nearly two miles deep? How to drill oil wells 250 miles out at sea? In 9,000 feet of water? Through 14,000 feet of rock? Through 8,000 feet of salt? Into fluids with pressures of 25,000 pounds per square inch? (By comparison, your household water pressure might be about 40 psi.) Into super-heated oil filled with poisonous gases? How to move that super-heated oil to the seabed from beneath four miles of the earth’s crust? Then how to move that oil across hundreds of miles of ocean bottom, and do it in the freezing waters of the deep ocean, even at the equator and, of course up in the Arctic? Do you know how to do that?

Where does the technology come from? Who builds the equipment? How do you pay for it? Where is the work force to accomplish these tasks? What about the government policies that influence it, for better and worse? How do you make 25- and 50-year plans — yeah, it takes THAT long — in a world where prices and policies change by the month? How about the national cultures that nurture (or suppress) the whole process?

Which Battle? Which War?
Let’s look at things from the standpoint of national cultures. When I attended the Naval War College a few years ago, going through a course for senior officers, one professor said something that stuck with me: “Your job is not to fight the last battle of the last war. It’s to fight the first battle of the next war.”

“The first battle of the next war?” Damn right. Sure, you’re going to study history. Sure, you’re going to read about the last war and its last battles. But you have to understand that things change. You have to realize that everybody else is studying the last battle of the last war. So you probably have no real advantage going into the next great effort. The other guy has read the same book.

Thus, if you want to succeed, you have to get ahead of the future. You have to write a new book. It’s YOUR book. Indeed, you have to invent that future. You have to decide what you want to do, and then acquire the people and equipment to get it done.

Brazil — Gearing up for the First Battle of the Next War
Where am I going with this? Let’s look at Brazil, for example. The Brazilians are gearing up for the first battle of the next war, so to speak. They intend to survive as a prosperous, industrialized country in the 21st century, despite intense future competition across the world for energy fuels and other natural resources.

Down in Brazil, they’re in something like national rapture at the prospect of drilling up the deep pre-salt hydrocarbon plays in the offshore basins. The estimates are that the deep basins off Brazil hold between 20-100 billion barrels of oil. Maybe more.

The entire nation of Brazil, apparently, revels in the prospect of investing over $120 billion in offshore development in just the next eight years. They have a plan. It’s their moonshot. The Brazilians believe that the offshore environment will bring their industries firmly into the modern era. Brazil wants to be a world power in the 21st century. And the oil? Well, of course they have plans for that oil.

As a nation, Brazil cannot wait to move ahead into its offshore realm. Just Petrobras, the national oil company, wants 40 new drilling rigs, each over 60,000 tons; and 32 new production units, each near 100,000 tons; and about 130 large supply vessels, each over 100,000 tons.

Petrobras has plans to emplace HUNDREDS of subsea systems on the deep ocean bottom to bring that oil into production. The Brazilians will lay thousands of miles of underwater pipeline, with all the associated ship-support and other equipment that entails.

The Brazilians are not living in the frozen past. They’re not hostage to paralyzing myths. The Brazilians envision a future for their nation, and they’re acting on it. They see hundreds of deep-water oil wells pulling petroleum out of the crust from many miles down and piping it ashore to their refineries and industries. Indeed, Brazil plans to win that first battle of the next war. And it’s cutting the steel with which to do it.

Meanwhile, Back in the US of A…
Meanwhile in the U.S., the policy battles rage endlessly over offshore development. Authorize? Don’t authorize. Explore? Don’t explore. Lease? Don’t lease. Drill? Don’t drill. Produce? Don’t produce.

Whenever the proponents of offshore development score a win, the opponents take it all to federal court for years on end. Years later, some judge makes a decision. Then comes the inevitable appeal. And then everyone goes back to litigate some more after the appeal. There’s no end. I’ve spent my adult life watching this ping-pong match play out.

What’s at the heart of the issue? A broken political process. Or you might call it a political “process” that works too well. Really, it seems that much of the U.S. energy mind-set is stuck firmly in the past. In essence, the debate is over how to fight the last battle of the last war.

Living in a 40-Year-Old Past
For example, again and again, the opponents of offshore development in the U.S. summon up their favorite bete noir — the images of the Santa Barbara oil spill of 1969. An event from four decades ago — before most Americans now living were even born — has become the iconic reason not to develop, say, offshore California. And this is despite the fact that the exploration, drilling and environmental technology of today is far advanced from what existed 40 years ago.

Think about it. Do you have a better computer today than 40 years ago — if you even used computers back then? A better television? A better car? Are there better airliners? Better heart transplants? You get the idea. But some people learn something and never let it go.

Along those lines, the other day, I visited the facilities of Cameron Intl., here in Houston. Cameron makes blowout preventers for deep-sea drilling, and a large host of other drilling-related equipment. Having been around the oil industry for over 30 years now, I can say that the new technology for safe drilling is beyond astonishing. Just the quality control alone is awesome. For example, EVERY HEAT of steel that goes into certain of Cameron’s subsea products goes through a rigorous quality-assurance check. Every heat.

Meanwhile, it’s not just California where the offshore is off-limits. Most of the rest of the U.S. offshore is locked up as well, except the western Gulf of Mexico and (grudgingly) some of northern Alaska. As one wag has put it, when it comes to offshore development, much of the U.S. political class is living in “The No Zone.”

The Future Is Right Now
But the last battle of the last war — the Battle of Santa Barbara — is over. The images of oil on the beaches led the U.S. to shut down much of its offshore drilling effort, and for many decades. Meanwhile, the mess got cleaned up. It’s history. The energy industry figured out what happened and fixed a lot of problems. Now where do we go? Because you have to go somewhere, sometime. You can’t live in the past — at least not for too long. Or can you? Well, you can try to live in the Good Old Days, but eventually, the future will overtake you. And in the world of energy, the future is right now.

Welcome to the Future
A year ago, the price of oil was $120 per barrel and rising. Indeed, by last July, the price was $147 per barrel. And when that happened, you might recall that the world economy didn’t work very well. It was oil prices; it was bad banks; it was a lot of things that went wrong. And then the economy cratered. That took down the oil price. So now the price of oil is in the $50s.

Look back. How did oil ever reach $147 per barrel? Was there really not enough to go around? That’s what some people thought. But then why did the price suddenly tumble, if not just plain drop off a cliff? Did people anticipate a demand crash? Again, that’s what other people thought.

Now we have oil in the $50s. What does that mean? With oil in the $50s, does it mean that the world has “too much” oil? Or not enough? Well, what’s your time frame? A day? A week? A month? A year? Five years? Fifteen years?

With oil in the $50s, yes there will probably be adequate supplies for the next few months. You can calm down. The oil you’ll burn in September is being loaded onboard distant tankers right now.

But with oil in the $50s, will there be adequate oil supplies in, say, 2012, if not 2020? I doubt it. At least not for the U.S. Because with oil in the $50s, some of that 2012 oil — and much of that 2020 oil — won’t see the light of day. There’s just not enough cash flow for the energy business to do its thing — like drill enough wells. Hey, the future is now.

Future oil production requires current exploration and development. Except we’re not drilling. We’re not developing. So welcome to the future. With oil in the $50s, it’s a no-brainer to predict future shortages.

For Now, Keep Drilling
One thing is certain. If the energy industry does not stay focused and capitalized, we’re in a lot of trouble — and I mean sooner, rather than later. That’s why a big trade show like the OTC is so important. The OTC embodies the new developments in offshore technology. It gets right into your face.

Almost every booth at OTC has some item on display that’s better than what used to be on display. Yesterday, for example, I saw a remarkable new invention from FMC Technologies that dramatically improves the safety and efficiency of the “fracturing” process (“frac-ing”) by opening up shale beds to yield natural gas. It’s what the late efficiency guru Edward Deming would have called an “incremental improvement” to an existing process. But it’s brilliant and elegant. And when this new equipment goes into widespread use, it will offer a dramatic improvement.

Ideas and improvements like this from FMC Technologies — and countless more on display at the OTC — will allow the energy industry to keep providing hydrocarbon molecules to us earthlings for as long as we want to burn them. (Burn them? That’s another story entirely.)

The OTC shows off what the U.S. has at its disposal, if it chooses to develop its offshore energy resources. Here are the tools with which to fight the first battle of the next war.

And the OTC also shines a light on how many U.S. policymakers and opinion leaders are living in the past, patting themselves on the back as they fight that last battle of the last war. Meanwhile the energy clock is running down, and other nations and cultures are shopping their wares.

Prior to joining Whiskey and Gunpowder, Byron received his Juris Doctor from the University of Pittsburgh School of Law, was a cum laude graduate of Harvard University, served on the staff of the Chief of Naval Operations and as a field historian with the Navy. Our resident energy and oil expert, Byron is the editor of Outstanding Investments and Energy and Scarcity Investor.

Tuesday, May 12, 2009

The Rush for Cap and Trade

With all that is going on Washington, one has to be a diligent news watcher to stay abreast of various energy policies that percolate to the top. Again, this is why CARE’s Blog is an important service. We search for both well-known and more-obscure sources for relevant and up-to-date information. Here we present you with insights from a new source that came our way. These Comments About Responsible Energy address Cap-and-Trade—which we believe to be a scary and just wrong approach to America’s energy usage. In a brief and concise way, this posting echoes previous statements made by some of our other experts. This position needs to be said loud and often. The massive spending plan cannot be funded on the backs of American consumer’s energy usage.

Not the Way to Go
President Obama, Governor Bill Richardson, and many state and federal government leaders seem to think that there is a solution to climate change called “cap-and-trade” – and that this plan will help increase investments in renewable technology companies.

This is not just a theoretical issue because top leaders in the U.S. House are busily trying to figure out how to enact a “cap-and-trade” plan--even bypassing one of their normal subcommittees if necessary.

Cap-and-trade is called that because it would put a “cap” on carbon emissions and then set up a system for trading carbon emissions “credits.”

However, in view of the program’s complexity and its potential for “gaming the system,” as well as downright corruption, the unintended consequences could well be economic damage at a time when the economy cannot sustain the burden.

Consider this excerpt from a recent article in the Houston Chronicle:
“(A market estimated to be valued at $3 trillion by 2020) could take on the same characteristics as the mortgage derivatives market if investors are allowed to securitize emissions credits without strong regulatory oversight and enforcement, said Michelle Chan, a senior policy analyst with the group Friends of the Earth and the author of the report. ‘If we aren’t careful, we could end up creating a massive, poorly regulated derivatives market that not only poses risks to the broader financial markets, but also undermines efforts to save the climate,’ Chan said.”

Indeed, cap-and-trade is similarly complex as the “derivatives” market that helped lead to a global economic meltdown, nor would it meet the desired quality of being “transparent.”

Given the fact that China is the largest emitter of CO2 in the world, and that many other nations such as India, Brazil, Indonesia and Russia use high-emission technologies, even if the U.S. were to adopt cap-and-trade so as to reduce our own emissions (doubtful given the European experience), any real solution has to be global--not just an ill-thought-out “feel-good” plan adopted by America.

There are more effective solutions than a go-it-alone cap-and-trade plan in this country.

California Senator Barbara Boxer, chair of the Senate Environment and Public Works Committee, was chided by The Washington Post recently for saying, " ‘We're willing to look at everything . . . .’ But she ended that declaration with ‘. . . but we believe cap-and-trade is the way to go.’” It behooves our own members of congress to not just take for granted that cap-and-trade is “the way to go.”

Bill McDonald, of Las Cruces, is a Ph.D. geophysicist whose experience includes managing a major National Science Foundation program on world ocean dynamics for the Scripps Oceanographic Institute.

Wednesday, May 6, 2009

Back to the “Good Old Days”

Many activists, bureaucrats, politicians and even some corporate executives present arbitrary CO2 reduction targets and timetables casually and with great fanfare--as though achieving them were simple, desirable and necessary.

In reality, reducing America’s carbon dioxide levels to 80% below 1990 levels would return the United States to emission levels last seen in 1905 … and that’s before accounting for changes in population and energy-based technology. The impact on our nation’s economy, employment, manufacturing, living standards and health would be profoundly negative.

And yet, there has been virtually no mention of this in Capitol Hill hearings or public policy discussions.

Here, regular contributor Paul Driessen seeks to bring these facts to light while presenting a fresh perspectives on cap-and-tax proposals, CO2 reductions, and wind energy “substitutes” for the hydrocarbons that make our modern lives possible.

US Energy And Climate Plans Would Drag Us Back To 1905--Or 1862
Think back to 1905.

The Wright brothers had just made history. Coal and wood heated homes. Few had telephones or electricity. AC units were handheld fans. Ice blocks cooled ice boxes. New York City collected 900,000 tons of vehicle emissions--horse manure--annually, and dumped it into local rivers. Lung and intestinal diseases were rampant. Life expectancy was 47.

Today, President Obama wants to prevent “runaway global warming,” by slashing US carbon dioxide emissions to 80% below 1990 levels by 2050. According to Oak Ridge National Laboratory data, this reduction would return the United States to emission levels last seen in those halcyon days of 1905!

But America’s 1905 population was 84 million, versus 308 million today. We didn’t drive or fly, or generate electricity for offices, factories, schools or hospitals. To account for those differences, we’d have to send CO2 emissions back to 1862 levels.

The Civil War was raging. Nine of ten Americans were farmers (versus 2% today). The industrial revolution was in its infancy. Malaria halted construction on the Washington, DC aqueduct. Typhus and cholera killed thousands more every year. Life expectancy was 40--half of what affordable hydrocarbon, hydroelectric and nuclear power helped make it today.

None of this seems to matter to the Obama Administration or liberal Democrats. The 648-page Waxman-Markey climate bill would compel an 80% CO2 reduction, by imposing punitive cap-and-tax restrictions on virtually every hydrocarbon-using business, motorist and family.
That’s making some legislators nervous, as they ponder the health, economic and employment effects of restricting energy supplies and driving up the cost of everything we eat, drink, make and do--especially in 20 states that get 60-98% of their electricity from coal.

So to prod Congress into action, or achieve the 80% target via regulatory edict, the Obama Environmental Protection Agency has decreed that natural, plant-enhancing, life-sustaining carbon dioxide “endangers human health and welfare.” The authoritarian actions it is contemplating would regulate cars, trains, boats and planes; pave the way for regulating farms and factories, hospitals, schools, malls and apartment buildings, computer servers and lawn mowers; and send energy prices skyrocketing.

It is astonishing how casually activists, bureaucrats, politicians and even some corporate executives advocate arbitrary CO2 reduction targets and timetables--as though they were possible, desirable or necessary.

The targets reflect worst-case scenarios generated by computer models. But the models assume human CO2 now drives climate changes that have been occurring for eons. They ignore many natural forces, and inadequately analyze incomplete data, based on our still limited grasp of complex climate processes.

They cannot accurately replicate last year’s regional climate shifts or predict changes even one year in the future. They ignore Earth’s history of repeated climate changes, and failed to anticipate the slowly declining global temperatures of 1995-2008.

Thousands of climate and other scientists say there is no climate crisis, and CO2 plays little or no substantive role in climate change. A new Rasmussen poll finds that 48% of registered American voters now believe climate change is caused by planetary and other natural forces. Only a third still believe it’s due mostly to humans.
Climate realists also recognize that, even if America eliminated all of its greenhouse gas emissions, increasing Chinese and Indian carbon dioxide emissions would promptly offset our draconian cuts.

This alarms Climate Armageddonites. They fear it’s now or never to wrest control over energy and the economic, manufacturing and transportation activities it fuels. Now or never to profit from cap-and-tax laws, renewable energy mandates, and a forced shift away from hydrocarbons that now provide 85% of US energy.

“Socially responsible” corporate groups like the Carbon Offset Providers Coalition are banking on passage of Waxman-Markey or similar legislation. They want to ensure that any CO2 regime is “rigorous and efficient,” to foster high carbon prices, maximum subsidies and strong profits.
President Obama says cap-and-trade will “raise” $656 billion over the next decade. The National Economic Council and other analysts put the tax bite at $1.3 to $3.0 trillion.
This is not monetary manna. The wealth will be extracted from every hydrocarbon-using business, motorist and family.

The intrusive energy rules and taxes will clobber households, manufacturers, farmers, truckers and airlines. The poorest families will get energy welfare, to offset part of their $500-3,000 increase in annual heating, cooling, transportation and food expenses. Everyone else will have to trim health, vacation, charity, college and retirement budgets to pay for energy.
Every increase in energy prices will result in more businesses laying off workers or closing their doors, more jobs sent overseas, more families forced into welfare, more school districts, hospitals and churches into whirlpools of red ink.

Exactly how will they, your family, your business eliminate 80% of CO2 emissions by 2050? Exactly how will you pay those skyrocketing fuel bills?

The Nature Conservancy predicts that, by 2030, “eco-friendly” wind, solar and biofuel projects will require extra land equivalent to Minnesota, to produce the energy we now get from oil, gas and coal. Interior Secretary Salazar’s proposal to have offshore wind turbines replace gas, coal and nuclear electricity generators would mean 336,000 3.25MW behemoths off our coasts--if they operate 24/7/365. Far more if they don’t.

Where exactly will we site those turbines--and get the billions of tons of concrete, steel, copper and fiberglass it will take to build and install the expensive, unreliable, subsidized monsters?
My grandmother used to say, The only good thing about the “good old days” is that they’re gone.
Few Americans will be enthralled by the prospect of returning to that era. Fewer will relish the hefty price tag--and damage to their freedoms, budgets, jobs and living standards.

The White House, EPA and Congress need a serious reality check.

Paul Driessen is senior policy advisor for the Committee For A Constructive Tomorrow ( and author of Eco-Imperialism: Green power – black death.

Friday, May 1, 2009

Climate Change and Policy Direction

Yesterday, after just hanging up from a successful and stimulating conference call with Marc Morano of during which the topic of climate change and energy policy was the theme, an e-mail popped in. It was the latest commentary from Byron King, the energy editor of the Whiskey and Gunpowder investment newsletter. CARE’s executive director Marita Noon had closed the conference call with the announcement that Byron King would be the conference call guest for May. How fortuitous that he sent this piece to CARE within minutes of the mention of his name.

This posting is a great follow up to the April conference call and a wonderful introduction for the May conference call. Byron picks up on the climate change discussion. He mentions several of the issues that CARE has been addressing—including hatred” of carbon-based fuels (see op-ed on this topic), algae to liquid fuels (as was the topic of one of the student speeches in CARE’s Student Speech Competition at New Mexico State University last week) and geothermal energy (see op-ed on this topic).

How we wish we could afford to have Byron on staff at CARE—but we are grateful he is a friend and is willing to share his insights!

The Direction of Energy Policy
The other day I had lunch with a “brain trust,” of sorts. Participants included a retired executive from an aerospace company. This guy helped design and build many of the reconnaissance satellites that the U.S. has launched. There was a senior executive from a large steel company. There was a venture capitalist who made his first $500 million in the software industry, and who now has much of that wealth spread around in biotech and nanotech startups. There was a former senior political appointee who worked in the Treasury Department. And then there was me.

“Climate Change” Driving Policy Now
According to the satellite builder, the dominant elements of the political and media culture are “completely in the tank” when it comes to believing in the dangers of “climate change.” It’s not as if climate change is demonstrably true, he pointed out. There are valid scientific data from both sides of the climate change issue, and many valid data points in between. But according to the aerospace executive — some of whose satellites were built to track climate change — “For at least ten years, if you have not been promoting the dangers of climate change then you have not been receiving government grants. So the research community is following the money.”

Thus the research literature is coming out strongly in favor of “doing something” about climate change. And policy-makers are using this research literature to justify doing what they’ve wanted all along, which is change the world as we know it. As a class, the activists want to change the world into something else.

“Pathological Hatred” of Carbon-Based Fuels
According to the steel executive, the climate change issue has spurred what amounts to “a pathological hatred” of carbon-based energy systems. “It doesn’t have to make practical sense,” says this source. “It doesn’t even have to work with economics. It just has to support a policy to utterly transform the nation’s energy system. The people making policy now have a crusader’s mentality. ‘The past is trash,’ is how many of the new policy makers view our world. So the new policy makers want to promote radical change in energy policy. They’re going to jam it down the throat of the economy.”

According to the steel executive, the steel industry expects to see inflation-adjusted, baseline energy prices triple or quadruple within ten years. “Whether the government taxes carbon-based energy at the source, or whether they pass ‘cap-and-trade’ legislation, it’s going to cost us. So we’ll pay. Of course, we’ll pass along the new costs to the steel buyers. If demand goes down, we’ll close facilities. Then the TV cameras will show up at the plant gates to watch us shut the doors and click the padlocks. And we’ll get called bad names by the people who never much liked us in the first place.”

Can the Economy Support What the Government Wants to Do?
The former Treasury official added that a new “policy paradigm” has yet to form in Washington DC. “It’s like during the Cold War, there was a bi-partisan consensus to confront and contain the Soviet Union. It was expensive, but we agreed to do it. We made the national sacrifice. Well, that foreign policy consensus ended when the Berlin Wall fell and the USSR came down.” The groupthink in the early 1990s was that another kind of broad consensus had to take the place of the confrontation with the Soviets. And by its very nature, that consensus was fragile.

“Let me back up,” said the former Treasury official. “Confronting the Soviet Union gave the U.S. an excuse to continue with Franklin Roosevelt’s Depression Era, New Deal, big government for 45 years after World War II. But after the USSR fell? Why did we still need big government? To run a modern welfare state? That was the justification.

Remember the talk about that ‘Peace Dividend?’ People were drooling over the idea of cutting the military budget and paying for more and better social welfare through more big government.”

“So what happened?” asked the Treasury guy. “Some people thought they were going to run a big government welfare state using modern monetary theory. They convinced themselves that we could do that. They didn’t understand the long term problem.”

What was the long-term problem? “The welfare state was never going to last. Especially because the nation collectively wanted it to support a rank, consumerist culture that could not earn its keep within the world economy. We imported, imported, imported. And we paid for it with cheap dollars. After the U.S. left the gold standard in 1971, the fundamentals of the American productive economy could never support what the nation was trying to do. We’ll look back eventually and realize it was delusional policy-making. All we did was run down the economy for a couple of generations. It finally collapsed in 2008.”

Whatever “post-USSR consensus” existed in the U.S. in the 1990s shattered during the 2000s. “People went nuts because of the Bush Administration,” said the Treasury official. “The white-bread explanation — call it ‘Decline and Fall for Dummies’ — was that it was all about the evil George Bush and his wars in Afghanistan and Iraq. Well, Bush and the wars were visible, so that’s what people blamed. The real problem for the U.S. was that the whole foundation for post-war American society, economy and governance was caving in under our feet. The timbers were rotten.”

The Barn Burned Down — Did Anyone Notice?
According to the Treasury man, the U.S. economy is now confronted by “block obsolescence” of many of the economic and political assumptions with which we’ve lived for decades, since World War II. “Chrysler isn’t the only big institution that’s bankrupt. We ought to burn down a few universities, while we’re at it,” he added.

And he noted that Republicans and Democrats both fed at the trough while the going was good. “But while the politicians had their heads buried in the trough for all those years,” he said, “they didn’t notice that the barn was burning down around them.”

The Treasury-man continued: “Look at the destruction of former industrial titans like General Motors, and with GM the annihilation of much of the rest of the automobile industry. Who’s going to invent whatever will take its place? We used to say that 40% of the U.S. economy was based on the auto industry, directly or indirectly. Are we ever going to see 40% of the U.S. economy based on putting solar panels on roofs, or tuning the gearboxes of windmills?”

“Free-Traded” to the Poorhouse — We’re at the Edge of the End
The former Treasury official looked at the ongoing economic crash. He placed it within the context of the long-term decline in U.S. manufacturing. “As a society,” he said, “we’ve made a lot of very bad choices of both moral philosophy and economic policy. Those bad choices have brought us to the edge of the end. We’ve spent, borrowed and ‘free-traded’ ourselves to the poorhouse. Now the Chinese own us.”

Helping Embryonic Industry — Creating a Success Story
The venture capitalist chimed in with some thoughts. “If the feds are going to spend billions on stimulus, then they ought to direct some of that money to help fund promising research. How about some money to pay for every fossil-fuel power plant in the country to siphon off some of its CO2? Then run the CO2 through a facility to grow algae to make biofuels.”

“We’d be killing about four birds with one stone,” explained the venture capitalist. “We’d be taking down CO2 emissions. Not much, maybe, but some. We’d be helping an embryonic industry that can be competitive in coming years. Heck, turning algae into fuel is easy. The basic part is just high school chemistry. So we’d be creating a new supply source for the liquid fuels industry. And we’d be able to point to at least one success story where people can agree that we all did something right.”

Then the venture capitalist added that one of his startups is “working on coal-eating bugs.” He explained that “There’s a lot of coal buried so deep, or under other conditions that we can’t mine it. That coal will never get out. So why not put bugs down in the deep seams, and let them eat the coal? Then we can harvest the gases that come out the back end of the bugs, and use that as feedstock for other things.”

“Well, What Do YOU Think?”
At one point, one of the lunch participants turned to the silent person at the table, who was busy taking it all in and making a few discrete notes. Then came the dreaded question, “Well Byron, what do YOU think?”

I focused my comments on geothermal development. I pointed out that for all the anti-carbon sentiment out there, the most under-appreciated, “clean and green” energy source is geothermal. There appears to be strong support for geothermal development via tax incentives and other, policy-based standards. Combine this with the growing social focus on clean, renewable energy sources.

Right now, 24 states have renewable portfolio standards (RPS) for electricity production. And Congress is leaning towards setting a national standard of 20% to 25% RPS power production by 2025. We’re at the point where a utility like California’s Pacific Gas and Electric is so desperate for “clean” energy that they’re contracting with a privately-owned company to build a satellite to harvest solar energy from space, and “beam” it back to earth.

The companies that are out there now are in relatively advanced stages of developments. The big problem is that the follow-on pipeline is almost empty. The problem has been lack of access to capital for the past year or so. In other words, lack of capital is the strongest headwind to progress. If the funding delays can break down, then we’ll see decreased complexity for funding, and project schedules moving ahead.

Byron received his Juris Doctor from the University of Pittsburgh School of Law, was a cum laude graduate of Harvard University, served on the staff of the Chief of Naval Operations and as a field historian with the Navy. Our resident energy and oil expert, Byron is the editor of Outstanding Investments and Energy and Scarcity Investor.