Saturday, June 7, 2008

Lets Talk Alternatives

When we think about what we use oil for we need a little context. You can see from this image that we dont use oil for electricity generation in the US - at least not in any meaningful amount.

Since its not being used to generate electricity most of the 20 million barrels per day habit in the US goes towards transportation. Gasoline, Diesel and Jet fuel specifically. Heating oil is another important use for oil. Heating oil, similar to Kerosene (a middle distillate) is most commonly used in the North East of the United States, but is falling out of favor as a heating energy source.

To break the oil habit we need to use "alternatives".

When we select alternatives we need to understand that there are 3 principle sources of energy in the world.

1) Fossil fuels. Conventional wisdom holds that oil, coal, gas peat etc... are comprised of decomposed organic matter. The decomposition process takes an extremly long time (thousands or millions of years), and also requires precisley the right conditions, the right rocks, the right porosity, permeability, temperature, surrounding rocks etc... For the purposes of this discussion, its non-renewable. Once you use it - its gone.

2) Sunlight. Not just solar power. Sunlight powers the atmosphere, so Hydroelectric, wind and solar. Sunlight powers photosynthesis so even biofuels fall into this category. It could be argued that the energy in fossil fuels came from the sun originally but that since the process is so slow it gets its own category.

3) Geothermal and Nuclear. energy from "within" the earth. Both of these forms are limited to various degrees. Some parts of the world are able to exploit Georthermal energy easily. Iceland is a country that enjoys such a relationship. Nuclear energy is derived from large volumes of Uranium that must be enriched and concentrated. Once the fuel is spent it must be disposed of.

If we choose to switch from oil to some other energy source for transportation we need to consider what that alternatives long term availability looks like.

At the moment half of our electricity comes from coal, so if we switch to transportation powered by the electricity grid instead of oil, we're going to be putting that load on Coal, and Nuclear - at least at first.

How much load? Well we use 20 million barrels a day mostly for trasnportation. Assume we switch away 10 million of those to the grid. 1 ton of coal = approx 12 barrels of oil. A switch like that means burning 800,000 extra tons of coal. Thats about 1/3rd of our current coal consumption level (which supplies half our needs for electrcity) So if we switch to "green" electric vehicles on a massive scale the grid will need some massive upgrades.

Cars that use hydrogen, batteries or compressed air, they all get their energy from the grid. Even if they are more efficient than oil burning engines you can see we will need to add a great deal of generating and transmission capacity.

Its possible also to imagine that what is happening now with oil could happen next with coal.

June 6th

Wow,
what a ride.
I wanted to start writing about alternative energy but instead I need to at least mention the amazing day on the NYMEX. Maybe someday people will look back at the 6th of June and view it as some kind of red letter day. Perhaps we will call June 6th "Yergin day" and celebrate the totally reidiculous prophecies from the now infamous Daniel Yergin of CERA.

So what happened. Well only about the biggest one day surge in oil prices in the history of the NYMEX. Not much then. We started Thursday the 5th with oil around 122. We gained about 5 dollars that day ending around 127-128.
This run started because for a couple of reasons.
Some European finance minister anounced that some interest rates would be raised in the Euro, which strengthened the Euro against the dollar (weakening the dollar). The rush to move money caused the price of oil and most other commodities to rise.

Also Israel announced that it would act against Iran if it did not suspend its nuclear program - I think act means "attack", maybe even they just came out and said attack. Either way it frightens the oil industry to think that Irans production might not be secure.

So we gained a few dollars. I'm thinking well thats mostly speculative, itll come down.

Then Friday came along and so did Ole Slorer Executive director at Morgan Stanley. Ole decided to tell everyone that he had been looking at the tanker traffic crossing the ocean, and that he didnt think that what is on its way will be enough to maintain inventory levels through the summer. $128 turned into $138 even 139 for a moment.

Well we do know that the last 2 weekly reports have shown significant declines in inventory.

So anyway my prediction of a few months rest in oil prices is now in tatters. At least for a while.

If Ole's precitions turn out to be true theres every reason to expect higher oil prices this summer. Maybe the market rest I predicted is done, not quite the 2 months or so that I expected, more like 2 weeks.

I always thought I was quite pessimistic, I assumed that oil should be priced around $120 and just as it was getting there we got more bad news... Maybe $130 is a better price. With all the news of demand destruction, Im still seeing plenty of Ford Excursions and H2s driving around like they have their own personal oil well.

While my oil predictions are going sour, the Cubs have lost 2 straight games in LA. When it rains it pours...

this was my favorite article.
The Goldman Sachs analyst that predicts the super spike, also thinks that after the spike hits we might return to lower levels of pricing - like $75. Im not sure. I can believe $100 or $120, but not $75. And after the "crash" from 200 to 120, the long term trend would be upward again...

Why would we return to $75 when at that price demand was still growing rapidly.

Tuesday, June 3, 2008

Well as you can imagine while things are going my way im going to toot the horn.

WTI fell more today to $124, Obama looks set now to recieve the nomination, Hillary even postured to be the Veep on his ticket. And the Cubs won their 8th straight game.

After reading the Westexas post on Export land model, and how tight the gulf supplies are getting, I am wondering what tomorrows inventory report will bring. Last week supplies fell but were blamed on fog, some folks have gone so far as to check on that story and its beginning to sound like theres more to that story than meets the eye. So I guess tomorrow will tell. A bounce in Inventory levels will show that the fog story had merit, we might even see some folks go short on that news and see the price lose another buck or two. Flat or declining oil inventorys would be bad news, and support a pretty big surge in prices ~ 3 to 5%.

I also got my little fuel leak sorted on the Mustang, and its now ready for a test drive.

Monday, June 2, 2008

More car progress

Dale helped out on Saturday as I did an intake Manifold swap. I was able to procure an Edelbrock RPM airgap intake manifold for cheap - it was new, but had been bolted on an engine and never run.

I took the opportunity to remove the heater hoses for now since I dont ever run the car in the cold.

The engine fired up well, timing seems about right. This is what the timing curve looks like right now. I approximated this by setting RPM with the idle screw and using the timing light to measure timing.


I think it needs more timing but Im not going to adjust it until I can drive the car.

My new fuel lines have a slight leak which I need to fix, then its drive time!

Jun 2nd

Well not much to report in the news.

Thursday last week was exciting with news of massive inventory declines.


I dont pay for up to the minute market data, I just watch the delayed data. Which took hours to catch up with reality. The inventory news caused a massive buying spike, but news came out to explain away the shocking data. The oil was here it was just stuck in the gulf due to fog...


That calmed everything back down and by the end of the day we were back on the gradual downward tradjectory. Last week I predicted a path towards $120 in the coming months, we are somewhat closer, down from around $130, to about $126-127. I think this can continue barring any frightening news of production declines or supply disruptions.

I also predicted a Cubs world series win and Obama winning the presidential election. So far those predictions are also panning out. The Cubs Swept Colorado at Wrigley field making it 7 wins straight and earning the title of "best team in MLB" for now anyway. Obama is inching closer to the nomination.

By the way dont take my predictions to mean I am an Obama supporter. I think if I had the choice I would probably vote McCain - but I wouldnt exactly be smiling my way to the polls. Obama does appear to be the straightest talking politician since JFK though. He told crowds in Detroit that their industry needs to do better. Wow. Does he even know that hes a politician?

Interesting articles:
Net export model

That was an article from Jeffrey Brown who goes by username Westexas on the oildrum. Written last year it warns that production declines from our top producing nations are not the only concern.

When you realize that many of the worlds net exporters actually subsidize their fuel price (they can afford to they are still net exporters! they use oil revenue to do it!) then you understand how oil consumption in those countries continues to rise in some cases at 3 or 4% per year.

A plateaued production curve or a decline suddenly looks much sharper when you account for their own increasing thirst for their own oil.

This makes you stop and think about the Saudis claims about excess production capacity. They may have some extra capacity - but they will likley need it just to cover their own needs - or face the prospect of removing some of those glorious subsidies. Imagine how your population reacts when they suddenly are forced to pay the market price for fuel!! Shock horror.