Category Archives: energy

Hair of the dog that bit you climate policy

Roy Spencer on reducing emissions by increasing emissions:

COL: Let’s say tomorrow, evidence is found that proves to everyone that global warming as a result of human released emissions of CO2 and methane, is real. What would you suggest we do?

SPENCER: I would say we need to grow the economy as fast as possible, in order to afford the extra R&D necessary to develop new energy technologies. Current solar and wind technologies are too expensive, unreliable, and can only replace a small fraction of our energy needs. Since the economy runs on inexpensive energy, in order to grow the economy we will need to use fossil fuels to create that extra wealth. In other words, we will need to burn even more fossil fuels in order to find replacements for fossil fuels.

via Planet 3.0

On the face of it, this is absurd. Reverse a positive feedback loop by making it stronger? But it could work, if given the right structure – a relative quit smoking by going in a closet to smoke until he couldn’t stand it anymore. Here’s what I can make of the mental model:

Spencer’s arguing that we need to run reinforcing loops R1 and R2 as hard as possible, because loop R3 is too weak to sustain the economy, because renewables (or more generally non-emitting sources) are too expensive. R1 and R2 provide the wealth to drive R&D, in a virtuous cycle R4 that activates R3 and shuts down the fossil sector via B2. There are a number of problems with this thinking.

  • Rapid growth around R1 rapidly grows environmental damage (B1) – not only climate, but also local air quality, etc. It also contributes to depletion (not shown), and with depletion comes increasing cost (weakening R1) and greater marginal damage from extraction technologies (not shown). It makes no sense to manage the economy as if R1 exists and B1 does not. R3 looks much more favorable today in light of this.
  • Spencer’s view discounts delays. But there are long delays in R&D and investment turnover, which will permit more environmental damage to accumulate while we wait for R&D.
  • In addition to the delay, R4 is weak. For example, if economic growth is 3%/year, and all technical progress in renewables is from R&D with a 70% learning rate, it’ll take 44 years to halve renewable costs.
  • A 70% learning curve for R&D is highly optimistic. Moreover, a fair amount of renewable cost reductions are due to learning-by-doing and scale economies (not shown), which require R3 to be active, not R4. No current deployment, no progress.
  • Spencer’s argument ignores efficiency (not shown), which works regardless of the source of energy. Spurring investment in the fossil loop R1 sends the wrong signal for efficiency, by depressing current prices.

In truth, these feedbacks are already present in many energy models. Most of those are standard economic stuff – equilibrium, rational expectations, etc. – assumptions which favor growth. Yet among the subset that includes endogenous technology, I’m not aware of a single instance that finds a growth+R&D led policy to be optimal or even effective.

It’s time for the techno-optimists like Spencer and Breakthrough to put up or shut up. Either articulate the argument in a formal model that can be shared and tested, or admit that it’s a nice twinkle in the eye that regrettably lacks evidence.

Thorium Dreams

The NY Times nails it in In Search of Energy Miracles:

Yet not even the speedy Chinese are likely to get a sizable reactor built before the 2020s, and that is true for the other nuclear projects as well. So even if these technologies prove to work, it would not be surprising to see the timeline for widespread deployment slip to the 2030s or the 2040s. The scientists studying climate change tell us it would be folly to wait that long to start tackling the emissions problem.

Two approaches to the issue — spending money on the technologies we have now, or investing in future breakthroughs — are sometimes portrayed as conflicting with one another. In reality, that is a false dichotomy. The smartest experts say we have to pursue both tracks at once, and much more aggressively than we have been doing.

An ambitious national climate policy, anchored by a stiff price on carbon dioxide emissions, would serve both goals at once. In the short run, it would hasten a trend of supplanting coal-burning power plants with natural gas plants, which emit less carbon dioxide. It would drive some investment into low-carbon technologies like wind and solar power that, while not efficient enough, are steadily improving.

And it would also raise the economic rewards for developing new technologies that could disrupt and displace the ones of today. These might be new-age nuclear reactors, vastly improved solar cells, or something entirely unforeseen.

In effect, our national policy now is to sit on our hands hoping for energy miracles, without doing much to call them forth.

Yep.

h/t Travis Franck

Zombies in Great Falls and the SRLI

The undead are rising from their graves to attack the living in Montana, and people are still using the Static Reserve Life Index.

The SRLI calculates the expected lifetime of reserves based on constant usage rate, as life=reserves/production. For optimistic gas reserves and resources of about 2200 Tcf (double the USGS estimate), and consumption of 24 Tcf/year (gross production is a bit more than that), the SRLI is about 90 years – hence claims of 100 years of gas.

How much natural gas does the United States have and how long will it last?

EIA estimates that there are 2,203 trillion cubic feet (Tcf) of natural gas that is technically recoverable in the United States. At the rate of U.S. natural gas consumption in 2011 of about 24 Tcf per year, 2,203 Tcf of natural gas is enough to last about 92 years.

Notice the conflation of SRLI as indicator with a prediction of the actual resource trajectory. The problem is that constant usage is a stupid assumption. Whenever you see someone citing a long SRLI, you can be sure that a pitch to increase consumption is not far behind. Use gas to substitute for oil in transportation or coal in electricity generation!

Substitution is fine, but increasing use means that the actual dynamic trajectory of the resource will show greatly accelerated depletion. For logistic growth in exploitation of the resource remaining, and a 10-year depletion trajectory for fields, the future must hold something like the following:

That’s production below today’s levels in less than 50 years. Naturally, faster growth now means less production later. Even with a hypothetical further doubling of resources (4400 Tcf, SRLI = 180 years), production growth would exhaust resources in well under 100 years. My guess is that “peak gas” is already on the horizon within the lifetime of long-lived capital like power plants.

Limits to Growth actually devoted a whole section to the silliness of the SRLI, but that was widely misinterpreted as a prediction of resource exhaustion by the turn of the century. So, the SRLI lives on, feasting on the brains of the unwary.

Energy rich or poor?

The Energy Collective echoes amazement at unconventional oil and gas,

Yergin, vice chairman of IHS CERA:

“The United States is in the midst of the ‘unconventional revolution in oil and gas’ that, it becomes increasingly apparent, goes beyond energy itself.

“Owing to the scale and impact of shale gas and tight oil, it is appropriate to describe their development as the most important energy innovation so far of the 21st century. … It is striking to think back to the hearings of even just half a decade ago, during the turmoil of 2008, when it was widely assumed that a permanent era of energy shortage was at hand. How different things look today.”

Mary J. Hutzler, Institute for Energy Research:

“The United States has vast resources of oil, natural gas, and coal. In a few short years, a forty-year paradigm – that we were energy resource poor – has been disproven. Instead of being resource poor, we are incredibly energy rich.”

Abundance is often attributed to a technical miracle, brought about by government R&D into unconventional fossil fuels. The articulated mental model is something like the following:

But is this really a revolutionary transition from scarcity to abundance, was it a surprise, and should technology get all the credit? I don’t think so.

(Abundance/Scarcity) = 1.03?

Contrast the 1995 and 2012 USGS National Assessments of onshore resources:

Resources, on an energy basis (EJ). Cumulative production from EIA; note that gas production data begins in 1980, so gas cumulative production is understated.

In spite of increasing unconventional resources, there’s actually less oil than there was, mainly because a lot of the 1995 resource has since been produced. (Certainly there are also other differences, including method changes.) For gas, where one can make a stronger case for a miracle due to the large increase in unconventional resources, the top line is up a whopping 3%. Even if you go with EIA/INTEK‘s ~2x larger estimate for shale gas, resources are up only 35%.

Call me conservative, but I think an abundance revolution that “disproves” scarcity would be a factor of 10 increase, not these piddly changes.

You could argue that the USGS hasn’t gotten the memo, and therefore has failed to appreciate new, vast unconventional resources. But given that they have reams of papers assessing unconventional fields, I think it more likely that they’re properly accounting for low recoverability, and not being bamboozled by large resources in place.

Reserves involve less guesswork, but more confounding dynamics. But reserves tell about the same story as resources. Oil reserves are more than 40% off their 1970 peak. Even gas reserves have only just regained the levels achieved 40 years ago.

EIA

Surprise?

In 1991, USGS’ Thomas Ahlbrandt wrote:

Unconventional natural gas resources are also becoming increasingly viable. Coalbed methane, which accounts for about 25 percent of potential natural gas resources in the U.S., will displace nearly a trillion cubic feet (TCF) of gas from conventional resources in the near term and perhaps several TCF by the turn of the century. Similarly, production of gas from low permeability resources may displace some production of conventional gas as increasingly smaller conventional accumulations are developed. Coalbed methane and tight gas, both abundant in the Rocky Mountain and Appalachian regions, will likely experience significant production increases. Optimistic scenarios suggest that tight gas and coalbed methane resources may provide more domestic natural gas production than conventional resources by the year 2010. Horizontal drilling technology will most likely unlock the large currently uneconomic gas resources in tight reservoirs. Technologies like this will most certainly change the status of what are presently considered unconventional resources.

I’d call that a “no.”

Should we be surprised to see supply increasing in the current price environment? Again, I’d say no. The idea that oil and gas have supply curves is certainly much older than its appearance in the 1995 USGS assessment. Perhaps the ongoing increase in shale gas development, when prices have collapsed, is a bit surprising. But then you have to consider that (a) drilling costs have tanked alongside the economy, (b) there are lags between price, perception, capital allocation, and production, and (c) it’s expectations of price, not current prices, that drive investment.

Does tech get the credit?

Certainly tech gets some credit. For example, the Bakken oil boom owes much to horizontal drilling:

EIA

But there’s more than tech going on. And much of the tech evolution is surely a function of industry activity funded out of revenue or accumulated through production experience, rather than pure government R&D.

If tech is the exclusive driver of increasing abundance, you’d expect costs and prices to be falling. Gas prices are indeed well off their recent peak, though one could wonder whether that’s a durable circumstance. Even so, gas is no cheaper than it was in the 90s, and more costly than in the pre-OPEC era. Oil isn’t cheap at all – it’s close to its historic highs.

So, if there’s anything here that one might call a tech fingerprint, it would have to be the decline in gas prices post-mid-2008. But that coincides better with the financial crisis than with the gas boom.

Cost data are less current, but if anything the cost picture is less sanguine. “Real gas equipment costs are 12 percent higher and operating costs are 37 percent higher than for the base year of 1976,” says EIA.

Bottom Line

First, let’s not kid ourselves. There’s less oil and gas under US soil than there has ever been.

Technology has at best done a little more than keep the wolf from the door, by lowering the cost of exploration and development by enough to offset the increases that would result from increasing physical scarcity.

It’s possible that the effects on shale and tight gas cost and availability have been dramatic, but there are plausible alternative hypotheses (financial crisis, moving up supply curves, and delays in production capital investment) for current prices.

Personally, I doubt that technology can keep up with physical scarcity and demand growth forever, so I don’t expect that gas prices will continue walking back to 1970 or 1960 levels. The picture for oil is even worse. But I hope that at some point, we’ll come to our senses and tax CO2 at a level high enough to reverse consumption growth. If that happens abruptly enough, it could drive down wellhead prices.

None of this sounds like the kind of tailfins and big-block V8 abundance that people seem to be hoping for.

 

 

Greek oil taxes – the real story

A guest post from Ventana colleague Marios Kagarlis, who writes about the NYT article on Greek heating oil taxes:

The problems in Greece are interdependent and all have their roots at the fact that the model of government that has been the status quo in Greece since WWII isn’t working and needs radical change, but the people who run the system know no other way, so the problems keep compounding with no solution in sight.There used to be two tiers of taxation for oil: one was for heating oil, which was relatively low, and the other was for oil used for all other purposes (e.g. for diesel cars etc) which was taxed at about 100% over the fuel cost.

Because of the inability of the government institutions to enforce the laws in Greece (which on paper are tough but in practice are not enforced because the system is incompetent), there has been widespread abuse of this: from refineries to gas stations, many oil merchants have been branding diesel as heating oil to evade the tax, and then selling at as non-heating oil, doubling their profit and ripping off both the consumers and the government.

The government has for years been attempting (supposedly) to crack down on this, with pitiable results. The international lenders have demanded from the Greek government, as a precondition for the continuation of the bailout installments paid every now and then (essentially going in their entirety toward servicing past debt, as opposed to relieving the economy), to crack down on tax evasion via illegal diesel sales of ‘heating oil’ as non-heating diesel. Because the tax collection system is broken and cannot control the diesel market or collect the taxes due, the Greek government had to do something quickly to meet the lenders’ demands. And this was the best they could come up with…

So they finally decided to do away with the two separate tiers of taxation and tax all oil as non-heating oil. To make up for the huge rise in cost to the end consumer they established obscure and bureaucratic criteria for lower income families to submit applications to the government for partial reimbursement of the extra tax, the idea being that this would deprive the sellers from a means to cheat and would still enable end consumers in need to get reasonably priced heating oil after reimbursements. However this didn’t work and instead people just massively stopped using oil for heating, which is by far prevalent in Greece (another government failure, for a country with no oil resources and lots of sun and wind). There are entire older building blocs in cities that were built without fireplaces (which up until recently in modern city apartments were more of a symbol of affluence than of any practical use – people essentially never using them) that have just turned off heating altogether, and fights amongst tenants are commonplace for disagreements over whether to turn on heating or not (which in older buildings is collective so it’s heating for all or for none). Those who cannot afford it just don’t pay so sooner or later most buildings in working class neighborhoods are forced to abandon central heating and sustain the cold or improvise.

Because the government again hadn’t foreseen any of this, and wood burning was never particularly widespread in Greece, there had not been standards for wood or pellet burning stoves. So the market is flooded with low quality wood-burning stoves which are totally inefficient and polluting. So suddenly from December the larger cities in Greece are filled with smog and particulates for the first time from inefficient wood-burning stoves, and from burning inappropriate wood (e.g. people burn disused lacquered furniture at their fireplaces, which is very polluting). Cases of asthma and respiratory illnesses in the larger cities since December have skyrocketed. In the meantime forests and even city parks are raided daily by desperate unemployed people who cannot afford heating (especially in northern Greece), who cut down any trees they can get their hands on.

It’s hard to see that there can be any short term solution to this, in the middle of the worst economic crisis Greece has faced since WWII.

Marios lives in Athens.

Oil tax forces single cause attribution folly

A silly NYT headline claims that Rise in Oil Tax Forces Greeks to Face Cold as Ancients Did.

The tax raised the cost of heating oil 46%, which hardly sends Greece back to the Bronze Age. Surely the runup in crude prices by a factor of 5 and a depression with 26% unemployment have a bit to do with the affordability of heat as well?  And doesn’t the unavailability of capital now make it difficult for people to respond sensibly with conservation, whereas a proactive historic energy policy would have left them much less vulnerable?

The kernel of wisdom here is that abrupt implementation of policies, or intrusion of realities, can be disruptive. The conclusion one ought to draw is that policies need to anticipate economic, thermodynamic, or environmental constraints that one must eventually face. But the headline instead plays into the hands of those who claim that energy taxes will doom the economy. In the long run, taxes are part of the solution, not the problem, and it’s the inability to organize ourselves to price externalities that will really hurt us.

Update: the real story.

Beggaring ourselves through coal mining

Old joke: How do you make a small fortune breeding horses? Start with a large fortune ….

It appears that the same logic applies to coal mining here in the Northern Rockies.

With US coal use in slight decline, exports are the growth market. Metallurgical and steam coal currently export for about $140 and $80 per short ton, respectively. But the public will see almost none of that, because unmanaged quantity and “competitive” auctions that are uncompetitive (just like Montana trust land oil & gas), plus low royalty, rent and bonus rates, result in a tiny slice of revenue accruing to the people (via federal and state governments) who actually own the resource.

For the Powder River Basin, here’s how it pencils out in rough terms:

Item $/ton
Minemouth price $10
Royalty, rents & bonus $2
Social Cost of Carbon (@ $21/tonCo2 medium value) -$55
US domestic SCC (at 15% of global, average of 7% damage share and 23% GDP share) -$8
Net US public benefit < -$6

In other words, the US public loses at least $3 for every $1 of coal revenue earned. The reality is probably worse, because the social cost of carbon estimate is extremely conservative, and other coal externalities are omitted. And of course the global harm is much greater than the US’ narrow interest.

Even if you think of coal mining as a jobs program, at Wyoming productivity, the climate subsidy alone is almost half a million dollars per worker.

This makes it hard to get enthusiastic about the planned expansion of exports.

Shocking stats from the WSJ

The WSJ has an article on the Chinese electric power sector that’s anecdotally interesting. It notes that increasing electricity prices would spur investment, creating a win-win for energy intensity and system reliability. Maybe so, but the supporting graph is an interesting example of statistics that are uninformative because they fail to account for bathtub dynamics. Here it is:

It seems plausible to compare investment and consumption, until you look at the system structure:

This indicates four problems with drawing conclusions from the plot:

  • Investment is not necessarily the same thing as installation of capacity, unless you assume constant price.
  • Consumption is essentially a direct function of stocks of consuming equipment and generating capacity, while investment is a flow. While there’s reason to expect growth rates of stocks and flows to match along a steady state growth path, this only applies in the very long term; in the short run, noise and disequilibrium will destroy any correspondence.
  • The thing we do care about is the match between generating capacity and consuming equipment, but that depends on outflows (retirements of capacity) as well as inflows, so again the stock-flow comparison tells us nothing.
  • There’s an additional level of indirection because we don’t see investment and consumption directly; the graph shows year-on-year changes. But that means that we’re seeing the slopes of investment and consumption, which tell us nothing about their absolute levels. So, it’s possible that investment growth is falling because it was much too high, and that consumption is growing because there’s excess generating capacity.

The best you can say about this graph is that it doesn’t contradict the article; otherwise it’s almost completely uninformative about the true state of the Chinese power system. It would be far better to have a direct comparison of generating and consuming capacity, or perhaps the growth rate of consumption (which is the net flow of consuming equipment) vs. investment in absolute terms.

Gas – a bridge to nowhere?

NPR has a nice piece on the US natural gas boom.

Henry Jacoby, an economist at the Center for Energy and Environmental Policy Research at MIT, says cheap energy will help pump up the economy.

“Overall, this is a great boon to the United States,” he says. “It’s not a bad thing to have this new and available domestic resource.” He says cheap energy can boost the economy, and he notes that natural gas is half as polluting as coal when it’s burned for electricity.

“But we have to keep our eye on the ball long-term,” Jacoby says. He’s concerned about how cheap gas will affect much cleaner sources of energy. Wind and solar power are more expensive than natural gas, and though those prices have been coming down, they’re chasing a moving target that has fallen fast: natural gas.

“It makes the prospects for large-scale expansion of those technologies more chancy,” Jacoby says.

From an environmental perspective, natural gas could help transition our economy from fossil fuels to clean energy. It’s often portrayed as a bridge fuel to help us through the transition, because it’s so much cleaner than coal and it’s abundant. But Jacoby says that bridge could be in trouble if cheap gas kills the incentive to develop renewable industry.

“You’d better be thinking about a landing of the bridge at the other end. If there’s no landing at the other end, it’s just a bridge to nowhere,” he says.

(For those who don’t know, Jake Jacoby is not a warm-fuzzy greenie; he’s a hard line economist who leads a big general equilibrium modeling project, but also takes climate science seriously).

For me, the key takeaways are:

  • Gas beats coal, and may have other useful roles to play. For example, gas backup might be a low-capital-cost complement to variable renewables, with minor emissions consequences.
  • It’s better to have more resources than less.
  • Whether the opportunity of greater resources translates into a benefit depends on whether the price of gas accounts for full costs.

The last item is a problem. In the US, the price of greenhouse emissions from gas (or anything else) is approximately zero. The effective prices of other environmental consequences – air quality, pollution from fracking, etc. – are also low. Depletion rents for gas are probably also too low, because the abundance of gas is overhyped, and public resources were suboptimally over-allocated decades ago. Low depletion rents encourage a painful boom/bust of gas supply.

Not only physical assets are mispriced. Another part of the story is learning-by-doing, deliberate R&D, and economies of scale – positive feedbacks that grow the market for low-emissions technologies. Firms producing new tech like PV or wind turbines are only able to appropriate part of the profits of their innovations. The rest spills over to benefit society more generally. Too-cheap gas undercuts these reinforcing mechanisms, so gas substitutes aren’t available when scarcity inevitably returns, hence the “bridge to nowhere” dynamic.

Long-term renewable deployment in the U.S. is going to depend primarily on policy. Is there enough concern about environmental consequences to put in place incentives for renewable energy?

- Trevor Houser, energy analyst, Rhodium Group

They key is, what kind of policy? Currently, we rely primarily on performance standards and subsidies. These aren’t getting the job done, for structural reasons. For example, subsidies are self-extinguishing, because they get too expensive to sustain when the target gets too big (think solar feed-in-tariffs in Europe). They’re also politically vulnerable to apparently-cheap alternatives:

“If those prices hang around for another three or four years, then I think you’ll definitely see reduced political will for renewable energy deployment, ” Houser says

The basic problem is that the mindset of subsidizing or requiring “good” technologies makes them feel like luxuries for rich altruists, even though the apparently-cheap alternatives may be merely penny-wise and pound-foolish. The essential alternative is to price the bads, with the logic that people who want to use technologies that harm others ought to at least pay for the privilege. If we can’t manage to do that, I don’t think there’s much hope of getting gas or climate policy right.

The static reserve life index rears its ugly head in the State of the Union

The President said, in the State of the Union Address,

We have a supply of natural gas that can last America nearly one hundred years, and my Administration will take every possible action to safely develop this energy.

The 100 year figure presumably comes straight from EIA:

According to the EIA Annual Energy Outlook 2011, the United States possesses 2,543 trillion cubic feet (Tcf) of potential natural gas resources. Natural gas from shale resources, considered uneconomical just a few years ago, accounts for 862 Tcf of this resource estimate. At the 2010 rate of U.S. consumption (about 24.1 Tcf per year), 2,543 Tcf of natural gas is enough to supply over 100 years of use.

100 years is the static reserve life index (SRLI). It’s well known that the SRLI is a misleading metric (this figured prominently in Limits to Growth, for example). Exponential growth in consumption violates the basic assumption of the SRLI, which is that consumption remains constant. Even a small amount of growth greatly erodes the actual lifetime of a resource:

Growth at 3% per year reduces the SRLI of gas from 100 years to a realized lifetime of 45 years, which is not nearly so comfortable. This ought to be intuitive even if you can’t integrate exponentials in your head, because gas consumption would have to roughly double to replace coal (and that doubling would have to happen quickly to meet job claims), so clearly “100 years at current rates” isn’t going to happen.

Update: EIA just lowered shale gas resource estimates by nearly half, taking another big bite out of the SRLI:

In the AEO2012 Reference case, the estimated unproved technically recoverable resource (TRR) of shale gas for the United States is 482 trillion cubic feet, substantially below the estimate of 827 trillion cubic feet in AEO2011.