Author: Gregor MacDonald

The rise and rise of North Dakota oil production has now moved this great plains state to fourth rank in US production, behind Texas, Alaska, and California respectively. Combined with the state’s sparse population, this partially explains why North Dakota currently enjoys the lowest unemployment rate in the US. (Yes, that’s right, the lowest at 4.2%). In my February newsletter, Energy Supply and the Individual States, I explained the asymmetric benefits of US production: local economies can benefit enormously from oil and gas production, even as this production doesn’t move the needle financially for the country as a whole.

It’s true that US oil production is currently at five year highs, however, and that North Dakota production has played a big role in steadying US supply over the past year. This of course doesn’t, and can’t, change the fact that US oil production peaked in 1971, or that the US imports more than 2/3rds of its oil supply. But that won’t stop the “supply” of misleading journalism, such as the 2009 Leonardo Maugeri article in Scientific American, which foolishly claimed that success in enhanced oil recovery at the Kern field in California would alter aggregate US oil production. Or even more incorrectly, that enhanced oil recovery would alter global production. This Scale Fail with regard to the public comprehension of oil supply is fairly rampant. I’ve have predicted, for example, that the next Presidential election cycle will bring forth candidates who will cynically, and dishonestly, claim the US can become oil independent once again, once we start new drilling. That said, let’s look at the chart of North Dakota oil production:

Nearly 250 kbpd in oil production–from North Dakota? That chart is wonderful news for North Dakotans. It’s not such great news for the world, however. Because with Non-OPEC supply having peaked in 2004, and global supply having peaked in 2005, it puts a rather fine point on the fact that very few regions in the world actually made a supply response to the price move from 40.00 to 150.00. If Fargo did not already have a certain resonance owing to recent cinematic history, there’s a new reason now.

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(This post appeared at the author’s blog.)

Back in the days when US oil demand controlled the price of oil, a massive recession in the United States would have sent oil to 12.00 dollars a barrel. That era, which ended last decade, was defined by ongoing spare capacity in OPEC, low-cost oil in Non-OPEC, and nascent demand for oil in the developing world. That was then, and this is now. And so it’s rather quaint that the energy analysts from that previous era still gather each week on American financial TV, to discuss the inventories at Cushing, Oklahoma. Inventories at Cushing, Oklahoma? The US has been removing discretionary demand for oil for years, starting back in 2004. And current unemployment in California is at 13.2%–another new post-war high. Yet oil is at 82.00 dollars? Get these analysts off TV. Please. We need analysis of diesel demand in Guangdong, and Uttar Pradesh.

With the closing out of the decade we also have the full data set, on global crude oil production. As you can see from the chart below, the twin peaks of oil production in 2005 and 2008 reveal that while the world was able to respond to a moderate price advance coming out of 2002, nearly all of the price action above 40.00 dollars a barrel starting in late 2004 did not produce more supply. Welcome to peak oil: when the world’s remaining supply of oil is more diffuse, of lower grade, harder to extract, and is unable to flow in the aggregate at higher production levels.

There is an extra measure of comedy today to our defunct and inward-looking group of oil analysts here in the States, as it was revealed that these weekly measures of US inventories are highly flawed. Well, actually, we knew that. But it’s always nice to get the proof. From tonight’s Wall Street Journal:

…documents, obtained through a Freedom of Information Act request, expose several errors in the Energy Information Agency’s weekly oil report, including one in September that was large enough to cause a jump in oil prices, and a litany of problems with its data collection, including the use of ancient technology and out-of-date methodology, that make it nearly impossible for staff to detect errors…Internal emails and a report from a consulting firm prepared in September describe a process at the EIA that served the oil world well in 1983, the first year that oil futures traded, but hasn’t kept up as the inventory data have become more influential and the nation’s oil infrastructure has become more complex.

The familiar names that you see on financial TV here in the US, talking about oil, are generally living in a past that no longer exists. One really has to go to London, Sydney, and Toronto to find not only the best minds in energy, but TV hosts smart and informed enough to even handle the conversation. Global oil production peaked in the 2005-2008 period and now trades at levels thought unthinkable in 2005 when unemployment levels in the OECD were half current levels, if not lower. The US no longer controls the geology or oil, or the price of oil. But, we carry on as though we will again in the future. After all, in places like California which is seeing a competitive race for the Governorship, phrases like Getting Back on Track are all the rage.

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(This post appeared at Gregor.us.)

I can never decide which is sadder: the Obama Administration’s token 12-15 billion dollars for national railways, or, the greenblogger, transportblogger, and mainstream media’s belief we’re pursuing a new rail policy. The United States has for years been piled high with unfunded rail projects, just waiting for a green light. But the 12-15 billion allocated so far will, at best, provide nothing more than seed money for mega projects like high-speed rail while neglecting the myriad smaller projects across the country. In the same way the Obama Administration has no energy policy, they have no transport policy.

Turning the clock back a few years, however, it’s worth recalling that John Stilgoe’s Train Time was not only well received among his graduate students at Harvard, but was also popular among hedge funds and private equity investors looking to invest in rail. There were reports that investors were scurrying to locate historic rail maps across America, and also Rights of Way deeds, to better quantify emerging opportunities. To this point, I found the first of some historic railway maps for the Bay Area this week, at Calisphere. Here is a section of the 1900 Mill Valley and Mt Tamalpais Railway Co Map and Schedule:

I believe the public would be surprised to learn that many railroad companies, and their descendant companies, have retained Rights of Way along the myriad disused rail beds that criss-cross the nation. (That bike path you’ve ridden over the past ten years may, in fact, not be owned by your town. It might be leased for 1.00 dollar a year from a railroad company). While I can’t know the current legal status of all the current and former railbeds of the Bay Area, it’s worth noting that the map above probably still lines up well with existing (and likely retained) Rights of Way. For a wider view, here is a 1900 Southern Railway Map of California–again with just the Bay Area detail:

I’ve identified the Bay Area as one of the regions in North America best positioned for a slow-to-no growth world, in which energy inputs are never cheap again, and the problem of transportation–actually, conveyance in general–becomes a central concern to economies. The Bay Area’s waterways are a natural gift and it’s not for nothing San Francisco was the dominant West Coast city 100 years ago, in 1910. It’s miles of waterfront within the bay itself is a powerful resource, especially when combined with the Carquinez Straight’s access to agricultural land. As you can see from the maps also, there is alot of historic rail in the region–a great deal of which is also near the water.

While it may take a while, eventually the country will bet once again on the railroads (did Warren Buffet read Stilgoe’s Train Time?). The old line that comes down through Petaluma to San Rafael (seen on the first map) is a good example of the current revival in two ways. First, the formation of the new Sonoma-Marin Area Rail Transit (SMART) shows strong community support for the project, and they’ve been successful in winning measures through balloting. Second, the difficulty that SMART has now run into is largely financial, and is pretty much courtesy of the recession. These twin influences, public interest in rail transport as oil prices resume their advance, and financial pressures, will likely define rail buildout in the years ahead. But regions rich in an existing rail footprint–especially near water–will have fewer hurdles to surmount.

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See Also:

• China Launches World’s Fastest Train That Blows Away Anything We’ll Ever See Here
• The Sexy Chinese Bullet Trains That Are Coming To America
• Who Needs To Play With Buffett’s Little Trains Once You Have A Bigger Panama Canal

(This post appeared at Gregor.us.)

EIA Washington produces a ton of energy data that’s very current and detailed on global energy production. But what’s harder to come by is Non-OECD oil and oil product consumption. As the calendar turns to March, alot of the annual data starts to complete for the prior years, and I found my way deep into some EIA caverns tonight, and drew up the following chart:

The chart shows total oil product use for Brazil, India, and California in quadrillion BTU. Oil products are best measured in BTU–not barrels–as it strips out the vagaries of different products like Jet Fuel, Gasoline, Diesel, and Heating Oil. Also, BTU can be a better way to compare countries that import barrels, with states that generally import oil products. Here, I wanted to compare California with fast growing Brazil and India over a twenty year period. The trajectories are fairly unsurprising. Fuel efficiency standards have helped to keep California consumption relatively in check, in its path from 3.543 quadrillion BTU in 1988 to 2007’s 3.946 quadrillion BTU.

With regards to Brazil and India, a friend chatting to me from China tonight remarked that Brazil’s consumption growth might have been somewhat restrained by its ethanol program. If that’s true, it’s intriguing to conjecture what Brazil’s demand would look like without ethanol’s roughly 17% contribution to total Brazilian liquid fuel use. And in regards to India, one can’t help but note the big spike from 2004 -2007 as demand moved from 4.950 to 5.869 quadrillion BTU and not recall India’s push to complete their Quadrilateral Highway.

An ongoing project of mine relates to per capita consumption of energy in the developing world–yet another difficult area where data can be hard to secure on a current basis. There are a number of issues at play on that topic. Not least of which is the very different marginal utility of liquid energy in the developing world, compared to the developed world. As I look at today’s chart, however, I am struck by something simpler: the differences in population. India’s population is 1.139 billion, and Brazil’s 191.9 million. California is lilliputian by comparison, at 36 million. But it’s oil consumption is not. This only confirms my view that we (continue to) underestimate the demand reduction for oil that’s inevitable in the developed world, and the awesome potential for further demand increases in the developing world.

Get more energy market analysis at Gregor.us >

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(This guest post previously appeared at the author’s blog)

Renewed belief in the concept of Energy Breakthrough seems resurgent these days, as a versatile scientist now helms the Department of Energy, and famous people such as Bill Gates invoke the need (and thus our quest) for energy miracles. The notion of a technological breakthrough was also, unsurprisingly, at play this weekend when I attended the MIT Energy Conference. And of course, in February, the world was treated to the roll out of Bloom Energy’s Bloom Box.

The problem with energy breakthroughs is that they actually require a Built Environment breakthrough. Energy transition, or the notion of disruptive energy technologies, are affairs that occur at the interface between an energy-source, energy-tools, and the built environment. I suppose coal was a kind of breakthrough for early 18th century (and wood-based) England but the barrier to coal adoption was that alot of England’s built environment was running on wood. You see, new energy sources or new energy technologies don’t distribute easily, or quickly, through the built environment.

It’s common among those who sell the idea of energy breakthrough to invoke electronic or digital adoption narratives. Breakthroughs in medicine, in electronic networks, and in other intellectual achievement distribute more easily upon existing systems. This is why I continue to believe that many (not all) in Cleantech Venture dont’ really understand the scale of our energy problem. Or, having understood the scale of our energy problem, many apply adoption pathways learned from other systems–that simply don’t translate to energy, and the built environment.

Let’s take a look at a 40 year chart of one of humankind’s oldest energy sources, Hydro energy, compared to use of Nuclear energy. It’s understandable that most would have considered nuclear power the epitome of energy breakthough, when first concieved. And, compared to hydro power, the chart seems to indicate a fast adoption of nuclear power–through the world’s built environment:

The disappointment comes, however, upon learning that Nuclear power still only provides a little more than 5.00% of the world’s primary energy. Hydro provides over 6.00%–thus eclipsing Nuclear after all these decades. No doubt, many will point to political and policy choices as barriers to adoption of nuclear. But, those political and policy factors are a direct outgrowth of nuclear’s enormous expense, time-to-completion, and safety costs. The barriers to nuclear power adoption relate more to the fact that it is not an energy breakthrough at all, in the sense that it did not easily dislocate coal, oil, or natural gas. Nuclear power neither undercut easily the cost of current energy sources, nor did it offer a way to easily transform existing energy sources to the built environment. This is why in the current debate between Amory Lovins and Stuart Brand (an excellent and friendly debate), I take the side of Lovins–who thinks we missed our date with destiny in nuclear, and that a grand pursuit of nuclear no longer makes sense.

I intend to write more this week on my experience at the (very fun) MIT Energy Conference, but the question one should ask all those who claim to be working on energy breakthroughs is how, in terms of engineering, time, and energy-cost, their idea will distribute through the current built environment.

Read more energy market commentary at Gregor.us >

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See Also:

• Sorry, The Much-Hyped "Bloom Box" Is Not The Holy Grail Of Alternative Energy
• Oil Is A Snooze, The Energy World Is Totally Obsessed With Natural Gas
• Is Energy Efficiency Helpful, Or Does It Just Give Humans An Excuse To Consume More?

(This post appeared originally on the author’s blog.)

The inevitable coming of the sovereign debt panic finally engulfed Europe this week as the derisively (or perhaps affectionately) named PIGS spilled their slop on the continent. But Portugal, Ireland, Greece, and Spain are hardly worthy of so much attention. In truth, they are little more than the currently favored proxies among the leveraged speculator community (cough) for the larger problem of all sovereign debt. Indeed, the credit default swaps on these smaller European satellite states were not alone this week in making large moves higher. UK sovereign risk rose strongly, and so did US sovereign risk. With a downgrade warning from Moody’s to boot.

Notable among three of the PIGS are their relatively small populations, and small contributions to either world or European GDP. While Spain has a population over 45 million, Portugal and Greece have populations roughly equal to a US state, such as Ohio–at around 10 million. And Ireland? The Emerald Isle has a population similar to Kentucky, at around 4 million. While the PIGS are without question a problem for Europe, whatever problems they present for Brussels are easily matched by the looming headache for Washington that’s coming from large, US states such as California, Florida, Illinois, Ohio, and Michigan.

I’ve identified seven large US states by four criteria that are sure to cause trouble for Washington’s political class at least for the next 3 years, through the 2012 elections. These are states with big populations, very high rates of unemployment, and which have already had to borrow big to pay unemployment claims. In addition, as a kind of Gregor.us kicker, I’ve thrown in a fourth criteria to identify those states that are large net importers of energy. Because the step change to higher energy prices played, and continues to play, such a large role in the developed world’s financial crisis it’s instructive to identify those US states that will struggle for years against the rising tide of higher energy costs.

First, let’s consider a large state that didn’t make my list. Texas didn’t make the list because its unemployment rate has not risen high enough to reach my cutoff: a state must register broad, U-6 underemployment above 15%, and currently Texas has only reached 13.7% on that measure. Also, Texas’s total energy production nearly perfectly matches its total energy consumption. Of course, Texas has indeed had to borrow more than billion dollars so far to pay unemployment claims, thus technically bankrupting its unemployment trust fund. That meets my criteria. But, it’s instructive to note Texas’ energy production capacity in this regard, as that produces dollars. And one of the big reasons US states are under so much pressure, like their European counterparts, is that they cannot print currency. Being able to produce oil and gas is the next best thing to printing currency. So, Texas doesn’t make my list.

The seven states to make my list are California, Florida, Illinois, Ohio, Michigan, North Carolina, and New Jersey. Each has a population above 8 million people. Each has had to borrow more than a billion dollars, so far, to pay claims out of their now bankrupt unemployment insurance fund. Also, each state currently registers broad, underemployment above 15% as indicated by the U-6 measure for the States. And finally, each state is a large net importer of either oil, natural gas, electricity, or all three of these energy sources.

Let’s consider the overall predicament for residents of states like California, with its epic housing bust, Ohio and Michigan at the end of the automobile era, or North Carolina and New Jersey in light of the financial sector’s demise. Not only have states such as these permanently lost key sectors that once drove their economies, but, residents in these states are over-exposed to structurally higher energy costs. The prospect for wage growth in the United States is now dim. We are already recording year over year wage decreases in real terms. The culprit? Energy and food costs. My seven states are squeezed hard at both ends: no wage growth at the top, and no relief through cheaper energy costs at the bottom.

US wage growth in real terms has been stagnant for years. And the most recent decade of higher oil prices has been particularly punishing to states over-leveraged to the automobile like California, Florida, and North Carolina where highway and road systems dwarf public transport. While it’s true that states like Ohio and California produce some oil and gas, the size of their populations overwhelm any production with outsized demand for electricity and gasoline. In contrast, and as I mentioned, it will be revealing to see how this depression ultimately plays out in such states as Colorado, New Mexico, Wyoming, Oklahoma, North Dakota, and Louisiana which are all net exporters of energy.

Were it not for peak oil, gasoline prices would have fallen to a dollar during this depression as oil returned to the lows of the late 1990’s–if not even lower. Petrol at 90 cents a gallon would begin to chip away at the  painfully decreasing spread between punk wages and energy input costs, currently endured by underemployed Americans. Natural gas and coal prices are also much higher than they were at the lows of the 1990’s. And I need not remind: while energy prices are very 2010, the American workforce has lost so many jobs that our labor force has indeed returned the 1990’s.

21st century energy prices overlaid on a 20th century economy? That’s no fun at all. The mainstream economics profession, perhaps unsurprisingly, still does not pay enough attention to the interweaving of long-term stagnant wage growth, higher energy inputs, and the resulting credit creation that OECD countries took as the solution to resolve that squeeze. Given that one of out of eight Americans takes food stamps, a visit to states like Illinois, Florida, Ohio, and North Carolina would reveal that the difference between 15 dollar oil and 75  dollar oil, and 2 dollar natural gas and 5 dollar natural gas is large.

My seven states of energy debt represent a full 35% of the total US population. As with other US states, they face looming policy clashes between protected state and city workers on one hand, and the growing ranks of the private economy’s underemployed on the other. The recent circus at the LA City Council meeting was a nice foreshadowing that the days of unlimited borrowing by governments–against future growth based on cheap energy–is coming to an end. Washington can print up dollars and fund these states for years, if it so chooses. But just as with the 70 million people in Portugal, Italy, Greece and Spain, the 108 million people in these seven large states are probably facing even higher levels of unemployment as austerity measures finally slam into their cashless coffers, and reduce their ability to borrow.

BONUS: 15 Sovereign Nations About To Go Bust >

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See Also:

• EU Privately Freaking Out About Greece And The PIIGS Breaking Apart The Union
• U.K. Decides To Double Down On Capitalism In Bid To Avoid Joining The Debt-Defaulting PIIGS
• The PIIGS Get Slaughtered, As Greek Bond Situation Deteriorates

(This post originally appeared at the author’s blog)

A great deal of the newsflow from Venezuela over the past decade has detailed the gutting of PDVSA, the national oil company, for the sake of illusory programs dreamed up by one Hugo Rafael Chavez. As this has gone on for some time now it was inevitable that Venezuelan oil production would eventually suffer. Indeed, after serial takings in the Orinoco, the stuffing of PDVSA with cronies, and the depletion of its capital, there’s little surprise that Venezuelan oil production is down 1 mbpd since 2001. That’s a 30% fall.

Of course, with each successive nationalisation it was inevitable that Venezuela’s various systems would eventually merge to form new, tightly coupled, super-scaled problems. From yesterday’s Bloomberg/BusinessWeek:

Venezuela’s power shortage may push oil above $100 a barrel if President Hugo Chavez diverts electricity from the biggest refining complex in the Americas, Curium Capital Advisors LLC said. Chavez may tap a power plant at the 940,000 barrel-a-day Paraguana complex to supply electricity for public use, said Colin Fenton, chief executive officer of the Boston-based oil research firm. “He has to decide every single day what to do with Paraguana,” Fenton said today in an interview with Bloomberg TV in New York. A shutdown there would cause a temporary price spike until U.S. refiners make up for the lost output, he said. Most regions of Venezuela are facing blackouts for two to four hours a day to save power as the worst drought in 50 years reduces water levels in hydroelectric dams that provide 73 percent of the country’s energy.

Despite alot of incendiary rhetoric from the Chavez regime over the years, The United States secures alot of its just-in-time supply from Venezuela. (I’m not convinced that the power outages in the country’s grid will actually get the price of oil to 100 just yet). However, it’s instructive that along with geological declines in Mexico, hemispheric supply to the United States remains on a well-established downward path. It appears that Chavez is about to achieve dysfunctional petrostate status for Venezuela.

Read more energy market analysis at Gregor.us >

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See Also:

• Hugo Chavez: A U.S. Weapons Test Caused The Haitian Earthquake
• Venezuela Approaching Humanitarian Disaster As Chavez Expropriates Food Retailers
• Venezuela’s 28% Inflation Is The Highest In The World

(This guest post originally appeared at Gregor.us)

Exxon is like the government. It’s constitutionally unable to face reality. This has been the case for some years now, and has been reflected in their refusal to accept that spending billions annually would not result in any appreciable growth in their oil reserves. I’ve been snickering for years at XOM’s stuck-in-time approach. Here’s a snippet of a post of mine from a year ago, Advice to Major XOM. 

Like sands through the hourglass, so are the days of ExxonMobil. Each year brings a new promise to grow production and build reserves “the old fashioned way.” They spend 20 billion. They spend 40 billion. The CEO is interviewed, and gives his patient outlook on the price of oil. (has no idea). Cash builds up on the balance sheet. The company is praised, for not being aggressive. The company is criticized, for not being aggressive. More cash builds up on the balance sheet. Investor groups become alarmed, at an apparent lack of strategy. Production stays flat, year after year. Reserve replacement flattens.

When Rex Tillerson was made CEO of ExxonMobil a few years ago he was asked for his outlook on the price of oil. Rex stated that was not his job, and that frankly he didn’t care. Now, that’s probably the kind of attitude that caused the Rockefeller heirs to probe the board, for a new strategy. While misunderstood as a push for investment in Alternative Energy, the Rockefeller group was correctly identifying the fact that Exxon was led by an intellectually incurious CEO, and that the company was sleepwalking its way into a paradigm shift in energy supply. Spending 20 billion a year just to keep production and reserves flat does, indeed, indicate a state of denial.

Whether Exxon’s corporate culture of denial has changed or not is unclear. However, Exxon today has purchased for itself one of the best run Natural Gas producers in the United States, with its all stock deal for XTO. (they should have paid cash and de-hoarded some of their dollars). XTO, Run by Bob Simpson, has assembled a fine collection of shale NG properties and conventional oil production in the continental US over the past five years, and is quite the prize. One wonders if XOM will have to compete a bit further, however, before the deal is actually closed.

A more poignant and broader question however is as follows: does Exxon see a shift coming, finally, to energy policy in the US that would favor natural gas? Given XOM’s devotion to doing things the old-fashioned way, I say maybe. But unlikely. I doubt very much Exxon would make a deal that would depend on the whims of future policy decisions, out of Washington. No, Exxon makes deals based on the hard-bitten truths and laws that oilmen of old would live by. So while I can’t give them credit for having any vision, they do know history. And that’s what you get with Exxon, visionless management–but safe, disciplined management.

Perhaps this is an apt moment to post the most recently updated chart of Non-OPEC crude oil production. Because that’s the real reason for today’s deal. Developing new oil production here in the West, except on a small scale, is tough. Exxon is too big to add reserves therefore on the oil side through development. Indeed, in recent years, Exxon has not been able to boost its annual reserve replacement ratio above 100% via oil. So instead, it obtains reserves of BTU’s another way, via natural gas. Needless to say, but this puts a finer point on how all the global majors will add to reserves in the years ahead: through more acquisitions of North American NG.

Read more analysis of the energy industry at Gregor.us >>

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See Also:

• California Has No Idea How Bad Soaring Oil Is Going To Hurt
• Exxon: Here’s Why We Love XTO (XOM, XTO)
• Exxon: Here’s Why We Just Spent $41 Billlion On Natural Gas (XOM, XTO, UNG)