Category Archives: Energy

Milkshake-drinking at all-time high

Before I talk about Friday’s jump in oil prices, I should probably state that these are my personal opinions and completely unrelated to what I do at work (which doesn’t involve energy markets anyway).
The papers emphasize that this is the “biggest jump ever” for oil, but this seems a bit misleading: “ever” only goes back to 1983 (when oil futures started trading on NYMEX, apparently), which means it doesn’t include the last big oil crisis in the 70’s. It may still be the case that $10.75 is the biggest absolute price increase, but the starting price is also higher than it’s ever been—usually the more relevant measure is fractional, so the real question is whether an 8% jump is record-setting. (It might be but it’s not clear from the articles I read.)
Next we have the question of whether or not there’s a bubble going on and oil is really overvalued at this point. According to the Times,

One view gaining ground is that the commodity market is caught in a speculative bubble akin to the recent housing bubble or the technology bubble of the late 1990s. That theory was raised by politicians in Washington and by OPEC producers, who blame speculators for the staggering oil rally.

I have to say that neither politicians in Washington or OPEC producers seem terribly trustworthy sources if you’re looking for accurate analysis of energy markets. At least part of the rise in prices this year is driven by the fact that supply isn’t increasing to match demand, but you’re not going to hear OPEC talk about this.
If I had to guess I’d say this is not a bubble, and if anything oil is probably still undervalued right now. I can think of a number of factors that plausibly contribute to the price of oil being as high as it is. Some of them are being mentioned in the press: the weak dollar, the concerns over possible war in Iran, the increased demand from Asia. On top of these things I think the long-term trends are going to cause oil prices to rise indefinitely. I’m not stocking canned goods in anticipation of a peak oil apocalypse, but the fact remains that oil is a limited resource and eventually the supply will start to decrease. We’re already seeing the growth of oil supply flatten out at the same time as demand from developing countries is ramping up rapidly, so it’s no surprise that prices would rise. (Had I the funds a few years ago I would have bet on this.)
Meanwhile, high gas prices in America will hopefully have good side effects, leading to energy conservation and spurring investment in alternative energy. Unfortunately, it’ll also bring economic hardship for a lot of people and push the economy further into recession, so I can’t really applaud it. However, I can at least be happy that I picked a good time to sell my car.

Wall Street rethinks coal

Via Stoat, the Wall Street Journal reports that some major investment banks are anticipating new regulations on carbon emissions:

Citigroup Inc., J.P. Morgan Chase & Co. and Morgan Stanley say they have concluded that the U.S. government will cap greenhouse-gas emissions from power plants sometime in the next few years. The banks will require utilities seeking financing for plants before then to prove the plants will be economically viable even under potentially stringent federal caps on carbon dioxide, the main man-made greenhouse gas.

I’d like to interpret this as an expectation of a Democratic victory in November, but if I remember right global warming is one of the policy areas where John McCain deviates from Republican orthodoxy. Thus it’s more likely driven by his success in the primaries, making this kind of regulation more likely no matter which party wins the presidency.
This decision is driven by the political situation but I’ve often wondered how much the scientific consensus on global warming impacts the investment world. After all, major climate change will cause a lot of economic damage and so it seems like there’s incentive for Wall Street to try to limit it. Probably, though, it’s a tragedy of the commons where the marginal coal power plant brings more short term profit than long-term costs to the individual investor. (And a lot of the fossil-fuel industry’s disinformation campaign on the issue is designed precisely to keep their stock prices up.)
Since I’m looking at some finance jobs, it would be nice to think that I could have a positive effect on this side of things, but in fact my skill-set seems more suited to high-frequency trading problems that don’t have this kind of look-ahead.

Long Form [Open Thread]

My trip back from Baltimore took about 12 hours longer than it should have, but I eventually made it back. Despite attempts to catch up on sleep I still feel like I’m recovering—it was a busy week.
V for Vendetta: This is a powerful movie that mostly does a good job blending action/suspense with a political message. The setting is a near-future Britain which has slid into fascism after the deterioration of Iraq and some high-casualty terrorist attacks. (Meanwhile the United States has fallen into anarchy and civil war.) The plot centers around the masked-and-caped V, who pursues a personal vendetta against certain government officials, while working on a larger plot to overthrow the entire government in the spirit of Guy Fawkes. It wouldn’t be correct to say that V is the hero of the movie—he’s morally ambiguous at best and commits at least one act I found horrifying. However, the government he’s fighting against is so much worse that he sometimes seems good by comparison.
The movie can be didactic at times, and the message is delivered in a heavy-handed way. However, I think the time for subtlety is past: the government we have right now is detaining citizens without trial, torturing innocent people, and asserting unlimited executive power. It’s refreshing to see a movie that stands up and says straight out that we, as a citizenry, should not tolerate these things. I certainly don’t think we need to blow up any buildings, and Guy Fawkes is the wrong model for this sort of thing, but the basic notion that the people have a right to replace an unacceptable government translates well to the ballot box.
As for the film qua action movie, it’s generally well done. There is a thread of paranoid tension running throughout that works well to keep up the suspense—this is one of the ways that the politics reinforce the action. A sequence early-on in which V takes over the state-run television studio is especially good, and the climactic fight scene at the end is the sort of thing the Wachowskis excel at. There are a couple of points where the exposition/recapping becomes excessive and the suspense wanes, but it picks up again afterwards.
Anyway, I liked it. (Remember when I wrote short capsule reviews in the open threads?)
David Goodstein: Out of Gas: This book is Goodstein’s effort to explain the interrelated problems of peak oil and climate change to a non-technical audience, and in doing so he explains the physics of energy and the historical development thereof. He sets forth a mostly pessimistic picture, anticipating oil supply problems in the very near future and associated social turmoil. Unfortunately I think he too quickly brushes off the economic arguments about alternative energies becoming more cost-effective as the costs of fossil fuels increase. I don’t think this solves the problem but it should make the situation better than he expects. (One of the frustrating things about reading peak oil commentary is that physicists are frequently naive about economics, and economists naive about physics.) His treatment of the basic physics issues surrounding energy production is very good, however, and I would recommend it to a non-technical audience for that reason.
In the end, I am still not sure just how worried I should be about peak oil, but the answer is clearly non-zero.
Arctic Monkeys: Whatever People Say I Am, That’s What I’m Not: This is the hot band over in Britain right now, and musical Anglophiles will find their sound pleasing. Imagine the drunken swagger of the Libertines with the guitar sound of Franz Ferdinand, and you have a good approximation. This CD hasn’t quite achieved the heavy rotation of certain other recent British additions to my collection, but it’s still pretty good. The major single seems to be “I Bet You Look Good On The Dancefloor” but several others are equally good, like “Fake Tales of San Francisco”.

Colloquium Blogging: Steve Koonin on the Energy Situation

Some of you know Steve Koonin from his days as Caltech’s provost. He’s now chief scientist at BP International, and gave the colloquium at Berkeley today under the title “A Physicist’s View of the World’s Energy Situation”. The talk was extremely interesting and seemed like a very realistic assessment. Some of the points I took away (in a bit of random order):

  • Koonin estimates peak oil in about 30 years. Asked about the more alarmist estimates of 10-20 years, he basically says that BP has better data about the oil supply.

  • On the other hand, there is 200 years worth of coal left in the ground.
  • Coal is the worst fossil fuel for carbon emissions, but technologies exist to mitigate this.
  • Oil in the US is mostly used for transportation, coal and natural gas for electric power.
  • Energy use in transportation is very inefficient, but efficiency needs to be coupled to conservation: car engines improved efficiency by about 25% in the 90’s but most of this went into heavier and faster cars rather than better gas mileage.
  • Koonin first downplayed the evidence for climate change, then stated that he is 90% confident that it is happening and went on to treat it as a serious issue.
  • However, based on projected fossil fuel use he feels that large quantities of CO2 in the atmosphere by 2100 are unavoidable, and we should focus on adaptation rather than prevention.
  • Renewable energy is very far from being a realistic replacement for fossil fuels.
  • There are two large numbers relevant to global energy use: the per capita energy consumption in developed countries (the USA is an outlier, but other developed countries are within a factor of two) and the population of developing countries. Efforts by Europe, the US, and Japan to control emissions only offset the effects of growth in China, India, etc. by a few years.
  • The word “fusion” did not appear in the talk. A number of questioners brought it up and Koonin stated that it was at least 50 years away from replacing fossil fuels. “First you have to get it to work.”
  • In the extreme long run (200+ years, once fossil fuels are exhausted) Koonin predicts fusion and solar will be the dominant energy sources. Currently solar is much more expensive than almost all other sources of energy, but this is a materials problem and can potentially be solved.

The talk will eventually appear here as a webcast. I’ve been increasingly interested in energy issues lately and I found it to be a fascinating look at how the oil companies (or at least one of them) look at these things. Next week while I’m traveling I’ll read Out of Gas and see what Koonin’s fellow Caltech prof David Goodstein has to say about this. (Goodstein is clearly more pessimistic.)

David Goodstein hits the Grim Meathook Lecture Circuit

Doug Natelson (via Mixed States) comments on a talk by Caltech prof David Goodstein. Goodstein is mostly known for bad physics puns, but is now brandishing a meathook and predicting the imminent end of civilization. Apparently he’s written a book, Out of Gas, on the increasingly frightening subject of peak oil. Anyone know if the book is any good? I’m tempted to check it out, assuming he’s foregone the puns this time.