Folks,

This longish article was broken into two parts for Energy and Capital (here and here), but I have reprinted it whole here for convenience.

In it, I discuss the paradox that many highly-anticipated oil and gas projects around the world are being delayed or cancelled due to the high cost of oil…when the high cost of oil was supposed to make them economical.

I think this is an important dynamic to be aware of as we cross into post-oil peak terrority. Our expectations for future production may not be fulfilled.

–C

Receding Horizons

By Chris Nelder

April 17, 2007

The bear went over the mountain

The bear went over the mountain

The bear went over the mountain

And what do you think he saw?

He saw another mountain…

Last
week, energy blogger Robert Rapier published a thorough analysis of what went
wrong with thermal depolymerization (TDP), a much-hyped technology that
promised to turn anything (starting with turkey guts) into usable oil and other
clean, usable byproducts, while being net energy positive and economical.

I
blogged it myself back in 2004 when it was supposed to be the Next Big Thing,
able to harvest landfills and deliver liquid fuels in a post-peak oil world, in
one fell swoop.

Rapier’s
account of the TDP story is an interesting study in how the “next big thing” in
energy often turns out to be overpromised and underdelivered.

 “This
is the same mistake that proponents of tar sands, GTL, oil shale, cellulosic
ethanol, and many others have run into,” Rapier observed. “They believe that
oil prices will rise, and yet their costs will magically remain where they
were. In fact, what happens is that as oil prices rise, all the costs
associated with these various projects rise.”

He called
TDP a victim of a phenomenon known as the “Law of Receding Horizons.”

Related articles on receding horizons: The Cavalry Stays Home The Dirt on Coal 2007: Renewable Energy Gets Real, Part One

I am
grateful to whomever gets the credit for that little coinage, because I’ve been
barking up that tree without a good name for the concept for a while now, and
it’s an apt description for what I’ve been seeing in the energy press lately:
receding horizons.

A Horrible Irony

So far, April is living up to T.S. Eliot’s aspersion that she is the cruelest
month.

Energy projects in oil, natural gas, and tar sands have been getting cancelled or
delayed left and right for the last two weeks or so.

Why?

Because of a horrible irony we have observed before: the rising cost of oil causes the
project’s costs to balloon until it is no longer economical. (Plus a healthy
dose of geopolitical unrest, and basic environmental overshoot.)

The horizon recedes. Like an oil slick mirage—always just out of reach, just
another mile or a billion dollars away.

Thanks to the record oil revenues
being raked in by oil producing countries of the Middle East, they’re building
and expanding infrastructure like gangbusters, which has led to a global
shortage of contractors, raw materials, equipment and qualified labor…and led in
turn to higher prices for all the world’s big construction projects, including
its own.

Talk about the snake eating its own tail.

We’re not just talking refineries,
either. Didja hear about the planned 68-story combination hotel,
apartment and office tower complex in Dubai, where each floor rotates 360
degrees independently, to create a constantly changing architectural form?

Well, whatever it takes to entertain the likes of Michael
Jackson, I guess.

But I digress…

The Unconventional Oil Mirage

The
point is, any time we hear that oil has to be over $30…or $40…or $x/barrel in
order for some marginal energy project to make sense economically, we should be
instantly skeptical.

Because
when oil does get to that cost per barrel, the project’s costs often
turn out to be based on the cost of oil back when they made the estimate…but now,
the project is still too expensive to make sense.

I
don’t know how they get away with such predictions, actually. We’ve all seen
this movie before, haven’t we?  

And
yet, the cost overruns are always called “unexpected.”

One
clear example of this is the production of the oil shale of the American West. 
Once you factor in the future cost of all the energy that it will take
to harvest those low-quality hydrocarbons, it never pencils out. Indeed
it seems to be a calculation that few even attempt.

The standard joke is: "Shale oil–fuel of the future, and always will be."

Back in 1946, you’d have seen a
billboard along the route of today’s I-70 suggesting that you "Get In On
the Ground Floor" of real estate there, to capitalize on the impending shale
oil rush. And it’s still not too late, because to this day there is still not a
single production scale oil shale facility.

Another
good example of receding horizons was given in the recent report by the Energy Watch
Group on the impending peak of global coal production. The report’s authors
concluded: “the present and past experience does not support the common
argument that reserves are increasing over time as new areas are explored and
prices rise.”

I’ll
say it yet again: when it comes to non-renewable resources, neo-classical
economics just doesn’t work. The Invisible Hand stays in its Invisible Lap, and
God doesn’t put more oil in the ground just because we’re willing to pay more
for it.

Unfortunately,
the cancelling of these projects is coming at a time when we’re just barely
able to balance global supply and demand, no matter what OPEC may say to the
contrary.

Claude
Mandil, executive director of the IEA, said last week "Demand growth has
exceeded the capacities put on the market, which currently are barely balanced….Even
if we are happy with increasing investments in Middle East countries of OPEC,
we think the rate of investment and capacity growth is not enough to meet
future oil demand."

Not
enough to meet future oil demand.

Let’s
take a look at the next cavalry regiment who has decided to stay home.

Bear
in mind that all of this has happened since April 1.

The Rogues Gallery

Nigeria: In Nigeria, the number five supplier of crude to the U.S.
and one of the few sources that can actually (theoretically) increase
production, militant groups have declared “full blown war” on the federal
government unless they withdraw all military personnel from the Niger Delta,
where the militants have continued to stay busy sabotaging the oil
infrastructure and taking oil workers hostage.

Multinational
oil companies are pulling out, workers are refusing to expose themselves to
dangerous sites, and many projects are being put on hold. But the oil companies
are largely staying mum.

California: The state Lands
Commission voted not to approve an environmental impact statement that would
have been necessary to proceed with a proposed liquefied natural gas (LNG)
facility 14 miles off the Ventura-Los Angeles County coast. They also denied a permit for the
pipelines to cross state lands, so the project is effectively dead. This bodes
poorly for the three other similar LNG projects that are still in the approval
process, and another Long Beach project which is currently being fought in
court.

Louisiana:
Shell has put the kibosh on a new LNG import terminal 36 miles off
the coast of southwest Louisiana, due to protests
over the environmental impact of the facility, which would have used millions
of gallons of Gulf water to warm the gas from liquid back into a gas.

Canada: In the Northwest Territories, the Deh Cho tribe,
the last aboriginal holdout against a natural gas
pipeline across the Mackenzie Valley, is making their approval of
the project conditional upon the federal government agreeing to set aside 60%
of the tribe’s lands as protected wilderness. The 1,220-kilometer
pipeline is needed to access large gas reserves in the Arctic, but its cost has
more than doubled to $16.2 billion.

Natural gas drilling in Canada has also been dampened
by the Canadian government’s dubious decision to kill the golden goose of
investment money flowing into its energy projects, by phasing out the sweet tax
benefits that the Canadian investment trusts who funded the projects used to
enjoy.

Accordingly, exploration and production companies are
scaling back on drilling. The number of drilling rigs that are operating in Canada
now are less than half the number that were operating there at the end of 2005.

"A lot of marginal drilling activity taking place
last year is probably gone for good," said Bill Herbert, co-head of
research for Matthew Simmons’ company, Simmons & Company International.  He
called the run of rig withdrawals a "blood bath," and projected that the
second quarter of this year will see the rig count fall by 40 percent from last
year’s level.

For those of you keeping score, this is not good news. North America is well past the peak of its natural gas production and is on the decline. Just
to stay even with current consumption, we need to increase imports. But, as we are
seeing in southern California, new facilities to import natural gas aren’t exactly
being welcomed with open arms.

Since natural gas is the primary feedstock for West
Coast electricity plants, this surely will translate into higher grid prices
here.

And since natural gas is a key feedstock for the
production of oil from the Canadian tar sands, it could dampen those projects
too. That’s scary, because that 1 million barrels a day of oil made from the tar
sands is equivalent to more than 10% of the U.S.’s oil imports.

Canada is, after all, our number one supplier of crude.
We’re counting on them to make up for the loss from our number three supplier, Mexico, due to the catastrophic decline of its main oil field, Cantarell.

So we’d like to see Canada increasing its production as
fast as possible—indeed, we lobbied them hard last quarter to do so, asking
them to suspend their environmental reviews in order to fast-track oil sands
projects.

But they demurred.

Now, the Canadian Association of Oilwell Drilling
Contractors anticipates that the number of oil wells drilled will drop from 22,575
last year to 19,023 this year.

With oil prices going up.

What does that tell you?

It tells me that the investment money is pulling back,
and that could very well be because the best prospects for drilling have already
been tested, and that they’re getting more and more dry holes and less payout
from the wet ones, even as the cost of drilling rises dramatically.

Oh, Canada!

Mexico: In a startlingly frank interview of Matthew Simmons on the
Financial Sense newshour with Jim Puplava, Simmons actually recommended that Mexico cut back on its oil production, in order to save a little for the rainy day
ahead when oil is scarce, and so are oil revenues.

“If I were Mexico today, as painful as this would
be temporarily, I would lower Cantarell’s production rate to about 800,000
barrels a day, and keep the other sister fields next to it from going into a
nitrogen injection program—or do the nitrogen injection, but then, don’t let
those wells flow as fast as they can. Cap it. And let it last at a lower rate
for 10 years while they try to figure out what in the world do we do once we
basically are no longer a major producer of oil, because otherwise, they have
no Plan B–just like we have no Plan B.”

Reinforcing his expectation of a near-term peak, he said “I don’t think we
have until 2010. It’s a pretty grim picture. …We need to have oil prices go way
up from where they are today.”

Russia: A government official
said that construction of the second leg of its pipeline to Asia could
be pushed back from its originally scheduled March 2008 completion by as much
as four years, because oil production from its underdeveloped East Siberian fields
has failed to meet expectations.

Saudi Arabia: The state-owned oil company Aramco
said that its ample supplies of heavy sour crude will continue to go
under-used, because the rising cost of construction materials such as steel and
concrete have caused delays in plans to build more of the complex refineries
needed to process it. The cost of building a refinery is up over 70% in the
last three years.

Many of these refineries may not materialize,"
Aramco’s Mishari said at the Middle East Petroleum and Gas conference in Dubai.
"The downstream bottleneck could remain."

Construction costs have also
doubled, to US$22 billion, for a planned large-scale refinery and
petrochemicals complex in eastern Saudi Arabia. The first cost estimate for the
project was $10 billion, which went up to $15 billion last July when Aramco
announced its partnership with Dow Chemical on the project. Now it’s $22
billion. Apparently, they are moving forward with the project anyway.

Anybody trust the new estimate?

More importantly, anybody want a
marker on what the real cost will be, if and when it gets completed?

Iran: According to an April 5 announcement by the French oil
company Total SA, their planned $10 billion LNG project in Iran is now in jeopardy because of—again—rising costs.

CEO Christophe de Margerie told reporters Thursday that the
costs "are so high that they are close to damaging the project."
"We have to renegotiate all our agreements" with suppliers, de
Margerie said, adding costs "have more than doubled" in recent years
and that this is a "strong concern."

He said the company also needs to re-evaluate the
geopolitical environment before deciding to go ahead with the project. (Duh!
And who thinks that assessment will come up rosy?)

The project was to harvest the
massive South Pars gas field, which holds about 1 billion barrels of oil
equivalent of proven reserves. It was scheduled to begin production by 2011. 

For the record, de Margerie also
has the distinction of being the only head of a major oil company to give a
fairly realistic date for peak oil: 2020.  He has also questioned whether it is
possible to increase global oil output from today’s 85 million barrels per day
to 100 million barrels per day, as many officials have projected. He should be
commended for his candor.

Kuwait: A proposed
615,000 barrel-a-day refinery in Kuwait was initially projected to cost around
$6 billion, but the contractors came in with prices in excess of $15 billion.
Part of the reason is that the cost of shallow water drilling rigs has exploded
from $50,000 a day just a few years ago, to $200,000 a day now.

Algeria: Our #7 source of imports, and Africa’s largest gas
exporter, may scrap a planned 36,000 bpd gas-to-liquids (GTL) plant due to—you
guessed it—the soaring energy costs of construction. “We had three bidders and
one dropped out,” said the country’s oil minister, “It is too expensive
apparently, so we may drop it.”

He said other GTL projects have been pushed back as far as 2011. The
projects “are being delayed because of haggling over costs and lack of
subcontractors.”

An LNG plant under construction in Algeria will also be delayed, according
to the builder, Spain’s Repsol.

Qatar: Realizing
that project costs are delaying oil and gas projects around the globe, Qatar’s Oil Minister Abdullah bin Hamad Al Attiyah met recently with the chairmen of oil
and gas companies. "Cost is a big concern," he said, and is "one
of the issues we should be concerned about before it snowballs."

While this happened in February
and not April, it bears repeating. In Qatar, home of the world’s
third-largest reserves of natural gas (after Russia and Iran), the energy
minister said that the future of some multi-billion dollar GTL projects planned
by Conoco Philips and Marathon Oil was in doubt, and their fate wouldn’t be
decided until a cost study is completed in 2009.

And, as we reported earlier, a much-anticipated,
$15 billion LNG project in Qatar was scrapped by Exxon due to costs running out
of control, and rising domestic gas needs.

Everywhere oil is owned by the state: And bringing up
the end of our rogues gallery is: everywhere foreign oil companies operate. It seems
that the days of windfall profits for oil companies are numbered, as oil
producing nations realize that they have the leverage to demand a bigger share
of the wealth.

The renationalizing of energy assets by Russia, Venezuela, and Algeria are just part of this picture. Nationally owned oil companies, or
NOCs, currently control some 75% of the world’s remaining reserves, and their
share will soon increase to 90%.

That puts them in the driver’s seat for dictating the terms
of future deals. And unless the international oil majors—overwhelmingly
companies from countries in the West that are past their own production
peaks—want to go out of the oil business entirely, they have to play ball.
Because that’s where the oil is.

In addition, the state owned oil companies have learned a
thing or two from their long partnerships with the Western majors, and are now
capable of taking on complex projects on their own. They don’t need the majors
as badly anymore, and tend to use them for their E&P expertise and then
toss them out just when the going gets sweet.

Sounds like a blues number, doesn’t it?

These days, says ConocoPhillips Chief Executive James Mulva:
"Big Oil is not so big."

And Exxon Chief Executive Rex Tillerson expects the new
trends to continue: "Until you get a change in the price environment, I
don’t see the pressure coming off much," he said last month.

A few examples: Anadarko Petroleum Corp., the largest
foreign producer in Algeria, estimates that the new taxes levied on it will
reduce the company’s income from Algeria by 12% to 23%.

Marathon Oil will now face taxes on any windfall profits in Equatorial Guinea.

Venezuela has raised taxes and royalties, and has taken a
controlling interest in all its heavy oil projects, which are among the most
profitable in the world for Western oil companies. Income taxes on heavy oil
projects are up 50% over the past couple of years, and royalty rates doubled to
33%…when they started at 1%.

A Questionable Future

This high-level survey of future of the world’s oil and gas
production clearly leads to some important questions.

Can we trust our expectations for future oil and gas
production? How eager do we think Big Oil is really going to be, between now
and say, five or ten years from now, when we’re clearly past the global oil
peak and they’re basically powerless to do anything about it?

What do these developments—or should I say, lack of
developments—imply for the timing of the global peak? For the price of oil?

And what about the other much-anticipated liquid fuel
alternatives? What corn price puts the hurts on ethanol production? On food
prices in general?

And can the vast resources of oil shale, tar sands, and coal
in North America really save the day?

Stay tuned to this space to find out.

Until next time,

–Chris

Folks,

Here’s my latest piece for the Green Chip Stocks subscription file, which they graciously allowed me to reprint here.

–C

Air Force Breaks Ground on Largest Solar Farm in North America

2007-04-25

On Monday, the Air Force broke ground on what will be the largest solar farm in North America.

The 15 megawatt power plant will occupy 140 acres of Nellis Air Force Base, outside of Las Vegas.  It will generate about 25 million kWh annually, providing about 25% of the electric needs of the base, where more than 12,000 people work and over 7,000 live.

The Air Force expects to save $1 million a year on their electric bills, while helping to fulfill its commitments to deploy more renewable energy.

And best of all, they didn’t have to front a dime for the $100 million project.

It’s true.

The project is being built through a creative collaboration of four partners…

• The PowerLight subsidiary of SunPower Corp.
• Financed by MMA Renewable Ventures, a San Francisco financier of renewable energy projects
• Connected to the grid via Nevada Power, the local utility
• Hosted by the Air Force.

And the reason the Air Force doesn’t have to pay anything up front for the project is due to MMA Renewable Ventures’ interesting third-party approach to financing solar projects.

This isn’t a traditional approach…but still, quite profitable!

Essentially, the company strikes a Power Purchase Agreement (PPA) with the customer, under which the solar project is installed at the customer’s site at no cost. In return, the customer agrees to buy their power at lower-than-utility rates from MMA Renewable Ventures, who buys, owns, and operates the solar system.

In addition to the steady stream of utility revenue that Renewable Ventures will enjoy, Renewable Ventures also gets to claim the 30% tax credit…in this case, about $30 million worth!

Not bad at all.

And what makes the deal even sweeter is that they can sell the renewable energy credits (RECs) generated by the solar system to Nevada Power, to help meet the utility’s portfolio standards for renewable energy.

Now Renewable Ventures’ parent company is Municipal Mortgage & Equity, LLC (“MuniMae”), which happens to hold an $18 billion portfolio (the fourth largest in the US) in debt financing, and clean energy investments.

And currently, MMA Renewable Ventures owns 1 MW worth of renewable generating capacity in the U.S., making them arguably the largest provider of institutional investment capital to the renewable energy sector.

The project also makes sense for Nevada Power, who needs to meet the Nevada renewable portfolio standard (RPS) of getting 20% of its power from renewable energy sources by 2015.

The Nellis project will enable them to meet their goals six years ahead of schedule.

As part of the deal, Nevada Power will subsidize the lower electricity rates offered to the Air Force by making payments to Renewable Ventures.

According to Nevada Power executive Thomas Fair, between the Nellis project and a 64-megawatt solar thermal power plant now under construction in Boulder City, Nevada will have the highest solar energy production per capita in the entire country.

"The fact that the military is taking a big leap into the renewables arena is significant," said Don Soderberg, chairman of the Nevada Public Utilities Commission.

MMA Renewable Ventures’ CEO Matt Cheney says the Nellis project is only the beginning: "In collaboration with our pioneering customer and partners, we have set a precedent of success with the Nellis project that we look forward to replicating at federal installations throughout the United States."

All in all, it’s another outstanding win-win for solar!

Until next time,

Chris Nelder 

Folks,

Here is my latest for Wealth Daily, about a new report by retired military brass about the national security implications of climate change, and what should be done about it.

Admirals, Generals Worried About Climate Change

By Chris Nelder

Thursday, April 19th, 2007

Retired military brass have officially joined the ranks of the “walking worried” on the climate change issue.

A top panel of eleven retired admirals and generals from all branches of the military released a report on Monday entitled “National Security and the Threat of Climate Change,” which was commissioned by the Center for Naval Analyses, a nonprofit government-funded think tank.

Though initially several of the authors were skeptical of the topic, they spent months meeting with climate scientists, business leaders and other experts, and found the experience “very sobering.”

Their conclusion? “Climate change is a national security issue.”

Well, blow me down.

Gotta wonder how this is going to sit with the global warming deniers in the White House.

As I’ve written previously, the Pentagon released its report on the national security implications of climate change some time ago. And last month, the U.S. Army War College sponsored a two-day conference on the subject titled “The National Security Implications of Global Climate Change.”

So seeing military brass join the movement isn’t a total surprise.

Global Warming Leads to Terrorism

But it’s the first time I’ve ever heard one of them connect global warming with the so-called global war on terror: “Climate change can provide the conditions that will extend the war on terror,” said retired Admiral T. Joseph Lopez, former commander in chief, U.S. Naval Forces Europe and Allied Forces, Southern Europe.

Why? Because it’s a “threat multiplier,” exacerbating the conditions, like water and food shortages, that tend to breed terrorist groups in volatile parts of the world.

For example, the report notes, nearly half the world gets about half of its drinking water from melting snow and glaciers, which are quickly disappearing.

The authors note that migrations of environmental refugees, strained border relations and resource conflicts will make it hard for states to meet the basic needs of their residents, which will lead in turn to security problems.

But the climate change threat affects us all, as report author Vice Adm. Richard Truly admits: “It’s going to happen to every country and every person in the whole world at the same time.”

The Army’s former chief of staff, Gen. Gordon Sullivan, dismissed the Bush administration’s position (that more certainty about the human causes of global warming is needed before taking action to reduce greenhouse gases) for the same reasons we do here: the precautionary principle.

“People are saying they want to be perfectly convinced about climate science projections,” he said. “But speaking as a soldier, we never have 100 percent certainty. If you wait until you have 100 percent certainty, something bad is going to happen on the battlefield.”

The report also showed that the commanders were wisely taking a long-term view of the problem. Said retired Marine Corps General Anthony C. Zinni, former commander of U.S. forces in the Middle East, “We will pay for this one way or another. We will pay to reduce greenhouse gas emissions today, and we’ll have to take an economic hit of some kind. Or, we will pay the price later in military terms. And that will involve human lives. There will be a human toll.”

Energy = Global Warming = Politics

But perhaps the part of the report that I found most vindicating was this statement, by retired Navy Admiral Frank “Skip” Bowman, who was director of the Naval Nuclear Propulsion program:

“Our national security is inextricably linked to our country’s energy security.”

Thank you, Adm. Bowman!

There you have it. As I have written previously, “energy IS global warming IS politics.”

But you don’t have to take my word for it. These commanders know the world a lot better than I do, and now they’ve said it too.

The report makes five recommendations:

• Fully integrate climate change into our national security and defense strategies.

• “Commit to a stronger national and international role to help stabilize climate changes.”

• Commit to helping developing nations to address their own climate impacts.

• “DoD should invest in technologies that will provide combat power more efficiently.”

• DoD should study the possible climate change impacts on its worldwide military installations.

This is truly outstanding news for the renewable energy and energy efficiency sectors!

And it makes an interesting bookend to my article last week, “Fighting Terror with Hypercars,” which was about how former CIA heads and other security hawks are likewise pushing hard for renewable energy and addressing the global warming challenge, both here and abroad.

With strong political support and serious investment dollars from the likes of the DoD and the CIA, there is no doubt that renewable energy is going to get a big shot in the arm this year . . . and the next . . . and the next. . . .

What a great time to be a green investor!

Until next time,

–Chris

Folks,

Here is my latest for Energy and Capital, about the intense lobbying for alternative vehicle designs (”hypercars”) and alternative liquid fuels, by a slew of former statesmen and CIA heads. These security hawks are all about renewable energy. Since I now find myself allied with some members of the neo-con rogues gallery, I think it’s a fascinating movement…especially as contrasted with the foot-dragging approach of the administration.

–C

Fighting Terror with Hypercars

2007-04-13

By Chris Nelder

Lately I’ve been fascinated by the way so many former CIA and State Department officials, once freed from their jobs, have gone to work lobbying for energy security.

While on the government payroll they mostly behaved like good soldiers, stuck to their talking points and didn’t say anything that might upset the apple cart.

But once out on their own, they’ve been blunt about how energy policy has everything to do with a sound national security strategy and a successful foreign policy.

Among them are former CIA heads James Schlesinger and John Deutch and former Secretary of State George Shultz.

But the most outspoken of these ex-officials is James Woolsey, former director of the CIA under President Clinton. He’s been traveling the world since 9/11 to champion renewable energy and educate the public about the intimate relationship between oil dependence and terrorism. (He also walks the talk, driving a hybrid and powering his farm with solar.)

He has held leadership roles in two nonpartisan groups, the Energy Future Coalition and the National Commission on Energy Policy, comprising experts in business, labor, the environment and national security, which are actively lobbying to reduce our reliance on fossil fuels and increase conservation, fuel economy and renewable energy.

Back in December, I wrote about another of his projects, chairing a special task force on energy for the Council on Foreign Relations, an extremely influential think tank. The report that group produced, "National Security Consequences of Oil Dependency," was startlingly frank about the futility of seeking energy independence, the absolute necessity of energy conservation, and the pressing need for investment in R&D for alternative energy and next-generation vehicles.

In other words, it was a prescription for facing the peak oil challenge.

So it was with great interest that I recently read a policy paper from 2005 by Woolsey and Shultz titled "Oil and Security," which they published via their antiterrorism lobbying group, the Committee on the Present Danger. I found it to be a remarkably clear-headed assessment both of our oil addiction and our best options going forward.

First, it is candid about recognizing that our whole transportation infrastructure is completely wedded to oil-based products, and that only alternatives that can work with that infrastructure are tenable and worth pursuing. Hydrogen, for example, would need an entirely new infrastructure, from the source all the way to the destination, so it’s written off as impractical - a sound bit of analysis that has been heard all too little amid the clamor of pie-in-the-sky promises about "the hydrogen economy."

It also offers a clear-eyed picture of global oil supply. It nimbly sidesteps the phrase "peak oil," but admits that demand growth from China and India, combined with the fact that enhanced oil recovery and deepwater drilling cannot change the basic oil production curve, means that we will continue to be - quite literally - over a barrel and beholden to Middle East oil producers who sit atop most of the world’s remaining oil reserves.

And it pulls no punches about how the money we spend on oil directly fills the coffers of the terrorist groups we’re fighting. To me, this is a hugely significant, if obvious, admission. None of that "they hate us because we’re free" nonsense for these national security professionals. They point out that the U.S. borrows about $13 billion per week, principally from Asian states, to finance its debt-fuelled consumption, and that $2-3 billion per week of that is just to pay for imported oil.

That’s right: two to three billion per week, just for oil, and some of it goes directly to those who strap explosives to themselves and set them off in public places from Baghdad to Jakarta.

I am in full agreement with Shultz and Woolsey that I’d much rather be spending that money at home on next-generation transportation technologies.

They propose several objectives for developing a sound national energy policy:

Improve fuel economy. In Europe, the average economy of private vehicles is 42 mpg, nearly double the U.S.’s 24 mpg, largely due to their reliance on efficient, next-generation, clean-burning diesel engines. They also see a bright future for hybrid cars (as do we!). And they point to the work done by Amory Lovins et al. at the Rocky Mountain Institute, which demonstrated that by building car bodies out of super-strong and super-lightweight carbon fiber instead of metal, with advanced engine designs and aerodynamic contours (so-called "hypercars"), we could double the efficiency of today’s hybrids, achieving 100 mpg or better.

Encourage cellulosic ethanol. They don’t pay any attention to corn-based ethanol in this paper, perhaps because they know that it runs quickly into competition for food production and has a very low EROI. They believe that biofuels will play a role, but probably a minor one. And they believe (quite correctly, I think) that liquid fuels produced from coal, tar sands, or oil shale will remain bit players in the overall fuel mix. But they project that at least half of the U.S.’s oil demand could be met by cellulosic ethanol from switchgrass grown on unused land in the "Conservation Reserve Program" soil bank, and that the fuel could be produced for as little as 67 to 77 cents a gallon when the industry is mature.

Push for plug-in hybrids (PEHV). Since most personal vehicle trips are under six miles, and since driving a car on batteries charged by grid power is less than half the price of driving on a tank of gasoline, hybrid cars with enhanced battery packs that can be charged up overnight from the grid could put a major dent in our liquid fuel demand. Accordingly, Shultz and Woolsey would make R&D on battery technology a top priority, as well as increased investment in the grid to make it more reliable and secure.

With the contribution of modern diesels, flexible-fuel vehicles, hybrids and plug-in hybrids, they believe that we could achieve a substantial reduction in our oil imports–and do it fairly quickly.

And by putting some of these technologies together, they say, à la Lovins’s "hypercars," "the reduction could be stunning." For example, a PHEV with next-generation lithium batteries, constructed with carbon fiber, charged overnight from the grid (preferably from domestically generated renewable energy), and running on E-85 cellulosic ethanol or biodiesel, could squeeze 1,000 mpg from the petroleum it uses.

Stunning indeed!

Seeing these bold and sweeping proposals, I’m reminded of one of the strangest things I’ve ever seen on television. It was a C-SPAN broadcast in 2005 of a hearing by the House Armed Services Committee on the proposed takeover of Unocal by China Oil. Woolsey testified before the committee on a panel that included prominent neo-con Frank Gaffney and Richard D’Amato of the U.S.-China Security Review Commission.

It was some of the most unflinching, candid talk about energy, peak oil, security, trade deficits and China that I’ve ever heard from anyone in the U.S. government. Their top recommendation? To heavily invest U.S. tax dollars in renewable energy production in China, because they have a chance to build their burgeoning economy on renewables from the beginning, whereas we are trapped by our fossil-fueled infrastructure and they will only compete with us for those diminishing resources.

Woolsey, Shultz, Schlesinger, Deutch and Gaffney are all veterans of government, each of them having spent several decades in a variety of key roles under both Republican and Democratic administrations. And all are old friends and colleagues of other prominent neo-con defense hawks such as Cheney, Wolfowitz and Perle.

I never thought I’d find myself aligned with the likes of them, but when it comes to peak oil, I’m allied with anybody who has real solutions to offer. And these solutions are real.

And if heavy hitters like these guys thought this way but kept quiet while they were still taking a paycheck from Uncle Sam, what other unknown allies might we have in government today? Might they not be emboldened by the recent GAO report admitting that peak oil is a serious threat?

Until next time,

- Chris

Here’s my latest article for Green Chip Stocks, about the proliferation of Renewable Portfolio Standards (RPS) all across the country. Almost half the states now have an RPS and that number is growing rapidly.

–C

Climb Aboard the RPS Express

By Chris Nelder

Thursday, April 12th, 2007

The renewable energy industry got a major shot in the arm over the last week, in a flurry of announcements about state renewable portfolio standards (RPS) for power generation. (An RPS specifies a percentage, or a fixed amount, of a state’s overall electrical power generation that must be derived from renewables by a certain date.)

Four states announced increased standards, and New Hampshire joined the game for the first time, becoming the 24th state–I think–to enact RPS. I say “I think” because state governments are moving to enact RPS so quickly that most of the information on the Web is already out of date, even if it’s just two months old–including the Department of Energy’s Web site. It’s hard to know exactly where we stand.

In fact it’s starting to look like a friendly game of one-upmanship.

Wisconsin Raises the Bar

Among states with RPS, Wisconsin used to bring up the rear with its measly little 2.2% by 2011 target. But on April 5, Governor Jim Doyle announced a bold new “Declaration of Energy Independence,” his plan to make Wisconsin a leader in energy independence and global warming mitigation.

“With our vast agricultural and forestry resources, our strong research institutions, and our strong manufacturing base, I want the Midwest to become the Saudi Arabia of renewable energy–with Wisconsin at the forefront,” Governor Doyle said. “The fact is, if an oilfield in Iran has to compete against a farmfield in Wisconsin, that’s a very good thing for the environment, for our economy, and for the world.”

Among the governor’s goals are:

• A “25 by 25″ goal (generating 25% from renewables by 2025). But this wasn’t your usual 25 by 25 goal–it applies to not only electricity, but transportation fuels! As far as I am aware, this is a first, and a very notable first at that, because as any reader of my columns knows, the most pressing problem we face due to peak oil is a shortfall of liquid fuels, not electricity.
• To take a 10% market share of renewable energy generation by 2030, bringing some $13.5 billion into Wisconsin’s economy every year. This is a very ambitious target.
• “To become a national leader in groundbreaking research that will make alternative energies more affordable and available to all.”

To help achieve those goals, the governor has created an Office of Energy Independence to serve as a single point of contact for all parties and to help round up federal incentive money for projects.

He also created a Task Force on Global Warming, a brain trust comprising members from industry, government, and environmental groups, and charged them to recommend a state plan of action to deal with global warming.

Further, he directed the Public Service Commission to explore technologies for capturing and sequestering carbon before it gets into the atmosphere.

To ensure they have buyers for all the excess renewable energy Wisconsin will generate, the governor launched the Midwest Renewable Energy Tracking System, a program for tracking and trading renewable energy credits with its neighbors (Minnesota, Iowa, South Dakota, North Dakota and Manitoba), so they can buy credits from Wisconsin in order to meet their own RPS.

All in all, it’s a breathtakingly ambitious program, and my hat is off to Governor Doyle!

New Hampshire Climbs Aboard

As if shamed into it, the day after the Wisconsin announcement the New Hampshire House of Representatives announced its new RPS: to generate 16 percent of new energy from renewable resources such as wind, solar, biomass and hydro by 2025. Combined with the state’s existing six percent of electricity from renewable resources, that will give New Hampshire nearly “25 by 25.”

Since the bill passed the House by an overwhelming margin of 253-37, it is expected to pass the New Hampshire Senate with a similar show of bipartisan support. No more will New Hampshire have the dubious distinction of being the only state in New England without RPS!

Colorado Doubles Up

On April 4, Colorado and New Mexico acted like twins in one of those old Doublemint Gum commercials, making the same moves in tandem. Both doubled up their RPS, raising their targets for investor-owned utilities to “20 by 20″ for electricity from renewable sources. Both states also went one step further, requiring for the first time that rural electric cooperatives achieve a 10%-by-2020 target as well.

The states also committed funds and directives to upgrading their electrical grids in order to support the additional generation.

The primary utility companies in both states said that they will meet both the old targets and the new targets ahead of schedule.

Colorado expects to profit handsomely from its commitment to renewables. Xcel Energy, its largest utility, said it will save customers about $400 million by substituting electric generation from natural gas with wind generation. And the new Colorado RPS is projected to add $1.9 billion to the state’s gross domestic product by 2020.

Nevada Greenlights Geothermal

On April 9, Nevada’s state Assembly threw a new twist into the RPS game by adding geothermal power to its list of energy technologies that qualify for state incentive money and qualifying geothermal plants to earn renewable energy credits.

Actually, I always found it baffling that geothermal wasn’t one of their approved renewable technologies from the beginning, as it’s arguably the cleanest and greenest of all energy technologies.

Another bill offers a 50% property tax break to geothermal companies who are willing to invest between half a million and $50 million in Nevada.

Nevada already has a “20 by 20″ RPS.

At the Tipping Point

Clearly, the states are taking the lead on climate change and domestic renewable energy generation.

With aggressive targets like these, renewable energy manufacturers have a guaranteed receptive market to go after. This is critical to attracting the hundreds of millions of dollars that will be needed to expand manufacturing capacity so that there will be enough generation equipment available to meet RPS.

“This is an indicator of the massive opinion shift we’ve seen over the past six months to a year,” said Jim Rubens of the Union of Concerned Scientists (UCS). “We’ve reached a tipping point now where Americans and legislators feel that we should be developing non-fossil sources of energy because of global warming, national security and economic reasons. I think Washington is taking notice.”

And it’s not just Washington. Wall Street is taking notice too. And that’s where we come in.

Until next time,

Chris