Folks,

In this week’s article for Energy and Capital, I finally get around to a detailed debunking of the “hydrogen economy.” Hydrogen has its uses, but I don’t believe it will ever be a significant part of the transportation infrastructure.

–C

Hydrogen Hype

Hydrogen and Fuel Cells are No Panacea

2007-07-27

By Chris Nelder

I’m going to make a prediction today: you will never drive a hydrogen fueled car.

Although hydrogen does indeed have some benefits in certain applications, it’s my task today to separate the reality of useful fuel cells from the hydrogen hype.

That may seem like a bold statement to you now, but by the end of this article, you’ll understand why.

Much has been made of the concept of a "hydrogen economy," because it offers the possibility of a portable fuel that can be generated from any number of sources and consumed without greenhouse gas emissions.

That’s a major win-win against the twin devils of peak oil and global warming, and as such it has attracted the support of an unlikely alliance including environmentalists, technologists, politicians and automakers.

It’s important to realize that hydrogen is not a fuel source; it’s an energy carrier. Hydrogen does not exist freely in the universe; it’s always bound to something else. So it takes an investment of energy to free hydrogen from its existing arrangement and make it available as a stored fuel.

The hydrogen fuel cycle goes like this: hydrogen is liberated from some source, compressed or liquefied for storage and transport, then "burned" in a device called a fuel cell, in which energy is captured from the hydrogen as it combines with oxygen from the air to form water. The captured energy can be used to power electric motors and generators, and the only emissions are pure water.

It’s an elegant vision, and has captured the imagination of such luminaries as Stan Ovshinsky, wunderkind founder of the advanced energy company Ovonics (Energy Conversion Devices, ticker symbol ENER). Proponents imagine a future wherein the original hydrogen is generated by the electrolysis of water, using electricity generated from renewable sources. Thus the hydrogen fuel cycle would begin and end with plain water, and would still offer portability, as well as a basis for a distributed clean, green energy cycle.

They envision homeowners generating their own renewable power (using solar, geothermal, micro-hydro, or whatever they’ve got) and turning it into hydrogen that they can store on-site, then consume in their hydrogen-powered cars or in the fuel cell stack that powers their home.

Unfortunately, the vision breaks down when we analyze the energy return on investment (EROI) of the process. According to the second law of thermodynamics, when energy is converted from one form into another, a little energy is lost in the process, usually as heat. Essentially, every time you convert energy, you pay a tax.

EROI: The Hydrogen Buzzkill

Calculating the EROI of a hydrogen fuel cycle requires a good many assumptions about how it will be generated, transported, stored and consumed. So different sets of assumptions can produce quite different results. In the aforementioned example of home-based hydrogen generation, where the hydrogen is generated and consumed in a single site, losses along the way are low. But when it is used in a vehicle, losses are much higher.

Let’s explore a typical calculation of the EROI of the hydrogen fuel cycle for cars:

1. Suppose we generate the hydrogen by the electrolysis of water. First we must"rectify" the grid’s
   AC electricity into DC, at a cost of about 2% to 3% of the energy contained in the hydrogen.
2. Now we can electrolyze the water, but that process is only about 70% efficient, so we lose another 30% there.
3. Now we have hydrogen gas, but it takes up a lot of space. We could compress it to around 10,000 psi to make it
   fit in reasonably sized tank, which costs another 15%. But even then, it would only have about one-fifth of the energy density of gasoline, and the pressurized tank needed to store it is very heavy, large and expensive. So if we wanted to use it in a vehicle, we would have to liquefy the hydrogen by cooling it down to about -253°C and keep it in a pressurized, insulated container instead. This process would cost another 30% to 40% of the energy in the hydrogen.
4. We lose some more during storage because hydrogen boils off above -253°C, so it’s very difficult to keep it from escaping its container. In vehicles, about 3% to 4% of the hydrogen boils off every day. And at least 10% of the hydrogen will boil off during delivery and storage.
5. Then we burn the hydrogen in a vehicle’s fuel cell at an efficiency of about 50% (for a proton membrane fuel cell stack).
6. And finally, we lose another 10% of the energy that makes it to the electric motors driving the wheels, because they are only about 90% efficient.

In the end, about 80% of the original energy generated in order to produce the hydrogen is lost, for an EROI of 0.25. Since it doesn’t pay to have an energy regime with an EROI of less than one, hydrogen cars seems a permanent improbability.

Carbon Emissions Persist

There’s another dirty little secret about hydrogen that is rarely mentioned by hydrogen hypers: the vast majority of hydrogen manufactured today is not made from the hydrolysis of water, because of the energy inputs needed. Instead, it’s made from natural gas, because it’s a ready and easily exploited feedstock for hydrogen production that can be transported more easily in liquid form. And that means that the hydrogen production does, in fact, produce carbon dioxide emissions, effectively nullifying the environmental benefits of fuel cells.

When natural gas is the feedstock, as it is today, the hydrogen fuel cycle amounts to going around the block to get to the back door, for nothing.

A final problem with the concept of a "hydrogen economy" is that we’d essentially need a whole new infrastructure for it, from "wells to wheels." Nothing in our current energy infrastructure is compatible with hydrogen.

A major reason for that is that it’s the smallest element, so it wants to escape from just about anything you use to contain it. Tanks, pipes, valves, and fittings all along the way leak, constantly. For another, it’s highly reactive, and makes metal brittle and prone to leakage. The storage and transport losses can be considerably worse than in the above example.

Starting Over

To build a "hydrogen economy," we would need to start over with everything. Hundreds of thousands of miles of pipeline, 90,000 new pumps at service stations, 210 million vehicles, everything.

Given what we know about the peak oil situation, one wonders just how much of the remaining fossil fuel energy would be needed to replace all that stuff. Let’s just say it would be a sizable chunk, a chunk we’d probably be better off using for food and shelter, and making solar panels and wind turbines.

And then there is the old chicken-and-egg problem: who’s going to pony up the hundreds of billions (actually probably closer to the low trillions) of dollars to build all that infrastructure until the cars are in the showroom, and who’s going to put hydrogen cars into a sufficient number of showrooms until the customer has easy access to a refueling station?

There are a few other alternative hydrogen infrastructures, but each has daunting challenges associated with it:

• Hydrogen could theoretically be produced on-board a vehicle from liquid methanol or gasoline, but it’s going to be difficult, inefficient, and expensive. Big R&D money needed for that direction.
• Hydrogen could be produced at local centers, but then we’re back to the aforementioned problems of storage, transfer, and the lack of infrastructure.
• It could also be produced right at the fueling station, from methane gas or from water via electrolysis, but the cost of building such stations will be enormous and the infrastructure needs would be great (either to ship natural gas to the stations or to upgrade the grid to handle all that extra electricity). And again, who’s going to make that investment before the cars are there?

Now, although it doesn’t make sense as a transportation solution, in the right applications hydrogen can be a useful storage system. For example, a large commercial building equipped with a solar system and a fuel cell stack could generate, store, and use much of its own power with minimal losses along the way and no emissions. In such applications, hydrogen is smart. Consequently, I believe the future is bright for companies that focus on that market segment.

But you will never drive a hydrogen car.

Until next time,

–Chris

Folks,

Here’s another excellent story by journalist Jason Leopold on the gaming of the electricity markets that caused the California energy crisis of 2001, and Cheney’s role in the cover-up.

“This story is based on a two-month investigation into Cheney’s energy task force; how the vice president pressured cabinet officials to conceal clear-cut evidence of market manipulation during California’s energy crisis, and how that subsequently led Cheney to exert executive privilege when lawmakers called on him to turn over documents related to his meetings with energy industry officials who helped draft the National Energy Policy and also gamed California’s power market.”

This is the most in-depth story in the whole affair that I have seen, and shows how the Davis coup that Ahnold rode to power was engineered directly from the White House…and what a spineless sap Davis was (and apparently still is) about the whole thing.

If this doesn’t make you madder than hell, read it again.

For this and so many other reasons, impeachment would be too good for these treasonous rats.

–C

    Cheney Suppressed Evidence in California Energy Crisis
    By Jason Leopold
    t r u t h o u t | Investigative Report

    Thursday 19 July 2007

In-depth investigation shows how Vice President
Dick Cheney pressured federal energy regulators to conceal evidence of widespread
market manipulation by energy companies during the California electricity crisis
in 2001.

    In March 2001, while California’s two largest utilities were teetering on the
brink of bankruptcy, and the state’s electricity crisis was spiraling out of
control, Vice President Dick Cheney summoned Curt Hebert, the chairman of the
Federal Energy Regulatory Commission (FERC), to his office next to the White
House for a hastily arranged meeting.

    Cheney had just been informed by his longtime friend Thomas Cruikshank, the
man who handpicked the vice president to succeed him at Halliburton in the mid-1990s,
that federal energy regulators were close to completing an investigation into
allegations that Tulsa, Oklahoma-based Williams Companies and AES Corporation
of Arlington, Virginia had created an artificial power shortage in California
in April and May of 2000 by shutting down a power plant for more than two weeks.

    Cruikshank was a member of Williams’s board of directors, and perhaps more
importantly, had been one of many energy industry insiders advising Cheney’s
energy task force on a wide-range of policy issues, including deregulation of
the nation’s electricity sector, that would benefit Williams financially.

    Cruikshank informed the vice president he had learned about the preliminary
findings of FERC’s investigation during a Williams board meeting earlier in
March 2001. FERC, Cruikshank told Cheney, was in possession of incriminating
audio tapes in which a Williams official and an AES power plant operator discussed
keeping a Southern California power plant offline so Williams could continue
to receive the $750 per megawatt hour premium for emergency power California’s
grid operator was forced to procure to keep the lights on in Southern California.

    AES was the operator of two power plants in Los Alamitos and Williams marketed
the electricity. The power plants were designated by the California Independent
System Operator (ISO), the agency that manages the state’s power grid, as crucial
in order to ensure a reliable flow of electricity in the Southern part of the
state. To stave off the potential for blackouts, the ISO was given the authority
to pay top dollar for power if the power plants operated by AES, as well as
power plants operated by other companies, were not in operation.

    California’s electricity crisis wreaked havoc on consumers in the state between
2000 and 2001. The crisis resulted in widespread rolling blackouts and forced
the state’s largest utility, Pacific Gas & Electric, into bankruptcy. California
was the first state in the nation to deregulate its power market in an effort
to provide consumers with cheaper electricity and the opportunity to choose
their own power provider. The results have since proved disastrous. The experiment
has cost the state more than $30 billion.

    According to a copy of the March 2001 Williams transcript, Rhonda Morgan, a
Williams official, told an AES power plant operator “it wouldn’t hurt Williams’s
feelings” if the power plant that was down for repairs was kept offline
for an extended period of time so the company could continue to be paid the
“premium” for its emergency energy supplies from the ISO. In a separate
conversation with Eric Pendergraft, a senior AES official, Morgan said, “I
don’t wanna do something underhanded, but if there’s work you can continue to
do …”

    Pendergraft responded to Morgan, saying, “I understand. You don’t have
to talk anymore.”

    The collusion between Williams and AES allowed Williams to earn an extra $10
million over a period of 15 days and set in motion a series of events that resulted
in the California power crisis between 2000 and 2001, a crisis that was based
almost entirely on manipulative practices by energy companies.

    This story is based on a two-month investigation into Cheney’s energy task
force; how the vice president pressured cabinet officials to conceal clear-cut
evidence of market manipulation during California’s energy crisis, and how that
subsequently led Cheney to exert executive privilege when lawmakers called on
him to turn over documents related to his meetings with energy industry officials
who helped draft the National Energy Policy and also gamed California’s power
market. Truthout spoke with more than a dozen former officials from the Energy
Department and FERC as well as current and former energy industry executives
all of whom were involved in personal discussions with Cheney relating to the
National Energy Policy.

    In addition to Hebert, the FERC chairman, the other senior cabinet officials
who attended the March 2001 meeting in Cheney’s office included Andrew Lundquist,
the former executive director of Cheney’s energy task force, now an energy industry
lobbyist, White House political adviser Karl Rove, President Bush’s chief of
staff Andrew Card, and Energy Secretary Spencer Abraham, according to former
Energy Department and FERC officials who spoke on condition of anonymity because
they said they were not authorized to disclose details of their secret meetings
with Cheney or information about the energy task force meetings.

    Joe Allbaugh, another adviser to the vice president’s energy task force,
had heard of a similar situation involving an energy company his wife was involved
with. Allbaugh told Cheney that Reliant Energy also shut down a power plant
in California in June 2000. That caused wholesale power prices in California
to reach levels that exceeded “just and reasonable” rates, a violation
of the Federal Power Act. FERC apparently had audio tapes of Reliant employees
discussing the scheme.

    ”[We] started out Monday losing $3 million … So, then we decided as
a group that we were going to make it back up, so we turned like about almost
every power plant off. It worked. Prices went back up. Made back about $4 million,
actually more than that, $5 million,” the Reliant trader says in a tape-recorded
conversation on June 23, 2000.

    Allbaugh’s wife, Dianne Allbaugh, was a lobbyist for Reliant, TXU and Entergy,
who was paid at least $20,000 a month by those corporations, and told her husband
what she had learned from executives at Reliant. Allbaugh then informed Cheney.

    Cruikshank and Allbaugh did not return dozens of calls or respond to emails
seeking comment. Devona Greenstone, a spokeswoman for Hebert, was sent a detailed
list of questions for Hebert to answer and was given more than one week to respond
to the queries. But neither Greenstone nor the former FERC chairman replied
despite numerous follow-up phone calls and emails sent to Hebert and Greenstone.
A spokesperson for Cheney also failed to return 16 messages left for comment
over the past month.

    If You Were “King” or “Il Duce”?

    Joseph Kelliher, a former Energy Department official, had been soliciting advice
from Williams, Reliant, El Paso, Enron and other energy companies on natural
gas issues on behalf of Cheney, another area those companies were accused of
gaming, particularly in California.

    In a March 10, 2001 email, just a week or so after Cheney was briefed by Cruikshank
about the Williams scheme, Kelliher emailed energy lobbyist Dana Contratto,
asking Contratto if he was “King or “Il Duce, what would you include
in a national energy policy, especially with respect to natural gas issues?”,
according to energy task force documents.

    Contratto responded with a three-page list of ideas, many of which were included
in the final version of the energy policy.

    On another occasion, Kelliher sought out Stephen Craig Sayle, an Enron Corp.
lobbyist, to make similar recommendations. Sayle, former counsel for the House
Commerce Committee, sent Kelliher Enron’s “dream list.” The list included
a recommendation that the administration commit to market-based emissions trading,
which was also used in administration’s National Energy Policy.

    Sayle wrote Kelliher about the energy policy, saying, “a multi-pollutant
regulatory strategy should be estimated for the power generation sector including:
Gradually phased in [mercury, nitrogen oxides and sulfur dioxide emissions]
reductions; reform/replacement of NSR; use of market-based/emission trading
programs; inclusion of both existing and new plants and equal treatment for
both. The last bullet is the critical one to ensure that: a) we encourage the
new generation that is required; b) we ensure that the new technologies developed
through DOE programs can come into the market.

    ”Obviously, this is a dream list,” Sayle said in the March 23, 2001
email he sent to Kelliher. “Not all will be done. But perhaps some of these
ideas could be floated and adopted.”

    Sayle also provided Kelliher with a PowerPoint presentation on behalf of his
other energy clients in the so-called Clean Power Group, a consortium made up
of a handful of the country’s biggest energy companies, including NiSource Inc.,
Calpine Corp., Trigen Energy Corp. and El Paso Corp, whose mission, according
to the group’s web site, is to “streamline requirements under the Clean
Air Act for electric generating facilities while at the same time making major
reductions in air emissions.”

    The PowerPoint presentation, A Comprehensive Multi-Pollutant Emission Control
Strategy for Power Generation, summarized the Clean Power Group’s support of
a “cap and trade” method in addressing emissions of mercury, nitrogen
oxides and sulfur dioxide from power plants, but included a proposal for a voluntary
cap on carbon dioxide. The Clean Power Group stood to benefit from the initiative
it urged Kelliher to get the White House to adopt in that the companies could
release more emissions under its proposed plan than under the more restrictive
rules the Clinton administration had put in place.

    After receiving Sayle’s email and supporting material, Kelliher recommended
that President Bush “direct the Administrator of the Environmental Protection
Agency (EPA) to propose multi-pollutant legislation that would establish a flexible,
market-based program to significantly reduce and cap emissions; provide regulatory
certainty to allow utilities to make modifications to their plants without fear
of new litigation; provide market based incentives, such as emissions-trading
credits to help achieve the required reductions,” all of which the president
approved and was eventually incorporated into the National Energy Policy.

    In fact, President Bush’s “Clear Skies” initiative consists of many
of the bullet points laid out months earlier in Sayle’s email to Kelliher.

    In addition to Kelliher’s correspondence with Sayle, he also met with oil and
gas industry lobbyists who helped draft language that Kelliher passed on directly
to the White House. Two months later, the president issued executive orders
nearly identical to those Kelliher received from the lobbyists months earlier,
according to energy task force documents.

    Kelliher now chairs FERC, the agency that is entrusted with keeping a close
eye on wholesale energy markets, ensuring that companies like Williams and Reliant
refrain from engaging in the type of manipulative practices they were caught
doing during the spring and summer of 2000 in California.

    Cheney Orders FERC to Seal Evidence

    But the documentary evidence of widespread market manipulation that FERC obtained
in March 2001, while Kelliher was soliciting energy industry officials to assist
in writing the National Energy Policy, and when Cruikshank and Allbaugh disclosed
to the vice president the manipulative tactics Williams and Reliant had engaged
in, was sealed by FERC on direct orders by Cheney because it would have been
a political nightmare for the Bush administration and would have derailed a
recommendation of one of the cornerstones of the vice president’s National Energy
Policy: deregulation, and perhaps scuttle the policy altogether if evidence
about the energy companies behavior in California was made public, according
to half-a-dozen former FERC officials and former Energy Department officials.

    So in May 2001, just days before Cheney unveiled his long-awaited National
Energy Policy, FERC entered into confidential settlements with Williams in which
the company forfeited $8 million it was owed by California’s grid operator for
power Williams sold into the marketplace at inflated prices. Williams did not
admit any guilt for the power plant shutdown and, on orders from Cheney, FERC
agreed to keep details of the settlement sealed. FERC later entered into a similar
settlement with Reliant. The company agreed to forfeit $13.8 million it was
owed by California’s grid operator, did not admit to any wrongdoing, and FERC
kept the details of the settlement confidential.

    Moreover, FERC kept California officials in the dark about the nature of the
state’s claims that its wholesale electricity market was being manipulated.
Hebert is now the vice president of external affairs for Entergy in New Orleans.

    For former Governor Gray Davis, the illegal behavior by energy companies like
Williams that federal energy regulators discovered, then covered up, during
a time when the former governor had said publicly he believed such behavior
had taken place, is beyond disturbing.

    Instead of protecting the interests of consumers, FERC’s primary job, Hebert
toed the White House line and together with Cheney, Hebert had come out publicly
to say that Davis should immediately order the California Public Utilities Commission
to relax environmental restrictions on the permitting process related to power
plant construction and raise electricity rates to keep utilities Pacific Gas
& Electric and Southern California Edison from becoming insolvent. The insolvency
issue was due to the fact that the utilities were paying higher prices for power
than it was legally allowed to charge its customers under the state’s deregulation
law.

    In an interview, Davis, now an attorney with Loeb & Loeb in Century City,
California, said he never saw the evidence FERC had obtained implicating Williams
in shutting down power plants in the state.

    ”If I had hard evidence that this was happening, I would have stood out
in front of the Congress until they did something,” Davis said. “I
thought there was something rotten going on but I never believed that these
energy companies would outright steal from us.”

    ”This was an absolute outrage and was based on pure greed,” Davis
added. “I clearly didn’t know this was happening with Williams. I think
FERC perpetrated a fraud on the American public and California consumers by
sealing the findings of this investigation while I was out there saying that
this type of manipulation was happening. I think that if the results of this
investigation were made public in March 2001, when FERC knew this was taking
place, it would have stopped energy deregulation in America in its tracks. This
admission in effect by Williams would have been the death knell for energy deregulation.”

    Davis had a tumultuous relationship with the federal agency that appeared to
be based on partisan politics. Just three months before Cruikshank and Allbaugh
provided Cheney with details that the energy companies they were affiliated
with had gouged California consumers and violated the state’s market rules,
the vice president, and FERC’s chairman, railed against Davis, blaming the energy
crisis on him and said the governor’s claims that energy companies were acting
like a “cartel” were baseless.

    ”The basic problem in California was caused by Californians,” Cheney
said, adding that he would resist calls by lawmakers to allow price caps to
be placed on wholesale energy prices in the Western United States.

    Even after Hebert had secured evidence showing that Williams manipulated the
power market, he continued to pin the blame for skyrocketing power prices squarely
on the shoulders of Davis and the state’s Democratic leaders.

    ”I went to FERC and laid out our problems and was promised they would
look into it. Nothing happened,” Davis said. “My experience with FERC
during the energy crisis was wholly unsatisfactory. I did not ever feel that
they believed their job was to act in the public interest. I always believed
they were acting in the interests of the energy companies. They operated as
if they were a wholly owned subsidiary of the energy companies.”

    Hebert, however, fell out favor with the Bush administration when he privately
opposed a recommendation by Ken Lay, made to Cheney, to open up the country’s
transmission lines to corporations such as Enron. Lay requested Cheney and Bush
replace Hebert, which they did in the summer of 2001.

    PG&E Files for Bankruptcy; Rove Orchestrates Political Spin Campaign

    In a televised speech to California residents on April 5, 2001, Davis resisted
Cheney’s and Hebert’s calls to increase electricity rates for average consumers
to keep the state’s public utilities afloat, opting instead to increase electricity
rates of the state’s largest power customers such as manufacturing plants. The
next morning PG&E filed for Chapter 11 bankruptcy protection.

    Davis publicly railed against the Bush administration’s refusal to launch an
investigation into wholesale energy companies trading practices, and its position
on price caps. Davis’s rhetoric started to impact the Bush administration’s
approval ratings. Rove, working closely with Cheney, entered into discussions
on how the White House would respond to criticism by Davis that the Bush administration
was turning its back on California.

    ”Karl [Rove] started to talk about using the resources of former Republican
National Committee staffers to put together an attack campaign against Davis,
and pin the power problems on the governor and his administration,” according
to one former high-level Energy Department official who was privy to the conversation
between Rove and Cheney.

    Rove enlisted the help of former RNC staffers Ed Gillespie, then a lobbyist
who was working for Enron and other energy companies, and Scott Reed, who used
to work for the RNC and was the former manager of Robert Dole’s presidential
campaign, to start devising a strategy to attack Davis and lead people to believe
that the energy crisis was entirely his fault. Gillespie was recently tapped
by President Bush to replace Dan Bartlett as White House counselor.

    Reed and Gillespie, who was doing double duty advising Cheney’s energy task
force on behalf of Enron, advised Rove and the vice president that the PG&E
bankruptcy left Davis vulnerable and the best course of action for the White
House was to take advantage of Davis’s vulnerability by stating that Davis single-handedly,
in refusing to raise electricity rates, caused one of the largest bankruptcies
in American history. Gillespie went a step further, according to Energy Department
officials familiar with his conversations with Rove and Cheney, by suggesting
that the White House start courting Republican gubernatorial candidates to replace
Davis in the 2002 election.

    At the White House in April 2001, Rove met with Brad Freeman, President Bush’s
California finance chairman during the 2000 presidential campaign, and Gerald
Parsky, an investment banker, who was Bush’s top adviser in California. The
discussion centered on Parsky and Freeman’s interest in courting actor Arnold
Schwarzenegger to discuss his bid for governor in 2002.

    ”That would be nice,” Rove said about the possibility of Schwarzenegger,
a Republican, to replace Davis as governor, according to people who were briefed
about the meeting. “That would be really, really nice.”

    Davis said he could see now see how the energy crisis created a political opportunity
for the White House in California.

    ”In retrospect I could see how that happened,” Davis said. “There’s
no question that the energy companies saw me as an adversary when I wouldn’t
buckle under their demands. I was vulnerable and the [energy companies and the
White House] took advantage of it. This crisis took place in the early days
of the Bush administration. I figured these guys are too busy picking out furniture
for their offices. I didn’t think they [the Bush administration] were spending
their days in office involved in some full-scale conspiracy. But it turns out
they were.”

    Cheney Takes Aim at Davis

    Meanwhile, Cheney continued to meet with energy company officials who were
instrumental in drafting key aspects of the National Energy Policy. At the same
time, the usually reclusive vice president was granting interviews to numerous
reporters discussing his take on the California energy crisis which continued
to spiral out of control.

    In May 2001, the PBS news program “Frontline” interviewed Cheney
who was asked by a correspondent whether energy companies were acting like a
cartel and using manipulative tactics to cause electricity prices to spike in
California.

    ”No,” Cheney said during the “Frontline” interview, even
though he was personally briefed about energy companies manipulating the state.
“The problem you had in California was caused by a combination of things
- an unwise regulatory scheme, because they didn’t really deregulate. Now they’re
trapped from unwise regulatory schemes, plus, not having addressed the supply
side of the issue. They’ve obviously created major problems for themselves and
bankrupted PG&E in the process.”

    The same month, May 2001, Davis met with Bush at a Century City hotel, not
far from the offices he now works at as an attorney. He pleaded with Bush one
last time to put price controls in place. Bush refused.

    Behind the scenes, while Bush and Davis discussed the state of the energy crisis,
Gillespie was emailing Enron officials on the status of Cheney’s energy policy.
He alerted Enron executives to the exact language that would appear on one of
the hot-button issues revolving around price caps in California and the west
and allowing energy companies free access to the nation’s transmission lines.

    ”I believe this is the exact language that will appear under the ‘energy
supply’ section of the report,” Gillespie wrote. “Recommends that
the President encourage the FERC to use its existing statutory authority to
promote competition and encourage investment in transmission facilities,”
which Enron was lobbying heavily for. “Please keep this under wraps. We
do not want to circulate this beyond the folks listed on this email. Please
let me know any concerns. As we have known for several weeks, the report is
not as explicit as we would want, but the White House, vice president, and [Department
of Energy] have repeatedly but verbally assured us that they are making clear
to FERC exactly what this means.”

    Another email Gillespie forwarded Enron officials, dated May 17, 2001, came
from Cheney’s spokeswoman, Juleanna Glover, who told Gillespie “you’re
really relied upon around here … hear your name all the time in connection
w. tough issues, but you know that already.”

    On May 21, 2001, five days after unveiling his energy policy, Cheney told Tim
Russert on “Meet the Press” that Davis was to blame for the energy
issues in the state.

    ”They knew over a year ago they had a problem, and Gray Davis refused
to address that problem,” Cheney said. “[They] kept putting it off
and putting it off and putting it off, with the notion that somehow price caps
could be maintained. Now, today, where are they in California?”

    GOP Front Group Attacks Gray Davis, Shields Bush, Cheney

    At the same time, Reed informed Rove and Cheney that his nonprofit, the American
Taxpayers Alliance, a Republican front organization, would begin to air a series
of scathing radio commercials taking aim at Davis’s failure to tame the energy
crisis in June 2001. The ads, Reed said, were aimed to shift attention away
from Republicans in Washington and “back to Sacramento where it belongs.”
Reed added that the ads would leave Davis “bleeding like a stuck pig.”

    The ads, which began to air in June 2001, did in fact make an impact:

    “He’s pointing fingers and blaming others. Gray Davis says he’s
not responsible for California’s energy problems; after all, the Public Utilities
Commission blocked long-term cost-saving contracts for electricity. But who
runs the PUC? The people Gray Davis appointed - Loretta Lynch and other Davis
appointees who left us powerless. That’s why newspapers say he just ignored
all the warning signals and turned a problem into a crisis. Grayouts on Gray
Davis.”

    The ads and the negative press Davis received helped set in motion a chain
of events that would lead to a historic recall campaign and put Schwarzenegger
in office.

    What the public didn’t know, however, is that Cheney and Rove recommended that
Reed approach Reliant Energy, the firm that one of Cheney’s energy task force
advisers, Joseph Allbaugh, was affiliated with via his wife’s lobbying for the
company, to fund the radio spots, according to former Reliant executives involved
in the matter. Reliant donated nearly $2 million of Reed’s $3.2 annual budget,
yet the company only reported spending a total of $340,000 on government lobbying
in apparent violation of the law, according to the company’s public records.

    Gillespie also launched a public relations campaign against Davis. He took
ads out in print publications attacking Davis. The ads were paid for by Gillespie’s
21st Century Energy Project, which he formed in close coordination with Karl
Rove less than a month after the National Energy Policy was released in May
2001, according to former Enron executives who worked closely with Gillespie.
Enron funneled at least $75,000 to Gillespie to pay for the ads through Grover
Norquist’s Americans for Tax Reform, according to documents obtained by Truthout.

    Russ Schriefer, who worked with Gillespie on Bush’s presidential campaign
and formed Mosaic Media with Quinn Gillespie in February 2001 to produce advocacy
ads for Republicans, wrote the Davis ads. The ads aired on ABC, Fox and CNN.

    Norquist, a longtime friend of Cheney’s, was personally tapped by Rove to assist
Gillespie with the ad campaign. Norquist may be best known for his close relationship
with disgraced lobbyist Jack Abramoff. One of Abramoff’s clients, Raul Garza,
chief of the Kickapoo Traditional Tribe of Texas, donated $25,000 to Norquist’s
organization in order to obtain an invitation to a reception with President
Bush on May 9, 2001. Norquist and Abramoff were also in attendance and a photograph
of Garza standing alongside Bush with Abramoff in the background was kept from
public view when the Abramoff scandal blew up. Bush had denied publicly that
he ever met Abramoff.

    At the time, Gillespie said the ads were necessary “because Davis put
all his time and energy into trying to shift responsibility and President Bush
spent all his time and energy trying to accept responsibility. The president
is trying to change the tone, but others of us have to point out that the crisis
developed on the watch of Governor Davis and President Clinton.”

    Executive Privilege

    Immediately following reports that Cheney relied upon the recommendations of
400 energy industry executives to draft the National Energy Policy, lawmakers
began to demand that the vice president turn over documents regarding his task
force meetings to Congress. The vice president vehemently refused.

    With White House Counsel Alberto Gonzales weighing in on the issue, the administration
exerted “executive privilege” as the reason it refused to turn over
task force documents to Democratic lawmakers. The issue reached the Supreme
Court that ruled in Cheney’s favor. As Attorney General, Gonzales still refuses
to publicly release audiotapes from 2000 and 2001 in which other energy companies
were also found to have discussed ways in which to manipulate the California
energy market. Some of the heads of those companies implicated in the crisis
also provided Cheney with input on the National Energy Policy.

    In 2004, Reliant became the first energy company that was indicted for its
role in manufacturing the California energy crisis. A year later, the company
refunded California $453 million.

    Last month, two power companies agreed to pay California $84 million to settle
charges stemming from the 2000-2001 California energy crisis.

    PacifiCorp, a unit of MidAmerican Energy Holdings Co., paid the state $27.9
million to resolve claims that it manipulated the California and Pacific Northwest
electricity markets in 2000 and 2001. MidAmerican Energy Holdings is a subsidiary
of Warren Buffet’s Berkshire Hathaway Inc.

    In a second case, a subsidiary of Houston-based El Paso Corp. paid California
$56 million.

    Joseph Kelliher, the chairman of FERC, and the man who, on behalf of Cheney
in March 2001, lobbied these very companies to help write the National Energy
Policy, helped negotiate the settlements.

    Davis feels vindicated in light of the refunds paid to California consumers,
which, to date, have totaled about $6 billion. He said that he believes he would
likely never have faced a recall if FERC publicly released details of its investigation
into Williams in March 2001. But despite what he knows now Davis doesn’t hold
a grudge against the individuals responsible for using the energy crisis to
have him recalled.

    ”No one ever said life is fair,” Davis said.

Folks,

In this week’s article for Energy and Capital, I address the buzz du jour: the new forecast on oil supply and demand from the National Petroleum Council. They’re still not acknowledging reality, but they seem to be getting closer.

–C

Peak Oil By Any Other Name

2007-07-20

By Chris Nelder

With apologies to William Shakespeare:

What’s in a name? That which we call a peak

By any other name would hurt as much.

This week, the National Petroleum Council (NPC) finally coughed up a report that we’ve been awaiting for two years, ever since U.S. Energy Secretary Samuel Bodman asked them to determine "what the future holds for global oil and gas supply" and whether "incremental supplies can be brought on-line, on-time and at a reasonable price that does not jeopardize economic growth."

Translation: the Energy Secretary was wise to peak oil, and asked the oil industry to tell him where we really stand. After all, if it goes down on his watch, he’s going to have one of the worst jobs on earth.

If he has any idea at all what the truth about global oil supply really is at this point, then I think he’ll be as disappointed in the result as the rest of us "walking worried" are.

The report was titled "Facing the Hard Truths about Energy," but it could just as easily have been called "Dodging the Hard Truths about Energy."

ASPO’s Randy Udall hit the nail on the head: "Charging the NPC with analyzing oil and gas is akin to asking the tobacco industry to forecast lung cancer."

The comparison is fair. The NPC report was chaired by Lee Raymond, former ExxonMobil CEO, and included over 350 participants, primarily from the energy industry, including such luminaries as the media’s favorite wild-eyed optimist, Daniel Yergin of Cambridge Energy Research Associates (CERA). We should expect nothing less than a positive spin on the energy business from the likes of these fine gentlemen.

The 422-page report claimed to be "a comprehensive study considering the future of oil and natural gas to 2030 in the context of the global energy system" and in fact, contained some good work. It’s worth a read and available on their Web site. And in all fairness, it did concede a couple of key points:

• "It is a hard truth that the global supply of oil and natural gas from the conventional sources relied upon historically is
  unlikely to meet projected 50% to 60% growth in demand over the next 25 years."
• "The concept of energy independence is not realistic in the foreseeable future,
  whereas U.S. energy security can be enhanced by moderating demand, expanding and diversifying domestic
  energy supplies, and strengthening global energy trade and investment. There can be no U.S. energy security
  without global energy security."
• "The United States must moderate the growing demand for energy by increasing efficiency of transportation,
  residential, commercial, and industrial uses."
• "The world is not running out of energy resources, but there are accumulating risks to continuing expansion
  of oil and natural gas production from the conventional sources relied upon historically. These risks create
  significant challenges to meeting projected total energy demand."

It’s a start. At least they admitted that there are serious supply challenges between now and 2030. The report also addressed the need for reducing demand, carbon capture and sequestration, and expanded production of renewables and other energy alternatives, as well as the demand-side challenges such as population growth and the red-hot economies of Asia.

It also mentions "The Peak Oil Debate," and for once, it represents the peaker case fairly accurately. The authors reviewed a range of global production forecasts, and noted that there was a significant gap between the ASPO forecast on the low side, the EIA reference case on the high side, and the forecasts of the international oil companies in between.

But like the IEA, the NPC seems to be bending over backwards in order to avoid saying "peak oil," by trying to couch it in terms of "accumulating risks" and "challenges" and parsing out the factors that are "conventional" or "above-ground."

The Peak By Any Other Name

Can we cut the crap?

When we reach the point where production stops increasing-as appears to be the case somewhere between last year and 2012-it’s the peak. They can call it Ray, they can call it Jay, but it’s still the peak.

Their belief that the many "challenges" can be overcome is based in the same old dogma, and is utterly unsupported by the facts on the ground. Factors pointing to an imminent peak, they say, "are countered by expectations for new discoveries, enhanced recovery techniques, advancing technology for producing oil from unconventional sources, and reassessments and revisions of know[n] resources."

Here’s their scenario:

What’s wrong with this picture?

Let’s take their assertions point by point:

"expectations for new discoveries": The NPC forecasts that production will increase from 86 million barrels/day today to over 115 mmb/day by 2030. Based on all the numbers we have seen, that’s simply not tenable, and even the EIA and IEA have said so.

The NPC production scenario for "known reserves" agrees with the ASPO model, as well as with the IEA forecast, with a peak around 2012. But after that, the NPC model takes a hard turn into fantasy land.

Worldwide discoveries have been on the decline for over 20 years. A sudden reversal of this trend to discover increasingly more oil ("exploration potential") after 2015 is pure fantasy. And as these oil industry experts know full well, it typically takes an average of seven years between discovery and first production of an oil field, so the fields that they expect to come online after the 2012 conventional peak should have already been discovered!

Like other forecasters, NPC expects that new supply will be provided mainly by the OPEC countries of Saudi Arabia, Kuwait, Iraq, Iran and the United Arab Emirates. Where they diverge is in the scale: the NPC believes that those countries will actually double their exports. But exports from those countries have been decreasing in the last few years, as they struggle to maintain current production levels while their domestic consumption rises. The top 15 exporters in the world account for fully 84% of the total oil exported worldwide, and production in half of them is either flat or in decline. Very few industry analysts believe that a doubling of OPEC exports is even possible.

"enhanced recovery techniques": The historical experience of using enhanced oil recovery (EOR) techniques does not affect the date of the peak, nor the peak rate of production. It typically just extends the "tail" on the back end of the curve and increases the ultimately recoverable total. This graph seems to hugely misrepresent the role of EOR.

"advancing technology for producing oil from unconventional sources":  The sources they refer to are oil shale, tar sands and unconventional natural gas production. As I have written about previously, oil shale is so unlikely to ever be a major player that I have written it off entirely. Tar sands production might reach 5 mbpd by 2030, but then it won’t be able to grow much more, and that would barely compensate for the decline of Canada’s conventional oil production. And while unconventional natural gas certainly holds significant potential, by 2030 both natural gas and oil will be in such tight supply that it won’t make any sense to think about one compensating for the other.

"reassessments and revisions of known resources":  As any peak oil student knows, this is a very sketchy area. The major revisions that have been made over the last thirty years appear to be more politically driven than anything, so all good models of oil peaking, like the ASPOs, rely on backdated reserve estimates which have proven themselves to be quite reliable. The honest revisions in the future are guaranteed to be marginal.

Remarking on the forecast that we’ll get to 120 million barrels per day of production by 2030, Matthew Simmons, the world’s top oil investment banker, said, "We don’t have any idea where those reserves are going to come from or how we are going to get them out of the ground. The odds of this ever happening are zero."

Simmons was reportedly disgusted with the report, and threatened to leave the council over it. "We should be preparing for a time when, in 10, 15 or 20 years, oil production is likely to be 40 million barrels a day to 60 million barrels a day, not 120 million," he said.

The Real Gulf War

Meanwhile, last week, the IEA had its come-to-Jesus moment, admitting that a global supply shortfall in oil is looming dead ahead:

Despite four years of high oil prices, this report sees increasing market tightness beyond 2010…It is possible that the supply crunch could be deferred — but not by much.

So the IEA (and the ASPO) see a supply crunch within three years, and yet the NPC sees smooth sailing for a full decade longer. It bears repeating: just three weeks ago, IEA chief economist Fatih Birol said in an interview with French newspaper Le Monde, "[I]f Iraqi production does not rise exponentially by 2015, we have a very big problem, even if Saudi Arabia fulfills all its promises. The numbers are very simple, there’s no need to be an expert."

At this point, we can only speculate as to the reasons for the reality "gulf war" between the sober, 150-odd nonaligned energy analysts of the IEA, and the 175 members of the industry group NPC.

But it doesn’t take a huge stretch of the imagination.

These Big Oil insiders all know what’s up with peak oil. They’re simply digging in their heels and denying it as long as possible in order to extract the highest possible value from their investments, plain and simple. We don’t hire them to tell the simple truth, and they make no promises of it. "Ask me no questions and I’ll tell you no lies" is their motto, and their obligations, as they are fond of telling us, are strictly to their shareholders.

The oil industry can no more wed itself to the truth than poor Romeo could his Juliet.

So by the time the NPC comes around to making its confession, they’ll have one more sin to add to the list: deliberately misleading the nation into squandering precious time that we could have spent averting the pain and chaos that peak oil will bring.

In the meantime, we can count on staying the course for at least a few more months, as oil rises up, up and away, and energy stocks rise right along with them. If you haven’t been playing the solar stocks in the Green Chip Stocks portfolio, you’ve been missing out on some serious fun this last week, where we’ve been bagging 20-30% gains in a single day!

So party on, NPC. We’ve got your number. But we’ll ride your coattails to profit until the day you decide to come clean and call a peak a peak.

Until next time,

–Chris

Folks,

The IEA’s new report last week had some very stark warnings about the tight balance between oil supply and demand, and projected a possible shortfall of supply by 2010. The report generated a lot of buzz around the world so I felt like I had to comment on it. Here’s my take, for the Energy and Capital newsletter.

–C

The IEA’S Come-to-Jesus Moment

2007-07-13

By Chris Nelder

Q: What’s the difference between an oil analyst and a used car salesman?

A: The used car salesman knows when he’s lying.

That’s a variation on the old joke about computer salesmen, but it can apply just as well to oil market analysts–such as the roughly 150 energy analysts and statisticians who work for the International Energy Association (IEA), the Paris-based agency that advises 26 OECD nations on energy.

On Monday this week, they had what I would consider a "come-to-Jesus moment," walking before the whole world to the front of the tent, admitting their unworthiness and publicly confessing their sins.

The confession was in their bombshell "Medium Term Oil Market Report," which looks at the global oil market over the next five years. And it was stark:

Despite four years of high oil prices, this report sees increasing market tightness beyond 2010 . . . It is possible that the supply crunch could be deferred–but not by much.

That was enough to set blogs and presses and email systems afire the world over. I was deluged with emails and phone calls about it. So I checked it out.

It’s a decent piece of work, 82 pages with lots of good charts and data. It was also a welcome break from the delusional projections that the IEA has made for its entire 30-year existence, consistently predicting that supply will magically meet whatever the demand was projected to be.

Because for the first time, the IEA admitted that they have some doubts about oil supply keeping up with demand.

Their chart really says it all:

Essentially, the report’s conclusions boil down to this:

1. Demand will rise at about the rate of 2.2% a year through 2012, primarily driven by the developing world’s consumption, which is rising three times as fast as in the OECD. Transportation fuels will be the largest source of demand, by far.
2. Non-OPEC production is expected to increase from 50 mbpd today to 52.5 mbpd by 2012, but the additional production will be mainly from unconventional sources such as natural gas liquids, tar sands production, extra heavy oil, coal-to-liquids, even biofuels.
3. OPEC spare capacity will increase slightly from 2.5 mbpd in 2007 to a high of 3.4 mbpd in 2009, then decline to just 1.5 mbpd (1.6% of demand) by 2012. Almost all of it will have to come from Saudi Arabia.
4. Depletion rates are worrisome: "Net oilfield decline rates average 4.6% annually for non-OPEC and 3.2% per year for OPEC crude. Aggregate levels mask much sharper declines in a 15-20% per annum range for mature producing areas and for many recent deepwater developments. All told, the forecast suggests the industry needs to generate 3.0 mb/d of new supply each year just to offset decline. Notwithstanding, above-ground supply risks are seen exceeding below-ground risks in the medium term."
5. Rising project costs, shortages of labor and materials, and geopolitical problems will continue to plague world oil production, and conspire to create uncertainty and delay projects, so supply could fall short of demand by 2010. And shortages of natural gas are even more imminent.

As Steve Andrews of the Association for the Study of Peak Oil (ASPO) described the report on a CNBC appearance this week, we have a "three D problem": demand, depletion, and delays.

I also hasten to point out that the ASPO’s estimate for global peak has been set at 2011 since March, having stood at 2010 since 2005. So I view this is a somewhat of a return to the fold of the truthful for the IEA.

The bottom line? IEA says that global demand will reach 95 mbpd by 2012, up from 86 mbpd today, but they don’t see how we can get there, and neither do observers I trust–people like T. Boone Pickens, Matthew Simmons and the geologists of the ASPO. We might not increase beyond where we already are, or we might manage to produce as much as 90-91 mbpd, but it’s not likely, and in any case we’ll probably be at the ultimate peak by 2010-2011.

Oh, and by the way, Simmons also said this week that there’s a "real risk" that gas pumps could run dry somewhere in this country this summer, due to our limited refining capacity (another factor mentioned in the IEA report).

It seems confirmed that we’ll have shortages starting now, with the big crunch–and skyrocketing oil prices–just two to four years from now.

Said Lawrence Eagles, head of the IEA’s oil industry and markets division: "The results of our analysis are quite strong. Either we need to have more supplies coming on stream or we need to have lower demand growth."

The IEA even acknowledged the peak of non-OPEC conventional oil, although they couldn’t quite bring themselves to say it:

"The concept of peak oil production and its timing are emotive subjects which raise intense debate. Much rests on the definition of which segment of global oil production is deemed to be at or approaching peak. Certainly our forecast suggests that the non-OPEC, conventional crude component of global production appears, for now, to have reached an effective plateau, rather than a peak."

You say potato . . .

Redefining conventional crude oil, by including sources like tar sands and coal-to-liquids, is really bending over backwards in order to call the top a "plateau" instead of a "peak."

In the end, they seemed to really try to put a happy face on their otherwise dire report:

Finally, we note that focusing on non-OPEC crude alone is a rather selective way of considering the sustainability of global oil production. Peak or plateau production is frequently taken as shorthand for impending resource exhaustion. While hydrocarbon resources are finite, nonetheless issues of access to reserves, prevailing investment regime and availability of upstream infrastructure and capital seem greater barriers to medium-term growth than limits to the resource base itself.

But that’s a "dog ate my homework" quality apology. Crude production is an honest measure of its sustainability! And when you get to peak production, we know from experience that you’re near the halfway point of total production, so it really is an indicator of resource exhaustion. And the accessibility of reserves affects when you reach the peak, so that doesn’t explain away anything.

We currently have billions in oil-industry capital that can’t find any decent place to invest itself, even with oil prices in record territory and insatiable demand. If the market can’t produce oil now, when can it?

In fairness, they did temper that little rationalization by noting the "curious contrast" between higher cash return to energy company shareholders and "essentially unchanged exploration and production efforts."

Above-ground factors, below-ground factors, who cares? When you’re falling from a cliff, does it matter if you leaped or were pushed off?

Let us not forget what IEA chief economist Fatih Birol said in an interview with French newspaper Le Monde just two weeks ago: "[I]f Iraqi production does not rise exponentially by 2015, we have a very big problem, even if Saudi Arabia fulfills all its promises. The numbers are very simple, there’s no need to be an expert."

Many peak oil observers, including me, have been hard on the IEA in the past for their wildly optimistic projections. So we should take a moment now–and I do, despite my continued criticism–to acknowledge that they have finally owned up to reality and admitted the error of their past projections.

Perhaps they just didn’t know they were lying.

Until next time,

–Chris

Folks,

If you tried to tune in to my interview on the Ken Brown show last week only to find another interview being broadcast, my apologies. I’m new to the broadcast business, but it seems to be a very flexible environment where last-minute changes to the schedule are common. Such was the case at the Florida radio station hosting my interview last week.

But they were kind enough to give me an MP3 of it, so I can share it with you here. Do note this is a large file–85 MB–so if you’re not on a broadband connection, you might want to let it download overnight or something.

I was pleased to have this opportunity to speak at length (45 minutes) on a broad range of energy topics, and I hope that it is informative and useful to the public. If you listen to it, please drop me a line with your constructive criticism!

Download here: Chris Nelder on the Ken Brown show July 5, 2007

–C

Folks,

In my article for this week’s Energy and Capital, I review some current events of interest to peak oil observers. There are some disturbing trends developing around the world–in particular fuel shortages–and it’s important to keep one’s ear to the ground.

–C

Heard It in the Peak Oil News

2007-07-06

By Chris Nelder

I’m going to let you in on a little secret today.

I’m going to reveal one of my best sources for peak oil-related news.

It’s Tom Whipple, a former CIA man who spent about a decade summarizing world news for the CIA’s morning report to the President. In short, he’s one of the best at scanning the news and picking out interesting trends and relevant bits.

These days he writes for the Falls Church News Press. Falls Church is just about 15 minutes down the road from CIA headquarters in Langley, VA.

Fortunately for all of us, in addition to being a news hound, he’s also a peak oil junkie, and now he shares the benefit of his skills with the public by picking out the key stories on peak oil and posting them online in his daily Peak Oil News and his weekly Peak Oil Review . The scope and volume of his summaries are amazing–as a major newshound myself, I can’t imagine how he does it–and they’re invaluable resources for anybody interested in watching the slow-motion train wreck of peak oil.

His news roundup on Independence Day was a doozy, and it reminded me that it’s been a while since I zoomed out and shared some peak oil current events with the Energy and Capital audience.

So today I bring you a sampling of recent stories he picked out, freely plagiarized, to create my digest of his digest of the news.

Out of Gas

• South Dakota fuel terminals have been struggling for weeks to maintain supply, leading to shortages at gasoline stations all around the region. Tanker truck drivers throughout the Midwest have found themselves sitting idle for hours at a time waiting for gas to deliver.

• Argentina is suffering through a severe energy crisis with rationing of energy and fuel as the government tries to find a way out of its recent "suicidal" policies of subsidizing oil and gasoline in order to drive economic development. Low rainfall has caused problems for hydroelectric dams, and industrialists, who have already made temporary layoffs, have begun warning that they will have to start cutting jobs soon.A cold spell in May forced Argentina to halt all gasoline exports to Chile. When temperatures fell again a few weeks later and gasoline restrictions returned, irate taxi drivers paralyzed the centre of Buenos Aires in protest at a sudden withdrawal of their fuel.

• Iraq has suffered from an acute shortage of oil products since the U.S.-led invasion in 2003. Prices of fuel on the black market are more than ten times the official prices. To meet growing shortages, the government is importing millions of dollars worth of oil products every month from neighboring countries.

• Likewise, Iran’s program of oil subsidies–combined with sanctions from the West over its nuclear intentions–has proved disastrous, putting the government in an intense budgetary squeeze and forcing it to impose gasoline rationing. Angry protesters torched gas stations in response. Tehran currently imports about half of its gasoline, and absorbs a loss of nearly $2 per gallon on it. As in Iraq, the rationing is expected to lead to a brisk black market for gasoline.

• In Nepal, after days of acute fuel shortage, the Kathmandu valley was hit Tuesday with its worst crisis in history as the state-owned petroleum importer and distributor reached the lowest level of fuel stocks and stopped supplies to gas stations entirely. Fuming taxi drivers subsequently parked their cars before the heart of the Nepalese government center to protest the shortfall.

The Nepal Oil Company (NOC) is also facing cuts from its sole supplier, Indian Oil Corporation (IOC), because of mounting debts owing to Nepal’s subsidies, which force NOC to sell fuel below cost. In response, Nepal’s government is expected to allow the NOC to raise prices and help the NOC pay down its debt to IOC in order to restore supply.

Oops, I Really Shouldn’t Have Said That

• Australia’s Defense Minister Brendan Nelson said oil was a factor in Australia’s contribution to the Iraq war, because the nation’s energy security depends on stability in the Middle East. Dr Nelson also said it was important to support the "prestige" of the US and UK.

"The defence update we’re releasing today sets out many priorities for Australia’s defence and security, and resource security is one of them," he told ABC radio. "Australians and all of us need to think what would happen if there were a premature withdrawal from Iraq," he said.

He was immediately assailed for his comments by the Prime Minister and opposition party leaders.

And speaking of Iraq, the Parliament continues to try to formulate a draft oil law that will dictate who controls Iraq’s reserves and provide a legal framework for foreign investment and the distribution of revenues. They have been under intense pressure from Washington to finalize it, as it is seen as a crucial foundation for restoring order in the country. But secrecy continues to surround the draft, and Sunni Arabs and Kurds fear that they will be denied an appropriate share of the spoils. The draft has not been made public, and the Kurdistan Regional Government (KRG) said it had not seen or approved the draft.

Oil and Gas

• A major British newspaper, The Independent, ran a front page story entitled "A World Without Oil," quoting the London-based Oil Depletion Analysis Centre, which said "global production of oil is set to peak in the next four years before entering a steepening decline which will have massive consequences for the world economy and the way that we live our lives."

• Fatih Birol, the International Energy Agency’s chief economist, implied that peak oil is just around the corner, saying "if Iraqi production does not rise exponentially by 2015, we have a very big problem, even if Saudi Arabia fulfills all its promises. The numbers are very simple, there’s no need to be an expert."

• Oil briefly topped $73 a barrel, a ten-month high. OPEC has no intention of raising production before their next planned meeting on September 11. Demand is strong and inventories of gasoline are low as refineries continue to struggle to maintain output.

• The closure of a flooded refinery in Kansas is expected to raise gasoline prices in Oklahoma, Kansas, Nebraska, South Dakota, North Dakota and Minnesota, which depend heavily on local supply, and possibly the rest of the country. The flood also caused a 42,000 gallon oil spill, which spread around the surrounding area and just reached one of the important area lakes that provide drinking water.

• Russia’s parliament voted to allow the country’s biggest two biggest energy companies to employ and arm private security units, with guns supplied from the national armory. Why? "A couple of terrorist acts and an ensuing ecological catastrophe would be enough to immediately declare Russia an unreliable partner and supplier of energy reserves," said MP Alexander Gurov.

• In the U.K., a shortage of natural gas is expected due to high demand and constrained supply.

• BP and Royal Dutch Shell are said to be in merger talks that would create a £250 billion oil giant. The combined entity would produce over 70% more oil and gasoline than industry leader ExxonMobil. I have to suspect that this further contraction of the oil industry is a reflection of their diminishing expectations for the future.

• Oil production from the North Sea has continued to fall, despite record levels of investment in recent years. Oil production in April was 7.8% lower than last year, and production from the Outer Continental Shelf dropped 12.1% on the year. Operators are clearly working harder and harder to produce less and less oil from these mature oil basins.

• Russia’s crude oil exports fell 6.9 percent in June as higher export duties encouraged oil companies to refine more crude domestically. (If you read my piece from two weeks ago, Canary in a Data Mine , you know that I believe declining exports will prove to be our first serious signals of a disconnect between oil supply and demand.)

• In Nigeria, the rebel group Movement for the Emancipation of the Niger Delta (MEND) ended their recent cease fire and resumed their abductions and attacks on oil installations. Earlier this week, five contractors were kidnapped from a rig in Nigeria, and two days ago, a three-year-old British girl, the daughter of an expatriate worker, was kidnapped (that’s the first time I’ve heard of them striking such a low blow). More than 200 expatriates have been kidnapped in the Niger Delta since the beginning of last year.

• Saudi Arabia raised its oil prices to Europe to a three-year high, as Europe becomes more desperate for oil due to rapidly declining production in the North Sea and the loss of production from Nigeria due to rebel attacks. But the Saudis actually lowered their price to the U.S. market, because crude oil stockpiles are at a 9-year high, due to the loss of refining capacity. The Saudis also cut their allocations of crude to South Korea by 9.5% from contracted volumes, and by 9.5% to 10% to Japanese customers.

• Now that melting ice is permitting access to formerly inaccessible areas of the Arctic, Russia announced its claim to a significant chunk of the Arctic seabed and is seeking UN approval to develop it for oil, gas, and mining potential. At present there is an international agreement to limit economic activity in the Artic to a 200 mile zone that follows national coastlines. The rest of the Arctic is under governance of the International Seabed Authority.

Arctic Sea Ice 1979:

Arctic Sea Ice 2003:

Source: NASA’s Visible Earth site

• As I have reported previously, deepwater exploration in the US Gulf of Mexico is being held back by a lack of rigs. "The tight rig market for deepwater rigs is a real throttle on the capability of the entire industry in the Gulf of Mexico," said Chevron.

• The Alberta Energy and Utilities Board says in its annual report it has "concluded that natural gas production in the province peaked in 2001." Natural gas production has entered a decline that will continue no matter how much drilling is done. This raises immediate questions about the viability of increasing production from Alberta’s vast tar sands.

• BP, Statoil, Chevron and Total accepted the new terms dictated to them by Hugo Chavez to continue operating in Venezuela, but ExxonMobil and ConocoPhillips refused and turned to international courts to plead their case. Oil output from Venezuela is expected to drop as the international oil majors become more sensitive to the risks of doing business there and Venezuela scrambles to round up replacements for skilled labor and equipment.

• Fires and explosions have idled refinery capacity around the world, from Lagos to the U.S.

• Shell has withdrawn a permit to start work on a federal oil in-situ shale research lease in Colorado due to problems with the freeze wall. Readers who have followed my columns will be unsurprised at this announcement. (I nearly fell off my chair when I first heard about the design of this project.)

I suppose that’s enough for one column.

Doesn’t exactly look like a recipe for boom times, does it?

So why would I spent this week’s column promoting the work of an independent newshound?

For one thing, because the mainstream media do an exceptionally poor job of informing the public about the dire state of the energy business, and we really need to start getting them up to speed.

For another, I did it because as far as I know, Tom does almost all of his work for no pay, reports to no one, is in cahoots with no one, and does it for no other reason than the public’s need to know. Like many such independent analysts in the peak oil arena, he does it simply because it needs to be done, and he makes a great personal sacrifice to do it. In short, he’s one of the peak oil movement’s heroes, and deserves a little recognition.

Until next time,

–Chris

Folks,

Just a quick heads-up for some new radio interviews I am doing this week.

First, I just taped a rather long (45 minute) interview with a Florida station that will air tomorrow, Friday July 6 at 5:15 PM EST (2:15 PST). You can listen live over the Web at www.wsbrradio.com

Also, I have another interview tomorrow first thing in the morning, which I believe is a live interview. It starts at 11:30 am EST (8:30 am PST) and will air on KFNN in Phoenix. You can isten live at www.kfnn.com

If you do tune in, drop me a line and give me some feedback on it!

–C