Anyone who thinks a peaceful transition from fossil fuels to distributed renewable energy is possible should think again.

In fact, the recent actions of the fossil fuel industry have the unmistakable flavor of war.

Its lords have clearly decided that they stand to lose far more in their existing businesses than they might gain from leading the clean energy revolution, at least in the short term. And in today’s business world, the short term is all that counts.

A comprehensive study on what’s really happening out there would fill a book. For this short column, I offer just a few current highlights.

The War for Renewables in California

I’ll begin right here at home, by updating the continuing drama around the Marin Energy Authority (MEA) I previewed in “The Renewable Power Rebellion.”

First, a bit of background.

After California deregulated its electricity markets in 1997, a flood of new competitors to the investor-owned utilities (IOUs) entered the market. Individual consumers could choose among several power providers, some of whom offered 100% renewable energy. But the power crisis of 2000-2001, precipitated by the despicable Enron and its comrades, ended that choice and forced consumers back into the arms of the IOUs.

In 2002, a different sort of consumer choice was enacted through AB 117, which allowed municipalities to form new entities called Community Choice Aggregations (CCAs). CCAs can buy power from other providers on behalf of the customers within their jurisdictions. Customers who do not want to join the CCAs may opt out.

CCAs effectively offer a new way that consumers can choose more renewable power than their utility can (or will) offer.

This year, MEA emerged as the first CCA in California, offering 25%* renewable power (as compared with PG&E’s 14%*) right out of the gate, with a consumer option to buy 100% renewable power for a modest 6% price premium. In time, MEA intends to offer 100% renewable power to all of its customers at competitive rates.

But the monopoly IOU, PG&E, is prosecuting an aggressive campaign to stop it in its tracks. I have begun an investigation into PG&E’s actions and as the Robert Hunter lyric goes, “If I told you all that went down, it would burn off both your ears.” Underhanded, dirty tricks are their norm, not the exception. Yet they are widely regarded (thanks in part to ample spending on public relations campaigns) as one of the greenest, most progressive utilities in the country.

PG&E originally lent its qualified support to CCAs when the legislation came out, but then adopted a neutral stance when the California Public Utilities Commission (CPUC) began its proceedings on the matter. Beyond the words, however, PG&E’s actions demonstrate that it clearly considers municipalization of power procurement a threat to its business.

Under a Byzantine arrangement of subsidiaries and relationships with other entities, the utility PG&E has devised various ways to work around the rules that pretended to protect the consumer after deregulation. For just one example, it now procures much of its power through swap agreements and opaque contracts with third parties so that the CPUC can no longer really examine their details. I’ve been told that I couldn’t find how much profit they make on generation if I wanted to, because nobody has all the information.

What is clear is that PG&E owns an effective monopoly on providing natural gas–both to customers directly, and to the gas-burning generators of its electricity. Its profit margin on the power itself is kept minimal under the law, but that’s allegedly about one-tenth of the profit it makes on transmission of the gas through its pipelines, and the transmission of power over its network.

That appears to be the real reason that PG&E has fought the MEA. If the latter were to succeed in fostering widespread deployment of distributed rooftop solar generation, it would cut PG&E’s revenues from both power transmission and natural gas supplied to centralized power plants. And if MEA were a stunning success, as Ohio’s CCA has been, it could lead to a proliferation of CCAs across the state.

After PG&E’s distortions and outright lies intended to whip up fear and confusion about MEA–under the guise of the “Common Sense Coalition” it funded–failed to stop it, the utility committed up to $35 million to put Proposition 16 on the ballot in June. It is the sole architect and sponsor of the initiative, which would embed in the state constitution a new requirement for “two-thirds of the voters in the territory being served and two-thirds of the voters in the territory to be served” to approve before any local government could proceed with power procurement, effectively closing the door on any further CCAs and preventing MEA from expanding its service area.

In typical fashion, PG&E has disguised the true objectives of Prop 16 under a high-minded appeal to protect the voters’ right to choose. Got that? A utility company is willing to spend $35 million in an altruistic effort to protect your rights as a voter! It’s an inversion of the truth that would make Orwell blush.

David vs. Goliath

Because municipalities are forbidden by law from such activism, the MEA can only defend itself through a small independent activist group funded by private donations. I don’t know the exact numbers, but it looks like the funding balance is roughly $35 million vs. $100,000, at best.

Here are the facts.

• PG&E has failed to meet the state 20% renewable portfolio standard (RPS) target for 2010, and it is in no way prepared to meet the proposed 33% by 2020 standard.
• It has failed to produce the efficiency gains that $450 million a year in state funding should have achieved, and has apparently used the money as a political slush fund while hiding where its alleged efficiency gains came from.
• It has successfully lobbied to limit renewable generation by its customers under net metering to a small fraction (from 0.5% initially to 5% now) of peak demand loads, when it makes no sense from a public interest standpoint for there to be a cap at all.
• It continues to parlay a few million dollars here and there in handouts for efficiency improvements in exchange for political favors, while vigorously lobbying for billions of dollars in new transmission lines, new natural gas power plants, and new nuclear plants…all while misrepresenting those projects as being much cleaner, and greener, than they actually are.

For example, when the CPUC asked PG&E and Southern California Edison to sign a pledge affirming their claim that a proposed multi-billion dollar new transmission line stretching from just below the Mexican border to San Diego would be used only to import renewable power, the utilities declined. Their true intent was to use the line to import power from new natural gas-fired plants in Mexico.

Indeed, PG&E is now one of the top lobbyists for nuclear power on Capitol Hill, seeking billions of dollars in loan guarantees for new nuclear plants, even as it tries to choke off the deployment of rooftop solar power.

The utility’s chutzpah is breathtaking, particularly considering that it has just received the largest rate hike in history, and has another $5 billion in rate hikes now pending before the CPUC. And that’s on top of the roughly $20 billion it received for the bankruptcy bailout in the wake of the Enron debacle, which we’re all still paying off on our monthly bills.

For its part, the CPUC fiddles around the edges of the utilities’ proposals in an attempt to create the illusion of guarding the public interest, while its president Michael Peevey (the former Vice President of Southern California Edison) rubber-stamps them.

The conflict of interest is painfully clear. A mass transition to distributed renewable power is the best hope for the future of local communities, but PG&E has nothing to gain from it and everything to lose. They will stand to profit handsomely from building billions of dollars’ worth of new gas- and nuke-based power infrastructure, but will lose when customers generate their own power and cut waste through higher efficiency.

Even in California, with its abundant sunshine and its high electricity prices, the push for renewables is a David vs. Goliath scenario…and CCAs are the stone.

The War for Solar in Hawaii

In a remarkably similar tale, a report from Hawaii last month detailed how the Hawaiian Electric Company (HECO) proposed a total ban on rooftop solar systems connected to its grid. The move was in response to the unveiling of an aggressive new feed-in tariff (FIT) program adopted by the state PUC.

HECO had originally supported the FIT, and committed to a broad agenda that would obtain 70% of the state’s power from clean energy by 2030. But when the program became real, it backpedaled with the usual whining and hand-wringing about maintaining grid stability, and proposed instead that it form a working group to study (read: delay) the issue further.

As my readers know, I believe that FITs are the most effective, tried-and-true policy approach around for encouraging distributed renewable power, and I have hailed Hawaii’s FIT as a promising step toward a national FIT model.

If the U.S. had any sense or vision at all, it would make Hawaii a proving ground for distributed renewable power. Being isolated, it is utterly dependent on imported fossil fuels, which provide 96% of its energy. Consequently, it pays the highest electricity rates in the nation.

Hawaii also has abundant sunshine and enormous marine energy potential. With the impetus of the FIT, it could show the rest of the country exactly how much of America’s fossil fuel habit could be cured through renewables.

At this point I don’t know exactly what’s behind HECO’s ban, but it doesn’t take much imagination to guess. Scratch a hoary utility, and you’ll quickly find its fossil fuel bedfellows.

The War On Greenhouse Gases

Another fight is now unfolding in California, as the so-called “California Jobs Initiative”–an entity backed by oil and gas companies–has raised nearly $1 million to put an initiative on the state ballot for November that would suspend the state’s tough new emissions law, AB 32.

According to SolveClimate blogger Leslie Berliant, the group has issued a stream of factually incorrect, fearmongering claims about the jobs that will be lost in the state as AB 32 is enforced, while funding studies that cast doubt on the number of green jobs that would be created under it.

If the initiative passed, it would stop the state’s planned cap-and-trade program until California has four consecutive quarters of unemployment below 5.5%…something that has only happened twice, in 2000 and 2006, and seems highly unlikely to happen again any time soon (if ever).

The War for Wind

Meanwhile, Danish journalists confirmed this week that the Institute for Energy Research (IER), an American think tank with close ties to the coal and oil industries, had commissioned and paid for a report released last year by a Danish think tank that made numerous false and disparaging claims about Denmark’s wind industry.

The study concluded that coal is cheaper than wind, conveniently ignoring the true costs of coal while assiduously counting all the costs of wind, and then some.

According to a post at Desmogblog, IER’s CEO Robert Bradley was formerly the Director of Public Relations Policy at Enron, where he wrote speeches for “Kenny Boy” Lay. IER’s connections extend to notorious fossil fuel companies and front groups including Koch Industries, the Competitive Enterprise Institute, TASSC, the Cato Institute, and the Heritage Foundation, yet they shamelessly accuse the Obama administration of being too cozy with wind energy lobbyists.

Pick a Side

It’s becoming abundantly clear that if communities want to have a resilient, secure, local renewable supply, they’re going to have to fight for it–and fight hard.

The businesses that control the power sector now are not going to just give up their grip on it, nor are they going to lead the transition to renewables. They’re going to oppose it at every turn with delay tactics, dirty tricks, outright lies, and anything else that will give them an edge. And they have far deeper ties to policymakers, and far deeper pockets with which to wage the war, than anybody in the renewables business. By a wide, wide margin.

What’s good for them is not good for communities, and vice versa. There will be no bridging of that gap. Nor would it be rational to expect investor-owned companies to act against their own self-interests for the benefit of the public.

The residents of Marin County are already being asked to choose a side in the war for the future of energy. Soon the rest of the country will be asked too. Do you have the will to form a stone like MEA? And if you do, do you have the will to throw it?

I say: ¡Viva la Revolución!

I’ll close with a few more lines from the song I quoted above:

Since it cost a lot to win
and even more to lose
You and me bound to spend some time
wondering what to choose

Goes to show you don’t ever know
Watch each card you play
and play it slow
Wait until your deal come around
Don’t you let that deal go down.

– Robert Hunter, “Deal”

Until next time,

Chris

Thanks to Barbara George of Women’s Energy Matters, Paul Fenn of Local Power,  Alexander Bischoff of open4energy, and Charles McGlashan of Marin Energy Authority for their contributions to this article.

Corrected from original

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It has taken awhile to arrive, but one of the more interesting–if unsung and unsexy–sectors in energy right now is software.

A whole array of new applications is finally hitting the streets: Systems that let consumers monitor their energy usage. Software that helps utilities redesign their grids to accommodate more distributed generation. Solar system design tools. Smart grid management systems. Bigger, better databases of actual solar insolation (sunlight), actual component performance, and actual customer usage, all being gradually integrated together.

Consider, as an example, the transformation that has happened in solar site evaluations in just four years.

Swapping Hardware for Software

Here’s what I had to do to bid on a rooftop solar PV system in 2006.

I would arrive at the customer’s house with a 16-foot folding ladder and a backpack full of gear. I would spend half an hour going through several years of paper bills (if they had them), copying the kilowatt-hours used each month onto a piece of paper. If they didn’t have paper bills, I would call the utility, get the customer’s permission, and then have the customer service person read me the data.

Then I would climb up on the roof and look for the best, unshaded location to install the modules. I would use a bulky, domed device to make a drawing of the shading profile on a paper grid.

Then I would spend an hour or more making a hand drawing of the roof, measuring every surface and penetration. I needed two kinds of physical tape measures and a laser measure. I carried a special, foot-long angle meter to measure the slopes. A hand compass would give me the right orientation for all my gear…if some nearby interference didn’t throw off the magnet.

I would shoot dozens of pictures and video clips of every roof, hoping to capture details that I might have missed on my hand drawing.

Back at my office, I would re-create the drawing in a CAD program, which could take hours.

I copied the usage data into a spreadsheet, which had very coarse-grained historical data for the hours of sunlight typically received in a given city. Then I would eyeball my drawing of the shading profile, and enter the amount of shading that I thought the system would receive at each hour of the day at various times of the year. This tool allowed me to estimate the output of a given system design.

Then I would return to the CAD drawing and try to fit the equipment I needed onto the roof, consulting the photos and video as I went. Then I’d have to change the equipment in the estimation spreadsheet. Rounds of adjustments would be needed to get the system right. Then I would draw in all the associated equipment, and calculate the racking down to the last nut and bolt.

A final spreadsheet would take data from the other spreadsheets and let me generate a financial model based on coarse historical data about the price of energy. And all of the spreadsheets were created in-house by a talented software engineer.

It would take a minimum of six hours just to produce a detailed bid, before the sale was even made. It often took far, far more. It’s one reason why I decided to get out of the business.

Now consider what it takes today, just four years later.

There are now over a dozen apps that will almost replace that backpack full of gear with an iPhone.

The angle meter? Gone. You can lay the iPhone on the roof and it will tell you the angle, or you can stand on the ground and shoot the roofline and it will calculate it. The compass? Gone. Even the camera–gone. You can shoot pictures of the site with the iPhone, then automatically stitch them together into a panoramic photo.

Name your site, and the latitude, longitude, elevation and altitude are automatically downloaded via GPS. Pan the camera around, and it figures out the shading, then shows you the path of the sun at various times of the day and the year. Check your overhangs and your solar window, and work around your roof penetrations in a snap.

Then just choose your equipment of choice from the built-in database and the enter the local price of a kilowatt-hour.

Boom. In a couple of minutes, I could do what used to take hours. Sun plot and shading maps, an equipment list, and rough estimates of the system’s production and the financials–done.

Other apps will even help you size the wire and conduits, convert units (like Btu to kWh), and make graphs.

For a field rep, the advancement is nothing short of phenomenal. All that’s missing now is a way to download customer usage data from the utility right into an app, and some next generation solar add-ons to CAD software.

Software for Efficiency

Software is making as much improvement in energy auditing as it has in PV site evaluations, and in about the same period of time.

Just a few years ago, a highly trained energy auditor would spend hours (or weeks) crawling all over buildings and mechanical rooms, counting light bulbs, copying down nameplate data from HVAC and other systems, poring over floor plans, taking lots of photos, doing data entry in clunky homegrown spreadsheets, and eventually trying to integrate it into various modeling tools that didn’t work well together. But no more.

A new system by startup kWhOURS, Inc. promises to slash the time required to perform an audit to a fraction of what it was, and automate the production of reports. It will export spreadsheets and play nice with standard analysis software developed by the DOE.

The San Francisco company Recurve has developed an internal system to streamline its own energy auditing and make it easier to design energy efficiency retrofits. Various builders across the country are now testing the software, which is likely headed for licensing.

On the hardware side, Recurve founder Matt Golden (a friend of mine) has also recently helped formulate a proposal for a new federal efficiency program called HOMESTAR, which would offer rebates up to $3,000 for a host of home efficiency upgrades including windows, insulation, caulking, and sealing for ducts, doors, and windows. President Obama outlined the program this month, touting the thousands of jobs it will create, and savings of as much as $500 a year for participants.

As my readers know, I have long been a champion of energy efficiency retrofits as the low-hanging fruit in addressing our energy challenge. And as Golden points out, over 90% of the materials needed to perform them are “Made in the U.S.A.”

Software for PV on the Smart Grid

A slate of software projects recently approved for $9.3 million in grants under the California Solar Initiative Research, Development, Deployment and Demonstration Program are tackling some of the larger challenges of the “smart grid”…with substantial matching funds.

The projects will be administered by Itron, Inc. (NASDAQ: ITRI), a longtime smart metering favorite.

One in particular, a proposal from Clean Power Research (CPR), caught my attention. With a budget of over $3 million, it will develop a model of solar resources using satellite data. Spatial resolution will be enhanced from 100 km² today to 1 km², and temporal resolution from 1 hour to 30 minutes. The system will be built upon an open-source distribution engineering and analysis tool used by utilities, and integrated with PV performance and economic screening data, to help identify the locations with the best potential for high penetration of PV systems.

When completed, the system will be made freely available to the public in California, and should vastly improve the industry’s ability to deploy and integrate distributed solar into the network. The participation of various entities from New York and Arizona in the project suggests that the tool could be adapted eventually by other states.

A similar $1.3 million proposal from SunPower Corp. (NASDAQ: SPWRA) will improve temporal resolution of solar resources all the way down to 1 second, and integrate with SunPower’s monitoring data and standard simulation tools to help grid operators maintain grid stability in near-real time as sunshine comes and goes in various areas.

Six other projects will work on communications between PV systems, smart meters and utilities; help customers determine the right mix of efficiency measures, energy storage, demand response, and PV; help utilities identify and correct weaknesses in the distribution infrastructure; improve inverter performance; and enable utilities to improve grid control, maintain voltage stability as cloud cover comes and goes, and perform better forecasting.

The best leadership in the energy revolution that Silicon Valley can offer is not in seeking the “next big thing” as Vinod Khosla is doing, nor is it in trying to drive carbon to zero in energy, as Bill Gates exhorted in his recent TED conference address. Instead, it’s in doing exactly what it’s best at: software and embedded systems. Not silver bullets, but silver BBs.

Hey BillG – How about working on an open standard with Apple and Google and appliance manufacturers to deliver some sexy consumer energy monitoring solutions for the iPhone? No, really.

Until next time,

Chris

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Dear Congress,

We, the American People, want a New Deal for energy.

We’re tired of watching the rest of the world kick the clean energy industry into high gear while we’re still stuck in neutral, debating a weak cap-and-trade bill that doesn’t come close to meeting our energy challenge.

Indeed, we believe the focus on climate change is fundamentally misguided. We should be thinking about what we put into the engine, not what comes out of the tailpipe. If we get energy transition right, the emissions problem will take care of itself. Incentivize, don’t penalize.

The “shovel ready” stimpak was nice, but we know that most of those jobs won’t be permanent. We also know that far more of it went to the dead end of roads and cars than to real, long-term fixes to our energy crisis.

Consider rail, the most viable solution to our oil-guzzling problem. You spent decades starving Amtrak of the funding that would make it truly viable, then doled out a paltry $13 billion stimulus for high-speed rail in America. That’s about 2% of what you need to spend on it. Meanwhile, China is spending $556 billion on a rail construction plan that will link nearly all its provincial cities in the next five years. The Shanghai-Beijing link alone is expected to create half a million jobs.

The desire for instant jobs gratification has actually done rail more harm than good. Directing the understaffed Federal Railroad Administration to sort through hundreds of plans and distribute a huge chunk of stimulus money as quickly as possible, before it had a chance to develop its national high-speed rail plan, bogged the agency down and misdirected its priorities, effectively setting back real progress.

Short-term thinking is what got us into this mess, and it’s not going to get us out.

We’re all for unleashing the can-do spirit and manufacturing might of America. We’re ready to do our part. But we’re going to need more than short term support. It’s going to take more than a one-year program to restore jobs that we spent three decades sending offshore.

The incentives that Congress has created for renewables and efficiency have always had the fatal flaw of being too short-lived. The resulting boom-and-bust cycles were devastating, and caused America to lose the edge in clean tech. Meanwhile, countries that made 20-year commitments to transforming their energy systems have become the world’s leaders in it.

It’s also time to tell us the truth about the future of energy. We understand now that we have a real problem which no amount of drilling or military intervention is going to cure. In return we promise that this time, we won’t crucify you–like we did President Carter.

The Challenge

Here is our reality:

• Oil production has peaked. Supply will be flattish for the next 2-4 years, then begin a long decline.
• We will lose roughly 25% of our oil supply in 25 years; 50% in 50 years; 100% in 100 years.
• To compensate for the decline of oil with renewables, the world would need to build the equivalent of all the world’s existing renewable energy capacity, every year.
• Since that is impossible, efficiency and a long transition to renewably powered infrastructure must make up the shortfall. This will take 50 years or more to achieve.
• It’s likely that we will also see the peaks of natural gas and coal in the next 20 years. Hydropower and nuclear will do little more than hold their current market share.
• By the end of the century, nearly everything will have to be powered by renewably-generated electricity, not liquids or gases.

The cap-and-trade bill’s aim to cut 600,000 barrels per day off U.S. oil demand–which is currently 19 million barrels per day (mbpd)–over a period of 10 years is a joke. That’s roughly the same amount that U.S. demand has grown over the last year.

We need to cut closer to 2 mbpd in 10 years, 6 mbpd in 20 years, 8 mbpd in 30 years and 10 mbpd in 40 years.

Do you have what it takes to confront this challenge, knowing that some of the solutions will be politically unpopular, impact your constituents back home, and take many times longer than your term in office to achieve?

Can you do what authoritarian and parliamentary governments elsewhere are already doing?

A Plan to Rebuild America

It’s time to come up with a real plan, an honest plan, to rebuild America under a new energy paradigm. One with serious, achievable 30-year and 50-year milestones that will slash our need for fossil fuels.

A plan based on facts and science, not political expediency. One that will create true, long-term wealth, prosperity, resiliency and self-sufficiency.

We need a Taskforce on Peak Oil and Energy Security to prepare the country for the decline of oil, not sweet lies from the EIA which completely ignore it. As Lester Brown observed, “only Sweden and Iceland actually have anything that remotely resembles a plan to effectively cope with a shrinking supply of oil.”

We want to stop spending half a trillion dollars a year for imported oil, and develop a defense strategy for the day when our imports dry up.

We need stable, simple feed-in tariffs, which have been proven successes in Germany, Japan and Spain…not complex, corruptible, ineffectual policies like cap-and-trade or cap-and-tax. And we need them for 30 years, not one.

We want solar on every rooftop, a wind turbine in every field and a micro-hydro turbine in every running stream, wherever viable resources exist. Distributed generation is resilient, and brings value to every community. Along with it , we need distributed power storage, and a smart grid with micro-islanding so we can fall back on our own resources if the grid goes down.

We want a plan to manage our resources for the long term health of our society, like Norway and Saudi Arabia have. Instead of planning to use our remaining oil and gas so we can drive in inefficient cars more cheaply, we should be planning to convert it into the renewables and efficiency gains we’ll need in the future.

We want a defensive strategy for our grid with hardening against cyber-attacks.

We need to reverse the long process of globalization and bring manufacturing back home. Instead of a society now dependent on complex, world-spanning, highly optimized supply chains, we need local resiliency, redundancy, and diversity in all the essential sectors: energy, water, food, and security.

Finally, we need energy education at all levels–from the street to the universities, from business to government employees.

Do you have the guts to tell the truth about our energy challenge, and bring America up to speed on what she must do? Or will you wimp out and kick the can down the road a little farther, as your predecessors have, leaving America to learn about it the hard way and pay a price so much higher than it would be today?

Time to Act – Wisely

The days of economic growth may be gone forever for import-dependent developed countries like the United States, unless we downsize, relocalize, and work hard on energy transition.

What we need now is an honest, long-range strategy. We need to build rail, rip up roads and unwanted, unsustainable housing, replant farmland, massively beef up the electrical grid, and deploy millions of renewable energy generators–the more distributed, the better.

By planning for it now, we could achieve a somewhat orderly transition away from liquid fuels and toward efficient electric transport. We’ll still create millions of new jobs, only they’ll be the right jobs. Jobs that won’t disappear the next time oil spikes.

Congress cannot meet this challenge without teamwork and good sportsmanship. The Greens, the Browns, the Department of Energy, Congress and all of us must work together. It will take sacrifice on all sides.

We sincerely hope you are up to the challenge.

Until next time,

Chris

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When oil crossed $120 a barrel for the first time in May 2008, oil cornucopians knew they were in trouble. Prices had quadrupled in just five years, yet had failed to bring new production online. Regular crude had flatlined around 74 million barrels per day (mbpd). The case for peak oil was looking stronger with every new uptick in crude futures.

The following month, prominent peak oil critic and cornucopian Daniel Yergin of IHS-CERA changed his stance: The peak oil threat would be neutralized by peak demand. Gasoline consumption had peaked in the U.S. and Europe, he argued, due to the combined effects of increasing efficiency, biofuels, and the recession.

In 2009 the peak demand story seemed confirmed, as prices stabilized around $70 in June, and U.S. consumption remained well off its previous high. Most people thought the nearly 2 mbpd decline in U.S. petroleum demand from 2007 through 2009 owed to efficiency and people driving less.

In reality, only about 15% owed to reduced gasoline demand. The other 85% was lost in the commercial and industrial sector: jet fuel, distillates (including diesel), kerosene, petrochemical feedstocks, lubricants, waxes, petroleum coke, asphalt and road oil, and other miscellaneous products.

Very simply, when oil got to $120 a barrel it cut into real productivity, and forced the world’s most developed economies to shrink. At $147, it wreaked serious damage.

As I explained in “Investment Themes for the Next Decade,” the new normal will be  cycles of bumping our heads against the supply ceiling, falling dazed to the floor, rising back to our knees, then finally standing, only to bump our heads against the ceiling once more.

Scooters Will Kill SUVs

Two interesting news stories crossed the wire this week, which portend badly for the world’s #1 net importer, the U.S.

The first was a Reuters report that the last quarter of 2009 had “wiped out” the equity of Mexican state oil monopoly Pemex, leaving it $1.4 billion in the negative. Falling crude output, falling refining margins and a burgeoning dependency of the state on its revenues had squeezed it to death.

Not only did the report offer further confirmation that the oil export crisis has arrived, but it also confirmed my growing suspicion that the oil production everyone has assumed will come online in five to ten years might, in fact, fail to materialize. Negative equity companies have a hard time raising capital for new exploration.

The second was a Bloomberg report that Saudi Arabia had agreed to double its oil exports to India, to some 866,000 barrels per day. India indicated separately that its onshore production of oil may peak this year.

This adds to the pressure on Saudi Arabia’s exports, whose oil shipments to China have been growing at a rate of 11-12% per year and now stand at roughly 1 million barrels per day (mbpd). China has eclipsed the U.S. as the primary bidder for Saudi oil, while U.S. imports from the Persian Gulf nation have fallen to a 22-year low.

The last two years have seen the marginal buyers of oil shift decisively to the non-OECD countries. A gallon of fuel delivers so much value in China and India–think peasants on scooters–that even at $120 a barrel, remarkable economic growth rates are possible. In major oil exporting countries like Saudi Arabia and Venezuela, where subsidized gasoline still sells for under 25 cents a gallon, the appetite for fuel grows steadily every year with little thought given to efficiency.

It’s a different story in the U.S. For debt-laden consumers, an extra $50 or $75 to fill up the tank on an SUV every month sharply reduced discretionary income and starved the economy of its most fundamental driver, consumer demand.

The Real Meaning of Peak Demand

The most promising effort I’ve seen to quantify the role of efficiency in peak demand was a report in October of last year by Paul Sankey of Deutsche Bank entitled, “The Peak Oil Market.” My initial excitement quickly gave way to disappointment as dug into it, however, as I realized that its confident assertions were unsupported by the data. I applauded the effort enthusiastically–and I hope to see more serious work along the same lines–but it fell far short of proving that energy transition can be accomplished under the status quo of economic growth, let alone its optimistic twist on “The end is nigh for the age of oil.”

The fact is that peak demand in the OECD is not merely a function of efficiency gains and biofuels substitution, aided by a temporary recession.

Instead, peak demand will be the result of a permanent state of increasing depression in which non-OECD countries not only more than make up for the loss of OECD demand, but outbid them for the marginal barrel.

As we enter the post-peak phase of global oil supply sometime around 2012-2014, the price that heavily import-dependent countries like the U.S. would have to pay for that marginal barrel will become increasingly intolerable. In a weakened economy, $100 a barrel (or less) could be the new $120.

The true import of peak oil, therefore, may not be sustained high prices, but economic shrinkage. Demand will be destroyed long before oil gets to $200 a barrel, but it will not be destroyed by improved efficiency.

From where we stand today, it’s hard to make an argument for economic recovery. Persistently high unemployment rates, broken state and federal balance sheets, and an inflationary depression will continue to cut into petroleum demand. We spent the last several decades offshoring the fundamental value-adding sectors like energy production and manufacturing, and now our FIRE economy (finance, insurance, and real estate) rests entirely on real value created elsewhere.

The reason is simple: Energy is the only real currency. Every dollar of fiat currency or GDP was ultimately derived from cheap energy. Trying to print your way out of energy decline is like prescribing ever-higher doses of aspirin for a headache caused by a brain tumor. Yet those at the levers of monetary policy are, by all appearances, completely ignorant (or in willful denial) of this fundamental fact.

The vogue prescription for the sovereign debtors at greatest risk of default (see a Top 10 list here) is “austerity measures.” The theory is that a period of belt-tightening will stanch the fiscal bleeding until economic recovery puts everyone into the black again.

Yet, if primary energy supply is declining, and the rising star of developing economies is inexorably cutting into the supply available to developed and indebted economies, then there can be no recovery.

I have joked on Twitter that I’m expecting an “M-shaped recovery,” where we’re now on the second hump. A more accurate image is slow strangulation.

Two Questions for Recoveryistas

Those who would argue for economic recovery must answer two intractable questions.

The first is: Where will the energy come from, as more of the world’s net exporters become net importers?

Britain, Argentina, Indonesia, and others have become net importers in recent years. Mexico and Columbia are expected to follow suit within a decade. Clearly, we can’t all be net energy importers.

There is also the obstinate fact that aggregate net energy–the energy you get in return for investing energy in its production–has been dropping steadily. Oil net energy dropped from 100 in the early 1930s to 11 or less today. Net energy for natural gas is now in decline. We don’t have adequate data to know yet, but coal’s net energy is probably in decline too. Meanwhile, the net energy of all substitutes is low: wind, 18; solar, 6.8; nuclear, 5-15; all biofuels, under 2.

It is not surprising that a study of the Herold database (Gagnon, Hall, and Brinker, 2009) showed the amount of oil and gas produced per dollar spent declined between 1999 and 2006.

The second question is: If the creeping infection of sovereign default continues to spread to more countries, where will the money come from to bail them out? The answer has been, and continues to be, more aspirin. Without more cheap energy, monetary tactics to play the game into overtime will not only be futile, they will only draw us closer to the edge of the net energy cliff.

All of which begs a final question: If the answers are transition to renewables, and rebuilding our infrastructure for high efficiency, then where will the money and energy to do it all come from? And how long will it hold out?

Without cheap energy to fuel the growth that is hoped to pay off the accumulated debt, austerity will become an everyday reality, not a short-term fix. A reality that slowly sinks in for the rest of our lives, as net importers become progressively poorer.

The peak demand argument is a good one–but not for the nice reasons.

Until next time,

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