Gasoline Ration Cards

I have posted often on the pending oil supply crisis, now been briefly masked by the decline in demand caused by the global credit collapse. As credit begins to flow again as it is now, demand will quickly recover.

This returns us fairly swiftly to the inelastic supply conditions that permitted this past summer’s price rise to $145. I do not get any sense of supply buildup taking place while the price is so low, but surely every refiner is restocking the pipeline while demand is lower. We will have a small cushion.

In the meantime OPEC is tamping back supply by a couple of million barrels. I would like to believe that this could last but it will be gone with the snow. In the event, the price of oil will soon back to a $60 to $100 trading range, assuring everyone that it is just too expensive. If inventories do build properly, we may get a year’s pause in volatility in oil pricing, but this is only a respite.

The fundamental problem remains. We have no method of turning on an additional two million barrels of production per day. We could not do it properly when oil was $145 per barrel. All we could do was standby and watch the train wreck. The first casualty was the excessive credit balloon aided and abetted by the two year long commodity bull and the massive exposure to soft mortgage lending.

Oil drained the cash flow needed to support that balloon.

We also now know that the economy cannot be operated on expensive oil. This means that we are headed for demand regulation in order to preserve the economy. We have already discussed this extensively and have concluded that switching the trucking industry over to liquid natural gas (LNG) as proposed in California is the best available quick fix. Done in the USA, some millions of barrels of oil per day will be released back into the global market. Done globally, a real percentage of global demand will be released. I have not recently checked the numbers, but I believe that this will be close to 15 million barrels out of 87 million barrels.

Therefore, before we even think of the solar build out, we can ride through a major portion of the pending decline.

That still leaves us with the most economically wasteful use of oil. Personal transportation will have to be rationed. We cannot permit the demand for private convenience to price public good. Up to now we have had both. We are now entering a world were the use of available stocks will need to prioritize in terms of the common good. The best way to do this will be the ration card.

A ration card for gasoline will do more than any thing else we could ever do to drive the adoption of the electrical autocart. And yes folks, EEStor is looking more real every day.

An alternative to a ration card is a non commercial use tax. This is unfair to those who must have a car just to operate from their suburban home, or is it? We have a century of persuading folks to move out into distant acreages all supported indirectly by cheap gas. In reality, a ration card issued against known available supply is about as good as it will get. Some will benefit by having a surplus while those who must will buy those surpluses.

The good news is that we do not have a problem for 2009. In the meantime, maybe someone will hit the panic button and cause a crash THAI program in Alberta to give us that real two million barrel cushion and regulate the rapid adoption of LNG as in California.

Recall one single fact today. We are now consuming four barrels for every barrel we now find of conventional oil, excluding the Tarsands and their ilk. Those have only begun to yield oil in appreciable amounts. How much more stark can I make this?

Rust Belt Solar Revival

The demise of the rust belt was always an exaggeration, just as the fear that German industry could not compete. All industrial production is about intelligent design and then taking a few cents of raw material, pounding it a few times and selling it for dollars.

The industrial heartland that also includes Ontario is one of the globe’s great industrial engines.

It has supported high wages and high taxation. This put it at a disadvantage when competing with low tax and low wage economies. It still managed to become richer and more efficient as did German industry.

The next generation is seeing the wages of China and India rising and their economies begin to properly internalize as happened in Europe. There is still plenty of cheap labor around but never so concentrated and organized as that of China and India. In fact China and India are now beginning to compete for those workers.

What this article makes clear is that solar energy and wind energy represents a massive manufacturing effort. A lot of this had not really registered. The modern windmill showed that it is possible to build hardware robust enough to stand up against all that Mother Nature can throw at it. We are now going to build thousands of them and install them everywhere that makes any sort of sense. After all, free fuel works for everyone.

The solar industry is an even bigger manufacturing opportunity. The nanosolar thin film is actually a minor part of the manufacturing bill and its cost is now dropping sharply, exponentially increasing manufacturing demand.

We will be installing hundreds of square miles of solar panels over the next twenty years. The hardware for all this must be manufactured and will surely generate a manufacturing boom for the rust belt.

I personally think that while the rest of the globe still has energy options to postpone conversion to alternative energy, North America and Europe does not. The Europeans recognized this twenty years ago and made it public policy to stay ahead of the curve.

In North America, we have ignored the inevitable day of reckoning until it arrived and sucked the cash liquidity out of the economy. Now we need to catch up in a hurry. That means a massive build out of windmills and conversion of our trucking industry over to LNG fuel over the next five years. This will slash our dependence on oil and commence the reduction of our reliance on coal fired and natural gas fired power plants.

This all translates into a major manufacturing boom in the rust belt, even before we factor in the rapid build up of solar energy.

Our thermal plants will end up been standby power sources to pick up the slack on bad weather days.

Logistics Resurrects the Rust Belt

by Lara L. Sowinski

October 28, 2008

As in recent presidential elections, much has been said by politicians about the tens of thousands of manufacturing job losses that have occurred in the region of the U.S. known as the Rust Belt—those states that have a long history in industrial manufacturing, particularly steel and auto production, as a driver for their economies. But politicians usually don’t tell the whole story, and such is the case with how the jobs were lost and, more importantly, what’s been occurring in recent years to turn the situation around.The “secret,” according to Bill LaFayette, Ph.D., and vice president, economic analysis, for the Columbus (Ohio) Chamber (www.columbus.org), is in large part due to logistics, and he and many others in the business, government, and academic sectors are pulling together to get that secret out in the open.

For starters, “There’s an initiative at the state level, the Ohio Skills Bank, to align public colleges and universities as well as secondary education providers with economic development priorities. The goal is to make sure the state’s workforce has the skills that employers really need now and in the future. And, transportation and logistics is one of the main focus sectors of this initiative, especially in the Columbus region,” says LaFayette. “Part of the plan includes making sure university classes and credits are on par around the state, so the workforce can be more mobile,” he adds.

State lawmakers also recognize the role of logistics in the larger economic development picture. Ohio is in the midst of a major tax reform, which along with numerous other advantages, is helping the state become more competitive against others that it often goes head-to-head with, including Illinois, Indiana, Wisconsin, Michigan, and Minnesota, explains Matt McCollister, vice president, economic development, Columbus Chamber.

In a recent article in the Wall Street Journal, Ohio Governor Ted Strickland asserted that the tax reform would yield significant results for the state.

“By 2010, Ohio will be one of only two states without a general tax on corporation profits or a property tax on business machinery, equipment, and inventories. This year is the last for Ohio’s business property tax; next year is the last for the corporation profits tax. And, Ohio’s personal income tax rates are falling by 21 percent across the board.”

“Between 2005 and 2007, Ohio’s per capita state tax burden has already fallen to 38th in the nation, from 27th, according to the Federation for Tax Administrators. When the new tax cuts are phased in, Ohio’s business taxes will be the lowest in the Midwest.”The Governor also pointed out that exports are up sharply. Last year, the state’s exports totaled more than $42 billion — an 11.1 percent increase over 2006—making it the only state in which exports have grown each year since 1998.

Moving from concept to creation

It’s great to have a vision, but it’s even better to put it into action, and the major logistics players in the Columbus region and throughout the state are beginning to see the results of this combined effort from the various interests in a number of ways.

Undoubtedly, one of the most important projects has been the Norfolk Southern railroad’s Heartland Corridor, a three-year railway improvement project scheduled for completion in 2010 that will significantly increase the speed of containerized freight moving in double-stack trains between the East Coast and Midwest. Currently, double-stack trains are routed through Harrisburg, Pennsylvania or Knoxville, Tennessee. However once it’s completed, the Heartland Corridor will move double-stack trains from Norfolk, Virginia’s seaports to Chicago, via West Virginia and Ohio.

The centerpiece of the Heartland Corridor is the Rickenbacker Intermodal Terminal located just outside of Columbus, which opened in March.

“The construction of the Rickenbacker terminal punctuates Norfolk Southern’s commitment to serve the growing intermodal demands of central Ohio and Midwest shippers,” said Wick Moorman, Norfolk Southern’s chief executive officer, earlier this year. “Rickenbacker, one of five Norfolk Southern intermodal terminals in Ohio, will anchor our Heartland Corridor when that project is completed.”

Elaine Roberts, A.A.E., president and CEO of the Columbus Regional Airport Authority, added that, “We have already witnessed the start of the intermodal terminal’s economic impact with new industrial development in the Rickenbacker area. We expect 20,000 new jobs over the next 30 years as a direct result of the new intermodal facility.”

The initial footprint of the Rickenbacker Intermodal Terminal will comprise approximately 175 acres with a handling capacity of more than 250,000 containers and trailers annually. However, it was designed to accommodate expansion as traffic volumes grow.At the same time, officials at the Columbus Regional Airport Authority are optimistic that the Rickenbacker International Airport (www.rickenbacker.org), a former military airport that boasts some of the longest runways in the country, will figure more prominently for air cargo shippers. One big draw is the relatively short taxi times and very low landing fees, along with easy entry to the cargo apron with direct plane-to-truck access so cargo can be off-loaded and ready for transport within an hour of arrival.The airport is currently under-utilized, say officials. Although the airport can handle up to 1 million metric tons of cargo, only about 100,000 metric tons are coming in now. In addition, there’s no regularly scheduled air cargo service at the moment, just charters. Nonetheless, airport officials say they’ll continue to aggressively pursue more business, which may come about sooner than expected should DHL’s hub in Wilmington, Ohio close down.

Another rail project that will bring more capacity to central Ohio is CSX’s National Gateway. Similar to the Heartland Corridor, the rail project will also link Mid-Atlantic ports to the Midwest with double-stack routes, which will transit through Maryland, Virginia, North Carolina, Pennsylvania, Ohio, and West Virginia.

The railroad plans to expand an existing intermodal terminal near Columbus and build a new terminal at Marion, Ohio. The total cost of the public-private partnership is estimated at $700 million.

In the meantime, the formation of the Columbus Region Logistics Council is a further example of how members of the business community, government, and academia are taking action to develop logistics throughout the region.

Battelle, the huge consulting, research and development organization, was tapped to put together a long-range strategic plan, a ‘logistics roadmap,’ that was delivered in 2007, explains Ben Ritchey, vice president, transportation market sector, Battelle. “One of the results was the Columbus Region Logistics Council,” he says. It’s a volunteer organization comprised of shippers, freight forwarders, developers, and transportation companies. Some of the members include ODW Logistics, Honda of America, Exel, Limited Brands, Ohio State University, CSX, and Norfolk Southern.

Part of the logistics roadmap calls for: fostering a logistics-friendly business environment; continuing to develop and enhance advanced logistics infrastructure; infusing world-class logistics technology into regional industry; and building a high-skill workforce for competitive advantage.

“The benefit of this four-pronged strategy lies in focusing appropriate investments and activities that will most readily achieve job and business growth, build infrastructure, develop a talented workforce, and enable technology adoption that sets our regional logistics industry apart from competing markets,” notes Ritchey.

However, lack of capital is still a concern, he acknowledges. Yet, the promise of public-private partnerships, especially for “last mile” projects, is a reason to stay enthusiastic, says Ritchey.

Transitioning to emerging industries

While the logistics industry is a key part of the broader economic development activity in Ohio, several other emerging industries are taking root there and in surrounding Rust Belt states, namely solar.

The U.S. is poised to become the manufacturing mecca for the $18 billion solar industry and nearly all of the current solar manufacturing capacity is in the Midwest. In fact, with the exception of Nanosolar’s thin film facility in San Jose, California and Ausra’s plant in Las Vegas, all solar panels manufactured in the U.S. are made in the Rust Belt.

First Solar, a $22 billion solar panel manufacturer based in Perrysburg, Ohio, announced in August that it plans to expand its manufacturing operations and development facilities near Toledo.

The investment will add approximately 500,000 square feet of manufacturing, research and development, and office space, and will add at least 134 new jobs to the company’s current workforce of 700 at its Perrysburg facility. First Solar is collaborating with state and local leaders on a comprehensive incentive package for these two projects. These incentives are central to First Solar’s expansion plans in Ohio and are subject to approval by state and local authorities.

The expansion is expected to be completed in the second quarter of 2010 and will increase the annual capacity at the Perrysburg facility to approximately 192 megawatts. In addition, First Solar will construct a separate facility to support increased development activities associated with its advanced thin film solar module manufacturing technology.“Scaling our manufacturing capacity while taking advantage of existing infrastructure will incrementally lower the manufacturing cost per watt at a rate comparable to our lowest cost facility in Malaysia,” said Bruce Sohn, president of First Solar. “The expansion of our operations in Ohio is a direct result of the outstanding achievements of our associates and a strong, ongoing partnership with state and local leaders.”

“The state of Ohio is proud to support industry leaders like First Solar who are using renewable energy to power the future,” said Ohio Governor Ted Strickland. “In making this significant investment and expansion in Toledo, First Solar is helping us to send a message to the world that Ohio is reinventing itself as the leader in the advanced energy industry.”State regulations require that at least 25 percent of the electricity sold in Ohio to be generated from new and advanced technologies by 2025.

According to Gov. Strickland, “Already, Ohio has more alternative energy-related projects under way than any other state. The state’s extensive manufacturing supply chain provides thousands of products to the alternative energy industry. And, Ohio is home to the largest fuel cell supply chain in the country. Our welders, machinists, electricians, and iron and steel workers are retooling and transferring their skills to retrofitting buildings, building mass transit, installing wind and solar power, and manufacturing energy-efficient cars and trucks.”

“Ohio now leads the Midwest in the growth of venture capital investments in the biosciences; we rank first nationally in per capita clinical trials and operate the largest center for stem cell and regenerative medicine between the coasts. In the U.S. News & World Report rankings, Ohio leads the nation with four of the country’s top 15 children’s hospitals. The Cleveland Clinic, meanwhile, has spun off two dozen start-up companies in the past decade, and averages 200 inventions each year.”

Commodity Decline

While we have been regaled with the ongoing unraveling and reconsolidation of the massive US mortgage market, the rise and fall of the oil market is delivering another casualty. As my readers know, I called both the price run up past $100 per barrel and the turn at $145 per barrel. This price move was necessary to force the public to pay attention to our serious exposure to the presently inelastic condition of the supply side of the oil equation. We now have a global consensus for shifting out of the fossil fuel business and demand has been visibly throttled. I now expect a return to $65 per barrel.

Prior to the oil price run up we had a huge price lift in commodity prices. This created a huge amount of credit and has thoroughly funded the metals industry in a way not possible for generations. The ongoing oil price decline appears to be collapsing that long lasting bubble.

To give my readers a meaningful standard to work with, I will share one fundamental idea. All commodities are normally sold at a price very close to the real cost of production. The rationale is obvious. Higher prices allow all producers to ramp up production and to invest in technologies and new operations that will bring costs down. The only real constraint to this behavior is the time needed to make this happen. Well, guess what? We have had the necessary two to three years to dust off every mothballed project from the past two generations and blast them through permitting.

And now the credit in the commodity markets is evaporating.

Up to about three years ago, all copper mines worked against a copper price of around $0.70 per pound. This had been the average since the sixties! This had actually driven new mine development out of North America. But all mines worked against an operational break even of around that seventy cent mark.

I address copper in particular because it continues to be the leader in terms of mining innovation and cost cutting. When I first got into the business in 1972, it was still possible to contemplate mining a several million ton deposit carrying twenty pounds of copper to the ton over several years. Today that represents a month’s supply in most major mines. Such scale has permitted mining grades to hang around eight pounds to the ton.

What I learned early on was that this technology ultimately came to every other minable commodity. I know of deposits in certain commodities that would idle every other mine in operation if brought on stream.

Returning to copper, we have a commodity that requires three or four years to ramp up but then can be produced for well under $1.00 per pound. Yet we have been forced to pay $4.00 per pound and now are back at $3.00 per pound. This I see returning to around $1.50 to put everything back in balance.

Of course there are an army of analysts who will argue vehemently that this is not so. Oh well!

We have just been through an old fashioned commodity boom and bust carried out over three years. All the producers are flush with cash and are bringing fresh production on stream. This is also happening throughout the global agricultural business. This next year we will be awash with huge surpluses and a rapid global business recovery driven be suddenly lower costs across the board.

Importantly, the market has decisively signaled the need to vacate the carbon business and governments are getting mandates to do just that. This is giving us the time to do it right.

As I have posted, the simple shift now from diesel to LNG in the USA alone will release half of our demand for oil. The advent of THAI will let North America become the globe’s strategic oil reserve with perhaps two trillion barrels of producible reserves booked before we are finished. That is twice all the oil produced to date.

This all means that the economic rebound will be very strong for the next three years.

Historic Sarah Palin Rise and Energy Independence

I normally do not comment at all on current news since rarely is it truly important in the framing of the issues of the day except perhaps through the mists of time. Then there are weeks like the past that reach a threshold to really stand out and beg for comment. Here last week we had a possible market bottom and the abrupt emergence of Sarah Palin as political kingmaker.

I say possible market bottom because it is the first week of September, the down move is now testing a prior low from two months ago when the worst financial news was first breaking. Also this low is 22% of the all time market peak. To go the next 10% all that strongly touted bad news would have to be true. If that bad news is not true and I am seeing solutions going into place to prevent the worst, then stocks are cheap again and the worst is over.

Remember that the real stupidity has been cleaned out over the past two years. All the holders of bad paper have been working overtime to repair the damage. Stabilizing Fannie Mae and Freddie Mac should mostly end the surprises and also stabilize housing prices. We are almost ready to return to prudent business as usual.

There will now be plenty of cash around to buy equities and this is one of the better times of the year for such buying of bargains. This last brief shakeout sets the stage for a decent bullish quarter offsetting the past nine months of ugly financial news and markets.

The price of oil continues to slip as everyone wakes up to the idea that $145 oil suppresses demand and that Americans want out of the oil business now. The oil price decline has also taken the speculative money out the commodities markets in general and they are all in major decline. This was long overdue. Next year everyone will be complaining about surplus everything.

This readjustment in global pricing will have the immediate benefit of improving cash flows as this source of costs is finally abated. This means that business can improve across the board over the next two years.

Then into this mix we have the introduction of Sarah Palin as the vice presidential candidate for the Republican Party. What a week!

I dislike commenting on the US political scene since I am an outsider looking in and can surely only offend everyone. However, I have watched the media give Obama a free pass for the past year and have been disquieted. I am not the only one. He has not been brought to heel on his visible attachment to long discredited policies of the liberal left. And let us be totally fair. The wacko right has policies that are just as far from the pale of acceptability. I simply believe that a country’s leader must be pragmatic and an independent thinker above the simplistic ideas of the ideologues. Obama may well be such a thinker, but he hides it well.

This set him up with a giant bull’s eye on his back for the moment that someone changed the story line. You must also admit that the press was getting tired of the great storyline presented by the Obama candidature. The nomination was wonderfully choreographed as the coronation of the prince culminating in the most heralded oration since the Gettysburg Address. I think he got twelve hours of coverage before the rug got pulled by McCain. Since then for the past several days he has barely gained a mention as the press leapt happily onto the story line of Sarah Palin.

The Campaign or battle is now truly joined and he is up against two wonderful scrappers who are surely not going to let go control of the script for the next sixty days.

More importantly, their success means a probable one term McCain presidency followed by a probable two term Palin presidency. Goodbye Hilary.

Vastly more important to the Republican brand itself is that their supporters identify with this renegade style of candidate. Remember that the original success of the party with Newt and the boys was as renegade outsiders. That they became insiders much too fast was their undoing.

I have no doubt that the first task undertaken by a McCain presidency will now be the reforging of the entire US energy business. My readers know what the solutions must be and see in my postings many of the most viable options. These have been mere words to date. In the hands of visionary leadership they can become total reality in the next four years. Sarah was totally right to drive the building of a working gas pipeline from the Alaska North Slope through the Mackenzie Valley (which may turn out to be the greatest store of hydrocarbons on earth) to the pipelines in place in northern Alberta to the lower forty eight. A huge long lived store of natural gas is a giant boon for the American economy and this pipeline and others have been dickered over for thirty years. It took political will to finish the job.

Readers already know that North America can be energy independent. It takes immediate conversion of the long haul transportation industry over to LNG, preferably from Alaska and rapidly expanding THAI oil production in both the Alberta tar sands and possibly in formerly depleted US oil fields. Cattail ethanol can also be expanded everywhere wetlands exist at a production rate a least an order of magnitude greater than corn. Full out this can all be done in the next four years.

I have seen no evidence that Obama can even imagine change on such a scale. I suspect that McCain/Palin are both able to and believe enough in themselves to go forward.

I think that this week will be remembered as truly historic.

What Congress Can do about Oil Now

The USA is currently consuming 20,000,000 barrels of oil per day or about 25% of the global supply. No one is in a better position to reduce consumption on a scale that matters to everyone else. And where the USA leads the rest of the world will surely follow.

The auto industry is now gearing desperately up to transition away from oil based products. Pricing alone is driving this move as consumers have been forced to forgo the pleasure of driving their mobile fuel hogs. No one seems prepared to buy a vehicle for the pleasure of parking it. I certainly expect the advent of a very inexpensive electric for short haul work. It makes eminent sense to use the SUV to haul; the kids to work while using the electric to go into work a lot further away. This is a new version of the two car family that everyone was excited about in the fifties. Yes, I remember all that.

The only problem with that is that it can only be a transitional process and may actually have little net effect on the oil supply even over several years. What is more, any attempt to legislate an outcome will be resented and paid for at the poles.

This again brings me back to the subject of diesel fuel. It represents about half of our consumption and it is primarily used by industry. It has never been very popular in the automotive industry.

It is thus possible for Congress to mandate a crash program to replace diesel with LNG or liquid natural gas. Apparently diesel engines can be converted easily over to LNG and the manufacturers are already prepared to produce LNG engines directly. That means fleet conversion and industrial conversion is possible within a very short time line of between two to five years. I would expect actual completion by the end of the five year cycle.

I would expect that the first two years will be needed to establish the necessary infrastructure.

LNG supplies are not in short supply, although a lot of the easiest supplies are again offshore. In any event, we have massive global supplies available to keep costs down for the trucking industry. It is also the cleanest possible hydro carbon and will go a long way to cleaning up the atmosphere.

California has seen the light and is already well down this road.

What Congress can do today is to mandate a swift conversion of the nation’s diesel consumption over to LNG ASAP.

This can release a possible ten millions of barrels of oil per day back into the global market. And our industry is even using a cheaper fuel.


Gallons of Oil per Barrel
42

Barrels of Oil per Metric Ton (U.S.)
7.33

U.S. Crude Oil Production
5,102,000 barrels/day

State Ranking of Crude Oil Production

Texas - 1,088,000 barrels/day

U.S. Crude Oil Imports
10,118,000 barrels/day

U.S. Crude Oil Imports from OPEC
5,517,000 barrels/day

Top U.S. Crude Oil Supplier
Canada - 1,802,000 barrels/day

U.S. Petroleum Product Imports
3,589,000 barrels/day

U.S. Petroleum Product Imports from OPEC
733,000 barrels/day

U.S. Net Petroleum Imports
12,390,000 barrels/day

Top U.S. Total Petroleum Supplier
Canada - 2,353,000 barrels/day

Top Oil Producing Countries & Exporters
#1 - Saudi Arabia

Top Oil Consuming Countries & Importers
#1 - United States

U.S. Total Petroleum Exports
1,317,000 barrels/day

U.S. Petroleum Consumption
20,687,000 barrels/day

Dependence on Net Petroleum Imports (2007)
58.2%

Crude Oil Domestic First Price (2007 wellhead price)
$66.52/barrel

Motor Gasoline Retail Prices (2007 U.S. City Average)
$2.85/gallon

Regular Grade Motor Gasoline Retail Prices (2007 U.S. City Average)
$2.80/gallon

Premium Motor Gasoline Retail Prices (2007 U.S. City Average)
$3.03/gallon

Federal Motor Gasoline Tax
18.4 cents/gallon

U.S. Motor Gasoline Consumption
9,253,000 barrels/day (388.6 million gallons/day)

Share of US Oil Consumption for Transportation
69%

U.S. Average Home Heating Oil Price
$2.37/gallon (excluding taxes)

Number of U.S. Operable Petroleum Refineries
149

U.S. Refiners Ranked Capacity (1/1/2006) #1 - Baytown, Texas (ExxonMobil) 562,500 barrels/day Top

U.S. Petroleum Refining States #1 - Texas 4,337,026 barrels/day

U.S. Proved Reserves of Crude Oil as of December 31, 2006
20,972 million barrels

Top U.S. Oil Fields (2005)
Prudhoe Bay, AK

Top U.S. Producing Companies (2006)
BP - 827,000 barrels/day

U.S. Strategic Petroleum Reserve
689 million barrels

Total World Oil Production (2005)
82,532,000 barrels/day

Total World Petroleum Consumption (2005)
83,607,000 barrels/day

T.Boone Pickens Goes LNG

You may have picked this up in the press, but T Boone Pickens has publicly stepped up to the plate and is leading two initiatives aimed at securing future energy supplies and freeing the USA from dependence on the middle East in particular.

His strategy has the merit of been applicable immediately. Essentially he is building mega wind farms to produce electricity and aggressively displace natural gas from the power generation business. This is happening now.

The displaced natural gas will be diverted to supply the transportation business. His press coverage mentions both cars and trucks.

In practice, the best immediate improvement will come from converting the diesel fleet directly to LNG for which a huge global resource is in place today.

I will never be the wind power supporter that many are, only because it truly needs to be integrated with a variable energy source that can used to offset shortfalls. The best solution is a power dam with a well filled reservoir and a LNG power generator is not far behind.

In any event nanosolar panels are not too far away and that is capable of dealing with much of our power needs.

LNG however, is the only viable alternative for the long haulage business that can be rolled out immediately and fully installed within a couple of years. Biodiesel suffers from been too little too late and needs a protracted build out on the supply side. The same holds true for ethanol.

It is obvious though that the industrial aspects of all three are been tested and mastered and their availability is eminent. The strength of LNG is that ample feedstock is available now. Feedstocks for either ethanol or biodiesel are grossly insufficient and will take a fair amount of time to nurture. Ethanol, though is well on the way to been a significant part of the fuel cycle, having already reached critical mass. We are now seeing late generation supply crops hit the market, so that sector should be optimized in side of five years.

Pickens is totally correct in his strategy of supporting LNG conversion in the transport industry while diverting LNG from the power generation industry through the immediate build out of wind farms now. The important fact is that all of this can be done now without any delay as either supply is built out or technology matured.

He gives lip service to the use of LNG in the automobile industry which I see as window dressing. The real conversion must take place in the trucking industry which has both the immediate need and the resources. They do not have any option.

The auto industry is embarking on a multi pronged conversion strategy that will shake out over the next five years. On top of that, the consumer even today has options to exploit. Most can easily switch down to a smaller car or public transport fairly easily. The advent of hybrids is now accelerating that process.

The advent of ethanol fuels is at hand and is now been implemented. Supply will soon follow this demand.

Biodiesel is now a cottage industry but is also building momentum.

These are all steps that can remove our need for any use of oil in the transportation sector by themselves.

Far more importantly, $140 oil has convinced everyone in North America that any dependence on offshore oil is A Bad Thing. They will support any and all initiatives that will speed us all out of the oil business. And where we go, the rest of the world will swiftly follow particularly Europe, India and China.

The electric car will slid into the short haul niche as ample electric power is made available. Quite simply, with a nanosolar plant outside of town, it is very attractive to go pick up an inexpensive light weight town car for personal mobility.

Pickens is just getting into this massive market a step ahead of the crush.

As an aside, LNG has always been held back from full exploitation because of perceived handling problems. These seem to not be the problem that they once were but they still require active management that is easily supplied in the trucking industry. In the meantime, global resources are ample for centuries of use and ultimately are backstopped by the oceanic frozen methane reserves. It is also the cleanest burning hydrocarbon fuel and will slash the percentage of CO2 emissions.

The transport industry could switch to biodiesel and perhaps will do some of that also, however, it is better all around to switch to LNG now. It alone will slash smog in the urban environment.

Oil Price Choke Point

I think this article by columnist Dick Morris, more than all the other hand wringing going on, has got it. The great transition out of the fossil fuel paradigm is underway. The political support is now in place to have the US economy and thereafter the global economy completely retooled away from any reliance on oil in particular and eventually natural gas and coal.

I expected it to take much higher prices to reach this trigger point, but it appears that we are here. The massive financial resources of the modern global economy will now be harnessed to shift us out of the fossil fuel energy trap.

Of course, if the Brussard fusion energy system works out, the transition will even be abrupt. The transition will appear to be abrupt anyway. The automakers are today cranking out electrics and hybrids. The next generation is next year. It is amazing to me that even manufacturers appear to have gotten on to internet time.

On top of all that, those who have actually read through this blog over the past year will have seen us discover several nifty strategies that are even happening now and many others if successful, that will be a major part of the energy equation within twenty years at most.

To begin with, conversion of the diesel truck fleet over to LNG is a must because this releases a major portion of our oil demand. LNG is not going into anything other than capacity shortage for a very long time. It is still a fossil fuel, but it is a good quick fix for the developing squeeze on global oil supplies. The last oil crisis pushed oil out of the home heating business. This one needs to shift the haulage industry out.

The conversion of the automotive fleet into less oil dependency is underway. My guess is that it will be able to cut demand there by about half over the next five years.

Several millions of barrels per day of demand can be fairly cut without any special action taken and in a simple response to the current price regime. And that is what we need to give us the five years we need to mobilize the alternatives.

What I have found always delightful, is the way that a generally free liberal economy is able to do when facing a clear cut challenge. It is amazing how swiftly decisions can be made and implemented in the face of sudden death. Now try to imagine any bureaucracy performing like that.

I had a revealing conversation yesterday. A Canadian businessman who has made his life for the past decade in Hong Kong told me that about two years ago the Chinese government veered away from attempting to involve the state and is now supporting the same style throughout China. It was very much a case of recognizing that China needed more of what Hong Kong has. This also suggests that within a generation we will see Taiwan climb back aboard as it will not matter anymore. I also now expect electoral systems to start working their way vigorously through the body politic. There is just too much heat to contain and that will blow it off. I also suspect that the political leaders of China are ready to transition to a fully democratic system as the middle class is now emergent and very conservative.

In any case, as I have said before, the oil price regime has shifted from the twenty year $30 mark to the plus $100 mark. This is a four fold increase in the cost structure and is now sitting at the upper range. We cannot afford this. The rest of the globe cannot afford this. What is more, we now know that we cannot depend solely on the oil industry. During the seventies oil shock brought on by the initial declines in US production, there was always the Middle East. All those reserves are no longer enough to satisfy projected global energy demand.

A lot of alternative energy strategies become feasible when cheap oil is $100 per barrel. We will soon see that price again because right now, consumers of oil are rapidly adjusting and demand is dropping. So unless we get a serious supply shock of a couple of millions of barrels per day, we will retreat from the $140 range. The long side speculators will get creamed and we will have a serious oversold market very quickly. The range may even open up to $60 to $140 before stabilizing at the $100 mark.

For those who like history, the seventies oil crisis peaked at $40 and crashed to $12. That was still four times the sixties bench mark of less than $3 and the real market shook out around $20 for the next twenty years. As I said, an accident could take us to $200, but it is now more likely we will see $60 first.

McCain Scores Big With Offshore Oil Drilling Proposal

Thursday, June 19, 2008 2:06 PMBy: Dick Morris & Eileen McGann

John McCain has drawn first blood in the political debate following Barack Obama's victory in the primaries. His call yesterday for offshore oil drilling — and Bush's decision to press the issue in Congress — puts the Democrats in the position of advocating the wear-your-sweater policies that made Jimmy Carter unpopular.

With gas prices nearing $5, all of the previous shibboleths need to be discarded. Where once voters in swing states like Florida opposed offshore drilling, the high gas prices are prompting them to reconsider. McCain's argument that even hurricane Katrina did not cause any oil spills from the offshore rigs in the Gulf of Mexico certainly will go far to allay the fears of the average voter.

For decades, Americans have dragged their feet when it comes to switching their cars, leaving their SUVs at home, and backing alternative energy development and new oil drilling. But the recent shock of a massive surge in oil and gasoline prices has awakened the nation from its complaisance. The soaring prices are the equivalent of Pearl Harbor in jolting us out of our trance when it comes to energy.

Suddenly, everything is on the table. Offshore drilling, Alaska drilling, nuclear power, wind, solar, flex-fuel cars, plug-in cars are all increasingly attractive options and John McCain seems alive to the need to go there while Obama is strangely passive. During the Democratic primary, he opposed a gas tax holiday and continues to be against offshore and Alaska drilling and squishy on nuclear power.

That leaves turning down your thermostat and walking to work as the Democratic policies.

McCain has also been ratcheting up his attacks on oil speculators. With the total value of trades in oil futures soaring from $13 billion in 2003 to $260 billion today, it is increasingly clear that it is not the supply and demand for oil which is, alone, driving up the price, but it is the supply and demand for oil futures which is stoking the upward movement.

The Saudis have made a fatal mistake in not forcing down the price of oil.

We could have gone for decades as their hostage, letting their control over our oil supplies choke us while enriching them. But they got greedy and let the price skyrocket. The sudden shock which has sent America reeling is just the stimulus we need for a massive movement away from imported oil and toward new types of cars.

The political will for major change in our energy policy is now here and those, like Obama, who don't get it need to rethink their positions. To quote FDR, “this great nation calls for action and action now” on the energy issue.

What has been a back-burner problem now has moved onto center stage and McCain has put himself in the forefront.

The Democratic ambivalence stems from liberal concerns about climate change. The party basically doesn't believe in carbon-based energy and, therefore, opposes oil exploration.

That's why Obama pushes the windfall profits tax on oil companies — a step that tells them “you drill, you find oil, and we'll take away your profits.” But Americans have their priorities in order: more oil, more drilling and alternative energy sources, flex-fuel cars, plug-in vehicles and nuclear power.

With his willingness to respond to the gas price crisis with bold measures, McCain shows himself to be a pragmatist while Obama comes off as an ideologue to puts climate change ahead of making it possible for the average American to get to work.

Of course, the high price of gas makes it inevitable that the U.S. will lead the world in fighting climate change.

With $5 gas, Americans will switch en masse to cars that burn less gasoline. Already we have cut our oil consumption by 500,000 barrels a day in the past year (about a 3 percent cut).
The move away from oil will be exponential from here on out, dooming radical Islam and reversing climate change at the same time. But while we are getting new cars, we need more oil and McCain has flanked Obama on this issue. Big time.

Oil headlines

The 2008 oil fright is continuing and we are seeing signs of volatility in the oil market itself and this likely presages a sell off in the price of oil which is rather welcome. We needed this price to get everyone’s attention. That accomplished, we now need a long period of price stability while demand is lowered and a vast redeployment of capital resources is put in motion. A price retrenchment to below a $100 is now in the works and is much more likely than any further advance. Much more importantly, the consumer is spending on ways to reduce the pain and this will cause a sharp lowering of USA oil consumption possibly beyond what anyone ever imagined possible.

I now expect that the conversion by the trucking industry to LNG engines will be precipitous in spite of the current distribution difficulties and the need to accelerate access to supply. Now that all minds are focused, it is possible to shed two to four million barrels of daily oil demand over the next four years. Yes this is optimistic, but the need is seen as dire and the effort will be there.

Recall that this price advance has not been driven by a shock of some sort. It has been driven by tightening supplies and the revealed inability of suppliers to crank up volume anywhere. That meant that the price had to go to a level were it became everyone’s business to cut down usage. At some point, the hole in your wallet sparks reaction. We have now clearly reached it and a full blown effort to reduce demand is now underway.

A shock may still arrive to run the price up to much higher levels, but I do not see many opportunities there. Besides, the retreat of the US dollar can only go so far as a way to balance the pressure and only hastens the day that other currencies take on reserve currency status.

What we cannot evade is that the current level of oil production at 87,000,000 bpd is likely as good as it gets and that this is terribly vulnerable to declines that are not easily replaced, although THAI promises to handle all that if we have enough time. Nothing else will do it.

This means that increased demand and some historic demand must be covered by other energy sources. The simplest but more inconvenient LNG can bridge this demand for a long time. It will certainly be having its heyday. On the other hand it is necessary. We simply cannot convert to anything else at sufficient speed.

I have already pointed out that cattail culture is capable of producing a cornucopia of ethanol as compared to any other biological pathway we have investigated. The sheer logistics are daunting. It would be better to properly encourage it and then allow it to roll out naturally, until all transportation fuel is ethanol. If every farmer took up the challenge today, it would still take at least a decade to make the easy stuff happen and a century to do the rest.

The fact is that we have options that sound policy can unleash.

What we do not have is a way to substantially stave of pending large field declines except by replacing such declines by fresh production using THAI on heavy oil reservoirs. This technology seems to be working in Alberta and will open up a major new class of field. It will still take a lot of time and as I have posted earlier, I think that we are confronting a production swing approaching 20,000,000 bpd over the next decade. And I am trying to downplay the scale of change hitting us, and hoping that is not really true.

That means energy will be in the headlines continuously from now on. Get used to it.

Developing Oil Fright

The past few weeks have made the developing supply crisis in oil crystal clear to everyone. The fact that I was able to predict this scenario a few months past did not require any prescience on my part. I only had to overcome everyone else’s state of denial. And now, the consumers are beginning to change their consumption habits.

The $130 price for a barrel of oil is quite sufficient to encourage a maximum effort to expand production and to expand replacement sources. A jump to $300 per barrel is unnecessary or that but will likely happen briefly if we have a surprise. By that I mean an unexpected drop of two million barrels per day. Such an event may not happen this year or even next year, and if we can get past that, other patches can kick in.

Right now a lot of folks are actually sitting down and doing the supply analysis and all you see are glum faces. The fact is that this crisis will not be magically fixed by turning on a well somewhere. That option has evaporated and with pending declines everywhere, supply has to be found by emergency replacement from non oil sources.

Even with the advent of THAI oil production and a number of important new fields, the industry can only hope to keep pace with the developing decline. To put it more succinctly, we are on the verge of losing roughly around 10,000,000 barrels per day of production over the next several years and I am likely still sugar coating the story. I think that we can bring on around this much new production with the aforementioned resources, after which the THAI technology could well be able to keep pace with further declines for some time.

The good news for us is that most of this will be focused in North America, permitting us the luxury of sort of controlling our destiny. So although we are going through an uncomfortable readjustment, the transition will be long and drawn out

The new emergency reserve supply is coming from the conversion of the transportation fleet over to LNG engines. This will easily release 15,000,000 barrels of oil per day globally and can be done almost overnight. In fact California is well on way to doing this and has begun to force the infrastructure. It is good to see that at least one group of politicians are not in denial. The point that I am making is that the USA can release millions of barrels of daily oil back into the market in probably less than two years by the simple expedient of a slight engine modification and a few tanks and tankers. The recent rise of diesel prices will force the truckers to make the switch as fast as they can.

I should mention that globally there are massive supplies of LNG for the asking. This is a direct result of a market that has been limited to pipeline distribution to meet the low end market of home heating. Transportation fuel readily can justify the economics of hauling it around in cryogenic tanks. I observe that LNG produces a steady supply of boil-off gas that needs to be shoved into a local pipeline if it is not immediately burned. We can live with all that with a lot of common sense applied.

The other big fix that is been suggested is the simple expedient of making all new automobile engines able to switch on demand to ethanol. That industry is still shy of a few solutions, but establishing capability is the first step to driving demand and supply. I have little doubt that ethanol supplies will begin to climb. I will be posting tomorrow on a discovery that I have recently made for a huge new ethanol feedstock that is likely capable of replacing all our gasoline.