In this episode: oil price fetish gone wild, CCS mysteries, OPEC as a true cartel, have a FIT, please!

New ’super-spike’ might mean $200 a barrel oil:

With $100-a-barrel here for now, Goldman Sachs says $200 a barrel could be a reality in the not-too-distant future in the case of a “major disruption.”

Goldman on Friday also boosted by $10 the low end of its 2008-2012 projected range for crude to $60 a barrel — significantly lower than current prices, to be sure, but a possible mark for oil if “normalized” trends return to the marketplace.

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Tacking on $15 a barrel to all of its oil estimates, Goldman now sees average selling prices of $95 a barrel for 2008, $105 a barrel for 2009 and $110 a barrel for 2010. The high end of its range is now $135 a barrel — but Goldman hinted that prices could be headed even higher.
“As the lack of supply growth and price-insulated non-OECD demand suggest a future rebound in U.S. gross domestic product growth or a major oil supply disruption could lead to $150-$200 a barrel oil prices,” Goldman said.

Here we go again.

For the newbies on this site (and I know you;’re out there), let me go through this one more time.

Of course oil could hit $200/barrel thanks to a “major oil supply disruption”. Why on earth would anyone think that with oil already persistently over $100 and the market still tight as a drumhead that it couldn’t be pushed to $200?

If you think that’s an extreme position, then ask yourself just what “major oil supply disruption” could entail. A terrorist attack closes the Gulf of Hormuz for months? Another war breaks out in the Persian Gulf region, leading to sharply curtailed exports, again, for months? Perhaps Venezuela, Iran, and some other exporting countries decide they’ve had enough of the US’s hamfisted foreign policies and band together to form a mini-OPEC that drastically cuts back shipments for, once more, months?

Frankly, not only are these comments From Goldman Sachs about the possibility of $200 oil pointlessly obvious, they also sound like a pretty blatnat attempt to get attention. “Hey everyone! We got that $105 price spike thingie right, look at what we’re saying now!”

Ottawa’s carbon plan jumps gun, critics say:

The [Canadian] federal government is relying too heavily on unproven technology as part of its efforts to fight climate change, critics are warning.

“We need an independent assessment on something of this magnitude,” said Ken Ogilvie, head of Pollution Probe.

Green Leader Elizabeth May said the Tories are relying on the promise of carbon sequestration as if it were a “future magic silver bullet.”

Ogilvie and May were commenting on a federal plan to get Canadian industry to start pumping its pollutants deep into the ground as part of the effort to fight climate change.

The Conservative plan to cut greenhouse gas emissions weighs heavily on Alberta’s oil sands and promises to put an end to “dirty coal-fired power plants” by 2012. Oil sands projects launched in 2012 or later must either capture and store emissions in underground rock formations or find another method of cutting the equivalent greenhouse gases.

See the article for a lot more detail on this evolving situation.

CCS (carbon capture and sequestration) is an almost perfect example of something Radar O’Reilly once described on the TV series M*A*S*H as being “pretty breakdownable”. Everything I’ve read on CCS says that we haven’t made it work on anywhere near the scale or time frame needed, plus it will be quite expensive to retrofit onto existing coal plants that were not sited or designed with CCS in mind.

What happens, for example, if we here in the US start pumping a significant portion of the 1.9 billion metric tons of CO2 we generate every year just from coal-fired electricity plants into the ground, and then a few years later discover that some of the repositories are leaking? We’ve spent a lot of money to sequester that CO2, only to find out it had other plans. How do we stop those CO2 deposits from continuing to leak? How do we make sure that others don’t do likewise?

And for that matter, how closely will we monitor these formations to ensure that we’ll know if and when they leak? Which utilities are interested in spending additional money for monitoring once they’ve been convinced that they must spend so much to sequester the CO2 in the first place? Put another way, where is the political will to pass laws that say either utilities must do extensive monitoring, permanently, or that they must pay an additional fee to the government so it can do the monitoring.

Why do I get the feeling that CCS will turn out to be one of several ways in which we find out that our on-paper CO2 emissions reductions don’t match reality? As I’ve pointed out before, what happens when the proclamations by industries or governments don’t line up with the observations of scientists? How do we determine who is cheating, and how do we force the cheaters, particularly when they’re in another country, make their actions match their claims?

This line of thought is why I think CCS will turn out to be a colossal waste of time and money. We’re far better off focusing on minimizing the initial creation of CO2 instead of trying to figure out how to deal with it after the fact.

Related article: A win-win-win solution

The Triumph of OPEC:

For much of its 47-year existence, the Organization of the Petroleum Exporting Countries (OPEC) has been a cartel in name only. It could not, in practice, control oil prices because many of its members regularly breached the production quotas that were intended to regulate the market. So OPEC generally followed oil prices up and down, as supply and demand conditions shifted. But now OPEC may be the real deal: a cartel that works. If so, that’s bad news for us.

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What’s wrong is that a fall of oil prices is one of the mecha­nisms by which a recession or economic slowdown corrects itself. Lower prices for gasoline, home heating oil and diesel fuel improve consumer purchasing power. They muffle inflation and in­crease confidence. In this sense, they’re an important “automatic stabilizer” for a faltering economy. If the automatic stabilizer is disarmed—or, worse, transformed into an automatic “destabiliz­er”—then the slowdown or recession may get worse.

Oil producers don’t much care. High prices have been good to them. Since 1999, annual oil revenues for OPEC countries have more than quadrupled, to an estimated $670 billion in 2007, says energy economist Philip Verleger Jr. What’s less clear—to ex­perts, at any rate—is whether OPEC has merely benefited from good luck (tight oil markets) or has acted as a true cartel, restrict­ing output and raising prices. The right answer is: both.

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The American approach is to rant at foreign producers on the silly presumption that they should subordinate their interests to ours. The resulting self-righteousness rationalizes a refusal to do much that would actually influence their behavior and limit their freedom of action. It was only last year that Congress raised fuel-efficiency standards for new cars and light trucks: the dampening effects on oil consumption will be years in coming. We have steadfastly re­jected higher gasoline taxes to curb unnecessary driving and strengthen demand for fuel-efficient vehicles (better to tax ourselves than let foreigners tax us through higher prices). And we have consistently restricted oil drilling in Alaska and elsewhere.

It is a fair commentary that, by doing so little to check its own thirst for imports, the United States has unwittingly con­tributed to OPEC’s present triumph. The extent of that tri­umph will be tested this year and next. The U.S. Department of Energy projects that non-OPEC oil supplies—from Brazil, Canada and Kazakhstan, among other places—will increase. Meanwhile, a weaker global economy may dampen demand. Even OPEC may be unable to hold prices at today’s high and undesirable levels. Whatever happens, the long-term threat of a global oil cartel will remain. We should be taking the hard steps to limit its power. Considering our past complacency, we probably won’t.

I have more than a few quibbles with this author, Robert Samuelson, in his other writings, but I’m largely in agreement with him on this one. We (the US) screwed up, and gave OPEC not only a stick to beat us with but more than enough incentive to use it.

I think anyone expecting a mild-to-moderate global recession to significantly trim oil prices is engaging in faith-based analysis, though. Even in such a situation we can expect to see India and China continue buying cars at record clips, and OPEC can easily maintain higher prices by trimming output. We’re so dependent on those imports that they can ship less oil and push up prices enough to more than make up for the lower sales volume–that whole inelastic demand curve thing cuts both ways.

And as for relying on the DOE’s projections, well, the less said about that, the better.

Building a FIT Renewable Energy Market in the U.S.:

As renewable energy developers and generators in the U.S. maneuver through a patchwork system of tax incentives, renewable energy credit markets and net metering policies, many in the industry are calling for the adoption of a national feed-in tariff (FIT), which they say will create a more simple, stable market.

Adding to the call for a U.S. FIT were two high-level political figures attending the Washington International Renewable Energy Conference (WIREC) in Washington, D.C. last week. U.S. Representative Jay Inslee (D-WA) and former California Energy Commissioner John Geesman have joined a growing number of FIT supporters who want to bring the renewable energy promotion policy to the U.S.

Geesman came out in support of a FIT for the state of California last October. He reaffirmed his commitment to FITs at a WIREC side event last Thursday, saying that they are the “best way to rapidly bring down the cost of renewable energy technologies and allow the state to live up to its aggressive policy targets.”

Congressman Inslee, who will soon introduce FIT legislation to the House of Representatives, said that a national performance-based incentive will “open the floodgates to innovation and the growth of these industries,” and help rebuild the shrinking U.S. manufacturing base.

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Now operating in 37 countries around the world, FITs are viewed by many people in the industry as the key to rapid, uncomplicated deployment of clean energies. Under a FIT law, renewable energy generators who connect to the grid are guaranteed a payment for the electricity produced by their system over a 15-20 year period. Tariff prices can vary based upon technology type, size of system and geographic location and are stepped down each year to reflect the cost-curve of each industry. The incentives are paid for by charging each ratepayer a small fee on their monthly utility bill. It is commonly said that the monthly fee in Germany is “about the same as a loaf of bread.”

See the article for much more detail.

I think a nation-wide FIT in the US would be a fantastic idea.

The key point here is that we can’t worship the free market (as some on the right would have us do), nor can we demonize it (as some on the left would do). The optimal approach is to view it as simply another tool, albeit an extremely large and powerful one, and figure out how to make it help us reach the goals we as a society value, such as reducing our CO2 emissions.

A lot of people, myself included, like the idea of a cap-and-trade system to force the market to monetize CO2 emissions and reduce them. We need more than that, however, and a FIT, which would suddenly give individual homeowners and businesses a strong incentive to not only conserve electricity but to become producers, would be a complementary and critical addition. I think of it as pairing a “push” and a “pull” signal in the market. The cap creates a push, downward pressure on doing the wrong thing, while a FIT would create a “pull” to get people to do the right thing.

In a way, this is similar to the view I’ve expressed in the past about vehicle policies. I’ve said that we need a combination of incentives, such as a high gasoline tax coupled with an offsetting payroll tax cut, to increase the financial benefits of conserving gasoline, regardless of what kind of vehicle they drive, with a feebate system to get people to buy more efficient vehicles, sooner.

I know that a lot of people find public policy to be about as interesting as watching dry paint peel. But I’m convinced that it’s worth talking about here simply because it has the potential, if done right, to be the closest thing to a silver bullet we’re ever going to see.

Assuming we can find some leaders, that is.