Are we headed towards a minor energy crisis?

Funny how this sentence is buried towards the end of an article on the current natural gas situation:
"Gas is up 32 percent this year, heading for the biggest annual gain since 2005."

That just does not fit the current narrative of energy cornucopia - and is dismissed as the result of unusually cold weather.

But reality is starting to show potential trouble on the near term horizon.

The current level of natural gas supply is the lowest it's been in years for this time of year and is dropping at a very fast rate compared with historical averages.

The other main heating fuels - propane and distillates (heating oil) are also running very low.

Stock levels of natural gas, propane and distillates are all so low that they are ALL below the lowest point in their 5 year range - IE this is the lowest stock level we have seen in over 5 years for this time of year.

And the media continues their cornucopia talk. Articles ask if  the U.S. be destabilizing energy rich nations when we start to export natural gas in a big way. I think this is absurdly premature.

If the rate of stock draws of Natural Gas continues at it's current pace (last three weeks) it will reach 718 Billion Cubic feet by the middle of March. The lowest stock levels recorded in recent history was 642 Billion Cubic feet at the end of winter 2003. Last years minimum was about 1700 BCF and the year before that the minimum was well over 2000 BCF.

Propane and Distillates are also on a path towards very low stock levels by the end of winter.

I do not think that Natural Gas inventories will drop to 718 Billion Cubic Feet by the middle of March because the price will move up in a big way long before it gets that low. Likewise propane and distillates will see strong increases in price if the current stock level draws continue at even close to the current pace.

The last two winters have been mild. 2011-2012 was one of the warmest in history and 2012-2013 was somewhat above average. So far 2013-2014 is running somewhat below average.

The Energy Cornucopias are warning that if prices rise this will result in the market being flooded with new supply. But stock levels are currently dropping like a stone so if this glut of low cost supply really exists it should hit the market any time. If this glut of low cost supply really exists the stock levels will quickly stabilize - in this case it means they will drop at a substantially lower rate while the price stays somewhat stable. Readers of this blog know that I am quite skeptical of the this "energy cornucopia" and am therefore guessing that we will see a big increases in the price of Natural Gas, Propane and perhaps even diesel over the next couple of months unless we have a big warning trend and fast.

It could get bad enough to be labeled as a minor energy crisis.

I do not think it will be a major energy crisis because solar and wind are waiting in the wings with prices not much higher than fossil fuels right now and could ramp up in a big way pretty fast. There was no such infrastructure for solar and wind in the 1970's.

How would this affect heating? Short run: space heaters running on electricity that stays cheap even as natural gas and propane skyrocket. Longer term: electric baseboard heat - or many other options.

Global Cooling?

- The amount of ice in the arctic for this time of year is the highest it's been in years. See: http://nsidc.org/arcticseaicenews/ (click on the graph on the right. The green line was last year and the blue line is this year. Notice that the blue line is way above the green line.

- The amount of ice in the antarctic set a all time record high this summer (winter for them). See http://nsidc.org/arcticseaicenews/. Go down the page to "Another record high in the Antarctic" Note: 2012 was the old record year.

- Hurricane activity has been very low this fall.

These are all signs of cooling of course.

What is causing this?

- From what I read the high ice level in the antarctic is believed to be due to leftover effects from the ozone hole.

- The current sunspot cycle is weak and weak sunspot activity is correlated with cooler temperatures. More sunspots indicate a more energetic sun.

And now the story starts to get interesting.

The current sunspot cycle is actually the weakest in over 100 years and it appears that we may be headed for another "Maunder Minimum" or something close to that. That's what caused the "little ice age" between 1680 and 1725. 

Regardless of whether we hit (or surpass) the Maunder Minimum, it looks like we are headed for a period of very few or no sunspots for an extended period of time. See: http://phys.org/news203746768.html and http://solarscience.msfc.nasa.gov/SunspotCycle.shtml 

and this is strongly correlated with cool temperatures.

But you hear nothing about this in our media. Nothing. And it's pretty interesting!

Why?

- Liberals don't want to talk about it for obvious reasons: it might undercut their dire warnings on Global Warming.

- Conservatives don't want to talk about it either. It might come across as defending polluters: "gee we might be headed for an ice age without all those coal fired power plants?". That's not a winning message. It also might come across as "admitting" to global warming in a back door way - and some want to deny global warming.

- The mainstream media (both liberal and conservative) likes sensationalism and likes to hew to a story line. The story line is Global Warming. 

- No one wants to hear that some things are out of our control. That makes people feel powerless. Sunspots are 100% out of our control. They don't even have to sign up for Obamacare :)

- Once "truths" are established, the powers that be do not like to admit they were wrong. Think the new economy of 1999 and "housing prices cannot go down on a nationwide basis for an extended time" crapola of 2003-2007.

One other interesting tidbit: on Sept 12, 2001 a noticeable increase of global temperatures was seen: something like .3 degrees. The reason is hypothesized to be the lack of contrails from jet airplanes that were not flying that day. Those contrails apparently cool things a bit. Take them away and the temp goes up. But before that contrails were thought to be another cause of warming. 

Takeaways from all this:

- Climate is influenced by things other than human activity

- Some things that humans do tend to increase the temperature and some things humans do tend to decrease the temperature. 

- It's complex and not at all straightforward.

- If climatologists got the contrail thing wrong (they did) then what else are they mistaken about.

The rise in CO2 is well documented and not controversial. The rise in CO2 is due to human activity. I asked my cousin Bradley about this last time we got together (he is a professor at Northwestern and a global warming expert!). He assured me that the rise in CO2 is attributable to fossil fuel and not volcanic activity and they can know that via isotopes and other very rigorous methods.

But the temp has not gone up nearly as much as the models predicted given the rise in CO2, and for the moment we have a noticeable cooling trend.

I think the reasons are a) the sunspot cycle and b) some human activity is having a cooling effect.

I think the biggest bias in our media is sensationalism and hewing to established story lines (herd behavior) and that's why you hear pretty much nothing about what I talked about above: a dramatic rise in ice in the arctic, very few hurricanes, all time max ice extent in antarctic, early cold in North America, a foot of snow in Kiev the other day but nothing about the trend. Important information is not getting through.

Remarkable stability in the oil market

The price has been remarkably stable/consistent since 2010. Never going much above $105 and never dropping below $85 during this time.

This, I believe is the result of a very large supply of expensive oil coming onto the market starting in earnest in 2009. Shale oil has a marginal cost of 80/barrel or so. The talk of a "technological revolution" is hype. 

It's real interesting that virtually nobody in the media talks about the stability of oil prices which could be construed as a good thing (isn't stability usually good?). But my guess is that stability at a price in the mid/upper 90's weakens the case of a "technological revolution" so it's ignored. Stability and revolution just do not go together. A technological revolution should send oil prices dropping like a stone (like computer chip prices did). Stability indicates that we have not have had one. We have had an economic revolution where due to economic factors (supply and demand) we now need to exploit much more expensive oil. It just so happens that there is a LOT of expensive oil out there hence the stability in price.

I think we may be on the verge of an era of green energy. Cost in a MPG sense for electric cars is 2/gallon right now and I do not see that going much higher. To many sources of elect are out there and wind and solar will never become more expensive. They will become less and less expensive but at a slow rate. We have a boom in nat gas. More cheap elect. Global warming may cause people to re-evaluate Nuclear.

Possible story in Popular Mechanics 5 years from now:

"10 Tips on keeping your Hybrid running on electricity for as long as possible "

Reason for this headline: oil will still be expensive but electricity may be even cheaper than it is today and the range problems of elect cars will not yet be solved.

Letter to Jeff Madrick regarding "Education Is Not the Answer"

See:
http://harpers.org/archive/2013/06/education-is-not-the-answer/

My letter to Mr. Madrick:

Mr. Madrick,

I thought "Education Is Not the Answer" was very good. I have been skeptical of the "Education IS the answer" arguments for a long time. 

My degree is in Finance and one of the basics of Finance is "net present value" which a way to determine present value of something given certain assumptions, payments etc. NPV analysis is used all over the place in business and finance but -tellingly- has not been used in any of the 'important' studies which purport to show the importance of college education WRT earnings/wealth.

A NPV analysis typically works by asking what is the current value of a stream of future income. Typically what is being valued is a loan or a business (how much should we pay to buy a business that is making a profit of X). The core concept is that you pay something now to get something later and given your assumptions on interest rates, future profits and so forth, how much should you pay.  This is a core concept of Finance and obviously could be used to estimate the value of a college education. But it isn't. The analyses I have seen on the value of education simply calculates the increased earnings that college graduates attain over their career and do not consider the up front cost at all! But there is (of course) a substantial up-front cost to college: not just the payments and loans and interest on those loans but 4 years making very little or no money vs. 4 years of employment. During those 4 years of employment a person can make contributions to a 401K, has withholding for Social Security and has 4 years seniority at the end where a college grad is starting for 0 with no 401k, and 0 into Social Security. This is significant. On a purely financial basis one needs to make a lot more money later to make up for all of that.

But no analysis that I have seen on the value of a college education gets into NPV - they simply calculate the increased earnings of college grads and say oh how great that is - without rigorously considering the costs. The costs are important! The lack of subjecting the costs to a a rigorous NPV analysis caused me to be skeptical of studies purporting to show the benefits of college (in a financial sense) a long time ago. 

But it gets worse. The "value" of college seems to be to broad a concept. It's like asking what is the value of living in New York City. The average income in New York is very high of course. But there is a big difference between Manhattan and the Bronx, and there is a big difference between being transferred to New York by an employer and moving there "on spec" so to speak. If someone asks "is it worth moving to New York?", you would need a lot more information before you could answer intelligently. A college education is likewise a very broad concept. There is a big difference between majoring in English vs. Electrical Engineering. 

But it gets even worse. How does an English major fare if he gets an entry level job and never gets any further education vs. an English major who goes into sales, gets and MBA had has a laser like focus on getting a corner office job someday. This latter English major's income stream will likely be far higher than the former. 

What is more important: level of education/skill or job title in determining who makes a lot of money. Where is the stronger correlation: level of education/skill to income (and income gains) or job title X (such as CEO) to income and income gains. I suspect the stronger correlation is to job title. 

I suspect that an there is a strong correlation between level of authority/management and income gains over the last 30 years. IE if you are in upper management of a sizable company then it's pretty likely that your income rose more than most people. I also suspect there is a strong correlation between money management and income gains over the last 30 years  IE if you in the management team of a hedge fund then then it's pretty likely that your income rose more than most people. Finally I suspect that professional athletes and major entertainers have made strong gains over the last 30 years. I also suspect that if you are involved in making something your income dropped. Think assembly line workers, and industrial engineers.

And how about this: what happened to your income over the last 30 years if you were in a job that used to be unionized but no longer is. Think assembly line worker. I'm guessing that if you are in this category your income over the last 30 years took a hit.

I use the word "suspect" and "guess" above because it's a) what I see all around me but b) you don't see a lot of rigorous analysis/reporting on it. You see a lot of reporting on the so called "1%" but you don't see a lot of reporting/analysis on who they are. When that subject comes up the platitudes fly regarding education and skills. 

The article "Education Is Not the Answer" seems to imply that a big cause of income polarization over the last 30 years has been the decline of unions which decreased the the bargaining power of workers and strengthened the hand of management. Perhaps there has been a substantial transfer of wealth away from (industrial and other) workers and to management (especially upper management). But this is certainly not the story we hear in our media day after day. We hear a bright sunny story about skill and education. It is important to know which one is more accurate.

And as to the value of a college education for the average person: how about a NPV analysis.

The energy bubble

Currently the media is filled with stories about a so called "Energy Revolution" that has occurred and is supposedly unleashing vast quantities of heretofore unknown or unusable hydrocarbon resources - mostly oil and natural gas.

This is nothing less than the intellectual fraud or our times and what we are seeing now actually just another bubble. It's an intellectual fraud almost on a par with the "new economy" of the dot com era and the crazy idea of 10 years ago that the housing market could not see a general contraction.

In a nutshell the idea is that a technological revolution has occurred over the past 10 years that has allowed the oil and gas industry to a) discover reserves they did not know about before and/or b) exploit reserves that were known about but to expensive prior to this "revolution" to exploit.

When the discussion moves to what exactly this technological revolution is the discussion gets hazy fast. Or downright inaccurate to an almost silly level.

Before I get into more details on this fraud let me tell you what has occurred: the price of oil has remained high enough for long enough so that long known about reserves of expensive and dirty oil can be exploited at a profit. The price has remained high because the ready supply of conventional light sweet crude is no longer enough to supply world demand and there no other choice but to either exploit expensive dirty oil or use more unconventional sources (solar and wind specifically). Both are happening.

What is my evidence? Exhibit A is the price of oil. As I write this the price of WTI crude is 95.61. Adjusted for inflation the price during the 1979 oil shock didn't even reach 80. The price of crude oil gained consistently from 2000 to 2008 and peaked at a bit over 135 in the summer of 2008 before dropping to just under 75 and then going back up to a consistent range of between 85 and 105 for several years.

The marginal cost of production of Saudi Crude is about 12/barrel, and the marginal cost of production of conventional Texas crude is about 25/barrel. The marginal cost of (fracked) oil in North Dakota is about 80/barrel.

From http://www.reuters.com/article/2009/07/28/oil-cost-factbox-idUSLS12407420090728

 Oilfields                   Estimated Production
 /source                        Costs ($ 2008)
 Mideast/N.Africa oilfields         6 -  28
 Other conventional oilfields       6 -  39
 CO2 enhanced oil recovery         30 -  80
 Deep/ultra-deep-water oilfields   32 -  65
 Enhanced oil recovery             32 -  82
 Arctic oilfields                  32 - 100
 Heavy oil/bitumen                 32 -  68
 Oil shales                        52 - 113
 Gas to liquids                    38 - 113
 Coal to liquids                   60 - 113

If there was enough in the first two lines above (conventional oil) to satisfy world demand then the price would collapse from what it is now (95.61) to at least 40/barrel (perhaps lower) and heavy oil/shale production would evaporate.

We have had a revolution all right but it has been a economic revolution. Oil prices are now persistently high enough to make it economic to exploit expensive dirty oil.

Lets look at some of the details of the "technological revolution" fraud.

Lets start here:

New technology propels 'old energy' boom

By JONATHAN FAHEY | Associated Press
http://finance.yahoo.com/news/technology-propels-old-energy-boom-155331085.html

what are the nuts and bolts of this "revolution?" horizontal drilling and fracking. Fact: horizontal drilling has been done since the 1930's and fracking since the 1960's. At no time then or now could they get the process such that the oil drilled would be price competitive with conventional oil. This article also talks about "imaging techniques" and "computer technology".  Both are of course used and both are better now then they used to but it's a fraud to call them revolutionary in the sense of enabling a technological hydrocarbon boom. Fact: nothing revolutionary from a technological standpoint has happened in this industry in the last 20 years.

The power of this "technology propels energy boom" story is that it tells us what we want to hear (and not coincidentally what the oil industry wants us to believe). Reality is not so nice. Also, reality is more complex. A simple happy story sells -  remember room temperature nuclear fusion? A complex story about high prices and hard choices does not sell.

This current happy story is so compelling that we now read things reminiscent of the dot com boom:

The Dark Side of Energy Independence says: "America’s oil and gas bonanza will drive down global energy prices, undercutting the foundations of petrostates everywhere " Talk about wishful thinking! The price of oil has not even dropped at all (see data above). The Dark Side of Energy Independence is filled with the kind of overconfident/wishful thinking we saw during the late 90's.

Power Shift "Energy Boom Dawning in America" has more happy story/overconfident talk.

And here's an article on exporting natural gas. Talk about counting your chickens before they hatch!

And here is something on the glorious wonders we see as the Energy Boom begins to ripple through the US economy.

In these stories we hear talk about how a) the U.S. will soon be energy independent, b) the U.S. will overtake Saudi Arabia in production c) the price of oil and natural gas will drop. d) it's all based on a technological (not economic) revolution.

But wait a minute....the price has not dropped (as I discussed above). Notice how those articles either completely miss that point or skirt around it. The problem is that the steady high price of oil over the very same time frame as this so called "technological revolution" blows a huge hole in the argument.

The facts are that pretty much the same technology is used now as was tried in 1979 (and earlier) but now the price of oil is high enough to make it economical. What we have had is an economic revolution not a technological revolution. 

There is plenty of dirty, hard to get unconventional oil and other hydrocarbons out there (and we knew a lot about them in Jimmy Carters time) but we have not had a technological revolution that has lowered the price. We exploiting these expensive and dirty sources now because we have no better choice. In 1995 we did have a better choice. 

What will happen now? The price of oil will continue it's long steady march upward (with some reversals of course) - because the easy oil is always drilled first. Conventional crude was preferred over unconventional because it's easier and cheaper, and the easiest unconventional crude will also be drilled first. The era of cheap oil is over and the price will continue to rise.

It appears that the lowest cost alternative energy is wind and the cost equivalent energy price of wind is approaching that of some fossil fuels. Once oil is more expensive than wind (or solar) on an energy equivalent basis we will see wind (or solar) energy explode. That day is coming and that will be the real news.