Chart of the Month: April

Last month, I promised to post at least one interesting chart every month. April has slipped by quickly! Here is a chart showing Vehicle Kilometers Traveled (VKT) by US Cars, Vans, SUVs, and pickups from 1970 to 2002 in billion kilometers per year. (1 kilometer ~ 0.62 miles)


Click on chart for a larger view.
Notice that the light-truck travel has increased very rapidly. This will help explain, in part, why light-truck fuel consumption has grown so rapidly in the past thirty years. Also notice how shocks due to wars and embargos tend to moderate growth in vehicle travel. I do not have the data from 2003/2004, but in '03/'04 we are likely to see a less sharp decline in VKT because continued strong sales of the light-trucks.
So, at least one of the reasons for growth in light-duty vehicle fuel consumption is that vehicle travel is increasing. This, in spite, of todays vehicles getting 50% more in terms of fuel economy than their counterparts thirty years ago. Next time, I will post this improvment in individual vehicle fuel economy, but todays chart should make one thing clear. If we are to slow down the growth in fuel consumption, we may have to moderate the growth in vehicle travel as well.

P.S. The fact of the week has a complimentary chart up for the coming week: How the Price of Gasoline Relates to Vehicle Miles Traveled?

The $6.66-a-Gallon Solution

The gasoline taxes are very high in Norway, and the gas costs $6.66-a-Gallon, but this is the part that I found most funny.

...a right-wing party in Parliament, the Progress Party, once again called for a cut in gasoline taxes, which account for about 67 percent of the price.

But 'those critics are but voices in the wilderness,' said Torgald Sorli, a radio announcer with the Norwegian Broadcasting Corporation who often discusses transportation issues. 'We Norwegians are resigned to expensive gasoline. There is no political will to change the system.

Admittedly, the gasoline costs too much in Norway, and too little in the US. Yet, Norway has exactly the same problem as the US. There is no political will to change the system.

Oil in Troubled Waters

Oil is on the cover of the Economist this week. See Oil in troubled waters, and Axis of Oil.

This Week In Petroleum comments on the "Dependency" factor

Very nice commentary from This Week In Petroleum.

Of course, many might argue over whether this dependence on oil imports is good or bad. But given current market conditions, petroleum product prices would be even higher, at least in the short-term, if we imported less, as it would reduce the amount of oil and petroleum products that would be available, thus making each barrel or gallon even more costly than it currently is. Not only are imports needed to meet current demand, but imports can also help build inventories, as we saw happen last week. While crude imports were the third highest weekly average ever, crude oil inputs into U.S. refineries actually declined slightly. As a result, much of the increase in crude oil imports found its way into inventories, which built by 5.5 million barrels during the week ending April 22. Nevertheless, with refinery inputs expected to increase significantly over the summer as refiners try to produce as much gasoline as possible (while still needing imports to meet demand), crude oil inventories will likely be drawn down. So, for the time being, increases in oil imports help keep prices from being even higher – even if it flies in the face of the American sense of “rugged individualism.”

Interdependence is not an easy concept to explain. This quote explains at least one piece of it very elegently.

Petroleum Day at The Big Picture

The Big Picture celebrated a Petroleum Day yesterday with some useful resources.

The Oil Drum

I have been very reluctant to talk at all, if ever, about Peak Oil. Anybody who is serious about oil knows that conventional oil production will peak soon. Soon depending upon definition, because while the most pessimistic estimates suggest that peak oil is here NOW, the most optimistic estimates suggest that the peak is probably thirty years away. Most reasonable estimates, in my opinion, indicate that sometime during 2015-2020 period, we will reach a plato in terms of out production at around 95-105 million barrels per day of oil, before some decline in production could be expected. Remember that the current production levels are at around 83 +/- 2 million barrels a day.
The Oil Drum has started to blog about the peak oil issue in a much more serious way.
Unlike some, I do not believe that peak oil is going to be the end of the world as we know it, but it is a fact that we cannot ignore either. Business planning for the long term must realise that. Where will the rest of our "oil" supplies come from? Tar sands in Alberta? Heavy oil in Venezuela? Oil shale in the US? At what cost hurdle does it make sense for producers to ramp up the investment in unconventional oil? Will they do so in time? What will be the effect of carbon pricing on this? Will options that did not seem very attractive until recently, will suddenly start to appear as decent long term bets? What is the time scale in which we can turn over the stock of the existing transportation energy supplies? These are not trivial questions; they do not have easy, simple answers, but I believe that they deserve our attention. Of course, I believe that the best course of action is to start paying attention towards reducing the rate of growth of our demand, but that will not solve the problem and we will have to supply side options as well.

Transparency Issues with ACEA Agreement?

So while voluntary agreements to reduce CO2 emissions from motor vehicles may be a good thing, how does one make sure that the actions taken by the OEMs are sound? WRI asks this question in their recent report titled Transparency Issues with ACEA Agreement: Are investors driving blindly?. You might remember the WRI-SAM report called Changing Drivers, which at least I take seriously in spite of simplistic nature of that report.

Should We Recall the U.S. Auto Industry?

Knowledge@Wharton has an excellent article titled: Car Trouble: Should We Recall the U.S. Auto Industry?. I do not agree entirely with all the opinions in the article, but by and large this seems like a very good assessment of the state of Detroit today. Excerpts:

MacDuffie notes that Ford and GM each pursue a "near-term, profit-boosting strategy" that relies heavily on "hit cars" instead of a more fundamental, longer-term approach in which they work to have every part of the company function strongly. Detroit has been riding the minivan, sport-utility and pick-up truck crazes for so long that it has become overly dependent on these product lines for profitability and pays insufficient attention to other issues.

"Now there is all this talk in Detroit about the 'year of the car' [in an attempt to produce a sales revival]," according to MacDuffie, co-director of the International Motor Vehicle Program (IMVP), which is based at the Massachusetts Institute of Technology and has a network of researchers at universities worldwide. "Well, if you have spent the better part of a decade neglecting your car line in favor of your truck line, you are not going to bring out cars that compete well with the Toyota Camry, the Honda Accord and the Volkswagen Passat. Cars are the most complicated part of the marketplace and it's hard to just step back in."

I often say that Detroit has thrown in the towel when it comes to the Car market. The Big 3 are destined to loose further in that market segment, and there seems to be little they can do about it now.

Most car companies continue to hold the view that having factories running at 100% capacity is the most efficient way to produce vehicles because it allows the manufacturer to minimize the cost to produce each unit. Indeed, overcapacity has long been cited as a problem for automakers worldwide: According to The Economist magazine, factories are capable of producing 80 million cars and light trucks a year but actually churn out only 60 million. But, in the view of Pil and Holweg, the problem with this volume mentality is that it is not enough to generate sustainable competitive advantage. Each year far too many vehicles are left unsold. To clear out inventory, manufacturers are then compelled to offer millions of dollars in incentives in the hope that customers like the price enough to settle for a car that was not their first choice.

There is a term to describe this type of behavior: Reinforcing loop. You do not get out of this cycle by pushing hard on running at full capacity. Some day Detroit will learn this, may be when it is too late.

(J. D. Dave) Power says global competition is so fierce that Detroit may have to become accustomed to being a smaller player. "There is a structural situation that is going to make it very difficult for GM and Ford to keep from losing market share, and they have to be looking at trimming down their operations. They have got excess capacity and excess overhead, and some of it they can't get rid of overnight, like the pension liability and the health care costs. Those decisions were made 10, 20 years ago. Perhaps there's more opportunity for them overseas than their home market."

GM believes that their salvation lies in the Chinese market, but it is not clear that it will have the strength to be competitive there also. Excess capacity, mounting healthcare costs, and neglect of the car market. You can't get rid of them overnight, but remember that these did not become the critical problems overnight as well.

EIA remain bullish on Oil

Excerpt from This Week In Petroleum:

Until demand growth slows dramatically or supply capacity grows significantly more than seen in recent years, it is unlikely that WTI will fall substantially below $50 per barrel for any significant period of time. While at least one prominent oil market analyst does expect a surge in non-OPEC production later this year, EIA does not share that view. While high oil prices should eventually lead to lower demand and more supply capacity, EIA does not envision this occurring in the immediate future. Thus, while some oil market analysts are calling for a sharp drop in oil and gasoline prices this summer, EIA is not expecting WTI to fall below $50 per barrel or the U.S. average retail price of regular gasoline to drop below $2 per gallon for a sustained period anytime soon.

I am yet to see a good argument as to why I should not believe this.

Will the Real Hybrid Please Drive Up?

I have noted previously that even though not all hybrids all created equal, they can be marketed as if they were all the same. Union of concerned Scientists have now launched a website called the Hybrid Center to compare different types of hybrid vehicles. They have also launched a blog called Hybrid Blog.
On the Hybrid Center site, one of UCS' concern seems that the hybrids offered by GM on their light-trucks are not real hybrids. This figure shows the different types hybrids according to UCS classification. A DOE report on potential of hybrids and diesels in the US used the following ay to classify the hybrids (pdf file):

1. Stop/Start (S/S): This hybrid system includes only the ability to shut off the engine when it would otherwise idle and to restart it instantly on demand. This provides no torque boost to aid acceleration, but offers a fuel economy advantage of 7.5% over the EPA test cycle.
2. Integrated Starter Alternator with Damping (ISAD): This hybrid system will operate at 42 volts and will allow some power to be contributed by the electric drive system in addition to the stop/start capability. An increase in torque of 10% and 12.5% higher fuel economy are expected.
3. Integrated Motor Assist (IMA): This 114 volt hybrid system is expected to be produced only by Honda through 2012. In comparison to the ISAD design it has a larger electric motor and greater battery power and energy storage and allows more electricity to be used for motive power. The system is expected to provide 15% higher torque and 20% greater fuel economy on average.
4. Full Hybrid (FH): These 300+ volt systems permit limited all-electric drive in addition to supplementing the power of the internal combustion engine. For cars, full hybrid systems should offer 20% more torque and 40% more miles per gallon; for light trucks increases of 15% in torque and 35% in fuel economy are expected.

How important is this distinction? UCS will tell you that it is very important. Honda would tell you not to confuse cutomers with four different types of hybrids and call all hybrids as hybrids. Unfortunately, UCS web site does not allow you to compare GMs hybrid pickups along with Ford Escape Hybrid SUV. I would have really appreciated if UCS would have done so, but doing so in their mind would have adulterated their web site.

Will the Oil Market Continue to Be Tight?

Take a look at the IMF World Economic Outlook (WEO), and the chapter on oil. Overview here.

How long will speculation last?

Andy Xie of Morgan Stanley has a warning:

Chinese demand cannot serve as an excuse anymore. China’s crude imports in Jan–Feb 2005 declined by 12.8% from the same period last year (see Oil vs. Coal, January 17, 2005). China’s oil demand in the past two years has been exaggerated by the shortage of its electricity production capacity. As the problem is being corrected through aggressive investment, China’s oil demand is softening also. However, it is virtually impossible to explain this story to an oil trader. The demand story for oil traders is that 1.3 billion Chinese are buying cars. The irony is that China’s car sales are declining.

Financial speculation is the key driver of oil prices, in my view. Oil demand or supply is inelastic in the short term. Extra demand from financial speculators can push up prices significantly. There has been an uptrend in oil prices during the current growth cycle, as in any growth cycle. The low interest rate so late in the cycle is causing the speculation in oil and exaggerating the upward price momentum. I suspect that financial speculation has added around US$15 per barrel to crude prices.

I am not sure what to make of this.

Greenspan on Energy

Chairman of the Fed Alan Greenspan gave an important speech yesterday from the point of view of energy.

Altering the magnitude and manner of U.S. energy consumption will significantly affect the path of the U.S. economy over the long term. For years, long-term prospects for oil and gas prices appeared benign. When choosing capital projects, businesses in the past could mostly look through short-run fluctuations in oil and natural gas prices to moderate prices over the longer haul. The recent shift in expectations, however, has been substantial enough and persistent enough to bias business-investment decisions in favor of energy-cost reduction.

Of critical importance will be the extent to which the more than 200 million light vehicles on U.S. highways, which consume 11 percent of total world oil production, become more fuel efficient as vehicle buyers choose the lower fuel costs of lighter or hybrid vehicles.

Is this the endorsement by the chairman of the fact that we must *do something* to stimulate demand for less fuel consuming vehicles. I am not sure that Greenspan likes the CAFE standards, but this might mean that he would be in favor of some incentives for building more fuel efficient vehicles.

Conversion of the vast Athabasca oil sands reserves in Alberta to productive capacity has been slow. But at current market prices they have become competitive. Moreover, new technologies are facilitating U.S. production of so-called unconventional gas reserves, such as tight sands gas, shale gas, and coalbed methane. Production from unconventional sources has more than doubled since 1990 and currently accounts for roughly one-third of U.S. dry gas production. According to projections from the Energy Information Administration, the majority of the growth in the domestic supply of natural gas over the next twenty years will come from unconventional sources. In many respects, the unconventional is increasingly becoming the conventional.

DOE is definitely worried about the future of oil supplies. That more and more of unconventional or other sources of supply would have to come live sometime in the next twenty-five years seems like a foregone conclusion. Of course, there could be aggresive demand management efforts before we get there, but we will probably still need them.

Clearly, limited substitution possibilities across fuels have resulted in persistent cost differentials, but those very differentials inspire the technologies that, over time, reduce such limitations. A clear example is gas-to-liquids (GTL) technology, which converts natural gas to high-quality naphtha and to diesel fuel. Given the large-scale production facilities that are currently being contemplated (and some that have already begun construction), GTL is poised to become an increasingly important component of the world's energy supply. Current projections of production however remain modest. GTL promises to add a good measure of flexibility in the way natural gas resources are utilized. In addition, given the concerns over the long-term adequacy of liquid production capacity from conventional oil reserves, GTL may provide an attractive, competitively priced, option for making use of stranded gas, which, for lack of access to transportation infrastructure, cannot be brought to market.

GTLs are much more like diesel than gasoline, so we may have to gear up ourselves for driving diesels. Diesels anyone?

Will try to make some sense out of this later.

Voluntary Agreement in Canada on CO2 emissions: What are the Implications for US?

As I have noted previously, Canada has been working with the auto companies to set greenhouse gas emission reduction targets. Today Green Car Congress reported that the agreement has now been made public.

This agreement calls on the automobile industry to cut GHG emissions from light-duty vehicles (cars, minivans, sport utility vehicles and pickup trucks) so that by 2010, annual emissions reductions will reach 5.3 Mt.
The 5.3-Mt target is measured from a "reference case" that projects business-as-usual vehicle emissions in 2010 and that has been agreed upon by industry and government. To assess progress toward meeting the 5.3-Mt target, a joint industry-government monitoring committee will be established. Annual reports from the committee will be available to the public.

The MOU states that "The Reference Case greenhouse gas emissions for the light duty vehicle sector in 2010 are 90.51 Mt of CO2e" as stated in Canada's Emission Outlook (Annex C Page 26). Greenhouse gas emissions from light-duty vehicles are already about 95 Mt due to the growth in the light-duty truck segment. So, the actual baseline number in 2010 is going to be much larger. So, I am not sure how this is going to be worked out. It can be safely assumed that the language in these MOUs is formulated rather loosely so that actual committee working on this may decide the actual details and the best possible ways for the Auto companies to reach their goal.
Let us put the 5.3 Megaton in perspective. The vehicle sales in Canada are about 1.5 million vehicles per year. I am assuming that they are driven much like the American light-duty vehicles (~11000 miles per year or 17600 km per year). If the average fuel economy of the current vehicles is about 25 miles per gallon (~ 220 grams of CO2 per km), then the emissions from new vehicle sales in one year are about (1.5 million * 17600 * 220) grams or 5.8 trillion grams or 5.8 Megatons of CO2. Think of 5 such years between 2005 and 2010, so the total additional emissions will be of the order of 5.8*5 = 29 Megatons. A 5.3 Megaton reduction means roughly a 20% reduction in greenhouse gas emissions or roughly 25% increase in fuel economy. (Note these are rough estimates, but they should be in the ballpark).
This, I think that this deal is a big thing. This agreement has other implications:
One, it shows that *some* agreement can be reached over reducing CO2 emissions from light-duty vehicles. ACEA in Europe started this trend (caution:pdf file). Now, the US needs to decide what it is going to do.
Two, my guess is that the Auto industry would rather not deal separately with California's AB 1493, US Northeast, Canadian MOU and the US CAFE standards. This means that there is now a significant chance of different parties coming together to talk about this issue seriously. This is a significant opportunity, and it will be a shame to squander it.
There is a lot to discuss here, but more thoughts later.

Hybrids to Plug-Ins: Not as good as it might sound?

We have heard about this before here and here. Yesterday's Times also has an article about converting hybrids to plug-ins.

But the idea of making hybrid cars that have the option of being plugged in is supported by a diverse group of interests, from neoconservatives who support greater fuel efficiency to utilities salivating at the chance to supplant oil with electricity. If you were able to plug a hybrid in overnight, you could potentially use a lot less gas by cruising for long stretches on battery power only. But unlike purely electric cars, which take hours to charge and need frequent recharging, you would not have to plug in if you did not want to.
..."If you're thinking about this as an environmental issue first and foremost, you're missing the point," Mr. Gaffney said. Curbing dependence on foreign oil, he added, "is a national security emergency."

This quote sums up what may be a problem with plug-ins, but by all means not the only one. Plug-in may seem attractive from the point of view of reducing oil use from transportation sector, but it will increase the electricity usage which in the US (and the world) is predominantly coal based. Prof. Andy Frank of UC Davis is a big supporter of plug-ins and he claims that on a well-to-wheels basis, plug-ins will be responsbile for less CO2 emissions per mile travelled. I am not sure that this claim holds up in all possible mix of electricity in the US grid. In addition, if plug-ins were to become significant in number (lets say 10% or more), then the effect on grid management would be very different, and in some if not all cases, plug-ins may be responsible for the tail of the demand curve causing a price spike in the electricity spot markets. Thus for plug-ins to make a meaningful contribution, we first must have a cleaner and more efficiently functioning power sector than what we have today.
Some of the other commonly cited problems with the plug-ins are the same as that of other electric vehicles, i.e. weight of the batteries and the range they can offer on all electric mode. Never the less, I am sure that there will always be enthusiastic people who will keep the Plug-in path towards electric vehicle alive, and that I do not consider a bad choice at all.

Hydrogen or electricity?

How many problems can you spot with the article edition:
Hydrogen or electricity? A nuclear fork in the road by David B. Barber.

Saving Oil in a Hurry

While oil hovers around 55 dollars a barrel, IEA is asking countries to prepare a crash oil saving plan, which may be needed in case of supply disruptions.

Oil importing countries should implement emergency oil saving policies if supplies fall by as little as 1m-2m barrels a day, the International Energy Agency will warn next month.

The figure is much lower than the official trigger of 7 per cent of global oil supply equivalent to 6m b/d agreed in the treaty that founded the energy watchdog for industrialised countries after the oil crisis of the 1970s. A fall in supply of just 1m-2m b/d would be equivalent to the disruptions during the 2003 Iraq war or the 2002 oil industry strike in Venezuela.

Meanwhile, yesterday Goldman Sachs created waves by openly admitting that there is a small chance that Oil prices could shoot up to 100 dollars a barrel.

It suggested that only a sharp, sustained increase in energy prices would meaningfully reduce energy consumption and therefore create the spare capacity needed to bring prices lower again.

How will we reduce energy consumption in the face of a "super-spike"? IEA's Saving Oil in a Hurry report has some comments:

The basic approach has been to evaluate the impact of a variety of measures, if applied individually during a crisis, given the necessary emergency planning and preparation before a crisis occurs. In most cases the measures have the effect of reducing light-duty vehicle travel, either by reducing demand or encouraging shifting to public transit or other modes. We have evaluated the following general approaches:
• Increases in public transit usage
• Increases in carpooling
• Telecommuting and working at home
• Changes in work schedules
• Driving bans and restrictions
• Speed limit reductions
• Information on tyre pressure effects
Our main conclusion finds that those policies that are more restrictive tend to be most effective in gaining larger reductions in fuel consumption. In particular, driving restrictions give the largest estimated reductions in fuel consumption. Restrictive policies such as this can be relatively difficult to implement and thus may come at higher political costs. Policies that rely on altruistic behaviour and provide information to consumers can give good reductions in fuel consumption. However, many of these policies are potentially very cost-effective, as the investment needed to implement them is low.

Still think that taking baby steps NOW towards reducing our fuel consumption is a bad idea?

UPDATE (04/03): See The stupid phase of Oil and the Super-Spike report. Personally, I think that the chances of oil shooting as high as $100 a barrel are very small, but as Barry notes, it is the reaction of the markets to the news that is interesting. Last summer, I talked about psychological barrier with 2 dollars a gallon gasoline being broken. By now, most people have gotten used to paying more than $ 1.80 per gallon. This years barrier would be $2.50 a gallon, which we might hit somewhere around Memorial day if the current trend in the oil markets persists.