Chart of the month coming up

I am late again on chart of the month, but it should be coming up later this week. So far, I have promised to do the following:
* post a review of Matt Simmons' book The Twilight in the Desert
* post my comments on the "reformed" light truck CAFE standards, and
* post the August chart of the month.

For analysis of situation developing as a result of hurricane Katrina, please see The Oil Drum and Econbrowser.

On Point on Fuel Economy

This last Thursday, NPR's OnPoint had a show titled Economics of Fuel Economy. If you listen to the show, it might help explain why I get sometimes get frustrated with environmental advocates. David Friedman on the show tries to propagate a myth that American can have their cake and eat it too (drive bigger, faster vehicles which are also more fuel efficient). When confronted that higher fuel taxes may be a smart way to encourage people to purchase more fuel efficient vehicles, Friedman notes that it is a more painful approach than increasing CAFE standards. By regulating fuel economy, entire burden of saving gas is placed on the shoulder of the vehicle manufacturers. I am all for increasing CAFE standards, but it will make much more sense to raise gasoline tax along with increases in CAFE standards. The fact of the matter is that American consumers are not yet willing to accept this reality, and I am sorry to say that well-intentioned environmental advocates such as Friedman are not helping by arguing for a very stringent increase in CAFE without providing a stick for the consumers.

While I was away

While I was away this past week, NHTSA publically proposed the much awaited changes to the light-truck CAFE standards. See GreenCarCongress for a first look. My expectation that the standards will crawl up to 23.4 mpg by 2010 seems to be quite correct (23.5 is the actual proposal). There are more interesting bits in the rulemaking (Hint: See page 150 and think California). I will make a detailed post about the proposed changes later this week. For a couple of different interesting (but not new) takes on the proposal, see here and here.
Meanwhile, Oil markets continue to be volatile and October crude futures are expected to flirt with $70 mark in the early part of the week.

Oil at a Breaking Point ?

(cross-posted on Tech Policy)

Peter Maass has an article titled The Breaking Point in today's NYT magazine. The article provides a very good roundup of the prevalent views on peak oil, although Maass personally appears a bit pessimistic. It is almost never easy to decipher whether a concern sounded by such an article comes from a profund understanding of the underlying issues or some preconceived notions about the oil problem.

The article quotes Saudi Aramco's Ali-al-Naimi, Matt Simmons, and CERA's Dan Yergin among others, but the interesting piece of the story is in the later half when Maass talked to an Aramco spokesman Ibrahim al-Muhanna and later with retired Aramco executive Sadad al-Husseini:

''They will not tell you,'' he said. ''Nobody will. And that is not
going to change.'' Referring to the fact that Saudi Arabia is often
called the central bank of oil, he added: ''If an outsider goes to the
Fed and asks, 'How much money do you have?' they will tell you. If you
say, 'Can I come and count it?' they will not let you. This applies to
oil companies and oil countries.''
...''There is no reason for any country or company to lie,'' Muhanna
replied. ''There is a lot of oil around.'' I didn't need to ask about
Simmons and his peak-oil theory; when I met Muhanna at the conference
in Washington, he nearly broke off our conversation at the mention of
Simmons's name. ''He does not know anything,'' Muhanna said. ''The only
thing he has is a big mouth. We should not pay attention to him. Either
you believe us or you don't.''

To me, the metaphor of using the fed doesn't wash well. A lot of uncertainty in the oil markets could be reduced, if Saudi Aramco as well as all major oil producers made a concerted effort to have more transparency in the data. Simmons' claim that Saudi production may be peaking in the next could of years may well turn out to be incorrect, but his push for data transparency is what should get more attention.

''You look at the globe and ask, 'Where are the big increments?' and
there's hardly anything but Saudi Arabia,'' he (al-Husseini) said. ''The kingdom and
Ghawar field are not the problem. That misses the whole point. The
problem is that you go from 79 million barrels a day in 2002 to 82.5 in
2003 to 84.5 in 2004. You're leaping by two million to three million a
year, and if you have to cover declines, that's another four to five
million.'' In other words, if demand and depletion patterns continue,
every year the world will need to open enough fields or wells to pump
an additional six to eight million barrels a day -- at least two
million new barrels a day to meet the rising demand and at least four
million to compensate for the declining production of existing fields.
''That's like a whole new Saudi Arabia every couple of years,''
Husseini said. ''It can't be done indefinitely. It's not sustainable.''
...''It's becoming unrealistic,'' he said. ''The expectations are beyond
what is achievable. This is a global problem . . . that is not going to
be solved by tinkering with the Saudi industry.''
...Husseini, for one, doesn't buy that approach (to pressure OPEC to increase supply). ''Everybody is looking at
the producers to pull the chestnuts out of the fire, as if it's our job
to fix everybody's problems,'' he told me. ''It's not our problem to
tell a democratically elected government that you have to do something
about your runaway consumers. If your government can't do the job, you
can't expect other governments to do it for them.''

Al-Husseini's explanation is that steadily increasing demand is the major reason behind the current unrest in the oil markets. Unfortunately, this is the aspect that is most often overlooked when dealing with the issue. Moderating demand for oil now, so that we can keep using oil for longer periods until clear alternative emerge may be the best option ahead. This job has to be done at home. Don't blame the Saudis for the high prices now or in the future. Simple laws of economics tell us that if demand keeps increasing at current rates, the oil markets will continue to be tight even with additional capacity, and prices will increase steadily. The time for action is now, unless you don't mind paying for that high priced oil.

Update on CAFE changes

Danny Hakim provides an update on coming changes in CAFE standards for light-trucks. Here are the interesting tidbits:

The Bush administration is expected to abandon a proposal to extend fuel economy regulations to include Hummer H2's and other huge sport utility vehicles, auto industry and other officials say.

Current CAFE stnadards are applicable to light-duty vehicles with gross vehicle weight of 8500 pounds and lower. One of the proposals under consideration was to raise this limit to 10,000 lbs. This is not an insignificant part of vehicle population as noted by NHTSA:

A study prepared for the Department of Energy, in February 2002, by the Oak Ridge National Laboratory found that 521,000 trucks with GVWR from 8,500 to 10,000 lbs were sold in calendar year 1999. The vast majority (82%) of these trucks are pickups and a significant number (24%) were diesel. At the end of 1999, there were 5.8 million of these trucks on the road accounting for 8% of the annual miles driven by light trucks, and 9% of light truck fuel use.

So strike one against the upcoming changes. March on:

Its broad plan to overhaul the light-truck mileage rules would change the regulatory system from one using averaged mileage for an automaker's entire annual light-truck output to one that sets up five or six classes, determined by a vehicle's size.
...Under the Bush administration plan, about half a dozen size classes will be determined by the vehicle's length and width. Instead of an overall mileage requirement for the total fleet of light trucks a manufacturer sells in a model year, makers will have to meet some kind of target or average within each size class.
...Under the administration's plan, for 2008 to 2010 models automakers will have a choice of complying with the new size-based system or the current system, though a further increase beyond 22.2 miles a gallon is expected in the current system. After 2010, the current system will be eliminated.

This is consistent with the previous reports on CAFE changes. One of the obvious criticisms of the size class based approach is that OEMs will increase the size of the vehicles to escape meeting higher CAFE standards in small size classes. It is not that simple unless everybody decides to do that. Also, it is not always possible to increase vehicle length and width without affecting aesthetics and cost of making the vehicle, although you may argue that with light-trucks this is less of an issue. So the next obvious question is how big the difference is between adjoining size classes. Recollect that both Japan and China have adopted vehicle weight class based fuel consumption standards.
Even more important question is how big of an increase above 22.2 mpg can NHTSA argue for while also trying to preserve the choices between vehicle sizes. I would argue that this is going to be much harder, and I would expect 0.3 to 0.5 mpg improvement in overall light-truck CAFE standards. This would imply that light-truck CAFE standards for 2008 would be around 22.5 mpg, for 2009 around 22.9 and for 2010 around 23.4 mpg. This is just an intelligent guesswork on my part. We will see what NHTSA has in store next month when the ANPRM comes out.

Econbrowser discussion on Hirsch report

Following a few posts about peak oil on his weblog, and a chat on econblog, Prof. Hamilton has opened another scintillating discussion on limitations of the Hirsch report on peak oil. I agree with many of the comments that follow the post, and I will try to collect the nuggets that I feel are in line with my poistion even as this discussion continues:

Heading out: World oil demand grew last year much more rapidly than anticipated, despite an increase in price at the end of the year. It appears that it is likely to do so again this year, even as prices continue to rise.

Joseph Somsel: The PURPOSE of the report was not to forecast future demand at some price point but to explore the technological options for convential oil substitution and their physical delivery timing.

Heading out: I think that what it (Hirsh report) was saying in part is that we have a huge inertia against change in the size and needs for fuel of our current transportation fleet, and that this cannot be turned around in less than about 20 years without significant impact, and that 20 years requires that R&D funds be invested now to find a new answer. Short of having that 20-years, we are in trouble.

Odograph: Do economists have any tricks to tell us if $60/barrel oil is signal or noise? Trend or volatility?

RoyYoung: Nymex WTI contract for 2011 is over $58/bbl! There has been a fundamental shift in the futures market in the last 6 months that is different from the (now outdated) heavy backwardation shape some people are referring to.
....I think the bottom line is that marginal cost to increase world oil production capacity is much higher than in years past (infinity if we have truly reach peak oil), so it will be difficult if not impossible to maintain reasonable rate of economic growth while maintaining current rate of energy consumption (Energy Consumed/GDP). So the choice is either lower future econ growth rate, or lower rate of energy consumption per unit of output.

T.R. Elliot: I'm not a peak oil fanatic. Nor anti-economics. But I do think we need a REALITY BASED community focusing attention on this issue.

I must thank JDH for provoking such a good discussion on a very important topic, even though, IMHO, at times JDH himself tries to dismiss concerns of the peak oil community by trying to stereotype their position. I would rather that he try to explain why the difference between futures prices of next month, and next year has all but disappeared, and the futures for 2010 are still selling at $59 a barrel. Historically, the market has always been in backwardation, but as noted by RoyYoung, this has disappeared in the past year. I doubt that JDH is doubting that prices of oil can be expected to increase steadily in the future. The critical issue is whether the adjustment towards increasing oil prices will come through determined efforts to adapt or through an abrupt realization that there really aren't that many promising alternatives to oil in the transportation sector. In spite of a 50% increase in gasoline prices in the last two years, vehicle purchasers and drivers have shown very little signs of budging from the twenty year old trend of buying bigger, heavier, faster and more powerful vehicles, and then driving those vehicles further than ever before. This market is far from being in any sort of an equillibrium, and I am not willing to trust any of the vehicle price or travel elasticity numbers any more.
I don't think that I have the right handle on this issue, but I don't think that anybody has a good understanding of this complex topic. This is precisely why dialogues like this are welcome.

Why I support Cleaner Cars

The images accompany this NYT article.

LA in 1953 as opposed to LA today.

Efforts continue to tackle the criteria air pollutants (carbon monoxide, lead, nitrogen dioxide, ozone, particulate matter, and sulfur dioxide). It is high time that similar crusade is mounted against the rising greenhouse gas emissions from motor vehicles. California has started to chart it's own course on greenhouse gas emissions from motor vehicles. Most of the players in the industry realize that this is where the challenges are in the next thirty years or so. Unfortunately, the federal government in the US has not yet come to terms with this reality. The sooner the American public and the federal government start to take action about greenhouse gas emissions from motor vehicles, the better.

Peak Oil in News!

WSJ's econblog features Drilling for Broke?.
See also Will oil markets loosen or tighten in the next five years? (via The Big Picture)
Financial Sense online interviews Matt Simmons about his new book Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy. I am reading the book currently and will post a review by the end of next week.

Toyota's Hybrid Strategy

NYT reviews The Hybrid Emperor's New Clothes. See also Toyota Develops Hybrids With an Eye on the Future.

The company expects that a quarter of its sales in the United States will use the technology by then as it tries to sell one million hybrid vehicles a year worldwide. That would put it far ahead of projections for hybrid sales across the industry.

"At our current rate of sales, that's about 600,000 hybrids in the U.S.," said Jim Press, president and chief operating officer of Toyota Motor Sales USA, in comments at a conference in northern Michigan. "To achieve that goal, we will have to look at offering hybrid power systems in virtually all of our vehicles, including trucks."

Mr. Press dismissed concerns by some consumers and reviewers that Toyota and Honda were using the technology to increase horsepower in newer hybrid models, eroding fuel economy benefits. And he said that the proliferation of technology in modern cars had led to what he called an epidemic of recalls.

Check out the discussion on Toyota Hybrid Math at the GreenCarCongress.

Chart of the Month: July 2005

In this months chart, I was going to post about the driving costs, and how gasoline and oil costs constitute only a small fraction of overall driving expenses. I realized that the Chart of the Week guys have already addressed that earlier this year. So, I have decided to take it a step further. In the previous charts, we have seen that the fuel economy of vehicles has either increased significantly as compared to late 70's. This has made driving cheaper than it already was. economists call this the rebound effect. The following chart shows that the cost of driving per mile for passenger cars has steadily decreased from 1980 to 2000, and as a result average vehicle miles traveled have increased from about 9,700 miles per year in 1980 to about 12,200 miles per year in 2000. This has been one of the main reasons for increased overall driving as seen from April's chart of the month.

(click on the chart for a larger image).

Economists argue that the rebound effect is of the order of 20%, that is a ten percent improvement in fuel economy increases vehicle travel by about 2%. So, next time when we argue that higher fuel economy standards are a good thing, we should keep in mind that some of the gains from higher fuel economy will be squandered away by increased driving. It may also indicate why CAFE standards should not be the only policy option on the table if we are serious about reducing our usage of petroleum.

P.S. The chart of the month archoive is available on your right.
P.P.S. It is so much easier to add pictures to blogger now. Bye bye Hello!

Not running out of oil. YET.

With oil hovering around 61 dollars a barrel, a friend pointed out to an op-ed piece by Daniel Yergin in the WaPo titledIt's Not the End Of the Oil Age. (See a copy on CERA's webpage). What Yergin is saying in this op-ed is not new. We have heard this again and again from him. Yergin uses carefully measured words:

...Between 2004 and 2010, capacity to produce oil (not actual production) could grow by 16 million barrels a day -- from 85 million barrels per day to 101 million barrels a day -- a 20 percent increase. Such growth over the next few years would relieve the current pressure on supply and demand.

(emphasis added.) If EIA's International Energy Outlook is to be believed, demand for oil is projected to increase to 95 million barrels a day by 2010. Even if all of the capacity additions materialize, there is no going to be a glut of supply as some would want us to believe. Demand growth has surprised us before.

The share of "unconventional oil" -- Canadian oil sands, ultra-deep-water developments, "natural gas liquids" -- will rise from 10 percent of total capacity in 1990 to 30 percent by 2010. The "unconventional" will cease being frontier and will instead become "conventional." Over the next few years, new facilities will be transforming what are inaccessible natural gas reserves in different parts of the world into a quality, diesel-like fuel.

Yergin points out that all of the capacity addition is not going to be in conventional oil. Of this list, Gas-to-Liquids (GTL which is a diesel like fuel), as well as natural gas liquids (NGLs) appear promising. My understanding is that the current GTL projects in Qatar are meant to supply fuel to parts of Asia, and not Europe or US markets.

The growing supply of energy should not lead us to underestimate the longer-term challenge of providing energy for a growing world economy. At this point, even with greater efficiency, it looks as though the world could be using 50 percent more oil 25 years from now. That is a very big challenge. But at least for the next several years, the growing production capacity will take the air out of the fear of imminent shortage. And that in turn will provide us the breathing space to address the investment needs and the full panoply of technologies and approaches -- from development to conservation -- that will be required to fuel a growing world economy, ensure energy security and meet the needs of what is becoming the global middle class.

This last paragraph is the most important (emphasis mine). I may be willing to concede CERA's projections until 2010, but I am not so sure that we have the capability to produce much more than 110-115 million barrels per day any time in to the future. If someone can show me real numbers where 115 million barrels are going to come from, I would be very happy. The fact is that we are banking on huge investments and improvements in "unconventional" (read tar sands and heavy oil) oil technology. We are also not paying attention to the most important measure highlighted by Yergin, that is conservation. This battle will not be won by supply alone, and the sooner we realize this the better.

Investing in the Clean Car Revolution

Earlier in June, Merrill Lynch and WRI put together a short report titled Energy Security and Climate Change: Investing in the Clean Car Revolution. The bottom line of the report is that global market and regulatory environment will increasingly drive competition in the global automotive industry. This is the same conclusion as the changing drivers report from WRI/SAM. What this report does is to speculate that diesels and hybrids, along with lighter materials will have an increasing role to play due to concerns about fuel use and climate change. As a result, Merrill Lynch identifies seven companies which might be a good buy. These seven are:
* BorgWarner Automotive (U.S.) : BWA is player in technologies that improve fuel economy, and reduce emissions.
* Denway Motors (China): Denway has about 50% stake in Honda operations in China.
* Faurecia (France): Faurecia is a European leader in Diesel Particulate Filter business (>60% market share).
* Hyundai Motor Company (Korea): Hyundai is rated neutral because it has the potential to improve its export performance, but may need significant investment in cleaner technology.
* Keihin (Japan): Keihin is a key player when it comes to switching dirty two-stroke engines with cleaner four-stroke engines in two and three wheeler vehicles in developing countries.
* Magna International (Canada): The report identifies Magna's expertise in hydroforming among other opportunities for vehicle lightweighting.
* Toyota Motor Corporation (Japan): Toyota is not only the financially most stable OEM, but is a dominant player in the hybrid vehicle market which is just beginning to grow.

You might ask why the report does not identify Garret (Honeywell) for its turbo chargers, or many other such examples, but I do not have time to go in to that.