This from the Rude Awakening:

Earlier this week, I attended a privately sponsored presentation on U.S. energy policy. The main speaker was a senior faculty member from Carnegie Mellon University. This guy has been “doing electricity” for about 40 years or so. He has written reports for the National Academy of Sciences. When the people at the U.S. Department of Energy have a question about electricity, they call this CMU professor.

The news is not good. In 2007, there were about 144 new coal-fired power plants on the drawing boards of the U.S. energy utilities. But, said the professor, “We will probably build none of them.” Indeed, “The electric industry in the U.S. is in terrible shape,” said the CMU man. So we should expect local and regional brownouts and blackouts to become common occurrences “within five years.” But the first isolated instances of brownout and blackout will hit us much sooner than that.

Why is there such a gloomy forecast? Because essentially, the deregulation of the 1990s was botched. According to the CMU electricity expert, botched deregulation “slowed investment, raised prices and led to more and more uncertainty.” So now few utilities or their executives want to take political, regulatory, technical or financial risks. Hence, the entire long-range planning cycle has broken down.

It’s almost impossible to decide what to build, and at what scale. Costs are exploding, particularly for new construction. It’s safe to say that most power plant construction cost projections have doubled within the past 18 months. The prospect of fast-changing environmental regulations also adds to the uncertainty. No one wants to build a power plant and learn in five or 10 years or so that environmental regulations are going to shut it down.

Even the alternative energy industry — with wind, solar and geothermal as the poster children — has formidable challenges. The biggest issue is cost competitiveness. That’s because alternative systems provide power at costs that range from slightly higher to much higher than traditional power from, say, coal plants. Then there are issues of reliability, due to the intermittent nature of wind and solar, and the still-novel nature of geothermal power. And other issues include the lack of transmission from the usually remote sites of wind and solar facilities.

Overall, U.S. power producers face the prospect of many different forms of investment uncertainty. What will be the availability of different fuel mixes? Will coal still be useable? Or will natural gas be available at a cost they can afford? Can power producers invest in nuclear systems when there is still no definite program for disposing of the waste stream over the next 50 years? Or should the utility companies go all out for alternative systems?

But the next question is how much can consumers afford to pay? And what rates will the regulators allow? If utilities invest in alternative power systems (like wind or solar) that produce electricity at, say, 20-30 cents per kilowatt hour (kwh), will the regulators set those relatively high costs as the level of reimbursement? And for how long? What if the regulators permit the higher costs for only a few years and then penalize the utilities because some “better” technology comes along? At the end of the day, the base line cost of electricity is set against the cost to produce comparable coal or natural gas-based electricity. And this cost setting occurs even though there is a growing bias against burning carbon in the U.S. political and regulatory culture. One attendee at the discussion commented, “When you’re in a ‘no-win’ situation, guess what? You can’t win.”

The CMU professor has looked at historical trends for power in the U.S. His best estimate is that over the next decade or so, the price for electricity will about double on average throughout the nation. “This would put the cost of electricity about on par, as a percentage, with where it was back in the 1950s.” But that is only if people keep making investments in new power systems and the nation adopts conservation and efficiency measures on a large scale. Absent that? It’s lights out.

So you might not see it in your daily life — not yet, anyhow — but the power industry is currently paralyzed by the uncertainty of lopsided risks. And as old power plants age and go off stream, there will be less and less reserve power. Costs are going to rise. And reliability will fall. It’s inevitable.

So one investment sector that ought to do well over the next five years is power and backup power systems. And particularly, the companies that should do well are involved in power systems that are off the drawing boards and in some phase of construction, or near completion.

Source: A “Jaws” Market

If Obama wins, greens will have a powerful upper hand.

If McCain wins, his administration will be on a war footing with Russia from day one. This will push up the price of oil and gas  – and favor alternative energy sources. Justice says the “fear premium” under a President McCain would push crude oil back up to $150 a barrel.

An Obama administration will be deeply beholden to the “greens” on multiple levels. Party players, green lobby interests, and grass-roots supporters will create a powerful alignment.

On the player side, think of elder party statesmen like Al Gore. Love him or hate him, Gore has reinvented himself as the larger-than-life face of environmentalism. If his party wins, he’ll play a big role… and get an even bigger megaphone. You’ll also see and hear more from green voices with clout, like New York Times columnist Thomas Friedman.

Green lobbyists and grass-roots supporters will not be shy in holding the Democrats’ feet to the fire if they win. With control of both the executive and legislative branch, there will be an overwhelming sense of “If not us, who? If not now, when?”

As for who will pay for the tens of billions (or even hundreds of billions) in green subsidies if Democrats win, that’s easy: Big Oil. (Three words: windfall profits tax.)

This is one of those cases where backroom politics and emotional sentiments perfectly align. The Dems are drooling at the thought of sticking it to the Big Oil fat cats, and using the money they extract to help save the planet at the same time.

One of the big worries for the green movement is too big a decline in fossil fuel prices. The general fear, already voiced loudly by pundits like Friedman, is that America might be tempted to go back to “business as usual” if a gallon of gas gets cheap again.

With Obama in the White House, though, the moral imperative of going green will keep the money flowing to green projects no matter what. Even if the price oil continues to fall, the greens will be humming along with The Who: “Won’t get fooled again.”

If McCain wins, the oil and gas “fear premium” will be back with a vengeance.

John McCain, on the other hand, relishes his image as a maverick warrior. His habit of playing the impulsive gambler has proven both a blessing and a curse over time (the raging debate over his VP choice serving as latest example).

On the plus side, McCain’s willingness to “tell it like it is” endeared him to many during the 2000 presidential campaign and cemented his reputation for blunt honesty.

On the negative side, McCain’s habit of making light of serious things has raised eyebrows in the past. (Like when he sang “Bomb, bomb Iran” to the tune of the Beach Boys’ “Barbara Ann.”)

And when it comes to Russia, the famed McCain temper comes into play… because the man simply hates Vladimir Putin’s guts.

In a foreign policy speech in March of this year, McCain openly called for booting Russia out of the G8 (a club of the world’s wealthiest democracies). In the rarefied world of international diplomacy, that’s the rough equivalent of spitting in someone’s eye.

McCain has also flatly accused Russia of “nuclear blackmail” and “cyber attacks.” And when the South Ossetia conflict broke out, McCain took sides aggressively, declaring “We are all Georgians” to the press.

For various reasons, as you can see, a McCain White House would be close to a war footing with Russia from Day One. (In Moscow they know this full well also.) Some columnists have joked about the possibility of McCain taking things to the brink with Putin… and then having “hockey mom” Palin step in. (It’s almost a funny thought but not quite.)

Make no mistake; the “new energy cold war” has already begun. On Monday, the UK Telegraph reported, “Fears are mounting that Russia may restrict oil deliveries to Western Europe… in response to the threat of EU sanctions and Nato naval actions in the Black Sea.”

If McCain is elected, though, energy traders will have something new and potent to chew on.

While an Obama White House is likely to err on the side of caution, geopolitically speaking, a McCain White House is far more likely to err on the side of aggression. With Russia especially, but others, too (like Iran or Venezuela).

That shift in the risk matrix would put global slowdown on the back burner of oil traders’ minds and make supply disruption worries a key factor once again.

Which, in turn, would send the price of oil climbing back towards $150 as the fear premium heats up… keeping the pressure on to find and fund alternative energy solutions.

Source: No Matter Who Gets Elected, Alternative Energy Wins

In the world of energy and scarcity, the name of the next president of the United States will matter quite a bit. “People are policy,” as Ronald Reagan used to say.

But then again, a lot of energy and scarcity facts defy party labels. The energy resources are out there.

They are what they are and where they are. We can exploit the resources or not. But it’s not like in Star Trek. There’s no “dilithium” power source out there to keep the economy running.

So for the next president and his administration, it’s a question of doing something. The U.S. can always just go on importing large amounts of its energy supply. That sure has worked well in the past, hasn’t it?

There’s offshore oil and gas. There’s onshore oil and gas. There’s coal. There’s uranium.

There’s biomass, wind, solar, geothermal, falling water and tidal power. There are conservation and efficiency methods. And there are big choices to make.

At the end of the day, the next administration will have to decide to do something to keep the pipelines full and power lines energised. Or the pipelines and power lines will start to run down. And then the next president will have bigger problems on his hands than just deciding which of his friends to appoint as federal judges, or who gets what plum job.

What can the U.S. afford to do?

I’ve written before that the capital costs for energy projects have swelled in recent years. The costs for key inputs – steel, cement, copper, aluminum, machinery, labor – have outpaced inflation. And it won’t all come to an end just because the Beijing Olympics are over. There’s still a lot of concrete to pour in the Middle Kingdom.

So the world commodity boom will continue its long-term trend upward. And according to the latest data, the costs to build different kinds of power sources have increased dramatically. The relative changes are astonishing, if not sobering.

According to the U.S. Federal Energy Regulatory Commission (FERC), the capital costs of building power generation capacity in the U.S. in 2008 compared with 2003-2004.

The inflationary environment in power generation capital costs has impacted all types of systems. Nuclear has increased the most, because it uses the most steel and concrete. Costs for coal systems have increased quite a bit, as well.

At the same time, the fact is that coal and nuclear generate in excess of 60% of the U.S. electricity supply.

And much of the installed base is between 30-40 years old, with a significant amount even older. So this installed base of power generation systems is coming to the end of its design life. What will replace it? The U.S. had better figure that out now, because it will take the next 20 years (and more) to build the next generation of power systems and plants.

On the other hand, wind power has been affected to a lesser extent by capital cost inflation. Combined cycle and gas turbine combustion still remain cheaper than wind, but wind made up a lot of ground in 2003- 2004. These effects will play out over the next few years. These are things that neither the next president nor his policymakers can do anything about. They will just have to ride the wave.

And look at geothermal. It has become more expensive to build out geothermal capacity, but not that much more so. So geothermal is among the most competitive systems out there.

And on the surface, wind appears “cheaper” to build than geothermal. But that does not take into account that geothermal is far better for baseload power. That is, geothermal can supply power pretty much 24 hours per day, seven days per week. Wind, on the other hand, is limited to times when the wind blows. So it might take, say, three or four separate windmill sites to ensure 24-hour coverage, instead of one geothermal site.

We can only expect that fossil fuel costs will rise over the next few years. Really, who thinks that coal or oil will get cheaper? Rising fuel costs will further damage the economics for fossil-fired power generation, along with rising capital costs.

And despite the relative cost advantage for coal-fired power, the climate change debate is affecting the energy markets. Uncertainty about the future “carbon regime” is a key factor.

There are many questions. That is, will there be a “cap and trade” system on a national or worldwide basis? Both of the major party U.S. presidential candidates are discussing this. And cap and trade could manifest itself in many different forms. We might see national limits on carbon emissions. Or there could be taxes on carbon. (British Columbia already has a small tax on carbon. And what happens to small taxes? Yes, of course.)

In addition, the U.S. could enter into any number of treaties that set limits on overall carbon emissions.

What will this do to U.S. industry, both domestic and international? This is no idle musing, either. Large companies like General Electric are making extensive preparations for a future of limitations on burning carbon.

Even now, Americans are living with the effects of the debate over climate change. The prospect of dramatic carbon regulation has already altered the economics for the coal industry. In the past two years, we have seen numerous cancellations for proposed U.S. coal plants, from Texas to Montana to Pennsylvania to North Carolina.

At the same time, renewable power systems are a fast-growing industrial sector. But renewable power systems cannot in any way meet the scale of future demand in the near to medium term. The industrial infrastructure is just not there to build large numbers of basic systems for wind, solar and even geothermal.

Anyone who says America is going to do vast amounts of renewable this or that within the next four years just does not know what he’s talking about.

So you can be sure that energy efficiency and demand control (higher prices and smart metering) are key near-term responses. That is, in locales where customers are exposed to fluctuating daily power prices, demand control is more likely via higher prices. In places where customers see relatively static pricing for energy usage, we can expect to see mandatory efficiency measures gain ground.

And if the next U.S. president does not get energy right, nothing else that he does will really matter very much.

Source: The Energy Resources Are Out There

The efforts to turn Canada’s tar sands and Colorado’s oil shale into energy are really just efforts to speed up what would happen naturally over time. But we don’t have time. So we throw excess energy at the problem, trying to cook shale in situ or use huge quantities of natural gas to increase oil production via the tar sands. We don’t have much excess energy, either.

Both processes use tremendous amounts of energy for a small net energy yield (energy returned on energy invested, or EROEI). Yet free solar income rains down on the planet each day. The sun is eight-minute energy! We simply don’t have an industrial system built to run off the modest amounts of energy we can convert from sunlight. We need a new system or a way to convert a higher percentage of sunlight into usable energy.

It’s not the sort of thing you design on your kitchen table. It’s the sort of thing that evolves out of necessity and experimentation. Its evolution obeys the same basic laws that govern the evolution of species… variation, mutation, adaptation. Australia has a wide variety of clever and well-managed companies working on different aspects of the problem.

But in the big picture, we think human beings are pretty good at adapting when they have to. The alternative is non-survival, which also goes by the name of death. True, civilisations seem to go through a life cycle of their own. And perhaps this oil-based one is past its prime. People are quarrelsome and stupid. We may not adapt our way out of this problem before it overwhelms us. But it would be unnatural not to try.

Source: A Hank and a Hurricane Affect the Oil Price

This piece is taken from The Growth Stock Wire. It’s in the form of a questions and answers session. But it’s well worth the read if you’re interested in the ins and outs of shale oil.

The Commodity Investor

Matt Badiali

Q: I’ve read some articles on shale gas. What is the big deal with this stuff? – H.B.A: Shale is the world’s most common rock, formed from mud and clay deposited at the bottoms of lakes and ocean basins. Shale looks like the slate you see in chalkboards or on roofs, (slate is actually shale that was “cooked” in the earth).

Clay and mud are tiny -– much smaller than sand. So it’s hard to tap shale deposits. (See the next question, about the Bakken Shale, for more details.)

Some shale is full of old plants and animals. These shales become the source rocks for oil and natural gas. In the past, it didn’t make sense to drill shale for either oil or gas. Shale presented technical challenges that were beyond most of the industry. However, that began to change in 1990, when oil-service giant Schlumberger began focusing its attention on the natural gas in shale.

The company estimates that shale contains 500 billion to 780 billion thousand cubic feet (MCF). We consume about 23 billion MCF per year, so that’s about 20 to 34 years worth of natural gas. Today, one MCF sells for more than $13. So the reward is in the trillions of dollars.

The Barnett Shale became the proving ground for shale technologies. Barnett is in the Fort Worth Basin of Texas, which underlies the entire region west of the city of Fort Worth. The Barnett Shale holds between 25 billion and 250 billion MCF.

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I’m not targeting companies that are just Barnett players for investment. However, I am interested in companies that learned how to drill the Barnett and are now leasing land in the many new shale regions.

Investors can take a look at companies operating in the Huron Shale in southern Ohio, the Fayetteville Shale in Arkansas, and the Ootla in Canada.

Q: Why can’t we pump all the oil out of the Bakken Shale? – D.S.

A: The Bakken Shale, the granddaddy of the shale oil fields, underlies northeastern Montana and western North Dakota. A recent government report put the amount of oil in the Bakken Shale between 200 billion and 400 billion barrels: enough to eliminate our oil imports for at least 45 years.

However, the report also says we can only recover about 3 billion to 4 billion barrels of that oil with current technology. That’s a terrible recovery rate… around 1% or 2%.

The problem with the Bakken Shale – and with many of the shale deposits around the world – is “permeability.”

Some reservoirs are like a glass of grape juice and ice cubes. You stick in a straw and suck up the juice around the ice cubes. That’s a permeable reservoir.

However, some reservoirs are like clusters of grapes. You know there’s a lot of juice in there, you just can’t get it out. You have to stick the straw in each grape, suck a little, and then move to the next one. That’s an impermeable reservoir.

Impermeability is one of the problems facing by companies working in the Bakken Shale and other “unconventional” oil fields. You need a way to put the straw through as many grapes as possible.

It took a long time for oil companies to realize that drilling straight down wasn’t the best way to do that. The solution is directional drilling. In directional drilling, the well is drilled at an angle using a computer to help guide the drill bit.

I visited a well in south Texas where the bit went down deeper than a mile, then turned west and drilled horizontally for more than a mile. I was amazed… Here was this thick steel drill casing, steered by an engineer in a truck miles away. Now nearly all the big drilling and service companies, like Schlumberger (SLB), Halliburton (HAL), and Baker Hughes (BHI), offer steerable drilling in three dimensions.

In 1990, only about 40 rigs, or 6% of all the rigs in the U.S., were drilling horizontally. As of last month (according to the Department of Energy), 519 rigs, or 28% of the total, were drilling horizontally.

That makes it much easier for oil companies to get more out of their shale deposits. And as this technology advances, I think more of Bakken’s “grapes” will yield oil.

Some excellent companies are drilling in Bakken, including XTO Energy (XTO). But while XTO is adding reserves, you’re going to have to pay up for the growth these days. I told readers of the S&A Oil Report about the company last July, and we’re up 41% so far.

Good investing,

Matt

Source: The Commodity Investor Q&A