Oil People Bubble

Apr 24 2015

Karel Beckman has published an article at RenewEconomy about the strategy of oil companies under the title “Why the strategy of oil companies is doomed to failure”. It is built mostly around an interview with Adriaan Kamp, who has spent some time as a manager at Shell and is now running an energy consulting firm.

I was interested in one thing Kamp said:

Oil people still “live in a bubble”, says Kamp. “They lead a very good life. They operate in a very strange environment: the less they do, the more the price of their product goes up, and the more money they will make. That’s a very perverse incentive.”

This confirms my Phaseout Profit Theory, in the words of an insider who knows much more about the oil industry than I ever will.

Of course the oil companies will make more money by doing less. Invest less in new projects and supply goes down. Do less production from existing wells and supply goes down.

Obviously, less supply means higher prices, which means higher profits per unit, as well as higher valuations for your reserves.

I fail to see what is “perverse” about this incentive. This is exactly the kind of incentive we need. If it is true that oil companies make more money by doing less, they get an incentive to leave more oil in the ground.

I hear there is this “global warming” problem that requires doing exactly that.

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Rod Adams on Phaseout Profit

Apr 21 2015

Rod Adams kindly replied with a couple of tweets to my latest article on Phaseout Profit. I am pleased with the opportunity to discuss why my idea might not work. He raised three points.

The first:

History is clear. If prices are high, more drilling in sensitive resource areas like Arctic, deep ocean, & tar sand

That is true. Higher oil prices make it possible to drill in more expensive places. It is also true that oil companies are unlikely to drill anywhere more expensive than current prices.

But there is no “history” on Phaseout Profit. This is a new idea. It remains to be seen what happens if the oil industry understands it.

And the idea is to reduce drilling and production in both expensive and cheap places.

The second is a related point:

Unrealistic to believe “for profit” companies would voluntarily refrain from drilling in a high price market.

That is correct as well. Therefore, Phaseout Profit would work not as a “voluntary” scheme. It would work like the environmentalists want. Force the oil companies to keep 80 percent of their oil in the ground (except for sales as raw material in the chemical industry).

That’s because if there is no obligation to reduce investments and production with legal force, the resulting cartel would be ineffective. Since less production leads to higher prices and therefore high profits per unit, each producer would be tempted to break the cartel by producing more than his allocated share.

The third:

High energy prices harm billions of humans. Better way to keep oil & gas in ground is to flood market with E

Again, correct. All things equal, cheap energy is better than expensive energy. And high prices for gasoline will hurt some people that depend on gasoline cars.

But people will be hurt on a much larger scale if global warming is allowed to continue unchecked.

Also, the argument of Phaseout Profit is from the point of view of the oil companies. As I mentioned in the article, they are just now hurting to the tune of close to a trillion dollars per year from the recent 40% oil price drop. While Europe and the United States rejoice in equivalent savings on their energy bill, those are clearly not in the interest of the countries holding the oil (many of them developing countries much poorer than either Europe or the United States).

As far as nuclear is concerned, I recall reading at Atomic Insights about gas prices. Obviously, low gas prices may be good for consumers, but they are not good news for the competing nuclear industry.

If a coalition of Bill McKibben and the fossil fuel industry pushes through effective reductions of fossil fuel production, and if such reduction leads to higher prices, competing sources of energy like nuclear and renewable will profit from that as well.

 

 

 

 

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“Campaign aims to turn oil companies into climate allies”

Apr 18 2015

That’s the headline of a new article by Marc Gunther at the Guardian.

I was excited to read that headline. Has the time finally come that someone else has figured out the solution to global warming?

I recall that I have been preaching on this blog again and again that global warming is easily solved in a week with time to spare once the oil companies join the fight on the same side as Bill McKibben. Phaseout Profit Theory. Having more fossil fuel stay in the ground means less supply. Less supply means higher fossil fuel prices. Therefore, fossil fuel companies should be interested in having more oil stay in the ground.

Unfortunately, the article only describes the old and well-known efforts by the Carbon Tracker Initiative to include the risk of “stranded assets” when analyzing the value of fossil fuel company stock.

“Turning fossil fuel companies into allies” would be achieved, in the view of the article, if some of the investment directed at finding new resources now would be channeled into renewable energy instead.

While that is a good idea and inevitable in the long term anyway, for the short term it is not necessary to have oil companies invest in solar projects. All we need them to do is strongly reduce their investments in developing new resources, leading to higher prices in the future because of reduced supply. They should like higher prices.

As Michael Liebreich explained in his recent key note speech, the oil producing countries are losing close to a trillion dollars per year in revenue because of the latest 40% drop in oil prices.

It is clearly not in their interest to have that happen.

So what they should do, they should join Bill McKibben and voluntarily restrict their investments in new resources, as well as their production. If they finally see the light and leave more oil in the ground, guess what happens to that 40% price slump?

Just announcing that all oil companies join the 350.org campaign might be enough to send oil to $200, giving an extra $5 trillion a year to the oil producers.

Again, I think that idea of “turning oil companies into climate allies” is a great headline. But the way to do that is not what the article recommends.

 

 

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Germany Keeping Renewable Lead?

Apr 14 2015

German Chancellor Merkel has commented on the “leading position of Germany in the renewable energy world market”. She wants to keep and increase that lead. See this report at Manager Magazin (in German).

That’s nice to hear.

Meanwhile, in the real world, Germany has set a new negative record for new solar installations. In February, for the first time in eight years, less than 100 MW of new solar capacity was installed (Klimaretter).

These numbers mean that new solar capacity has dropped by 75% in only about two years.

I am not sure how that is “keeping and increasing” the world wide lead Germany still enjoys in cumulative solar installation. That lead will go to China shortly, they are expected to add 17.8 GW this year alone.

Since there are considerably more Chinese than Germans, the world lead in per capita installations will take a couple of years longer to go.

That’s good news for Chinese manufacturers of solar panels. With a strong domestic market, they will be able to keep and increase the lead the Chinese industry has.

 

 

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New Book by Jeremy Leggett

Mar 02 2015

I just finished reading the first couple of chapters of a new book by Jeremy Leggett released today. I recall having reviewed (favorably) his 2013 book “The Energy of Nations” on this blog.

The title of this book is “The Winning of the Carbon War”. Leggett has released the first part as a free download today and plans to publish later parts once a month. The whole thing will then be condensed into a book some time next year.

I found the first part interesting and inspiring. Leggett talks about his efforts to do something about global warming. Mostly he shares his experience in talking with people involved. His ideas are not so much in the center as in his last book, this is more a personal perspective, maybe even close to a dairy.

The main theme is the connection between financial markets and global warming. Leggett is involved with the Carbon Tracker Initiative. They rightly think that global warming will have a large impact on the fossil fuel industry. I disagree with their idea of “stranded assets”, though. I rather expect global warming to boost the fossil fuel industry’s profits, if they understand that reducing their production faster than they will be forced to anyway is good business (Phaseout Profit Theory).

It would be fun to discuss this with Leggett.

Anyway, I liked this first part and am looking forward to reading more.

 

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Germany Suing the EU Commission over Feed-In Tariffs

Feb 17 2015

According to SPIEGEL (in German), the German government has sued the EU Commission over their decision to treat the German feed-in tariff as “State aid”, with the consequence of requiring approval by the EU Commission for all German legislation in this area. Thanks to this Tweet by Energiewende Germany for the link.

I applaud this move. How Germany legislates on renewable energy is none of the business of the EU Commission. They have been engaged in an illegal power grab that is incompatible with basic democratic values and the German Constitution.

I hope the German government wins this case, like they won the PreussenElektra case on the same question in 2001.

But for the very least, even if the Court says that there are some elements to the present feed-in tariff that make it qualify as “State aid”, the consequence of that should be to abolish those elements, not to continue taking the orders of the EU Commission elected by nobody in Germany on this point.

Also, even if a feed-in tariff was “State aid”, Article 3 Paragraph 3 of the Renewable Energy Directive 2009/28 already says that Member States may implement “support schemes” for renewable energy, which includes feed-in tariffs under the definition of the term in Article 2 k).

Since this Directive already allows feed-in tariffs unconditionally, there is no room for the EU Commission to attach any conditions to that permission. For example, if the Commission thinks that it is a great idea to restrict feed-in tariffs to a system where the tariffs are determined by auctions, they are free to introduce legislation changing Directive 2009/28. If they find a supporting majority in Parliament and in the Council for this useless and harmful idea, then the support schemes for renewable energy in the EU will reflect their opinion.

But they obviously don’t have the power to unilaterally change the Directive without any legislation procedure. Their position is incompatible with EU law as well as with the German Constitution.

What interest exactly is the EU Commission’s position supposed to protect?

They are correct in their assessment that support schemes for renewable energy come at a cost to competition. Selling electricity from coal power plants in Poland is more difficult with a feed-in tariff system in place in Germany.

But that interest (coal power plants from Poland) is not worthy of any protection whatsoever. The EU has made multiple policy decisions to phase out fossil fuel and to support renewable energy. Abusing general competition law to try to help coal power plants is in clear contradiction to this basic policy.

To sum this up: The Commission’s position is incompatible with basic values of democracy, incompatible with the German Constitution, and incompatible with Directive 2009/28. And they take this extreme position to help coal stay longer in business, which is incompatible with basic EU policy decisions.

I really hope the German government wins this case.

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New Record for Wind Installations in Germany

Jan 31 2015

As Spiegel and many others report, the German Wind Energy Association BWE has announced figures for 2014. They are a new record 4.75 GW, breaking the 12 year old record of 2002 (3.2 GW).

That sounds like good news, and it is.

The bad news is that much of that is built by people who think that the 2014 reform of the Renewable Energy Law will make projects harder to build. They have finished their projects early to avoid being hit by these changes.

I have just written a paper (in Japanese) on the 2014 reform and agree with the sentiment that it may be a good idea for a developer to try avoiding these changes. Most of them are intended to prolong the life of coal electricity generation in Germany by delaying the transition to renewable, under the pretext of saving costs (actually, the transition to an auction model will work to increase cost).

It will take a couple of years to see how much renewable energy in Germany is slowed down by this reform. But one good thing has already happened, and it is irreversible. In anticipation of these unfortunate changes, Germany has set a new record for new wind installations last year.

That will come in handy when the time for evaluation of the transition to an auction model comes. Obviously, the drop in speed will look even more impressive when it is compared to a record year like 2014.

 

 

 

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Oil Price Crash

Jan 30 2015

Thanks to J.L. Morin for writing about the oil price at Huffington Post. That’s a good occasion for me to break my recent silence on this blog.

Morin explains the recent downward trend in oil prices with the fact that fossil fuel will be phased out because of global warming policy concerns.

All things equal, less demand for fossil fuel means lower prices. Therefore a scenario where fossil fuel prices go down because of global warming concerns is quite possible.

But the opposite may happen as well. Prices may go up because of global warming concerns.

Obviously, the oil companies should be interested in having this happen, instead of seeing the price crash like in recent months.

The way to make it happen is simple. Just reduce production faster than demand is going down anyway. Never mind antitrust concerns. These have to stand back behind the noble goal of avoiding global warming.

If the oil companies understand this, they will be able to boost the value of their oil reserves (which is tied to the price of oil sold now). And they will be able to make large extra profits.

J.L. Morin has written a global warming novel. I have reviewed it on this blog (I didn’t like the book).

So have I. The basic idea of this post is developed in a novel format in my book “Last Week”. It shows that our little global warming problem is easily solved in a week with time to spare once the fossil fuel companies get the basic idea of “phaseout profit”.

 

 

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Japanese Translation of German Constitutional Court Decision on European Stability Mechanism II

Nov 16 2014

I recall my Japanese translation of the 2012 decision of the German Constitutional Court on the European Stability Mechanism, which I published last year on this blog.

That decision was about the plaintiffs’ request for a temporary injunction.

Now I will be talking again at the Japanese Association for the Study of German Constitutional Cases on the final decision in this case next month. I have prepared a complete Japanese translation of that decision as well for the occasion.

Here is a free PDF file:

ESMII6x9

A printed version can be ordered for $9.98 (the lowest price I could set) at this Createspace page.

Here is a small version of the cover:

coverII

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Regional Variations in Feed-In Tariffs

Nov 06 2014

Craig Morris at Renewables International discusses some interesting numbers on the regional differences in the cost of wind and solar energy in Germany.

The big picture is that wind is cheaper in the north, and solar is cheaper in the south.

For solar, that makes sense. Solar resources are better in the south.

For wind, it makes sense in the big picture. There are more good wind sites in the north, but that doesn’t mean there are no windy places in southern Germany.

Morris also goes ahead and compares these different costs per kWh to the feed-in tariffs for wind and solar. And he finds that the feed-in tariffs are insufficient for some sites, but way too high for others.

To remedy this problem, one might want to change the feed-in tariff so as to reflect these differences.

That would seem to be a good idea. So good actually, that this is already the way things are done right now for wind power.

Article 49 Paragraph 2 of the Law on Deployment of Renewable Energy has a very fine-tuned granular approach, under which the amount of feed-in tariff payments already depend on whether the site in question is above or below average.

With the large differences for solar reported by Morris it would probably make sense to have a similar approach for solar as well. Costs are about 2 cents (Euro) lower per kWh in the most southern part of Germany compared to the most northern parts. It doesn’t make much sense to have the same feed-in tariff for these very different conditions.

That in turn means that if, like the EU Commission wants, Germany moves to a system based on auctions, that most of solar under such a system would be built in the south. Projects in northern parts of the country would be unable to compete. That in turn would mean that whatever costs are saved by concentrating solar where the sun shines more would probably be offset by the need to have more power lines coming from such concentration.

 

 

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