Archive for the 'Phaseout Profit Theory' category

“Campaign aims to turn oil companies into climate allies”

Apr 18 2015 Published by under Phaseout Profit Theory

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 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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New Book by Jeremy Leggett

Mar 02 2015 Published by under Book Review, Phaseout Profit Theory

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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Oil Price Crash

Jan 30 2015 Published by under Phaseout Profit Theory

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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10,000 Generations

Oct 08 2014 Published by under Phaseout Profit Theory

The Wikipedia article “Human” says that it’s been 200,000 years since anatomically modern humans developed in Africa.

Taking an average of 20 years for one generation, that leaves us with about 10,000 human generations in our history until now. The last 200 years in which most of the fossil fuel burned until now has been used account for only 10 of those, or only about 0.1 percent.

It is quite obvious that if humans want to survive another 10,000 generations, we need to phase out fossil fuels sooner or later. There is not enough left for even another 10 generations at present consumption rates.

It is an interesting question what percentage of the fossil fuel treasure these 10 generations already burned through. I am quite sure that is is substantially more than 0.1 percent, but I am not able to give an exact figure right now. I may want to come back to that question in a later post.

Anyway, once you look at the big picture (10,000 generations), it becomes super evident that humanity needs to phaseout fossil fuel anyway, even without our little global warming problem.

The only question is how fast that will happen. And, from my point of view (phaseout profit theory), if the fossil fuel companies will deal with the phaseout in a way that makes them money.

Which is to reduce production faster than necessary anyway, so as to increase prices early on in the transition.



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Book Review: Don’t Even Think About It, by George Marshall

Don’t Even Think About It – Why Our Brains Are Wired to Ignore Climate Change, by George Marshall, link to the Kindle edition.

This review is in the “Global Warming Fiction” section, though it is not fiction. But I recommend reading it for anyone writing global warming fiction.

And anyone concerned about how to improve the impact of global warming campaigning.

I started writing global warming science fiction novels in the first place because Bruce Schneier pointed out what George Marshall did in this book. Again, here is a link to the Youtube video of Schneier’s talk:

The Security Mirage

In that talk, Schneier explains that the ability to accurately assess risks is important for survival in evolution. He uses the example of a rabbit who hears a predator approaching. If he bolts to soon, he will starve. If he bolts to late, he will be eaten.

Humans have evolved in the same environment. That means that visible, present, individual risks with a face and a name like a large predator will impress humans.  In contrast, abstract, slow changes in the environment will not.

I have not found any reference to Schneier in Marshall’s book, but he makes the same point in much more detail and backed up with opinions from many noted experts in related fields like psychology.

So I find confirmed what I already knew. But there is much more.

For starters, Marshall fictionally attributes global warming to the North Koreans. I discussed this yesterday, and he wrote that at the Guardian as well:

The discovery that North Korea has been secretly pumping climate-altering chemicals into the atmosphere in an attempt to destroy agricultural production across the US has sparked an international crisis.

This is an excellent way to show the basic point. Global warming is a problem without the face of an enemy. If this really was some plot to intentionally inflict damage by a clearly defined bad actor, the reaction would be much more decisive than the lukewarm response global warming got until now.

Next up: Marshall shows that some of the symbols used in connection with global warming campaigns are not chosen very well.

For one, the idea of turning of lights for one “Earth Hour” is actually exactly what denial campaigners like to use. They want to paint global warming activism as turning the lights off.

Next, the polar bear symbol. That makes as much sense in the context of global warming as choosing a camel if you were concerned about global cooling.

Marshall doesn’t try to find better alternatives. I will do so right now.

The “Earth Hour” event should be one hour of fun with electrical vehicles and solar panels. People getting together to celebrate all the technology we already have. I don’t have time to elaborate in this post, but the basic idea would be to get a community experience and to turn the lights on brightly and have a party, instead of turning them off.

I don’t know what to do about the polar bear yet. (Update: I propose the desert fox as an alternative).

The most interesting part of this book for me was Chapter 32, titled “Wellhead and Tailpipe”.

He notes that most solutions (like the European Emission Trade System) are concerned with the consumer side, the tailpipe, the gas emissions. In contrast, there is not much discussion about what could be done at the producer’s end, the wellhead.

That’s interesting, because my favorite solution (phaseout profit theory) is addressing the wellhead. I think the owners of fossil fuel could make enormous extra profits by reducing their production voluntarily and see prices shoot up because of reduced supply. I have a category on this blog with over 50 posts discussing that basic idea.

And I learn from that chapter that wellhead solutions are much easier than tailpipe solutions. That’s because there are only very few producers involved. Marshall says only about ten major oil producers. They can all easily fit around one medium sized table and figure out how to reduce production in the most profitable way.

And the next Chapter 33 is titled “The Black Gooey Stuff – Why Oil Companies Await Our Permission to Go Out of Business”.

That was also rather interesting. He cites someone from Shell like this:

The oil industry is not given the permission to make a transition out of fossil fuels. The main reason is that the international agenda is driven by people with political agendas that are unrelated to solving the problem.

After thinking about the issue for about 0.5 seconds, I have decided to give the oil industry the permission to make that transition.

And I think we should give them a permission that is actually worth a lot of money. That is an antitrust exception allowing a coordinated phaseout.

As discussed earlier, the famous Standard Oil antitrust case decided by the American Supreme Court a hundred years ago gives these reasons for antitrust law:

1. The power which the monopoly gave to the one who enjoyed it to fix the price and thereby injure the public; 2. The power which it engendered of enabling a limitation on production; and, 3. The danger of deterioration in quality of the monopolized article which it was deemed was the inevitable resultant of the monopolistic control over its production and sale. (Emphasis mine).

“Enabling a limitation on production” is not a “danger” right now. It is exactly what we need to make happen.

They should love this antitrust exception so much that they might even accept a moderate carbon price of $50 a ton in exchange.


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You Can’t Make Plastic From a Solar Panel

Sep 23 2014 Published by under Phaseout Profit Theory

But you certainly can run cars in India and China in the next couple of decades on solar electricity.

This post is a preliminary discussion of a new report by Mark C. Lewis titled “Toil for oil spells danger for majors“. Thanks to this tweet by Chris Nelder for the link.

I have only read the executive summary until now, though I am looking forward to reading more.

Lewis looks at the “energy return for capital investment”, especially for driving cars and trucks.

And he reports that $100 billion invested in oil buys between 1,694 and 2250 TWh, depending on the cost of the development project in question ($75 a barrel or $100), while onshore wind will deliver 2,336, solar 704, and offshore wind 1,246. That makes onshore wind already competitive for gross energy.

But when looking at cars, only 25% of the energy in the oil gets delivered to the wheel (the rest is lost in the inefficiency of the engine). In contrast, electrical vehicles deliver 70% of the energy to the wheels.

That dramatically changes the numbers above. Oil delivers only between 424 and 563 TWh for $100 billion investment, while solar gets 475, wind 1,518 onshore and 779 offshore.

And that’s assuming $3000 per kW of cost for solar. I recall that solar in Germany has been installed for less than 1000 euros already over a year ago.

Anyway, Lewis says that the oil industry faces a risk of “stranded assets” not only because demand may go down because of global warming regulation. He says that they also face the risk of losing out to the competition of electric vehicles because oil prices go up too high.

I certainly hope that happens. People need to stop driving stinking gasoline cars. That’s one of the big factors when pumping CO2 into the atmosphere.

And eventually it will. Already now fuel costs for electrical vehicles are much lower than for stinking gasoline cars. The only thing saving gasoline as an option is the fact that batteries are still expensive, making the electrical vehicles’ purchasing prices higher.

But I agree that this may be a problem for the oil industry. They certainly should not rely on cars and trucks staying with the gasoline option.

So what should they do? There is no way to win in the competition against electric fuel in the long run. And if the price of oil goes up and the price for renewable energy goes down even more, as Lewis thinks it will, then the above figures will look even worse for oil.

I think they should face the inevitable fact that the world is going to use less oil sooner or later. And compensate for that fact with much higher prices.

Let’s take ExxonMobil as an example case. As Wikipedia tells us, they had revenue of $420.836 billion and an operating income of $40.301 billion in 2013, selling around 3.921 million of barrels a day.

Take that number down by 80 percent to 0.782 million a day over the next couple of decades. That would result in revenue of $84.167 billion, all things equal.

Now get the price up by a factor of three, to $300 a barrel, and take revenue up as well to $252.50 billion. Operating income should go up massively, even with revenue down, since they would get a margin of around $200 instead of one of around $20.

The higher price would in turn accelerate the transition away from stinking gasoline cars. And leave ExxonMobil without a market in the transport sector. Stinking gasoline cars would become as rare as steam locomotives are now, something for the occasional tourist attraction.

As well they should, of course. And as they will sooner or later anyway.

But the market for non-fuel use of oil will always remain. You can’t make plastic from a solar panel. You can make it from oil. That non-fuel use is about 10 percent of all oil use right now. Add in another ten percent for air traffic (not suited for batteries) and other niche markets to get your goal of about 20 percent of present oil use.

All the oil companies need to do to stay profitable is accept that they will need to sell less, at higher prices.

To come back to the report by Lewis, I agree with his conclusion: Cars will move to electric vehicles.

But I don’t necessarily agree with the idea that this is bad for the oil industry, or that this will lead to “stranded assets”. I think that if the oil industry handles the challenge from the transition to renewable energy correctly, this will be a large opportunity to increase their profits.

Update: Lewis kindly answers over Twitter:

yes, nice piece KF, but note that the oil majors are vulnerable to stranding b/c of their position on cost curve.

IOW just because world will still need oil for plastic and other uses doesn’t mean it will need the majors.

I am not sure I understand this correctly. I treated the whole oil industry as a block above. Maybe “the majors” will face some competition from cheaper producers.

But in my scenario (phaseout profit), the oil industry takes care to always starve the market, so as to raise prices. That in turn should leave ample margins for everyone in the industry.

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How Much For 10 Million Barrels Oil Each Day?

Sep 19 2014 Published by under Phaseout Profit Theory

A group of 347 investors holding assets of $24 trillion has called for introducing world wide “carbon pricing”. They want effective climate policy.

I agree with their position.

But there already is a price on carbon. That is the price the market sets for oil (I am restricting my discussion here to oil, but the same is true for coal, lignite, and gas).

That price is changing all the time. But let’s just set it to $100 a barrel for this post.

That means if these investors started buying 10 million barrels a day, they would need to find $1 billion each day for such an investment fund. With $24,000 billion in their portfolios, that looks quite possible.

So, if they start taking 10 million barrels a day off the market, what would happen to the price of oil? World consumption is estimated to be around 92.4 million barrels a day right now. Taking 10 million barrels a day off the market, equal to about one third of OPEC production and over 10% of demand would bring prices up.

Which would be good news for the investors who bought that oil. They can sell their position with a profit, if they are after short term gains.

Anyway, this just shows that a small amount like $1 billion a day may be enough to get phaseout profit going.

And this could be done tomorrow. If these rich investors want higher prices for oil, all they need to do is buy some.




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Do It Again, OPEC

Sep 17 2014 Published by under Phaseout Profit Theory

OPEC is expected to reduce their production next year from 30 million to 29.5 million barrels a day at their next meeting in November, says Reuters. They cite OPEC Secretary General Abdallah Salem el-Badri for this expectation.

Already the news of a possible reduction in production has sent up oil prices to S99.05, from a previous 26 month low of $96.21. That’s an increase of $2.84.

Multiply with the 1.3 trillion barrels of world wide oil reserves, and we  understand that this announcement of a possible reduction next year made the oil owners richer by $3.692 trillion (the increase in the value of their reserves).

So what would happen if they did that again next year, and then for every year until 2020? Announce that they will reduce production by 500.000 barrels each year from 2015 to 2020.

How many trillions of dollars would the worth of their oil reserves go up with such a simple announcement?

The only way to find out would be to do it.



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Germany Dirtiest Country of the World

That’s not a title to be proud of. I like the World Cup win much better.

Unfortunately, Germany is the largest producer of lignite in the World. I just learned this because I read this blog post by Craig Morris about Germany’s large lignite reserves, and their relation to the transition to renewable energy. Morris points out that Germany might continue producing “cheap” lignite electricity even once it is not needed any more domestically and export it.

Wikipedia explains that Germany has over 14 percent of the World’s lignite reserves and is the World’s largest producer. At least the trend is in the correct direction: Production is down to 169 million tons in 2010, from 388 million in 1980.

I think Germany should greatly reduce production of lignite. The way to do this is easy. All that is needed is to stop granting permits to expropriate citizens’ real estate for these projects, which typically require whole villages to relocate. The only way that can be done under German Constitutional law (Article 14 Paragraph 3) is if the project is necessary for the common welfare (Wohl der Allgemeinheit).

Digging lignite out of the ground and burning it to produce electricity is making global warming worse, since that is the most CO2 intensive way of producing electricity. There is no fuel as dirty as lignite. As such digging it out of the ground is incompatible with the common welfare. Common welfare interests require phasing out the dirtiest energy first. They certainly don’t require expanding lignite mining.

If it is impossible to expropriate real estate owners, companies who want to relocate villages to get at the lignite buried below them will have to pay much higher prices. That in turn will remove the only remaining advantage of this dirty fuel: Price.

Another way to increase the price of lignite would be to reduce production (phaseout profit theory). In contrast to coal, lignite is sold at localized prices, since it doesn’t make sense to transport lignite over long distances. Reduce supply each year by 3 percent (which would result in a reduction around 60 percent over the next 30 years) and watch prices go up. That’s good for the owners of these lignite resources, good for people who else would see their home villages disappear in a big hole, good for future generations (who will have left more of the valuable resource left), and good for the climate.

And all it takes to do that is to stop relocating people and destroying whole villages.



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Book Review: The Collapse of Western Civilization: A View from the Future

By Naomi Oreskes and Eric M. Conway. I bought the Kindle version because of this review by Joe Romm at Climate Progress.

I am not quite sure if this is fiction or not.

The basic premise is that in 2393 Chinese historians look back at how global warming has played out and why humanity was not able to solve the problem as long as that was still possible.

That idea appeals to me, since I wrote a novel about a Princess coming back in a time machine from the 24th Century to warn humanity of how horribly global warming has played out (and to solve the problem in the one week she has left to live as a side effect of time travel). It is called “Last Week”. A FREE PDF file is here.

In contrast, this book has no time machines in its plot. It also doesn’t have a plot, or a story, or main characters, or antagonists. I don’t think it qualifies as a novel.

Instead, it reads like a learned article reflecting on what exactly makes humanity miss the obvious need for drastic countermeasures. Much of it is documented with footnotes. If this is science fiction, it is more science as fiction.

But there is also a strong fictional element. The authors tell us how much degrees of global warming we end up with. And how China dealt with the problem of relocating 250 million people from their coast lines. And many other things in the future, which obviously are impossible to document exactly with a footnote. About one third of the book is speculation about what might happen.

The authors blame something they call the “carbon-combustion complex”, which is a parallel to the “military-industrial complex” term already well known.

They may be correct. If so, it would help to have the “carbon-combustion complex” on the other side, the side of the climate activists. That is easily done. All it takes is to realize that oil companies and other fossil fuel owners would realize massive profits from rising fossil fuel prices, and that of course a fast phase-out of fossil fuel means higher prices (less supply).

I am preaching this all the time on this blog under the name of Phaseout Profit Theory.


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