343. UK EMBRACES NUCLEAR POWER

Good news from the UK today:

A government minister will call today for a huge expansion of Britain's nuclear power in what he predicts could be a £20bn economic bonanza that will create 100,000 new jobs and benefit the economy as much as North Sea oil.

As we've known all along here at POD, nuclear will be a key backbone of the post-peak-oil energy regime, and countries which get out in front of it, like France, and now the UK, will derive huge benefits. The title of the article say it all:

Nuclear is UK's new North Sea oil

What happens when the North Sea runs out? You send all the babbling old farts from the oil industry to the nursing home, and replace it with nuclear. Problem solved. Just like Hubbert suggested in his 1956 paper Nuclear Energy and the Fossil Fuels(pdf):
Also nice to see the Minister discussing the economic benefits of a massive nuclear build:

But in his speech to Unite, Britain's largest union, which has 26,000 members in the energy sector, Hutton will attempt to focus attention on the potential economic gains to be achieved from the replacement of Britain's nuclear reactors.

"Just replacing our existing capacity alone will equate to three times the size of the project to build Terminal 5 at Heathrow. It could represent around £20bn worth of business for UK companies," he will say.

"And with no artificial cap to constrain the potential of new build in the UK, there is every reason to believe that the industry could be contributing a significantly higher proportion of the UK in the decades ahead. Creating thousands of long-term highly skilled jobs directly within the energy industry and throughout the supply chain, the prize could be massive."

POD couldn't agree more. The solution to peak oil -- retrofitting and rebuilding our entire energy/transportation infrastructure from the ground up -- is going to be a massive economic stimulus. A process of intense creative destruction, rather like a war, except it will occur during peacetime.

by JD

342. MATT SIMMONS: SPECULATORS SET OIL PRICES

Big hat tip to juan for finding today's tasty nugget: a January 27, 1998 paper by Matthew R. Simmons* entitled Is Another "MG" at Work? (Or, What is Driving Down the Price of Oil?) (paper archived here: Simmons & Co). In this paper, Simmons proves that oil prices are set by speculators, with little reference to the underlying fundamentals.

Some choice quotes from this explosive document (bold in original):

Effectively, the changing perceptions of a small handful of speculators now appear to set the price for West Texas Intermediate crude oil, which in turn sets the general price for almost all other crude grades throughout the world.

If this is true, the world's most important commodity is being priced by a handful of hedge funds or individual speculators who, as a group, invest less than $100 to $150 million at any period of time.

-----

For all those that fervently believe price movement always reflects fundamental changes in the physical markets, the discussion in this paper bears careful reading. Our work strongly suggest that large swings in the funds' net position in oil contracts on the NYMEX have driven virtually every significant movement of crude oil since the MG position was unwound in 1994.

-----

Why Should the Funds Have Such Heavy Influence on Crude?
It seems hard to believe that the buying behavior of a small group of hedge funds could actually move the price of a commodity as important as crude oil. After all, it is the world's largest single traded commodity both in terms of dollars changing hands and in daily volume.

Throughout this period, the commercial buyers generally held three to four times as many contracts. So why would they not be the big drivers of crude prices?

The answer is that few, if any, of the significant commercial traders are charged with betting on the future direction of crude. While the commercial traders do watch the technical charts and attempt to minimize daily losses or make reasonable trading profits, few have the mandate (or the temperament) to make a heavy bet on the direction of crude prices. In fact, a number of the large industry traders have company policies which preclude being able to "bet on the future of oil".

But the funds are clearly a horse of a different color. Their huge shifts between holding big short and big long positions clearly indicate this. Both the velocity and magnitude of their swings, often occurring in a handful of weeks, have become the proverbial tail wagging the dog or Archimedes' famous lever, which moves perhaps not the entire world, but certainly the world of crude.

-----

Thus, if funds are driving the NYMEX price, the NYMEX price drives the WTI cash price and the WTI drives world crude prices, it leads us to the conclusion that a small number of speculators are driving the world price of oil.

In our opinion, this indicates that prices over the short-term tell us nothing about the supply and demand fundamentals for oil. Rather than being a perfect indicator for the fundamentals, price is a perfect indicator for the psychology of a small number of funds.

Matt Simmons: Oil prices driven by speculators

*) Chairman of Simmons and Co., Intl., the world's leading investment bank in the energy industry.

341. INDIA'S OIL DEMAND IS NOT INCREASING MUCH

Recently I've noticed a lot of articles blaming the spike in oil prices on demand from China and India.

Goldman Sachs:

But he [Giovanni Serio, oil analyst at Goldman Sachs] remained positive on oil long-term because of the market's deeply-ingrained structural constraints that mean supply cannot easily rise to meet rapidly increasing demand from emerging countries like China and India.Link

Dick Cheney:

Cheney said there had also been a "dramatic increase" in demand from countries like China and India,Link

Christophe de Margerie, head of France's Total SA:

The crunch is due to a slate of “above-ground” factors that make it unlikely the world will ever produce the amounts of oil Mr. Yergin or the International Energy Agency think it will, Mr. de Margerie said. That includes sudden and voracious demand from China and India;Link

Sounds plausible enough. After all, "surging demand form China and India" is the soundbite reason given to justify the bubble in all commodities. There's just one problem. Oil demand from India is not rapidly increasing, and it's not dramatically increasing, and it's not sudden and voracious either.

Here's India's recent oil consumption from the June 2007 BP Statistical Review:
2004: 2573kbd
2005: 2569
2006: 2575

Here's the oil consumption figures for "Other Asia", which includes India, from the EIA:
2005: 8.53mbd
1st quarter 2006: 8.62
2nd quarter 2006: 8.71
3rd quarter 2006: 8.54
4th quarter 2006: 8.82
1st quarter 2007: 8.73
2nd quarter 2007: 8.82
3rd quarter 2007: 8.63

by JD

340. TIME TO STRANGLE THE SPECULATORS

It's getting clearer by the day that commodities are the next bubble -- the successor of the NASDAQ and housing bubbles. All the signs are there: vertical takeoff of all commodities simultaneously, massive piling on by hedge funds and J6Ps, talk of a "New Era" where prices will never come down.

As usual, the bubble(s) are being primed with fraud. Here's a couple of enlightening talks by Frank Veneroso on rampant market manipulation and cornering in the base metal markets.

Address to Global Central Bankers at the World Bank(pdf)
PPI summer 2007 roundtable(pdf)

It's not clear what useful social function is being served by hedge funds with massive leverage trampling all over small markets in essential commodities like metals, oil and food -- billionaire investment clubs turning a tidy profit on the backs of the world's poor.

When it comes to oil, Pickens is not often wrong. He has pocketed more than $1 billion (£493m) in each of the past two years by making big bets on rising oil prices, say Wall Street sources.Source

You know who paid Boone that $2 billion? You did, at the pump. And that's just the frost on the tip of the iceberg. You know what Boone did to earn that money? Nothing except sit on his bony ass. It's welfare for billionaire parasites.

Here's a helpful hint on how to strangle the speculators:

Oil prices will continue to rise, insists Verleger, who compares the rise in oil to the accompanying rise in silver prices during the 1980s oil crisis, which is mirrored by the rush to commodities today. CalPERS, the California retirement fund for state employees, is increasing its investment in commodities, notes Verleger, from $450 million to $7.2 billion. This will mean an additional 36,000 crude futures to the fund's portfolio. The push on these futures is also reminiscent of silver, he says.

Silver's rise was ended by government intervention, when Fed chairman Paul Volker asked banks to stop lending to investors buying commodities. "I suspect the continued rise in oil prices will be broken only when the Federal Reserve, CFTC, NYMEX and ICE take similar actions. To be specific, I expect to see prices fall when the central bank orders banks not to lend to hedge funds to purchase commodities."

This sounds like a great idea. And since the banks are over a barrel right now, this would be a great time to "encourage" them to pull the plug on the hot money surging into commodities.

But why stop there? All these commodity markets, from base metals to agriculturals, are small markets, ripe for manipulation by massively leveraged big players. So I think we need a much stronger enforcement presence on the LME, NYMEX, grain exchanges etc. The Feds and the CFTC need to be crawling all over the exchanges, sticking a periscope up everybody's ass, looking for collusion, cornering, squeezes, squirreling and all the usual species of commodity fraud. The enforcement agencies also need to start taking down names and numbers of every person involved in the futures and ETF markets, in preparation for confiscatory windfall taxes.

by JD

339. CARGO SCOOTERS AND BICYCLES

Clearly, there is tremendous waste in our current usage of oil and oil products. Everyone agrees with that. The argument arises over what that means in the context of peak oil. There are two basic positions which we can summarize as follows:

1. Optimist: Waste is our friend. The solution to peak oil is to dramatically conserve energy, and then switchover the remaining part to alternatives.
2. Doomer: We can't conserve -- because conservation: a) is impossible and b) will destroy the economy -- therefore we're doomed.

My view is that peak oil will cause "lifestyle armageddon" in places like the U.S. By that I mean that, over time, personal transportation will evolve from something like this:


To something like this:

Or this:

So the bad news, if you're an American etc., is that your superstud lifestyle is going to go down the toilet. The good news is that it was only your lifestyle, so who cares? Suck it up, and quit whining like a bunch of wimps. You still get from point A to point B, and that's what counts. It's not business-as-usual, but it is functionality-as-usual, and the beat goes on.

I know it's hard for Americans to visualize people actually living in such a high-efficiency future, and I've previously posted a series of articles to help them with that: (144. YOUR BUDDY THE SPACE HEATER, 156. BICYCLES IN JAPAN, 285. STREET CAR!). Today, I'd like to show you a place where ordinary people routinely move around and tote cargo using scooters, bicycles and motorcycles. It's the city where I live -- Osaka, Japan.

Lately I've been seeing so many cargo scooters and electric bicycles, that I decided to shoot the video above to share it with you. The above was shot over the course of about an hour, just walking around a few blocks in central Osaka. One interesting cargo scooter that I see a lot is this unit, a 3-wheel scooter with cargo space and roof (mileage approx. 41km/l, or 100mpg):

Honda Gyro Canopy

by JD

338. $1 MILLION WAFFLE FROM ASPO-USA

You wanna know what somebody really believes? Follow the money.

At first blush, Steve Andrews & Co. over at ASPO-USA seem to be taking the position that peak oil is an imminent threat. They say things like:

But the preponderance of current analysis suggests this event [peak oil] is highly likely within the next eight years.

So is it so highly likely that Steve & Co. are willing to bet $1 million dollars on that outcome? Apparently not:

We are prepared to bet Saleri, or anyone else for that matter, $1,000,000 that world oil production will peak before 2030.

2030. LOL. Steve, you seem to be having a little identity crisis here. People who talk about oil peaking around 2030 are known as denialists and cornucopians.

by JD

337. OIL-FIRED POWER GENERATION

Henry Groppe is a very well-respected oil analyst, and on a couple of occasions he has described a common sense mitigation process for the early phase of peak oil:

[Henry Groppe] believes that something like 20mbpd of the current 84mbpd of oil demand is going for heat and power generation primarily in developing countries. He thinks that with oil in the $50-$60 range, all of this will get converted to coal or natural gas, and that, along with vehicle fuel efficiency, will be the main initial responses to peaking, and will keep us out of serious economic pain for a decade or so.Source

Groppe gives more detail in a Dec. 11, 2007 podcast interview with David Strahan which I've transcribed below (excerpt begins 24:54):

David Strahan: If you expect peak oil in 2008, what do you think will happen to the oil price in 2008 and beyond?

Henry Groppe: We think that, for perhaps the next 6 or 7 years, the oil price will range, without extraneous disruption, in the $65-$85 range. At that price, there can continue to be growing transportation fuel use and home heating oil use and raw material use, but, of the order of 25% of all the oil that is used is used solely to provide heat to generate steam for industrial operations, or to generate electric power, and for that use, there are much cheaper alternatives than the equivalent of $65-$85 oil, in the form of coal and natural gas and nuclear. And that fuel oil being burned for that low-value use will be converted in refinery expansions, which are being made now, to convert that fuel oil to transportation fuel. After that has all been substituted, and most of the oil is being used for the high-value special quality uses -- transportation, raw material and home heating -- it will require a higher price level to restrain consumption. We haven't done that work yet, but that's over this $65-$85 a barrel range, and during the next several years, it'll become clearer what that level will have to be, probably $85 to $100 plus.

David Strahan: Those numbers seem to me extraordinarily low. Most people, when they think of peak oil, think of extremely high oil prices. We've already had oil go up to $90 a barrel, even almost up through $100 a barrel. Is it really credible that we can have peak oil, that the oil supply will start to shrink, and oil prices will be lower than they are today, really in this $65-$85 a barrel range?

Henry Groppe: We think so, because, as we observe the responses among all of the consumers, we have found that, instead of growing at a historical rate of 2.5% a year, consumption has actually been essentially flat for 3 years, because we've had prices in the $60 to $70 a barrel range. So we've eliminated all growth in consumption at the $60-$70 range. If prices are above that, consumption -- based on all the results we're seeing -- will continuously decline.

David Strahan: How is it that consumption has stayed flat then? What has happened in the last three years to make that happen?

Henry Groppe: All of the users of this fuel oil that I described have suddenly found that the cost of that energy has risen to something like of the order of $10/MMbtu and there are other energy supplies like coal that are available for $2/MMbtu are hard at work to improve their efficiency of usage and convert to these cheaper fuels as rapidly as they can. The biggest conversion is taking place in China. Almost two-thirds of China's oil is used for these fuel uses, rather than transportation fuel, and they are halfway through the world's largest expansion of coal mining and coal-fired power generation in the history of the world, and they're releasing that consumption of fuel oil.

If this process is indeed occuring, and involves 25% of world oil consumption as Groppe says, then it can definitely absorb a lot of the initial post-peak shock. So it's worth exploring in detail. However, to keep things brief I will save the topic of oil-fired process heat for later, and focus here on the broad view of world oil-fired power generation.

I've known for a while that islands are particularly dependent on oil for electricity, but to get the global picture, let's turn to the World Bank's World Development Indicators (WDI) 2007.

Here are the top 30 countries/regions in terms of percentage of electricity generated from oil in 2004:

Rank , Country, Percent
1 Malta 100
2 Netherlands Antilles 100
3 Yemen, Rep. 100
4 Benin 98.77
5 Iraq 98.47
6 Jamaica 96.54
7 Cuba 95.34
8 Cyprus 89.12
9 Lebanon 89.01
10 Libya 80.66
11 Kuwait 79.47
12 Nicaragua 75.23
13 Senegal 75.03
14 Sudan 72.78
15 Dominican Republic 72.62
16 Sri Lanka 63.15
17 Haiti 52.47
18 Honduras 51.52
19 Saudi Arabia 50.84
20 Cambodia 49.33
21 Jordan 49.21
22 El Salvador 45.62
23 Syrian Arab Republic 45.58
24 Togo 38.93
25 Guatemala 35.74
26 Panama 33.99
27 Angola 33.53
28 Ecuador 32.58
29 Singapore 31.2
30 Mexico 31.06

The following are the top 30 countries in terms of amount of power generated (and barrels consumed per day, assuming efficiency of about 35%, or 620kwh/barrel)

Rank, Country, kwh generated from oil, Barrels per day burned in oil-fired generation
1 Japan 9.83E+10 434480.7777
2 Saudi Arabia 8.13E+10 359164.8255
3 China 7.17E+10 316942.1122
4 Mexico 6.96E+10 307534.2466
5 Italy 4.59E+10 203026.9554
6 Indonesia 3.63E+10 160397.7022
7 India 3.60E+10 158961.5555
8 Kuwait 3.28E+10 144882.8988
9 Iraq 3.18E+10 140530.2696
10 Iran, Islamic Rep. 2.85E+10 125766.6814
11 Korea, Rep. 2.77E+10 122315.5104
12 Russian Federation 2.51E+10 111113.5661
13 Spain 2.38E+10 105342.4658
14 Canada 2.18E+10 96243.92399
15 Egypt, Arab Rep. 1.64E+10 72527.61821
16 Libya 1.63E+10 72006.18648
17 Cuba 1.49E+10 65943.43791
18 Syrian Arab Republic 1.46E+10 64613.34512
19 Pakistan 1.36E+10 60035.3513
20 Brazil 1.23E+10 54520.54795
21 Venezuela, RB 1.19E+10 52567.38842
22 Singapore 1.15E+10 50751.2152
23 Germany 1.01E+10 44807.77729
24 Dominican Republic 9.99E+09 44153.77375
25 Lebanon 9.07E+09 40088.37826
26 Philippines 8.50E+09 37578.4357
27 Greece 8.39E+09 37052.58506
28 Thailand 7.74E+09 34206.80513
29 Israel 7.74E+09 34193.54839
30 Turkey 7.67E+09 33893.06231

The WID data shows that many countries were already following the Groppe model before oil prices started rising in 2004.

Country, % of power from oil 1990, % of power from oil 2004
Albania 10.9 1.7 (Substitution achieved by increasing hydro)
Algeria 5.4 2.2 (Substitution achieved by increasing gas)
Azerbaijan 91.1 28.4 (Substitution achieved by increasing hydro/gas)
China 7.9 3.3 (Substitution achieved by increasing coal)
Japan 18.4 9.2 (Substitution achieved by increasing coal and gas)
Mexico 56.7 31.3 (Substitution achieved by increasing gas and coal)
Saudi Arabia 56.5 50.8 (Substitution achieved by increasing gas)
etc.

On the other hand, there are also about 20 countries (mostly from Latin America for some reason) which didn't follow the Groppe model in the 1990-2004 timeframe (although some of this may be a distortion from the pre-2004 period of cheap oil in the late 90s, early 00s):

Country, % of power from oil 1990, % of power from oil 2004
Angola 13.8 33.5
El Salvador 6.9 45.6
Guatemala 9.0 35.7
Kenya 7.6 24.1
Kuwait 54.3 79.5
etc.

According to the WID stats, and using the conversion factor specified above, the world consumed approx. 5mbd of oil in oil-fired power generation in 2004. So if Groppe's theory that 25% of world oil consumption is used for process heat and electric power is correct, then it would seem that the process heat component accounts for approx. 15mbd, and will be much more important than the oil-fired power component.

by JD