Archive for Peak Oil

Peak Oil on the Radio

peak_oil2[1]Another EarthWise piece I wrote aired on WAMC Wednesday.  This one was a very basic introduction to the concept of Peak Oil, which is pretty much what it had to be, since it was a 2-minute piece for a general radio audience which might not have even heard of peak oil.

You can listen to it or read the full text here:

What Do We Mean By Peak Oil?

If you’d like something with a bit more meat, check out my in-depth look at the economic implications of Peak Oil, The End Of Elastic Oil.

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Fossil Debt

An off-hand comment by Marc Gunther in an article on Solyndra about the started an email chain between the two of us on green jobs.

We agree that most of the debate is silly, but I see some interesting economics underlying green jobs. I explore those ideas in this article: The Microeconomics of Green Jobs.

The article also gave me the opportunity to explore a parallel between using fossil fuels and running up the deficit:

[I]f we spend too much borrowed money to create jobs today, the long-term drag on the economy caused by paying back the debt will leave everyone worse off.

Economic growth fueled by the extraction of non-renewable resources is very similar to economic growth fueled by debt. When we extract these resources and use them, we increase economic activity today, but their non-renewable nature means that we lose the opportunity to extract and use them tomorrow. Hence, the economic stimulus today comes at the cost of an economic drag tomorrow, and the future economic drag will generally be larger than today’s stimulus, since improving technology should allow us to get more benefit from each unit of resource in the future.

Using renewable resources to stimulate growth does not have this problem: Tapping the wind or the sun for energy today does nothing to diminish the wind or sun tomorrow.

In my mind, this is a deep contradiction in current Conservative politics: they don’t like debt (and I agree) but they do like fossil fuels.

I’d be a conservative, if being a conservative actually meant conserving things.

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Renewable Energy World Podcast: The Renewables Gap

As a long-time listener to the Stephen Lacey’s weekly podcast, I was happy to join in as he takes an in-depth look at the Renewables Gap: the question of where the energy is going to come from to power the necessary transition to a clean energy economy, an issue I looked at in Managing the Peak Fossil Fuel Transition.

I’m in great company on this podcast, so if you don’t tune in for me, you might want to know what Bill McKibben has to say about it.

You can download or listen to the podcast here.

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Will 2010 Mark the Shift from the Backward-Looking and Unaffordable Electric Cars to Forward-Thinking Smart Mobility?

Cleantech Group Chairman Nicholas Parker Thinks So

Tom Konrad, Ph.D.

I’ve long argued that the future of mobility in the peak oil era will center on alternative modes of transport, not alternative fuels for the same old car infrastructure.  Electric cars are probably the car of the future, but the cost of batteries and escalating cost of oil will mean that the number of electric vehicles is likely to remain low, while how often we use conventional vehicles will decline as fuel prices rise.

In his annual clean technology predictions for 2010, Cleantech Group Chairman Nicholas Parker prophesies,

Electric cars take the back seat to smart mobility

In 2009, electric vehicles and hybrids eclipsed fuel cell vehicles as the undeniable new center of gravity of the auto industry. Virtually every car company in Asia, Europe and North America announced ambitious clean car strategies, and many brought new models to market, in addition to startups funded by venture capitalists.

In 2010, clean cars will form part of a broader shift to smart mobility. Smart mobility will quickly permeate beyond simply the transport sector, and will be integrated into the new energy paradigm and influence the design of urban systems, even shipping ports. Look increasingly in 2010 for eco-city designs based on concepts such as “new urbanism.” Leading governments around the world will rethink tax systems, fiscal incentives and budgets to encourage greener forms of work and transport based on smart mobility concepts (SNCF, the French state-owned rail operator, set up a fund in 2009 specifically to invest in e-mobility.)

I think he’s being too optimistic on the time frame, but I sincerely hope he is right.   If he is, it will be good for my investments.  Three of my forthcoming Ten Clean Energy Stocks for 2010, to be published on AltEnergyStocks.com in this coming week are currently profitable companies focused on alternative forms of transport.

Two of his other predictions should also be good for my stock pick, if they come to pass.  Mr. Parker sees energy efficiency (three picks) eclipsing solar (no picks), and growing interest in waste-to-energy (one pick.)  You can see the rest of his predictions here.

 

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Managing the Peak Fossil Fuel Transition 

EROI and EIRR

by Tom Konrad, Ph.D.

Current renewable energy technologies must be adopted in conjunction with aggressive Smart Growth and Efficiency if we hope to continue our current standard of living and complex society with diminished reliance on fossil fuels. These strategies have the additional advantage that they can work without large technological breakthroughs. 

Energy Return on Investment

Energy keeps our economy running.  Energy is also what we use to obtain more energy.  The more energy we use to obtain more energy, the less we have for the rest of the economy.  

The concept of Energy Return on Investment (EROI), alternatively called Energy Return on Energy Invested (EROEI) has been widely used to quantify this concept.  The following chart, from a SciAm paper, shows the EROI of various sources of energy, with the tan section of the bar representing the range of EROIs depending on the source and the technology used.  I’ve seen many other estimates of EROI, and this one seems to be on the optimistic (high EROI) end for most renewable energy sources.

The general trend is clear: the energy of the future will have lower EROI than the energy of the past.  Low carbon fuels such as natural gas, nuclear, photovoltaics, wind, and biofuels have low EROI compared to high-carbon fuels such as coal and (formerly) oil.   

The graph also clearly shows the decline in the EROI over time for oil.  Other fossil fuels, such as coal and natural gas, also will have declining EROI over time.  This happens because we always exploit the easiest resources first.  The biggest coal deposits that are nearest to the surface and nearest to customers will be the first ones we mine. When those are depleted, we move on to the less easy to exploit deposits.  The decline will not be linear, and new technology can also bring temporary improvements in EROI, but new technology cannot change the fact that we’ve already exploited all the easiest to get deposits, and new sources and technologies for extracting fossil fuels often fail to live up to the hype.

While there is room for improvement in renewable energy technologies, the fact remains that fossil fuels allow us to exploit the energy of millions of years of stored sunlight at once.  All renewable energy (solar, wind, biomass, geothermal) involves extracting a current energy flux (sunlight, wind, plant growth, or heat from the earth) as it arrives.  In essence, fossil fuels are all biofuels, but biofuels from plants that grew and harvested sunlight over millions of years.  I don’t think that technological improvements can make up for the inherent EROI advantage of the many-millions-to-one time compression conveys to fossil fuels.

Hence, going forward, we are going to have to power our society with a combination of renewable energy and fossil fuels that have EROI no better than the approximately 30:1 potentially available from firewood and wind.  Since neither of these two fuels can come close to powering our entire society (firewood because of limited supply, and wind because of its inherent variability.) Also, storable fuels such as natural gas, oil, and biofuels all have either declining EROI below 20 or extremely low EROI to begin with (biofuels). Energy storage is needed to match electricity supply with variable demand, and to power transportation. 

Neither hydrogen nor batteries will replace the current storable fuels without a further penalty to EROI.  Whenever you store electricity, a certain percentage of the energy will be lost.  The percent that remains is called the round-trip efficiency of the technology, shown on the vertical axis of the graph below, taken from my earlier comparison of electricity storage technologies. (Click to enlarge.)

Storage Technology Comparison

Round trip efficiency (RTE) for energy storage technologies is equivalent to EROI for fuels: it is the ratio of the energy you put in to the energy you get out.  You can see from the chart, most battery technologies cluster around a 75% RTE.   Hence, if you store electricity from an EROI 20 source in a battery to drive your electric vehicle, the electricity that actually comes out of the battery will only have an EROI of 20 times the RTE of the battery, or 15.  Furthermore, since batteries decay over time, some of the energy used
to create the battery should also be included in the EROI calculation, leading to an overall EROI lower than 15.

The round trip efficiency of hydrogen, when made with electrolyzers and used in a fuel cell, is below 50%, meaning that, barring huge technological breakthroughs, any hoped-for hydrogen economy would have to run with an EROI from energy sources less than half of those shown.

Taking all of this together, I think it’s reasonable to assume that any future sustainable economy will run on energy sources with a combined EROI of less than 15, quite possibly much less. 

It’s Worse than That: The Renewables Hump

All investors know that it matters not just how much money you get back for your investment, but how soon.  A 2x return in a couple of months is something to brag about, a 2x return over 30 years is a low-yield bond investment, and probably hasn’t even kept up with inflation.

The same is true for EROI, and means that users of EROI who are trying to compare future sources of energy with historic ones are probably taking an overly-optimistic view.  For fossil fuels, the time we have to wait between when we invest the energy and when we get the energy back in a form useful to society is fairly short.  For instance, most of the energy that goes into mining coal comes in the digging process, perhaps removing
a mountaintop and dumping the fill
, followed by the actual digging of the coal and shipping it to a coal plant.  Massey Energy’s 2008 Annual Report [pdf] states that "In 2008… we were able to open 19 new mines, and ten new sections at existing underground mines."  This hectic rate of expansion leads me to believe that the time to open a new mine or mine section is at most 2 years, and the energy cycle will be even quicker at existing mines, when the full cycle between when the coal is mined and when it is burnt to produce electricity requires only the mining itself, transport to a coal plant, and perhaps a short period of storage
at the plant.  Most coal plants only keep a week or two supply of coal on hand.

In contrast, Nuclear and Renewable energy (with the exception of biofuels and biomass) present an entirely different picture.  A wind farm can take less than a year to construct, it will take the full farm life of 20 years to produce the 10 to 30 EROI shown in the graph.  Solar Photovoltaic’s apparent EROI of around 9 looks worse when you consider that a solar panel has a 30 year lifetime.  Only a little of the energy in for Nuclear power comes in the form of Nuclear fuel over the life of the plant: most is embodied in the plant itself.   

Jeff Vail has been exploring this concept on his blog and the Oil Drum.  He refers to the problem of the front-loading of energy investment for renewable energy as the Renewables Hump.  He’s also much more pessimistic than the above chart about the actual EROI of most renewables, and found this chart from The Economist which illustrates the up-front nature of the investment in Nuclear and Wind: 

In terms of EROI timing, those technologies for which the cost of generation includes more fuel have an advantage, because the energy used to produce the fuel does not have to be expended when the plant is built.

In a steady state of technological mix, EROI is the most important number, because you will always be making new investments in energy as old investments outlive their useful lives and are decommissioned.  However, in a period of transition, such as the one we are entering, we need a quick return on our energy investments in order to maintain our society.  Put another way, Jeff Vail’s "Renewables Hump" is analogous to a cash-flow problem.  We have to have energy to invest it; we can’t simply charge it to our energy credit
card and repay it later.  That means, if we’re going to keep the non-energy economy going while we make the transition, we can’t put too much energy today into the long-lived energy investments we’ll use tomorrow.

To give a clearer picture of how timing of energy flows interacts with EROI, I will borrow the concept of Internal
Rate of Return (IRR)
from finance.  This concept is covered in any introductory finance course, and is specifically designed to be used to provide a single value which can be used to compare two different investments with radically different cash flow timing by assigning each a rate of return which could produce those cash flows if the money invested were compounded continuously.

Except in special circumstances involving complex or radically different size cash flows, an investor will prefer an investment with a higher IRR.

Energy Internal Rate of Return (EIRR)

I first suggested that IRR be adapted to EROI analysis by substituting energy flows for investment flows in early 2007.  I called the concept Energy
Internal Rate of Return, or EIRR
.  Since no one else has picked up the concept in the meantime, I’ve decided to do some of the basic analysis myself.

To convert an EROI into an EIRR, we need to
know the lifetime of the installation, and what percentage of the energy cost is fuel compared to the percentage of the energy embodied in the plant.  The following chart shows my preliminary calculations for EIRR, along with the plant lifetimes I used, and the EROI shows as the size of each bubble.

 EIRR

The most valuable energy resources are those with large bubbles (High EROI) at the top of the chart (High EIRR.)  Because of the low EIRR of Photovoltaic, Nuclear, and Hydropower, emphasizing these technologies in the early stage of the transition away from fossil fuels is much more likely to lead to a Renewables Hump scenario in which we don’t have enough surplus energy to both make the transition without massive disruption to the rest of the economy.

How to Avoid a "Renewables Hump"

Note that the three fossil fuels (oil, gas, and coal) all have high EIRRs.  As we transition to lower carbon fuels, we will want to keep as many high EIRR fuels in our portfolio as possible. 

The chart shows two renewables with EIRRs comparable to those of fossil fuels: Wood cofiring, and Wind.  Wood cofiring, or modifying existing coal plants to burn up to 10% wood chips instead of coal was found to be one of the most economic ways of producing clean energy in the California RETI study. The scope for incorporating biomass cofiring is fairly limited, however, since it requires an existing coal plant (not all of which are suitable) as well as a local supply of wood chips.  Some coal plants may also be converted entirely to wood, but only in regions with plentiful supplies of wood and for relatively small plants.  The EIRR for this should fall somewhere between Wood cofiring and Wood Biomass, which is intended to represent the cost of new wood to electricity plants.

Natural Gas

To avoid a Renewables Hump, we will need to emphasize high-EIRR technologies during the transition period.  If domestic natural gas turns out to be as abundant as the industry claims (there are serious doubts about shale gas abundance,) then natural gas is an ideal transition fuel.  The high EIRR of natural gas fired generation arises mostly because,
as shown in the chart "it’s a gas" most of the cost (and, I assume energy investment) in natural gas generation is in the form of fuel.  Natural gas generation also has the advantage of being dispatchable with generally quick ramp-up times.  This makes it a natural complement to the variability of solar and wind.

However, I think it is unlikely that we’ll have enough domestic natural gas to both (1) rely much more heavily on it in electricity generation and (2) convert much of our transportation fleet to natural gas, as suggested by T Boone Pickens.  We’re going to need more high-EIRR technologies to manage the transition.  Fortunately, such technologies exist: the more
efficient use of energy.  

Energy Efficiency and Smart Growth

I have been unable to find studies of the EROI of various efficiency
technologies.  For instance, how much energy is embodied in insulation, and how does that compare to the energy saved?  We can save transportation fuel with Smart Growth strategies such as living in more densely populated areas that are closer to where we work, and investing in mass transit infrastructure. 
The embodied energy of mass transit can be quite high in the case of light rail, or it can be very low in the case of better scheduling and incentives for ride sharing.

Many efficiency and smart growth technologies and methods are likely to have much
higher EIRRs than fossil fuels.  We can see this because, while the
embodied energy has not been well studied, the financial returns have. 
Typical investments in energy efficiency in utility run DSM programs cost
between $0.01 and $0.03 cents per kWh saved, much less than the cost of new fossil-fired generation.  This implies a higher EIRR for energy efficiency, because part of the cost of any energy efficiency measure will be the cost of the embodied energy, while all of the savings are in the form or energy.   This relationship implies that higher IRR technologies will generally have higher EIRRs as well.  

Smart growth strategies also often show extremely high financial returns, because they reduce the need for expensive cars, roads, parking, and even accidents [pdf.]

Conclusion: Brian or Brawn

The Renewables Hump des not have to be the massive problem it seems when we only look at supply-side energy technologies.  By looking at demand side solutions, such as energy efficiency, conservation, smart growth, and transit solutions, we need not run into a situation where the energy we have to invest in transitioning from finite and dirty fossil fuels to limitless and clean renewable energy overwhelms our current supplies.  

Efficiency and Smart Growth are "Brain" technologies, as opposed to the "Brawn" of traditional and new energy sources.  As such, their application requires long-term planning and thought.  Cheap energy has led to a culture where we prefer to solve problems by simply applying more brawn.  As our fossil fuel brawn fades away, we will have to rely on our brains once again if we hope to maintain anything like our current level of economic activity.

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Peak Coal, Peak Oil: getting closer

Clean Energy Action, a Boulder, Colorado based environmental orgnaization recently released a reoport on US coal supplies. Peak coal will happen in the lifetime of most people reading this.

The credit crunch (explained here), has probably brought peak oil closer. Because of the current low oil price and low investment in exploration and production, I expect the oil price to spike when demand recovers.

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Investments for Peak Oil

I’ve written a series of articles over the past few weeks focussing on what a green investor can do to prepare for and profit from peak oil:

Peak Oil and Your Lifestyle

Behavioral Finance and Mass Transit

New Flyer: A Stock to Hedge Peak Oil

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Climate Denial: Past Peak

RealClimate has an article outing "The 2008 International Conference on Climate Change" as a publicity event to generate reports in the press of a lack of consensus in the scientific community about anthropogenic Climate Change.

I was struck by this quote:

they are offering $1,000 to those willing to give a talk. This reminds us of the American Enterprise Institute last year offering
a honorarium of $10,000
for articles by scientists disputing anthropogenic climate change. So this appear to be the current market prices for calling global warming into question: $1000 for a lecture and $10,000 for a written paper.

That’s a high price, since serious scientists usually happy to deliver lectures on their scientific work for free.  I can only conclude that we have passed "Peak Climate Denial" and that, because demand for "scientific" papers continues to be funded by industry lobbies such as the Heartland Institute and the American Enterprise Institute, the price has had to rise in the face of diminishing supply (i.e. scientists willing to destroy their reputations for money.)

Unfortunately, accurate data on the Climate Denial Reserves and Prices are scarce, but these prices make me think we’re well past peak (or at least on an undulating plateau.)   Fortunately, society will continue to function (and most likely run better) when Denial Depletion reduces Denial Reserves to a few crazy bloggers in dark corners of the Internet.

 

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Holistic Approaches to Energy Problems

H. L. Mencken said, “For every human problem, there is a neat, simple solution; and it is always wrong.”  When it comes to solving the problems of peak oil and global warming, I also think that the loudest barking is up the wrong tree.  We look for the quick fix, trying to find a substitute energy source that allows us to change the way we do things little as possible, when the real problem is actually what we’re doing, not how we’re doing it.   We need holistic solutions, not quick fixes.

Too abstract?  Here are some concrete examples:

 Problem: Peak Oil

Quick fixes: Ethanol and slight increases in vehicle efficiency standards.

Holistic solutions: Change our driving culture and infrastructure, by changing the way car use is priced from fixed charges to a per mile basis (“Pay as you drive”).   Removing subsidies to use cars when other forms of transport are available, and redesigning our cities to make them easier to get around on foot, bike, and public transport.  Like other holistic solution, all these steps increase safety and reduce congestion, reduce obesity and associated health problems, as well as reducing the use of gasoline.

Problem: Wind and Solar are intermittent resources, but coal produces too much CO2 and natural gas prices are rising rapidly.

Quick Fixes: Nuclear power and “Clean” Coal.

Holistic Solutions: Shift our demand for electricity to times when it is available, by using time of use pricing, energy storage and demand alignment, and distributed energy storage such as plug in hybrid vehicles.

Investing opportunities:On thing that’s striking about these examples is it’s much easier to find investment opportunities in the quick fixes than in the holitistic solutions.  To invest in ethanol, you can just buy ADM or one of the multitude of ethanol stocks that have been going public recently, but I have yet to come up with a satisfactory way to invest in better urban planning (except buy a house in a walkable community, which is something I’m planning on doing this summer.   Stapleton is the community.  I currently live there, but I’ve been renting and waiting for the end of the housing bubble.  I actually don’t think that housing is going to go up again any time soon, but I’m tired of waiting.) 

The investment landscape is a little better when it comes to energy management.  Itron and Siemens both have divisions that help utilities manage their grids better, and there are many battery and other energy storage companies to choose from.  Still, it’s a lot harder to pick through battery companies than to just buy a nuclear powered utility or uranium miner.

Holistic solutions, by their nature, have weak boundaries… the benefits tend to be diffuse, and spread over society as a whole, so it is difficult to charge fairly for them.  This, I think, is why there are so few companies pursuing them when they can pursue a quick fix that they can charge for up front.  

Companies have an obligation to their shareholders to make money.  It’s our job, as human beings, to work towards regulations that make it easier for companies to make money with holistic solutions that actually solve the problem than it is to make money with quick fixes that just cover the problem up.

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Social ETFs and Clean Energy ETFs

Forbes ETFZone had an article today by Wil McClachy about socially conscious ETFs, with some comparison between iShare’s two social index ETFs, KLD and DSI, contrasted with PowerShares Cleantech and Clean Energy ETFs, PZD, and PBW.   This ties in well with my entry Green ETFs- How to Choose from last month by expanding the field to consider general social investing as well as just clean/alternative energy.  

I also discuss the new Clean Energy Index fund, CELS, in that blog entry; it is scheduled to launch next month.

Holding a broad portfolio is well worth doing, because the basic principle of diversification implies that most investors would be crazy to focus the entire stock portion of their portfolio into such a volatile sector as energy, let alone clean energy.  Even though I’m a strong believer in peak oil, and I feel that the peak may even have already passed, and economic recession in any large part of the world could lead to a fall in oil prices, which would hurt the biofuels sector.  In addition, there is a lot more to energy than just oil prices, and while peak gas and peak uranium may be near at hand, I don’t think anyone is arguing that we’re going to see peak coal soon. 

I agree with McClachy’s point that the extra expense of the Social index ETFs may not justify the additional expense (0.5% vs 0.1% for SPY)… the extra .4% might be better used (and better targeted) by a donation to your favorite charitable cause, but for many investors, it is deeply troubling to own firms that treat the environment, society, or their workers badly, and a donation to charity does not serve as sufficient absolution.  When working with clients, I try to find out the approach that suits them best; it is often a little of both.   Even though choosing SPY and a donation to charity might be the best financial move, it’s more important to do what makes you able to sleep at night, especially when we are talking about fractions of one percent. 

On the other hand, fractions of a percent should not be minimized.  If you had $100,000 to invest in either SPY or KLD, and choose to put the money in SPY, while keeping half of the savings in your account, and to donate the other half to a charity every year, and SPY were to increase 8% every year for 30 years, you would have donated over $25 thousand to charity in the interim, while and end up with over $57 thousand extra in your account after that time.

This is the real advantage of investments in alternative energy: the chance to have your cake and eat it, too.  Both rising energy prices due to peak oil/gas/uranium and the actions our governments take to combat global warming should increase the returns for alternative energy.  To some extent, this is already recognized by the investment community, and already priced in.  However, I feel that the effects of both have been grossly underestimated by most market participants, despite the recent surge of interest.  Over the long term, the seriousness of the situation we are in will become clear, and that will allow ethical investors in alternative to also be successful investors.  When it comes to social investing, I feel there is often a trade-off between loss of diversification and increased cost.  With investment in alternative energy, the trade-off is between increased risk and increased returns.   The increased risks of alternative energy arise from the small size and speculative nature of many (although not all) of the companies involved, and the concentration of ones’ assets in a sector.  But managing risk is what portfolio theory and asset selection are about; as is making wise trade-offs between risk and return.  To me, the case for alternative energy is compelling, the only real question is how much exposure (and volatility) the particular investor is prepared for, emotionally and financially.

 Another Social/Clean Energy ETF article: ETF Guide.

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The Danger of Impatience

This week’s Peak Oil Review has an excellent commentary by Debbie Cook, Mayor ProTem of the City of Huntington Beach.  She uses her impatience with an unripe avocado as a metaphor for her (and our) impatience waiting for the signs of peak oil to become clear to the world as a whole.

I like her metaphor because it is also a good way to think about the stock market.  John Maynard Keynes once commented, “Markets can remain irrational longer than you can remain solvent.”  As Robert Shiller points out in his excellent book, Irrational Exuberence, part of the reason that the late ’90s dot-com bubble got so high was that many people who had initially been skeptical were worn down by the continued rise of the market.  Emotionally, it is extremely difficult to go on, day after day, year after year, remembering that valuations are based on so much hype and hot air, when everyone around you is making money hand over fist from that very same hype and hot air.

I started managing money in 1999, and so I only had to endure that emotional strain of being out of sync with the world for about a year before the market peaked, and the reality of the market began to confirm my convictions.  However, I became skeptical about the housing market in 2001, and actively bearish in 2003.  Because of this, when I moved to Tucson in 2003, I chose to rent a house rather than buy one,  and I continued to rent when I moved to Denver in the spring of 2005. 

Renting is a lot less fun than buying, and when house prices are going up 15% a year, the gains you might have made by owning add to the emotional burden.  In retrospect, while I was right not to buy dot-coms in 1999, I was “wrong” to choose to rent in Tucson from 2003 to 2005.  The Tucson market rose considerably during that period, and while the rent I was paying was considerably less than I was earning with the investments I would have had to sell to buy and maintain a house (no, I would not have used a mortgage), the capital gains on the house would have been a nice windfall.

What lesson was there to be learned from my Tucson renting experience?  The wrong lesson would be that you should always buy a house.  House prices in Denver have been basically flat since I moved here (data from Zillow), and rental prices are currently about 5% of house prices.   Considering that many money market accounts are now paying over 5%, and taxes, HOA fees, and maintenance costs are added when you own a home, renting is a better financial deal.  In addition, my time renting has given me the opportunity to learn what part of the city I want to live in, and the current glut of inventory means that when I buy, I will be in a much stronger bargaining position than I would have been a year and a half ago.

The right lesson to be learned from my Tucson renting experience is the lesson of the avocado: patience.  Opinion does not change, oil does not peak, and markets don’t move when you want them to… they do it in their own time.  As Richard Russell says, “The market always does what it is supposed to, but never when.”  

Markets are the economic manifestation of investors’ optimism or pessimism.  In the housing market, pessimism is beginning to set in.  In the oil market, we have a way to go.

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Vision of a sustainable energy future

I’ve been meaning to write an article outlining a vision of a sustainable energy future, where biomass is converted into fuel and electricity through pyrolysis and the waste product, carbon is used as a fertilizer a-la terra preta to produce more biomass.  The good news is I don’t have to.  The Engineer Poet did, and it’s just part of a much broader vision you’ll find here.   He also goes into a great discussion of transportation technologies and efficiency which would never have made it into the article I’d write.  I like it when other people crunch numbers, so I don’t have to.

Give yourself a half hour to read the whole article.  It’s worth it.

( Terra Preta: I got a comment from Erich J Knight on terra preta here that went into a lot of depth, but I deleted it by mistake.  Forturnately, he says pretty much the same thing in his blog.  I first heard about terra preta from Ron Larson, chair of the American Solar Energy Society, who is very active in the local (Denver) renewable energy scene.  If you haven’t heard about terra preta, and are concerned about globabl warming or soil fertility without fertilizers from fossil fuels, it’s worth looking into.)

Read the rest of this entry »

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Hedging Your Peak Oil Risk

In today’s issue of Peak Oil Review, I wrote a commentary on how to use the financial markets to hedge your peak oil risks.  These risks include not only the cost of energy, but possible job or income losses due to a slowing economy.  I  include some discussion of securities which pay dividends based on income from renewable energy, or may do so in the future.

Peak oil is key to my belief that investing in renewable energy and energy efficiency companies is not only the right thing for the planet, but also the right thing for your pocketbook.  Peak Oil Review is an excellent source for staying up with events and commentary related to peak oil.  It’s on my weekly reading list.

You can read my entire commentary  here (pages 4-5.)

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Good Ethanol

I wrote a blog a couple months back talking about how environmentalists should avoid lumping all ethanol together as “bad” renewable energy because the Energy Return on Energy Investment (EROEI) is very low.  First of all, new ethanol plants being built today do have a net energy gain on a well-to-wheels basis (the critics are using decade old data), and so long as the energy inputs come from renewable sources, ethanol looks like a decent way to turn other forms of renewable heat energy into something we can put into our tank and drive around with.

E3 Biofuels is doing just that with a 25 million gallon “closed loop” ethanol plant in Mead Nebraska.  The distiller’s grain byproduct of the ethanol production is fed to cattle at an adjacent feedlot.  This saves energy by avoiding having to dry the grain and transport it to where the cattle are.  The manure from the feedlot is passed into an anaerobic digester which not only produces 100% of the energy necessary for the ethanol distillation process in the form of methane, but it also helps solve the nasty environmental problems caused by the massive supply of manure feedlots produce.  It was runoff from cattle manure that caused the problems with our spinach supply recently.

Other benefits are that by running the manure through the digester, odor is reduced, and methane from the manure decomposition does not escape into the atmosphere.  Methane is a much more potent greenhouse gas than is CO2.

If you believe the promoters that “This plant will make ethanol more than twice as energy-efficient as any other method of producing ethanol or gasoline,” I estimate that the well-to-wheels EROEI is between 2 and 4 (probably closer to 2.)  It’s not the great EROEI’s we get from Wind and geothermal, but it’s a liquid fuel we can use in our existing vehicle fleet (either as E85 in Flex-Fuel vehicles, or as E10 or E20 in standard gasoline engines.)

Without liquid fuel, we’re in great danger of economic disruption due to peak oil, but unless we get that liquid fuel in a manner less carbon intensive than conventional corn ethanol, we’ll be up to our ears in melted icecaps.

Obviously, what we really need is much more energy-efficient cellulosic ethanol which does not compete with our food supply for feedstock, and it will be great if that process is powered by renewable heat (methane form digesters, or solar thermal) but given that we’re unlikely to stop eating beef anytime soon, this is an elegant, closed process.

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You Can’t Hide from Peak Oil in Big Oil

Last week, Russian Natural Resources Minister Yuri Trutnev signed an order to cancel part of Shell’s Sakhalin-2 license on environmental grounds.  Russia is also pressuring Exxon about cost overruns in a related project.  A triumph for environmentalists over Big Oil?  Hardly.

shell.jpgMost analysts agree that this is an attempt by the Russian government to renegotiate an oil and gas deal struck when prices were low.  Thinking back on what Russia did to Yukos, and Chavez forcing foreign oil firms to renegotiate contracts in Venezuela, the trend is clear:  Countries rich in fossil fuels are increasingly re-writing the rules to their liking, with little regard to the desires of foreign capital.

Given that 90% of the world’s oil and gas is controlled by state owned firms, private companies have little bargaining power, yet desperately need access to new reserves. 

Big Oil needs Russia more than Russia needs big oil: they’re going to have to settle for a much smaller take than they negotiated 10 years ago.  As oil prices rise in response to the peaking of world oil output, realpolitik will continue to trump contracts.  Western, publicly held oil firms will be the losers, as will their investors.

How can we invest to protect ourselves from rising energy prices, if Big Oil is at the mercy of every oil-rich dictator around the world?   I see two choices: fossil fuel reserves in western countries: coal mining companies and tar sands, or renewable energy sources.

Tar sands and coal both have the problem of causing high greenhouse gas emissions.  The process of extracting oil from tar sands releases 80kg of greenhouse gasses per barrel of oil extracted (and that is before the oil is used.)  The extraction of tar sands has caused Canada’s greenhouse gas emissions to increase 24% since 1990, despite the fact that they are obligated under the Kyoto protocol to reduce emissions by 6%. 

Coal is also carbon intense.  So while both coal and tar sands are relatively safe from political risk due to opportunistic regimes, both are likely to become relatively less economic in the face of possible restrictions on greenhouse gas emissions. 

Oil Shale is a boondoggle, and requires even more energy to extract than tar sands. 

This brings us back to investing in renewable energy and energy efficiency companies, both of which will benefit from rising energy prices and restrictions on greenhouse gas emissions.  The problem here is that many of them are start-ups with little or no revenues, let alone earnings.  Right now, I like energy efficiency best, since many renewable technologies have been the subject of a feeding frenzy over the last year.  Although things have calmed down over the last couple months, energy efficiency is still more economic than most renewables, and subject to a lot less hype.

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Paul Notari on confronting the Oil crisis

If you’re wondering about how the US should deal with the looming oil crisis, Paul Notari wrote an excellent overview on RE Insider this week.   His prescription for the US is exactly what we need.

High oil prices are starting to move us in the right direction, but not nearly fast enough.  We need to take action before Adam Smith’s invisible hand forces action on us, through demand destruction.  Demand destruction is a nice way of saying that when gas hits $20 a gallon, people will start taking their bikes to work because they can’t afford to do otherwise. 

Economists who pooh-pooh peak oil becase “demand destruction will take care of the problem” are forgetting the human element: demand destruction is incredibly painful.  We need to take proactive steps to solve the problem, such as those outlined in Paul’s article, or the problem will be solved for us… and it will hurt.  A lot.

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What does all this environmental stuff have to do with investing?

Question: What do all these long postings about Ethanol, Biodiesel, Global warming, and CFLs have to do with investing?

TK: Superior investing arises out of having a deeper understanding of the companies and industries you’re investing in than other market participants. 

Global warming is not just an impending ecological disaster, it is an economic disaster as well. Understanding global warming, energy efficiency, and renewable energy are the first steps to protecting our financial assets from the effects of global warming and peak oil.   

Many consider it immoral to profit from disasters.  That is a recipe for going broke when the disaster hits.  When there’s a drought, I want to be able to pay my water bill.  If the water system shuts down, I want to be able to come up with whatever it takes to buy a few gallons wherever I can find them.

It’s sensible to use our investments to mitigate the problems we see on the horizon, and make a profit which we can use to help shield ourselves and those we care about from those problems when they arrive.  To do that, we have to understand the nature of those problems, and the possible solutions.

Causing disasters is immoral.  Preparing is the right thing to do.

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