Green Car Congress

Window of Vulnerability

John Robb continues to write in Global Guerrillas on the extreme vulnerability of the global economy to a successful terrorist disruption of the oil/energy system.

Today, the price of oil hit a record high of $43.05 a barrel (UPDATE). A combination of excessive demand, uncertainty, and a lack of spare producation capacity have combined to create this price. This situation, as it persists through this fall/winter, is a window of vulnerability that can be exploited by global guerrillas. A series of well orchestrated GG [Global Guerrillas] attacks on Saudi, Caspian, and Iraqi oil infrastructure (while these conditions persist) would drive the price over $100 and keep it there.

The only real question is whether operational GGs have developed a strategic understanding of their current capacity to control global markets and national economies.

His analyses are on target—you should definitely check in there. What he describes does not strike me as a containable problem—at least given current knowledge, strategy and tactics.

We need immediate defenses against terrorism and this immediate vulnerability of disruption. The economy also needs a medium-term defense against the disruption that will occur when geology, not global guerrillas, begins closing the taps. And, for those concerned by the long-term devastating impact of climate change, we need a defense for that as well.

Solutions for the latter two come through urgent, aggressive support for efficiency, and R&D and deployment of alternatives. And, as a nice long-term gift with purchase, as we reduce the dependency on petroleum by reducing demand through efficiency, or displacing demand through alternatives and renewables, we reduce our vulnerability to the swarms of GGs. Not that terrorism goes away; but the impact becomes more local, more contained. Less devastating globally, although tragic locally.

Dodging the immediate bullet (GGs) doesn’t solve the larger problems. Putting the majority of time, money and focus into the short term still leaves us exposed.

Oil Up, Markets Down

A conversation with a colleague led me to this simple exercise: plot oil prices against the performance of the market indices over the last few months. Result: almost a classic inverse relationship. Oil up, markets down.

The plots use data from 3 May through 27 July, using the closing spot price for Texas West Intermediate crude, and the closing numbers for both NASDAQ and Dow Jones Indices. (Click to enlarge.)

Spot prices are what you’d pay today. (“I’ll take that barrel now, please.”) Futures prices try to predict what the market will look like in a few months, a year, so on. Futures prices currently are below the spot price—the further out in time, the lower the price drops (although it is still substantially higher than many expected even a few months ago).

That reflects an expectation, although perhaps a diminishing expectation, that the situation will improve. That Iraq will stabilize. That Russia won’t be too heavy handed with the oil companies. That terrorists won’t cripple the Saudi oil industry. That economic growth may cool and self-regulate oil demand to the point where the tension between demand and supply is not so high. In other words—the price premiums stem from political or economic factors. The market has yet to acknowledge or to factor in the possibility of production peaking sooner rather than later.

The charts above provide a peek at the impact of short term price spikes. Consider the impact of long term shortage and decline. Moving rapidly to alternative fuels and sustainable energy isn’t just good for the environment. It is, to paraphrase THK from the convention last night, good business.

A Blog and a Book

I came across WorldChanging, a very interesting and substantive group effort on “Models, Tools, and Ideas for Building a Bright Green Future.” What caught my eye was this review and recommendation of an online resource at the American Institue of Physics—The Discovery of Global Warming— that surveys the breadth and depth of research over the years into climate change and global warming.

If you already accept the global climatological consensus that anthropogenic global warming is happening and is getting worse, The Discovery of Global Warming will provide abundant detail to help you better understand how that consensus came about. If you have been honestly skeptical about the global warming threat, but willing to listen, this site will help you better understand why there is a broad scientific consensus about climate disruption in the first place. It may not change your mind, but you’ll see why so many scientists take the problem so very seriously.

Both blog and book appear to be excellent resources. Worldchanging is now in my feeds list.

Pirates Attack LPG Tanker in Indonesia

Reuters. Pirates stormed a Liquefied Petroleum Gas (LPG) tanker at anchor in Indonesia, firing shots at the crew.

The International Maritime Bureau (IMB) said five men armed with automatic rifles boarded a Liquefied Petroleum Gas (LPG) tanker anchored at Anyer on Monday and fired at the crew before escaping with equipment.

No one was injured in the shootout but the IMB’s director, Captain Pottengal Mukundan, classed the attack as extremely serious. “This is very dangerous because an LPG tanker is the last place you want to have a gun battle,” he told Reuters.

Although pirate attacks have declined globally since last year (which recorded the second highest number of attacks since 1992), they remain a significant worry especially in specific areas of the globe: the foremost being Indonesia and the Strait of Malacca.

In its half yearly piracy report on Monday the IMB ranked Indonesian waters as the world’s most dangerous, with 50 attacks reported, or more than a quarter of the world’s total. The IMB also reported two new attacks in the Malacca Straits, one of the world’s busiest sea lanes.

More than 11 million barrels of oil per day flow through the Strait, according to the US EIA, making it the second-most critical global chokepoint by volume for oil transport.

The Strait of Malacca, linking the Indian and Pacific Oceans, is the shortest sea route between three of the world’s most populous countries—India, China, and Indonesia—and therefore is considered to be the key choke point in Asia.

The narrowest point of this shipping lane is the Phillips Channel in the Singapore Strait, which is only 1.5 miles wide at its narrowest point. This creates a natural bottleneck, with the potential for a collision, grounding, or oil spill (in addition, piracy is a regular occurrence in the Singapore Strait).

If the strait were closed, nearly half of the world’s fleet would be required to sail further, generating a substantial increase in the requirement for vessel capacity. All excess capacity of the world fleet might be absorbed, with the effect strongest for crude oil shipments and dry bulk such as coal. More than 50,000 vessels per year transit the Strait of Malacca. With Chinese oil imports from the Middle East increasing steadily, the Strait of Malacca is likely to grow in strategic importance in coming years.

One of the major worries is that the terrorist attacks on oil infrastructure that are evolving in Iraq will morph into an assault on shipping at a critical chokepoint—such as the Strait of Malacca.

Piracy has plagued the strait for centuries but has worsened in recent years. Regional governments and security experts fear the growing lawlessness could result in a terrorist strike.

The price of oil would climb even more. A successful attack on an LNG carrier could have even longer-term ramifications for both producers and consumers. (Indonesia currently is the world’s largest producer of LNG, so there are ample opportunities.)

Indonesia, Singapore and Malayasia are cooperating in defense of the strait. (BBC.)

A final note on piracy in this post. Nigeria follows right after Indonesia and the Strait of Malacca in terms of number of attacks; the attacks in Nigeria are more deadly, accounting for 50% of the piracy-related fatalities in the first half of this year. allAfrica.com.

GM Expands (and Greens?) Hummer Line

Chicago Tribune / AP. First, the specifics. GM is adding to its Hummer lineup: a smaller, midsize H3, and a higher performance, more efficient version of the H1 called the Alpha.

GM has been talking about the H3 for months—a vehicle clearly targeted at DaimlerChrysler’s Jeep franchise, and a larger market than the one served by GM’s $100,000+ H1s and $50,000+ H2s.

The H3 uses a 220-horsepower, 3.5-liter inline five-cylinder engine, similar to the one in the mid-size Chevy Colorado. That vehicle carries an EPA mileage rating of 18mpg city / 23mpg highway. (GM apparently is building the H3 on the Colorado frame.)

The 2006 H1 Alpha, debuts in mid-2005 with a 300-horsepower, 6.6-liter turbo-diesel V-8 engine, presumably offering improved emissions performance and fuel economy over the original H1.

Why are we talking about this? GM seems to be taking the approach of trying to improve faltering Hummer sales by broadening the lineup and by stressing fuel efficiency and emissions reductions. That will seem counter-intuitive both to fans of the Hummer (who probably don’t spend a lot of time on those issues) and to foes (who see the Hummer as a fuel-guzzling, emissions-spewing, lumbering behemoth with no place on city streets). But here are some interesting comments from an interview in the San Diego Union-Tribune:

“We definitely have a concern about gas prices,” says Mike DiGiovanni, Hummer marketing general manager. “We are going to be looking at improving fuel economy.”

“I think it is silly to put your head in the sand,” DiGiovanni says. “You should address the issues head-on. So we are looking at improved gasoline engines, diesel engines and hybrids.”

More significant fuel economy changes are scheduled for the H2 around the 2007 or 2008 model year, when a diesel and possibly a hybrid-electric engine will be offered.

“We are not going to compromise being an authentic Hummer because that’s what our DNA is,” DiGiovanni says. “But we are going to try and make Hummers more fuel-efficient.”

A couple of takeaways from this for me:

• GM is increasingly concerned about its perception by the market with respect to fuel economy—not just with the Hummer, but with its entire lineup. That concern is clearly heightened by the sales results of the past two months. This could signal the beginning of a dash to scramble for position, in marketing if not in products, in case the oil price/availability picture continues to degrade.
• GM recognizes that Toyota has accelerated to the front of the pack with its positioning around the Prius. You’ll start to see “hybrid” appear more frequently in GM statements. Where does the new Silverado “hybrid” fit in this? Stay tuned.
• Many of GM’s improvements are incremental. Applied over millions of vehicles, those increments can add up to a lot—but it still may not be enough.
• Car product planners—and not just at GM—are working with a more leisurely timeline than we or they may have. I’m sure it does not seem leisurely to them, given the accelerated rollout of new models and the time it takes to do the appropriate development, design, production, and so on. But external market factors don’t necessarily track to the same Gantt chart. There is no discernible sense of urgency. Urgency—focused, in-control urgency, not hair-on-fire panic—is the pathway to market leadership and sector dominance. Whoever gets it and executes on it in both product design and marketing is going to be set up to win. At this point, Toyota is closest.

GM has a terrific opportunity in the Hummer area if they’d take it. The company is already building diesel-hybrid pickup prototypes for the Army; it should definitively announce that this is a platform for a future Hummer, assuming it wants to stick with that brand. That keeps the quasi-military cachet so important to the initial Hummer buyers, and combines it with one of the better solutions for fuel efficiency and emissions management. GM could take a leading position, rather than look like it is scrambling to catch up.

Audi8 TDi: Tipping Europe into a Diesel Age?

European Car. It’s not just rational; it’s emotional.

The history of the last 20 years has been filled with tipping points—the moments when one commodity gives place to another. [In] Europe at least, we may well be experiencing a tipping point in which petrol gives place to diesel power.

As little as two years ago, the case for diesel was still made on rational grounds—diesel cars used less fuel, which meant they were significantly cheaper to run. But with the advent of second-generation common rail technology, the decision to “go diesel” has become more emotive. In many instances, the diesel variant has become the most desirable car in the range, and this is certainly true of the Audi A8.

A very enthusiastic review follows, summarized with:

The rational case for the TDi surrounds the fuel costs—it averages 29.4 mpg compared with the 4.2’s 23.7 mpg—but it is even easier to make an argument for the diesel by describing its performance, refinement and sheer desirability. The age of the diesel really is upon us.

As we’ve discussed earlier, diesel has made a stunning penetration into the European market in the last ten years, accounting for more than 50% of new cars sold in some countries. In a region where gas prices are currently 2 to 3 times those in the US, the additional fuel economy (and attendant environmental benefits coming from reduced fuel consumption) are certainly attractive. It proves that a different technology can not only penetrate a market, but come to lead it in a short period of time, given the appropriate factors.

As a result of (a) having some experience with mass adoption of new engine platforms and (b) having a large and increasing diesel base as a foundation, Europe may well become the first serious market for diesel hybrids. According to several studies, the interesting thing about a diesel-hybrid platform from the perspective of a complete emissions and energy lifecycle (well-to-wheel) is that such a platform actually performs as well as or even better than a hydrogen fuel cell vehicle, given current dominant production methods for hydrogen. More on this in a coming post.

BP: Results Up, Production Declining

BP announced record-breaking half-year results, posting a profit of $8.625 billion, up 20% from $7.213 Billion in the first half of 2003. Despite the strong results, analysts were slightly disappointed as the results were a bit lower than they had forecast.

Lord Browne, CEO of BP, noted in his remarks during the investors’ call that the results were driven by increasing demand in China, Russia, India and Brazil; that uncertainty was pushing prices; and that despite more capacity coming onstream in the next several years, that “It does now seem likely that oil prices will be very significantly high above the long run average of $20 a barrel for some time to come.”

At the top level on the production side, BP seems to have had a great first half, with total production of barrels of oil equivalent rising 14% from 3.49 million barrels oil equivalent per day to 3.993 mboed. The “oil equivalent” is a measure of total production— it converts natural gas to an equivalent measure of barrels of oil, factors in other liquids, and so on. If we look just at crude oil, however, we see that BP’s production 1H to 1H rose an astonishing 31%, from 1.771 to 2.331 million barrels of crude oil per day.

Peel it back further, though, and you see that the result is due to the new TNK-BP joint venture in Russia. The oil results from that JV just in the first six months of this year accounted for 33.8% of BP’s total crude production, and for all of the production increases posted by the company.

As Lord Browne stated in his remarks:

Production from the existing profit centres is declining but Clair and other projects in the North Sea, Argentina and elsewhere are helping to keep that production decline in the range of 3% to 4% a year.

That 3-4% reflects total production decline (in other words, including gas, etc.). If we were to back out the TNK-BP crude oil contribution from the total crude oil production figures, it would reflect a 13% drop in crude oil production 1H 2003 to 1H 2004.

Alaskan production, which was enormous for BP, is flattening out at around 310 thousand barrels per day, the gradual decline in regular oil production being offset by BP’s working with more viscous oil— harder and more expensive to produce.

Russia now represents the largest geographic element in BP’s production portfolio, thereby making Russia BP’s key strategic partner, at least for now.

Transcript of the investor presentation is here. Webcast is here. Supporting material is here.

Oil Week and Indonesia Peaking

This is going to be an Oil week. With the production figures coming out from the majors, I thought I’d spend some time poking around those, plus a few other aspects of global oil production and fuels that I’ve been wanting to explore for awhile but haven’t made the time to do so.

The availability of oil has a direct impact on decisions that we’re making in transportation and energy; it’s worth spending some time on it. From a post a few weeks back:

Toyota became a leading pioneer in hybrid technology because it could see increased environmental restrictions in the future. But it may be pressure from oil prices that will be the biggest driver of the technology.

Indonesia. As posted earlier, oil production from Indonesia, one of the OPEC countries, has slipped to the point where it is a net importer, not exporter of oil. As shown in the chart on the right (Click to enlarge), the country’s production seems to have tipped over the point of peak production, and is rapidly heading down the slope on the other side.

The annual data comes from the BP Statistical Review; the monthly from the US EIA.

The dip and rise in the 1980s reflects what the Association for the Study of Peak Oil calls the “OPEC saddle”—the policy-based production restrictions in that decade. You’ll see that currently, however, Indonesia’s production is far below its theoretical production quota.

There is some hope, expressed by the US EIA, that Indonesia may be able to up its daily rate based on the production of some new fields. As detailed in the quote below, however, even those fields, presuming they do come online, won’t reverse the inexorable trend.

The country’s declining oil production could be turned around once the new Cepu field in Java comes online. The field, estimated to hold reserves of at least 600 million barrels of oil, is being developed by ExxonMobil in partnership with Pertamina. However, the two oil giants have been unable to reach an agreement over profit sharing, with Pertamina demanding half the field’s output and ExxonMobil demanding that Pertamina cover half the field's production costs. Additionally, ExxonMobil wants Jakarta to extend its technical assistance contract, due to expire in 2010, for 20 years. ExxonMobil officials have indicated that the field could be operational in 2006 and could produce up to 180,000 bbl/d, according to recent reports.

Smaller fields could help boost production numbers if they become fully operational in 2004 and 2005. Unocal’s West Seno field, under development offshore from East Kalimatan, is producing 40,000 bbl/d and is expected to produce up to 60,000 bbl/d when the second phase of development is completed in early 2005. ExxonMobil’s Banyu Urip field, in Java, is expected to come onstream in 2006, according to the company, and reach its peak production capacity of 100,000 bbl/d soon after. Even with these new fields, though, Indonesia’s oil production is not likely to rise markedly, due to the continuing decline of mature fields.

This mirrors fairly precisely the peak production scenarios laid out by numerous geologists such as Deffeyes, Campbell and Laherre and some on the business side such as Simmons: the biggest fields have already been found, new discoveries are smaller, enhanced production technology accelerates the rate of depletion. Data seems to be mounting in support of those who are predicting global peaking sooner rather than later...

More Prisues Promised—Perhaps

Autoweek. Production, allocation and delivery constraints and delays are giving Toyota some problems. With new hybrids from other vendors coming out this fall, Toyota needs to resolve its issues. Dealers and customers are getting a bit antsy, and Toyota will lose some of its momentum if it is unable to fulfill the demand it has created.

Toyota Motor Corp. President Fujio Cho has promised to “ship more Priuses to the United States.” But Cho and other top executives refuse to say how many more of the popular hybrid cars will go to Prius-starved U.S. dealers. A lower-level official says an extra 12,500 to 15,000 Priuses might go to the United States by the end of 2004. That would be in addition to the 47,000 allocated to the U.S. market this year.

A shortage of key components such as batteries rules out further output increases, Cho said. Batteries for the Prius are made by a joint venture between Toyota and Matsushita Electric. If Toyota can solve the parts-shortage problem, Toyota might build the hybrid in a second plant, a Toyota official in the United States told Automotive News.

Until last December, Toyota’s allocation system gave Japan and the United States roughly the same number of Prius sedans. At the time, the shortage of Priuses in Japan was comparable to that in the United States. Then Toyota tilted the system in favor of Japan, even though the U.S. market has taken more Priuses over the life of the vehicle.

U.S. shoppers must wait six to seven months for a Prius. Buyers who can get one in some cases pay $5,000 over sticker. Some dealers have stopped taking orders for 2004 Priuses. In turn, some customers are giving up and leaving showrooms unhappy. But today Japanese consumers have to wait only about six weeks for a Prius.

Toyota in December [2003] raised the 2004 U.S. allocation of Prius cars by 34 percent, from 35,000 set in September [2003] to 47,000. It nearly doubled the 2004 Japan allocation from 36,000 to 70,000. Toyota also raised Prius output in April from 7,500 a month to 10,000 a month. It plans to build 130,000 this year, including 10,000 to be made on overtime and Saturdays.

Irv Miller, group vice president of corporate communications for Toyota Motor Sales U.S.A. Inc., told Automotive News that the automaker has reached a breaking point with its popular gasoline-electric hybrid. “I would be surprised if (Toyota) does not respond with some kind of increase in Prius production and allocation to the United States,” Miller said. “Our belief is that we can sell significantly more than what our current sales volume is.”

Said Miller: “Frankly speaking, we’re greedy, and we don’t want to lose the market share we’ve built up and the customers that have raised their hands.”

The Sticky Situation With Oil Sands

The Toronto Star does a nice job in a long piece outlining the opportunities and the downside risks associated with the processing of Canada’s oil sands into usable oil. Some snippets:

The flow of synthetic crude out of the oil sands today now exceeds that of conventional crude from Alberta’s conventional southern oil fields. In theory, their capacity is second only to the oil fields of Saudi Arabia.

The sands are not just a source of energy; they’re also a voracious consumer of energy in the form of natural gas — and in that capacity are competing with homeowners and industrial gas users who use natural gas both for heat and as a source of chemicals for products ranging from fertilizer to plastics. As both a source and a consumer of fossil fuels, the sands also are a big source of greenhouse gases, pushing Canada away from its goals of cutting emissions.

Oil sands plants make or lose money on labour costs and the cost of the energy they need to drive the plants — both of which are only marginally important to conventional oil. Their success also depends on their success in bringing massive, complex projects in on schedule and on budget — a problem that has plagued all of the major projects in Canada’s oil sands to date.

It’s a use of natural gas that some critics question. Gas is not only a clean fuel, it's a rich source of raw material for the petrochemical industry.

Using a high quality fuel — natural gas — to produce a low quality fuel — bitumen — is, in the words of Tom Adams of Energy Probe, “crazy.”

It also raises the question: How much gas do we have? If we're using increasing amounts to produce our oil, how does it affect other uses, such as home heating and petrochemicals?

Industry experts talk about gas supplies with varying degrees of urgency, but it’s no heresy to suggest gas will become scarcer.