The Price Is Wrong
Even $50 a barrel can't wean the world from oil. Only government can
By Leonardo Maugeri
Newsweek International
Sept. 6-13 issue - Is the internal-combustion engine dead? listening to all the voices calling hybrid vehicles the future of transportation, you might think so. Alternative energy is back in style among the chattering classes. But oil prices would have to go a lot higher to make so-called renewables—such as solar and wind energy—commercially viable. That means their future won't be decided by consumer tastes or market conditions, but by government policy.
These are facts. Any oil company will use whatever energy source makes economic sense, since its basic mission is not to pump oil. It's to create value from energy. We figure the cost of one kilowatt of solar photovoltaic power at a minimum of five times the cost of oil power, even when oil is hovering near $50 a barrel—a price we don't expect to hold up for long. Solar power is even less competitive against cheaper fossil fuels like coal and natural gas, and relies on mature technology. A radically new technology—perhaps replacing the silicon in photovoltaic cells with polymers—will be needed to make solar cost effective. That day is at least 20 years off. Wind and biomass are closer than solar to becoming competitive with fossil fuels, but their capacity to supply large amounts of energy is limited. And even the most modern windmills have inspired a popular backlash on esthetic grounds.
Many energy industrialists think nuclear is the answer, but they rely on a misleading analysis of its cost competitiveness. Even if you ignore the political concerns surrounding nuclear waste, producers often fail to correctly calculate the real price of electricity produced from nuclear energy. It costs about as much to close a nuclear plant as it does to build a new one, which is why nuclear power companies are now lobbying worldwide to delay planned plant closings.
There's also a lot of fuzzy talk about things like hybrid homes and cars. Many analysts note that while consumers still pay a lot more for hybrid cars than they can make back in gas savings, this gap is closing. What this line of reasoning ignores is that no technology competes only against itself, and combustion engines are rapidly evolving, too. The rush to innovate is led by the makers of diesel engines, which nearly match the gas efficiency of hybrids, but at much lower cost to consumers. Diesel also cuts greenhouse emissions by 30 to 40 percent compared with gas.
The conclusion is that even with real oil prices at their highest levels in 20 years, no alternative can compete head to head with fossil fuels on a scale broad enough to challenge their market dominance. Given this outlook, market forces won't wean society away from oil, gas and coal. Only government can do this. And since the late 1970s and early 1980s, public funding for R&D in the energy sector has been halved in the United States and Europe. Incentives and subsidies to produce alternative energy sources have fallen throughout the developed world with only a few exceptions—Japan, Germany, Denmark and a few others. This is why, for example, the bulk of U.S. solar hardware is exported to Germany and Japan.
In the United States, public policy continues to support America's love of the sport utility vehicle, which is the major factor behind the continued surge of American oil demand. An absurd loophole allows SUVs to be considered light trucks—and thereby not subject to passenger-vehicle emission requirements. The average total (federal plus local) tax on gas is 25 percent, compared with 50 percent in Japan and more than 70 percent in Western Europe, which partly explains why an American consumes twice the energy of a European. Yet any attack on this policy structure is seen as an attack on the American lifestyle, a quick form of career suicide for politicians.
Europe also faces large (but very different) obstacles to the adoption of new energy sources. For example, high gasoline taxes do encourage conservation, but they also count as the third or fourth largest source of revenue for most European governments. This gives policymakers a double-edged incentive to maintain the fossil-fuel status quo, because a transition to cleaner alternatives would cut their tax income, while raising outlays to subsidize the transition.
Yet the road to a society less dependent on oil is clear. If politicians were serious about these goals, the solution would be at hand: a mix of tax increases on oil products; more rigid mileage and emissions standards for automakers, and incentives to retire old cars and buy cleaner new ones. The transportation sector is crucial, since it will account for about 80 percent of the growth in world oil consumption over the next 25 years. These measures would motivate automakers to step up research, development and production of new cars, and consumers to buy them. But knowing the best road doesn't guarantee that society will take it.
Maugeri is group senior vice president for corporate strategies at Eni, the Italian oil and gas company.
© 2004 Newsweek, Inc.
URL: http://www.msnbc.msn.com/id/5852664/site/newsweek/
Fuel's Future
Business sees clean natural gas as the next dominant fossil fuel. But there will be political storms along the way
By Christopher Dickey
Newsweek International
Sept. 6-13 issue - The moment of maximum danger came suddenly on the evening of January 19.
The scene was the Algerian port of Skikda, where processing plants take natural gas pumped from the Sahara and cool it under enormous pressure to 162 degrees below zero Celsius. At that temperature the gas turns into a liquid that can be shipped all over the world in a new breed of refrigerated supertankers. When it arrives at its destination, liquefied natural gas, commonly called LNG, is then warmed very carefully until it becomes, again, the clean-burning stuff with the fine blue flame that sizzles hamburgers in countless kitchens, warms offices and bedrooms, and generates an increasingly large share of the electricity in the United States.
At 6:39 that January evening, one of the plant operators at Skikda noticed that the steam-pressure indicator in "Train 40," an array of compressors and separators, was rising fast. He tried to slow the fuel flow to the burners. One minute later, another operator reported that a vapor cloud was forming around Train 40. A disaster was taking shape.
For years oil companies have seen natural gas as the environmentally friendly fossil fuel of the future. Power companies have invested billions in new gas-fired plants that meet increasingly stringent emissions requirements. "Gas could overtake oil as the global No. 1 fuel of choice by 2025," says Malcolm Brinded, CEO of Shell Exploration and Production. Yet, as with other promising energy sources in the past, there's serious tension between the industry's best-laid plans and public perception of the risks that come with them.
On the plus side, virtually untapped natural-gas reserves are found all around the world. There's no gas cartel to deal with, at least for the moment. And the environmental benefits are manifest. Britain's switch from coal to gas at its power plants during the 1990s helped it more than meet its Kyoto emissions standards for 2010. Brinded even dreams that "young people" will learn "to think as positively about gas as they do about renewables such as wind and solar."
From the industry point of view, the main challenge has been the cost and difficulty of shipping the stuff. Gas can be sent through pipelines, but pipelines don't cross oceans, and many of the biggest gas fields are in terrain that's as politically problematic as the oilfields—Russia, the Middle East. Pipelines also distort markets, making it impossible to sell to the highest bidder.
The solution is LNG. As global demand has gone up, so has the financial incentive to build "liquefaction" plants like those operating in Algeria and "regasification" facilities like the one at Everett, Massachusetts, which sits in the heart of Boston. These are hugely expensive. Shell's new liquefaction plant in Sakhalin, Russia, cost more than $11 billion. But with economies of scale, the price of moving LNG goes down. Long-distance-delivery costs have been cut by more than half since 1990, and wholesale-gas prices have risen more than 50 percent in the last two years.
ExxonMobil predicts that natural gas will be the fastest-growing major energy source through 2020, and CEO Lee Raymond calls LNG "a huge deal" for the industry. Europe and Asia are now the main buyers, but North America has the most growth potential. Only four receiving terminals operate in the continental United States, but more than 30 are planned. Unless at least some are completed, many new gas-fired power plants—which are already built—simply won't be able to function. Raymond says that with North American natural-gas reserves running low, new supplies will have to be imported or brand-new power plants will "have to be junked," and "that's just not going to happen."
But are the liquefaction and regasification plants safe? The question has loomed large ever since 1944, when a badly engineered LNG storage tank leaked into the Cleveland, Ohio, storm drains and blew up, killing 128 people and injuring 435. Since September 11, 2001, fears have grown that terrorists could target LNG ships. "Because LNG infrastructure is highly visible and easily identified, it can be vulnerable to terrorist attack," warned the U.S. Congressional Research Service last year. The Coast Guard, the Office of Pipeline Safety and the Transportation Security Administration have all recently tightened security. Sen. John Kerry has recommended that Boston raise its alert level every time an LNG tanker sails into the harbor.
The industry, meanwhile, has pointed to an admirable safety record. It argues that unless LNG mixes with air at a specific ratio it won't ignite, and since facilities are designed to prevent that from happening they are not bombs-in-waiting, as alarmists claim. "Such risks, while significant, are not as serious as is popularly believed," the same congressional study said last year.
But at 6:40 p.m. on Jan. 19, according to a subsequent report on the Skikda incident by the Algerian state energy company, Sonatrach, "a first explosion was heard, followed immediately by a second more massive explosion and a huge fireball." The va—por cloud, said the report, "was unfortunately at the right explosion ratio." Flames quickly engulfed Train 40, and 30 and 20. When the fire was contained eight hours later, 27 people were dead and 56 wounded. The political and financial shock waves reached the United States, stalling or stopping plans to build receiving terminals in California, Maine and Alabama. Never mind that new plants bear little resemblance to the Algerian plants, which date to the 1970s. "People have the fear of LNG that it's going to go boom," says another oil-company executive. "If people believe it's an issue, then it's an issue."
Still, most industry sources believe the demand for natural gas will just keep growing, while development of the huge fields in Qatar, Iran, Russia and elsewhere will continue to provide ample supply at reasonable cost. Even if most of the terminal projects now planned for North America are never built, and only four or five are eventually completed, that could be enough for the next decade or so. The same executive predicts that "there will be sufficient terminals in friendly areas"—particularly more remote locations that need the jobs.
And in the long term? Malaysia and some other countries already use compressed natural gas to power taxis and public vehicles. Oil companies are developing "gas to liquid" processes to make more sophisticated fuels. But the lesson of Skikda is that fear and politics will also shape the search for affordable energy supplies.
© 2004 Newsweek, Inc.
URL: http://www.msnbc.msn.com/id/5853559/site/newsweek/