New developments
This blog provides a reference - a FAQ. As I learn things, I add them to the individual articles, whose posting dates don't change as they are updated. People need a way to know what's new, so, they'll be here in this post. It will be at the top unless I add an entirely new post.
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http://energyfaq.blogspot.com/2008/07/are-plug-ins-economically-justified.html
EV technology, while more than adequate, will continue to improve. Regenerative braking eliminates one source of waste ( or finds a new energy source, depending on your perspective) by capturing vehicle kinetice energy: another source is the vertical kinetic energy now lost to shock absorption, which appears to have been solved. posted 11/23/08
July 16, 2008
July 7, 2008
Are plug-in's economically justified?
Yes. Plug-in's cost the equivalent of about $3/gallon with lithium-ion. As the price of gasoline rises above that level, plugins become more and more compelling.
First, let's simplify, and assume we simply add additional battery capacity to a Prius (and a plug, which is trivial). I would argue that a serial hybrid (like the Chevy Volt) is less complex than a parallel (and therefore less expensive in large, mature volumes), but that's not necessary to demonstrate the point.
OK, at 45MPG and $3/gallon, a Prius costs 6.7 cents/mile.
Now, good quality cobalt-based small-format batteries, as used in the Tesla, cost $400/KWH. Iron-phosphate is less expensive, and large formats are less expensive. The plug-in Prius is planned by Toyota for 2 years from now, which gives us another 2 years of the normal 8-10% annual cost reduction seen with li-ion's. Large scale PHEV battery production will instantly raise the volume of production for these 2nd generation li-ions to very large levels compared to conventional li-ion, reducing costs further. That gives us a reasonable forecast of $300/KWH (if this seems too aggressive, perhaps you'll grant that this is very likely several years later, when PHEV's have gone beyond early adopters, are ramping up to much higher production volumes, and batteries are that much more mature).
A123system's batteries can handle 5,000 discharges at 100% depth of discharge. If we assume 250 per year we have a battery that will last the life of the car. At a 10:1 capitalization rate (to account for interest, depreciation and obsolescence), we're paying $30/KWH per year, for 250 discharges, or $.12 per KWH discharged.
At .25kwh/mile, that's $.03 per mile, less than half the Prius cost. If we double the battery size to account for GM's conservative decision to only use 50% of the battery capacity (this is similar to the Prius, and almost certainly unnecessary, but GM's taking no chances at all), we're still at $.06/mile.
Now, charging will be done almost exclusively at night. Utilities are required to offer time-of-use power pricing by the 2005 energy statue, but many don't publicize it. OTOH, PG&E, SCE and Exelon are pushing it. PGE&E's night time pricing (like most CA electricity) is more expensive, starting at $.08/KWH, OTOH gas is also more expensive there.
So, add $.04/KWH for night time electricity (and 4 KWH/mile) for a cost of $.01/mile for power, and we're at $.07/mile, or rough parity.
Of course, taxi's and other fleet operators are likely to recharge more than 250 times per year, dramatically raising payback. For the average driver, add in CO2 costs, and other external intangibles like independence from the ME, and the ability to weather gas shortages and you have a compelling case.
And that assumes $3 gas, and a Prius as a benchmark - $4.10 gas, and a 22MPG vehicle (the US average) would make the case that much more compelling.
How about battery reliability?
Every report indicates that both batteries are doing extremely well. Could there be problems? Well, A123systems batteries have been in the field for years. It's competitor is an extremely large, competent company. Finally, we have redundancy in the two competititors. GM wants a very high level of assurance (as they should), but there's no question that these batteries come very close to their highly demanding specifications, and very little chance that one of them won't meet those specs entirely.
What about charging all these cars - do we have the power?
Pacific National Lab's study, showing that we don't need new power plants, is here.
Using a wide boundary analysis, including materials, employees, marketing via dealerships, and spending of profits, how much oil is used 'per GM-Vol' (not in driving it, but in making it)?
Not a lot.
First, an ErEV (extended range EV, aka plugin/PHEV) like the Volt won't cost any more than an ICE vehicle, or require more energy to manufacture. The high initial prices you hear about are a combination of R&D (which is very low energy - think high paid engineers in front of LCD displays - their biggest energy consumption is the junk food they eat as they work 18 hours per day) and GM exaggerating costs to justify an initial early-adopter premium, and lobbying for tax credits (or possibly they're just being very conservative - they're now saying that they're figuring in the cost of a replacement battery under warranty, which is pretty silly given the over-engineering already in the battery design - only 50% depth of discharge for a li-ion chemistry which can handle 100%, unlike, say, the NIMH being used by the Prius).
2nd most manufacturing (with the main exception of smelting, like PV silicon or aluminum) takes relatively little energy, and very little oil - what energy is consumed is primarily electricity, making irrelevant the claims one hears about BOE's (barrels of "oil equivalent") consumed by car manufacturing.
Employees don't take much oil: I suppose it would mostly be commuting gasoline. 1st, there aren't as many hours as one would expect in cars, as they're pretty high-wage jobs even now - perhaps 100 hours of assembly time, for instance, which is only 12.5 shifts of work. 2nd, they could drive a Volt...
Materials: Steel is the major material input. It's mostly recycled: more than 50% of inputs, and 95% of scrapped cars are recycled, so that energy isn't wasted. Even so, the energy input isn't enormous, and finally, it doesn't come from oil: it's a combo of electricity and coking coal (I have a steel mill a mile from my home: it operates at night when electricity is cheap).
Marketing is high paid labor and TV, which is powered electrically.
Profits? What profits?? Don't forget, this is GM we're talking about - the external costs of the spending of profits are the very least of their problems...
Will the Volt be too expensive?
No, not in the long-term.
GM says their latest price estimate of $40k for the first year model includes the cost of 2 batteries! They're including a warranty replacement of the battery, just to be ultraconservative (see http://gm-volt.com/2008/09/03/lutz-each-volt-factors-in-the-cost-of-a-battery-replacement/ ). Realistically, it's just a way to exaggerate the price in order to capture as much money as possible from early adopters, given that the first year demand will greatly exceed supply, yet GM doesn't want to appear to be gouging customers. Also, they want to encourage tax rebates and discourage increases in the CAFE regulations.
Lutz said the following: "We're being conservative on battery life. For our cost calculations we're assuming each car will need a replacement during the warranty period." original source: http://blogs.cars.com/kickingtires/2008/09/gm-exec-volt-ba.html
GM is being ultraconservative on design - they're using 50% depth of discharge, where Tesla is using 100%, even though GM's cell chemistry has about 10x the cycle life in bench tests (at any given depth of discharge). They're assuming 2 battery packs during the life of the warranty, where Tesla is assuming 1 (of course, the warranty is longer, but that's GM's (conservative) choice).
There's no way this car can cost $40k to produce, unless they're using very, very unusual ways of applying R&D overhead and warranty costs. Heck, the Prius also has 2 (more complex) power-trains, and it costs roughly $20k less to produce than the $40k figure. The battery, in volume, should cost far less than $10K, so where does this premium come from?? The answer: GM is front-loading R&D costs, and exaggerating warranty costs, for the reasons I gave above.
Is the Volt development still on track?
"the company is "happy" with the capacity and performance of the batteries. GM also knows what the cooling system will look like and has physically integrated the pack into the vehicle. What's more, the entire propulsion system, including the battery pack, the electric motor, and the generator, was incorporated into a test vehicle and delivered to the company's Milford, MI, testing grounds at the end of August, just two days behind the schedule set last year.
"I wouldn't say that the battery is ready," Cesiel says, "but we're right on track." source: http://www.technologyreview.com/Energy/21387/
What about lithium supplies?
Lithium is pretty abundant, and can be found in a lot of places, including China and Australia. Here's an article about the world's largest producer of one form of lithium ore:
http://www.talison.com.au/pdfs/Talison_shifts_full_focus_to_lithium.pdf
Here's an article about li-ion battery costs - it's a bit outdated, but it provides a lot of detail.
http://www.transportation.anl.gov/pdfs/TA/149.pdf
What about hydrogen fuel cell vehicles instead?
A short answer: a hydrogen vehicle is an electric vehicle, like the Chevy Volt, which uses a smaller battery and a fuel cell to generate it's electricity. It will always be better to use a larger battery which is charged from the grid, combined with a small, cheap ICE engine for occasional backup. Here and here is the same information in much greater detail.
Why are some manufacturers, like Honda, still pursuing them?
Here's a good answer, posted by "Pangolin" as a comment on my first reference above: "I suspect that Honda's strategy was to develop electric car components and systems using hydrogen-vehicle research subsidies and have them on tap for fleet conversion to all-electric or plug-in vehicles. Toss the fuel cell and the hydrogen tanks and install larger batteries and you have an electric sedan. Throw in a small Honda generator and you have a plug-in hybrid. Off the shelf, every bit of it.
The nasty bit from Honda's point of view is that they will sell fewer vehicles. The only thing that could make a Honda more reliable would be to give them electric drive trains. That makes cars more of a long term investment as components would become swap-able. It was best to get all the bits right and wait until they were forced to make the shift. "
What's the future?
There are going to be a serious surge of PHEV/EVs by 2010, including GM's Volt, Toyota, Nissan, Chrysler, and other large car manufacturers. They're available now, in small but growing numbers from several small manufacturers, like Think and Tesla. Hybrid (the transitional form in the evolution to EVs) are now available from almost every manufacturer, including producers that would appear to be less vulnerable to customer demand for lower operating costs, such as BMW.
Electric vehicles (either PHEV's or EV's) faced serious barriers to entry in the form of very large investments (capital, emotional, career, etc, etc). This period of prolonged high oil prices will provide the impetus to push through this barrier. Once the barrier is crossed, costs will come down due to economy of scale, and PHEV/EV's will be forever entrenched. They are likely to follow ever falling cost curves, and largely replace fuel-based transportation.
How this will play out for the whole world (and the race against global depletion curves) is a tough question, as the US is the clear leader in adoption of hybrids, PHEV's and EV's (Japan sells them, and China is developing PHEVs and EVs), but I see fundamental change ahead for the US.
Here's a nice article about coming plug-ins. I'm also curious about retrofits - this appears to only cost about $4,000, and provide around 15 miles of electric driving. It isn't available yet (the promise fall 2008), and they haven't addressed regulatory issues, but the tech looks plausible. Hybrid taxi's are growing quickly, and Electric taxi's are coming.
EV technology, while more than adequate, will continue to improve. Regenerative braking eliminates one source of waste ( or finds a new energy source, depending on your perspective) by capturing vehicle kinetice energy: another source is the vertical kinetic energy now lost to shock absorption, which appears to have been solved.
First, let's simplify, and assume we simply add additional battery capacity to a Prius (and a plug, which is trivial). I would argue that a serial hybrid (like the Chevy Volt) is less complex than a parallel (and therefore less expensive in large, mature volumes), but that's not necessary to demonstrate the point.
OK, at 45MPG and $3/gallon, a Prius costs 6.7 cents/mile.
Now, good quality cobalt-based small-format batteries, as used in the Tesla, cost $400/KWH. Iron-phosphate is less expensive, and large formats are less expensive. The plug-in Prius is planned by Toyota for 2 years from now, which gives us another 2 years of the normal 8-10% annual cost reduction seen with li-ion's. Large scale PHEV battery production will instantly raise the volume of production for these 2nd generation li-ions to very large levels compared to conventional li-ion, reducing costs further. That gives us a reasonable forecast of $300/KWH (if this seems too aggressive, perhaps you'll grant that this is very likely several years later, when PHEV's have gone beyond early adopters, are ramping up to much higher production volumes, and batteries are that much more mature).
A123system's batteries can handle 5,000 discharges at 100% depth of discharge. If we assume 250 per year we have a battery that will last the life of the car. At a 10:1 capitalization rate (to account for interest, depreciation and obsolescence), we're paying $30/KWH per year, for 250 discharges, or $.12 per KWH discharged.
At .25kwh/mile, that's $.03 per mile, less than half the Prius cost. If we double the battery size to account for GM's conservative decision to only use 50% of the battery capacity (this is similar to the Prius, and almost certainly unnecessary, but GM's taking no chances at all), we're still at $.06/mile.
Now, charging will be done almost exclusively at night. Utilities are required to offer time-of-use power pricing by the 2005 energy statue, but many don't publicize it. OTOH, PG&E, SCE and Exelon are pushing it. PGE&E's night time pricing (like most CA electricity) is more expensive, starting at $.08/KWH, OTOH gas is also more expensive there.
So, add $.04/KWH for night time electricity (and 4 KWH/mile) for a cost of $.01/mile for power, and we're at $.07/mile, or rough parity.
Of course, taxi's and other fleet operators are likely to recharge more than 250 times per year, dramatically raising payback. For the average driver, add in CO2 costs, and other external intangibles like independence from the ME, and the ability to weather gas shortages and you have a compelling case.
And that assumes $3 gas, and a Prius as a benchmark - $4.10 gas, and a 22MPG vehicle (the US average) would make the case that much more compelling.
How about battery reliability?
Every report indicates that both batteries are doing extremely well. Could there be problems? Well, A123systems batteries have been in the field for years. It's competitor is an extremely large, competent company. Finally, we have redundancy in the two competititors. GM wants a very high level of assurance (as they should), but there's no question that these batteries come very close to their highly demanding specifications, and very little chance that one of them won't meet those specs entirely.
What about charging all these cars - do we have the power?
Pacific National Lab's study, showing that we don't need new power plants, is here.
Using a wide boundary analysis, including materials, employees, marketing via dealerships, and spending of profits, how much oil is used 'per GM-Vol' (not in driving it, but in making it)?
Not a lot.
First, an ErEV (extended range EV, aka plugin/PHEV) like the Volt won't cost any more than an ICE vehicle, or require more energy to manufacture. The high initial prices you hear about are a combination of R&D (which is very low energy - think high paid engineers in front of LCD displays - their biggest energy consumption is the junk food they eat as they work 18 hours per day) and GM exaggerating costs to justify an initial early-adopter premium, and lobbying for tax credits (or possibly they're just being very conservative - they're now saying that they're figuring in the cost of a replacement battery under warranty, which is pretty silly given the over-engineering already in the battery design - only 50% depth of discharge for a li-ion chemistry which can handle 100%, unlike, say, the NIMH being used by the Prius).
2nd most manufacturing (with the main exception of smelting, like PV silicon or aluminum) takes relatively little energy, and very little oil - what energy is consumed is primarily electricity, making irrelevant the claims one hears about BOE's (barrels of "oil equivalent") consumed by car manufacturing.
Employees don't take much oil: I suppose it would mostly be commuting gasoline. 1st, there aren't as many hours as one would expect in cars, as they're pretty high-wage jobs even now - perhaps 100 hours of assembly time, for instance, which is only 12.5 shifts of work. 2nd, they could drive a Volt...
Materials: Steel is the major material input. It's mostly recycled: more than 50% of inputs, and 95% of scrapped cars are recycled, so that energy isn't wasted. Even so, the energy input isn't enormous, and finally, it doesn't come from oil: it's a combo of electricity and coking coal (I have a steel mill a mile from my home: it operates at night when electricity is cheap).
Marketing is high paid labor and TV, which is powered electrically.
Profits? What profits?? Don't forget, this is GM we're talking about - the external costs of the spending of profits are the very least of their problems...
Will the Volt be too expensive?
No, not in the long-term.
GM says their latest price estimate of $40k for the first year model includes the cost of 2 batteries! They're including a warranty replacement of the battery, just to be ultraconservative (see http://gm-volt.com/2008/09/03/lutz-each-volt-factors-in-the-cost-of-a-battery-replacement/ ). Realistically, it's just a way to exaggerate the price in order to capture as much money as possible from early adopters, given that the first year demand will greatly exceed supply, yet GM doesn't want to appear to be gouging customers. Also, they want to encourage tax rebates and discourage increases in the CAFE regulations.
Lutz said the following: "We're being conservative on battery life. For our cost calculations we're assuming each car will need a replacement during the warranty period." original source: http://blogs.cars.com/kickingtires/2008/09/gm-exec-volt-ba.html
GM is being ultraconservative on design - they're using 50% depth of discharge, where Tesla is using 100%, even though GM's cell chemistry has about 10x the cycle life in bench tests (at any given depth of discharge). They're assuming 2 battery packs during the life of the warranty, where Tesla is assuming 1 (of course, the warranty is longer, but that's GM's (conservative) choice).
There's no way this car can cost $40k to produce, unless they're using very, very unusual ways of applying R&D overhead and warranty costs. Heck, the Prius also has 2 (more complex) power-trains, and it costs roughly $20k less to produce than the $40k figure. The battery, in volume, should cost far less than $10K, so where does this premium come from?? The answer: GM is front-loading R&D costs, and exaggerating warranty costs, for the reasons I gave above.
Is the Volt development still on track?
"the company is "happy" with the capacity and performance of the batteries. GM also knows what the cooling system will look like and has physically integrated the pack into the vehicle. What's more, the entire propulsion system, including the battery pack, the electric motor, and the generator, was incorporated into a test vehicle and delivered to the company's Milford, MI, testing grounds at the end of August, just two days behind the schedule set last year.
"I wouldn't say that the battery is ready," Cesiel says, "but we're right on track." source: http://www.technologyreview.com/Energy/21387/
What about lithium supplies?
Lithium is pretty abundant, and can be found in a lot of places, including China and Australia. Here's an article about the world's largest producer of one form of lithium ore:
http://www.talison.com.au/pdfs/Talison_shifts_full_focus_to_lithium.pdf
Here's an article about li-ion battery costs - it's a bit outdated, but it provides a lot of detail.
http://www.transportation.anl.gov/pdfs/TA/149.pdf
What about hydrogen fuel cell vehicles instead?
A short answer: a hydrogen vehicle is an electric vehicle, like the Chevy Volt, which uses a smaller battery and a fuel cell to generate it's electricity. It will always be better to use a larger battery which is charged from the grid, combined with a small, cheap ICE engine for occasional backup. Here and here is the same information in much greater detail.
Why are some manufacturers, like Honda, still pursuing them?
Here's a good answer, posted by "Pangolin" as a comment on my first reference above: "I suspect that Honda's strategy was to develop electric car components and systems using hydrogen-vehicle research subsidies and have them on tap for fleet conversion to all-electric or plug-in vehicles. Toss the fuel cell and the hydrogen tanks and install larger batteries and you have an electric sedan. Throw in a small Honda generator and you have a plug-in hybrid. Off the shelf, every bit of it.
The nasty bit from Honda's point of view is that they will sell fewer vehicles. The only thing that could make a Honda more reliable would be to give them electric drive trains. That makes cars more of a long term investment as components would become swap-able. It was best to get all the bits right and wait until they were forced to make the shift. "
What's the future?
There are going to be a serious surge of PHEV/EVs by 2010, including GM's Volt, Toyota, Nissan, Chrysler, and other large car manufacturers. They're available now, in small but growing numbers from several small manufacturers, like Think and Tesla. Hybrid (the transitional form in the evolution to EVs) are now available from almost every manufacturer, including producers that would appear to be less vulnerable to customer demand for lower operating costs, such as BMW.
Electric vehicles (either PHEV's or EV's) faced serious barriers to entry in the form of very large investments (capital, emotional, career, etc, etc). This period of prolonged high oil prices will provide the impetus to push through this barrier. Once the barrier is crossed, costs will come down due to economy of scale, and PHEV/EV's will be forever entrenched. They are likely to follow ever falling cost curves, and largely replace fuel-based transportation.
How this will play out for the whole world (and the race against global depletion curves) is a tough question, as the US is the clear leader in adoption of hybrids, PHEV's and EV's (Japan sells them, and China is developing PHEVs and EVs), but I see fundamental change ahead for the US.
Here's a nice article about coming plug-ins. I'm also curious about retrofits - this appears to only cost about $4,000, and provide around 15 miles of electric driving. It isn't available yet (the promise fall 2008), and they haven't addressed regulatory issues, but the tech looks plausible. Hybrid taxi's are growing quickly, and Electric taxi's are coming.
EV technology, while more than adequate, will continue to improve. Regenerative braking eliminates one source of waste ( or finds a new energy source, depending on your perspective) by capturing vehicle kinetice energy: another source is the vertical kinetic energy now lost to shock absorption, which appears to have been solved.
July 5, 2008
What's needed, nationally and personally?
On the national level:
Short-term:
We can create policies that mandate or promote carpooling, telecommuting and videoconferencing. Telecommuting in particular could save 10B gallons of gasoline per year (7% of total consumption, or much more than ethanol) or more, with no pain at all. Sadly, business culture isn't quite ready for it - a rapid expansion of telecommuting will take a real push. Paradoxically, everyone would be better off. Similarly, telecommuting can be better than solo driving.
One painless and important change: we can immediately end policies that favor free parking, which effectively subsidize driving. One study estimates that up to 25% of commuters who receive free parking would stop driving alone to work, if their employers allowed them to receive the value of their free-parking in cash. Cities should charge more for parking (while reducing other business and citizen costs, such as sales or other taxes or fees, to avoid becoming un-competitive) and switch from requiring businesses to provide free parking to requiring businesses to charge for parking. This would encourage mass-transit and ride-sharing, and immediately save fuel (as much as 50% of city driving can be looking for parking!). This won't harm consumers: customers will find shopping much more convenient, and businesses will have more money to encourage shopping in other ways.
More transparency for futures trading would be helpful, and slightly reduced leverage (greater capital requirements) would help reduce any bubbles. Most of the speculation-related proposals would do more harm than good. For instance, elimination of the ability of institutional investors to trade futures would drive some to less transparent foreign markets. Elimination of trading by investors (those not taking delivery) would do a great deal of harm - at minimum it would make hedging much more difficult for many energy consumers.
Longer-term:
Obviously, we need to dramatically raise fuel taxes - the best way would be a gradual increase over 5 years, with revenues rebated per capita to individual and industrial/commercial consumers. This will be very difficult to do before a true emergency, but the rebate would help sell it - like social security, it would spread the benefit in a reasonably progressive way.
Fuel taxes are much better than emissions-trading. Emissions-trading requires complex legislation and bureaucracies, and endless expenses in brokering. Sadly, carbon and fuel-taxes are much harder to sell, precisely because they're simpler, more transparent and more effective, which makes them seem more painful.
We need to raise the CAFE dramatically and provide rebates for plug-ins and electric cars (assistance to Detroit for retooling, and socialization of Detroit's pensions and healthcare costs wouldn't be a bad idea - the alternative for Detroit is bankruptcy, which will achieve the same ends in a much more painful way), and expand non-fossil fuel electrical generation ASAP. Obviously, the wind and solar federal programs need to be extended, with a 7 year gradual phaseout. Expanded mass transit is a good idea, though it's far from a silver bullet. National model building codes should be revised for much greater efficiency, and pushed into local government.
We need greatly expanded research into bio-fuels from cellulose and algae. Algae in particular has a great deal of technical potential. Cellulosic fuels will always be limited in scale, but improved processes could reduce their cost and environmental impact. Coal To Liquids with CO2 sequestration should be offered loan guarantees, to allow greatly expanded private investment without the fear of another Synfuel-type disaster (caused by the 80's oil price crash ).
I suspect that reliance on diesel is a blind alley - it's more efficient than gasoline, but only a little (a gallon of diesel has more energy, and carbon, than a gallon of gasoline), and it's success in Europe is dependent on subsidies. The US hybrid->plugin->ErEV->EV path seems much better in the longrun.
Here's a good article on these questions by Andy Grove, the ex-CEO of Intel: http://www.american.com/archive/2008/july-august-magazine-contents/our-electric-future
What can we do personally?
Short-term:
Better driving can save 20%. Try to take the train, carpool, or ask about telecommuting. The next time your work requires travel, ask if this can be done by teleconferencing. If not, ask if there are any plans to make it possible. All of these can make life easier, and at the same time cut costs dramatically.
Reduce home energy consumption: we all know the simple and effective things, like CFLs, plugging air leaks (windows, doors, attics, electrical outlets, roof, joints, chimney and walls), and programmable thermostats. Spot/room heating with electric space heaters is very cost-effective. Space heater infrared radiated at people (say, at one's desk or kitchen counter) is even more efficient, since it allows one to feel warm even if the air is cool. Comforters allow lower winter temperatures, and fans (ceiling and desk) allow higher summer temps. Simple, cheap, kits allow you to add a layer of insulation to windows with a sheet of transparent plastic.
How does saving electricity and natural gas help with oil/gasoline prices (for those of us not heating with fuel oil)? In the US, natural gas is used for both transportation and electrical generation, so NG connects the electricity and oil markets. Outside the continental US, oil is used for electrical generation.
Longer-term:
High-mileage drivers can buy used high-MPG cars easily and quickly, such as a Corolla (40MPG highway, but as little as $3K for a reliable 10 year old model), or a Honda Insight (gets 60-70 MPG, but still only $10k). Get rid of an SUV, and rent it back when needed for heavy cargo. Look into carsharing.
At home:
-insulate,
-install better windows (we added two more layers to our thermopane windows, and now don't need the furnace until outside temperatures are below freezing),
-replace appliances, including refrigerator, furnace and A/C, with higher efficiency models.
-Consider a heat-pump - new air-based heat pumps work very well, and are very cost effective, compared to any other form of heat.
-If you heat with fuel oil, simple resistance electricity may be cheaper for whole-house heating, and is relatively inexpensive to install. For instance, $4.50 #1 fuel oil is more expensive than 13 cent electricity (the national average is about 10 cents). There are about 35 KWHs per gallon (at 90% combustion efficiency): divide your cost per gallon by the $/KWH - if it's higher than 35, you'll save.
-Natural gas is almost always cheaper than simple resistance electricity (the necessary price ratio is 264, and we're only at about 130, on average).
Don't forget that these things help reduce household costs, CO2 and oil/gasoline prices (a threefer!).
When looking for a new job, give preference to closer jobs - this will pay many dividends beyond reducing fuel costs. Look for homes close to rail, or to work, if possible.
July 3, 2008
What will oil do in the short-term?
There are many dynamics operating in oil markets, including geological limits, capital expenditure lag-time, geopolitics, currency valuations, technology, consumer psychology, institutional resistance to change, and speculation. It is reasonably accurate to say that supply and demand got us to $100 oil in the last year. This is well explained at Econbrowser.
$100 oil was sufficient to flatten out oil consumption (the US DOE calls this "demand", though this word usage drives economists crazy) for the last several years, despite the overwhelming media message that high prices were temporary. Lately supply (and consumption) has increased slightly, which should have helped keep prices at the same level. Instead, prices are jumping - from the viewpoint of supply and demand, it makes no sense. For instance, David O'Reilly, chief of Chevron, is baffled by the extremely high oil prices seen recently. "We're surprised. We can see how you can get to $100," he says. "At $140, I just don't know how to explain it." (NYT 7/5/08) .
Could speculation raise oil prices beyond $100?
Sure. Fundamentally, futures markets are a marketplace to order commodities for future delivery at a fixed price (even if they're used as a casino). If many new participants place new orders, we have new demand, and prices will go up, so there's no question that speculators can raise prices by "going long" - in other words, betting that prices will rise. Of course, they can also lower prices by going short. In the most benign scenario, speculators provide a socially productive service by "price-finding": pushing prices up (or down) until supply and demand are balanced. If speculators see a looming shortage, they bring that shortage forward to the present, and accelerate the necessary economic adjustment. This is good, though the process is by trial and error, and can easily overshoot and oscillate around the ideal price, causing unpleasant volatility. On the other hand, it is common for speculators to "herd" - IOW they mostly choose one side or the other of such a bet (this is often what is called a "momentum play", aka "the greater fool" theory), and this can create a much larger and very unpleasant overshoot, and an excessive adjustment afterwards, such as we are seeing in the housing market.
An analysis at Econbrowser suggests that a small bubble is possible. Some people say that the effect has to be temporary, as eventually delivery must be taken or the contracts sold, but new paper bidders (speculators) can surely raise futures prices temporarily (IOW, create a bubble), and spot prices will rise in tandem due to arbitrage. Even if it is only temporary, most futures contracts are measured in years, so why can't we see a bubble for a year or even more? Further, if existing investors roll over their bets, and new investors continue to arrive ("greater fools") the bubble can grow for a significant time.
So, are we creating a bubble?
It seems to me that, that fundamental supply and demand are the problem, but there's no question that there's a lot of speculative money in the market. Even though price-finding is probably a healthy thing from an economic viewpoint, that can easily overshoot. Further, there's a lot of money that is herding (mostly, apparently, in the form of Exchange Traded Funds), so a bubble due to momentum-play speculation is also reasonably likely, and these investors seem to be mostly going long.
I suspect that current prices are unsustainable: higher prices stop consumption, even in China. We see that China had to cave in, and raise price controls, even before the olympics, which is very likely something that they really didn't want to do. Despite a constant linkage in media reports of Chinese and Indian consumption, India's consumption has been flat for several years. Brazil has become an exporter, due to increasing oil production (with a greatly exaggerated assist from sugar cane ethanol). The highest prices are being seen by the US, and countries whose currencies are tied to the dollar, including China and Japan.
Short-term demand elasticity is much smaller than long-term. In other words, people don't reduce consumption if they think high prices are temporary, and reductions are much easier over time, as people make routine capital expenditures such as car purchases. It's a serious mistake to think that people and businesses don't respond to oil prices. Overall global demand is unsustainable at this price level, and will fall until prices decline substantially. The level at which demand matches the current plateau of oil production is probably around $100-$120. I expect to see more stories like this describing a short-term decline to more sustainable prices.
Wouldn't we see accumulating oil storage in the form of rising inventories?
First, that assumes increasing production or falling demand. Oil export show no sign of responding strongly to prices (outside of a small increase from Saudi Arabia), and it would take some months for declining demand to have a strong effect (there are a number of sources of delays, including the time required for oil product distributors in China and India to run out of money because of price controls, the time required for pundits in oil-consuming countries to admit to the public that prices are going to stay high, and the delay in reporting production and consumption statistics), so a bubble measured in months wouldn't have a visible effect. Second, the speculators don't have to store it (and refiners currently consider oil far too expensive to store - they're minimizing inventories just to save money). The logical place for storage is by the sellers who have promised future delivery. AFAIK we have little info about National Oil Company storage, and in the final analysis NOC's can store oil in the ground. The King of Saudi Arabia has recently talked publicly about doing just that ("saving our oil for future generations").
Are NOC's (like Saudi Arabia) manipulating prices?
They certainly could - they have more than enough money. I think that Saudi Arabia is smart enough not to do that, as it would hurt them in the long-run. Sadly, not all oil exporters are as smart as Saudi Arabia. The leading regulator thinks manipulation is possible : "The acting CFTC chairman told the panel that it is imperative that strong enforcement actions be taken in order to prevent illegal manipulation of the commodities markets, noting that the markets are "ripe" for such manipulation. "
Do we know for sure?
No, there's inadequate data on trading and and inventories outside the US. We have to rely on our analysis of fundamentals, and read the entrails of snippets of information about the activities of traders. Here is a good discussion of how little we know.
Note: I remember seeing the heads of the commodities exchanges quoted as saying that oil speculation is a productive price-finding process, in effect bringing future shortages to the present. I can't find a reference - has anyone seen that?
$100 oil was sufficient to flatten out oil consumption (the US DOE calls this "demand", though this word usage drives economists crazy) for the last several years, despite the overwhelming media message that high prices were temporary. Lately supply (and consumption) has increased slightly, which should have helped keep prices at the same level. Instead, prices are jumping - from the viewpoint of supply and demand, it makes no sense. For instance, David O'Reilly, chief of Chevron, is baffled by the extremely high oil prices seen recently. "We're surprised. We can see how you can get to $100," he says. "At $140, I just don't know how to explain it." (NYT 7/5/08) .
Could speculation raise oil prices beyond $100?
Sure. Fundamentally, futures markets are a marketplace to order commodities for future delivery at a fixed price (even if they're used as a casino). If many new participants place new orders, we have new demand, and prices will go up, so there's no question that speculators can raise prices by "going long" - in other words, betting that prices will rise. Of course, they can also lower prices by going short. In the most benign scenario, speculators provide a socially productive service by "price-finding": pushing prices up (or down) until supply and demand are balanced. If speculators see a looming shortage, they bring that shortage forward to the present, and accelerate the necessary economic adjustment. This is good, though the process is by trial and error, and can easily overshoot and oscillate around the ideal price, causing unpleasant volatility. On the other hand, it is common for speculators to "herd" - IOW they mostly choose one side or the other of such a bet (this is often what is called a "momentum play", aka "the greater fool" theory), and this can create a much larger and very unpleasant overshoot, and an excessive adjustment afterwards, such as we are seeing in the housing market.
An analysis at Econbrowser suggests that a small bubble is possible. Some people say that the effect has to be temporary, as eventually delivery must be taken or the contracts sold, but new paper bidders (speculators) can surely raise futures prices temporarily (IOW, create a bubble), and spot prices will rise in tandem due to arbitrage. Even if it is only temporary, most futures contracts are measured in years, so why can't we see a bubble for a year or even more? Further, if existing investors roll over their bets, and new investors continue to arrive ("greater fools") the bubble can grow for a significant time.
So, are we creating a bubble?
It seems to me that, that fundamental supply and demand are the problem, but there's no question that there's a lot of speculative money in the market. Even though price-finding is probably a healthy thing from an economic viewpoint, that can easily overshoot. Further, there's a lot of money that is herding (mostly, apparently, in the form of Exchange Traded Funds), so a bubble due to momentum-play speculation is also reasonably likely, and these investors seem to be mostly going long.
I suspect that current prices are unsustainable: higher prices stop consumption, even in China. We see that China had to cave in, and raise price controls, even before the olympics, which is very likely something that they really didn't want to do. Despite a constant linkage in media reports of Chinese and Indian consumption, India's consumption has been flat for several years. Brazil has become an exporter, due to increasing oil production (with a greatly exaggerated assist from sugar cane ethanol). The highest prices are being seen by the US, and countries whose currencies are tied to the dollar, including China and Japan.
Short-term demand elasticity is much smaller than long-term. In other words, people don't reduce consumption if they think high prices are temporary, and reductions are much easier over time, as people make routine capital expenditures such as car purchases. It's a serious mistake to think that people and businesses don't respond to oil prices. Overall global demand is unsustainable at this price level, and will fall until prices decline substantially. The level at which demand matches the current plateau of oil production is probably around $100-$120. I expect to see more stories like this describing a short-term decline to more sustainable prices.
Wouldn't we see accumulating oil storage in the form of rising inventories?
First, that assumes increasing production or falling demand. Oil export show no sign of responding strongly to prices (outside of a small increase from Saudi Arabia), and it would take some months for declining demand to have a strong effect (there are a number of sources of delays, including the time required for oil product distributors in China and India to run out of money because of price controls, the time required for pundits in oil-consuming countries to admit to the public that prices are going to stay high, and the delay in reporting production and consumption statistics), so a bubble measured in months wouldn't have a visible effect. Second, the speculators don't have to store it (and refiners currently consider oil far too expensive to store - they're minimizing inventories just to save money). The logical place for storage is by the sellers who have promised future delivery. AFAIK we have little info about National Oil Company storage, and in the final analysis NOC's can store oil in the ground. The King of Saudi Arabia has recently talked publicly about doing just that ("saving our oil for future generations").
Are NOC's (like Saudi Arabia) manipulating prices?
They certainly could - they have more than enough money. I think that Saudi Arabia is smart enough not to do that, as it would hurt them in the long-run. Sadly, not all oil exporters are as smart as Saudi Arabia. The leading regulator thinks manipulation is possible : "The acting CFTC chairman told the panel that it is imperative that strong enforcement actions be taken in order to prevent illegal manipulation of the commodities markets, noting that the markets are "ripe" for such manipulation. "
Do we know for sure?
No, there's inadequate data on trading and and inventories outside the US. We have to rely on our analysis of fundamentals, and read the entrails of snippets of information about the activities of traders. Here is a good discussion of how little we know.
Note: I remember seeing the heads of the commodities exchanges quoted as saying that oil speculation is a productive price-finding process, in effect bringing future shortages to the present. I can't find a reference - has anyone seen that?
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