August 23, 2005
The PR of PO
Sometimes discussions on both sides of the issue of PO (peak oil) look more like a PR (public relations) campaign than an open exchange of ideas.
A recent report from Cambridge Energy Research Associates claimed that the world will have plenty of capacity to increase oil production an additional 16 million barrels a day over the next five years. This report was extremely influential, cited by a number of observers as assurance that peak oil cannot be just around the corner. However, as the Oil Drum noted, very few of those claiming to have been persuaded by the report are likely to have carefully examined it, since CERA charges $2,500 to obtain a copy of the actual report. What people have seen instead are summaries by CERA Chairman Daniel Yergin of what's in the report-- basically press releases. I am concerned that I have yet to see anyone respond to the challenge raised by the Oil Drum, repeated here and extended there, to explicate and defend CERA's assumptions about depletion rates for existing fields.
And then from this week's New York Times comes the story that columnist John Tierney has engaged Matthew Simmons, peakest among peak oilers, in a wager of $5,000, which Simmons can only win if oil averages over $200 a barrel, adjusted for inflation, in the year 2010. Multiple pundits commended Simmons for "putting his money where his mouth is."
Except that he isn't. For starters, I wonder whether $5,000 is that significant a sum to Mr. Simmons. And, as I've noted many times, if one had faith in Simmons' prediction, one could bet many, many millions of dollars, at terms far more favorable than Simmons received with this Tierney wager, using existing futures or options contracts. For example, Simmons could pay $5,800 today to buy a $70 December 2010 call option, which would net him $130,000 in 2010 if oil reaches a nominal price of $200 a barrel by 2010. Or, if he felt ever so slightly greedy, he could buy, say 100 of these, if he's got $580,000, and earn himself $13 million in 2010. And you could, too, if you think Simmons is right.
No, Simmons isn't putting his money where his mouth is. He's putting his mouth where his mouth is, and very effectively, too, I might add. After all, I'm talking about it, and you're reading about it, and that is what Simmons really wanted to accomplish. His goal isn't to win a bet. His goal is to get people thinking and talking about the prospect of oil going above $200 a barrel in a few years.
Not that there's anything wrong with trying to get people thinking about an issue that you feel they're ignoring. But my one concern is that the hoopla over this bet makes it look as if Simmons is really ready to back up his claim, when the truth is that he's not. The fact that there is so much money out there eager to take Tierney's side of such a wager is in my mind one of the key issues that peak oil advocates need to explain.
And I suppose, given that I'm often extolling the virtues of capitalism, I'm not in a position to berate Yergin for figuring out how to make a few bucks on the side in the process of getting his version of the truth out. Even if I do wish somebody from CERA would address the depletion question.
No, I guess what really bugs me is that I haven't figured out a way to charge people $2,500 each time they want a new installment of the wit and wisdom of Econbrowser.
Posted by James Hamilton at August 23, 2005 09:16 PMdigg this | reddit
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Tracked on August 25, 2005 11:25 PM
:-) Love this piece. Of course, we don't know what positions Matt Simmons has taken in the oil futures markets...
Posted by: Stuart Staniford at August 23, 2005 11:10 PM
I think you guys are treating peak oil like an anomaly when there are many parallel situations.
Take the catastrophic collapse of fisheries, for example. Ignore for a moment that some can recover (some don't seem to, who knows why). Just study the history: technological advancement leading to more efficient exploitation of the resource, followed by collapse of the resource.
Good heavens, it's happened before.
The same arguments you give were put forward: if the catch is not increasing, we'll just exploit it more efficiently. But technology didn't prevent collapse, it brought it on more swiftly.
I don't know if there are futures markets for fish. If there were, I imagine they would have the same view that you do about oil: they imagine there will be about as many fish next year as there are this year. I've read that futures markets tend to price oil in 5 years at roughly the same price it has today - whatever that price happens to be.
I think you are better off looking at what oil companies are doing than futures markets. They have the info. If there's tons more oil out there, I'm sure they'd be rushing to build refineries. As they are ... not.
Posted by: camille roy at August 24, 2005 12:14 AM
"No, Simmons isn't putting his money where his mouth is."
Seriously, what are you talking about? Simmons is an investment banker specializing in energy. It can't be a mistake on your part because you also said:
"But my one concern is that the hoopla over this bet makes it look as if Simmons is really ready to back up his claim, when the truth is that he's not"
Sure - the bet may be small potatos to Simmons, and that mention in Tierney's column will probably sell alot of books for Simmons, enough to cover the bet...but I think the thrust of your argument is weak.
And one more thing that confuses me:
"The fact that there is so much money out there eager to take Tierney's side of such a wager is in my mind one of the key issues that peak oil advocates need to explain."
Why do peak oilers have to explain the psychology of those who side with Tierney? Is that OUR responsibility?
Posted by: Jon S. at August 24, 2005 12:41 AM
I just want point out that some people are constructive and offer real input in the discussion. The best I have seen is the lecture by Dr. Albert Bartlett: Arithmetic, Population and Energy (VIDEO). Everybody ought to invest 50 minuites - much more worth than the mentioned wagers.
Posted by: Steffen Weckner at August 24, 2005 03:45 AM
Thanks for this blog post.
You talked about futures and options markets. But they are not retail financial markets.
I know two:
On both exchanges, select "crude oil".
Chris. F. Masse
Posted by: Chris. F. Masse at August 24, 2005 06:17 AM
Has no-one thought of this? I will send $25 to you and if another 99 people do the same then we can find out what's in Yergin's report. It may be a waste of money but it would clear up a few things. Many in the PO community seem pretty knowledgable about the more technical side so we could find out if the report was crap or not pretty quickly.
Posted by: Philip Martin at August 24, 2005 06:19 AM
In a post above it was noted that "If there's tons more of oil out there, I'm sure they (the refining companies) would be rushing to build more refineries.
If we perceive an adequate, or excess supply then we would also conclude that the price of oil would either stabilize or decline. Long term investment, in either wells or refineries, is based upon not only supply, but price assumptions.
As I have previously noted, the perception of a supply shortage works to the benefit of the current producers. Professor Hamilton's observation that the peak oil discussion sounds like public relations is right on.
The Chevron acquisition of Unocal indicates that some companies believe that prices will be relatively strong for a long period of time. However, if this was the universal prediction, then other producing companies, such as Apache would be selling for more than 12 times earnings, and the 2010 call option at $70 would be selling for more than $5,800.
Thirty years ago there were forecasts of $100 per barrel oil, and fortunes were lost on over agressive exploration activity. Five years ago there were predictions of $30,000 on the DJIA.
Posted by: Bill Ellis at August 24, 2005 07:04 AM
As Jon noted, Mr. Simmons has bet his working career by going long on the oil industry. "You bet your life" is a pretty serious bet! A $5,000 wager is probably one month's janitorial service in his offices but plenty for the journalist.
I think it an odd fact of life that many of us make the biggest bets of our lives when we're very young adults - what career, how much education, whom to marry, how many kids to have, where to live. Mr. Simmons has put food on the table and now sees the energy markets changing substantially - a historical discontinuity. As another laborer in the energy biz, I'm in the same general boat.
As to Mr. Martin, CERA's report is no doubt copyrighted and justly so. A detailed critique by a purchaser would be appreciated since CERA managed to make the conclusions public and exploited their reputation without providing a public defense - for that they should be criticized.
Of course, the one best able to analyze the CERA report and offer a public rebuttal is Mr. Simmons!
Posted by: Joseph Somsel at August 24, 2005 07:11 AM
Jon S., I described an investment strategy which, if Simmons is correct, would earn greater than an 86% annual rate of return, compounded, for 5 years. Actually I could do much better than this if you'll let me play with other options and horizons, but I just used 2010 and the price quote I saw yesterday to match up with the public bet. As an investment banker, is Simmons telling his clients he will double their money every year for five years? If not, then he's not putting his clients' money where his mouth is.
And as for explaining psychology, perhaps you don't have to explain the psychology of the market. But can you clarify for me your own psychology? Don't you want to earn an 86% return on your money? Don't you know some other people who do? If I don't see you making those investments, should I nevertheless be persuaded that you are fully convinced that you are correct in what's going to happen?
Posted by: JDH at August 24, 2005 07:35 AM
I throw my hat in with JDH on this one. The Simmons/Tierney bet is pure PR. In that sense, it may be a good expenditure of funds. But it isn't a sound bet on Simmons part--if his goal is to maximize return on investment within the confines of the bet itself. But if his idea is to extend awareness of the peak oil concept, and/or broaden sales of his book, he's achieved his goal.
I'm also--somewhat--in sync with JDH's argument that the fact that the futures market says oil prices will not explode in the future tells us something. But what it tells me is that there is a lot of uncertainty regarding (a) the amount of oil left and, relatedly, the production capacity that remains and (b) the response of industrial society to this production capacity.
The futures market does not tell me peak oil will not happen. It simply tells me that we don't know. I've said before that I believe a strong possibility is that the price of oil will gradually increase to balance supply and demand until a shock arrives--which is highly probable if production drops due to unforeseen event (terrorism, etc). Then recession and demand destruction leads to cheaper oil. And even along the gradual path, I think there is a price point at which the economy tips into recession.
My point: Economists need to be honest when discussing this topic as well. There are some--Mr Freakonomics seems to be a case--who are not providing all the information that the public needs to make an informed decision. Maybe we should sue those economists for misinformation? I'll have to give Mr Lanier a call. Somehow, I suspect this case won't interest him. Imagine trying to edcuate a jury on the concept of "demand."
Posted by: T.R. Elliott at August 24, 2005 08:42 AM
I am in for the $25.
Posted by: Robert Schwartz at August 24, 2005 09:11 AM
Look, the situation is very simple as Dr. Hamilton has pointed out. If you believe in peak oil and that the price of oil will be $200 or more by 2010 then buy options and sit back and wait to be rich. Take advantage of other people's inability to see the obvious. Don't worry be happy! The fact that most of the people on the peak side will not do this shows that they are not 'that' confident in their beliefs after all.
Posted by: Ian at August 24, 2005 09:18 AM
Simmons has put his credibility on the line here, and if he is proved to be a fool, there goes his M&A advisory business. If "all" he wanted to was make money in the ordinary course of business, while expecting oil to continue going up, he could have done so quietly. He has a very big bet going right now. Who will be his client if oil production his 100 mm/bd and stays there for 30 years with no problems? Furthermore, as any of us who have worked on Wall Street know, Simmons can make more in one good financial deal than he can expect to make on a technical book like "Twilight in the Desert" that will never top a best seller list. Nor did he need the publicity to do deals --potential clients have known all about him for a long, long time.
Posted by: Jonathan at August 24, 2005 09:49 AM
Jonathon: I think high profile bets like this are a disservice to ecological economics, environmental concerns, and similar topics. If Simmons loses the bet, for whatever reason, we'll have yet more "ammunition" that the cornucopians will use to "prove" that resource depletion is not a problem.
Resource depletion and the associated economics is a complex process and hinging its credibility upon a simple bet such as this may increase awareness but also has a down side (as noted above).
I believe industrial society faces an never-before-seen energy problem in this century. The $200 bet, as well as the "futures market says everything is ok" oversimply the problem and therefore can be easily misintepreted--or purposely twisted.
Posted by: T.R. Elliott at August 24, 2005 10:02 AM
I'm in for $100 on funding a copy of CERA's report tor JDH to review. If he provides an address, the $100 bill is in the mail.
Posted by: Tom at August 24, 2005 10:32 AM
I'll just give him a $100 just for providing us all access to his economics background on this econbrowser site
Posted by: Tom at August 24, 2005 10:34 AM
Dr. Hamilton, I think you are being a wee bit too critical of Simmons. You say that Simmons isn't putting his money where his mouth is because he hasn't bet the farm on his $200 prediction, but what about Tierney? Why didn't he insist that the bet be based on the market price of oil in 2010 (about $60)? After all, $60 is high historically.
Posted by: Seer at August 24, 2005 10:34 AM
How could something recognized as an "unexpected event" be anything but expected?
If anything, the previously unexpected event is the theory of Peak Oil.
As a risk to current prices, wouldn't the market account for this in its pricing?
And if it does, who cares about terrorism and the price of oil?
Posted by: Eric at August 24, 2005 10:36 AM
TR Elliot : "The futures market does not tell me peak oil will not happen. It simply tells me that we don't know."
No, the futures market tells you what the people in that market believe and are putting resources behind in their beliefs. Further, uncertainty does not translate into a lack of knowledge. When meteorologists give a weatherforecast, it involves uncertainty. Yet we don't blow it off as meaningless because of that. The price of oil does reflect those uncertanties you speak about.
Posted by: Allen at August 24, 2005 10:42 AM
I was just kidding about the money, folks. What I'd really like to see is someone from the CERA camp step into the public discussion about depletion rates.
And Seer, I wasn't criticizing Simmons for not betting the farm. What I was saying was that when you compare the terms of their public wager with the terms anybody can get on existing markets, you have to conclude it's just a publicity stunt, albeit a very clever and effective one. And it's Simmons, not Tierney, who was taking a position profoundly out of line with what the rest of the market is betting, so he's the one who's basically paying for the publicity. Tierney's just agreeing to take his money. Again, as a capitalist sympathizer, I rarely fault somebody for that.
Posted by: JDH at August 24, 2005 10:49 AM
Allen: I think we're talking past each other, yet probably saying the same thing. Then again, perhaps not. Read what I said above. I think $200 oil would lead to recession and demand destruction. And production constraints would significantly increase the probability of shock. What does that mean? It means that $200 oil is very unlikely. It tells me nothing about peak oil. I am personally betting a lot of money on oil prices. At $30 I bet it would go up. At $50 I also bet that it would go up. So far, so good. I WOULD NOT BET ON $200. That is all. I believe in peak oil, but there is enough uncertainty associated with the time and the response of society to it that I would not bet on $200. I'm looking at the shorter term, the production capacity (as ODEC tells me, for example). But as a personal investor, I am not going to bet that we can sustain oil at $200 a barrel in the year 2010.
I cannot predict this, and I don't believe the futures market--through collective decisions--can predict this. Therefore, I'm saying the futures market tells me little about peak oil. And I've also said several times on this board--and I'm not a close follower of the futures market--that it appears to me the futurs market is looking in the readview mirror, adjusting to the spot prices, not the price of oil. Isn't that the case? If so, then I don't put much faith into the futures market as it look to the present to readjust its idea of the future. What that tells me is that it doesn't know. I'm not saying its a bad thing, but I just don't think the futures market is telling me much about peak oil in 2010.
Posted by: T.R. Elliott at August 24, 2005 11:00 AM
JDH, I wish you would provide some EVIDENCE that the oil futures market is good at predicting future spot prices, rather than simply repeating it as a mantra. Unless and until you provide that evidence, peak oilers are under no obligation to "explain" your blind-faith assumption.
Posted by: Avo at August 24, 2005 11:02 AM
And, how about some comments on the ideas of the late economist Julian Simon, Tierney's "mentor", who has said that, if we run out of copper, we can simply make more out of other elements; and that, if we deplete the earth's resources, we can simply move to another planet.
Posted by: Avo at August 24, 2005 11:06 AM
Simmons is of course not betting on Peak Oil. He is betting on oil price. Oil price is determined by production costs, demand and supply, not by production growth or level. The price of oil in the future depends mostly on the demand situation then. We have reason to expect that the production peaking will occur in a situation where the economy is still growing and hence the demand for oil. In this situation we will get a price shock. But we might as well be in a situation where some other causes than peaking oil has already destructed demand and then we will not get a price shock when oil actually peaks. Peak Oil doesn't mean Peak Oil Price.
Here we see why the market cannot quite account for Peak Oil in there futures pricing.
The present oil prices are linked to the physical supply problems mostly by the absence of swing capacity. There is no more any buffers that could dampen price fluctuations. And the general price level is connected at least somehow to rising marginal production costs. We have definitively run out of cheap oil but the total oil production has still been rising at a fairly rapid pace, so the most pressure is from the demand side.
The demand has mostly been driven by the Chinese economic growth. This is fuelled by the unprecedented growth of their coal production. So the Chinese coal is driving up the oil prices.
My guess is that the price spike will come a little before the actual Peak Oil when the production growth starts stagnating but the demand is still strong. The absence of spare capacity means that every disruption is likely to cause a high price spike. The world peak is probably rather smooth so we probably get the recession before the peak and the price might ease a little.
Posted by: TI at August 24, 2005 11:11 AM
Well, we can move to Saturn, at least Saturn's moon Triton appear have crude oil...
Sorry the bad english, my native language is portuguese.
Posted by: Joćo Carlos at August 24, 2005 11:13 AM
Investment bankers don't tell private clients how to invest money. They help companies go through M&A and IPO events, and they get paid a percentage of the deal if it happens. Ie their compensation model is a bit like a real-estate agent. To be successful in that line of work, you have to be good as a salesperson, you have to be good at seeing through other people's sales pitches (since your client will be trying to snow you that they are worth more than they are, and so will the other guy's client), and you have to have a good sense of what your market segment is doing and where it is going.
Posted by: Stuart Staniford at August 24, 2005 11:14 AM
I think it's the other way around. The spot price immediately adjusts to any perceived high futures price (otherwise you could make free money by storing oil).
Posted by: Stuart Staniford at August 24, 2005 11:19 AM
It is a risky bet whether peak oil has arrived or not. We will probably be in recession then and prices will be down regardless.
Posted by: Lord at August 24, 2005 11:26 AM
Stuart: I agree with your point in principle, but unless I'm mistaken (always a possibility) the futures market was telling us eight months ago or so that oil in a few years would be $30 when the spot price was more like $40. It took a while of sustain high spot prices for the future price to drift up. To me, that looks a lot like the futures market (future price) reacting to the spot price.
Think of it this way. The futures market thinks that the current capacity constraints--and risk factors--will ameliorate in a few years. So current prices are high while people are unwilling to pay the current prices for future oil. Hence higher spot prices. Now, after a time, people start changing their thinking. "Maybe I should buy some future oil at $40. I'm paying that today, and I could very well be paying that tomorrow as well. Yesterday, I thought $40 was a glitch but I needed the oil. I wasn't willing to pay $40 for tomorrow's oil. Now I think it's not a glitch and I'm going to pay $45 for tomorrow's oil."
Hence, the reality on the ground, today, starts changing thinking that affects the future prices of oil. That's what I mean by looking in the rear view mirror. People writing contracts for oil in a couple years look at the price of oil the past few years and think "I'm not willing to pay $60 for oil in two years but I need the $60 oil today in the spot market." But after $60 spot prices persist long enough, that same person suddenly has a revelation "Better grab some $60 just in case."
Also, from a practical perspective, there is only so much storage capacity for oil.
Posted by: T.R. Elliott at August 24, 2005 11:33 AM
I take back one comment I made. There is a lot of storage capacity for oil. You don't pump it. We've been through that before on one of these threads. So there is sufficient storage capacity for the oil that is pumped each and every day. But that's under the control of a few producers.
There is one consideration that peak oil advocates must take into account--though I think peak oil is inevitable--OPEC and/or the Saudis could very well be testing the higherwater market for oil prices. They see future constraints and would like to adjust price expectations upwards.
They'll make a killing. I'd do the same if I was in their place. The whole peak oil theory, from a certain perspective, is exactly what the Saudis need to maximize their long-term return. Push present prices up to what they think oil will be selling for in the future by forcing everyone to accept higher prices based upon scarcity rather than greed. If you see what I'm saying.
I had a debate via email with Stephen Moore of Cato (now Mr WSJ propaganda meister) who argued in some ways that the Saudis had no right to their oil. They must pump all out. Mr Moore argued that oil would be back to $25 by now. Guess he got that one wrong. Hence the move to WSJ opinion page. Facts never stop them.
Posted by: T.R. Elliott at August 24, 2005 11:44 AM
I think that the relationship between futures prices and spot prices is asymmetric.
If futures prices were very far above spot prices, then people could make money by (1)storing oil (or leaving it in the ground) (2) selling futures (i.e. contracting to sell a barrell in the future.)
The first of these drives the spot price up, and the second drives the futures price down. So both react to each other, and futures prices should never be too much higher than spot prices.
On the other hand, there is no reason why future prices couldn't be well below spot prices, because beyond some limit current supply cannot be quickly increased at reasonable cost.
Posted by: ed at August 24, 2005 11:59 AM
The principal basis of the futures market is a hedge vehicle for producers and consumers of oil. In essence, on any given day a producer can elect to set the price for oil that he is going to receive next month, next year, or 2010. While speculators obviously delve into, and affect the futures market, as futures price move to, or beyond, the pricing assumptions of the oil producers they have the power to increase the contracted supply. There is a risk factor because if the producers supply is interupted he must still fulfil the delivery contract, and possibly the spot oil price will be much higher than the contract commitment.
The disconnection of the futures market is that it is based upon assumptions about the future. Here in Chicago, we are certain that the sun will rise over Lake Michigan tomorrow morning. All else is a guess multiplied by an if.
Posted by: Bill Ellis at August 24, 2005 12:00 PM
off the cuff ... i think if oil "wanted" to be $200, a recession would intervene. believing that depletion will make oil "more dear" is not the same as thinking depletion will be the only driver on prices near or far.
Posted by: odograph at August 24, 2005 12:10 PM
JDH: Thanks for the response, interesting thread.
"Jon S., I described an investment strategy which, if Simmons is correct, would earn greater than an 86% annual rate of return, compounded, for 5 years."
I should have been more clear in that, as an investment banker specializing in energy, Matt Simmons IS making that bet, in addition to the one he made with Tierney, after Tierney called him up and pulled his Julian Simon stunt.
"If I don't see you making those investments, should I nevertheless be persuaded that you are fully convinced that you are correct in what's going to happen?"
Why don't you see myself, and Matt Simmons and others in the PO community making those investments? Is it possibly because you don't know anything about us, beyond straw man ruminations?
Posted by: Jon S. at August 24, 2005 12:26 PM
The depletion is no main driver of oil prices. At this moment the demand is. Oil production is still growing (but how long?). We could say that depletion has been an issue for 30 years because the oil production has been growing on the average at slower pace than before the first oil crisis. The present growth rate is fairly good from this point of view. The prices have also been quite volatile during this period. So actually this is nothing new.
Recessions do affect demand for oil quite effectively. The oil consumption actually dropped in 2001. All severe recessions show in the oil statistics as diminished consumption (or as stagnated growth of consumption). Hence the oil demand curve is not so steep and inflexible as many people think.
People may not be willing to stop commuting if the gasoline price rises but they definitely stop it if they lose their job. If they lose their job they can't afford to buy as much as before so trucking decreases. So it goes. There accelerator effect here forces the demand down.
Posted by: TI at August 24, 2005 12:44 PM
The argumentum ad crumenam assumes that money is a measure of rightness, and that those with money are more likely to be correct. 'If you're so right, why ain't you rich?' is the common form, but it translates poetically as the belief that `truth is booty'. (http://www.adamsmith.org/logicalfallacies/000609.php)
Posted by: Fernando at August 24, 2005 01:53 PM
Current prices are enough to alter behavior on the supply and demand sides. In the 70's, the supply shortage was a major surprise. The entire auto industry had to retool. This time, the shifts required are ongoing and easier to make. The exact year of PO is not important. The question is, Will the market have time to make a smooth adjustment?
The twenty three(?)nuclear plants under construction in the world today say yes. Hundreds of coal powered plants planned or under construction say yes. Sales of 86,000 scooters say yes. Massive construction of inter city homes say yes.
The conversation is interesting because of the excitement about the topic. The good news is that the solutions are already in process.
Posted by: Jack Miller at August 24, 2005 01:55 PM
As Tierney called Simmons with the bet, how can Simmons be accused of a publicity stunt? What would you be saying had Simmons refused? IOW, was there any reply Simmons could have made that would not have brought criticism from this forum?
Posted by: Donal Fagan at August 24, 2005 02:28 PM
who could predict the price of oil for the next thirty years even if the exact extent of reserves and thus potential production were known ? (they aren't ).
lets make it easier - take the graph of the price of oil 1970 - 2000 and relate it purely to the reserves and production over that period. ( still can't do it ?)
lets make it easier still. go to the beach. make an educated guess at the time of high tide. now surf in on that, ignoring the (volatile and unpredictable) waves.
Posted by: gillies at August 24, 2005 02:58 PM
I added my 100$ for Simmons bet, but I still have not been notified that my bet is accepted as Tierney boasted.
Just curious to see how many bets will he receive.
Posted by: Marcel at August 24, 2005 03:45 PM
Donal: I think Simmons should have gone with the first bet. As Tierney writes:
"I proposed to him a bet....that the price of oil would not rise faster than the average wage, meaning that future workers would be able to afford oil more easily than they could today.
Mr. Simmons said he favored a simpler wager, based on his expectation that the price of oil, now about $65 per barrel, would more than triple during the next five years. He said he'd bet that the price in 2010, when adjusted for inflation so it's stated in 2005 dollars, would be at least $200 per barrel."
I would have gone with the first bet. Priced oil according to some measure of inflation or delation. That would have been a sound bet on the part of Simmons, one that I would make and count on a higher probability of winning.
But as JDH says, the point was to attract attention. I'm not complaining about it. But if in five years, oil is still $60 or less and the economy is humming along, Simmons will look pretty foolish. And if oil is above $200, I don't think anyone will care about Simmons anyway--there will be bigger concerns. Simmons is trying to attract attention today.
Posted by: T.R. Elliott at August 24, 2005 03:51 PM
For Simmons to go with the original terms would have been lily-livered. When interviewed by Jim Puplava, Simmons warned that oil prices could reach triple digits this winter, and not low triple digits. And that warning was repeated in the Maass story. The current bet more closely reflects what Simmons fears will happen.
I hope Simmons loses. In fact, I'd be ecstatic, and I'd guess that Simmons hopes he loses, too, because where's he gonna spend the money if he wins?
Posted by: Donal Fagan at August 25, 2005 05:07 AM
Here's the one aspect of this whole recent runup in oil prices that concerns me from a hedger's/trader's perspective - this has primarily been a demand driven rally, NOT one of sudden supply shortages. One can see this in the price action both short-term and deferred.
However, given a sudden and significant supply shortage (Use your imagination), oil prices should and would spike significantly - at least in the short-term.
Interestingly, a sudden doubling or trebling of prices, rather than a long, gradual rise, might actually make it more difficult for Simmons to collect in the long-term - think frog tossed into a boiling pot rather than a cold pot that's warming...
Posted by: Jon at August 25, 2005 05:44 AM
We may not know what Simmons is doing privately in the financial markets, but we know what "his" public firms are doing:
Posted by: brix at August 25, 2005 06:24 AM
I understand your point about sensationalism. I don't, however, quite understand why you directed it to me, since I did not take a position on Simmons's $5,000 bet.
I only said that in taking such a public position on peak oil, Simmons is risking his business. His public activities have plenty of financial downside for him, and little financial upside. One guesses that his motivations are, in no particular order, ego, personal satisfaction, and altruistic public service. They certainly are not financial.
Posted by: Jonathan at August 25, 2005 07:12 AM
Jonathon: I agree with what you wrote, namely that Simmons is taking a risk, must have a good reason to do so, is risking his reputation, etc. I suppose I responded to your post in particular to emphasize that even with all the considerations you correct point out, the bet seems more out of line than Simmon's other efforts, because he's making a bet that I find him very likely to lose. Not because peak oil isn't occuring, but for the other reasons posted--demand destruction, etc.
Posted by: T.R. Elliott at August 25, 2005 07:43 AM
Seems to me the force of Simmons' argument stems from his call for real data -- he's accusing the Saudis of hiding the facts. Until someone comes out with a detailed refutation based on newer information than Simmons has, a lot of us are going to harbor some suspicion that he might be right.
I don't care much about Simmons' personal motivation. You can't do valid analysis of time series without data, so to my mind the question is: "where's the data?"
Posted by: STS at August 25, 2005 07:50 AM
Simmons believes Saudi production, and probably Russian production too, will got into very steep North-sea style declines in the not-too-distant future. If he's right, $200 oil wouldn't be that surprising.
Posted by: Stuart Staniford at August 25, 2005 08:17 AM
Although most comments in this thread have (understandably) focused on the Simmons' bet, JDH's point regarding global depletion rates should not be ignored.
Take a look at this editorial piece by Philip Algar on page 5 of the August 2003 issue of Pipeline magazine, published by the IPE.
About as far from a fringe 'peak oil' publication as you can get, but you'll see that the same concerns regarding global depletion rates, and the need for more openness about such data, were being voiced two years ago.
Without a meaningful number for depletion, CERA, ASPO, Uncle Tom Cobbley and All, can pretty much come up with any figures they like for future production.
Posted by: FTX at August 25, 2005 08:39 AM
To what extent is the bet actually a bet on future economic growth over the next 5 years? If there's a recession in any of the major consuming regional economies (US, Europe, East Asia) in 2010, then it doesn't matter how right Simmons is - he loses. , That would be true even if he merely bet that oil would exceed $100, adjusted for inflation (not $200).
Posted by: Silent E at August 25, 2005 09:10 AM
If you want to bet on peak oil, don't buy oil futures.
Your biggest bet: your house. Buy you next house closer to mass transit and the job centers of your urban area. Prices will rise more (or fall less) than in distant suburbs where commutes are becoming substantially more expensive.
Invest in companies that stand to make LOTS of money if the oil peak happens in the next five years. The largest effects will be one energy companies directly, with follow-on impacts to sectors heavily dependent on low gas prices:
Oil companies - their reserves will be worth more.
Oil services and exploration - their technology will be even more valuable to the majors and the NOCs once the peak is here.
Toyota, Honda, BMW & Mercedes - Japanese hybrids and German diesels are going to gobble market share as prices rise.
CSX & other rail companies - far more fuel-efficient for overland transport than trucks.
Urban light-rail contractors and rolling stock manufacturers - municipal systems will expand considerably as ridership rises.
ADM - they will probably shift from ethanol to biodiesel production (and still get their subsidies!), although rising oil-based input prices for fuel, fertilizer, and pesticides will squeeze agriculture generally.
Almost any energy producer - oil usage for electricity will end (currently only 3% of US supply), even as electricity demand increases. That means Coal, Gas, and Wind (growing at 30% plus per year!). Solar is not there yet.
Urban real estate developers and REITs - rising commute costs will increase the value of property close to jobs and city centers.
Likewise, sell or short companies who will find their market niches being drastically curtailed, or who will be incapable of adjusting:
Airlines - rising fuels will be VERY bad.
GM & Ford - they missed the boat in '73 and '79. The idiots have probably already missed this one too.
Trucking companies - duh.
Nuclear power - it will become obvious in the next five years that wind is cleaner, cheaper, and safer (vis meltdown, property values, or terrorists).
Ethanol makers - the negative energy requirements will doom it. It will be replaced with biodiesel.
Exurb Homebuilders - those who primarly develop greenfield tracts at great distance from city centers.
Posted by: Silent E at August 25, 2005 09:35 AM
1.) As a few people already pointed out, Simmons didn't initiate the bet, Tierney did. The PR stunt is on the other foot. $5,000 is chump change to Simmons, he just did it cause Tierney asked. He never would have initiated this.
2.) If anything, Simmons' positions are going to cost him business, not bring him business. The business world does not appreciate mavericks and this kind of negative publicity, particularly in a time of already high oil prices. And the Saudis are unhappy with the attention, and you can be sure the Saudis are going to try to pay him back. They may not do much business with his firm, but they do business with people who do.
3.) Simmons is betting on Saudi production collapsing between now and 2010. There are rumors there's something up with Ghawar, though of course there are always all kinds of rumors.
4.) I'm not sure if we got to read the CERA report there would be much we didn't already know. There was a lot of news on it, Yergin did a number of interviews, and stuff has leaked out. They are optomists, and if everything goes right in the world and depletion isn't too bad, who knows, maybe the peak is 2010-2020. But the undulating plateau idea is nuts. And their track record with the natural gas prediction is not so stellar.
5.) As somebody pointed out, if futures were perfect, then a year ago they would have predicted $67 oil now. Instead they were predicting $40 oil.
Nobody really knows enough to say what's going on right now and what the future will bring. This is one of Simmon's major points.
Posted by: mh497 at August 25, 2005 09:37 AM
"Nobody really knows enough to say what's going on right now and what the future will bring. This is one of Simmon's major points."
IMHO, Simmon's major point is that his data can be rewied by his peers. Simmon analysed the information disponible at a scientific publication and anyone can go and verify that data to see if simmon's conclusions are right (however, analyse all that data will need time and a lot of work).
He aparently is confindent that he get the right conclusions....
Sorry the bad english, my native language is portuguese.
Posted by: Joćo Carlos at August 25, 2005 10:04 AM
Going back to Yergin's CERA report for a moment. Ronald R. Cooke, author of Oil, Jihad and Destiny, provides CERA's implied assumptions at the link below.
Posted by: lesterb at August 25, 2005 10:34 AM
"5.) As somebody pointed out, if futures were perfect, then a year ago they would have predicted $67 oil now. Instead they were predicting $40 oil."
A) I don't think anyone who actually trades futures would *ever* consider them to be remotely "perfect" - if they were, the prices would never change. They are, on the simplest level, representative of a price where risk is transferred - and only the sum of then best knowledge.
B) What some of us have been arguing, wrt futures, is that given the expectations of the PO crowd, the futures are incredibly underpriced. IOW, if there is a large group of market participants who feel that oil in the next 5 years will be incredibly scarce and pricey, they would be avid buyers of deferred contracts *based* on their knowledge as insiders.
And this is the action we're simply not seeing.
The price of any commodity is both simple to determine and yet comprised of many, many factors. But "predictiveness" is a feature I'd be very leery of assigning much beyond the context of "best guesstimate given current knowledge which changes constantly".
Posted by: Jon at August 25, 2005 10:56 AM
Jon, you completely failed to answer the question of why we should trust oil futures now over geological estimates, given how wrong oil futures were about the current price of oil. Calling them 'imperfect' is irrelevant - you want us to trust them MORE than the geologists who say that we're peaking or near peaking.
Posted by: M1EK at August 25, 2005 11:19 AM
Why should we trust the geologists? There biggest employer is the oil production companies. The oil production companies profit from high current prices. The original hypothesis of this string was that PO sounds like PR.
Posted by: Bill Ellis at August 25, 2005 11:34 AM
Please refer to section B)
Producers have geologists too, ya know....
Posted by: Jon at August 25, 2005 11:59 AM
M1EK: The strawman is dead. Call off your attack.
The questions that you are asking have been answered dozens of times in this an earlier posts. You are just not listening. Many posters have said all forecasting is inaccurate. Go back and look at the hundreds of price projections publicly made over the last 30 years regarding oil, gold, stocks, etc. It is impossible to accurately forecast an asset price in an efficient (or even highly liquid) market, because exoectation is built into the price.
All futures prices show is that half the people making bets are guessing higher and half lower than the futures price. If it was obvious to everyone the the price was going to be higher, why would half the people bet it will be lower?
I believe that oil is peaking and that the geologists may well be right. But I am not stupid enough to think futures markets have nothing to say about future prices.
Posted by: Jack at August 25, 2005 12:16 PM
Jon, perfect was perhaps the wrong word. Anyway, I agree on your view of what futures serve as.
The PO crowd has an awful lot of 'end of civilization' types, and they are unlikely to worry about futures because they believe the end of everything we know is at hand. Thus they aren't market participants.
Posted by: mh497 at August 25, 2005 12:29 PM
Mr. Silent E suggests that nuclear power will be such a loser that one could make money by shorting those companies involved.
These economic data suggest otherwise:
1) As an experienced nuclear engineer, I'm being pursued by three different firms at the moment, one of them my current employer offering a big promotion. I haven't even sent out a resume yet.
2) There are 934 listings on Monster.com under "nuclear power" (although many are US Navy postings.) If anything, we in the nuclear industry are worried about adequate manpower to support new plant construction.
3) Yesterday saw the Henry Hub natural gas month ahead future top $10/mmBTU for the first time in history before closing at $9.94.
So perhaps Silent E could explain why the next 5 years will reveal the superiority of wind power over nuclear power that was somehow overlooked in the last 50 years?
Posted by: Joseph Somsel at August 25, 2005 12:30 PM
And that, in a way, is a shame - that they don't participate. They *may well* have an accurate view of the future - but without their active participation, what I see as a hedger does not reflect their point of view.
Sure wish futures were perfect - but then, if they were, they'd be lousy risk vehicles and not very much fun to trade....:-)
Posted by: Jon at August 25, 2005 12:40 PM
because the economics are wrong, and the market knows it. The efficiency keeps rising and the costs keep dropping every year as the technology matures.
There's 2500 MW of wind capacity being installed this year. Where are the new nuclear plants?
Wind power will grow by nearly 40% this year. How much is nuclear going to grow?
Wind power generation has rates under 5 cents/kwh. What's the equivalent rate for nuclear?
100 MW wind farms can be built in under a year. Existing facilities can scale very quickly. How fast can you build a nuclear plant?
If wind grows at the same rate in the next five years as it did in the last five, it will account for over 1.6% of US generating capcity. Five years after that, it could rise to almost 10%. What's the share for nuclear?
No waste. No terrorist risks. Limited NIMBYism. No need for federal disaster liability waivers. No massive capital costs.
Posted by: Silent E at August 25, 2005 01:37 PM
You were onto something - right up until the limited NIMBYism bit....
But yes, there's certainly room for wind power, as well as tidal, etc.
Posted by: Jon at August 25, 2005 01:47 PM
Maybe someone said this above (because I haven't read all the comments) but Simmons was contacted by Tierney and asked to bet. He didn't concoct the bet, he just took it. Did he take it for PR? Maybe, but maybe he just answered the phone and when asked, put his money where his mouth is. And I agree with Stuart Staniford - we have no idea whether Simmons holds a significant options or futures position on the price of oil.
I find the futures market to be a poor predictor of the future long term price of oil. Traders are notorious for their short term focus. However, how do you economists explain the relatively long-lived contango status of the futures market for oil? It seems that the trading community always thinks that oil in the coming months are always going to be $2.00 higher than in the current month?
Posted by: bubba at August 25, 2005 04:25 PM
2500 MW at 25% capacity factor equals 700 MW of nuclear at 90%. There are 23 nuclear power plants under construction worldwide with about 12,000 MW just about to be ordered in the US (I know, because I'm helping with the pre-bid stuff and lots of money is being spent). Construction is scheduled to take 42 months from ground breaking (whoops, wasn't supposed to let that out!)
Our ramp rate for new capacity will be manpower limited for maybe a decade since experienced people in the US are scarce. So you got me about growth rates although in 2003, wind put out only 4% of the MWe as nuclear according to the EIA so it's growing from a much smaller base.
Wind requires 460 tonnes of steel and 870 cubic meters of concrete per MW.
Nuclear requires 40 tonnes of steel and 190 cubic meters of concrete for the equivalent output.
Concrete and steel represent 95% of the resource inputs and both are expected to increase in price with increased energy costs so nuclear's cost advantage only gets better. According to the EIA, capital costs per MW-hr output are twice or thrice those of new nuclear plants.
Today, nuclear has about a 20% market share of total US generation (in MWe-hr). Market share is not a valid metric for wind since it is neither dispatchable nor can it be base loaded - it can only displace energy, i.e. offset fuel costs by downturning fossil plants. It has very little capacity value.
Note that no system can have over a very few percent of wind (5%?) since it makes the grid unmanagable - Denmark and other "leaders" are learning that to their chagrin. I worked for the utility that had the world's largest concentration of wind at the time. Wind was a huge pain. It was counter-peak due to the climate in the area - pure PR and tax write-offs.
With that, wind could save some natural gas so it is not worthless. Just don't you dare try to build one in my backyard (or Ted Kennedy's)!
Sorry, but wind is one of those public delusions that will never make a real difference except to distract us from real energy solutions and waste our money.
Posted by: Joseph Somsel at August 25, 2005 05:50 PM
"some EVIDENCE that the oil futures market is good at predicting future spot prices"
As I understand CAPM, the current market price of an asset reflects all of the publicly available information about that asset. The future price is, by definition, unknowable.
Look at it this way. If anyone knows something the rest of the market does not, he has an incentive to play the market for a gain. In particular, the Sa'uds may embargo information about their reserves, but they cannot control everyone who knows the truth. Most of the technical people at Aramco are not Arabs, and when their contracts are up, they go home. They have an incentive to make their knowledge available to the market by trading.
We can in turn extract some information from the market. One outstanding features of the current oil futures market is that the out year contracts are trading at the same levels as the current contracts. This would seem to be an indication that nothing is known to market participants that causes them to believe that there is a general upward trend.
Posted by: Robert Schwartz at August 25, 2005 07:31 PM
If you don't think that wind power has NIMBYism, you need to come visit Massachusetts, and watch the shrillness of the politicians (both Democrat and Republican) who are trying to stop wind farms from going up because the offend our New England sensibilities to deal with their visual pollution.
Posted by: Dan at August 25, 2005 08:32 PM
I really don't see any question about this bet being a PR stunt by Tierney and/or Simmons -- of course it's a publicity stunt by both of them.
But so what? Julian Simon's original bet was PR too (only $576 changed hands) but *it worked* --25 years later people still remember it and are copying it.
BTW, the Saudis seem to be taking Tierney's side of the bet. People can argue about the forecasting power of futures market all they want, and Simmons may really have investigated the status of the Saudi oil fields more than anyone else so that he knows more about them than any of the major oil companies (though I doubt it).
But Simmons doesn't know more about the status of the Saudi fields than the Saudis do.
The Saudis are as greedy as anybody. And when you are greedy you don't give away for $65 what will be worth $200 in five years, while ramping up to give away more at that low price as fast as possible. Especially when what you are giving away is your only national asset.
If the Saudis believed their fields are going to fail like Simmons says, they'd be nurturing their depleting but appreiciating-in-value sole asset -- instead of giving it away as fast as possible at a 65% discount.
The Saudis being on Tierney's side is good enough for me.
Posted by: Jim Glass at August 25, 2005 10:57 PM
As to nuclear versus wind, let's be real.
Nuclear power generation in the US is up 140% in the last 20 years in spite of the lack of new plants due to plant quality improvements, and it accounts for 20% of electricity in the US today.
Wind power is nowhere, growing *if* rapidly from a microscopic base to perhaps be one of the nice little marginal contributors in the mix a couple generations from now.
In the meantime its greatest accomplishement has been to get Ted Kennedy to come out as anti-renewable energy where *he* lives, and Walter Cronkite to muse about how there must be "less valuable neighborhoods" to place such things.
If the price of hydrocarbons really ever takes off toward a $100/b equivalent and beyond then the economics of nuclear, which are already becoming credible again, are going to look *wonderful*. The same if CO2 global warming turns out to be the real deal. Nuclear will be powering the electric grid then because there'll be nothing else to do it at prices near today's until they can plug in the sun (which will happen in time).
Worldwide, in the meanwhile, nuclear accounts for 16% of all power and is growing again, particularly fast in Asia, especially so China, where they are saying "pebble bed".
Sounds good to me. Let the wind catch up there.
Posted by: Jim Glass at August 25, 2005 11:08 PM
I'm worried about the helium that appears to be involved.
Posted by: Mandos at August 26, 2005 12:01 AM
"If it was obvious to everyone the the price was going to be higher, why would half the people bet it will be lower?"
It was obvious to everyone five years ago that the current price wouldn't be this high. Except, of course, for a few geologists.
Posted by: M1EK at August 26, 2005 06:55 AM
"The Saudis are as greedy as anybody. And when you are greedy you don't give away for $65 what will be worth $200 in five years, while ramping up to give away more at that low price as fast as possible. Especially when what you are giving away is your only national asset."
This ignores the Saudi royal family's tenuous position; as well as their desire not to give the Western economies much incentive to reduce consumption.
Posted by: M1EK at August 26, 2005 06:57 AM
"Sorry, but wind is one of those public delusions that will never make a real difference except to distract us from real energy solutions and waste our money."
Don't buy this BS from the nuke guys - wind is here, and it's real; and it is being used at non-trivial amounts right here in Austin.
Posted by: M1EK at August 26, 2005 06:59 AM
"The PO crowd has an awful lot of 'end of civilization' types, and they are unlikely to worry about futures because they believe the end of everything we know is at hand. Thus they aren't market participants."
More accurately, a better 'bet' if you believe in PO is to make investments in your own built environment which reduce your need for oil. Because PO doesn't foresee steady rising prices; it predicts wild swings (i.e. oil at $100 -> big recession -> oil at $40 for a while; too bad if you bought your $100 futures and didn't sell them at just the right time).
In PO discussions on H&R, I'm one of a handful of people who have made these kind of investments or are planning to (we bought a Prius; we're down to one car; I 'overpaid' for a house in a dense urban area; etc.)
Posted by: M1EK at August 26, 2005 07:37 AM
According to AustinElectric.com, the municipal electric utility in M1EK's home town, 3.4% of their capacity ownership is wind power. Given the typical 25% capacity factor for wind, that's probably less than 1% of all the MWe-hrs used in Austin coming from wind (but that's an estimate on my part.)
Mr. Mandos mentioned a concern with helium. Pebble bed reactors would use helium as a coolant but it is non-toxic and non-reactive so presents no safety issues. We seem to have plenty stored away in government-owned reserves and more is being produced as a byproduct of natural gas production so shortages are not foreseen. Perhaps he would care to elaborate on his concern?
Posted by: Joseph Somsel at August 26, 2005 03:30 PM
I'm worried about the fact that it does come from the same places that we get fossil fuels from and hence subject to similar depletion curves. It would mean that pebble-bed reactors are limited by Peak Helium.
Posted by: Mandos at August 26, 2005 05:29 PM
From the link I posted:
"Renewable energy now supplies up to 6.5% of the utility's overall energy requirements. The City has established a goal of meeting 20% of its electricity needs with renewables by 2020."
There are negligible contributions from methane and solar; nearly all of that 6.5% is and a smaller but still overwhelming percentage of that 20% are going to be wind.
Joseph, why do you need to misrepresent wind in order to make yourself feel better about nuclear? I've not hidden the fact that AE gets a huge chunk of its energy from the STNP.
Posted by: M1EK at August 27, 2005 08:02 AM
"The Saudis are as greedy as anybody. And when you are greedy you don't give away for $65 what will be worth $200 in five years, while ramping up to give away more at that low price as fast as possible. Especially when what you are giving away is your only national asset."
Saudi don't stock billions of bills in vaults. All this money is invested, guess where, in those countries that have strong economic growth and are heavily reliant on oil. A global economic recession or depression due to high oil prices is as bad news for them than it is for us. Second, they need lots of cash to pacify their own population bent on radical wahabism.
Posted by: Z at August 27, 2005 08:47 AM
My figures are from:
with applied EIA average wind capacity factor. The horse's mouth, no? Note I mistakenly referred to AustinELECTRIC.com when it should have been AustinEnergy.com
Note that 85 MW wind annual OUTPUT is about equal to 25 MW nuclear when adjusted for capacity factors. Those are the well documented facts of the electric business.
25 MW can fall off the wagon at South Texas Project (2500 MW total) due to a leaky valve or a poorly tuned control circuit. The staff would spend time looking for it but it is well within the seasonal varience in output due to changes in HUMIDITY on the cooling towers.
Perhaps the city is buying wind power elsewhere off the market but I suspect that the delta for "renewables" is previously existing federal hydro power allocations to munis. Further, if Austin needs to supplement its power requirements off the (non-wind) market because it doesn't own enough capacity, the actual share from wind would be even lower than I estimated.
Sorry, but I did not "misrepresent" wind's sorry economics, difficult operating characteristics, marginal output, nor its limited reliability. The facts are clear and available to anyone with open eyes.
But, hey, if Austin's citizens chose to invest in wind, more power to 'em. (My employer is the world's largest manufacturer.) Just don't spent MY tax or rate dollars on windmills and don't go bidding up the spot market the next windless, hot summer day (I'm OK since California and Texas are not connected.)
I've accepted the fact that M1EK has his dreams but welcome constructive dialogue from others.
I hear you now but I don't have a solid answer. My buddies in the gas-cooled reactor business don't seem worried. If I get time, I'll check.
Posted by: Joseph Somsel at August 27, 2005 05:26 PM
"Note that 85 MW wind annual OUTPUT is about equal to 25 MW nuclear when adjusted for capacity factors. Those are the well documented facts of the electric business."
This doesn't seem right - why would Austin Energy brag about 85 MW if it were really only 25 MW? Note: this isn't ME making the claim.
By the way, there's a negligible amount of hydro around here. So it's unlikely that has anything to do with it.
"Sorry, but I did not "misrepresent" wind's sorry economics, difficult operating characteristics, marginal output, nor its limited reliability. The facts are clear and available to anyone with open eyes."
And power companies all over the country are investing in wind. You're being misleading by pretending otherwise. Investment in wind, as a matter of fact, far exceeds that in nuclear. What do they know that you don't want us to know?
Posted by: M1EK at August 28, 2005 08:46 AM
On further reflection, I think you're misrepresenting AE's wind power contribution. Note from YOUR link this paragraph:
" Contract for 89 MW of wind-generated power mostly from the King Ranch Wind Farm near Mc Camey, Texas"
Note they don't say "89 MW before capacity adjustment". They said "Contract for 89 MW". AE's not going to be paying the King Ranch Wind Farm if the turbines aren't spinning. They pay by the MW; and thus for you to then apply your capacity factor to the 89 MW is dishonest. It's apparently already been applied.
Posted by: M1EK at August 28, 2005 08:51 AM
"Capacity" is the nameplate rating - the MAXIMUM electrical output in kilowatts (kW). Nuclear power plants, coal plants (aka "dirt burners"), combined cycle gas turbines, photovoltaic installations, wind mills, all have a maximum capacity and nameplate rating.
"Capacity Factor" is the yearly output in kilowatt-hours divided by the 8760 hours per year times the nameplate rating ("capacity"). If a plant ran at its nameplate capacity for every hour of the year, its capacity factor would be 100%. However, they rarely do. Capacity factor tells you how productive your generation asset is in operation. High capacity factors are good.
Using the above industry standard definitions on the raw data for 2003 from the EIA:
Wind generation in Texas had a 22.8% capacity factor.
For the South Texas Project, its three year average capacity factor over 2002 to 2004 was 85.5% but that included new steam generators in Unit 1 in 2003. For 2004, Unit 1 hit a 101% capacity factor (must have been a cool, dry summer or else those improved new steam generators). Average US nuke performance is over 90%.
Austin Energy has signed up 89 MW CAPACITY (or 85) from this project but it cranks out less than 25% of the kilowatt-hours of theoritical so DELIVERS electricity equal to about 25 MW of nuclear capacity. Austin owns 400 MW of South Texas Project. I'll leave it to you to estimate the relative MW-hrs delivered by wind and by STP.
"This doesn't seem right - why would Austin Energy brag about 85 MW if it were really only 25 MW?"
Because, that's what you WANT to hear! It wouldn't be the first time a politician promised "Pie from the Sky." Remember, it's all OPM (other peoples' money) to the pols. That's the reason I spend so much time explaining the facts of the energy business to people like you. (Yes, there's hope for you yet, M1EK!)
On a more technical matter, there are two main values that a generator can sell - capacity and energy. There's some minor ones like VARs and frequency control but that's chump change. Energy is the meat-and-potatoes and is measured by kW-hrs - how much by how long. Capacity is being on the grid ready to serve load. Nuclear at a 90% capacity factor gets credit for both capacity and energy. Wind only gets paid for energy since the system dispatcher can't depend on the wind blowing when the customers turn on the air conditioners. So, Austin Energy pays for MW-hr, not MW. If they are paying your bucks for wind capacity, you're getting screwed.
So what does Austin Energy and wind farm developers know that you don't ? The EIA lists some things:
Investment tax credits, production tax credits, property tax reductions, accelerated depreciation, direct production incentives, direct investment grants, government subsidized loans, "standard offer contracts" at avoided costs, net metering, net billing, and wind set asides. A least some of these apply here.
That's why Austin Energy, a government entity, doesn't own the wind farm, just contracted for the output. A private outfit does own it and they have no doubt exploited all those government goodies to the fullest, perhaps even "montarized" the tax advantages by selling them to third parties. Out here in California, dentists and physicians owned most of the windmills as tax shelters at one time although there's been considerable consolidation.
Digging a bit, I find you're right about Federal hydro in Texas. Western Area Power Authority (WAPA) has only 98 MW of hydro in Texas on the Rio Grande and that all goes to coops and power marketers, not munis like Austin. Does the state own any dams?
"Investment in wind, as a matter of fact, far exceeds that in nuclear."
Let's say you ignore power uprates at nuclear plants (a multibillion dollar a year effort and a big chunk of our current business here at VBM), I don't have a good handle on how much people are investing in wind. I will say that technocrats at the utilities wouldn't touch wind if the government doesn't either 1) mandate it, or 2) sweeten the deal with $$$$.
That's another reason I put time into this blog - we're WASTING money on wind (and PV) when we could be doing something useful like building new nukes.
May I suggest that you chose your words more carefully - "dishonest" is pretty strong coming from a guy that needs a better grasp on the fundamentals. Maybe I should write it out in FORTRAN?
Posted by: Joseph Somsel at August 28, 2005 02:33 PM
"Austin Energy has signed up 89 MW CAPACITY (or 85) from this project but it cranks out less than 25% of the kilowatt-hours of theoritical so DELIVERS electricity equal to about 25 MW of nuclear capacity."
I repeat again, capitalization added for emphasis, from your very own link:
Contract for 89 MW of wind-generated POWER
This does not say
Contract for 89 MW of wind-generated CAPACITY
it in fact implies:
89 MW of wind-generated OUTPUT.
If you have information to the contrary, please post it. I believe my conclusion to be reasonable here barring additional information. If they had wanted to say "capacity", they could have.
"I will say that technocrats at the utilities wouldn't touch wind if the government doesn't either 1) mandate it, or 2) sweeten the deal with $$$$."
The subsidies to wind production are minimal compared to the huge subsidies to nuclear production. That's the kind of thing which makes it appear that you're being dishonest.
And yes, shielding nuclear plants from liability counts as "sweetening the deal with $$$$".
Posted by: M1EK at August 29, 2005 08:08 AM
Limiting (not shielding) the maximum liability for nuclear power plant accidents says more about US tort laws and its lawyers than about nuclear reactor risks. We carry insurance for, what, $600 million? I noticed a Vioxx verdict in Texas where the jury wants to pay out $250 million for a single "victim."
You still don't understand how power systems work or the terms of trade. May I recommend "Energy Economics" by Ferdinand E. Banks (2000) as a good introduction.
I called Austin Energy and talked with Ed Clark and Mark Kapner. Austin now has 215 MW of wind under contract (some yet to come on-line) but ERCOT (the state grid operator) only allows a 2.9% capacity credit for wind power. Austin Energy ONLY pays wind for kW-hr delivered and their experience with wind capacity factor mirrors the state rate from the EIA.
In fact 70% of the energy distributed by Austin Electric comes from coal and nuclear.
PV is heavily subsidized by Austin Electric (AE). If you want to install a PV setup on your roof, AE will pay you $5,000/kW but this will decline soon to $4,500/kW. Their experience in Austin is that a properly setup system will yield a 19% capacity factor, a darn good performance for PV! Your southern latitude and summer rains (to wash off the dust) help.
Still, a new nuke will cost about $1,500 a kW (although I think $2,000/kW is a better assumption) and will have a long-run capacity factor of over 90%. Your nuclear dollar goes a lot farther!
Back to the specifics - our before-mentioned 89 MW of wind at 22.8% capacity factor will yield 177,758 MW-hr a year. 25 MW from a nuke at 90% capacity factor will yield 197,100 MW-hr a year.
If the new total of 215 MW of wind performs as expected in Texas, it will be equal only 54.5 MW of average nuclear plant performance.
The AE guys pointed out, as I did earlier, that production tax credits and especially accelerated depreciation were big helps in keeping wind power costs down and they were proud that they had captured some of those federal subsidies for their customers in their contracts. Still, AE customers buying under their "Green Power" program paid more than the general customers although expected coal and natural gas price increases may change that.
I'd say you've got some competent operators at AE who are making some decent deals for you. Still, the best deal of all was your 400 MW in South Texas Project.
Posted by: Joseph Somsel at August 29, 2005 09:29 AM
"Still, the best deal of all was your 400 MW in South Texas Project."
No. Maybe ten years down the road, if the plant doesn't have any more outages, and it lasts longer than expected. The sunk costs in that thing are HUGE, and although the energy they get out of it NOW is very cheap (as I've said on numerous occasions), when the fixed startup costs were amortized over the life of the project so far, NOT SO CHEAP.
You continue to misrepresent the amount of subsidy for wind power. Clearly the liability shield is a far larger subsidy than the penny or two per KwH that wind gets.
Finally, from the last outage of the STNP:
"the downed Nuke, offline since March, is costing Austin Energy customers between $6 million and $8 million a month, says Ed Clark, spokesman for the city utility. (That doesn't include the $4 million in repair costs that customers of the four utilities will end up sharing.) Austin has to turn to more expensive natural-gas-fired generation, and beyond that to purchases on the spot power market, to make up the lost megawatts normally generated by STP."
While these wind turbines don't spin all the time, it's much less likely that they'll go all the way down to 0% capacity as the STNP did.
Posted by: M1EK at August 29, 2005 10:06 AM
Keep setting 'em up!
So making up power from non-nuclear sources costs more than if the nuke had made it. If you had never bought into STP, you'd be paying most of those higher costs anyway. That's not news.
And I will point out that STP didn't go completely dark. One of the two units needed a major overhaul and got it that year. The other unit chugged right along. Wind farms do tend to go completely off-line, and on a regional basis too. That's why their capacity credit is so low. When the wind stops blowing, it stops over a large gegraphic area. Wait until you have to replace the batteries in your Prius!
You seem to love power sources that work 22.8% and 19% of the time (wind and PV) and then damn nuclear when it deviates in one year from its long-running standard of 90%.
Some people are never happy.
So what is your source for claiming that the public cost of Price-Anderson is greater than the public cost of renewables subsidies? Given the claim history of the nuclear industry and the fact that nuclear plants get their premium refunds regularly, we seem to have a "good driver" rate that is zero.
The big advantage from having Price-Anderson is so that the corporations who build, operate, and service nuclear power plants are not subject to confiscation by runaway juries. Legitmate claims for damage are few and far between - there was no personal or property damage from TMI to the public, for example, except for payouts for evacuation expenses.
Posted by: Joseph Somsel at August 29, 2005 11:05 AM
"Wait until you have to replace the batteries in your Prius!"
Now I know you're just a troll.
"You seem to love power sources that work 22.8% and 19% of the time (wind and PV) and then damn nuclear when it deviates in one year from its long-running standard of 90%."
The outages PLUS the overruns PLUS the delays mean that the 'too cheap to meter' power out of The Nuke is, in fact, not cheap. Marginal power IS cheap; but the fixed cost of the plant was so darn HUGE that you'd have to run it for decades more to get back even with a natural gas plant, for instance. Or wind, if you like.
Posted by: M1EK at August 29, 2005 12:07 PM
Come on, guy, you can do better than that! I give you facts and figures and you come back with name-calling and unsubstantiated accusations (again).
So who said "too cheap to meter"? What was the cost breakdown of STP? If the fixed costs for nuclear are too high for you, why would you support your utility subsidizing generation (with your bucks) that are two to three times MORE capital intensive for the capacity and 4.5 times as expensive for the energy?
BTW, About your Prius, don't feel too bad, I once drove a girly-man car too. But hey, they are so cute and adorable! Did you get the pink one? (OK, so I'm stooping but it's just guy car talk.)
Seriously, what is the promised life for the batteries and how much and how long does it take to replace them? I understand that Toyota offers a 8 year/100,000 mile warrantee on just the batteries but what then?
Note that STP didn't need steam generator replacement until 15 years after Unit 1 commercial operation. Think your Prius batteries will hold out that long?
Posted by: Joseph Somsel at August 29, 2005 03:26 PM
"Come on, guy, you can do better than that! I give you facts and figures and you come back with name-calling and unsubstantiated accusations (again)."
"BTW, About your Prius, don't feel too bad, I once drove a girly-man car too. But hey, they are so cute and adorable! Did you get the pink one? (OK, so I'm stooping but it's just guy car talk.)"
And you expect an honest response?
I'll be charitable. People who repeat this crap about the batteries are, in my experience, universally Limbaugh-listening knuckle-dragging trolls who are desperately trying to come up with reasons why GM isn't doomed.
Toyota's supposedly never replaced one for wearing out (even the 150,000 cab example often quoted).
If and when you admit you were full of it on this and just throwing up chaff, I'll bother to respond to the rest of your posting.
Posted by: M1EK at August 30, 2005 06:45 AM
I rest my case.....
Posted by: Joseph Somsel at August 30, 2005 11:16 AM
Folks, I really appreciate your comments and frank discussion, but I don't want to allow the disagreements to become too personal-- had to delete a comment here that seemed to go a little over that line.
Please try to make sure your comments address substantive issues rather than your suspicions about the family lineage of some of the other participants.
Posted by: JDH at August 30, 2005 03:43 PM
Here's the substantive issue: Joseph Somsel is misrepresenting nuclear vs wind power, and is misleading you about hybrid technology. He's utilizing the most common tactic from the standard playbook of the hybrid haters - throw up a bunch of FUD about batteries which has long since been refuted out in the real world in the hopes that the audience doesn't know any better.
If you leave his "I rest my case" comment up, you help him in this mission.
Posted by: M1EK at August 31, 2005 07:13 AM
"Sorry, but wind is one of those public delusions that will never make a real difference except to distract us from real energy solutions and waste our money."
Don't buy this BS from the nuke guys - wind is here, and it's real; and it is being used at non-trivial amounts right here in Austin."
ROFL!! Austin gets more of its power from nukes than from wind. So what if wind has 1% ... in France nuclear power is used for 70% of generation,in Korea and Japan used for more than in the US... other nations lead us, and have better trade balances and economic and ecological records as a result.
Nuclear power is the safest, most environmentally clean source of power we have. It's the least expensive form of power at today's fossil fuel prices and has the lowest operating costs of any form of electrical generation. It's a renewable energy resource if nuclear reprocessing is used, and in any case we have the resources to run on nuclear energy for millenia.
Wow. Abundant, safe, cheap, clean energy. No wonder environmental whackos hate it.
Posted by: PJM at September 7, 2005 09:30 PM