Month: March 2012

By MoneyMorning.com.au

For years, the United States has feared an energy crisis.

That one day the U.S. would have to import nearly all its oil and gas from overseas.

If there was a disruption to the supply lines, it would lead to rising fuel prices and severe shortages. That would mean higher costs for businesses. And higher prices for consumers.

All of which could push the world’s biggest economy into recession. And cause mass civil unrest.

It would be the 1970s “oil shock” all over again. But this time… it would be much worse…

Energy Crisis Over?

But, despite those fears, the U.S. energy crisis never really happened.

Why?

Well, it may seem counter-intuitive, but it’s thanks to $100 oil.

That’s not something you’ll read anywhere in the mainstream press. But it’s true.

When oil prices were low, it was too expensive for explorers and producers to reach hard-to-get oil reserves. And the harder it is to get, the tighter the supply. And the more the West had to rely on the Middle East.

That was just fine for the Middle East oil cartel. It had plenty of easy-to-get oil.

And when oil prices soared from 2001 onwards, it seemed as though it would provide riches to the Middle East, while dooming the West (especially America) to economic depression.

In fact, some have argued the crash in 2008 was partly due to high energy costs. That may be true.

But sometimes it’s hard to look past the short term and focus on the long term. Short term, a high oil price was great for Saudi Arabia, Iran and the rest of OPEC. But it wasn’t great for the U.S. and the West.

But in the long term, the opposite will be true.

In fact, we believe the high oil price of the past 10 years has actually secured America’s energy future. And soon, it could do the same for the rest of the Western world too…

The Energy Future for Investors

You see, while high oil prices have caused short-term pain, long term it means hard-to-get energy reserves became viable.

This is where entrepreneurial and risk-hungry energy companies have started to exploit the high oil price.

In the U.S., this has mostly happened with the exploration of shale oil and shale gas reserves. 20 or 30 years ago, these resources were too expensive to consider.

That’s changed. To the extent that according to global energy giant, BP, the U.S. is set to be energy self-sufficient by 2030. And soon after it will become a net energy exporter.

That’s an amazing shift from where the U.S. was just a few years ago.

And so now, the race is on to sideline Middle Eastern influence in energy markets.

You see, while a high oil price is good news for big producers in the Middle East, it’s also bad news. Simply because a high oil price makes other projects viable.

And that means more price and supply competition. It explains why Saudi Arabian oil minister, Ali al-Naimi is so keen to make sure the market still knows who’s in charge.

As Bloomberg News reports:

“Saudi Arabia said it could potentially raise output capacity to 15 million barrels a day, from 12.5 million barrels a day, using new oil fields if needed.”

That’s all talk.

Saudi Arabia doesn’t really want to knock down the oil price. It just wants to make investors, explorers and producers think it can knock down the price.

Because while lower oil prices are actually better for the Middle East in the long term (because it makes competing oil fields less viable), in the short term, Middle East dictators like high oil prices because they can buy more trinkets (football teams, London and New York property, and so on).

And because they’re afraid of what could happen if prices fall and they can no longer afford the handouts they’ve promised their oppressed citizens.

Under-Explored East Africa

The effect is that explorers are pushing the boundaries of the exploration frontier. For years, when oil was just USD$20 per barrel, certain areas of the world were no-go zones. They were politically unstable…geologically inaccessible… or just plain not worth the risk.

But with oil at USD$100 per barrel, the reward has started to offset the risk. Of course, it’s still risky. Very risky.

But the risk is now worth taking. Norwegian oil company, Statoil is exploring in an almost untouched area – the east coast of Africa. To highlight just how risky it is, Statoil has hired armed security guards to patrol its offshore assets to protect them from pirate attack!

But even machine-gun toting pirates can’t keep the explorers away.

And why would they? The east African coastline is almost completely unexplored when it comes to oil and gas.

That’s highlighted by these amazing numbers from U.K-based explorer and producer, Afren plc…

For every 70 wells drilled in North, West and Central Africa, only one well has been drilled in East Africa.

Oil company, Africa Oil, makes a similar comparison. This time comparing the triangle of Kenya, Somalia and Ethiopia with the North Sea and the Suez Basin:

Fewer than 200 wells drilled, compared to 7,706 for the North Sea and Suez Basin. That’s just 2.5% the number of the wells drilled, in an area 10-times larger!

Despite the risks (including from pirates), exploring this untouched frontier is already starting to pay off. As the Financial Times recently reported:

“Statoil set the oil industry abuzz late last month when it announced it had found large volumes of natural gas off the coast of Tanzania, confirming east Africa’s reputation as one of the energy world’s most promising new frontiers.”

The Biggest Energy Shake-Up in 20 Years

The idea of frontier energy plays (whether it’s a geographical or technological frontier) is something we’ve focused on in Australian Small-Cap Investigator.

The idea that explorers and producers are doing things and going places that could shake up the entire world energy market.

This is attractive, because as a speculative investor, you want to be at the turning point of change. Because if you can identify a change in direction early – or as it happens – that’s where you can potentially make your biggest returns.

And as we see it, one of the biggest changes in direction is happening in energy markets right now. If you’re quick, there’s still time to get involved.

How?

We’re preparing a special report on the subject. So look out for it over the next couple of weeks.

Cheers.

Kris.

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By MoneyMorning.com.au

Political risk is being blamed for driving up oil prices. The looming threat of Iran, the constant risk of further money-printing by central banks, and concerns over unrest in Saudi Arabia are three that we’ve covered.

However, it’s worth pointing out one political risk that – in the longer run – could end up making crude oil cheaper. We’re talking about Venezuela.

Hugo Chavez is sicker than previously thought. This could force him to stand down – creating a power vacuum. And even if he continues in office, he could lose the election in October.

Chances are, any change in government could result in a major boost for oil production in Venezuela. It might even help to curb the power of both Iran and Saudi Arabia. Here’s why.

A Tale of Two Economies

The experience of Brazil shows how developing countries can take advantage of a commodity boom. In the last decade, Brazil has paid down its debts, becoming a net creditor. It has also invested in roads and ports.

This has led to a virtuous circle of increased economic growth, rising living standards and increased foreign investment. Adjusted for prices, Brazil is now the ninth largest economy in the world. Towards the end of last year, credit rating agency Standard & Poor’s upgraded its debt.

Venezuela has done exactly the opposite. Since Chavez came to power in 1999, he has wasted oil revenue buying votes and supporting countries such as Syria and Cuba. His decision to take 300 private companies into public ownership – many without compensation – has scared investors away.

The oil industry has been hit hard by Chavez’s policies. Not only did he reverse plans to let the private sector have a greater role, he raised production taxes and fired a large number of oil workers for political reasons – starving the state oil company of talent.

The ‘Chavez effect’ on oil production is easy to demonstrate: in 1998, when the price of crude oil hit a low of under $11 a barrel, Venezuela produced 3,167,000 barrels of crude oil a day. Twelve years later, despite record prices, output was only 2,090,000 barrels a day – nearly a third lower.

Could Chavez Step Down?

Despite these economic failures, Chavez was re-elected in 2000 and 2006. He runs what some call a ‘soft dictatorship’. Although the law allows free speech and free elections, these rights do not exist in practice.

Those who speak out against the regime may lose their jobs or have their firms taken over by the state. Critical papers and TV stations have been banned. Voters also face intimidation while the opposition has been heavily divided. This has made it hard to effectively challenge Chavez.

However, these things may be about to change. The opposition has finally united behind a single candidate, Henrique Capriles. Despite high levels of official pressure, huge numbers of people turned out to vote in the opposition primary.

More importantly, Chavez may not make it to the election. Last year doctors found that he had cancer. Ray Walser of the Heritage Institute tips henchmen Diosdado Cabello, Rangel Silva and Adan Chavez – Hugo’s brother – as possible replacements. But Andrew Cawthone of Reuters believes that “none of the figures around him has his charisma, political and rhetorical skills.” Overall, says Walser, “if Chavez dies, I think the chances are good for a reformist. Even if he does not I think we could see the Bolivarian movement self-destruct.”

Of course, even if Chavez dies or loses the election there is a chance that his cronies could still cling to power. In 2002, a popular uprising forced him out of office, only to see pro-Chavez forces remove his successor from power. Since then Chavez has put his supporters in key military positions. He has also devolved power to political militias, and worked with Russia, China and even Iran to arm himself to the teeth. A civil war could stop all output – increasing the price of crude.

It’s All About the Long Run

Even if Chavez goes in October, there will be little short-term impact on oil prices. When he leaves office, the state firm PDVSA is also likely to be sued over the seizure of assets in 2008 and 2009, delaying any investment. Foreign firms are likely to hold back until the political situation has calmed down.

However, the ability of a free Venezuela to lower oil prices in the long run is huge. The US Energy Information Agency (EIA) thinks that Venezuela has the second largest levels of proven reserves in the world. Oil cartel Opec even claims that it could have more crude oil than Saudi Arabia.

A committed private sector player could even find the huge amount of sea oil that is not currently viable. This would bring the total amount up to 513 billion barrels.

Clearly, this isn’t a story that will have an instant impact on investors. But in the long run, Venezuela could be a ‘game-changer’ for oil prices. We’ll be keeping a close eye on it and watching for potential opportunities.

Matthew Partridge

Contributing Editor, MoneyWeek (UK)

Publisher’s Note: This is an edited version of an article that first appeared in MoneyWeek (UK).

From the Archives…

A Better Inflation Bet Than Gold?

2012-03-23 – Kris Sayce

3D Printing: How “Desktop Factories” Will Create the Next $1 Trillion Industry

2012-03-22 – Michael Robinson

How to Invest in the Fastest-Growing Energy Business of the 21st Century

2012-03-21 – Aaron Tyrrell

Why You Should Build Your Wealth Using the Biggest BRICS Possible

2012-03-20 – David Thomas

Oil Getting Ready For Its Next Rally

2012-03-19 – Dr. Alex Cowie

For editorial enquiries and feedback, email [email protected]

How a ‘Venezuelan Spring’ Could Push Down Oil Prices

By MoneyMorning.com.au

It’s not often that I feel sympathy for a politician.

But you have to feel for Spain’s prime minister, Mariano Rajoy. Three months into his government, and he’s facing a general strike from the unions on the one hand, and a potential buyers’ strike from investors on the other.

The unions are striking because they’re fed up with economic reform that might reduce their power. Investors are threatening to stop buying Spanish government debt because they want even more reform.

What’s a prime minister to do? And more importantly, what does his dilemma mean for you?

Spain – The Weakest Link in the Eurozone

Spain’s economy – more so than Italy’s – has always been the major fault-line in the eurozone.

Sure, Greece causes a lot of noise and commotion. There was always the chance that Greece would throw a hissy fit and pull out of the euro unilaterally. Better-behaved small countries like Portugal and Ireland barely warrant a mention in the papers these days.

Even so, people always knew that in terms of size, Greece by itself didn’t matter. It was the knock-on impact that everyone worried about. The big fear was always that the market would say to itself, “If Greece can go bust, maybe it will be someone who matters next time.”

So the point of all the bail-out packages wasn’t so much to save the smaller countries. It was to prevent fears about the small countries from spreading to the “too big to fail” ones.

For a short while, it seemed as if the European Central Bank’s LTRO (Long-Term Refinancing Operation) had done the job on that score. Now it’s starting to look as though that was over-optimistic.

Investors are fretting about Spain again. The government’s cost of borrowing over ten years has risen by around 0.5 percentage points since the start of this month.

The trouble is, Spain missed its 2011 budget deficit target (in other words, it ended up overspending by even more than expected). As a result, it set itself a softer target for 2012.

Markets don’t like to see this sort of target slippage. For now, they don’t care so much when it’s the US or the UK. Those countries have their own currencies and central banks who are prepared to print as much money as it takes to pay off their creditors.

Europe isn’t prepared to do that (although it might be getting closer to doing so). And as private investors in Greek debt have discovered to their cost, there’s no guarantee that a eurozone country with problems will make good on its debts. So naturally, investors are warier of European government debt than perhaps they once were.

Spain’s Big Economic Problems
– Debt and Unemployment

The Spanish economy’s big problem is private sector debt, which might end up on the government’s balance sheet. Spain had a massive property bubble. The fall-out from that bubble continues. Prices haven’t been allowed to fall as far as they really need to. And that means no one can be sure just how much bad debt is still sitting on the banks’ books.

When banks don’t know just how bad a state their balance sheets are in, they stop lending. That makes it even harder to dig an economy out of trouble.

Spain’s economy also has the usual European problem of overly restrictive labour laws that discourage hiring. This is something the government is trying to tackle. The general strike today is partly about an overhaul of labour rules. A new bill passed in February makes it easier to cut wages, reduces the power of the unions, and could cut the cost of firing staff.

Given that unemployment is standing at 23%, and an incredible 50% among young people, you have to wonder who’s left to go on strike. As one Spanish political communications professor tells Bloomberg, the unions “have a lot at stake as Spanish society is very much questioning their role… [They] don’t represent the unemployed.”

This is one of the rarely-appreciated benefits of having a ‘hard currency’ like the euro. When it’s harder to take the easy way out (allowing your currency to weaken) then sometimes you are forced to take genuinely tough measures to change the way your economy works.

Of course, the trouble is that it takes a strong government to cope with the resulting social upheaval. And if your economy is in such a deep hole that people don’t get to see the benefits of reforms, only the pain, then it’s even harder to push reform through.

So What Happens Next for Spain?

Spain’s economy can’t be allowed to go bust. And it won’t be. We’re going to see the usual back and forth about bail-out funds and arguing between the Germans and the rest of Europe. But the most likely outcome still seems to be some form of European quantitative easing. The ECB has already taken a pretty big step in that direction with the LTRO.

But what does all this mean? The short answer is that the future for Europe holds continued loose monetary policy, and a banking system in many countries that’s largely reluctant to lend.

John Stepek

Editor, MoneyWeek (UK)

Publisher’s Note: This is an edited version of an article that first appeared in MoneyWeek (UK).

From the Archives…

A Better Inflation Bet Than Gold?

2012-03-23 – Kris Sayce

3D Printing: How “Desktop Factories” Will Create the Next $1 Trillion Industry

2012-03-22 – Michael Robinson

How to Invest in the Fastest-Growing Energy Business of the 21st Century

2012-03-21 – Aaron Tyrrell

Why You Should Build Your Wealth Using the Biggest BRICS Possible

2012-03-20 – David Thomas

Oil Getting Ready For Its Next Rally

2012-03-19 – Dr. Alex Cowie

For editorial enquiries and feedback, email [email protected]

Why Spain’s Economy is the Next Big Problem for the Eurozone

With Apple’s (NASDAQ:AAPL) much anticipated smart TV rumored to hit stores this year, the tech company’s gadget manufacturer is betting on its success.Hon Hai Precision Industry took around a 10 percent stake of 100-year-old Japanese firm Sharp, a maker of advanced televisions. Hon Hai’s own billionaire founder Terry Gou even put is own money in the deal that could position the Taiwan firm to push for orders to make the Apple TV, potentially taking the business from other TV manufacturers such as LG Display. This is a gamble on Hon Hai’s part though. This is because there is no guarantee the company will get Apple’s orders.Apple’s new TV, being called the iTV by many, is rumored to be 42-inches and may have voice control via the Siri technology. However, all of this is still speculation and we won’t know what the TV will have until its unveiling most likely sometime later this year.

Tom Jenkins, author of a key report on innovation, responds to the federal budget’s focus on spurring business innovation and development

This is what’s in the news for Wednesday March 28, 2012. The Wall Street Journal reports Goldman Sachs Group (NYSE:GS) agreed to change its board structure in order to persuade a union pension fund to drop a shareholder proposal that could have cost CEO Blankfein his job as chairman. The Wall Street Journal also reports the Airlines for America trade group representing the largest U.S. carriers called on the Obama administration to take action against the EU in a bid to end the bloc’s carbon trading market. Reuters reports Facebook CEO Mark Zuckerberg wants about $5B from Wall Street investors, but they won’t see much of him, and it could become an issue because of the control he exerts over Facebook via special shares. Finally, Bloomberg reports Transcoean (NYSE:RIG), the world’s biggest owner of offshore rigs, stands to benefit the most this year from a surge in demand as rental rates for ultra-deep-water rigs should climb 28% to a record $714,000.

Bargain hunters are wise to pay careful attention to insider buying, because although there are many various reasons for an insider to sell a stock, presumably the only reason they would use their hard-earned dollars to make a purchase, is that they expect to make money. Today we look at two noteworthy recent insider buys.

By JW Jones – www.OptionsTradingSignals.com

Welcome back to the world of options. My reality exists in three dimensions and far more combinations of potential positions than does the one-dimensional world of the stock trader.

The view from my turret is ruled by the three primal forces of options — time to expiration, price of the underlying, and implied volatility. Consider for a moment the fact that each of these factors can independently impact a given option.

Multiply this by several available expiration dates and strike prices; add in the fact that individual option positions can include a variety of short and long positions at different strikes and expirations, and the potential combinations that make up an option position in a single underlying can approach a very large number.

For those traders first beginning to navigate this unfamiliar world, I think it is important to understand trade selection is manageable. There are certain families of trades that are unified by similar characteristics.

It is important to become familiar with the various trade constructions available to the knowledgeable options trader. Grouping the potential trades into related groups dramatically reduces the number of trade setups you must consider before entering a new trade.

If you are familiar with the various trade constructions, it makes discussion of a specific family member whom we may consider for employment in a trade far easier to understand.

Description of the family characteristics will take a little time, but it forms the framework on which we can hang the individual trades we will discuss in future postings.

I want readers to begin to become familiar with these patterns because it is these families of multi-legged option trades that we will return to on a regular basis to consistently perform for us.

Let me begin discussion of the various families by pointing out the redheaded stepchild of the trade constructions available. This family member, the single-legged position of being long either a put or call, is not completely without utility.

The reason for its seldom use is that for the knowledgeable options trader, this position rarely represents the best risk / reward structure given the variety of available trade constructions.

One basic and important family is that of the vertical spread. We will return several times to this family not only because of its utility in its basic form, but also because these spreads form the basic building blocks for more advanced spreads such as butterflies and iron condors.

The basic vertical spread is constructed by both buying and selling an option of the same type, either puts or calls, within the same expiration series. This is a directional spread with one breakeven point that reaches maximum profitability at expiration or when the spread has moved deep in-the-money.

It has a defined maximum profit and defined maximum loss when established. The spread is used to trade directionally in a capital efficient manner and largely neutralizes impacts of changes in implied volatility.

There are four individual vertical spread family members — the call debit spread, the call credit spread, the put debit spread, and the put credit spread. Each has its distinct and defining construction pattern. These are not the only names by which these spreads are known. Trying to keep independent option traders confined to a single set of terminologies is like trying to herd cats — it is not going to happen.

For this reason, the additional confusing and duplicative names for these spreads include bull call spread, bear call spread, bear put spread, and bull put spread. To make matters even more confusing, traders often refer to “buying a call spread” or “selling a put spread.” This multiplicity of names for the same trade structure is mightily confusing to those getting used to my world.

I am a visual learner and find that a picture is worth well more than the often cited thousand words. When I review in my mind the various option families available to use in trade construction, I think of the characteristic family portrait of each as displayed in the profit and loss, or P&L, curve.

Attached below is the first in our series of family portraits, but remember within this framework is abundant room for individual variation.

This particular example is a call debit spread, a bullish position in Apple (AAPL).

We will see trades displayed in this format with many variations as we meet the different families. The solid red line represents the profit or loss at expiration. The dotted line represents the P&L curve today and the dashed line the curve halfway to options expiration from today.

In future articles I will discuss other trade constructions that are regularly employed by experienced option traders. Until then, be sure to manage your risk accordingly.

In 2012 subscribers of my options trading newsletter have won 12 out of 13 trades. That’s a 92% win rate,  pocketing serious gains with the trades focusing only on low risk credit spread options strategies.

If you are looking for a simple one trade per week trading style then be sure to join– www.OptionsTradingSignals.com

Jw Jones

This material should not be considered investment advice. J.W. Jones is not a registered investment advisor. Under no circumstances should any content from this article or the OptionsTradingSignals.com website be used or interpreted as a recommendation to buy or sell any type of security or commodity contract. This material is not a solicitation for a trading approach to financial markets. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This information is for educational purposes only.

By OilPrice.com

Rising geopolitical tensions and high oil prices are continuing to help renewable energy find favour amongst investors and politicians. Yet how much faith should we place in renewables to make up the shortfall in fossil fuels? Can science really solve our energy problems, and which sectors offers the best hope for our energy future?

To help us get to the bottom of this Oilprice.com spoke with energy specialist Dr. Tom Murphy, an associate professor of physics at the University of California.

Tom runs the popular energy blog Do the Math which takes an astrophysicist’s-eye view of societal issues relating to energy production, climate change, and economic growth.

In the interview Tom talks about the following:

Why we shouldn’t get too excited over the shale boom

Why resource depletion is a greater threat than climate change

Why Fukushima should not be seen as a reason to abandon nuclear

Why the Keystone XL pipeline may do little to help US energy security

Why renewables have difficulty mitigating a liquid fuels shortage

Why we shouldn’t rely on science to solve our energy problems

Forget fusion and thorium breeders – artificial photosynthesis would be a bigger game changer

OilPrice.com: Whilst you have proven that no renewable energy source can replace fossil fuels on its own. Which source is the most promising for providing cheap, abundant, clean energy?

Tom Murphy: First let me say that I think “proven” is too strong a word. But yes, I have certainly indicated as much. When it comes to cheap, clean, and abundant, I am drawn to solar. I don’t care if it’s two or three times the cost of fossil fuel energy that’s still cheap. Abundance is unquestionable, and I don’t see manufacturing as being inordinately caustic. The fact that I have panels on my roof feeding batteries in my garage only confirms for me the viability of this source of energy. Wind and next-generation nuclear also deserve mention as potential large-scale sources. Yet none of these help directly with a liquid fuels shortage.

OilPrice.com: Bill Gates has stated that innovation in energy can take 50-60 years to take effect. How then do you believe that that the ARPA-E’s short term objectives for projects can be helpful for solving current energy problems?

Tom Murphy: I applaud any effort that takes our energy challenge seriously, and gets boots on the ground chasing all manner of ideas. If nothing else, it raises awareness about our predicament. At the same time, I worry about our technofix culture with a tendency to interpret news clips about ARPA-E projects to mean that we have loads of viable solutions in the hopper.

Many of the ideas are just batty. And right to the extent that implantation of innovation can take decades, we may find ourselves in a squeeze wondering where all those funky news blurbs went.

OilPrice.com: What do you think is the most exciting energy science or energy technology being researched at the moment?

Tom Murphy: As cautious as I am about techno-giddiness, I do have the giggles for artificial photosynthesis. Combining universally available sunlight (in my own backyard) with a liquid fuel that can support personal and commercial transportation on land, sea, and air with minimal changes to infrastructure is too juicy for me to resist. More so than thorium breeders or even fusion, this is a real game-changer. The catch is that our finite periodic table may not avail itself to our wishes. Groups are now shaking the periodic table by its ankles, hoping that some new and unappreciated catalysts clank to the floor. I’m rooting for them, but at the same time advocate not relying on its realization.

OilPrice.com: A recent report stated that replacing all coal based power stations with renewable energy, would not affect climate change, and in fact after 100 years the only difference would be a change of 0.2 degrees Celsius. What are your views on climate change?

Tom Murphy: I see climate change as a serious threat to natural services and species survival, perhaps ultimately having a very negative impact on humanity. But resource depletion trumps climate change for me, because I think this has the potential to effect far more people on a far shorter timescale with far greater certainty. Our economic model is based on growth, setting us on a collision course with nature. When it becomes clear that growth cannot continue, the ramifications can be sudden and severe. So my focus is more on averting the chaos of economic/resource/agriculture/distribution collapse, which stands to wipe out much of what we have accomplished in the fossil fuel age. To the extent that climate change and resource limits are both served by a deliberate and aggressive transition away from fossil fuels, I see a natural alliance. Will it be enough to avert disaster (in climate or human welfare)? Who can know – but I vote that we try real hard.

OilPrice.com: Do you think that the shale gas boom will lead/has led to reduced investment in alternative energy, and could therefore limit the advancement of alternative energy and its mainstream implementation?

Tom Murphy: I do worry about the sentiment that “our problems are solved” based on a very short history of tapping low-hanging shale-gas fruit. David Hughes presented a sobering report to put these claims in perspective. Even though it is clear that shale gas will contribute to our net energy demands in an unanticipated way, I worry that A) extrapolations based on the “gusher” equivalents is risky; B) natural gas is not a direct answer to a liquid fuels shortage; and C) the associated exuberance can stifle the imperative that we have an all-hands-on-deck response to the looming challenges.

OilPrice.com: What are your thoughts on Biofuels? Will they ever be able to compete with fossil fuels? If you were to pick one that you think has the best potential which would it be?

Tom Murphy: The scale of our fossil fuel use prohibits replacement by biofuels at a substantial level. They certainly can and do play a role, which I anticipate will increase with time – up to a point. The energy return on energy invested (EROEI) tends to be pretty poor (less than 10:1) even for the best examples like sugar cane. And it’s a heck of a lot of year-in-year-out work to manage harvests – much depending on the increasingly erratic weather. Of the biofuels, I am most intrigued by algae: mainly because it can be grown and moved about as a liquid medium in sealed tubes. That said, I worry about gunking up the works with bio-sludge, the algae contracting disease, and the fact that we have not yet found/created a viable hydrocarbon-excreting critter.

OilPrice.com: Following the Fukushima disaster many have been calling for the end of nuclear power. What are your views? Should we abandon nuclear power? Are we in a position to abandon it?

Tom Murphy: I don’t think Fukushima should be seen as a reason to abandon nuclear. True, nuclear has its challenges, its risks, its hazardous wastes. But it’s one of the few things we know how to do that can scale. Of course conventional nuclear again stares right down the barrel of limited resources, which is a déjà-vu we would rather not experience. So next-generation concepts, particularly thorium are preferable. Then again, we are not prepared to execute such schemes this moment, so they are not much help in a near-term crisis. And ultimately, like so many things, nuclear is yet another technique to create electricity. That’s not where the pinch will come. I think nuclear will remain part of our energy mix in any case, so I don’t think Fukushima spells an end.

OilPrice.com: What are your thoughts on the Keystone XL Pipeline? Is it vital for America’s energy security?

Tom Murphy: Canada produces something like 1 million barrels per day (Mbpd) of oil from tar sands. This is about 5% of U.S. demand. Ambitious plans call for 5 Mbpd production, but even this does not amount to half of our current oil imports. So could it play a role in America’s energy security? Possibly. Will it guarantee it? Not likely. We should remember that Canada is a separate country. In a global petroleum decline scenario, how much of that oil will Canada sell to the U.S.? How much will China pay for it? How much of this precious lifeblood will Canada decide to keep for themselves?

I won’t say that I’m opposed to the pipeline, but like every other “solution” out there, it’s complicated, and not a crystal clear win.

OilPrice.com: I’ve come across many comments and articles online about human ingenuity and that we shouldn’t be too concerned with peak oil and fossil fuel depletion because our scientists are surely close to an energy breakthrough. Although this thinking is dangerously naive i was hoping to get your opinion on which technology you think is closest to providing this possible breakthrough?

Tom Murphy: I worry about the strength and pervasiveness of faith in science and technology to fix our problems. And I say this as a scientist who is no stranger to high-tech design and development. We deserve better than blind hope that someone somewhere will pull off a transformative energy miracle. Some things peak. We should acknowledge that once our inheritance is spent, we may not live like the kings we want to be. I can hope along with

the rest of us that this isn’t true. But I don’t feel like gambling: I’m the type to cash out when I’m a bit ahead, rather than keep betting my purse that the next hand will hit paydirt. More concretely, I can say that most physicists I meet in departments around the country are not aware of peak oil and associated challenges. Hardly anyone I meet is working on the problem. No one (i.e., funding) has told us this is a real problem that deserves our full attention. And I sense that it would be political suicide to do so. So which technology do I think will save our bacon? Most ideas on the table provide electricity, which does not address our most critical need. As I said before, artificial photosynthesis hits the sweet spot, and batteries are tremendously important. But let’s also prepare a plan B that may be less about techno-fixes and more about behaviors and attitudes.

OilPrice.com: Giant batteries the size of a football pitch are being constructed in order to store energy from renewable sources and release it during times of low power production, for a more consistent supply. Do you think this is the future for renewable energy, or would we be better served creating a giant grid, linking many different renewable sources together so that they can cover for each other?

Tom Murphy: Batteries work, we know. I think we absolutely should be gaining experience on the practical issues/economics of giant batteries. Making large-scale storage more practical resolves the single-biggest technical barrier to widespread solar and wind deployment. I am sceptical about giant grids especially the global variety based on the simplistic notion that “It’s always sunny somewhere.” I am more attracted to resilient local solutions. Transmission loss today tends to be less than 10% on an old, dumb grid. High-voltage DC would reduce this loss somewhat, and the science fiction superconducting grid would eliminate loss (until the inevitable cryogenic failure vaporizes the lines; and let’s not ignore the considerable energy investment needed to keep the lines at cryogenic temperatures). On a moderately ambitious scale, a continental grid will reduce the need for storage, but it will not eliminate it. We still benefit from super-sized batteries.

OilPrice.com: What do you think about the idea that it would be more useful improving the efficiency of current power systems, rather than researching new types of energy production?

Tom Murphy: Efficiency is a lovely thing, and it has always been seen as a lovely thing. Because of this, efforts to improve efficiencies of the big stuff like power plants have been continuous. And we have seen improvements at the level of 1% per year. In rare instances, One can get dramatic leaps via co-generation strategies, but that relies on power plants being situated near demand for waste heat. So realistically, I think incremental efficiency improvement does not have nearly enough bite to “solve” our problem, and in any case tends to be limited to factor-of-two level changes even in the long term. We need much more than that, in the end. I have found behavioural modification to be far more effective, achieving factors of 2, 3, 5, etc. in short order without grossly changing lifestyles.

OilPrice.com: Oilprice.com published an article a few months ago on space-based solar plants. Do you think that constructing space-based power plants could be a valuable option in the future?

Tom Murphy: I have to admit to being somewhat baffled by the concept. Why make solar power even more expensive with exorbitant launch costs (which only increases as energy costs increase), placing the equipment in an unserviceable, hostile space environment (cosmic rays, debris) while only gaining a factor of five in night/weather avoidance? The microwave link is no joke either. The required dishes are huge for both diffraction and ground safety reasons. I have just made a detailed post on Do the Math on Spaced based Solar. But let’s think about storage, and save ourselves absurd machinations.

OilPrice.com: Despite the rather public failure of Solyndra and other less well known companies investments in green energy are growing. Which sectors would you be willing to invest in and do you feel offer the greatest potential to investors? Wind, solar, wave, geothermal? Or none of the above?

Tom Murphy: I am not myself an investor, but I would surely like to see more funding for battery research and development, and for anything that can synthesize liquid hydrocarbons using a non-fossil input. Investors want to make money, but I’d rather tackle the important problems. Sometimes timescales make these two goals incompatible. Can you make money on wave or geothermal? Possibly. I’ll leave that for others to determine.

But I’m not too excited about niche solutions, which may distract us from the real prizes to the extent that they exist.

OilPrice.com: What role do you think the smart grid has to play in the future?

Tom Murphy: I’d sooner have smart people than a smart grid, deciding that it’s in our collective interest to scale back energy use at a personal level. Failing that, a smart grid helps distribute demand in such a way that intermittent renewables are more easily accommodated (using energy when it’s available). Some things may work well like this, but I don’t think this is a realistic way to hide variable energy supply from the consumer. They may be irked that they lose control over when the laundry decides to start, possibly resulting in clothes smelling of mildew, or that they are not present to fold clothes at 2 AM when the dryer is finished. Loss of control may not play well. If, instead, informed people accepted limitations of future energy supplies, and modified their own behaviour accordingly under their own control, we would break the habit of people taking energy for granted: an attitude that the smart grid attempts to preserve. We want greater personal awareness of energy, not less.

OilPrice.com: Cold Fusion (or LENR) has been deemed impossible for many years, yet Andre Rossi claims to have mastered it. However he won’t let anyone examine his E-Cat machine, and some believe that it may be a fraud. Where do you stand? Do you believe that he has mastered an “impossible” science, or that the claims of fraud have merit?

Tom Murphy: This appears to be outside the domain of known physics, so I’ll not comment further.

OilPrice.com: The Kardashev scale is a method of measuring an advanced civilization’s level of technological advancement. A Type I civilization has achieved mastery of the resources of its home planet, Type II of its solar system, and Type III of its galaxy. Whilst just a bit of fun, do you think that in the future, whether it be millennia or eons, we will ever reach Type I or Type II, or do you believe it impossible?

Tom Murphy: I think it is fallacious to think that humans will master the energy flow and resources even of Earth. Successful examples of long-term sustainable living tend to see people living as part of the energy/resource flow, but not as masters of it. We are only good at mastery in our fertile imaginations. The real world tends not to care what we can imagine. Titanic hubris. I would rather see humans try to live in equilibrium with natural services, rather than attempt foolhardy domination. Our attempts thus far are not very impressive: we’re failing to hold it all together even now.

OilPrice.com: Popular focus is on the global energy crisis, but an equally important crisis is looming. Rock phosphate is vital for creating fertiliser, which in turn is necessary for producing large quantities of today’s food. It is depleting at a rate similar to crude oil, which could soon mean that the world will experience food shortages. How do you believe this problem could be solved? Should more media attention be focussed on the potential food shortage of the future?

Tom Murphy: Sigh. Another problem we must “solve.” How about this solution: one billion people on Earth would obviate many of our problems. Any takers? Any acceptable path to this state? The original question does remind us that our problems are numerous. It is no surprise that the phenomenal surge in population and living standards/expectations in the last few hundred years – both a direct consequence of exploiting our fossil fuel inheritance – should be exposing fault lines every which way. Aquifers, soil, forests, fisheries, coral, ice pack, and species counts are in decline. The very simple answer staring us in the face, yet somehow unthinkable, is to consume far fewer resources and aim to reduce population. Hopefully we can do this in a more controlled way than nature may enforce if we ignore the myriad warnings. This “solution” will no doubt offend many, but just because we want to continue growth does not mean we can. We need to take control of our destiny, and that starts with us as individuals. Decide to reduce; mentally abandon the growth paradigm. Let’s maximize our chances of preserving our accomplishments by easing off the gas for a bit.

OilPrice.com: Oil companies are mainly driven by the aim of pleasing shareholders, which generally means pursuing large dividends and high share prices. Surely this profit seeking mentality is detrimental to the advancement of green energy technologies, as the companies have little incentive to seriously invest in new types of energy whilst old, cheaper types still exist. What are your views? Is there any way to change this dynamic?

Tom Murphy: I sense that plenty of people are waiting to cash in on green energy, and investment begins to flourish when energy prices soar. But as soon as high energy prices trigger recession, demand flags, prices crash, and the volatility wipes out many green efforts. A year or two of high prices is simply not long enough for a transformation, which takes decades to accomplish. I hope that we can tolerate smoothly and continuously escalating energy prices for conventional sources, but those high prices hurt large segments of the (conventional) economy and self-generate volatility. In principle, governments could “artificially” keep energy prices high enough to maintain the impetus for developing alternatives, pumping the revenue into a national alternative energy infrastructure. But governments are bound by voters who simply don’t want sustained high energy prices. I don’t know how to evade this dynamic in a functioning democracy, except via education about the challenges we face – including a sober confrontation of the fact that failure is a likely result of our not bucking up to the challenge.

OilPrice.com: How would you best describe the current situation with oil reserves? Do you believe we have reached Peak oil or are pretty close to it?

Tom Murphy: The simple observation that a peak in global discovery in the 1960’s must be followed by a peak in production some decades later is unassailable. So we know the decline is coming, as most major oil-producing countries have experienced already. That part is easy, it’s the when that is always hard. The fact that the current petroleum production plateau has hardly budged through factor-of-three price fluctuations is very suggestive that no one has spare capacity at the ready. If we can maintain high prices without re-experiencing a spike and crash like we did in 2008, we might see sub-prime production come online fast enough to maintain the plateau. But A) this might not happen, and B) it’s not a resumption of production growth. So I would not at all be surprised if a decline makes itself clear by the end of this decade. I, would, on the other hand, be surprised to see a 5% increase of conventional petroleum production over recent (plateau) levels. But in the decline case, volatility, deliberate withholding, recession, unemployment, wars, etc. can stir in enough complexity to hide the physical truth from us for years. Will it be obvious to the world when we pass into the land of inexorable decline?

This interview is cross posted with Oilprice.com

Thank you Tom for taking the time to speak to us. For those who wish to see more of Tom’s work please take a moment to visit his blog: Do the Math

By. James Stafford of Oilprice.com

As the saying goes, there are many possible reasons for an insider to sell a stock, but only one reason to buy — they expect to make money. So let’s look at two noteworthy recent insider buys.