Fractals of Change

The Internet’s Next Killer App

Fred Wilson, blogging about the economic disruption caused by high oil prices, says: "And the web clearly has a role to play in all of this too. More on that later."

I look forward, as always, to seeing what Fred has to say but a smart reader Rajesh Raut jumped the gun in a comment on my post Passing the BTU:

"Why do we need smart meters to use off peak electricity?

"Take a space heater, connect the on/off switch to a small computer with Wi/Fi access. Have the computer read a web page once an hour and if the price of electricity on the page is above a certain value (settable by the user) turn the heater off. With a little more work you can have it read the outside temperature and ignore the price of electricity if the temperature is too low.

"Why wait for the electric company to grow a brain? It could be a long wait."

As Rajesh points out, the Internet (and the web as part of it) have a huge role to play in both immediate coping with the current emergency and a long term response to a world with more affluent people and a basically fixed supply of fossil fuel (oil production WILL grow in response to higher prices but, absent a catastrophe, demand for energy will grow even faster). Communication and computing are the key both to using existing energy sources more effectively and the very necessary switchover from oil to electricity first for home heating and manufacturing and , only slightly later, for transportation.

Electricity, of course, is not an energy source; it's a mechanism for energy delivery. The real substitution is whatever fuel is being use to generate the electricity for oil. Many of these fuels – coal, nuclear from existing plants, hydro from existing dams, solar and wind in the right configuration – are already cheaper than oil even given energy losses in generation and transmission. However, peak electricity is generated from natural gas, propane or oil so is less efficient in most cases than just burning the fossil fuel at the end point where you need heat or motive power.

So the trick is to use off-peak electricity better at the same time as we develop more baseline capacity. Because different parts of the world are suitable for different types of generation, a very smart grid – with the parallel Internet carrying the data required to be smart – is necessary both so that local price signals will be correct and actionable and so that electricity can be wheeled from areas of surplus to areas of deficit and routed around inevitable outages.

Consistent with Rajesh's vision, much of the price signaling will be between the grid and its endpoints in businesses and residences with no human intervention required. Energy use will be the first massive D2D (Device to device) application on the Internet. Energy is the next "killer app". It will be energy use that will force 100% broadband connectivity and even pay for getting to the hardest to reach places – all we're talking about is reaching all the places the electrical grid already goes.

My only quarrel with Rajesh's comment is that it is naïve. Some people may be willing to regulate their own energy use for the common good, but significant self-regulation of demand won't happen without prices which reward those who use energy when it is in surplus and penalize those who use it in when it is scarce. We need the smart meters both so that everyone doesn't have to hack together his or her own solution and to charge appropriately for usage.

Related posts:

 Heads in the Sand

 Passing the BTU

 Electric Heat Savings Estimator

 Energy Saving Devices

 Fuel Selector Helper

 Energy Tipping Point – Part 1

 Should You Be Heating with Electricity?

• Geothermal Heat Pumps and Saving the World
• The Answer is Plug-In Electric Hybrid Vehicles
• Modest Proposal

Heads in the Sand

"Please, don't buy my product" is how fellow Vermonter Art Woolf, in a post on the Vermont Tiger site,  characterized yesterday's statement by all 21 of the state's electric utilities. The utilities were warning consumers NOT to substitute electricity for fossil fuel as a heat source this winter even though we may be billed less for the electricity than we would have to pay for gasoline, propane, or kerosene. The coverage of that strange statement including a lead story on WCAX probably did more for space heater sales than a paid advertising campaign would have.

As I've been posting (probably ad nauseum), electricity at $.15/kWh is a cheaper way to heat house than oil at $5.00/gallon. Since an electric space heater costs $20 (according to the WCAX story), this is a switch that many people will make at current prices and will make en masse if the price of oil continues to climb AND ELECTRIC RATES REMAIN UNCHANGED. (NOTE: check your local tariff, some towns including Stowe, VT have penalty rates which could kick in and more than negate savings). Jawboning against the switch will only encourage more people to do it – they have to look out for their families this winter.

The utilities DO have two legitimate problems:

1. Current rates encourage us to use electricity for heating onpeak as well as off. The cost to the utilities will skyrocket if they have to add massive amounts offpeak purchased power to their supply. Since onpeak power is produced by burning fossil fuels (NOT including much coal here in the Northeast), it's expensive. Current electric rates make onpeak residential use a loss leader: the more of it the utilities sell, the more they'll lose. Even worse, prices in the spot market for wholesale electricity literally change every minute. A growth in demand without a growth in supply will drive the unit cost up – perhaps drastically.  The utilities response will predictably and necessarily be to ask for rate increases.
2. There is not enough electrical transmission everywhere in Vermont to deliver a significant increase in peak load.

Fortunately there is an option besides jawboning but it's hard and has to be planned quickly. We need to go to time-of-day pricing for residential electricity everywhere in Vermont. It must be mandatory – at least for those who use more than a certain amount of electricity per month. There must be a provision to change which times of day are peak and offpeak with fairly short notice as demand fluctuates. Towns with a totally inadequate supply will have to protect themselves with very high peak rates.

The huge job includes installing time-of-day meters which may not be very smart meters meaning they themselves will be replaced and scrapped in not too many years. There are regulatory changes required – not something that usually happens fast. the whole effort MAY be premature if the price of oil comes back down (which it may).

Fortunately electric heat is not all or nothing if you already own a furnace. Even if rates only encourage electric heat at night, you still save money on fuel. Moreover, time-of-day rates give you the option of saving on other discretionary electric use during the day and saving money by doing so.

Time-of-day rates align the interest of the power producers and power consumers; that's a good thing. Utilities can be more profitable (or charge less) if peaks are smoothed out. New facilities are more quickly paid for if they serve more than peak needs.

Burying our heads in the sand and hoping that people will voluntarily buy more expensive oil to prevent FUTURE electric rate increases is not a good thing. It won't work; the utilities are perfectly right to predict problems this winter WITH THE CURRENT rate structure. The rate structure needs to be changed.

New Car

Wanted to buy an American-made plugin hybrid electric vehicle (PHEV). But there are no PHEVs available commercially, American-made or not, and the seven year old SUV was due for replacement even if it weren't guzzling premium at an alarming rate. Gas economy counts and, here in Nerdville, technology is important too. So what about an American-built hybrid? Got to have high road clearance and four wheel drive or can't reliably get up the last gravel hill on the way home in the winter.

My first pick was the Ford Escape Hybrid; the four wheel drive model is supposed to get 29mpg city and 27 on the highway (the front wheel drive is even better). Was getting ready to go for a test drive and feeling good about buying a domestic car when a friend suggested we look at the safety ratings. Unfortunately, those made the car a no-go for us. It's only got a 3 star rating for rollover in government tests and is not in the top rank for crashworthiness in Insurance Institute tests.

Ended up with a Toyota Highlander Hybrid which is really a bigger car than we need and doesn't get as good mileage (27/25)  and isn't American-made but comes out better on the safety tests. It's full of cool technology and displays of what is being charged by what which Mary says are unsafe when a nerd is driving. Fortunately you can also check out your gas performance retrospectively when you stop. You also can't enter an address in the GPS while you're moving (but maybe I'll figure out how).

I have a little – but not much – sympathy for Ford's problem. There is an arms race: the smaller and lighter the car, the less well it fares in a collision with a bigger car. If everyone had a smaller car and there were no trucks, the problem wouldn't exist. So, although a bigger car pays a fuel penalty, it gets a safety bonus – perhaps at the expense of someone else. But that's the way the world is.

This OUGHT to be a great time to be in the car business. Almost everyone who can afford to wants to trade up (down?) to a car that gets better mileage. You go on a waitlist and no bargaining if you want a Toyota Prius; I only got to bargain a little for the Highlander Hybrid and had to buy the one car on the lot if I wanted any assurance on when we'd get delivery. Toyota had the foresight to build hybrids early – but even they apparently didn't anticipate the demand.

Why isn't the president of Ford or GM or Chrysler meeting with their union leaders and their engineers and their bankers and coming up with a plan to radically retool over the next six months and retake not just the American car market but a chunk of the world as well? It took less than a year for a much less automated American manufacturing sector to go from refrigerators and cars to guns, tanks, and planes after Pearl Harbor: that retooling was a big part of what won that war. We could do that again. Will we? Only if we want to continue to be one of the leaders of the world economy.

I'm not suggesting a government program other than a commitment to buy hybrids and plugin hybrids for its own fleet and provide recharge points at its own facilities. I'm suggesting that we act hungry and change fast, that huge companies act like small companies have to (that may be unrealistic). There is a huge market for fuel efficient cars – we don't need hype to create that. We do need product to meet the demand. If the product isn't made here, that'll be a shame but we're better off buying cars from Japan, India, and China than oil from Saudi Arabia.

So I'm hoping that when our other car is old enough to trade – about two years – I really can buy an American-built plugin hybrid electric vehicle with a good safety rating.

First impressions of the Highlander Hybrid are here.

Opportunity Not Lost is about turning high gas prices to opportunity.

The Answer is Plug-in Hybrid Electric Vehicles is about the car I hope to buy next.

Passing the BTU

Without a lot of fast planning or a drop in oil prices before winter many parts of America may face an electricity crisis when the heating season begins. At the worst, there could be serious repeated failures of transmission facilities. At best, there is likely to be pressure for steeply higher electric rates. There isn't much planning time left let alone time for action; nevertheless there's lots of action that should be taken. This is a good time for incumbent politicians including the two incumbent US senators running for President to go beyond rhetoric and actually take action.

The problem (or maybe opportunity) is that it costs Americans less to heat with electricity at $.15/kWh than with oil at $5.00/gallon. In most parts of the country using electric radiant heat from either baseboard heaters or space heaters used to cost much more than oil heat. But now the price of oil has gone up much faster than the price of electricity. Moreover, partially substituting electricity for oil, propane, or natural gas can be done by simply buying some electric space heaters and turning the furnace down – no construction required. It's reasonable to assume that people will do what they can to reduce this winter's heating cost. IT's much easier to switch the fuel we use in our homes than the fuel we use in our cars.

But, if there is a substantial cutover to electric heat during peak periods, the extra electricity required will either be very expensive OR perhaps not even available if there isn't sufficient transmission capacity. Moreover, we could easily end up burning more fossil fuel rather than less with the "wrong kind" of cutover to electricity

Baseload electricity – the electricity used in non-peak times – comes largely from coal, nuclear, and hydro facilities in most of the country. Here in Vermont our baseload energy comes from Vermont Yankee (nuclear) and Hydro Quebec. During peak times, the extra energy required is often produced by burning natural gas. Natural gas plants have proliferated both because they can be spooled up and down quickly depending on how much power is required and because they are relatively clean and don't generate as much neighborhood opposition as other types of power plants. So, if more electricity is required during peak periods, we burn more natural gas to get that electricity.

If you burn natural gas in your house to get heat, you extract about 78% of the energy available in the gas as useful heat. If a utility burns natural gas to make electricity, at best about 38% of the energy in the gas will become electrical energy at the generating plant. Even ignoring the fact that some electricity is lost in transmission (surprisingly little), it takes more than twice as much fossil fuel burned in a power plant to heat your house through radiant heating as it would take if you simply burned the fossil fuel in your furnace. So, if we all suddenly switch to heating our houses with electricity and the result is a lot more natural gas burned in power plants, electric utilities – with justification – will scream for economic relief and electricity for all purposes will become much more expensive – assuming the facilities are even available to generate and transmit it. Whoops.

So should we ignore electricity as an alternative? Should we just put up with the high price of oil for heating? No!

There is a way we can have our electricity and use it too – that's where the planning comes in.

During some hours of the day – currently the middle of the night – most parts of the country use LESS power than baseload capacity can deliver. Extra use of baseload power during these periods is actually an economic advantage to the power companies because it lowers the average price of power they purchase or generate. Moreover, transmission facilities have extra capacity during offpeak periods so electricity can be moved (wheeled) from where it is cheaply available to where it is needed. Everyone except fuel importers wins if we can substitute OFFPEAK electricity for oil.

Fortunately, the technology to use electric heat selectively is cheap given the cost of modern electronic components. Unfortunately, most houses are not equipped with smart meters which allow information from the grid to directly control use in the home. That's why we need to cobble together some solutions with timers and off-grid information dissemination (web sites, for example) so that we can use electricity this winter at times when it is effective to do so. We also will need to cobble together time-of-day electric rates and ways to do time-of-day measurement quickly (that'll be hard but is not impossible if done first in the places where it'll have the most impact).

Here's an outline of a quick action plan at the state level:

1. Quickly inventory from the utilities and regulatory records where there is the most offpeak capacity available.
2. Map where the existing transmission facilities can deliver that electricity to.
3. Enact enabling regulation for on and offpeak pricing of electricity where capacity IS available offpeak.
4. Plan the winter's fuel assistance program to aid and encourage the use of electric heat where it is the best alternative to fossil fuel (In some place in Vermont, wood pellets, for example may be a much better alternative).
5. Convert recipients of fuel aid to time-of-day metering as a priority.
6. Target time-of-day meter conversions for this winter to the places where the most offpeak electricity is available.
7. Try to assure that those who are going to switch to electric heat on their own can get time-of-day rates and have an incentive to do so (the trickiest part but crucial to the health of the grid).
8. Switch government buildings to electric heat during non-peak periods.
9. Help municipalities do the same.

Note that these are all short-term actions. Longer term electric geothermal heat is an effective use of electrical energy even if some of that comes from fossil fuels. Electric storage heat IS efficient and makes more effective use of available generating capacity for daylong space heating. We obviously need a greater baseload supply of electricity that isn't generated from imported (and/or carbon producing) fuels. And we need really smart metering everywhere.

But the surge in oil prices as compared to electricity means we need to plan for this winter now and concentrate on what is feasible in the shortterm.

Electric Heat Savings Estimator is a calculator to determine what you might save by switching to electric heat.

Time of Day Pricing for Electricity is about exactly that.

A Modest Proposal is about really smart metering and appliances.

If I Can’t Have a Magic Bullet, I Won’t Shoot

"Windmills can't provide enough power to give us energy independence (or save the environment), so let's not build any."

"Solar won't save the environment (or give us energy independence), so let's not pursue it."

"Conservation won't make us energy independent (or save the environment), so let's not conserve."

"We can't build enough nuclear plants to replace all the coal we use, so let's not build any."

"There isn't enough oil off our coast to meet our energy needs, so let's not drill for it."

There is no single magic bullet either for energy independence or significant reduction in CO2 emissions. But there is a magic bandolier: if we fire many energy bullets on both the demand and supply side, we CAN become energy independent AND we can significantly reduce CO2. We'll never get to either goal if we insist on waiting for a single solution we can all agree on. There is no single magic bullet! We need to do all of the above (and more).

There are "only" 16 billion recoverable barrels of oil offshore in the areas which would be opened up by ending the drilling moratorium begun by the first President Bush. Put aside the imponderable of what effect the release of that oil'll have on retail gasoline prices; at $140/barrel (which assumes prices don't rise further – or fall – in the eight years it'll take to get that oil flowing) that's $2.24 TRILLION that ends up in the US economy instead of going to fund terrorism abroad. Hmm. That's jobs in America. That's a lot of oil, too.

In 2007, we imported 4.4 billion barrels of oil (DOWN from 4.6 billion barrels in 2005) including imports of refined petroleum products according to the Energy Agency. We used 7.6 billion barrels altogether. Critics of offshore drilling say that we will only displace four years worth of imports – why bother? Well, forget the small matter of the $2.24 trillion dollars, suppose that in eight years time we have reduced our total oil use by 10% (it's falling fast) and that other domestic production, spurred by high prices, has remained constant (that may be optimistic). It's reasonable to assume that the entire reduction would come from imports so now we import only 3.6 billion barrels and those 16 billion barrels stretch a little further towards independence. Suppose we cut oil consumption by 20% (by using much more electricity); then we have enough recoverable oil offshore to totally replace imports for five and a half years. But during those five and a half years we continue to reduce our use of oil. If we don't watch out, we could end up energy independent this way. Point is that we need to work both the demand and the supply side.

So why don't we want to drill for oil offshore?

There could be oil spills. That's a fact; there probably will be some. Recent experience with hurricanes and offshore drilling seems to show that the technology now works to make the likely impact very, very small. There are a lot of oil rigs in harm's way in the Gulf of Mexico. Moreover, very high prices make it economically feasible to impose very high environmental requirements on leases.

Coastal states will bear a disproportionate impact. Forget that people in the middle of the country may not have much sympathy for us coasties; plans currently proposed give states both a veto and a share of the loot. If Florida and California don't think it's worth the risk to have drilling off their coasts, they can forgo the revenue and stop the drilling. Frankly, I'm not sure the states should get a choice; but what opponents are actually saying is that they're afraid the states will choose drilling. Presenting a choice doesn't erode states' rights.

It'll be eight years before the oil starts to flow. Prices at the pump won't immediately come down. I hope politicians aren't right that we're so short-sighted that we only care about this year or can't imagine even worse prices. It's probably unfair hindsight to point out that coastal oil would be flowing now if leasing had started in the Clinton-Gore administration.

President Bush (the current one) is in favor of it. So, when he was opposed to offshore drilling, which he was until yesterday, was it a good idea?

The oil companies have leases they aren't yet drilling. I suspect that some of this territory doesn't have recoverable quantities of oil (at yesterday's prices) since they lease before they drill. No reason why new leases shouldn't have strict use it or lose it provisions, though.

The oil companies are making lots of money. These leases obviously should reflect market rates with an escalator. WE'LL make plenty of money through lease revenue.

John McCain flip-flopped on this issue. Do we want another president who can't recognize changing circumstances and change policy accordingly?

 

 

Electric Heat Savings Estimator

As promised, there is now a tool on this blog for estimating how much you'll save or lose annually in heating fuel costs if you switch completely from oil, propane, or natural gas to either electric radiant heat or electric geothermal heat. In order to use the estimator, you'll need to know what you expect to pay for electricity next winter, make a guess of how much whichever fossil fuel you now use will cost, and look up or guess how much of that fossil fuel you used last winter.

$5.00/gallon oil, for example, costs roughly the same to use for heating as $.15/kwh electricity when the electricity is used to produce radiant heat. Geothermal electric heat is, however, much more efficient but also has a higher capital cost. The estimator does NOT take capital expense into account but is useful in seeing how much savings you'll have to amortize any capital expense you may be considering.

The model also does not take into account the fact that using electric heat may throw you into a penalty electric rate in some places (Stowe, VT, for example).

The estimator is here.

All calculations are based on the data in this spreadsheet from the US Energy Agency.

A primer on geothermal heat is here.

A post about a cheap and partial conversion to electric radiant heat is here.

You are welcome to put the code on any site you want but please don't change it in any way. The code is here.

Energy Saving Devices

Two solar devices on the back of my boat.

The solar mat trickle charges the batteries when the boat's at anchor. I rarely use the engine for anything but getting on or off the mooring or dock (unless the crew is impatient and the wind recalcitrant). If you use the battery to start the engine and then turn it off five minutes later, you haven't replaced the electricity used to start. Moreover, I use electricity while sailing to power the instruments. And, somewhere there's a small leak letting in either lake or rain water so the automatic bilge pump runs from time to time. All of those factors led to a dead starter battery a couple of times last year and forced me to run the engine an extra ten or fifteen minutes after mooring or on a long sail just to charge the battery. Now the batteries stay topped off with sunlight. Since I only used five gallons of diesel last year, I don't expect great savings, however.

There's a solar light with its own collector in the flagpole holder when I'm on my mooring. A real anchor light would be on the top of the mast and, technically, I don't need a light on my mooring; but the boat is moored close to the path boats take back from some popular bars on the New York side of the Lake so seemed prudent to make it more noticeable at night.

Bruiser, sitting on top of Mt. Mansfield, is wearing my Father's Day present from Mary: a pack so he can carry his own water and supplies. At 100 lbs, he can carry some of his own load.

 

Fuel Selector Helper

The price of home heating oil is so high that even electric radiant heat has become a lower cost alternative across much of the country. The prices of propane and natural gas have also risen. You may have a decision to make: do you replace some or all of the fossil fuel you're burning for heat with electricity (even just by topping off with inexpensive electric space heaters). Obviously the answer depends on both what rate you expect to pay for fossil fuel this winter and what you expect your electric rates will be.

The charts below are meant to tell you whether it's worth thinking about making a change. If the answer is "yes", then you need to ask how much your saving are likely to be to determine how much capital you're willing to spend to go electric; a spreadsheet for that'll be in an upcoming post an estimator for annual savings in now available here. These charts already take into account the different energy values of different fuels and the average efficiency of each fuel. It is assumed that you burn oil, natural gas or propane in a furnace and pipe the heat around your house. The first three charts assume you use electricity either as baseboard heat or in a space heater. The next three charts assume that the electricity powers a geothermal heat pump – an alternative mainly available to us rural folk. Since geothermal electric heat is much more efficient than radiant electric heat, it breaks even with oil at much lower oil prices or higher electric rates but, of course, has a higher capital cost to get into than radiant heat.

Here's how to use the charts:

1. Guess what rate you're going to pay for oil, natural gas or propane this winter. For the sake of example, let's choose $5/gallon for oil and use the chart immediately below.
2. Trace over to the right from that fuel cost until you hit the blue diagonal line.
3. Look at the electricity cost straight below where you hit the diagonal line. In our example, that would be a little past $.15/kWh.
4. If you pay less than this for electricity, you ought to consider switching. If you pay more, then it's not worth switching unless and until oil gets even more expensive.

   

   

All calculations are based on this US Energy Agency spreadsheet.

Energy Tipping Point – Part 1

Here in Vermont we're at a tipping point: conventional electric heat now costs about the same to use as oil heat at current rates (details here). Although oil prices may recede from the current bubble and electricity rates are likely to rise (speculation here), price drives behavior. Partial conversion to electric heat through judicious use of space heaters is cheap so it's reasonable to assume that electricity usage for heat is about to go up and oil usage go down, probably starting this fall.

The change may be quite rapid as we go through the tipping point. It's a safe prediction that a rapid change will have unforeseen circumstances. There's no excuse, however, for not preparing for the foreseeable. Below are some of my predictions and some suggested actions; please add your own in comments.

Distribution

Although most of us are on the electric grid, the grid does not have adequate capacity everywhere and anytime to deliver all the kilowatts we'll consume if we switch massively to electric heat from oil. The distribution problem starts at home. We have rooms in our house we can't use a space heater in without tripping circuit breakers. The solution is NOT bigger circuit breakers; it's bigger wire and then bigger circuit breakers. More use of electric heat is going to mean more electrical fires (but less carbon monoxide problems).

The lines that come from the grid into our towns won't always have enough peak capacity for very cold days. Many of those lines will have to be upgraded. As always happens, neighbors of the lines will object. Old fears about diseases caused by high voltage lines will be resurrected. Although obviously construction projects need to be responsible and environmental impact needs to be considered, we cannot afford to wait years to get through all of the objections to each proposed project. Financing shouldn't be a major problem given the increased usage which is easy to anticipate – UNLESS each project risks lengthy delays in the regulatory process and the courts. We need to make some basic tradeoffs now. Whether it's the fate of those who can't afford oil for heat, the sources of oil, energy independence, or reduction of carbon footprint which is important to you, substituting electricity (most of which doesn't come from fossil fuel here in Vermont) for oil is worth a loss in each citizen's ability to block each project indefinitely.

BTW, we need to upgrade the national grid as much as the local grid. We get better diversity of supply by being able to move electricity freely between regions. We need less power plants overall if we can share better across the whole grid. We can better match sunny days in Virginia to cold days in Vermont and windy days in Nebraska to baking heat in California if we upgrade the national grid. We've got to do that. Not sure how much role government needs to have in that other than all-important permitting and perhaps use of eminent domain for land acquisition.

Generation

If we're going to use more electricity, we're going to have to produce more of it. The harder it is to get additional supply, the more the price of electricity will rise – perhaps keeping pace with oil. At peak time the electricity needed in New England is usually generated from fossil fuels (but not usually oil or coal). In other parts of the country coal is the major source of electricity.

Here in Vermont we face the issue of relicensing our nuclear plant – Vermont Yankee. There is significant opposition. In my opinion we'll be shooting ourselves in both our environmental left feet and our financial right feet if we don't keep Yankee open. But that issue would be much more clear cut if there were someplace to store nuclear waste other than a pool next to the plant. On a national level, we need to go ahead and get Yucca Mountain Repository operating regardless of Nevada's electoral votes.

In the meantime, it might be good policy to give those states which host nuclear plants preferred access to their output. Perhaps that would help break the log jam on both relicensing and construction of new plants.

Nuclear isn't the whole answer to electrical supply, particularly as we increase the use of electricity for transportation and manufacturing as well as for heating. Both large scale and small scale wind and solar projects can and should provide much of our supply. Again expedited permitting is important. An improved grid and diversity of supply mean that local and regional mismatches between supply and demand when the wind doesn't blow or the sun doesn't shine will not be nearly as important as they are today.

We are currently shipping coal overseas because it's politically difficult to build new coal-fired electrical plants here. Needless to say, coal has an even larger carbon footprint when it's shipped a long distance than when it's used close to the mine; we just don't watch it being burned. We can't keep dithering over cap-and-trade or carbon tax or wait for CO2 sequestration (which we DO need to work on). We have to find ways to burn our own coal. This subject is worth a post of its own which I'll provide later.

Also upcoming in this series: demand-side smarts, more on hyper-local supply, the problems of the last oil users, rates.

 

Oil Bubble?

Yes… but.

It's an important question since the answer affects a huge swath of business, personal, and government decisions – not to mention political campaigns. Is the historically high price of oil in dollars a temporary aberration, the creation of evil market manipulators, a frothy bubble that'll look absurd after it collapses? Or are we at the very beginning of a repricing of energy and other commodities caused by developing nations developing ("developing" used to be just a euphemism like "needs improving" on a report card) and the formerly destitute becoming consumers faster than resources can be found for them to consume?

Yes.

Let's start with recent history and remember that supply and demand are never in a static balance. They affect each other and are both affected by myriad other factors. There is always change. Sometimes muted, sometime violent. This change is fractal. It is non-linear; in the short-term it may appear to follow the smooth charts of economists or other forecasters. In the long run both the direction and rate of change are unknowable and unpredictable like any other fractal phenomenon.

OK. We had a period of relative stability in energy prices. Think of the prices as a pendulum swinging back and forth: movement in one direction was about equal to movement in the other; the average was reasonably constant.

Now somebody tilts the structure which contains the pendulum – the tilting force in this case was new demand coming online faster than new supply but it didn't have to be something so significant or straightforward. The "average" has now shifted; the pendulum swings through a wider arc. Will it stop when it gets to the new "equilibrium" point? Of course not, it'll overshoot; then it'll overshoot in the other direction. Volatility is a symptom of rapid change.

The wildly swinging pendulum, however, moves the structure from which the weight hangs. It too careens in one direction and then the other. The movements of the structure, in turn, affect the pendulum. Now add in a bunch of people who are trying to stabilize (or upset) either the structure or the pendulum itself. In physics this is called the n-body problem. To quote from wikipedia:

"For n ≥ 3 very little is known about the n-body problem…

"The three-body problem is much more complicated; its solution can be chaotic. A major study of the Earth-Moon-Sun system was undertaken by Charles-Eugène Delaunay, who published two volumes on the topic, each of 900 pages in length, in 1860 and 1867. Among many other accomplishments, the work already hints at chaos, and clearly demonstrates the problem of so-called "small denominators" in perturbation theory."

Net: You can't believe anyone who says he or she knows where energy prices are going to be tomorrow let alone next week or next year. They could even crash below historic lows in the case of a worldwide recession, an epidemic, or certain wars – or technical breakthroughs. They could move much higher than they are now.

I'm sure people are making money in oil speculation. I'm just as sure some speculators are losing their shirts – just as I'm sure there are winners and losers in Las Vegas. I'm sure the chaos creates cover for illegal and immoral acts. My guess is that the speculation sometimes dampens the price swings and sometimes exacerbates them and can lead to bubbles – certainly – but can't create long term trends.

I'm also reasonably sure – barring a number of both foreseeable and unforeseeable catastrophes (black swans) – that demand for energy is currently growing faster than supply if price were a constant (which, of course, it isn't). I'm not at all sure that high-priced oil won't lead to a breakthrough in either supply or demand technology – or both – that'll lead to a decline in the price of energy if not oil itself. Through human history, energy costs have gone down and not up.

Is all this unknowability a cause for inaction? Of course not. Times of rapid change are times of great opportunity and great danger. We have to guess at short term trends; we have to duck when the pendulum swings towards us. We are sentient bodies in this n-body problem. The future is being built on the rubble of the past but the past is not necessarily prologue to the future.

The only certainty is change and change is a fractal.