While some advocate more spending but others instead favor tax cut as a stimulus to the ailing economy, what is better? What combination is good? I will try to take a qualitative view on the merits of each, leaving to quantitative view to those with established and powerful models.
As written on September 30 and October 12, of the four pillars of the economy, consumption, investment, net exports and government spending, the first 3 are not growing. Let's examine the situation of each sector below:
- In this consumer-led recession, consumption is primarily affected by people losing jobs, the difficulty to borrow, and the fear that things will get worse, so spending is delayed.
(i) For people losing jobs and can't even spend on essentials, tax cuts would not help them directly. Extending unemployment benefits would help them spend on essentials, which helps to keep other people's jobs.
(ii) The difficulty in borrowing stems from (1) financial institutions questioning people's repayment capability and capacity, due to the job cuts or salary cuts as a result of the ailing economy, and (2) the declining asset base on the balance sheet of many financial institutions that make lending less available. (Therefore, capital injection to those institutions on the edge of insolvency, so they could be solvent or buying toxic assets from those healthier so that the market and counterparties have more confidence in investing or deal with them. Otherwise, healthier banks are lumped into the same group as unhealthy banks because outsiders cannot tell which institution is sound. But let's leave that to another discussion.)
(iii) For those with the means to buy, many are holding back because of the fear that things will get worse or that they will lose their jobs (which is a widespread sentiment as reported by recent market surveys). As such, they are either rebuilding their war chest, saving for rainy days down the road, or paying down debt upon realizing the potential dire straits they could be in. A tax cut will not really help, since whatever amount that is retained will likely not be used for purchases. A permanent tax cut will not really help either, since if people lose their jobs, they will not benefit from any permanent tax cuts. Hence, keeping their jobs is key.
On the investment side, housing and business investments are in general not picking up.
(i) On housing, buyers' sentiment is in part similar to consumption in that it is a question of whether they can afford it and whether they should invest now. Of course, the other factor is bank's general reluctance to lend. Of course, if house prices fall enough, more buyers will emerge, but most will still be affected by their outlook on the stability of income going forward.
(ii) On business investment, having a strong current demand and having more certainty about the future (just like consumers) help with the investment appetite. With consumers down the value chain not really spending, investments, in most cases, will unlikely help with spurring demand. Investing in productivity improving equipment and such could help lower cost, which could mean more sales, but it also depends on whether consumers will spend and buy. In addition, in the initial stage of productivity improvement, more workers are not needed unless sales increase to an extent that the current staff cannot effectively handle the increased demand. For taxes, lower interest rates lower the cost of operation in ways similar to a business tax cut, loosely speaking. If long term rates are lowered, as a result of the Federal Reserve buying long-dated treasuries, the longer term cost of capital will be lower as well. Tax cut or not, if the difficulty in borrowing persists or that demand continues to be weak that threaten the survival of companies, a permanent tax cut, will not help company realize this permanent increase of retained earnings.
On the net export side, (i) the stronger dollar, due to weaknesses in other countries and that the USD is considered as a safe haven, (ii) weakness in lending to continue or expand operations, and (iii) the weakness in global demand are all hurting this sector. Factors affecting the business investment side are similarly affecting many businesses in the export sector. In addition, many goods still cost less to produce outside of the U.S., so consumers hoping to save money will more likely opt for cheaper alternatives, produced mostly outside of the U.S. "Buy American" sounds good as a slogan, but how many consumers will pay more in most cases, instead of saving money.
As such, that consumers, investment and net exports are not driving growth, then the government, in this uncertain and down market, is the entity left that could act as one, create jobs (so that people can spend, which in the process helps keep some existing jobs or create new ones.), have a much longer term horizon and have access to a lower cost of capital than other businesses.
Spending helps preserve and/or create jobs. When people, like businesses, have more certainty about their future, they are more willing to buy and invest. Buying helps merchants and their workers. Consumer buying causes businesses to buy from suppliers, all the way down the value-chain and so on.
It is not a surprise that many respected economists on the Republican side, such as Martin Feldstein, are in favor more spending and less tax cuts.
Wednesday, January 28, 2009
Sunday, January 11, 2009
Implications of a greater and faster push of electric cars
http://online.wsj.com/article/SB123172034731572313.html
This WSJ article is about the new and low cost electric car F3DM by BYD, a Chinese manufacturer. The main hurdle in making electric car practical and cost-effective is the size, weight and capacity of the battery. This new car could enter the market at the end of 2009, earlier than GM's Chevy Volt.
Yet the broader implication of a faster and wider roll out of electric cars is profound, especially in the power market. Aside from the much talked about implications on the environment and oil markets, where there will be less direct pollution from cars, as the combustion of fossil fuel produces various carbon oxides and other particulate matters. Also, the demand growth of petroleum could slow.
In particular, the greater need for offpeak power, where much of that power is produced by nuclear and coal plants, and to some extent in the future by wind, will drive new dynamics in the environmental and fuels markets. But the biggest impact would likely be coming from coal.
[I] Implications on generation fuel mixes:
(The following discussion assumes some technological improvements along the way, but getting a breakthrough sometime somewhere remains an unknown, so let's not rely on it, especially given the efficiency hurdle and physics that governs the conversion of fuel into energy.)
Some power plants run throughout the day, where they are the primary producer of electricity during the so-called offpeak hours. With plug-in vehicles mostly drawing power overnight, there will be a greater need for consistent production of electricity. Most of these plants are hydro, nuclear and coal plants, with wind coming in the future. Let's examine the impact of each of these generation types, as well as natural gas and oil:
- Hydro: Most locations suitable for hydro generation have already been exploited, so it is unlikely to increase generation capacity. The impact will be small.
- Nuclear: Nuclear could form one of the pillars in supporting the increase of offpeak power generation. The nuclear revival could be coming, although the main impediments remain the construction time, cost overruns historically and regulatory approvals. Construction of nuclear plants are plagued by delays throughout its history. A good rule of thumb is that it takes about 10 years to build, at least in the US, with cost overruns. New developments in nuclear reactors where plants will use the same design, unlike the past, could help shave some time off, but it could be hampered by two other factors:
(i) Human capital and regulatory approvals. Nuclear reactors involve highly specialized technologies. Although there are some plants built around the world, none has been built in over 30 years in the US, except some up-rates (ie, increasing generation capacity) of exisiting plant and one unit in the Tennessee Valley Authority. Over these years, there was a significant drop-off in the training of people skilled in nuclear construction and operation. People already working in the industry will approach retirement age by the time many plants are constructed. This talent gap will certainly delay the advent of a large-scale nuclear revival.
(ii) Regulatory approvals could cause substantial delays as well, among them are the siting, where local residents would very likely oppose new constructions, and disposal of spent fuel rods.
- Wind: New installation of wind turbines will help supply part of the power during offpeak hours. But several factors make them less of a contributor than expected.
(i) Places with strong winds are far away from population centers. Even if wind farms were built, transmission lines will have to be erected to transmit power from, say in the U.S., the Plains in the middle of the country to coastal population centers. The permitting and siting of new transmission lines would very likely elicit local oppositions, access right and other legal issues, which are extensive, since these lines will have to transverse a very large distance. Hence, their construction will be delayed.
(ii) Winds are not so consistent, despite improvements in battery technology that can store power. Although wind, whose strength fluctuates a lot within a short time, is typically stronger at night than during the day, if it dies down, their production drops fast. But demand does not respond to this drop in supply. Batteries will remain too expensive to substitute other forms of generation, unless some breakthrough technology comes along. Therefore, some backup generation that can ramp up quickly will be needed. The most likely candidate is natural gas.
(iii) The high frequency of fluctuation in wind generation will cause other backup generation to ramp up much more frequently. The wear-and-tear to these generation facilities and transmission lines, in addition to the reduced stability of the transmission grid, could drive up the hidden cost associated with wind generation.
- Natural gas: Whether it be a backup to the fluctuating wind generation, or simply serving as next fuel of choice after coal, which is cheaper, the greater demand for power will necessitate the new buildout of natural gas plants. As a cleaner burning fuel as well, the global demand for natural gas will increase accordingly. Usual implication to major natural gas countries applies.
- Coal: What I think will be the biggest surprise driver of future energy and environmental policy could be coal.
(i) With the generation cost of natural gas plants in general higher than coal, coal would have to remain a major fuel that supports the growth in power supply.
(ii) Coal plants are faster to construct than nuclear. To meet demand needs, investors might have to return to constructing coal plants and delaying retirement of old ones.
(iii) The freight business that transports coal will flourish, as coal will be transported from major coal producing countries to consuming countries.
(iv) The drive to mine more coal could test safety standards, when producers would seek to produce more at dangerous places and keep cost low. People's lives are at stake.
(iv) *Most important, the delayed retirement of existing coal plants and higher buildout of new ones will drive up future emission prices. While higher emission prices will add to the marginal cost of coal generation, making natural gas generation more competitive, that coal would remain the backbone power generation will increase emissions, which impacts policy.
-- If the objective to reduce emission is to be held fast, then emission prices (be it a tax or permit) will increase substantially and increase the cost of operations across sectors, which could slow growth. If governments succumb to pressure to lower energy prices and, by extension, emission prices, emission will likely be going up. "Dirty" scenarios in climate change predictions could come true. Rest of the "dirty" scenarios will apply.
- Oil: Oil-fired plants are usually too expensive. With their combustion technology, they are polluting as well, so they are unlikely to help.
- Other renewables: Solar will likely remain expensive; biomass could run into multitude of problems. First generation biofuels, such as those that use corn, will compete with food supply. Another consideration is possibly the rate of regeneration of biofuel sources - ie, how much can be burned and how fast can they be regenerated? Can they meet demand like other fossil generation such as coal and natural gas?
[II] Implication on prices
The load factor, which compares the offpeak load with peak load, will also flatten. It is because the peak load, say at mid-day on a hot summer day, will continue to be driven by factors such as cooling demand (or heating demand in cold winter days), but offpeak power prices will be higher as well, since the demand for electricity due to charges will be higher. Having wind as a major component of power generation will cause spikes in power prices, as a dying down of wind will require higher cost generation to quickly substitute. Net-net, the average power price will increase.
Essentially the above is a brief description of the energy supply picture.
Solution? With these supply-side dynamics, maybe the only good way out of the run-away growth would have to be conservation...
This WSJ article is about the new and low cost electric car F3DM by BYD, a Chinese manufacturer. The main hurdle in making electric car practical and cost-effective is the size, weight and capacity of the battery. This new car could enter the market at the end of 2009, earlier than GM's Chevy Volt.
Yet the broader implication of a faster and wider roll out of electric cars is profound, especially in the power market. Aside from the much talked about implications on the environment and oil markets, where there will be less direct pollution from cars, as the combustion of fossil fuel produces various carbon oxides and other particulate matters. Also, the demand growth of petroleum could slow.
In particular, the greater need for offpeak power, where much of that power is produced by nuclear and coal plants, and to some extent in the future by wind, will drive new dynamics in the environmental and fuels markets. But the biggest impact would likely be coming from coal.
[I] Implications on generation fuel mixes:
(The following discussion assumes some technological improvements along the way, but getting a breakthrough sometime somewhere remains an unknown, so let's not rely on it, especially given the efficiency hurdle and physics that governs the conversion of fuel into energy.)
Some power plants run throughout the day, where they are the primary producer of electricity during the so-called offpeak hours. With plug-in vehicles mostly drawing power overnight, there will be a greater need for consistent production of electricity. Most of these plants are hydro, nuclear and coal plants, with wind coming in the future. Let's examine the impact of each of these generation types, as well as natural gas and oil:
- Hydro: Most locations suitable for hydro generation have already been exploited, so it is unlikely to increase generation capacity. The impact will be small.
- Nuclear: Nuclear could form one of the pillars in supporting the increase of offpeak power generation. The nuclear revival could be coming, although the main impediments remain the construction time, cost overruns historically and regulatory approvals. Construction of nuclear plants are plagued by delays throughout its history. A good rule of thumb is that it takes about 10 years to build, at least in the US, with cost overruns. New developments in nuclear reactors where plants will use the same design, unlike the past, could help shave some time off, but it could be hampered by two other factors:
(i) Human capital and regulatory approvals. Nuclear reactors involve highly specialized technologies. Although there are some plants built around the world, none has been built in over 30 years in the US, except some up-rates (ie, increasing generation capacity) of exisiting plant and one unit in the Tennessee Valley Authority. Over these years, there was a significant drop-off in the training of people skilled in nuclear construction and operation. People already working in the industry will approach retirement age by the time many plants are constructed. This talent gap will certainly delay the advent of a large-scale nuclear revival.
(ii) Regulatory approvals could cause substantial delays as well, among them are the siting, where local residents would very likely oppose new constructions, and disposal of spent fuel rods.
- Wind: New installation of wind turbines will help supply part of the power during offpeak hours. But several factors make them less of a contributor than expected.
(i) Places with strong winds are far away from population centers. Even if wind farms were built, transmission lines will have to be erected to transmit power from, say in the U.S., the Plains in the middle of the country to coastal population centers. The permitting and siting of new transmission lines would very likely elicit local oppositions, access right and other legal issues, which are extensive, since these lines will have to transverse a very large distance. Hence, their construction will be delayed.
(ii) Winds are not so consistent, despite improvements in battery technology that can store power. Although wind, whose strength fluctuates a lot within a short time, is typically stronger at night than during the day, if it dies down, their production drops fast. But demand does not respond to this drop in supply. Batteries will remain too expensive to substitute other forms of generation, unless some breakthrough technology comes along. Therefore, some backup generation that can ramp up quickly will be needed. The most likely candidate is natural gas.
(iii) The high frequency of fluctuation in wind generation will cause other backup generation to ramp up much more frequently. The wear-and-tear to these generation facilities and transmission lines, in addition to the reduced stability of the transmission grid, could drive up the hidden cost associated with wind generation.
- Natural gas: Whether it be a backup to the fluctuating wind generation, or simply serving as next fuel of choice after coal, which is cheaper, the greater demand for power will necessitate the new buildout of natural gas plants. As a cleaner burning fuel as well, the global demand for natural gas will increase accordingly. Usual implication to major natural gas countries applies.
- Coal: What I think will be the biggest surprise driver of future energy and environmental policy could be coal.
(i) With the generation cost of natural gas plants in general higher than coal, coal would have to remain a major fuel that supports the growth in power supply.
(ii) Coal plants are faster to construct than nuclear. To meet demand needs, investors might have to return to constructing coal plants and delaying retirement of old ones.
(iii) The freight business that transports coal will flourish, as coal will be transported from major coal producing countries to consuming countries.
(iv) The drive to mine more coal could test safety standards, when producers would seek to produce more at dangerous places and keep cost low. People's lives are at stake.
(iv) *Most important, the delayed retirement of existing coal plants and higher buildout of new ones will drive up future emission prices. While higher emission prices will add to the marginal cost of coal generation, making natural gas generation more competitive, that coal would remain the backbone power generation will increase emissions, which impacts policy.
-- If the objective to reduce emission is to be held fast, then emission prices (be it a tax or permit) will increase substantially and increase the cost of operations across sectors, which could slow growth. If governments succumb to pressure to lower energy prices and, by extension, emission prices, emission will likely be going up. "Dirty" scenarios in climate change predictions could come true. Rest of the "dirty" scenarios will apply.
- Oil: Oil-fired plants are usually too expensive. With their combustion technology, they are polluting as well, so they are unlikely to help.
- Other renewables: Solar will likely remain expensive; biomass could run into multitude of problems. First generation biofuels, such as those that use corn, will compete with food supply. Another consideration is possibly the rate of regeneration of biofuel sources - ie, how much can be burned and how fast can they be regenerated? Can they meet demand like other fossil generation such as coal and natural gas?
[II] Implication on prices
The load factor, which compares the offpeak load with peak load, will also flatten. It is because the peak load, say at mid-day on a hot summer day, will continue to be driven by factors such as cooling demand (or heating demand in cold winter days), but offpeak power prices will be higher as well, since the demand for electricity due to charges will be higher. Having wind as a major component of power generation will cause spikes in power prices, as a dying down of wind will require higher cost generation to quickly substitute. Net-net, the average power price will increase.
Essentially the above is a brief description of the energy supply picture.
Solution? With these supply-side dynamics, maybe the only good way out of the run-away growth would have to be conservation...
Friday, December 5, 2008
Are we close to another beginning of a commodity spike down the road?
The negative
While one should not catch a falling knife, what about a contrarian take? These super-contangos could be caused by two major factors, among others: the lack of liquidity or appetite for trading that put near-term storable commodities below the cost of carry, and the notion that a downturn will substantially curb demand and, therefore, supply-side investment. This increases the probability of supply tightness further out the curve. This decline in investment could affect reservoir management especially in ways that reduce future output. Chesapeake Energy cut its capital budget and planed to build cash over the next two years. The Saudis also suggested that $75/bbl oil is the price for marginal producers. Regardless of whether this could be a signal for price targeting, the current price level disincentivizes producers with higher variable costs.
While it is possible that available storage has been taken, so the cost of carry cannot be arbitraged away, but there have not been reports on this. One contrary indicator is the large build in Crude stocks in Cushing, OK, (a location designated by NYMEX, the commodities exchange, for oil delivery, when futures (or one of many kinds of financial) contracts expire and the holder of a contract has to take delivery of the commodity) which is most probably deliveries against the November contract and perhaps some level of speculative filling ahead of the December contract or further out the curve.
Further, fiscal stimulus in the form of large scale infrastructure investments, which aim to create jobs, are typically energy-intensive, in contrast with modern growth engines in the service sector. As such, the demand erosion in one segment will likely be partially offset by growth in fiscally-stimulated sectors, along with a slowing of projected efficiency gains.
But then again, don't stand in front of a moving freight train. The contrarian play may not work at all in the near-term!
Sunday, November 9, 2008
This downturn may be taking place in a different environment, but China still acted. Will other governments?
Now that China has put out a large domestic spending plan that amounts to USD586 billion, other governments world-wide strongly affected by the crisis might have to take similar steps, especially given faltering consumer spending and investments. But since the world is different from the past, such as improved technology, greater interconnectivity and higher mobility of workforce, would the downturn play out differently? What’s the resulting impact on developing countries?
With consumers being engines of the economy, their general lack of access to credit, fear of job losses and the resulting belt-tightening are causing a sharp downturn in spending. As such, on the investment component of the GDP, there is a lack of will for businesses to invest; home values, still at elevated levels, have to come down, causing investments to continue to suffer. In the US, the rising dollar does not help with the trade balance, also hurting the export industry, aside from the credit issues. We might be entering a deflationary environment, with input (eg, fuel, commodities) prices falling and firms cutting prices to clear inventory. A deflationary spiral would be a bad outcome.
But this downturn takes place under a different environment, with improved technology and greater mobility of workforce, than previous ones, so could the situation be different?
(1) Would improved technology help? It will, but more in the long run as technology looks to be correlated with increasing productivity. (Hence, economies still have to recover first. However, ways that increases aggregate demand in the short that also helps increase productivity in the long run would be most appropriate. Infrastructure projects are therefore usually taken.) What about the web or the higher interconnectivity around the world? It is hard to say outright. Nonetheless, fundamentally, the web is a platform that consumers and producers transact, rather than doing it on the street, so the basic economic interaction between consumers and producers remain the same. Thus, if demand falters, so does production. Moreover, if the wealth generated by the web is not “tangible,” but people treat it as if it were tangible, then the bursting of the asset bubble could be worse then, as the true value is realized. This happened after the bursting of the technology bubble earlier.
(2) The mobility of the global workforce has also improved significantly in recent years, but it is the very mobility of workforce that will make the situation in many OECD countries worse. As wages in those countries are still high, then moving operations to low wage countries will continue. In the last couple of years when the economy was booming, some companies have slowed or reversed the pace or direction of outsourcing, due partly to customer-service issues and time-zone differences. This reversal to some extent cuts into corporate profit but was more than offset by gains during the boom. But with profits shrinking during the recession, firms would likely to take greater advantage of this labor arbitrage and began another wave of outsourcing/offshoring, now perhaps on more core operations that do not have to be in high-wage countries.
At first glance, developing economies might appear to benefit from it. Nevertheless, I’d think that the benefits are likely to be offset by losses in other areas. As exports still account for a large portion of their economies, internal demand looks unlikely to bridge the gap left by falling exports. In fact, many who work in the exports industries will or are afraid that they would lose their jobs, which dampens the propensity to spend. In fact, this is happening in China as well, as domestic consumption falls measurably in Q3. China is also working off its own real estates bubble.
The role of government could be key. Since self-interests prompt people to hoard cash and not spend, then the hope for a recovery from either consumers or businesses could prove elusive. Given the severity of the downturn, then a coordinated effort is needed to boost the economy, so the government, which is the single biggest entity in the economy, would need to take the lead.
China has taken that step, with the massive government spending program. Will others do the same? Or will they have the means to do the same?
With consumers being engines of the economy, their general lack of access to credit, fear of job losses and the resulting belt-tightening are causing a sharp downturn in spending. As such, on the investment component of the GDP, there is a lack of will for businesses to invest; home values, still at elevated levels, have to come down, causing investments to continue to suffer. In the US, the rising dollar does not help with the trade balance, also hurting the export industry, aside from the credit issues. We might be entering a deflationary environment, with input (eg, fuel, commodities) prices falling and firms cutting prices to clear inventory. A deflationary spiral would be a bad outcome.
But this downturn takes place under a different environment, with improved technology and greater mobility of workforce, than previous ones, so could the situation be different?
(1) Would improved technology help? It will, but more in the long run as technology looks to be correlated with increasing productivity. (Hence, economies still have to recover first. However, ways that increases aggregate demand in the short that also helps increase productivity in the long run would be most appropriate. Infrastructure projects are therefore usually taken.) What about the web or the higher interconnectivity around the world? It is hard to say outright. Nonetheless, fundamentally, the web is a platform that consumers and producers transact, rather than doing it on the street, so the basic economic interaction between consumers and producers remain the same. Thus, if demand falters, so does production. Moreover, if the wealth generated by the web is not “tangible,” but people treat it as if it were tangible, then the bursting of the asset bubble could be worse then, as the true value is realized. This happened after the bursting of the technology bubble earlier.
(2) The mobility of the global workforce has also improved significantly in recent years, but it is the very mobility of workforce that will make the situation in many OECD countries worse. As wages in those countries are still high, then moving operations to low wage countries will continue. In the last couple of years when the economy was booming, some companies have slowed or reversed the pace or direction of outsourcing, due partly to customer-service issues and time-zone differences. This reversal to some extent cuts into corporate profit but was more than offset by gains during the boom. But with profits shrinking during the recession, firms would likely to take greater advantage of this labor arbitrage and began another wave of outsourcing/offshoring, now perhaps on more core operations that do not have to be in high-wage countries.
At first glance, developing economies might appear to benefit from it. Nevertheless, I’d think that the benefits are likely to be offset by losses in other areas. As exports still account for a large portion of their economies, internal demand looks unlikely to bridge the gap left by falling exports. In fact, many who work in the exports industries will or are afraid that they would lose their jobs, which dampens the propensity to spend. In fact, this is happening in China as well, as domestic consumption falls measurably in Q3. China is also working off its own real estates bubble.
The role of government could be key. Since self-interests prompt people to hoard cash and not spend, then the hope for a recovery from either consumers or businesses could prove elusive. Given the severity of the downturn, then a coordinated effort is needed to boost the economy, so the government, which is the single biggest entity in the economy, would need to take the lead.
China has taken that step, with the massive government spending program. Will others do the same? Or will they have the means to do the same?
Tuesday, November 4, 2008
Carbon-absorbing rocks and the implementation?
Essentially the researchers discovered that certain rock formation off the coast of Oman has substantial carbon absorbing capability, upto billions of tons a year, if the rock-cracking process can be self-sustaining. For comparison, coal plants in the U.S. emit between 1-2 billion tons per year. Since carbon dioxide travels long distance and stays in the air, then carbons can be stored with little leakage - a major problem that confronts typical carbon capture and sequestration (CCS) techniques.
CCS works by transporting emitted carbon dioxide and pumping it into some underground storage locations, such a porous aquifiers. But the high cost of transport and building pipelines makes it uneconomical. Carbon dioxide leaking from those locations is also a major problem.
Instead, this new proposed method uses the carbon-dioxide-absorbing ability of sea water and a convection system that pumps sea water deep into the rock formation in one hole and releases the "decarbonized" water in another hole. The rock formation peridotite has a large amount of olivine, which contains magnesium and oxygen, among others. The olivine reacts with water and leaves behind large amounts of dissolved magnesium and bicarbonate. With bicarbonate, the carbon concentration in the water can be increased by 10 times as well. As the water gets deeper into the ground and temperatures get higher, magnesium, carbon and oxygen are released to form magnesium carbonate and dolomite (with calcium). They expand the rock in size, creating more pores and fractures. The chemical reaction also generates heat, making the process self-sustaining. Then the water exits, rises to the sea surface and absorbs more carbon dioxide, completing the convection cycle.
If the science works and it works on a large scale, then it'd be an economical partial solution to carbon emissions, but what about the money needed to pay governments to allow this kind of operation off their coast? Would it involve a global payment system or be incorporated into some permit trading system in some form similar to the CDM? Perhaps it could work like the reforestation mechanism in CDM (Clean Development Mechanism). The CDM was established by the UN following the Kyoto Protocol, which allows for the creation and trading of emission credits through the capture of greenhouse gas and reforestation, among others.
==
Kelemen and Matter (2008) "In situ carbonation of peridotite for CO2 storage," Proceedings of the Nationa Academy of Sciences, 105(44)
PNAS abstract: http://www.pnas.org/content/early/2008/10/31/0805794105.abstract
Also at Technology Review: http://www.technologyreview.com/energy/21629/?a=f
CCS works by transporting emitted carbon dioxide and pumping it into some underground storage locations, such a porous aquifiers. But the high cost of transport and building pipelines makes it uneconomical. Carbon dioxide leaking from those locations is also a major problem.
Instead, this new proposed method uses the carbon-dioxide-absorbing ability of sea water and a convection system that pumps sea water deep into the rock formation in one hole and releases the "decarbonized" water in another hole. The rock formation peridotite has a large amount of olivine, which contains magnesium and oxygen, among others. The olivine reacts with water and leaves behind large amounts of dissolved magnesium and bicarbonate. With bicarbonate, the carbon concentration in the water can be increased by 10 times as well. As the water gets deeper into the ground and temperatures get higher, magnesium, carbon and oxygen are released to form magnesium carbonate and dolomite (with calcium). They expand the rock in size, creating more pores and fractures. The chemical reaction also generates heat, making the process self-sustaining. Then the water exits, rises to the sea surface and absorbs more carbon dioxide, completing the convection cycle.
If the science works and it works on a large scale, then it'd be an economical partial solution to carbon emissions, but what about the money needed to pay governments to allow this kind of operation off their coast? Would it involve a global payment system or be incorporated into some permit trading system in some form similar to the CDM? Perhaps it could work like the reforestation mechanism in CDM (Clean Development Mechanism). The CDM was established by the UN following the Kyoto Protocol, which allows for the creation and trading of emission credits through the capture of greenhouse gas and reforestation, among others.
==
Kelemen and Matter (2008) "In situ carbonation of peridotite for CO2 storage," Proceedings of the Nationa Academy of Sciences, 105(44)
PNAS abstract: http://www.pnas.org/content/early/2008/10/31/0805794105.abstract
Also at Technology Review: http://www.technologyreview.com/energy/21629/?a=f
Sunday, November 2, 2008
Impact of the global recession on future energy prices
The current global slowdown in energy demand growth, and lower oil and energy prices could pave the way for sharply higher prices when economies begin to recover.
(1) While we will very likely see a global recession, which decreases demand of oil and eases prices, the relative reduction in the size of oil exploration and production now will mean much higher oil prices in the future, I believe.
New exploration and production, along with necessary infrastructure investments, could take 10 years or so before oil could start flowing. (Similar outcome, but in shorter time frames, will probably play out in other energy commodities.) Even though many large oil majors have not announced any significant cutbacks in oil investments, the national oil companies (NOCs), controlled by various governments and all in the top 10 in terms of production, may think differently. Higher oil prices to a certain level benefit them more (such as Venezuela). Hence, as the pressure to produce more is off with the sharp drop in oil prices, they could reduce their investment both to conserve cash and, consequently, raise longer term prices. NOCs also tend not to have good reservoir management, where, loosely speaking, the full production of the field may not be reached. Mismanagement could in fact reduce the amount of oil recoverable as well. Hence, on this thesis, a slower growth in supply over the medium and long term is likely.
(2) Alternative energy development is hampered by both the lack of fund due to the recessions and lower energy prices. Without a certain amount of promising alternatives in the pipeline, there would be few substitutes if the supply and demand of traditional energy sources become tight again.
The weak credit environment is already impacting start-ups on solar, bio-fuels or other alternative energy sources, with stories from the venture capital industries about cutbacks. Large scale investments such as nuclear, where a plant costs billions to construct, are likely to be substantially slowed. Wind farms could still be built given government tax breaks, but the bottle necks come from transmission lines. Again, billions of investments are needed for the build-out, assuming all else being equal, including legal issues about access rights, compared with several months ago. Of course there could be "disruptive technologies" that come about and could change the world in short order, but should we count on that? If Paul Romer's Endogenous Growth Theory is any guide, the amount of resources put in would, broadly speaking, affect the R&D outcome.
As such, as the world economy recovers down the road, sharply rising energy prices could very well slow the rate of growth.
(1) While we will very likely see a global recession, which decreases demand of oil and eases prices, the relative reduction in the size of oil exploration and production now will mean much higher oil prices in the future, I believe.
New exploration and production, along with necessary infrastructure investments, could take 10 years or so before oil could start flowing. (Similar outcome, but in shorter time frames, will probably play out in other energy commodities.) Even though many large oil majors have not announced any significant cutbacks in oil investments, the national oil companies (NOCs), controlled by various governments and all in the top 10 in terms of production, may think differently. Higher oil prices to a certain level benefit them more (such as Venezuela). Hence, as the pressure to produce more is off with the sharp drop in oil prices, they could reduce their investment both to conserve cash and, consequently, raise longer term prices. NOCs also tend not to have good reservoir management, where, loosely speaking, the full production of the field may not be reached. Mismanagement could in fact reduce the amount of oil recoverable as well. Hence, on this thesis, a slower growth in supply over the medium and long term is likely.
(2) Alternative energy development is hampered by both the lack of fund due to the recessions and lower energy prices. Without a certain amount of promising alternatives in the pipeline, there would be few substitutes if the supply and demand of traditional energy sources become tight again.
The weak credit environment is already impacting start-ups on solar, bio-fuels or other alternative energy sources, with stories from the venture capital industries about cutbacks. Large scale investments such as nuclear, where a plant costs billions to construct, are likely to be substantially slowed. Wind farms could still be built given government tax breaks, but the bottle necks come from transmission lines. Again, billions of investments are needed for the build-out, assuming all else being equal, including legal issues about access rights, compared with several months ago. Of course there could be "disruptive technologies" that come about and could change the world in short order, but should we count on that? If Paul Romer's Endogenous Growth Theory is any guide, the amount of resources put in would, broadly speaking, affect the R&D outcome.
As such, as the world economy recovers down the road, sharply rising energy prices could very well slow the rate of growth.
Monday, October 27, 2008
A moving goal post
I wonder when this gyration in the market will subside. When will deleveraging, or the unloading of debt to boost return, be done?
(1) For investment firms, if I understand the process correctly, the deleveraging goal post might be moving, prolonging a rather painful process. (Leverages are essentially debt that firms borrow to boost return. Say if I have $1's worth of asset, borrow $4 and invest $5, then a 10% increase in return, ie $0.5, is almost equivalent to a 50% increase in return, since the original amount of asset was $1.) The problem is that the $1's worth of asset might be devaluing, which lengthens the deleveraging process. Say a firm wants to reduce its leverage from 20:1 to 10:1, it will have to sell assets. If the market is under massive deleveraging pressure, prices of assets are also driven down. Even if a firm has reduced its position from 20 to 10, if the value of assets are similarly driven down from $1 to, for argument sake, $0.5, then a 10:0.5 ratio is effectively a 20:1 ratio.
Given how long it took to build up this leverage and the size of it, the unwinding process will take time or that quick action will surely cause turmoil. Quick action is what is being observed now, driven in part by margin calls, redemption requests (or anticipation of such), or flight to safety from volatile assets to something safe.
(2) The next to deleverage are those consumers who loaded up with debt for purchases. I wonder how much banks and other financial institutions have marked down or set aside sufficient amount of reserves for the anticipated defaults on credit card, auto and loans on other purchases. (I still see ads where you can buy furnitures and don't pay until 2010 or 2012...)
One bright spot is the falling fuel prices that helps keep money in people's pockets, but it may not last long, given that some refined products' prices, such as a barrel of reformulated gasoline (RBOB), are less than a barrel of benchmark crude oil. This assumes, of course, that crude oil prices stay in the same range.... more later...
(1) For investment firms, if I understand the process correctly, the deleveraging goal post might be moving, prolonging a rather painful process. (Leverages are essentially debt that firms borrow to boost return. Say if I have $1's worth of asset, borrow $4 and invest $5, then a 10% increase in return, ie $0.5, is almost equivalent to a 50% increase in return, since the original amount of asset was $1.) The problem is that the $1's worth of asset might be devaluing, which lengthens the deleveraging process. Say a firm wants to reduce its leverage from 20:1 to 10:1, it will have to sell assets. If the market is under massive deleveraging pressure, prices of assets are also driven down. Even if a firm has reduced its position from 20 to 10, if the value of assets are similarly driven down from $1 to, for argument sake, $0.5, then a 10:0.5 ratio is effectively a 20:1 ratio.
Given how long it took to build up this leverage and the size of it, the unwinding process will take time or that quick action will surely cause turmoil. Quick action is what is being observed now, driven in part by margin calls, redemption requests (or anticipation of such), or flight to safety from volatile assets to something safe.
(2) The next to deleverage are those consumers who loaded up with debt for purchases. I wonder how much banks and other financial institutions have marked down or set aside sufficient amount of reserves for the anticipated defaults on credit card, auto and loans on other purchases. (I still see ads where you can buy furnitures and don't pay until 2010 or 2012...)
One bright spot is the falling fuel prices that helps keep money in people's pockets, but it may not last long, given that some refined products' prices, such as a barrel of reformulated gasoline (RBOB), are less than a barrel of benchmark crude oil. This assumes, of course, that crude oil prices stay in the same range.... more later...
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