Jim Zellmer's View from Madison

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Category: Energy

The costs of subsidizing solar electricity have exceeded the 100-billion-euro mark in Germany, but poor results are jeopardizing the country’s transition to renewable energy.  The government is struggling to come up with a new concept to promote the inefficient technology in the future. 

The Baedeker travel guide is now available in an environmentally-friendly version.  The 200-page book, entitled “Germany – Discover Renewable Energy,” lists the sights of the solar age: the solar café in Kirchzarten, the solar golf course in Bad Saulgau, the light tower in Solingen and the “Alster Sun” in Hamburg, possibly the largest solar boat in the world. 

The only thing that’s missing at the moment is sunshine.  For weeks now, the 1.1 million solar power systems in Germany have generated almost no electricity.  The days are short, the weather is bad and the sky is overcast. 

As is so often the case in winter, all solar panels more or less stopped generating electricity at the same time.  To avert power shortages, Germany currently has to import large amounts of electricity generated at nuclear power plants in France and the Czech Republic.  To offset the temporary loss of solar power, grid operator Tennet resorted to an emergency backup plan, powering up an old oil-fired plant in the Austrian city of Graz. 

The American phoenix is slowly rising again.  Within five years or so, the US will be well on its way to self-sufficiency in fuel and energy.  Manufacturing will have closed the labour gap with China in a clutch of key industries.  The current account might even be in surplus. 

Assumptions that the Great Republic must inevitably spiral into economic and strategic decline – so like the chatter of the late 1980s, when Japan was in vogue – will seem wildly off the mark by then. 
Telegraph readers already know about the “shale gas revolution” that has turned America into the world’s number one producer of natural gas, ahead of Russia. 

Less known is that the technology of hydraulic fracturing – breaking rocks with jets of water – will also bring a quantum leap in shale oil supply, mostly from the Bakken fields in North Dakota, Eagle Ford in Texas, and other reserves across the Mid-West. 

If there is one most frightening thing that war always exposes, even if one is on the winning side, it’s weakness in the supply logistics.  While most never consider it, official policy often changes during a war because supplies that are critical to the war effort seem in danger of being disrupted.  Such jeopardy, moreover, forces the accountants, economists and politicians waging the conflict to start thinking about how the world will be changed once the fighting has ended. 
Few today appreciate the fact that our foreign policy, particularly as it is tied to the Middle East, came about because of just such concerns in the first years of the Second World War.  As one might expect, that official policy was based on real fears that America would one day run out of oil. 
“The European War”
It was the summer of 1941 and the State Department had requested that the White House include Saudi Arabia in our Lend Lease program.  It wasn’t because the Saudis were going to become a direct ally against the European Axis Powers, but because we were about to embargo U.S. oil shipments to Japan.  Many believed – correctly, as it turned out – that this would probably lead to hostilities with Japan that would draw us into the war. 
Standard Oil of California, which had been drilling for oil in Bahrain for over a decade, now had oil concessions granted by King ibn Saudi.  The first six wells Standard drilled into the Arabian desert were nothing to write home about, but when Well No.  7 came in on March 4, 1938, the engineers and wildcatters all knew that Saudi Arabia was going to be an oil bonanza. 
Yet on July 18, 1941, Roosevelt refused the request for Lend Lease for Saudi Arabia.  He saw no immediate benefit to diverting U.S. dollars overseas simply because Standard had oil concessions there.  In any case, the outbreak of the European War in 1939 had reduced oil production in the Kingdom to an insignificant volume — a trickle, considering that American oil amounted to 60 percent of the world’s crude at the time.  Instead Roosevelt asked Federal Loan Administrator Jesse Jones to look into the possibility of having England deal with the Saudi King’s pressing needs. 

No matter how many of his Fed presidents claim they are not to blame for the high price of oil, the real problem starts with Ben Bernanke.  The fact is that when you flood the market with far too much liquidity and at virtually no interest, funny things happen in commodities and equities.  It was true in the 1920s, it was true in the last decade, and it’s still true today. 
Richard Fisher, president of the Dallas Federal Reserve, spoke in Germany in late March.  Reuters quoted him as saying, “We are seeing speculative activity that may be exacerbating price rises in commodities such as oil.”  He added that he was seeing the signs of the same speculative trading that fueled the first financial meltdown reappearing. 
Here Fisher is in good company.  Kansas City Fed President Thomas Hoening, who has been a vocal critic of the current Fed policy of zero interest and high liquidity, has suggested that markets don’t function correctly under those circumstances.  And David Stockman, Ronald Reagan’s Budget Director, recently wrote a scathing article for MarketWatch, titled “Federal Reserve’s Path of Destruction,” in which he criticizes current Fed policy even more pointedly.  Stockman wrote, “This destruction is, namely, the exploitation of middle class savers; the current severe food and energy squeeze on lower income households … and the next round of bursting bubbles building up among the risk asset classes.” 

In a testing cell tucked deep in the bowels of Navistar’s engine plant and technical center here, a hulking prototype of a truck engine sits behind a large glass window like a patient on an operating table.  A snarl of sensors and wires is attached to nearly every part of the humming engine, feeding reams of data to a battery of computers and watchful engineers in the adjacent control room. 
One measurement — for nitrogen oxide emissions, or NOx — is of particular concern to Navistar.  From 2010 onward, all new truck engines must achieve tough, near-zero limits for NOx, a chief ingredient of smog.  Virtually every truck maker besides Navistar chose to use an add-on system to their existing engines that uses a fluid cocktail to help neutralize the pollutant as it makes its way out of the exhaust. 
Navistar went a different route, deciding to invest hundreds of millions of dollars to refine an engine that produces minimal NOx in the first place.  At the same time, the company attacked the competing systems, suing federal air quality regulators and claiming that the add-on technology was so flawed that it failed to meet the clean-air requirements. 

On June 25, 2008 I blogged asking the question: Is Oil A Cancer Or A Cure?  At that time, the price of a barrel of oil had not yet reached its apex of $147 per barrel, but was well on its way.  Based on findings by the Air Transport Association’s superb economic analysis team led by chief economist John Heimlich, the U.S. airline industry paid the equivalent of $174.64 per barrel [price of a barrel of oil plus the equivalent cost to refine crude into jet fuel (the crack spread)] on July 11, 2008.  By December 23, 2008 the price of a barrel of West Texas Intermediate had fallen to $30.28 per barrel.  So far in 2011, we’ve seen a similar surge in oil prices, but based on current geopolitical events, I am not expecting another $117 drop in the price of a barrel of oil like we witnessed in 2008. 
I’m actually wondering what happens if the wave of Mideast political upheaval washes over Algeria?  Or Saudi Arabia?  Some economic experts say the price of oil could rocket past the $200 threshold. 
In 2011, the industry has paid an average of $89.15 per barrel of crude and another $25.80 in the crack spread for a total cost of “in the wing” jet fuel of nearly $115 per barrel.  Since February 22, 2011 the industry has paid more than the equivalent of $120 per barrel for jet fuel.  On March 1, 2011 the industry paid the equivalent of $132.17 per barrel for jet fuel including the crack spread of $32.54.  For all of 2008, the industry paid the equivalent of $25 per barrel to refine crude into jet fuel.  In the last five days of trading the crack spread paid by the industry is nearly $30 per barrel. 

Getting America off imported oil is always urged in the context of national security.  No matter how often that refrain is repeated, however, it always points toward how much imported oil American motorists use. 
It’s never about the amount of oil imported into the United States, refined into numerous products and shipped back out of the country.  Nor are people arguing that we need to quit using imported oil for manufacturing concerns – like making fertilizers to grow corn, to make into ethanol to put into our gas, so we can quit importing oil. ( That’s the most comical circular argument currently making the rounds.)  But we also use oil for things like asphalt for our roads, and in the plastics industry, and even the most ardent “get America off imported oil” advocates don’t talk about constraining those industries. 
In reality, the country from which we import the most oil is Canada.  And I’m fairly certain that we aren’t too worried about the national security aspect of bringing that oil into America, now or in the future.  Yet we’re still hearing the constant mantra that this is a national security issue, and that’s what troubles me most.  And, if you own one of the nation’s 240 million vehicles, the “national insecurity of imported oil” refrain should trouble you, too. 

One of the great arguments against biofuels is the wisdom, if not the morality, of using land to produce fuel instead of food.  But research out of Illinois suggests it doesn’t have to be an either-or proposition. 
Researchers at University of Illinois Urbana-Champaign have found that biofuel crops cultivated on land unsuitable for food crops could produce as much as half the world’s current fuel consumption without adverse impact on food crops or pastureland. 
The study, published in Environmental Science and Technology, identifies land around the world that is unsuitable for food production but could be used to raise biofuel feedstocks like switchgrass. 
According to the researchers, many studies examining biofuel crop viability focus on yield — how productive the crop can be.  They wanted to examine land availability to determine whether it is possible to produce sufficient biofuel to meet demand without sacrificing food production. 

Diesel and jet fuel are usually made from crude oil.  But with oil prices rising even as a glut of natural gas keeps prices for that fuel extraordinarily cheap, a bit of expensive alchemy is suddenly starting to look financially appealing: turning natural gas into liquid fuels. 
A South African firm, Sasol, announced Monday that it would spend just over 1 billion Canadian dollars to buy a half-interest in a Canadian shale gas field, so it can explore turning natural gas into diesel and other liquids.  Sasol’s proprietary conversion technology was developed decades ago to help the apartheid government of South Africa survive an international oil embargo, and it is a refinement of the ones used by the Germans to make fuel for the Wehrmacht during World War II. 
The technology takes “a lot of money and a lot of effort,” said Michael E. Webber, associate director of the Center for International Energy Environmental Policy at the University of Texas, Austin. “ You wouldn’t do this if you could find easy oil,” he said.