Marcellus Shale:New York::Prudhoe Basin:Alaska. Why Not?

The New York Department of Environmental Conservation has put out a 46 megabyte document with proposed regulations on horizontal drilling and hydraulic fracturing  of the Marcellus Shale formation in the state. The regs together with existing regs cover almost every known possibility of risk with some ways to mitigate the risk.  The DEC has asked for comments. I just posted one which you will see below. I don’t understand why these massive game-changing formations, the Marcellus, the Bakken and others, should not be treated the same as the Prudhoe Basin for the benefit of those states under which the formations exist.  These are depleting assets–and they produce GHG emissions. Why not create Permanent Funds designed to create something lasting beyond the lives of these assets. And why not create some mechanisms to deal with possible unintended consequences from the exploitation of these resources?  These formations and the technology to exploit them are game changers. They have certainly quieted the dialogue on Climate Change as we focus on Energy Independence and that natural gas takes us part way to reduced emissions relative to other fossil fuels. Let’s not forget: it is still a fossil fuel. I can’t solve everything in this post, but take a look at the suggestions for how to deal with the Marcellus. The submitted DEC comments begin below:

The SGEIS of September 7, 2011 provides a very comprehensive review of the risks associated with Horizontal Drilling and High-Volume Hydraulic Fracturing and provides mitigation against many of the known risks either through regulation, approvals or restrictions on where drilling can take place. However, in its work, the DEC with the assistance of Alpha Environmental does recognize that there are substantial risks and actual likelihood of occurrences of damage as indicated by the restrictions on where drilling can take place as well as the substantial amount of requirements necessary to be allowed to drill, to handle the materials and back-flow from the processes, to reduce the GHG emissions and to transport materials and the ultimate hydrocarbons resulting from the drilling. The Marcellus and the Utica formations as well as others that may be exploited represent a significant economic opportunity for New York and other states as well as the United States in general. There will be much comment on the proposals put forth in this document. No doubt, the Oil and Gas Industry will have comments on the costs of the proposals as well as whether the risks highlighted are significant enough to warrant all the proposals for mitigation.  Economics will be a key factor. These formations, the Marcellus in particular, represent a low cost source of domestic energy, in some ways not too dissimilar from the Prudhoe basin, which has been a major economic boon for Alaska and the US.  I would like to suggest that, in addition to the proposals in the SGEIS, that the state of New York, in conjunction with the other states that exist over these formations, consider the following:

1)    Much as the state of Alaska created a Permanent Fund for collection of royalties on the production from the Prudhoe basin and other Oil and Gas activities, there should be a similar Permanent Fund developed for the states where hydraulic fracturing and any other approaches are used to exploit these enormous and game-changing formations. An appropriate royalty (Alaska takes 33%) should be determined. While a small portion of the royalties could go toward the various state operating budgets, the majority would be available for the creation of alternative energy or energy efficiency opportunities to ultimately replace or supplement the production from the formations, as they are depleted. It could also be used for training of local residents in the technical skills required to participate in the manpower requirements for the industry. The royalties could also be used to support the inspection efforts and other mitigating elements in order to support the O&G industry in its exploitation of the formations. The DEC has indicated that drilling approvals will be slow as there are not sufficient resources to meet the likely demand.

2)    While the DEC has proposed many mitigations to avoid problems, specifically with water contamination, there is no certainty that problems, anticipated or unanticipated, will not occur.  The O&G industry is certainly of the view that there are no serious problems that could affect the various water supplies in the state or water that either contains animal life or is important to land-based animals’ survival. It would make sense for the industry to put up a sizable bond to deal with any problems that do arise, requiring treatment plants or other means to correct any such problems. If as the industry states, the occurrence of such problems is remote, such a bond would bear a reasonable price, and could be targeted to specific elements. For example, while the NYC watershed has been excluded from drilling specifically, drilling will be allowed to take place not far from the borders of the watershed area. NYC consumes about 1 billion gallons per day of unfiltered water for which it collects about $1 billion a year. To construct treatment plants and maintain them could cost as much as $30 billion and add about a billion dollars per year to operating costs.  In the event that the unforeseen happens or appears to be happening, it would be good to know that funds are available to insure that sufficient potable water continues to exist.

3)    The DEC has also proposed rules to mitigate GHG emissions, which could be high in the early stages of the process if methane releases are not contained. It is understood that under steady state conditions natural gas produces fewer GHG emissions than coal or oil, but there are still emissions.  And such emissions can exceed those of other hydrocarbons if there are methane releases during the early hydrofracturing activity. A CO2 or CO2e charge per ton above a certain level of emissions would provide an economic incentive for the industry to keep emissions levels in the drilling, production and transportation activity to a minimum. Such a charge could revert to the Permanent Fund.

I leave it to the experts to determine the feasibility of these suggestions and the appropriate economics. Exploitation of the Marcellus and other gas reservoirs in New York and elsewhere in the country can have a major impact on the economics of the United Sates and can serve as a significant interim step toward reduction of GHG emissions if done properly. Much as Alaska, Texas and other states have benefited greatly from the exploitation of resources within the states, New York should as well. I commend the DEC for the thorough review of the risks associated with this method of drilling and production and its proposed rules for mitigation of those risks. I would hope that we use this opportunity to benefit the state and its residents appropriately, and consider the long-term effects of exploiting a depleting hydrocarbon resource.

Shutting Down Nuclear Power in Germany? This May be the Best Thing for Renewable Energy and Emissions Reductions.

So, Germany is shutting down all of its nuclear plants by 2022. At the peak the plants produced 27.5% of Germany’s electricity. Renewable Energy is now up to 17.5%. There is a big gap to fill in a short period of time and it has German industry and the utilities screaming. This is on the path to have 80% of all its electrical energy come from non-carbon sources by 2050 in addition to a 50% reduction in consumption.  While one could question eliminating Nuclear from the clean energy picture, what Germany is doing will very likely produce an acceleration in innovation, efficiency and the development of intellectual property that will 1) keep Germany’s energy costs from rising, 2) expand Germany’s trade surplus 3) increase Germany’s share of global Intellectual Property and 4) reduce the world’s CO2 emissions more than would have occurred otherwise. This is a bold, audacious step and does require a leap of faith that the German engineers and scientists will accelerate the pace of economic renewable energy development, and German industry and its people will further increase the efficiency of energy usage. I think they will do it, primarily because they have to and they have the talent to do it. This may be one of the most exciting moves by a government to date in the renewable energy field—and a positive move on emissions.

In the meantime, the US is looking for more carbon in less mature formations to fill its energy needs. We’ve basically found all the pooled oil and gas that took 300 million years or more to produce and are now going after “tight” carbon in shale formations as our solution to meet energy demand and produce energy independence. While the shale gas most likely will produce fewer emissions than coal over the 100 year life of a formation, it is still producing carbon and requiring a fairly aggressive use of other resources, primarily water, and some real brute force in liberating the carbon. This, too, is a bold step with some big environmental risks associated with it. It may prove to be a bold step in the wrong direction. We will take a closer look at this in a future blog. The move by Germany is an exciting one, but it saddens me to see the innovation and the aggressive steps to produce the lower carbon world we need taking place elsewhere.

Reduce Oil Imports by 1/3? Can we do it all with fuel efficiency?

The short answer is maybe. It would require that vehicles being sold ten years from now would have to average 75 miles per gallon—not impossible, but  improbable–unless. It requires political will, higher and real CAFE (fuel efficiency) standards and continued technological improvements or a gasoline price that rises substantially. The latter two are the factors about which I have the most confidence.

I hate to do this, but we need to understand the numbers. Try and stick with me on this. These numbers are rough but get us into the ballpark.

We import 9 million barrels of oil a day, about half from OPEC by the way. So we need to get rid of 3 million barrels a day or 1.095 Billion barrels a year. Now, those barrels don’t just go into making gasoline, but let’s make the leap of having all that reduction come from gasoline.  Based on refining experience, each barrel of oil typically produces about 19  gallons of gasoline (there are 42 gallons in a barrel). If we are to get rid of 3 million barrels of oil per day that means we need to reduce gasoline consumption by about 46 Billion gallons (42 gallons per barrel x 1.095 Billion barrels);  that’s out of the 160 Billion gallons consumed each year by the 240 million vehicles on the road today. (Notice that I capitalize Billion. We are talking BIG numbers.)  Those vehicles, each traveling about 12,000 miles a year, are actually averaging about 18 miles per gallon. To think about it another way (inverted), each vehicle is consuming about 0.0556 gallon per mile or 0.00132 barrel per mile. Pretty exciting so far…

Over the next ten years at a scrappage rate of 5% a year we will replace half of those 240 million vehicles. That’s where the reduction in consumption has to come from.  Let’s calculate what the mileage improvement has to be to eliminate those 1.095 Billion barrels a year.   Currently the half of the fleet that will be scrapped, which is less efficient than the whole fleet, is likely consuming about 1.8 Billion barrels a year or 4.93 million barrels a day. We would need it to be consuming only 1.93 million barrels per day or 0.705 Billion barrels a year or 29.61 Billion gallons per year. If each vehicle in that half of the fleet is traveling 12,000 miles a year it would have to be averaging about 49 miles per gallon. You can do this calculation yourself by dividing the total mileage for the fleet (1.44 Trillion miles) by the gallons expected to be consumed (29.61 Billion).  To get that average for the 120 million vehicles assuming a linear increase in miles per gallon over that ten-year period, the vehicles bought in 2022 would have to be averaging 75 miles per gallon.  While the all-electrics are already getting over 100 miles per gallon equivalent and many of the hybrids over 50 mpg it is still a stretch to think that we will get the average on all vehicles sold in a year up to 75 miles per gallon in 10 years or about 50 miles per gallon in 5 years.  It is not impossible, but would require one hell of a change in the growth path for highly fuel-efficient vehicles, supported by significantly higher CAFE standards.  The problem is we are starting with only 40% of all vehicles being subject to the higher CAFÉ standards. We have a lot of light trucks and real trucks on the road.

We should strive for all 3 million barrels a day coming from fuel efficiency. As I said, political will, CAFE standards, and technology are required, and higher oil prices are a given unless we do this. And, by the way, every million barrels a day of gasoline we don’t use, reduces CO2 emissions by 148 megatons per year.

Management Trends in the 21st Century–Climate Change and Innovation play their part

I recently posted a comment on the Harvard Business School Working Knowledge website where a discussion is developing on the Most Significant Ideas in Management for the 21^st Century. Below are five ideas I posted, all of which relate to management trends vs. societal trends. Of course, societal trends are almost always incorporated in forward thinking management views:

1)    Global Businesses, regardless of where they are headquartered, will be run by non-Western citizens.

2)    In the early part of the century there will be a significant age shift to a younger senior management structure effectively skipping a generation.

3)    With the accumulation and availability of investment capital outside the Western World, entrepreneurship will truly become global.

4)    A recognition of the growing real financial liability a corporation faces from not incorporating environmental sustainability and other societal issues into its decision-making will lead to widespread adoption of CSR. We already are seeing a valuation differential in the marketplace between CSR adopters and their counterparts.

5)    As the developing world begins creating its own patentable Intellectual Property, the fight over IP will become global and intense and, to some extent, may offset expanding universal access to information. The creation of IP may assert itself as a higher objective for management even though the shortened life of a new idea decreases its present value.

By the way, this is an interesting forum and I would urge others to contribute to it, http://hbswk.hbs.edu/item/6639.html?wknews=02222011 .

The last two bullet points above clearly relate to what I think will be a management requirement—incorporating the impact of Climate Change on conducting business as the century progresses.  There is an implicit growing business liability related to lack of incorporation of likely legal and administrative response to emissions of various types as well as an impact on various factors of production. Some of that liability is already showing up, and in other instances, e.g.,  super fund sites, acid rain, there is some element of retroactivity that can be applied. It is not an easy present value calculation to determine if and when a corporation takes action, but it is not clear that many corporations are even making the calculation. Intellectual Property is a part of this calculation. Of course, here, it is not just related to innovations around Climate Change, but all innovations. I wrote,  in an earlier post, about steps China is taking to enhance its ability to create and protect Intellectual Property. Maybe coincidentally–or maybe not–the US is now making significantly more noise about increasing its spending on R&D and patent services in the face of significant pressure to cut federal spending. If the differential that the market place is willing to pay for reduction in liabilities through CSR investment and for ownership of Intellectual Property becomes more apparent, the pressure to lay out clearer guidelines in response to Climate Change and to improve our patent services should come from the corporate world with the government following. That is the way it should be. I hope it won’t be too late.

One Million Electric Vehicles by 2015? Well, It’s a Start.

In the State of the Union address President Obama announced a goal of 1 million electric vehicles on the road in the United States by 2015.  Part of that plan involves continuation of some existing incentives such as the $7500 credit on a purchase, but some new incentives and actions as well—incentives to communities for vehicle fleet conversions, HOV access and other steps. In addition the GSA will purchase 40,000 alternative fueled and fuel-efficient vehicles as replacements for aging vehicles in its fleets. 1 million sounds like a nice number, and we have to start somewhere, but let’s hope the number is significantly larger.

There are over 240 million vehicles on the road in the US now, and a replacement of 5-7% of those vehicles a year. Those vehicles average about 20+ miles per gallon.  Replacing 0.4% of the fleet with vehicles averaging, let’s say, 100 miles per gallon equivalent, under the most optimistic assumptions reduces our oil-equivalent consumption by about 12 million barrels a year and CO2 consumption by about 4 million tons.  Unfortunately, we import 9 million barrels of oil a day.  However, it’s a start! It also has the effect of stimulating activity in electric vehicles and associated and competitive technologies.  Importantly, it will stimulate activity on increased fuel efficiency of all types.  In my view, this is where we need to focus—set very aggressive targets on average fuel efficiency for each manufacturer selling in the US with a goal to getting the whole fleet—all 240 million vehicles–up to 60 miles per gallon or better in 25 years. That does start making a big dent in CO2 emissions and our dependence on foreign oil. I have written about this in earlier posts, (see TRADE DEFICITS, ENERGY INDEPENDENCE AND, OH YES, CO2 EMISSIONS—November, 2009).  In other words, provide incentives for fuel efficiency in general.  With electric having the potential for the highest efficiency, the credits and other specific incentives there will drive the rest of the industry, but lets get more explicit on very aggressive fuel efficiency targets.  The competitive juices and the resulting innovation will get us there.  President Obama talked about out-competing and out-innovating the rest of the world. That has to start with competition and innovation at home.  More to come.

 

California Climate, Iben Browning and the Business of Weather

Southern California lashed once more by rain, slides

The tail end of a storm that dumped rain on Southern California for nearly a week gave the region one final lashing on Wednesday, burying houses and cars in mud, washing hillsides onto highways, flooding urban streets, threatening dozens of canyon homes and spreading filthy water that prompted the closure of 12 miles of beaches. – Los Angeles Times, December 2010.

“The weather in California has been ‘abnormal’ for most of this century. It will begin returning to the ‘normal’ weather of the 19^th century. You can expect colder and wetter winters and hotter and dryer summers.” — Iben Browning, c. 1975.

In the early days of my analytical career in the ‘70’s, I was fortunate to be a part of Mitchell Hutchins, a research boutique that ultimately was merged into PaineWebber.  Among the many assets of Mitchell Hutchins was its consulting program with the likes of Otto Eckstein, Bill Moyers, Henry Kissinger, David Broder and others spending time internally with us and with our clients.  One of those “others” was Iben Browning, who originally was hired by our food analyst, Roger Spencer, to do short term and seasonal weather forecasting, in order to help us predict soft commodity prices. While Iben’s work turned out to be quite useful on the short-term weather front, he was a man of many talents. His PhD was in zoology. He wrote several books, had over 60 patents, was a test pilot, spent some time with the DOD on geopolitical strategy related to weather patterns and the ability to influence same, and developed a keen interest in long term weather forecasting and climate change. He was an engaging speaker and quickly became a regular with our investing clients as much in demand as some of those with significantly higher profiles.  He ultimately developed some fame as a forecaster of earthquakes and volcanic activity based on changing gravitational pulls on the earth from the alignment of other celestial bodies.  Unfortunately, a rather precise but unfulfilled prediction of a quake in the Mississippi Valley in late 1990, which generated enormous media attention, turned fame to infamy.  He died of a heart attack 7 months later in his home in Tijera, New Mexico; a home rumored to be a house trailer (safer than a real house,  in his view, when an earthquake hits) on rather barren land that he ultimately expected to become arable and fertile as weather patterns shifted over the next century. As with many involved in forecasting, one is only as good as one’s last prediction. Iben does not get much credit for a long history of fairly accurate forecasts done with flair and more data than “An Inconvenient Truth.”  He is remembered for the “New Madrid” quake prediction which even became a country and western song. You can view several renditions on You Tube, if you choose: http://www.youtube.com/watch?v=C5QCeSS03RE&feature=related.

Iben used to start every presentation with a standard punch line: “The next Ice Age will occur in about 10,000 years.  Those people who say it begins in 2000 years are just trying to scare you.”  His other perennial statement was the one that started this post and to me of most interest. At the time I did not totally understand his logic. It consisted of looking at historical weather patterns as reflected in tree rings and other data points, an expected reversal of the pattern of emissions–particularly in Southern California, sunspots and a warming of the east-west currents in the Pacific. In retrospect, the changing weather patterns in California may reflect a combination of increased CO2 emissions globally, producing generally more extreme weather patterns, combined with a more localized moderation in emissions which has eliminated some of the heat trap effects as California has benefited from national improvements in emission controls combined with even more stringent efforts within the state. In other words, the combination of the effect of global emissions on weather patterns with relative improvements locally may be returning California weather to its 19^th century patterns with more seasonal extremes from today’s changes in climate: colder and wetter winters and hotter and dryer summers. At the moment, Browning’s predictions seem to be on point.  It’s all relative, though. I am not suggesting that coastal Californians need to move—yet. Nor should they reverse their efforts to slow emissions.  It may just be another interesting phenomenon of the Climate Change we are experiencing, or another Iben Browning prediction that will ultimately prove to be wrong. I would bet on the former.

This also brings us somewhat full circle to the value of understanding weather as a part of one’s investment decisions. As we have become a more global economy where supply  of soft commodities, or lack thereof, in one part of the world affects worldwide prices, the ability to predict positive or negative weather patterns can be quite important to investment and business decisions. I think this is being magnified by the more extreme variations in weather patterns that can come out of these early stages of Climate Change. I would only expect these patterns to become even more extreme as temperatures continue to rise.  Corporations involved in the agricultural industries have always paid attention to the weather. Investors, as evidenced by Iben Browning’s popularity, have as well. Today, those making the most use of weather forecasting would appear to be a number of hedge funds with the ability to place bets using a wide variety of instruments, where value is affected by a change in the monsoon season in India or extended drought in the Sacramento Valley. As these extreme weather events become more frequent the Iben Brownings of today’s world may become more prominent features in both the investment community and the media. Climate Change will continue to produce a new class of celebrities some of whom will stay with us for a long while.

What to Expect for the Economy and the Climate in 2011

2011 is shaping up to be an interesting year for the global and the US economies, and it could be an interesting year on the climate change front as well. In mid-December, 2010, it is the normal time for prognostications on the next calendar year by those who actually do the work and may know what they are talking about and those of us who read the work and make our less data-driven forecasts.  Indulge me while I put some of my thoughts about next year in print.  I think this is an important exercise for anyone to do.  It establishes a base line from which to look for and measure deviations from expectations. And it puts in place a discipline that I always suggested to analysts who worked with me: once one has developed a point of view, spend the time looking for disconfirming information. At the same time, one needs to step away from the data and do a little speculation, particularly when in the early stages of a change in direction and a possible change in the second derivative of an established trend. So here we go:

The Economy. I think next year could be surprisingly good in the US with the likelihood of us printing a 5% GDP quarter at some time during the year. The truth is the economy has been clicking along reasonably well in most areas excluding the construction industry. That industry, which at its peak can employ 10 million people, has always produced the amplitude on the downside and upside to our statistics on employment and overall GDP.  Without much lift there we are still starting to see employment numbers improve. The trade numbers, aided by a weaker dollar over the last year working its way into purchase decisions, will also add to GDP, even if the dollar does better than many expect over the next year. At the same time, we have just passed a very stimulative tax package, which puts money in wage earners’ pockets as well as corporate America, while quantitative easing continues. QE2 and the tax package probably represent the last of the stimulus efforts, which almost always are lagging indicators of economy. We do have some issues around several state budgets, but the responses by the new crop of governors could be surprising, maybe because they have to be.  One can almost sense a palpable shift now toward addressing the federal deficit with the Budget Commission’s recommendations producing some fundamental change. It may not all happen next year, but I suspect that before we are done, we will see some major changes in the tax law. I am looking forward to a 28% top rate on income and I will accept the other changes that get us there. Lots of details to observe along the way including what’s happening in the rest of the world, but if the US surprises, that may be enough.

The Climate. In spite of the cold December in populous areas of the Northern Hemisphere, 2010 may end up being the second or third warmest year globally since measurements began in 1880.  There are some indications that the changing weather patterns are themselves a product of long term anthropomorphic-driven climate change. Based on what took place in Copenhagen at the end of last year and what was just concluded in Cancun, there will be no concerted world-wide effort to do anything other than recognize that there is a problem requiring some movement away from a carbon-based global economy or simply adaptation to a warmer world. On the other hand I continue to be amazed at the innovation that is taking place globally to produce non-carbon or low carbon solutions to energy needs either through greater efficiency or truly new economic approaches. These include the transportation sector in most countries where mileage standards are much higher than in the US. These changes are driven by a desire for energy independence, economic innovation, or a response to the will of the people, even in China.  It is sad to see the limited response by the US which will ultimately result in much of the new technology being owned and controlled elsewhere. We should not be buying 9 million barrels of oil a day from other countries for many reasons well beyond the effect on the atmosphere.  And we don’t need to take on the cost and risk of additional carbon production domestically as a way to eliminate our trade imbalance, although natural gas is an interim step in the right direction. We do need to support the technology and innovation that can occur domestically to move us away from carbon and affect our trade balances as we export these solutions to others.

More to Come. There is much more to talk about on both the economy and the climate. Stay tuned.

 

“Cool It” Redux

It is worth seeing the commercial version of “Cool It.”  Hurry, though, since I don’t think 4 people in an audience at each showing will be commercially viable.  Ondi Timoner must have gotten more control over the final product than I thought she would.  The commercial version is quite balanced.  There are some fairly sharp digs at Al Gore and “An Inconvenient Truth,” but a recognition that Gore brought the topic of Global Warming to the forefront. Let me get some of the critiques out of the way:  There’s a little too much of “We’ve only seen a one foot rise in sea levels in the last century,” “… life is good with standards of living having risen substantially,” etc. In other words,  “We’ve jumped off the 50-story building and as we pass the 25^th floor things actually look okay.”  Bjorn Lomborg points out that there is a bell curve of potential global warming outcomes and the alarmists only use the low odds extreme possibilities to make their case for immediate action and large expenditures.  However, he turns around and uses the least possible impact of the current actions on temperature change and sea level rise to make his case for diverting resources away from climate change toward other pressing needs.  He is right regarding the need to address other issues, poverty, health, housing, etc., but, as Ned Babbitt points out in a comment below, Lomborg doesn’t provide a lot of documentation for the expenditure levels he calls for.  Those may exist in his book of the same name.  I could go on, but these are all just nits. Go see the movie!

Lomborg goes out of his way to affirm that he is a true believer in global warming, that man is the big contributor to the path we are on, and that we need to do something about it. However, he believes that the solutions being implemented, cap and trade, electric vehicles, windmills, solar PV are just not adequate today to deal with the problem and much of the dollars being invested could be put to better use. I have to agree except in the case of the transportation industry, where I believe the solutions are there—they just haven’t been implemented. Elsewhere, the technologies we are using today are just not adequate to solve the problems in an economic fashion without an explicit price on carbon. The documentary spends a fair amount of time on geo-engineering, which Lomborg thinks may be necessary as stop gaps because we won’t have developed the economic solutions that can move us away from a carbon-based energy system in the right time frame.  His call is for spending more of the money on new technologies and innovation and less on today’s implementation, and in the process freeing up capital to deal with the other needs of the global society. The documentary supports the case by taking us on a whirlwind tour of some of the new technologies in the developed world that could get us to the right solutions. Whether it is Nathan Myhrvold’s work on 4^th generation nuclear technologies, Stephen Salter’s work on wave energy or cloud whitening, or Hashem Akbari’s work on mitigating the urban heat effect, the journey through the new technologies is exciting and encouraging.  The solutions are there, in the lab, in prototypes or in a scientist’s head.

Unfortunately, most of the solutions don’t fit today’s venture capital model of low investment and quick return, which is still available in various aspects of the internet space.  The work that is being done is occurring in university labs based on government grants and other non-profit funding with the exception of the Myhrvolds of the world who are recycling the capital from earlier software/internet ventures into this new and exciting field. The other small exception is in those few cases where adaptation, primarily to rising water levels is already a requirement. The Dutch cannot really afford to take the chance that the low end of the distribution curve of climate change will be the end result. I don’t think the rest of the world can either.

We have to create the financing models that allow these innovations to progress to the next levels. Whoever does will own these technologies and the fruits of their implementation for their own geographies and certainly for the benefit of their own economies.  Lomborg’s whirlwind tour doesn’t get outside the developed world, but the innovation and implementation are occurring in the developing world at a startling pace as well. Go get excited by the view of what can happen as presented in “Cool It,”  and put some thought as to what needs to be done to move these innovations and others toward practical reality.

Cool It

At the Hamptons International Film Festival, I saw “Cool It,” the new documentary directed by Sundance two-time Grand Jury Prize winner, Ondi Timoner (“Dig!,” “We Live in Public”).  It features Bjorn Lomborg, author of “The Skeptical Environmentalist,” and a pariah in many climate change and environmental circles. I thought it would be good to “know one’s enemy,” and went armed with facts and data to refute what I expected to be hyperbole and assertions in the documentary. This was the first US showing of the film. It was very poorly attended as one might expect, given the environmental views of many of the Hamptons’ weekend residents. A mistake.

The documentary actually presents a quite balanced view of climate change.  Balanced in the sense of putting Climate Change into perspective along with all the other global problems we face today. Lomborg is actually a strong believer in the likelihood of climate change.  He also believes that the polarization on the topic brought about by some of the hyperbole coming from the climate change zealots has been a detriment to progress on solving the problems. I think he does understate the risks in an attempt to present a “balanced” view, using some of the same techniques that he accuses the zealots of using.  However, his conclusions are valid—the primary one being that more of the dollars that are going toward today’s solutions would be better spent on research and development at this stage, to come up with true economic innovations that would speed the shift away from carbon based energy. This version of the film doesn’t talk about the need for a higher price on carbon, although it is my understanding that earlier cuts did.

I suspect that by the time this film hits the commercial theaters the final producers’ cut will be more of a polemic against Al Gore and others who have been a big part of raising awareness on this issue. I hope to see it when it becomes commercial, and I would urge others to do the same. I also hope that an earlier cut makes it to the Internet so one can compare the director’s apparent intent with the final product. Timoner’s responses to questions after the screening portrayed an intelligence and understanding that is already not showing up in each cut as it makes its way from the film festivals to the multi-cinemas for mass consumption. Lomborg will likely continue to be viewed as a pariah in certain circles, when his thoughts should be broadly incorporated into our efforts to deal with this and other serious global problems.  Read the book. See the movie. And get your hands on a director’s cut, if you can.

Trade Deficits, Energy Independence and, Oh Yes, CO2 Emissions

Our trade deficit with the rest of the world widened in September to $36.5 Billion, more than was expected.  Oil prices, a weak dollar and a rising deficit with China were viewed as the culprits. To the extent the trade deficit widens it reduces the growth of GDP. So economists are lowering their growth rate numbers for the third quarter and shaving numbers for the future as well. With President Obama’s trip to China in the news, journalists and others have jumped on the “undervalued” Chinese currency as a systemic problem that China must correct to solve the US’s trade problems and maybe those of the rest of the world as well.  It is highly unlikely, in my view, that a rise in the value of the yuan would do much beyond shifting the manufacture of some of the goods the Western world is buying from China to other Asian countries. I also think those countries, which already have strong trading relationships with China, would remain within the Chinese supply chain.  Nominally, our trade deficit with China might shrink, but it would rise with the other lower cost countries within the Asian sphere that are increasingly an integrated  part of the new center of manufacturing for the world. Of course, in the short term, deficits would rise as US companies would not easily shift from the established supply chains they have which are working well. Some combination of profit margins falling and prices rising on finished goods would be the more likely result.

So let’s, instead, turn to something that we control that would over time reduce our trade deficit—eliminating imported oil. I wrote about this in my post “Our Mileage Standards Are a Joke,” but let’s do it again with some refinement.  I apologize for all the numbers but we have to deal in facts if we want to get to a solution:

We are still importing close to 10 million barrels of oil a day, about half from OPEC (with Saudi Arabia and Venezuela the biggest), a fourth from Canada and a little more than 10% from Mexico. We have about 240 million cars on the road traveling about 3 trillion miles a year, consuming 4 billion barrels of gasoline or about 11 million barrels per day. At a scrappage rate of 4.5% a year we will have a new fleet of cars on the road in 20 years.  By the way, the current rate of new car sales is about equal to the scrappage rate.  We aren’t adding to the fleet. If we pushed our mileage standards up to get us to 55 miles per gallon on new cars in 20 years (which is where the rest of the world is going already), our usage would only be 5 1/2 million barrels per day on its way down every year after that as continued scrappage eliminated the lower mileage vehicles. Given what we are seeing already from the new start-up car companies and Ford and GM I think we could blow those standards away. I also think scrappage would accelerate if there was a real breakthrough in miles per gallon on a broader class of new cars.  The eVolt gives us a hint of what could happen.

So what about the trade deficit?  Well, the reduction of 5.5 million barrels per day of oil equivalent at, say, $70 per barrel (pick your price) is a $140 Billion annual reduction in imported oil. That is giving no credit for exports of the technology created to meet these mileage standards if the US government truly supports the development of these technologies within this country. The ARRA and DOE grants to new vehicle and battery companies are a start.  It also gives no credit for a possible share gain by US based auto manufacturers as the new technologies grab hold.

And CO2 emissions? A little more problematic a calculation since it depends on what gets one to 55 miles per gallon.  The simple calculation is the elimination of 83 billion gallons of gasoline at 20  pounds of CO2 per gallon or about 830 Megatons of CO2 per year.

Certainly, this is not the only thing we can do to reduce the trade deficit, but it provides a partial solution to existing geopolitical, economic and climate change problems that we don’t really seem to be addressing.