Matthew Engel

National Resource Defense Council Loses Legal Battle Against US Government

The National Resource Defense Council, local state environmental advocacy groups and Native American tribes have been protesting the construction of a new $12 billion pipeline which stands to stretch from Alberta, Canada to Wisconsin, US. On August 20th, the U.S. State Department approved permits for Enbridge Energy to begin construction. The pipeline will allow for 450,000 barrels of heavy crude to be pumped from tar sands in Canada, transported, ultimately to be refined in Wisconsin, as reported by the Associated Press. Tar sands, or oil sands, are extra heavy deposits of “unconventional crude oil” stored as bitumen deposits - a substance similar to tar, or asphalt. Bitumen contains lead, arsenic, selenium, mercury and many other toxic elements. Until recently bitumen recovery had not been considered profitable to extract due to the necessary mining process. Since this material is nearly solid, harvesting this material requires heating the tar until it is nearly boiling deep underneath the earth, and then separating out the sand and water. Some of the world’s largest tar sands reserves are in Canada, which produced 44% of its oil from this source in 2007.

Affect on US Oil Consumption

As of 2000, the US was consuming 19.6 million barrels of oil per day, one quarter of the world’s consumption at an annual rate of 7.2 billion barrels. This rate of consumption is increasing by 2% annually. It is estimated that Canada contains roughly 1.7 trillion barrels of tar sands oil, and at the aforementioned rate, is enough to last the US 237 years. However, it should be noted the cost of extracting the resource is very high - both financially and environmentally. This type of oil, referred to as unconventional oil requires surface mining or other in situ techniques that require massive amount of water and energy. Therefore, the economic benefit of mining this unconventional oil source was non-existent with the relatively cheap cost of fuel until 2005. The chart below illustrates the price of light crude oil on the NYMEX from 2001 through 2009.

Here we can see that crude oil peaked at over $140/barrel in early 2008. Economists may consider the correlation of these record high costs as a precursor to the current recession seen in the US right now. It is difficult to calculate if this was an example of correlation or causation - i.e. did the record high prices of oil spur on the recession? or did a recession cause the price of oil to collapse? This link provides historical charts tracing the price of crude oil back to 1983. The massive monetary and industrial investment in tar sands oil production and transportation infrastructure is a sign of an important trend to come in the near future - the probable increase in costs of crude oil. Since Q1 09 there is a clear rise in the cost per barrel, and this trend is likely to increase, barring unpredictable political events abroad. This commitment and investment in construction could only be worthwhile if the price of crude was expected to rebound with a dramatic increase in price. At $75/barrel, the intensive energy required for tar sands oil mining is not economically profitable. The NRDC case described above was dismissed by a federal judge on procedural grounds, claiming the NRDC lacked the proper authority to challenge the pipeline’s environmental impact permit.

Future of alternative energy at stake

With all the government pledges and political talk about alternative energy investment, technology development, and job creation, the presidential approval of this project to go forward was a massive disappointment. Economists and environmentalists alike agree that the current long-term strategy of investing in oil production is a major step in the wrong direction (see Thomas Friedman Hot, Flat and Crowded). Sierra Club Executive Director Carl Pope says ”This project will lock our nation into a dirty energy infrastructure for decades to come”. “Instead of increasing our reliance on oil and piping in pollution, the State Department should support clean, American energy and the jobs that come with it.” The decision by the federal government to allow this construction and old polluting technology infrastructure to go in place is a significant blow to the alternative energy industry. Instead of supporting the research, development, and commercialization of alternative energy technologies i.e. cleantech, the federal government is tacitly approving the influx of billions of barrels of oil, the carbon monoxide that is produced as a biproduct and released into the atmosphere, not to mention the destruction of the natural environment from which this tar sands oil came from. From an economic standpoint, this project will produce jobs in the short term, but threaten a nancesent industry from burgeoning in the long term which ahs the opportunity to transform our country and our world. This project will cost American jobs that could have been created in the high-technology industry which sustains long term financial growth, opposed to short term construction projects that do not add to any new industry.

Essentially, this is a major victory for big oil sanctioned by our own government which is acting as a mouth piece for the clean energy industry while doing literally nothing to practically support it. The rise of cleantech is not an if, but when. If it not now, it will be in the future when petroleum resources are no longer economically or politically viable or people realize that burning oil for fuel is not sustainable. And if America is not a leader in this innovation, surely China and India will step up to the plate.

Even with the price of gas at an all time low in recent memory, it is still prudent to contemplate investing in an electric or hybrid vehicle when purchasing your new car.

Alternative Motor Vehicle Credit

The federal government continues to encourage the purchase of alternatively fueled vehicles in a limited way. Qualified electric and hybrid cars owners receive federal tax credit depending on the year, model, and date of purchase. The credit amounts can be found here, provided by the IRS. These credits are for a limited time and only apply to new cars bought after January 2006.

This is both logical and inevitable, since the price of gasoline is highly variable. There is no guarantee of a steady supply of oil into the US, and fluctuations in demand cause prices to oscillate. Fierce competition for resources world wide lead to wars and enviromental wastes. Whatever the reasons, the econimic data speaks for itself. Below is the average costs for one gallon of regular gasoline in the Northeast United States (New England). An increasing trend is clearly evident.

Regular gas prices in the Northeast United States show a strong increase over the last 15 years. The trend is expected to remain positive over the coming century.

This data is publicly available and can be downloaded from the Energy Information Administration whose goal is to provide official statistics regarding petroleum, natural gas, electricity, coal, and renewable energy usage. Data on crude oil prices and refinement can readily be found. The information regarding historical gasoline prices can be accessed here and was compiled by me into the previous diagram.

Interestingly, the above data was downloaded in October 2008, and is already reflecting a strong decline in gas prices. The current meteoric drop in price is not shown here, and there is no downfall on the graph quite like the drop we are currently experiencing.

Considering this data, one should intuitively think of how to strategically plan for long term stability regarding their vehicle costs. This includes a source of energy for your vehicle, like gasoline. However, many other forms of energy are available - most notable electricity.  Tax credits for electric cars range from $2,500 to $7,500. However, this is only available for a limited time: only for the first 250,000 vehicles sold domestically. In general, the most popular cars, such as the Toyota Prius have little tax credits. However, it is expected that the newer domestic hybrid vehicles, such as the Chevy Volt will see a significant tax advantage.

General Motors, where art thou? The once premier American motors company is now lying in ruins, begging for money. What happened? What is going on??

What happened was the SUV. The sale, retail, and resale value of all sport utility vehicles has plummeted south. For SUV owners, I am very sorry. For some SUV owners it is even necessary to have these cars, for work related transportation. But for the vast majority of drivers, large off-road vehicles are completely unnecessary. The vast majority of owners never (or perhaps once) take their SUV off-road for its intended use, instead using it to scare people on the highway while tailgating. This is not a practical use of our Earth’s natural resources. These trucks require roughly 50% more fuel than the average mid-size sedan to travel the same distance, and roughly 100% more fuel (or double the amount) than their compact, light weight, economy, or hybrid counterparts.

In addition, the cost of fuel in the United States is somehow subsidized. I do not pretend to understand how this happened or why, but gallon-for-gallon gasoline is roughly half the price in the United States than in Europe or even the Middle East. The worldwide market for these commodities is so extremely volatile, relying on gasoline alone for our nation’s transportation needs is a very risky proposition.

Finally, American automakers have seen the light. And as they lie in their deathbed, I ask why? Why has Chevy, GM, and Ford waited until just now to introduce these technologies into the mainstream markets? Why are you just beginning to engineer and mass produce electric vehicle technologies? Is it because hybrid or electric cars are stigmatized? The 2004 Honda Insight. The 2006 Toyota Prius. Not the most beautiful pieces of automotive engineering I have ever witnessed. Yet the insight can get an incredible 66mpg on the highway and 57 in the city!! I find it unusual that when the 2008 the Honda Insight was finally redesigned, it looks identical to the Prius. These cars are acceptable, but certainly not works of refined beauty.

And in 2009, we have the Chevy Volt. From its long awaited announcement at this year’s LA Auto Show, the Volt is the first ‘cool’ looking mainstream hybrid car. I could sit here and criticize the technology under the hood, but I will not. Instead, I will compliment Chevy on taking its vision, our vision, one step further and creating the first beautiful electric vehicle. Thank you!!

There has been a lot of talk recently about how changes in the economy are affecting the energy sector. This is an extremely important topic to anyone who has money invested in mutual funds, stocks, their 401(k), mortgages, housing or any retirement portfolio. Why? Because the face of the stock market, as we know it, is about to change. The past decade has seen large oil companies reigning supreme posting double digit growth, with natural gas vying for a close second. It is indisputable fact, that these products are natural resources. And it is also indisputable fact that these resources are finite, and their steadily increasing consumption will lead to a jump in price as the Earth’s reserves dwindle. Therefore, at some point in the future, any company which relies solely on oil or gas supplies will be bound for failure. This can be validated by the divestment of the world’s largest energy companies into renewable sources such as wind and solar.

The New York Times reported in late October that investors are nervous about prices for fossil fuels falling, which could cause alternative energy start-ups to incur heavy losses or declare bankruptcy as their market dries up. It is already difficult enough to obtain venture capital or equity financing in these times. Fluctuations in energy prices add considerable uncertainty to alternative energy (AE) technology based companies. It is well known that this industry is currently extremely vulnerable and will probably require strong government backing by means of subsidies and research financing. Personally, I think this would be a tremendous investment in our nations future - much better than investing in other securities that may continue to decline in value, such as American automakers.

Let it be known, that I have full respect for American car manufacturers - I just believe that are much to slow reacting to market forces and have been at the mercy of American oil companies for too long. Why else would they continue to market and manufacture the gas-guzzling SUV’s when all other nations across Earth are making smaller, lighter, faster cars which run on less fuel. I find that absurd, and unless Detroit mounts a drastic change and realizes that the future is electric and hybrid vehicles, they will be out of business by Q4 09.

This is my challenge to the next president of the United States: many of us see a new way forward, and hope that you can realzie this vision. Our hope is that you can solve both the economic and energy crises simultaneously with one blow: bringing alternative energy sources and electric vehicles to market will no doubt require large amounts of man power and resources while slashing our most damaging expenditure - oil. Creating thousands of new jobs for AE contractors, mecahical and electrical engineers, and scientists to design and install solar panels, geothermal systems, wind turbines nationwide. This would destroy our addiction to oil and usher in the green century we all so desperately need.

Much has been made of the recent drop in oil prices world wide. As we all understand, the price of almost everything in the U.S is directly tied to the cost of non-renewable fossil fuels. This is an extremely unfortunate situation, which we hope to change in the next century, the ‘green’ century some are calling it. I have seen more commercials and ads claiming their product are ‘going green’ in the past month than ever before. Apparently, even the oil companies are going green if you believe BP’s television ads, hardly a trustworthy source of information. The truth is, we could only hope for that type reality right now. Our automobiles are no cleaner than they were last year and our consumption of oil has steadily increased, even with record prices. You should note that value of stocks on the London Stock Exchange skyrocketed, bolstered by record profits of BP - British Petroleum. BP’s earnings were up 83% this year, meaning profits nearly doubled!! Profits increased from $4.4 billion to $8.05 billion this year alone, due to an increase in energy prices.

However, as Thomas Friedman of the New York Time’s reports, the recent (temporary) slump in energy prices has sent the alternative energy (AE) companies scrambling. AE investors are watching their stock holdings crumble as people run to the gas station to buy their $2.89/gallon petro. This is a real shame, however it is fleeting. I think we can all safely assume that after the election prices will resume their normail uphill climb and alternative energy technologies will once again be in full demand.

Therefore, we should all be prepared for a huge spike in gas prices at the end of this year. For the record, it should be noted that in July regular gas was costing $4.11 in the US and oil was selling for nearly $150 a barrel, which is now down roughly 25% at the pump and 50% less for a barrel of oil ($64.02 today on NYME). With the economy diving and spiking wildly, consumer confidence has steadily declined leading to less spendong on recreational items. In turn, this has led to a decrease in fuel consumption and with an oil glut, prices have bottomed out. Thankfully, OPEC has been on the case and called an emergency meeting in Switzerland this week to discuss reducing supply. In fact, OPEC has decided to cut supply by 5%, or 1.5 million barrels a day beginning November 1, 2008. Be prepared.

Ali Naimi of Saudi Arabia - Minister of Petroleum and Mineral Resources, Oct. 23 in Vienna.

If I were a commodities trader, I would be stocking up on barrels of oil. Imagine oil bought at $65/barrel - what profit could be made when it reaches $150/barrel in a few months? If you had the capacity, individuals could store large volumes of gasoline for a personal inventory in preparation for the eventual price spike.