Here’s a new twist to my post below on a $100 floor price of oil.

Creep up the floor price.  Imagine something like a $5 rise in the floor per quarter, and leveling off at some point, maybe even at $150/barrel.

Several important reasons for this twist:

1. it would gradually phase in the pain (even though all the money should be given back in the form of lower taxes elsewhere — I propose this should be tax neutral.  The only purpose should be encouraging different use patterns and stability and predictability.

2. it would be a dramatic boost to the car industry.  Here’s what I learned about the car industry since I wrote my last post on this: the car industry needs predictability to succeed.  The wild volatility in the price of fuel is what causes the making of the incorrect car models and the extra car inventory that is so harmful to the car industry.  There is no other industry where the swing in the price of an outside substance — not under the control or predictability of the car industry — affects the demand / value of its product so much.  Here’s what I heard from the CEO of Auto Nation at the WSJ:EcoNomics conference — when gas prices went from $2 to $3, to $$ and then back down to $3 and then $2 last year, he said that the value of a used Prius went from $15,000, to $20,000, and then to $25,000 at $4.  Then it went back down to $20k, and $15k on the way back.  It was completely symmetric on the way up and down and swung $10,000 (or more than 40% in value) just by a $2 swing in gas prices.  Think about this.  You are a car company planning to invest $1B or $2B to make your car making decision 3-4 years out and there’s something you don’t control that can make the value swing more than $10,000, or more than 6x your profit on that product!  That’s insane, and unsustainable, and in fact, look what happened in that experiment.

Therefore, I think that it’s not even price of gas that matters, it’s just knowing with some stability what it will be, and if you took the current $50/barrel and just slowly phased in a $5/barrel floor increase, so it would be $70 in a year, $90 in two years, and so on, that would give an underlying hugely valuable signal to the market (both customers AND manufacturers).  Let me know what you think of this idea.

Thanks,

Bill

Here’s a very bold idea on how electricity should be priced that I believe could completely change the world in several positive ways.

It would be the first, global, progressive pricing scheme that would give “life-line” like service to all in need of the freedom and convenience of basic electricity.  Second, it would, at the same time, provide the incentive for renewable energy to blossom, in an extremely fair and global way.

The idea is this – take the lowest possible electricity price anywhere on the planet, about $0.03 per kilolwatt hour, and offer that rate to everyone on the planet, for their first kilowatt hour (per month, per person).  For each doubling of usage, increase the rate $0.01.  So if you use 2 kilowatt hours per month, your rate is $0.04.  For 4 kilowatt hours per month, per person, your rate is $0.05.

On a blended average basis, rates would not rise for any consumers basic consumption.  Only for very large consumption would rates rise slightly.  However, the large consumption rise would allow a fast payback on renewable energy installations, and utilities would know a fixed rate that they could earn for expanding usage and demand, and this would allow much greater deployment.

If the entire world could both stabilize and articulate an increasing rate like this, then that knowledge and stability to providers would encourage tremendous innovation and investment to meet the need.  Right now, in many places of the world, electricity is subsidized to be so inexpensive (Governments fund this by taking a loss) that it’s impossible for renewable to compete.  The intent is to provide affordable power to lower-income, smaller users.  But with fixed pricing, renewable competition is eliminated.  Logarithmic pricing would fix this and allow both – affordable power and unsubsidized renewable competition.

A while ago, when oil was at $140 per barrel, I suggested that we set a floor price of $100 / barrel so that if there was ever a shock spike lower, we could achieve two things.  First, we could raise a lot of money to offset taxes, and now, with the economy in such trouble, to help out.  Second, we would make sure that there was never a short-term blip to discourage long-term investment in alternatives.  I’m afraid that might be going on right now.  I never anticipated such a dramatic economic decline like the one we are in right now.  I think people are therefore finding relief at the pump a welcome thing right now.  However, I think this could be deceptive as we bask in this short-term effect.

Had we instituted a $100 floor price of oil, just since the middle of September, when oil went below $100, we would have raised nearly half a billion dollars a day, or more than $33 billion so far.  That’s nothing to sneeze at, even in this new era of huge numbers we hear about.  Plus it would be continuing to pile up at more than $1B per day right now.  In addition, we would have no fear that investments in the future would not pay back at a particular rate, because of the certainly of minimum $100 / barrel oil.

On the one hand, I find it hard to bring myself to suggest people should be paying this extra price right now, but actually, I feel it’s the right thing.  Why?  Because with any good strategy, there is by definition a trade of a short-term loss in return for a long-term gain.  In this case, I feel setting a floor price of $100 (or any reasonably high number) is medicine that will definitely make the patient healthier in the long term.

I suspect there are people who would disagree.  I would love to hear what you think.

Thanks,

Bill

Global Norming

 I’m very worried that with the current economic crisis we as a civilization are going to put global warming on the back burner.  It’s hard for even me, a big fan of renewable energy, to justify the expense.  However, if instead of Global Warming, we focus on Global Norming – which I’ll explain in a moment — we can still make the positive impact that the world needs in immediate terms.

 Global Norming, in my terms, is the normalization of the immediate costs of pollution, and factoring those into our current energy production.  For example, coal plants in the United States cause about 24,000 cancer deaths per year.  Outside of the priceless value of each life to those families affected, economists have done various studies determining the value of each life between about $1m and $6.5m.  Even if you take the low end of that range, that’s $24B per year.  Coal plants account for about 49% of the electricity in the United States, or about 1,995 billion kilowatt hours.  JUST the life lost from those coal plants, NOT including ANY impact on global warming, is about 1.2 cents per kwhr, on the low end, and 7.8 cents per kwhr on the high end.  If we immediately taxed coal plants for the true negative economic impact they make on society, we would instantly have several things:

 1.      Huge revenues

2.    Huge incentive for innovation to make electricity without that tax

3.    Solar (and other alternative) energy that’s cost effective with NO government subsidies

4.    Job creation to continue to innovate to make electricity that doesn’t pollute because it would be economical, at last, to fund that innovation.

 This normalization of pollution impact would have the side benefit of positively impacting global warming, but even if you don’t believe that global warming exists, or is man-made, it doesn’t matter, because making this effort would have IMMEDIATE (i.e. same-year) payback, as opposed to next-generation payback. 

 We must do this not only for electricity, but across the board, for all pollution, and I believe that this will not only solve the economic crisis (by directing infrastructure innovation to the most efficient job creation) but also be the most cost effective way to achieve sustainability.  I feel it is also more politically possible to tax something that has an immediate – this year – health and life payback than a suspect 50-year payback period.  People are short-term thinkers.  Governments are supposed to be long-term thinkers, but tough economic times make it harder for them to act that way.  Global normaliziation of pollution costs into the energy expenditure and production side of our power plants and our cars would be the boldest, but easiest step to efficient job creation and innovation in renewable energy.

I read a few interesting things today about the state of the automotive industry.  First, some analysts said that the international market might completely fall apart in 2009.  Second, GM’s market cap just sunk to the price of 1950!  A 58 year low, and a market cap of $2.7B.  That’s just remarkable.  Finally, with oil declining (possibly only temporarily, but maybe longer if demand stays low if we’re in for a long recession) the U.S. car companies can’t figure out if they should start rushing to sell profitable trucks and vans again, or if they should double-down on their bets to make efficient cars.  Of course, I’m biased to the second, but I can imagine the tough decisions they face to even stay alive right now.  What challenging times.  I believe there will be many unintended consequences of the housing market decisions we have made, and they just might end up re-shaping the U.S., and possibly the world auto industry.

          With all the news lately about the price of oil climbing, I would like to make a contrarian point –  I believe oil is cheap. 

          I realize American’s can’t afford to take their driving vacations, people in Europe are protesting, the economy is hit hard, and people are complaining.

          My view is that cheap oil was an anomaly, a relatively short-term gift that we really never did deserve, and whether you agree with that statement or not, we can’t replicate it.  So we’d better get over it and move on, and get our energy in new ways.  We need to start making those new ways inexpensively, and if we make them sustainable, then they’ll last, and finally, we’ll deserve it.

          Okay, let me give you some numbers.  Let’s say a barrel of oil costs $143, about what it is now.  That barrel of oil is equal to 1,640 kilowatt hours, or 1,640,000 watts for one hour.  A human, working hard, can put out about 75 watts an hour, and that’s not easy.  Lance Armstrong, when he was younger, could do about 500 watts for one hour.  So us regular people, working all day – if we even could – at 75 watts per hour, would have a hard time powering our lifestyles.  It would take us nearly 22,000 hours to equal one barrel of oil.  Even at today’s minimum wage of $6.55 in the US, that barrel of oil is really worth $143,226 to us!   In other words, it’s 1,000 times more valuable than it costs.

          We expect our energy to be nearly free, and that’s why we complain – because it no longer is.  But we should face those facts, realized how this unbelievably discounted energy we have had – and still have – is what makes us comfortable and productive.  Since it’s only going to go up in price due to supply and demand (the demand side especially from China and India) if we want to continue our lifestyles, we’d better make the renewable stuff scale fast and become competitively priced.  At these prices of oil, it’s starting to get easy, or should I say, possible.  Rather than wishing for something that’s impossible – nearly free fossil fuel based energy again – we should focus on the R&D to make the renewable stuff work.

Yesterday, I heard a very controversial but very interesting talk at the Fortune Brainstorm Green Conference here in Pasadena. It was by Bjorn Lomborg, and he spoke about some of the economic issues of going green. He strongly challenges many of the traditional assumptions people have about what they can and should do to make a difference. The most eye-opening to me was the ideas that the only way we are going to make a real difference is to invest on a monumental scale in new technologies that are wildly disruptive. I had a gut feeling that this was a good way to go, and that’s why I try to work on, but he had some economic arguments supporting his thesis that were very persuasive.

The strongest argument he made — in my opinion, at least — was that rather than have a Kyoto protocol, or carbon tax or cap and trade to spur investment in new technologies, why not just invest DIRECTLY in new technologies. He proposed a miniscule 1/20th of 1% fraction of GDP from all the major countries going into a major $25B per year investment fund to invest in new technologies. He claims that that would make 10 times the difference, and cost 1/10th as much (in other words, 100x more effective) than the indirect method. He also said this would be more fair by country, because countries with much bigger GDP’s would contribute so much more.

It was a very compelling argument. He had 5 others that were compelling. He’s very controversial, but now I want to read his book and test his thoughts with some more rigor.

His talk alone made the conference worthwhile — but there were 50 other great speakers to make it even better. Fortune Magazine did a great job on this one, and I hope Marc Gunther and David Kirkpatrick decide to do this again.

I just read two accidentally adjacent articles in the New York Times this morning. One was on the doubling of rice prices in the last three months, and what great hardship that is placing on people all over the world who rely on rice for their calories. The other was about thieves not stealing cars anymore, but instead stealing the catalytic converters. They’re easy to steal, you just saw them off, and then the platinum in them (which is now up to $2,300 per ounce, more than double gold) causes them to fetch great value on the black market.

Both of these items point out how scarce all of our commodities in the world are becoming, and will continue to become. Both of these point out how we have to use all of our resources more carefully — not just the ones we usually talk about, like coal and oil. In general, we humans are going to have to get a lot better at “doing more with less” to quote a famous engineering dictum. I believe there will continue to be big rewards to those who figure out how to do to more with less. The more we can achieve our happiness and utility using fewer “atoms,” whatever those atoms may be, the better off humanity will be, and for sure, the less resource wars we will have.

We humans are facing a tsunami of hardship this century if we don’t figure out a way to get renewable energy to beat the price of coal. That bogie is hard, but important, because of the consequences for humanity of we don’t. Our seemingly limitless, cheap supply of energy is so fundamental to prosperity in the world, we don’t realize how painful life would become if we lost it. And yet, with the population of the planet steadily growing, we are going to either run out of natural resources, or face skyrocketing energy prices that cripple our economies. To prevent these catastrophes, we need to convert people to renewable energy sources. But we will only successfully switch to renewable energy sources when we provide a solution that is economically the same price as coal. Unfortunately, most people won’t pay a premium to “be green”, and we cannot rely on government subsidies to save the planet.

The energy business is the biggest in the world, dwarfing nearly every other business in size, scope, revenues, and profits. The picture below shows a breakdown of how we in the United States get and use our energy. We have a bunch of energy inputs on the left, much of it from around the globe, and then we convert it for our homes, business, and industry and for our cars (and other transportation). Basically, almost 70% goes into electricity, heat, and industrial processes, and the remaining 30% is for transportation.

(Click here to enlarge figure 1)

The picture is pretty representative of the rest of the developed world today as well. We can safely assume that demand for energy is going to double in the next 50 years as the world’s population grows and we continue to lift people out of poverty in record numbers in China, India and everywhere else in the developing world. The people in those countries will expect to live in the same relative comfort, or close to, what we have been living at. What that means, simply, is that we’re going to run out of the stuff that forms the bulk of the inputs on the left; and even if you don’t believe we’re going to run out, the price because of supply and demand is going to start skyrocketing — look what has happened to the price of coal in the past year(going from about $40 per metric ton to over $100 per metric ton) and the price of oil breaking $100 per barrel. Right now the cheapest (and unfortunately the dirtiest, and most dangerous) input on the left is coal, and it accounts for most of the electricity produced on the planet. All the other fossil fuels (largely used for transportation) are more expensive, and even scarcer.

To address this we only have two places to turn — using what we have more efficiently, and finding alternative sources of fuel instead of the fossil stuff in the form of renewable energy. We have to do both. But in both cases, we have to shift consumer behavior by creating energy alternatives matching or beating the price of coal and other fossil fuels.

The best source of fuel is the sun - the sun provides us more than 170,000 times as much energy as the entire earth needs. Of course, we need to take advantage of every other resource as well, whether it’s wind, nuclear, hydro, or biomass, but all of those combined can only make up a fraction of what the sun can give us. Only by putting together all alternative solutions will we be able to replace coal — and eventually fossil fuels — completely. And the resource will be renewable, allowing us to make it as we use it, so hopefully the energy resource wars can end.

Fortunately, there is huge investment going into this right now. There are hundreds - if not thousands - of different angles to beat coal that we need to undertake. We are excited to see entrepreneurship across the whole spectrum of the renewable energy sector and to see that it is growing by such leaps and bounds. People see the economic reward and opportunity, and thus risk capital is flowing to solve the problem. In the past, virtually all of our energy generation was fossil fuel based and centralized, and done at huge scale. It was not possible for a startup to enter that arena. Renewable energy, on the other hand, can be decentralized; not only can it be done at smaller scale, it can actually be more cost effective at smaller scale, especially if used near where it is produced. That means that entrepreneurs can and will make the difference in this revolution. There has often been talk of a “Manhattan Project” that is necessary to solve our energy problem. We actually believe it’s a “Million Little Manhattan Projects” that will end up making the difference.

Since costs matter so much, here’s a final point on costs — these are all approximate, because they depend on region, pollution control, tax credits, and other factors — but these are representative and relative:

• $0.05 per kw/hr — the cost of electricity generated from coal (the dirtiest fossil fuel)
• $0.10 per kw/hr — the cost of electricity generated from gas (more expensive, but quite a bit better than coal)
• $0.16 per kw/hr — the cost of electricity generated from solar thermal (many people are working to beat this now)
• $0.24 per kw/hr — the cost of electricity generated from photovoltaic panels on large scale solar farms (many people are working to beat this too)
• $0.40 per kw/hr — the cost of electricity generated from photovoltaic panels on rooftops of homes and businesses

The important thing, in my opinion, is for all these new efforts to be focused on beating the price of coal, with either no or equivalent subsidies, and when we do, we have a chance to cause the widespread/wholesale adoption that will really change the world for the better.

I woke up this morning to read some of the best news for the planet I’ve seen in a long time. On page 1 of the WSJ was an article proclaiming that China’s wild demand for energy has finally spurred a coal-price surge.

(Click here to read the Journal article.)

Finally, the demand for coal is driving up the price. Forever, it seems, China has been a net exporter of coal to the world, and finally their insatiable appetite is making them a net importer. This has triggered a huge rise in the price of coal (see graph above). I think this is actually a good thing that supply and demand is working. I think this is a great thing for the planet because I believe the only way we can beat coal is to make electricity by renewable means that actually beats the price of coal. That’s a VERY tall order, but now is made easier with the price increase. Further, I think the ultimate solution to the energy demand is to make electricity renewably for cheaper than coal, eventually, with NO subsidies. This is only possibly, I believe, if the full externalities of coal usage are priced in. But they are not. Until they are – and I’m not holding my breath until they are, if they even ever are – then the best way to compete is for supply and demand to properly set the price. And this is the first move in a long time that I’ve seen to reflect that, and I think it’s a good thing for long term, albeit painful to energy consumers in the short term.