Time for a US Oil Change?

Underway replenishment

On the heals of last week's post on China surpassing the US to become the biggest importer, two recent articles ponder oil's place in our world, particularly in light of how it was used as a weapon against the US during the Arab-Israeli War.

The first, Does OPEC Still have the US over a Barrel? brings the events of those days back vividly.  If you're old enough, this will conjure up a scary memory. If you're young enough, this may sound like a Tom Clancy (RIP) novel, but it was far too real for those managing the crisis in 1973:

“I’m sitting at my desk at the Pentagon,” recalls James Schlesinger, then secretary of defense, “and a cable comes in, and it reads: ‘In accordance with the orders of His Majesty, we are obliged to cut off all oil supplies to your 6th Fleet and to your forces in western Europe. Signed [Saudi oil minister] Zaki Yamani.’ ”

Major Oil Market Shift of Colossal Importance to DOD and DOD Energy Planners

From this morning's WSJ.  You don't need my help to quickly understand how the shift described below will impact US and DOD policymakers in the years ahead.

The article is titled: Middle East Oil Fuels Fresh China-U.S. Tensions and here's an excerpt that boils is down to the essence:

The turnabout has added to tensions because it leaves the U.S. military securing China's growing oil shipments in the region at a time Beijing resists U.S. pressure on it to back American foreign policy in the Middle East.

For years, China and other oil-consuming nations have benefited as Washington spent billions of dollars a year to police choke points like the Strait of Hormuz and other volatile parts of the Middle East to ensure oil flowed around the globe. 

Alternative Energy and the DOD Battlefield of the Future

Assistant Secretary of Defense for Operational Energy Plans and Programs, Sharon Burke shared a few mid 2013 insights in an interview published last week.  Here's an excerpt that signals more of the same ... and a subtle shift:

Status Quo

Though alternative energy use is increasing, the military will continue to depend heavily on petroleum.  "We do expect that we will continue to be a very petroleum-dependent force. Petroleum has an energy density and a universal availability that's very, very important for a military force," Burke said. "We have equipment in our arsenals that's designed to use liquid fuels that are going to be around for many decades." 

New Deal

But because energy diversity guidelines were added into the requirements and acquisition processes, Burke said she anticipates an increase in the implementation of tactical solar panels, fuel cells, flywheels, more efficient batteries and other energy-saving measures and practices in the future.

You can follow Ms. Burke on Facebook here: https://www.facebook.com/sharon.e.burke

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URL for Fed News Radio article:

http://www.federalnewsradio.com/394/3375799/Alternative-energy-key-to-DoDs-battlefield-strategy

Photo credit: Treehugger.com

Energy Security Conference Alert: IAGS' Target Energy 2013

What is IAGS you say? I'll answer briskly: the Institute for the Analysis of of Global Security. Teaming with NATO's Energy Security Center of Excellence, IAGS is hosting a conference called Target Energy that includes but goes well beyond cybersecurity and the grid.

For those DOD Energy Blog readers whose professional lives are circumscribed by US military energy matters only, this is a chance to stretch a bit. Here's how the organizers describe the focus:

The cost of securing energy supplies is increasing due to threats from terrorists, hackers, activists and hostile nations. What is the impact of attacks against energy, and how can companies, organizations, and governments work with NATO to increase security?

Energy Security Update: Straight of Hormuz Less Crucial to US in 2012

Uber strategic analyst Tom Barnett points to a recent Financial Times piece on oil metrics and this most important piece of aquatic real estate. Quoting FT:

Earlier this year, Riyadh and Abu Dhabi opened new pipelines that will increase the ability of countries to bypass the strait. Fully operational, 6.5m barrels per day, or about 40 per cent of total flows, will now be able to take alternative routes. “The Middle East is much better prepared now than a year ago to cushion the impact of a disruption in the Strait of Hormuz,” says Edward Morse, head of commodities research at Citigroup and former US deputy assistant secretary of state for international energy policy.

Recommend you read the whole post, which includes a great map and infographic, HERE. Andy

Farrell says Stay the Course on DOD Energy Diversification

With the rash of stories this past year on failures of US solar companies, the lack of speedy adoption of electric vehicles, and the boom in un-conventional natural gas and oil, occasional readers of the DOD Energy Blog might wonder whether renewables and energy efficiency have lost some of their luster for operational and facilities energy applications.

Well, the June edition of National Defense leads with a piece called "New American Oil Boom: "Will it Slow DOD's Renewable Energy Momentum?" which convincingly refutes the idea that energy leaders have taken their eye off the alternative energy strategy ball. National Defense magazine has long had a strong focus on energy matters, thanks to the leadership and insight of its President, retired USAF General Larry Farrell.

Reminding us of how tightly bound the DOD remains to oil, Farrell says:

When speaking of petroleum, independence is a myth, regardless of where it comes from. The fact is that, for transportation energy, there is no diversity of supply or source.

And looks a few years into the future:

Diversity has strengths of its own. The current positive situation of domestic supply will last a few years at best — perhaps out to 2030 or so. At some point global demand and increasing difficulties to get supplies will catch up. 

Concluding with a vote of confidence that DOD leadership is still on point on energy strategy:

We have the gift of time to address the problem. Knowledgeable leaders in the Defense Department realize this. It is unlikely that they will slacken their efforts to bring solutions to operational capability. There really is no other choice. 

I believe Farrell's observations and conclusions are correct, but Dan and I would be happy to hear if you see things the same way.  Andy Bochman

An Important Argument to Watch for DOD's Energy Future

In the energy sector, the price of a barrel of oil isn't the only thing that's highly volatile. The future is too.

Here's a LINK to a recent piece in the Wall Street Journal where energy gurus Daniel Yergin and Vinod Khosla debate how quickly cleantech will begin to substantially supplant fossil fuels in the US.

This is Yergin responding to a question about the future, starting with a look back to the very recent past:

... [T]he world was going to run out of oil. It was peak oil. And we were going to be importing so much natural gas that we would be paying $100 billion a year to import natural gas. That was five years ago. The picture changed. The picture will change in five years.

and,

[Regarding national security], we've talked a lot about natural gas today. But what is also striking is what's happening in U.S. oil, with what's called tight oil and the development of that. You look at Canadian oil sands. You look at what's happening offshore of Brazil. And you see this kind of re-balancing of world oil going on, where probably 10 years from now the Western Hemisphere will be getting a lot less oil from the Eastern Hemisphere to begin with.

In case you couldn't tell, DOD Energy Bloggers like Dan and myself have a passion for cleantech and a more sustainable energy future for the US and the US military. But more than that, we put the interests and security of the country and the armed forces well ahead of our goals for new energy sources and energy efficiency.

I think you can hear in Yergin's response a sense that the world has just shifted, and that the US has moved quickly from a net energy importer to a potential energy exporter and that this condition may hold for the near and mid-term future.

Clearly, DOD's got to keep itself fully up-to-speed on the current version of the energy future and I believe it is.  This re-balancing thing ... there's security in that. Andy Bochman

Yergin Speaks Out Again on Favorable US Energy Security Trends

Back in September we wrote a post or two on the latest thinking on US and global energy futures from energy market guru Daniel Yergin. In today's Wall Street Journal he had a bit more say re: Energy Security that I think you'll find both helpful and promising. First, the ...

Bad News

Yergin: It is true that the U.S. is still importing a larger share of its oil than it was in 1973, at the time of the first oil crisis. Even with increased domestic production and higher imports from Canada, it will still be part of the global oil market and vulnerable to disruptions and price spikes.

Again, to reinforce: the US is both a seller and a buyer of oil and gas in the global markets, and no matter what we do, that condition will remain the same. We don't set the prices, and we don't get to keep or use all that we make. We buy from many sources, ranging from very friendly to somewhat hostile, and yet there's some significant security in that diversity. 

Now for what's gotten better lately and promises to improve even further in the years ahead thanks to some new ways to get at oil and gas.

Good News

Yergin: ... the shift in oil sources means the global supply system will become more resilient, our energy supplies will become more secure, and the nation will have more flexibility in dealing with crises. It ... also means that economic benefits—in terms of jobs, manufacturing and services—will register on the ground in North America.

Click HERE for the full article, and one more thing: I'll be attending a DY lecture tomorrow afternoon at MIT. If you have a question you'd like me to ask him, please fire away fast.

Image credit: Mitra Encyclopedia

An Upbeat Assessment of Iraq's Dictator-Free, Energy-Driven Future

Followers of mainstream news will report hearing nothing good from Iraq lately. Just the usual smattering of terrorist bombs in Baghdad and beyond, and accounts of slow-moving government incompetence.

But guess what? If you're willing to follow THIS LINK to Thomas Barnett's recent post, you'll get an entirely different picture. One in which it's possible we'll look back at the invasion and all its subsequent pain and suffering and conclude - wow, it was really worth it.

Only time will tell, of course. Here's one more picture though, because our guys are so great, and because the good will they generate from the pure of heart (i.e., kids) is so visible for everyone to see here at home, and inside and outside the Middle East.

Photo credits: US Army's Soldier Media Center on Flickr.com

Thinking about the End of Easy Oil (EOEO) and the DOD

There've been a lot of articles about EOEO in the last few years, and of course, a spike of interest in the topic since the BP DeepWater rig explosion and ensuing Gulf of Mexico oil deluge. Basically, the oft-repeated point is that while there's still a lot of oil left on the planet, much of what's left lies far below the floor of deep oceans, or in remote and often environmentally pristine latitudes. No matter how you slice it, the costs are higher in these places, and so are the risks.

But was there ever easy oil? I don't think it was ever quite as simple as depicted in the Beverly Hillbillies. But maybe the crude we got from our East Texas wells before they ran low was the easiest. If you really want to know about the phases of energy history (and you should), there's really only one book for it: Daniel Yergin's The Prize: The Epic Quest for Oil, Money & Power.

A case can be made that oil is often far from easy, even when it's relatively simple to extract. Here's what I mean:

• Expeditionary oil is never easy. Consider the often enormous costs in dollars and soldiers
• Our real warfighting orgs, the Unified Combatant Commands, don't have to plan for fuel problems or pay for fuel no matter how much they use ... that's easy for them. But maybe not good for helping focus DOD energy strategy
• Theater commanders don't directly pay for fuel no matter how much they use ... that's easy for them and necessary for effective warfighting
• DLA's DESC directly pays for fuel and ensures its delivery to where it is needed. That's not easy. And it masks our forces' dependency on the stuff
• Is oil sourced from the Middle East, some percent of which is then used against us, easy? I'd have to say that's a big NO

Despite the recession-induced downward price pressure on oil since its 2008 peak, you don't need Daniel Yergin to tell you that oil prices will rise again as the recovery continues, Chinese and Indian demand rises steeply, and new controls are placed on offshore rigs. That's the money part. That's not going away. And neither are the hard facts about the heavy man and mission costs we pay via fuel convoys. Easy oil is over, and the pressure is relentlessly building on senior leadership to accelerate our moves away from dependency on this increasingly problematic resource.

Photo Credit: Sig Nygaard on Flickr.com

War Gaming an Israeli Strike on Iran from an Energy Perspective

The Brookings Institute recently conducted a war game centered on a preemptive Israeli attack on Iran's nuclear production facilities. Sounds like a good idea to simulate this thing, but it also seems a little too neat the way they did it (i.e., optimistic) for me. Here's how it starts according to David Sanger in the NY Times:

Without telling the U.S. in advance, Israel strikes at six of Iran's most critical nuclear facilities, using a refueling base hastily set up in the Saudi Arabian desert without Saudi knowledge. ... Convinced that the Saudis had colluded with the Israelis, and emboldened by the measured initial American position, Iran fires missiles at the Saudi oil export processing center at Abqaiq, and tries to incite Shiite Muslims in eastern Saudi Arabia to attack the Saudi regime.

Nothing is said of the impact on worldwide oil availability or prices, but given the way the real markets responds to much less substantial events in Nigeria and elsewhere, we could assume prices would sky rocket.  Then there's an indication of a more sustained attack on Saudi's oil infrastructure and the confidence of global marketplace:

Knowing that its ultimate weapon is its ability to send oil prices sky high, Iran decides to attack Dhahran, Saudi Arabia, an oil industry center, with conventional missiles and begins mining the Strait of Hormuz. A Panamanian-registered, American owned tanker and an American minesweeper are severely damaged. The price of oil spikes, though temporarily.

OK, so there's an impact, but relax, it's only temporary. Why so short lived? Well, maybe because the game itself was short-lived:

The game ends eight days after the initial Israeli strike. But it is clear the United States was leaning toward destroying all Iranian air, ground and sea targets in and around the Strait of Hormuz, and that Iran's forces were about to suffer a significant defeat.

So there's no real impact to the highly oil dependent US or world economies, and we're about to kick Iran's butt with finality with air strikes alone? Don't get me wrong: I'm all in favor of giving Khamenei, Ahmadinejad and their like a major dose of whoop ass. But I think we'd better get our games on straight before embarking on the real thing.

Photo Credit: Wired.com

Barnett on Yergin on China/US Energy Competition

Actually, Tom Barnett doesn't say much here besides endorsing Daniel Yergin's take. But his finding and highlighting these nuggets of energy wisdom is of great value: see here. Take away is that there's little to fear in the contention for fossil fuels (namely oil) from the world's great and rising powers as our economies are so interdependent.

What concerns me (and others) more is China's tremendous push on renewable technologies. It's not a bad thing at all, globally speaking. But if it leaves the US in the dust, unable to capitalize on renewables innovation and the huge global market for clean energy products, that would signal a major lost opportunity for us. Let's make sure we win the competitions that matter most, and not fret over those that don't.

Photo: NY Times

In Which I Take Issue with those Taking Issue with CNA's "Powering America's Defense" Energy Report

Nothing furthers understanding better than a healthy critique of a seemingly sound argument. The counter argument will either surface errors, factual or logical, which is for the good, or it's going to miss the mark and if anything further reify the positions made in the original piece. In the latest issue of National Defense magazine, I contend the authors of "National Security and Energy: Setting the Right Priorities" accomplish the latter.

I won't subject you to a point by point analysis ... this isn't a new piece of critical legislation. But briefly, the authors seek to undermine some of the foundational assumptions of the CNA report, that:

• the US uses too much oil (by faulting the rhetoric)
• that the US is too dependent on foreign oil, particularly from the Middle East (by saying we have a big economy and that our allies depend on it too)
• that the report's characterization of climate change risk is not nuanced enough and should allow for regional variations and temperature change, not just rise

They then abruptly pivot to say the answer to all of the above is hybrid electric cars for the nation, and hybrid electric vehicles for the military and that our grid can't handle waves of electric cars or renewables. To me, that's way too big a leap, and is neither suggested by the title of the article, nor supported by the facts / evidence they bring to bear. The authors also point to "clean coal" as part of our energy mix; a term which for me signals the triumph of marketing over substance.

Don't get me wrong, I've cited and linked to dozens of energy related articles in National Defense, including some solid ones by Frodl and Manoyan, but IMHO, this one does little but solidify my initial reading that the CNA did a great job of summing up some super-complex challenges facing DOD and suggesting some potential ways forward.

Put Your Head Between Your Knees - another Volley of Oil Volatility is Underway

Call it a yo-yo (I have many times), or a roller coaster (to better convey the anxiety), but whatever terms you use, oil is on the verge of doubling in price since reaching the 30's a few months ago. This link to a recent Mckinsey report on oil futures requires a paid membership. This article from the Times of London's Liam Halligan is free, and does as good a job as any at laying out many of the moving parts that make forecasting the price of a barrel of oil a ridiculous, though necessary, undertaking.

Cautionary Words for Energy Tech Optimists

Sometimes you can get caught up in the relentless optimism of new energy evangelists like Better Place's Shai Agassi and believe that a totally different clean tech future is right around the corner. In fact, you want to get caught up.Yet as with almost endeavor, a balanced perspective is best for the long haul.

This post is from approx 6 months ago when oil was at $80 a barrel. Consider it now at $50 ... and how it applies at all other, highly volatile price points in the future. The words are to venture capitalists (VCs) (most often steeped in IT and internet models) and their investors ... but they matter to all of us including DOD:

Be forewarned, you do not have a comparative advantage here. The oil men invented risk taking, AND risk management. The oil men are bigger, faster, smarter, richer, have more scientists and more entreprenuerial spirit than you, AND they know energy.

VC's tend to believe that new technologies will always trump old processes, and they often don't fully grok how very different the energy business is:

In energy, there is no disruptive technology, only disruptive policy that makes some technologies look disruptive after the fact. In energy, the risk is in the scale up, not the R&D, and the end application is so massive, so capital intensive, and so utterly dependent on commodity prices, that you can't invest in it like you invest in IT. It takes longer, 10x as much money, and the ante up to play the game for one project is the size of your largest fund. At scale, there is no capital efficient strategy in energy.

Don't want to burst anyone's bubble, but it's important to keep the gigantic scale and enormous experience of the oil industry in mind at all times. And yet still push for change.

Energy Industry Shooting Self in Foot

You may recall a phrase that came out of the Republican convention last year, "Drill, Baby, Drill"? It referred to some folks' desire to access more of the fossil resources in Alaska and US waters. Well, despite the cheers it generated at the time, the oil business pays far more attention to markets than it does to politics and politicians.  

This NY Times article calls out the hardships facing oil and gas companies (and their workers) as the economics $45/barrel oil drives the number of rigs in operation way down. As almost everyone can imagine, the price of oil will go way up again ... in fact it already has already climbed $10 since hitting $35 in February. But as hedge fund director Adam J. Robinson says:

Inevitably, the [oil] market doesn't react; it overreacts and shoots itself in the foot.

No one (and I mean NO ONE) can predict the price of oil, but shutting down US capability at this point guarantees that we won't be ready to ramp up quickly if/when economies, and the global demand for oil, recover.

“Inevitably, the market doesn’t react; it overreacts and shoots itself in the foot,” said Adam J. Robinson, director of commodities at Armored Wolf, a California hedge fund.

Is Fuel Price Yo-Yo Broken?

I've posted on the yo-yo before. Basically it was a simple peak oil-based supply and demand system that had some logic to it. Speculation aside, it helped explain how and why oil was rising towards $150 last summer, and to a lesser extent why it began to fall off from its high of $147. But when demand started cratering in the fall, though the y0-yo effect would have predicted it, it had little to do with the high price of oil. The drop in prices turned out to be connected more closely with the sharp global economic downturn that became visible to the mainstream in 4Q08, and that signalled an almost unprecedented drop in demand. 6 months in, and we're seeing the next major snap of yo-yo take shape.  The WSJ reports that there are:  

mounting signs that the economic crisis and lower oil prices are shuttering projects around the world. OPEC countries—which meet next week to consider another output cut—have voluntarily slashed production by around three million barrels a day since last fall.  But the big and lasting cuts are coming in non-OPEC countries, where companies are postponing or canceling projects in droves. Bernstein Research said this week that non-OPEC oil production could fall by 2.5 million barrels/day over the next year.

A drop that steep,  analysts say, would more than make up for the steep fall in global oil demand. PFC Energy said in a report this week that it expects non-OPEC supply to continue to droop next year, losing an additional 460,000 barrels a day. Oil gurus at Barclays Capital predict that the fall in demand will become “less precipitous in coming months, while the supply-side contraction starts to bite and the impact spreads out from the physical markets.” Translation: Higher prices.

This time it's not rising demand that's looming (though many wish it were); it's falling supply that's going to drive the price up. I see a future yo-yo post on a reaction to higher prices in the form of more oil development. How it plays out timing-wise vis-a-vis a global economic recovery is the real wild card.

Photo of ancient Yo-Yo player: Wikimedia Commons

Energy Security a Major Concern for China as Well

And you thought Energy Security was only something that keeps certain US officials up at night? The good news and the bad news is: we are not alone. Europe is increasingly being squeezed by Russia who, through the pseudo company Gazprom, can turn off the lights and heat in many major cities at (almost) a moment's notice. And now you can add China, with its formerly rapidly expanding and very energy intensive economy to the club:

Chinese security analysts fear that oil import dependency is a potential pressure point that could be exploited by future adversaries of the People’s Republic of China (PRC). Approximately 80 percent of China’s 3.3 million barrels per day (bpd) in crude oil imports passes through the Straits of Malacca. Such funneling could facilitate interdiction of China’s oil lifeline in times of crisis.

In "No Oil for the Lamps of China?" in the Naval Warfare College Review, Gabriel Collins and William Murray make it clear that China has ample cause to be concerned about keeping the oil routes open. Unlike the US, its ability to defend those lanes is far from mature. The paper also gets pretty detailed about how to perform an energy blockade of China, and what China's most likely responses would be. Very interesting reading about energy as an offensive and a defensive weapon.

Another Type of Energy Insecurity

We all know oil supplies are finite and potentially at or beyond peak production. And we also know that geopolitical factors can have a big impact on US access to (and the price of) oil. But a year ago how many would have predicted that modern-day pirates would join the fray to add yet one more dimension to energy supply uncertainty. 

Once again, a DOD that likes to plan and equip for big battles has found itself in an asymmetric situation for which it seems ill equipped. While there are signs we're beginning to figure this problem out, here is another good reason to accelerate efforts to get off, to the greatest extent possible, the stuff that gave the pirates who hijacked the Sirius Star super tanker a multi million dollar pay day.

Photo: Wikimedia Commons

Real DOD Energy Progress ... or Beating Heads Against Walls?

I love breakthroughs as much as anyone, be they technology or policy based. But while I enjoy exciting evidence of progress, I place an even higher value on realism/pragmatism so we don't fool ourselves. And this is where I often find myself on this blog: shuttling back and forth between enthusiasm (when a bold move is made like last week's announcement of 4,000 electric cars for Army bases) and concern (when the Air Force seems to place all its hopes in the synth fuel basket) to fear, when DOD leaders continue to refuse to acknowledge the most basic new energy concepts: FBCF and EEKPP.

This post is about all three: enthusiam, concern and fear. And as usual, former IEA official Dr. Sohbet Karbuz does a better job of bringing it all together than I do. Like this, from his recent piece in National Defense Magazine:

... the Pentagon does not have a coherent and viable long-term strategy on energy. Its efforts on energy concentrate on three issues: supply oriented (alternative and renewable fuels and nuclear); demand oriented (energy efficiency technology options such as turbine and engine technologies, material and aerodynamic design etc); and cross cutting technologies (conversion of waste to energy). Efficient use and conservation of energy deserves much more emphasis. The Air Force’s efforts to increase the use of flight simulators, modifications to flight routes, efficient cargo loading, more en route fuel stops instead of in-flight refueling, and culture change constitute good examples. Similar efforts should be adopted by the other services.

It's not too long and I recommend reading it all if you get a chance.  BTW, on the eve of the inauguration of President Barack Obama, I found a great image of the Jefferson Memorial. Lincoln's been getting a lot of visibility lately, and for very good reason. But I'm also counting on thinkers and visionaries in the mode of Jefferson to help guide us as we seek exits from the tremendous holes we've dug for ourselves, in energy and many other areas. He seems full of hope and potential; now let's see what Obama can do. With the rest of us helping, of course. With the rest of us helping.

Photo by Trey Ratcliff