Monthly Archives: June 2016

Why Saudi Arabia Let Oil Prices Fall – 6/14/16

Since the fall of oil prices to devastatingly low levels, Saudi Arabia has fought other OPEC members on the best strategy to reverse the trend. Members such as Venezuela were desperate for output reductions or freezes, while Saudi Arabia gave only superficial encouragement before essentially sabotaging freeze talks in Doha with its demanding that Iran join any agreement.

The kingdom’s reluctance to tamper with oil markets is based on a simple economic argument: oversupply cannot be resolved by propping up prices. The two main contributors to the glut – explosive growth in U.S. shale-oil production and weakening Chinese demand – were never in doubt, so it is understandable that any action would have to address the effects of one or the other. Since replacing China’s insatiable appetite is beyond any country’s power, solutions would have to reduce the flood of U.S. oil.

Propped up prices were only going to make the glut last longer. U.S. shale-oil producers proved that they could survive low prices far longer than analysts expected and OPEC cuts to output would have only encouraged more pumping from shale at the expense of Saudi Arabia’s market share.

With prices recovering following a bruising month for U.S. output, Saudi officials can finally say their strategy is working with some confidence. Oil production outside OPEC is headed for a huge drop as the U.S. shale-oil boom is ending, according to IEA forecasts, while the Energy Information Administration estimates U.S. output has fallen to its lowest since September 2014. At the same time, oil prices have risen from mid-$20 a barrel to about $50 a barrel.

“It might not look a victory compared with when oil was $100 a barrel, but the Saudi strategy is working as you’ve got significant production declines showing up in a lot of places, and prices are grinding higher,” said Seth Kleinman, head of energy research at Citigroup Inc.

Low prices took a heavy toll on budgets and reserves, but the strategy probably preserved Saudi Arabia’s future revenues far better than cutting output and effectively subsidizing U.S. competitors. The next OPEC meetings are likely to be less contentious so long as supply and demand continue moving back into balance.

“The Saudis might be concerned that if prices go a little higher and sustain it, that could nip the re-balancing in the bud just when it’s getting going,” said Mike Wittner, head of oil market research at Societe Generale SA . “I don’t know they have a whole lot of incentive to particularly do anything.”

Even if Saudi Arabia had some incentive to coordinate with other OPEC members, there is no guarantee it actually would. The failure to complete an output freeze accord in Doha illustrated just how dysfunctional OPEC had become when the deal fell apart at the last minute on Saudi Arabia’s Deputy Crown Prince Mohammed bin Salman insisting that regional rival Iran would need to join. In the midst of recovering from trade sanctions that crippled its oil output, Iran refused with no small amount of indignation.

“The coming period is going to be a real test of whether or not OPEC is still alive,” said Mohammad al-Sabban, a former senior adviser to the Saudi oil ministry.

Saudi Solar – 6/13/16

Saudi solar energy may soon grow exponentially under the government’s plans to diversify away from oil.

To replace its current system of costly oil and gas burning power plants, Saudi Arabia is taking another shot at solar power. Although targets set four years ago ended up too ambitious as efforts ultimately stalled out, the falling cost of solar panels combined with cheap land and intense sunlight have encouraged the kingdom to try again.

Under its Vision 2030 program, the kingdom is planning to install 9.5 GW of renewable energy, about 14% of the country’s current generating capacity, from virtually zero capacity today.

“Solar should be the fundamental solution for Saudi Arabia,” Ibrahim Babelli, the country’s deputy minister for economy and planning.

Since stepping into the spotlight as the guiding hand of Saudi Arabia’s economy, Prince Mohammed bin Salman, the heir-apparent to the current king, has made several moves aimed at seeing the kingdom diversify away from fossil fuels. Besides the new renewable energy capacity, the Prince has pushed for selling off part of the massive, state owned Saudi Arabian Oil Co., encouraged the adoption of the new renewable energy plan, and acted antagonistically towards other members of OPEC such as Iran in an unusual mixing of economic and political policy.

Previous plans to increase Saudi solar power capacity were stymied by the state-owned utility which limited private company involvement to safeguard its own control. This time around, the kingdom may have more luck as it seeks to free up crude for export by reducing use in inefficient, domestic power plants and take advantage of Chinese-driven cost reductions in solar panel manufacturing. The price of solar power in projects in the Persian Gulf over the last year has plunged by about 50%, falling from 5.85 cents per kilowatt-hour in 2015 to as low as 2.99 cents per kilowatt-hour in recent months.

A Post-Oil Future for Saudi Arabia – 6/10/16

If any country has taken the pain of the oil price collapse to heart, then it would have to be Saudi Arabia. Only matched by Russia and the United States in raw output and the de facto leader of OPEC, the kingdom has a lot to lose if its chief export, which makes up over 70% of government revenues, can no longer support its generous government programs and involvement in regional conflicts. Few nations have more to lose in a post-oil future than Saudi Arabia.

Leading Saudi Arabia’s movement towards that post-oil future is the Council for Economic and Development Affairs headed by Deputy Crown Prince Mohammed bin Salman, according to a recently released document outlining future plans: the Saudi Vision 2030. The plans call for growth independent of oil and includes plans to sell shares in Saudi Arabian Oil Co. to create a sovereign wealth fund to encourage non-oil economic activity. It would also have the government encourage more of its citizens to look for jobs in the private sector, shrink its civil service size and salaries, cut subsidies, consider new taxes, and greatly increase the amount of electricity derived from renewable energy sources.

Around 70% of Saudis are currently employed in the public sector because it offers life long job security and high salaries for often undemanding work, an arrangement that is fast becoming unsustainable. The government spends 45% of its budget on wages today, but the new plan would have that reduced to 40% by 2020 via slowdown of hiring and early retirements.

Yet, good intentions can only do so much if the private sector broadly can’t provide alternative employment. Saudi Arabia’s private sector currently makes up only 40.5% of the country’s gross domestic product versus over 60% for most countries, according to the IMF.

Citizens have little incentive to go for the jobs that do exist after seeing their parents live comfortably off of public sector payrolls. A recent study published by Riyadh’s King Saud University found that 80% of Saudis polled in the capital said they would rather wait for a government job than work in the private sector. And who could blame them when the public sector promises long vacations, short working days, and a lifetime of job security. The government will have its work cut out for it reaching its goal of having half of Saudis employed in the private sector by 2020.

For decades, the ruling monarchy used oil money to fund a generous welfare state without substantial taxation, but low oil prices and the inevitability of a post-oil world are forcing a change.

“Now, with resources tight because of lower oil prices, what you are seeing is a move away from this model,” said Farouk Soussa, Citigroup’s chief economist for the Middle East. “The expectation that people should earn a living in the market, that their wage should reflect their contribution to the economy, that is a radical shift in thinking.”

Increased public sector accountability, reduced subsidies for water and electricity, value-added taxes, and levies on tobacco and soft drinks are all part of the plan to reduce the budget deficit. And while Saudi officials say an income tax is not officially planned, the Ministry of Finance has been tasked with “the preparation and implementation of the unified income tax.” The government has made it clear that while it wouldn’t introduce an income tax for Saudi citizens, it may still be considering it for expatriates.

The reason for the sudden urgency comes from two years of low oil prices. The kingdom’s finances are suffered from a record budget deficit of about $98 billion in 2015 significantly reducing its reserves. In response, government has made moves to stem losses: taking on billions in debt; making unpopular spending cuts; and raising the domestic cost of fuel, water and electricity. The International Monetary Fund expects Saudi economic growth to slow this year due to cheap oil.

Unfortunately, much of the success of Saudi Arabia’s plans for a post-oil future the thing it’s been designed to ignore: crude prices. If subsidy cuts, value-added taxation and a green card-type program for foreign workers deliver an additional $20 billion of new revenue each year, Saudi Arabia could balance its budget by 2020, according to EFG-Hermes economist Mohamed Abu Basha. But that scenario assumes a rise in Brent crude prices to $65 a barrel by 2020 and a boost of non-oil revenue to 20% of economic output from 6%, both of which may be overly optimistic.

Merkel’s Push for Renewable Energy – 6/9/16

In a milestone for renewable energy, clean power supplied almost all of Germany’s power demand for the first time. The event marks a victory for Chancellor Angela Merkel’s “Energiewende” policy aimed at boosting renewables while phasing out nuclear and fossil fuels. Yet, there are still many issues to be resolved when it comes to making renewable energy Germany’s primary source of electricity.

Germany 100% renew

Renewables were only able to meet demand because of Germany’s strong export capability, said Monne Depraetere, an analyst for Bloomberg New Energy Finance.

“Events like this highlight that eventually we may need to start curtailing because of market-wide oversupply,” said the analyst. “In the long-run, that may provide a case to build technologies that can manage this oversupply — for example more interconnectors or energy storage.”

Germany already wastes a small portion of its wind energy even though, by law, renewable sources have priority access to the grid over traditional sources like coal.

Germany curtail renew

Renewable electricity generation in Germany represented 31% of the country’s gross electricity generation in 2015, an increase of 19% from 2014. Germany has tripled its electricity generated from renewable sources in the past 10 years.

Germany energy sources

If Energiewende goals are met, the share of power generated from renewable sources is set to increase to about 40% by 2025 and to more than 80% by 2050. In addition to phasing out fossil fuel and nuclear power generation, Energiewende goals include reducing energy import dependence and lowering carbon emissions.

Costs associated with Germany’s shift to clean energy are being passed on, at least partly, to consumers. The German government policy of supporting renewable electricity growth by guaranteeing a fixed, above-market price for solar and wind energy is likely culpable in rising electricity rates. Along with Denmark, Germany has among the highest residential electricity prices in Europe.

As a net electricity exporter, Germany’s rapid growth in electricity production has created problems domestically and for its neighbors. The variability of clean energy flows puts pressure on local grids as they struggle to keep up increasing renewable energy supplies. Lacking the infrastructure needed to distribute or store all electricity produced domestically, German power flows to nations such as Poland, often creating power surges. Infrastructure proposals for new transmission lines that would help transfer the electricity from producers in the North to populous Southern cities have been met with resistance from municipalities and citizens.

Grid problems in Germany reflect a larger problem for renewable energy. As clean power takes a larger share of the nation’s energy mix, Germany has made several changes to its energy policies already to control costs such as the implementation of auctions and the decreasing of feed-in tariff incentives in years following years when clean power targets are exceeded. Germany should serve an example to other nations looking to grow their renewable energy industries.

Wind Rises, Carbon Falls – 6/8/16

Investors are beginning to talk with their feet as they shift money from fossil fuels to renewables. As wind rises on a tide of money from European investors looking to take advantage of the change, carbon falls under the weight of increased competition and regulatory risks.

The GWEC recently launched its Global Wind Report: Annual Market Update. The report shows the wind power industry set new records across the world last year in capacity installation as wind power installations broke through the 50 GW barrier for the first time in a single year in 2014 and annual installations topped 63 GW in 2015.

At the start of 2016, there was near 433 GW of wind power installations around the globe, a 17% increase over last year, according to the International Energy Agency. China alone added 30 GW in 2015 and now has more than 146 GW installed. China’s new Five Year Plan covering the period from 2016-2020 has increased the 2020 target for wind to 250 GW likely due to air pollution and energy security concerns.

European installations were led by Germany’s 6 GW of installations, more than 2 GW of which came from offshore wind. In non-China Asia, India became the nation with the fourth highest amount of cumulative installations as it surpassed Spain in global rankings.

U.S. states in the Plains region have had lower prices for wind power than most for a while now, but an uncertain regulatory environment has hampered the development of the U.S. market. The catalyst for the rise in U.S. investment in wind came from the unexpected extension of tax credits for wind and solar projects in late 2015.

by state

Screenshot 2016-03-06 at 10.58.06 AM

In contrast to the boom wind is experiencing, fossil fuel assets are being eyed with suspicion by U.S. insurers who see many energy-related investments at risk of becoming stranded assets due to climate change concerns.

European fossil-fuel companies in particular are seeing their value decline as countries shift their focus to renewable energy. Sovereign wealth funds and European insurers including France’s Axa SA and Germany’s Allianz SE committed to exiting some coal-related holdings as global leaders commit to fighting climate change.

In the U.S., California Insurance Commissioner Dave Jones urged insurers to voluntarily divest from thermal coal, and is requiring annual disclosure of carbon-based investments.

“If the international community, nations, states and local governments adopt the policies necessary to limit global warming to 2 degrees Celsius, then the value of holdings in the carbon economy will diminish dramatically if not drop to zero,” Jones said in an interview.

Costs of Emissions Cuts – 6/7/16

Since the world’s top officials have already signed an agreement to fight emissions and climate change, it is clear that most would be open to enacting policies to do so. Yet, the costs of sustainable, long-term changes are unclear to the economists advising policymakers, what is apparent is that the short-term emissions targets will be easier to reach than the long-term targets.

“There’s an optical illusion right now, which is that short-term planning leads to low-hanging fruit but not to the kind of strategy that we need to achieve deep decarbonization by 2050,” said Columbia University economist Jeffrey Sachs.

Still, any scientist with a shred of credibility would agree that the risk of catastrophic flooding and heat waves rises significantly with each degree increase in global temperatures.

Politicians in power are beginning to act as though such disasters are possible and need to be avoided. For the U.S. in particular, the Obama administration committed to cutting U.S. greenhouse-gas emissions 26%-28% by 2025 based on 2005 levels with a less definite suggestion that the U.S. could cut emissions 80% by 2050.

Modeling conducted by Resources for the Future, an independent think-tank, shows that a carbon tax could achieve the 2025 target with only a small impact on the U.S. economy. A $45-per-ton tax of carbon dioxide would make households worse off in 2030 by an amount equal to an imperceptible 0.45% – 0.79% of household spending. Their findings show the price of electricity would rise 15% and gasoline prices would go up slightly less than 8% over the course of 14 years while achieving over 75% of the 26% to 28% emissions target. The Clean Power Plan may force states to use such a carbon tax as a means to meet mandated emissions cuts.

An 80% reduction goal by 2050 could hurt much more. Of course, many factors, such as advances in technology (electric cars, self-driving cars, falling renewable energy costs), are difficult to account for in analysis. Most attempts to predict the state of the world beyond 2030 will be pure speculation so the following numbers should be taken with a grain of salt.

A simulation from the think-tank using six different models suggests the world could meet those emissions targets if every country applied a carbon tax of $60 per ton by 2050 with a resulting reduction in economic output of 5% to 10%. The only long-term models without significant economic costs attached to greenhouse-gas cuts were those assuming the implementation of negative emissions technology that would remove greenhouse gases. Sadly, negative emissions technology does not yet exist in a form viable for meaningful usage.

“To believe you can stabilize emissions at concentrations that would be protective of a two-degree target, means you can believe you can suck carbon dioxide out of the atmosphere at a cost the general population of the world will accept,” said Mr. Kopp, of Resources for the Future. “These are science-fiction sort of problems.”

Again, technological “revolutions” could make deep carbon reductions possible. It would hardly be surprising to see emissions fall once people start buying electric cars en masse or once utilities switch to less carbon intensive fuels like natural gas or renewables.

Analysis by Bloomberg New Energy Finance illustrates how close we may be to widespread adoption of electric vehicles. It seems safe to assume that more electric vehicle use would mean less oil use, but that wouldn’t mean much for emissions if that electricity came from dirty coal power plants.

rise of electric cars

Fortunately, Bloomberg data shows that solar and wind are growing at an astoundingly fast rate compared to fossil fuels.

Screenshot 2016-06-01 at 12.25.21 PM

And even the conservative estimates provided by the EIA show natural gas, a substantially cleaner burning fossil fuel, and renewables, primarily zero-emissions technologies like wind and solar, replacing coal as the primary source of electricity for Americans.

EIA energy projections

An optimist might say that the combination of lower power sector and transportation sector emissions could change entirely the equations for long-term costs of emissions cuts. Though a carbon tax would still be necessary to reach the 80% cut target, the size of the tax and the pain passed down via prices to American consumers would shrink quite a bit.

Renewable Energy: Explosive Growth, Tricky Integration – 6/6/16

Renewable energy use around the world has grown explosively over the last decade with a six-fold increase from 85 GW to 657 GW in non-hydro renewables.

Last year’s investment in renewable technologies was of $285.9 billion. It was the first year investment in developing countries was higher than in developed ones with three of the world’s most populous nations, China, India and Brazil accounting for more than half ($156 billion) of all investment.

Falling costs have driven the widespread adoption where traditional concerns over energy security, climate change, and air pollution could not. Between 2009 and 2014, prices for solar modules fell 75% which outpaced most expectations with similar cost reductions for wind. Those cost reductions are primarily technology-based (i.e. permenant improvements to cost-effectiveness) putting increasing pressure on fossil-fuels.

Jarring swings in fossil-fuel prices and the falling cost of renewable energy substitutes have encouraged electricity sectors to use resources less susceptible to the volatility of commodity pricing. Many companies and governments continue shifting capital away from coal power plants to avoid holding stranded assets. Coal-based electric generating capacity additions have dropped off sharply in the last few years, none are planned for 2016.

electric addons

Screenshot 2016-03-06 at 10.58.06 AM

The rise of renewable energy comes with a new set of challenges.

Variability in supply caused by large amounts of wind energy additions to the grid can cause system-balancing issues often dealt with by curtailing wind generation, which means wasting wind power unless power grids are expanded or upgraded. The problem may also be solved by battery storage if costs keep falling faster than expected thanks to economies of scale prompted by increased demand from electric car manufacturers.

Screenshot 2016-05-15 at 12.21.55 PM

In addition, the decentralized nature of residential PV panels threatens to upend the business models of traditional utilities as they reduce revenue streams used to account for large fixed costs related to building infrastructure. Net-metering policies, where utility customers can sell the excess electricity to the grid, in particular are raising concerns about how utilities are going to deal with the rise of residential solar. The balance between cost and benefit among customers involved in net-metering and those who aren’t is becoming both harder to maintain and more important to consider as solar panels are installed in greater numbers.

World CO2 emissions – 6/3/16

energy OECD

In spite of a decrease in the carbon intensity (CO2 per unit of energy) of the global energy supply, global energy-related carbon dioxide (CO2) emissions are projected to increase by one-third between 2012 and 2040 in the EIA’s International Energy Outlook 2016 (IEO2016) Reference case.

Many countries agreed to emissions reduction goals at the Paris Climate Talks with approaches to meet the goals including absolute reductions, reductions from business-as-usual cases, reductions in intensity, peaking targets, and specific policy actions. The variety of approaches combined with data limitations led the EIA to aggregates countries into 16 world regions, as well as OECD and non-OECD countries, rather than attempt individual nation modeling.

As shown below, the lion’s share of emissions has shifted away from the 34 current OECD member countries to non-OECD countries due to economic growth and increased energy use. The trend is expected to continue through 2040 as CO2 emissions from OECD members remain steady relative to non-members.

share energy co2

Global carbon intensity is projected to decrease by 0.4% annually, which is an improvement over the historical average of 0.3% between 1850 to 2008.

projected co2 intensity changes

The projected lowering of intensity is accounted for by a shift from high carbon intensity coal toward the use of renewable energy and natural gas.

The actual consumption of fossil fuels is projected increase albeit at a slower rate than the increase in consumption of renewable energy. In 2012, fossil fuels accounted for 84% of worldwide energy consumption.

fuel cons and co2 changes

It is important to remember that the EIA projections do not take into account technological changes that could be considered “revolutionary”. The introduction of electric vehicles alone is likely to make the forecasts given above obsolete since they will undoubtedly change the share of emissions. Incentives, competition, and rapid acceleration of timelines are likely to speed up what is already certain to be a disruptive technological change as falling costs and greater availability allow more consumers to choose less carbon intensive transportation options. As the world is today, higher individual incomes give OECD consumers the luxury of buying such vehicles sooner than non-OECD consumers, but by 2040 we are likely to see emissions from the transportation drop in all nations as electric vehicle use becomes more widespread. In the U.S., which produces about 17% of the world’s total CO2 emissions, transportation accounts for about a quarter of emissions so the effects of switching to less carbon intensive fuels for cars would be significant.

CO2 emissions in the U.S. – 6/2/16


Carbon dioxide (CO2) emissions from electricity generation in 2015 were at their lowest lowest since 1993, 21% below their 2005 level, thanks to generation from natural gas and renewables displacing that of coal. Electricity from natural gas exceeded coal-based power for 7 months in 2015. Overall demand for electricity remained steady over the decade in response to greater efficiency balancing out population increases.

coal emissions

The source of electricity is usually determined by available capacity and relative operating costs. With regard to capacity, natural gas and renewable energy have dominated additions and most retirements have been coal units. In terms of operating costs, the drop in natural gas prices and advancements in natural gas-related technology have made the fuel a more cost-effective substitute for coal. Increased regulation concerning air pollution, mercury runoff, and CO2 emissions have also increased operating costs for coal while creating doubts about its prospects in the long-run.

coal v gas emiss

Compared to coal plants, a combined-cycle natural gas plant is capable of producing the same amount of electricity without as much heat loss or CO2 emissions. Natural gas generation emits roughly 40% of the CO2 coal generation would.

US electric share

Renewable energy sources are also gaining in their share of generation with wind and solar capacity in particular making substantial gains in recent years.

Screenshot 2016-06-01 at 12.25.21 PM

US CO2 clean power plan

Trends in CO2 emissions from electricity generation through 2040 depend significantly on whether or not the Clean Power Plan (CPP) rule is implemented. The CPP would have an especially significant effect on coal usage as evidenced in the EIA’s  Reference case assuming the EPA enforces the final CPP rule and the No CPP case where the rule never comes into effect.

In the Reference case, power-sector emissions are projected to be 28% lower than the 2005 level in 2022. The reduction in CO2 emissions compared with 2005 levels is about 35% from 2030–40.

In the No CPP case, power-sector CO2 emissions are 7% higher than in the Reference case in 2022 and about 25% higher in 2030 and beyond.

The power sector accounts for 36% of total energy-related CO2 emissions, but its share falls to 31% by 2030, below the share held by the transportation sector, in the Reference case. Its share of emissions remains unchanged in the No CPP case. Keep in mind that the EIA does not take into account major technological changes such as the introduction of mass-market electric and/or self-driving cars. Tesla Motors has planned to sell over 500,000 electric cars in 2018; it bumped up that schedule from an expected date in 2020. Most major car companies and even some technology companies like Apple will be selling competing electric vehicles before 2025.

In the Reference case, reductions in CO2 emissions to comply with the CPP are primarily achieved by switching from coal to natural gas, solar, and wind. Increased energy efficiency is also expected to contribute to lower fuel use and emissions.

Coal retirements

Coal retirements are expected regardless of the CPP’s enforcement or lack there of. Retirements are already high due to competition from natural gas units and stricter environmental regulations. And retirements of coal are expected to spike in 2016 because the final deadline for the EPA’s Mercury and Air Toxics Standards (MATS) occurred in April. The standards themselves survived legal challenges that were resolved with the Supreme Court ruling in favor of EPA enforcement.

In the Reference case, the remaining coal-fired generation capacity is used less intensively over time. The combination of retirements and lower utilization is expected to cause coal consumption in the electric power sector to decline by 34% from 2015 to 2040 in the Reference case. The electric power sector accounts for more than 90% of total U.S. coal consumption.

US coal production

Page 2 of 2
1 2