US Oil Output 1% Below Last Year

The US EIA weekly petroleum report announced that US oil output fell 1.3% last week to a rate of 5.107 million barrels per day (Mbd). That is 1% below the same week in 2008 and 6.8% lower than the 2009 production peak of 5.48 Mbd hit in mid-April.

How Low Could Oil Output Fall?

US oil output will probably continue to gradually fall since drilling for new wells remains below average on the relatively lower oil prices of 2009. But production will be higher than last year in the period from late August to October — unless we have an unlikely repeat of hurricanes slamming directly into the Gulf of Mexico’s oil production and refining hub. But an interesting question is, “How low could US oil output go?” If the average output decline of .5% per week over the last 15 weeks continued for several weeks, production would be significantly below 5 Mbd by the winter. Such an occurrence could lift prices back to $80 per barrel, especially if current trends continue to our South.

Mexico Oil Output Plummets Further

Mexico’s state-run oil company, PeMex, recently reported its output fell even more in June. Its liquid production was 3.6% below May levels, and 10% below June 2008 (crude was 11% lower). Production is now at the lowest point since the early 1990s and shows little sign of curbing its fall. Output from Mexico’s largest discovered field, Cantarell, continued to nosedive — falling 41% from last June to a production of .604 Mbd. This country that was recently the second largest source of US imports may struggle to export a single barrel by 2015.

With lower output in the US and Mexico (along with depletion in Norway, the UK and Russia), the only way we can keep a lid on our transportation costs in the years ahead is to increase fuel efficiency and implement an active transportation revolution. A bicycle network for local and long-distance travel will be an important step for US planners to take (see the East Coast Greenway vision for a model). And as Fatih Birol of the International Energy Agency says, let’s leave oil before oil leaves us.

Onwards in the Sustainable Energy Transition-

Competing with Thin Film’s First Solar

The cost leader for solar has recently been First Solar, who lowered their production cost per watt to 93 cents during the first quarter. But the lower efficiency of First Solar’s modules (at ~10.9% vs. 14-22% for silicon-based cells) means that selling its modules at $1 per watt is equivalent to Yingli Green Energy, JA Solar or Sunpower selling its modules for $1.30-$2 per watt. I thought sub-$1.75 per watt was unrealistic for crystalline silicon producers in 2009. But LDK’s revised second quarter guidance means that such prices are expected per silicon-based watt throughout the rest of the year.

Prices Less than Half 2nd Quarter 2008

Such a price translates into less than half the price of just a year ago. If installation costs can fall in a similar trajectory, relative prices versus fossil fuels will be similar to last year at this time. And once economic recovery begins to lift the price of natural gas in coming months, solar will become competitive and demand will soar.

The Strong Will Thrive

Solar companies who are strong enough to weather the next few months by lowering their cost of production will emerge highly profitable as the recession subsides. In the meantime, the second half of 2009 may witness serious consolidation throughout the solar industry as impaired financial markets fail to provide enough capital for smaller players. But the stronger producers (such as First Solar, Sunpower, and Suntech) appear poised to thrive as solar becomes mainstream and grid parity expands into several markets by 2010.

Onwards in the Sustainable Energy Transition-

Thousands of Deaths per Year

The same combustibility that makes fossil fuels a generous energy source claims the lives of thousands of people per year worldwide. A natural gas plant in Saudi Arabia recently exploded and killed 40 people. Several helicopters ferrying offshore oil workers have crashed in the last few months in the UK, the US, and Canada, killing scores of workers. But the most deaths probably occur in the coal mines of China, where thousands of miners lose their lives each year in explosions, collapses, and floods.

Renewable Energy Not Immune to Accidents

Wind turbines hundreds of feet in the air and rooftop solar installations can sometimes result in injuries or even a fatality as well. So the industry will need to take care and government regulations will be crucial to keep those numbers low as these industries scale up. Another risk that wind companies must take responsibility for is potential accidents at iron ore mines that are the source of their turbines’ steel (a recent iron ore flooding accident in China claimed 29 lives).

Bottom Line: The transition to efficiency and renewable energy reliance can help reduce mortality in our global energy system – not just from the effects of climate change and pollution. But even though wind and solar power may have inherently fewer risks, safety regulations will need to adapt to keep up with these new technologies and ensure the safety of the growing green-collar workforce.

Onwards in the Sustainable Energy Transition-

Petroleum Inventories Remain Very High

The Energy Information Administration (EIA) reported yesterday in its weekly petroleum report that US crude oil storage fell another ~1% last week. Even so, crude supplies remain more than 10% above average and US output has been rather robust above 5.2 million barrels per day (Mbd). The lower oil rig count in 2009 has yet to lower crude oil production below last year’s levels. Gasoline is the only fuel with below-average inventory levels. And the lower pump price (compared to last year) allowed last week’s gasoline demand to rise 1.1% above the same week in 2008. But demand for distillates (mainly diesel) and propane continued to languish at recessionary low levels — 16.9% and 10.2% lower than last year, respectively. Either further demand recovery or lower output and imports are necessary to drive significant price increases from current levels.

Natural Gas Inventories Sky-High

And the storage level for natural gas has kept prices close to their recent lows below $4.50 per MMBtu. Even though natural gas is substituting coal for electricity generation across much of the Southeast, lower industrial demand and persistent high domestic production have storage levels moving toward record highs. Inventories are almost 23% above average and continue to surprise analysts with its weekly growth.

Higher Oil Prices Spur Hope for Alternatives

Bicycling, pedicabs, solar and wind power, and other alternatives to fossil fuel energy are benefitting from the return of higher oil prices. Oil is now more than double its winter low below $35 per barrel. If non-OPEC output begins to wane in the weeks ahead and the recession does begin to fade, these alternatives may surge forward quickly. I’ll keep you updated on progress in the weeks ahead.

Onwards in the Sustainable Energy Transition-

Denmark offshore, photo by Jim Hodson of Greenpeace

SET’s home state of New York is moving to become a leader in offshore wind power. Both the New York Power Authority (NYPA) and the Long Island Power Authority (LIPA) have offshore wind farms they are pursuing. The NYPA project would be the first major freshwater wind farm in the world. And the LIPA project could end up as the biggest proposed offshore wind farm in the US.

New York Needs to Accelerate its Renewable Deployment

New York has one of the highest renewable shares of electricity at ~21.5%, largely due to the hydroelectric plant at Niagara Falls (only Washington and Oregon currently have higher renewable shares, also mainly due to hydro). New York aims to get 45% of its electricity from renewables by 2015, a goal that will take tremendous deployment to achieve. In fact, renewable capacity of ~10 GW is necessary to reach 45% at current generation levels. Achieving such a high capacity by 2015 would translate into average annual deployment of 1.5 GW.

As I wrote a few weeks ago, NY recently became one of only eight states with over 1 GW of wind power capacity. All of the existing wind capacity in NY and the rest of the country is land-based. Now, state leaders have their sites on offshore wind helping NY reach several GW capacity by 2015.

First Freshwater Wind Farm

NYPA aims to build the first freshwater wind farm in the world. On Earth Day, they announced a Request For Expressions of Interest (RFEI) which will be followed by a Request For Proposals (RFP) from wind developers. Siting and construction will take time, but it’s great the process is in motion. I will share the MW capacity proposed as progress is revealed.

First US Offshore Wind Farm

Europe has had offshore wind farms since the 1990s. LIPA seeks to finally commission the first American one a few miles into the Atlantic Ocean. Initial capacity proposed is 350 MW with potential for a second phase to achieve 700 MW.

Sustainable Energy Transition Takes Time and Effort

Freeing NY from the need to burn coal (~12.5%) and oil (~10%) for electricity is not a quick and easy process. It will take solar and wind deployments more than double recent growth. Its nice to see NYPA and LIPA taking concrete steps to take advantage of the steady, powerful winds offshore.

Here’s to more progress in the months ahead-

Such data show that the time to act swiftly is indeed upon us. The major economies of the world need to fix humankind’s worst market failure yet, global warming. If greenhouse gases aren’t priced into our energy system shortly (most likely through a global cap and trade system), the climate balance that is economically worth tens of trillions (and spiritually much more) will be lost.

It’s up to all of us to do our part in the Sustainable Energy Transition!

Wind is already converging with electricity from fuel oil and is close to electricity from natural gas at times. But a wide gap remains between wind and coal electricity costs.

As for solar, the industry is growing and efficiencies are increasing, but it remains economically inefficient (based on today’s market with existing externalities), except in remote off-grid applications and when policy subsidizes its installation. A statement released recently by LDK solar mentions the potential of falling polysilicon prices in the 4th quarter of 2008. Many analysts think polysilicon costs could fall 75% from ~$400 per kilogram to ~$100 if the current shortage eases during the quarters ahead, enabling module prices to fall as much as 40%. Such a fall would bring solar prices within striking distance of grid parity and allow governments to lower subsidies, especially if fossil fuel prices continue their recent march upward.

Tomorrow’s EIA weekly oil report should provide some further direction for oil and gas prices, along with the potential formation of a tropical storm that could flow into the Gulf of Mexico, and any further escalation in the Russia-Georgia conflict that has already taken a few hundred thousand barrels per day off of the global oil market. We will see how these events develop.