However, the US production picture remains gloomy. Rig recovery from Gustav and Ike has proved to be a slow process, leaving almost half of the Gulf of Mexico’s oil production offline still today. With crude production poised to remain below last year’s level for at least a couple more weeks, 2008 production could end up significantly more than 2% below last year (it now stands 1.8% below 2007). With US oil production now less than half of what it was at its peak 38 years ago (1970), it’s clear that “drill, baby, drill”-ing has little chance of remedying our lack of oil security. Efficiency and conservation to reduce demand has proved this year to be the best way to reduce oil prices (as oil has fallen 40% from its record high in July and gasoline may approach $3 per gallon within a few weeks). If we do even more to drive demand down while growing green jobs manufacturing efficient vehicles and appliances, then we can keep oil from crippling our economy further in the future.

Unless we take such aggressive measures, much of our economy will depend on the generosity of OPEC to keep supply high. But with oil prices approaching $80-$85, many OPEC members are getting anxious for another cut in production. Even producers outside of OPEC like Russia may cut their production as its more expensive fields may lose money at such prices.

Natural gas producers in the US face a similar dilemma as their costs of production get undercut by the price in the market currently below $7 per MMBtu. The good news is this will leave more production for future generations. But we must make sure we don’t get complacent about our addiction to oil and gas just because current recession-induced prices remind us of the care-free 90s when SUVs replaced cars as the most favored means for the daily commute…

Onwards to the sustainable energy transition-

The EIA predicts that next year will be different (as they did last year) since two large new fields are scheduled to ramp up production by the end of 2009 (Gulf of Mexico deepwater projects Thunderhorse and Tahiti). But continued depletion in old fields, the 2009 hurricane season, and the tight credit market may prevent such an increase — at least from getting significantly above 2007 levels.

One of the exciting predictions in the STEO is that coal demand will fall almost 1% in 2009 as substitutes such as wind and natural gas generate more of our country’s electricity. The recent renewal of federal renewable energy tax credits could result in wind and solar alone fully replacing 2% of coal electricity. It should be exciting to see how this plays out.

Thanks to the many Princeton alumni who have endorsed the PACE statement in its first day!

Onwards-

So, even though inventories are all significantly below average, they are back into balance due to lower demand. The next few weeks will probably show a growth in inventories as they prepare for the peak demand of wintertime, that is unless another hurricane or other supply shock occurs. Continuing to reduce demand can keep prices from reaching new records this winter and allow us to get our country’s economy back on track.

The natural gas report will come out tomorrow, giving us a sense of whether natural gas inventories will climb substantially above the five-year average as they did last year.

As the Southeast experiences the crippling effects of fuel shortages, planning to replace this oil over the next seven years is critical if we are to prevent such shortages from becoming the national norm. If I was a new observer to the oil market, I would say the US should just replace those imports with output from other oil producers. But the decline story is similar elsewhere. The UK and Indonesia, major exporters until recently, are now importers. Norwegian oil production is in geological decline, and another major source, Nigeria, has declining supplies due to political conflict. Our own production here in the US is also in decline. Even though we are increasing the amount of rigs poking holes throughout the American landscape, our production has been declining over 1.5% per year ever since it peaked more than 35 years ago. So, we may have to replace much more oil than imports from Ven/Mex by 2015. But for this post, I will keep our focus on replacing the lost 2.9 million barrels per day from Mexico.

We have already cut our consumption by 800,000 barrels per day this year, with consumers finally buying more efficient vehicles and driving less as a result of $3.50+ per gallon fuel and a slowing economy. So that leaves us with 2.1 million more barrels per day to cut while our population increases and our economy grows (hopefully). With population growth ~.9% per year and limited economic growth, I will assume a natural 1.1% growth in the number of cars every year. This brings the total number of vehicles to ~275 million vehicles, up from just over 250 million today. Last year’s passage of CAFE standards should achieve a further .4 million barrels per day. That leaves 1.7 million barrels per day of consumption that we need to reduce to keep ourselves from dependence on these fading sources.

I propose that this reduction comes from conservation and the integration of plug-in hybrid electric vehicles (PHEVs). The conservation I propose is for drivers to go ~5% fewer miles in their vehicles, not a huge sacrifice for the energy security it helps to achieve. And private initiative can be a big part of this conservation as we figure out ways of telecommuting productively and taking more trips that involve walking, bicycling, public transit and carpooling. The remaining 700,000 barrels per day would take 10 million PHEVs in operation by 2015, which could run on new wind and solar installations. Back of the envelope calculations project 35 GW necessary for such an endeavor — which can be provided by wind and solar if they grow at 30% and 35% per year, respectively (which is lower than their growth over the last few years).

This rapid growth does not look possible without progressive policies that enable the energy revolution to take place. For instance, Congress will need to renew production tax credits or other equivalent incentives at least through 2010 as the technologies continue to mature.

The Presidential candidates need to be debating which policies are best at fostering this sustainable energy transition to prevent oil shortages from disrupting school and work for our citizens. This discussion is crucial, as an absence of such policy could pressure elected leaders to begin military conflicts to secure elusive oil from nation-states like Venezuela and Iran. Our bankrupt federal government and its citizens cannot afford to get caught in that situation a few short years from now.

The weekly EIA natural gas report showed slower than usual inventory growth due to Hurricane Ike. Storage is now close to the five-year average, a slightly bullish fact considering consumption is higher than it has been the last few years. Gulf natural gas production remains lower than half its normal rate as production rigs take time to recover. After one more below average build next week, storage should begin average builds again unless the winter arrives early, generating abnormally high demand.

For a stronger economy, its time to usher in climate-friendly solutions to our current oil dependence!

One of the more dramatic elements of today’s report was the rapid drop in distillates supplies. They fell 4.2 million barrels, or more than 3%, at a time when inventories need to be building for the winter heating season. Hurricane Ike outages will probably trigger one more week of inventory draws across the board before refineries and rigs return to normal next week. Then, refined fuels will need to recover in the following weeks, potentially pulling crude supplies down below the low average range they are in now. Prices will probably have to stay at these record highs for this time of year to attract the imports and keep up the production necessary for inventories to recover.

As usual, continued strides to reduce demand through efficiency and substitution is the most promising strategy to ameliorate the situation. Continued growth in scooters sales (66% thus far in 2008), bicycling, mass transit ridership, and telecommuting will help the transition be as smooth and shortage-free as possible. Lower demand saved this past week’s inventory report from being much worse than it was. Though all inventories were down significantly from last year, their days of supply measurements were mostly made up by huge drops in demand for gasoline ~5.6%, distillates ~8.2%, and propane ~22%! Continuing these trends would keep our oil costs from rising significantly in the months ahead.

Tomorrow, I will discuss the natural gas weekly storage report and its impact on home heating prices this winter.

Crude oil supplies continue to look questionable as the recovery from Ike is very slow. The Mineral Management Survey reported that only 7% of Gulf oil production has been restored. This opens the prospect of another 6 million barrel fall in inventories to ~185 million barrels and puts the low levels at the beginning of the year within striking distance.

The other development I’d like to explore today is an article on a recent report projecting extremely swift growth for the solar industry. Nomura Securities’ puts together a Top 10 ranking of solar producers each year, with this year marked by a rapid rise of Chinese manufacturers as Japanese firms slow production on the scarcity of poly-silicon feedstock. Their report cites massive expansion plans by firms such as Sharp and Showa Shell Solar to levels greater than 1 GW each in 2010 and 2011, respectively. They predict rapid solar production growth ~60% per year to continue for several years, making the solar market of 2013 a 20 GW market similar to the wind power market of 2007. If they are right, solar and wind can significantly chip away at the electricity market share of fossil fuel competitors.

But such expansion will require a more competitive price for solar to come to fruition. The report predicts solar price reductions partly due to a continued market shift within the solar industry to thin-film panels which require less poly-silicon, from thin-film’s current ~10% share to ~50% by 2013. I’ll definitely be rooting for such quick growth, as they would help make our dreams of climate stability much more achievable.

Onwards in the sustainable energy transition-

However, next week’s report will test the ability of lower demand to make up for even lower supplies. Crude supplies will most likely fall below 290 Mb with gasoline supplies falling the farthest, potentially below 180 Mb. These inventories would have rattled markets last year, but are much easier to handle thanks to last week’s consumption that was 3.7% below last year for gasoline and was 7.5% lower for distillates/diesel. Propane inventories will probably remain way below average, though recent demand reduction on the order of 25% from last year has prevented shortages thus far for the fuel. So far, crude production recovery from Ike has been very slow as only 4% of production has been restored as of 11:30am CST today. That will need to ramp up quickly to prevent market imbalances from lasting through the winter from Ike.

Also on the bullish side, Nigeria has reported that their production has been reduced another 600,000 barrels per day by the escalation in fighting that began a few days back. Their production is now down 40% from their normal level of 2.5 million barrels per day. Such a disruption offsets Saudi Arabia’s current overproduction and helped futures prices to now trade around $95 per barrel. It looks as though Lehman Brothers was right about the price of oil dropping below $100 due to the economic slowdown. Too bad it took their own downfall to close the deal.

Tomorrow, I will report on the implications of the weekly US natural gas report that will emerge in the morning. I’ll also explore the exciting prospects laid out in a recent report for solar to be as big as wind power in just five years.

With AIG and WaMu woes, the US (and rest of the OECD) economy is so fragile that oil fell toward $90 per barrel — especially after the Fed decided to keep interest rates at 2%, which maintains bearish pressure from dollar strength. Further falls in price may test producers ability to generate profits from new production — as many of them, like some oil sands projects, have overall marginal costs approaching $75 per barrel. The volatility in oil markets may put the brakes on new production capacity worldwide, thus exacerbating this volatility further by triggering another run-up in prices once demand picks up again. These moments are when we can appreciate OPEC as a potential reducer of volatility by lowering their production some to help the oil market stay in balance and prevent firms from losing money by selling their more expensive newer oil at a lower level than their costs. Oil prices remain more than 25% above last year’s average level, but the huge drop in price over the last two months has been remarkable.

I will give details from the oil inventory report, as it sheds light on the prospect for worse shortages in the remote corners of America (including parts of my home state of North Carolina).

Bullish news that an explosion is cutting off oil exports from a pipeline in northern Iraq and that the security situation in the Niger Delta is deteriorating has been overshadowed by demand side weakness. Even the continued loss of oil production from Gulf rigs in the wake of Gustav and Ike hasn’t held oil prices above $100, because futures traders think the temporary reductions in supply in September can be made up in October and beyond.

That won’t help the average consumer much over the next couple of weeks though. Gasoline supplies are flirting with Minimum Operating Levels (~20 days of supply, or ~182 million barrels based on last week’s demand). If they get any lower, we may see disruptive shortages of gasoline at more remote markets around the country. Average pump prices may climb back up to the $4 level nationwide before higher imports and restored production gets the system back in order in October (as long as another hurricane doesn’t hit the Gulf and other supply shocks are avoided).

A key to economic recovery is energy efficiency and substituting oil for domestic energy sources such as natural gas and wind. Otherwise, our economy’s attempts to get out of the doldrums will be blocked by the heavy burden of high-priced energy. Oil remains more than 30% higher than its average last year and almost five times the price level of early 2002. Meanwhile, efficiency and renewables have matured to become reliable alternatives as long as we implement progressive policies like an extension of the federal renewables Production Tax Credit.

Onwards to a sustainable energy transition-