- Chronicle Says Warming Causes More Hurricanes
- Interesting Highlights Of E&P Survey About Near Future
- Want To Know Green Energy Myths? Read This Book!
- The Elusive Green Jobs Employment Machine
- Transportation Index Signals Economic Recovery
- U.S. Geothermal Industry Growing With Federal Money
Musings From the Oil Patch
April 27, 2010
Allen Brooks
Managing Director
Note: Musings from the Oil Patch reflects an eclectic collection of stories and analyses dealing with issues and developments within the energy industry that I feel have potentially significant implications for executives operating oilfield service companies. The newsletter currently anticipates a semi-monthly publishing schedule, but periodically the event and news flow may dictate a more frequent schedule. As always, I welcome your comments and observations. Allen Brooks
Chronicle Says Warming Causes More Hurricanes (Top)
An editorial in the April 15, 2010, edition of the Houston Chronicle titled “The heat goes on” was attempting to make the case that the global warming skeptics have been proven wrong by the science and that it is time this nation takes action. The timing of the editorial was designed to support Earth Week and the anticipated introduction of energy/climate change legislation in the U.S. Senate. While the editors claimed skeptics used bogus claims to try to disprove the global warming science, they immediately turned around and used a bogus relationship to try to make their case. Their key point was contained in the final two paragraphs of the editorial, which we quote:
“For those of us living in hurricane-vulnerable areas, keep in mind this ominous measurement: Sea surface temperatures in the Atlantic main development area for tropical storms last month were the warmest ever recorded for March, already reaching levels typical of late June. The conjunction of several climate patterns combined with ongoing overall warming of the world’s oceans is thought to be the cause.
“Despite all the spinning and hot air, the science is solid and global warming is a real, deadly serious concern. It’s time to deal with it.”
The Houston Chronicle editors are trying to link the concerns of people residing in the region about hurricanes with the March record warm sea surface temperatures off West Africa, the development zone for tropical storms. Yes, March had record sea surface temperatures as recorded by the UK’s Hadley Center going back to 1850, although there is much missing data before 1910 and during World Wars I and II. Not only was March a record, so was February. But merely having warm sea surface temperatures is not proof of more hurricanes forming nor that those that do form will be more severe than normal. There are records showing hurricanes strengthening when moving over warmer sea surfaces, but there are also records showing storms weakening. The same holds true for storms moving from warm waters to cooler waters. Another point missed by the editors is that so far in April there have been cooling anomalies suggesting a possible change in the environment.
All the early tropical storm forecasts for the upcoming season have incorporated the increased sea surface temperatures into their models. As a result, virtually every forecaster is expecting 2010 to be a much more active tropical storm season than last year. Another consideration many forecasters are including is lower shear winds in the Atlantic basin this storm season that should allow more storms to form and potentially grow stronger. A number of tropical storms last year were destroyed or at least limited in their intensity by shear winds fairly early in their development. What is new are studies suggesting that global warming may increase wind shear over the Atlantic, potentially leading to a decrease in the frequency of Atlantic hurricanes. It is interesting that the Houston Chronicle editors didn’t factor this news into their conclusion that global warming, which is cooking Atlantic Ocean temperatures might experience an offsetting climate phenomenon that should dampen their fear of more severe hurricanes.
One of the new studies utilized output about climate conditions from 18 Intergovernmental Panel on Climate Change (IPCC) models and found that by 2100 there were be a reduction of Atlantic tropical storms by 27% and hurricanes by 18%. The principle reason for the reduction is the increase in wind shear caused by global warming. The second study utilized a technique called “double downscaling” to develop its forecast, which means using broad macro models to produce forecasts that can then be run through more finite models to ultimately generate the level of detail to answer the question being asked.
First, they generated a storm forecast based on the atmospheric and oceanic conditions generated by the IPCC models. Using that data, the authors of the study ran the results through a model that has been used successfully to simulate the frequencies of hurricanes over the past 50 years. They then put those results through a more finite forecasting model for hurricanes that has proven to be the best-performing hurricane track forecasting model in recent years. The conclusion of the study was a reduction in the total number of hurricanes by the end of the century, but an 81% increase in the number of Category 4 and 5 hurricanes. The authors point out, however, that there already has been a 20% increase in the number of Category 4 and 5 hurricanes since the 1940s, but the trend of increases is too small to be detected, given the natural variability of storms and the difficulty meteorologists have had in measuring the exact strength of intense hurricanes before the 1980s.
The cause of the sea surface warming has not been clearly identified as being related to global warming. Yes, there are characteristics of warming ocean temperatures that someone can relate to the supposed warming of the planet, but there are other atmospheric patterns in the Atlantic basin that are more clearly able to demonstrate a cause and effect impact on sea surface temperatures. These climatology forces, in particular the Atlantic thermohaline circulation (THC), play a greater role in explaining the frequency of hurricanes than just warmer water temperatures. The THC was weak in the 15-year period 1980-1994 and there were only 22 major storms as compared to the period 1995-2009 when the THC was strong and there were 56 major hurricanes, a two and a half times greater frequency.
Exhibit 1. Global Warming Has Little Correlation To Hurricanes
Source: Colorado State University
Dr. William Gray of Colorado State University has done extensive work on forecasting hurricanes and their formation. He has examined the linkage between global warming and hurricanes and finds little to support that thesis. Dr. Gray included a table in the most recent CSU hurricane forecast a couple of weeks ago dealing with the THC strength and its impact on hurricanes. The table shows storm activity and measures for three periods – 1950-1964 when the THC was strong; 1970-1994 when the THC was weak; and 1995-2009 when the THC was strong. The ratio of the number of major hurricanes (MH) and major hurricane days (MHD) between strong and weak periods was 2.5 and 3.8 times greater, respectively.
Exhibit 2. Cyclone Energy Down With Carbon Up
Source: Colorado State University
Another chart in the report compared a 24-month running total of accumulated cyclone energy since the late 1970s. It is plotted against the measure of CO2 emissions in the atmosphere. Since 2006 there has been a steady slide lower for cumulative cyclone energy at the same time CO2 emissions rose. More importantly, the peak in cyclone energy was in the late 1990s when CO2 emissions were much lower than now. As a result, all the work Dr. Gray and other meteorology experts who research hurricanes have assembled clearly shows that the factor influencing the frequency and strength of storms has been natural decadal signals in the Atlantic basin.
Several new hurricane forecasts have been released in the past few days. One is the forecast from the Commodity Weather Group, LLC of Washington, D.C., which is calling for 14 named storms (up three from its prior forecast); eight hurricanes (up three); and three major hurricanes (no change). This group sees warmer ocean temperatures and reduced shear winds as contributing factors to their increased forecast.
The British firm Tropical Storm Risk, Inc.’s forecast calls for a higher number of storms based on a similar assessment of the climate forces. The TSR estimates a 74% probability of 2010 being a very active storm year, a 20% chance of it being a normal year, and only a 6% chance of it being below normal. They see 16.3 named storms, 8.5 hurricanes and 4.0 intense hurricanes. They rate 2010 as having a 77% chance of being in the top third of most active hurricane seasons on record.
Exhibit 3. April Hurricane Forecasts Of Little Real Value
Source: Dr. Jeff Master’s WunderBlog
The interesting thing about the TSR forecast, and the one prepared by the CSU team, is how poor a record their April forecasts have. According to TSR, their skill at forecasting successfully in April for the number of named storms is 12%, while they have only a 7% skill for estimating the number of hurricanes and a 6% skill for intense hurricanes. These measures are barely better than flipping a coin. TSR is also calling for 5.1 named storms hitting the United States and 2.3 hurricanes compared to the average for 1950-2009 determined by climatology of 3.2 and 1.5, respectively. The skill assessment of this forecast by TSR is estimated at 9-13%.
CSU maintains a spreadsheet in which they compare their forecasts against climatology. It shows that while their model has demonstrated strong hind casting powers, it has no greater skill than climatology in predicting the future. It seems that only the June CSU forecast has better than climatology results as shown by the chart above that tracks both forecasts. Stay tuned for the CSU updated hurricane forecast due out in about five weeks.
Interesting Highlights Of E&P Survey About Near Future (Top)
We recently saw the results of a survey of E&P professionals and energy industry financial and consulting advisors about trends for 2010. The survey was conducted by The Oil Council, a new global organization of E&P and financial executives dealing with the upstream business. Results of the survey were presented in the organization’s monthly magazine, Drillers and Dealers.
In light of where crude oil prices have traded this year, it was not a huge surprise to see quite optimistic projections of where survey respondents felt oil prices might peak this year. Current oil prices have already exceeded the lowest peak target of $80 a barrel. Most respondents believe the peak will be $95, although a not insignificant number believe $110 could be the top. A much smaller group believes crude oil prices may peak at $125 a barrel, although there didn’t appear to be any respondents who think we may reach the lofty neighborhood of $147 a barrel that marked the 2008 peak.
Exhibit 4. Survey Forecast For Peak Oil Price
Source: The Oil Council
When it comes to estimating the average crude oil price for the year, the numbers were more modest and suggest we might even be looking at lower prices in the future. As the numbers suggest, a small group of survey respondents think we could average $50-60 a barrel, which would require a sharp fall in current oil prices and an extended period of prices below $50. Through April 16th, oil prices have averaged $79.85 a barrel so far this year. If oil prices stay at about the current price of $85 a barrel for the balance of 2010, we would average about $83 for the full year. It is interesting to note that if oil prices immediately jumped to $95 a barrel, we still would not break the $90 price threshold, averaging only about $89.
Exhibit 5. Guessing At Average 2010 Oil Price
Source: The Oil Council
Given the relatively optimistic outlook held by the industry, it was not surprising to see survey respondents being optimistic about the outlook for oil and oil service stocks. At the same time, this positive outlook for oil prices suggests potential inflation and thus investors’ bearish view of bonds and the value of the U.S. dollar. Investors were surprisingly uncertain about the outlook for Canada’s oil sands, which probably reflects the impact of environmental concerns, the lower quality oil produced and possible operating cost inflation. On the other hand, investors seem pretty optimistic about Iraq’s potential to become a major international oil province.
Exhibit 6. Bullish And Bearish Sector Views
Source: The Oil Council
Even though investors are positive about Iraq’s potential, the industry is much more optimistic about the exploration attractiveness of West Africa, and almost as optimistic about East Africa’s potential as that of the Middle East where Iraq is located. The least attractive areas include North America, Southeast Asia and the North Sea – all of which are relatively mature basins with high finding and development costs. It is also interesting that Russia and the CIS are rated fairly attractive for E&P returns by the survey respondents.
Exhibit 7. Ranking Attractive Exploration Regions
Source: The Oil Council
In response to a question about what forces may have the greatest impact on oil company prospects this year, the category of government and regulators was the top one cited. The second major force identified was national oil companies, meaning issues such as access to reserves and prospects along with increased competition in the purchase of oil and gas reserves and companies is a problem for private companies. It was interesting that many of the scapegoats accused of creating high oil prices – OPEC, traders and speculators, banks and financiers and the USA consumer – are expected to only minimally impact oil markets this year. We tend to agree with the survey results for the most important disruptive forces at work in the global oil market today.
Exhibit 8. Greatest Risk To Energy Industry
Source: The Oil Council
One of the interesting questions about today’s oil and gas market is where the capital will come from in order for the industry to develop sufficient new reserves and production to meet growing world oil consumption. According to survey respondents, equity capital markets will be the principle source of industry capital followed by joint ventures, farm-ins, concessions, etc. These results seem consistent with what has been happening in the industry since the second half of 2009 and so far this year. Depending on equity markets for investment funds means companies will continue promising industry-better reserve and production growth as investors seldom pay for earnings growth merely coming through commodity price appreciation. The fact the oil industry is looking to industry partners to be the second most important source of new capital could mean that capital markets are not as receptive to providing money as we have been thinking. This may be more for natural gas and especially gas shale investments. Additionally, the industry’s willingness to fund fellow E&P company projects may slow or even stop because all the good prospects are funded and/or low commodity prices make prospects uneconomic.
Exhibit 9. Top Sources For Capital In 2010
Source: The Oil Council
While there were few revelations in the survey’s results, the responses to these key questions confirm our views of industry activity and trends. Commodity prices are up, industry prospects appear to be improving, and there has been, and seems likely to continue to be adequate capital for exploration and development work. As a result, we are not surprised investors are bidding up the share prices of E & P and oilfield service companies.
Want To Know Green Energy Myths? Read This Book! (Top)
If you think you’re being inundated by green energy arguments now, hold on to your hat because you ain’t seen nothing yet, says Robert Bryce in his latest book, Power Hungry: The Myths of "Green" Energy and the Real Fuels of the Future
The world is hungry for power, but the public has little understanding of the issues that influence the best choice of fuel to power our electronic gadgets, heat our homes, enable us to earn a living and move about the world. The political appeal of “green energy,” “green jobs” and a “new energy future” is very strong today, but can wind, solar and biofuels meet the challenge of powering our economy and improving our environment at a price anywhere close to what the dirty fossil fuels are costing us? This is where Mr. Bryce is at his best – setting forth in an easy to understand way the facts and statistics about why this challenge won’t be met by these renewable fuels and how Americans who lack sound energy knowledge are being deceived by the politicians and regulators.
Power Hungry covers a lot of ground in explaining the Four Imperatives of energy: power density, energy density, cost and scale. If an energy source has low power density it will likely have a high cost and cannot be scaled up to provide large amounts of power at reasonable prices. Mr. Bryce takes on the various “green” fuels and shows why none of them will be more than bit players in global energy markets. He shows how their proponents confuse and confound the public with “feel-good” concepts that if followed blindly will turn this country’s low-cost energy matrix upside down eroding our economy and living standards. While renewable fuels have a place in a nation’s energy portfolio, trading off inherently efficient energy fuels because of their “dirty” nature in favor of high-cost, less efficient power will not help Americans now, or in the future. After examining the multitude of claims about the economic and societal advantages of clean fuels, Mr. Bryce lays out his vision for America’s energy future for the next few decades. N2N is his answer. Natural gas to nuclear power provides the best solution to meet our need for more power and to do it in an environmentally sensitive manner.
For those of you who have been long-time readers of the Musings, you will find little new in Power Hungry. We have been covering these topics for a long time. But if you find yourself in a debate about “green” energy, save your energy and just hand them a copy of this book. Mr. Bryce, as he did in his earlier book, Gusher of Lies: The Dangerous Delusions of "Energy Independence"
Want The Elusive Green Jobs Employment Machine (Top)
With the world celebrating the 40th anniversary of Earth Day last week, Europe spent much of the time trying to recover from the Iceland volcano ash-induced transportation chaos. For the better part of a week, air transportation to and from Europe and within the continent was shut down by tons of volcanic ash spewed into the atmosphere from the Eyjafjallajokull (EYE-a-fyat-la-jo-kutl) volcano on Iceland that blew southwestward over Britain, Scandinavia and the European continent. The microscopic particles of ash can damage sensitive jet engines causing planes potentially to crash. As precaution, European civil aviation organizations shut down the principle air lanes into and out of the continent stranding hundreds of thousands of fliers at airports throughout the world and causing an estimated $200 million a day in losses for air carriers. In the U.S. Earth Day brought the announcement of the sinking of Transocean’s (RIG-NYSE) Deepwater Horizon rig in the Gulf of Mexico that was destroyed in a spectacular explosion and fire that appears to have claimed the lives of 11 workers, also.
On Capitol Hill, the U.S. Senate is beginning to consider energy and climate change legislation along with another jobs incentive bill. As a part of this grand debate, the subject of fossil and renewable fuels and their appropriate government subsidies was examined as well as their impact on green job creation. A week ago, The Wall Street Journal carried an article about green jobs and the challenge of creating them. The article focused on the challenge one city, Joliet, Illinois, was having in finding work for people it was training for the new green jobs the economy is supposed to create by our embrace of renewable fuels. As the Journal put it: “Declaring that a city is going to replace yesterday’s lost jobs with new green ones is a lot easier than actually doing so.”
President Obama wants to create five million green jobs during the next decade and allocated a chunk of the 2009 stimulus money to do so. A number of new initiatives have been unveiled such as cash incentives to build new battery plants for electric vehicles that are being forced into the marketplace by government mandates requiring significant vehicle fleet mileage performance improvements. The administration and Congress are wrestling with which renewable energy incentives and how much will be necessary to boost investment in new green energies. However, as AnnaLee Saxenian, a University of California, Berkeley professor pointed out, the push for green jobs could produce plenty of service jobs and some manufacturing jobs, they are unlikely, however, to replace the millions of jobs lost in the automobile, steel and semiconductor industries that were shipped abroad.
During a House Ways and Means Committee day-long hearing on renewable energy tax credits two weeks ago, an expansion and extension of the manufacturing tax credit seemed to be considered as the best incentive available. The 30% Advanced Manufacturing Tax Credits for expanding or retrofitting facilities for clean energy industries was hailed as a key piece of any new jobs bill. Matt Rogers, senior advisor to the Secretary of Energy said that 12,000 renewable energy jobs were saved in the last year and 60,000 in the manufacturing sector. In looking at some of these green jobs reports, we were struck by the one-sided nature of the analysis – they only looked at the new jobs that will be created by the incentives to increase the nation’s use of renewable fuels and do not examine the potential jobs that will be lost in fossil fuel industries.
This is becoming an important consideration as the Congress considers how to pay for new job creation efforts. Given the current and future financial outlook for the United States, it is becoming increasingly paramount that Congress not create new spending plans that are not offset by increased income from other sources. In this debate, the target is quickly becoming the fossil fuel industry, which the Obama administration believes is under-taxed and overly-pampered. Thus, the rationale behind the administration’s proposal to repeal all the tax breaks afforded the oil and gas industry.
When long-term economic growth models for the U.S. were created years ago, an underlying assumption was that the nation’s growing economy would create sufficient new employment opportunities for the additional citizens reaching working age. It was anticipated that many of these new workers would go into industries such as utilities, oil and gas, petrochemicals, coal and other businesses critical to supplying the energy needed by the economy to achieve its growth potential. If all the new power requirements are met by renewable fuels, there will an increase in green jobs, but at the same time we will no longer need the additional jobs projected for the fossil fuel industries as their growth is eliminated. Do the green jobs created by this government initiative offset the fossil fuel jobs that will not be created? According to Dr. Saxenian, the answer is no.
We have been examining this employment issue for quite a while and find that most of the studies pointing up the power of renewable fuels in creating green jobs are based on dated analyses. Recently we read an article on the National Wind web site that stated; “For every one megawatt of installed capacity, wind energy produces 22 direct and indirect jobs. Five jobs are added for installing turbines and 17 jobs per megawatt (MW) are added related to manufactures.”
As we looked further into the article, it seems the data came from the web site Windustry.org and uses figures that appear to come from a 2005 study prepared for the Office of the State Comptroller of New York. When examining that paper, it bases its figures on several studies. These studies, however, all refer to a study prepared in 2003. In turn, that study actually was based on surveys of wind farm employment during their construction and follow-on operation taken during the 1998-2000 period. The surveys were conducted of the number of hours required to perform 15 different activities to manufacture, transport, install and service 1 MW of wind power. Some 19 firms engaged in one or more of these activities were surveyed and the hours needed were based on constructing a 37.5 MW wind facility. A key consideration was that the wind farm was located near power lines so no new transmission lines were needed to be installed.
Exhibit 10..Labor Requirements For Wind By Activity
Source: Renewable Energy Policy Project, Nov. 2001
What we noticed about this trail of website citations, however, was that the percentage of jobs created by wind farms compared to coal-fired power plants grew from 27% to 30%. Compared to natural gas powered plants, the percentage increase in jobs in the initial study was 66%, but that number stayed constant throughout the trail. We are wondering if the job count increase versus coal-fired plants was subject to the “growing fish” phenomenon in story-telling, or whether someone just thought 27% was too small a number compared to 66%.
A big question about green job creation is the cost. The study based on surveys of new wind farm employment developed a measure that says 1 MW of wind power installed and operating for one year requires 9,500 hours of labor for a number of job skills. That translates into four jobs assuming 49 weeks of work at 40 hour work weeks. Note from the chart above that 20% of the labor required is for servicing, which becomes the primary long-term employment opportunity. A 2000 survey in Texas found that for every 16.7 MW of capacity requires one full-time employee to operate, monitor and service it, a rate of 0.06 jobs created per MW. The Union of Concerned Scientists found that servicing employment needs range from 0.06 jobs per MW for large projects to 3.6 jobs per MW for small projects with most projects are around 0.1-0.2 jobs per MW. Based on the measure of one full-time servicing job for every 10 MW of installed capacity, a study prepared for the Mid-Atlantic states says that based on projected wind power additions by 2015, the region will support 740 direct new jobs.
New manufacturing is also potentially a long-term employment opportunity, but given the transportation difficulties, many of the new plants being built are relatively small and could be abandoned if an area were fully developed with wind facilities. Recently, one Asian wind tubing manufacturer announced it was planning to build a new manufacturing plant in Tennessee that could, when it reached maximum capacity, employ 300 workers. That number of workers was cited in the news reports of the new plant, but buried in the release was a comment that maximum capacity would not be reached before the end of 2012 at the earliest.
A 2004 brochure published by the U.S. Department of Energy about the potential benefits of wind energy for rural areas cited employment data for two wind farms actually built and operating. One, a 240-MW wind facility in Iowa, constructed in 1998 and 1999, produced 200 six-month-long construction jobs and 40 permanent maintenance and operations jobs. The other was a 143 wind turbine, 107-MW project built in 1998 in Minnesota that created 10 full-time jobs. The Texas Comptroller’s office estimates that 1.15 indirect jobs are created for every direct wind energy job. The 2004 DOE brochure cited data from Texas about the employment effect and also the cost of wind facilities. After the Texas legislature passed a Renewable Portfolio Standard, utilities and wind companies invested $1 billion in 2001 to construct 912 MW of new wind power projects. The brochure quotes the Texas Comptroller’s office as saying, “The completed plants created 2,500 quality jobs with a payroll of $75 million,…[and] will stimulate another 2,900 indirect jobs in Texas.” All of these new green jobs were created at an average cost of $185,185. If we only figure the cost of the direct jobs created, the average cost is $400,000.
With wind energy costing so much, as pointed out by the recent study prepared for the International Energy Agency (IEA), how will it continue to gain market share in the electric power business? It will take lots of government mandates and subsidies.
Exhibit 11. Only In North America Is Wind Cost Competitive
Source: IEA-NEA
Interestingly, the American Wind Energy Association (AWEA) states in its literature that the wind industry supplied 1.8% of the nation’s electric power in 2009 and employs 85,000 people. If we use the Texas Comptroller’s estimate for indirect jobs, the industry may be supporting upwards of 182,750 jobs nationwide. We checked the ratio of wind power produced between the United States and Denmark, the leading European wind energy supplier. Based on the statistics, the U.S. wind industry is 2 ½ times more efficient (power produced per employee) than the Danish industry. If so, it is hard to see how the wind industry is going to be a primary force in creating new green jobs.
Transportation Index Signals Economic Recovery (Top)
Many readers of the Musings know that we often offer commentary on the health of the economy, which impacts on energy’s growth rate, based on visual observations during our drives between Houston and Rhode Island each spring and summer. We have always believed that truck traffic is an excellent measure of the economy’s pulse as so much of the nation’s goods are distributed by trucks. On the other hand, passenger vehicle and RV traffic can be a signal of the health or weakness of the consumer sector since much of this traffic is associated with vacation and other discretionary travel. All of these observations are useful in gauging the possible trends in gasoline and diesel fuel demand and indirectly demand for crude oil.
Exhibit 12. Freight Index Reflects Overall Economy Health
Source: USDOT’s BTS
In mid April the U.S. Department of Transportation’s Bureau of Transportation Statistics (BTS) reported that its Freight Transportation Services Index (TSI) rose 0.3% in February from the January level. The increase marked the second consecutive month the index has advanced. According to the BTS, the Freight TSI has climbed 3.6% over the last nine months starting in June 2009 after falling 15.3% in the previous 10 months beginning in August 2008.
The Freight TSI measures the month-to-month changes in freight shipments measured in ton-miles, which are then combined into one index. The index measures the output of the for-hire freight transportation industry and consists of data from the for-hire trucking, rail, inland waterways, pipelines and air freight industries. This is a broad based measure of business activity.
The Freight TSI was first published by the BTS in March 2005, but it has a history extending back to January 1979. An analytical report
Exhibit 13. Recovery In Freight TSI Still Lags Past Demand
Source: USDOT’s BTS
published by the BTS in December 2007 examined the relationship between the three transportation indexes the BTS reports – Freight, Passenger and Total – and overall economic activity. The thrust of the report was an examination of whether any, or all, of the indexes might provide a leading view of the future course of the American economy. The study’s conclusion pointed to the Freight TSI as a leading indicator of economic activity with a four to five month average lead, while the Passenger index proved to be a coincident index.
The report examined all the turning points in the indexes compared to those of the national economy as determined by the National Bureau of Economic Research (NBER) that is the official designator of economic recessions. The rationale for the Freight index being a leading indicator was stated in the report. “Freight transportation activity, in particular, is directly tied to the supply chain and to the build-up and maintenance of inventories, and so transportation of finished goods may anticipate growth in sales at the retail and wholesale levels.”
As the report demonstrated, the Freight index accurately called the four turns in overall economic growth as determined by the NBER, although the index also called two other turns. The two spurious turns were for the periods from mid 1989 to the end of the first quarter of 1990 and then the 12-months between July 1992 and July 1993. So while not a perfect economic predictor, the historic track record of the Freight index suggests paying attention to its trend.
Exhibit 14. Freight TSI Has Called The Four Recessions
Source: USDOT’s BTS
As shown in Exhibit 13, the Freight TSI has recovered 3.6% from its recent low in May 2009. It is still down 14.1% from its historic peak of 112.9 reached in May 2006. Even after the recent recovery in the index, it is still only on par with where it was during the second half of 1997, suggesting there is still a long way for economic activity to recover before we return to the heady days of 2004-2008. So while the Freight index signals an economic recovery is underway, energy consumption as a result of this stronger freight-related activity is still well below past demand levels. In our estimation, until the Freight TSI approaches its performance in the mid 2000s, overall energy demand for America’s industrial sector will remain sub-par.
U.S. Geothermal Industry Growing With Federal Money (Top)
The Geothermal Energy Association (GEA) recently released its 2010 annual state of the geothermal industry showing it had a 26% increase in the number of new projects under development. The 188 new projects spread over 15 states could produce as much as 7,785 MW of new electric power when complete, effectively doubling the nation’s installed geothermal capacity of 3,086.6 MW. In 2009, the industry completed seven new projects adding 176 MW to the industry total.
A major factor in the sharp ramp up in new geothermal projects has been federal stimulus money that was authorized in 2009. The GEA estimates that the new projects under way will result in a total investment of more than $35 billion when all are completed. Equally important is the employment effect of these new projects. The GEA estimates that through direct, indirect and induced employment, these projects will create 29,750 permanent jobs and 112,000 person-years of construction and manufacturing jobs.
Exhibit 15. The West Has Optimal Geothermal Resources
Source: GEA
The U.S. has substantial geothermal resources, although they are primarily centered in the nation’s 11 western states. Nevada is currently the most active state with new geothermal projects that will add 3,000 MW of new capacity, or nearly half of all the new planned capacity. The GEA report talked about the spread of geothermal projects from the western states to the Gulf Coast where there are new projects in Louisiana, Mississippi and Texas. According to the report, these states have a strong interest in small geothermal projects of less than 1 MW in size.
Like all the other renewable fuel industries, the geothermal industry is touting its environmental and green jobs creation potential, although it is not talking about the industry’s economics. If the GEA estimate of the magnitude of investment going into these new projects is correct, then the per-megawatt capacity cost is roughly $4.5 million. Based on recent data, the comparable cost for a coal power plant is $2.3 million, $4-6.7 million for a nuclear plant and $0.9 million for a natural gas plant. Offshore wind is estimated at $5 million. Coal and natural gas remain cheaper alternatives to geothermal. Without government subsidies, geothermal energy seems pretty expensive, albeit clean.
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Parks Paton Hoepfl & Brown is an independent investment banking firm providing financial advisory services, including merger and acquisition and capital raising assistance, exclusively to clients in the energy service industry.
