Newsletter January 2006

Energizing the Debate

• Feature Article: Energizing the Debate
• 1) Is there enough energy out there?
• 2) If there is enough energy out there, why is it so expensive?

Energizing the Debate

In our last issue, we discussed how we were working on ways in which software can help companies save energy. After talking to many people, we've come to realize that the topic of energy is very, very confusing. Sure, everyone knows that the price of gasoline is high. But if you're going to make an investment in any kind of new technology, you want to know that the problem you're looking to solve is not going to solve itself within a year. Indeed, it was only three years ago that oil was $20 a barrel. (For more information, see historical data.)
So — do you ride it out or do you actually start investing? To answer this question, you have to begin by answering some others. Now, there's a tremendous amount being written about energy right now, but we think the whole matter comes down to the following four questions:
1) Is there enough energy out there?
2) If there is enough energy out there, why is it so expensive?
3) Is it practical to use less energy?
4) Is the environment really a business issue?
For reasons of space, we can't cover all these questions in this newsletter. So we'll start with the first two. (If you want the rest of the answers sooner, contact us.)

1) Is there enough energy out there?

There has been much talk in the media about the end of oil. Take your pick, from the New York Times down to small niche publications, and you'll find catastrophic predictions. These articles focus on the problems with OPEC and the decline in new petroleum finds. If you take them seriously you, too, will believe that oil is going, going, gone.
These articles generally ignore three issues:
a) Cheap oil from Saudi Arabia is not our only source of hydrocarbons. Those of you old enough to remember the oil crisis of the '70s may recall discussions of the importance of coal, oil shale and even Canadian tar sands. These resources have plenty of hydrocarbons. The reason they haven't been effective sources of energy is that when oil was just $20, it was hardly economical to exploit them.
b) The United States is the world's largest consumer. And the United States is the world's most inefficient consumer. While the growth of China and India has certainly changed the global consumption picture, we still consume well over three times what China does. And we use at least twice as much energy per capita as any other developed country. It seems to me there are ways we could change the demand side of the equation dramatically.
c) Alternative energy isn't so alternative any more. While I would urge you not to believe the hype about hydrogen cars, other technologies are maturing. For proof, look no further then General Electric, which owns a billion-dollar business selling turbines to generate power from the wind.

2) If there is enough energy out there, why is it so expensive?

Our current crunch is not caused by an absolute lack of energy. Rather, it is caused by other factors:
a) A lack of the most easily used forms of energy. Coal isn't oil, but oil isn't oil, either. Our refineries are designed to refine the best kinds of crude. While this is not an exact analogy, let's say that refineries prefer Evian to water that comes directly out of the Hudson River.
b) A lack of capacity to convert oil. If you've been paying close attention, you've noticed that the price of gasoline has jumped much more than the price of oil since Hurricane Katrina. Why? Because the storm knocked out refining capacity more than it knocked out production capacity. So, while we might be able to replace the oil, we ultimately can't use raw crude to keep our SUVs running.
After reading the above, you might come to the conclusion that our problems are temporary. Stay tuned; in our next issue, we'll discuss why they're not.

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