Our Energy Future

Posted by Jeff Carter
on May 13th, 2012

At the Chicago Booth Graduate School of Business Management Conference Friday, I listened to a panel discussion on energy. It was interesting, primarily because the two panelists didn’t mince words.

They offered up some interesting stats. Did you know that Chevron ($CHV) spends $33 billion a year just to keep the doors open and the lights on. Amazing operating budget. For that 33 billion spend, they control 2% of the world wide oil market.

Conclusion: Running an oil company isn’t cheap and has a lot of fixed costs.

Question: Why do we demonize, regulate and tax the crap out of them?

Another data point they offered was that in the next ten years, the world will need 40% more energy to operate. Demand is going up. The reason? In America, when we go through our daily lives, we implicitly trust that lights will go on, air conditioning and heating will work. We know if we plug something in, the electricity will power it. We use cell networks. We don’t walk and bike everywhere, and generally get to place to place using some form of powered transportation.

Well guess what. The rising middle class in the rest of the world wants the same thing. As China, India, Brazil and other countries increase their standards of living, they will demand more energy.

There is the concept of “energy density” to consider. For example, solar power is 10-15 times less dense than wood.

Material– EnergyDensity(MJ/1kg)
Solar*- 0.2-1
Wood- 10
Ethanol- 26.8
Coal- 32.5
Crude Oil- 41.9
Diesel- 45.8
Natural Gas- 55.6
Natural Uranium- 570000
Reactor-grade Uranium- 3700000

Conclusion: Energy prices aren’t going lower in the long run and instead of battery powered cars and trucks we should figure out how to make uranium powered cars and trucks.

Question: Why aren’t we exploring like crazy for new sources of energy? Why aren’t we building nuclear power plants? Why aren’t we utilizing things like coal to be a bridge to get us to future energy sources?

There was a section of the discussion that pertained to “green energy”. Currently, 2% of the entire supply curve for energy in the world is green. There is plenty of research and development on green energy, but there is no exponential “Moore’s Law” that holds true when it comes to energy. The world will use 3% green energy ten years from now.

Conclusion: Research into green energy isn’t a total waste of money or time since fossil fuels will eventually be gone. However, government subsidies and government money pouring into research seems ill spent.

Question: Why aren’t we building nuclear plants since it’s the greenest and most efficient energy we know of?

The panel talked about transportation. They both see natural gas as a way for fleets to operate vehicles. The problem is both logistical and economic. When a company buys a big diesel truck and operates it there are different calculations that go into the purchase. First, the initial price, the annual cost of operation and maintenance and the depreciation each year. When the asset is used up and no longer economical for the company to use, they generally sell it and someone else uses it. For example, a lot of times American companies will sell their trucks to third world operations. There is a residual value for the diesel truck that can be counted on. With natural gas or hydrogen, the initial company that buys the vehicle assumes all the risk since there isn’t a natural repurchaser. Logistically, if you operate trucks on the open road, how do you fill them up? There aren’t natural gas filling stations all along the road. The other problem is transporting the natural gas. The best way to do it is turn natural gas into liquefied natural gas. We need refineries to do that and there aren’t enough available.

Conclusion: Natural gas is a good alternative, but we need to figure out how to develop an ecosystem so that it becomes easy for companies to switch. Natural gas has more energy density than diesel fuel.

Engines are getting more and more efficient. Cars and trucks are getting more efficient. There is economic pressure causing research and development to go into creating more fuel efficient cars. The average MPG of cars will be close to 60mpg within ten years.

Conclusion: We don’t need CAFE standards to stimulate car companies to create better cars. Economic incentives create them. There is no secret car that gets 90 MPG that car companies are withholding from the market. If they had it, you could buy it on a lot.

They touched a little on government energy policy. The conclusion is because the political winds shift all the time, there is no cohesive policy. They even questioned whether Eisenhower would have been able to build the interstate highway system today. On super fast trains, they said we would never have trains like they do in other countries. Primarily the problem is because they have to share track that exists, rather than get the right away to build new track.

Conclusion: Give up on high speed rail. It’s not going to be possible under the current political environment, or economic environment.

They spoke about energy exploration. Even though there are behemoths in the energy industry, there are still a lot of small entrepreneurs that fill in market niches. Many of them are in the risky exploration business. It’s amazing how accurate current technology makes exploration. You can drill miles sideways under the earth and pinpoint exactly where you want the drill to go. Fracking has unleashed an amazing amount of new sources of energy. We need to take advantage of it.

Japan has shut down a nuclear reactor, and shifted to old inefficient diesel generators. Both panelists felt they would make the jump to natural gas in the near future. They will have to import most of it. The US should build a port in Long Beach or San Francisco to export liquefied natural gas. Good luck getting something like that done in crazy California.

Conclusion: The US will squander much of it’s storehouse of current energy due to bad policy.

They talked about batteries and cars. Batteries have gone as far as they can right now. There is no technology on the immediate horizon that will change battery dynamics. They both felt that the battery only cars on the market weren’t game changers.

Conclusion: Things like the Chevy Volt in the current technological environment are not efficient. They are science experiments.

All in all it was a very enlightening session and I got a new appreciation for the fixed costs of operating an energy company. I learned how to think about energy in the future. As an angel investor, I don’t see me making investments in green energy that will take years to come to fruition. However, as an angel investor I can make investments into companies like Power2Switch that are in the energy sector, but not in the research and development of it.

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