Category: Energy Pricing

OPEC’s inaction prompts Chinese action

Posted on by Carlos Enrique
Motorists fill their tanks at a China Petroleum & Chemical Corp. gas station in Beijing, China. The world’s second-biggest economy consumed the largest volume of oil on record in October, according to data compiled by Bloomberg. Photographer: Nelson Ching/Bloomberg

As the price war between the United States and OPEC begins in earnest, China stands to gain substantially. Developing at a still rapid 7.5%, China’s expansive development projects are necessary to keep unemployment numbers down and local economies thriving. Unfortunately, a lot of these projects are inefficient and necessarily energy intensive, so China will continue to purchase coal and petroleum wherever there is a cheap price to be had.

Interestingly, China is also taking in additional supplies of petroleum to expand their Strategic Petroleum Reserve. Current Chinese leadership aims to expand their reserves from 30 to 100 days. This is a significant increase, and this is an excellent time to buy lots of petrol at a bargain price. If demand from developing countries continues to increase, existing explored oil/shale/coal deposits are exhausted, and exploration for new deposits goes into geologically or politically dangerous regions, the prices China will purchase at today will seem like a bargain in a few years.

This development, along with the favorable energy deals China has struck with Russia within the last few months, will allow China to continue developing at a moderate cost. Whether this is is a good thing in the long-run is questionable. Loose fiscal discipline enabled by cheap credit and cheap energy allows for projects that, under normal circumstances, would not net a sufficient return on investment. Additionally, cheap fossil fuels slow the adoption of alternative energy sources, causing further environmental damage at a time when health and the environment are growing concerns with the Chinese citizenry.

P.S. It’s rather telling how much petroleum the United States consumes when comparing strategic reserves. 570 million barrels is equivalent to 100 days in China, where 691 million is equivalent to only 37 days in the United States.

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China Winning in OPEC Price War

The Winds Shift and the Sun Rises

Posted on by Carlos Enrique
A wind farm in Weatherford, Okla. In a study, the cost of wind power came in as low as 1.4 cents a kilowatt-hour. Credit: Paul Hellstern for The New York Times

Solar and wind generated electricity have reached price levels that are comparable, if not superior, to that of conventional fuels such as coal and natural gas. This is a wonderful and significant event, particularly because they are now price competitive without continued government support.

While continued government support would certainly be a boon to the industry and speed its adoption, the removal of government support would not be a death knell for the alternative energy industry. Unfortunately, the alternative energy industry has been stuck in a boom-and-bust cycle for the previous 44 years, mostly due to intermittent government support for both research and development, and deployment of alternative energy technologies. The fact that these technologies are finally commercially competitive sans government support means that, while the growth of the industry is impacted by government involvement, the industry is certainly not the risky investment it was before.

There is still one major issue to tackle, however. The current intermittent nature of solar and wind electrical power generation means that it is still very expensive for utilities (and individuals, but particularly utilities) to adopt alternative energy technologies wholesale. There are instances of utilities investing in large scale alternative energy power plants, but it is still necessary for utilities to have back-up, on-demand power plants based on coal or gas in order to smooth out the power generation curve. This is a very expensive set up, and so long as alternative energy generation has the intermittency issue, cost will remain a prohibitive barrier to the full-scale implementation of alternative energy around the country.

The solution? Utility-scale battery grids capable of storing and distributing the power generated by solar and wind. This would allow for solar and wind farms to smooth out their energy curve on their own, eliminating the need for expensive, massive back-up power plants.

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Solar and Wind Energy Start to Win on Price vs. Conventional Fuels

According to a study by the investment banking firm Lazard, the cost of utility-scale solar energy is as low as 5.6 cents a kilowatt-hour, and wind is as low as 1.4 cents. In comparison, natural gas comes at 6.1 cents a kilowatt-hour on the low end and coal at 6.6 cents. Without subsidies, the firm’s analysis shows, solar costs about 7.2 cents a kilowatt-hour at the low end, with wind at 3.7 cents.