Offsets and Behavior

It took a while for US petroleum product demand to respond to high oil prices, but once gasoline neared $4 per gallon in a slowing economy that no longer afforded consumers the opportunity to translate home equity appreciation into purchasing power, it set up the first absolute decline in gasoline use since 1991. But would this response have been so dramatic, if the majority of consumers had already locked in their fuel costs, or hedged them financially? That question has interesting parallels with regard to climate change, for which emissions offsets can provide individuals with a cost-effective temporary alternative to more difficult or expensive changes.

Having just received a renewal notice from my emissions-offset provider, it seemed like a good time to recap my family's fuel consumption for the past year, in order to calculate how much CO2 our two cars emitted. I won't pretend the Styles household is typical in its gasoline consumption. Since neither adult commutes to work, we drive less than the national average. That's just as well, since our cars' fuel economy is nothing special: the station wagon and the sports sedan both get around the national average fuel economy of roughly 22 mpg. Together they consumed 705 gallons of gasoline in the last 12 months.

Tallying our fuel use also provided an opportunity to assess the actual impact of higher fuel prices on our family budget. At an average price increase since last July of 63 cents per gallon, we spent $450 more on gasoline than in the previous year. Although that result fell short of my perceptions, it still represents money we could have spent on other goods and services, or saved. Yet I also knew I couldn't view it isolation, without considering the impact of the natural hedge provided by the oil company stock I retain as a result of my previous employment. Although its performance has been disappointing since oil began its retreat from $145 per barrel, over the last four years it has more than offset the approximately $2 per gallon increase in fuel prices we've experienced. But that isn't just a benefit of being an ex-oil company executive; anyone could have created such a hedge, if they had a spare few thousand dollars to invest.

Four years ago the average US price for regular gasoline stood at $1.90 per gallon. This week it's $3.95. Although its rise has hardly been smooth, that works out to roughly an extra 50 cents per gallon each year, compounded. For a typical car consuming 500 gallons per year, that equates to a cumulative fuel-expense increase of $2,500 over the entire period. As it turns out, $2,900 invested in a fund tracking the Amex Oil Index (XOI), a basket of oil equities, on August 1, 2004 would have grown to $5,750 by now, enough to cover the entire increase in gasoline prices and still pay a 3% return on the principal, though not without significant risk and volatility. Since oil equities are hardly a perfect proxy for fuel prices, a bolder investor might have achieved the same hedge by investing directly in a commodity fund. Alternatively, anyone lacking the capital or the inclination to tie it up this way could have locked in his or her gas purchases using a service such as MyGallons.com. (I haven't tried it and can't vouch for it in any way; caveat emptor.) And never forget that hedges can lose money; if you hedge but the price falls, you will be worse off than if you had done nothing.

Even without our natural hedge, I doubt that we'd seriously be considering trading in our pair of 4-year-old cars on new, more efficient models, in order to save that $450 per year. We don't drive enough to justify taking the resulting hit on depreciation, even if we doubled our fuel economy. Nor does our desire to reduce our greenhouse emissions alter that calculation by much. The gasoline we've burned since last July produced 7 tons of CO2. Based on the rates charged by TerraPass, we can offset that for $83.30, getting us effectively to zero emissions, rather than the reduction of 1/3 to 1/2 we might expect from newer, thriftier cars--and at a much lower cost.

Now, I've heard all the arguments about "buying indulgences" instead of making real changes in our lifestyles. Although my family has effectively negated the personal impact of higher oil prices and our vehicles' CO2 emissions, the world as a whole might be better off if we had bought a pair of hybrids, instead. However, that argument contains two fallacies, one arising from the inappropriate application of a pollution mindset to greenhouse gases, and the other reflecting the limited supply of highly fuel-efficient cars and the benefit of allocating them first to the highest-intensity users. As long as my offset provider is really investing in projects that truly reduce emissions--emissions that are equivalent in impact regardless of where on the planet they occur, and that wouldn't be cut otherwise--then for less than $100 per year we have the climate equivalent of two EVs running on wind power, minus their cachet. And we aren't competing for a hybrid with someone who drives 20,000 miles per year.

That isn't an excuse for perpetual indulgence, of course. When we do buy new cars, they will be much more efficient: diesels or hybrids, at least. And if the US hasn't enacted economy-wide cap & trade or carbon taxation by then, we'd pay to offset the remaining emissions. Similar calculations by millions of Americans may help to explain the fuel economy inertia of the US vehicle fleet, and why it will only improve incrementally within the next five years, no matter how efficient the new-car fleet becomes.

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NIMBY vs. TANSTAAFL

It is encouraging that our reaction to the current energy crisis has reached the stage at which we are beginning to see concrete plans for addressing it systematically, rather than via the grab-bag approach employed in last year's energy bill. The same applies to the related, but not quite parallel problem of climate change. But whether voters ultimately gravitate towards the Pickens Plan or to Mr. Gore's more dramatic goal of eliminating fossil fuels, such approaches are likely to run afoul of the same factors that have hampered the ability of the US conventional energy sector to keep pace with demand. Real progress in this area will require us to confront the collision between our desire for abundant energy and our distaste for the means of providing it.

The current debate over offshore drilling exemplifies many of the same obstacles that renewable energy sources will face, as we attempt to scale them up to a level that can compete with oil, gas and coal. Too many advocates of alternative energy cite our inability to drill our way out of this energy crisis--kicking a dead dog, if there ever was one--without realizing that the sensibility that opposes oil exploration off our coasts or in Alaska is not so different from the one raising lawsuits against the transmission of concentrated solar power from the desert to coastal markets.

Whether we are talking about oil wells, refineries, wind farms, or uranium mines, most Americans would prefer them to be far enough away from us that we can't see, hear or smell them. Until recently, it has been just barely possible to satisfy both our demand for energy and our state of denial about its origins, because the energy sources we have relied on are so concentrated. One mid-sized offshore oil platform contributes as much net energy production as the entire US ethanol program did in 2006. But as we shift toward renewable energy, it will become increasingly difficult to shield our sources of energy from our view. Generating the electricity necessary to displace natural gas from the power sector into transportation, as Mr. Pickens suggests, would require between 90,000 and 200,000 wind turbines, using current technology. In order the make that a reality, the viewscapes of millions more Americans must include either wind turbines or the new transmission lines necessary to bring their output to market.

Breaking this tension between NIMBY and TANSTAAFL--the popular acronym about free lunches that restates the Laws of Thermodynamics--will require a willingness to set clear national priorities and make the compromises necessary to turn them into practical reality. Does our desire to become energy independent, or at least reduce our reliance on unstable oil suppliers and the financial drain that accompanies it, exceed our preference for keeping big, ugly infrastructure out of sight and out of mind? Does our concern about the potential consequences of climate change trump the ability of small, vocal minorities to block essentially any project that doesn't fit their vision? Or has this energy crisis finally become painful enough to force us to grapple pragmatically with the consequences of solving it?

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Leveraging the SPR

Election-year politics and prudent energy policy do not mix well. The combination is even worse when the election cycle coincides with a genuine energy crisis, and both parties seek to curry favor through short-sighted proposals aimed at producing votes, rather than BTUs or kilowatt-hours. We saw this earlier in the year with suggestions by Senator Clinton and Senator McCain to suspend the federal tax on motor fuels for the summer, and we are seeing it again in calls by the Speaker of the House and others to release oil from the Strategic Petroleum Reserve to drive down fuel prices.

It's remarkable how quickly the debate over the Strategic Petroleum Reserve (SPR) has shifted from halting additions to it, to draining it. The former was eminently sensible, in light of the cost of the program and the possibility that diverting small quantities of light, sweet crude into storage was having a disproportionate impact on the price of all oil. The balance of risks strongly favored suspending additions to the SPR; quite the contrary is true for using SPR oil to create a brief, convenient slump in the oil market, while diverting attention from the more serious discussion of increasing supply and reducing demand--both sides of which would be harmed by a non-emergency release from the SPR.

Make no mistake: the current SPR is a relic of the energy crisis of the 1970s that merits serious re-thinking about its fundamental purpose and the best way to achieve it in a very different economic and geopolitical environment. It is also possible to conceive of ways in which oil in the SPR could be used to speed up the contribution of production from new oil fields, once they are identified and under development, via SPR vs. reservoir exchanges. However, such considerations are quite different from simply dumping SPR oil into the market--volumes that under the policy passed by this Congress could not be replaced as long as oil remains expensive--for no purpose other than to provide some relief at the gas pump, where prices are already likely to fall by another 25-35 cents per gallon, based on the past week's drop in the crude oil and gasoline futures markets.

The problems with releasing SPR oil now are straightforward. Inventory is not production. The proposed draw-down is not sustainable, while the production that new drilling could add would contribute to our energy supplies for a generation. Moreover, oil prices are a classic stock-and-flow system, reflecting the current balance between actual supply and actual demand, and the difference between actual inventory and desired inventory. Although the flow of SPR oil into the market would create a temporary glut and drive down the price of oil for prompt delivery, the subsequent lower inventory levels--even for an emergency back-up such as the SPR--could result in even higher prices after the release program ended than before it began. At the same time, this signal--not just from lower current prices but also from the demonstrated willingness of the government to use the SPR to manipulate the market--would deter new energy projects, including those for alternative fuels that are more attractive when oil prices are high, while impeding our transition to more efficient vehicles.

The world has changed in many ways since the SPR was first opened, and some of those changes make it even more essential for the US to have quick access to large volumes of oil in extremis. Among other things, our net oil imports have doubled since President Ford signed the SPR into law in 1975. Although oil prices remain high, supply still meets demand. Yet it is far too easy to envision plausible scenarios in which that would not be the case, involving terrorism, expanded conflict in the Middle East, or the effects of Peak Oil. In any of those cases, we might find that the SPR's current 160 days of supply at its 4.4 million barrel per day maximum delivery rate are not nearly as ample as they seem.

Aside from expediency, the theory behind releasing SPR oil now is based on a flawed narrative involving a bubble in oil prices. If the evidence were clear that supply and demand would balance at a much lower oil price, and that speculators were responsible for a large fraction of the current oil price, then I could support using a brief release from the SPR to crush speculation. The reality appears much different. Oil prices have fallen since this debate started, largely because of the extraordinary reduction in demand that high prices and a weak economy have triggered--and not because the market sees a realistic prospect of a SPR release this year. Oil is trading today below $125 per barrel for delivery in September 2008, as well as for delivery in December of 2010, 2011 and 2012. That could change tomorrow, due to some event, but it suggests that the impact of speculation is more like the foam in a glass of beer than a steadily-inflating bubble. The interests of the nation would be better served by a Congressional commission on re-engineering the SPR for the 21st century, than by Congressional legislation to fritter away this $88 billion asset in the pursuit of short-term goals.

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Setting Oil Prices

As the Congress moves ahead with legislation aimed at reducing the contribution of speculation to high oil prices, it's worth taking a moment to reflect on how oil was priced before the influence of the futures markets became so pervasive, or before they even existed. A quick review reveals that any nostalgia for this earlier, simpler era is largely misplaced. Today's oil markets, for all their faults, are models of transparency and efficiency by comparison. Let's hope that our government can discover the right formula for curbing their excesses, without destroying the liquidity and highly-visible price discovery that they provide to producers and consumers, alike.

I've devoted a fair amount of space to the question of oil market speculation. I don't see the signs of a housing or Dot-Com-style bubble, but I also don't dismiss the effect of demand from long-biased asset-class investors on the market. As we often hear from skeptics of the influence of speculation, buyers and sellers must indeed be evenly matched, but higher demand for long futures can only be met by bidding up the price. That tends to drive up the price of the physical commodity bought by refiners, because of the mechanisms by which physical oil is priced. However much this has contributed to pushing oil beyond the $70-$80 per barrel that some industry experts suggest more reasonably fits the market fundamentals, a return to the way oil prices were formerly determined would not guarantee lower prices.

There are many excellent accounts of the history of oil and its pricing, and I can't possibly do justice to this subject in a brief blog posting. If you haven't read the book for which Daniel Yergin won the Pulitzer Prize in 1992, that would be a good place to start. Prior to the first oil crisis, the price of oil was effectively set by the Texas Railroad Commission, which published the monthly quota for production in the state. Together with import restrictions, this constrained supply enough to keep US oil prices between $2 and $4 per barrel. Once the Railroad Commission quota hit 100% in 1971, as a result of growing demand and the peaking of Texas oil output, its influence on prices ended. Oil from the Middle East and other big exporters in that period was sold mainly via long-term contracts, at prices that changed infrequently and that sometimes included "net-back" provisions, explicitly tying the price received by the producer to the revenue realized by refiners in key markets.

All of this changed in the 1970s, after OPEC consolidated its control and began raising the price. It ended net-back discounts and nationalized the holdings of the international oil companies. Between 1972 and 1978, the average price US refiners paid for imported crude oil quadrupled in dollars of the day. The US government intervened in the market by setting the price of "old" and "new" oil--trying to hold down prices while leaving incentives for new domestic production--and limiting imports. These distinctions were exploited by clever traders, and integrated refiners were forced to supply small, independent refiners, even if their own facilities were under-utilized. It was a mess. From 1978-81, in the aftermath of the Iranian Revolution, oil prices increased by another 150%. Over the next few years, OPEC's ability to set prices was eroded by a 10% reduction in global oil consumption and a tsunami of new non-OPEC output from the North Sea, the North Slope and elsewhere. In the ensuing battle for market share, the price of oil fell from its peak of around $40/bbl. to $13, requiring the 1990 Iraqi invasion of Kuwait finally to push it back above $20.

When I traded oil in the late 1980s, most of the US production I dealt with was bought and sold on the basis of the oil companies' posted prices, which solicited offers to sell them lease-level crude output. Alaskan North Slope crude was one of the few domestic grades I handled that was sometimes pegged to the price of West Texas Intermediate crude on the New York Mercantile Exchange (NYMEX.) The prices of the relatively few international cargoes I bought were typically negotiated for each cargo, without reference to other markets. Although I never bought Saudi oil, it was priced by Aramco on two formulas, one for "eastern" and one for "western" destinations. Transparency in that period depended on the ability of reporting services such as Platts to ferret out the details of the transactions that occurred each day. The fewer the transactions, the less reliable these reports were, especially for domestic grades outside the week or so prior to monthly pipeline scheduling, when most deals took place.

History is rarely a perfect guide, but in this case I think it offers some useful lessons concerning how oil might be priced, if the futures markets became less liquid or less influential. Although prices might not be as volatile, day to day, they would be no less prone to manipulation, or to sudden price spikes in response to changes in supply or demand. The pre-NYMEX oil market only yielded low prices when supply was abundant, a characteristic that has been absent since oil prices took off in 2003. Today's problems of transparency, involving the identity and motivation of market participants, pale in comparison to the former challenges of discerning precisely what the day's price was, in the absence of an open, visible exchange platform. I dislike clichés, but as the father of a small child the image of throwing out the baby with the bathwater resonates strongly, here.

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Changing Our Energy Diet

Over the weekend I participated in a panel discussion on space-based solar power (SSP) at a space-development conference, for the second time in as many months. My presentation focused on what it would take for a new source such as SSP to find a place in our energy diet, which will be changing at the same time that the technology for producing power in space and sending it to markets here on earth develops. The audience of entrepreneurs and space professionals was quite engaged by the idea that SSP couldn't just be a space project; it had to be a viable energy project, too. These same challenges apply to any new energy technology with a long development period, including some that are much more established than SSP. But with politicians, pundits, and experts of all stripes telling us we must rapidly shed our addiction to fossil fuels, the inertia of our present energy diet remains the under-appreciated elephant in the room.

I began my brief remarks with a simple pie-chart showing US energy consumption for 2007, based on data from the Energy Information Agency of the US Department of Energy. As replicated below, it showed the breakdown of our primary energy supply--the raw energy going into power plants, factories, and oil refineries for further processing into fuels, electricity and materials, along with the contribution from nuclear power plants and those energy sources that produce electricity directly, such as hydroelectric dams, solar panels and wind turbines. Despite the recent, breathtakingly-fast growth of wind and solar, and the tremendous success of the nuclear industry at squeezing more output from its 104 existing reactors, the low-emission portion of our energy diet only accounts for 15% of our primary energy needs, and less than a third of our electricity demand, with 93% of that coming from mature hydropower and nuclear sources.

US Primary Energy Supply

As in a diet, not all calories are equal or interchangeable. The 39% of this diet supplied by oil cannot be replaced by renewable sources of electricity without a lengthy and dramatic change in our vehicle fleets, because oil accounts for less than 2% of our electricity generation, and there's very little of it left to displace from the power sector. Nuclear power and natural gas already accomplished that task over the last several decades. The much bigger challenge now is to shift the roughly 97% of transportation energy currently derived from oil to other sources--either electricity in the view of Al Gore, Dr. Andrew Grove and others, or natural gas, as suggested by T. Boone Pickens. But as we make that shift, we can't leave the portions of our economy that will still depend on oil high and dry. We must continue to provide enormous quantities of petroleum, even as we work aggressively to shrink its share of our diet and expand the portion supplied by sources that don't emit greenhouse gases or contribute to our trade deficit. It is fundamental to the nature of oil production that if you don't keep drilling, its supply quickly dwindles.

Tom Friedman's column in Sunday's New York Times drew a parallel between Mr. Gore's ten-year goal for ending our use of fossil fuels and President Kennedy's commitment to reach the moon in a decade. Unfortunately, this analogy breaks down once it gets past the R&D stage. I regard our accomplishment of landing two men on the moon 39 years ago yesterday as the pinnacle of the 20th century. It was a remarkable feat, requiring billions of dollars and hundreds of thousands of scientists, engineers, and support staff of every description, yet it ultimately only put 12 Americans on the lunar surface. We're talking about displacing 85% of the current energy diet of a nation of 300 million people that accounts for between a fifth and a quarter of global GDP. Doing that within a decade wouldn't just be moonshot-impressive; it would require a flat-out miracle.

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Farewell to $4?

The price of oil on the New York Mercantile Exchange has dropped $15 per barrel in less than a week, bringing us the first closing price under $130 since June 5. It is premature to suggest that this marks the start of a major correction back to sub-$100 territory, but it's noteworthy that this appears to be happening largely due to the weakening of demand, particularly in the US, where gasoline sales are now down around 3% compared to the same time last year--even more if we adjust for the additional ethanol being blended in under this year's higher Renewable Fuel Standard target. If the oil price stabilized here and refining margins remained weak, the national average retail price of gasoline would shortly drop back below $4.00/gallon. Although that wouldn't mean we'd never again experience prices that high, it would be very interesting to see how a return to the mid-to-high $3 per gallon range would affect consumer psychology.

At the very least, this week's drop should deflate some of the recent oil market hysteria, which was making $200 oil and $6 or $7 gasoline seem like an immediate inevitability, on the strength of little more than self-fulfilling prophesies and jitters about a possible conflict with Iran--something that has had the market on edge since oil was under $50. But while that other mainstay of expensive oil, demand growth in the developing economies, continues apace, the market cannot for long ignore a 3% aggregate drop in petroleum demand from a country that still accounts for nearly a quarter of the world's oil imports. Small fractions of large numbers can have a big impact.

Refiners remain caught in the middle, as they have been for most of the last year. With demand responding to high prices and the soft US economy, refiners are making very little money turning oil into gasoline. Weak demand has forced them to absorb a large chunk of the recent increase in oil prices. Nor does it seem likely they will be able to hang onto more of the margin as oil prices drop, because US gasoline inventories are building at the rate of roughly 2 million barrels per week, despite refiners shifting their operations to produce record quantities of diesel, partly at the expense of gasoline output. Refiners have room to increase crude runs, but at these margins, they are probably better off maximizing distillate and purchasing any gasoline shortfall abroad. But while these conditions have benefited consumers in the short run, they could set the stage for higher product prices in the longer term, by making the economics of refinery expansions less attractive.

After Hurricanes Katrina and Rita, there was a spate of concern about the nation's refining system. No new refineries had been built since the 1970s, and too many were concentrated along the Gulf Coast. All that talk came to nothing, but the exceptional margins that existing refineries were earning for several years kicked off some significant refinery expansions, including the Motiva and Marathon projects in the Gulf Coast that will effectively add the equivalent of a brand new refinery inside the boundaries of two existing facilities--a model currently under consideration by some nuclear plant operators.

Now, this might seem like an odd time to build more refining capacity, with demand falling and over a third of the country convinced that we'll get most of our energy from renewable sources within a few years, according to a new API/Harris Interactive survey. But even if we don't end up using more oil in the future, the kind of oil US refineries can process matters greatly in the global market. Although some analysts are skeptical that Saudi Arabia can deliver on the sustained output increases they have promised, one of the main reasons the market has largely yawned at the prospect of another 2 million barrels per day of Saudi crude is that much of the incremental oil will be of low quality--just the kind that these refinery projects are designed to handle. If refining margins don't recover soon, projects like this could be slowed down or deferred, and additional heavy, sour crude oil production will have less impact on the global price of oil--and that would affect us all at the gas pump.

In the meantime, no one should become complacent, even if average gasoline prices soon fall below $4 for a while--though probably not in California. Global supply and demand remain pretty tightly balanced, and we're now never more than one or two events away from a big spike in oil prices or refining margins. While we might soon spend a bit less at the gas pump, we'd be better off pocketing any savings, rather than turning them into a rebound in fuel demand.

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Deferring Climate Action

Depending on one's perspective on climate change, last week's events provided either a series of predictable disappointments or a temporary breather, before our expected plunge into a world of constrained emissions. The statement on climate change from the G8 Summit in Hokkaido, Japan, and the subsequent "Major Economies Meeting" reflected only incremental progress since 2005's Gleneagles G-8 meeting and last year's Bali Climate Conference. And although the announcement that the EPA would effectively defer regulating greenhouse gas emissions under the Clean Air Act until the next administration was overshadowed by allegations that Vice President Cheney had interfered with Congressional testimony on the health risks of climate change, the former should not have shocked anyone. On the heels of the latest failure of US cap & trade legislation, it was not in the cards for 2008 to be more than a transition year for action on climate change, and that view has been borne out.

Lacking the time or space to comment on all of the implications of these actions, I'd like to focus on the principal complaint I've seen concerning the G8's contribution, to the effect that their stated target of cutting global greenhouse gas emissions in half by 2050 falls far short of what would be necessary to stabilize the climate. I would suggest that at this point setting any global emissions target and then starting to work towards it is more important than the absolute level of the goal. Stabilizing atmospheric concentrations of CO2 and other greenhouse gases at their current level would apparently require reductions on the order of 80%, but whatever target we set now for 2050 is unlikely to be the last word, and even more unlikely to be achieved with precision. We will ultimately either undershoot, because global emissions are now growing so rapidly that it will take longer and cost more to halt and reverse this trend than we hope, or we will overshoot, because the world will change so much in the next 42 years that a 50% reduction will prove to have been ridiculously timid.

Consider 1966, removed from us by the same interval as the world of 2050, and the sorts of predictions that were then current regarding the 21st century--predictions rooted firmly in the dominant technologies and institutions of the day. By now all air travel should take place in sumptuous luxury aboard supersonic aircraft. Rather than lumbering along with gasoline engines, our cars should zoom down the roads on nuclear batteries and occasionally even fly. Recessions and credit crises should be a relic of the past, as gigantic mainframe computers guide the economy with total accuracy. And don't forget the colony on the moon. For good or ill, we didn't get those outcomes. Instead, we got ubiquitous real-time information and communications via wireless PCs, cellphones and the Internet, and the beginnings of unprecedented medical and materials revolutions based on DNA-level biotech and nanotechnology. In addition, the world's population has grown by about a half billion fewer people than once expected, making some of our current problems less severe than they would have been. I see little reason to conclude that the next four decades will be any less surprising and prediction-thwarting than the last four. That doesn't mean we should punt on climate change and wait for a miracle, but it does suggest that focusing our first steps firmly on the next 10-20 years makes more sense than bogging down in arguments about a longer-term future we can't forecast.

Few things about climate change are certain, including the level of our emissions in 2050. However, at this point we do know that the roadmap set forth in Bali last December, and resting on the findings of the Fourth Assessment Report of the Intergovernmental Panel on Climate Change, continues to guide the negotiations on a new global climate agreement. Although the shape of the ultimate compromise between the developed and developing economies--the sine qua non of a meaningful successor to the Kyoto Protocol--remains unclear, the key parties at least seem to be willing to tackle it. And we know that on January 20, 2009, a new US administration will take office with climate change as a top priority from day one.

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Energy Resilience

In an important op-ed in yesterday's Washington Post the former CEO of Intel, Andrew Grove, issued a rebuttal to all the slogans we've been hearing lately promoting energy independence. Without ever mentioning it by name, he also offered a practical alternative to the recently-proposed Pickens Plan. In the process, he has introduced a phrase that might catch on as more precise and pragmatic than either energy independence or energy security: "energy resilience." This notion relies on extending the dominance of electricity into transportation, and on producing this energy carrier from many different primary energy sources, including fossil fuels, various renewable flows, and nuclear energy. An energy economy entirely mediated by electricity would be much less vulnerable to disruptions or price spikes in any one commodity, such as oil.

When confronted with the overwhelming challenges preventing the US from achieving true energy independence in the foreseeable future, many of the advocates of this goal respond that we ought not be overly literal in interpreting it. Independence is a matter of degree, and what they really intend is that we become more energy independent, despite the arrow having pointed steadily in the opposite direction since the early 1980s. If that isn't merely rhetoric, then perhaps they'd be willing to trade in this imprecise slogan for one that represents an equally desirable, yet more achievable goal. Energy resilience could be just what a nation reeling from the inflationary impact of the quadrupling of oil prices in five years is seeking: an economy with the ability to absorb an oil (or natural gas or coal) price shock and keep on growing.

So what might a transition to a more resilient energy economy entail, with electricity powering most transportation, in addition to its other roles? As Dr. Grove notes, shifting our transportation systems to electricity wouldn't be easy, because it will require much new infrastructure and the turnover of most of our vehicle fleet. Powering half of the energy needs of the current US fleet of cars and light trucks would require an additional 40 1,000 MW nuclear power plants or 125,000 MW of additional wind and solar capacity--a seven-fold expansion from current levels--or some combination. In the early years of this transition, we might also consume more natural gas for power generation, not less, because natural gas turbines provide much of the existing base of spare overnight electrical generating capacity that would be used to recharge the first wave of electric cars. In addition, we'll need to upgrade our electrical infrastructure to accommodate more generation from intermittent and cyclical sources, and more sharing between regional grids.

Then there are the cars themselves. Here I think Dr. Grove may be overly optimistic in his estimate of a decade to make this shift. It has taken conventional hybrids, which don't plug into the grid, 9 years to capture 3% of the US car market, though until recently their sales depended more on government incentives and green cachet than on fuel economics. The first original-equipment plug-in hybrid models should reach the market within one to two years, depending on whether Toyota or GM launches first, and until then electric cars such as the Tesla and Aptera will occupy a small niche. Replacing half the 240 million cars and light trucks now on the road by 2020 with plug-ins hybrids and pure EVs would require them to attain a 50% market share within about five years and essentially 100% a few years after that. Dr. Grove suggests retrofitting existing cars to shorten the transition, though I wonder how attractive consumers will find such options. Nor will plug-ins and EVs be the only efficient models vying for market share.

During such a transition our demand for liquid fuels would fall gradually at first, and then more dramatically, while demand for natural gas for power generation would probably rise initially and then level out, depending on how climate change legislation affects the output of our existing coal-fired power plants. Increasing domestic oil and gas production and expanding biofuels output have an important role to play in reducing our net energy imports in the early years of a transition to a strategy of energy resilience. In any case, US oil demand would continue at reduced levels for many years to come, as the long tail of our vehicle fleet turned over, and liquid fuels continued to underpin long-distance travel.

The approach suggested by Dr. Grove has many advantages, and the most important is avoiding the trap of becoming overly reliant on any one source of primary energy, imported or domestic, in the future. In this respect, his idea has an edge over the plan put forward by T. Boone Pickens, though the latter might be simpler to execute. Energy resilience also has thermodynamic efficiency on its side. Because fossil fuels can be used to generate electricity at least twice as efficiently as burning them in internal combustion engines, a US vehicle fleet made up mostly of electric cars would require much less primary energy than the current one, without reducing annual vehicle miles traveled. That would have very beneficial implications for the long-term price of energy, and it would greatly reduce our energy imports. That still might not get us to energy independence, but the combined price and volume effects would shrink our oil import bill to much more manageable proportions.

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Airlines vs. Speculators

Yesterday a friend sent me a copy of an email letter she had received from an airline on which she is a frequent flyer. It made an urgent plea for public support to rein in oil market speculation, which it blamed for between $30 and $60 per barrel of the current oil price, which has been ruinous for the airline industry. Millions of Americans received the same letter--apparently I haven't flown enough, lately, to merit one--with a link to the "Stop Speculation Now" campaign website. Congress and the Commodity Futures Trading Commission have been grappling with this issue, and new energy futures market regulations should be forthcoming shortly. However, I hope that the chiefs of America's airlines are not banking on a speedy return to sub-$100 oil, and the $1.00 or more per gallon this would subtract from their jet fuel bills. Even if all speculation were eliminated tomorrow, the combination of a weak supply response and the low price elasticity of demand for oil make it unlikely that prices would quickly revert to last fall's $80-$95 per barrel price range.

For the last year, I have discussed the potential impact of speculation on oil prices. Investment in oil futures, options and derivatives as a new asset class has affected the market in ways that traditional speculation by financial players--a key ingredient of market liquidity--didn't. Even if these investors never take delivery of a single barrel of oil, they constitute a new segment of demand for oil futures and exert upward pressure on the market. I have also described at length the mechanism by which the resulting higher futures prices affect the prices that refineries pay for the physical barrels of oil they process, and why in that margin-based business, resistance to higher prices is likelier to come from end users, rather than refiners. But none of this alters the main facts governing the price of oil: The growth of global demand over the last five years has consumed most of the existing spare production capacity, and restrictions on access to resources--within OPEC and the US--combined with the time-lags inherent in bringing new supplies online have left the market balanced on a knife edge, setting up the conditions without which asset-class investments in oil futures would just be another complicated way to lose money, which may still be the ultimate result for many.

In a recent Wall Street Journal op-ed, Martin Feldstein, a former chairman of the Council of Economic Advisers, provided an exceptionally clear explanation of how small changes in supply and demand can translate into large price movements for commodities with very low short-term price elasticity, or sensitivity, of demand. Yesterday I discussed the recent demand response in the US. It took $4 per gallon pricing to halt the steady year-on-year rise of US gasoline consumption, a trend that was unbroken since 1991. And in the absence of serious refining problems, the only two paths to $4 gasoline were $130 oil or the imposition of a $1.00 per gallon surtax when oil was still under $100/bbl. Constraining the futures market now might provide some temporary relief, but it won't resolve the underlying problems that brought us to this point.

I don't blame the CEOs of the airlines for grasping at this straw. The signatories to the letter include my former boss at Texaco, Glenn Tilton, who understands the oil and airline businesses better than most. These executives know that a commercial aviation industry built on cheap fuel will emerge from a long period of sustained high oil prices as transformed as if it had been re-regulated, and that the mass access to cheap and convenient air travel that we have taken for granted could disappear. Their effort here may even pay off, but as I noted recently, the exact form of any new regulations on energy trading matters greatly, if the cure is not to be worse than the disease.

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Driving Less

The signs that Americans are driving less are everywhere. From headlines such as, "Gas Prices Spur Drivers to Cut Use to Five-Year Low", to increasing ridership on mass-transit systems and TV news segments on the growing numbers of folks bicycling to work, we see $4 gasoline doing what $3 fuel didn't: deliver a meaningful conservation response. But before we pat ourselves on the back for the DOE report that gasoline demand has fallen by 3% compared to last year, we should review a somewhat longer stretch of our recent history of fuel consumption and vehicle miles traveled. It suggests that the current decline, abetted by a weak economy, barely scratches the surface of our per-capita fuel consumption increase since 1995.

Conventional wisdom blames the SUV fad for most of the increase in US oil consumption in the last decade or so. But while rising sales of large SUVs in that period certainly helped to stall the positive trend of passenger car fuel economy, the bigger culprit has been the heretofore steady growth in vehicle miles traveled (VMT.) Between 1995 and 2005 this statistic grew by 23%, slightly more than the 21% increase in gasoline and diesel fuel consumption, and ahead of the 19% expansion of our car and light truck fleet. By comparison, during this period the US population grew by about 13%. In other words, Americans have been driving more cars, and on average driving them farther each year, than in 1995, accounting for more of the accompanying increase in fuel consumption than SUVs. This year's 2% decline in VMT compared to last year's record figure only erases part of the roughly 10% per capita growth of average annual miles driven since 1995. If we unraveled the rest of that growth, we could reduce US gasoline consumption by another 8% without any contribution from the higher fuel economy of the new cars consumers are now choosing. That equates to more than twice as much oil as our use of ethanol will save this year.

I don't pretend that conservation on that scale would be easy or costless. Some portion of the increase in VMT is structural, in the form of workers traveling longer distances from communities beyond the traditional suburbs. Much of the rest is associated with some sort of economic activity, including delivering goods and taking children to daycare or activities. The main advantage of this kind of conservation is that, at least in principle, it can occur much more rapidly than the efficiency gains from the gradual turnover of the vehicle fleet to smaller cars and a larger number of hybrids and alternative fuel vehicles.

It remains to be seen whether the fuel savings we are now observing will persist and expand, level out, or rebound. The first appearances of $2 gasoline in 2004 and $3 gasoline in 2005 delivered milder shocks to a healthier economy, slowing the growth of gasoline demand but not reversing it in the way that sustained $4 fuel has. That result could be put to the test, if oil prices continue to slide from their $145 high last week, or once the economy finally starts to improve. In the meantime, the scope for further behavior-based conservation remains significant.

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Hyundai Tiburon

The Hyundai Tiburon is why you should never analyse a car from just its specs sheet. The Tiburon boasts a 2.7-litre V6, 6-speed close ratio gearbox, all-independent suspension and 17 x 7 alloys wearing high performance tyres. And to many people’s eyes (though not ours) it looks good, with the latest styling upgrade adding a bit more impact. Add all that lot to the increasingly impressive reputation that Hyundai is now carving out and you’d think the Tiburon a winner.

Except it isn’t. Instead, it’s an inconsistent mish-mash of components and ideals, assembled into the ultimate committee car.

Is it a sports car? Nope, not with front-wheel drive that will noticeably torque-steer and with factory performance figures that include a not-scintillating 0-100 km/h in 8.2 seconds.

So is it a personal coupe – y’know, practical and stylish? Not even close – with a cramped and contorted cabin, harsh ride and with six gear ratios stacked closer than the cards in a deck.

So it must be good for economy then, one of those cars that unexpectedly turns-in really good fuel consumption? Not there either – we recorded 12.4 litres/100 in pretty gentle driving, mostly done on the highway.

The trouble is, as a cohesive car the Tiburon isn’t.




Let’s start with the best first. The all-alloy Delta V6 runs on normal unleaded and develops 123kW at 6000 rpm and 245Nm at 4000 rpm. Those figures aren’t anything groundbreaking but the engine is an absolute sweety, silky smooth and superbly linear in its power delivery. Helped by the (absurdly) low gearing, there’s excellent throttle response and power available everywhere. The note developed by the engine is also wonderful. But there’s a jerk when getting on and off the throttle (the cruise control shows this up very well) and a strong dash-pot effect, where revs are slow to fall when the throttle is released.

The final drive ratio (4.4:1!) gives gearing that is way too low and so the engine’s revving at 2800 rpm at 110 km/h. That makes the six-speed box a chore rather than delight – what’s the point of changing gear after gear to get into 6th by 60 km/h, when clearly the engine could pull gearing 20 per cent taller? And it’s not just irritating to drive: the fuel consumption must also suffer a great deal. We get the feeling someone liked the look of “close ratio 6-speed” on the pamphlet, and didn’t concern themselves unduly with the reality. (Although the four-speed auto is also geared much the same.)

The gear-change itself is a delight, with a very short throw and a metallic clicking sound that assures you the gear has been selected. The clutch is also positive and light.




The steering – controlled by a good leather steering wheel – is relatively heavy for a power-steer system. It’s fine most of the time but can kick-back when cornering hard on bumpy surfaces. Under full throttle in the lower gears, torque steer is clearly present.

Handling is an interestingly mixed bag. Corner at 7/10ths on smooth surfaces and it’s impressive. Go really hard on smooth surfaces and it doesn’t take much to realise the car is set up extremely stiffly in roll, which in turn makes it rather skatey. Get off the loud pedal abruptly and the tail will come out at a rate of knots – just as well there’s the electronic stability control to help catch it.

On bumpy surfaces the bad ride tends to obliterate any interest in the handling. The ride is awful – far harder than a current model Porsche we recently drove over the same roads. It feels very much like the low-speed bump setting of the dampers is too firm – or it’s that in combination with the 45 series tyres. Over bad surfaces you can actually hear your conversation being altered by the bumps – air whistles out of your lungs as you ride over bigger ones…

And it’s the ride and the interior packaging that we think are the biggest disappointments. Inside, the car feels cramped. Head-room in the front is tight – and it’s simply impossibly bad in the back. No adult can ride in the back seat (their head hits the glass of the rear hatch) and no rear head restraints are even provided. (Yep, no rear head restraints!!) Even children are hard-pressed in the back – a baby seat is a horrible squeeze and once the children are large enough to be directly strapped-in, their legs will also have grown long enough for room to again be a struggle. The driver also needs to place their seat exactly right if their left knee isn’t to bang the console, and the high waistline makes room feel even tighter. We’ve been in smaller, lower cars that had far more room.




Interior equipment is ok - good quality switchgear, a decent stacker CD radio and four airbags. But there’s no electric seat adjust, no proper trip computer and the steering is tilt-only. There were also some exposed screw heads in the interior trim, rough edges you don’t expect when paying $37,590. The tested TS limited edition model also includes for that money a glass sliding sunroof and leather seats.

As we said at the beginning, Hyundai is now building some very good cars. This isn’t one of them.

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Driving the Porsche 997 Carrera S

Talk to the mythical average person about a current model Porsche and they’re likely to say things like hard ride, heavy controls, and an engine that’s a bit temperamental in traffic. After all, that’s what lots of people have long associated with performance cars and well, the higher the performance, surely the greater all these must be in evidence?

But those perceptions are a long way from the truth. We recently stepped out of a 2005 model 997 Carrera S (still available new) and what impressed us most was not the performance or the handling, but instead the way it combined these with an incredibly tractable and sweet engine, and a ride so good you could take your grandma down to the shop without a single complaint.

Let’s start with that engine. We think it’s the best naturally aspirated engine we’ve ever driven.

But that’s not the immediate impression.




Step into the car and turn the key and resulting vibration at idle is downright unpleasant. Paul of the QSM Auto Group, owner of the car and very familiar with all Porsches of the last 20 years, suggested that in fact the idle quality was better than previous models. And that is probably the case – but it doesn’t excuse the high frequency vibration that’s a constant at idle. And no, we’re not talking about the engine being just a nice accompanying growl that let’s you know you’re in a sports car; we’re talking 3-cylinder Daihatsu vibration that’s simply ugly.

The clutch is also a bit of a disappointment. It has an ‘over-centre’ feel which, by definition, gives a non-linear weight through the travel. It’s moderately heavy; not heavy as in the muscle cars of yore but heavy in the context of other current cars. But, in contrast both to the clutch weight and also the gearshifts of all other Porsches we’ve driven, the 6-speed gearbox lever is a delight. With a factory short throw (most Porsches with short throw gears have aftermarket modification) and a light weight, the gearshift would be completely at home in a modern Japanese sports car. Reverse is over to the left and forwards; there’s no lock-out.




With the engine warmed and the clutch out in first gear, the brilliance of the engine starts to show. For this is a car that you can idle along, foot completely off the throttle. The Porsche creeps along without the slightest hint of a stutter or a surge. And yes, you can do that in plenty of modern cars but not one other that we know of that has 261kW available from a naturally aspirated 3.8 litres! Still trickling along in first gear, apply just the slightest throttle and the Porsche moves faster; take your foot back off again and the car slows back to its idle progression. As later proves to be the case across the whole rev range, this is one engine where the power can be absolutely accurately dealt out by the driver; there’s never the slightest hint of stutters or non-linearities to upset driving flow.

Up to about 4000 rpm the response is strong but not mind-blowing. But from 4000 to 7000 rpm the Porsche just gets up and flies. But the transition in power delivery isn’t ever startling; the simply superb mapping of the engine management, electronic throttle and camshaft timing make this a car that - believe it or not – a learner driver could safely pedal. The contrast with all-or-nothing turbo cars (including Porsche’s own non-sequential twin turbos) is extreme.

In fact, even as I write this, I find it hard to describe how good the engine is. It’s not the power, although that is tremendous. It’s not the engine note; I guess Porsche aficionados might get off on it but it doesn’t do much for me in this car. It’s not even the throttle response; I’ve been in naturally aspirated cars with even greater instant eagerness.




It’s just the sheer capability of the engine to deliver what the driver wants without requiring thought or effort. Nought to 100 km/h in 4.8 seconds yet with the ability to roll along in sixth gear, two people in the car and climbing an incline, 1200 rpm showing on the tacho and the car completely happy…

As has been shown in plenty of road-based competition events, I think cars like the Evo Lancers and WRX Subarus wouldn’t be at all far behind the Porsche in terms of handling and brakes. And in fact may even be ahead. But their engines are simply light-years behind the Porsche, feeling in comparison like shoddy aftermarket quickie jobs by Joe’s Garage. If anything at all justifies the enormous amount of money that the Porsche commands, it’s that engine.

But a glorious engine is only one part of a car. This is a sports car: what’s the handling like?

Lift the rear cover and there’s the water-cooled flat six, still stuck out behind the rear axle like an anachronistic sore thumb. But the tail-happy characteristics naturally embodied in this placement have long been quelled by suspension and tyre selection, and in the more recent cars, by electronic stability control.




won’t use that old cliché - handles like it’s on rails – because that’s true of no car. In slow speed corners taken fast, the Porsche progressively powers into understeer; get on the power too early and too hard and it progressively moves into oversteer. The stability control intervened only once or twice in the drive (as owner Paul says: why’d you ever switch it off?), with the car telegraphing very well what was required to stop the slides before the electronics came into action. There’s plenty of grip (in high speed corners, too much for a driver of my capability to move the car around, I think), and the car always feels poised and agile.

The two-position sports damper control (which when activated, also changes throttle mapping) does very much what you’d expect. I preferred the handling on the softer setting for much the same reason that I prefer a car with slightly less than maximum anti-roll bars – the attitude of the car better communicates what’s going on and the tyres more progressively lose grip. Ride firmness noticeably increases with the control activated but it’s still quite acceptable. The damper control switch is on the left-hand lower side of the centre dash – it would be better in right-hand drive cars if it was moved across to the other side of the panel as, on a challenging road, we could see the driver wanting to access it a lot.

The brakes look awe-inspiring – huge red calipers biting on huge discs inside the huge wheels.

But we didn’t like them.

We’ve no doubt the system is capable of hauling the car down from 300 km/h plus speeds, and on a hard brake from 160 km/h to 100 km/h they had plenty of stopping power. As of course you’d expect. But the pedal is wooden and has a complete lack of feel. A humble Falcon or Commodore has far better pedal progression (but then again that’s technically easier to achieve if high speeds are never met!) and in city traffic the Porsche pedal was like stepping on, um, the brake pedal of a car with seizing drum cylinders. Perhaps in normal use softer pads would help?

Interior equipment of the test car – the only option fitted was reversing sensors – was pretty good. (Most Porsches come relatively stripped and then you spend perhaps 25 per cent more on options.) The car has a Bose sound system, intuitively excellent navigation, and superb instrumentation that combines digital and analog displays. The ergonomics are now well sorted.

The front boot is large and we’re always surprised by the folding rear seats that continue to be present in 911s. The rear seats clearly aren’t the sort that would suit adults but for small children, or simply as an extra load space, the in-cabin volume is a big plus.

Watch a Porsche 911 drive by and it’s easy to wonder at their ongoing success. Engine in the wrong place, hugely expensive, idiosyncratic styling, a niche car in a very small niche. But experience the car and your opinion changes: practical, comfortable, blisteringly fast, easy to drive, excellent handling, absolutely capable of doing the daily humdrum or exhilarating with a blast through the twisty bits.

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Porsche 550

Henry ford II decided to produce a super car on his failure to buy Ferrari, resulting in Ford GT40 in the year 1965. Ford GT40 challenged Ferrari with 4.7 litre V8 Engines making 350 bhp, the car was raced and tested atLe Mans. The car had an imoressive top speed of 207mph.

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Mercedes 300SL

The Porsche 550 was a sports car automobile produced by Porsche in the year 1955.Inspired by a small Porsche 356 Spyder which was created and raced by Walter Glöckler in 1951, the factory decided to build such a car,being its first designed specifically for use in auto racing.The 550 became known as Spyder or RS, and gave Porsche its first overall win in a major sports car racing event, the 1956 Targa Florio. Its successor from 1957 onwards, the Porsche 718, was even more successful, scoring points in Formula One as late as 1963.

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2008 Lotus Sport Exige Cup 260 Car

Lotus Sport Exige Cup 260 (2008) has been launched by Lotus. With revised on its engine management system, Lotus Sport Exige Cup 260 takes the power output up to 257 hp (260 PS) at 8000 rpm and 236 Nm (174 lb.ft.) of torque at 6000 rpm. Lotus Sport Exige Cup 260 has a top speed of 237 km/h and may accelerates from 0 to 100 km/h in around 4.1 seconds and from 0 to 160 km/h (100 mph) in around 9.9 seconds. The price of 2008 Lotus Sport Exige Cup 260 starts at 56,034 Euros - not included tax.

Lotus Sport, the motor sport division of Lotus Cars Ltd, has unveiled the MY2008 Lotus Sport Exige Cup 260. A direct development of the 2007 Exige Cup Car, this year�s car has a revised engine management system to take the maximum power output to 257 hp (260 PS), up by nearly 5 hp (5 PS) over last year. Bespoke performance enhancements created to offer a car with even greater levels of handling and acceleration capable of taming Europe�s most challenging race circuits.

The Exige Cup 260, once again represents Lotus� most radical version of the Exige, with the track environment being its home and for 2008, the Lotus Sport Exige Cup 260 has full European homologation for road use (a must have for some competitive environments where a road legal car has to be entered).

There are further product changes: all Lotus Sport Exige Cup 260 cars now have a number of the 2008 Model year improvements from the road versions of the Elise and Exige, namely:

� Instrument pack with new graphic design and expanded functionality
� New alarm/immobiliser + single integrated function key
� Variable Lotus Traction Control
� Variable Lotus Launch Control

In traditional Lotus style, weight saving is paramount. Weighing in at just 928 kg, the power to weight ratio is an impressive 271 hp / tone (273 PS / tone). Such a fantastic power to weight ratio alone of course does not make a superlative track car, so the Exige Cup 260 has a formidable list of standard equipment that includes Lotus specific LTS compound Yokohama A048R tires, 4-piston AP Racing front brake calipers, adjustable dampers and anti-roll bar, the latest FIA 6-point roll cage and sports driver and passenger seats. The options are even more race-focused with slick tires, an FIA approved Recaro/Lotus Sport driver�s seat*, an FIA approved 70 litre fuel cell*, �Level Two� stainless steel sports exhaust with de-cat pipe*, dog gearbox* and a plate type Lotus Sport limited slip differential (*track use only and special conditions apply).

The Lotus Sport Exige Cup 260 is one of the quickest cars around a circuit. Key to this incredible performance is the aerodynamic package, which produces over 40 kg of downforce at 160 kmh increasing grip and stability at higher speeds. With a top speed of 237 kmh (147 mph) and a zero to 160 kmh (100 mph) in circa 9.9 seconds, 0 to 100 kmh in circa 4.1 seconds (0 to 60 mph in circa 4 seconds), the MY2008 Exige Cup 260 is the perfect partner for the serious racer.

The Exige Cup 260 is available now for sale in mainland Europe at 56,034, exclusive of local taxes and on the road charges.

Mike J Kimberley, Chief Executive Officer Group Lotus plc said:

“In keeping with our racing and high performance sports car heritage, we are very pleased to launch this exceptionally exciting, phenomenal-handling Lotus Sport Exige Cup 260. This is yet another example of how Lotus Cars and high-tech engineering with Lotus Sport, can transform an already brilliant road car into an exceptionally high performance product for the track.�

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You Missed Your Chance on Owning a Farrari

Italian police have found a new height of craftsmanship and cunning when they broke up a ring selling fake Ferrari cars for a fraction of the real price.

Police have accused 15 people of building the blood red sports cars and selling them to car fanatics on a budget, most of whom knew they were buying a counterfeit classic.

Car body workers who police called "very able" cobbled together mostly fake parts and a few original components. They used body parts from other makes of automobiles, such as chassis, roofs, hoods, trunks and doors. The body parts were modified to look like Ferrari classics such as the 328 Gtb, which went out of production in the late 1980s.

Police confiscated 21 cars, 14 of which had already been sold, and seven in production in Sicilian garages. Some of the cars sold for about 20,000 euros ($32,000), about a tenth of the going price for some versions.

Be sure to check out the awesome craftsmanship by clicking on the two thumbs.
Thanks for the tip, Laure!

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