green econometrics

As energy and food prices set new world records, what can we do at home to avert the crisis? Food prices are rising because corn is diverted from food production to producing ethanol for use as fuel in motor vehicles and is exacerbated by the recent flooding in the Mid West. Oil prices continue to escalate as demand for oil in developing countries increases and supply constraints, rising production costs, and limited refining capacity constrain the supply of oil. These factors continue to weigh against homeowners that will face escalating fuel bills to heat or cool their homes. There are some viable alternative energy solutions including wind and solar as well as home insulation that should offset the rising cost of energy. As far as food for fuel, we need to break our dependence on hydrocarbons which continues to impact our climate and weather and transfer our wealth to oil producing nations

Corn Prices have increased 264% since 2005. The rising price of corn used for ethanol is causing farmers to plant more corn and less production of other grains such as wheat or soy. Lower supply of grains is driving up food prices. Rising food prices is most debilitating to the poor, especially those in developing countries.

Figure 1 Corn Prices

Growing demand for oil and questions over Peak Oil suggesting even with oil prices rising to such an elevated level, production is rather anemic. According to the Energy Information Administration (EIA) , while oil prices increased 344% since 2001, oil production from OPEC is up only 1.2% over this same period.

Figure 2 Oil Prices

According to the EIAl The demand for oil in China is growing at an 8.1% CAGR over the last five years. With demand for oil growing significantly in developing countries and despite production developments in Saudi Arabia and the 5-to-8 billion deepwater Tupi oil discovery in over Brazil The Tupi announcement in January 2008 is the world’s biggest oil find since a 12-billion-barrel field discovered in 2000 in Kazakhstan according the International Herald Tribune. These new oil discoveries are often in inhospitable eras or deep ocean environments, which makes extraction costly and difficult.

Figure 3 Rig Count and OPEC Oil Production

What can we do? . Forget drilling for more oil, electric vehicles and investment into alternative energy is the only way to avert this crisis. OPEC area drilling activity is up 48% since 1998 and yet, despite dramatically higher oil prices, up 5 fold since 1998, OPEC oil production increased only 11% over 1998.

Homeowners could begin to deploy energy saving and alternative energy systems. Wind and solar energy could help reduce some of the pain. As consumer embrace hybrids, electric, and fuel cell vehicles, wind and solar should begin to offer a stronger value proposition. Energy saving tips such as compact fluorescent bulbs, on-demand hot water heaters, and thicker home insulation products should help reduce heating and cooling costs.

According to the American Wind Energy Association AWEA a turbine owner should have at least a 10 mph average wind speed and be paying at least 10 cents per Kilowatt-hour (KWH) for electricity. There are electric utility and tax credits available in some areas. There are also questions regarding zoning restrictions, and whether to connect to batteries for energy storage, or directly to your electric utility. Consult the Wind Energy Resource Atlas of the United States Wind Resource Maps to get a better understanding of wind speeds in your area.

Cost wind systems will vary depending on model and installation costs will vary by your location. The Whisper 500 from Southwest Windpower offers electric production of 538 KWK/month at 12 mph (5.4 m/s). The system weighs 155 lb (70 kg) and has blade span of 15 feet (4.5 m) and must be mounted on a tower in cement. At 538 KWH per month, that is enough energy to cover the needs a modest house with conservative electric usage. Small wind systems can range from under $1,000 to over $20,000 with a payback period of approximately five years depending on wind resources and utility rates.

Solar photovoltaic (PV) panels cost an average of $4.80 per watt according to Solarbuzz which is about $0.24 per KWH over a 20 year life of the PV system. With an average output of approximately 10.6-watts/square foot (114 w/m^2), a five KW PV systems would cover 515 square feet (47.8 sq. meters) costing approximately $36,000 before credits and tax benefits and produce about 490 KWH per month. Of course installations costs are extra, but with PV production ramping and new PV suppliers entering the market we can expect costs to decline. Federal and local tax credits as well as selling unused electric to your local utility offers economic value on the margin.

The economic value is expected to increase as costs decline and electric rates increase and we can expect significantly higher utility rates in the near future. The economics of zero carbon emissions is not even measured as a benefit to the consumer. We are just beginning to see the cost impact of extreme weather and climate change.

Consumers should try to ameliorate the rising cost of energy by investing into solar and wind. There are several companies offering complete installation services. Among these include: Akeena Solar (AKNS) in California and The Solar Center in New Jersey .

The bottom line: energy and food prices are creating a crisis for consumers globally and there are several initiatives that could help minimize the pain. In addition, the erratic weather patterns around the world may be just a prelude to climate changes due to the impact of carbon dioxide on climate, which may cost us much more in the long run. Let’s stop the drain of wealth cause by oil and invest into clean and renewable energy solutions.

The question of Peak Oil, first proposed by Dr. M. King Hubbert can best be illustrated by analyzing the supply and demand for oil. With use of statistics complied by Energy Information Administration (EIA) , the tenuous position our energy needs becomes more apparent. Let’s examine the latest data from the EIA to provide a picture of the global demand and supply of oil.

Oil Demand

Figure 1 Oil Demand U.S. and China

From Figure 1 we can see that while the demand for oil in the U.S. has grown at a rather moderate rate in comparison to China. The demand for oil in the U.S. declined at an average annual rate of 0.4% during the 1980’s. U.S. oil demand has averaged at a 1.5% compounded annual growth rate (CAGR) during the 1990’s and 1.0% in the last five years since 2001.

In China, demand for oil is grew at 2.7% CAGR during the 1980’s and increased to 7.6% in the 1990’s. Since 2001, the demand for oil in China is growing at an 8.1% CAGR over the last five years. The strong demand for oil from China is remains unabated and is driven by growing motor vehicle usage. In nine years, at its current growth rate, China’s oil consumption will exceed the level of oil consumption the U.S. had in 1991 and in twelve years exceed our current level.

Figure 2 Oil Demand in China

Figure 2 illustrates that the demand for oil in China is quite substantial. With the rate of growth in oil consumption in China exceeding 8% it won’t take very long to exacerbate our tenuous current energy position. Perhaps a review of oil production will shed some light on the topic.

Oil Supply

The following graphs provide a review of oil supply from the Middle East, Saudi Arabia, OPEC, Russia and surrounding Eurasia countries including the former Soviet Union.

Figure 3 Oil Production Middle East and Saudi Arabia

While oil production contracted somewhat during the 1980’s, oil production in the Middle East and Saudi Arabia has grown since 1980, but recent oil production appears constrained. Oil production in the Middle East is up 3.1% on a CAGR during the 1990’s, and has remained at that level since 2001. Saudi oil production grew 3.0% during the 1990’s, but has dropped slightly to 2.1% since 2001.

Meanwhile, among the countries of the former Soviet Union, we see oil production gaining strength. In the countries comprising the former Soviet Union (Eurasia), oil production is up 6.7% on a CAGR since 2001.

Figure 4 Oil Production Eurasia, Middle East and Saudi Arabia

Currently OPEC accounts for approximately 37% and Saudi Arabia 11% of the world’s oil production. Saudi Arabia is recognized as having the largest oil reserves in the world and its Ghawar oil field is the single most productive oil field in the world, according to a recent article in the Wall Street Journal . “Saudis Face Hurdle in New Oil Drilling” The Saudis are developing new fields such its Khurais field, but are finding production efforts challenging as they employ deep horizontal drilling and water injection to achieve production. Given what we glean from the EIA production statistics, achieving moderate oil production growth maybe more of a challenge then we think.

Figure 5 Monthly Oil Production

The bottom line is that our dependence on oil leaves us vulnerable not only to supply disruptions but also in trying to protect supply in countries that gravitate towards violence and terrorism. If more global efforts were employed to develop alternative energies, we could limit our dependence on oil, improve global economics by offering affordable energy to the world, and save our environment and climate - a small step for our planet.

Solar energy is gaining considerable attention from Wall Street and countries looking to achieve energy independence. Solar energy represents one of the most significant energy solutions to help eradicate our addiction to oil. Despite the tremendous success offered with solar photovoltaic (PV), more research is required to sustain further deployment and achieve energy independence. Some semiconductor materials used to develop photovoltaic devices are scarce and may limit PV from achieving mass penetration. Let’s review the current solar PV market to better understand the dynamics of this market.

Figure 1 PV Production by Year

Figure 1 demonstrates the rapid market growth of solar PV and Solarbuzz is astute to point out some critical data points: cumulative PV deployment is still less than 1% of global electric usage, PV industry faces capacity constraints, and Germany and Spain account for 47% and 23% of total PV deployment in 2007. With the significant growth in both the production and deployment of solar PV devices, the stock price of some of the leading PV suppliers have appreciated dramatically even despite a recent pull back in the beginning of the year.

Figure 2 PV Production of Leading Suppliers

Despite the turbulence on Wall Street in 2008 with the NASDAQ down 14% year-to-date, and Dow Jones Industrial Average down 7.3% YTD, investor appetite for clean technology stocks remains robust. First Solar (FSLR), a leading supplier of thin film solar PV remains in positive territory and is up nearly ten-fold from its IPO in November 2006. Thin film PV offers a cost advantage over traditional crystalline PV cells. PV devices employ various elements with different band gap properties to achieve improving solar efficiencies. (See our post on semiconductor band gaps: What’s Pushing Solar Energy Efficiency?, October 1st, 2007)

Figure 3 Market Capitalization Solar PV Suppliers

There are several elements used in thin film PV production. Among the elements used include cadmium and tellurium (CdTe), copper, indium, and selenium, (CuInSe), and copper, indium, gallium, and selenium (CIGS). These various elements are used to improve operating efficiencies and lower production costs of PV devices. In general, crystalline PV devices have higher solar efficiencies, but cost more due to their material thickness of 200-to-300 microns. Whereas, thin film PV are usually about 3 microns deep offering significantly lower production costs. However, SunPower (SPWR) the leading polycrystalline silicon PV supplier offers the highest solar efficiency a rating of 22.7% that started shipping in 2007.

Figure 4 FSLR and SPWR Solar PV Production

FSLR and SPWR are the two leading PV players as measured by Wall Street in terms of market valuation. The cost-efficiency tradeoff between these two PV suppliers offers an interesting framework to evaluate the solar PV market.

Figure 5 PV Cost-Efficiency

The stock market appears to be betting on FSLR given its market capitalization of $22 billion and trading at 43 times 2007 revenues of $504 million. FSLR employs CdTe in its solar modules. In several postings on Seeking Alpha starting back in November 2007, Anthony and Garcia de Alba have provided valuable insight into material constraints in the production of PV devices.

Tellurium is a rare metalloid element that is used in producing semiconductor materials because it does not conduct electricity. Tellurium is recovered as a by-product in refining and processing of gold and copper as well as other ores. Tellurium was primarily used to create metal alloys that enable easier machining of end products.

Because of its unique properties, Tellurium and cadmium (CdTe) have been used in thin film PV production since the 1980’s. According to a comprehensive study by Fthenakis and earlier work by Moskowitz “The Life Cycle Impact Analysis of Cadmium in CdTe PV Production”, CdTe is deposited on a thin film substrate using electrodeposition, chemical surface deposition, and vapor transport deposition. FSLR reports in their 10K that they employ a proprietary vapor transport deposition process for CdTe PV production.

A thin film of CdTe is deposited on a substrate at a thickness of 3 microns. According to the Fthenakis and Moskowitz, back in the 1980’s, a 10 megawatt (MW) PV facility employing vapor transport deposition of CdTe uses 3,720 kilograms (kg) of CdTe to achieve a10% efficiency at 3 microns. A one-one bond of CdTe with an atomic weight of Cd at 112.41 and Te at 127.60 suggests Te comprises 53% of the weigh of CdTe. With 3,720 kg of CdTe used at 10MW, the amount of Tellurium used is estimated at 1,978 kg or 197.8 kg/MW.

The electrodeposition CdTe process using a mixture of cadmium sulfate and tellurium dioxide used 880 kg of tellurium dioxide, which amounts to approximately 696.8 kg of Te for 10 MW PV productions. The electrodeposition CdTe process would equate to about 69.7 kg of Te per MW. For a 100 MW PV production approximately 7 tons of Te are consumed.

One would assume the PV production process would improve significantly from the 1980’s and the amount of Te consume would decline with improving efficiencies. This would suggest that FLSR at 200 MW PV capacity in 2007 would consume somewhere between 14 and 38 metric tons of tellurium. This figure is significantly higher than the estimates derived from the FSLR tellurium posts on Seeking Alpha that are closer to10 tons per 100 MW (100 kg/MW).

Figure 6 Te Production

Let’s proceed with the conservative figure of 100 kg/MW (10 tons at 100 MW) to assess the tellurium constraints. Tellurium production is a by-product of gold, copper and other ores. We have found Te production estimates ranging from 132 metric tons (MT) to 300 MT per annum. In a National Renewable Energy Laboratory (NREL) report Assessment of Critical Thin Film Resources in 1999 estimated Te production between 200 and 300 metric tons per year in 1997 and indicated under utilization of capacity for the production of tellurium.

Let’s compare our conservative estimate of 100kg/MW Te usage for FSLR to the optimistic production forecast of 300 MT to evaluate capacity constraints for FSLR. With 300 MT (300,000 kg) global Te production and FSLR using 80% of the Te production, capacity of PV tops out at 2,400 MW (2.4 GW).

The U.S. electric energy usage in 2006 was 4,059.91 billion kilowatt hours (KWH) which translates into 463,460 MW (divide 4060 by 365 days x 24 hours). So without significant investment into research and development for PV FSLR could be constrained at 2,400 MW representing only 0.5% of the U.S. electric usage in 2004. Further more, if FSLR were to be constrained at 2.4 GW annual production, revenues ($2.60 per watt Q4/07) would peak at approximately $6.24 billion, a price-to-sales multiple of 3.4x with its market capitalization of $22 billion.

However, in comparison to leading companies in energy, pharmaceuticals, technology and finance, FSLR’s market capitalization is relatively small. Perhaps with improving production processes, FSLR could reduce the amount of Te per panel and improving mining and metal refinement process could increase Te production to expand the market for CdTe thin film PV devices.

Figure 7 Market Capitalization of Leading Companies

The bottom line is that more research and investment into alternative energies is required to ameliorate the world from being held hostage to oil and hydrocarbon fuels that are directly linked to rising CO2 levels and climate change.

With the infinite wisdom of the White House and U.S. Congress, food prices are now directly tied to the price oil. The price of corn-based ethanol is now determined by the price of gasoline that it substitutes in motor vehicles and that price is established by supply and demand for oil. The price of gasoline at your local gas station or convenience store is based on the price of oil. And now that the price of corn is rising because it is tied directly to oil, the price of other grains and subsequently, prices along the entire food chain are rising.

Corn Prices have increased 166% since 2005. The rising price of corn that is used to produce corn ethanol is causing farmers to direct their limited resources to grow more corn, which means other grains such as wheat or soy become scarce and their prices rise. The growing scarcity of grains for food products is raising price across the food chain. Developing a renewable energy solutions based on diverting food as a substitute for expensive gasoline forces food supplies to become scare and expensive.

It is the supply and demand for gasoline and diesel fuels that establishes the price at the pump. When corn ethanol is substituted for gasoline, prices tend to gravitate towards a mean price that continues to rise to keep pace with the escalating price of crude oil now over $110 per barrel. Corn prices are inextricably linked to oil prices and in turn; corn prices impact other grain prices that means it cost more to feed your family or to feed livestock and forces those prices higher.

The rise in corn prices is illustrated in Figure 1.

Figure 1 Corn Prices

Irrespective of the timing of Peak Oil, a long-term energy strategy is required. The days of cheap oil are over. Remember how oil production in Alaska helped ease the U.S demand for foreign oil a couple of decades ago. Oil production in Alaska declined by nearly 75 percent from its peak in 1987 according a Washington Post article back in 2005. In November 2007, the Petroleum News indicated production in Alaska is expected to decline further in the future. The U.S. depends on oil production in the Gulf of Mexico for about 25% of our supply, according to the Department of Energy which is why the impact from Hurricane Katrina was so devastating.

Diminishing supply and rising demand suggests oil prices should continue to remain elevated. The rising motor vehicle usage in China (China Motor Vehicle Registration)
and India continues to influence the demand for oil.

Figure 2 Vehicle Registrations in China

Figure 2 and Figure 3 illustrate the rising use of motor vehicles in developing countries. This trends should continue and in turn, increase the demand for oil.

Figure 3 Automobile Sales in India

Maybe we should look to some leading countries in the development of alternative energy strategies. Perhaps we can learn from Norway’s HyNor Project. Solar photovoltaic projects being lead by Germany
and Spain.

So the next time you fill your tank or when you’re at your local food store and find that your wages don’t quite cover your food bill, ask your local Congressional representative for better planning on alternative energy strategies and solutions. Investment and research into solar, wind, electric vehicles, and hydrogen energy could provide real solutions by addressing energy needs, climate concerns, the environment, and food prices.

Oil continues to trade above $100 per barrel with the NYMEX CRUDE FUTURE closing at $101.84 on the last day of February 2008 and the US House of Representative passes legislation to raise $18 billion in new taxes for Big Oil to foster development of alternative energies. While President Bush plans to veto the legislation and Republicans claim the legislation unfairly impacts the oil industry, let’s look at the numbers. The legislation calls $18 billion tax over the next ten years so the impact amounts to $1.8 per year. The oil demand is approximately 20.6 million barrels per day according the to latest data from the Energy Information Administration. With oil at $100 per barrel the US will spend about $2 billion a day on oil and that equates to over $750 billion a year. In comparison to the total amount of oil we use, the tax is about 2/10th of one percent.

Figure 1 US Oil Supply and Demand

Well maybe that’s not a fare comparison. The bill, H.R. 6, the CLEAN Energy Act. would roll back two tax breaks for the five largest U.S. oil companies and offer tax credits for energy efficient homes and gas-electric hybrid vehicles.
According to the CNN article, the money to be collected over the 10-year period would provide tax breaks for solar, wind and other alternative energies and for energy conservation. The legislation was approved 236-182, and is expected to cost the five largest oil companies an average of $1.8 billion a year over that period, according to an analysis by the House Ways and Means Committee. So in other words this bill just repeals tax breaks given to Big Oil to become more competitive in the global market.

Figure 2 Oil Prices and World Rig Count

So what is the $1.8 in tax impact on Big Oil? Let’s just look at the impact this would have if just Exxon Mobil Corp (XOM) had to endure the tax only. Exxon Mobil generated $404 billion revenues in 2007, which means if Exxon had to face this tax only, it would be less than ½ of 1% of revenues. Considering that some states impose a 6% sales tax on consumers, a tax impact of 0.2% on the largest oil companies seems rather innocuous.

If the world has to depend upon OPEC oil production, questions do arise over the expansion of oil production and OPEC’s willingness to supply oil despite oil over $100 per barrel. As figure 3 illustrates production among OPEC nations is faltering. Could this be a prelude to Peak Oil?

Figure 3 OPEC Oil Production

The bottom line is that without incentives and further research on alternative energies, the world continues to be held hostage to oil and hydrocarbon fuels which are directly linked to rising CO2 levels and climate change.

World oil demand continues to rise despite efforts to limit demand. Renewable energies such as solar and wind have the potential to limit our dependence on hydrocarbon fuels, but one issue remains prominent - storing energy. While the sun provides radiation for solar and generates wind, when its cloudy or dark we are unable to produce solar energy. One must provide a means to store that energy for when it is needed. Fuel cells enable energy conversion and fill a reliable role in alternative energy strategies.

A chart compiled by Wasserstoff-Energie-Systeme GmbH (h-tec) provides an easy to understand depiction of how fuel cells integrate with solar and wind energy solutions. Fuel cells provide the enabling technology that allows hydrogen to serve as the storage and transport agent. The solar energy that is produced during the daylight hours is used in an electrolyzer to produce hydrogen that in turn, is then used to operate the fuel cell producing electricity at night when it is needed. This process is called the solar-hydrogen energy cycle. Figure 1 illustrates the importance of energy storage in adopting alternative energies.

Figure 1 Solar-Hydrogen Energy Cycle

Demand for oil and hydrocarbon fuels continues to grow despite effort to conserve. Total Petroleum Consumption shows increasing oil demand from China and India while demand in the U.S. grows at a slower pace. With improving efficiencies and lower production costs, fuel cells could provide a solution to our appetite for oil in motor vehicles. Figure 2 describes how fuel cells and electrolyzers (fuels running in reverse) work.

Figure 2 Fuel Cells

Fuel cells are devices that convert chemical to electrical energy - in essence; it’s an electrochemical energy conversion device. In the chemical process of a fuel cell, hydrogen and oxygen are combined into water, and in the process, the chemical conversion produces electricity. In the electrolyzer, an electrical current is passed through water (electrolysis) and is the reverse of the electricity-generating process occurring in a fuel cell.

Hydrogen fuel cells offer tremendous opportunity for storing and transporting energy enabling broad applications for home, business, motor vehicle and large-scale energy projects. The follow provides a review of current technologies applicable to hydrogen fuel cells. Factors to consider in using hydrogen fuel cells include operating efficiency, operating temperature range, and material used for the electrolyte (the catalyst that separates hydrogen) and fuel oxidant (that transfers the oxygen atoms).

Figure 3 Hydrogen Fuel Cell Technologies

One of the most practical fuel cell technologies for motor vehicle use include Proton Exchange Membrane (PEM) because it operates at normal ambient temperatures and offers high electrical efficiency. There are several useful web sites that illustrate the benefits of hydrogen fuel cells. h-tec and the National Renewable Energy Laboratory provide some very useful information on hydrogen fuel cells.

We are also seeing progress on fuel cell vehicles that could ultimately ameliorate are demand for oil, if not eliminate it entirely, all with no carbon dioxide or other harmful emissions. We see most major automakers developing hydrogen powered fuel cell vehicles. GM is making progress introducing several models using GM’s Fuel Cell Technology.
Honda’s experimental hydrogen refueling station in Torrance, CA uses solar to produce hydrogen for their hydrogen fuel cell vehicle Honda’s FCX .

The bottom line is that the availability of cheap oil is on the decline and without further research on alternative energies we may find the global economy in a very tenuous position. Further research into solar and hydrogen fuel cells could significantly reduce our dependence on oil.

From the Industrial Revolution we learned that economic growth is inextricably linked to energy and as a result, our future is dependent upon equitable access to energy. When the Stourbridge Lion made entry as the first American steam locomotive in 1829 it was used to transport Anthracite coal mined in nearby Carbondale, PA to a canal in Honesdale that in turn linked to the Hudson River and onto New York City. Coal fueled the growth of New York and America’s Industrial Revolution because coal was cheap and more efficient than wood.

Advances in science and technology gave way to improvements in manufacturing, mining, and transportation. Energy became the catalyst to industrial growth. Steam power such as Thomas Newcomen’s steam powered pump in 1712 developed for coal mining and James Watt’s steam engine in 1765 were initially used to bring energy to market.

In terms of heating efficiency, coal at the time offered almost double the energy, pound for pound, in comparison to wood. Energy Units and Conversions KEEP Oil offers higher energy efficiencies over coal and wood, but as with most hydrocarbon fuels, carbon and other emissions are costly to our economy and environment.

With rapid growth in automobile production in the U.S., oil became the predominant form of fuel. According to the Energy Information Administration, in 2004 the U.S. spent over $468 billion on oil.

Figure 1 U.S. Energy Consumption by Fuel

We all need to become more conversant in understanding energy costs and efficiency and as a corollary, better understand the benefits of renewable energy such as solar, wind, and hydrogen fuel cells. A common metric we should understand is the kilowatt-hour (KWH) - the amount of electricity consumed per hour. The KWH is how we are billed by our local electric utility and can be used to compare costs and efficiency of hydrocarbon fuels and alternative energies.

One-kilowatt hour equals 3,413 British Thermal Units (BTUs). One ton of Bituminous Coal produces, on the average, 21.1 million BTUs, which equals 6,182 KWH of electric at a cost of about $48 per short ton (2,000 pounds). That means coal cost approximately $0.01 per KWH. To put that into perspective, a barrel of oil at $90/barrel distilled into $3.00 gallon gasoline is equivalent to 125,000 BTUs or 36.6 KWH of energy. Gasoline at $3.00/gallon equates to $0.08 per KWH. So gasoline at $3.00 per gallon is eight times more expensive than coal.

Is oil and gasoline significantly more efficient than coal? Let’s compare on a pound for pound basis. A pound of coal equates to about 10,500 BTUs or approximately 3.1 KWH per pound. A gallon of gasoline producing 125,000 BTUs weighs about 6 pounds equating to 6.1 KWH per pound (125,000 /3,413 /6). While gasoline is almost twice as efficient as coal, coal’s lower cost per KWH is why it is still used today to generate electric.

The Bottom Line: the economics of energy determines its use - coal still accounts for approximately half of our electric generation because it has a lower cost than other fuels. However, there are two factors to consider 1) the cost of carbon is not calculated into the full price of coal or other hydrocarbon fuels and 2) the cost of conventional fuel is calculated on a marginal basis while alternative fuel costs are calculated on a fixed cost basis. Meaning the cost of roads, trucks, and mining equipment is not factored into the price of each piece of coal, only the marginal cost of producing each ton of coal. For solar, hydrogen fuel cells, and wind energy systems, the cost to construct the system is factored into the total cost while the marginal cost of producing electric is virtually free. We need a framework to better measure the economics of alternative energy. The impact of carbon on our climate and global warming are clearly not measured in the costs of hydrocarbon fuels nor is the cost of protecting our access to oil such the cost the Iraq War.

Despite the carbon issues surrounding coal, (coal has higher carbon-to-hydrogen ratio in comparison to oil or gas) coal is more abundant and therefore is cheaper than oil. As electric utilities in 24 states embrace alternative energies through such programs as Renewable Portfolio Standards (RPS), perhaps the benefits of alternative energies will begin to combat the negative economics of hydrocarbon fuels.

Ethanol may emit less CO2 and help reduce the demand for foreign oil in the short term, but ethanol and in particular, corn-based ethanol raises food prices, is less efficient than gasoline, diesel, and biodiesel, and is not a substitute for oil.

According to research compiled by National Geographic Magazine , the energy balance of corn ethanol, (the amount hydrocarbon fuel required to produce a unit of ethanol) is 1-to-1.3 whereas for sugar cane ethanol the ratio is 1-to-8. This suggests corn-based ethanol requires significantly more energy to produce than sugar cane ethanol. Corn ethanol is only marginally positive.

A major issue with corn ethanol is its impact on corn prices and subsequently, food prices in general. It is the price of oil that is impacting the price of corn because nearly all ethanol produced in the U.S. is derived from corn. Therefore, corn prices are inextricably linked to oil prices as well as to the supply and demand of corn as food and feedstock. Corn Prices while volatile and impacted from weather and other variables appear to follow the rising price of oil as illustrated in Figure 1. In turn, corn prices are also influencing other commodity prices where corn is used for feed for livestock.

The rising motor vehicle usage in China and India is escalating the already tenuous situation in the oil markets. With ethanol tied to oil prices we are beginning to see corn prices exacerbate the inflationary pressures at the retail level. Over the last year consumers are paying more for food with large increases in the prices of eggs, cereal poultry, pork, and beef which are tied to corn.

Figure 1 Corn Prices

Senate legislation for Renewable Fuels Standard calls for ethanol production to increase to 36 billion gallons by 2022 with 21 billion derived from as cellulosic material such as plant fiber and switchgrass . Corn is expected to comprise 42% of the ethanol production in 2002 from virtually all today. The fact is that ethanol production at its current level of 6 billion gallons equates to only 4% of our gasoline usage and is already impacting food prices. Gasoline consumption in 2005 amounted to 3.3 billion barrels or 140 billion gallons. Current estimates put gasoline consumption at 144 billion gallons a year in 2007. Even if vehicles could run entirely on ethanol, there is not enough corn harvest to substitute our demand for oil. We need a cohesive and coordinated effort using multiple technologies to develop alternative energies to reduce our dependence on foreign oil.

Performance

According to Renewable Fuels Association ETHANOL FACTS:
ENGINE PERFORMANCE, ethanol offers higher engine performance with octane rating of 113 in comparison to 87 for gasoline and has a long history in the racing circuit. In 2007, the Indy Racing League, sponsors of the Indianapolis 500 started using ethanol in racecars. However, the higher engine performance may come at a cost of lower fuel efficiency.

Table 1 Specific Energy, Energy Density & CO2

Efficiency

Gasoline offers 56% higher energy efficiency (specific energy) over ethanol as measured by kilo-joules per gram (kj/g). (As a reference: 1 kilowatt-hour = 3,600 kilojoules = 3,412 British Thermal Units) Biodiesel with 35 kj/g is 33% more energy efficient than ethanol at 24.7 kj/g.

In terms of energy density, ethanol would require larger storage capacity to meet the same energy output of gasoline diesel, and biodiesel. Ethanol requires a storage tank 48% larger than gasoline and 41% larger than diesel for the same energy output.
Please see Hydrogen Properties and Energy Units

For a quick review of Specific Energy and Energy Density - (Molecular Weight Calculator) the specific energy of a fuel relates the inherent energy of the fuel relative to its weight and is measured in kilo-joules per gram.

CO2 Emission

The molecular weight of CO2 is approximately 44 with two oxygen molecules with an approximately weight of 32 and one carbon atom with a weight of 12. During the combustion process, oxygen is taken from the atmosphere producing more CO2 then the actual weight of the fuel. In the combustion process a gallon of gasoline weighing a little over six pounds produces 22 pounds of CO2.

CO2 emission is a function of the carbon concentration in the fuel and the combustion process. During combustion ethanol produces approximately 13 pounds of CO2 per gallon. Gasoline and diesel produce approximately 22 and 20 pounds per gallon, respectively. CO2 emissions per gallon appear quite favorable for ethanol. However, the results are less dramatic when CO2 emissions are compared per unit of energy produced.

Figure 2 CO2 per KWH

When measured in pounds of CO2 per kilowatt-hours (KWH) of energy, the results show ethanol producing 6% less CO2 than diesel or biodiesel and 5% less than gasoline. In the case of ethanol, the lower specific energy of the fuel negates the benefit of its lower CO2 emissions. Meaning more ethanol is consumed to travel the same distance as gasoline or diesel thereby limiting the benefit of its lower CO2 emissions.

The bottom line is ethanol does not ameliorate our dependence on foreign oil and while it demonstrates higher performance for racecars, it is still less efficient than gasoline diesel, and biodiesel, and diverts food production away from providing for people and livestock. The reality is there are special interest groups that obfuscate the facts about ethanol for their own benefit. The real solution to our imminent energy crisis is alternative energies including cellulosic ethanol, solar, hydrogen fuel cells, and wind.

Peak oil has been a discussion for several decades after the theory developed by Dr. M. King Hubbert was put forth to alert the world of the impending decline in oil production. Recent data from the Energy Information Administration (EIA) oil production from the twelve members of OPEC has declined from its peak in 2005, despite increased global drilling activity.

Figure 1 OPEC Oil Production

Higher oil prices is driven demand for energy exploration and drilling is up significantly in the U.S. and the world according to Baker Hughes Worldwide Rig Count. Oil price continue to remain above $90/barrel and despite the increased oil drilling activity, oil production remains relatively flat.

Figure 1 demonstrates the tenuous nature of OPEC oil production with oil production declining almost 4% from the peak average production of 31.2 million barrels per day. One must remember that oil production is variable with up and down trends over time. However, with oil over $900 a barrel we are not seeing significant production increase despite the rise in oil drilling. Figure 2 illustrates world-drilling rigs in comparison to oil prices on a global basis. The U.S. accounts for over half the world oil drilling rigs yet our production is less than 10% of total global production.

Figure 2 Rig Count and Oil Production

What does all this mean? For one peak oil may be a reality or sooner then we like. Secondly, with concern over climate change and global warming, there is no real spending on alternative energy to help mitigate a potential shortage in oil. More spending on solar and hydrogen fuel cells is required to ameliorate the eminent disruption in oil flow. Without an orchestrated government mandate to develop alternative energies all nations face a national security issue that has the potential to cripple economic activity.

A brief review of history and in particular the industrial Revolution, it’s quite apparent that economic growth is inextricably linked to energy. As energy is tied to our economy, our future is dependent upon equitable access to energy. This in turn sets the framework of our dependence on oil and hence, why our national security is tied to securing the flow of oil.

Eighteenth-Century England gave birth to the Industrial Revolution. Four critical components provided the framework enabling the Industrial Revolution: Labor, Technology, Risk Capital, and Energy

Improving efficiencies in agriculture lead to an increase in the food supply while minimizing the amount of labor required to cultivating crops. The improving agriculture efficiencies lead to population growth and an available labor force that began to migrate to the cities.

Advances in science and technology gave way to improvements in manufacturing, mining, and transportation. It was the harnessing of steam power such as Thomas Newcomen’s steam, powered pump in 1712 for coal mining and James Watt’s steam engine in 1765 that lead to railroads and machinery.

Risk capital was also an important element for the development of the Industrial Revolution. Risk capital and the entrepreneurial spirit that allowed capital to be applied innovation helped transition England into the largest economy in the world.

And Energy. Access to an available source of energy was instrumental fueling the Industrial Revolution. With wood being used for just about everything in the early 1700’s from housing, wagons, tools, and fuel, deforestation lead to energy scarcity. It was coal that enabled the growth of Industrial Revolution by providing an accessible energy source.

With rapid growth in automobile production in the U.S., oil became the predominant form of fuel. According to the Energy Information Administration, in 2004 the U.S. spent over $468 billion on oil. Given that we import nearly 60% of the oil we consume, most of our wealth travels abroad. More emphasis on alternative energies could help ameliorate our dependence on oil.

Figure 1 U.S. Energy Consumption by Fuel

While solar and wind energy have seen some very strong growth, alternative energy still account for less then 2% of our global energy production.

We need to realize that our dependence on oil could cripple our economy. Supply constraints or disruption to oil flow could derail economic activity. It should be an imperative for our national security to develop alternative energies.

Improving economics and high market valuations should help drive research for alternative energy. With the release of Q3/07 financials, it’s clear that the economics of solar photovoltaic (PV) suppliers is improving. Some of the leading pure play publicly traded PV stocks are demonstrating significant improvements in financial performance that should drive further investment into solar and green technology. The improving economics of solar should continue to drive further investment into alternative energy companies as venture capital firms and Wall Street find that alternative energy is a significant secular trend with sustainable economic foundation.

Most visible among the solar PV suppliers is First Solar (FSLR) with y/y revenue growth for Q3/07 increasing 290% and gross margins exceeding 50% and operating margins above 30%. FSLR’s management was clear in articulating that these strong Q3 numbers reflect ramping on of its German manufacturing facility and would not be sustainable. However, with gross margins exceeding 50% and operating margins above 30% Wall Street takes notice and rewards the firm with valuation multiple envious of leading technology companies such as Google (GOOG) and Cisco Systems (CSCO).

Figure 1 Revenues, Margins, and Capacity

The stronger financial performance of solar PV suppliers is significant because it improves the viability of the solar PV business model thereby attracting more investors and in turn drives funding for alternative energy start up companies. FSLR went public in November 2006 with a closing price of $24.74 on its first day. With a closing price one year later of $212.63, FSLR offers investors a yearly return of 759%. The attractive return generated by solar stocks tends to attract more investors and drives market valuations higher thus feeding the flow of additional venture capital funding.

In terms of market valuation FSLR trades at a significant premium to most companies in the S&P 500 as well as leading technology companies including GOOG and CSCO. . Most solar PV companies trade at higher market valuation multiples than CSCO and GOOG. Both FSLR and Sun Power (SPWR) trade at premium price-to-sales (P/S) and price/earnings-to-growth (PEG) multiples in comparison to some leading technology stocks. In terms of PEG ratios, FSLR and SPWR trade at 2.9x and 2.2x respectively while CSCO and GOOG trade at 1.3x and 1.2X, respectively. In comparison, the S&P 500 index trades at a PEG of 0.8x while the technology and energy segments trade at 0.6x and 2.2x, respectively. These high market valuations prove the venture capital community with high exit values on their current crop of alternative energy investments. Please see Figure 2.

It is this premium market valuation multiple that suggests the importance of alternative energy. Wall Street tends to be a leading indicator and keen in its ability to identify secular trends. Major trends command premium valuations and reward venture capital with attractive exist strategies. Wall Street rewards cash flow growth fueling further venture capital funding that in turn, fuels the flow of intellectual and financial capital. The value migration measured by price-to-sales multiples and illustrated by A. Slywotsky in his book Value Migration provide a framework to gauge the significance of trend towards alternative energies. Capital gravitates to the business model that creates economic value and is measured by a stock’s price-to-sale ratio. By that measure solar stocks is where the value is headed.

Figure 2 Price-to-Sales Ratio

The bottom line is that high market valuations attract research funding and brain power. Rising oil prices, rapid industry growth, and high public market valuations of solar PV companies, should act to attract further venture capital funding of alternative energy companies. Increased solar funding should translate into increased research and talent migration that could improve solar efficiency and reduce costs that in turn could bring solar to electric grid parity.

Rising oil prices have driven exploration and drilling activity, yet oil production remains anemic in comparison. Could the latest data suggest oil production is nearing a peak? With global demand expected to rise over 30% by 2030 according to a recent article in the Wall Street Journal, Handicapping the Environmental Gold Rush the latest oil production figures suggest we are indeed vulnerable to energy shocks.

High oil prices have driven demand for energy exploration and investment into oil and gas drilling rigs. In the U.S., rig count is up 181% with 1,749 rigs in operation in 2007 from 622 in 1999 according to Baker Hughes Worldwide Rig Count. Oil prices are up quite dramatically in the last few weeks with latest price above $94/barrel.

Figure 1 Worldwide Rig Count and Oil Prices

Figure 1 illustrates world-drilling rigs in comparison to oil prices. The U.S. accounts for over half the world oil drilling rigs yet our production is less than 10% of total global production. While oil prices are nearly as high as they were back in the 70’s (accounting for inflation) we are not witnessing the tremendous oil-drilling explosion as we did back then.

Part of the explanation could lie with oil production. If we look at recent data, oil production appears to be leveling off while demand is expected to increase significantly as developing countries increase their use of motor vehicles. Data from the U.S. Department of Energy (DOE) and Ward’s Communications, Ward’s World Motor Vehicle Data show that the number of motor vehicle on the road is up 48% from 1990 to 2005 with countries like China experiencing the most dramatic increase. Yet oil production over this same period is up only 27%.

Figure 2 US Rig Count and Oil Production

In the U.S., rig count is up 118% from 1999, yet petroleum production is actually down 7%. On a global basis, oil and petroleum product production increased 13% since 1999 while global rig count increased 112%. The U.S. and the rest of the world is experiencing diminishing returns on investments in oil production wile usage, led by motor vehicle consumption continues to escalate. In the U.S. more than 60% of oil consumption goes to vehicle use.

With all of the attention given to oil and hydrocarbon fuels, alternative energies are just a small fraction of our energy needs. We need to dramatically increase our research efforts into alternative energies such as solar, wind, and hydrogen fuel cells energies.

After reviewing some of the details of Honda’s experimental solar-power hydrogen refueling station in Torrance, CA and its fuel cell vehicle several questions concerning efficiency and practicality come to mind. It most be noted that solar and hydrogen don’t emit harmful byproducts such as carbon dioxide or carbon monoxide so both technologies are important to our energy security. First let’s look at the efficiency of hydrogen and second the efficiency of generating hydrogen from solar.

As we learned from science class, hydrogen is the most abundant element in the universe. Hydrogen has approximately 3 times the energy per unit mass as gasoline and requires about 4 times the storage volume for a given amount of energy according to a Hydrogen Energy report from Stanford University. In further review of additional information on hydrogen we are also making some adjustments to our fuel-ranking table.

We are revising Table 1 that was used in our post of October 3, 2007 for data on the energy density for hydrogen from 2.5 kilowatt-hours (KWH) per gallon to 10.1 KWH/gal and is reflected in the revised Table 1 below. The discrepancy lies in measuring the weight of hydrogen in liquid volume. We are calculating the energy density of hydrogen using the high heat values of hydrogen of 61,000 British Thermal Units (BTUs) and a weight 0.57 pounds per gallon from the Stanford Hydrogen Report.

As a reference: 1 KWH = 3,600 kilojoules = 3,412 BTUs

Revised Table 1 Specific Energy, Energy Density & CO2

Hydrogen offers tremendous energy potential, but as we see from Table 1, hydrogen has a low energy density meaning it requires a large storage container to make it practical for use in a motor vehicle. Several car manufacturers including GM and Toyota have developed hydrogen vehicles. Hydrogen can be used in internal combustion engines replacing gasoline or in fuel cells to generate electric to power the vehicle. However, there are some limitations to the current technology that may limit the economic viability hydrogen powered vehicles in the near term. But there are no detrimental emissions with hydrogen as apposed to hydrocarbon fuels thus providing tremendous benefits as vehicle efficiency improves.

Honda’s solar-powered hydrogen fueling station takes nearly a week in sun to produce enough hydrogen to power Honda’s FCX concept hydrogen fuel cell vehicle. Honda employs a Proton Exchange Membrane Fuel Cell (PEMFC) that converts hydrogen to electric that in turn, powers the vehicle. The Honda FCX fuel cell vehicle has two fuel tanks that can be filled with up to 156.6 liters of hydrogen or about 43 gallons that offers 430km (267 miles) driving range. The hydrogen fuel cell vehicle provides a reasonable driving range, but with a fuel efficiency of 6.5 miles per gallon (MPG), suggests more research is needed.

BMW’s Hydrogen 7 can travel 125 miles on hydrogen and 300 on gasoline before refueling. In tests the BMW 745h liquid-hydrogen test vehicle has 75 kg tank has a Hydrogen Fuel Efficiency of 10 km/liter or about 25.2 MPG and cruising speed of 110 MPH. Not too bad for an internal combustion engine that is able to run on gasoline or hydrogen.

Figure 1 Specific Energy

Given the changes to hydrogen’s energy density we are also adjusting hydrogen density (Figure 2) to reflect liquid hydrogen and high-energy value as noted by Hydrogen Properties College of the Desert.

Revised Figure 2 Energy Density: KWH per Gallon

We still have more questions given hydrogen’s very high specific energy, (3 times that of gasoline) and low energy density (4 times the volume of gasoline). Hydrogen is more efficient then petroleum fuel, yet when used as a fuel cell in a vehicle Honda’s MPG of 6.5 MPG is quite low. The fuel efficiency of BMW’s Hydrogen 7 of 25.2 MPG is only at parity with gasoline.

The efficiency of using solar energy to generate hydrogen may not be the most efficient method. One report from Walt Pyle, Jim Healy, and Reynaldo Cortez Solar Hydrogen Production by Electrolysis indicated that a 1-kilowatt solar photovoltaic device could generate 1 cubic meter of hydrogen in 5.9 hours. Essentially, 5.9 KWHs from a 1KW solar cell produces 1 cubic meter of hydrogen. We know that a pound of hydrogen in liquid state equals approximately 61,000 BTUs (51,500 BTUs at low heat value) or 17.9 KWH.

Research at Caltech, suggests that photoelectrochemistry The Lewis Group may offer a more efficient means of generating hydrogen. We will continue to explore solar efficiency and hydrogen fuel cells to evaluate the economics of alternative energy.

The bottom line is that our dependence on foreign oil is the biggest threat to national security and without cultivation of alternative energies we continue to endure an untenable situation. Further research into solar and hydrogen fuel cells could significantly ameliorate our dependence on oil.

Despite efforts that have enabled the U.S. to limit its demand for oil, world oil demand is up significantly. Advances in technology such as solar energy and vehicle fuel cell could help the world reduce its dependence on oil.

Figure 1 Oil and Gold Prices

The U.S. Department of Energy (DOE) and the U.S. Environmental Protection Agency (EPA) today released the Fuel Economy Guide for 2008 model year vehicles Fuel Economy Leaders: 2008 Model Year Coming in first place is the Toyota Prius (hybrid-electric) with city/highway miles per gallon (MPG) of 48/45. With higher fuel costs more people are factoring in fuel efficiency into their purchase decision. However, it is the purchase of pickup trucks and SUV that account for most of the vehicle purchases in the U.S. and these vehicles are dramatically less fuel-efficient than hybrids and small four-cylinder automobiles.

Despite the trend towards larger vehicles, the U.S is not experiencing a rapid rise in oil demand. Yet oil prices continue to climb. While geopolitical risk may account for the bulk of the recent price increase, latest information from the U.S. Energy Information Administration (EIA) Total Petroleum Consumption shows increasing oil demand from China.

Figure 2 Oil Demand: U.S. and China

Figure 2 illustrates that while oil demand in the U.S. has grown only modestly since 2000, the growth in China’s oil demand is rising rapidly. The recent data from the EIA shows oil demand through Q2/07. The demand for oil in the U.S. is up 5% from 2000 while in China oil demand is up 59% over the same period.

Improving vehicle fuel ef