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Energy quote of the day:
"How many times do I have to tell you, prices have nothing to do with supply and demand."
--Saudi oil minister Ali al-Naimi according to story by Bloomberg News.
The comment was made as Naimi was reiterating his view that "speculators", not the fundamentals of supply and demand, were driving up oil prices, and that OPEC did not need to raise output to bring prices down.
The Energy Department earlier this week outlined plans to solicit proposals for $18.5 billion of loan guarantees for the construction of new nuclear plants. Nuclear foes say it's way too much, but the nuclear industry says it's not enough.
Both of them can claim to be right with some reason. The loan guarantees could certainly lead to the construction of the first completely new nuclear plants in nearly three decades since the scare at the Three Mile Island plant in Pennsylvania. That would be a setback for nuclear power's foes. But new nuclear plants are so expensive that the $18.5 billion in loan guarantees are only big enough to finance the construction of three new nuclear plants.
On Friday, we were talking about why the nuclear industry isn’t satisfied with the $18.5 billion in loan guarantees that the Energy Department is opening up for proposals. And that reminded me of a meeting I slipped into on Capitol Hill in mid-May that was organized by the Heritage Foundation, whose nuclear energy expert, Jack Spencer, used to work for Babcock and Wilcox, a maker of nuclear plant equipment. He had invited Michael Metzner, senior vice president and treasurer for Exelon Corporation, and Caren Byrd, executive director of Morgan Stanley's investment banking division, to speak. There were two or three dozen congressional staff members there.
Wrapping up our discussions in the last few posts about the nuclear industry, here are some other fun facts about nuclear finance and loan guarantees:
1. The Energy Department is also handing out about $8 billion for renewable energy and energy efficiency projects.
2. France relies on nuclear power for 78 percent of its electricity while the United States relies on nuclear power for 19 percent of its electricity. But the United States, a much bigger economy, produces nearly twice as much energy from nuclear plants as France does.
3. "Loan guarantees from the Department will enable project developers to bridge the financing gap between pilot and demonstration projects to full commercially viable projects that employ new or significantly improved energy technologies," Jeffrey F. Kupfer, the Acting Deputy Secretary of Energy, said. But many critics wonder what is so new about the design of new nuclear plants.
4. Last October, Moody's delivered a downbeat assessment of the U.S. nuclear industry's prospects. In a report, it said:
"Moody's does not believe the sector will bring more than one or two new nuclear plants on line by 2015, a date cited by a majority of the companies currently highlighting their nuclear ambitions. The complexity associated with the permitting process as well as the execution risks associated with construction projects of this nature should not be underestimated.... Moody's believes that many of the current expectations regarding new nuclear generation are overly ambitious. In fact, the timing associated with commencing construction and making the next nuclear unit commercially available could be well beyond 2015 and the costs associated with the next generation of nuclear build could be significantly higher than the approximately $3,500/kW estimates cited by many industry participants."
Don’t look now, but the model nation for peaceful nuclear power just had a spot of trouble.
Nearly 8,000 gallons of radioactive waste spilled from the Tricastin nuclear site on Wednesday, forcing the closure of two French rivers for fishing and bathing, and threatening people and the environment. The timing, right after the Energy Department said it would seek proposals for new nuclear plants worthy of federal loan guarantees, could have been better.
“This spill should knock down the myth that France ’s dependence on nuclear power is a role model for the U.S. to follow,” said Erich Pica of Friends of the Earth.
Speaking of timing, the Government Accountability Office issued a report on the $38.5 billion in federal loan guarantees lawmakers approved early this year. The GAO recommended that Congress limit the size of the program (PDF) because the Energy Department isn't ready to assess risk of defaults and protect taxpayer interests. The GAO said that “Risks inherent to the [loan guarantee program] will make it difficult for DOE to estimate subsidy costs with a reasonable degree of accuracy…” It criticized the Energy Department for considering non-cash assets, such as land, as equity if contributed to the project by developers. It also said that the Energy Department’s decision to lend as much as 100 percent of the project costs diminished the incentives project owners might have if they were on the hook for part of the project cost.
For two days this week, oil was looking like a typical bubble market. The price slid more than $10 a barrel in two days. Had supply and demand changed that much? Was this the beginning of the end of high oil prices?
Then on Thursday, the oil price bounced up at the end of the trading session. It’s hard to see what news might have triggered that. The day’s major developments – the firing of missiles by Iran and an e-mail from Nigerian insurgents calling off their self-declared ceasefire – were known at the beginning of the day. Brazilian oil workers were planning a strike, but the International Energy Agency lowered consumption forecasts. Go figure.
That led some analysts to say that the oil market is indeed a bubble.
The price of crude oil has tumbled almost $11 a barrel in less than two days and a lot of people are (again) asking: Has it all been a bubble? Is it about to burst? Have prices fallen short of the predictions of the financial analysts who were talking up the idea of $150 or $200 a barrel?
I don't think it's quite that simple. I think that a combination of things are happening to oil prices: an influx of financial players into the market has helped drive up prices, but they wouldn’t have been able to do that in a sustained way if the gap between global production capacity and global oil consumption were not so narrow.
If $4-plus for a gallon gasoline feels like a burden to American households, it feels like an emergency to members of Congress.
With elections looming, how Americans will factor the high price of gasoline into their voting makes both parties anxious. Democrats think it's such an emergency that they want to tap the Strategic Petroleum Reserve to lower prices. President Bush, by contrast, wants to keep the emergency reserve aside for what he might call a real emergency -- one with war and a really big disruption in world supplies.
There's a lot of rhetoric flying around on this at the moment, but neither side gives the other its due.
You could look at yesterday’s announcement by the US Geological Survey that there may be 90 billion barrels of oil and 44 billion barrels of natural gas liquids in 25 geological areas underneath the Arctic Sea as evidence that there isn’t any oil supply crisis. Or you could look at it as evidence that we need to go to the ends of the earth to get enough oil to feed our oil addiction.
Finding all that Arctic oil will require huge expensive drilling rigs and ways of dealing with dangerous melting ice. One line in the USGS release: “For the purposes of this study, the USGS did not consider economic factors such as the effects of permanent sea ice or oceanic water depth in its assessment of undiscovered oil and gas resources.”
Those of us who live in the United States have a tough time with high oil prices. But the Philippines doesn’t produce any of its own oil, and it’s having an even tougher time.
And that means tough times for the Philippines’ President Gloria Macapagal-Arroyo. Her popularity has fallen to a low point, lower than any president there since 1986, the year long-time leader Ferdinand Marcos was toppled from power. Moreover, while the nation’s growth rate is still good, inflation has climbed to 11.4 percent. Growth has slowed from 7 percent to 5.2 percent. Many members of Congress are demanding that Arroyo trim the 12 percent value-added tax on oil products, but she has refused. Tomorrow she is scheduled to deliver a nationwide address, and oil prices will be at the center of her talk.
It's not every company that can register $11.68 billion in quarterly profits -- and still disappoint the analysts. Yet Exxon Mobil Corp. is a special company in many ways, and analysts have their own view on the world.
Poor Exxon. Its profit margin is a meager 8.5 percent of sales. It doesn't have enough places to drill. Costs are going up. Skilled manpower is scarce. Despite all that, it is still under attack from members of Congress, consumer groups and environmental groups. And now the analysts are disappointed too!
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