Oil at $100 a barrel – the halfway point

When I started developing Project Better Place as a white paper for the World Economic Forum, oil was hovering around $50 a barrel. I predicted in my calculations that by the end of the decade we will reach $100 a barrel. That point was very contentious at the time, as most people predicted that we are in a cyclical industry. One of the industry experts even told me that I do not understand oil (a correct statement at the time), and that “…Oil is cheap and abundant…whenever an alternative solution will show up the price will go down till the alternative is not viable”. On the flip side, sometime early this year, I had made a bet with my friend and co-conspirator Andrey Zarur, who claimed that Oil will reach $100 before the end of the year – I won that bet by a narrow margin of 3 days.

“…Oil is cheap and abundant.." - oil expert

At any price under $30, oil is practically not a factor in governmental decisions. During the Clinton days we had oil at $10 bbl and the total daily import cost of oil to the American trade balance added up to roughly $100M. Even when we add it up across an entire year the cost is $30B, not easy to swallow for most country budgets, but negligible for a super power. On Jan 3rd 2008 the cost of importing oil to the US was $1.3B a day – roughly 2 weeks worth of oil in 1999 – and if the price point stays where it is the US will see another $500B disappearing from its trade balance in 2008. Adding in the cost of subsidies for the domestic oil industry, the delivery and refining costs of gasoline, the healthcare cost of using it, and the cost of securing oil sources around the world and we are looking at probably the same amount in “externalities” of oil which the US budget loses every year. The combined sum is a staggering ANNUAL Trillion US dollars – roughly the Chinese federal cash reserve.

Oil, we found out, is neither cheap nor abundant. It is dwindling and hard to extract. The issue at hand is not whether we have enough reserves, but rather whether we have enough of a pipe out of the current reserves to feed the global addiction. We have moved from supply side constraints to demand based pricing. As another oil expert explained to me we are at the mid point of oil prices as they move from an equilibrium at $50/bbl to a new level at $150/bbl. He had a chilling analysis for the two sides of the oil price spectrum. “…At $50/bbl governments invest in demand; At $150/bbl they secure supply…”. I see that statement as one of the most profound statements I had heard about the oil market and the role government plays in it.

“…At $50/bbl governments invest in demand; At $150/bbl they secure supply…” -Another Oil Expert

What he meant is that governments at $50 bbl have enough time to invest in finding alternatives that will reduce their demand for oil. Dependence on a scarce and expensive substance is called an addiction. We are all addicts. We value our freedom to drive more than many other freedoms that have a specific amendment in the constitution. We wasted the good years, when we could take the time and research alternatives. We wasted them on hydrogen research and ethanol subsidies. Don’t take me the wrong way, it wasn’t all waste – fuel cells will give us solid electric drive trains (only no need for hydrogen), and ethanol might buy us some precious time until we get completely off the need to burn something in an inefficient engine. But hydrogen is never going to be an efficient way to distribute electric energy (wrong package for an electron), and ethanol will never scale to provide us enough liquid fuel without destroying the food markets (oh, and run out of water). We were enamored with ideas that solved a technical solution but didn’t scale.

"We will not reduce our use of oil until it is significantly more expensive. Hence oil is bound to become very expensive" - Smart man about oil

The other side of the spectrum is best demonstrated by a scenario-planning event run by SAFE in DC two months ago. During the event staffed by former cabinet members advised a president (not present, nor identified by gender) what to do whenever the price of oil reached a new high (increased by $10/bbl through external events). To make a long story short, at $150 bbl the president was left with two alternatives – (a) instruct all Americans not to drive on Sunday or (b) take over the Persian gulf. You guessed it right, Football games were not suspended. At the same time, The US is not the only country which cannot afford the implications of $150 bbl, China’s economy depends on cheaper Diesel, and at $150 bbl, they have no choice but to raise Diesel prices to roughly $4.50 a gallon – implying a significant inflationary pressure on all basic commodities. Will we have a timeshare agreement with China and the US over oil sources?

"Given the choice between driving on Sundays and our military securing oil sources we will prefer our freedom over others" - Unfortunate reality

The question that remains open in many people’s mind is which statement to believe regarding state of oil in the world – “cheap and abundant” or “apocalyptic scenario”. The hidden factor in all of this assessment is the negative feedback loop the oil market has entered over the last two years. Countries that sit on reserves are smarting up – and had become very reluctant to extract and sell it at any price. If you are a leader of a country that is lucky to have extracted oil for the last few years, your reserves do not require a cash infusion any more. What you do is the same as any driver does in times of shortage - you store some oil for rainy days. Countries on the verge of running out of their reserves in the next decade or so, decided to stop exporting oil (smart planning). On the other hand, countries that are importing oil, but have fields are shifting the ownership on the new fields to the national oil companies. Some of those companies (not Saudi Aramco or Petrobras), do not have the same technology that global-oil is using, so their pipes move oil a bit slower than the big guys can – hence the constraint is now on the width of the pipe, not the size of reserves (although that will be an issue soon enough).

What do we have to do – we have to put our money into easing demand before it is too late. Addicts who wait for the crisis do not recover in the same shape as they were before a stroke or heart attack hit them. In the world of oil a heart attack is a global recession, and a stroke is probably global war. We can’t afford either. Only solution to addiction is drying up on the substance. We may be too late, but we still need to try – putting more money into oil without putting any money into oil independence will make us dream of days when oil was cheap and abundant – at only $100 a barrel.

Comments

[Oded Roth]

Quotation from the article:

“ “…At $50/bbl governments invest in demand; At $150/bbl they secure supply…” -Another Oil Expert”…
….
“What do we have to do – we have to put our money into easing demand before it is too late. “

Simply, the two sides of the equilibrium will be tackled. From the side of demand there is an ample range to improve, at list from the industrial and management point of view, not to mention social justice and “constitutional” freedom of movement to everyone:
http://www.e-mago.co.il/Editor/bikoret-2063.htm

[T Pitcher]

I agree with your points, Shai, though I think the scenario behind ethanol and biofuel production supplementing demand is not quite as bleak as you intimate. Another factor that will buoy, if not totally exacerbate prices is the continued bloodletting of the dollar as the Fed continues to satisfy the Street's own addictions.

[Or Coral]

Your project reminds me of a beautiful children's book I've read, many many moons ago. I think you can, too. You can take over the other engines. Enjoy.

THE LITTLE ENGINE THAT COULD
(Watty Piper)

A little steam engine had a long train of cars to pull.

She went along very well till she came to a steep hill. But then, no matter how hard she tried, she could not move the long train of cars.

She pulled and she pulled. She puffed and she puffed. She backed and started off again. Choo! Choo!

But no! the cars would not go up the hill.

At last she left the train and started up the track alone. Do you think she had stopped working? No, indeed! She was going for help.

"Surely I can find someone to help me," she thought.

Over the hill and up the track went the little steam engine. Choo, choo! Choo, choo! Choo, choo! Choo!

Pretty soon she saw a big steam engine standing on a side track. He looked very big and strong. Running alongside, she looked up and said:

"Will you help me over the hill with my train of cars? It is so long and heavy I can't get it over."

The big steam engine looked down at the little steam engine. Then he said:

"Don't you see that I am through my day's work? I have been rubbed and scoured ready for my next run. No, I cannot help you,"

The little steam engine was sorry, but she went on, Choo, choo! Choo, choo! Choo, choo! Choo, choo!

Soon she came to a second big steam engine standing on a side track. He was puffing and puffing, as if he was tired.

"That big steam engine may help me," thought the little steam engine. She ran alongside and asked:

"Will you help me bring my train of cars over the hill? It is so long and so heavy that I can't get it over."

The second big steam engine answered:

"I have just come in from a long, long run. Don't you see how tired I am? Can't you get some other engine to help you this time?

"I'll try," said the little steam engine, and off she went. Choo, choo! Choo, choo! Choo, choo!

After a while she came to a little steam engine just like herself. She ran alongside and said:

"Will you help me over the hill with my train of cars? It is so long and so heavy that I can't get it over."

"Yes, indeed!" said this little steam engine. "I'll be glad to help you, if I can."

So the little steam engines started back to where the train of cars had been standing. Both little steam engines went to the head of the train, one behind the other.

Puff, puff! Chug, choo! Off they started!

Slowly the cars began to move. Slowly they climbed the steep hill. As they climbed, each little steam engine began to sing:

"I-think-I-can! I-think-I-can! I-think-I-can! I-think-I-can! I-think-I-can! I-think-I-can! I think I can - I think I can - I think I can I think I can--"

And they did! Very soon they were over the hill and going down the other side.

Now they were on the plain again; and the little steam engine could pull her train herself. So she thanked the little engine who had come to help her, and said good-bye.

And she went merrily on her way, singing:

"I-thought-I-could! I-thought-I-could! I-thought-I-could! I-thought-I-could! I thought i could - I thought I could - I thought I could - I thought I could - I thought I could - I thought I could I thought I could --"

[Sumit]

Hii Shai,

I just happened to go through this video today.
The Energy Non-Crisis by Lindsey Williams.
http://video.google.com/videoplay?docid=3340274697167011147
Can you share your views on the same.

Regards,
Sumit

[Shai Agassi]

Sumit,

To understand the real potential of Alaskan oil reserve here is the real data (from Wikipedia - so it could have been edited by the conspirators...if you believe a conspiracy)...

Excerpt from wikipedia on "Arctic Refuge drilling controversy" the bottom line is "If the Arctic National Wildlife Refuge was used to meet 100% of U.S. demand, it would last for 215 days under the low estimate, and 525 days or just 1.4 years if it contained 10.4 billion barrels."

In other words, when the disaster hits - we have a year to sustain on Alaskan oil. The guy is overestimating and inventive.

Estimates of oil reserves

A 1998 United States Geological Survey (USGS) study indicated at least 4.3 billion (95% probability) and possibly as much as 11.8 billion (5% probability) barrels (0.9 to 2.5 km³) of technically recoverable oil exists in the Arctic National Wildlife Refuge 1002 area, with a mean value of 7.7 billion barrels (1.7 km³). In addition, in the entire assessment area, which covers not only land under Federal jurisdiction, but also Native lands and adjacent State waters within three miles, technically recoverable oil is estimated to be at least 5.7 billion (95%) and as much as 16.0 billion (5%) barrels (0.7 to 1.9 km³), with a mean value of 10.4 billion barrels (1.2 km³). Economically recoverable oil within the Federal lands assuming a market price of $40/barrel (constant 1996 dollars - the highest price included in the USGS study) is estimated to be between 3.4 billion (95%) and 10.4 billion (5%) barrels (0.5 to 1.7 km³), with a mean value of 6.8 billion barrels (1.1 km³).[3]

The 10.4 billion barrel figure was used in publications by the U.S. Department of the Interior while it was headed by Gale Norton, a proponent of drilling in the Arctic Refuge.[10]

The U.S. consumes about 20 million barrels daily. If the Arctic National Wildlife Refuge oil reserves were used to supply 5% of the U.S. daily consumption -- most is imported from Canada (19%) Mexico (15%), Saudi Arabia (11.5%), Nigeria (10.5%) and Venezuela (10.5%)[11] -- the reserves, using the low figure of 4.3 billion barrels, would last approximately 4300 days, or almost 12 years. Using the high estimate, the reserves would last approximately 11800 days, or 32 years. If the Arctic National Wildlife Refuge was used to meet 100% of U.S. demand, it would last for 215 days under the low estimate, and 525 days or just 1.4 years if it contained 10.4 billion barrels.

[Roger Atkins]

Perhaps all this was already factored into western administrations foreign policy - hence the Iraq project. Most folk seem to have said it was all about oil more than regime change or terrorism. There may be big reserves of oil to come from the former Soviet Union - what scenario might be developed to visit there? In the meantime, the 'voice of the people' on global warming and other items is being given a voice at Davos at the end of this month - see
www.youtube.com/watch?v=BDqs-OZWw9o

[Rob Wilson]

Hi Shai,

It’s been a while; great to hear that you are bringing your creativity to this need! I think I understand the concepts you stated as countries quickly transition from the demand management, to the need of securing supply. The issue of oil supply/demand is one that I think the average person (I consider myself that) does not truly grasp the ramifications. I.e. “I can still get gas when I go to a gas station; yes the cost is a bit more but…” – certainly a shortsighted typical perspective… There are a variety of people/sites/etc. that estimate what the remaining global oil reserves; what are your thoughts (from what you have learned) on what the estimate truly is? (I know the estimate must take into account the emerging consumers of China and India)

From the thought of what supply is left rises my main question on what will bring the average consume to the table. I am curious, what are your thoughts on what the true $/bbl breaking point to where the economy cannot bear the price and catastrophic economic results occur? Obviously today we see strains occurring, but the average person has/is/must adjust their budget to still allow for similar driving patterns as well as purchasing items delivered from the “oil chain”. Really, will it take a series of catastrophic events (economy and otherwise) to bring the majority of the “oil chain” users to the table to demand alternatives? Or is it simply provide a solution that does not inconvenience the average person and they will buy into it?

Regards, Rob

[Little Prince]

Dear Shai,

I just saw your report on the Israeli Friday news today (11/01/08) - I must say that my first reaction was “EUREKA” finally this is the thing I was looking for, I was hoping for.
The report piece completely inspired me!! The opportunity to be part of something so big, so significant, so contributing, created such a powerful and exciting reaction in me.
I could sympathize with your sudden decision to resign from SAP and I could totally understand the urge to get it….

I am an Israeli woman who is part of the high tech industry (for several good years by now) who is looking for a better place – a better world to be living at and mainly to be part of this change.
I am debating with my self for few months lately about my carrier path and the direction I should take from here…I couldn’t find this “idea” that will shake me, drive me and excite me but I kept looking for it (in my optimistic way), thinking it will come to me eventually, it is just a matter of time…

It is rear in life that you feel so sure about something and I just experienced this feeling today. I would appreciate if you can open for me a window and help me to be part of this incredible project. I have a feeling I can contribute also to the business side of it 

Looking forward to your advice

I.

[gilad]

hi shai
For a long time i'm following your project and find it as one of the most important and practical ideas we had here in Israel for years.
Its seems that your saying about developing a new project in a "social island" like Israel can work out and be a genius way.

I'm a 2nd year student of mechanical engineering in TLV uni.
I originally came to study this field after years of looking for the way to get into the world of clean energy and from a strong ideological interest in ecology.
Your project seems to connect perfectly between 2 very important subject in our life - clean energy and Zionism and i would be proud to take part in it.

I served for 8 years in the air force as a navigator of F-16 and i took a part in un "establishing team" of the new F-16 which arrive to israel 4 years ago.
As-mentioned i'm facing you from a strong inner feeling that this field is the most fascinating and important which i wish to take part in it and i believe that i'm coming with many ideas, ideology and talent, which will be good for your project.

Looking forward for your response.
I'm planning my future in this field, maybe it will be in your project.
gilad.

[E.T]

Hi Shai, and everybody.

I am very happy that finaly someone take this important issue and move it on!
And someone like Shai is great.

We all know that energy is not belong to some unique countries , it belong to everybody , to the nature !
This rule say that everyone who want to produce energy can do it....

Everyone have something like sun , wind , waves...

We just have to save it in batteries....

look at :

www.altairnano.com

[yoav]

Hi Shay
First I want to support you in your important enterprise, it's can influence the life of all of us.
Second I think that if you try to start with the public transport, the impact will be much powerful.
The advantages of public transport are:
1. The numbers of loading stations are less then private cars, because there are routine lines for the transport.
2. Buses are massive polluted; a silent and clean air bus is the best advertising you can get for your enterprise.
3. The immediate benefits for change from oil bus to electric bus will be to the weak levels of the Israeli society, something that can be easier to get support from the Israeli media and the public opinion.

Regards from yoav.

[Vitaly Fishman]

Hi Shai,
We have been waiting for you for a long time and truly wish you success.
There are, certainly, many questions to be answered.
One of them power production.
I am sure we could be very helpful for you in this issue.
Agren is for Agro-Energy, at 1980 we started to explore the alternative energy sources. Visit www.agren.co.il
We have many years experience in energy production and conversion systems, a lot of ideas and knowledge.
In addition we are highly motivated to participate in such a project.
Would be more then happy, to cooperate with you.
Vitaly Fishman.

[Yehoshua Fishler]

Hi Shai,

local solar power production is the missing link to the solar car.
I am sure I can be very helpful for you in this issue.
At the moment I develope a solar air conditioner.
I have the idea and access to the proper technology to produce the needed power for the electric car from the sun localy and with competitive price.
Please Visit www.koron.co.il
I am highly motivated to participate in such a project.
Would be more then happy, to cooperate with you.
Yehoshua Fisler.

[Lascelles Linton]

Hi,

I write for AutoblogGreen. I am sorry I have to try to reach you at your blog. I could not find anything about a Channel 2 report of the apparent debut of the Project Better Place car with you racing a gas car. Can you tell me anything about that? Thank you.

To keep this comment on topic, oil is used less per car for example and if you adjust for inflation, it's really not up at all. Just about even, down a little actually. A great search for oil is also not impossible. We could search every where. It would destroy nature and probably ourselves but that search is possible.

So the debate should NOT be framed, oil is running out and getting expensive, it should be framed, oil is cheap and it's not running out BUT we have to move away from it to save nature. The reason I don't think you hear that argument is no one would care. We have bumped up against a few things making the damage we are doing more apparent but we can still ignore action because the next set of damages our senses let us recognize (we feel on a log scale) is probably 30 years away.

Linton

[Simon Rochefort]

Hi Shai
in fact I have the exact same problem as Linton Lascelles of Autobloggreen
I work for www.leblogauto.com in France, so this matter and your great project with a partner as Renault are very important for us
Please tell me where to find pictures and videos of your car
Best Regards
Simon

>Linton >wink colleague !

[Simon Rochefort]

Hi again Shai
Here's what I wrote anyway, waiting for more infos, photos and vidéos
http://www.leblogauto.com/2008/01/renault-constructeur-de-voitures-electriques-2.html
Best regards
Simon Rochefort

[Assaph Ziv]

Hi Shai

I have been trying to contact you through Plc for some time, regarding your last confrence (In Tel-Aviv) and as there was no comment I'm trying this channel. Pls contact me

bye,

[danny]

The tipping point is almost with us. Thank you for introducing the world to an alternative and I sincerely hope it works.

[g.thornton]

Shai,
You are a sad loser and SAP didn't need you in the first place. The top developers in the U.S knew this. How you've been successful is astounding to intelligent business men and women. Henning, Tom DeLise, from the top c-levels to the top developers...they felt you were insane, so you're out!

[scott]

Imagine fossil fuel reserves accumulating over billions of years as a result of solar energy impinging onto the Earth. Next imagine that oil production will peak in say, 2008, and that from this instant prices will rise steadily and never decline, again. Similar scenarios will follow for natural gas and coal. Replenishment of these reserves will take billions of years and any human civilization left on the planet during this time will subsist at a much lower level of energy consumption. Where are the voices of concern?

[יוני]

שלום שי.
קודם כל ברכות על הצלחתך .
הייתי מעוניין להשתתף בעניין תחנות ההטענה הארציות והבין לאומיות.
כולל גיוס משאבים לעניין.
אשמח אם תיצור עימי קשר במייל .
בברכה.

[יוני]

[email protected]
יוני.

[Brian]

I'm sure you've thought of this, but I see some security vulnerabilities with the Israel electric car project. Specifically, there would seem to be the opportunity to place an explosive device in a vehicle while ostensibly replacing used batteries.

These devices might use the replacement battery itself as the platform/form factor, and could easily be made sophisticated enough to detonate some time or miles after the user has driven away from the changing station.

Great idea...but take vulnerabilities into account during implementation. One such exploit would probably be enough to scuttle the idea.

[אבי שרף]

שי שלום רב

המכונית החשמלית תכנס לשוק העולמי כבר בשנת 20010 ע"י כל יצרניות הרכב הגדולות שכעובדות על המכונית הזאות כבר מתחילת המאה
המכונית החשמלית היא הפתרון האולטימטיבי וההכרחי
לכן זה רק טבעי שאתה תהיה מבין אלו שיחדירו אותה עם החברה לשיקראל ואני מברך את האחים עופר ומשפחתם על היוזמה העסקית המבורכת
פוליטית יש לנושא גיבוי אצל אל גור ואצלינו נשיא המדינה וכל המערכת לטובת הענין
יש לקדם את הנושא בהעברת מפעלים ליצור פנלים פוטואלקטרים בארץ ברוכת האור ולא נחוץ כל כך הרבה שמש להפקה של מטענים פוטו אלקטרי היתי מצטרף אליך ולכל גוף שיכנס לנושא חשוב זה שבטח יש עמו התפתחות כלכלית במעלת המדרגה הראשונה
אנא פנה אלי
אבי שרף
0544942934
email:
[email protected]

[ShinsakuHigashide]

突然のお便り失礼します。
この度の日産自、ルノ～、プロジェクトベタ～プレ～ス社様の共同事業によるイスラエルへの電気自動車契約の成立、おめでとうございます。
当方は自動車の今後について調査しているものです。
この度、温暖化対策の　主な研究方向であるCO2ガスを除去する装置を開発した財団法人が日本にあります。
何かの参考になればと思い連絡させていただきました。
今後のご活躍を祈念します。よろしくお願いします。
急ぐため日本語で失礼します。