III: Beasts of Burden
The third part of this series focuses on the operations of Shell and the lexicon of lessons to be learned from its interactions with the government and the citizen.In the second part of this series of articles, I had expounded upon the fallacious assumption - dressed up as the corollary of pure rational thought - that consumers would prefer free, unfettered competition between energy alternatives and the current oil/gas options. Shell CEO Jeroen van der Veer laid out the truth of the matter to those who still are unable to recognise for themselves the sheer profitability of oil - the price of which has continued to climb to $140 and above as we speak - over alternative energy arrangements [emphases added]:
Thus, simple logic amounting to lower profitability may be adequate to explain Shell's decision to pull out of London Array, the biggest offshore wind farm in the world. Only days after recording first-quarter profits of four billion pounds, the announcement that Shell would no longer partake in investment in the project had arrived as a particularly rude shock to those who have been envisioning the possibility of cleaner, greener energy alternatives to cope with the rising oil price. Of course, the first salvoes were directed at Shell for being "dishonest" and "irresponsible". No surprise there. Yet one must delve deeper, beyond the surface arguments, to understand why such accusations were made.If one day a renewable proves to be a true competitor of oil and gas we would be prepared to invest a considerable amount in it. We do not want to be a small player because we would eventually lose out. But large investments are only worthwhile if the price/performance ratio vis-à-vis the market is sound. Renewables are still too expensive and there is really no point investing in large-scale production of something that is too expensive for consumers.
We are and will remain an ordinary company and so we have to meet all the normal business criteria. We’re not taking part in a popularity contest.
No, I am not an apologist for oil companies, and neither am I a boisterous proponent of Shell's apparently green credentials. Still, I truly wonder in what way Shell was being "dishonest" - has it ever vowed as a private company to be primarily responsible for the successful transition of preferences of a distant country's citizens from oil to wind energy? Since when has it been logical to blame a multinational company for betraying promises that were conjured up by the British public? Note that if the British public were actually consulted in the decision to allow Shell to operate in Britain, then the British public would have a legitimate stake in Shell's operations in the country and demand that Shell honour its commitments: to provide an affordable and consistent supply of oil to match domestic demand. Even so, I doubt that one of those commitments would have encompassed sustainability or green energy.
"Irresponsible" to whom? Shell's decison-making process has to be understood through the eyes of its management, which has to be primarily to its shareholders. As van der Veer remarked, Shell has no intention of participating in a popularity contest, because it recognises the sheer fickle nature of public opinion that fluctuates between extremes as it is readily manipulated by communications structures controlled by the media, lobby groups and the government. Public opinion tends to alter or calibrate the standards with which it judges how effectively or favourably government, private companies or other institutions operate - most likely, how well that entity serves the individual's own interest or the interests of an institution he or she works in. Yes, we have talked about companies such as Chevron and BP noticing the increasing willingness of consumers to reward more environmentally-friendly companies by preferring them over their competitors. Yet if oil prices continue to exact punishing effects on people and their lifelihoods, the public may decide to fall back on old criteria: which oil company can provide cheap and accessible oil to fulfil short-term needs and sustain current living standards and patterns of consumption in the First World. There is an even greater possibility for Third World publics to forsake green options due to their relatively impoverished status. How does one worry about the future when one's immediate chances of survival are threatened?
Thus, one should not foist the burden of blame and shame solely on Shell. Yes, it is detrimental to the credibility of Shell's claims of desiring to be more environmentally friendly, and it has certainly missed a golden opportunity to improve its PR position, as well as to gain profits from being one of the first to enter the market for supplying wind power in Britain. That is only one side of the story. Consider the rising costs of investment in constructing the necessary infrastructure for the wind farm, and that the rate of increase may eventually outpace the rate of increase of oil prices. Shell has tried to rope in other companies to share in this investment, logically to buffer against huge losses and spread the risk around:
The coordinated market economy of Germany greatly limits the agency of the federal government and Bundestag to approve new regulations and policies by enforcing institutional procedures that consult the various state governments and take into account their opinions. As such, the implementational and adaptational costs are distributed more equitably between local and federal governments in a reflection of the "pay-and-say" principle of multi-level governance: if you want us to foot the costs, we want to have a say in its negotiations as well. Thus, the central government is incentivised to craft policies that are agreeable with the green preferences of citizens living in these local provinces, ensuring that companies are motivated to adopt green practices and sustainable policies via taxes and subsidies. It retains the circumscribed arena of action of the state, since if inadequate incentives are given to these companies, the latter will pass on the cost increases to consumers, who will then likely punish their government.
What is thus needed in Britain to encourage multinational companies to invest in infrastructure on British soil is reform of its price mechanisms, as well as the willingness of government to own up to its responsibility to its citizens - of serving and protecting their interests:
Presumptive presidential nominee Barack Obama has sounded out his plans to levy a $15b tax on oil company profit, noting that it would be possible to retain the economic incentive of these companies to continue producing oil, given the huge profits being raked in thus far. While the economic viability of this proposal has yet to be criticised beyond the one-liner sound bites, one needs to consider the need to balance such taxes with appropriate subsidies to urge these companies to further invest in technology that would allow them to regain or sustain that level of profitability, as well as wean their dependency off oil as their sole source of profits. Treat it as advocating diversification to reduce the risk of huge economic losses should one find itself incapable of squeezing out production to meet current demand: Exxon-Mobil is already discovering for itself the consequences of such a narrow business approach.
More to come in part IV as we delve deeper into Total's operations in Myanmar, Sudan and China - three of the more inscrutable locales on earth, and whether it is possible to gain an understanding of how Total will function in Iraq when nobody's looking.
Since Shell and its partners E.on and DONG Energy set up the joint venture five years ago, the costs of building offshore wind farms has jumped by roughly 50 per cent...Shell has already begun sounding out other companies, including Centrica, to see if they are interested in its stake. A spokesman for the British Wind Energy Association said Shell's move was a "hard-headed business decision. This is simply not as lucrative as oil and gas". Dr Paul Golby, head of E.on UK, claimed the project's economics were now "marginal at best".Who else should share the burden? As a vindicated rebuff to proponents of less government, more individual freedom of agency to choose between alternatives without price-distorting mechanisms set up by government, a significant number of people in Britain are now pointing their fingers accusatorily at their own government:
Steve Webb, Liberal Democrat environment spokesman, believed Shell's decision "blows a huge hole" in the government's rhetoric about renewable energy.
Britain was already near the bottom of the European league table on green energy, and now a major investor had decided that other countries offered a better environment for wind power, he said. "If we are to meet our internationally agreed goals on renewable energy, the government needs a radical rethink ... Only yesterday the Brown government faced its biggest ever rebellion over its refusal to back new incentives for small-scale renewable generators. Now a flagship wind farm has been undermined by the withdrawal of a major international investor."
[...] The oil company was pursuing wind projects in the US rather than Britain due to the economies of scale and because planning permission was easier to obtain, a spokeswoman said.
Governments in liberal market economies such as those in Britain are considerably empowered to a greater degree than the federal government in the U.S., Germany or the regional authorities in Spain. Consider the two-party system, first-past-the-post electoral advantages that empowers the government in terms of centralisation of power; the unwritten constitution that allows the government much flexibility in refining its contents. The U.K. government has the capability to dictate the rules of operation for private companies within its territory, to introduce regulatory standards, taxes and subsidies to encourage capital coordination of demand and supply. While this capability has been considerably blunted by the multinational and transnational companies, compare the relative ease of introducing regulation to that in Germany.
The coordinated market economy of Germany greatly limits the agency of the federal government and Bundestag to approve new regulations and policies by enforcing institutional procedures that consult the various state governments and take into account their opinions. As such, the implementational and adaptational costs are distributed more equitably between local and federal governments in a reflection of the "pay-and-say" principle of multi-level governance: if you want us to foot the costs, we want to have a say in its negotiations as well. Thus, the central government is incentivised to craft policies that are agreeable with the green preferences of citizens living in these local provinces, ensuring that companies are motivated to adopt green practices and sustainable policies via taxes and subsidies. It retains the circumscribed arena of action of the state, since if inadequate incentives are given to these companies, the latter will pass on the cost increases to consumers, who will then likely punish their government.
What is thus needed in Britain to encourage multinational companies to invest in infrastructure on British soil is reform of its price mechanisms, as well as the willingness of government to own up to its responsibility to its citizens - of serving and protecting their interests:
[...] the government was also under attack from opponents who saw the move as a body-blow to UK renewable energy policies. They called for more incentives to encourage wind developments.Caroline Lucas, Green MEP for the south-east of England, said ministers should urgently reform their approach to clean power schemes and add so-called feed-in tariffs to its energy bill to encourage homeowners to join the fight against climate change. Under the tariffs, those generating electricity from renewable sources would be paid generously for any surplus power they feed to the grid.
Furthermore, Shell's greater willingness to invest in the U.S. rather than across the Atlantic serves as evidence that the company is willing to invest in renewables, but at its own pace. The state governments in the U.S. enjoy a special degree of autonomy compared to those in Germany, and several governments such as that in California have chosen to adopt large-scale reforms in order to kickstart similar reforms elsewhere. Shell Hydrogen LLC has recently opened California's first hydrogen refuelling station in West Los Angeles, which is a major advancement in terms of adopting green energy alternatives. Thus, we cannot simply discount Shell's motives for investing in renewables on the sole criteria of pace of transition. Another factor that we have observed in this case study also proves imperative in the final conclusion: government willingness to introduce incentives to absorb the costs of transition.
Presumptive presidential nominee Barack Obama has sounded out his plans to levy a $15b tax on oil company profit, noting that it would be possible to retain the economic incentive of these companies to continue producing oil, given the huge profits being raked in thus far. While the economic viability of this proposal has yet to be criticised beyond the one-liner sound bites, one needs to consider the need to balance such taxes with appropriate subsidies to urge these companies to further invest in technology that would allow them to regain or sustain that level of profitability, as well as wean their dependency off oil as their sole source of profits. Treat it as advocating diversification to reduce the risk of huge economic losses should one find itself incapable of squeezing out production to meet current demand: Exxon-Mobil is already discovering for itself the consequences of such a narrow business approach.
More to come in part IV as we delve deeper into Total's operations in Myanmar, Sudan and China - three of the more inscrutable locales on earth, and whether it is possible to gain an understanding of how Total will function in Iraq when nobody's looking.
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Iraq
2 spoke up:
I touch on Total as part of the OFF debacle, and don't like what I see.
Part of the overall problem with oil and the companies involved is that the US has no longer-term policy towards diversification of energy sources. That sort of policy must address the entirety of energy sources and recognize the lacks of many touted replacements for fossil fuel. Using food-based alternatives is a non-starter: it causes hunger and raises food prices. The NAFTA agreement with Mexico has been one of the most destructive agreements that country has gotten into because it undercut their home agricultural system, created temporary industrial jobs to replace agricultural ones and then saw the US Congressional subsidies for bio-fuels hit hard and hike up the cost of corn and wheat while those industrial jobs were moving overseas. That net effect now sees the Red Mafia aiming for a 'piece of the action' in Mexico and one of those organizations is perfectly set up to take over portions of the Mexican petro industry.
Non-food based alternative fuels are a major consideration, although the algae folks forget that it is DeBeers that picked up the patents from MIT and have demonstrated their inability to solve industrial output of the devices. Even with that and heavy utilization of cross-manufacturing and such, the amount of industrial knowledge for this is limited and with the heaviest of pushes you can't make it get to the majority of the US market in 75 years. You can't get from here to there on algae.
What this does bring up, however, is that the stored efficiencies of liquid fuel, are good for limited applications which the industrial world centered on in the late 19th century. As alcohols (ethanol and especially methanol) are corrosive to the infrastructure set up over the intervening century (due to chemical reactions with metals, gaskets, etc.) the entire infrastructure to *deliver* such things needs to be replaced if you go the alcohol route. Even if you wanted to do that, the cost of that new infrastructure would need to be factored into end-yield costs... so fuels that are chemically identical are necessary. Even bio-diesel needs some additives for transport due to slightly different chemistry.
Hydrogen has the water bond problem of needing more energy to get the stuff than you get back: it is a form of battery when enclosed. Plus the stuff escapes nearly as fast as helium from pipelines when in non-liquid form.
Wind, tide, and all other non-geothermal sources of energy depend on sunlight for derivative power and deliver a fraction of the incident insolation. The very best of plant biofuels deliver less than 10% of solar power as fuel... something you can get from low-grade solar cells these days.
That puts us in the realm of electricity: polywell fusion going into its test phases, fission (third or fourth gen reactors), and solar. Note that the polywell fusion is electrostatic containment made with off-the-shelf parts, not a tokamak magnetic system that we have all been seeing since the mid-1960's. Absent fusion, fission and solar can be an alternative, but not immediate nor quickly as the infrastructure is not set up for those levels of current to run things like automobiles on a mass scale.
Liquid fuel stored energy systems, in modern terms, is a nasty, inefficient and quite hard to handle system. Even the largest scale projects, like the Alaska pipeline is at end-of-lifecycle after 30 years while the copper grid around the Niagara power station still in place after more than three times that with some upgrades, of course. To implement a longer term policy, not plan but industrial policy system of rewards for innovation, the basics are now being set:
1) Cannot rely fully on liquid fuels, nor on extracted fossil fuels in the majority.
2) Must have equal or lower cyclical maintenance cost than current infrastructure.
3) Must have storage capacity with minimal loss of power.
4) Requires lower cost to shift power in terms of energy and economic cost.
5) As safe as liquid fuels.
That is a nasty outlook, but put in a 30-50 year time horizon and things look much, much better.
What it means, however, is that unless bio-fuels from plants can get economically competative and require no infrastructure change, they are a loss. Incentivize that with X-prizes aimed at non-food plants and getting chemically similar fuels to not require any swap outs.
Fossil fuels, before that, are not going away and the US has plenty of polluted land designated as superfund sites where humans are not allowed to habitate. Sounds like a refinery site to me, lease at $1 a year with 99 year clean-up plan which is far faster than the federal government is doing.
I have no problems with drilling in 'natural' reserves and such: when people point to ANWR, I point to the Orphan Coppermine that yielded uranium for the US weapons programs that sits in the middle of the Grand Canyon and was active until 1950. I do not notice the Grand Canyon despoiled due to a uranium mine and a oil pumping system is as innocuous as that and actually less deadly due to leaching.
Electricity generation, transport and storage. Again, incentives for production (either via Polywell or new solar technologies), transport (incentives to get high capacity room temp superconductors looked at in basic r&d), and storage (again superconductors or nano-systems).
The final place to look is space policy: sunlight that gets to the planetary surface comes in at an angle and is filtered by the atmosphere. Higher density production with safe beaming via microwaves (India is clearing an island for this as we speak) points to the need for safe, clean and efficient energy production without industrial wastes. Environmentalist? Move it to orbit. Encourage private industry with rewards for safe transport at higher altitudes with guaranteed contracts... like to get rid of 'junk' in orbit, which is a safety hazard. There are multiple groups looking at this from the airship to orbit folks to the various X-prize groups.
Clean, efficient and non-polluting industrial production belongs in space. It is time to lift our horizons to address our problems and get to places where a good life can be had by courage, determination and ingenuity.
You wrote:
"Yet if oil prices continue to exact punishing effects on people and their lifelihoods, the public may decide to fall back on old criteria: which oil company can provide cheap and accessible oil to fulfil short-term needs and sustain current living standards and patterns of consumption in the First World."
Change "may" to "will" and we're in complete agreement.
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