Week of September 28

Another week of surpassingly bad economic news…. With respect to alternative energy I heard much speculation as to impact of the downturn on funding.

Right now despite the dark shadow that has been hanging over the overall economy for the better part of a year, the funding situation for our sector has never been better. In the algae fuel industry alone over $180 million in investments have been made according to one report I saw. Kleiner Perkins, the West Coast's premier venture capital firm, has invested in more than 40 energy startups, and it's one among many. After many false starts, the level of investment activity in alternative energy is precisely where I predicted it would be at the beginning of the decade—in the tens of billions of dollars.

This is not equivalent to the trillions that went into IT and telecom a decade ago, and which still represents the greatest technology investment boom of all time, but it is noteworthy nonetheless. There is, however, nothing akin to the mood of ebullience I sensed in Silicon Valley a decade ago. Not even close. The late nineties brought us delirium. The best we're getting today is cautious optimism.

One of the investment reports I scrutinized pointed out quite accurately that the venture firms would be unlikely to follow up the investments they have made in research and development with funding for industrial production. The assumption at the time the venture firms made those investments was that the major investment banks would step into the breech and provide that capitalization when the time came to productize the innovations. Now that appears extremely unlikely as major banks all over the world struggle to avert catastrophe in what appears to be the biggest banking crisis of all time. Nobody's going to pony up the tens of billions necessary to build new manufacturing industries and new public utilities—except maybe rogue multi-billionaires of the T. Boone Pickens and Warren Buffet stripe. Both in fact are making alternative energy plays right now. But I don't think there are enough mega private investors as opposed to institutional investors to build an industry right now. Angel investment is normally considered the most irregular and least reliable source of funding. How ironic that angels have become the lenders of last resort for our industry now.

Government, of course, is traditionally the lender of last resort, but so many are resorting to it right now that here in the U.S. it is beginning to take over the entire banking function. Both candidates speak often of the role of government in fostering new sources of energy, but in the mid term it is clear that it can have practically no role. The money to finance massive infrastructures builds will not be forthcoming.

Meanwhile, we note other interesting developments with a bearing on this matter.

I happen to write for a petroleum journal on the side, and I'm deeply engaged in researching what is known as ultra-deep oil at this time. Ultra-deep refers to deposits of petroleum occurring thousands of feet below the surface of the sea, in most cases, beyond the continental shelves. No one even knew such deposits existed twenty years ago, but now the thinking is that oil may even be found in mid ocean hundreds of miles out to sea. Another virgin territory is the sea floor under the Arctic Ocean. Oil exploration firms, global warming deniers all, secretly believe that the entire polar ice cap will melt away exposing the seabed to their depredations. How much oil will that make available? No one knows, nor does anyone really know how much ultra-deep oil really exists.

Ultra-deep and Arctic oil will carry heavy production costs—probably more than $70 per barrel in either case. But no one I've talked to in the oil patch is worried. Everyone believes that oil will remain above $90 per barrel, save for brief dips representing momentary demand collapse.

Another interesting development is the agreement on the part of the Iraqi oil ministry to sell off that country's assets in confiscatory production sharing agreements. The Iraqis are letting foreign oil companies keep 82% of the profits—the biggest giveaway since the Brits occupied Mesopotamia in the wake of World War II and simply stole the oil, giving half to themselves and a quarter each to the U.S. and France, their wartime allies.
President Bush has been trying to secure such agreements for years, and whatever threats and blandishments he mustered in the past were insufficient. The thinking among Iraqi officials was that you were a dead man if you acceded to such a request—you and probably your immediate family as well. But Bush in the last triumph of his Administration has finally gotten what he wanted. Will this drive his approval ratings up from the abyssal depths to which they have fallen? Or is it something he really wants to trumpet, lending credence as it does to all of those old blood for oil charges?

Altogether, these new oil sources may amount to several hundred billions of barrels, maybe even more. Most of it, even the Iraqi oil, will probably prove to be expensive and hard to get oil, but it's a supply we didn't really know we had in the past. So Davy Jones Locker is the new Saudi Arabia.

What I think will happen is that the new sources will provide a measure of price stability for a number of years and this will retard the development of alternative fuels. So how long will the respite be? One of the folks I interviewed was a deep water rig operator with a lot of experience in this area. He told me that the problem with these wells is that they tend to reach peak production very quickly, and that enhanced oil recovery techniques employed on land are difficult or impossible to use at great depths. He also said that the pressure from management to get these wells producing at full capacity is enormous. A single derrick can cost close to a billion dollars to construct. The company has to get its money back quickly or risk serious financial difficulties.

So probably what we'll see is a surge or successive surges in deep water activity and public attention turning to other matters as prices stabilize for a few years. Then all of a sudden it's over and the only resources left to exploit are coal, oil shale, and methane hydrates, the unholy trinity. Do things get ugly then? Probably they do.