Navigant Research Blog

Amid Global Turmoil, Oil Prices Oddly Stable

— July 18, 2014

The world has entered a zone of maximum upheaval.  From the Atlas Mountains of North Africa to the Hindu Kush, in Afghanistan, the Middle East is in flames.  The destruction of a Malaysian airline over Ukraine, almost certainly shot down by Russian-backed separatist rebels, threatens war in the Black Sea region.  Libya is being torn apart by competing militias, while parts of Iraq are under assault by the murderous Islamist force known as ISIS.  Syria remains a bloody horror show, and Israeli troops have launched a ground invasion of Gaza.  At no time since the terror attacks of 2001 has the world seen such conflict and instability.

So why aren’t oil prices higher?

Prices spiked briefly after the news on July 17 that Malaysian Air flight 17, en route from Amsterdam to Kuala Lumpur, was shot down by a surface-to-air missile fired from eastern Ukraine.  U.S. oil futures rose $1.99 a barrel, up 2% on the New York Mercantile Exchange, to reach nearly $104.  That was the largest one-day jump since June 12, when ISIS launched its offensive in Iraq, according to The Wall Street Journal.  But markets quickly calmed: the next day, benchmark crude had retreated below $103 a barrel on the NYME.  The shocks of recent days had caused a tremor across world petroleum markets, not a tsunami.

No Lost Sleep

“At any given point of time, global financial markets are always at risk from geopolitical disturbances, but this time around nobody’s losing sleep over it,”  wrote Malini  Bhupta in the  Business Standard, India’s leading economic newspaper, in a column headlined “Markets shrug off geopolitical risks as oil prices remain stable.”

Before the latest outrage in Ukraine, oil prices had actually been easing: in mid-July U.S. crude fell below $100 a barrel for the first time since May.  That’s not to say that prices aren’t high; as Steve LeVine, of Quartz, points out, geopolitical disturbances have removed around 3.5 million barrels of oil a day from world markets since last fall, and if the world were a more stable and peaceful place, oil prices would likely be well below $100 a barrel.  But given the current unrest, a price per barrel of $125, or higher, would not be startling.

The ability of the market to absorb multiple shocks and keep prices relatively stable is an indication of structural changes that have taken place in recent years.

Awash in Conflict, and Oil

According to Liam Denning, writing in The Wall Street Journal’s “Heard on the Street” column, the “forward curve” – the price of oil scheduled for delivery months or years in the future, based on the trade in futures contracts – has flipped in recent weeks, meaning that prices for contracts nearer in time are now lower than those further out.  When the curve slopes upward like that, it’s an indication that supplies are plentiful.  “The global oil market no longer looks quite so panicked about Iraq,” commented Denning.

More broadly, the world’s supply of oil has been climbing for years, and continues to do so despite the current crises.  What’s more, the sources of that supply have diversified; the Middle East no longer has as a dominant role in world production as it did 10 or even 5 years ago.

Defying “peak oil” predictions, world crude production increased roughly 50% over the last 30 years, rising from about 50 million barrels a day in 1983 to 76 million in 2012.  Regions that were negligible producers before the turn of the century are now significant oil suppliers: Africa’s production has doubled since 1983, as has South America’s.  Despite the current civil war, oil production in Iraq has soared, growing from about 300,000 barrels a day in 1991 to 3 million in 2012.  Driven by new drilling in the tar sands, Canada has more than doubled its production in the last 20 years.

And then, of course, there’s the United States, which in 2011 became a net exporter of petroleum products for the first time since the post-World War II era.  In  short, the world is awash in petroleum, and barring an all-out war between Putin’s Russia and the West, is likely to remain that way for some time.

 

How Can the United States Pay for Road Upkeep?

— July 17, 2014

More vehicles throng U.S. roads each year, expansion necessary to support them and with less money to fund road repairs.  The root of the problem is that road construction funds are largely derived from taxes on gasoline and diesel fuel, and U.S. consumption of both is declining and will continue to decline.  The increasing fuel economy of new vehicles combined with rising penetrations of alternative fuel vehicles (AFVs) is having a marked impact on U.S. fuel demand.

In the upcoming report Global Fuel Consumption, Navigant Research forecasts that liquid fuels (gasoline, diesel, and biofuels) consumed by U.S. vehicles will decrease from approximately 160 billion gallons in 2014 to around 104 billion gallons in 2035.  Meanwhile, forecasts from the Navigant Research reports Light Duty Vehicles and Medium and Heavy Duty Vehicles indicate that the U.S. vehicle fleet will grow from approximately 250 million to nearly 270 million in 2027 before beginning a slow decline.

More Per Gallon

If the status quo funding mechanism is maintained, annual federal gasoline and diesel tax revenue will decline from current levels of about $30 billion to near $20 billion in 2035.  Meanwhile, over the same time, the fleet of vehicles in use will grow by 10 million.  However, in the near term, the federal Highway Trust Fund and Mass Transit Fund are headed for insolvency before the end of the year.

A number of short-term funding options have been proposed that will likely push a decision on a long-term solution out past the November mid-term elections.  However, one long-term solution emerged last month from two U.S. senators who proposed raising the federal gasoline and diesel tax by $0.06 per gallon over 2 years and then indexing the tax to inflation for following years.  The tax has been stagnant since 1993, at $.184/gallon of gasoline and $.244/gallon of diesel.  Raising it would probably be the easiest long-term solution to implement, since the machinery for tax collection is already in place.

U.S. Federal Gasoline/Diesel Tax Revenue and Vehicles in Use, United States: 2014-2035

(Source: Navigant Research)

What this proposal has in ease of implementation, though, it lacks in political appeal and fairness.  Taxes are a bitter pill for any Republican member to swallow, and pushing through a hike on gasoline and diesel, no matter how small or sensible, is likely to be impossible.  Additionally, as the tax stands now and the proposal will maintain, motorists who drive newer fuel efficient vehicles pay less tax, and those who drive AFVs pay no tax per mile driven, despite that they are using the same roads as owners of less fuel efficient conventional vehicles who bear more of the tax burden.  As the tax was designed to make those who use the road pay for the road, the above scenario is an unintended consequence to the advantage of alternative fuel and fuel efficient vehicle owners.

Dollars Per Mile

In early 2009, Secretary of Transportation Ray LaHood recommended that the federal government should look into a vehicle miles traveled (VMT) tax.  The VMT tax would clock vehicle owners’ mileage and then tax them on a per-mile basis.  While this solution would not be easy to implement, it would be a fair way of collecting taxes in line with the original purpose of federal gasoline and diesel taxes.  It could also be used as a tool to manage traffic along specifically congested corridors.

Despite the suitability of a VMT tax, it is unlikely it will emerge as a legitimate policy option in the near term, due to a lack of political support and a tested method for implementation.  Rather, owners of older conventional vehicles will likely pay more at the pump – or traffic is only going to get worse.

 

Ending the Office Climate Wars

— July 17, 2014

For some commercial building tenants, interacting with the heating, cooling, and lighting of their offices has been a challenge.  There are the dummy thermostats, the inoperable windows, the buildings that are running heating and cooling at the same time, and the hot and cold calls from the corner office.

Many cubicle dwellers use space heaters in summer to keep their overly-cooled selves from shivering, while others need fans to mitigate afternoon sun – even in the winter.

Improved automated buildings controls, networked light sensors, occupancy sensors, and re-commissioning have all helped office workers be more comfortable in their workplaces.  Yet, the overarching problem remains.  This is due in part to the challenge of keeping old and complex system running optimally.  The other challenge gets back to the dummy thermostat: You can’t keep all people happy (or warm, or well-lit) all of the time.  It’s no simple matter to gain an understanding of people’s comfort levels and equip a building to serve those different and diverse needs.

My Chair, My Climate

The University of California Berkeley’s Center for the Built Environment (CBE) has led a number of research efforts that try to determine how comfortable we are when sitting at our  desks.  CBE has developed prototypes of office chairs that incorporate user-controlled fans and thermometers.  These climate-controlled chairs, known as Personal Comfort Systems, aim to take some of the balancing load off the HVAC system.  A one-degree expansion of a building’s deadband (the temperature range where HVAC systems do not have to heat or cool) can result in energy savings reductions of 5% to 15%.

CBE also conducts regular occupant surveys in buildings of all kinds.  One recently found that occupants of LEED-certified buildings feel no more comfortable than those in buildings that lack the LEED plaque.  One interesting observation is that, over time, LEED-occupied people report less and less comfort.  Perhaps there’s a honeymoon period for green buildings when people seem to feel more comfortable.

The Goldilocks Strategy

For some occupants, the proximity to windows is an attractor, while others find the glare and the heat disruptive.  The smart glass company View has created a mobile application that enables users to remotely control their windows’ opacity from their desks.  The app allows a user to schedule tinting depending on personal need – for instance, when it’s time to wake from an afternoon nap.  For more on smart glass, see Navigant Research’s report, Smart Glass.

Meanwhile, a startup called Building Robotics is attempting to solve the collective comfort puzzle using an algorithmic technique.  Its innovative occupant comfort product, called Comfy, asks users to rate their comfort simply: too hot, too cold, or just right.  Comfy then tunes a building’s HVAC system to deliver maximal comfort based on occupant feedback instead of predetermined setpoints.  Using machine-learning algorithms and facility management guides, it can create user-focused HVAC schedules based on what feels good to most users, not what temperature air is being delivered.

Comfy will likely prove to be a disruptive technology, reducing the engineering focus on setpoints and increasing the striving for customer satisfaction (i.e., comfort).  As these types of technologies spread, office workers will be more comfortable; and in serving them, buildings will use less energy.

 

Urban Population Growth Drives the Need for Smart Cities

— July 15, 2014

The latest update from the United Nations on global urbanization trends is a powerful reminder of the most important of all drivers for smart city development: population growth.  World Urbanization Prospects, the 2014 revision reaffirms the core findings of previous studies but also further highlights the dramatic changes that will occur over the next 3 decades.

Today, the world’s urban population is close to 3.9 billion.  It will reach 6.3 billion in 2050, by which time two-thirds of the world’s population will be living in cities.   Nearly 90% of the increase in urban population will occur in Africa and Asia, and three countries alone – China, India, and Nigeria – will account for 37% of the 2.5 billion new urban dwellers.  Although more than half of the world’s urban citizens live in Asia today, the continent is only 48% urbanized and only 40% of Africans live in cities.  By 2050, Africa will be 54% urbanized and Asia will have reached 64%.

Percentage of Population in Urban Areas: 1950-2050

(Source: United Nations)

China and India Focus on Urban Infrastructure

China’s response to these pressures has been well-publicized.  The central government plans to invest up to $1 trillion in urban infrastructure during the 12th Five-Year Plan.  China’s Ministry of Housing and Urban and Rural Development (MOHURD) is currently assessing plans from 193 cities that are competing for up to $70 billion in investment to smart city development programs. In March 2014, the Ministry of Finance released details about the National New-type Urbanization Plan (2014-2020).  The government has stated a desire to develop a more inclusive path to urbanization that will benefit more citizens, improve the quality of life, and reduce the environmental impact of new developments.

India has taken longer than China to embrace urbanization as part of national policy.  As a result, despite the rapid growth of cities, like Mumbai and Delhi, and the global role of Indian technology suppliers, investment in the urban infrastructure has lagged economic development.  After decades of attempts to hold back the tide in favor of the traditional role of rural communities, there is a now a greater focus on the needs of the expanding urban population.

100 New Cities

India’s main smart city initiative to date has been the Delhi Mumbai Industrial Corridor (DMIC).  The development is intended to spur manufacturing and urbanization across a broad swath of northern India, with seven new cities planned and a total investment of $90 billion.  The new Indian government elected in May 2014 has put urban development at the core of its program and declared a target of building 100 new cities by 2022.  It has allocated around $1 billion for the program in its first budget.   According to M. Venkaiah Naidu, the new urban development minister, the planned cities will employ the latest technology and infrastructure, including advanced waste management and transportation systems.

The vast expansion in the urban population and growing expectations among city dwellers for better quality services and infrastructure will drive demand for smart city solutions across Asia Pacific over the next decade.  Navigant Research’s latest Smart Cities report estimates that a total of $63 billion will be invested in smart city technologies in Asia Pacific between 2014 and 2013, more than one-third of a global investment of almost $175 billion.

 

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