Block’s Indicator of Sustainable Growth

by  Ray Block

While commodity prices remain in long term uptrend, the short term cyclical outlook is dramatically down. The speculators are at it again, driving prices down with the same intensity as they were doing, when commodity prices were being pushed up to extreme levels earlier in the year.

The fast money people, including hedge funds are testing out how far down they can go in pushing oil prices lower, given that no one seems to know the floor price. The price charts are in breakdown mode.

But accompanying the speculators, there is an economic downturn gathering pace in an increasing number of countries, as they head into recessionary conditions. The credit crisis engulfing international banks now 13 months old continues to grind on showing no sign of ending over the next 18 months.

The economic blog, RGE Monitor (August 3 2008) said that a group of countries is “navigating towards (or through) recession. The list included the US, Canada, Spain, Ireland, Italy, UK, the small Baltic countries and New Zealand. And moving closer to zero growth are the two heavyweights of the European Union – Germany and France, and Japan is in the same boat.

The only good news is that the commodity price falls should help to puncture the high level of international inflation.

Motor gasoline demand has been in decline since the last quarter 2007, and with consumption still down in the second half of 2008, even demand in 2009 is expected to further shrink. In August 2008, despite a slide in oil prices, US auto sales tanked 15.5 per cent from a year ago, with demand for SUVs and truck pickups are still in the doldrums.

Crude oil prices have tumbled to $108 a barrel since it peaked six weeks ago. The International Energy Agency on August 11 cut its estimate of US oil demand by 6 per cent. With speculators eyeing $100 a barrel as a likely level, it is a long way down from July 2008’s high of $147.27. Oil consumption is contracting not only in the US, but in Europe as well, with sharp falls in Italy and Spain.

Iran is now demanding that the OPEC cartel should shore up prices by cutting production levels, and Saudi Arabia, OPEC’s most powerful member, which had increased its crude production to more than 9.5 million barrels a day in July may well agree to a cut.

The oil price slide triggered off a broader fall in commodity prices such as copper, corn and soybeans, with the Reuters-Jefferies CRB raw materials index, about 18 per cent down from July’s peak. In another sign of commodities in downturn, the Baltic Dry Index which measures the cost of shipping dry bulk commodities fell almost 5 per cent, the lowest level since February 2008.

Of the 21 commodities tracked by Deutsche Bank, only four – live cattle, lumber, sugar and pork bellies showed positive returns so far in the second half of this year. In three of the commodities- live cattle, lumber and sugar, the increase was 10 per cent or less. But in pork bellies, the rise has been quite dramatic, increasing by 30 per cent over the two months to August 2008.

Steel is the latest commodity to show weakness in demand and prices. Arcelor Mittal, the world’s largest steel group announced that it would cut prices in South Africa, as much as 8 per cent across all its steel products, because of lower international prices. The cut will start on October 1 2008. The lower steel outlook has been echoed in China, which collectively accounts for more than 35 per cent of world steel production.

Steel consumption in China, which grew by 16 per cent in the June half 2008 is forecast to increase by only half this level in the December half. Paul Waldmeir in Shanghai for Financial Times (September 3 2008) says that major Chinese industries consuming steel- such as construction, household appliances and car production are all showing signs of weakness. Steel prices have been sliding since July.

In Eastern Europe, the price for hot-rolled steel has fallen about 30 per cent in less than two months. In the US, the Wall Street Journal reported (September 3 2008) that prices of domestic hot-rolled and cold-rolled steel are off about 8 per cent. The three month price of nickel has fallen 23 per cent on the London Metal Exchange (LME), and along with the fall in demand for stainless steel, the substantial rise in stockpiles augurs unfavourably for further price weakness.

Aluminium is at a seven month low on the LME. In food commodities, wheat, soybeans and corn are well off their 2008 highs, with soybeans and corn more than 20 per cent lower than their 2008 highs.

Accompanying the commodity price falls, the commodity driven dollar currencies of Australia, Canada and New Zealand, along with the South African rand are all in retreat, and even the emerging market Asian currencies are also trending down.

by Ray Block

The Future of Coal, an interdisciplinary MIT study released in 2007 was convinced that there would be a continuing large role for coal, which supplies 20 per cent of world energy demand, because of its low costs per BTU.  What then to do with coal’s high carbon content, which with increasing use can only intensify the problems of climate change.

50 per cent of electricity generated in the US comes from coal. China, which is both the world’s largest coal producer and coal consumer relies on coal for 70 per cent of its electricity generation.

China, in its expansion from world’s fourth largest economy to second largest economy by 2020 is currently constructing the equivalent of two 500 megawatt coal-fired power plants per week, bringing with it an additional 6 million tons a year of carbon dioxide emissions.

What to do about it?

Apart from the growth of renewable energy solutions, the many ardent supporters of carbon capture and storage (CCS) say with almost religious zeal that new or retrofitted coal plants in the generation of electricity can be deployed with very high efficiency and significant reductions in emissions.

Understandably, US, China and Australia, the latter- the world’s largest coal exporter, with coal the No1 export commodity, they all have a vested interest in making CCS a reality.

The US initiative in CCS was to be (and still maybe) the FutureGen initiative, which is proposing to constructing the first of its kind power plant to produce electricity and hydrogen with near zero emissions. The aim was to sequester, that is store underground, CO2 emissions at the rate of one million metric tons per year for four years. That was the recommendation of the MIT future of coal study.

The preferred coal combustion and conversion technology to be used is integrated gasification combined cycle (IGCC) for electricity production with CO2 capture, because it is estimated to have lower costs than pulverized coal with capture.

If adequate finance becomes available, the aim is for the plant to be built near Mattoon Illinois, which would serve as the prototype for the next generation of coal fired power plants in the US and around the world.

The FutureGen Alliance was to be a partnership of US Department of Energy, which was to make available a government contribution of $1 billion out of a $1.8 billion funding package, with 13 power utilities and other private companies. But the Bush Administration pulled out early in 2008, on the grounds of having so much public funds tied up in one initiative. FutureGen is now hoping for a more encouraging response from the new administration in 2009.

In Australia, the CO2 Cooperative Research Centre for Greenhouse Gas Technologies with Australian government and private company support is solely employed on CCS research and ultimate commercialization. The $36 million Otway Basin Pilot Project is one of 19 CCS projects endorsed by the Carbon Sequestration Leadership Forum (CSLF), an international climate change initiative focusing on the development of technologies for the cost effective capture and storage of CO2.

The CO2 CRC’s project partners include the US Department of Energy, the US Lawrence Berkeley National Laboratory, CSIRO – Australia’s largest research organisation, Geoscience Australia, five Australian universities,  Alberta Research Council in Canada, Foundation for Research Science and Technology (NZ), other public organizations and 19 resource companies. The Otway Basin in south-west Victoria is considered an excellent test site, because it has a large source of natural CO2 and an abundance of now depleted gas fields containing rock formations, with a geologic history of storage permanence. CO2 will be produced from an existing well, then compressed to a supercritical state to more efficiently move and store at a final location.

After transporting and injecting the CO2, comprehensive monitoring and verification takes place to demonstrate that long term storage is viable. The CO2 is compressed to a fluid-like state, piped, injected and stored two kilometres underground in a depleted natural gas field, where the rocks had previously held natural gas for possibly millions of years. One of the most important features of the project is the demonstration of new geosequestration subsurface monitoring techniques.

In July 2008, the project managers announced the first successful storage of 10,000 metric tons 2km underground. Soil, groundwater and atmospheric monitoring complement the subsurface activities. The use of a wide variety of monitoring techniques gives a high level of confidence that the compressed liquid CO2 is stored safely and securely.

The next 10,000 metric tons is now being similarly treated. But this is a long way from storing one million tons, and proving beyond any doubt about the safety and durability of the storing techniques.

Lessons learned from the Otway project can be applied elsewhere in Australia, the US, and worldwide. There are at least two other international CO2 storage demonstrations, including CO2SINK near Berlin, Germany, and the commercial scale CO2 storage operations at In Salah, Algeria.

In a presentation – Australia’s CCS technology roadmap to the CSLF 3rd Capacity Building Workshop held in Saudi Arabia January 2008, Peter Cook, chief executive, CO2 CRC for GHG technologies and Dennis Van Puyvelde outlined the timelines for CCS in terms of commercialization.

The draft timelines would see the period through to 2010 taken up in selecting storage sites, storage demonstration and capture research, which is in line with the Otway Pilot project, and hopefully projects in Germany and Algeria. From 2010 to 2016, the time spent would be in capture and storage demonstration. This would lead to capture and storage deployment, with accelerating commercial deployment over the period 2016 through to 2025.

Is this the panacea? CCS will become a leading resource to a large scale reduction of carbon emissions. But this is going to take time. By 2020, there will be a few isolated commercial scale plants.

One of these will be ZeroGen, the Qeensland Government’s coal demonstration research and development unit, which is planning the world’s most advanced coal power demonstration project at Stanwell, combining an advanced IGCC power plant with carbon capture and storage. Shell is involved in the venture. The aim is to have a 400 MW commercial power plant in operation by 2017.

But substantial progress to retrofitting coal fired power stations, let alone constructing new power plants on a large scale will take many years. It is going to take the whole suite of renewable energy technologies to be employed in the fight to cut carbon emissions.

Global warming, carbon abatement, low carbon economy, renewable energy, carbon capture and storage