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Energy Timeline

By Robert S. Preston
Portfolio Manager PIA Program
Merrill Lynch
Edited by Cynthia Coulson

In the beginning there was energy and, over 17 billion years, this energy became less volatile …according to the first two laws of thermodynamics. Photons settled, producing planets, trees and you. Today we need to make some choices, not to change the energy timeline, but to survive and thrive. One measured observation since the 1800s has been the reduced intensity of carbon in our energy sources. This brief timeline of energy evolution suggests we will use energy with less carbon.

The objective of this article is to focus attention on profits in energy management; where carbon is a cost. Energy sources are mostly comprised of carbon and hydrogen. For example, wood has 10 molecules of carbon for every 1 molecule of hydrogen. And coal has only 2 molecules of carbon to every molecule of hydrogen. So, from a decarbonization viewpoint, coal is more efficient to burn than wood.

Profits are the big driver of less carbon. Burning coal produces only 20% of the carbon that would be produced by burning wood. Oil and natural gas are respectfully 4 and 8 times more carbon efficient than coal. Biofuels, like ethanol and biodiesel, could be considered zero emitters of carbon on yearly basis, since they release what they absorb. Economics drove energy decarbonization…not politics or public policy. There are financial benefits in the removal of carbon from our energy sources. Even though decarbonization has been occurring for over 150 years, we want to know what’s most likely in our lifetime. Decarbonization has occurred not due to environmental decree, moral guidance or governmental policy but because of economic advantages of reduced energy density and spatial considerations .

Spatial density consideration is one primary reason energy systems have evolved from the growing demands of the consuming end user. Coal is easier to store than cords of wood. Oil, by truck, is easier than coal by rail. Gas can be shipped by pipe. A wire is smaller than a pipe. Density has been one primary driver of the fuels we use.

Our primary energy sources have gone from wood, to coal, to oil, to gas over the last 150 years. At each step two related changes occurred. The output per energy source increased and the carbon content per BTU dropped. If we extrapolate this period into a straight line it suggests zero carbon by 2100…but will we ever get to a point where all BTUs are carbonless…a hydrogen economy? Since 1860 the reduction in the carbon intensity of the world economy, historically about 1.3% per year, has been overwhelmed by growth in economic output of roughly 3% per year. The difference, 1.7%, parallels the annual increase in CO2 emissions, implying another doubling before 2030. So even if we continue on the decarbonization track we could have excessive CO2 emissions which may result in climatic changes, such as snow melting off Mt Kilimanjaro.

The good news is we are getting more GDP per BTU cost. We are getting more out of any given energy source. We will continue to improve the efficiency of energy which is divided into two energy economies…one for stationary applications where weight does not matter as much as the second energy economy, the transportation sector. Now liquid hydrocarbons deliver instantly accessible energy with less weight than any other fuel. Transportability is where oil is a must whereas other cheaper non-oil fuels dominate the stationary demand. We have vast amounts of coal and uranium. We have and will continue to evolve a highly integrated fuel system that uses the right form of energy for the most appropriate application. For example, someone once said that using natural gas to produce electricity is like taking a shower in Evian water. Look for more natural gas and biofuels as transportation fuels and not for stationary applications or for electricity. We can use clean coal, nuclear, wind or solar for electricity. Biofuels can also begin to power heavy trucks, delivery vehicles and buses which currently burn oil. Natural gas should come off the grid in the form of base line electricity and not even compete with grid electricity for commercial and residential heating.

Now if we depend on clean “Advanced” coal for grid electricity then we might expect this decarbonization line to level out. In this case the investment implications might be in coal gasification, CO2 mitigation, sequestration of carbon or planting trees.

On the other hand if natural gas and biofuels begin to replace oil in the transportation sector and we expect renewable resources, or atomic resources, to take up the slack on the grid then we may see an acceleration of the decarbonization curve. In this case, we may conclude the investment implications may come from other areas in energy such as renewable resources (biomass, biofuels, hydro currents, wind, solar), methane, uranium and hydrogen.

We should increase our production of cellulose, sugar or corn ethanol and soybean, rapeseed and sunflower biodiesel ten-fold. Combined with improved fleet mileage of 40 mpg (lower than the EU at 42 mpg or Japan at 47 mpg) and a modest yield improvement in switchgrass to around 10tons/acre, we could fuel half the U.S. passenger fleet with cellulosic ethanol on 30 million acres of land. We could construct wind turbines (5KW per acre) over this land to increase our current wind capacity of 10,000MW, 20 times to 200,000MW or 1/5th of total US demand. Further down the road, we could be splitting or fusing hydrogen for energy. Now ethanol is the world’s main bio-fuel (30 million tons sold in 2005 versus 4 million for biodiesel). Europe has the largest concentration of biodiesel plants world wide with 80% of global bio-diesel capacity. The U.S. needs to make these choices now.

The U.S. energy landscape will develop where the investment opportunities are available. The investment implications are clearly marked. Energy sources have reduced their carbon. How we continue this energy timeline over the next business cycle is our choice to make. Our attention on profits by reducing the carbon content of our energy sources should continue to be a good strategy.

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