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Financial crisis could slow energy research

A panel of experts at an MIT Energy Initiative research conference Thursday tried to assess the likely impact of the ongoing financial crisis on energy issues, and found no simple answers as to what can be expected. But they suggested that falling oil prices and the uncertainties in financial markets could slow the development of new energy technologies and supplies.

David Hobbs, vice president of Cambridge Energy Research Associates, said that the investment cycle for energy development is on such a long time scale that there is a significant lag in responding to changing circumstances. Right now there are major new sources of supply about to come online in oil, natural gas and coal, just at a time when demand is falling, along with prices, because of the troubled economic situation.

For example, an armada of new liquefied natural gas tankers is about to come into service, bringing to market a huge quantity of gas for which "the demand doesn't exist," he said, largely because high prices have led to an influx of new alternative sources. And there is a similar disparity between demand and new sources of supply for coal, he said.

People had predicted that coal would never rise above a price of $30 a ton, but it is now $200 or more. As a result, instead of rising, demand this year has been flat, and is expected to be flat next year as well. Meanwhile, forecasts of demand for oil have already been knocked down by 10 million barrels a day, he said, and even that may be an overestimate.

It's a difficult time for any company to invest in developing new energy supplies, because of these long lead times. How can anyone predict "what the economy is going to require in five years?" As a result, he said, "we could see a hiatus in investing in new supplies." But that could lead to a new cycle. "Underinvestment and low prices lead to another spike in prices," he said.

Gregory McRae, a professor of chemical engineering at MIT, said that one of the more subtle impacts of the economic crisis is on the way energy companies themselves are valued. Even the definition of such things as "proven reserves" of oil, coal or natural gas can be affected. Proven reserves mean those that "under present economic conditions are recoverable at a reasonable price." But if oil prices continue to plummet, that changes the equation significantly.

Falling oil prices have other effects as well, for example as to "whether the alternatives become viable," McRae said. "A lot of alternatives don't look very attractive" when oil prices fall below about $80 a barrel, he said, and they are currently below $60.

But even though the economy is shaky right now, McRae said, at the same time "there are enormous sets of opportunity" for profitable ventures in the energy sector. Businesses would do well to "focus on energy costs" and ways of reducing them. Many of the models they currently use to analyze their energy use patterns, he said, are quite old and need to be updated.

The genesis of the crisis, said John Reed, retired chairman of Citigroup, had nothing to do with the "real economy," but rather was confined to the narrower world of the financial sector. "This is a situation where the financial sector has experienced a shock that has spilled over into the real economy," he said. "There was nothing in the real economy that had to do with this."

But, Reed said, while people tend to see the money being spent on a federal "bailout" of financial institutions as being money lost, in fact "the government is going to make a lot of money on this," he said, because it was "able to pick up assets on good terms."

A version of this article appeared in MIT Tech Talk on November 19, 2008 (download PDF).

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