One Big Reason Why We Have an Energy Crisis
July 30th, 2008Posted by: Roger Pielke, Jr.
Some hard-to-believe numbers reported in the Financial Times yesterday on the investments by major energy companies in R&D (emphasis added):
The west’s biggest oil companies raised their research and development spending by an average of 16 per cent last year but still lag behind many other industries, a survey by the Financial Times has found.
There is also a wide variation in R&D budgets, both in absolute terms and as a proportion of revenues.
Royal Dutch Shell, already the top spender in 2006, raised its budget the fastest with a 36 per cent increase to $1.2bn for 2007. Last year it spent more than twice as much as BP on R&D.
ExxonMobil, the world’s biggest oil company, has a market capitalisation almost twice that of Shell, but spent only two-thirds the amount on R&D, at $814m.
Relative to revenues, oil companies’ R&D expenditures are strikingly low: about 0.3 per cent last year for Shell, and 0.2 per cent for Exxon. That compares with typical proportions of 15 per cent for technology and pharmaceuticals companies, and 4-5 per cent for motor companies.
In other words, compared to revenues technology and pharmaceutical companies spend 50 to 75 times the amount on research and development than Shell or Exxon. Is it any wonder that your desktop computer would have been considered a supercomputer a few decades ago, whereas you are still filling up your car with the same stuff that your great-grandparents did?
July 29th, 2008 at 11:56 pm
Roger, what “energy crisis”? The world is still swimming in fossil fuels which, excluding all of their environmental costs, are much cheaper than other fuels, especially for fuelling transportation. Maybe that’s why we’re still using them in our cars, trucks, airplanes, ships and many other things that go.
Shell and Exxon aren’t delivering high-tech new products; they’re competing to deliver most cheaply commodities that fuel our transportation networks. Of course they have invested in R&D that allows them to drill and extract in ever more challenging environments and to produce and transport more efficiently greater volumes over greater distances.
We will see greater investment in nuclear, hydrogen and other energy currencies and production/transmission/storage once we decide to tax fossil fuels and to permit sequestration. Exxon and others are ready to invest in these areas, but the market isn’t exactly sending them strong signals to do so.
July 30th, 2008 at 2:28 am
No it isn’t …’one big reason why we have an energy crisis.’ Applying the metric of percent of revenues to the oil and gas industry is a silly old canard. One problem with this practice is that revenues is a somewhat meaningless figure; they include a large fraction paid in excise taxes and duties to various governments (the industry is the world’s largest tax collector). Another problem is that this metric does not recognize economies of scale inherent in the industry; a company is likely to use a new seismic technique everywhere in the world regardless of revenues. Another problem is that so much of the revenue figures are driven by basic commodity prices which have nothing to do with technology. Yet another is that in most industries, the R&D figure is largely ‘D’ — that is, Development — that has nothing to do with new technology. GM does a huge amount of R&D, but most of it is product development for new models; they do very little research. The oil and gas industry actually does mostly ‘R’ — that is, Research — with its R&D dollar, and this is what leads to new technology.
The last time I looked, ExxonMobil files more U.S. patents than Microsoft. Maybe the Times could do a bit on how that results in Microsoft’s operating systems being so unstable.
It’s hard to make a case that an industry that has researched and deployed 4-dimensional seismic exploration, chemically enhanced oil recovery, directional drilling, high strength pipeline steel,and new reforming and desulphurization catalysts has not done enough to generate new technology to enable finding, refining and delivering the energy product when governments around the world restrict access or manipulate production while collecting taxes from the publicly owned companies. Yet another case of ignorant scapegoat journalism.
July 30th, 2008 at 11:43 am
What were the E&P (exploration and production) expenses for pharmaceutical and technology companies? The EIA says that major energy producers increased their E&P from $68 billion in 2005 to $203 billion in 2006. If pharmaceutical and technology companies did the same, would we have cheaper medicines and even more affordable computers? Or are we mixing apples and oranges here?
July 30th, 2008 at 1:49 pm
I often hear this low R&D investment argument, but why would the oil companies be responsible for this? Why would their management be positioned to do this? It’s the shareholders who should know better, and put all dividends from oil directly into alternative energy funds… Because oil won’t be around for long anymore.
I really don’t see why good oil drillers are to blame. I think they’re pretty efficient in doing that. We want oil (and gasoline), they give it to us.
July 30th, 2008 at 7:22 pm
“…when governments around the world restrict access or manipulate production while collecting taxes from the publicly owned companies.”
Yes, the actions of governments that own oil companies significantly affects the cost of world oil. According to Ron Bailey, 77 percent of proven reserves are in deposits owned by government-owned production companies (e.g. Saudi Aramco).
And I’m virtually certain that those companies have the reserves with the lowest production costs (e.g. Saudi Aramco’s Ghawar Field).
So government-owned companies are substantially affecting the price of oil in the world.
Mark
P.S. Note that this does not include the government subsidies on the consumption side that also drive the price higher, by artificially inflating demand.
July 31st, 2008 at 6:08 pm
It is a mistake to view all industries by the same criteria. I worked in research and exploration at a major oil company until I was laid off during the cost-cutting and mergers that characterized the late 90’s era of low prices. The oil industry is capital intensive in a way very few industries are. While I think that the R&D expenditures by major oil companies are low, they can never be in the same range (as a percentage of revenues/profits/you-name-it) as pharmaceutical companies. The exploration and production part of the business requires billions of capital investment every year. Thus, a company like Exxon can spend $600 million on R&D (a figure a year or two old) and although this is a sizeable dollar amount, it appears as a low percentage of revenue.
As other posters have mentioned, oil is basically a commodity business. The difference between name brand gasoline and generic at the pump is about 1%. Pharmaceutical companies have patented products and charge much more than generic manufacturers even when the product goes off patent.
Oil companies have therefore invested greatly in cutting costs, and have been pretty successful. Some of this involves R&D to apply technology to cut costs including reducing employees. Consider that Exxon currently has 11 times the revenues of Merck (and in fact will probably have higher profts this year than Merck’s revenue), but has only about 33% more employees (excluding service stations).
In the long run, this may well be a problem because academic geoscience and engineeering related to petroleum has scaled down too (in US and Europe), so finding employees to scale up efforts now has proved difficult. Another potential long run problem is that the oil industry has, at least in geoscience, been developing new ways to apply technology developed in other fields (e.g., much computer visualization tools were adapted from NASA or even biomedical fields). This may crimp the ability to be creative in thinking through the most effective solutions to problems without being constrained by technology developed for a completely different purpose.
July 31st, 2008 at 6:08 pm
It is a mistake to view all industries by the same criteria. I worked in research and exploration at a major oil company until I was laid off during the cost-cutting and mergers that characterized the late 90’s era of low prices. The oil industry is capital intensive in a way very few industries are. While I think that the R&D expenditures by major oil companies are low, they can never be in the same range (as a percentage of revenues/profits/you-name-it) as pharmaceutical companies. The exploration and production part of the business requires billions of capital investment every year. Thus, a company like Exxon can spend $600 million on R&D (a figure a year or two old) and although this is a sizeable dollar amount, it appears as a low percentage of revenue.
As other posters have mentioned, oil is basically a commodity business. The difference between name brand gasoline and generic at the pump is about 1%. Pharmaceutical companies have patented products and charge much more than generic manufacturers even when the product goes off patent.
Oil companies have therefore invested greatly in cutting costs, and have been pretty successful. Some of this involves R&D to apply technology to cut costs including reducing employees. Consider that Exxon currently has 11 times the revenues of Merck (and in fact will probably have higher profts this year than Merck’s revenue), but has only about 33% more employees (excluding service stations).
In the long run, this may well be a problem because academic geoscience and engineeering related to petroleum has scaled down too (in US and Europe), so finding employees to scale up efforts now has proved difficult. Another potential long run problem is that the oil industry has, at least in geoscience, been developing new ways to apply technology developed in other fields (e.g., much computer visualization tools were adapted from NASA or even biomedical fields). This may crimp the ability to be creative in thinking through the most effective solutions to problems without being constrained by technology developed for a completely different purpose.
July 31st, 2008 at 7:06 pm
We would be much better off if the government had developed improved nuclear technology. Its not fair to expect the oil companies to do this.
For those of you concerned about nuclear safety and waste products there is a much better alternative. Thorium based (rather than uranium based) nuclear power. This technology was demonstrate in the 50’s and 60’s but was abandoned because it was much harder to produce weapons grade material (compared to uranium). The military considerations favored the uranium fuel cycle.
More specifically LFTR (liquid fluoride thorium reactors) compared to uranium reactors burn fuel 100x more efficiently without reprocessing, result in ~100x less waste and are inherently safer and should cost less to build.
In addition, since LFTR is a high temp low pressure process it can use water or air cooling. Thus Ut/Nv etc, where water is scarce, could replace it’s coal fired plants with low cost, clean thorium power plants. Much more cost effective and reliable than the wind and solar plants that California is building. (fyi, California’s electricity currently costs 2x Utah’s and they are on a path to keep it that way.)
Uranium LWR : Thorium LFTR
Fuel Reserves (relative) __________________ 1 : 100 (1000s yrs)
Fuel Mining Waste Volume (relative) ____ 1000 : 1
Fuel Burning Efficiency _______________ ~1% : >95%
Radioactive Waste Volume (relative) ______ 40 : 1
Radioactive Waste Isolation Period __10000yrs : 80% 10yrs, 20% 300yrs
Plant Cost (relative) _____________________ 1 : <1
Plant Thermal Efficiency _____________ ~33% : ~50%
Cooling Requirements _______________ Water : Water or Air
Plant Safety _______________________ Good : Very Good
Weapons Grade Material Production ____ Yes : No(very hard)
Burn Existing Nuclear Waste ___________ No : Yes
Development Status _______ Commercial Now : Demonstrated
for more info see
http://www.energyfromthorium.com/
http://www.energyfromthorium.com/ppt/thoriumVsUranium.ppt