Blessed by the Potato

Netbug sends along this opinion piece on electric cars after discussing it with his family, saying “I’m sure the math is sound, but I think he’s missing the point… Can you refute the article articulately or am I way off base?”

I’ve only read it twice, but I’m sure he’s missing the point. Moreover, I’m not sure the math is sound. He uses a particularly bizarre way of figuring the cost/savings of EVs, and even then gets his figures wrong.

Let’s start with his assumptions about fuel economy for gas cars. Note that he does not spell them out. To maintain consistency, through most of this I’ll be using US units, figures, and data sources.

A CAFE compliant new car will offer an average fuel economy of 33.3 mpg while a CAFE compliant new light truck will offer an average fuel economy of 25.4 mpg.

Well, right off the bat, that’s untrue. CAFE is not a measure of any particular car, it’s a fleet average, and it includes the contribution of electric vehicles and hybrids (plus some voodoo about ethanol credits). Moreover, it uses a modified scale/test procedure: 33 MPG for CAFE terms is more like 25 MPG on the current EPA test, and even lower real-world. Look up the EPA ratings. I picked a Ford Focus (compact car): it’s at 28 MPG combined. Even compact cars aren’t at the numbers he’s using. According to Natural Resources Canada, the average fuel consumption of the current light vehicle fleet is just under 11 L/100km, or 21.8 MPG.

Now, there is room to quibble there: that’s for a range of cars from new to 10+ years old, whereas new cars will be slightly better. Still, your comparison car is not going to be getting 30 MPG, and especially not when you consider that you should be comparing to the city mileage since EVs are for urban settings.

At 30 mpg, the owner of a new light duty vehicle will consume about 420 gallons of gas per year

He didn’t go through his math, but let’s go backwards: 420 gallons * 30 MPG = 12600 miles/year. That’s probably a reasonable figure to use (I’ve seen 15k mi as more common, but that may just be a case of rounding to a prettier number; not sure what the figure is for those with daily driving commutes). At 22 MPG, that’s more like 572 gallons.

Then he goes to another paper, and somehow gets that electrification doubles the cost of the car (from $19k to $39k). That again is a pretty suspect analysis. For instance, a general rule-of-thumb is that the engine & transmission are 20-40% of the value of a car, yet that paper somehow found that the engine & transmission were just 13% of the cost of a gas car. Moreover, we can buy EVs on the market today that do not cost that much — the Nissan Leaf is “only” $35k (USD), the Prius plug-in has a gas engine and a plug-in battery, is larger and nicer than a $19k comparable car, and is only $32k (USD). Indeed, from looking at US manufacturer’s websites, a compact car with automatic transmission is more like $21k than $19k, and that’s still not adjusting for non-driving features.

The ultimate obscenity is that a conversion from gasoline drive to electric drive will not reduce the total amount of energy used in transportation.

This statement is unsupported by the author, and with good reason: it is patently false. Half the reason to go to electrification or hybridization is the efficiency gain: electric motors are just simply more efficient at turning chemical potential energy into kinetic energy than internal combustion engines. Plus, you can shift the source of that energy from oil to natural gas, hydro, or other renewables.

So, if we re-do his analysis with more realistic numbers (all US figures), we have that the incremental cost for an EV ($21k to $35k) is $14k. That’s saving 572 gallons of gas/year, or 14.1 bbl/yr, or 212 bbl/car lifetime. That works out to a cost of $66/bbl. Which is less than the current cost of oil. Now, this is not the method I would have chosen to make a comparison, but even using his analysis the point he’s reaching for isn’t made.

He also forgot a lot of factors that make EVs a better choice.

Direct financial ones like: Less mainenance cost (no oil changes, spark plugs, timing belts, water pumps, brake pads, etc., etc., etc.), lower fueling costs (oil is an expensive and volatile commodity).

Plus, environmental factors like: Less total pollution (even on a 100% coal power source, an EV is arguably cleaner than a conventional car, and most places are only a fraction coal-powered); pollution shifting (no more smog in city centres!); self-reliance (you can make your own electricity if you’re a doomer, whereas refining your own gas is hard; plus, the cars are quiet and good for sneaking up on zombies). And that efficiency gain.

So right now, going with an EV is close to break-even (though maybe just one the far side). You get all the nice stuff on top of that, but it’s also new, unfamiliar technology. That’s why the subsidies come in: to help make it not only better, but cheaper, to get the ball rolling.

I’m sure the author was cautious in his conclusion, pointing out that his back-of-the-envelope paper, pencil, and calculator analysis could have some holes, that it’s a bit of a strange approach to take (cost per barrel of oil offset?) and that EVs might in fact make some sense…

Electric drive proponents are selling a house of cards based on fundamentally flawed assumptions and glittering generalities that have nothing to do with real world economics. Their elegant theories and justifications cannot withstand paper, pencil and a four function calculator. Shiny new electric vehicles from General Motors (GM), Ford (F), Nissan (NSANF.PK), Toyota ™, Tesla Motors (TSLA) and a host of privately held wannabe’s like Fisker Motors and Koda are doomed to catastrophic failure. Their component suppliers will fare no better.

Oh wow, he really got the whole foot in there, didn’t he.

Now, as usual, I’m not saying that EVs are going to suddenly take the market by storm: there’s a lot of range anxiety to conquer. They’re not suitable for everyone. But no car is. There are about 1.5M families in the GTA alone; of those, about half have 2 or more cars. I’d estimate that something like 15% of those have (or could easily have) one car that is largely used just for commuting within the GTA — in other words, there’s potentially a market for about 100k EVs in the GTA alone. It’s a niche, but a respectably large one; one that’s worth developing. The economic argument may not be a slam-dunk on its own, but it’s a far cry from a house of cards doomed to catastrophic failure.

I recently was pointed to Canadian Doomer’s site, where I saw this comment:

“Ontario Hydro is paying $0.80/kwh to those who sell them electricity on the MicroFIT program. But consumers are paying $0.05 to $0.10/kwh. This makes absolutely no sense, unless Ontario Hydro knows that they will soon be charging consumers MORE than $0.80/kwh. Look at your hydro bill and imagine it multiplied by 8.”

Well, no, it’s the price they have to pay to get solar off the ground. Very few people wanted to pay ~8x the price of grid power to buy their own solar panels, so the companies weren’t making panels, so the panels were expensive, etc… By offering enough money that PV would be profitable, it bootstrapped the industry, and broke the vicious cycle. The industry has already brought the price down by huge amounts (panels now cost half or a third of the price in just 3 years), and the government is going to cut microFIT any day now (they’ve already started dragging their feet with applications).

That lead CD to ask the follow-up question:

“Why does Ontario Hydro care so much about getting solar off the ground when they’re not making money on it?”

The short answer is that it’s because it’s the right thing to do.

The longer answer is to first up realize that Ontario Hydro is not an independent company: this isn’t Capital Power or Emera or Fortis offering money to install panels, it’s the government. And sometimes the government subsidizes things for social rather than strictly economic reasons.

Consider other breaks offered recently for green technologies:

The federal government was offering up to $2000 to buy a hybrid car, until just a year or two later, they changed their minds and took that incentive away. Many provincial governments (including Ontario) also offered rebates of several thousand dollars ($2k in Ontario) for hybrid cars (and similarly, no PST on bicycles). Those rebates by our government as well as others around the world — notably the US, which had various tax credits as well as other incentives to buy hybrids like free parking and HOV lane passes — were very helpful in getting this fuel-efficient technology off the ground. Hybrids are now reasonably mainstream, something like 4% of the overall passenger car market, and still growing quickly. However back 10 years ago, a hybrid was a very difficult sell: they were more expensive than a traditional car, there was a lot of uncertainty over how reliable they would end up being (a sentiment that still persists, even with over a decade of experience), how much they would cost to maintain… and all that was on the back of gas prices that were still measured in cents per litre. So those subsidies helped level the playing field until the cost of the cars and the price of gas brought us to where we are today, where $1.20/L looks cheap, and it seems stupid to buy anything other than a Prius. And while I tend to focus on how awesomely quiet my car is and the gas savings, the fact is that the gas savings is in part a side-effect of the hybrid’s original goal, which was to reduce pollution — an important social goal in an urban country.

So back to the solar subsidy: by guaranteeing a certain return on the panels, people became interested in purchasing them. The government could stand up and say that, for at least the next few years, there would be a certain level of demand for panels, which allowed panel manufacturers to go to their investors and raise money to build factories and invest in R&D to make more efficient and cheaper panel technologies, and basically got the whole ball rolling. Ontario and Germany really lead that area*, and factories really started churning out panels to meet the new demand, and to build capacity in the hopes that a certain superpower with a lot of desert would also decide to start subsidizing solar energy in the future (let’s call it “Nerizonda”). In just a few years we’ve gone from a world where you had to be an eco-nerd and know someone at NASA just to get a panel, to one where salesmen call up on a weekly basis to let you know how much the panels are on sale this week. Indeed, the build-up has been so rapid that now we’re facing a glut (exacerbated by Germany and other nations scaling back their subsidies for new projects now that they can declare victory), and panels can in some cases be had for below cost.

Now, the solar subsidy could have come in many forms: the government could have directly purchased the panels themselves, and installed them in parks or on government buildings, or even installed government-owned panels on private homes. They could have subsidized the purchase price directly. Instead, they chose this strange scheme that involved all the overhead of metering the panels, and making regular payments (or deducting from the power bill) for 20 years running. And that decision comes down to politics: the budget looks cleaner with a long-standing trickle of money for a program than it does with a big buy over just a few years, even if the total cost is the same. Furthermore, to give Dalton a little bit of credit for being political operators, there was going to be a big delay between starting the MicroFIT program and when the bulk of the payments would start rolling out the door, and in-between was another election. So for the 2011 election, hardly any microFIT payments would have shown up on the budget, and by the ~2016 elections, the program will have ended; off the radar either way.

It’s also important to note that there were several levels to the FIT program: for large commercial solar farms, the rate was less than half what an individual could get under the MicroFIT program. So from a “this is how much OPG expects power to cost in the future” point of view, that might be the upper-end figure to use. Why pay more for smaller systems? Several good reasons:

• In part as an experiment. People have been talking about distributed generation for years, and the government wanted some data on what that would actually look like. Which meant that you had to find some way to get people to put some kind of generator in their homes, and test out how well the load-balancing and monitoring systems worked. So getting solar out there in particular was a bit of a bonus on that front.
• In part to raise awareness. You can give money to a big corporation like Samsung to build a giant solar farm in the middle of nowhere, and accomplish your goal of bootstrapping the industry. But if you can get it on people’s homes they’ll see it every day, they’ll talk about it with their neighbours, and it’s also nice to pay your own citizens rather than a faceless corporation. From a political point of view, that also helps make it an issue you can focus on in an election if you want to.
• In part for long-term efficiency synergies. A giant centralized solar farm is a great way to quickly get solar power on the grid if that’s your only goal. But one of the beautiful things about solar is that its nicely correlated with peak air conditioner demand: just as the sun is beating on your house is also when your panels are at their maximum output. That benefit could potentially go away if Toronto is getting sun while the solar farm on Lake Huron is experiencing clouds. Though you need more inverters and monitors, you don’t need any transmission capacity to be built or maintained, since the generation is right at the site of demand. And on top of all that, you get the synergies that come with rooftop solar: the panel itself helps to shade a house and keeps it cooler than a typical asphalt shingle, further reducing peak power demand.
• In part for short-term inefficiencies. The fastest, most efficient way to get X number of panels installed and tied into the power grid is to go with a giant centralized solar farm: make braces and connect panels in assembly-line fashion in a consistent, controlled environment. You can even bulldoze any hills if you can’t find a naturally flat spot. But when you’re introducing a program in the middle of a recession, maybe you don’t necessarily want to be as efficient as possible, maybe you also want a little bit of economic stimulus for good measure: help create jobs for guys to crawl around roofs and take measurements and figure out where the bolts should go.

As for that central question of why? Well, because it’s a green, emission-free, renewable energy source. It has some side-benefits (correlated with air conditioner demand, cooling synergies), but also some negatives (inconsistent, extremely difficult to plan power loads with, expensive even after the cost reductions from recent investments). It has a good image, and getting to some single-digit percent of our power mix being wind and solar is something we can do a little chest-thumping over (never underestimate the importance of chest-thumping, it’s a trillion-dollar industry). Plus, innovations that are created for stationary solar may translate to other applications (space systems, remote self-sustainability).

* - I’m going from memory here folks, apologies if I forgot any other pioneers.

A new frozen yogurt place opened up called Kiwi Kraze, and they have the guess the weight of your sundae and get it for free deal. So I did, and I did :) That may have been related to the fact that despite officially moving the goalposts back from the “don’t gain” to “lose weight” objective now that vacation is over, I gained weight this week. Grrr. It may be because I had a number of real Cokes enter my inventory (free > calories).

Then there were a tonne of fireflies out tonight on my walk home. It’s truly magical once you realize you’re not having a stroke.

I’m starting to turn negative on my BB. I like the keyboard, and between email, calendar syncing, and the omnipresence of the hivemind, I’m finding a smartphone to be just ever so handy these days, but I think my next one might be a droid. I like BBM, and I want to be patriotic, but I really don’t know anyone who said “hey, I really miss the days of trying to carefully manage system memory in DOS. I wish there was a phone that let me relive that experience.” I’ve got 4 GB free for photos and music, I don’t know why my cache of 160-char SMSes and apps has to stay in the shallow end… Recently, my ringer just stopped working. The little message light would still flash, and most of the time the vibration would still go off to alert me to a call or message, but no audio. From searching online, this is a frightfully common problem with the BB, and there are a host of zany solutions, including turning it off and on, pulling the battery out (which is a different off and on), and yes, trying to clear out the pathetic amount of “application memory” available. Some combination of that and doing this to the part near the speaker ended up fixing it.

Random hilarious conversation snippets:

“What are wild Popples called? Armadillos?” I’m eternally amazed at how the mind works sometimes. Like when trying to think of an animal that balls itself up at a sign of danger, one goes first to Popples, and from there to their wild equivalent, armadillos (though I would have also thought Popples had a strong hedgehog influence). Actually, I’m amazed anyone remembers Popples at all.

Links:

A surprisingly good read on whale poop. (HT: Barry Ritholtz)

John Hempton describes the problem auditors of Chinese RTO frauds faced, that may let them off the hook: in some cases, the banks were in on it. If the banks have lost credibility, what are the implications of that?!

An excellent real-world application of Mathematica. Stupid brownie nuts. “I hate nuts in Brownies.” “Who does that?” “I don’t know, old people?”

The Globe has another article lamenting the limitations of electric cars, this time moaning that the cars can’t handle the all-day all-out testing of an automotive press junket. The author seems to be a bit misinformed, or got his tenses wrong: “pure electric vehicles will be glorified golf carts, useful for short distances, in good weather conditions.” Depending on what you mean by short distances, that’s true: they’re good for commuting within the city, but I wouldn’t count on one for trips to the cottage. But most families in urban areas have two cars (and pretty much all the ones with cottages do), so there is a market for an electric commuter as a 2nd vehicle. But I’m not saying anything new for you guys. Most outrageous was the closer: “The infrastructure necessary for the next generation of volume-produced passenger vehicles will determine their success. […] My money is on fuel cells and hydrogen stations.” I’ll take that bet.

Yet another bank housing analyst turns bearish on Canadian real estate.

And Canadian Business has a bearish article out as well.

A 3D printer using… chocolate. It makes so much sense: it’s a self-binding polymer-type product, so it can form complex 3D shapes (like bunnies), and is well-suited to being put down in layers. Plus, it’s chocolate!

What a crazy couple of weeks. This last week in particular featured back-to-back all-nighters as I tried to finish my thesis revisions. The crazy thing is the revisions weren’t even that bad, I just have enough trouble writing the fluffy bits that go around the sciency bits the first time around, and re-writing them seems to completely drain me. Since this week was largely fuelled by my discovery of delicious home-made onion rings, I’m afraid to even step on a scale to see where I’m at now. Anyway, it’s over, the latest revised version is out of my hands, and I just slept 24 of the last 30 hours; feeling much better now. I’ve got the penultimate exam to study for now, and hopefully a week of working out to make up for the weeks featuring dozens of hours in a chair per day…

On with the links!

The Neurologica blog has a few neat posts, including a follow-up to the CBC Marketplace report on homeopathy. A homeopathy advocate complained to the CBC, but their review found that the report was fair. “The achievement of balance does not mean mathematical equivalence; rather, the important principle is that different views are, in the words of the CBC policy, “reflected respectfully.” Also, a post about human echolocation.

A pair of articles in the Financial Post on condo speculators and using the housing bubble to sell out and fulfill your dreams. I know a few people my parents’ age who realized in the last few years that they could sell their house and retire off the proceeds if they moved even just a little ways outside the GTA. I’m surprised it hasn’t been more.

Google’s using its search data to discover interesting trends, such as uncovering the spread of flu-like symptoms. There are a lot of other possibilities for the correlation of search terms with real-life events, like getting a leading indicator of unemployment.

The CDC has created a clever page to use the threat of a zombie plague to inspire disaster readiness for more mundane emergencies.

Via BoingBoing, an interesting case in Texas on radiation in the drinking water, and the implications of margin-of-error. On the one hand, I can see the rationale for using the most liberal interpretation of the stats: who wants to tell a bunch of Texans that there’s slightly elevated levels of radioactivity in their drinking water (less than the margin-of-error above the limit), especially if the regulatory thresholds are set conservatively anyway. But, it’s not proper to consistently subtract the margin of error like they did. That’s the most optimistic interpretation of the data, but not actually the correct one. If it was a one-off reading, you could perhaps make that argument, but when it consistently happens then no, you know that the “true” value you’re measuring is indeed above the threshold.

Germany has decided to shut down nuclear power by 2022. I find that surprising: that’s a big shift to make in a deceptively short time period. According to the article, 23% of Germany’s power came from nuclear prior to the Japanese tsunami. In the wake of the fear that followed, Germany promptly shut down its 7 oldest reactors, and I’m surprised to see that sentiment following on for so long to have this much impact even on their newer reactors. 23% is a lot of power to have to find elsewhere. For comparison, roughly 8 years ago Ontario vowed to shut down our coal plants within 5 years, and it was a challenging goal to meet — indeed, the goalpost was moved to 10 years down the road pretty quickly (2014). We’re pretty close here in 2011: 8 of 19 units have been shut down, and the remainder are seeing less utilization. And coal was just about 20% of our energy mix before the phase-out. So the Germans have some pain ahead of them, and some hard choices: what on earth are they going to use to replace that much baseload power? Or will they have to pick one fifth of their things to turn off when the brownouts and rolling blackouts threaten?

It’s been another rough few weeks over here. I have revisions to make to my now-complete first draft, and though there aren’t that many, they’re taking me forever. I had hoped to be done these almost two weeks ago. I seem to have serious issues concentrating (also why there haven’t been many blog posts here), and my stress levels are once again through the roof. But it’ll be over soon (just months now!) and then I can worry about what to do with the rest of my life. To try to get my science groove on I’m even going out to give some rah-rah science! outreach talks at high schools soon, which I hope goes well.

Mother’s day seemed pretty hectic here, with dinners and brunches and last-minute shopping. I ended up getting a new pizza cutter for myself while I was at Caynes. I’m impressed enough with it that I had to give it a quick mini-review: it cuts through pizzas way better than my old ones. That might be because it’s new and sharp, but even then it seems to do a better job than they ever did: I’ve always had to go back-and-forth to get a clean cut, but this did the job in one swipe. It has a rather heavy handle (vs. the cheap plastic or wood handles of my other two), and the blade disc is held securely with no play: the other two both had fairly significant wobble in the roll of the cutter.

I was recently interviewed by a reporter from the Globe & Mail, and had a brief mention in an article as a result… but although it was my website and Potato identity that brought me to his attention, the article had no mention of either. So at least my quasi-secret identity remains safe, and I don’t have to write a tedious “welcome, G&M readers” post. However, if my understanding of comic-book lore is correct, this reporter is now in grave danger, as those who possess the information of a person’s secret identity — especially reporters with privileged sources — are abducted with uncanny regularity: whether by targeted schemes or pure evil happenstance. Fortunately, I believe the last time I updated my arch-nemesis page I selected “the geese who block the bike path by the river” and they are not the hostage-taking sort of villains.

Rob Carrick agrees with my earlier post that TD’s e-series funds are great, but hard to buy. I think it’s really weird that the fund you have to trade online requires faxing/mailing in an application to open an account, but weirder still that people like me have to write third-party user guides on how to actually manage the things.

CC weighed in before I got around to publishing this post, saying that he didn’t find the e-series that hard to set up. I don’t find it that hard from the instructions either, and have helped people set them up… but Wayfare did run into issues, mostly with the branch staff being clueless and trying to sell her on higher-MER funds, and with that conversion step not going through right away. Plus some of the other steps (like withdrawing under the HBP) are a little less clear, as Krystal found out. As much as I love the e-series funds for average investors, something’s not right when the best instruction sets and knowledgeable people are outside of TD. Anyway, I’ll repeat my best advice: use TD Waterhouse.

Deliquencies are rising in Alberta as the housing market there flattens out. I consider it more evidence that delinquencies are a trailing measure, so not very relevant in a discussion on the health of Canada’s housing market, but take it however you want (i.e.: too small to be meaningful at all is also a good way to take it).

A little article on Home Capital Group also points to some more warning signs: “He said the company is being cautious when considering loans that will go toward properties in Vancouver or downtown Toronto, because the markets are showing signs of overheating.”

Canadian Business revamped their website, breaking the RSS feeds and leading to many 404 errors for old links to their articles. The ability to comment also seems to have disappeared. But, I’ve found Larry MacDonald again, and now he seems to be moving towards believing that Vancouver at least, is in a bubble.

I’m a bit late on this, but Freddie Mac actually reported a profit this quarter. The preferreds I own (a very small speculative bet) are actually in the black now by over 30% (given the timeline though, still no better a performance relative than the index). I still don’t expect a final resolution for years yet, and this only suggests that rank insolvency is perhaps not as much of a risk — but political risk still looms large, as it didn’t look like the conservator allowed them to repay any significant portion of the bailout. Despite the recent run-up, they’re still only trading for 10 cents on the dollar, quite a reasonable discount given the return to profitability. Though I was tempted to buy more on the news, I figure I’d hold pat with my thimble-full of exposure. There’s still lots of risk here, and I don’t need to bet any more than I already have.

A short post by Saj Karsan on learning from your history, but not letting randomness influence that. I can’t dig it up now, but Michael James had a similar idea some time ago: a good decision is not necessarily the one that lead to the correct outcome in the way things played out, but one that made the most sense given the information available at the time.

A cute tongue-in-cheek site about the benefits of coal-fired electricity.

It’s been a tumultuous year so far, and the snow hasn’t even melted yet! The big news story has been the Japanese earthquake and tsunami, which has killed thousands of people and caused billions in dollars of damage. Oh, it also put some nuclear reactors into partial meltdown which added salt to the wounds by possibly making a few hundred more people sick, and releasing radiation into an area around the plants. But since it’s the ongoing story which will take weeks to fully play out, since people are afraid of the very word nuclear, and since fear-mongering sells papers, it’s been the headline story all week. Not that I am free of blame — I’ve re-read my radiation safety training materials and spent a lot of time brushing up on nuclear power generation this week, and have been soaking up the Fukushima stories.

While I do want to help everyone who’s going out of their minds keep perspective, I also don’t want to minimize the tragedy: the workers are being very brave while facing a terrifying situation, and are making personal sacrifices to try to minimize the damage to the rest of Japan. There have been fires, explosions, and meltdowns, leading to some radiation release (though whether the panicked mobs in Tokyo have anything to fear is an open question)…

Oh yeah, and there’s a civil war in Libya, demonstrations in Saudi Arabia, and crackdowns in Bahrain.

Joe Kelly over at Nerd Boys has a few posts on UBB up. He even tabulates the UBB fees by various ISPs.

Michael James reports that AT&T in the US has introduced UBB, which has sparked some outrage… at 1/10th the price of Canadian UBB.

Something I haven’t really drawn enough attention to is the very framework the CRTC laid out for making its decisions. They state that when congestion occurs, it should be corrected first by network infrastructure upgrades, then by economic incentives (i.e.: UBB), then by throttling and other traffic control measures. The thing is, there’s no structure to those guiding principles, leading to perverse incentives with UBB: an ISP can make more money by encouraging congestion, then charging UBB than it can by upgrading the network to stay ahead of traffic growth. Anyway, it was back in my 5-page submission if you read that, and if not, you probably want to focus on other things now.

Michael Geist, who has been debating Dan McTeague about proposed copyright reform, points out that despite calling for severe penalties for copyright infringers, Dan McTeague himself appears to fit the criteria for a repeat infringer. Zing!

Laser pulse pistol. Yes. The future is here.

On the profiteering side of the Japanese tragedy, Financial Uproar discusses investing in Tepco, which I was actually just talking about today with Netbug. I saw a lot of parallels with the BP situation there. Though there is an ADR, it trades on the pink sheets and is quite illiquid: TD Waterhouse wouldn’t let me put in a bid online, I had to call. I decided to sleep on it, but it’s now up ~20% in Tokyo tonight, so I may have missed my chance.

National Post: Language used to describe Japan’s atomic crisis borders on reckless hyperbole.

An old Scientific American article about how the emissions from coal plants are more radioactive than those from nuclear power plants. However, the mercury, particulate, and greenhouse gas emissions of the coal plants are far bigger concerns, not to mention mining issues.

And finally, I think my favourite link in the round-up: A post showing the deaths per TWh for different power generation methods. There’s lots of room to quibble about an order of magnitude here or there, but the end result is that coal is several orders of magnitude more deadly than nuclear. And coal never provided us with medical advances like radiotherapy or diagnostic nuclear medicine.

There’s Chernobyl, everyone knows that one. Then a handful of other accidents involving nuclear power generation, with the most famous perhaps being Three Mile Island, though the impact of the non-Chernobyl accidents have been pretty minor.

In the early days of research, there were a fair number of accidents, especially with enriched fuel, and a bunch of military accidents.

But after Chernobyl, most of the worst civilian radiological accidents come from the medical side. As much as people rail against nuclear energy, I don’t hear a lot of people trying to ban nuclear medicine.

The biggest cause of accidents seems to be the escape of radiation sources, with the Goiania, Brazil accident being perhaps the best example. There, a medical clinic moved, and left behind a radiotherapy device. These guys came in to the abandoned, half-demolished structure, and stole the Cesium-137 source at the heart of the machine, to sell for scrap. In dismantling the source, they got a large dose of radiation, and then later did sell the core for scrap. The scrap dealer noticed this blue glow in the material, and — I kid you not — decided it was magic.

He invited his friends and family over to check it out, made jewellery and body paint out of it, and spread this stuff all over. People were putting it on their bodies to increase sexual potency, ingesting it, and selling it. It took over two weeks before it was realized that a disaster was unfolding. 4 people died, many others got sick, and something like the equivalent of 100 transport truck containers of contaminated waste were produced.

There are also a number of cases of accidental over-exposure from radiotherapy or imaging, though those seem to be more accepted as there is always some background medical mistake risk.

I don’t know what to say about the disaster striking Japan. The size of the earthquake (now being reported as a 9.0) was tremendous, one of the largest earthquakes ever, and the following tsunami overwhelmed even one the countries best prepared for tsunamis.

The focus now is on the nuclear plants that are in partial meltdown. There is a lot of fear out there, and some of the coverage has been hyperbolic. The situation is still unstable, and it could of course get a lot worse from here.

As someone who supports nuclear power, who is a scientist, and who has been trained in radiological disaster management, I have to ask myself if these events would change my views, and I would have to say so far, no. I do think there could have been more done at the plants for saftey backups (e.g., the ability to run a backup turbine off the decay heat to power the cooling pumps), and that a safer (in my non-specialist and Canadian opinion) CANDU design probably should have been used in a seismically active country like Japan. But, nuclear power is one of the few options to meet the power requirements of the world, and especially countries like Japan, with high population densities and few hydroelectric options.

Plus, I think it’s important to keep in mind the scope of the problem so far. First off, this is not a separate nuclear power problem, this is a result and an extension of the one of the worst earthquakes and tsunamis ever. This is the worst-case scenario for these reactors, and these are old reactors. The death toll from the earthquake and tsunami are still being tallied, but are in the several thousand range. There are workers in the plants that will likely have health effects from radiation exposure (unclear how many at this point), but most of the general public near the plant was evacuated days ago. Radiation has been released into the environment, with the highest numbers I’ve seen peaking at 12 mSv/hr close to the plant, but generally much lower than that. A typical background dose is in the range of a few mSv per year, and a CT scan might be several mSv. The Canadian occupational limits are 20 mSv/year. So even close to the plant, a person could take their sweet time evacuating and still have no health effects.

What the ultimate outcome will be is still an open question, and it will take several days until the decay heat from the cores is gone and any further fire/explosion/breach risk dissipates. However, the actual impact of the nuclear disaster looks like it will pale in comparison to the impact of the tsunami and earthquake natural part of the disaster. Yet, already the fear is enough to compromise the development of nuclear plants around the world.

I know there must be burning questions out there, ask away and I’ll try to answer them!

On the topic of BP and the environment: I meant to focus more on the horrible nature of the situation in my last post, on the Chernobyl-like precedent this tragedy might have in the public mind. How things like the deepwater drilling ban might spur us to say, tax oil a bit more to reflect the costs, or encourage better, faster implementation of crude alternatives in our power and transportation systems.

But I got on the investment thinking train, and that seemed to prove popular, so let me just continue briefly here.

First up, I’ve been trying to pay more attention to the story in the media lately. I was a little surprised to see a guest on BNN the day after I put my last post up saying almost word-for-word what I said about this disaster not killing BP outright, so at some point there must be value in the stock. He followed up by advising people to not catch the falling knife though, which is advice I have a particularly tough time following, so it’s good to hear again.

BP has now successfully cut off the top of the riser pipe down there, making for a cleaner hole. That makes it possible for them to siphon some of the oil off of the gusher and up to a surface ship. It also unfortunately allowed more oil in total to be released, which will be really bad if say a hurricane starts to form and the surface ships have to skedaddle. I thought that net-net, it was a positive move, but that may be a close thing, depending on how close to the upper end of the range we were at for the size of the gusher: if they’re collecting ~15k barrels/day, and the cut in the pipe allowed 20% more oil to escape, then that’s a losing move if the size of the leak was over 75 k barrels/day. I actually expected BP’s stock to jump on that news, but it had another horrible day today (down almost 16%). It’s now under $30, which has me making “Om Nom Nom” noises.

One thing their collection operation proves though is that the early estimates of oil flow were way, way too low. The most-reported estimates of the size of the spill are still climbing day by day in the media, but now seem to be plateauing in the lower range of what the image analysis guys were saying (i.e., in the neighbourhood of 50k barrels/day). Not all of that is making it to the surface, and there’s no way to tell yet whether or not that’s a good thing. Obviously it’s harder to skim/clean oil that for whatever reason is remaining dispersed beneath the surface, but maybe we’ll get lucky and it won’t need to be cleaned. OTOH, it may poison marine life for decades to come. No way to say just yet, I think.

Alongside the climbing volume estimates comes the climbing cost estimates, which are now closing in on my back-of-the-envelope $50B figure. At that point, I still have to think that BP is value-priced now at < $30. Some articles today raised the spectre of bankruptcy for BP, which I think is highly unlikely given the facts on the ground right now — as I said before, BP is a very profitable company, and can afford to make good on even large payments if given time (and litigation will likely give them that time). Even a $100B final price tag wouldn’t kill them if they had 5-10 years to pay out, though it would mean that the stock would have more shit left in it to get kicked out. Despite the fact that I’ve been pretty pessimistic on the scale and cost of this disaster so far, I think $100B is probably the upper-end of the range.

That is, assuming that the relief wells being drilled right now are able to stop the leak before the end of August. A 3rd-party drilling expert was interviewed on BNN the other day, and he gave me hope that this would work. Specifically he said that these kill wells have a greater than 90% chance of success, and are very good at being able to find the borehole underground. With two drills going, there’s a very good chance this will stop before the fall.

In the scenario that the kill wells fail (or to compound a tragedy, one of them blows out) then there is unfortunately no salvation for BP. If this thing leaks for the better part of a year like Ixtoc, then the Clean Water Act penalties and other settlement costs could conceivably bankrupt them. I can’t say that it won’t happen for sure, but I discount it as a very remote possibility.

On the matter of the dividend there has been a good deal of commentary. It’s a tough call. On the one hand, they do have enough cash on hand and cashflow being generated to pay for the ongoing costs of the cleanup at the moment, so a dividend cut isn’t strictly necessary. Plus, it’s a “widows and orphan” stock, especially in Britain, so there’s some pressure to continue to pay a dividend (even if a reduced one). On the other, there are the optics, which can cut both ways. They may seem callous to the situation by paying out cash to shareholders in the midst of the crisis (and powerful politicians are calling for them to cut it). To a lawyer in front of a jury though, a cut and the buildup of a reserve fund may just be a target — however much they build up, a court may reason that they should award more in damages to make the award truly punitive. Giving the cash to their limited-liability shareholders may help keep the court awards/settlements down. The dividend is pretty rich, but I’m not sure that eliminating it for a few years should really affect the investment thesis all that much — the uncertainty in the cleanup costs is much higher than that, so I don’t get the news reports saying that the stock declined on rumours of a cut. I think that they can keep it up, but will probably cut (not necessarily to zero though — probably down to 25-50% of what it was), however either way I don’t think it’s a significant enough factor to affect my value price.

So after looking at it a little closer, my back-of-the-envelope calculation doesn’t seem all that far off to me: BP is likely getting into the buy range now (under $30 for the NYSE ADR), and it might just be a matter of waiting for it to stop being sold in a panic to get in as a long-term value/recovery play. That said, it’s definitely getting detached from the fundamental issues here and trading on emotion in my opinion. It could go nowhere until the relief well connects and kills the leak; it might stay low until a decade from now when the settlement payouts stop and people see the EPS clearly again. It might spring back 15% tomorrow on no news. Some big-name analyst might pan it and it could go no-bid until the vultures start picking it up for pennies. Just no way to say in the short term. That said, the bonds may also be well worth looking at: I haven’t bothered to log into the fixed income side of my broker’s website, but the paper today said that their debt was now yielding 8% — and that was just a 3-year bond! — which plays even better into the “they won’t go bankrupt” thesis (especially if you conclude with “at least not in the next 3 years”).

Another side to the catastrophe that I haven’t seen mentioned yet is the fact that a large portion of the release appears to be methane. As we know from the snickering over cow farts, methane is a very potent greenhouse gas, and here we have a rather substantial release of the stuff going on. I have to wonder if it’s going to be enough to affect the climate records for the next 10-20 years, though I suppose that’s a problem to worry about after the spill is stopped.

One final note on government malfeasance. Some have speculated that the US will simply confiscate BP (or it’s american assets), or create legislation to penalize them post hoc. That is expressly forbidden in the US constitution. However, the US government’s actions during the financial crisis (seizing banks that were not necessarily demonstrably insolvent; arbitrarily making bondholders whole and wiping out common and preferred shareholders without the benefit of a release of their calculation arriving at such a split or orderly liquidation; their continued efforts to keep the GSE’s down with ridiculous interest payments on money that they are forcing them to borrow, which the GSE’s don’t really need — what use capital requirements when possessed and guaranteed by the government?) do not inspire continued faith in the concept of due process.

PS: note that when I say “today”, I mean June 9th (I composed this the evening of June 9th, but held off until June 10th to hit publish).

You’d have to have been in a hole the last month to have not heard about the disaster in the Gulf of Mexico leading to huge amounts of oil streaming out of a well after an accident at the rig. The oil under the ocean floor is under a great deal of pressure, so it’s pouring out through the hole, and has been for a month now. And every day, more comes streaming out. The slick on the surface is huge, affecting a large number of fishery operations, and coming ashore now.

This is a massive disaster, and it’s not over yet. It could be another month or two before the gusher is finally brought under control, and then a long time after that mopping up the coastlines.

For some perspective I did a quick bit of reading on the Exxon Valdez spill. The oil was thicker on the coast there, in large part because the tanker grounded fairly close to land (esp. relative to the BP drill site).

As this plays out there may be more realization in the public mind of what the externalities of an oil-based economy are, and we may finally get more of a drive towards alternative energy, public transit, hybrids, etc. Plus of course, stricter regulations on environmental protection for drillers (though like with financial reform, closing the barn doors after the horse has run out).

From an investing point of view, people are looking at the massive decreases in BP’s stock over the last month — 30% over the last month, 15% today alone! — and are wondering whether this is now becoming a value play. I doubt very much that this disaster will lead to BP going bankrupt and the common shares becoming worthless. Thus at some point, there must be value in the stock. However, determining what that point would be is very difficult at this point since there is so very much uncertainty at the moment. To be sure, uncertainty and volatility can present opportunities, and there’s a good discussion about that possibility at CMF right now.

So, a quick back-of-the-envelope calculation: the ultimate costs to BP are probably the largest unknown factor, but also the most important here at trying to guess at the bottom. The Exxon Valdez spill ended up costing Exxon in the neighbourhood of $5B. This is likely going to be about 10X worse (BP has reportedly already spent $1B in the first month on cleanup and well capping attempts — and the litigation hasn’t even started). So I’d start with a guess of about $50B to clean things up. That figure makes me more pessimistic than most of the reporters and analysts I’ve seen in the news, but there’s so much uncertainty here that I think it could end up being more. At the very least, I’d be looking for a margin of safety on top of that before I start bottom-fishing. As big as that number is though, it’s not a killer for BP: it’s a huge company with profitable oil operations all over the world, and it can probably pay out the costs of the cleanup out of operating profits over the next few years (as they’re required for cleanups, or as litigations complete).

Let’s assume that we’re willing to pay a stock price of the sum of the earnings for the next 10 years (i.e. a P/E of 10). Their earnings for 2009 were about $17B, so 10X that gives us a 10-year sum of $170B, or a stock price of about $54, which is where they were trading before the disaster. If we now figure that $50B comes off that 10-year sum, we’re left with earnings of $120B, which would be a stock price (US ADR) of about $38 (which as of today it’s below). On top of that, we want a margin-of-safety of at least 20% (though I think given the uncertainty, a higher margin of safety would not be out of the question). That brings me to a price of about $30-31 before it starts to look interesting to me. I haven’t done a whole lot of research since I’m busy with my real life, but if BP does start getting down into that range, I might give up a Saturday afternoon to sit on the porch and read up.

All that said, the bloody thing dropped 15% in a day. I’m not going to touch it for at least a few more days. Plus there’s the ethical investing issue: even if it is bargain-priced, do I want to own a fractional share of a company that was responsible for such a massive environmental disaster?