Oil + Hubris = Danger

Posted on 09 July 2009

Today’s news featured two stories that cry out for “compare and contrast.” T. Boone Pickens, the very public face of wind energy in the US, announced that he is downsizing his “world’s biggest” Texas wind farm plans in the face of various setbacks. And the other BP, oil and gas giant “Beyond Petroleum” said in effect it is going “Back to Petroleum” and abandoning the “alternative energy” unit on which it had invested perhaps more advertising dollars than R&D dollars.

Was it wind’s fault or Pickens fault? Is this a sign that many other wind energy projects are doomed?

And given the drop in oil prices, why wouldn’t BP be even more interested in alternative energy?

Both Pickens and BP were highly visible, and intentionally so, about their moves into alternative energy. Both came to it from oil. Pickens has recruited an “Army” of volunteers to help him lobby Congress for subsidies to help his wind business. BP, like most large and visible public companies, is sensitive to its image and the power of governments to change the economics of its business. It had decided to appear as green as possible.

Both entities were guilty of hubris. Pickens’ hubris was evident in the Pickens plan. First we make enough wind energy to generate 20% of the country’s electricity needs. Since that will free up a lot of natural gas, we divert the natural gas to fuel vehicles. And Pickens happened to have a stake in the natural gas vehicle business. A key piece of hubris in this logic lies in thinking that Pickens can decide the fate of the natural gas. Markets will decide. If wind were 20% of electricity, the offset could be coal stays underground, or all other sources cut back equally, or total consumption goes up by the amount of the new wind energy, or of course some combination of the above. Natural gas vehicles have their prospects and will win or lose quite separately from Pickens’ wind farms.

Another sign of hubris was the “if we build it they will come” strategy towards transmission lines. Most wind developers work on making sure they have lined up transmission before they place the order for turbines. Boone went a step further linking transmission to a water pipeline and that the extra 100 feet of eminent domain abuse made all the difference to the Justice Department; Why would Pickens think he was immune?

The hubris of BP was clear from the mismatch of its PR campaign and the reality of its business mix. Just because a company is good at oil and gas, why should it be good at wind, solar, and bioenergy? Why not something equally related to oil and gas like financial services, airlines, or apparel retailing?

There are several lessons to be learned here in our view.

For one, it is important for public policy to place a price on carbon. The momentum towards that has dramatically increased since the US electorate alerted the US government in November of 2008 to take the issue more seriously than the Bush administration had done. Simply “being green,” however, does not work as a business strategy. The underlying economics have to make sense. If wind is more expensive than natural gas or coal as a source of electricity, the market will not go for the wind in a serious way. Add a carbon price to the economics and the market will pick differently.

For another, just because you have a lot of money or have been successful in a separate business does not mean you will be successful in renewable energy. Each of the various renewable energy businesses has its own quirks and requirements for success.