Consulting: Carlyle Buy Booz's Government Business

Not much to really add to the topic, but its definitely a very interesting development. (nytimes article)

Auto: Diesel's increasing popularity

This article contains a pretty good sum up of the differences between gasoline and diesel engines. It would be interesting to find out whether or not the changing market for diesel engines will be strategically good for companies like Cummins (which makes diesel engines and components) and for Corning, which makes diesel engine parts. On the one hand, the market is now expanding rapidly, on the other hand many large companies are now throwing for more resources into developing their own clean diesel technologies. Its possible that some of the industry's new entrants might expand into the heavier horsepower segments.

Telecom: Mobile Virtual Network Operators

Apparently two US based mobile virtual network operators (MVNOs) might merge. SK might purchase both Helio and Virgin Mobile USA. Interestingly, one the web pages where they define their raison d'etre, states that one of Helio's advantages is a lightening fast network. Apparently, Helio's network as well as Virgin Mobile's are both owned and operated by Sprint Nextel.

Wikipedia's explanation for the existence of the MVNO niche is rather interesting...

MVNOs Classification and Marketing strategies

• Discount MVNOs provide cut-price call rates to market segments.

• Lifestyle MVNOs like Helio focus on specific niche market demographics.

• Advertising-funded MVNOs like Blyk or MOSH Mobile build revenues from advertising to give a set amount of free voice, text and content to their subscribers.

There are three primary motivations for mobile operators to allow MVNOs on their networks. These are generally:

• Segmentation-Driven Strategies – mobile operators often find it difficult to succeed in all customer segments. MVNOs are a way to implement a more specific marketing mix, whether alone or with partners and they can help attack specific, targeted segments.

• Network Utilisation-Driven Strategies – Many mobile operators have capacity, product and segment needs – especially in new areas like 3G. An MVNO strategy can generate economies of scale for better network utilisation.

• Product-Driven Strategies – MVNOs can help mobile operators target customers with specialised service requirements and get to customer niches that mobile operators cannot get to.

MVNO models mean lower operational costs for mobile operators (billing, sales, customer service, marketing), help fight churn, grow average revenue per user by providing new applications and tariff plans and also can help with difficult issues like how to deal with fixed-mobile convergence by allowing MVNOs to try out more experimental projects and applications. The opportunity for mobile operators to take advantage of MVNOs generally outweighs the competitive threat.

Energy: Oil and Gas Companies

This is mostly a collection a snippets I lifted from S&P's industry analysis of the oil and gas industry. Interesting things to note are the differences between sweet and sour crudes - sweet crudes have much lower sulfur contents and are thus easier to refine (especially as the EPA is in the process of decreasing the acceptable sulfur contents in refined gas). Also - oil is fungible; a production disruption in one OPEC country will increase global prices even though that OPEC country probably primarily supplied a specific region or country.

Industry Summary
The oil and gas business has three major segments: exploration and production of oil and natural gas (the upstream); the transportation, storage, and trading of crude oil, refined products, and natural gas (the midstream); and refining and marketing of crude oil (the downstream). Participants include integrated oil and gas companies, and pure-play companies in various areas, including exploration and production, midstream services, refining and marketing, and oilfield services and drilling.

Many integrated oil and gas companies also make and sell petrochemicals.

Saudi Aramco, owned by Saudi Arabia, is that nation's primary source of income and is estimated to be the largest oil and gas company in the world. The largest publicly owned firms - BP PLC, Chevron Corp., ConocoPhillips, Exxon Mobil Corp., Royal Dutch Shell PLC, and Total SA - are known as the "supermajors." Each has a market capitalization of $100 billion or more.

Large integrated oil and gas companies - typically with market capitalization of less than $100 billion - are known as the "majors." They explore for and develop oil and natural gas worldwide, but their refining and marketing operations are generally focused on their local markets. Major integrated oils based in the United States include Hess Corp. (formerly Amerada Hess) and Marathon Oil Corp; in Western Europe, the majors include Eni SpA, Repsol YPF SA, and StatoilHydro ASA; and in Latin America, the majors include (Petrobras).

Independent exploration and production companies
Exploration and production companies are often referred to as independents because their "upstream" operations are not integrated with "downstream" operations such as refining or petrochemical production. Most such firms were spun off from larger corporations, including railroads (Burlington Resources Inc., acquired by ConocoPhillips on March 31, 2006, and Union Pacific Resources Group Inc.), integrated oil and gas companies (Kerr-McGee Corp., acquired by Anadarko Petroleum Corp. on August 10, 2006), pipeline companies (Anadarko Petroleum Corp.), or utilities (Houston Exploration Co.). A number of companies originated in a single field and grew by acquiring smaller competitors or individual properties from larger competitors; among them are Devon Energy Corp., Apache Corp., and Pioneer Natural Resources Co.

Independents with oil and gas reserves predominantly in the Americas tend to have higher cost profiles than their international counterparts, because the American continent is a geographically mature region with many fields in the late stages of their lives. In many cases, these independents bought their properties from the international integrated oils, which were focused on higher-return operations abroad.

However, the independent exploration and production companies in the North American natural gas sector are cost-competitive, due to tight supply and demand conditions and a lack of competition from cheaper imports. Thus, they are key players in North American natural gas.

Midstream services companies
Services provided to oil and gas producers by the midstream firms include transportation, storage, and trading of oil, natural gas, and refined products. Many of these companies are structured as limited partnerships, which confer tax advantages for their unit holders. Major independent participants include El Paso Corp., Enterprise Products Partners LP, and Kinder Morgan Energy Partners LP.

Refining and marketing companies
These firms refine and sell crude oil products such as gasoline, jet fuel, heating oil, motor oil, and various lubricants. The largest independent US refining and marketing companies have market values of less than $50 billion. These companies included Valero Energy Corp. (13% of US refining nameplate capacity), Sunoco Inc. (5.2%), PDV America Inc. (private; 4.7%), Koch Industries Inc. (private; 4.5%), Motiva Enterprises LLC (private; 4.4%), and Tesoro Corp. (3.3%), according to data as of January 2007 (latest available) from the Energy Information Administration (EIA), an agency of the US Department of Energy (DOE).

UPSTREAM OPERATIONS: THE EXPLORATION AND PRODUCTION PROCESS

The process of exploring for, developing, and producing oil and gas reserves involves several steps, which generally take several years to complete. Some of the major steps are described below.

Exploration
The first step in the production process involves the search for oil and natural gas by geologists and geophysicists. Once hydrocarbon accumulations are found, subsurface conditions are investigated using seismological or other techniques to construct subsurface maps of the reservoir.

Drilling and logging
Although the exploration process yields much data concerning the potential presence of oil and natural gas, the only way to know for sure is to drill a test well (also known as an exploratory well).

As a company drills exploratory wells, it performs tests on the formations penetrated. The data gathered through such tests, including detailed physical properties of the formation, are used to evaluate whether commercial amounts of oil and/or natural gas are present. The process of obtaining and recording information pertaining to downhole conditions is known as logging.

If commercial amounts of oil and/or natural gas are found in a test well, the process moves to the completion stage.

Completion
If a well is determined to contain commercial quantities of oil and/or natural gas, it must be "completed" before production can begin. In other words, one or more flow paths must be constructed for the hydrocarbons to travel between the reservoir and the Earth's surface.

Casing - steel pipe - is used to line the raw hole made by the bit in the formations. This lining keeps the hole from caving in, and once cemented, keeps fluids from migrating to another formation. Tubing, also made of steel, is the pipe through which the oil and/or natural gas flows to the surface. Together, casing and tubing typically represent the second largest expense of drilling and equipping a well, after payments to contract drillers.

Lifting
Several different methods are used to bring (or lift) oil and/or natural gas to the surface. The appropriate method depends on whether oil and/or natural gas are being produced and on the formation's characteristics. Due to the heavy, viscous nature of crude oil, most producing oil wells require some kind of artificial lifting system. A small percentage of completed oil wells flow freely without any stimulus at first because of built-up pressure in the reservoir. By comparison, natural gas is much lighter, and many gas wells are produced by the natural pressure gradient throughout the formation.

There are three stages of lifting, which require different mechanical systems. During primary recovery, oil is pushed to the surface using pumps and the reservoir's natural pressure. Secondary recovery involves driving out oil by stimulation, usually through the injection of water or natural gas. Methods of tertiary (or enhanced) recovery include injecting carbon dioxide, steam, or chemicals into a formation. Fire flooding, or combustion, may also be used to increase the flow.

MIDSTREAM OPERATIONS: TRANSPORTATION AND STORAGE

Once extracted, crude oil must be moved from the wellhead to the refinery. Since crude oil and refined products are liquids, they can be transported internationally in barges or tankers. On land, crude oil and refined products are usually transported by pipeline, truck, or rail.

In contrast, natural gas usually moves via pipeline from the producer to the gatherer or transmission company, and then to the distributor. Gas gatherers are primarily engaged in the collection of natural gas at the wellhead from producers or from field lines for delivery to a natural gas processing plant or some central point; they also provide compression, dehydration, and/or treating services.

Gas transmission companies convey the natural gas from the region where it is produced to the region where it is to be consumed. Occasionally, economics permitting, natural gas is liquefied (to make liquefied natural gas, or LNG) and transported internationally in LNG tankers.

In addition, gases from various sources may be converted into synthetic liquid hydrocarbons. Companies involved in synthetic fuels include Rentech Inc., Sasol Ltd., Chevron, ExxonMobil, BP, Royal Dutch Shell, and Syntroleum Corp.

In the United States, interstate oil and natural gas pipelines are federally regulated (by the Federal Energy Regulatory Commission, or FERC), while intrastate pipelines are regulated by the individual states. The tanker industry remains an unregulated global market.

Tankers
Most crude oil is transported internationally in ships called tankers. Tanker companies provide transportation services to oil companies and traders, as well as to government agencies. According to the Institute of Shipping Economics and Logistics (ISL), a research and consulting firm, as of March 2007, the global tanker fleet (ships of 300 gross tonnes, or gt, and over) consisted of 10,824 vessels with a total carrying capacity (tonnage) of 411 million deadweight tonnes (dwt). In terms of dwt, the total tanker fleet increased 6.1% over 2006, whereby the net gain (i.e., the tonnage balance between tonnage additions, or newbuilds, and tanker demolitions) stood at 24.5 million dwt (21.6 million dwt for oil tankers, 0.3 million dwt for chemical tankers, and 2.6 million dwt for liquid gas tankers).

The world shipping arena is determined by only a few shipping countries with a strong regional focus on Europe and Asia. According to ISL, as of July 1, 2007, the top 10 leading shipping nations (Greece, Japan, Germany, the People's Republic of China, Norway, the US, Hong Kong (SAR), the Republic of Korea, Singapore, and the UK) controlled 68.7% of the total world merchant fleet tonnage (ships of 1,000 gt and over). As of July 2006, according to E.A. Gibson Shipbrokers Ltd. (a shipbrokering service), ownership within the shipping industry was highly fragmented: oil companies owned less than 6% of the world tanker fleet and tonnage; independent ship owners collectively controlled about 79%, and government oil and shipping companies owned the rest.

An important characteristic that affects the supply of tankers is their age. Environmental laws impose higher operating costs on tankers more than 25 years of age, resulting in increased scrapping of older vessels. While a large amount of newbuilds during the past five years changed the age profile of the tanker fleet, there continues to be a considerable number of single hull tankers that must be phased out of the world fleet by the end of 2015.

According to data from ISL, as of January 2007, about 27% of total oil tanker fleet tonnage was comprised of single hull tankers (around 1,695 single hull tankers with 102.9 million dwt). As of March 2007, the average age of the global tanker fleet was about 22.4 years, versus 17.3 years the prior year. As of January 2007, the total order book stood at 2,466 tankers, or 57.4 million compensated gross tonne (or cgt; where cgt = A * gt ** B; A represents the influence of ship type, and B is the influence of ship size), an increase of 37.2% from 2006. About 16 million cgt is due for delivery before 2008, 17.9 cgt will be available in 2008, and 23.6 cgt in 2009 or later.

Pipelines and storage
There are two main types of pipeline systems: trunk pipelines, usually eight to 24 inches in diameter, which transport oil and natural gas between regional markets; and gathering pipelines, usually two to six inches in diameter, which transport oil and natural gas from the wellhead to the trunk pipelines. Pipelines are owned by major oil companies, as well as by smaller independent operators. North American pipeline companies include Kinder Morgan Inc., Enbridge Inc., and TransCanada Pipelines Ltd.

Storage is an essential function of an efficient and reliable pipeline network because it provides a means to manage fluctuations in supply and demand. Storage facilities include bulk terminals, refinery tanks, pipeline tanks, barges, tankers, and inland ship bunkers. Oil companies and governments usually hold crude oil and refined product inventories. Other downstream users, such as gas stations and fuel oil dealers, may also hold refined products.

Natural gas storage in the United States usually is held in salt caverns, with inventories built up between April and October (the storage injection season), in order to meet additional demand during the peak November-through-March period (the storage withdrawal season).

Emergency reserves
Since the mid-1990s, refineries have focused on maximizing profits and minimizing costs, allowing their inventories to drop to "just-in-time" levels. We believe these lower inventory levels may have induced stockpiling by the US government and by smaller private businesses further down the supply chain, in order to provide a buffer of capacity against unexpected shortages.

* Strategic Petroleum Reserve (SPR). The US government established the SPR in December 1975, when President Gerald Ford signed the Energy Policy and Conservation Act. The SPR has been authorized to hold a petroleum reserve of up to one billion barrels. Maintained by the federal government, it is to be used in case of a severe supply disruption that threatens national security. According to comments made in August 2004 by US Vice President Dick Cheney, a severe US supply disruption might be defined as a loss of at least five million to six million barrels per day (b/d).

To store the reserve oil, the US government currently has four salt caverns along the Gulf of Mexico coast that can hold about 700 million barrels of petroleum liquids (around 70% of the authorized total). As of December 14, 2007, the SPR held about 695.6 million barrels (99% of current capacity). The Energy Policy Act of 2005, signed by President Bush in August 2005, authorized the Secretary of Energy to expand the SPR to a one billion barrel capacity; it also provided guidance to the secretary in choosing appropriate site(s) to enable the SPR to be filled to this capacity.

With the maximum additions to the SPR averaging around 210,000 b/d (about 1% of total US consumption of oil and 0.3% of global consumption), additions to the SPR are relatively small compared with the market and should have a negligible impact on oil prices, in our opinion. The SPR has a maximum drawdown capability of 4.3 million b/d for 90 days. Drawdown declines progressively to 1.2 million b/d after 150 days; after 180 days, the rate drops significantly.

DOWNSTREAM OPERATIONS: REFINING AND MARKETING

Crude oil is a complex mixture of hydrocarbons, which may be characterized by their molecular weight distribution and separated according to their boiling point ranges. Crude oil is typically classified as light, medium, or heavy according to its crude density, which is typically measured by API Gravity (see the "Glossary" section of this Survey for details). The refining of crude oil creates a variety of final products. The process typically starts with the crude distillation tower, where crude oil is vaporized at high temperatures and pressures so that various components can be drawn off as their boiling points are reached. Products obtained in this manner are known as distillates.

Lighter-weight products (known as light ends) vaporize at lower temperatures and are drawn off from the top of the tower. Medium-weight products (light, medium, and heavy gas oils) vaporize at moderate temperatures and are drawn off from the side of the tower. Heavyweight products (heavy ends) are withdrawn from the bottom of the tower. Additional processing is sometimes required to crack the heavyweight products into lighter-weight products or to create other products.

Once refined, oil products are sold to customers by wholesale and retail distributors. Wholesale distributors, such as distributors of motor fuel and/or heating oil, sell fuel oil to retail gasoline stations and industrial users. They tend to be privately owned and are often family businesses passed from one generation to the next. Retail distributors include retail gasoline stations and convenience stores (c-stores). Although the c-store chain Casey's General Stores Inc. is publicly held, most US c-store chains are privately held companies, such as 7-Eleven Inc., Wawa Inc., Sheetz Inc., and Pilot Travel Centers LLC; the latter is 50% owned by privately held Pilot Corp. and 50% owned by Marathon Petroleum Co. LLC (formerly Marathon Ashland Petroleum, a subsidiary of publicly traded Marathon Oil Corp.).

According to data from National Petroleum News (NPN), the National Association of Convenience Stores, and Trade Dimensions, a provider of retail data, motor gasoline sales rose 18% to $405.8 billion in 2006, yielding a gross fuel profit margin of 5.5% (versus 6.9% in 2005). In-store sales of food and other merchandise increased 8.3% to $163.6 billion in 2006 and yielded an in-store gross profit margin of 29.9% (versus 29.7%), for a total c-store sales growth rate of 15% to $569.4 billion (71% motor fuels, 29% in-store) and a combined gross profit margin of 12.3% (versus 13.5%). As a result, only 29% of the c-store's gross profit was sourced from motor fuels during 2006 (compared with 28% in 2005; latest available).

Gasoline marketing
Oil industry marketing involves selling refined products to customers. While the US gasoline market is unregulated, different marketing methods exist for each of the many products that come out of the refinery. Our focus is on the retail marketing of gasoline, the refinery's main output.

According to NPN, US retail gasoline locations, both branded and unbranded, are owned and operated in four different ways: lessee/dealer operated (company-owned, and leased to an independent dealer); open dealer (branded station owned by dealer); salary operated (company-owned and -operated); and commission operated (company-owned stores run by an independent operator on a commission basis, usually based on gasoline volumes).

Gasoline may be sold directly by refiners to a retail gasoline station bearing the company's name and emblem. Gas stations provide the refiners with outlets for their products. Refiners also sell their branded products to independent dealers, which own their stations and sell branded gasoline and other products from one or more oil companies. The independent dealers generally purchase their gasoline either directly from the refiner or through a wholesale marketer, which contracts with a particular refiner to sell its gasoline at wholesale.

Another method of selling gasoline is through independent dealers. These retail gasoline locations purchase motor fuel from a variety of sources, including major oil companies (used by 79% of retail gasoline stations in 2006, according to NPN), large independent refiners (55%), small refiners (26%), spot market (22%), non-refiners (46%), and refineries owned by the retail gas stations (4%). They sell this gas through their own unbranded stations as a "no-frills" fuel, generally for a few cents per gallon less than brand-name gasolines. Today's independent marketers are generally c-stores operating their own gasoline pumps. The c-store has evolved further in recent years, as branded fast-food restaurants have combined operations with them.

OPEC WIELDS WORLDWIDE POWER

The Organization of the Petroleum Exporting Countries (OPEC) is a cartel formed by nations that are substantial net exporters of oil. Founded in September 1960 by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela, OPEC currently has 13 member countries and is headquartered in Vienna, Austria. The cartel has stated objectives: to coordinate and unify the petroleum policies of its member countries; to safeguard its members' individual and collective interests; to stabilize the price of oil; to provide an efficient, economic, and regulated petroleum supply to oil-consuming nations; and to provide a fair return on capital to those investing in the petroleum industry.

Algeria:
12.20 billion barrels (0.92% of the world's proved oil reserves)
159.0 trillion cubic feet (Tcf) of proved natural gas reserves (2.6% of the world's proved gas reserves)
Algeria's crude oil production during 2007 averaged 1.36 million b/d, up slightly from 1.35 million b/d in 2006. Algeria is an important exporter of oil and natural gas to European markets.

Angola:
9.04 billion barrels (0.68% of the world's proved oil reserves)
9.53 Tcf of proved natural gas reserves (0.2% of the world's proved gas reserves)
Angola's crude oil production during 2007 averaged 1.70 million b/d, up from 1.41 million b/d in 2006. Angola exports crude oil primarily to China, the US, Europe, and Latin America. The majority of natural gas produced in Angola is either flared or used in oil recovery.

Ecuador
4.52 billion barrels (0.34% of the world's proved oil reserves)
345 billion cubic feet (Bcf) of natural gas reserves
Ecuador's crude oil production during 2007 averaged 500,000 b/d, down slightly from 535,000 b/d in 2006. Ecuador is one of Latin America's largest exporters of crude oil, sending about half of its crude oil exports to the US, with the remainder split between Latin America and Asia.

Indonesia
4.37 billion barrels (0.33% of the world's proved oil reserves)
93.90 Tcf (1.52% of the world's total)
Although Indonesia's crude oil production declined to 0.84 million b/d in 2007, from 0.89 million b/d in 2006, it remains a substantial global oil producer and is one of the world's largest exporters of LNG.

Iran
10% of the world's proved oil reserves, or about 138.40 billion barrels
15% of global proved natural gas reserves, or 948.2 Tcf
In 2007, the country's crude oil production averaged 3.92 million b/d, up from 3.89 million b/d in 2006.

Iraq
115.0 billion barrels of oil (8.6% of the world's proved oil reserves),
111.9 Tcf (1.8%) of proved natural gas
The country's production averaged about 2.08 million b/d of crude oil during 2007, up from 1.90 million b/d during 2006.

Kuwait
101.5 billion barrels (7.6% of the world's proved oil reserves)
55.5 Tcf (0.90% of the world's proved natural gas reserves)
Kuwait's crude oil production (including its half of Neutral Zone production) averaged 2.16 million b/d in 2007, down from 2.21 million b/d in 2006. Along with Saudi Arabia and the United Arab Emirates, Kuwait is one of the few oil-producing countries with a significant excess of oil production capacity.

Libya
41.46 billion barrels (3.1% of the world's proved oil reserves)
50.1 Tcf (0.81% of the world's proved natural gas reserves)
Libya's production of crude oil averaged 1.70 million b/d in 2007, about flat with 1.71 million b/d in 2006. Libya is a major oil exporter, particularly to Europe.

Nigeria
36.22 billion barrels (2.7% of the world's proved oil reserves)
183.99 Tcf (3.0%) of proved natural gas reserves
Nigeria is one of the world's largest oil exporters and is a major supplier to Western Europe and the United States. Its crude oil production averaged 2.17 million b/d in 2007, down from 2.22 million b/d in 2006.

Qatar
15.21 billion barrels of proved oil reserves (1.14% of the world's total)
905.3 Tcf (15%) of proved reserves
Qatar's crude oil production averaged 0.80 million b/d in 2007, down from 0.82 million b/d in 2006.

Saudi Arabia
264.3 billion barrels, as of January 2008, or 20% of the world's proved oil reserves
252.6 Tcf (about 4.1% of the world's proved gas reserves)
Saudi Arabia produced an average of 8.43 million b/d of crude oil (including half of the Neutral Zone's production) in 2007, versus 8.93 million b/d in 2006. From January through November 2006, Saudi Arabia supplied the United States with about 1.4 million b/d of crude oil, or 14% of US imports during that period.

United Arab Emirates
97.6 billion barrels of proved oil reserves (7.4% of the world's total)
214 Tcf of natural gas (3.5%)
Crude oil production averaged 2.51 million b/d in 2007, down from 2.62 million b/d in 2006. The federation also exported significant amounts of LNG.

Venezuela
87.04 billion barrels of proved oil reserves (6.5% of the world's proved oil reserves)
166.3 Tcf (2.7% of the world's proved gas reserves)
Venezuelan crude oil production averaged 2.39 million b/d in 2007, down from 2.56 million b/d in 2006.

The obvious big gap in OPEC is Russia:

Russia
Russia produces approximately 10 million bpd, and exports about 70% of that. The true size of its reserves appear to be unknown as Russian oil companies are constantly re-forecasting. It might be as high as 150 billion barrels though.

Misc. Industry facts

85.54 million barrels per day is the production capacity as of 2007.

While the supermajor oils and other publicly traded oils (major international oil companies, or IOCs) have built up considerable cash, there appears to be reduced opportunities for upstream investment going forward: these major oils lack access to large oil and gas reserves and face increased competition from state-owned firms, or national oil companies (NOCs). As a result, the long-term upstream growth options of these publicly traded oils are limited, versus emerging majors with some state ownership that are willing to take greater risks for smaller rewards.

A key conclusion of Victor's study - On Measuring the Performance of National Oil Companies (NOCs) - was that the IOCs were one-third better at converting oil reserves into actual production than their NOC counterparts.

These supermajors are also among the industry leaders based on refinery distillation capacity (as shown in the "World's Top 20 Oil Companies" table), as is major oil company Chevron, in the No. 12 position. (Majors are the next largest publicly traded integrated oil companies, with capitalizations of less than $100 billion.)

Global demand for refined petroleum products continues to rise. In addition, we have seen a global movement toward low-sulfur motor fuels, reflecting tightened fuel specifications for sulfur content in North America and Europe, and emerging import fuel sulfur specifications in the eastern Mediterranean, the Middle East, and India. We believe that, because of these changes, the demand for low-sulfur (sweet) crude oils has increased and is outpacing available sweet crude reserves, thus driving up the price of sweet crude oils.

With the global demand for these motor fuels rising faster than additions to refining capacity, we believe that those refiners with the ability to process heavy crude oils laden with impurities such as sulfur (sour crudes) will benefit from large crude oil price discounts until substantial new complex refining capacity comes onstream from 2010-12.

In 1911, the US Supreme Court ruled that John D. Rockefeller's Standard Oil Trust - a holding company with near-absolute monopolies in the drilling, refining, transport, and sale of petroleum - represented a restraint of trade. The court's order to break up the company produced 34 separate companies, including Standard Oil Co. of New Jersey (which later became Exxon) and Standard Oil Co. of New York (later known as Mobil). However, in recent years, much of the Rockefeller monolith has been reassembled.

Sharp drops in oil prices throughout 1998 precipitated the wave of consolidation. This development sent major oil companies scrambling to cut costs in order to remain profitable or minimize losses. The promise of merger synergies exerted a strong appeal, and the rush to unite was on.

Renewables
Most of the supermajors, such as BP, Chevron, Royal Dutch Shell, and Total, are building renewable energy businesses with a long-term view. BP Alternative Energy was launched in 2005, with a focus on solar power, wind, and hydrogen power.

With Chevron's acquisition of Unocal in 2005, the company became one of the largest renewable energy producers in the world. Shell Renewables was established in 1997 and is now one of five core businesses for Royal Dutch Shell - with a focus on wind and solar photovoltaics, but it is also involved in biofuels, geothermal, and hydrogen. Since 1983, Total has been investing in renewables, such as solar and wind power, through its 35% stake in Total Energie. ExxonMobil is investing in renewable research, such as the Global Climate and Energy Project.

Retail: Exclusive and Private Labels

I'm sort of new to the concept, but private label products are brands that are owned by retailers that are often produced by third parties at very low prices. Exclusive brands are brands licensed by a retailer for exclusive sale within their stores. I had always knows Sears to be very big on private label brands for differentiating itself. Kenimore, Craftsmen, Diehard, Land End are some of Sear's more famous brands. Apparently, though, the trend to create in house labels has increased dramatically.

In a previous entry about Steve & Barry I posed the question of whether Wal-mart has its own private clothing labels. As should have been obvious, Walmart has no shortage of its own brands. Subjectively speaking, some of their brand names are bizarrely unappealing sounding. For example, there is a mens fashion line named "Puritan," a women's beauty product line named "Simply Basic," and a clothing line named "Faded Glory."

Walmart's Equate brand of generic drugs have rather interestingly entered the news for insanely cheap prices on commonly used drugs no longer protected by patents.

In any event, as the WSJ article below states, there are indeed some risks associated with having in-house brands - namely inventory risks as well as risks associated with possible "minimum guaranteed royalties."

Exclusive Lines May Prove Risky In Cool Economy

By VANESSA O'CONNELL and CHERYL LU-LIEN TAN
April 11, 2008; Page B1

(See Corrections & Amplifications item below.)

With sales falling dramatically, one looming question for big department-store chains is whether their recent push into in-house labels and designer lines made exclusively for them will come back to haunt them.

In good times, such products help retailers differentiate themselves from competitors, while generally producing higher profit margins than national brands. That's why department stores have poured millions of dollars into exclusive lines of clothes and home goods, such as the new American Living line at J.C. Penney Co., Simply Vera Vera Wang at Kohl's Corp., and Martha Stewart Collection at Macy's Inc. Some of these are the result of licensing deals with designers, while others are labels produced in-house.

Kohl's relies heavily on exclusive lines, like the in-house label Elle.

But with sales declining -- department stores' March same-store sales reported Thursday were the weakest in the retail sector, dropping 11.4% from the previous year -- that equation could change. If the retailers are forced to sharply mark down their exclusive goods, that could hurt the image of both the brand and the store.

What's more, retailers can't share the pain with suppliers, as they do with national brands that offer allowances for markdowns, meaning retailer profits will suffer. And, retailers often commit to large minimum orders to get the best prices on their in-house products -- and can wind up with far more inventory than they need.

"This vehicle for improved profitability is a double edged sword when sales are weak," says Bill Dreher, an analyst with Deutsche Bank Securities.

While department stores say they haven't yet had to make widespread markdowns on in-house labels or exclusive brands, analysts see these goods -- which stores have ramped up dramatically in recent years -- as a vulnerable spot if the economy continues to worsen. "The indication is that the customer is not shopping, so you may have across-the-board markdowns," including in private label goods, says Linda Beauchamp, CEO of Beauchamp Vision in Commerce, a retail consulting firm.

The higher margins in some private-label programs, which might have provided a cushion for retailers' markdowns, now are coming under pressure as retailers grapple with higher sourcing costs in China and elsewhere.

In licensing exclusive brands, retailers often must agree to pay minimum royalties to the designers or celebrities the brands are named for, regardless of sales. Sears Holdings Corp.'s struggling Kmart unit paid $65 million in minimum guaranteed royalties to Martha Stewart Living Omnimedia last year, even though the Martha Stewart Everyday products it sells exclusively didn't meet sales targets. For 2008, its obligation is $20 million. Kmart declined to comment.

Similarly, Macy's agreed to minimum guarantees to Martha Stewart's company for the use of her name in its Martha Stewart Collection products, according to Martha Stewart's company, Macy's bears all the inventory risk if those products don't sell. Macy's declined to comment.

At Macy's, where private and exclusive brands account for 35% of sales, Chief Financial Officer Karen Hoguet acknowledged in a February conference call with analysts that "sales were disappointing in some of our private brands," though private brands in total still had outperformed other brands.

Macy's strategy has long been to develop big private brands such as Alfani and I.N.C to offer shoppers "differentiation and value," with profit margins that are "roughly equivalent to other brands," says spokesman Jim Sluzewski, who added that "we carefully plan our inventories, which remain in good shape."

Proponents of exclusive lines say house brands hold up better than national brands during economic downturns.

Kohl's -- which gets nearly 40% of its sales from these programs, double the amount 10 years ago -- says its lines including Simply Vera Vera Wang, Elle and Food Network all did well last year, and are "outperforming their planned sales even in a tough selling environment." Kohl's President Kevin Mansell acknowledged that the chain's exclusive arrangements require a commitment to minimum volumes but said they are "set just as a basement."

"Consumers are interested in newness, things that differentiate one store from another -- they want a reason to come to you versus somebody else," he said. "And generally, private and exclusive brands do offer better value." On Thursday, the chain cut its quarterly earnings forecast to 40 cents to 42 cents a share from 50 cents to 54 cents.

Penney, which gets 50% of its revenue from in-house labels and exclusive designer lines -- among them the American Living line of apparel and home goods produced by Polo Ralph Lauren Corp. and launched in February -- reported a 12.3% drop in March same-store sales.

Penney President Ken C. Hicks says the company's private-label arrangements allow it to be more nimble than it can be with national brands. Last fall Penney zeroed in on improving the flow of merchandise into its 1,073 stores, and it now places "discretionary orders" for 40% to 50% of its private-label and exclusive merchandise, meaning it reserves the right to cancel deliveries if an item isn't selling well, he says.

Dillard's Inc., too, has been expanding its stable of exclusive brands. Last year, 24.2% of its sales came from exclusive brands, up from 15.4% in 2001. Last month, it started another -- Pink Twill, a casual, contemporary women's line -- and plans to roll out more labels later this year.

In July, Penney will introduce Fabulosity, a juniors sportswear line designed by Kimora Lee Simmons and produced by Kellwood Co.'s Phat Fashions, in 630 stores. Bernt Ullman, president of Phat Fashions, acknowledged it could be a risky time to start an exclusive line.

"But it's significantly riskier to maintain the status quo -- that is a recipe to shrink your business," he said, adding, "We need to excite the shopper."

Write to Vanessa O'Connell at vanessa.o'connell@wsj.com and Cheryl Lu-Lien Tan at cheryl.tan@wsj.com

Corrections & Amplifications:

At Macy's Inc., where private and exclusive brands account for 35% of sales, Chief Financial Officer Karen Hoguet acknowledged in a February conference call with analysts that "sales were disappointing in some of our private brands," though private brands still had in total outperformed other brands. A version of this Marketplace article on private-label brands didn't include Ms. Hoguet's comment that private brands as a whole had outperformed other brands.

Auto: Nissan's Electric future

Two interesting things to note here:
1) The pricing model that Nissan is exploring for its electric cars - charging per mile instead of for batteries and charges/watts. Though, such a model wouldn't really work unless both the charging stations and the car makers are integrated. Given that different cars could have different levels of efficiency (i.e. an electric SUV will still presumably be less efficient than an electric compact) the charger would need to bill different car models differently. Also: if Nissan were able to integrate (via contracts or ownership) with charging stations they would be better able to block new entrants into the markets they operate in.
2) The first market being explored - Israel. Israel is a very small country where it wouldn't require a huge initial investment to obtain sufficient charging station coverage. Few Israeli drivers probably drive outside of Israel and the Palestinian territories, meaning questions of overall range aren't as relevant. Also: Israelis would probably be more likely to adopt electric cars out of desire to become more energy independent than the citizens of other countries.

To quote from the nytimes:

GAS-FREE NATION: In January, Shai Agassi announced that his California-based company, Project Better Place, would help convert Israel into the first gasoline-free car-loving nation. The plan will get rolling with the mass-market introduction of nearly emission-free electric cars, to be made by Renault and Nissan. The Israeli government will offer tax incentives for their purchase. Project Better Place (backed by $200 million in venture capital) will construct up to 200 battery-exchange stations and 500,000 parking spots with charging capacity; then it will lease to drivers the lithium-ion batteries that power the cars. A similar system is in the works for Denmark. Agassi says an electric vehicle that gets 100 miles per charge will bring the public on board. “We are not trying to build a cool sexy car, or a new model for public transport, or force people to walk to work,” he says. “We love our cars; we love our freedom.” But he wants people to give up gas. To that end, his company will offer subscription plans with incentives, perhaps even a free car to anyone who purchases a long-term “fuel” plan. Other monthly plans will be based on kilometers driven. When combined with subsidies to reduce the cost of batteries and a network of plentiful and easy-to-use charging stations, he says, the barriers that have long thwarted electric-car champions will fall. SARAH WILDMAN

Electric vehicles
Charge!

May 8th 2008
From The Economist print edition

Renault-Nissan's ambitious plans for all-electric cars

COMMITMENT is one of Carlos Ghosn's favourite words. He makes commitments himself and he expects his senior managers in the Renault-Nissan alliance to do the same. His latest, and one of his boldest, is that Renault and Nissan will lead the car industry in developing profitable zero-emission vehicles.

In recent months Renault-Nissan has teamed up with Project Better Place, a Silicon Valley start-up, to introduce all-electric vehicles and a network of charging points in Israel and Denmark by 2011. Now Nissan is going further. Speaking at a media event in Portugal this week, Mr Ghosn said that the time for the mass-market zero-emission car has come. Nissan plans to launch a battery-powered car in America in 2010 and by 2012 the Renault-Nissan alliance will offer a complete range of electric vehicles in every large car-market. And these new battery-powered cars, it claims, will work out less expensive than equivalent petrol models.

Renault-Nissan's new electric-vehicle strategy is, says Mr Ghosn, the culmination of two years' work. It is the product not just of rising fuel prices and the prospect of new emissions rules, but the frightening environmental implications of rapid growth in emerging markets. At the Beijing motor show in April, he observed that “nothing can stop the car being the most coveted product that comes with development”—but that more efficient conventional engines were not the answer.

Technically, says Mr Ghosn, everything is now ready for electric vehicles to enter the mainstream—except for the batteries, in which Nissan and NEC, a Japanese industrial giant, are “investing massively”. What matters for all-electric vehicles—as opposed to hybrids, such as the Chevrolet Volt, due in 2010, which can fall back on a petrol engine when the battery runs out—are their limited range and the time taken to recharge their batteries.

When California briefly mandated the sale of electric vehicles in the early 1990s, their 50-mile range and long charging cycles meant that they failed to attract more than a dedicated core of green-minded motorists. But lithium-ion battery technology could push range to 200 miles, and fast-charge systems promise to provide a 70% top-up in only a little more time than it takes to fill a tank with petrol.

Another requirement is innovative business models. Mr Ghosn says the electric version of the Mégane saloon that Renault is building for Israel will come with a lifetime warranty, and payment will follow the model established by the mobile-phone industry. After buying the car, owners will subscribe to a battery-replacement and charging plan based on their anticipated mileage. Recharging will be done at one of 500,000 spots that Project Better Place will build and maintain.

When Nissan launches its new line of electrical vehicles in America in 2010, it will initially target fleet buyers, which can provide their own charging stations. “It will be a real business,” says Tom Lane, Nissan's global product-planning chief, “not just a way to sell 200 cars in California.” He expects sales to retail buyers to begin in 2012, at a price of around $25,000.

Nissan is also hedging its bets by developing both a “parallel hybrid” system (akin to that found in the Toyota Prius) and a plug-in “series hybrid” similar to the Chevy Volt. But it favours the all-electric approach, even though it will be a tough sell, says Mr Lane. As for Mr Ghosn, he has no doubts. “We must have zero-emission vehicles,” he says. “Nothing else will prevent the world from exploding.”

Energy: Negawatts

Steeling an entire article here...

The elusive negawatt

May 8th 2008
From The Economist print edition

Alamy

If energy conservation both saves money and is good for the planet, why don't people do more of it?

IN WONKISH circles, energy efficiency used to be known as “the fifth fuel”: it can help to satisfy growing demand for energy just as surely as coal, gas, oil or uranium can. But in these environmentally conscious times it has been climbing the rankings. Whereas the burning of fossil fuels releases greenhouse gases, which contribute to global warming, and nuclear plants generate life-threatening waste, the only by-product of energy efficiency is wealth, in the form of lower fuel bills and less spending on power stations, pipelines and so forth. No wonder that wonks now tend to prefer “negawatts” to megawatts as the best method of slaking the world's growing thirst for energy.

Almost all blueprints for tackling global warming assume that energy efficiency will have a huge role to play. Nicholas Stern devoted a whole chapter to it in the report he wrote on climate change for the British government. In the greenest of futures mapped out by the International Energy Agency, a think-tank financed by rich countries, greater efficiency accounts for two-thirds of emissions averted. The McKinsey Global Institute (MGI), the research arm of the consultancy, thinks that energy efficiency could get the world halfway towards the goal, espoused by many scientists, of keeping the concentration of greenhouse gases in the atmosphere below 550 parts per million.

MGI is particularly enthusiastic because it believes that unlike most other schemes to reduce emissions, a global energy-efficiency drive would be profitable. The measures it has in mind, all of which rely on existing technology, would earn an average return of 17% and a minimum of 10%. The Intergovernmental Panel on Climate Change, a group of scientists advising the United Nations on global warming, makes a similar point. It believes that profitable energy-efficiency investments would allow Pakistan to cut its emissions by almost a third, Greece by a quarter and Britain by more than a fifth.

In other words, big investments in energy efficiency would more than pay for themselves, and fairly fast. Although a lot of money would have to be spent—$170 billion a year until 2020—by MGI's reckoning that is only 1.6% of today's global annual investment in fixed capital. Moreover, with ample profits to be made, financing should be easy to attract.

Yet if there are so many lucrative opportunities to improve efficiency, why are investors not already taking advantage of them? To a degree, they are: in America, for example, “energy intensity”—the amount of energy required to generate each dollar of output—is falling by about 2% a year (see chart 1). This is only partly because America's factories, houses, cars and appliances are becoming more efficient: it is also because energy-guzzling factories have moved to cheaper spots such as China. But globally, too, energy intensity is falling by around 1½% a year.

That decline is not predestined. Before the first oil shock, in 1973, America's energy intensity was falling by only 0.4% a year. At that languid pace, America would now be spending 12% of GDP on energy instead of 7%, according to Art Rosenfeld, an efficiency pioneer and a member of the California Energy Commission, which sets efficiency standards and other energy policies for the state. Simply by buying more efficient fridges over the years, he reckons, Americans have come to save more than 200 terawatt-hours (TWh) annually, or roughly 80 power plants' worth.

But as McKinsey points out, there are still hundreds of billions of dollars' worth of unfulfilled but potentially profitable opportunities in energy efficiency available to households and companies. What is holding investors back?

One answer is price. In the eyes of many consumers, electricity and fuel are often too cheap to be worth saving, especially in countries where their prices are subsidised. Industrialists in Russia are profligate with natural gas, because it sells there at a quarter of the international price. Drivers in Qatar have little incentive to scrimp on petrol when they pay barely a dollar a gallon for it.

By and large, energy intensity is, not surprisingly, lower in countries where electricity prices are higher. It is no coincidence that Denmark has both high power prices and an energy-efficient economy. Among American states, for every cent per kilowatt-hour by which prices exceed the national average, energy consumption drops by about 7% of the average. George David, the boss of United Technologies, a conglomerate that makes air-conditioners, lifts and aircraft engines, among other items, argues that higher fuel and power prices are the only motor needed to drive energy efficiency.

But there are still plenty of profitable investment opportunities in energy efficiency, even in the places with the most expensive power. David Goldstein, author of a recent book on energy efficiency, points out that until recently businesses in New York lit their premises more brightly than did those in Seattle, despite New York's much higher power prices. And Hawaii, the American state with the dearest power, is not the most efficient (although the one with the cheapest, Kentucky, does come bottom of the efficiency table).

The problem, analysts explain, is a series of distortions and market failures that discourage investment in efficiency. Often, consumers are poorly informed about the savings on offer. Even when they can do the sums, the transaction costs are high: it is a time-consuming chore for someone to identify the best energy-saving equipment, buy it and get it installed. It does not help that the potential savings, although huge when added up across the world, usually amount to only a small share of the budgets of individual firms and households. Despite recent price increases, spending on energy still accounts for a smaller share of the global economy than it did a few decades ago.

For all these reasons, homeowners, as Lord Stern pointed out in his climate-change report, tend to demand exorbitant rates of return on investments in energy efficiency—of around 30%. They generally want new boilers or extra insulation to pay for themselves within two or three years, says Mark Hopkins, of the United Nations Foundation, an NGO. Businesses are not quite so demanding, he says, but they still tend to put greater emphasis on increasing revenues than on cutting costs.

Similar stories crop up in the markets for new homes and offices, appliances and vehicles. Builders are not the ones who end up paying the utility bills, so have little reason to add to the construction costs—and hence the price of a home or office—by incorporating energy-saving features. The makers of appliances and cars also know that not all consumers and drivers will think as carefully about running costs as about the purchase price. By the same token, landlords have scant incentive to invest in energy efficiency on their tenants' behalf. And power companies are usually keen to encourage their customers to consume as much power as possible.

Financing energy-efficiency investments can also be difficult. In the developing world, capital can be scarce. In rich countries, the savings from making individual homes more efficient are too small and the overheads involved too high to be of much interest to most banks.

The scent of savings

Despite these obstacles, as energy prices rise and more countries adopt limits on greenhouse-gas emissions, banks and consultancies are beginning to sniff an opportunity. Firms that help businesses and families to trim their energy bills have become common enough to earn an acronym: ESCos, or energy-service companies. Their industry group in America says business, which had been growing at 3% a year in the early part of this decade, is now increasing by 22% a year. The total revenues of the 46 ESCos it surveyed were about $3.6 billion in 2006, about three-quarters of which came from energy efficiency.

Typically, an ESCo designs a scheme to reduce a building's energy bill, borrows money to pay for the kit it needs, and installs and maintains it over a fixed period. Clients do not need to provide any cash up front: the ESCo's reward comes from retaining most of the savings—out of which it must repay the loan. The revenues are steady and predictable enough to allow ESCos to unburden their balance sheets and lower their borrowing costs by securitising them. Hannon Armstrong, one of the financial-service firms involved, says it has arranged more than $1.5 billion-worth of such securities.

The hitch is that 80% of ESCos' customers in America are from the various branches of the government, along with schools, hospitals and universities. Small businesses and households would provide a much bigger market, but they tend to be less creditworthy and to move more often. Moreover, the transaction costs tend to outweigh the savings.

Jeff Eckel, of Hannon Armstrong, believes it is possible to overcome these problems by aggregating many similar properties and by drawing up clever contracts. The Clinton Climate Initiative, a charity set up by the former American president, is thinking along the same lines. It has persuaded the local authorities in 40 big cities around the world to co-ordinate their investments in energy efficiency. It then used the allure of such a big market to persuade the makers of energy-efficient goods, the ESCos that will install them and the banks that will finance them to reduce their margins. The cities with which the charity has linked up include Chicago, London and New York.

Most governments, however, do not seem convinced that businessmen and do-gooders are capable of overcoming the impediments to energy efficiency on their own. So they are intervening in markets. The variety of methods they use hints at the difficulties.

The simplest tactic is to try to get the public to think. Britain set up a body called the Energy Saving Trust in 1993; America has a similar outfit, called Energy Star. Among other things, it helps consumers identify energy-efficient products and houses through a voluntary labelling scheme. The European Union goes slightly further, with compulsory labelling of goods such as fridges, washing machines and dishwashers; and Britons selling a home must now have its energy efficiency assessed.

But consumers often ignore such labels or at least do not give them as much weight as price, appearance or convenience. So governments sometimes try to make efficient appliances more appealing through financial incentives. America's federal government, for example, offers a tax credit to makers of extremely efficient appliances—and several states give rebates, income-tax credits or sales-tax exemptions to anyone who buys them. China has just said it will subsidise makers of compact fluorescent light-bulbs, which are four or five times more efficient than the cheaper incandescent sort.

Other governments blanch at bribing people to do something that is already in their interest. Australia has proposed banning incandescent light-bulbs outright. Many have adopted building codes and appliance standards that dictate minimum levels of efficiency. Several tighten the standards regularly, to foster constant improvement. Japan's Top Runner scheme, for example, identifies the most efficient appliances on the market in different categories, and then requires all competing brands to improve on them within four to six years. Those that fail face fines.

Businesses often complain that such tough measures impose undue costs, which they must then pass on to consumers as higher prices. They also argue that their customers should be free to buy bigger or more powerful devices if they want, even if that makes them relatively inefficient. Notably, America's carmakers have used such arguments to resist increases in fuel-economy standards.

When Congress raised standards last year it tried to address these complaints by setting different targets for heavy and light vehicles. Each firm's target is an average across all the cars it sells, not a model-by-model limit, so there is still scope to make the odd guzzler. Anyway, environmentalists dispute the notion that energy-efficiency standards drive up prices. The average price of fridges in America has fallen by more than half since the 1970s, even as their efficiency has increased by three-quarters, according to Mr Goldstein. Those gains have come in spite of steady increases in the size of the average unit (see chart 2).

Governments are also obliging utilities to get involved in the business of energy efficiency. Some, including many American states, add an extra sum to electricity bills to finance investments in energy efficiency. Others specify the amount of energy to be saved, rather than the amount to be spent. France, for example, requires gas and electricity suppliers to invest enough over three years to reduce projected demand by 54TWh.

Britain and Italy have similar schemes, although the targets are expressed in tonnes of carbon and barrels of oil, respectively. External auditors verify the savings, and the “white certificates” they issue when they have done so are tradable. The intention is to keep the cost of the scheme low by allowing those that can achieve reductions most cheaply, including ESCos, to do so on behalf of less expert participants. The idea is also spreading in America: Connecticut, Nevada and Pennsylvania have all adopted it.

A sparky divorce

But a white-certificate scheme would have to be very demanding to outweigh a utility's incentive to sell more power. So other American states have gone further, and attempted to “decouple” utilities' profits from their sales. Regulators forecast demand and allow utilities to charge a price that would recoup their costs and earn a fixed return on the basis of that forecast. If demand turns out to be lower than expected, the regulator lets prices rise so that the utility can make the mandated profit; if it is higher, the regulator cuts prices to return the excess to customers.

California, predictably, has gone further still. It first decoupled sales and profits for gas in 1978 and for electricity in 1982. Last year, it adopted a scheme called “decoupling plus”, which aims to make investments in energy efficiency more profitable for utilities than new power stations would be. Fees to finance energy-saving measures are added to each bill, and utilities spend the money in pursuit of targets set by the regulator, the California Public Utilities Commission (CPUC). The commission then calculates the savings from these investments, compared with the cost of new power plants. If a utility achieves between 85% and 100% of the target, it is allowed to keep 9% of these savings. If it exceeds the regulator's target, it gets 12%, more than it would earn from building new infrastructure. Between 65% and 85% it does not earn any return at all, and below 65% it pays a fine for every kilowatt-hour by which it has fallen short.

This complicated system is designed to make sure utilities spend more on energy efficiency, but do not waste billpayers' money on investments of dubious merit. California's private utilities now spend about a $1 billion every year on energy efficiency. In July the CPUC will announce their energy-savings targets as far as 2020. The state, says Dian Grueneich, one of the commissioners, hopes to meet half of all projected demand growth through increased energy efficiency.

Less dainty governments just oblige the most energy-hungry firms to cut back. The 13,000 factories in Japan with the highest energy use are required to improve their efficiency by 1% a year. Those that fail to do so are fined. China's central government has followed suit, setting energy-efficiency targets for the country's 1,000 biggest firms. That step, in turn, has spawned similar initiatives in the provinces. Overall, the Chinese government hopes that energy intensity will be 20% lower in 2010 than it was in 2006.

However, no matter what methods governments adopt to encourage energy efficiency, the results may not be as impressive as they imagine. The culprit is something called the “rebound effect”. Falling demand for electricity or fuel brought on by an efficiency drive should lead to lower prices. But cheaper energy, in turn, is likely to prompt greater consumption, undermining at least some of the original benefits. What is more, consumers with lower electricity or fuel bills often put the money they have saved to some other use, such as going on holiday or buying an appliance, which is likely to involve the consumption of fuel and power.

Economists disagree about the size of the rebound effect, which is hard to measure. The British government commissioned two studies of the effect, from two different universities. The first found that it cancelled out roughly 26% of the gains from energy-efficiency schemes; the other put the figure at 37%. Either way, negawatts are worth pursuing. But they are unlikely to satisfy the world's thirst for energy to the extent their advocates assume.

Tech: HP buys EDS

Hp has apparently purchased EDS. Given my past interactions with EDS, I can see why HP's stock price has plummeted. But, despite what the article says, I can see where HP probably sees both potential revenue and cost synergies behind the purchase.

On the cost side, EDS does a horribly job of managing their data centers (I know from experience). HP has been putting considerable effort into purchasing and developing tools to make data center management more efficient. Its not hard to imagine that they feel they can lower costs considerably. I don't doubt the potential is there, though I suspect it will take many people many years to actually realize those savings - especially given how poorly run EDS currently is. To quote a comment from the dealbook blog:

I used to work for a company that got swallowed by EDS and then spat out. The year or two I spent as part of EDS were incredibly depressing. The internal message boards were humming with unhappy employees from all around the globe. If I were still there I’d be hoping that HP culture takes over EDS culture, but I wouldn’t be shocked if the opposite happens.

On the revenue side, I'm sure HP hopes to use EDS as a channel to push HP servers. Also: now HP can try to push its servers more aggressively to EDS's customers, and HP can try to push EDS's services on HP customers that are currently only purchasing HP hardware.
Also - by HP more fully integrating into the data center space, they can not only provide customers with servers, but they can also help customers plan their capacity - those increasing HP's ability to forecast their own sales.

As a quick update, apparently EDS will be put in charge of HP's outsourcing segment...

Ms. Livermore had overseen all the pieces of Hewlett-Packard’s services business. But the outsourcing segment that E.D.S. specializes in will be managed by Ronald A. Rittenmeyer, the chief executive of E.D.S, who will report directly to Mr. Hurd.

Mr. Hurd said in a conference call with investors that E.D.S. would bring some expertise and infrastructure in an area where Hewlett-Packard wants to grow. “Frankly, E.D.S. is more mature and more sophisticated in many of the processes they bring to market than we are,” Mr. Hurd said.

On the surface, that probably makes sense, but its definitely pretty scary for dissatisfied EDS customers that recently switched to HP.

Auto: CAFE standards and alternative energy

From the following wikipedia article on CAFE standards:

The Corporate Average Fuel Economy (CAFE) regulations in the United States, first enacted by Congress in 1975,^[1] are federal regulations intended to improve the average fuel economy of cars and light trucks (trucks, vans and sport utility vehicles) sold in the US in the wake of the 1973 Arab Oil Embargo. Historically, it is the sales-weighted harmonic mean fuel economy, expressed in miles per gallon (mpg), of a manufacturer's fleet of current model year passenger cars or light trucks with a gross vehicle weight rating of 8,500 pounds (3,856 kg) or less, manufactured for sale in the United States. This system would have changed with the introduction of "Footprint" regulations for light trucks binding in 2011, except that the 9th Circuit Court of Appeals has returned that rule to NHTSA for reconsideration for, among other things, being "arbitrary and capricious"^[2]. Light trucks that exceed 8,500 lb GVWR do not have to comply with CAFE standards; SUVs and passenger vans are exempt up to 10,000 lb. In 1999, over half a million vehicles exceeded the GVWR and the CAFE standard did not apply to them.^[3] In 2011, the standard will change to include many larger vehicles. ^[4] The United States has the lowest average fuel economy among first world nations; the European Union and Japan have fuel economy standards about twice as high as the United States.^[5]

The National Highway Traffic Safety Administration (NHTSA) regulates CAFE standards and Environmental Protection Agency (EPA) measures vehicle fuel efficiency. Congress specifies that CAFE standards must be set at the "maximum feasible level" given consideration for 1) technological feasibility; 2) economic practicality; 3) effect of other standards on fuel economy; and 4) need of the nation to conserve energy. Historically EPA has encouraged consumers to buy more fuel efficient vehicles while NHTSA expresses concerns that smaller, more fuel efficient vehicles may lead to increased traffic fatalities.

If the average fuel economy of a manufacturer's annual fleet of car and/or truck production falls below the defined standard, the manufacturer must pay a penalty, currently $5.50 USD per 0.1 mpg under the standard, multiplied by the manufacturer's total production for the U.S. domestic market. Historically, higher fuel efficiency has been associated with lower traffic safety, intertwining the issues of fuel economy, road-traffic safety, air pollution, global warming and greenhouse gases, although this relationship is falling increasingly into dispute.^[6]

And, interestingly...

Fuel economy calculation for alternative fuel vehicles multiplies the actual fuel used by a "Fuel Content" Factor of 0.15^[17] as an incentive to develop alternative fuel vehicles.^[18] Dual-fuel vehicles, such as E85 capable models, are taken as the average of this alternative fuel rating and its gasoline rate. Thus a 15 mpg dual-fuel E85 capable vehicle would be rated as 40 mpg for CAFE purposes, in spite of the fact that less than one percent of the fuel used in E85 capable vehicles is actually E85.^[7]

Manufacturers are also allowed to earn CAFE "credits" in any year they exceed CAFE requirements, which they may use to offset deficiencies in other years. CAFE credits can be applied to the three years previous or three years subsequent to the year in which they are earned. The reason for this requirement is so that manufacturers are penalized only for persistent failure to meet the requirements, not for transient noncompliance due to market conditions.

This "alternative energy clause" has resulted in GM and Ford installing flex fuel capabilities in their larger trucks to make them cafe compliant. It was only recently though that GM and Ford started marketing their cars as flex fuel capable. Apparently though, as per this article, for years cars were sold that were capable of running on E85, though they were never advertised as such.

The fuel works in more than 30 models, including General Motor's Yukon, Chevrolet's Silverado, and Ford's Taurus, but many people don't know it. Ford and GM have only recently begun national ad campaigns to promote their vehicles' flex-fuel capabilities, trying to lure consumers skittish over gas prices.

Drivers can see if their vehicle will run on E85 by checking the owner's manual or a Web site, e85fuel.com, that lists compatible models. Ethanol promoters say motorists are often stunned to learn their cars will run on the fuel, but even those well-schooled in E85 may need to drive hundreds of miles to buy it.

As such, the one positive of this regulation is that there is now a much larger installed base of cars that can run on E85 than one would expect. However, in the short run, much value was eliminated by the regulation. Car companies installed devices worth 70 to 100 dollars that didn't provide any consumer value - this meaning the cars could have been sold at a marginally lower value. And, in general, fuel efficiency was allowed to be much lower than otherwise expected as a result.

Finance: SPAC deals

This article gives a brief discription, but I also quote:

Over the last couple of years investors have been pouring money into special-purpose acquisition companies or SPACs. SPACs are companies that don't have operations. However, their management teams intend to raise money in the public markets in order to make acquisitions. Offerings are typically sold on the strength of management teams and the promise of future plans. According to Barron's (sub req) more than three dozen of these SPACs have gone public this year including a number whose plans consist of making acquisitions in China. The following is a list of those China-focused SPACs that went public in 2005, charts showing how they have fared on the public markets, and a list of those China-focused SPACs in IPO registration:

Finance: facebook financing

This Henry blodget blog entry covers the $150 million facebook just raised using the debt markets and why most start-ups don't raise cash via debt markets. The article sort of touches on the issue of whether or not Facebook is actually worth 15 billion.

In any event, now Facebook is taking on $100 million in debt to buy servers. Why is it borrowing the money instead of selling stock? The positive spin, brought to Spencer Ante at BusinessWeek by Facebook and debt lender TriplePoint, is that its a shame for exciting private companies to squander expensive equity on mundane stuff like servers. And that's true up to a point. (Start-up debt financing is a growing trend).

But the real reason you don't often see emerging private companies take on big debt-loads is that borrowing money is riskier than selling stock, and it also subordinates the existing equity holders. The owners of Facebook common stock, for example, now have at least $350 million of claims that have to be paid out of whatever Facebook is ultimately sold for before they get a dime. Given Facebook's current growth, this shouldn't ever be a factor, but you never know.

In any event, Google, Microsoft, Yahoo, eBay, et al, never borrowed money as private companies. And we suspect the real reason Facebook is doing so now is because it couldn't raise the rest of that $500 million round at that $15 billion valuation. Especially now, after the Beacon flop.

According to the numbers Mark Zuckerberg threw out on a conference call last fall, Facebook will burn at least $150 million of cash this year. Given the latest debt deal, we suspect the number is now expected to be considerably higher than that, and Facebook didn't want its cash balances to drop too low. It couldn't sell any more equity at $15 billion, and it didn't want to do a down round, so it turned to the debt markets.

The following Yahoo article covers the same issue - though the commentators are clearly far more upbeat on facebook's prospects.

General: alternative fuels

Alternative systems for powering cars have increasingly received attention in the drive to decrease the United States' dependence on foreign countries for fossil fuels (i.e. oil). In general, the following alternatives are currently being pursued:

1. Ethanol
1. Corn-based
   
2. Sugarcane based
3. Cellulosic (produced from any form of bio-mass)
   
2. Diesel
   
1. Oil based
2. Bio-diesel (generally soy-based)
   
3. Hydrogen
4. Pure-Electrics
   
5. Hybrids

Ethanol, in the United states, is generally made using corn. However, making ethanol from corn is very inefficient, possibly requiring more energy to create than it yields when its used. As a result, corn based ethanol is far more expensive than most other forms of ethanol - especially ethanol made from sugar cane. This is evidenced by the fact that E85 costs almost as much as regular gas, while E100 generally costs a third the price of regular case in Brazil - which makes its ethanol using sugarcane. Furthermore, corn based ethanol requires approximately 3 to 4 gallons of water to produce a single gallon of ethanol. Cellulosic ethanol, though not currently commercially viable, has a ratio of water used to ethanol yielded closer to 1 to 1.

A big problem with ethanol, regardless of the form, is that it can't be transported and stored using existing oil distribution infrastructure because of its much high corrosive water content. As a result, gas stations need to install special tanks to store it, and transportation costs make it prohibitively expensive to transport ethanol far from where its created. As a result, E85 is hard to find outside of the mid-west - where corn is abundant. I personally haven't seen it pumped since I moved from Texas.

Ethanol's energy content is also less than regular gas's by roughly 30%. As a result, flex-fuel vehicles get roughly 30% fewer mpg on Ethanol than they do on regular fuel. Given E85, as sold in the US, is about the same price as gas, consumers are deciding against their own interests when they purchase E85.

The above raises the following questions: why is corn based ethanol the primary form found in the US? Why is ethanol even produced? Why do car producers produce cars that use E85? And, why do consumer purchase E85?

The United States doesn't have a large supply of sugarcane because of its climate, and foreign produced ethanol is subject to a large $0.53 per gallon tariff. Locally generated ethanol though is subject to a ~ .50 subsidy for each gallon produced. Also: the US Agriculturally policy effectively subsidizes corn production. As a result of currently regulations, corn based ethanol is economically viable. Presumably, if regulations and tariffs were removed from the picture, the US wouldn't produce any corn based ethanol and would instead import sugarcane based ethanol from brazil (which would still be more expensive than $1 a gallon because of transportation costs). Thus, the justification for the existing regulatory structure is that its necessary to encourage local production.

As to why consumers purchase E85 when its available and when they're car supports it -- they apparently usually don't. Though, those that do are often ignorant of the decreased fuel efficiency and base their decision on the slightly lower price tag per gallon that E85 sports. So, from what I've read, have patriotic motivations.

Cellulosic Ethanol, on the other hand addresses many of the current problems with corn-based ethanol. Coskata claims that in several years it will be able to produce ethanol at a cost of $1 a gallon. instead of a food crop like corn being used, any biomass should be usable - meaning that production plants could profitably be operated near points of sales - thus reducing transportation costs.

Related Links:

1. http://www.edmunds.com/advice/alternativefuels/articles/120863/article.html
2. http://www.nytimes.com/2006/05/14/automobiles/14GREEN.web.html?scp=5&sq=e85&st=nyt
3. http://www.nytimes.com/2007/12/15/business/15ethanol.html?scp=1&sq=e10&st=nyt
4. http://wheels.blogs.nytimes.com/2007/12/08/35-mpg-until-you-read-the-fine-print/?scp=1-b&sq=e10%20lower%20fuel%20efficiency&st=nyt
5. http://www.nytimes.com/2007/09/19/opinion/19wed1.html?scp=5&sq=ethanol%20subsidies&st=nyt
6. http://wheels.blogs.nytimes.com/2008/01/14/gm-grabs-for-some-alcohol/?scp=1-b&sq=coskata&st=ny
7. http://www.wired.com/wired/archive/14.10/ethanol_pr.html
8. http://blogs.edmunds.com/greencaradvisor/
9. http://wheels.blogs.nytimes.com/2008/05/13/2010-endgame-or-hype/index.html
10. http://www.coskata.com/
11. http://en.wikipedia.org/wiki/Corporate_Average_Fuel_Economy
12. http://wheels.blogs.nytimes.com/2007/09/24/corn-ethanol-biofuel-or-biofraud/
    

The major loophole involves still giving extra mileage credits for flexible-fuel vehicles. These are vehicles that can operate on regular gasoline or an alternative like E85, a blend of 85 percent ethanol and 15 percent gasoline.

Even if these vehicles never use a drop of E85, the automaker gets credit for about 50 percent better mileage than the vehicle delivers on gasoline.

Here’s how Mr. Becker explains it: “If I am G.M., God forbid, and I produce a certain number of flexible-fuel vehicles capable of running on E85 ethanol, they will be assumed to be running on ethanol 50 percent of the time. So the fuel economy of a 20 m.p.g. truck that is technically capable of running on E85 will essentially be 30 m.p.g.

“Because the auto companies are not as stupid as they look, they have chosen to make most of their flexible-fuel vehicles their least-efficient vehicles. So they get the maximum fuel economy benefit.”