The Hydrogen Rush

"Oh, Susanna, don't you cry for me,
I'm bound for the Lone Prairie with my pocket full of gold."
— Merrie Melodies (1942)

Have you ever wondered what the name of the San Francisco 49ers means? In 1848, a gold rush began in Northern California. Fortune seekers from the eastern and central United States started migrating to the state in search of instant wealth with relatively modest capital. Migration peaked in 1849, and those fortune seekers who arrived between 1848 and 1855 became known as the “forty-niners,” or simply the “49ers.”

A similar phenomenon occurred during the oil rush, the pursuit of “black gold,” in Pennsylvania between 1859 and 1880. Just as wild as the gold rush, the oil rush attracted countless fortune seekers, though only a few ultimately became truly wealthy. It was a gamble, but one with a relatively low cost of entry if fortune happened to smile upon you.

As a result, oil became the world’s primary energy source throughout much of the twentieth century. It powers national and international transportation systems, but it is also used to generate electricity and heat. However, recent efforts point toward a gradual reduction in oil use over the medium term and a transition toward hydrogen. This raises an important question: are we living through the hydrogen rush?

Transitions toward new forms of fuel are nothing new in the history of energy. In lighting, we moved from whale oil to kerosene and eventually to the electric light bulb. In electricity generation, we transitioned from small hydroelectric facilities to large coal-fired power plants, then to natural gas plants, and more recently to the rapid growth of renewable energy. In transportation, we progressed from animal-powered mobility to steam locomotives and eventually to petroleum-derived fuels such as gasoline, diesel, and fuel oil.

Hydrogen has become what nuclear energy once represented: a world of possibilities capable of transforming and unifying energy production and consumption over the long term. It offers potential not only for the generation of electricity and heat through hydrogen-powered plants, whose only byproduct is water, but also for energy storage and as a principal substitute fuel for passenger vehicles, freight transportation, light and heavy rail systems, and a variety of other high-value industrial applications.

Research centers in developed countries, a modern version of fortune seekers, are investing heavily in hydrogen-based technologies to solve many of the challenges associated with the energy transition. Just as the early gold and oil prospectors tested their luck and some ultimately generated wealth and regional development, the same may occur with the countries that are taking the first steps in the hydrogen rush.

Mexico possesses significant potential to develop an industry based on hydrogen applications. The challenge is simply to look toward the future rather than cling to the past and its former glories. Otherwise, we may find ourselves purchasing technologies developed elsewhere, much like the fortune seekers who arrived too late to the gold rush and ended up enriching the merchants selling shovels and pickaxes.

This article was originally published by Business Insider México.
Date: June 17, 2020
Original Link: https://businessinsider.mx/la-fiebre-del-hidrogeno-energia-circular-paul-alejandro-sanchez-opinion/ [offline]
Archived Link: https://web.archive.org/web/20240725122203/https://businessinsider.mx/la-fiebre-del-hidrogeno-energia-circular-paul-alejandro-sanchez-opinion/ [Archived]

Game Theory and Oil-Producing Countries

Last Saturday we witnessed another meeting of the Organization of Petroleum Exporting Countries and its allies (OPEC+). This organization is what economists refer to as a cartel or an oligopoly with cooperative strategies. In other words, it is a group of producers cooperating to influence prices, primarily by reducing production in order to increase prices from the supply side for the benefit of cartel members.

It sounds simple, but it is not. As a result, it has become one of the classic cases studied in game theory, a discipline that examines the strategic interaction of rational decision-makers. Game theory has been applied in fields such as biology, computer science, and the social sciences, particularly economics, which is where we will focus our attention.

The logic of a cartel suggests that if all participants agree to reduce production and maintain a target price, everyone benefits from higher oil prices. As a result, producers can earn greater revenues with lower output and higher prices. However, while this may be the socially optimal solution for participants, it is not the dominant strategy.

For any country within OPEC+, the dominant strategy is for all other members to reduce production and raise market prices while it does not. In that scenario, prices increase while that country produces more and sells at higher prices. Consequently, the dominant strategy for each individual country is to defect while everyone else cooperates.

Imagine a group of friends agreeing to split a restaurant bill equally. The socially efficient outcome would be for everyone to order similar meals and pay similar amounts. However, knowing that the cost will be shared, one person’s incentive is to order the most expensive item on the menu and distribute the cost among everyone else. If everyone thinks this way, the final bill becomes so high that everyone pays more, or those who ordered less feel the arrangement is unfair. If this behavior becomes repetitive, the group may eventually decide that each person should pay only for what they consume.

For this reason, a successful cartel requires certain conditions: a limited number of producers, transparent reference prices, relatively homogeneous goods, barriers to entry for non-members, and a credible threat of punishment for members who fail to cooperate.

These conditions are increasingly difficult to achieve because, in recent years, the number of countries outside OPEC+ that nevertheless contribute significant production to international markets has grown considerably. In particular, the United States, Canada, Brazil, Norway, and the United Kingdom together account for more than 20 percent of global oil production.

As a result, the price targeted by OPEC+ must be high enough to incentivize its members while remaining low enough to discourage non-members. If oil prices remain above USD 40 per barrel, it is only a matter of time before independent producers in the United States, for example, begin flooding the market once again, forcing additional production cuts and making cooperation among OPEC+ members increasingly difficult.

If game theory teaches us anything, it is that coordinating oil-producing countries around a long-term strategy becomes extremely challenging when a significant portion of global production remains outside the agreement or is willing to refuse cooperation over the long run, as is the case with countries such as Mexico. Under such circumstances, maintaining a coordinated strategy is unlikely to be sustainable for very long.

This article was originally published by Business Insider México.
Date: June 10, 2020
Original Link:https://businessinsider.mx/teoria-de-juegos-en-los-paises-petroleros-opinion-energia-circular-paul-alejandro-sanchez/ [offline]
Archived Link: https://web.archive.org/web/20240225023731/https://businessinsider.mx/teoria-de-juegos-en-los-paises-petroleros-opinion-energia-circular-paul-alejandro-sanchez/[Archived]

What NASA Can Teach CFE

"They were building a Ferrari for every launch when a Honda Accord could get the job done."
— Elon Musk

On May 30, the first private space mission was launched by Elon Musk’s company SpaceX, whose founder is also known for creating Tesla. The mission carried two NASA astronauts to the International Space Station. The launch represented the first crewed spaceflight departing from the United States in nearly a decade and what some have called the beginning of the private space race. Can this teach us any lessons for CFE?

It would be difficult to imagine an area more strategic for a government than its space program, particularly when that program is closely tied to an arms race and ideological competition under the perceived threats of the Cold War. As such, it received substantial public funding to sustain its operations.

However, in the more than sixty years since its creation, the world has changed dramatically in political, economic, and social terms. The welfare state model gradually became strained, largely because of the growing resources required to sustain government structures, and with it came a reduction in the amounts governments could devote to strategic sectors.

For example, NASA’s budget declined from USD 43.554 billion to USD 22.559 billion between 1966 and 2020 (in constant 2014 dollars). As a result, the agency was forced to retire some of its most emblematic programs, including the crewed Space Shuttle Program, which operated for thirty years from 1981 to 2011. In total, the program completed 135 missions, each with a launch cost ranging from USD 450 million to USD 1.5 billion.

The most important lesson from the launch of SpaceX’s Dragon spacecraft is that it cost approximately USD 50 million, only about 10 percent of the cost of the least expensive NASA Space Shuttle launch. As a result, NASA has decided to become one of the company’s principal customers for transporting astronauts into space.

In other words, NASA continues to carry out strategic activities in the space sector while concentrating its resources and efforts where they can generate the greatest value for the country and the world, such as the remote exploration of Mars, Jupiter, and Saturn, as well as deep-space exploration through its satellites. At the same time, it leaves launch services to private companies that can perform them more efficiently and at lower cost.

Viewed in this way, CFE could learn a great deal from NASA by focusing on the strategic areas that generate the highest value per unit of investment, such as transmission, distribution, telemetry, natural gas transportation, and natural gas marketing, among others. At the same time, it could move away from volumetric electricity generation targets that require the continued operation of expensive, inefficient, and highly polluting plants fueled by fuel oil and coal. Such generation could instead be replaced by low-cost clean and renewable energy, such as that procured through the Long-Term Electricity Auctions, benefiting both public health and consumers’ wallets.

Who knows? Instead of continuing to repair the legendary Volkswagen Beetle with a Ferrari-sized budget, perhaps CFE could accomplish far more for all Mexicans, just as NASA has done.

This article was originally published by Business Insider México.
Date: June 3, 2020
Original Link: https://businessinsider.mx/lo-que-la-nasa-puede-ensenarle-a-cfe-opinion-paul-alejandro-sanchez-energia-circular/ [offline]
Archived Link: https://web.archive.org/web/20210117004053/https://businessinsider.mx/lo-que-la-nasa-puede-ensenarle-a-cfe-opinion-paul-alejandro-sanchez-energia-circular/ [Archived]