Eye on the Market | November 21, 2011 J.P Morgan Topic: The quixotic search for energy solutions Wind should play an important role, but unless there is a high-voltage, high-capacity, high-density grid to accompany it (as in Northern Europe), or electricity storage, the variability of wind means that co-located natural gas peaking plants are needed as well. The cost of such natural gas plants are rarely factored into the all-in costs of wind, but perhaps they should be. These exercises are important, since unfounded expectations might lead to suboptimal policy choices. One example: the Keystone Pipeline extension, which the President has opted not to consider until after 2012. The US imports more oil from Canada than from any other country. With the extension, the Keystone system would account for 13% of US petroleum imports. The pipeline has been opposed on environmental grounds, but the extension itself would only add 1% to the entire network of crude oil and refined product pipelines already criss-crossing the US. Moving petroleum products by rail or truck instead is more expensive and riskier. If the US does not provide a market for the Alberta tar sands oil, it could end up on tankers to China; and the US will end up importing more of its energy needs from the Persian Gulf and Venezuela. Could misperceptions about wind, solar and biofuel® feasibility explain why some people are opposed to this extension? Unclear. The art of the possible Now let’s take a (desperately needed) look at some good news. Over the last 3 decades, the oil intensity of the developed world has been falling, followed by non-OECD countries (see first chart). This is not meant to suggest that declining availability of cheap crude oil isn’t a problem, since it is. There are lots of studies showing rapid declines in the production rate of existing crude oil fields, and that the discovery of new fields is (a) not keeping up, and (b) are located where marginal costs of extraction are considerabl