Friday, June 6, 2008

Today's Oil Price Equals a CO2 Price of $336.98 per Tonne

I used API 39 (a bit heavier than West Texas Intermediate) which weighs 131.578947 Kg per barrel (7.6 bbl/Tonne) and the NYMEX futures price of $138.19.

$336.98 is damn close to the midpoint of the range the International Energy Agency was talking about in our earlier post "To Cut CO2 in Half , You're Looking at $200 per Tonne Cost (and maybe $500/T)".

Amaze your friends, drop THAT into casual conversation.

The number is approximate: I've forgotten the alkane mix in WTI and plugged in 85% carbon content.
And this brings up an important point about working with numbers.

That 131.578947 Kg/Bbl figure intimates a higher degree of accuracy than is warranted. If I had cut it off at two places to the right of the decimal rather than six it makes a difference of a few cents per tonne of CO2.

Much more important is the informed guess at 85% carbon content. The eye just glides over that assumption. If I bump the carbon content of WTI up by one percentage point, from 85% to 86% the equation lowers the price of carbon dioxide to $333.06/T.

One percentage point in one part of the equation changes the result by almost $4.00.
Which leads me to one of the easiest-to-identify problems with computer models, financial, climate, whatever.

If you have a model with 100 variables (and don't get me started on confusing a variable with a constant), each of which is represented to be at the 99% confidence level, the result is a coin flip.

Try it: .99 x .99 x .99 x .99... ends up at ~.50.

Neat huh?