This past weekend, I was talking about a tech company with a friend of mine. The company in question looked promising, but the exit strategy patently seemed geared toward a quick sale.

“It’s a burger,"? he said. “Born to flip."?

That description will become more common in the world of biofuels. A whole raft of cellulosic ethanol, biodiesel and butanol companies have launched in recent years and gathered hundreds of millions in venture capital. Their processing techniques range from futuristic (getting microbes to convert plant matter into alcohol) to slightly retro (employing the Fischer-Tropsch method once used by the Third Reich to turn coal into tank fuel to convert leaves into liquids).

Established conglomerates, however, are coming to town. Today, DuPont and food/agricultural giant Danisco from Denmark said they will plunk $140 million into a biofuel joint venture. Earlier this year, Chevron and Weyerhauser, the lumber company, formed Catchlight Energy to produce cellulosic ethanol. Daimler, the car maker, and Archer Daniels Midland have also become allies. Oh yes, and Tyson Foods and ConocoPhilips want to turn scraps from the slaughterhouse into biodiesel.

When conglomerates gather, it’s tough for start-ups to survive, particularly in manufacturing. In software, it’s a lot easier. Two or three people can coin a novel application and become a global success through word-of-mouth marketing. Not so in fuel. You need long-term R&D funding, prototyping plants, large refineries, and miles and miles of pipeline connections. The land use planning meetings alone can turn a young college graduate into a bitter, middle-aged man.

Last year, Don Paul, the recently retired CTO of Chevron, estimated that it takes 15 years and $3 billion to get a fuel from the lab to market.

That really narrows down the likelihood of a Facebook of ethanol. Think of it. A prototype plant that produces 500,000 gallons a year can cost nearly $15 million. (the budget for a plant by Mascoma in New York.). A 100-million gallon a year plant can run over $75 million. (Range Fuels.) and 100 million gallons is a drop in the sea. The U.S. consumes over 140 billion gallons of liquid fuel a year.

Fortunate start-ups have already landed alliances or received investments from conglomerates. Coskata, which will make ethanol and other fuel from plant waste and garbage, has linked up with General Motors and Marathon Oil. Solazyme, which cooks algae into a fuel precursor in brewing kettles, has a research agreement with Chevron. Acquisitions in this area will likely become more common in recent years.

So in the future, we will probably see fewer deals where venture capitalists pour tens of millions into a cellulosic ethanol company. Instead, you will see a few million going into companies on the fringes of scientific knowledge that will be flipped while they are still in the lab.

Automaker Nissan will announce plans today to launch an electric vehicle in the U.S. and Japan by 2010. In doing so, Nissan will be the first major automaker to bring an EV to the U.S. market. It will expand the line globally by 2012. Nissan is also working with corporate partner Renault on developing an EV for Shai Agassi's Project Better Place, an electric vehicle startup with operations in Silicon Vally and Tel Aviv, and possibly soon Copenhagen. The partnership combines Nissan's research on lithium-ion batteries with Renault vehicles. Carlos Ghosn, CEO of Renault and Nissan, said recently his companies would spend between $500 million and $1 billion in the next three years developing a market-ready EV. It is uncertain, though highly likely, the EV designed for Project Better Place will be the same one offered for sale in the U.S. and Japan. The announcement, planned for later today, comes just one day after Ghosn and Agassi unveiled PBP's EV prototype in Tel Aviv. The prototype is already capable of accelerating from 0 to 60 MPH in eight seconds and traveling up to 125 miles on a single charge.

 The world could see an unprecedented spike in oil prices toward $200 a barrel that could plunge the world into a panic.

Or it might drop to $90 a barrel after a new president is inaugurated in 2009 as the Saudis try to cozy up to a new U.S. president.

Arjun Murti of Goldman Sachs put out a recent report, according to the Telegraph, that demand from China and lackluster growth in supply will push oil near the $200 mark over the coming months.

“We believe the current energy crisis may be coming to a head. A super-spike end game may be in the early stages of playing out,� Murti wrote, according to the paper.

But wait! Edward Morse over at Lehman Brothers in a report speculated that Saudi Arabia may boost output by 1.3 million barrels a day next year, more than the growth in demand. This could push prices toward $90 a barrel, according to the report, as reported by Forbes.  The Saudis recently said that three new fields have entered production. And the country has used oil for diplomatic overtures before. A weakened correlation between the dollar and oil prices may also help push prices down.

Lehman, however, admits it predicted oil would drop to $90 a barrel this quarter in an earlier report. It sells for around $122 to $126 a barrel. Hurricane season could also hurt a drop in prices.

I also had my cat, Fraulein Katze, walk across my keyboard. She came up with $132 a barrel. (disclosure: Frost and Sullivan sometimes employs her as a consultant.). 

News like this really must be tough on survivalists. I mean, do you stock up on more canned foods and ammo, beating the surge in demand that’s going to occur, or do you unload all that powdered milk you have stored in that cave near McGill, Nevada  and buy more armor for the Hummer?

No matter who you believe, however, it does point to an essential truth in the oil business.  It is wildly unpredictable. I recall once attending an oil technology conference in Qatar in 2005.  Oil had just come down from $70 a barrel to the mid-50s range.  Despite the drop, companies were enjoying a surge in profits. So you’d expect everyone to be excited.

Not so. Most of the speakers went out of their way to remind the audience that boom times only last for brief periods. 

The concept of the Prisoner's Dilemma is pretty familiar to anyone who's taken an introductory economics course in college. Briefly explained, two co-conspirators are arrested and interrogated in different cells. The police, who have incomplete information about the crime, tell each conspirator their night will end in one of three ways: (1) each conspirator can confess, and they both receive moderate sentences; (2) each conspirator can remain silent, and they both receive extremely light sentences; or, (3) one conspirator can confess while the other remains silent, sending the confessor back to the streets while the silent conspirator receives a harsh sentence. Silence and confession are proxies for cooperation and defection. While both conspirators benefit more from cooperating, separated and self-interested, each tries to maximize their own gain at the expense of the other. As such, both defect - hoping the other remains silent - and receive moderate sentences. This outcome is suboptimal. The possibility of a different outcome emerges in an iterated version of this game. Tit-for-tat, a strategy developed by Anatol Rapoport, is premised on four essential conditions: a player (1) cooperates from the start, (2) defects if the other player defects, (3) cooperates in the next period, and (4) has a reasonable expectation the game will continue. The fourth essential condition means the player believes his or her long-term payoff from being nice, retaliatory, and forgiving will be great enough to offset the payoff loss from cooperating initially. While this strategy works for an infinitely iterated game, it fails at the introduction of a defined endpoint. If one or both players knows the next period, or the one after that, or even the one after that, is the final period, each will defect consistently and with reckless abandon. Now, consider the failure of the tit-for-tat strategy with the introduction of a defined end point in terms of the behavior of oil companies.

Each oil company takes part in a repeated, multi-player Prisoner's Dilemma. Action choices - the decision to cooperate or defect - are comprised of investment decisions and commodity pricing. If the game were infinitely repeated and constrained, that is, if the supply of oil were infinite in the presence of the current climate disaster, demand from the public and private sector for renewable energy sources would compel the oil companies to diversify. A tit-for-tat strategy, where diversification is cooperation and oil production ramp-up is defection, would prevail. Each oil company would initially pursue a strategy of energy diversification but, because oil is cheap and available, a defection could be punished by increasing supply and undercutting prices. Declining oil reserves, constrained supply markets, and rising commodity prices clearly signal a defined endpoint. In other words, oil is running out and all the major producers know it. As such, it makes sense that the major oil companies are largely foregoing the development of renewable energy projects, i.e. cooperating, in favor of increasingly expensive, high-risk projects such as those in Alberta, the Arctic Circle, and, in the near future, Brazil. Now, let's step back for a second and play a little game. Think about the names of the major oil companies and try associating those companies with different renewable energy projects or R&D operations. Okay, think a little bit harder. You've got Shell and the *cough* London Array, Chevron and WaveBob, the ConocoPhillips-Tyson biodiesel joint venture, BP Solar and the BP-GM hydrogen project, etc. Who's missing? Exxon Mobil, the world's largest non-state owned oil company, has a pathetically nonexistent renewable energy record. However, given what we know about defection in the presence of a defined endpoint, Exxon Mobil's strategic decision makes sense. Though the long-term payoff from cooperation is higher than repeated defection, a self-interested player will always try to maximize its payoff in the immediate round if it has some knowledge about the game's ultimate period. The other companies have little choice but to defect as well, lest they miss an opportunity to discover another oil field and maximize their share of the increasingly constrained supply market. Shell's recent decision to abandon the London Array in favor of pursuing development of Alberta's tar sands is a good example of abandoning the tit-for-tat strategy in favor of a defection cycle. Some game theorist's refer to this as the "death spiral."