This opening blurb from an article in the New York Times reminded me of an exchange I recently had with an old friend:
Ikpikpuk River Delta, Alaska – The 217,000 acres of windblown water and mottled tundra here on the North Slope of Alaska, separating Teshekpuk Lake from the Beaufort Sea, are home in summer to 50,000 to 90,000 migratory birds. This corner of Alaska’s National Petroleum Reserve is also thought to be brimming with oil.
From the presidencies of Ronald Reagan through Bill Clinton, federal officials put the bird habitat off limits to oil development. But after federal geologists in 2002 quadrupled their estimate of the oil available here in the northeast quadrant of the reserve, the Bush administration proposed putting the whole area up for lease to oil and gas companies.
The move has touched off a fierce debate …
…and so on. A few days earlier I had sent my friend a link to an article from Business Week Online which began as follows:
High gas prices and traffic: They’re the banes of a driver’s existence. With neither about to improve anytime soon, there may be a small solution to these big problems. Scooters are an increasingly popular way to zip to errands, make parking a snap, and cut down on fuel costs.
Along with that link I reminded my friend that I’d been riding a motorcycle for ten years almost exclusively, and that I was getting 40 miles to a gallon or better. Of course I sent him a picture of the bike (for the second time) and awaited his inevitable response:
Roger, millions of impoverished Indians and Chinese are turning their bicycles and motor bikes in for cars, finally. Do you think we should go the other way? I have four SUV’s. We drive them less than five thousand miles a year. Screw the price of gasoline. If Hummers or Abrams Fighting Vehicles get cheap enough, I will drive one. There is nothing safer to drive in a world full of minis and motorcyles.
But that was just the start of it. He then forwarded an email he had sent to another correspondent days earlier stating that this writeup should just about cover his thinking on the matter. I reproduce it here with only minor editing:
Roger, I think this will cover the oil situation:
I’d like to try to articulate some fine points about marginal utility and price elasticity. The prevailing contention that cheap oil reserves have peaked is most likely correct. The point I want to make is that as the price goes up, production will continue to climb, regardless of the peaked reserves. As prices rise, there are other more costly reserves of fossil fuels that can be tapped.
There are also biomass fuels that we have not yet developed. For instance, some would say, converting excess corn into ethanol is a boondoggle because we need to pay for costly fertilizer which is not factored into the price of ethanol. However, we could be using grasses and trees for biomass, which don’t require cost intensive farming.
Gas pricing today doesn’t worry me as an individual, but the implications for the economy as a whole do. Soon our economy will suffer if we don’t change our political stance. Today, as a percentage of income, gas is about the same price as it was in 1947. The tragedy is that this should not be the case; it should be cheaper. On the other hand, if you factor out the costs of specially formulated fuel only for California, the banning of efficient four banger diesels, the banning of the sale of experimental cars which could be running on bio-diesel, the moratorium on drilling almost anywhere in America except in the gulf and parts of the Rocky Mountain states – along with the fact that we have not built a new refinery anywhere in the U.S. in the past thirty years – I would say we are not in such bad shape as I would have expected. But, yes, it may be about to get worse.
Cheap oil reserves, not production, probably has peaked. However, oil drilling world wide is going full blast. Production will soon rise even in this environment of falling reserves of cheap oil. As to the disappearance of cheap oil, we need to get used to that fact and deal with it.
As ridiculous as it may seem, in the U.S. oil, gas and alternative energy production of all kinds is discouraged by law everywhere in the Nation. In Europe they are safely drilling in the Paris basin, the midlands of England, and in the fisheries of Norway. Unless we get the regulators the hell out of the way and allow experimentation with alternative fuels, small clean diesels, nukes, domestic hybrids, and lighter more exotic materials in cars, we will continue to have an outdated car and truck manufacturing industry, which is slowly being regulated out of business, along with skyrocketing fuel prices.
We talk a lot about it but we do everything we can to shoot ourselves in the foot when it comes to developing alternative energy supplies and lessening our use of imported oil.
While the Sierra Club yells that we are cutting down too many trees on the one hand, on the other they won’t let anyone build a plant to recycle paper.
They decry dirty air quality and yet they force us to burn more coal and oil every year because, on the other hand, they ban LNG terminals and nukes.
France and Japan were able, as a result, to buy our plutonium reserves at scrap metal prices and now produce 85% of their electricity with nukes.
Why is it that the enviros in Europe help their oil and gas industry clean up? They help them find oil everywhere they can. They help their nuclear industry build safe reactors. They help their bio-diesel fuel business. They help their domestic auto makers develop small cheap clean diesels. While our enviros make mindless attacks on business.
There are three factors in world crude oil pricing:
- Supply and demand
- Weather and acts of terrorism
At this time we are no longer making prices in oil. We are price takers. If we could build 3.5 million BBL’s a day in excess capacity, we could cut the last two out of the pricing equation worldwide, and prices would be stable. However, today, with no excess capacity and terror on the rise and weather worsening, we are seeing a price spike.
We are the price takers in the world for crude oil because we don’t have the political will to increase our production of all sources of energy to create surplus capacity on the margin.
The world uses 82 million barrels of oil a day. Of that, the U.S. consumes 20 million barrels a day. The Saudi’s produce 12.5 million barrels a day which includes about 2.5 million they used to hold in reserve capacity. Today, they are running flat out. In the past, this reserve has been enough to take the pressure off pricing and allowed exploration and production somewhere in the world to catch up. This is no longer true with India and China taking up any excess.
So, because we are no longer able to contribute to competitive pressures on energy or fuel prices (because politically, we limit the domestic production of energy of all kinds) we will most likely be in a price spike until a recession kicks in and increased production catches up in a year or so.
There are experimental car makers in small spaces all over the nation which are barred from selling vehicles in any quantity to the public. They don’t have the money to crash dozens of cars until they get permission to sell some. They can’t build a light car of exotic materials which will survive a collision with a Ford Explorer for instance. These outmoded rules must be changed to broader limits. The government must offer more help and latitude. The government must become a friend to industry, not an obstruction.
It’s been said California is rife with price fixing and gouging on gasoline. I agree with the gouging, and for two reasons. (1) Across the nation 98% of gas stations are privately owned and are free to buy gasoline from anyone they wish. In California, that is not the case. In this state, gas stations are mostly company owned. (2) California’s unique gas formula restricts suppliers.
Most California independents were forced out of business by the environmentalists with the new tank replacement law, and the limits on real estate development which forced the price of land through the roof. These two factors made it economically compelling for independents to shut down their stations and sell the land to developers. Yes, Shell wanted to shut down their refinery in California, and they did so for economic reasons.
But that is not the same as price fixing. They saw that escalating costs of regulation and litigation was forcing up their price of operation, and offshore refining capacity was simply cheaper to bring on line even if gasoline had be shipped half way around the world. The loss of one refinery by itself would have little impact if California jobbers could buy gasoline from anyone anywhere in the nation. But they can’t. While related, this special case in California has only marginal bearing on the rising price of crude oil worldwide or nationwide.
In summary, the U.S. is the richest nation on earth. We are the biggest energy consumers on earth at about 25% of the total. We have the natural resources and technology to deal with the problem better than any other nation on earth. And yet, we have used our political process and our legal system to stop innovation at every level. We hate our oil companies. We hate our nuclear power companies. We hate our little car makers who aren’t allowed to bring innovative cars to market. We hate our importers of clean LNG. We hate our coal producers. And at the same time, we wonder why energy prices of all kinds are rising around us faster than almost anywhere else in the world. We have the most to lose unless we adopt a more enlightened approach to helping our energy producers, and the most to gain if we do.
What should be just a glitch will soon become a tsunami if we don’t face the facts. There is no foreign oil supplier who will bail us out. There is no big oil company to blame or sue. The U.S. is on its own. We need to find and encourage the safe development of all energy sources right here in California, even if it means nukes and oil rigs between Sacramento and Bakersfield. Even if it means damning up the Golden Gate and Puget Sound to harness tidal surge. We need to limit the use of cars by allowing high rise mixed use development along our transportation grid, like every other nation on earth has done to get people out of their cars.
Hurricane Katrina destroyed fourteen oil rigs in the Gulf. There were no oil spills. France and Japan safely derive 85% of their electicity from nukes. They have bullet trains connecting their population centers to cut down on car use. We can do this. The technology exists. We need political leaders on both sides of the aisle to agree to do something about it.
I fired off a quickie that vented some of what I feel about the hullabaloo over the wrong issue:
Yeah, but the problem is not world wide oil production (China and Russia haven’t yet built out their production capability nor have they tapped their reserves significantly, and neither, for that matter, has Iraq) but rather refining capacity. In this world it doesn’t matter where the oil comes from so long as there’s plenty of it. It’s a world market. On balance, though, several of your arguments are good.
It’s just that all arguments in favor of increasing production domestically are absurdly off point.
To which he responded:
You are right. We haven’t built any new refineries in this country in nearly 30 years. We have been building refineries in places such as the Virgin Islands and other venues where the enviro nazis have no sway. Having said this, the new demands have them running flat out. We need to wake up and start drilling, refining, and conserving (up to fifty percent of our consumption could be saved with off the shelf technologies).
Over time, much of our energy transportation meeds could be served by nuclear/electric. We also need to broaden our menu of energy suppies to nuclear/hydro/wind/PV, and permit the wide spread expansion of our public transportation grid, along with mixed use development along that right of way.
There would no reason for us to import foreign oil if we had real leadership ready to take on the oil and car industries in this country over, say, twenty years time.
The main monkey wrench in this plan is this. Oil is stilll cheap, cheaper than any of the alternatives by far. It is still the cheapest way to develop energy and get around. Even at $5 per gallon. If we doubled the wells and refinery capacity in five years, gasoline could go down to $1/gallon again, even with declining reserves. Little cars that sip gas would disappear again, just as they did after the 1970’s oil shock.
Think of the geopolitical impact if oil was discontinued as the source of energy for your car. Suppose there was just no need to import a drop of oil from the middle east next week.
Actually, I think my friend was strolling along both sides of the issue there. Our leaders taking on the oil and auto industries … Right. But all his points hold water. His last point was especially beguiling. What if the middle east suddenly had nothing to sell, or we didn’t need what they had?