Solution to gas-price crisis not as simple as you might think

Op-Ed by Edward R. Long

On May 6, Democrat Sen. Harry Reid accused big oil companies of shutting down refineries temporarily to raise gasoline prices and rake in”obscene profits.” Sen. Charles Schumer, D-N.Y., stated that it would take too long to bring new sources online and that there would never be drilling for oil in the Arctic National Wildlife Refuge (ANWR, pronounced ‘anwar’). Democrat Speaker of The House Nancy Pelosi stated, “Years of Bush administration policies that have favored Big Oil over the consumers have resulted in record dependence on foreign oil.”

Two years ago Reid and Pelosi announced they had a “commonsense plan to lower gas prices” and now apparently their plan amounts to a 25 percent profits tax. Somehow that tax is going to make gasoline cheaper and solve the supply/demand problems.

Certainly one thing the tax will accomplish is putting at least $15 billion per year in the congressional coffers for more important things like earmarks. Seemingly these three individuals have not considered the negative effect the tax will have on American oil companies’ competition with the European ones and the effects on stocks and the market. It seems that if there is greed amongst the oil companies it is only exceeded by those in the U. S. Congress.

What about the oil company profits? They are 10 percent of their total sales, a percentage that is the target of all business, big or small. The profit is due to the sales. The sales are due to our demand. Our demand’ is due to our wants, our habits, our needs and our lifestyles, good or bad.

The U.S. consumes about 25 million barrels of oil per day. Of that we import 17 million and produce 8 million. The demand grows at 2 percent per annum. About 20.5 million is for the production of gasoline. Each 42-gallon barrel of oil produces 19.5 gallons of gasoline, or 400 million gallons per day. Our domestic refinery capacity is about 17 million barrel of oil per day, or 332 million gallons of gas per day. So each day we import the remaining 68 million gallons. Thus not only do we buy the oil from other countries, but we also pay other countries to refine a significant portion of that oil. (It should be clear from these numbers why we have a weak dollar and oil and gasoline supply problems. And it should be unclear why Congress refuses to push for more domestic production and refinery capacity.)

We are paying from $3.70 to $3.90 per gallon for premium today (May, 9, 2008) for the following reasons: inflation, a weak U.S. dollar, market futures speculation, and price increases charged by the countries from which we get oil. In 1963 a gallon of premium gas cost about 35 cents. In terms of 2008 U.S. dollars that 35 cents becomes $2.40. As much as 92 cents of the remaining $1.30 to $1.50 is due to a weak dollar in international trade and the other 38 to 58 cents is market speculation and price hikes by the supplying countries.

Today’s price for oil closed at $125.96. Is there an oil bubble like the tech bubble some years ago? Could be, could not be. But even if it is, and even if it bursts, that does not solve the fundamental problem of supply verses demand. At a 2 percent annual growth in U.S. demand, we will need 30.5 million barrels of oil and 488 million of gasoline per day by 2018. (Yes, we can all start driving gas-sippers, but it takes energy to make those gassippers and the population growth for the U.S. and Canada is projected to increase by 36 million in the same period, a 1 percent per annum growth. So, a lot more gas-sippers will be using gasoline. Moreover, not all of us will buy gas-sippers and, unless something drastically changes, we will need more trucks to haul stuff to places like Costco, Foods- Of-The-World, Kohls, Target, and Wal-Mart so we can buy it.)

Reducing demand is just one part, some say a small part, of the solution. The other is increasing supply, i.e. increasing domestic production of energy. We need to increase our domestic production of oil, to build more refineries, to increase use of nuclear energy production, to convert coal to oil, to find ways other than corn for ethanol production, and to pursue whatever else comes to mind, including alternative sources of energy. You can argue “we can’t,” “we shouldn’t,” “we need to be green,” and/or “global warming” (more on that at another time), but none of that alters immutable facts: We will continue to want cars and trucks and vans and SUVs, we are a people who want to be on the go, and we do not want to carpool or use public transportation. We want energy-consuming things like computers, large TVs, and air conditioning. We want to be very warm in the winter in ever larger houses. We want variety in our food, at home or at the restaurant. We want to have the latest things and we tend to throw away the old things. We want – period. So, we need to realize that our demands are not going away and figure out how to increase supply.

There is another aspect about demand. We are not the only place in the world that has wants and needs. China’s consumption has increased about 7 percent per year since 1986. In 2008 China will use about 8 million barrels/day. Similarly, India’s consumption has increased about 5 percent each year and will be about 2.6 million barrel/day in 2008. China

and India combined will consume about half the volume consumed by the U.S. (In the 70s these two countries used almost nothing compared to the U.S.) The current consumption in Europe is approximately 14.7 million barrels/day, Russia at 7 million barrels/day, and Japan at 6 million barrels/day. Their rates of growth either equal or exceed ours.

Some thoughts on supply:

Oil Production – Perhaps you do not want to drill in ANWR, or off the coast of the U.S., or in the Bakken Field. OK. But you still want refrigerators, a/c, food, and a host of other things, including gasoline for your cars. Meanwhile, Cuba, China, and as many as three other countries are currently setting up to drill in the Gulf of Mexico. We can be 100 percent sure that these countries will be happy to produce the oil and charge us for it. (Except perhaps China who needs it for herself.) And you can be certain that they are not going to be as concerned about oil spills and other accidents as we might be – if we were to drill.

It does not make sense for us to sit on our beaches and look at other countries’ offshore drilling rigs. It does not make sense to have to pay other countries their asking prices for oil when we could be producing our own. It does not make sense for our capacity for industrial production to dry up for want of energy. There are 19 million acres of ANWR (about the size of South Carolina). Within ANWR there is an area of 1.5 million acres (about the size of Delaware) estimated to contain 4.8 to 29 billion barrels of oil and 35 trillion cubic feet of oil. If horizontal drilling technology has been developed to a level claimed then the footprint could be near that of a large metropolitan airport. The estimates for the 16-million acre Bakken Field in North Dakota and Montana is from 4 to 50 billion barrels of oil from shale. This, too, would use horizontal drilling.

The offshore areas (Outer Continental Shelf – OCS) is approximately 1.76 billion acres and is estimated to contain 86 billion barrels of oil and 420 cubic feet of gas. These three area combined would provide an additional amount of oil from 94 to 195 billion barrels. (Saudi Arabia has 262 billon barrels.) If we are going to be energy-independent, and if we are to have national security, then, in spite of the Chuck Schumers in the world, we need to begin increasing our domestic production. The added benefits: there will be more natural gas, and if more refineries, more propane to keep us cozy in the winter.

Moreover, those other countries who now supply us will reduce the price of their oil and the futures market will stop bidding up the price per barrel. And yes, there has to be a clear set of requirements to prevent oil spills, pipe leaks, and other environmental ‘accidents’. Perhaps we need also to require that once an oil field is depleted the oil companies be required to return it to pristine conditions. Maybe we need a coalition of government, oil people, environmentalists, and some simply wise and fair citizens to have oversight. But let’s also make certain that the coalition disbands and disappears when the oil drilling stops.

Refineries – We need them. If we do not build more then it is fairly certain that gasoline prices will continue to balloon or we will have rationing like we had in the 1970s, or worse. President George W. Bush expressed a good idea in one of his talks towards the end of April of this year. He suggested that we build new oil refineries at the locations of military sites that have been closed. This is a good thought for several reasons: The military sites have probably already been compromised to some extent – that is to say they probably are not pristine. It solves the not-in-my-backyard issue. It could be rented for the use and make some money to reduce taxes or if for free it would reduce the cost of refinement. The only problem is keeping Congress’s nose out of the business so that the pork and Ear Marks would be kept to zero.

Nuclear – The problem with nuclear energy is that no one outside of its engineering and science community understand it. Congress does not understand it, environmentalists do not understand it, and especially Jane Fonda does not understand it. We in the general population are led to believe it is the monster lurking in the dark recesses of our world. Simply put, it is not a monster. Yes, it needs lots of smarts and control for safe operation. But the smarts have been around for more than 50 years, perhaps a 75 years, and with each year the technology gets better and the controls more reliable. Nuclear energy is more green than any other form of energy production. It does not use coal or oil so the CO2, sulfur, and nitrogen emissions approach zero. Its footprint is efficient. For example, the North Anna plant occupies 1075 acres and produces 1786 megawatts (1.66 MW/acre) compared to a one of the most advanced solar-energy systems, Waldpolenz Park in Muldentalkreis district in Saxony Germany: 40 megawatts on 276 acres (0.14 MW/acre).

But you say, what about reactor accidents? Yes, but less so than in other areas of energy, such as oil. There has been no human death associated with an American nuclear reactor incident but there are over 40,000 human deaths per year due to automobile accidents. One concern has been for the storage of spent fuel, its cost and its safety. The storage isn’t necessary if the U.S. government would participate in the development of breeder and reprocessing facilities instead of creating laws to prevent them. Nuclear reactors have another potential that has not been public ally examined. A reactor of the output of the one at North Anna can produce about 38 thousand barrels of coalderived- oil per day. One such facility per contiguous state would produce about 2 million barrels per day, approximately 10 percent of our current consumption rate. You can take the arithmetic from there. The cost per barrel would be approximately $60 to $70 in today’s dollar. (The problem with any discussion on this subject is the presence of emotions, prejudices, political agendas, business agendas, and ignorance. The objective aspect is difficult, if not impossible, to attain.)

Coal-to-oil – The coal reserves in the U. S. are approximately 275 billion tons. One ton of coal and four barrels of oil produce the same quantity of hydrocarbon products, such as gasoline. So our coal reserves are equivalent to 1.5 trillion barrels of oil, which is about four times Saudi Arabia’s oil reserves. The historic problem with coal is its emissions. The problem to coal-to-oil is the concern for CO2 production. Like nuclear, coal is surrounded by emotions, prejudices, and agendas. It will be difficult (and that is putting it mildly) to have objective discussions, explore the possibilities, and enable the growth of technologies that solve these two main problems of coal.

Ethanol – Read the article in the October 2007 issue of National Geographic. Ethanol production at a supply cost and volume that is commensurate with demand can be achieved – but not by using corn.

Alternative sources of energy – There are solar cells, solar thermal, and solar concentrators. There are ocean currents, ocean waves, and tides. There is wind. There is biomass. There are even more esoteric sources such as deep underground heat sources that come up from the core of Earth. At present these are far into the future and simply are not in positions at this time to make a serious contribution to energy need. (Yes, I know that a few of you actually do generate a sizeable fraction of your warmth and electricity from one or more of these. I congratulate you. But you are in a tiny, tiny minority.)

It will take time but each of these alternatives do merit effort, or at least the freedom to make the effort and explore ideas. It is by no means impossible to imagine that someone out there will come upon the energy source that is powering those flying saucers. I know, this last remark probably irked you. But humor aside, don’t corral the imagination and the creativity of humans.

 

Edward R. Long is vice president of the Augusta County-based Longhill Technologies.


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