Tag: oil

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A true stimulus

Unconventional oil and gas production added the equivalent of $1,200 to real household disposable income on in 2012. Since the poor spend relatively more on energy, this is clearly one of the best anti-poverty program going.  

The industry raised GDP by by $283 billion last year and was responsible for $74 billion in federal and state tax payments.

What a great program. It not only pays its own way but also pumps revenue into the treasury, more than $200 million a day. Revenue is expected to rise to $138 billion a year by 2025.

Fracking has been as close to a gift from God as I have ever seen. Imagine the trouble we would be in w/o it. It has been the single most important stimulus after what the Fed has been doing. And it keeps on coming, year after year.

I am not a big believer in one or two things “saving” the economy. But clearly the unexpected bonus from fracking helped lift us from recession and will do a lot to get the economy finally back on track. Revenue from fracking can pay for a lot of mistakes, such as Solyndra.

Let’s just not let them screw it up.

On a related item, I was learning from a UC Santa Barbara study that energy exploration has REDUCED natural oil seepage into the ocean by about half. An article starts, “Next time you step on a glob of tar on a beach in Santa Barbara County, you can thank the oil companies that it isn’t a bigger glob.”

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War – The father of us all

In early human societies, and among the less technologically advanced until now, war is/was endemic.  Simple societies are warrior societies that live in a constant state of lethal conflict. These are small fights, murder raids & minor skirmishes, but they are never ending. The “noble savage” was kept in top form by the exigencies of war.  We cherish a myth about people before civilization – that they lived in harmony with each other and with nature. The fact is that it was more like road warrior, with death, capture and rape a constant reality. The only protection was the ability to defend yourself or hide in vast spaces. It was constant war and disease that kept the population below the carrying capacity of the land. It didn’t take long for our brainy ancestors to control or kill most of our erstwhile predators, but man preys on man. This is not an optimistic view of our species, but it comports well with the facts. Fortunately, people respond to challenges and especially to challenges perceived as threats. What is more challenging or threatening than war?  In many ways our civilized institutions are responses to the endemic conflicts of our ancestors. War is the father of us all.

Alex and I went to see Victor Davis Hanson speak at the Smithsonian last week.  He was one of the most engaging speakers I have ever seen.  He was also very un-PC, as you can infer from the ideas up top that I took from the talk. He is one of the few historians that still characterizes himself as a military historian. Hanson points out that military history is extraordinarily popular. If you go to any bookstore, you see that a very part of the history section consists of accounts of wars and biographies of war leaders. Series like “the Civil War,” “Band of Brothers” or “the Pacific” win big audiences.  But being popular with people in general and being accepted in academic history circles are different and often mutually exclusive things. I wrote about that before here, here, here and here. 

Today people prefer to study peace, assuming that war is some kind of aberration and that peace is the natural human state. History does not back this up.  As I mentioned above, our ancestors lived in a constant state of unrelenting war.   Most of us personally live much more peaceful lives, but we live in a world that is still always at war somewhere. The ancient Greeks, Hanson says, recognized the ubiquity of war and didn’t give it much of a second thought. We can avoid some wars if we recognize what the Greeks knew and address the causes of war. So what are the causes of war? Hanson disagrees that they are primarily economic, although economics is a necessary part of most wars, it is not sufficient.  Modern states do not have to conquer others to enjoy their resources.  Albert Speer warned Hitler about invading the Soviet Union.  He pointed out that as an ally Stalin was already supplying the Nazis with all the Soviet raw materials that they could expect to get by conquest and that he was doing it at a significantly lower price than the Germans would have to pay if they did it themselves. Speer was right and the Germans were never able to get as many resources from the Soviet Union after the invasion as they easily got before.  Hitler invaded the Soviet Union for ideological or “honor” reasons.  Economically, everybody knew it was a loser.

The same goes for our “war for oil” in Iraq.  It makes absolutely no sense to view the conflict in these economic terms.  Saddam Hussein was willing – even eager – to sell all the oil he could and he did it at a discount.  After the war, we do not get more oil from Iraq and we did not take over any oil fields.  If it was a war for oil, we forgot to pick up the prize. Some people might wish it was indeed a war for oil, because it is was we would have the oil.  But we don’t. War is caused by a combination of many factors, such as fear, greed, honor and ambition.  But these things are kept in check by deterrence of the power of others.  Hanson says wars break out when there is a decline in the perception of deterrence.  Put simply, people don’t go to war unless they think they have a reasonable chance of winning.  It doesn’t mean that their perception is accurate or that they define winning in the same sense that we do, but war is not a random act and it is almost never the result of the oppressed just rising up, so we cannot solve the conflict by attacking the “root causes” if we find them in oppression and injustice.

Conflicts also require fuel. Consider the case of the Palestinians and the Israelis. This conflict has been going on since the 1940s (and before).  The ostensible cause is that Palestinians were dispossessed of their land and they remain aggrieved.  We take it for granted, but it is not the whole truth. In the late 1940s lots of people lost their ancestral lands. Around 15 million Germans were kicked out of places their ancestors had lived for centuries.  The same happened to Poles, Ukrainians, Hungarians … the list goes on and on.  Among the peoples dispossessed in the 1940s, the Palestinians were a fairly small group and not poorly treated in relation to the other examples. In fact, much more recently ancient Jewish & Christian communities were driven out of homes in Arab countries, where their ancestors had lived a thousand years before the coming of the Arabs or Islam. Why is it that after all these years only the Palestinian problem remains an open wound?  Why doesn’t the Silesian liberation organization highjack airplanes? Where is the Galician liberation army?  The simple answer is that they had nobody to bankroll their misery and encourage them to continue the fight. They were also allowed to resettle. Other Arab countries could have solved the Palestinian problem years ago by simply doing what Poland, Germany, Hungary, Ukraine, Finland and many others did with refugees associated with their countries.  Why they didn’t can be explained by their perceptions of deterrence and their long-term perception of the chances of achieving their goals through conflict.

Anyway, both Alex and I enjoyed the talk.  It gave us something to think about. One of the things l like best about Washington is the many opportunities we have to go to these sorts of things.

BTW – The picture up top is the Smithsonian castle looking NE on June 30 at around 6pm. It is what Alex and I saw as we headed for the lecture.  

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Gas $1.97 a gallon and Falling: Not so Good

Below – unrelated to my post below is a picture of my thinned pines, a food plot and the tall trees from the SMZ in the background.

I bought gas at BP in Petersburg, just south of Richmond and paid only $1.97 a gallon.  That was below the price I saw advertised on the electronic board at Pilot.  They were offering regular at $2.03, but when I passed going home around nine hour later the price had dropped to $1.99.   I have never seen anything like that before, but it is not all good.

High prices encourage conservation and alternatives.  Low prices do the opposite.   We had a chance to do the right thing in the 1990s and we blew it.  The right thing, BTW, is to raise taxes on gasoline as the price goes down.   We need to keep the prices high to put a floor under conservation and alternatives and to drop the floor out from under despots and potentates who control much of the world’s oil.    I know that I could never run for political office with a “raise the gas price” platform, but it is the right thing.  

Countries like Venezuela, Iran & Russia depend on high oil prices to fund their adventures.  It is probably better if they don’t get them.   I am not enthusiastic about any sort of taxes, but gas taxes serve the salutary purpose of dampening demand for oil.   There is no painless way to a more independent energy future.  We use oil for a very logical reason: it is cheap.  But the price we pay does not reflect the price of sending cash to despots in the most unstable parts of the world.  Nor does it include the mitigation of the greenhouse gases it puts into the air.  

It gets worse.  Not only does cheap oil keep us from a more independent energy future, it also leads – paradoxically – to high energy prices.   The oil despots, IMO, drop prices periodically in order to drive alternatives to bankruptcy and make conservation look like a dumb idea.   I know this sounds like a silly conspiracy theory and it is the only one I suspect might be true.  The solution is simple, but not easy.

I drive and I use gas.  That is how I know the prices.  I understand that we will be using oil for a while to come.  I am not advocating quitting cold turkey, but it would help to get the incentives right and price is one of the biggest incentives I know.   Of course, I can say all this because I won’t be running for office.

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War For Oil

Don’t you wish the Iraq war REALLY was for oil as the conspiracy nuts told us?  Then we would have that $79 billion dollar surplus Iraq now enjoys.  The country earns around $90 billion a year in oil revenues and Iraqi officials face the unusual dilemma of not being able to spend money as fast as it comes it.  I wrote re this in an earlier post.

Meanwhile, we Americans are paying for development projects.   This is not how the textbooks describe empires.  When the Romans took over Carthage, Egypt or Gaul, they MADE money.  “To the victor belong the spoils”, is what the Romans always said.  That was the way it was throughout history.  We Americans broke the mold.

The American method is more enlightened.   We started doing this big time with the Marshal Plan after World War II.  American generosity made possible the reconstruction of war-torn Europe.  Allies and former enemies alike benefited.  But it was actually enlightened self interest.  It helped us avoid the threats of chaos in Europe and still another rise of an angry and irredentist Germany.  Our leaders back then understood that American prosperity would be enhanced by prosperous partners and that prosperity would hold back the evils of Communism.   The often overlooked truth of a free market is that everybody is better off when everybody else is better off. 

The Romans could profit from the spoils of war because their world was different.  The ancient world was much closer to a zero sum game, where one person could gain wealth only at the expense of another.  Our world, with its market economy, is a positive sum game, where we can all get richer through trade and better production methods. 

We did both the right thing and the smart thing when we choose to help Iraqis to their feet rather than exploit the riches under them.   We could not have enjoyed success in Iraq had we not taken the more holistic and enlightened approach.  And American success in Iraq in establishing order is what made possible Iraq’s prodigious oil earnings.

We are on the way to a prosperous and stable Iraq that will be a partner of the U.S. rather than a menace to the world.  Nevertheless, each part of the journey has different challenges and opportunities.   A couple of years ago it looked like Iraq was spinning out of control and was greatly in need of proactive American generosity.   As Iraq piles up money from oil revenues, some of the variables of the equation change.  Iraq can pay for its own reconstruction and probably help more with the costs of maintaining its own security.

Since the day I arrived in Iraq, we have been working to help them spend their own money.  This is NOT a new policy.  But the sheer size of the cash mountain has added a new urgency to the efforts and created many new opportunities.   

Iraq is a rich country and until the 1970s was one of the most advanced countries in the Middle East, but in recent generations hydrocarbon wealth has been more a curse than a benefit as the oceans of oil fueled wars, facilitated tyranny and permitted mismanagement on a monumental scale.  No country w/o such wealth could have afforded to sink so low but still allow the rulers to be so threatening.  Iraq’s conflicts were not FOR oil, but they certainly were ABOUT oil.  W/o the power oil could by, Saddam would have been someone on the order of Robert Mugabe – a horrible man and a local menace, but not a world concern.   Oil wealth boosts the opportunity to do good or evil. 

The money accumulating in Iraqi coffers must be used to produce good outcomes, to build infrastructure, to educate the Iraqi people and restore Iraq’s rightful place in the world.   If it sits around too long, somebody will figure out how to steal it or employ it in some nefarious fashion.  There are lots of projects that need doing in Iraq.  In the recent past, the U.S. would have paid for them, but we are weaning them off American largess.  Iraq is unique among war-torn states and developing ones in that it has the resources to pay for its own development. It is time they did.

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The Oil Curse and the Patronage Trap

Stories that begin with somebody winning the big lottery usually end sadly.  I suppose it has to do with the corrupting power of unearned/unexpected wealth and the frailties of human nature.  Oil wealth can be as bad as a lottery win because not only does it often shoot more money into a country than it can usefully absorb, but it also empowers governments and encourages both centralization and corrupting patronage.

Let me hasten to say that I am speaking only my opinion and it is not based on any special knowledge, but as we see Iraq’s oil revenue jumping from around $20 billion under Saddam to $70+billion today.  I fear we may have a lottery winner. 

Oil revenues past helped destroyed Iraqi agriculture and retarded local initiative.   It doesn’t make intuitive sense that good fortune could be such a curse, but the influx of so much easy money crowds out other endeavors.   It cheapens hard work.  The lottery winner feels like a chump if he keeps on working just as hard.   Local initiative is stifled more directly, as money from the central government supplants local funding until the only guys left standing are those from Baghdad.

Oil wealth also creates a feeling of entitlement.   People think they deserve “their” share and start getting angry when that share is too small in their opinion … and eventually it always is too small.   It really is true that money cannot buy happiness and bribing people with gifts is a losing proposition.  Over the long run (or even the not so long run), resentment & irritation always trump gratitude and satisfaction in these sorts of uneven relationships.    

All this is much beyond my pay grade and since I have no ability to influence the outcome, I feel free to speculate.  Take it for what it is worth.   I think it is a stroke of good, but dangerous luck that Iraq is taking in so much more oil revenue.  The money will allow Iraqi to rebuild and recover from the damage done by so many years of war and mismanagement.  The caveat is that the oil wealth helped create the mismanagement and waste in the first place.  To adapt an old saying, to err is human, but to really screw up you need the steroid power of oil wealth.

I hope that Iraq will spend that windfall on infrastructure upgrading and maintaining what they already have.   There are certainly many places that could use such investments.  Infrastructure investments that do not include governmental management of the economy are usually a good thing.  Another thing that could be usefully done is to distribute revenues directly to the people, like the State of Alaska does.  This is not perfect, but it gets some of the money out of the control of the bureaucrats.  I fear there will be pressures to “do something positive” such as subsidize the dinosaur state owned enterprises and spread patronage from the central government.  Actually, I suppose it will be a mix of both hope and fear.  Let’s hope the hopeful part predominates.

But this is really above my pay grade.

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No War for Oil

We did not invade Iraq to take the oil.  We are not trading blood for oil, but conspiracy buffs have been saying we did for years now.  I think we now have definitive proof that these guys were wrong.  As I reread my note from yesterday, I realized the proof was before us.  I even mentioned it, but I cannot resist expanding a bit.

War opponents have changed arguments.  They now acknowledge that we are achieving success in Iraq.  All that talk about defeat, so common last year, is gone.  Now they are complaining that it costs too much.  They also point out that Iraq is rich enough to pay for its own reconstruction.  They have a point on both issues.  But consider the implications.

If you call upon Iraqis to pay more, you have to assume they CAN.  What does this say about your confidence in the capacity of the Iraqi government and economy?  You cannot simultaneously believe that Iraqi is collapsing into ruin and that they can afford to pay billions of dollars. The other thing that it says is that this was not a war for oil.  If CF went in to take the oil, we would not have to worry about asking the Iraqis to pay more of their own way.  It would be like somebody robbing a liquor store, not taking any money and in fact using his own money to help fix the place up.  I don’t think we would call that a robbery.

I am just getting sick of this war for oil crap.  It is juvenile.  Let me explain.  There is no doubt that w/o oil we would have been unlikely to have a strong interest in this country or region.  But that does not make it a war FOR oil.  Oil in a resource that allows those who control it to wield power.  If you have a tyrant in a poor country, he is a local menace.  Somebody like Robert Mugabe is a good example.  W/o the big money provided by a resource like oil, guys like Osama bin Laden and his followers would just be a nutty bunch of desert bandits.  Add oil to the equation – lots of oil – and you get lots of trouble.  A local psychopath can become a global threat when you inject the steroids of oil wealth. In some ways, therefore, the war is about oil but not for oil.  That distinction is very important. 

The oil curse is also the curse of easy and generally unearned wealth.  It tends to corrupt the recipients and it can make them dangerous. This is a variation on the point and don’t want to belabor it.  Those who know me understand that I sometimes can rant a bit, but now that rhetoric has changed from defeat in Iraq to success in Iraq is costing too much – and that Iraq can and should pay more – it should at least let us dispense with one of the more annoying pieces of disinformation.  There was no war for oil.

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A Million Here … A Million There

When I was a kid, I used to play in the abandoned industrial area near the RR tracks.  It kind of looked like this, except in Milwuakee we had tall grass, bushes and trees.

The K3 refinery and pump station can produce 16,000 barrels a day when it is working, but it is not working and it does not immediately impress the visitor with its orderliness or its up to date technologies.  The British built the installation in 1948 and did not use even the cutting edge technologies available in 1948.  After that, it was not always managed to high standards; the refinery was run flat out during the last years of Saddam Hussein with minimal maintenance and it has not been in operation at all since September 2005, when a shortage of crude oil shut it down. 

Still and all, this place has potential because K3 sits in a favored spot, sort of the Gettysburg of this part of Iraq, at the intersection of rail, road and pipelines as well as in the catchment point among geographical features such as the Euphrates River and Lakes Qadisiya and Tharthar.  Oil can come down from Bayji by pipeline, road or rail or up from the south.  Oil and oil products can transshipped east to international markets via Syria and Jordan or used to satisfy local demand.  

Byproducts of oil refining also have immediate local uses.  Crude from Bayji yields a great deal of pitch.  Disposing of the pitch is a potential problem, or would be except that local asphalt factories can absorb as much pitch as the refinery can reasonably produce.  This asphalt is essential to rebuild and expand the road network in Anbar and in Iraq more generally.  Another byproduct is heavy fuel oil (HFO), which is … heavy and hard to move, but would be used as fuel source for a nearby projected thermal electric station at Tahadi, immediately across the Euphrates from K3.  Iraq needs the electricity generated at Tahadi, so reopening the refinery and pump station at K3 would go a long way to addressing pressing fuel needs and crude oil either refined or transshipped could provide significant income, especially when energy prices are high. 

If this all seems too good to be true, it is.  That is why we talk about potential instead of achieved.  Oil thieves damage the pipeline in literally hundreds of locations by tapping oil and war damage rounded out the trouble.  That is why the plant ran out of crude in 2005.  Alternative methods of supplying the refinery with crude, either by truck or rail are more expensive, but viable alternatives if/when the roads and rail lines are secure. 

The logical course of action is to create enough redundancy in the system that failure in any one part will not break the whole.  According to the plant managers, the refinery has enough storage capacity to keep the operation going for 7-10 days.  K3 does not produce gasoline since it lacks the machinery to blend in the octane increasing element.  I don’t know much about these things so I trust their word, and the Marines have engineers that verify it (trust but verify.)They also say that for a small investment in repairing and replacing equipment, the refinery can begin to produce naphtha and kerosene almost immediately.  Coalition Forces have been working to get the refinery up and running again.  Our ePRT has agreed to make small funds available to jump start the process and eliminate little stumbling blocks, with the hope that once the wheels start moving and people see that it works, momentum will build to get other parts of the refinery on line and begin to expand and update operations.

Some people say that for an investment of only around $80 million everything would be working just fine, but a couple million here, a couple million there and pretty soon you are talking about real money.  Decisions about these things are made above my pay grade.  Besides, this is now an investment for the Iraqis to make.  It is their oil after all.  The jobs and income from the refining itself and all the related activities could be significant and go a long way toward stabilizing the region, so we all hope the right decisions are made. Getting this thing going again has been the subject of much discussion since I arrived in Iraq and people tell me before that too.  I do believe that something will finally be happening at the plant by next week.  It is a small step forward, a down payment on future success, and I hope the start of something big.

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Energy too Good to Be True?

Reposting article from an old blog. Oil shale.

We have more of it than anybody else; much of the rest lies under friendly places like Canada & Brazil. With new innovations it to be produced @$25/barrel w/o a big surface footprint AND it is extracted by injecting CO2 into sequestration right back where the oil came from. How elegant, efficient & perfectly balanced AND it is American. We have found the Tao of energy.   

I am not an engineer, so those who know better please write me back and curb my enthusiasm, but let me summarize. Please listen to the whole thing and make your comments. The Q&A cleared up many of my doubts.

Oil shale is an old resource and extracting it is an old technology. Pioneers heading crossing the vast expanses of the west used the oil for axle grease and we all recall the oil shale related debacles such as Tea Pot Dome in the 1920s and the synfuels program of the late 1970s. Back in those days, there was no way to make the oil shale into useable fuel w/o an unacceptable ecological and economic cost. In 1980, they had to literally dig the shale out of the ground, release the oil with lots of water, then dump the slag all over the previously verdant hills and the dirtywater into the heretofore pristine rivers of the Rocky Mountains. We can all be grateful that synfuels crashed and nothing burned.

Why have we not used oil shale before?

We tried. We did. It used to cost too much and make too much of a mess, but new technologies allow the liquefaction of the oil below ground, producing no slag and requiring no water, AND it requires the injection of CO2. The CO2 stays down there were the oil was. It is more environmentally benign than almost any other extraction method because it not only extracts cleanly, but it also sequesters CO2. Maybe we could even sink more than we bring up.

The other big problem was/is price. Price volatility has always been a problem in an industry where investments must be made based on price estimates 5-7+ years from today. Middle Eastern oil is almost free. There was (and remains) no way that oil shale can compete with oil from the Middle East when they are pumping flat out. There is still the danger that the sheiks, despots, potentates and dictators who control so much of the world’s exportable oil will open the pumps to kill innovations in oil shale before it gets off the ground. Oil shale needs minimum prices about $25/barrel. Big oil producers with lots of fixed cost capacity can undercut that anytime they want. It would not be the first time and the dirty business actually wins them accolades from consumers.

How can we avoid this fate? Keeping the price of oil artificially high is nearly impossible over any long periods of time (and imagine the political problem is high prices became U.S. policy) and it takes only a short time for low prices to destroy alternative investments. It happened in the 1990s and it can happen again. The author suggests a simple expedient. President Bush wants to fill the strategic oil reserve. Why not commit to fill it with oil produced from oil shale. This will provide a market floor to the shale and insure that investments made are not too risky. Once the infrastructure is in place, we can tell those foreign potentates to go to hell, as shale oil can free us from foreign oil for a generation – long enough for us to develop viable alternatives to hydrocarbons.

Here is some more background on oil shale from Rand and a CRS report on oil shale. The Rand report is mildly critical. The author addressed some of the concerns, BTW. Some general industry background on oil shale is here.
Posted by Jack at March 9, 2007 5:30 PM
CommentsComment #211249

Jack, I’ve mentioned this before but I’ve heard an extremely interesting lecture given by a professor Albert Bartlett about energy use and the coming crisis. It is relevant to issues like oil shale development and ethynol production. Neither one is viable from what I have heard, (although I will read the links you have provided). Canada produces @ a million barrels a day from oil shale but it is economical only because they are using on-site natural gas in the process, gas that would otherwise go to waste. It costs energy to produce energy. This equation has nothing to do with the price we pay retail, even if we were able and willing to pay $10 a gallon for fuel produced from shale, if it costs 1.1 units of energy to extract 1 unit net, it’s going to stay in the ground.
Also, estimates in number of years of supply from a given source invariably assumes no growth in demand; very unrealistic.Posted by: charles Ross at March 9, 2007 6:33 PMComment #211253

Charles

I think if we do not subsidize it (but give it that floor to protect from wild swings) the market will sort out whether or not it is viable re inputs.

I really do not know. It seemed too good to be true and such things often are. Listen to the lecture. He updates some of the info in the articles. He is talking about a new developing technologies.Posted by: Jack at March 9, 2007 6:41 PMComment #211263

More good reason for a tariff on imported oil to keep the price at about 60$ a barrel. I think it would be a politically viable plan as energy independance is important for geopolitical reasons.
I would rater see the SPR used like the Federal Reservedoes to control inflation. They buy heavily when prices fall and sell heavily when prices inflate.Stability is the key to any alternate industry capitalization. The Saudis have already said they are willing to drop oil prices to fend off alternatives. Our friends.
PS Denmark is getting half their power now from offshore wind. Tidal pumping is getting big in Scotland etc. .Posted by: BillS at March 9, 2007 7:59 PMComment #211394

If we can get enough of our own oil out of the ground to tell the Arabs to shove theirs where the sun don’t shine I’m all for it.
But wouldn’t $25 a barrel compared to $65 a barrel lower gas prices? And sense your for high gas prices why are you for this?Posted by: Ron Brown at March 10, 2007 8:09 PMComment #211402

Oil shale? call me ignorant but that is rock right? Well I guess if you can get it through the hose, y’know..(Second thought, call me beligerant)

self serve shovels? Shale gas station?

Maybe the future is firewood—we got all these damn trees, right? Call Rand about all these freakin’ trees we found.Posted by: Servitudinal at March 10, 2007 9:16 PMComment #211404

Why do republicans hate the bio-deisel idea so much?—is it the messenger (dems)? Or the influential big-oil dinars that flow so rapidly into the RNC warchest that gears you off in such directions? Thine own holy-cow partyline are thine own nemesis.

A year or so back there were a group of highschool kids that created a GTO that ran on refined soy fuel I recall reading. It can be done.Posted by: Servitudinal at March 10, 2007 9:27 PMComment #211406

Another idea—genetically modify insects to give off highly flamable bug-sh*t. Let’s face it thirty years from now we’re friggin’ Amish with the way the two parties are going, I don’t see any avenues of greater advent in the way of motor or energy resource technology.Posted by: Trident at March 10, 2007 9:48 PMComment #211424

Generally, you have to strip mine shale so I’m not sure how viable this will be. Virginia has plenty of shale, Jack. Perhaps you’d like to donate your wooded estate for a good cause. 🙂

Seriously, I’d rather use the natural gas to provide relatively clean power than to extract carbon-rich (i.e. – dirty) petroleum.Posted by: American Pundit at March 11, 2007 12:04 AMComment #211428

AP

Listen to the talk. That is the big innovation. Back in 1980 you had to bring the shale to the surface. That is what made the big mess. The new system extracts the oil underground AND injects CO2, which sequesters it right when the oil came from. That is what is so interesting.

Presumably if there was oil shale under my working forest, they could extract it w/o significant damage and I could make more money than Jed Clampet. That is not my business, however. My land grows trees and provides wood, clean water, fresh air and wildlife habitat. People really should appreciate tree farmers more.Posted by: Jack at March 11, 2007 12:34 AMComment #211484

Jack,
your story about the Alberta oil shale and sands is appropriate and timely. As you state correctly, making crude out of shale is nothing new but the economics of the process have always been very unattractive in competition with the exploitation of conventional till recently.
Although I have an engineering background one does not have to be a petroleum engineer to understand the basics of the shale oil or oil sands process to appreciate the industry’s challenges.
It’s my understanding that CO2 has been used in the past as a pressurizing agent to bring oil to the surface, but it’s not the only one. But sequestration is a different issue entirely, as I understand it, because it either needs to bind itself, chemically to some subterranean substance, or it gets stored far below the surface in a salt dome or similar cavity.
These are expensive operations and together with water treatment and waste treatment adds major costs to the process.
But I think you are on the money with a price of $25-30/barrel of crude as a bottom cost to make shale and sand oil economic.
My view about the projected crude oil cost/barrel is that the demand for oil will continue to increase at a good rate, mostly due to China and India growing so rapidly. And since economic development is critically coupled to the cost and availability of energy I see no reason that the cost of oil will drop by anything more than 20 or 25% and then only if we have a serious depression.
The world has enormous remaining reserves of oil but they will not do anybody any good if they cannot be developed because of overly strict or ill conceived environmental constraints. It is really time for the USA to develop the ANWAR deposits more aggressively together with multiple continental shelf options available right now.
FredPosted by: Fred Engel at March 11, 2007 4:32 PMComment #211539

Oil shale — it is too good to be true.

One, the CO2 used does not counterbalance the carbon removed. If the literature is correct, the replacement occurs at around a 1:2 ratio.

Two, Engel brings up the more serious problem (presuming one is interested in reducing atmospheric carbon)—sequestration. The CO2 will slowly rise to ground surface and be released into the atmosphere.

Three, the costs (including energy consumption) required for the industrial production, transportation, and use of CO2 are quite sizeable.

Four, the costs of making oil shale extraction financially viable from a business perspective are not small and would be better invested in the development of non-fossil fuels technologies which can produce more efficient fuels with fewer negative consequences for the atmosphere.


I installed solar panels on my home 4-1/2 years ago. They provide 100% of the electrical power for my all-electric home (with a heat pump for heating & cooling). I broke even at the 3-1/2 year point even though living in Chicago which is not known for an over abundance of sunlight. Of the many benefits, not getting a monthly electric bill is my favorite.Posted by: Allen at March 12, 2007 10:53 AMComment #211717

The CEO of JetBlue has asked that government place a floor on oil, at which point a subsidy would kick in to prevent OPEC from undercutting coal and driving it out of business, as they did once before. That makes more sense that subsidizing farmers to grow corn and grass to inefficiently make ethanol. We have enough coal reserves to satisfy our needs. Why not?Posted by: Clay Barham at March 13, 2007 12:49 PMComment #211942

Clay,
I certainly agree with you that we should encourage the use of more coal, clean coal that is, slurry and hi-temp combustion, but more importantly we should take the clamps off drilling for more oil in North America, anywhere, and go all out on natural gas and nuclear energy plants. That would transfer a large part of our energy use to electric from particularly oil. What will it take for the country to start doing that very soon? More clear thinking, strong character politicians?
FredPosted by: Fred Engel at March 14, 2007 1:31 PMComment #211964

Fred,

The environmental impact of oil exploration for extremely narrow returns is why not.

jack,

I read up on the shale oil / syncrude plan. It looks like a push by Shell to get corporate welfare to pony up on some far off scheme with a questionable 10+ year ROI. Since big oil and Bush Co has the credibility of Tommy Flanagan, I’ll wait a few years until a truly unbiased and respectable opinion develops.Posted by: Dave1-20-2009 at March 14, 2007 3:40 PMComment #212066

Jack,
I can’t quite see it your way and do not consider our modern oil companies as willfully polluting the environment. Some foreign firms is a different kettle of fish. As a matter of fact, the upstream part of the industry is very localized (for instance, at ANWAR they want the equivalent of 2 acres out of 1500 for their drilling and storage activities with everybody looking over rtheir shoulders)but pipelines are vulnerable and downstream refineries occasionally have accidents. Which industry doesn’t have bad days? Furthermore, looking over their annual reports, they are neither undercapitalized nor typically marginal players. Returns are good. What they cannot control is market process, that’s another organization’s privilege.In my view there is no good reason to go slow on the production and use of oil as long as it can we made a readily available. After all, can you think of any other energy source as practical as a gallon of gasoline or diesel fuel?
I am all for growing parallel energy sources and products but carbohydrates will be hard to beat for a long time.
FredPosted by: Fred at March 15, 2007 9:06 AMComment #212089

Fred,

Sorry for not being thorough. I was not talking profit when I said returns. I meant that my current understanding is the maximum ANWR extraction rate would be pretty small in terms of our overall usage and the environmental impact would huge (e.g Prudhoe had an average reported spill rate of more than one spill a day and the required seismic testing just to verify 10+ year old studies is permanently damaging to the tundra by itself). Saying “bad days” for disasters that impact local conditions for years is unbecoming.Posted by: Dave1-20-2009 at March 15, 2007 1:04 PMComment #212328

Dave, thanks for your response.
I looked over my own notes and some relevant references (the latest from 2005) and came up with the following:
Alaska produced 315 million barrels of crude that year, or about 860,000 gallons per day. The USA used approximately 20 million gallons per day in toto,two third of which is imported from all kinds of places and total domestic production was about 5 million barrels including Alaska. Hence today, Alaska produces about 4% of our national requirements. But opening the ANWR area judiciously would raise that amount to about 8%, so it’s certainly very worthwhile.

The big stumbling block about ANWR is the concern by environmentalists that the whole ANWR area would be affected. That is patently just not so. The total ANWR area is about, 1,500,000 acres. The oil companies have asked permission for operations in a very small area of 2000 acres, that is the equivalent of 2 acres out of 1500. I do not see that as a problem but some people just don’t want any oil drilling at all. But they do expect somebody to find enough oil to keep their local pumps supplied. Oil, like evrything else that isn’t fruits or nuts, doesn’t grow on trees.
One has to find it and drill holes.

I am sympathetic with anyone’s concern about the environment but people do make a mistake now and then, usually not deliberately either. Sometimes they even lose their lives, like 40,000 people annually lose their lives in car accidents, certainly not deliberately. That’s why I always have a problem with self righteous people immediately claiming conspiracies, malicious intent, careless behavior etc. etc. Nevertheless, none of that should stand in the way of utilizing the earth’s resources in a responsible manner to support our and any other country and its people in a long term attempt to try to see if we can live more humanely together and more so than other societies in the past. But I’m getting off the subject.

As far as oil spills are concerned, I am aware of 3 substantial ones over the past 15 years as far as Alaska is concerned, of which the Exxon Valdez of course was by far the largest. Two of these accidents had nothing to do with oil exploration or processing, or Alaska as far as I remember. The third one was a leak in a pipeline that wasn’t noticed for 5 days. Now that upsets me, because as a former engineer that shows a failure in maintenance procedures and for that a head should roll. But even that is no reason to condemn the use of carbohydrates.

I do not know where one spill/day at Prudhoe Bay comes from but if a gasket is changed in a pipeline or a valve is replaced at a tank and spills 30 or 40 gallons of crude in the process I would call that maintenance and certainly not an oil spill in the same category as accidents. Any more than you would call dropping some gasoline from the hose when you fill your tank is an ecological disaster. In my opinion it is necessary for us to maintain our common sense about things.

But whether we like it or not, we do need more oil and lots of it while it will give us the time to develop better and even more ecologically responsible, energy sources. If we lose the energy supply race our whole country will go down the tubes and not just the USA.
Posted by: Fred at March 16, 2007 2:38 PM

Posted on

Notes on Energy

From some old files

January 11, 2006

Raise Taxes

Government interventions usually crash on the concept of price. Prices are not accidental. They not only regulate supply and demand, but also contain information about scarcities and expectations that allow everyone to make sound decisions. Governments cannot permanently lower prices without creating shortages. But they can create inefficiencies and scarcities that push prices higher. Sometimes this might be an appropriate use of government power.

In today’s WSJ an article called “The Upside of the Oil Curse” talked about the benefits of high oil prices. Our experience with the first energy crisis shows how well prices work. For all the talk about conservation and alternatives energy intensity improved by little before the 1973 price spikes. In the 1970s and early 1980s, energy efficiency improved remarkably (2.7% a year). Progress slowed after prices fell, dropping to 1.6% a year from 1986-2002. We just saw progress again when prices rose recently. SUVs sat on the lots; hybrids sold in hours. Prices work.High prices encourage conservation and alternatives like nothing else. In fact, the oil barons and OPEC potentates fear high prices for this very reason. The problem is that oil prices will drop again and will be low about the same time investments in new energy sources could be expected to pay off, so smart money is slower to make such investments.

I know that many of you are saying that prices will never come down. A brief look at the history of oil prices shows why this is not true. In the early 1980s, nobody thought the price would ever come down, yet by 1998 oil was only about $10 a barrel. So what can we do to prevent this happening again? We should provide a floor to oil prices. When oil drops to around $45 or $50 a barrel (in today’s dollars), and it will, we should tax it back up. (We might have a chance to pass such a tax now, since it seems so impossible that lower prices would ever happen.) This tax would have the advantage of being counter cyclical. It is one of the few times when government can influence prices for good. Maybe a good tax is not always an oxymoron.

August 11, 2006  

Higher Gas Prices Doing Their Good Thing

I am in favor of higher gas prices even if it means raising taxes. As I wrote in the linked sources, price is the surest and fastest way to alternative energy sources and conservation. A recent Pew Study shows how this works. There is some time lag, but it is quick.

We missed a big opportunity in the 1990s. Gas prices were at an all time low (real dollars) in 1998. We should have taxed gas then to reduce demand. Instead, we convinced ourselves that $1 a gallon gas was normal and bought SUVs.We will never run out of oil, but the cost in environmental and geopolitical terms may become too high. Why do we continue to use oil? Because it is cheap. Even at today’s prices, gas is cheap. We are still paying less for gas than our grandfathers did in the 1930s.

I apologize to all of you who have heard this from me before (I have linked to some of the other posts), but it must be repeated all the time. If you want conservation and alternative energy, you have to tolerate higher energy prices. You do not get a free lunch. But the good news is that with the proper conservation and energy efficiency, your total bill can be reduced. You just gotta do it because you are responsible for energy use.My fear is that many people prefer fixing blame to finding solutions. I heard an interesting program on NPR. It was Lester Brown, Founder of Earth Policy Institute, fretting about a surge in ethanol production. He advocated ethanol when it was not really practical. Now he has second thoughts. Maybe it is a kind of market phobia. Brown prefers wind power. Good idea. I agree, but we know that wind power has limits and its enemies. The best bet for our energy future is nuclear power, which emits no greenhouse gases. Of course, nuclear power has its detractors. This is the truth and everything else a lie: all forms of energy come with costs. Cheaper forms of energy often come with significant external costs. “Clean” energy requires large capital investment. Often our favorite form of energy is difficult to get. We have to make choices among options, none of which will produce an ideal outcome. One thing is certain, you cannot have energy that is cheap, plentiful, clean and trouble free all at the same time. So make your choices and be realistic.

October 30, 2006

Oil Getting Too Cheap (again)

The price of crude oil tumbled 3.9% today. This is good news for the economy but it presents both a challenge and an opportunity. We need higher fuel prices to encourage conservation and the development of alternatives. I have advocated this many times.  As the price approaches $55 a barrel, it is time to think of ways to keep the price of fuel from falling. I advocate a tax on oil to keep the prices up. The big oil companies obviously are not up to the job. Where is price gouging when you need it? You can see why I can never run for elected office. I suppose we could tax only foreign oil. It is always popular to stick it to someone else.Seriously, anyone who cares about a cleaner environment, getting out from under the influence of foreign despots and improving our long-term economic prospects should appreciate this point of view. Unfortunately, driving cheap trumps these concerns for many.

November 15, 2006

Energy Independence Too – Alternatives

We have been here before. Harry Truman started the first big alternative fuels project. President Carter promised that the U.S. would never again import as much foreign oil as it did in 1977. Twenty-nine years later, President Bush warned about our addiction to oil (BTW more than in 1977). What did we learn? Cheap oil trumps policy promises and alternatives. Sowaddawedo?First, we need to recognize that the problem is political, social and economic, but not really technical. This is important, because we keep on trying to apply the technical solutions and they never work. We use oil because it is cheap. We use foreign oil because it is even cheaper. We want to continue to use oil because it supports the lifestyles we enjoy at a price we accept. Unless we change part of that equation, we will always come up with the same answer – more oil.

Before going on, let me break the problem down into two parts. The one part is oil as an environmental problem. The second part is FOREIGN oil as an economic and geopolitical problem. They are separable. You could solve one and not the other. For example, foreign oil can be replaced by American oil from ANWAR, oil shale from Utah, Colorado & Wyoming or from oil sand from Alberta (yes a foreign country but nearby and generally stable). This oil will cost a little more in terms of dollars and a lot more in terms of environment, but we can achieve reasonable energy independence in this way. This is not the way to go, IMO.Oil use as an environmental threat is the bigger challenge. Remember why we use oil, but then figure in the external costs. This makes oil less of a good deal.

Rand Corporation has recently released a study indicating that falling costs of ethanol, wind power and other forms of renewable energy could allow them to supply 25% of U.S. energy by 2025 at little or no additional expense. (Renewables currently account for only 6% of our energy, and about half of that comes from hydroelectric dams.) This assumes that the price of oil does not decline by very much. Low cost oil (reaching its lowest point in 1998) has destroyed hopes for alternatives before. So let’s make sure the prices do not drop very much.Once they get started, renewables have a big constituency, especially in farm states. The most promising, IMO, is ethanol from wood chips. I admit a personal interest in that. Also interesting are various ways to make methane from manure and other wastes. Read more about these things here.

Promising as all this is, read the number very carefully – 25%. That is the optimistic scenario. That still means 75% has to come from someplace else. We will still be using oil, coal and gas for a long time. The most promising large scale clean alternative is nuclear (the French get 78% of the electric power from nukes; we get about 20%). We might be able to squeeze a little more out of energy conservation. If we just build smarter we can save money, be comfortable and help the environment at the same time. A sustainable resource house, BTW, need not be built out of straw or sticks and it can be very attractive and comfortable.

So let’s address the energy problem, but let’s address the right one in the right way. Recognize that we have the energy mix we have today because it is what we chose and what we continue to choose. We need not blame others or talk about the stupidity of past generations. We chose what we have and that means we have the choice to choose alternatives too.

September 03, 2005

We can never run out of oil

Katrina hit our oil infrastructure hard. Coming at a time of already tight supply, this will mean higher prices and talks of the end of oil. But this too will pass and if we don’t repeat the price control debacles of the 1970s it will pass quickly.

We almost ran on of oil on many occasions. The first time was just after WWI; Many of us remember the last time in the 1970s. Of course we never ran out of oil. We never run out of anything. What we really mean is that we don’t have a particular resource at a price we are willing to pay. By the time we reach this price with oil, we will have moved to different energy sources.The long term is too uncertain to predict, but we have a good handle on the short and medium runs. In the near term prices will rise. In the medium term, we can expect a drop in oil prices. Why? During the low prices of the 1980s and 1990s, we invested less in energy. It takes many years for an investment to begin to produce results. Much of the capacity that will be available very soon was planned and begun back in 2001 or 2002. What is being started now will be ready in 2008 or 2010. This supply will be supplemented by the development of alternatives and conservation provoked by today’s high prices.

Cheap gas will be upon us by 2008.

The prospect of cheap oil is not something I eagerly anticipate. The longer the price stays high, the faster we will develop alternatives. I would like nothing more than to reduce the grip of oil on our country. Each price spike makes us less dependent, but the subsequent drop takes off the edge. A higher tax at the pump is one of the few taxes I approve, especially if it replaces other taxes. As the price comes back down we should offset at least some with a higher gas tax. But we won’t have to think about that for a couple of years.

Posted on

Energy Independence Too – Alternatives

We have been here before. Harry Truman started the first big alternative fuels project. President Carter promised that the U.S. would never again import as much foreign oil as it did in 1977. Twenty-nine years later, President Bush warned about our addiction to oil (BTW more than in 1977). What did we learn? Cheap oil trumps policy promises and alternatives. Sowaddawedo?

First, we need to recognize that the problem is political, social and economic, but not really technical. This is important, because we keep on trying to apply the technical solutions and they never work. We use oil because it is cheap. We use foreign oil because it is even cheaper. We want to continue to use oil because it supports the lifestyles we enjoy at a price we accept. Unless we change part of that equation, we will always come up with the same answer – more oil.

Before going on, let me break the problem down into two parts. The one part is oil as an environmental problem. The second part is FOREIGN oil as an economic and geopolitical problem. They are separable. You could solve one and not the other. For example, foreign oil can be replaced by American oil from ANWAR, oil shale from Utah, Colorado & Wyoming or from oil sand from Alberta (yes a foreign country but nearby and generally stable). This oil will cost a little more in terms of dollars and a lot more in terms of environment, but we can achieve reasonable energy independence in this way. This is not the way to go, IMO.

Oil use as an environmental threat is the bigger challenge. Remember why we use oil, but then figure in the external costs. This makes oil less of a good deal.

Rand Corporation has recently released a study indicating that falling costs of ethanol, wind power and other forms of renewable energy could allow them to supply 25% of U.S. energy by 2025 at little or no additional expense. (Renewables currently account for only 6% of our energy, and about half of that comes from hydroelectric dams.) This assumes that the price of oil does not decline by very much. Low cost oil (reaching its lowest point in 1998) has destroyed hopes for alternatives before. So let’s make sure the prices do not drop very much.

Once they get started, renewables have a big constituency, especially in farm states. The most promising, IMO, is ethanol from wood chips. I admit a personal interest in that. Also interesting are various ways to make methane from manure and other wastes. Read more about these things here.

Promising as all this is, read the number very carefully – 25%. That is the optimistic scenario. That still means 75% has to come from someplace else. We will still be using oil, coal and gas for a long time. The most promising large scale clean alternative is nuclear (the French get 78% of the electric power from nukes; we get about 20%). We might be able to squeeze a little more out of energy conservation. If we just build smarter we can save money, be comfortable and help the environment at the same time. A sustainable resource house, BTW, need not be built out of straw or sticks and it can be very attractive and comfortable.

So let’s address the energy problem, but let’s address the right one in the right way. Recognize that we have the energy mix we have today because it is what we chose and what we continue to choose. We need not blame others or talk about the stupidity of past generations. We chose what we have and that means we have the choice to choose alternatives too.