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Achieving $2 Gas: It’s possible, with the right policy.
NATIONAL REVIEW ONLINE ^ | September 15, 2011 | Robert Zubrin

Posted on 09/15/2011 11:23:28 PM PDT by neverdem

Achieving $2 Gas
It’s possible, with the right policy.

Republican presidential contender Michele Bachman has said that if she is elected, gas prices will fall to $2 per gallon. Such promises have understandably been greeted with considerable skepticism. But $2 gas is exactly what America needs. The question is, how can we get it?

We can’t do it just by expanded domestic drilling. In order for gasoline prices to fall to $2 per gallon, oil prices must be cut to $50 per barrel. And oil prices are set globally, with the dominating influence being the OPEC oil cartel. Since 1973, this cartel, which controls 80 percent of the earth’s commercially viable oil reserves, has refused to expand production, thus keeping petroleum prices artificially high. While, with a more pro-business government, the United States might conceivably be able to expand its production by a million or two barrels per day, OPEC could easily counter by cutting its production to match, or more likely, by simply continuing its non-expansion policy and letting increased Chinese demand take care of the slack.

If we are ever to get $2 gas, the power of OPEC to control oil prices needs to be broken. The United States Congress could do this with a stroke of the pen, simply by passing the bipartisan Open Fuel Standard bill (H.R. 1687). This act would effectively destroy OPEC by requiring that all new cars sold in the USA be fully flex fuel, able to run equally well on gasoline, ethanol, and — most important — methanol. This latter capability is critical because methanol can be, and is, made cheaply in large quantities from coal, natural gas, or any kind of biomass without exception. The United States has only 4 billion tons of oil reserves, but we have 270 billion tons of coal, vast amounts of natural gas, and an enormous capacity to produce biomass. By requiring that all cars sold here (and thus all cars made worldwide) be compatible with methanol, the act would force oil to compete with a fuel whose sources are not controlled by the cartel, and that we and our allies possess in abundance.

Methanol has only about half the energy per gallon as gasoline, but is 105 octane, which means it can be burned more efficiently. Taken together, these two factors make methanol’s current spot price of $1.38 per gallon roughly competitive with $2 gasoline.

Of course, the passage of the OFS bill would not cause gasoline prices to crash instantly. While it would no doubt hit oil futures hard, and thus cut the speculative premium on petroleum prices, the most immediate result of allowing methanol to compete against gasoline in the vehicle-fuel market would be to send methanol prices up, perhaps by as much as 60 percent. This situation would not, however, last for long. Methanol can be made and sold profitably today for $1.38 per gallon. At a 60 percent markup, its manufacture would be super-profitable, and massive amounts of capital would rush in to expand production. This would drive the price of methanol down, dragging gasoline and oil down prices with it, until methanol reached a price point where its production offered no greater profit than that prevailing in the economy at large. The fact that methanol would reach this price — what Adam Smith would term its natural price — follows from the fact that the sources to make methanol are plentiful and diverse, so that no cartel can artificially limit its production.

This underscores the key issue. There is not a free market in oil. Adjusted for inflation, the price of oil has increased eightfold since 1973, but OPEC production has not increased at all. In a free market, such a price increase would spur increased investment, with subsequent expanded production driving the price right back down again. That is why the inflation-adjusted price of coal, and nearly every other industrial commodity, has not risen in four decades. But because of the cartel, oil production has not responded to price increases in the way that it should in a properly functioning capitalist economy. In order for the free-enterprise system to do its work and deliver the cheap fuel the world needs, the ability of this cartel to limit the world’s liquid-fuel supplies needs to be broken. The Open Fuel Standard bill would accomplish that.

High oil prices are wrecking our economy. Since the United States imports 5 billion barrels of oil per year, the current price of nearly $90 per barrel will hit us for $450 billion this year alone, a huge tax on our economy. As a result, millions of jobs and thousands of businesses are being lost. If this wealth-draining process is allowed to continue, fiscal necessity will require us to withdraw the military forces protecting our national interests abroad, without a shot being fired.

Instead of seeking to exploit this catastrophe by placing its blame on their opponents, or posing with empty promises of salvation contingent upon their promotion to higher office, politicians need to take action. Two-dollar gas is not just a nice idea for inclusion in a campaign speech. It’s a critical necessity for economic recovery.

Either we break the cartel, or the cartel breaks us. The Open Fuel Standard bill needs to be passed.

— Robert Zubrin is a member of the Board of Advisors of Americans for Energy and author of Energy Victory: Winning the War on Terror by Breaking Free of Oil.



TOPICS: Business/Economy; Culture/Society; Editorial; Politics/Elections
KEYWORDS: energy; gasoline; methanol; openfuelstandard
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To: Spktyr

I don’t understand how Wikipedia and this paper can reach such different conclusions. One of them must be wrong. But which? We all know that Wikipedia is infallible, right? Yeah, right!

But seriously though, I consider Wikipedia to be reasonably accurate on non-controversial topics. That means essentially anything that is not political or religious.


41 posted on 09/17/2011 9:25:45 PM PDT by RussP
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To: jjotto

Wikipedia says that, since ethanol is an antidote to methanol poisoning, mixing ethanol in with methanol essentially reduces its toxicity. But what ratio of ethanol do you need to render the methanol less toxic than, say, gasoline?


42 posted on 09/17/2011 9:28:20 PM PDT by RussP
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To: Craftmore
An easier solution is to remove the federal and state taxes from each gallon of gas.Next time you buy gas see how much that adds up to.

If the tax on gas went directly into repairing roads and bridges I'd be all for keeping it where it is. Use it for building bike paths etc. not so much.

43 posted on 09/17/2011 9:35:14 PM PDT by Straight Vermonter (Posting from deep behind the Maple Curtain)
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To: RussP

From memory, 10% ethanol greatly reduces methanol toxicity, but I’m not sure it’s ever less toxic than gasoline.

Gasoline is worse for the environment, methanol is worse for people.


44 posted on 09/17/2011 9:40:31 PM PDT by jjotto ("Ya could look it up!")
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To: jjotto

“Gasoline is worse for the environment, methanol is worse for people.”

Then the environuts should love it!


45 posted on 09/17/2011 9:42:57 PM PDT by RussP
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To: Spktyr
Another problem is that methanol fires are literally invisible. You cannot see them. Gasoline fires are blatantly obvious.

I think the methanol for cars would be blended with gasoline. It is unlikely that there would be a fire that did not involve both fuels. In that case you wouldn't have to worry about the invisible fire.

46 posted on 09/17/2011 9:44:00 PM PDT by Straight Vermonter (Posting from deep behind the Maple Curtain)
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To: Straight Vermonter

No, this guy is advocating straight methanol.


47 posted on 09/17/2011 10:57:40 PM PDT by Spktyr (Overwhelmingly superior firepower and the willingness to use it is the only proven peace solution.)
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To: RussP

Methanol cannot ever be made as ‘safe’ as gasoline, not at any significant proportion. Another issue is that a meth/eth mix is incredibly hygroscopic (attracts water) and goes “off” within a couple of days. Imagine having to do a hazmat flush and fill of your fuelling system if you don’t drive your car for a week, or if you don’t burn it all off in that same time.

You also have the additional effects of ethanol - residues, corrosion - on top of methanol’s in a mix.

Methanol is harder to ignite and easier to extinguish, but it’s harder to fight since you can’t see the fire in the first place.

Also, note what the Wikipedia page on IndyCars has to say about Methanol vice Ethanol:

http://en.wikipedia.org/wiki/IndyCar_Series#Methanol

Since ethanol gets better fuel mileage than methanol, the fuel tanks in the car were decreased. Compared to methanol, human contact with the current ICS fuel is much less harsh, and the fumes much less irritating. The fumes are often compared with the sweet smell of apple cider or apple cobbler. Unlike methanol, ethanol is not caustic and does not cause chemical burns when it comes in contact with skin. It is also less polluting when spilled compared to methanol.

Behold the conflict.


48 posted on 09/17/2011 11:04:10 PM PDT by Spktyr (Overwhelmingly superior firepower and the willingness to use it is the only proven peace solution.)
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To: Spktyr

I don’t think Zubrin is advocating straight methanol. But even if he is, so what? Mix in some gasoline for flame visibility, and mix in some ethanol to reduce toxicity. Sounds good to me. Or at least it sounds like it’s worth strong consideration.

By the way, Zubrin is no dummy. I saw him speak at an AIAA dinner meeting over a decade ago on his plan for getting humans to Mars within a decade. His plan sounded pretty good to me, though I am admittedly no expert on space, but alas it was not implemented.


49 posted on 09/17/2011 11:04:31 PM PDT by RussP
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To: dsc
Fifty-cent gas is entirely possible.

Sure, when we get back to $3,000.00 cars to put it in.

In the meantime, realistically, the price is going to be higher or drilling and completion costs will not be recouped, with a profit.

Otherwise, no new wells, existing wells deplete, and the price goes back up.

Then the boom/bust cycle repeats.

If prices are stable, then the economy can adjust to that. Price volatility creates budgetary problems.

As for cheap Methanol (the writer's spot price) how long would the price remain that cheap if demand surged? (not long).

50 posted on 09/17/2011 11:54:25 PM PDT by Smokin' Joe (How often God must weep at humans' folly. Stand fast. God knows what He is doing.)
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To: Smokin' Joe

“Sure, when we get back to $3,000.00 cars to put it in.”

Sorry, I don’t accept that pessimism. If we exploit our own resources and use our own refineries, great things can be done.


51 posted on 09/18/2011 2:35:17 PM PDT by dsc (Any attempt to move a government to the left is a crime against humanity.)
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To: dsc
Let me put it this way. It takes a $40,000 pickup to haul small oil tools in, at today's prices. Go for larger tools that don't need to be hauled on a semi, and you're talking a $100,000 rig.

Two dollar gas, $40-50 dollar oil isn't going to pay for that. Fifty cent gas won't get the job done. The equipment on that $8-10 million land rig isn't cheap, and drilling operations in the Bakken, for instance, cost $80,000 and more--a day.

Counting production costs, bringing a well on line will run on the order of eight to ten million dollars, if things go smoothly, and more if they don't.

Either the well reaches payout in a reasonable amount of time, or the incentive to drill more wells just isn't there.

I've been in the industry for over 30 years and have been through a couple of boom/bust cycles.

But don't take my word for it. Go back and compare the price of oil historically with the number of rigs drilling wells. I think you'll find a correlation without having to work very hard.

I'll admit great things can be done, but the low hanging fruit has been picked. Today's extractive technologies are more cost and tech intensive than the old vertical wells, and drilling and production cost more.

One other thing, those of us who work on drilling sites, often risking life and limb just to get there, aren't going to put in 14 hour days and live on drilling locations for 1960s wages, we aren't union, but we don't come cheap.

52 posted on 09/18/2011 8:16:07 PM PDT by Smokin' Joe (How often God must weep at humans' folly. Stand fast. God knows what He is doing.)
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To: Smokin' Joe

“Let me put it this way. It takes a $40,000 pickup to haul small oil tools in, at today’s prices. Go for larger tools that don’t need to be hauled on a semi, and you’re talking a $100,000 rig.”

You obviously know your stuff, and I won’t dispute your analysis of present conditions.

It may be true that “Two dollar gas, $40-50 dollar oil isn’t going to pay for” drilling expenses. However, it seems that once a pipeline is in and drilling costs have been recovered, that the price could come down steeply—in the absence of government meddling.

“drilling operations in the Bakken, for instance, cost $80,000 and more—a day.”

Accepting your figure, I’m left wondering why it costs that much. When I was a boy, I used to see unattended wells chugging out oil 365 days a year, and I know that wasn’t costing much.

“Counting production costs, bringing a well on line will run on the order of eight to ten million dollars, if things go smoothly, and more if they don’t.”

How much of that is unnecessary? How much of that could you eliminate if you were running everything?

“I’ll admit great things can be done, but the low hanging fruit has been picked. Today’s extractive technologies are more cost and tech intensive than the old vertical wells, and drilling and production cost more.”

Why do they cost 14 times as much as they did in 1968? I presume they do, because that’s approximately the increase in gasoline prices at the pump. I understand that some technologies are more expensive, but we have lots of oil we could pump up with 1930s technology.

“One other thing, those of us who work on drilling sites, often risking life and limb just to get there, aren’t going to put in 14 hour days and live on drilling locations for 1960s wages.”

Nor should you, but even after inflation those wages should be five to six times as high as they were in the 60s. Why is gasoline 14 times as high?

BTW, you have no connection with anyone who speculates in oil futures, do you?


53 posted on 09/20/2011 1:49:20 PM PDT by dsc (Any attempt to move a government to the left is a crime against humanity.)
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To: dsc
It may be true that “Two dollar gas, $40-50 dollar oil isn’t going to pay for” drilling expenses. However, it seems that once a pipeline is in and drilling costs have been recovered, that the price could come down steeply—in the absence of government meddling.

The costs don't just evaporate once the well is drilled. Of that barrel of oil in revenue there are royalties to be paid to the mineral rights owners, (generally up to 20%), pipeline rights of way leases, access roads to be maintained, well maintenance including workovers, re-fracs, daily inspection of the well, at least to start, making sure nothing is leaking, etc.

Part of what you pay for at the pump is the work of the production crews.

Equipment replacement is a factor as well, because, as you noted, the wells are pumping 24/7/365 when not shut down for work on the well or surface equipment. On some wells, produced natural gas runs the pump jack, on others, electricity, both require maintenance, one an electric bill--and not a small one. Some wells have problems with parafin accumulations or salt buildup and corrosion, and those issues need to be addressed periodically as well. So there are a lot of costs beyond what is spent just drilling and setting the well up to produce, which are ongoing. Wells decline in production over time, and the IP (initial production) figures are seldom maintained. Despite the occasional badgering on this site about abiotic oil, few wells produce much beyond their theoretical maxima, determined by roughly calculating the thickness of the pay zone, the porosity of the rock (which gives a maximum fluid volume in the pay zone, subtracting the water saturation percent (there is always some, even if it just coats the inside of the pore spaces), to get the maximum volume of oil present in the formation in that lease spacing.

Recoverable oil is a different matter, dependant on reservoir pressures, how much water is present, and the amount of water which will come out of the rock with the oil, and how much it will cost to dispose of it, versus the price of the oil which comes out.

Eventually, a well which produces both oil and water will produce so much water (or so little oil in comparison), that it is no longer economical to continue production, at least at a given price, and although there is still recoverable oil present,it may not be economically recoverable, it may cost more to get it out than it is worth on the market.

I’m left wondering why it costs that much. When I was a boy, I used to see unattended wells chugging out oil 365 days a year, and I know that wasn’t costing much.

Wells that are chugging out oil 365 days a year are already drilled.

Moving a drilling rig capable of drilling 20,000+ ft. costs on the order of $200,000, and that does not count the cost of preparing the site and access roads. The day rate for such a rig is over $20,000.00 Mud chemicals can run $10,000 a day, directional personnel and equipment another $10,000, fuel, trucking, rentals on subsurface equipment and surface equipment (mostly solids control equipmnet to remove find cuttings from the drilling mud), supervisory personnel (Company hand and geologist), gas detection, safety equipment (H2S), drill bits, mud motors, 'soap rope and pipe dope' (AKA miscellaneous costs) make up much of the balance. Everything has to be trucked in or out, from the site housing to wastewater to trash, so drilling a well in the Bakken isn't cheap. There are generally two casing strings run: a 9 5/8 surface casing which is set at somewhere between 1700 and 2500 ft. as a rule (sometimes deeper to protect aquifers), and cemented in place, and then an intermediate casing string of 7-inch pipe run to the pay zone (usually about 11,000 ft.) also cemented in. The actual pay horizon is the drilled out of the end of the 7-inch, for another roughly 9500 ft. on a two-section (1280 acre) lease. Keep in mind, that setting the casing in the pay zone involves starting a curve some 410 feet above the pay zone, and turning the drill string to very nearly horizontal--in the right place. Generally, you do not have much to guide you except logs from a well a few miles away, and even in a mile or less, the formation thickness can vary by enough to throw that off. Then, after setting that 7-inch casing, you have to navigate in the formation, generally staying in a 4 to 8 foot thick layer for the next 9500 ft.

That's where my job comes in, I'm a wellsite geologist who does geosteering.

How much of that is unnecessary?

None of it, really. The oil industry has been through some rather severe contractions in the past three decades, along with the booms. If you checked the drilling rig counts going back to the late 70's you'd see that over half of the drilling rigs which were running last year might not be making hole next year. When that happens, the dead weight hits the bricks. One of two philosophies are used by companies: they either lay off the top personnel because it is cheaper to field less expensive less experienced personnel (a gamble if the job goes badly which maay cost far more in the long run), or they keep the core personnel who are more expensive but are most exerienced, to train the next generation of hands.

The latter is often more successful long term, the former lets the company sockaway some cash, usually before selling out to a competitor.

Either way, benefits packages dry up, and lean times are lean. Drilling tool and service companies sell their product (even in good times) on a basis of how much money they can save their clients, and there is no fat left to trim.

To an extent, when there is high demand during a boom cycle prices come up, as does pay, but in the meantime, folks elsewhere are steadily making a paycheck, getting their incremental raises, and stuffing a 401K. In the oil patch, you are always saving for the next bust, or paying off the last one.

Why do they cost 14 times as much as they did in 1968? I presume they do, because that’s approximately the increase in gasoline prices at the pump.

By the time gasoline comes out the pump, you have to add in a few things (look at the price of a '68 Camaro versus a new one).

First, inflation. Second taxes. (fifty cent gas won't happen in some places because the state and federal taxes combined are more than fifty cents). Third, regulations. I didn;t get into the industry until 1979, but the number of regulations, not just on the drilling end, but on the refineries, emmissions refits, etc. have added a substantial burden. Retailers have undergone similar regulatory shifts, some of which put former retailers out of business because of the compliance costs. Distribution costs are up as well, whether by truck or rail, and adding in ethanol which has to be blended in near the point of sale means that the cost of transporting and blending the ethanol separately is factored in as well. Those additional burdens are the product of the government, for good or ill, but they increase the cost as well, and that is without getting into the regional fuel blends mandated by the EPA and others.

Just as prior to 1968, you could fill out the order form, toss a check in an envelope and mail order a rifle or pistol, things are more complicated now for the oil industry, too, whether it be in the drilling and production end (the upstream part of the industry) or in refining and distribution (the downstream end of the industry).

I understand that some technologies are more expensive, but we have lots of oil we could pump up with 1930s technology.

If it isn't already being produced, point me to it! I know a guy with a cable tool rig, and we could make a killling!

Seriously, I don't think many outside the industry realize how much things have changed. The first wells drilled in this area took over 40 bits to drill, went to roughly 9800 ft. (vertically), and only took six to eight months to get there. We drill down two miles (roughly speaking) and over two miles, now, run two casing strings and a liner for production in the lateral and are usually done in 30 days, with a far better safety record overall.

No, I do not play the futures market in any way, I only use it as an indicator of future demand for a resource I have an integral role in bringing to the surface because it indicates when the next 'bust' is coming.

I know I tend to digress, but the reason for the disproportional cost you are seeing is more government then anything else, ultimately.

Since 1968, substantial regulatory burdens have been added to every aspect of the oil industry, from site preparation to drilling to production to transport to refining to distribution of the refined products. I'm not saying all of those are bad, but the way they have been implemented often has caused costs beyond what might have been incurred if they were implemented differently.

54 posted on 09/20/2011 7:15:58 PM PDT by Smokin' Joe (How often God must weep at humans' folly. Stand fast. God knows what He is doing.)
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To: Smokin' Joe

“I know I tend to digress, but the reason for the disproportional cost you are seeing is more government then anything else, ultimately.”

Aha!


55 posted on 09/20/2011 7:44:31 PM PDT by dsc (Any attempt to move a government to the left is a crime against humanity.)
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