Posted on 08/27/2012 4:21:30 AM PDT by SeekAndFind
Recent headlines provoked by two positive but modest developments — a slight early-summer decline in gasoline prices and a laudable increase in domestic oil production — have trumpeted that these developments mean we are on the verge of achieving “energy independence.”
Whoa.
Oil monopolizes about 95 percent of the world’s transportation, and OPEC — eight nations in the Middle East and four others — controls nearly 80 percent of the world’s conventional oil reserves. We cannot change anything fundamental if we continue to permit oil and OPEC, a monopoly with a cartel nested inside it, to maintain their dominance of the transportation-fuel market and if we relegate ourselves merely to working within the framework of that dominance to increase our share of the oil market. It’s true that by doing so we can improve our balance of payments and add some domestic oil-related jobs. Good. But this won’t fill the basic need: to break oil’s monopoly and OPEC’s cartel.
Why is that essential? Because oil is not just a commodity. It is a crucial strategic commodity, as salt was for many centuries when it was the only means of preserving food (to borrow Anne Korin’s excellent analogy). So long as transportation is almost exclusively dependent on oil, we are in thrall to OPEC and its decisions on how much to pump and what to charge us. OPEC has made the basic decision to maintain oil prices at a level where we borrow about a billion dollars a day — equivalent to a tax of some $4,000 a year on every American family. OPEC has this power to, essentially, tax us (without any more representation than George III provided our ancestors), because the Saudis and some others in OPEC can lift oil for less than five dollars a barrel, whereas for the U.S. and most other non-OPEC nations the cost is tens of dollars a barrel.
Saudi Arabia, the swing producer — the nation with large oil reserves that it can tap or not, as it wishes — has indicated that, to meet its domestic-welfare commitments, it needs oil’s price to be more than $90 per barrel. What it means is that, if the price of oil were lower, the Saudi government would need to go to the trouble of putting together an economy in which it couldn’t afford to keep a staggering half of its men unemployed and on the dole.
This low cost of lifting oil, especially in Saudi Arabia, and OPEC’s control of over three-quarters of the world’s reserves of conventional oil is why improved fuel economy for our vehicles, although a good idea, is not the solution to our central problem. Seeing us economize, OPEC can just cut production to keep prices up. We could never reclaim anything like the oil-market dominance we held in the Fifties and Sixties. OPEC would manipulate the market to plunge the U.S. deeper and deeper into debt and force us to spend the maximum it can wring out of us.
OPEC chooses to sell only about 31 million barrels of oil a day, almost exactly what it sold 40 years ago when both oil demand and the size of the world’s economy were about half what they are today. Like John D. Rockefeller at the beginning of the 20th century, OPEC withholds oil from the market to keep the price up. It holds nearly 80 percent of the reserves of conventional oil, but only about a third of what is sold daily on the world market is sold by OPEC. We cannot escape the consequences of OPEC’s price-fixing by buying more oil from, say, non-OPEC Canada and less from Saudi Arabia. There is essentially one worldwide oil market. Other countries will just buy more from Saudi Arabia and less from Canada.
But suppose we become what many, inaccurately, call “energy independent” — that is, we produce about as much oil as we use. Wouldn’t that solve our problem?
No.
The U.K. was, by this distorted definition, essentially energy independent in 2008, and yet there oil hit the same peak, over $145 a barrel, that it hit everywhere else. The high price of diesel fuel in the U.K. led truckers there to strike.
A good idea would be the creation of a North American Energy Alliance. In the event of major hostilities that halted international shipping, the U.S., Canada, and Mexico could still share resources among themselves. Our two major neighbors are allies and good friends, and we should work with them when we can — for example, by permitting construction of the Keystone pipeline in an environmentally sound fashion — from Canada to the Gulf of Mexico.
We should not plan to secede from the world’s oil market. The problem is OPEC’s control of prices, not the fact of trade itself. As long as oil overwhelmingly dominates transportation and OPEC controls oil’s price, we cannot end OPEC’s control of oil prices simply by seceding from the world oil market. We do not become “energy independent” just by being able to produce as much as we use, as Britain learned in 2008.
“Independent” means “free from control by others” — not autarky, that is, shunning imports. We should neither move toward secession nor assume that our oil problems are solved merely because we produce more oil and improve our balance of payments. Instead we should follow Teddy Roosevelt’s example in dealing with Rockefeller’s Standard Oil monopoly and make OPEC’s cartel face competition. The only realistic way to accomplish this is to enable vehicles, in short order and with relatively little investment in new infrastructure, to operate on alternatives to petroleum products.
What are those alternatives?
Biofuels? Probably, to some degree. At present, the best candidates are mainly those made from algae. Biomass gasification to produce synfuels also shows some promise. Ethanol may have a role as well, as long as it can compete, unsubsidized, with gasoline.
Electricity? It has promise, but it won’t move 18-wheelers, and it will take years before all-electric cars and plug-in hybrids are a large-enough share of the vehicles on the road to substantially reduce the market for oil.
Other renewables? We are fans of an evolution toward wind and solar for electricity generation and will be more so as batteries or other electricity-storage systems grow more affordable. But what gets lost in the shouting on the cable-news talk shows is that since less than 1 percent of our electricity is generated by oil, the president’s call for renewable electricity generation to reduce oil consumption is more than 99 percent off base. Two-thirds of the oil we consume is used to move our 250 million cars and light trucks and 8 million heavy-duty vehicles. We can’t solve our oil problem without making it possible for people, realistically and soon, to choose a different transportation fuel.
The laboring oar in any practical, affordable, and near-term competition with oil will have to be pulled by a plan to enable drivers to choose between gasoline and fuels derived from natural gas.
Natural gas has become a game-changer because of horizontal drilling and hydrofracturing (fracking), which now make available huge reserves in shale-gas deposits. The effect of this combination on energy prices is stunning. There are about the same number of BTU’s in a million cubic feet of natural gas as in six barrels of oil. So some years ago, when oil and natural-gas prices tracked one another, if natural gas’s price (in mmcf) was at $8, oil would have been at about $48 — a ratio of 6 (barrels of oil) to 1 (mmcf of gas). But because of horizontal drilling, fracking, and OPEC’s thirst for U.S. dollars, natural gas at one point this year was under $2 per mmcf, while oil was well over $100 per barrel — a ratio of more than 50 to 1.
Fracking and horizontal drilling have caused the price of natural gas to plummet, and OPEC’s machinations have caused oil’s price to reach new heights, so the days of a 6-to-1 price ratio of oil to gas are largely gone. We are now in a world where the ratios are 30 to 1, 50 to 1, or even higher. This completely changes the energy picture.
Certainly drilling, including fracking, must be done in an environmentally sensible manner, but this is entirely feasible. The two of us grew up in Oklahoma, a few miles and a few years apart, hunting, fishing, and camping on land that had been fracked (although at that point fracking had not yet been combined with horizontal drilling). Except when you came across a small valve (a “Christmas tree,” named after its size and silhouette) surrounded by a small cyclone fence, you had no idea of what had taken place thousands of feet below you. Indeed, of the some 4 million oil and gas wells drilled in human history, about 3 million of them were drilled in Oklahoma and Texas. And hundreds of thousands of those, beginning in the 1940s, were fracked. The environmental issues that have understandably been raised about fracking are manageable if both sides are committed to reason.
Cheap natural gas, which is key to ending our vehicles’ oil addiction affordably and promptly, can destroy oil’s monopoly and OPEC’s cartel.
We need to move expeditiously to convert a large share of our buses, delivery vans, and other fleet vehicles to run on compressed natural gas (CNG); and trucks, to run on liqueified natural gas (LNG). The conversions will pay for themselves within a year or two because of the now-huge price advantage that natural gas has over oil. The market is already moving this way.
Moreover, innovative companies are rapidly devising methods for using natural gas as a feedstock for liquid fuels as well as for industrial chemicals. Stay tuned — these will not be limited to the old version of the highly capital-intensive Fischer-Tropsch process invented in Germany in the 1920s. Silicon Valley, Houston, Oklahoma City, and other venues are home to concentrations of very smart folks turning their attention to the goal of driving on liquid fuels made from natural gas. They are already beginning to change the energy game fundamentally.
Finally, the two of us agree that the U.S. should have an open fuels standard, a requirement that vehicles be able to use multiple fuels, not solely fuels derived from petroleum. An open fuels standard would inject fuel competition into the transportation sector. The two of us disagree only on one point: whether, as an alternative to gasoline for powering the family car, natural gas itself or methanol (“wood alcohol”) made from natural gas is likely to move faster into the market.
One of us (Pickens) emphasizes transitioning the nation’s heavy-duty and fleet-vehicle market to compressed and liquefied natural gas, a move that could create more than 400,000 new jobs and cut OPEC dependence by 70 percent. The other (Woolsey) stresses the low, one-time cost (under $100 per car), according to recent studies by MIT and General Motors, of making it possible to use methanol and gasoline in the same vehicle. But the point is not for policymakers, or the two of us, or indeed anyone to resolve these disagreements at the level of policy. The point is to do something OPEC won’t — let the market, the people, decide. Do as the Brazilians do and the Chinese are beginning to do — let drivers pull into a filling station and make their own choice about what to fill up with.
Do we really want to stay on our current path of being less willing than the government of Communist China to permit competition in the transportation sector of the economy?
Moreover, freedom to drive vehicles that run on fuels other than gasoline entail important health benefits. Driving on either natural gas or methanol removes the need to add benzene, which is carcinogenic, or other dangerous chemicals to our fuel tanks for the purpose of boosting octane. Published work by Boyden Gray and Andrew Varcoe shows how the use of benzene, like the use of lead in an earlier era, leads to huge medical costs — tens of thousands of shortened lives and well over $100 billion annually.
Our dependence on OPEC oil and the consequent strain on our national security and the undermining of our economic vitality add up to a problem that does, though, have a solution, if we just stay at it. Let’s choose some leaders who understand the issue and can lead the transition to natural gas as a clean, lower-cost, domestic replacement for today’s diesel, gasoline, and other fuels made from OPEC-controlled oil. And let’s arrange the transition so that the people decide how much natural gas replaces oil.
Let’s make a national commitment to this and bring forward the day when we can all cheerfully tell OPEC that if they don’t like it they can go play in their oil ponds.
— T. Boone Pickens is a longtime oil-and-gas-industry executive. R. James Woolsey is a former director of Central Intelligence, a venture partner with Lux Capital, and chairman of the Foundation for the Defense of Democracies and of the Opportunities Development Group’s Advisory Board.
That is a great idea. I heat with fuel oil at my current home. My contract for this winter heating season is $3.49/gallon. This equalts to about $2800 to heat my 2400 sq. ft house.
However, NG requires a pipeline to be bulit in front of my house in its current form. This will not happen anytime soon. They are more likely to build a pipeline to a new subdivison because they will then get 100% of the houses as new customers. If they build a pipeline along my road, they may only get 50% of the houses to connect. Therefore, unless NG can be liquified , so that it can be tranported by tanker truck and then stored in a tank on my property, it will not be a potential fuel for people like me anytime soon.
So I am stick with oil and the wood stove. That is why pellet stoves are good sellers around here. They are about a 5-6 year payoff. They have drawbacks too. Such as , where do you store the the 4-5 pallets of pellets in a dry place that you will need this winter. They are also noisy and need electricity to operate.
Coal is actually making a comeback because it is even cheaper than NG. I looked at a new hot water boiler/furnace at last winters homeshow. It was a duel fuel unit. It burned anthracite pellitized washed coal or heating oil. It had a hooper that could hold about 3-4 days of coal. With the flick of a switch you could change it over to fuel oil. The sales point was you could store the coal outside. It is a mineral. It doesn’t matter if it gets wet. It is actually wet in the bag to reduce the dust.
Obviously, I have been contemplating all these alternative methods of home heating ever since the spike in heating oil prices in the last 10 years. I have already added as much insulation, new doors and windows, etc. to make my house as efficint as possible. The crazy thing is that heating oil used to always run about a $1/gallon less than gasoline. Keep in mind there is no state or federal tax of $.40-.70/gallon on heating oil like there is on gasoline or diesel. In the last 5 years it has been has been the same price as unleaded gas or higher in the winter. The other fact is it costs a lot less to make heating oil. It is junk. It is basically like kerosine. It should be lot less.
Correct, DRILL BABY,DRILL for oil that is..
Sorry for all the spelling errors. I should have checked before I posted.
No pipeline required for LPG (propane) it is delivered by truck just like your fuel oil. Burns as clean as NG, and is in fact made from waste products of NG and gasoline refining.
Current retail price in my area is $1.60 a gal.
IMO, fuel oil for home heating is an insane option.
Co-products, not considered waste at $55~60/barrel for the wholesale price and $120/barrel for the final sale price.
http://www.eia.gov/dnav/pet/pet_pri_wfr_a_EPLLPA_PWR_dpgal_m.htm
http://www.eia.gov/dnav/pet/pet_pri_wfr_a_EPLLPA_PRS_dpgal_m.htm
Some wells are being drilled for natural gas liquids like propane, butane and consider the Natural Gas as a side product.
I agree. At a 50:1 price differential, it seems like a quick payoff in increasing the NG distribution infrastructure. It is likely that a case could be made at 6:1. From stats I’ve seen, between 8 and 9 million homes use over 5 billion gallons of fuel oil per year. About 80% of the homes using fuel oil are in the northeast which is a small area when compared to the entire US. This would free up a lot of fuel for transport.
Agreed, oil is an insane option now. However, in 1972 when my house was built it was by far the cheapest. There were a lot of houses built in NH in the mid 1970’s that had electic baseboard heat. Most of those houses were converted to oil or propane in the 1980s or 90s. When I bought this house 15 years ago, oil was still the cheapest. It has only been the last 5-6 years that it has gone to a premium of propane.
When(not if)I replace my current furnace, I most likey will convert to propane.
Buy your own tank and you can shop around for the cheapest price, rather than being tied to one company and tank rental and bloated prices.
If you can buy a used 1000 gal tank you can sometimes get your gas wholesale.
Used tanks are easy to find and quite cheap. You will more than save the price of the tank in lower fuel price the first year.
Natural Gas, and propane, only make sense in large displacement engines operating in stop and go city driving. The savings evaporate when cruising down a highway
My wife worked for a utility that had NG flex vehicles. She drove one all day, every day. They were Dakota pick ups, because they needed somewhere to put the huge NG tank. We have a huge hill, (3 miles?), in our town and she would have to switch over to gasoline to go up it. The vehicle had no power on NG. Also it had no range. I forget those details, but you had to keep switching back to gasoline when you ran out of NG.
They have since gotten rid of all those vehicles. The fueling station gathers dust. EPIC FAIL!
Actually, it is not. It is significantly cheaper per gallon, but fuel oil has ~60% more BTU’s per gallon. Assuming similar efficiencies in the burners:
$2.868 Propane at 71,000 BTU/gallon is 4.0¢ per thousand BTU.
$4.104 Fuel Oil at 115,000 BTU/gallon is 3.6¢ per thousand BTU.
Just like ethanol to gasoline, not all fuels are created equal. Propane is relatively expensive fuel, especially compared to natural gas.
Fuel Oil Price http://www.eia.gov/dnav/pet/pet_pri_wfr_a_EPD2F_PRS_dpgal_m.htm
Propane Price
http://www.eia.gov/dnav/pet/pet_pri_wfr_a_EPLLPA_PRS_dpgal_m.htm
At the same time period (March 2012), Residential Natural Gas averaged $10.36 per 1,000 cu ft which equates to 1.0¢ per 1,000 BTU.
Except for the fact that I pay $1.60, not the $2.86 you use to figure costs.
Natural gas has been used in cars for years.One can still obtain conversion kits.
I remember cars in the 50’s having them.
I used the national average. There is plenty of variation in the price. At that same time period, the Central East coast was $3.50 a gallon.
I have never heard him advocate that taxpayers pay for the transition. It seems likely that the transitional savings will be adequate to justify the costs involved in the change.
The market profitability will permit the infrastructure requirements to be developed.
Pickens, Koch spar over natural gas subsidies
http://www.washingtonpost.com/blogs/2chambers/post/pickens-koch-spar-over-natural-gas-subsidies/2011/05/20/AFVjez7G_blog.html
The T. Boone Pickens Earmark Bill (Ron Paul Co-Sponsors Taxpayer Boondoggle)
http://www.freerepublic.com/focus/f-news/2719999/posts
T. Boone Pickens has a federal subsidy beef with the Koch brothers over natural gas, ethanol
http://green.autoblog.com/2011/11/25/t-boone-pickens-federal-subsidy-koch-brothers-cng-ethanol/
My current supplier said the true wholesale to the distributors is about .70-.80 cents a gal.
I didn't look up the NYSE traded price, but I think the current traded price is less than last years and that was in the .70 cent range.
The infrastructure is coming. But the industry does not want the gov't to get invovled.
So, the primary focus is first on fleet users, municipal vehicles (garbage trucks, buses, etc) and truck lines.
Once they have refilling stations, it will spread from there to truck stops and along interstates.
Eventually, like diesel, it will be available at nearly every station.
Trust in the market to make it happen right.
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