October 2008

Energy: What’s Hot and What’s Not

Author: Jim McCaffrey

Oil politics is very hot
“Drill here. Drill Now” is catching on because of $4/gallon gasoline. We got here due to the tight world oil supply/demand situation. Total current world oil production is about 87 million barrels/day with a demand of 87 mmb/d. There is 1.5 mmb/d spare capacity, plus a few new fields due in a year, but modest supply additions won’t match surging demand in fast-developing nations.

U.S. consumers have changed their behavior a bit over high fuel prices, reducing our demand by 800,000 b/d (Jan.-June ’08 vs. the same time period in ’07). Since we still use 20 mmb/d and 13 of that is imported, we remain highly vulnerable to volatile world prices and supply interruptions. This has stimulated politicians to begin efforts to produce more domestic oil and look hard at alternatives. These debates toward a better energy policy will be very intense for months ahead.

The focus on oil and gas deposits in our federal outer-continental shelf (OCS) areas is appropriate because large oil fields are most likely to be discovered there. The minerals Management Service (MMS) and other government agencies have estimated up to 86 billion barrels of recoverable in all banned OCS acreage. Only six smaller OCS areas may hold 18 billion barrels, per MMS. Then Alaska’s ANWR has up to 16 billion. Arctic Circle prospects 90 billion (partly U.S.) and oil shale deposits in three Western states up to 1.5 trillion barrels. Big numbers, big challenges, but the oil is definitely there.

New OCS wells will typically be drilled in one to two-mile-deep water, then through three to five miles of rock. The complex geologic structures have differing oil reservoir characteristics, some being commercially viable and some not. About 4,000 exploratory wells are forecast for the U.S. this year. Some will find new oil, but the chances for a new giant oil field are small.

“Not Hot” issues are hearings on price-gouging, windfall profits, speculators, new oil taxes, et.al. These political forays are counter-productive, yielding mostly diversion from the real task at hand: add more domestic energy!

Finally a hot issue with many is global warming. Too broad to discuss here, this issue will be around and affect some policies for a long time.

Petroleum prices: one of the hottest.
The sinking U.S. dollar, plus uncertain world oil supplies prompted commodity futures trades to bid oil up to $1.46/bbl. Then conservation, temporary supply and inventory increases and a strengthening U.S. dollar—topped by President Bush’s removal of the federal OCS exploration/development ban—dropped oil futures down to $113/bbl. Oil may now range between $100-$150/bbl as market conditions fluctuate.

National average regular gasoline fell to $3.86/gallon August 11, 2008. Hilton Head’s price at this writing (8/18/08) is down to $3.55/gallon. National mileage driven is down 5.5 percent in June ’08 vs. June ’07. Government is considering mandating 35 mpg by 2020 (average for manufacturers up from 25 mpg today. Consumers are shifting to “hot” hybrids and mini-cars for 28/40 city/highway mpg. Not “hot” are vehicles fueled by natural gas, hydrogen and solar power as more R&D is needed.

Diesel fuel, heating oil, and jet fuel are all being conserved. Yet with all of this, we won’t be able to conserve our way out of the long-term crisis.

Another “hot” topic is aggregate food price increases (8.7 percent—first six months of ’08) due, in part, to corn going to ethanol and transportation costs overall.

The real question is, at what price ranges can oil and product prices stabilize, be sustainable and allow us to prosper in economic growth and security?

Alternatives: a very hot part of our energy strategy
These sources (hydroelectric, wind, geothermal, solar, biomass) will provide 7 percent of 2008 energy demand. Nuclear will be 8 percent, Coal 23 percent, Natural gas 24 percent and oil 38 percent. Hot political speeches about eliminating imports, replacing fossil fuels, etc. are election year hype, because most alternatives won’t be ready for decades in massive quantities.

Perhaps “possibilities” is a better label here. Some are more possible than others, but none are major practical alternatives yet.

Problems still being forced are a) unsolved technology challenges; b) remote, difficult location of energy sources; c) doable transmission and distribution methods and available devices affordable to the masses. We know they’re there, but we don’t know how to make them work.

Very intense discussions are coming on how many billions of dollars more to subsidize which possibilities. For example, wind supplies one percent of needs today in small, isolated projects. But massive wind farms serving millions in large cities face problems: a) If it doesn’t blow hard enough, a fossil or nuclear plant is needed as back-up; b) Wind speed varies, causing electric generated power surges and declines. Power can’t be inventoried, so the connecting power grids have to absorb these surges. They are simply not able to do this; c) Environmental obstruction (even though they want fossil-free power) causes permitting delays or refusals because windmills are not pretty; they’re noisy; they kill birds, etc.

Another possibility is hydrogen powered fuel cell/electric cars. There are now only four fueling stations in the U.S. that make hydrogen from natural gas. Early handmade H2 cars carry small high pressure liquid H2 tanks (5,000 to 10,000 psi) giving a driving range of 200 to 300 miles. A Honda executive said the cost to buy an H2 car needs to come down $92,000 to be marketable. Then Honda’s Fox Clarity vehicle was announced to be leasable at $600/month for three years with no purchase option. Return the car after paying $21,600 over 36 months. No, not ready yet.

These are merely two examples of inadequate possibilities now. Another very hot alternative that has energy problems and a negative effect on another part of our economy is ethanol. In 2006, taxpayers paid $7 billion in subsidiaries to get 5 billion gallons of ethanol. This year it may be 8 billion gallons—about six percent of the 130 billion gasoline gallons we produce. But the return on ethanol is negative. This is because to grow corn, transport, cook into ethanol and transport it to blenders is energy negative. It takes 29 percent more energy for these things than it delivers to the consumer. Then, since it contains only 66 percent of the BTUs that gasoline has, the consumer gets 5 to10 percent lower gas mileage on a 10/90 percent ethanol/gasoline blend. It’s proven that ethanol’s entire process emits more greenhouse gases, too—a government renewable energy project that failed, because it was born on the political fast track without adequate research. Also, the huge demand for corn to make ethanol has raised corn’s price to $8 from $2 per bushel. Many corn products, dairy and meat prices have jumped primarily for this reason.

A bright spot could be nuclear power—not an alternative like others, but a proven power source for electricity generation. Currently, companies in the U.S. operate 104 nuclear plants and a few are in the difficult permitting process. The fuel is available; the technology works; the electricity is produced dependably and safely. This is a huge potential energy source that isn’t “hot” today, but definitely should be!

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